REGISTRATION NO. 333-77561
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3/A
AMENDMENT NO. 1 TO
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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RESIDENTIAL FUNDING MORTGAGE SECURITIES II, INC.
(Exact name of registrant as specified in governing instruments)
Delaware
(State of Incorporation)
41-1808858
(I.R.S. Employer Identification Number)
8400 Normandale Lake Boulevard
Minneapolis, Minnesota 55437
(612) 832-7000
(Address and telephone number of Registrant's principal executive offices)
Christopher J. Nordeen, President
Residential Funding Mortgage Securities II, Inc.
8400 Normandale Lake Boulevard
Minneapolis, Minnesota 55437
(612) 832-7000
(Name, address and telephone number of agent for service)
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Copies to:
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Robert L. Schwartz, Esq.
GMAC Mortgage Corporation
3031 West Grand Boulevard
Detroit, Michigan 48232
Stephen S. Kudenholdt, Esq. Katherine I. Crost, Esq. Robert C. Wipperman, Esq.
Paul D. Tvetenstrand, Esq. Orrick, Herrington & Sutcliffe Stroock & Stroock & Lavan
Thacher Proffitt & Wood 666 Fifth Avenue 180 Maiden Lane
Two World Trade Center New York, New York 10103-0001 New York, New York 10038
New York, New York 10048
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Approximate date of commencement of proposed sale to the public: From time
to time on or after the effective date of this Registration Statement, as
determined by market conditions.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, please check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT OFFERING AGGREGATE AMOUNT OF
TITLE OF SECURITIES BEING TO BE REGISTERED PRICE OFFERING REGISTRATION
REGISTERED (1) PER UNIT (2) PRICE (2) FEE (1)
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Home Equity Loan Pass-Through
Certificates and Asset-Backed
Notes (Issuable in Series) $3,000,000,000 100% $3,000,000,000 $834,000
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(1) $75,489,846.57 aggregate principal amount of securities registered by the
Registrant under Registration Statement No. 333-28025 referred to below and not
previously sold are consolidated in this Registration Statement pursuant to Rule
429. All registration fees in connection with such unsold amount of securities
have been previously paid by the Registrant under the foregoing Registration
Statement. Accordingly, the total amount registered under the Registration
Statement as so consolidated as of the date of this filing is 3,075,489,846.57.
In addition, the registration fee in connection with the $3,000,000,000.00
aggregate principal amount of securities to be registered by the Registrant
under this Registration Statement has been previously paid by the Registrant in
connection with the original filing on April 30, 1999.
(2) Estimated solely for the purpose of calculating the registration fee.
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The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission acting pursuant to said Section 8(a),
may determine.
Pursuant to Rule 429 of the Securities Act of 1933, the prospectus which is part
of this Registration Statement is a combined prospectus and includes all the
information currently required in a prospectus relating to the securities
covered by Registration Statement No. 333-28025 previously filed by the
Registrant. This Registration Statement which relates to $3,075,489,846.57
aggregate principal amount of securities, constitutes Post-Effective Amendment
No. 2 to Registration Statement 333-28025.
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EXPLANATORY NOTE
This Registration Statement includes (i) a basic prospectus relating to Home
Equity Loan Pass- Through Certificates, (ii) an illustrative form of prospectus
supplement for use in an offering of Home Equity Loan Pass-Through Certificates,
(iii) a basic prospectus relating to Asset-Backed Notes, and (iv) an
illustrative form of prospectus supplement for use in an offering of Asset-
Backed Notes.
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The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
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PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, Dated June 4, 1999
Prospectus
Home Equity Loan Pass-Through Certificates
Residential Funding Mortgage Securities II, Inc.
Depositor
The depositor may periodically form separate trusts to issue certificates in
series, backed by the assets of that trust.
Offered Certificates The certificates of any series will represent interests
in a trust and will be paid only from the assets of that
trust. Each series may include multiple classes of
certificates with differing payment terms and
priorities. Credit enhancement will be provided for all
certificates.
Mortgage Collateral Each trust will consist primarily of:
o home equity mortgage loans secured by first or
junior liens on one-to four-family properties
acquired under the home equity program; and
o securities and whole or partial participations in
these mortgage loans.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these certificates or determined that
this prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
______________________, 1999
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Important notice about information presented in this
prospectus and the accompanying prospectus supplement
We provide information to you about the certificates in two separate documents
that provide progressively more detail:
o this prospectus, which provides general information, some of which
may not apply to your series of certificates; and
o the accompanying prospectus supplement, which describes the specific
terms of your series of certificates.
If the description of your certificates in the accompanying prospectus
supplement differs from the related description in this prospectus, you should
rely on the information in that prospectus supplement.
You should rely only on the information provided in this prospectus and the
accompanying prospectus supplement, including the information incorporated by
reference. See "Additional Information," "Reports to Certificateholders" and
"Incorporation of Certain Information by Reference" in this Prospectus. You can
request information incorporated by reference from Residential Funding Mortgage
Securities II, Inc. by calling us at (612) 832-7000 or writing to us at 8400
Normandale Lake Boulevard, Suite 600, Minneapolis, Minnesota 55437. We have not
authorized anyone to provide you with different information. We are not offering
the certificates in any state where the offer is not permitted.
Some capitalized terms used in this prospectus are defined in the Glossary
attached hereto.
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TABLE OF CONTENTS
INTRODUCTION.................................................................4
THE TRUSTS...................................................................4
General....................................................................4
Closed-End Loans...........................................................8
Revolving Credit Loans....................................................10
ALLOCATION OF REVOLVING CREDIT LOAN BALANCES
............................................................................11
MORTGAGE LOAN PROGRAM.......................................................12
Underwriting Standards....................................................12
Qualifications of Sellers.................................................16
Representations Relating to Mortgage Loans................................16
Subservicing..............................................................19
DESCRIPTION OF THE CERTIFICATES.............................................21
General...................................................................21
Form of Certificates......................................................21
Assignment of Trust Assets................................................23
Review of Mortgage Loans..................................................25
Excess Spread and Excluded Spread.........................................26
Payments on Mortgage Loans; Deposits to Certificate Account
.......................................................................26
Withdrawals from the Custodial Account....................................28
Distributions.............................................................29
Principal and Interest on the Certificates................................29
Advances on Closed-End Loans..............................................30
Funding Account...........................................................31
Reports to Certificateholders.............................................31
Collection and Other Servicing Procedures.................................32
Special Servicing and Special Servicing Agreements........................34
Realization Upon Defaulted Mortgage Loans.................................35
Hazard Insurance and Related Claims.......................................36
DESCRIPTION OF CREDIT ENHANCEMENT...........................................37
Financial Guaranty Insurance Policy.......................................38
Letter of Credit..........................................................39
Special Hazard Insurance Policies.........................................39
Bankruptcy Bonds..........................................................39
Overcollateralization.....................................................41
Reserve Funds.............................................................41
Maintenance of Credit Enhancement.........................................42
Reduction or Substitution of Credit Enhancement...........................42
OTHER FINANCIAL OBLIGATIONS RELATED TO THE
CERTIFICATES................................................................43
Swaps and Yield Supplement Agreements.....................................43
Purchase Obligations....................................................43
THE DEPOSITOR...............................................................44
RESIDENTIAL FUNDING CORPORATION.............................................44
THE POOLING AND SERVICING AGREEMENT.........................................44
Servicing and Administration..............................................45
Evidence as to Compliance.................................................45
Certain Matters Regarding the Master Servicer and the Depositor
.......................................................................46
Events of Default.........................................................46
Rights Upon Event of Default..............................................47
Amendment.................................................................48
Termination; Retirement of Certificates...................................49
The Trustee...............................................................50
YIELD AND PREPAYMENT CONSIDERATIONS.........................................50
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND
RELATED MATTERS
............................................................................55
General...................................................................55
Cooperative Loans.........................................................56
Tax Aspects of Cooperative Ownership......................................57
Foreclosure on Shares of Cooperatives.....................................58
Anti-Deficiency Legislation and Other Limitations on Lenders
.......................................................................60
Environmental Legislation.................................................61
Enforceability of Certain Provisions......................................62
Applicability of Usury Laws...............................................63
Alternative Mortgage Instruments..........................................63
Soldiers' and Sailors' Civil Relief Act of 1940...........................64
Forfeitures in Drug and RICO Proceedings..................................64
Junior Mortgages; Rights of Senior Mortgagees.............................65
MATERIAL FEDERAL INCOME TAX CONSEQUENCES....................................66
General...................................................................66
REMICS....................................................................67
STATE AND OTHER TAX CONSEQUENCES............................................82
ERISA CONSIDERATIONS........................................................82
Plan Asset Regulations....................................................83
Prohibited Transaction Exemptions.........................................84
Representation from Investing Plans.......................................87
Tax Exempt Investors......................................................88
Consultation with Counsel.................................................88
LEGAL INVESTMENT MATTERS....................................................88
USE OF PROCEEDS.............................................................89
METHODS OF DISTRIBUTION.....................................................89
LEGAL MATTERS...............................................................90
FINANCIAL INFORMATION.....................................................90
ADDITIONAL INFORMATION......................................................90
REPORTS TO CERTIFICATEHOLDERS...............................................90
INCORPORATION OF CERTAIN INFORMATION BY
REFERENCE...................................................................90
GLOSSARY....................................................................92
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INTRODUCTION
The Home Equity Loan Pass-Through Certificates offered by this prospectus
may be sold from time to time in series, as described in the related supplement
to this prospectus, each, a prospectus supplement. Each series of certificates
will represent in the aggregate the entire beneficial ownership interest,
excluding any interest retained by Residential Funding Mortgage Securities II,
Inc., or the depositor, or any other entity specified in the related prospectus
supplement, in a trust consisting primarily of a segregated pool of one- to
four-family, first or junior lien home equity mortgage loans, acquired by the
depositor from one or more affiliated or unaffiliated institutions. Each series
of certificates will be issued under a pooling and servicing agreement among the
depositor, the trustee and master servicer specified in the related prospectus
supplement.
THE TRUSTS
General
The mortgage loans and other assets described below and in the related
prospectus supplement will be held in a trust for the benefit of the holders of
the related series of certificates and the Excess Spread, if any, under a
pooling and servicing agreement as described in this section and in the related
prospectus supplement. As specified in the accompanying prospectus supplement,
each series of certificates in the aggregate will represent the entire
beneficial ownership interest in a pool of loans that is referred to as the
mortgage pool. The mortgage pool will consist primarily of the mortgage loans,
or certain balances thereof, excluding any interest retained by the depositor or
any other entity specified in the related prospectus supplement, evidenced by
promissory notes, or mortgage notes, secured by mortgages or deeds of trust or
other similar security instruments creating a first or junior lien on one- to
four-family properties, or interests in the mortgage loans, which may include
mortgage pass-through certificates, or mortgage securities, evidencing interests
in mortgage loans.
The mortgage loans will either be:
o loans where the principal amount is advanced in full at origination,
or closed-end loans or
o home equity revolving lines of credit, or revolving credit loans.
As specified in the related prospectus supplement, each trust will consist
primarily of:
o owner-occupied attached or detached one-family dwelling units
o two- to four-family dwelling units
o condominiums
o townhouses
o row houses
o individual units in planned-unit developments and modular
pre-cut/panelized housing, or modular housing
o manufactured homes which are permanently affixed to the real
property on which they are located, or manufactured homes, and
o the fee, leasehold or other interests in the underlying real
property.
The mortgaged properties will be located in any of the fifty states, the
District of Columbia or the commonwealth of Puerto Rico and may include
vacation, second and non-owner-occupied homes. As specified in the related
prospectus supplement relating to a series of certificates, a mortgage pool may
contain Cooperative Loans evidenced by Cooperative Notes secured by security
interests in shares issued by Cooperatives and in the related proprietary leases
or occupancy agreements granting exclusive rights to occupy specific dwelling
units in the related buildings. As used in this prospectus, unless the context
indicates otherwise, "mortgage loans" includes Cooperative Loans, "mortgaged
properties" includes shares in the related Cooperative and the related
proprietary leases or occupancy agreements securing Cooperative Notes, "mortgage
notes" includes Cooperative Notes and "mortgages" includes a security agreement
with respect to a Cooperative Note. In connection with a series of certificates
backed by revolving credit loans, if the related prospectus supplement indicates
that the mortgage pool consists of certain
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balances of the revolving credit loans, then the term "mortgage loans" in this
prospectus refers only to those balances.
The prospectus supplement for a series will describe the specific manner
in which certificates of that series issued under a particular pooling and
servicing agreement will evidence specified beneficial ownership interests in a
separate trust created under that pooling and servicing agreement. A trust will
consist of:
o the mortgage loans, and the related mortgage documents, or interests
in them, including any mortgage securities, underlying a particular
series of certificates are subject to the pooling and servicing
agreement, exclusive of, if specified in the related prospectus
supplement, any Excluded Spread or other interest retained by the
depositor or any of its affiliates in each mortgage loan;
o assets, including all payments and collections derived from the
mortgage loans or mortgage securities due after the related cut-off
date, as from time to time are identified as deposited in the
Custodial Account and in the related Certificate Account;
o property acquired by foreclosure of the mortgage loans or deed in
lieu of foreclosure;
o hazard insurance policies as described in this prospectus, if any,
and portions of the related proceeds; and
o any combination, if applicable, of a letter of credit, financial
guaranty insurance policy, special hazard insurance policy,
bankruptcy bond, certificate insurance policy, derivative products,
surety bond or other type of credit enhancement as described under
"Description of Credit Enhancement."
The related prospectus supplement will describe the material terms and
conditions of certificates of interest or participations in mortgage loans to
the extent they are included in the related trust.
Each mortgage loan will be selected by the depositor for inclusion in a
mortgage pool from among those purchased by the depositor, either directly or
through its affiliates, including Residential Funding Corporation, or the master
servicer, GMAC Mortgage Corporation, Residential Money Centers, Inc. and
HomeComings Financial Network, Inc., or from banks, savings and loan
associations, mortgage bankers, investment banking firms, the FDIC and other
mortgage loan originators or sellers not affiliated with the depositor, all as
described below under "Mortgage Loan Program." If a mortgage pool is composed of
mortgage loans acquired by the depositor directly from sellers other than
Residential Funding, the related prospectus supplement will specify the extent
of mortgage loans so acquired. The characteristics of the mortgage loans are as
described in the related prospectus supplement. No more than five percent (5%)
of the mortgage loans, as they are constituted as of the cut-off date, by
aggregate principal balance as of the cut-off date will have characteristics
that deviate from those characteristics described in the accompanying prospectus
supplement. Other mortgage loans available for purchase by the depositor may
have characteristics which would make them eligible for inclusion in a mortgage
pool but were not selected for inclusion in a mortgage pool at that time.
The mortgage loans may be delivered to the depositor in a Designated
Seller Transaction. The related series of certificates may be sold in whole or
in part to any seller identified in the related prospectus supplement in
exchange for the related mortgage loans, or may be offered under any of the
other methods described in this prospectus under "Methods of Distribution." The
related prospectus supplement for a Designated Seller Transaction will include
information, provided by the designated seller, about the designated seller, the
mortgage loans and the underwriting standards applicable to the mortgage loans.
None of the depositor, Residential Funding, GMAC Mortgage Group, Inc. or any of
their affiliates will make any representation or warranty with respect to these
mortgage loans, or any representation as to the accuracy or completeness of the
information provided by the designated seller.
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Any seller, including any designated seller, or Residential Funding may
retain or acquire any Excluded Balances with respect to any related revolving
credit loans, or any loan secured by a mortgage senior or subordinate to any
mortgage loan included in any mortgage pool.
If specified in the related prospectus supplement, the trust underlying a
series of certificates may include mortgage securities. The mortgage securities
may have been issued previously by the depositor or an affiliate, a financial
institution or other entity engaged in the business of mortgage lending or a
limited purpose corporation organized for the purpose of, among other things,
acquiring and depositing mortgage loans into trusts, and selling beneficial
interests in trusts. The mortgage securities will typically be similar to
certificates offered under this prospectus. As to any series of certificates,
the related prospectus supplement will include a description of any mortgage
securities and any related credit enhancement, and the mortgage loans underlying
the mortgage securities will be described together with any other mortgage loans
included in the mortgage pool relating to the series. As to any series of
certificates, as used in this prospectus the term "mortgage pool" includes the
mortgage loans underlying the mortgage securities. Notwithstanding any other
reference in this prospectus to the master servicer, with respect to a series of
certificates as to which the trust includes mortgage securities, the entity that
services and administers the mortgage securities on behalf of the holders of the
certificates may be referred to as the "manager." The manager, if any, will be
identified in the related prospectus supplement. References in this prospectus
to advances to be made and other actions to be taken by the master servicer in
connection with the mortgage loans may include advances made and other actions
taken under the terms of the mortgage securities.
The prospectus supplement for each series of certificates will contain
information appropriate to describe the type of mortgage loans which will be
included in the related mortgage pool. Each prospectus supplement applicable to
a series of certificates will include information, to the extent then available
to the depositor, as of the cut-off date, on an approximate basis. The
information may include, if applicable:
o the aggregate principal balance of the mortgage loans
o the type of property securing the mortgage loans and related lien
priority
o the original or modified and/or remaining terms to maturity of the
mortgage loans
o the range of principal balances of the closed-end loans at
origination or modification
o the earliest origination or modification date and latest maturity
date of the mortgage loans
o the loan-to-value ratios, or LTV ratios, or combined LTV ratios of
the mortgage loans, as applicable
o the mortgage rate or range of mortgage rates borne by the mortgage
loans
o if the mortgage loans are adjustable rate mortgage loans, or ARM
loans or revolving credit loans, the applicable index, the range of
gross margins, the weighted average gross margin, the frequency of
adjustments and maximum loan rate
o the geographical distribution of the mortgaged properties
o the percent of ARM loans
o if the mortgage loans are revolving credit loans, the aggregate
credit limits of the related credit line agreements
o the weighted average Junior Ratio and Credit Utilization Rate
o the range of debt-to-income ratios, and
o Credit Scores.
A current report on Form 8-K will be available upon request to holders of
the related series of certificates and will be filed, together with the related
pooling and servicing agreement, with the Securities and Exchange Commission
within fifteen days after the initial issuance of the certificates. The
composition and characteristics of a mortgage pool containing revolving credit
loans may change from time to time as a result of any Draws made after the
related cut-off date under the related credit line agreements that are included
in the mortgage pool. If mortgage loans are added to or deleted from the trust
after the date of the related prospectus supplement other than as a result of
any Draws, the addition or deletion will be noted in the current report on Form
8-K. Additions or deletions of this type, if any, will be made prior to the
closing date.
As to each mortgage loan, the LTV ratio generally will be the ratio,
expressed as a percentage, of:
o the original principal balance or the credit limit, as applicable,
to
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o the appraised value of the related mortgaged property mortgage loan,
or, if permitted by the Guide, a Statistical Valuation or the Stated
Value.
As to each mortgage loan, the combined LTV ratio generally will be the
ratio, expressed as a percentage, of:
o the sum of:
o the original principal balance or the credit limit, as
applicable, and
o the principal balance of any related senior mortgage loan at
origination of the mortgage loan together with any mortgage
loan subordinate thereto, to
o the appraised value of the related mortgaged property, or, if
permitted by the Guide, a Statistical Valuation or the Stated Value.
The appraised value for any mortgage loan will be the appraised value of
the related mortgaged property determined in the appraisal used in the
origination of the mortgage loan, which may have been obtained at an earlier
time; provided that if the mortgage loan was originated simultaneously with or
not more than 12 months after a senior lien on the related mortgaged property,
the appraised value will be the lesser of the appraised value at the origination
of the senior lien and the sales price for the mortgaged property.
Mortgaged properties consisting of modular housing--also known as
pre-assembled, pre-fabricated, sectional or pre-built homes--are factory built
and constructed in two or more three dimensional sections, including interior
and exterior finish, plumbing, wiring and mechanical systems. Upon completion,
the modular home is transported to the property site to be joined together on a
permanent foundation.
Mortgaged properties consisting of manufactured homes must be legally
classified as real estate, have the wheels and axles removed and be attached to
a permanent foundation and may not be located in a mobile home park. The
manufactured homes will also have certain other characteristics as specified in
the prospectus supplement.
A mortgage pool may include mortgage loans that have been modified. The
modifications may include conversions from an adjustable to a fixed mortgage
rate or other changes in the related mortgage note. If a mortgage loan is a
modified mortgage loan, references to origination shall be deemed to be
references to the date of modification.
The depositor will cause the mortgage loans or their Trust Balances
constituting each mortgage pool, or mortgage securities evidencing interests
therein, to be assigned to the trustee named in the related prospectus
supplement, for the benefit of the holders of all of the certificates of a
series. The master servicer named in the related prospectus supplement will
service the mortgage loans, either directly or through other mortgage servicing
institutions, or subservicers, under a pooling and servicing agreement and will
receive a fee for its services. See "Mortgage Loan Program" and "Description of
the Certificates" in this prospectus As to those mortgage loans serviced by the
master servicer through a subservicer, the master servicer will remain liable
for its servicing obligations under the related pooling and servicing agreement
as if the master servicer alone were servicing the mortgage loans. In addition
to or in place of the master servicer for a series of certificates, the related
prospectus supplement may identify a certificate administrator for the trust.
The certificate administrator may be an affiliate of the depositor. All
references in this prospectus to "master servicer" and any discussions of the
servicing and administration functions of the master servicer will also apply to
the certificate administrator to the extent applicable.
The depositor's assignment of the mortgage loans or the Trust Balances to
the trustee will be without recourse. See "Description of the Certificates --
Assignment of Trust Assets." The master servicer's obligations with respect to
the mortgage loans will consist principally of its contractual servicing
obligations under the related pooling and servicing agreement. These include its
obligation to enforce purchase obligations of Residential Funding or any
designated seller and other obligations of subservicers, as described in this
prospectus under "Mortgage Loan Program -- Representations Relating to Mortgage
Loans," and " -- Subservicing" and "Description of the Certificates --
Assignment of Trust Assets," and its obligation to make certain Advances, if
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applicable, in the event of delinquencies in payments on or with respect to the
mortgage loans in amounts described in this prospectus under "Description of the
Certificates -- Advances on Closed-End Loans", or under the terms of any
mortgage securities. With respect to revolving credit loans, Residential
Funding, or any other entity specified in the related prospectus supplement,
will be obligated to advance funds to mortgagors in respect of Draws made after
the related cut-off date. The obligation of the master servicer to make
principal and interest advances on the closed-end loans will be limited to
amounts which the master servicer believes ultimately would be reimbursable out
of the proceeds of liquidation of the mortgage loans or any applicable form of
credit support. See "Description of the Certificates -- Advances on Closed-End
Loans."
The proceeds of the mortgage loans may be used by the borrower to purchase
or improve the related mortgaged properties, may be retained by the related
mortgagors or may be used for purposes unrelated to the mortgaged properties.
A mortgaged property securing a mortgage loan may be subject to the senior
liens of one or more conventional mortgage loans at the time of origination and
may be subject to one or more junior liens at the time of origination or
thereafter. A mortgage loan secured by any junior lien or senior lien will
likely not be included in the related mortgage pool, but the depositor, an
affiliate of the depositor or an unaffiliated seller may have an interest in the
mortgage loan. revolving credit loans and closed-end loans that are secured by
junior liens, will not be required by the depositor to be covered by a primary
mortgage guaranty insurance policy insuring against default on the mortgage
loan.
Closed-End Loans
Unless specified below or in the related prospectus supplement, all of the
closed-end loans in a mortgage pool will be secured by mortgaged properties
located in any of the 50 states, the District of Columbia or the Commonwealth of
Puerto Rico and be of one or more types of the following types of mortgage loans
described below:
o fixed-rate, fully-amortizing closed-end loans providing for level
monthly payments of principal and interest and terms to maturity of
generally 5, 10, 15, 20 or 25 years at origination or modification
as specified in the related prospectus supplement;
o fully-amortizing ARM loans having an original or modified term to
maturity of not more than 30 years with a related mortgage rate
which usually adjusts initially after a specified period subsequent
to the initial payment date and thereafter at either one-month,
six-month, one-year or other intervals, with corresponding
adjustments in the amount of monthly payments, over the term of the
mortgage loan to equal the sum of a fixed percentage described in
the related mortgage note, or gross margin, and an index. The
related prospectus supplement will describe the relevant index and
the highest, lowest and weighted average gross margin with respect
to the ARM loans in the related mortgage pool. The related
prospectus supplement will also indicate any periodic or lifetime
limitations on changes in any per annum mortgage rate at the time of
any adjustment. An ARM loan may include a provision that allows the
mortgagor to convert the adjustable mortgage rate to a fixed rate at
specified times during the term of the ARM loan. The index for a
particular mortgage pool will be specified in the related prospectus
supplement and may include one of the following indexes:
o the weekly average yield on U.S. Treasury securities adjusted
to a constant maturity of either six months or one year
o the weekly auction average investment yield of U.S. Treasury
bills of six months
o the daily Bank Prime Loan rate made available by the Federal
Reserve Board
o the cost of funds of member institutions for the Federal Home
Loan Bank of San Francisco
o 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
o the weekly average of secondary market interest rates on
six-month negotiable certificates of deposit;
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o Balloon Loans;
o convertible mortgage loans, Cooperative Loans or modified mortgage
loans; or
o similar mortgage loans with other payment characteristics as
described in the related prospectus supplement.
As specified in the related prospectus supplement, a portion of the
closed-end loans underlying a series of certificates may be Simple Interest
Mortgage Loans. Other closed-end loans may be Actuarial Mortgage Loans.
A Simple Interest Mortgage Loan provides the amortization of the amount
financed under the mortgage loan over a series of equal monthly payments,
except, in the case of a Balloon Loan, the final payment. Each monthly payment
consists of an installment of interest which is calculated on the basis of the
outstanding principal balance of the mortgage loan multiplied by the stated
mortgage rate and further multiplied by a fraction, with the numerator equal to
the number of days in the period elapsed since the preceding payment of interest
was made and the denominator equal to the number of days in the annual period
for which interest accrues on the mortgage loan. As payments are received under
a Simple Interest Mortgage Loan, the amount received is applied first to
interest accrued to the date of payment and then the remaining amount is applied
to pay any unpaid fees and then to reduce the unpaid principal balance.
Accordingly, if a borrower pays a fixed monthly installment on a Simple Interest
Mortgage Loan before its scheduled due date, the portion of the payment
allocable to interest for the period since the preceding payment was made will
be less than it would have been had the payment been made as scheduled, and the
portion of the payment applied to reduce the unpaid principal balance will be
correspondingly greater. Conversely, if a borrower pays a fixed monthly
installment after its scheduled due date, the portion of the payment allocable
to interest for the period since the preceding payment was made will be greater
than it would have been had the payment been made as scheduled, and the
remaining portion, if any, of the payment applied to reduce the unpaid principal
balance will be correspondingly less. If each scheduled payment under a Simple
Interest Mortgage Loan is made on or prior to its scheduled due date, the
principal balance of the mortgage loan will amortize more quickly than
scheduled. However, if the borrower consistently makes scheduled payments after
the scheduled due date, the mortgage loan will amortize more slowly than
scheduled. If a Simple Interest Mortgage Loan is prepaid, the borrower is
required to pay interest only to the date of prepayment. The variable
allocations among principal and interest of a Simple Interest Mortgage Loan may
effect the distributions of principal and interest on the certificates, as
described in the related prospectus supplement.
A mortgage pool may contain ARM loans which allow the mortgagors to
convert the adjustable rates on the mortgage loans to a fixed rate at some point
during the life of such mortgage loans, usually, not later than six to ten years
subsequent to the date of origination, depending upon the length of the initial
adjustment period. If specified in the related prospectus supplement, upon any
conversion, the depositor will repurchase or Residential Funding, the applicable
designated seller or a third party will purchase the converted mortgage loan as
and to the extent described in the related prospectus supplement. Alternatively,
if specified in the related prospectus supplement, the depositor or Residential
Funding, or another party specified therein, may agree to act as remarketing
agent with respect to the converted mortgage loans and, in its capacity, to use
its best efforts to arrange for the sale of converted mortgage loans under
specified conditions. Upon the failure of any party so obligated to purchase any
converted mortgage loan, the inability of any remarketing agent to arrange for
the sale of the converted mortgage loan and the unwillingness of the remarketing
agent to exercise any election to purchase the converted mortgage loan for its
own account, the related mortgage pool will thereafter include both fixed rate
and adjustable rate mortgage loans. If so specified in the related prospectus
supplement, the inclusion of a converted mortgage loan in a mortgage pool may
adversely affect the holders of the certificates by restricting the ability of
the related pass-through rate or rates to adjust to the extent intended by the
adjustable pass-through rate.
The closed-end loans may provide for payment of a prepayment charge if the
related mortgagor prepays the closed-end loan within a specified time period.
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Revolving Credit Loans
The revolving credit loans will be originated under credit line agreements
subject to a maximum amount or credit limit. Interest on each revolving credit
loan will be calculated based on the average daily balance outstanding during
the billing cycle and the billing cycle generally will be the calendar month
preceding a due date. Each revolving credit loan will have a mortgage rate that
is subject to adjustment on the day specified in the related mortgage note,
which may be daily or monthly, equal to the sum of the index on the day
specified in the related prospectus supplement, and the gross margin specified
in the related mortgage note, which may vary under circumstances if so specified
in the related prospectus supplement, subject to the maximum rate specified in
the mortgage note and the maximum rate permitted by applicable law.
Notwithstanding the foregoing, a mortgage loan may have an introductory rate
that is lower than the rate that would be in effect if the applicable index and
gross margin were used to determine the mortgage rate and as a result of the
introductory rate, interest distributions on the certificates may initially be
lower than expected. This type of loan is known as a teaser loan. Commencing on
their first adjustment date, the mortgage rates on the teaser loans will be
based on the applicable index and gross margin.
Unless specified in the related prospectus supplement, each revolving
credit loan will have a term to maturity from the date of origination of not
more than 25 years. The mortgagor for each revolving credit loan may make a Draw
under the related credit line agreement at any time during the Draw Period.
Unless specified in the related prospectus supplement, the Draw Period will not
be more than 15 years. Unless specified in the related prospectus supplement,
with respect to each revolving credit loan, if the draw period is less than the
full term of the revolving credit loan, the related mortgagor will not be
permitted to make any Draw during the Repayment Period. The mortgagor for each
revolving credit loan will be obligated to make monthly payments on the
revolving credit loan in a minimum amount as specified in the related mortgage
note, which usually will be the greatest of:
o 1% of the outstanding principal balance of the mortgage loan
o the accrued interest or
o $100.
The mortgagor for each mortgage loan will be obligated to pay off the
remaining account balance on the related maturity date, which may be a
substantial principal amount. The maximum amount of any Draw with respect to any
revolving credit loan is equal to the excess, if any, of the credit limit over
the principal balance outstanding under the mortgage note at the time of the
Draw. Unless provided in the related prospectus supplement, Draws made after the
related cut-off date will be excluded from the mortgage pool.
Unless specified in the related prospectus supplement, with respect to
each revolving credit loan
o the finance charge for any billing cycle generally will be equal to
interest accrued on the average daily principal balance of the
mortgage loan for the billing cycle at the related mortgage rate
o the account balance on any day generally will be the aggregate of
the unpaid principal of the revolving credit loan outstanding at the
beginning of the day, plus all related Draws funded on that day and
outstanding at the beginning of such day, plus the sum of any unpaid
Finance Charges and any unpaid fees, insurance premiums and other
charges--collectively, additional charges, that are due on the
mortgage loan minus the aggregate of all payments and credits that
are applied to the repayment of any Draws on such day, and
o the "principal balance" on any day usually will be the related
account balance minus the sum of any unpaid finance charges and
additional charges that are due on the revolving credit loan.
Payments made by or on behalf of the mortgagor for each mortgage loan
generally will be applied, first, to any unpaid finance charges that are due on
the revolving credit loan, second, to any unpaid additional charges that are due
thereon, and third, to any related Draws outstanding.
The mortgaged property securing each revolving credit loan will be subject
to the lien created by the related mortgage in respect of the outstanding
principal balance of each related Draw or portion thereof that is not included
in the related mortgage pool, whether made on or prior to the related cut-off
date or thereafter. The lien will be the same rank as the lien created by the
mortgage in respect of the revolving credit loan, and monthly payments,
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collections and other recoveries under the credit line agreement related to the
revolving credit loan will be allocated as described in the related prospectus
supplement among the revolving credit loan and the outstanding principal balance
of each Draw or portion of Draw excluded from the mortgage pool. The depositor,
an affiliate of the depositor or an unaffiliated seller may have an interest in
any Draw or portion thereof excluded from the mortgage pool.
In most cases, each revolving credit loan may be prepaid in full or in
part at any time and without penalty, and the related mortgagor will have the
right during the related Draw Period to make a Draw in the amount of any
prepayment made with respect to the mortgage loan. The mortgage note or mortgage
related to each revolving credit loan will usually contain a customary
"due-on-sale" clause.
As to each mortgage loan, the mortgagor's rights to receive Draws during
the Draw Period may be suspended, or the credit limit may be reduced, for cause
under a limited number of circumstances, including a materially adverse change
in the mortgagor's financial circumstances or a non-payment default by the
mortgagor. However, as to each mortgage loan, the suspension or reduction
usually will not affect the payment terms for previously drawn balances. In the
event of default under a mortgage loan, at the discretion of the master
servicer, the mortgage loan may be terminated and declared immediately due and
payable in full. For this purpose, a default includes:
o the mortgagor's failure to make any payment as required
o any action or inaction by the mortgagor that materially and
adversely affects the mortgaged property or the rights in the
mortgaged property or
o fraud or material misrepresentation by a mortgagor in connection
with the loan.
The proceeds of the revolving credit loans may be used by the borrower to
improve the related mortgaged properties, may be retained by the related
mortgagors or may be used for purposes unrelated to the mortgaged properties.
ALLOCATION OF REVOLVING CREDIT LOAN BALANCES
With respect to any series of certificates backed by revolving credit
loans, the related trust may include either
o the entire principal balance of each revolving credit loan
outstanding at any time, including balances
attributable to Draws made after the related cut-off date, or
o the Trust Balance or each revolving credit loan.
The related prospectus supplement will describe the specific provisions by
which payments and losses on any revolving credit loan will be allocated as
between the Trust Balance and any Excluded Balance. Typically, the provisions:
o may provide that principal payments made by the mortgagor will be
allocated as between the Trust Balance and any Excluded Balance
either:
o on a pro rata basis
o first to the Trust Balance until reduced to zero, then to the
Excluded Balance, or
o in accordance with other specified priorities, and
o will provide that interest payments, as well as liquidation proceeds
or similar proceeds following a default and any Realized Losses,
will be allocated as between the Trust Balance and any Excluded
Balance on a pro rata basis.
Even where a trust initially includes the entire principal balance of the
revolving credit loans, the pooling and servicing agreement may provide that
after a specified date or upon the occurrence of specified events, the trust may
not include balances attributable to additional Draws made thereafter. The
related prospectus supplement will describe these provisions as well as the
related allocation provisions that would be applicable.
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MORTGAGE LOAN PROGRAM
The mortgage loans will have been purchased by the depositor, either
directly or indirectly through Residential Funding from sellers. The mortgage
loans will typically have been originated in accordance with the depositor's
underwriting standards or alternative underwriting criteria as described below
under "Underwriting Standards" or as described in the related prospectus
supplement.
Underwriting Standards
General Standards
The depositor's underwriting standards relating to the mortgage loans will
usually conform to those published in Residential Funding's Client Guide, which
together with Residential Funding's Servicer Guide, is referred to as the Guide,
as modified from time to time, including, the provisions of the Guide applicable
to the depositor's Home Equity Program. The underwriting standards as contained
in the Guide are continuously revised based on opportunities and prevailing
conditions in the residential mortgage market, the consumer lending market and
the market for mortgage securities. The mortgage loans may be underwritten by
Residential Funding or by a designated third party. In some circumstances,
however, the mortgage loans may be underwritten only by the seller with little
or no review performed by Residential Funding. See "Underwriting Standards --
Guide Standards" and "Qualifications of Sellers." Residential Funding or a
designated third party may perform only sample quality assurance reviews to
determine whether the mortgage loans in any mortgage pool were underwritten in
accordance with applicable standards.
The depositor's underwriting standards, as well as any other underwriting
standards that may be applicable to any mortgage loans, include a set of
specific criteria under which the underwriting evaluation is made. However, the
application of the underwriting standards does not imply that each specific
criterion was satisfied individually. Rather, a revolving mortgage loan will be
considered to be originated in accordance with a given set of underwriting
standards if, based on an overall qualitative evaluation, the loan is in
substantial compliance with the underwriting standards. For example, a mortgage
loan may be considered to comply with a set of underwriting standards, even if
one or more specific criteria included in the underwriting standards were not
satisfied, if other factors compensated for the criteria that were not
satisfied.
In addition, the depositor purchases mortgage loans which do not conform
to the underwriting standards contained in the Guide. A portion of the mortgage
loans may be purchased in negotiated transactions, and those negotiated
transactions may be governed by agreements, or master commitments, relating to
ongoing purchases of mortgage loans by Residential Funding, from sellers who
will represent that the mortgage loans have been originated in accordance with
underwriting standards agreed to by Residential Funding. Residential Funding, on
behalf of the depositor or a designated third party, will normally review only a
limited portion of the mortgage loans in any delivery of mortgage loans from the
related seller for conformity with the applicable underwriting standards. A
portion of the mortgage loans may be purchased from sellers who will represent
that the mortgage loans were originated under underwriting standards acceptable
to Residential Funding.
The level of review, if any, by Residential Funding or the depositor of
any mortgage loan for conformity with the applicable underwriting standards will
vary depending on any one of a number of factors, including:
o factors relating to the experience and status of the seller, and
o factors relating to the specific mortgage loan, including the
original principal balance or credit limit, as applicable, the
combined LTV ratio, the loan type or loan program, and the
applicable Credit Score of the related mortgagor used in connection
with the origination of the mortgage loan, as determined based on a
credit scoring model acceptable to the depositor.
Credit scoring models provide a means for evaluating the information about
a prospective borrower that is available from a credit reporting agency. The
underwriting criteria applicable to any program under which the mortgage loans
may be originated may provide that qualification for the loan, the level of
review of the loan's
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documentation, or the availability of various loan features, including maximum
loan amount, maximum LTV ratio, property type and use, and documentation level,
may depend on the mortgagor's Credit Score.
The underwriting standards utilized in negotiated transactions and master
commitments and the underwriting standards applicable to mortgage loans
underlying mortgage securities may vary substantially from the underwriting
standards contained in the Guide. Those underwriting standards are generally
intended to provide an underwriter with information to evaluate the borrower's
repayment ability and the value of the mortgaged property as collateral. Due to
the variety of underwriting standards and review procedures that may be
applicable to the mortgage loans included in any mortgage pool, the related
prospectus supplement usually will not distinguish among the various
underwriting standards applicable to the mortgage loans nor describe any review
for compliance with applicable underwriting standards performed by the depositor
or Residential Funding. Moreover, there can be no assurance that every mortgage
loan was originated in conformity with the applicable underwriting standards in
all material respects, or that the quality or performance of mortgage loans
underwritten under varying standards will be equivalent under all circumstances.
In the case of a Designated Seller Transaction, the applicable underwriting
standards will be those of the designated seller or of the originator of the
mortgage loans, and will be described in the related prospectus supplement.
The depositor, either directly or indirectly through Residential Funding,
will also purchase mortgage loans from its affiliates, including GMAC Mortgage
Corporation, Residential Money Centers, Inc. and HomeComings Financial Network,
Inc., with underwriting standards in accordance with the Guide or as otherwise
agreed to by the depositor. However, in some limited circumstances, the mortgage
loans may be employee or preferred customer loans with respect to which, in
accordance with the affiliate's mortgage loan programs, income, asset and
employment verifications and appraisals may not have been required. With respect
to mortgage loans made under any employee loan program maintained by Residential
Funding, or its affiliates, in limited circumstances preferential interest rates
may be allowed. Neither the depositor nor Residential Funding will review any
affiliate's mortgage loans for conformity with the underwriting standards
contained in the Guide.
Guide Standards
The following is a brief description of the underwriting standards
contained in the Guide for full documentation loan programs. Initially, a
prospective borrower, other than a trust if the trust is the borrower, is
required to fill out a detailed application providing pertinent credit
information. As part of the application, the borrower is required to provide a
statement of income and expenses, as well as an authorization to apply for a
credit report which summarizes the borrower's credit history with merchants and
lenders and any record of bankruptcy. Under the Home Equity Program, the
borrower normally must show, among other things, a minimum of two years' credit
history reported on the credit report and that no mortgage delinquencies of
thirty days or greater in the past 12 months existed. Borrowers who have less
than a 12 month first mortgage payment history may be subject to additional
lending restrictions. In addition, under the Home Equity Program, borrowers with
a previous foreclosure or bankruptcy within the past seven years may not be
allowed and a borrower generally must satisfy all judgments, liens and other
legal actions with an original amount of $1,000 or greater prior to closing. In
addition, an employment verification is obtained which reports the borrower's
current salary and may contain the length of employment and an indication as to
whether it is expected that the borrower will continue that employment in the
future. If a prospective borrower is self-employed, the borrower may be required
to submit copies of signed tax returns. The borrower may also be required to
authorize verification of deposits at financial institutions where the borrower
has accounts. In the case of a mortgage loan secured by a property owned by a
trust, the foregoing procedures may be waived where the mortgage note is
executed on behalf of the trust.
The value of the mortgaged property securing each mortgage loan will be
determined by either an appraisal, or if permitted by the Guide, a Statistical
Valuation, or the Stated Value. An appraisal is made of the mortgaged property
securing each mortgage loan. Appraisals may be performed by appraisers
independent from or affiliated with the depositor, Residential Funding or their
affiliates. The appraiser is required to inspect the property and verify that it
is in good condition and that construction, if new, has been completed. In some
circumstances, the appraiser is only required to perform an exterior inspection
of the property. The appraisal is based on various factors, including the market
value of comparable homes and the cost of replacing the improvements. Under the
Home
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Equity Program, each appraisal is required to be dated no more than 360 days
prior to the date of origination of the mortgage loan; provided, that depending
on the original principal amount or credit limit, as applicable, an earlier
appraisal may be used if the appraisal was made not earlier than two years prior
to the date of origination of the mortgage loan and the related appraiser
certifies that the value of the related mortgaged property has not declined
since the date of the original appraisal or if a field review or Statistical
Valuation is obtained. However, appraisals, Statistical Valuations, or Stated
Values will not establish that the mortgaged properties provide assurance of
repayment of the loans. Title searches are undertaken in most cases, and title
insurance is required on all mortgage loans with original principal balances or
credit limits, as applicable, in excess of $100,000.
Certain information, including the Credit Scores for a portion of the
mortgages of the mortgage loans underlying each series of certificates will be
supplied in the related prospectus supplement. Credit Scores are obtained by
many mortgage lenders in connection with mortgage loan applications to help
assess a borrower's credit-worthiness. In addition, Credit Scores may be
obtained by Residential Funding after the origination of a mortgage loan if the
seller does not provide to Residential Funding a Credit Score. Credit Scores are
obtained from credit reports provided by various credit reporting organizations,
each of which may employ differing computer models and methodologies. The Credit
Score is designed to assess a borrower's credit history at a single point in
time, using objective information currently on file for the borrower at a
particular credit reporting organization. Information utilized to create a
Credit Score may include, among other things, payment history, delinquencies on
accounts, levels of outstanding indebtedness, length of credit history, types of
credit, and bankruptcy experience. Credit Scores range from approximately 350 to
approximately 840, with higher scores indicating an individual with a more
favorable credit history compared to an individual with a lower score. However,
a Credit Score purports only to be a measurement of the relative degree of risk
a borrower represents to a lender, i.e., a borrower with a higher score is
statistically expected to be less likely to default in payment than a borrower
with a lower score. In addition, it should be noted that Credit Scores were
developed to indicate a level of default probability over a two-year period,
which does not correspond to the life of a mortgage loan. Furthermore, Credit
Scores were not developed specifically for use in connection with mortgage
loans, but for consumer loans in general, and assess only the borrower's past
credit history. Therefore, a Credit Score does not take into consideration the
differences between mortgage loans and consumer loans generally, or the specific
characteristics of the related mortgage loan, for example, the LTV ratio, the
collateral for the mortgage loan, or the debt-to-income ratio. There can be no
assurance that the Credit Scores of the mortgagors will be an accurate predictor
of the likelihood of repayment of the related mortgage loans or that any
mortgagor's Credit Score would not be lower if obtained as of the date of the
related prospectus supplement.
Once all applicable employment, credit and property information is
received, a determination is made as to whether the prospective borrower has
sufficient monthly income available to meet the borrower's monthly obligations
on the proposed mortgage loan and other expenses related to the home if
applicable, such as property taxes and hazard insurance, as well as other
financial obligations, including debt service on any mortgage loan secured by a
senior lien on the related mortgaged property. In most cases, the monthly
payment used to qualify borrowers for a revolving credit loan will be assumed to
be an amount equal to 1.00% times the applicable credit limit. The mortgage rate
in effect from the origination date of an ARM loan or a revolving credit loan to
the first adjustment date in most cases will be lower, and may be significantly
lower, than the sum of the then applicable index and gross margin. If the
borrowers' incomes do not increase in an amount commensurate with the increases
in monthly payments, the likelihood of default will increase. The monthly
payment used to qualify borrowers for a closed end loan is a fully amortized
fixed payment which is added to the housing expenses and other monthly debt to
calculate the debt-to-income ratio. Unless specified in the related prospectus
supplement, the mortgage loans will not provide for negative amortization. With
respect to Balloon Loans and revolving credit loans, payment of the full
outstanding principal balance at maturity may depend on the borrower's ability
to obtain refinancing or to sell the mortgaged property prior to the maturity of
the mortgage loan, and there can be no assurance that refinancing will be
available to the borrower or that a sale will be possible.
The underwriting standards set forth in the Guide also allow for mortgage
loans to be supported by alternative documentation. For alternatively documented
mortgage loans, a borrower may demonstrate income and employment directly by
providing alternative documentation in the form of copies of the borrower's own
records,
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rather than by having the originator obtain independent verifications from third
parties, such as the borrower's employer or mortgage servicer.
The underwriting standards contained in the Guide may vary in appropriate
cases, including in "limited" or "reduced loan documentation" mortgage loan
programs. Limited documentation programs normally permit fewer supporting
documents to be obtained or waive income, asset and employment documentation
requirements, and normally compensate for increased credit risk by placing
greater emphasis on either the review of the property to be financed or the
borrower's ability to repay the mortgage loan. For example, under Residential
Funding's Stated Income limited mortgage loan documentation program, some
submission requirements regarding income verification and debt-to-income ratios
are removed, but the seller is still required to perform a thorough credit
underwriting of the mortgage loan. Normally, in order to be eligible for a
reduced loan documentation program, a mortgagor must have a good credit history,
and other compensating factors, such as a relatively low combined LTV ratio,
must be present. The borrower's eligibility for the program may further be
determined by use of a credit scoring model.
The Home Equity Program sets forth some limitations relating to the
combined LTV ratio for the mortgage loans and restrictions with respect to any
related underlying first mortgage loan. The underwriting guidelines for the Home
Equity Program normally permit combined LTV ratios as high as 100% except as
otherwise provided in the related prospectus supplement; however, the maximum
permitted combined LTV ratio may be reduced due to various underwriting
criteria. In areas where property values are considered to be declining, the
maximum permitted combined LTV ratio is 75%. The underwriting guidelines also
include restrictions based on the borrower's debt-to-income ratio. In addition
to the conditions described above, an evaluation of the prospective borrower's
credit quality will be made based on a credit scoring model approved by
Residential Funding. The Home Equity Program underwriting guidelines include
minimum credit score levels that may apply depending on certain factors of the
mortgage loan. The required yields for fixed-rate closed-end loans and required
gross margins for revolving credit loans purchased under the Home Equity
Program, as announced from time to time, vary based on a number of factors
including combined LTV ratio, original principal balance or credit limit,
documentation level, property type, and borrower debt-to-income ratio and credit
score.
In its evaluation of mortgage loans which have twenty-four or more months
of payment experience, Residential Funding usually places greater weight on
payment history and may take into account market and other economic trends while
placing less weight on underwriting factors generally applied to newly
originated mortgage loans.
Qualifications of Sellers
Except with respect to Designated Seller Transactions, each seller, other
than the Federal Deposit Insurance Corporation, or FDIC, and investment banking
firms, will have been approved by Residential Funding for participation in
Residential Funding's loan purchase program. In determining whether to approve a
seller for participation in the loan purchase program, Residential Funding will
consider, among other things:
o the financial status, including the net worth, of the seller
o the previous experience of the seller in originating home equity or
first mortgage loans
o the prior delinquency and loss experience of the seller
o the underwriting standards employed by the seller and
o the quality control and, if applicable, servicing operations
established by the seller.
There can be no assurance that any seller presently meets any
qualifications or will continue to meet any qualifications at the time of
inclusion of mortgage loans sold by it in the trust for a series of
certificates, or thereafter. If a seller becomes subject to the direct or
indirect control of the FDIC, or if a seller's net worth, financial performance
or delinquency and foreclosure rates deteriorate, that institution may continue
to be treated as a seller. Any event of this type may adversely affect the
ability of any seller to repurchase the mortgage loans in the event of a breach
of a representation or warranty which has not been cured.
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Residential Funding monitors sellers that it knows to be under control of
the FDIC or are insolvent, otherwise in receivership or conservatorship or
financially distressed. Any seller that is under control of the FDIC or
insolvent may make no representations and warranties with respect to mortgage
loans sold by it. The FDIC, either in its corporate capacity or as receiver for
a depository institution, may also be a seller of the mortgage loans, in which
event neither the FDIC nor the related depository institution may make
representations and warranties with respect to the mortgage loans sold, or only
limited representations and warranties may be made--for example, that the
related legal documents are enforceable. The FDIC may have no obligation to
repurchase any mortgage loan for a breach of a representation and warranty.
Unless otherwise specified in the related prospectus supplement, the
qualifications required of sellers for approval by Residential Funding as
participants in its loan purchase programs may not apply to designated sellers.
To the extent the designated seller fails to or is unable to repurchase the
mortgage loan due to a breach of representation and warranty, neither the
depositor, Residential Funding nor any other entity will have assumed the
representations and warranties, and any related losses will be borne by the
certificateholders or by the credit enhancement, if any.
Representations Relating to Mortgage Loans
Except as described above, each seller will have made representations and
warranties to Residential Funding with respect to the mortgage loans sold by it.
However, except in the case of a Designated Seller Transaction or as otherwise
provided in the related prospectus supplement, the representations and
warranties of the seller will not be assigned to the trustee for the benefit of
the holders of the related series of certificates, and therefore a breach of the
representations and warranties of the seller generally will not be enforceable
on behalf of the trust.
In the case of a mortgage pool consisting of mortgage loans purchased by
the depositor from sellers through Residential Funding, Residential Funding,
except in the case of a Designated Seller Transaction or as to mortgage loans
underlying any mortgage securities or unless otherwise specified in the related
prospectus supplement, will have made certain limited representations and
warranties regarding the mortgage loans to the depositor at the time, just prior
to the initial issuance of the related series of certificates, that they are
sold to the depositor. The representations and warranties will include, among
other things, that:
o as of the cut-off date, the information contained in a listing of
the related mortgage loans is true and correct in all material
respects;
o Residential Funding was the sole holder and owner of the mortgage
loan free and clear of any and all liens and security interests;
o each mortgage loan complied in all material respects with all
applicable local, state and federal laws;
o except as otherwise indicated in the related prospectus supplement,
no mortgage loan is one month or more delinquent in payment of
principal and interest; and
o there is no delinquent tax or, to the best of the Residential
Funding's knowledge, assessment lien against any mortgaged property.
In the event of a breach of a representation or warranty made by
Residential Funding that materially adversely affects the interests of the
certificateholders in a mortgage loan, Residential Funding will be obligated to
repurchase or substitute for the mortgage loan as described in the third and
fourth succeeding paragraphs. In addition, Residential Funding will be obligated
to repurchase or substitute for any mortgage loan as to which it is discovered
that the related Mortgage is not a valid lien on the related mortgaged property
having at least the priority described with respect to the mortgage loan in the
listing of related mortgage loans, subject only to:
o liens of real property taxes and assessments not yet due and payable
o covenants, conditions and restrictions, rights of way, easements and
other matters of public record as of the date of recording of the
mortgage and some other permissible title exceptions
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o 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
o if applicable, the liens of the related senior mortgage loans.
In addition, with respect to any mortgage loan as to which the depositor
delivers to the trustee or the custodian an affidavit certifying that the
original mortgage note has been lost or destroyed, if the mortgage loan
subsequently is in default and the enforcement of the mortgage loan or of the
related mortgage is materially adversely affected by the absence of the original
mortgage note, Residential Funding will be obligated to repurchase or substitute
for the mortgage loan, in the manner described in the second and third
succeeding paragraphs. However, Residential Funding will not be required to
repurchase or substitute for any mortgage loan above if the circumstances giving
rise to the requirement also constitute fraud in the origination of the related
mortgage loan. Furthermore, because the listing of the related mortgage loans
generally contains information with respect to the mortgage loans as of the
cut-off date, prepayments and, in some limited circumstances, modifications to
the interest rate and principal and interest payments may have been made with
respect to one or more of the related mortgage loans between the cut-off date
and the date of the initial issuance of the certificates. Residential Funding
will not be required to purchase or substitute for any mortgage loan as a result
of the prepayment or modification.
In a Designated Seller Transaction, unless otherwise specified in the
related prospectus supplement, the designated seller will have made
representations and warranties regarding the mortgage loans to the depositor
usually similar to those made in the preceding paragraph by Residential Funding.
The depositor will assign to the trustee for the benefit of the holders of
the related series of certificates all of its right, title and interest in each
agreement by which it purchased a mortgage loan from Residential Funding or a
designated seller, insofar as the agreement relates to the representations and
warranties made by a designated seller or Residential Funding, as the case may
be, in respect of the mortgage loan and any remedies provided for with respect
to any breach of the representations and warranties. If a designated seller or
Residential Funding, as the case may be, cannot cure a breach of any
representation or warranty made by it in respect of a mortgage loan which
materially and adversely affects the interests of the certificateholders in the
mortgage loan, within 90 days after notice from the master servicer, that
designated seller or Residential Funding, as the case may be, will be obligated
to purchase the mortgage loan at a price contained in the related pooling and
servicing agreement, which purchase price typically will be equal to the
principal balance of the mortgage loan 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.
Unless otherwise specified in the related prospectus supplement, as to any
mortgage loan required to be purchased by Residential Funding as provided in the
preceding paragraph, rather than purchase the mortgage loan, Residential Funding
may, at its sole option, remove the mortgage loan, making it a deleted mortgage
loan, from the trust and cause the depositor to substitute in its place another
mortgage loan of like kind, or qualified substitute mortgage loan. However, any
substitution must be effected within 120 days of the date of the initial
issuance of the certificates with respect to a trust treated as a grantor trust
for federal income tax purposes. When a REMIC election is to be made, except as
otherwise provided in the prospectus supplement relating to a series of
certificates, substitution of a defective mortgage loan must be effected within
three years of the date of the initial issuance of the certificates, and may not
be made if the substitution would cause the trust to not qualify as a REMIC or
result in a prohibited transaction tax under the Internal Revenue Code. Except
as otherwise provided in the related prospectus supplement, any qualified
substitute mortgage loan will, on the date of substitution:
o have an outstanding principal balance, after deduction of the
principal portion of the monthly payment due in the month of
substitution, not in excess of the outstanding principal balance of
the deleted mortgage loan--the amount of any shortfall to be
deposited in the related Custodial Account in the month of
substitution for distribution to the certificateholders;
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o have a mortgage rate and a Net Mortgage Rate not less than, and not
more than one percentage point greater than, the mortgage rate and
Net Mortgage Rate, respectively, of the deleted mortgage loan as of
the date of substitution;
o have a combined LTV ratio at the time of substitution no higher than
that of the deleted mortgage loan at the time of substitution;
o have a remaining term to maturity not greater than, and not more
than one year less than, that of the deleted mortgage loan; and
o comply with all of the representations and warranties contained in
the related pooling and servicing agreement as of the date of
substitution. The related pooling and servicing agreement may
include additional requirements relating to ARM loans, revolving
credit loans or other specific types of mortgage loans, or
additional provisions relating to meeting the foregoing requirements
on an aggregate basis where a number of substitutions occur
contemporaneously. Unless otherwise specified in the related
prospectus supplement, a designated seller will have no option to
substitute for a mortgage loan that it is obligated to repurchase in
connection with a breach of a representation and warranty.
The master servicer will be required under the applicable pooling and
servicing agreement to use its best reasonable efforts to enforce this purchase
or substitution obligation for the benefit of the trustee and the
certificateholders, using practices it would employ in its good faith business
judgment and which are normal and usual in its general mortgage servicing
activities; provided, however, that this purchase or substitution obligation
will not become an obligation of the master servicer in the event the designated
seller or Residential Funding, as the case may be, fails to honor its
obligation. The master servicer will be entitled to reimbursement for any costs
and expenses incurred in pursuing a purchase or substitution obligation,
including but not limited to any costs or expenses associated with litigation.
In instances where a designated seller is unable, or disputes its obligation, to
purchase affected mortgage loans, the master servicer, employing the standards
described in the preceding sentence, may negotiate and enter into one or more
settlement agreements with the designated seller that may provide for, among
other things, the purchase of only a portion of the affected mortgage loans or
coverage of only certain loss amounts. Any settlement could lead to losses on
the mortgage loans which would be borne by the related credit enhancement
supporting the related series of certificates, and to the extent not available,
by the certificateholders of the series. Furthermore, if applicable, the master
servicer may pursue foreclosure or similar remedies concurrently with pursuing
any remedy for a breach of a representation and warranty. However, the master
servicer is not required to continue to pursue both remedies if it determines
that one of the remedies is more likely to result in a greater recovery. In
accordance with the above described practices, the master servicer will not be
required to enforce any purchase of a designated seller arising from any
misrepresentation by the designated seller, if the master servicer determines in
the reasonable exercise of its business judgment that the matters related to the
misrepresentation did not directly cause or are not likely to directly cause a
loss on the related mortgage loan. If the designated seller fails to repurchase
and no breach of either the depositor's or Residential Funding's representations
has occurred, the designated seller's purchase obligation will not become an
obligation of the depositor or Residential Funding. Unless specified in the
related prospectus supplement, the foregoing obligations will constitute the
sole remedies available to certificateholders or the trustee for a breach of any
representation by a designated seller or by Residential Funding in its capacity
as a seller of mortgage loans to the depositor, or for any other event giving
rise to the obligations as described above.
Neither the depositor nor the master servicer will be obligated to
purchase a mortgage loan if a designated seller defaults on its obligation to do
so, and no assurance can be given that the designated sellers will carry out its
obligations with respect to mortgage loans. A default by a designated seller is
not a default by the depositor or by the master servicer. Any mortgage loan not
so purchased or substituted for shall remain in the related trust and any losses
related to that mortgage loan shall be allocated to the related credit
enhancement, and to the extent not available, to the related certificates.
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However, if any designated seller requests Residential Funding's consent
to transfer subservicing rights for any related mortgage loans to a successor
servicer, Residential Funding may release the designated seller from liability
under its representations and warranties described in this section, upon the
assumption of the successor servicer of the designated seller's liability for
its representations and warranties as of the date they were made. In that event,
Residential Funding's rights under the instrument by which the successor
servicer assumes the designated seller's liability will be assigned to the
trustee, and the successor servicer will be deemed to be the "designated seller"
for purposes of the foregoing provisions.
Subservicing
The servicing for each mortgage loan in most cases will 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. In
either case, each mortgage loan will then be serviced by the subservicer under a
subservicing agreement between the master servicer and the subservicer. The
master servicer may, but is not obligated to, assign the subservicing to
designated subservicers which will be qualified sellers and which may include
GMAC Mortgage Corporation or its affiliates. While the subservicing agreement
will be a contract solely between the master servicer and the subservicer, the
pooling and servicing agreement under which a series of certificates is issued
will provide that, if for any reason the master servicer for the series of
certificates is no longer the master servicer of the related mortgage loans, the
trustee or any successor master servicer must recognize the subservicer's rights
and obligations under the subservicing agreement.
Each subservicer typically will be required to perform the customary
functions of a servicer, including but not limited to:
o collection of payments from mortgagors and remittance of those
collections to the master servicer
o maintenance of escrow or impoundment accounts of mortgagors for
payment of taxes, insurance and other items required to be paid by
the mortgagor under the mortgage loan, if applicable
o 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 that exercise is
permitted by law and would not adversely affect insurance coverage
o attempting to cure delinquencies
o supervising foreclosures
o inspection and management of mortgaged properties under certain
circumstances and
o maintaining accounting records relating to the mortgage loans.
The subservicer may be required to make advances to the holder of any
related first mortgage loan to avoid or cure any delinquencies to the extent
that doing so would be prudent and necessary to protect the interests of the
certificateholders. A subservicer also may be obligated to make advances to the
master servicer in respect of delinquent installments of principal and interest,
net of any subservicing or other compensation, on closed-end loans, as described
under "Description of the Certificates -- Advances on Closed-End Loans," and in
respect of some taxes and insurance premiums not paid on a timely basis by
mortgagors. The subservicer generally shall be responsible for performing all
collection and other servicing functions with respect to any delinquent loan or
foreclosure proceeding. In addition, the subservicer is required to advance
funds to cover any Draws made on a revolving credit loan subject to
reimbursement by the entity specified in the related prospectus supplement. No
assurance can be given that the subservicers will carry out their advance or
payment obligations with respect to the mortgage loans.
A subservicer may, in most cases, transfer its servicing obligations to
another entity that has been approved for participation in Residential Funding's
loan purchase programs, but only with the approval of the master servicer.
As compensation for its servicing duties, the subservicer will be entitled
to a monthly servicing fee, to the extent the related mortgage loan payment has
been collected, in a minimum amount described in the related prospectus
supplement. The subservicer or master servicer may also be entitled to collect
and retain, as part of its servicing compensation, all or a portion of any late
charges, if any, provided in the mortgage note or related
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instruments and in the case of the master servicer, any penalties enforced
against a subservicer. The remaining portion of the late charges will be
remitted to the master servicer. The subservicer will be reimbursed by the
master servicer for some expenditures which it makes, in most cases to the same
extent that the master servicer would be reimbursed under the applicable pooling
and servicing agreement. See "The Pooling and Servicing Agreement --Servicing
and Administration."
Each subservicer will be required to agree to indemnify the master
servicer for any liability or obligation sustained by the master servicer in
connection with any act or failure to act by the subservicer in its servicing
capacity. Each subservicer is required to maintain a fidelity bond and an errors
and omissions policy with respect to its employees and other persons acting on
its behalf or on behalf of the master servicer.
Each subservicer will be required to service each mortgage loan under the
terms of the subservicing agreement for the entire term of that mortgage loan,
unless the subservicing agreement is earlier terminated by the master servicer
or unless servicing is released to the master servicer. Subject to applicable
law, the master servicer may have the right to terminate a subservicing
agreement immediately upon giving notice upon specified events, including the
violation of the subservicing agreement by the subservicer, or up to ninety
days' notice to the subservicer without cause upon payment of specified amounts
set forth in the subservicing agreement. Upon termination of a subservicing
agreement, the master servicer may act as servicer of the related mortgage loans
or enter into one or more new subservicing agreements. The master servicer may
agree with a subservicer to amend a subservicing agreement. Any amendments to a
subservicing agreement or to a new subservicing agreement may contain provisions
different from those described above which are in effect in the original
subservicing agreements. However, the pooling and servicing agreement for each
trust will provide that any amendment or new agreement may not be inconsistent
with or violate the pooling and servicing agreement in a manner which would
materially and adversely affect the interests of the certificateholders.
The master servicer may either assume the primary servicing responsibility
form the related subservicer, and may perform all collections, loss mitigation
and other servicing functions with respect to any delinquent loan or foreclosure
proceeding, or may review the loss mitigation procedures conducted with respect
to any delinquent loan, as well as the management and liquidation of any
delinquent mortgaged properties acquired by foreclosure or deed-in-lieu of
foreclosure.
DESCRIPTION OF THE CERTIFICATES
General
The certificates will be issued in series. Each series of certificates,
or, in some instances, two or more series of certificates, will be issued under
a pooling and servicing agreement, similar to one of the forms filed as an
exhibit to the registration statement under the Securities Act of 1933, as
amended, with respect to the certificates of which this prospectus is a part.
Each pooling and servicing agreement will be filed with the Commission as an
exhibit to a Form 8-K. The following summaries, together with additional
summaries under "The Pooling and Servicing Agreement" below as well as other
pertinent information included elsewhere in this prospectus, and subject to the
related prospectus supplement, do not describe all terms of the certificates but
reflect the material provisions relating to the certificates common to each
pooling and servicing agreement.
Each series of certificates may consist of a single class of certificates
or any combination of the following:
o a single class of certificates;
o two or more classes of certificates, of which one or more classes of
certificates, the senior certificates, may be senior in right of
payment to any other class or classes of certificates, the
subordinate certificates, and as to which some classes of senior or
subordinate certificates may be senior to other classes of senior or
subordinate certificates, as described in the related prospectus
supplement--any of these series is referred to as a
senior/subordinate series;
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o one or more classes of certificates, the mezzanine certificates,
which are subordinate certificates but which are senior to certain
other classes of subordinate certificates in respect of
distributions or losses;
o one or more classes of certificates, which are referred to as strip
certificates, which will be entitled to:
o principal distributions, with disproportionate, nominal or no
interest distributions or
o interest distributions, with disproportionate, nominal or no
principal distributions;
o two or more classes of certificates which differ as to the timing,
sequential order, rate, pass-through rate or amount of distributions
of principal or interest or both, or as to which distributions of
principal or interest or both on any class may be made upon the
occurrence of specified events, in accordance with a schedule or
formula, including "planned amortization classes" and "targeted
amortization classes" and "very accurately defined maturity
classes", or on the basis of collections from designated portions of
the mortgage pool, which series may include one or more classes of
certificates with respect to which certain accrued interest will not
be distributed but rather will be added to the principal balance
thereof--accrual certificates--on each distribution date, commencing
in the month following the month in which the cut-off date occurs;
or
o other types of classes of certificates, as described in the related
prospectus supplement.
Credit support for each series of certificates will be provided by a
financial guaranty insurance policy, derivative products, special hazard
insurance policy, bankruptcy bond, letter of credit, reserve fund, surety bond,
by the subordination of one or more classes of certificates,
overcollateralization or other credit enhancement as described under
"Description of Credit Enhancement," or by any combination of the foregoing.
Form of Certificates
As specified in the related prospectus supplement, the certificates of
each series will be issued either as physical certificates or in book-entry
form. If issued as physical certificates, the certificates will be in fully
registered form only in the denominations specified in the related prospectus
supplement, and will be transferrable and exchangeable at the corporate trust
office of the person appointed certificate registrar under the related pooling
and servicing agreement to register the certificates. No service charge will be
made for any registration of exchange or transfer of certificates, but the
trustee may require payment of a sum sufficient to cover any tax or other
governmental charge. The term "certificateholder" as used in this prospectus
refers to the entity whose name appears on the records of the certificate
registrar, or, if applicable, a transfer agent, as the registered holder of a
certificate.
If issued in book-entry form the classes of a series of certificates will
be initially issued through the book-entry facilities of:
o The Depository Trust Company, or DTC
o Cedelbank, societe anonyme, or Cedel, or
o the Euroclear System, or Euroclear (in Europe).
Certificateholders may hold book-entry certificates directly through these
facilities if they are participants of those systems, or indirectly through
organizations which are participants in those systems, or through any other
depository or facility as may be specified in the related prospectus supplement.
Any class of certificates issued in book-entry form via one of the facilities
described above will list DTC's nominee as the record holder. Cedel and
Euroclear will hold omnibus positions on behalf of their participants through
customers' securities accounts in Cedel's and Euroclear's names on the books of
their respective depositaries, which in turn will hold those positions in
customers' securities accounts in the depositaries' names on the books of DTC.
DTC is a limited-purpose trust company organized under the laws of the
State of New York, which holds securities for its participating organizations
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 other organizations. Other institutions that are not
participants but clear through or maintain a custodial relationship with
participants have indirect access to DTC's clearance system and are referred to
as indirect participants.
Unless specified in the related prospectus supplement, no person acquiring
an interest in any book-entry certificate, or beneficial owner, will be entitled
to receive a certificate representing that interest in registered, certificated
form, unless either DTC ceases to act as depository for that certificate and a
successor depository is not obtained, or the trustee elects in its sole
discretion to discontinue the registration of the certificates through DTC.
Prior to this happening, beneficial owners will not be recognized by the trustee
or the master servicer as holders of the related certificates for purposes of
the pooling and servicing agreement, and beneficial owners will be able to
exercise their rights as owners of their certificates only indirectly through
DTC, participants and indirect participants. Any beneficial owner that desires
to purchase, sell or otherwise transfer any interest in book-entry certificates
may do so only through DTC, either directly if the beneficial owner is a
participant or indirectly through participants and, if applicable, indirect
participants. Under the procedures of DTC, transfers of the beneficial ownership
of any book-entry certificates will be required to be made in minimum
denominations specified in the related prospectus supplement. The ability of a
beneficial owner to pledge book-entry certificates to persons or entities that
are not participants in the DTC system, or to otherwise act with respect to the
certificates, may be limited because of the lack of physical certificates
evidencing the certificates and because DTC may act only on behalf of
participants.
Because of time zone differences, the securities account of a Cedel or
Euroclear participant as a result of a transaction with a DTC participant, other
than a depositary holding on behalf of Cedel or Euroclear, will be credited
during the subsequent securities settlement processing day immediately following
the DTC settlement date, which must be a business day for Cedel or Euroclear, as
the case may be. Credits or any transactions in those securities settled during
this processing will be reported to the relevant Euroclear participant or Cedel
participant on that business day. Cash received in Cedel or Euroclear as a
result of sales of securities by or through a Cedel participant or Euroclear
participant to a DTC participant, other than the depositary for Cedel or
Euroclear, will be received with value on the DTC settlement date, but will be
available in the relevant Cedel or Euroclear cash account only as of the
business day following settlement in DTC.
Transfers between participants will occur in accordance with DTC rules.
Transfers between Cedel participants and Euroclear participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
participants or Euroclear participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the relevant depositaries; however, these cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in that system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to its
depositary to take action to effect final settlement on its behalf by delivering
or receiving securities in DTC, and making or receiving payment in accordance
with normal procedures for same day funds settlement applicable to DTC. Cedel
participants and Euroclear participants may not deliver instructions directly to
the depositaries.
Cedel, as a professional depository, holds securities for its
participating organizations 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 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, or the
Euroclear operator, under contract with Euroclear Clearance Systems S.C., or the
Clearance Cooperative, a Belgian co-operative corporation. 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
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the Clearance Cooperative. The Clearance Cooperative establishes policy for
Euroclear on behalf of Euroclear participants. The Euroclear operator is the
Belgian branch of a New York banking corporation which is a member bank of the
Federal Reserve System. As a result, it is regulated and examined by the Board
of Governors of the Federal Reserve System and the New York State Banking
Department, as well as the Belgian Banking Commission. Securities clearance
accounts and cash accounts with the Euroclear operator are governed by the Terms
and Conditions Governing Use of Euroclear and the related Operating Procedures
of the Euroclear System and applicable Belgian law. 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.
Distributions on the book-entry certificates will be forwarded by the
trustee to DTC, and DTC will be responsible for forwarding those payments to
participants, each of which will be responsible for disbursing the payments to
the beneficial owners it represents or, if applicable, to indirect participants.
Accordingly, beneficial owners may experience delays in the receipt of payments
in respect of their certificates. Under DTC's procedures, DTC will take actions
permitted to be taken by holders of any class of book-entry certificates under
the pooling and servicing agreement only at the direction of one or more
participants to whose account the book-entry certificates are credited and whose
aggregate holdings represent no less than any minimum amount of percentage
interests or voting rights required therefor. DTC may take conflicting actions
with respect to any action of certificateholders of any class to the extent that
participants authorize those actions. None of the master servicer, the
depositor, the trustee or any of their respective affiliates will have any
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in the book-entry certificates, or for
maintaining, supervising or reviewing any records relating to those beneficial
ownership interests.
Assignment of Trust Assets
At the time of issuance of a series of certificates, the depositor will
cause the mortgage loans ,or Trust Balances thereof, if applicable, or mortgage
securities and any other assets being included in the related trust to be
assigned without recourse to the trustee or its nominee, which may be the
custodian. If specified in the related prospectus supplement, all principal and
interest received on or with respect to the mortgage loans, or Trust Balances
thereof, if applicable, or mortgage securities after the cut-off date, other
than principal and interest due on or before the cut-off date and any Excluded
Spread, will also be assigned. The trustee will, concurrently with the
assignment, deliver a series of certificates to the depositor in exchange for
the mortgage loans, or Trust Balances thereof, if applicable, or mortgage
securities. Each mortgage loan, Trust Balance or mortgage security will be
identified in a schedule appearing as an exhibit to the related pooling and
servicing agreement. The schedule will include, among other things, information
as to the principal balance of each mortgage loan as of the cut-off date, as
well as information respecting the mortgage rate, the currently scheduled
monthly payment of principal and interest, the maturity of the mortgage note and
the combined LTV ratio at origination or modification.
If so specified in the related prospectus supplement, and subject to the
rules of membership of Merscorp, Inc. and/or Mortgage Electronic Registration
Systems, Inc., which are referred to together as MERS, assignments of the
mortgages for the mortgage loans in the related trust will be registered
electronically through Mortgage Electronic Registration Systems, Inc., or the
MERS(R) System. With respect to mortgage loans registered through the MERS(R)
System, MERS shall serve as mortgagee of record solely as a nominee in an
administrative capacity on behalf of the trustee and shall not have any interest
in any of those mortgage loans.
In addition, except as provided below with respect to some series of
certificates backed by Trust Balances of revolving credit loans, the depositor
will, as to each mortgage loan other than mortgage loans underlying any mortgage
securities, deliver to the trustee, or to the custodian, the legal documents
relating to the mortgage loan that are in possession of the depositor, which may
include:
o the mortgage note, and any modification or amendment made to the
mortgage note, endorsed without recourse either in blank or to the
order of the trustee or its nominee;
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o the mortgage, except for any mortgage not returned from the public
recording office, with evidence of recording indicated thereon or,
in the case of a Cooperative Loan, the respective security
agreements and any applicable UCC financing statements;
o an assignment in recordable form of the mortgage, or evidence that
the mortgage is held for the trustee through the MERS(R) System or,
with respect to a Cooperative Loan, an assignment of the respective
security agreements, any applicable UCC financing statements,
recognition agreements, relevant stock certificates, related blank
stock powers and the related proprietary leases or occupancy
agreements; and
o if applicable, any riders or modifications to the mortgage note and
mortgage, together with any other documents at such times as
described in the related pooling and servicing agreement.
The assignments may be blanket assignments covering mortgages secured by
mortgaged properties located in the same county, if permitted by law. If so
specified in the related prospectus supplement, the depositor may not be
required to deliver one or more of the documents if the documents are missing
from the files of the party from whom the mortgage loans were purchased.
In the event that, with respect to any mortgage loan, except as provided
below, the depositor cannot deliver the mortgage or any assignment with evidence
of recording thereon concurrently with the execution and delivery of the related
pooling and servicing agreement because of a delay caused by the public
recording office, the depositor will deliver or cause to be delivered to the
trustee or the custodian a true and correct photocopy of the mortgage or
assignment. The depositor will deliver or cause to be delivered to the trustee
or the custodian the mortgage or assignment with evidence of recording indicated
on the mortgage or assignment after receipt from the public recording office or
from the related subservicer.
With respect to any Puerto Rico mortgage loans, the mortgages with respect
to those mortgage loans either secure a specific obligation for the benefit of a
specified person--a direct Puerto Rico mortgage--or secure an instrument
transferable by endorsement--an endorsable Puerto Rico mortgage. Endorsable
Puerto Rico mortgages do not require an assignment to transfer the related lien.
Rather, transfer of those mortgages follows an effective endorsement of the
related mortgage note and, therefore, delivery of an assignment of mortgage
would be inapplicable. Direct Puerto Rico mortgages, however, require an
assignment to be recorded with respect to any transfer of the related lien and
the assignment would be delivered to the trustee or the custodian.
Assignments of the mortgage loans to the trustee will be recorded in the
appropriate public recording office, except for mortgages held under the MERS(R)
System or in states where, in the opinion of counsel acceptable to the trustee,
the recording is not required to protect the trustee's interests in the mortgage
loan against the claim of any subsequent transferee or any successor to or
creditor of the depositor or the originator of the mortgage loan, or except as
otherwise specified in the related prospectus supplement.
Notwithstanding the preceding three paragraphs, with respect to any series
of certificates backed by Trust Balances of revolving credit loans, the
foregoing documents generally will have been delivered to an entity specified in
the related prospectus supplement which may be the trustee, a custodian or
another entity appointed by the trustee. That entity shall hold those documents
as or on behalf of the trustee for the benefit of the certificateholders, with
respect to the Trust Balances thereof, and on behalf of any other applicable
entity with respect to any Excluded Balance thereof, as their respective
interests may appear.
Review of Mortgage Loans
The trustee will in most cases be authorized to appoint one or more
custodians under a custodial agreement to maintain possession of and review
documents relating to the mortgage loans as the agent of the trustee. The
identity of any custodian will be described in the related prospectus
supplement.
The trustee or the custodian will hold the documents in trust for the
benefit of the certificateholders and, normally will review the documents within
90 days after receipt. If any document is found to be defective in any material
respect, the trustee or the custodian shall notify the master servicer and the
depositor, and the master
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servicer, the servicer or the trustee shall notify Residential Funding or the
designated seller. If Residential Funding or, in a Designated Seller
Transaction, the designated seller cannot cure the defect within 60 days or
within the other period specified in the related prospectus supplement, after
notice of the defect is given to Residential Funding, or, if applicable, the
designated seller, Residential Funding or the designated seller, as the case may
be, is required to, not later than 90 days after such notice, or within the
other period specified in the related prospectus supplement, either repurchase
the related mortgage loan or any property acquired in respect of it from the
trustee, or if permitted substitute for that mortgage loan a new mortgage loan
in accordance with the standards described in this prospectus. The master
servicer will be obligated to enforce this obligation of Residential Funding or
the designated seller to the extent described above under "Mortgage Loan Program
- -- Representations Relating to Mortgage Loans," but the obligation is subject to
the provisions described below under " -- Realization Upon Defaulted Mortgage
Loans." There can be no assurance that the applicable designated seller will
fulfill its obligation to purchase any mortgage loan as described above. In most
cases, neither Residential Funding, the master servicer nor the depositor will
be obligated to purchase or substitute for the mortgage loan if the designated
seller defaults on its obligation to do so. The obligation to repurchase or
substitute for a mortgage loan constitutes the sole remedy available to the
certificateholders or the trustee for a material defect in a constituent
document. Any mortgage loan not so purchased or substituted for shall remain in
the related trust.
Notwithstanding the foregoing, with respect to the Trust Balance of a
revolving credit loan, the review of the related documents need not be performed
if a similar review has previously been performed by the entity holding the
documents with respect to an Excluded Balance and such review covered all
documentation with respect to any Trust Balance.
The master servicer will make representations and warranties regarding its
authority to enter into, and its ability to perform its obligations under, the
pooling and servicing agreement. Upon a breach of any of these representations
of the master servicer which materially adversely affect the interests of the
certificateholders in a mortgage loan, the master servicer will be obligated
either to cure the breach in all material respects or to purchase the mortgage
loan at its purchase price, less unreimbursed advances, if applicable, made by
the master servicer with respect to the mortgage loan, or, unless otherwise
specified in the related prospectus supplement, to substitute for the mortgage
loan a qualified substitute mortgage loan in accordance with the provisions for
substitution described above under "Mortgage Loan Program -- Representations
Relating to Mortgage Loans." This purchase obligation will constitute the sole
remedy available to certificateholders or the trustee for a breach of this type
of representation by the master servicer. Any mortgage loan not so purchased or
substituted for shall remain in the related trust.
Excess Spread and Excluded Spread
The depositor, the master servicer or any of their affiliates, or any
other entity as may be specified in the related prospectus supplement may retain
or be paid a portion of interest due with respect to the related mortgage loans
or mortgage securities. The payment of any portion of interest in this manner
will be disclosed in the related prospectus supplement. This payment may be in
addition to any other payment, including a servicing fee, that any specified
entity is otherwise entitled to receive with respect to the mortgage loans or
mortgage securities. Any of these payments generated from the mortgage loans or
mortgage securities will represent Excess Spread or Excluded Spread. The
interest portion of a Realized Loss or Extraordinary Loss and any partial
recovery of interest in respect of the mortgage loans or mortgage securities
will be allocated between the owners of any Excess Spread or Excluded Spread and
the certificateholders entitled to payments of interest as provided in the
applicable pooling and servicing agreement.
Payments on Mortgage Loans; Deposits to Certificate Account
Each subservicer servicing a mortgage loan under a subservicing agreement
will establish and maintain a subservicing account which materially meets the
requirements described in the Guide from time to time or is approved by
Residential Funding. A subservicer is required to deposit into its subservicing
account on a daily basis all amounts that are received by it in respect of the
mortgage loans, less its servicing or other compensation. As specified in the
subservicing agreement, the subservicer must remit or cause to be remitted to
the master servicer all funds held in the subservicing account with respect to
mortgage loans that are required to be so remitted on a periodic
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basis not less frequently than monthly. If so specified in the related
prospectus supplement, the subservicer may also be required to advance on the
scheduled date of remittance any monthly installment of principal and interest,
or interest only, with respect to Simple Interest Mortgage Loans, less its
servicing or other compensation, on any mortgage loan for which payment was not
received from the mortgagor.
The master servicer will deposit or will cause to be deposited into the
Custodial Account certain payments and collections received by it subsequent to
the cut-off date, other than payments due on or before the cut-off date, as
specifically contained in the related pooling and servicing agreement, which
generally will include the following:
o payments on account of principal of the mortgage loans or on the
mortgage securities comprising a trust;
o payments on account of interest on the mortgage loans or on the
mortgage securities comprising the trust, net of the portion of each
payment thereof retained by the subservicer, if any, as its
servicing or other compensation;
o Liquidation Proceeds, net of unreimbursed liquidation expenses and
insured expenses incurred, and unreimbursed Servicing Advances, if
any, made by the related subservicer, including Insurance Proceeds
or proceeds from any alternative arrangements established in lieu of
any insurance and described in the applicable prospectus supplement,
other than proceeds to be applied to the restoration of the related
property or released to the mortgagor in accordance with the master
servicer's normal servicing procedures;
o proceeds of any mortgage loan in the trust purchased, or, in the
case of a substitution, certain amounts representing a principal
adjustment, by the master servicer, the depositor, Residential
Funding, any subservicer or seller or any other person under the
terms of the pooling and servicing agreement. See "Mortgage Loan
Program -- Representations Relating to Mortgage Loans," and
"Description of the Certificates -- Assignment of Trust Assets"
above;
o any amount required to be deposited by the master servicer in
connection with losses realized on investments of funds held in the
Custodial Account, as described below; and
o any amounts required to be transferred from the Certificate Account
to the Custodial Account.
Both the Custodial Account and the Certificate Account must be either:
o maintained with a depository institution whose debt obligations at
the time of any deposit in the account are rated by any rating
agency that rated any certificates of the related series not less
than a specified level comparable to the rating category of those
certificates;
o an account or accounts the deposits in which are fully insured to
the limits established by the FDIC, provided that any deposits not
so insured shall be otherwise maintained so that, as evidenced by an
opinion of counsel, the certificateholders have a claim with respect
to the funds in the accounts or a perfected first priority security
interest in any collateral securing the funds that is superior to
the claims of any other depositors or creditors of the depository
institution with which the accounts are maintained;
o in the case of the Custodial Account, a trust account or accounts
maintained in either the corporate trust department or the corporate
asset services department of a financial institution which has debt
obligations that meet specific rating criteria;
o in the case of the Certificate Account, a trust account or accounts
maintained with the trustee; and
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o any other Eligible Account. The collateral that is eligible to
secure amounts in an Eligible Account is limited to certain
Permitted Investments.
Unless otherwise set forth in the related prospectus supplement, not later
than the business day preceding each distribution date, the master servicer will
withdraw from the Custodial Account and deposit into the applicable Certificate
Account, in immediately available funds, the amount to be distributed therefrom
to certificateholders on the distribution date. The master servicer or the
trustee will also deposit or cause to be deposited into the Certificate Account:
o the amount of any Advances on closed-end loans, if applicable, made
by the master servicer as described in this prospectus under " --
Advances on Closed-End Loans"
o any payments under any letter of credit, financial guaranty
insurance policy, credit derivative and any amounts required to be
transferred to the Certificate Account from a reserve fund, as
described under "Credit Enhancement" below
o any amounts required to be paid by the master servicer out of its
own funds due to the operation of a deductible clause in any blanket
policy maintained by the master servicer to cover hazard losses on
the mortgage loans as described under "Description of the
Certificates -- Hazard Insurance and Related Claims" below
o any distributions received on any mortgage securities included in
the trust and
o any other amounts as described in the related pooling and servicing
agreement.
The portion of any payment received by the master servicer in respect of a
mortgage loan that is allocable to Excess Spread or Excluded Spread, as
applicable, will generally be deposited into the Custodial Account, but any
Excluded Spread will not be deposited in the Certificate Account for the related
series of certificates and will be distributed as provided in the related
pooling and servicing agreement.
Funds on deposit in the Custodial Account may be invested in Permitted
Investments maturing in general not later than the business day preceding the
next distribution date, and funds on deposit in the related Certificate Account
may be invested in Permitted Investments maturing, in general, no later than the
distribution date. Unless otherwise specified in the related prospectus
supplement, all income and gain realized from any investment will be for the
account of the master servicer as additional servicing compensation. The amount
of any loss incurred in connection with any investment must be deposited in the
Custodial Account or in the Certificate Account, as the case may be, by the
master servicer out of its own funds upon realization of the loss.
Withdrawals from the Custodial Account
The master servicer may, from time to time, make withdrawals from the
Custodial Account for certain purposes, as specifically contained in the related
pooling and servicing agreement, which will include the following:
o to make deposits to the Certificate Account in the amounts and in
the manner provided in the pooling and servicing agreement and
described above under " -- Payments on Mortgage Loans; Deposits to
Certificate Account;"
o to reimburse itself or any subservicer for Advances, if applicable,
or for Servicing Advances as to any mortgaged property, out of late
payments, Insurance Proceeds, Liquidation Proceeds or collections on
the mortgage loan with respect to which those Advances or Servicing
Advances were made;
o to pay to itself or any subservicer unpaid servicing fees and
subservicing fees, out of payments or collections of interest on
each mortgage loan;
o to pay to itself as additional servicing compensation any investment
income on funds deposited in the Custodial Account, any amounts
remitted by subservicers as interest in respect of partial
prepayments on the mortgage loans, and, if so provided in the
pooling and servicing agreement, any profits realized upon
disposition of a mortgaged property acquired by deed in lieu of
foreclosure or repossession or otherwise allowed under the pooling
and servicing agreement;
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o to pay to itself, a subservicer, Residential Funding, the depositor
or the seller all amounts received with respect to each mortgage
loan purchased, repurchased or removed under the terms of the
pooling and servicing agreement and not required to be distributed
as of the date on which the related purchase price is determined;
o to pay the depositor or its assignee, or any other party named in
the related prospectus supplement all amounts allocable to the
Excluded Spread, if any, out of collections or payments which
represent interest on each mortgage loan, including any mortgage
loan as to which title to the underlying mortgaged property was
acquired;
o to reimburse itself or any subservicer for any Nonrecoverable
Advance, subject to any limitations set forth in the pooling and
servicing agreement as described in the related prospectus
supplement;
o to reimburse itself or the depositor for certain other expenses
incurred for which it or the depositor is entitled to reimbursement,
including reimbursement in connection with enforcing any repurchase,
substitution or indemnification obligation of any designated seller,
or against which it or the depositor is indemnified under the
pooling and servicing agreement;
o to withdraw any amount deposited in the Custodial Account that was
not required to be deposited in the Custodial Account;
o to pay to itself or any subservicer for the funding of any Draws
made on the mortgage loans, if applicable;
o to make deposits to the Funding Account in the amounts and in the
manner provided in the pooling and servicing agreement, if
applicable; and
o to clear the Custodial Account of amounts relating to the
corresponding mortgage loans in connection with the termination of
the trust under the pooling and servicing agreement.
Distributions
Distributions of principal and/or interest, as applicable, on each class
of certificates entitled thereto will be made on each distribution date either
by the trustee, the master servicer acting on behalf of the trustee or a paying
agent appointed by the trustee. Payments will be made to the persons who are
registered as the holders of the certificates at the close of business on the
day prior to each payment date or, if the certificates are no longer book-entry,
to the persons in whose names the certificates are registered at the close of
business on the last business day of the preceding month, or the record date.
Distributions will be made in immediately available funds, by wire transfer or
otherwise, to the account of a certificateholder at a bank or other entity
having appropriate facilities therefor, if the certificateholder has so notified
the trustee, the master servicer or the paying agent, as the case may be, and
the applicable pooling and servicing agreement provides for that form of
payment, or by check mailed to the address of the person entitled thereto as it
appears on the certificate register. The final distribution in retirement of the
certificates will be made only upon presentation and surrender of the
certificates at the office or agency of the trustee specified in the notice to
certificateholders. Distributions will be made to each certificateholder in
accordance with the holder's percentage interest in a particular class, which
will be equal to the percentage obtained by dividing the initial principal
balance or notional amount of the certificate by the aggregate initial amount or
notional balance of all the certificates of that class.
Principal and Interest on the Certificates
The method of determining, and the amount of, distributions of principal
and interest, or, where applicable, of principal only or interest only, on a
particular series of certificates will be described in the related prospectus
supplement. Distributions of interest on each class of certificates will be made
prior to distributions of principal on
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each class. Each class of certificates, other than certain classes of strip
certificates, may have a different specified interest rate, or pass-through
rate, which may be a fixed, variable or adjustable pass-through rate, or any
combination of two or more such pass-through rates. The related prospectus
supplement will specify the pass-through rate or rates for each class, or the
initial pass-through rate or rates and the method for determining the
pass-through rate or rates. Unless otherwise specified in the related prospectus
supplement, interest on the certificates will be calculated on the basis of
either a 360-day year consisting of twelve 30-day months or the actual number of
days in the related interest period and a 360-day year.
On each distribution date for a series of certificates, the trustee or the
master servicer on behalf of the trustee will distribute or cause the paying
agent to distribute, as the case may be, to each holder of record on the record
date of a class of certificates, an amount equal to the percentage interest
represented by the certificate held by the holder multiplied by such class's
Distribution Amount.
In the case of a series of certificates which includes two or more classes
of certificates, the timing, sequential order, priority of payment or amount of
distributions in respect of principal, and any schedule or formula or other
provisions applicable to the determination of principal distributions, including
distributions among multiple classes of senior certificates or subordinate
certificates, shall be as described in the related prospectus supplement.
Distributions in respect of principal of any class of certificates will be made
on a pro rata basis among all of the certificates of that class unless otherwise
described in the related prospectus supplement. In addition, unless otherwise
specified in the related prospectus supplement, distributions of principal on
the certificates will be limited to monthly principal payments on the mortgage
loans, any Excess Interest, if applicable, applied as principal distributions on
the certificates and any amount distributed as a payment of principal under the
related form of credit enhancement. To the extent the trust contains Balloon
Loans that require no monthly payments and non-amortizing mortgage loans that
require only small principal payments in proportion to the principal balance of
the mortgage loan, the amount of principal distributions on the certificates
generally will be less than the amount that would otherwise be distributable on
a similar pool of conventional loans.
On the day of the month specified in the related prospectus supplement as
the determination date, the master servicer will determine the amounts of
principal and interest which will be passed through to certificateholders on the
succeeding distribution date. Prior to the close of business on the business day
succeeding each determination date, the master servicer will furnish a statement
to the trustee setting forth, among other things, the amount to be distributed
on the next succeeding distribution date. The information in the statement will
be made available to certificateholders by the master servicer on request.
Advances on Closed-End Loans
In connection with closed-end loans, the master servicer will agree to
make Advances, either out of its own funds, funds advanced to it by subservicers
or funds being held in the Custodial Account for future distribution, for the
benefit of the certificateholders, on or before each distribution date, which
were delinquent as of the close of business on the business day preceding the
determination date on the mortgage loans in the related mortgage pool, but only
to the extent that the Advances would, in the judgment of the master servicer,
be recoverable out of late payments by the mortgagors, Liquidation Proceeds,
Insurance Proceeds or otherwise. Advances will not be made in connection with
revolving credit loans, except as otherwise provided in the related prospectus
supplement. As specified in the related prospectus supplement with respect to
any series of certificates as to which the trust includes mortgage securities,
the master servicer's advancing obligations will be under the terms of the
mortgage securities, as may be supplemented by the terms of the applicable
pooling and servicing agreement, and may differ from the provisions relating to
Advances described in this prospectus. Unless specified in the related
prospectus supplement, the master servicer will not make any advance with
respect to principal on any Simple Interest Mortgage Loan.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to related certificateholders. Advances do not represent an
obligation of the master servicer to guarantee or insure against losses. If
Advances have been made by the master servicer from cash being held for future
distribution to certificateholders, those funds will be required to be replaced
on or before any future distribution date to the extent that funds in the
Certificate Account on that distribution date would be less than payments
required to be made to
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certificateholders. Any Advance will be reimbursable to the master servicer out
of recoveries on the related mortgage loans for which those amounts were
advanced, including, for example, late payments made by the related mortgagor,
any related Liquidation Proceeds and Insurance Proceeds, proceeds of any
applicable form of credit enhancement or proceeds of any mortgage loan purchased
by the depositor, Residential Funding, a subservicer or a seller under the
circumstances described above. These Advances will also be reimbursable from
cash otherwise distributable to certificateholders, including the holders of
senior certificates, if applicable, to the extent that the master servicer shall
determine that any Advances previously made are not ultimately recoverable as
described above. With respect to any senior/subordinate series, so long as the
related subordinate certificates remain outstanding and subject to limitations
with respect to Special Hazard Losses, Fraud Losses, Bankruptcy Losses and
Extraordinary Losses, the Advances may also be reimbursable out of amounts
otherwise distributable to holders of the subordinate certificates, if any. The
master servicer generally will also be obligated to make Servicing Advances, to
the extent recoverable out of Liquidation Proceeds or otherwise, in respect of
certain taxes and insurance premiums not paid by mortgagors on a timely basis.
Funds so advanced will be reimbursable to the master servicer to the extent
permitted by the pooling and servicing agreement.
The master servicer's obligation to make Advances may be supported by
another entity, the trustee, a financial guaranty insurance policy, a letter of
credit or other method as may be described in the related pooling and servicing
agreement. In the event that the short-term or long-term obligations of the
provider of the support are downgraded by a rating agency rating the related
certificates or if any collateral supporting that obligation is not performing
or is removed under the terms of any agreement described in the related
prospectus supplement, the certificates may also be downgraded.
Funding Account
If so specified in the related prospectus supplement, a pooling and
servicing agreement or other agreement may provide for the transfer by the
sellers of additional mortgage loans to the related trust after the closing date
for the related certificates. Additional mortgage loans will be required to
conform to the requirements contained in the related pooling and servicing
agreement or other agreement providing for the transfer. As specified in the
related prospectus supplement, the transfer may be funded by the establishment
of a Funding Account. If a Funding Account is established, all or a portion of
the proceeds of the sale of one or more classes of certificates of the related
series or a portion of collections on the mortgage loans in respect of principal
will be deposited in the Funding Account to be released as additional mortgage
loans are transferred. Unless otherwise specified in the related prospectus
supplement, a Funding Account will be required to be maintained as an Eligible
Account, all amounts in the Funding Account will be required to be invested in
Permitted Investments and the amount held in the Funding Account shall at no
time exceed 25% of the aggregate outstanding principal balance of the
certificates. Unless otherwise specified in the related prospectus supplement,
the related pooling and servicing agreement or other agreement providing for the
transfer of additional mortgage loans will provide that all transfers must be
made within 9 months, as to amounts representing proceeds of the sale of the
certificates, or 12 months, as to amounts representing principal collections on
the mortgage loans, after the closing date, and that amounts set aside to fund
those transfers, whether in a Funding Account or otherwise, and not so applied
within the required period of time will be deemed to be principal prepayments
and applied in the manner described in the prospectus supplement.
Reports to Certificateholders
On each distribution date, the master servicer will forward or cause to be
forwarded to each certificateholder of record a statement or statements with
respect to the related trust setting forth the information described in the
related pooling and servicing agreement. Except as otherwise provided in the
related pooling and servicing agreement, this information will include the
following, as applicable:
o the aggregate amount of interest collections and principal
collections;
o the amount, if any, of the distribution allocable to principal;
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o the amount, if any, of the distribution allocable to interest, and
the amount, if any, of any shortfall in the amount of interest and
principal;
o the aggregate unpaid principal balance of the mortgage loans or, if
applicable, the Trust Balances thereof after giving effect to the
distribution of principal on the distribution date;
o the outstanding principal balance or notional amount of each class
of certificates after giving effect to the distribution of principal
on the distribution date;
o based on the most recent reports furnished by subservicers, the
number of mortgage loans in the related mortgage pool that are
delinquent one month, two months and three months, and that are in
foreclosure, and the aggregate principal balances of these groups of
mortgage loans or, if applicable, the Trust Balances thereof;
o the book value of any property acquired by the trust through
foreclosure or grant of a deed in lieu of foreclosure;
o the balance of the Reserve Fund, if any, at the close of business on
the distribution date;
o the percentage of the outstanding principal balance of the senior
certificates, if applicable, after giving effect to the
distributions on the distribution date;
o the amount of coverage under any letter of credit or other form of
credit enhancement covering default risk as of the close of business
on the applicable determination date and a description of any credit
enhancement substituted therefor;
o if applicable, the Special Hazard Amount, Fraud Loss Amount and
Bankruptcy Amount as of the close of business on the applicable
distribution date and a description of any change in the calculation
of those amounts, as well as the aggregate amount of each type of
loss;
o in the case of certificates benefitting from alternative credit
enhancement arrangements described in a prospectus supplement, the
amount of coverage under those alternative arrangements as of the
close of business on the applicable determination date; and
o with respect to any series of certificates as to which the trust
includes mortgage securities, any additional information as required
under the related pooling and servicing agreement.
Each amount set forth in the first two items in the list above will be
expressed as a dollar amount per single certificate. As to a particular class of
certificates, a "single certificate" will evidence a percentage interest
obtained by dividing $1,000 by the initial principal balance or notional balance
of all the certificates of that class, except as otherwise provided in the
related pooling and servicing agreement. In addition to the information
described above, reports to certificateholders will contain any other
information as is described in the applicable pooling and servicing agreement,
which may include, without limitation, information as to Advances,
reimbursements to subservicers and the master servicer and losses borne by the
related trust.
In addition, to the extent described in the pooling and servicing
agreement, within a reasonable period of time after the end of each calendar
year, the master servicer will furnish a report to each person that was a holder
of record of any class of certificates at any time during that calendar year.
The report will include information as to the aggregate of amounts reported
under the first two items in the list above for that calendar year or, in the
event the person was a holder of record of a class of certificates during a
portion of that calendar year, for the applicable portion of that year.
Collection and Other Servicing Procedures
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The master servicer will have the option to allow an increase in the
credit limit applicable to any revolving credit loan in certain limited
circumstances. The master servicer will have an unlimited ability to obtain
increases provided that the following conditions are met:
o a new appraisal is obtained
o the new combined LTV ratio is less than or equal to the original
combined LTV ratio
o verbal verification of employment is obtained and
o 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 combined
LTV ratio 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 the
revolving credit loans exceed 10% of the current pool balance; provided further,
however, that for revolving credit loans with original combined LTV ratios in
excess of 80%, the combined LTV ratio resulting from the credit limit increase
must be less than or equal to the original combined LTV ratio and at no time
shall the aggregate principal balance of the revolving credit loans exceed 5% of
the current pool balance.
The master servicer, directly or through subservicers, as the case may be,
will make reasonable efforts to collect all payments called for under the
mortgage loans and will, consistent with the related pooling and servicing
agreement and any applicable insurance policy or other credit enhancement,
follow the collection procedures which shall be normal and usual in its general
mortgage servicing activities with respect to mortgage loans comparable to the
mortgage loans in the mortgage pool. Consistent with the foregoing, the master
servicer may in its discretion waive any prepayment charge in connection with
the prepayment of a mortgage loan or extend the due dates for payments due on a
mortgage note, provided that the insurance coverage for the mortgage loan or any
coverage provided by any alternative credit enhancement will not be adversely
affected by any waiver or extension. With respect to any series of certificates
as to which the trust includes mortgage securities, the master servicer's
servicing and administration obligations will be governed by the terms of those
mortgage securities.
The master servicer, in its discretion, may, or may allow a subservicer to
extend relief to mortgagors whose payments become delinquent. The master
servicer or subservicer, without the prior approval of the master servicer, may
grant a period of temporary indulgence, in most cases up to three months, to a
mortgagor or may enter into a liquidating plan providing for repayment by the
mortgagor of delinquent amounts within six months from the date of execution of
the plan, in each case without the prior approval of the master servicer. Most
other types of forbearance require master servicer approval. Neither indulgence
nor forbearance with respect to a mortgage loan will affect the pass-through
rate or rates used in calculating distributions to certificateholders. See " --
Distributions."
In instances in which a mortgage loan is in default or if default is
reasonably foreseeable, and if determined by the master servicer to be in the
best interests of the related certificateholders, the master servicer may engage
in a wide variety of loss mitigation practices including waivers, modifications,
payment forbearances, partial forgiveness, entering into repayment schedule
arrangements, and capitalization of arrearages rather than proceeding with
foreclosure. In making this determination, the estimated Realized Loss that
might result if the mortgage loan were liquidated would be taken into account.
These modifications may have the effect of reducing the mortgage rate or
extending the final maturity date of the mortgage loan. Any modified mortgage
loan may remain in the related trust, and the reduction in collections resulting
from a modification may result in reduced distributions of interest or other
amounts on, or may extend the final maturity of, one or more classes of the
related certificates.
In connection with any significant partial prepayment of a mortgage loan,
the master servicer, to the extent not inconsistent with the terms of the
mortgage note and local law and practice, may permit the mortgage loan to be
re-amortized so that the monthly payment is recalculated as an amount that will
fully amortize its remaining principal amount by the original maturity date
based on the original mortgage rate, provided that the re-amortization shall not
be permitted if it would constitute a modification of the mortgage loan for
federal income tax purposes.
In any case in which property subject to a mortgage loan, other than an
ARM loan described below, is being conveyed by the mortgagor, the master
servicer, directly or through a subservicer, shall in most cases be obligated,
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to the extent it has knowledge of the conveyance, to exercise its rights to
accelerate the maturity of the mortgage loan under any due-on-sale clause
applicable thereto, but only if the exercise of the rights is permitted by
applicable law and only to the extent it would not adversely affect or
jeopardize coverage under any applicable credit enhancement arrangements. If the
master servicer or subservicer is prevented from enforcing the due-on-sale
clause under applicable law or if the master servicer or subservicer determines
that it is reasonably likely that a legal action would be instituted by the
related mortgagor to avoid enforcement of the due-on-sale clause, the master
servicer or subservicer will enter into an assumption and modification agreement
with the person to whom that property has been or is about to be conveyed, under
which that person becomes liable under the mortgage note subject to certain
specified conditions. The original mortgagor may be released from liability on a
mortgage loan if the master servicer or subservicer shall have determined in
good faith that the release will not adversely affect the collectability of the
mortgage loan. An ARM loan may be assumed if that ARM loan is by its terms
assumable and if, in the reasonable judgment of the master servicer or the
subservicer, the proposed transferee of the related mortgaged property
establishes its ability to repay the loan and the security for the ARM loan
would not be impaired by the assumption. If a mortgagor transfers the mortgaged
property subject to an ARM loan without consent, the ARM Loan may be declared
due and payable. Any fee collected by the master servicer or subservicer for
entering into an assumption or substitution of liability agreement will be
retained by the master servicer or subservicer as additional servicing
compensation unless otherwise set forth in the related prospectus supplement.
See "Certain Legal Aspects of Mortgage Loans and Related Matters --
Enforceability of Certain Provisions" in this prospectus. In connection with any
such assumption, the mortgage rate borne by the related mortgage note may not be
altered. Mortgagors may, from time to time, request partial releases of the
mortgaged properties, easements, consents to alteration or demolition and other
similar matters. The master servicer or the related subservicer may approve this
type of request if it has determined, exercising its good faith business
judgment in the same manner as it would if it were the owner of the related
mortgage loan, that the approval will not adversely affect the security for, and
the timely and full collectability of, the related mortgage loan. Any fee
collected by the master servicer or the subservicer for processing this type of
request will be retained by the master servicer or subservicer as additional
servicing compensation.
Special Servicing and Special Servicing Agreements
The pooling and servicing agreement for a series of certificates may name
a special servicer, which will be responsible for the servicing of certain
delinquent mortgage loans. The special servicer may have discretion to extend
relief to certain mortgagors whose payments become delinquent. The special
servicer may be permitted to grant a period of temporary indulgence to a
mortgagor or may enter into a repayment plan providing for repayment of
arrearages by the mortgagor, in each case without the prior approval of the
master servicer or the subservicer. Other types of forbearance may require the
approval of the master servicer or subservicer, as applicable.
In addition, the master servicer may enter into various agreements with
holders of one or more classes of subordinate certificates or of a class of
securities representing interests in one or more classes of subordinate
certificates. Under the terms of these agreements, the holder may, with respect
to certain delinquent mortgage loans:
o instruct the master servicer to commence or delay foreclosure
proceedings, provided that the holder deposits a specified amount of
cash with the master servicer which will be available for
distribution to certificateholders in the event that liquidation
proceeds are less than they otherwise may have been had the master
servicer acted under its normal servicing procedures;
o instruct the master servicer to purchase the mortgage loans from the
trust prior to the commencement of foreclosure proceedings at the
purchase price and to resell the mortgage loans to the holder, in
which case any subsequent loss with respect to the mortgage loans
will not be allocated to the certificateholders;
o become, or designate a third party to become, a subservicer with
respect to the mortgage loans so long as the master servicer has the
right to transfer the subservicing rights and obligations of the
mortgage loans to another subservicer at any time, or the holder or
its servicing designee is required to service the mortgage loans
according to the master servicer's servicing guidelines; or
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o the related prospectus supplement may provide for the other types of
special servicing arrangements.
Realization Upon Defaulted Mortgage Loans
With respect to a mortgage loan in default, the master servicer or the
related subservicer may take a variety of actions including foreclosing upon the
mortgaged property, write off the balance of the mortgage loan or the Trust
Balance as bad debt, take a deed in lieu of foreclosure, accept a short sale,
permit a short refinancing, arrange for a repayment plan or a modification as
described above. In connection with this decision, the master servicer or the
related subservicer will, following usual practices in connection with senior
and junior mortgage servicing activities, estimate the proceeds expected to be
received and the expenses expected to be incurred in connection with the
foreclosure to determine whether a foreclosure proceeding is appropriate. To the
extent that a mortgage loan is a junior mortgage loan, following any default
thereon, unless foreclosure proceeds for that mortgage loan are expected to at
least satisfy the related senior mortgage loan in full and to pay foreclosure
costs, it is likely that the mortgage loan will be written off as bad debt with
no foreclosure proceeding. In the event that title to any mortgaged property is
acquired in foreclosure or by deed in lieu of foreclosure, the deed or
certificate of sale will be issued to the trustee or to its nominee on behalf of
certificateholders and, if applicable, the holders of any Excluded Balances.
Notwithstanding any acquisition of title and cancellation of the related
mortgage loan, the mortgage loan, or REO Mortgage Loan, will be considered for
most purposes to be a Liquidated Mortgage Loan.
For purposes of calculations of amounts distributable to
certificateholders in respect of an REO Mortgage Loan, the amortization schedule
in effect at the time of any acquisition of title, before any adjustment thereto
by reason of any bankruptcy or any similar proceeding or any moratorium or
similar waiver or grace period, will be deemed to have continued in effect, and,
in the case of an ARM loan, the amortization schedule will be deemed to have
adjusted in accordance with any interest rate changes occurring on any
adjustment date therefor, so long as the REO Mortgage Loan is considered to
remain in the trust. If a REMIC election has been made, any mortgaged property
so acquired by the trust must be disposed of in accordance with applicable
federal income tax regulations and consistent with the status of the trust as a
REMIC. To the extent provided in the related pooling and servicing agreement,
any income, net of expenses and other than gains described below received by the
subservicer or the master servicer on the mortgaged property prior to its
disposition will be deposited in the Custodial Account upon receipt and will be
available at that time to the extent provided in the related pooling and
servicing agreement, for making payments to certificateholders.
With respect to a mortgage loan in default, the master servicer may pursue
foreclosure or similar remedies subject to any senior loan positions and certain
other restrictions pertaining to junior loans as described under "Certain Legal
Aspects of Mortgage Loans and Related Matters -- Foreclosure on Mortgage Loans"
concurrently with pursuing any remedy for a breach of a representation and
warranty. However, the master servicer is not required to continue to pursue
both of these remedies if it determines that one of the remedies is more likely
to result in a greater recovery. Upon the first to occur of final liquidation
and a repurchase or substitution under a breach of a representation and
warranty, the mortgage loan will be removed from the related trust. The master
servicer may elect to treat a defaulted mortgage loan as having been finally
liquidated if substantially all amounts expected to be received in connection
therewith have been received. Any additional liquidation expenses relating to
that mortgage loan thereafter incurred will be reimbursable to the master
servicer, or any subservicer, from any amounts otherwise distributable to the
related certificateholders, or may be offset by any subsequent recovery related
to the mortgage loan. Alternatively, for purposes of determining the amount of
related Liquidation Proceeds to be distributed to certificateholders, the amount
of any Realized Loss or the amount required to be drawn under any applicable
form of credit enhancement, the master servicer may take into account minimal
amounts of additional receipts expected to be received, as well as estimated
additional liquidation expenses expected to be incurred in connection with the
defaulted mortgage loan. Upon foreclosure of a revolving credit loan, the
related Liquidation Proceeds will be allocated among the Trust Balances and
Excluded Balances as described in the prospectus supplement.
If so provided in the related prospectus supplement, the applicable form
of credit enhancement may provide, to the extent of coverage thereunder, that a
defaulted mortgage loan or REO Mortgage Loan will be removed from the trust
prior to the final liquidation thereof in which case any estimated loss may be
covered by any applicable form
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of credit enhancement or other insurance or the certificateholders may bear the
loss. If a defaulted mortgage loan or REO Mortgage Loan is not so removed from
the trust, then, upon the final liquidation thereof, if a loss is realized which
is not covered by any applicable form of credit enhancement or other insurance,
the certificateholders will bear the loss. However, if a gain results from the
final liquidation of an REO Mortgage Loan which is not required by law to be
remitted to the related mortgagor, the master servicer will be entitled to
retain that gain as additional servicing compensation unless the related
prospectus supplement provides otherwise. For a description of the master
servicer's obligations to maintain and make claims under applicable forms of
credit enhancement and insurance relating to the mortgage loans, see
"Description of Credit Enhancement" and "Description of the Certificates --
Hazard Insurance and Related Claims."
The master servicer is required to maintain a fidelity bond and errors and
omissions policy with respect to its employees and other persons acting on
behalf of the master servicer in connection with its activities under the
pooling and servicing agreement. The master servicer may be subject to
restrictions under the pooling and servicing agreement with respect to the
refinancing of a lien senior to a mortgage loan on the related mortgaged
property.
Hazard Insurance and Related Claims
Unless specified in the related prospectus supplement, each mortgage loan,
other than a Cooperative Loan, will be required to be covered by a hazard
insurance policy, as described below. The following summary, as well as other
pertinent information included elsewhere in this prospectus, does not describe
all terms of a hazard insurance policy but will reflect all material terms
thereof relevant to an investment in the certificates. The insurance is subject
to underwriting and approval of individual mortgage loans by the respective
insurers. The descriptions of any insurance policies described in this
prospectus or any prospectus supplement and the coverage thereunder do not
purport to be complete and are qualified in their entirety by reference to the
forms of policies.
Unless otherwise specified in the related prospectus supplement, the
pooling and servicing agreement will require the master servicer to cause to be
maintained for each mortgaged property a hazard insurance policy providing for
no less than the coverage of the standard form of fire insurance policy with
extended coverage customary in the state in which the property is located.
Coverage generally will be in an amount equal to the lesser of (i) 100% of the
insurable value of the improvements, or guaranteed replacement, or (ii) the sum
of the outstanding balance of the mortgage loan plus the outstanding balance on
any mortgage loan senior to the mortgage loan. The ability of the master
servicer to ensure that hazard insurance proceeds are appropriately applied may
be dependent on its being named as an additional insured under any hazard
insurance policy or upon the extent to which information in this regard is
furnished to the master servicer by mortgagors or subservicers.
As described above, all amounts collected by the master servicer under any
hazard policy, except for amounts to be applied to the restoration or repair of
the mortgaged property or released to the mortgagor in accordance with the
master servicer's normal servicing procedures, will be deposited initially in
the Custodial Account and ultimately in the Certificate Account. The pooling and
servicing agreement provides that the master servicer may satisfy its obligation
to cause hazard policies to be maintained by maintaining a blanket policy
insuring against losses on the mortgage loans. If the blanket policy contains a
deductible clause, the master servicer will deposit in the Custodial Account or
the applicable Certificate Account all amounts which would have been deposited
therein but for such clause.
Unless otherwise specified in the related prospectus supplement, the
master servicer shall also cause to be maintained on property acquired upon
foreclosure, or deed in lieu of foreclosure, of any mortgage loan, fire
insurance with extended coverage in an amount which is at least equal to the
amount necessary to avoid the application of any co-insurance clause contained
in the related hazard insurance policy.
Since the amount of hazard insurance that mortgagors are required to
maintain on the improvements securing the mortgage loans may decline as the
principal balances owing thereon decrease, and since residential properties have
historically appreciated in value over time, hazard insurance proceeds could be
insufficient to restore fully the damaged property in the event of a partial
loss. See "Description of Credit Enhancement -- Special Hazard Insurance
Policies" for a description of the limited protection afforded by any special
hazard insurance policy against losses
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occasioned by hazards which are otherwise uninsured against, including losses
caused by the application of the co-insurance clause described in the preceding
paragraph.
DESCRIPTION OF CREDIT ENHANCEMENT
Credit support with respect to each series of certificates may be
comprised of one or more of the components described below. Each component may
have a dollar limit and will generally provide coverage with respect to Realized
Losses that are, as applicable:
o Defaulted Mortgage Losses;
o Special Hazard Losses;
o Bankruptcy Losses; and
o Fraud Losses.
Most forms of credit support will not provide protection against all risks
of loss and will not guarantee repayment of the entire outstanding principal
balance of the certificates and interest thereon. If losses occur which exceed
the amount covered by credit support or which are not covered by the credit
support, certificateholders will bear their allocable share of deficiencies. In
particular, Defaulted Mortgage Losses, Special Hazard Losses, Bankruptcy Losses
and Fraud Losses in excess of the amount of coverage provided therefor and
Extraordinary Losses will not be covered. To the extent that the credit
enhancement for any series of certificates is exhausted, the certificateholders
will bear all further risks of loss not otherwise insured against.
As described below and in the related prospectus supplement,
o coverage with respect to Defaulted Mortgage Losses may be provided
by one or more letters of credit
o coverage with respect to Special Hazard Losses may be provided by
one or more letters of credit or a special hazard insurance policy
or special hazard instrument
o coverage with respect to Bankruptcy Losses may be provided by one or
more letters of credit or a bankruptcy bond and
o coverage with respect to Fraud Losses may be provided by one or more
letters of credit or mortgage repurchase bonds.
In addition, if so specified in the applicable prospectus supplement, in
lieu of or in addition to any or all of the foregoing arrangements, credit
enhancement may be in the form of:
o a Reserve Fund to cover the losses
o subordination of one or more classes of subordinate certificates to
provide credit support to one or more classes of senior certificates
or
o overcollateralization, letters of credit, surety bonds, financial
guaranty insurance policies, derivative products or other types of
insurance policies, certain other secured or unsecured corporate
guarantees or in any other form as may be described in the related
prospectus supplement, or in the form of a combination of two or
more of the foregoing.
The credit support may be provided by an assignment of the right to
receive cash amounts, a deposit of cash into a reserve fund or other pledged
assets, or by banks, insurance companies, guarantees or any combination thereof
identified in the related prospectus supplement.
With respect to a mortgage loan the principal balance of which has been
reduced in connection with bankruptcy proceedings, the amount of the reduction
will be treated as a Realized Loss.
For any series of certificates backed by Trust Balances of revolving
credit loans, the credit enhancement provided with respect to the certificates
will cover any portion of any Realized Losses allocated to the Trust Balances,
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subject to any limitations described in this prospectus and in the related
prospectus supplement. See "Allocation of Revolving Credit Loan Balances" in
this prospectus.
Each prospectus supplement will include a description of:
o the amount payable under the credit enhancement arrangement, if any,
provided with respect to a series;
o any conditions to payment thereunder not otherwise described in this
prospectus;
o the conditions under which the amount payable under the credit
support may be reduced and under which the credit support may be
terminated or replaced; and
o the material provisions of any agreement relating to the credit
support.
Additionally, the accompanying prospectus supplement will describe
information with respect to the issuer of any third-party credit enhancement.
The pooling and servicing agreement or other documents may provide for
reimbursement rights, control rights or other provisions that may be required by
the credit enhancer.
The descriptions of any insurance policies, bonds or other instruments
described in this prospectus or any prospectus supplement and the coverage
thereunder do not describe all terms thereof but will reflect all relevant terms
thereof material to an investment in the certificates. Copies of the instruments
will be included as exhibits to the Form 8-K to be filed with the Commission in
connection with the issuance of the related series of certificates.
Financial Guaranty Insurance Policy
If so specified in the related prospectus supplement, a financial guaranty
insurance policy may be obtained and maintained for a class or series of
certificates. The issuer of the financial guaranty insurance policy will be
described in the related prospectus supplement and a copy of the form of
financial guaranty insurance policy will be filed with the related current
report on Form 8-K.
Unless specified in the related prospectus supplement, a financial
guaranty insurance policy will be unconditional and irrevocable and will
guarantee to holders of the applicable certificates that an amount equal to the
full amount of distributions due to these holders will be received by the
trustee or its agent on behalf of the holders for distribution on each
distribution date. The specific terms of any financial guaranty insurance policy
will be described in the related prospectus supplement. A financial guaranty
insurance policy may have limitations and generally will not insure the
obligation of the sellers or the master servicer to purchase or substitute for a
defective mortgage loan and will not guarantee any specific rate of principal
prepayments or cover specific interest shortfalls. Unless specified in the
related prospectus supplement, the insurer will be subrogated to the rights of
each holder to the extent the insurer makes payments under the financial
guaranty insurance policy.
Letter of Credit
If any component of credit enhancement as to any series of certificates is
to be provided by a letter of credit, the letter of credit bank will deliver to
the trustee an irrevocable letter of credit. The letter of credit may provide
direct coverage with respect to the mortgage loans. The letter of credit bank,
the amount available under the letter of credit with respect to each component
of credit enhancement, the expiration date of the letter of credit, and a more
detailed description of the letter of credit will be specified in the related
prospectus supplement. On or before each distribution date, the letter of credit
bank will be required to make payments after notification from the trustee, to
be deposited in the related Certificate Account with respect to the coverage
provided thereby. The letter of credit may also provide for the payment of
Advances.
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Special Hazard Insurance Policies
Any insurance policy covering Special Hazard Losses obtained by the
depositor for a trust will be issued by the insurer named in the related
prospectus supplement. Each special hazard insurance policy will, subject to
limitations described in the related prospectus supplement, if any, protect the
related certificateholders from Special Hazard Losses which are:
o losses due to direct physical damage to a mortgaged property other
than any loss of a type covered by a hazard insurance policy or a
flood insurance policy, if applicable, and
o losses from partial damage caused by reason of the application of
the co-insurance clauses contained in hazard insurance policies. See
"Description of the Certificates -- Hazard Insurance and Related
Claims."
A special hazard insurance policy will not cover losses occasioned by war,
civil insurrection, certain governmental actions, errors in design, faulty
workmanship or materials, except under certain circumstances, nuclear reaction,
chemical contamination or waste by the mortgagor. Aggregate claims under a
special hazard insurance policy will be limited to the amount contained in the
related pooling and servicing agreement and will be subject to reduction as
contained in such related pooling and servicing agreement. A special hazard
insurance policy will provide that no claim may be paid unless hazard and, if
applicable, flood insurance on the property securing the mortgage loan has been
kept in force and other protection and preservation expenses have been paid by
the master servicer.
To the extent described in the related prospectus supplement, coverage in
respect of Special Hazard Losses for a series of certificates may be provided,
in whole or in part, by a type of special hazard coverage other than a special
hazard insurance policy or by means of a representation of the depositor or
Residential Funding.
Bankruptcy Bonds
In the event of a personal bankruptcy of a mortgagor, a bankruptcy court
may establish a Deficient Valuation. The amount of the secured debt could then
be reduced to that value, and, thus, the holder of the first and junior loans
would become unsecured creditors to the extent the outstanding principal balance
of those loans exceeds the value assigned to the mortgaged property by the
bankruptcy court. In addition, Debt Service Reductions can result from a
bankruptcy proceeding. See "Certain Legal Aspects of Mortgage Loans and Related
Matters -- Anti-Deficiency Legislation and Other Limitations on Lenders." Any
bankruptcy bond to provide coverage for Bankruptcy Losses resulting from
proceedings under the federal Bankruptcy Code obtained by the depositor for a
trust will be issued by an insurer named in the related prospectus supplement.
The level of coverage under each bankruptcy bond will be set forth in the
related prospectus supplement.
Subordination
A senior/subordinate series of certificates will consist of one or more
classes of senior certificates and one or more classes of subordinate
certificates, as described in the related prospectus supplement. With respect to
any senior/subordinate series, the total amount available for distribution on
each distribution date, as well as the method for allocating the available
amount among the various classes of certificates included in the series, will be
described in the related prospectus supplement. Generally, with respect to any
senior/subordinate series, the amount available for distribution will be
allocated first to interest on the senior certificates of the series, and then
to principal of the senior certificates up to the amounts described in the
related prospectus supplement, prior to allocation of any amounts to the
subordinate certificates of the series.
Realized Losses will be allocated to the subordinate certificates of the
related series in the order specified in the related prospectus supplement until
the outstanding principal balance of each specified class has been reduced to
zero. Additional Realized Losses, if any, will be allocated to the senior
certificates. If the series includes more than one class of senior certificates,
the additional Realized Losses will be allocated either on a pro rata basis
among all of the senior certificates in proportion to their respective
outstanding principal balances or as otherwise described in the related
prospectus supplement. The respective amounts of specified types of losses,
including certain Special
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Hazard Losses, Fraud Losses and Bankruptcy Losses, that may be borne solely by
the subordinate certificates may be limited to an amount described in the
related prospectus supplement. In this case, losses in excess of these amounts
would be allocated on a pro rata basis among all outstanding classes of
certificates. Generally, any allocation of a Realized Loss to a certificate will
be made by reducing the outstanding principal balance thereof as of the
distribution date following the calendar month in which the Realized Loss was
incurred.
As described above, the rights of holders of the various classes of
certificates of any series to receive distributions of principal and interest is
determined by the aggregate outstanding principal balance of each class or, if
applicable, the related notional amount. The outstanding principal balance of
any certificate will be reduced by all amounts previously distributed on that
certificate in respect of principal and by any Realized Losses allocated
thereto. If there are no Realized Losses or prepayments of principal on any of
the mortgage loans, the respective rights of the holders of certificates of any
series to future distributions generally would not change. However, to the
extent described in the related prospectus supplement, holders of senior
certificates may be entitled to receive a disproportionately larger amount of
prepayments received during specified periods, which will have the effect,
absent offsetting losses, of accelerating the amortization of the senior
certificates and increasing the respective percentage ownership interest
evidenced by the subordinate certificates in the related trust, with a
corresponding decrease in the Senior Percentage. As a result, the availability
of the subordination provided by the subordinate certificates will be preserved.
In addition, as described above, certain Realized Losses generally will be
allocated first to subordinate certificates by reduction of the outstanding
principal balance thereof, which will have the effect of increasing the
respective ownership interest evidenced by the senior certificates in the
related trust.
If so provided in the pooling and servicing agreement, the master servicer
may be permitted, under some circumstances, to purchase any mortgage loan or the
Trust Balance thereof, if applicable that is three or more months delinquent in
payments of principal and interest, at the purchase price. The purchase price
will be advanced by the master servicer to the trust, subject to the right of
the master servicer to reimbursement from the trust for any Realized Losses
subsequently incurred. Any Realized Loss so incurred in connection with any such
mortgage loan or the Trust Balance thereof, if applicable will be allocated
among the then outstanding certificateholders of the related series in the same
manner as Realized Losses on mortgage loans that have not been so purchased.
To the extent provided in the related prospectus supplement, certain
amounts otherwise payable on any distribution date to holders of subordinate
certificates may be deposited into a reserve fund. Amounts held in any reserve
fund may be applied as described under "Description of Credit Enhancement --
Reserve Funds" in the related prospectus supplement.
With respect to any senior/subordinate series, the terms and provisions of
the subordination may vary from those described above. Any variation and any
additional credit enhancement will be described in the related prospectus
supplement.
Overcollateralization
Excess Interest may be deposited into a reserve fund or applied as a
distribution of principal on the certificates. To the extent Excess Interest is
applied as principal distributions on the certificates, the effect will be to
reduce the principal balance of the certificates relative to the outstanding
balance of the mortgage loans, thereby creating overcollateralization and
additional protection to the certificateholders, as specified in the related
prospectus supplement.
Reserve Funds
If so specified in the related prospectus supplement, the depositor will
deposit or cause to be deposited in an account or reserve fund any combination
of cash or Permitted Investments in specified amounts, or any other instrument
satisfactory to the rating agency or agencies, which will be applied and
maintained in the manner and under the conditions specified in the related
prospectus supplement and related pooling and servicing agreement. In the
alternative or in addition to that deposit, to the extent described in the
related prospectus supplement, a reserve fund may be funded through application
of all or a portion of amounts otherwise payable on any related certificates,
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from the Excess Spread, Excluded Spread or otherwise. A reserve fund for a
series of certificates which is funded over time by depositing therein a portion
of the interest payment on each mortgage loan may be referred to as a "spread
account" in the related prospectus supplement and pooling and servicing
agreement. To the extent that the funding of the reserve fund is dependent on
amounts otherwise payable on related certificates, Excess Spread, Excluded
Spread or other cash flows attributable to the related mortgage loans or on
reinvestment income, the reserve fund may provide less coverage than initially
expected if the cash flows or reinvestment income on which the funding is
dependent are lower than anticipated. With respect to any series of certificates
as to which credit enhancement includes a letter of credit, if so specified in
the related prospectus supplement, under specified circumstances the remaining
amount of the letter of credit may be drawn by the trustee and deposited in a
reserve fund.
Amounts in a reserve fund may be distributed to certificateholders, or
applied to reimburse the master servicer for outstanding advances, or may be
used for other purposes, in the manner and to the extent specified in the
related prospectus supplement. Unless otherwise provided in the related
prospectus supplement, any of this type of reserve fund will not be deemed to be
part of the related trust. A reserve fund may provide coverage to more than one
series of certificates if described in the related prospectus supplement. If so
specified in the related prospectus supplement, reserve funds may be established
to provide limited protection against only certain types of losses and
shortfalls. Following each distribution date amounts in a reserve fund in excess
of any amount required to be maintained therein may be released from the reserve
fund under the conditions and to the extent specified in the related prospectus
supplement and will not be available for further application to the
certificates.
The trustee will have a perfected security interest for the benefit of the
certificateholders in the assets in the reserve fund. However, to the extent
that the depositor, any affiliate thereof or any other entity has an interest in
any reserve fund, in the event of the bankruptcy, receivership or insolvency of
such entity, there could be delays in withdrawals from the reserve fund and the
corresponding payments to the certificateholders. These delays could adversely
affect the yield to investors on the related certificates.
Amounts deposited in any reserve fund for a series will be invested in
Permitted Investments by, or at the direction of, and for the benefit of the
master servicer or any other person named in the related prospectus supplement.
Unless otherwise specified in the related prospectus supplement, any
reinvestment income or other gain from those investments will be credited to the
related reserve fund for the series, and any loss resulting from those
investments will be charged to the reserve fund. However, the reinvestment
income may be payable to the master servicer or another service provider as
additional compensation.
Maintenance of Credit Enhancement
If credit enhancement has been obtained for a series of certificates, the
master servicer will be obligated to exercise its best reasonable efforts to
keep or cause to be kept the credit enhancement in full force and effect
throughout the term of the applicable pooling and servicing agreement, unless
coverage thereunder has been exhausted through payment of claims or otherwise,
or substitution therefor is made, or as otherwise described below under " --
Reduction or Substitution of Credit Enhancement." The master servicer, on behalf
of itself, the trustee and certificateholders, will provide the trustee
information required for the trustee to draw any applicable credit enhancement.
The master servicer or other entity specified in the accompanying
prospectus supplement will agree to pay the premiums for each financial guaranty
insurance policy, special hazard insurance policy or bankruptcy bond, as
applicable, on a timely basis. In the event the related insurer ceases to be a
"qualified insurer" because it ceases to be qualified under applicable law to
transact the insurance business or coverage is terminated for any reason other
than exhaustion of that coverage, the master servicer will use its best
reasonable efforts to obtain from another qualified insurer a comparable
replacement insurance policy or bond with a total coverage equal to the then
outstanding coverage of the original policy or bond. If the cost of the
replacement policy is greater than the cost of the policy or bond, the coverage
of the replacement policy or bond will, unless otherwise agreed to by the
depositor, be reduced to a level so that its premium rate does not exceed the
premium rate on the original insurance policy. Any losses in market value of the
certificates associated with any reduction or withdrawal in rating by an
applicable rating agency shall be borne by the certificateholders.
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If any property securing a defaulted mortgage loan is damaged and
proceeds, if any, from the related hazard insurance policy or any applicable
special hazard insurance policy are insufficient to restore the damaged property
to a condition sufficient to permit recovery under any letter of credit, the
master servicer is not required to expend its own funds to restore the damaged
property unless it determines:
o that restoration will increase the proceeds to one or more classes
of certificateholders on liquidation of the mortgage loan after
reimbursement of the master servicer for its expenses and
o that the expenses will be recoverable by it through Liquidation
Proceeds or Insurance Proceeds.
If recovery under any letter of credit or other credit enhancement is not
available because the master servicer has been unable to make the above
determinations, has made the determinations incorrectly or recovery is not
available for any other reason, the master servicer is nevertheless obligated to
follow whatever normal practices and procedures, subject to the preceding
sentence, as it deems necessary or advisable to realize upon the defaulted
mortgage loan and in the event this determination has been incorrectly made, is
entitled to reimbursement of its expenses in connection with the restoration.
Reduction or Substitution of Credit Enhancement
The amount of credit support provided with respect to any series of
certificates and relating to various types of losses incurred may be reduced
under specified circumstances. In most cases, the amount available as credit
support will be subject to periodic reduction on a non-discretionary basis in
accordance with a schedule or formula described in the related pooling and
servicing agreement. Additionally, in most cases, the credit support may be
replaced, reduced or terminated, and the formula used in calculating the amount
of coverage with respect to Bankruptcy Losses, Special Hazard Losses or Fraud
Losses may be changed, without the consent of the certificateholders, upon the
written assurance from each applicable rating agency that the then-current
rating of the related series of certificates will not be adversely affected
thereby. Furthermore, in the event that the credit rating of any obligor under
any applicable credit enhancement is downgraded, the credit rating of each class
of the related certificates may be downgraded to a corresponding level, and,
unless specified in the related prospectus supplement, neither the master
servicer nor the depositor will be obligated to obtain replacement credit
support in order to restore the rating of the certificates. The master servicer
will also be permitted to replace any credit support with other credit
enhancement instruments issued by obligors whose credit ratings are equivalent
to the downgraded level and in lower amounts which would satisfy the downgraded
level, provided that the then-current rating of each class of the related series
of certificates is maintained. Where the credit support is in the form of a
reserve fund, a permitted reduction in the amount of credit enhancement will
result in a release of all or a portion of the assets in the reserve fund to the
depositor, the master servicer or any other person that is entitled thereto. Any
assets so released and any amount by which the credit enhancement is reduced
will not be available for distributions in future periods.
OTHER FINANCIAL OBLIGATIONS RELATED TO THE CERTIFICATES
Swaps and Yield Supplement Agreements
The trustee on behalf of the trust may enter into Swaps and other Yield
Supplement Agreements.
An interest rate Swap is an agreement between two counterparties to
exchange a stream of interest payments on an agreed hypothetical or "notional"
principal amount. No principal amount is exchanged between the counterparties to
an interest rate swap. In the typical swap, one party agrees to pay a fixed rate
on a notional principal amount, while the counterparty pays a floating rate
based on one or more reference interest rates including the London Interbank
Offered Rate, or LIBOR, a specified bank's prime rate or U.S. Treasury Bill
rates. Interest rate Swaps also permit counterparties to exchange a floating
rate obligation based upon one reference interest rate, such as LIBOR, for a
floating rate obligation based upon another referenced interest rate, such as
U.S. Treasury Bill rates.
Yield Supplement Agreements may be entered into to supplement the interest
rate or other rates on one or more classes of the certificates of any series.
Additionally, agreements relating to other types of derivative products that are
designed to provide credit enhancement to the related series may be entered into
by a trust and one or more
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counterparties. The terms of any derivative product agreement and any
counterparties will be described in the related prospectus supplement.
There can be no assurance that the trust will be able to enter into or
offset Swaps or enter into Yield Supplement Agreements or derivative product
agreements at any specific time or at prices or on other terms that are
advantageous. In addition, although the terms of the Swaps and Yield Supplement
Agreements may provide for termination under certain circumstances, there can be
no assurance that the trust will be able to terminate a Swap or Yield Supplement
Agreement when it would be economically advantageous to the trust to do so.
Purchase Obligations
Some types of mortgage loans and some classes of certificates of any
series, as specified in the related prospectus supplement, may be subject to a
purchase obligation that would become applicable on one or more specified dates,
or upon the occurrence of one or more specified events, or on demand made by or
on behalf of the applicable certificateholders. A purchase obligation may be in
the form of a conditional or unconditional purchase commitment, liquidity
facility, remarketing agreement, maturity guaranty, put option or demand
feature. The terms and conditions of each purchase obligation, including the
purchase price, timing and payment procedure, will be described in the related
prospectus supplement. A purchase obligation with respect to mortgage loans may
apply to those mortgage loans or to the related certificates. Each purchase
obligation may be a secured or unsecured obligation of the provider thereof,
which may include a bank or other financial institution or an insurance company.
Each purchase obligation will be evidenced by an instrument delivered to the
trustee for the benefit of the applicable certificateholders of the related
series. Unless otherwise specified in the related prospectus supplement, each
purchase obligation with respect to mortgage loans will be payable solely to the
trustee for the benefit of the certificateholders of the related series. Other
purchase obligations may be payable to the trustee or directly to the holders of
the certificates to which that obligation relate.
THE DEPOSITOR
The depositor is an indirect wholly-owned subsidiary of GMAC Mortgage,
which is a wholly-owned subsidiary of General Motors Acceptance Corporation. The
depositor was incorporated in the State of Delaware on May 5, 1995. The
depositor was organized for the purpose of acquiring first or junior lien home
equity mortgage loans and mortgage securities and issuing securities backed by
these mortgage loans and mortgage securities. The depositor anticipates that it
will in many cases have acquired mortgage loans indirectly through Residential
Funding, which is also an indirect wholly-owned subsidiary of GMAC Mortgage. The
depositor does not have, nor is it expected in the future to have, any
significant assets.
The certificates do not represent an interest in or an obligation of the
depositor. The depositor's only obligations with respect to a series of
certificates will be limited to representations and warranties made by the
depositor or as otherwise provided in the related prospectus supplement.
The depositor maintains its principal office at 8400 Normandale Lake
Boulevard, Suite 600, Minneapolis, Minnesota 55437. Its telephone number is
(612) 832-7000.
RESIDENTIAL FUNDING CORPORATION
If specified in the related prospectus supplement, Residential Funding, an
affiliate of the depositor, will act as the master servicer or manager for a
series of certificates.
Residential Funding, either directly or through affiliates, buys mortgage
loans under several loan purchase programs from mortgage loan originators or
sellers nationwide, including affiliates, that meet its seller/servicer
eligibility requirements and services mortgage loans for its own account and for
others. Residential Funding's principal executive offices are located at 8400
Normandale Lake Boulevard, Suite 600, Minneapolis, Minnesota 55437. Its
telephone number is (612) 832-7000. Residential Funding conducts operations from
its headquarters in
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Minneapolis and from offices located in California, Colorado, Connecticut,
Florida, Georgia, Maryland, New Jersey, New York, North Carolina, Pennsylvania,
Rhode Island and Texas. At December 31, 1998 Residential Funding was master
servicing a first lien loan portfolio of approximately $55.0 billion and a
second lien loan portfolio of approximately $2.9 billion.
Residential Funding's delinquency, foreclosure and loan loss experience as
of the end of the most recent calendar quarter for which information is
available on the portfolio of loans for which it acts as master servicer,
including loans that were originated under its modified loan purchase criteria
will be summarized in each prospectus supplement relating to a mortgage pool for
which Residential Funding will act as master servicer. There can be no assurance
that this experience will be representative of the results that may be
experienced with respect to any particular series of certificates.
THE POOLING AND SERVICING AGREEMENT
As described above under "Description of the Certificates -- General,"
each series of certificates will be issued under a pooling and servicing
agreement. The following summaries describe certain additional provisions common
to each pooling and servicing agreement and are qualified entirely by reference
to the actual terms of the pooling and servicing agreement for a series of
certificates.
Servicing and Administration
The principal servicing compensation to be paid to the master servicer in
respect of its master servicing activities for each series of certificates will
be equal to the percentage per annum described in the related prospectus
supplement. As compensation for its servicing duties, a subservicer or, if there
is no subservicer, the master servicer will be entitled to a monthly servicing
fee as described in the related prospectus supplement, which may vary under
certain circumstances from the amounts described in the prospectus supplement.
Some subservicers may also receive additional compensation in the amount of all
or a portion of the interest due and payable on the applicable mortgage loan
which is over and above the interest rate specified at the time the depositor or
Residential Funding, as the case may be, committed to purchase the mortgage
loan. See "Mortgage Loan Program -- Subservicing." Subservicers will be required
to pay to the master servicer an amount equal to one month's interest, net of
its servicing or other compensation, on the amount of any partial principal
prepayment. The master servicer will usually retain those amounts to the extent
collected from subservicers. In addition, the master servicer or a subservicer
will retain all prepayment charges, assumption fees and late payment charges, to
the extent collected from mortgagors, and any benefit which may accrue as a
result of the investment of funds in the Custodial Account or the applicable
Certificate Account, unless specified in the related prospectus supplement or in
a subservicing account, as the case may be. In addition, certain reasonable
duties of the master servicer may be performed by an affiliate of the master
servicer who will be entitled to reasonable compensation therefor from the
trust.
The master servicer, or, if specified in the related pooling and servicing
agreement, the trustee on behalf of the applicable trust, will pay or cause to
be paid certain ongoing expenses associated with each trust and incurred by it
in connection with its responsibilities under the pooling and servicing
agreement, including, without limitation, payment of any fee or other amount
payable in respect of certain credit enhancement arrangements, payment of the
fees and disbursements of the trustee, any custodian appointed by the trustee,
the certificate registrar and any paying agent, and payment of expenses incurred
in enforcing the obligations of subservicers and designated sellers. The master
servicer will be entitled to reimbursement of expenses incurred in enforcing the
obligations of subservicers and designated sellers under limited circumstances.
In addition, as indicated in the preceding section, the master servicer will be
entitled to reimbursements for certain expenses incurred by it in connection
with Liquidated Mortgage Loans and in connection with the restoration of
mortgaged properties, such right of reimbursement being prior to the rights of
certificateholders to receive any related Liquidation Proceeds including
Insurance Proceeds.
Evidence as to Compliance
Each pooling and servicing agreement will provide for delivery, on or
before a specified date in each year, to the trustee of an annual statement
signed by an officer of the master servicer to the effect that the master
servicer
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has fulfilled in all material respects the minimum servicing standards described
in the audit guide for audits of non-supervised mortgagees approved by the
Department of Housing and Urban Development for use by independent public
accountants, the Uniform Single Attestation Program for Mortgage Bankers or the
Audit Program for Mortgages serviced for Federal Home Mortgage Corporation
throughout the preceding year or, if there has been a material default in the
fulfillment of any obligation, the statement shall specify each known default
and the nature and status thereof. The statement may be provided as a single
form making the required statements as to more than one pooling and servicing
agreement.
Each pooling and servicing agreement will also provide that on or before a
specified date in each year, beginning the first date that is at least a
specified number of months after the cut-off date, a firm of independent public
accountants will furnish a statement to the depositor and the trustee to the
effect that, on the basis of an examination by that firm conducted substantially
in compliance with the standards established by the American Institute of
Certified Public Accountants, the servicing of mortgage loans under agreements,
including the related pooling and servicing agreement, was conducted
substantially in compliance with the minimum servicing standards described in
the related audit guide--to the extent that procedures in that audit guide are
applicable to the servicing obligations described in those agreements--except
for significant exceptions or errors in records that shall be reported in the
statement. In rendering its statement the 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 the
statement, of firms of independent public accountants with respect to those
subservicers which also have been the subject of that type of examination.
Copies of the annual statement of an officer of the master servicer may be
obtained by certificateholders without charge upon written request to the master
servicer, at the address indicated in the monthly statement to
certificateholders.
Certain Matters Regarding the Master Servicer and the Depositor
The pooling and servicing agreement for each series of certificates will
provide that the master servicer may not resign from its obligations and duties
thereunder except upon a determination that performance of its duties is no
longer permissible under applicable law or except in connection with a permitted
transfer of servicing. No resignation will become effective until the trustee or
a successor servicer has assumed the master servicer's obligations and duties
under the pooling and servicing agreement.
Each pooling and servicing agreement will also provide that, except as
described below, neither the master servicer, the depositor nor any director,
officer, employee or agent of the master servicer or the depositor will be under
any liability to the trust or the certificateholders for any action taken or for
refraining from the taking of any action in good faith under the pooling and
servicing agreement, or for errors in judgment; provided, however, that neither
the master servicer, the depositor, nor any such person will be protected
against any liability which would otherwise be imposed by reason of willful
misfeasance, bad faith or gross negligence in the performance of duties or by
reason of reckless disregard of obligations and duties thereunder. Each pooling
and servicing agreement will further provide that the master servicer, the
depositor and any director, officer, employee or agent of the master servicer or
the depositor is entitled to indemnification by the trust and will be held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the pooling and servicing agreement or the related
series of certificates, other than any loss, liability or expense incurred by
reason of willful misfeasance, bad faith or gross negligence in the performance
of duties thereunder or by reason of reckless disregard of obligations and
duties thereunder. In addition, each pooling and servicing agreement will
provide that the master servicer and the depositor will not be under any
obligation to appear in, prosecute or defend any legal or administrative action
that is not incidental to its respective duties under the pooling and servicing
agreement and which in its opinion may involve it in any expense or liability.
The master servicer or the depositor may, however, in its discretion undertake
any of these actions which it may deem necessary or desirable with respect to
the pooling and servicing agreement and the rights and duties of the parties
thereto and the interests of the certificateholders thereunder. In this event,
the legal expenses and costs of an action and any liability resulting therefrom
will be expenses, costs and liabilities of the trust and the master servicer or
the depositor, as the case may be, will be entitled to be reimbursed therefor
out of funds otherwise distributable to certificateholders.
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Any person into which the master servicer may be merged or consolidated,
any person resulting from any merger or consolidation to which the master
servicer is a party or any person succeeding to the business of the master
servicer will be the successor of the master servicer under the pooling and
servicing agreement, provided that the person meets the requirements set forth
in the pooling and servicing agreement. In addition, notwithstanding the
prohibition on its resignation, the master servicer may assign its rights and
delegate its duties and obligations under a pooling and servicing agreement to
any person reasonably satisfactory to the depositor and the trustee and meeting
the requirements set forth in the related pooling and servicing agreement. In
the case of any assignment, the master servicer will be released from its
obligations under such pooling and servicing agreement, exclusive of liabilities
and obligations incurred by it prior to the time of assignment.
Events of Default
Events of default under the pooling and servicing agreement in respect of
a series of certificates, unless specified in the prospectus supplement,
generally will include:
o any failure by the master servicer to make a required deposit to the
Custodial Account or the Certificate Account or, if the master
servicer is the paying agent, to distribute to the holders of any
class of certificates of the series any required payment which
continues unremedied for five business days after the giving of
written notice of the failure to the master servicer by the trustee
or the depositor, or to the master servicer, the depositor and the
trustee by the holders of certificates of that class evidencing not
less than 25% of the aggregate percentage interests constituting
that class;
o any failure by the master servicer duly to observe or perform in any
material respect any other of its covenants or agreements in the
pooling and servicing agreement with respect to that series of
certificates which continues unremedied for 30 days, or 15 days in
the case of a failure to pay the premium for any insurance policy
which is required to be maintained under the pooling and servicing
agreement, after the giving of written notice of the failure to the
master servicer by the trustee or the depositor, or to the master
servicer, the depositor and the trustee by the holders of any class
of certificates of that series evidencing not less than 25% of the
aggregate percentage interests constituting that class;
o some events of insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings regarding the master
servicer and certain actions by the master servicer indicating its
insolvency or inability to pay its obligations; and
o any other event of default as contained in the pooling and servicing
agreement.
A default under the terms of any mortgage securities included in any trust
will not constitute an event of default under the related pooling and servicing
agreement.
Rights Upon Event of Default
So long as an event of default remains unremedied, either the depositor or
the trustee may, except as otherwise provided for in the related pooling and
servicing agreement with respect to the credit enhancer, if applicable, and, at
the direction of the holders of certificates evidencing not less than 51% of the
aggregate voting rights in the related trust, the trustee shall, except as
otherwise provided for in the related pooling and servicing agreement with
respect to the credit enhancer, by written notification to the master servicer
and to the depositor or the trustee, as applicable, terminate all of the rights
and obligations of the master servicer under the pooling and servicing
agreement, other than any right of the master servicer as certificateholder and
other than the right to receive servicing compensation, expenses for servicing
the mortgage loans during any period prior to the date of termination and any
other reimbursements, of amounts the master servicer is entitled to withdraw
from the Custodial Account, covering the trust and in and to the mortgage loans
and the proceeds thereof, whereupon the trustee will succeed to all
responsibilities, duties and liabilities of the master servicer under the
pooling and servicing agreement, other than
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the obligation to purchase mortgage loans under some circumstances, and will be
entitled to similar compensation arrangements. In the event that the trustee
would be obligated to succeed the master servicer but is unwilling so to act, it
may appoint, or if it is unable so to act, it shall appoint, or petition a court
of competent jurisdiction for the appointment of an approved mortgage servicing
institution with a net worth of at least $10,000,000 to act as successor to the
master servicer under the pooling and servicing agreement, unless otherwise set
forth in the pooling and servicing agreement. Pending this appointment, the
trustee is obligated to act in this capacity. The trustee and its successor may
agree upon the servicing compensation to be paid, which in no event may be
greater than the compensation to the initial master servicer under the pooling
and servicing agreement.
No certificateholder will have any right under a pooling and servicing
agreement to institute any proceeding with respect to the pooling and servicing
agreement unless
o such holder previously has given to the trustee written notice of
default and the continuance thereof,
o the holders of certificates of any class evidencing not less than
25% of the aggregate percentage interests constituting that class:
o have made written request upon the trustee to institute the
proceeding in its own name as trustee thereunder and
o have offered to the trustee reasonable indemnity and
o the trustee has neglected or refused to institute any proceeding of
this sort for 60 days after receipt of the request and indemnity,
except as otherwise provided for in the related pooling and
servicing agreement with respect to the credit enhancer. However,
the trustee will be under no obligation to exercise any of the
trusts or powers vested in it by the pooling and servicing agreement
or to institute, conduct or defend any litigation thereunder or in
relation thereto at the request, order or direction of any of the
holders of certificates covered by the pooling and servicing
agreement, unless the certificateholders have offered to the trustee
reasonable security or indemnity against the costs, expenses and
liabilities which may be incurred therein or thereby.
Amendment
Each pooling and servicing agreement may be amended by the depositor, the
master servicer and the trustee, without the consent of the related
certificateholders:
o to cure any ambiguity;
o to correct or supplement any provision therein which may be
inconsistent with any other provision therein or to correct any
error;
o to change the timing and/or nature of deposits in the Custodial
Account or the Certificate Account or to change the name in which
the Custodial Account is maintained, except that:
o deposits to the Certificate Account may not occur later than
the related distribution date
o the change may not adversely affect in any material respect
the interests of any certificateholder, as evidenced by an
opinion of counsel and
o the change may not adversely affect the then-current rating of
any rated classes of certificates, as evidenced by a letter
from each applicable rating Agency as specified in the related
prospectus supplement;
o if an election to treat the related trust as a "real estate mortgage
investment conduit" or REMIC has been made, to modify, eliminate or
add to any of its provisions
o to the extent necessary to maintain the qualification of the
trust as a REMIC or to avoid or minimize the risk of
imposition of any tax on the related trust, provided that the
trustee has received an opinion of counsel to the effect that
o the action is necessary or desirable to maintain the
qualification or to avoid or minimize the risk, and
o the action will not adversely affect in any material respect
the interests of any related certificateholder or
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o to restrict the transfer of the REMIC residual certificates,
provided that the depositor has determined that the change would not
adversely affect the applicable ratings of any classes of the
certificates, as evidenced by a letter from each applicable rating
agency as specified in the related prospectus supplement, and that
any amendment will not give rise to any tax with respect to the
transfer of the REMIC residual certificates to a non-permitted
transferee;
o to make any other provisions with respect to matters or questions
arising under the pooling and servicing agreement which are not
materially inconsistent with the provisions thereof, so long as the
action will not adversely affect in any material respect the
interests of any certificateholder; or
o to amend any provision that is not material to holders of any class
of related certificates.
The pooling and servicing agreement may also be amended by the depositor,
the master servicer and the trustee, except as otherwise provided for in the
related pooling and servicing agreement with respect to the credit enhancer,
with the consent of the holders of certificates of each class affected thereby
evidencing, in each case, not less than 66% of the aggregate percentage
interests constituting that class for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of the pooling and
servicing agreement or of modifying in any manner the rights of the related
certificateholders, except that no amendment of this type may:
o reduce in any manner the amount of, or delay the timing of, payments
received on mortgage loans which are required to be distributed on a
certificate of any class without the consent of the holder of that
certificate
o impair the right of any certificateholder to institute suit for the
enforcement of the provisions of the pooling and servicing agreement
or
o reduce the percentage of certificates of any class the holders of
which are required to consent to any amendment of this type unless
the holders of all certificates of that class have consented to the
change in percentage.
Notwithstanding the foregoing, if a REMIC election has been made with
respect to the related trust, the trustee will not be entitled to consent to any
amendment to a pooling and servicing agreement without having first received an
opinion of counsel to the effect that the amendment or the exercise of any power
granted to the master servicer, the depositor or the trustee in accordance with
the amendment will not result in the imposition of a tax on the related trust or
cause the trust to fail to qualify as a REMIC.
Termination; Retirement of Certificates
The primary obligations created by the pooling and servicing agreement for
each series of certificates, other than certain limited payment and notice
obligations of the trustee and the depositor, respectively, will terminate upon
the payment to the related certificateholders of all amounts held in the
Certificate Account or by the master servicer and required to be paid to these
certificateholders following the earlier of:
o the final payment or other liquidation or disposition, or any
advance with respect thereto, of the last mortgage loan subject
thereto and all property acquired upon foreclosure or deed in lieu
of foreclosure of any mortgage loan; and
o the purchase by the master servicer or the depositor or, if
specified in the related prospectus supplement, by the holder of the
REMIC Residual certificates (see "Material Federal Income Tax
Consequences" below) from the trust for a series of all remaining
mortgage loans and all property acquired in respect of the mortgage
loans. In addition to the foregoing, the master servicer or the
depositor may have the option to purchase, in whole but not in part,
the certificates specified in the related prospectus supplement in
the manner described in the related prospectus supplement. Upon the
purchase of the certificates or at any time thereafter, at the
option of the master servicer or the depositor, the mortgage loans
may be sold, thereby effecting a retirement of the certificates and
the termination of the trust, or the certificates so purchased may
be held or resold by the master servicer or the depositor. Written
notice of termination of the pooling and servicing agreement will be
given
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to each certificateholder, and the final distribution will be made
only upon surrender and cancellation of the certificates at an
office or agency appointed by the trustee which will be specified in
the notice of termination. If the certificateholders are permitted
to terminate the trust under the applicable pooling and servicing
agreement, a penalty may be imposed upon the certificateholders
based upon the fee that would be foregone by the master servicer
because of the termination.
Any option to purchase described in the second item above will be limited
to cases in which the aggregate Stated Principal Balance of the remaining
mortgage loans is less than or equal to ten percent (10%) of the initial
aggregate Stated Principal Balance of the mortgage loans.
Any purchase of mortgage loans and property acquired from the mortgage
loans evidenced by a series of certificates shall be made at the option of the
master servicer, the depositor or, if applicable, the holder of the REMIC
residual certificates at the price specified in the related prospectus
supplement. The exercise of that right will effect early retirement of the
certificates of that series, but the right of any such entity to purchase the
mortgage loans and related property will be subject to the criteria, and will be
at the price set forth in the related prospectus supplement. Any early
termination may adversely affect the yield to holders of certain classes of
those certificates. If a REMIC election has been made, the termination of the
related trust will be effected in a manner consistent with applicable federal
income tax regulations and its status as a REMIC.
The Trustee
The trustee under each pooling and servicing agreement will be named in
the related prospectus supplement. The commercial bank or trust company serving
as trustee may have normal banking relationships with the depositor and/or its
affiliates, including Residential Funding.
The trustee may resign at any time, in which event the depositor will be
obligated to appoint a successor trustee. The depositor may also remove the
trustee if the trustee ceases to be eligible to continue as trustee under the
pooling and servicing agreement or if the trustee becomes insolvent. Upon
becoming aware of these circumstances, the depositor will be obligated to
appoint a successor trustee. The trustee may also be removed at any time by the
holders of certificates evidencing not less than 51% of the aggregate voting
rights in the related trust. Any resignation or removal of the trustee and
appointment of a successor trustee will not become effective until acceptance of
the appointment by the successor trustee.
YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity of a certificate will depend on the price paid by
the holder for the certificate, the pass-through rate on any certificate
entitled to payments of interest, which pass-through rate may vary if so
specified in the related prospectus supplement, and the rate and timing of
principal payments, including payments in excess of required installments,
prepayments or terminations, liquidations and repurchases, on the mortgage loans
and the rate and timing of Draws in the case of revolving credit loans and the
allocation of principal payments to reduce the principal balance of the
certificate or notional amount thereof, if applicable.
The amount of interest payments on a mortgage loan distributed, or accrued
in the case of Deferred Interest or accrual certificates, monthly to holders of
a class of certificates entitled to payments of interest will be calculated on
the basis of that class's specified percentage of each payment of interest, or
accrual in the case of accrual certificates, and will be expressed as a fixed,
adjustable or variable pass-through rate payable on the outstanding principal
balance or notional amount of that certificate, or any combination of the
pass-through rates, calculated as described in this prospectus and in the
related prospectus supplement. See "Description of the Certificates
- --Distributions." Holders of strip certificates or a class of certificates
having a pass-through rate that varies based on the weighted average mortgage
rate of the underlying mortgage loans will be affected by disproportionate
prepayments and repurchases of mortgage loans having higher Net Mortgage Rates
or rates applicable to the strip certificates, as applicable.
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The effective yield to maturity to each holder of certificates entitled to
payments of interest will be below that otherwise produced by the applicable
pass-through rate and purchase price of the certificate to the extent that
interest accrues on each mortgage loan during the calendar month or a period
preceding a distribution date instead of through the day immediately preceding
the distribution date.
A class of certificates may be entitled to payments of interest at a
variable or adjustable pass-through rate, or any combination of those
pass-through rates, as specified in the related prospectus supplement. A
variable pass-through rate may be calculated based on the Net Mortgage Rate of
the related mortgage loans or certain balances thereof for the month preceding
the distribution date, by reference to an index or otherwise. The aggregate
payments of interest on a class of certificates, and the yield to maturity
thereon, will be affected by the rate of payment of principal on the
certificates, or the rate of reduction in the notional amount of certificates
entitled to payments of interest only and, in the case of certificates
evidencing interests in ARM loans, by changes in the Net Mortgage Rates on the
ARM loans. The yield on the certificates will also be affected by liquidations
of mortgage loans following mortgagor defaults and by purchases of mortgage
loans in the event of certain breaches of representations made in respect of the
mortgage loans, or conversions of ARM loans to a fixed interest rate. See
"Mortgage Loan Program -- Representations Relating to Mortgage Loans" and
"Description of the Certificates -- Assignment of Trust Assets" above. In
addition, if the index used to determine the pass-through rate for the
certificates is different than the index applicable to the mortgage rates, the
yield on the certificates will be sensitive to changes in the index related to
the pass-through rate and the yield on the certificates may be reduced by
application of a cap on the pass-through rate based on the weighted average of
the Net Mortgage Rates or any other formulas as may be described in the related
prospectus supplement.
In general, if a certificate is purchased at a premium over its face
amount and distributions of principal on the certificate occur at a rate faster
than anticipated at the time of purchase, the purchaser's actual yield to
maturity will be lower than that assumed at the time of purchase. Conversely, if
a certificate is purchased at a discount from its face amount and distributions
of principal on the certificate occur at a rate slower than that assumed at the
time of purchase, the purchaser's actual yield to maturity will be lower than
that originally anticipated. If strip certificates are issued evidencing a right
to payments of interest only or disproportionate payments of interest, a faster
than expected rate of principal payments on the mortgage loans, net of Draws if
applicable, will negatively affect the total return to investors in any
certificates. The yield on a class of strip certificates that is entitled to
receive payments of interest only will nevertheless be affected by any losses on
the related mortgage loans because of the effect on the timing and amount of
payments. In some circumstances, rapid principal payments on the mortgage loans,
net of Draws if applicable, may result in the failure of their holders to recoup
their original investment. If strip certificates are issued evidencing a right
to payments of principal only or disproportionate payments of principal, a
slower than expected rate of principal payments on the mortgage loans, net of
Draws if applicable, could negatively affect the anticipated yield on those
strip certificates. In addition, the total return to investors of certificates
evidencing a right to distributions of interest at a rate that is based on the
weighted average Net Mortgage Rate of the mortgage loans from time to time will
be adversely affected by principal payments on mortgage loans with mortgage
rates higher than the weighted average mortgage rate on the mortgage loans. In
general, mortgage loans with higher mortgage rates or gross margins are likely
to prepay at a faster rate than mortgage loans with lower mortgage rates or
gross margins. In addition, the yield to maturity on other types of classes of
certificates, including accrual certificates, certificates with a pass-through
rate that fluctuates inversely with or at a multiple of an index or certain
other classes in a series including more than one class of certificates, may be
relatively more sensitive to the rate of principal payments on the related
mortgage loans, net of Draws if applicable, than other classes of certificates.
The timing of changes in the rate of principal distributions on a
certificate may significantly affect an investor's actual yield to maturity,
even if the average rate of principal distributions experienced over time is
consistent with an investor's expectation. In general, the earlier a
distribution of principal on a certificate, the greater will be the effect on an
investor's yield to maturity. As a result, the effect on an investor's yield of
principal distributions occurring at a rate higher or lower than the rate
anticipated by the investor during the period immediately following the issuance
of a series of certificates would not be fully offset by a subsequent like
reduction or increase in the rate of principal distributions.
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Unless otherwise specified in the related prospectus supplement,
prepayments in full or final liquidations of closed-end loans will reduce the
amount of interest distributed in the following month to holders of certificates
entitled to distribution of interest because the resulting Prepayment Interest
Shortfall will not be covered by Compensating Interest. See "Description of the
Certificates -- Principal and Interest on the Certificates." Unless otherwise
specified in the related prospectus supplement, a partial prepayment of
principal of a closed-end loan is applied so as to reduce the outstanding
principal balance thereof as of the first day of the month in which the partial
prepayment is received. As a result, the effect of a partial prepayment on a
closed-end loan will usually be to reduce the amount of interest distributed to
holders of certificates in the month following the receipt of the partial
prepayment by an amount equal to one month's interest at the applicable
pass-through rate or Net Mortgage Rate, as the case may be, on the prepaid
amount. See "Description of the Certificates -- Payment on Mortgage Loans;
Deposits to Certificate Account." Neither full nor partial principal prepayments
on closed-end loans will be distributed until the distribution date in the month
following receipt.
The rate and timing of defaults on the mortgage loans will also affect the
rate and timing of principal payments on the mortgage loans and thus the yield
on the related certificates. There can be no assurance as to the rate of losses
or delinquencies on any of the mortgage loans, however, those losses and
delinquencies may be expected to be higher than those of traditional first lien
mortgage loans. To the extent that any losses are incurred on any of the
mortgage loans that are not covered by the applicable credit enhancement,
holders of certificates of the series evidencing interests in the related
mortgage pool or certain classes thereof will bear all risk of those losses
resulting from default by mortgagors. Even where the applicable credit
enhancement covers all losses incurred on the mortgage loans, the effect of
losses may be to increase prepayment experience on the mortgage loans, thus
reducing average weighted life and affecting yield to maturity.
With respect to some mortgage loans, including ARM loans and revolving
credit loans, the mortgage rate at origination may be below the rate that would
result from the sum of the then-applicable index and gross margin. Under the
applicable underwriting standards, mortgagors under closed-end loans typically
will be qualified on the basis of the mortgage rate in effect at origination,
and mortgagors under revolving credit loans are usually qualified based on an
assumed payment which reflects a rate significantly lower than the maximum rate.
The repayment of any mortgage loan may thus be dependent on the ability of the
mortgagor to make larger interest payments following the adjustment of the
mortgage rate.
With respect to some closed-end loans that permit negative amortization,
during a period of rising interest rates as well as immediately after
origination, that portion of the interest currently accruing thereon but not
currently payable will become deferred interest which will be added to the
principal balance thereof and will bear interest at the applicable mortgage
rate. The addition of any deferred interest to the principal balance of any
related class of certificates will lengthen the weighted average life thereof
and may adversely affect yield to their holders. Unless otherwise specified in
the related prospectus supplement, revolving credit loans will not be subject to
negative amortization.
Except for certain programs under which the Draw Period is less than the
full term thereof, required minimum monthly payments are generally equal to or
not significantly larger than the amount of interest currently accruing thereon,
and therefore are not expected to significantly amortize the outstanding
principal amounts of those mortgage loans prior to maturity, which amounts may
include substantial Draws recently made. As a result, a borrower will generally
be required to pay a substantial principal amount at the maturity of a revolving
credit loan. Alternatively, a pool of closed-end loans may include Balloon Loans
which require a single payment at maturity. These mortgage loans pose a greater
risk of default than fully-amortizing mortgage loans, because the mortgagor's
ability to make such a substantial payment at maturity will generally depend on
the mortgagor's ability to obtain refinancing of the mortgage loans or to sell
the mortgaged property prior to the maturity of the Balloon Loan. The ability to
obtain refinancing will depend on a number of factors prevailing at the time
refinancing or sale is required, including, without limitation, the mortgagor's
personal economic circumstances, the mortgagor's equity in the related mortgaged
property, real estate values, prevailing market interest rates, tax laws and
national and regional economic conditions. Neither the depositor, Residential
Funding, GMAC Mortgage nor any of their affiliates will be obligated to
refinance or repurchase any mortgage loan or to sell any mortgaged property,
unless that obligation is specified in the prospectus supplement.
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For any mortgage loans secured by junior mortgages, any inability of the
mortgagor to pay off its balance may also affect the ability of the mortgagor to
obtain refinancing at any time of any related senior mortgage loan, thereby
preventing a potential improvement in the mortgagor's circumstances.
Furthermore, if so specified in the related prospectus supplement, under the
applicable pooling and servicing agreement the master servicer may be restricted
or prohibited from consenting to any refinancing of any related senior mortgage
loan, which in turn could adversely affect the mortgagor's circumstances or
result in a prepayment or default under the corresponding junior mortgage loan.
In addition to the mortgagor's personal economic circumstances, a number
of factors, including homeowner mobility, job transfers, changes in the
mortgagor's housing needs, the mortgagor's net equity in the mortgaged property,
changes in the value of the mortgaged property, national and regional economic
conditions, enforceability of due-on-sale clauses, prevailing market interest
rates, servicing decisions, solicitations and the availability of mortgage
funds, seasonal purchasing and payment habits of borrowers or changes in the
deductibility for federal income tax purposes of interest payments on home
equity loans, may affect the rate and timing of principal payments or Draws, if
applicable, on the mortgage loans. There can be no assurance as to the rate of
principal payments on the mortgage loans, and there can be no assurance of the
rate of Draws on revolving credit loans. The rate of principal payments and the
rate of Draws, if applicable, may fluctuate substantially from time to time. In
most cases, home equity loans are not viewed by mortgagors as permanent
financing. Accordingly, closed-end loans may experience a higher rate of
prepayment than typical first lien mortgage loans. On the other hand, for
revolving credit loans, due to the unpredictable nature of both principal
payments and Draws, the rates of principal payments net of Draws for those loans
may be much more volatile than for typical first lien mortgage loans.
The yield to maturity of the certificates of any series, or the rate and
timing of principal payments or Draws, if applicable, on the related mortgage
loans, may also be affected by a wide variety of specific terms and conditions
applicable to the respective programs under which the mortgage loans were
originated. For example, revolving credit loans may provide for future Draws to
be made only in specified minimum amounts, or alternatively may permit Draws to
be made by check or through a credit card in any amount. A pool of revolving
credit loans subject to the latter provisions may be likely to remain
outstanding longer with a higher aggregate principal balance than a pool of
revolving credit loans with the former provisions, because of the relative ease
of making new Draws. Furthermore, revolving credit loans may provide for
interest rate changes on a daily or monthly basis, or may have gross margins
that may vary under certain circumstances over the term of the loan. In
extremely high market interest rate scenarios, certificates backed by revolving
credit loans with adjustable rates subject to substantially higher maximum rates
than typically apply to adjustable rate first mortgage loans may experience
rates of default and liquidation substantially higher than those that have been
experienced on other adjustable rate mortgage loan pools.
The yield to maturity of the certificates of any series, or the rate and
timing of principal payments, or Draws if applicable, on the related mortgage
loans and corresponding distributions on the certificates, will also be affected
by the specific terms and conditions applicable to the certificates. For
example, if the index used to determine the pass-through rates for a series of
certificates is different from the index applicable to the mortgage rates of the
underlying mortgage loans, the yield on the certificates may be reduced by
application of a cap on the pass-through rates based on the weighted average of
the mortgage rates. Depending on applicable cash flow allocation provisions,
changes in the relationship between the two indexes may also affect the timing
of certain principal distributions on the certificates, or may affect the amount
of any overcollateralization or the amount on deposit in any reserve fund, which
could in turn accelerate the distribution of principal on the certificates. For
any series of certificates backed by revolving credit loans, provisions
governing whether future Draws on the revolving credit loans will be included in
the trust will have a significant effect on the rate and timing of principal
distributions on the certificates. For a series of certificates backed by the
Trust Balances of revolving credit loans, the specific provisions applicable to
the allocation of payments, Draws and losses on the revolving credit loans
between the Trust Balances and the Excluded Balances thereof will also have a
significant effect on the rate and timing of principal distributions on the
certificates. See "Allocation of Revolving Credit Loan Balances" in this
prospectus.
For a series of certificates backed by revolving credit loans, as a result
of the payment terms of the mortgage loans or of the certificate provisions
relating to future Draws, there may be no principal distributions on those
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certificates in any given month. In addition, it is possible that the aggregate
Draws on revolving credit loans included in a mortgage pool may exceed the
aggregate payments with respect to principal on the revolving credit loans for
the related period.
Unless otherwise specified in the related prospectus supplement, all
revolving credit loans and all closed-end loans, other than ARM loans, will
contain due-on-sale provisions permitting the mortgagee to accelerate the
maturity of the mortgage loan upon sale or certain transfers by the mortgagor of
the underlying mortgaged property. The master servicer will generally enforce
any due-on-sale clause to the extent it has knowledge of the conveyance or
proposed conveyance of the underlying mortgaged property and it is entitled to
do so under applicable law, provided, however, that the master servicer will not
take any action in relation to the enforcement of any due-on-sale provision
which would adversely affect or jeopardize coverage under any applicable
insurance policy. An ARM loan is generally assumable under specific conditions
if the proposed transferee of the related mortgaged property establishes its
ability to repay the mortgage loan and, in the reasonable judgment of the master
servicer or the related subservicer, the security for the ARM loan would not be
impaired by the assumption. The extent to which ARM loans are assumed by
purchasers of the mortgaged properties rather than prepaid by the related
mortgagors in connection with the sales of the mortgaged properties may affect
the weighted average life of the related series of certificates. See
"Description of the Certificates -- Collection and Other Servicing Procedures"
and "Certain Legal Aspects of the Mortgage Loans and Related Matters --
Enforceability of Certain Provisions" for a description of provisions of the
pooling and servicing agreement and legal developments that may affect the
prepayment experience on the mortgage loans.
In addition, certain mortgage securities included in a mortgage pool may
be backed by underlying mortgage loans having differing interest rates.
Accordingly, the rate at which principal payments are received on the related
certificates will, to a certain extent, depend on the interest rates on the
underlying mortgage loans.
A subservicer or the master servicer may, from time to time, implement
refinancing or modification programs designed to encourage refinancing. A
subservicer or the master servicer, including an affiliate of the master
servicer, may also aggressively pursue refinancing or loan modification programs
that could require little or no cost and significantly decreased documentation
from the borrower. These programs may include, without limitation, general or
targeted solicitations, the offering of pre-approved applications, reduced
origination fees or closing costs, or other financial incentives. Targeted
solicitations may be based on a variety of factors, including the credit of the
borrower, the location of the mortgaged property, or the subservicer's or master
servicer's judgment as to the likelihood of a borrower refinancing. In addition,
subservicers or the master servicer may encourage assumptions of mortgage loans,
including defaulted mortgage loans, under which creditworthy borrowers assume
the outstanding indebtedness of the mortgage loans which may be removed from the
related mortgage pool. As a result of these programs, with respect to the
mortgage pool underlying any trust
o the rate of principal prepayments of the mortgage loans in the
mortgage pool may be higher than would otherwise be the case
o the average credit or collateral quality of the mortgage loans
remaining in the mortgage pool may decline and
o weighted average interest rate on the mortgage loans that remain in
the trust may be lower, thus reducing the rate of prepayments on the
mortgage loans in the future.
In addition, a subservicer may allow the refinancing of a mortgage loan by
accepting prepayment thereon and permitting a new loan or contract secured by a
mortgage on the same property, which may be originated by the subservicer or the
master servicer or any of their respective affiliates or by an unrelated entity.
In the event of this type of refinancing, the new loan or contract would not be
included in the related trust and, therefore, the refinancing would have the
same effect as a prepayment in full of the related mortgage loan.
If the pooling and servicing agreement for a series of certificates
provides for a Funding Account or other means of funding the transfer of
additional mortgage loans to the related trust, as described under "Description
of the Certificates; Funding Account" in this prospectus, and the trust is
unable to acquire the additional mortgage loans within any applicable time
limit, the amounts set aside for this purpose may be applied as principal
distributions on one or more classes of certificates of that series.
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Although the mortgage rates on revolving credit loans and ARM loans will
be subject to periodic adjustments, these adjustments typically:
o as to ARM loans will not increase or decrease the mortgage rates by
more than a fixed percentage amount on each adjustment date
o will not increase the mortgage rates over a fixed maximum rate
during the life of any revolving credit loan or ARM loan and
o 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 some circumstances, and which may be
different from margins being used at the time for newly originated
adjustable rate mortgage loans.
As a result, the mortgage rates on the revolving credit loans or ARM loans
in any mortgage pool at any time may not equal the prevailing rates for similar,
newly originated adjustable rate home equity mortgage loans or lines of credit,
and accordingly the rate of principal payments and Draws, if applicable, may be
lower or higher that would otherwise be anticipated. In certain rate
environments, the prevailing rates on fixed-rate mortgage loans may be
sufficiently low in relation to the then-current mortgage rates on revolving
credit loans or ARM loans that the rate of prepayment may increase as a result
of refinancings. There can be no certainty as to the rate of principal payments
or Draws, if applicable, on the mortgage loans during any period or over the
life of any series of certificates.
With respect to any index used in determining the pass-through rates for a
series of certificates or mortgage rates of the underlying mortgage loans, a
number of factors affect the performance of the index and may cause the index to
move in a manner different from other indices. To the extent that the index may
reflect changes in the general level of interest rates less quickly than other
indices, in a period of rising interest rates, increases in the yield to
certificateholders due to the rising interest rates may occur later than that
which would be produced by other indices, and in a period of declining rates,
the index may remain higher than other market interest rates which may result in
a higher level prepayments of the mortgage loans, which adjust in accordance
with the index, than of mortgage loans which adjust in accordance with other
indices.
Under some circumstances, the master servicer, the depositor or the
holders of the REMIC residual certificates may have the option to purchase the
mortgage loans in a trust, thus resulting in the early retirement of the related
certificates. See "The Pooling and Servicing Agreement -- Termination;
Retirement of Certificates."
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND RELATED MATTERS
The following discussion contains summaries of various legal aspects of
mortgage loans that are general in nature. Because those legal aspects are
governed in part by state law, and laws may differ substantially from state to
state, the summaries do not purport to be complete, to reflect the laws of any
particular state or to encompass the laws of all states in which the mortgaged
properties may be situated. The summaries are qualified in their entirety by
reference to the applicable federal and state laws governing the mortgage loans.
General
The mortgage loans, other than Cooperative Loans, will be secured by deeds
of trust, mortgages or deeds to secure debt depending upon the prevailing
practice in the state in which the related mortgaged property is located. In
some states, a mortgage, deed of trust or deed to secure debt creates a lien
upon the real property encumbered by the mortgage, deed of trust or deed to
secure debt. Those instruments are not prior to the lien for real estate taxes
and assessments and other charges imposed under governmental police powers.
Priority with respect to those instruments depends on their terms and in some
cases on the terms of separate subordination or inter-creditor agreements, and
on the order of recordation of the mortgage in the appropriate recording office.
There are two parties to a mortgage, the mortgagor, who is the borrower and
homeowner, and the mortgagee, who is the lender. Under the mortgage instrument,
the mortgagor delivers to the mortgagee a note or bond and the mortgage. In some
states, three parties may be involved in a mortgage financing when title to the
property is held by a land trustee who is the land trustee under a land trust
agreement of which the borrower is the beneficiary; at origination of a mortgage
loan, the land trustee, as fee owner of the property, executes the mortgage and
the borrower executes a separate undertaking
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to make payments on the mortgage note and an assignment of leases and rents.
Although a deed of trust is similar to a mortgage, a deed of trust has three
parties:
o the trustor, who is the borrower-homeowner
o the beneficiary, who is the lender and
o a third-party grantee called the trustee.
Under a deed of trust, the borrower grants the property, irrevocably until
the debt is paid, in trust, typically with a power of sale, to the trustee to
secure payment of the obligation. A deed to secure debt typically has two
parties, under which the borrower, or grantor, conveys title to the real
property to the grantee, or lender, typically with a power of sale, until the
time when the debt is repaid. The trustee's authority under a deed of trust, the
grantee's authority under a deed to secure debt and the mortgagee's authority
under a mortgage are governed by the law of the state in which the real property
is located, the express provisions of the deed of trust, mortgage or deed to
secure debt and, in certain deed of trust, transactions, the directions of the
beneficiary.
Cooperative Loans
The mortgage loans for a specific series of certificates may include
Cooperative Loans. Each Cooperative Note evidencing a Cooperative Loan will be
secured by a security interest in shares issued by the related corporation, or
Cooperative, that owns the related apartment building, which is a corporation
entitled to be treated as a housing cooperative under federal tax law, and in
the related proprietary lease or occupancy agreement granting exclusive rights
to occupy a specific dwelling unit in the Cooperative's building. The security
agreement will create a lien upon, or grant a security interest in, the
Cooperative shares and proprietary leases or occupancy agreements, the priority
of which will depend on, among other things, the terms of the particular
security agreement as well as the order of recordation and/or filing of the
agreement, or the filing of the financing statements related thereto, in the
appropriate recording office or the taking of possession of the Cooperative
shares, depending on the law of the state in which the Cooperative is located.
This type of lien or security interest is not, in general, prior to liens in
favor of the cooperative corporation for unpaid assessments or common charges.
Generally, each Cooperative owns in fee or has a leasehold interest in all
the real property and owns in fee or leases the building and all separate
dwelling units in the building. The Cooperative is directly responsible for
property management and, in most cases, payment of real estate taxes, other
governmental impositions and hazard and liability insurance. If there is an
underlying mortgage, or mortgages, on the Cooperative's building or underlying
land, as is typically the case, or an underlying lease of the land, as is the
case in some instances, the Cooperative, as mortgagor or lessee, as the case may
be, is also responsible for fulfilling the mortgage or rental obligations.
An underlying mortgage loan is ordinarily obtained by the Cooperative in
connection with either the construction or purchase of the Cooperative's
building or the obtaining of capital by the Cooperative. The interest of the
occupant under proprietary leases or occupancy agreements as to which that
Cooperative is the landlord is generally subordinate to the interest of the
holder of an underlying mortgage and to the interest of the holder of a land
lease. If the Cooperative is unable to meet the payment obligations:
o 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
o arising under its land lease, the holder of the landlord's interest
under the land lease could terminate it and all subordinate
proprietary leases and occupancy agreements.
In addition, an underlying mortgage on a Cooperative may provide financing
in the form of a mortgage that does not fully amortize, with a significant
portion of principal being due in one final payment at maturity. The inability
of the Cooperative to refinance a mortgage and its consequent inability to make
the final payment could lead to foreclosure by the mortgagee. Similarly, a land
lease has an expiration date and the inability of the Cooperative to extend its
term or, in the alternative, to purchase the land, could lead to termination of
the Cooperative's interest in the property and termination of all proprietary
leases and occupancy agreements. In either event, a foreclosure by the holder of
an underlying mortgage or the termination of the underlying lease could
eliminate or significantly diminish the value of any collateral held by the
lender who financed the purchase by an individual tenant-stockholder of shares
of the Cooperative or, in the case of the mortgage loans, the collateral
securing the Cooperative Loans.
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Each Cooperative is owned by shareholders, referred to as
tenant-stockholders, who, through ownership of stock or shares in the
Cooperative, receive proprietary leases or occupancy agreements which confer
exclusive rights to occupy specific dwellings. Generally, a tenant-stockholder
of a Cooperative must make a monthly rental payment to the Cooperative under the
proprietary lease, which rental payment represents the tenant-stockholder's pro
rata share of the Cooperative's payments for its underlying mortgage, real
property taxes, maintenance expenses and other capital or ordinary expenses. An
ownership interest in a Cooperative and accompanying occupancy rights may be
financed through a Cooperative Loan evidenced by a Cooperative Note and secured
by an assignment of and a security interest in the occupancy agreement or
proprietary lease and a security interest in the related shares of the related
Cooperative. The lender typically takes possession of the share certificate and
a counterpart of the proprietary lease or occupancy agreement and a financing
statement covering the proprietary lease or occupancy agreement and the
Cooperative shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the Cooperative Note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of 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
Internal Revenue Code, of a corporation that qualifies as a "cooperative housing
corporation" within the meaning of Section 216(b)(1) of the Internal Revenue
Code is allowed a deduction for amounts paid or accrued within his taxable year
to the corporation representing his proportionate share of various interest
expenses and real estate taxes allowable as a deduction under Section 216(a) of
the Internal Revenue Code to the corporation under Sections 163 and 164 of the
Internal Revenue Code. In order for a corporation to qualify under Section
216(b)(1) of the Internal Revenue Code for its taxable year in which those items
are allowable as a deduction to the corporation, the section requires, among
other things, that at least 80% of the gross income of the corporation be
derived from its tenant-stockholders. By virtue of this requirement, the status
of a corporation for purposes of Section 216(b)(1) of the Internal Revenue Code
must be determined on a year-to-year basis. Consequently, there can be no
assurance that Cooperatives relating to the Cooperative Loans will qualify under
this section for any particular year. In the event that this type of Cooperative
fails to qualify for one or more years, the value of the collateral securing any
related Cooperative Loans could be significantly impaired because no deduction
would be allowable to tenant-stockholders under Section 216(a) of the Internal
Revenue 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 Internal Revenue Code, the likelihood that this type of
failure would be permitted to continue over a period of years appears remote.
Foreclosure on Mortgage Loans
Although a deed of trust or a deed to secure debt may also be foreclosed
by judicial action, foreclosure of a deed of trust or a deed to secure debt is
typically accomplished by a non-judicial trustee's or grantee's, as applicable,
sale under a specific provision in the deed of trust or a deed to secure debt
which authorizes the trustee or grantee, as applicable, to sell the property
upon any default by the borrower under the terms of the note or deed of trust or
deed to secure debt. In addition to any notice requirements contained in a deed
of trust or a deed to secure debt, in some states, prior to a sale the trustee,
or grantee, as applicable, must record a notice of default and send a copy to
the borrower/trustor and to any person who has recorded a request for a copy of
notice of default and notice of sale. In addition, in some states, prior to the
sale, the trustee or grantee, as applicable, must provide notice to any other
individual having an interest of record in the real property, including any
junior lienholders. If the deed of trust or deed to secure debt is not
reinstated within a specified period, a notice of sale must be posted in a
public place and, in most states, published for a specific period of time in one
or more newspapers in a specified manner prior to the date of trustee's sale. In
addition, some states' laws require that a copy of the notice of sale be posted
on the property and sent to all parties having an interest of record in the real
property.
In some states, the borrower-trustor has the right to reinstate the loan
at any time following default until shortly before the trustee's sale. In
general, in those states, the borrower, or any other person having a junior
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encumbrance on the real estate, may, during a reinstatement period, cure the
default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation.
Foreclosure of a mortgage generally is accomplished by judicial action. In
most cases, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure may occasionally result from difficulties in locating and
serving necessary parties, including borrowers located outside the jurisdiction
in which the mortgaged property is located. If the mortgagee's right to
foreclose is contested, the legal proceedings necessary to resolve the issue can
be time-consuming.
In the case of foreclosure under a mortgage, a deed of trust or a deed to
secure debt, the sale by the referee or other designated officer or by the
trustee or grantee, as applicable, is a public sale. However, because of the
difficulty a potential third-party buyer at the sale might have in determining
the exact status of title, and because the physical condition of the property
may have deteriorated during the foreclosure proceedings, it is uncommon for a
third party to purchase the property at a foreclosure sale. Rather, it is common
for the lender to purchase the property from the trustee or referee, or grantee,
as applicable, for a credit bid less than or equal to the unpaid principal
amount of note plus the accrued and unpaid interest and the expense of
foreclosure, in which case the mortgagor's debt will be extinguished unless the
lender purchases the property for a lesser amount in order to preserve its right
against a borrower to seek a deficiency judgment and the remedy is available
under state law and the related loan documents. In the same states, there is a
statutory minimum purchase price which the lender may offer for the property and
in most cases, state law controls the amount of foreclosure costs and expenses,
including attorneys' fees, which may be recovered by a lender. Thereafter,
subject to the right of the borrower in some states to remain in possession
during the redemption period, the lender will assume the burdens of ownership,
including obtaining hazard insurance, paying taxes and making repairs at its own
expense that are necessary to render the property suitable for sale. In most
cases, the lender will obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the property. Depending upon
market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property and, in some states, the lender
may be entitled to a deficiency judgment. In some cases, a deficiency judgment
may be pursued in lieu of foreclosure. Any loss may be reduced by the receipt of
any mortgage insurance proceeds or other forms of credit enhancement for a
series of certificates. See "Description of Credit Enhancement."
A junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to the senior mortgages, in which case it
must either pay the entire amount due on the senior mortgages to the senior
mortgagees prior to or at the time of the foreclosure sale or undertake the
obligation to make payments on the senior mortgages in the event the mortgagor
is in default thereunder, in either event adding the amounts expended to the
balance due on the junior loan, and may be subrogated to the rights of the
senior mortgagees. In addition, in the event that the foreclosure by a junior
mortgagee triggers the enforcement of a due-on-sale clause in a senior mortgage,
the junior mortgagee may be required to pay the full amount of the senior
mortgages to the senior mortgagees to avoid foreclosure. Accordingly, with
respect to those mortgage loans which are junior mortgage loans, if the lender
purchases the property, the lender's title will be subject to all senior liens
and claims and some governmental liens. The proceeds received by the referee or
trustee from the sale are applied first to the costs, fees and expenses of sale
and then in satisfaction of the indebtedness secured by the mortgage or deed of
trust under which the sale was conducted. Any remaining proceeds are payable to
the holders of junior mortgages or deeds of trust and other liens and claims in
order of their priority, whether or not the borrower is in default. Any
additional proceeds are payable to the mortgagor or trustor. The payment of the
proceeds to the holders of junior mortgages may occur in the foreclosure action
of the senior mortgagee or may require the institution of separate legal
proceedings. See "Risk Factors -- Special Features of the Mortgage Loans" and
"Description of the Certificates -- Realization Upon Defaulted Mortgage Loans"
in this prospectus.
Foreclosure on Shares of Cooperatives
The Cooperative shares owned by the tenant-stockholder, together with the
rights of the tenant-stockholder under the proprietary lease or occupancy
agreement, are pledged to the lender and are, in almost all cases, subject to
restrictions on transfer as described in the Cooperative's certificate of
incorporation and by-laws, as well as in the proprietary lease or occupancy
agreement. The proprietary lease or occupancy agreement, even while pledged, may
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be canceled by the Cooperative for failure by the tenant-stockholder to pay rent
or other obligations or charges owed by the tenant-stockholder, including
mechanics' liens against the Cooperative's building incurred by the
tenant-stockholder.
In most cases, rent and other obligations and charges arising under a
proprietary lease or occupancy agreement which are owed to the Cooperative are
made liens upon the shares to which the proprietary lease or occupancy agreement
relates. In addition, the proprietary lease or occupancy agreement generally
permits the Cooperative to terminate the lease or agreement in the event the
borrower defaults in the performance of covenants thereunder. Typically, the
lender and the Cooperative enter into a recognition agreement which, together
with any lender protection provisions contained in the proprietary lease or
occupancy agreement, establishes the rights and obligations of both parties in
the event of a default by the tenant- stockholder on its obligations under the
proprietary lease or occupancy agreement. A default by the tenant-stockholder
under the proprietary lease or occupancy agreement will usually constitute a
default under the security agreement between the lender and the
tenant-stockholder.
The recognition agreement provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate the lease or
agreement until the lender has been provided with notice of and an opportunity
to cure the default. The recognition agreement typically provides that if the
proprietary lease or occupancy agreement is terminated, the Cooperative will
recognize the lender's lien against proceeds from a sale of the shares and the
proprietary lease or occupancy agreement allocated to the dwelling, subject,
however, to the Cooperative's right to sums due under the proprietary lease or
occupancy agreement or which have become liens on the shares relating to the
proprietary lease or occupancy agreement. The total amount owed to the
Cooperative by the tenant-stockholder, which the lender typically cannot
restrict and does not monitor, could reduce the amount realized upon a sale of
the collateral below the outstanding principal balance of the Cooperative Loan
and accrued and unpaid interest thereon.
Recognition agreements also provide that in the event the lender succeeds
to the tenant-shareholder's shares and proprietary lease or occupancy agreement
as the result of realizing upon its collateral for a Cooperative Loan, the
lender must obtain the approval or consent of the board of directors of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares and/or assigning the proprietary lease. This approval or
consent is usually based on the prospective purchaser's income and net worth,
among other factors, and may significantly reduce the number of potential
purchasers, which could limit the ability of the lender to sell and realize upon
the value of the collateral. In most cases, the lender is not limited in any
rights it may have to dispossess the tenant-stockholder.
Because of the nature of Cooperative Loans, lenders do not require the
tenant-stockholder (i.e., the borrower) to obtain title insurance of any type.
Consequently, the existence of any prior liens or other imperfections of title
affecting the Cooperative's building or real estate also may adversely affect
the marketability of the shares allocated to the dwelling unit in the event of
foreclosure.
In New York, foreclosure on the Cooperative shares is accomplished by
public sale in accordance with the provisions of Article 9 of the New York
Uniform Commercial Code, or the UCC, and the security agreement relating to
those shares. Article 9 of the UCC requires that a sale be conducted in a
"commercially reasonable" manner. Whether a sale has been conducted in a
"commercially reasonable" manner will depend on the facts in each case. In
determining commercial reasonableness, a court will look to the notice given the
debtor and the method, manner, time, place and terms of the sale and the sale
price. Generally, a sale conducted according to the usual practice of banks
selling similar collateral in the same area will be considered reasonably
conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, provides that the lender's right to reimbursement is subject
to the right of the Cooperative corporation to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is
responsible for the deficiency. See " -- Anti-Deficiency Legislation and Other
Limitations on Lenders' below.
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Rights of Redemption
In some states, after sale under a deed of trust or a deed to secure debt
or foreclosure of a mortgage, the borrower and foreclosed junior lienors or
other parties are given a statutory period, typically ranging from six months to
two years, in which to redeem the property from the foreclosure sale. In some
states, redemption may occur only upon payment of the entire principal balance
of the loan, accrued interest and expenses of foreclosure. In other states,
redemption may be authorized if the former borrower pays only a portion of the
sums due. In some states, the right to redeem is an equitable right. The equity
of redemption, which is a non-statutory right that must be exercised prior to a
foreclosure sale, should be distinguished from statutory rights of redemption.
The effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The rights of redemption would defeat
the title of any purchaser subsequent to foreclosure or sale under a deed of
trust or a deed to secure debt. Consequently, the practical effect of the
redemption right is to force the lender to maintain the property and pay the
expenses of ownership until the redemption period has expired.
Anti-Deficiency Legislation and Other Limitations on Lenders
Some states have imposed statutory prohibitions which limit the remedies
of a beneficiary under a deed of trust, a mortgagee under a mortgage or a
grantee under a deed to secure debt. In some states, including California,
statutes limit the right of the beneficiary, mortgagee or grantee to obtain a
deficiency judgment against the borrower following foreclosure. A deficiency
judgment is a personal judgment against the former borrower equal in most cases
to the difference between the net amount realized upon the public sale of the
real property and the amount due to the lender. In the case of a mortgage loan
secured by a property owned by a trust where the mortgage note is executed on
behalf of the trust, a deficiency judgment against the trust following
foreclosure or sale under a deed of trust or deed to secure debt, even if
obtainable under applicable law, may be of little value to the beneficiary,
grantee or mortgagee, if there are no trust assets against which the deficiency
judgment may be executed. Some state statutes require the beneficiary, grantee
or mortgagee to exhaust the security afforded under a deed of trust, deed to
secure debt or mortgage by foreclosure in an attempt to satisfy the full debt
before bringing a personal action against the borrower.
In other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting the security; however,
in some of these states, the lender, following judgment on the personal action,
may be deemed to have elected a remedy and may be precluded from exercising
remedies with respect to the security. Consequently, the practical effect of the
election requirement, in those states permitting this election, is that lenders
will usually proceed against the security first rather than bringing a personal
action against the borrower.
Finally, in other states, statutory provisions limit any deficiency
judgment against the borrower following a foreclosure to the excess of the
outstanding debt over the fair market value of the property at the time of the
public sale. The purpose of these statutes is generally to prevent a
beneficiary, grantee, or mortgagee from obtaining a large deficiency judgment
against the former borrower as a result of low or no bids at the judicial sale.
Generally, Article 9 of the UCC governs foreclosure on Cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted Article 9 to prohibit or limit a deficiency award in various
circumstances, including circumstances where the disposition of the collateral,
which, in the case of a Cooperative Loan, would be the shares of the Cooperative
and the related proprietary lease or occupancy agreement, was not conducted in a
commercially reasonable manner.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other federal and state statutory provisions, including the federal bankruptcy
laws and state laws affording relief to debtors, may interfere with or affect
the ability of the secured mortgage lender to realize upon its collateral and/or
enforce a deficiency judgment. For example, under the federal bankruptcy law,
all actions against the debtor, the debtor's property and any co-debtor are
automatically stayed upon the filing of a bankruptcy petition. Moreover, a court
having federal bankruptcy jurisdiction may permit a debtor through its Chapter
11 or Chapter 13 rehabilitative plan to cure a monetary default relating to a
mortgage loan on the debtor's residence by paying arrearages within a reasonable
time period and reinstating the original mortgage loan payment schedule, even
though the lender accelerated the mortgage loan and
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final judgment of foreclosure had been entered in state court, provided no sale
of the residence had yet occurred, prior to the filing of the debtor's petition.
Some courts with federal bankruptcy jurisdiction have approved plans, based on
the particular facts of the reorganization case, that effected the curing of a
mortgage loan default by permitting the borrower to pay arrearages over a number
of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property which is not the principal
residence of the debtor may be modified. These courts have allowed modifications
that include reducing the amount of each monthly payment, changing the rate of
interest, altering the repayment schedule, forgiving all or a portion of the
debt and reducing the lender's security interest to the value of the residence,
thus leaving the lender a general unsecured creditor for the difference between
the value of the residence and the outstanding balance of the loan. In most
cases, however, the terms of a mortgage loan secured only by a mortgage on real
property that is the debtor's principal residence may not be modified under a
plan confirmed under Chapter 13 except with respect to mortgage payment
arrearages, which may be cured within a reasonable time period. Courts with
federal bankruptcy jurisdiction similarly may be able to modify the terms of a
Cooperative Loan.
A number of tax liens arising under the Internal Revenue Code may, in some
circumstances, have priority over the lien of a mortgage, deed to secure debt,
or deed of trust. This may have the effect of delaying or interfering with the
enforcement of rights with respect to a defaulted mortgage loan. In addition,
substantive requirements are imposed upon mortgage lenders in connection with
the origination and the servicing of mortgage loans by numerous federal and some
state consumer protection laws. These laws include the federal Truth-in-Lending
Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair
Credit Billing Act, Fair Credit Reporting Act and related statutes. These
federal laws impose specific statutory liabilities upon lenders who originate
mortgage loans and who fail to comply with the provisions of the law. In some
cases, this liability may affect assignees of the mortgage loans.
Some of the mortgage loans may be originated on or after October 1, 1995
may be High Cost Loans. Purchasers or assignees of any High Cost Loan, including
any trust, could be liable for all claims and subject to all defenses arising
under these provisions that the borrower could assert against the originator of
the High Cost Loan. Remedies available to the borrower include monetary
penalties, as well as rescission rights if the appropriate disclosures were not
given as required.
Environmental Legislation
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act, as amended, or CERCLA, and under state law in some states, a
secured party which takes a deed-in-lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, or operates a mortgaged property may become
liable in some circumstances for the costs of cleaning up hazardous substances
regardless of whether they have contaminated the property. CERCLA imposes
strict, as well as joint and several, liability on several classes of
potentially responsible parties, including current owners and operators of the
property who did not cause or contribute to the contamination. Furthermore,
liability under CERCLA is not limited to the original or unamortized principal
balance of a loan or to the value of the property securing a loan. Lenders may
be held liable under CERCLA as owners or operators unless they qualify for the
secured creditor exemption to CERCLA. This exemption exempts from the definition
of owners and operators those who, without participating in the management of a
facility, hold evidence of ownership primarily to protect a security interest in
the facility.
The Asset Conservation, Lender Liability and Deposit Insurance Act of
1996, or 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
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substantially all of the operational functions of the mortgaged property. The
Conservation Act also provides that a lender will continue to have the benefit
of the secured creditor exemption even if it forecloses on a mortgaged property,
purchases it at a foreclosure sale or accepts a deed-in-lieu of foreclosure
provided that the lender seeks to sell the mortgaged property at the earliest
practicable commercially reasonable time on commercially reasonable terms.
Other federal and state laws in some circumstances may impose liability on
a secured party which takes a deed-in-lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, or operates a mortgaged property on which
contaminants other than CERCLA hazardous substances are present, including
petroleum, agricultural chemicals, hazardous wastes, asbestos, radon, and
lead-based paint. These cleanup costs may be substantial. It is possible that
these cleanup costs could become a liability of a trust and reduce the amounts
otherwise distributable to the holders of the related series of certificates.
Moreover, a number of federal statutes and some states by statute impose an
Environmental Lien. All subsequent liens on that property usually are
subordinated to this type of Environmental Lien and, in some states, even prior
recorded liens are subordinated to Environmental Liens. In the latter states,
the security interest of the trustee in a related parcel of real property that
is subject to this type of Environmental Lien could be adversely affected.
Traditionally, many residential mortgage lenders have not taken steps to
evaluate whether contaminants are present with respect to any mortgaged property
prior to the origination of the mortgage loan or prior to foreclosure or
accepting a deed-in-lieu of foreclosure. Accordingly, the depositor has not made
and will not make any of these evaluations prior to the origination of the
secured contracts. Neither the depositor nor any replacement servicer will be
required by any agreement to undertake any of these evaluations prior to
foreclosure or accepting a deed-in-lieu of foreclosure. The depositor does not
make any representations or warranties or assume any liability with respect to
the absence or effect of contaminants on any related real property or any
casualty resulting from the presence or effect of contaminants. However, the
depositor will not be obligated to foreclose on related real property or accept
a deed-in-lieu of foreclosure if it knows or reasonably believes that there are
material contaminated conditions on the property. A failure so to foreclose may
reduce the amounts otherwise available to certificateholders of the related
series.
Enforceability of Certain Provisions
The mortgage loans in most cases contain due-on-sale clauses. These
clauses permit the lender to accelerate the maturity of the loan if the borrower
sells, transfers or conveys the property without the prior consent of the
mortgagee. The enforceability of these clauses has been the subject of
legislation or litigation in many states, and in some cases the enforceability
of these clauses has been limited or denied. However, the Garn-St Germain
Depository Institutions Act of 1982, or Garn-St Germain Act, subject to a number
of exceptions, preempts state constitutional, statutory and case law that
prohibits the enforcement of due-on-sale clauses and permits lenders to enforce
these clauses in accordance with their terms. The Garn-St Germain Act does
"encourage" lenders to permit assumption of loans at the original rate of
interest or at some other rate less than the average of the original rate and
the market rate.
The Garn-St Germain Act also sets forth nine specific instances in which a
mortgage lender covered by the Garn-St Germain Act may not exercise a
due-on-sale clause, notwithstanding the fact that a transfer of the property may
have occurred. These include intra-family transfers, various transfers by
operation of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St Germain Act also prohibit
the imposition of a prepayment penalty upon the acceleration of a loan under a
due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a mortgage
loan bearing an interest rate below the current market rate being assumed by a
new home buyer rather than being paid off, which may have an impact upon the
average life of the mortgage loans and the number of mortgage loans which may be
outstanding until maturity.
Forms of notes and mortgages used by lenders may contain provisions
obligating the borrower to pay a late charge or additional interest if payments
are not timely made, and in some circumstances may provide for prepayment fees
or yield maintenance penalties if the obligation is paid prior to maturity. In a
number of states, there are or may
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be specific limitations upon the late charges which a lender may collect from a
borrower for delinquent payments. Some states also limit the amounts that a
lender may collect from a borrower as an additional charge if the loan is
prepaid. In addition, the enforceability of provisions that provide for
prepayment fees or penalties upon an involuntary prepayment is unclear under the
laws of many states. Most conventional single-family mortgage loans may be
prepaid in full or in part without penalty. The regulations of the Federal Home
Loan Bank Board, as succeeded by the Office of Thrift Supervision, or OTS,
prohibit the imposition of a prepayment penalty or equivalent fee for or in
connection with the acceleration of a loan by exercise of a due-on-sale clause.
A mortgagee to whom a prepayment in full has been tendered may be compelled to
give either a release of the mortgage or an instrument assigning the existing
mortgage. The absence of a restraint on prepayment, particularly with respect to
mortgage loans having higher mortgage rates, may increase the likelihood of
refinancing or other early retirements of the mortgage loans.
In foreclosure actions, courts have imposed general equitable principles.
These equitable principles are designed to relieve the borrower from the legal
effect of its defaults under the loan documents. Examples of judicial remedies
that have been fashioned include judicial requirements that the lender undertake
affirmative and expensive actions to determine the causes for the borrower's
default and the likelihood that the borrower will be able to reinstate the loan.
In some cases, courts have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right of
the lender to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower failing to adequately maintain the property or
the borrower executing a second mortgage or deed of trust affecting the
property. Finally, some courts have been faced with the issue of whether or not
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that borrowers under deeds of trust, deed to secure
debt, or mortgages receive notices in addition to the statutorily prescribed
minimum. For the most part, these cases have upheld the notice provisions as
being reasonable or have found that the sale by a trustee under a deed of trust,
or a grantee under a deed to secure debt or a mortgagee having a power of sale,
does not involve sufficient state action to afford constitutional protections to
the borrower.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, provides that state usury limitations shall not apply to various
types of residential first mortgage loans, including cooperative loans
originated by various lenders after March 31, 1980. A similar federal statute
was in effect with respect to mortgage loans made during the first three months
of 1980. The OTS is authorized to issue rules and regulations and to publish
interpretations governing implementation of Title V. The statute authorized any
state to impose interest rate limits by adopting, before April 1, 1983, a law or
constitutional provision which expressly rejects application of the federal law.
In addition, even where Title V is not so rejected, any state is authorized by
the law to adopt a provision limiting discount points or other charges on
mortgage loans covered by Title V. Some states have taken action to reimpose
interest rate limits or to limit discount points or other charges.
Usury limits apply to junior mortgage loans in many states. Any applicable
usury limits in effect at origination will be reflected in the maximum mortgage
rates for revolving credit loans and ARM loans, as set forth in the related
prospectus supplement.
Unless otherwise described in the related prospectus supplement, each
seller of a mortgage loan will have represented that the mortgage loan was
originated in compliance with then applicable state laws, including usury laws,
in all material respects. However, the mortgage rates on the mortgage loans will
be subject to applicable usury laws as in effect from time to time.
Alternative Mortgage Instruments
Alternative mortgage instruments, including adjustable rate mortgage loans
and adjustable rate cooperative loans, and early ownership mortgage loans,
originated by non-federally chartered lenders have historically been subjected
to a variety of restrictions. These restrictions differed from state to state,
resulting in difficulties in determining whether a particular alternative
mortgage instrument originated by a state-chartered lender was in
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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 provides that, notwithstanding any state law to the contrary:
o 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
o state-chartered credit unions may originate alternative mortgage
instruments in accordance with regulations promulgated by the
National Credit Union Administration with respect to origination of
alternative mortgage instruments by federal credit unions and
o all other non-federally chartered housing creditors, including
state-chartered savings and loan associations, state-chartered
savings banks and mutual savings banks and mortgage banking
companies, may originate alternative mortgage instruments in
accordance with the regulations promulgated by the Federal Home Loan
Bank Board, predecessor to the OTS, with respect to origination of
alternative mortgage instruments by federal savings and loan
associations.
Title VIII also provides that any state may reject applicability of the
provisions of Title VIII by adopting, prior to October 15, 1985, a law or
constitutional provision expressly rejecting the applicability of these
provisions. Some states have taken this action.
Soldiers' and Sailors' Civil Relief Act of 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended, or the Relief Act, a mortgagor who enters military service after the
origination of the mortgagor's mortgage loan, including a mortgagor who was in
reserve status and is called to active duty after origination of the mortgage
loan, may not be charged interest, including fees and charges, above an annual
rate of 6% during the period of the mortgagor's active duty status, unless a
court orders otherwise upon application of the lender. The Relief Act applies to
mortgagors who are members of the Air Force, Army, Marines, Navy, National
Guard, Reserves, Coast Guard, and officers of the U.S. Public Health Service
assigned to duty with the military.
Because the Relief Act applies to mortgagors who enter military service,
including reservists who are called to active duty, after origination of the
related mortgage loan, no information can be provided as to the number of loans
that may be affected by the Relief Act. Application of the Relief Act would
adversely affect, for an indeterminate period of time, the ability of the master
servicer to collect full amounts of interest on those mortgage loans. Any
shortfall in interest collections resulting from the application of the Relief
Act or similar legislation or regulations, which would not be recoverable from
the related mortgage loans, would result in a reduction of the amounts
distributable to the holders of the related certificates, and would not be
covered by Advances and may not be covered by the applicable form of credit
enhancement provided in connection with the related series of certificates. In
addition, the Relief Act imposes limitations that would impair the ability of
the master servicer to foreclose on an affected mortgage loan during the
mortgagor's period of active duty status, and, under a number of circumstances,
during an additional three month period thereafter. Thus, in the event that the
Relief Act or similar legislation or regulations applies to any mortgage loan
which goes into default, there may be delays in payment and losses on the
related certificates in connection therewith. Any other interest shortfalls,
deferrals or forgiveness of payments on the mortgage loans resulting from
similar legislation or regulations may result in delays in payments or losses to
certificateholders of the related series.
Forfeitures in Drug and RICO Proceedings
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations, or RICO, statute can be seized by the government if the
property was used in, or purchased with the proceeds of, those crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984, the
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.
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A lender may avoid forfeiture of its interest in the property if it
establishes that its mortgage was executed and recorded before commission of the
crime upon which the forfeiture is based, or the lender was, at the time of
execution of the mortgage, "reasonably without cause to believe" that the
property was used in, or purchased with the proceeds of, illegal drug or RICO
activities.
Junior Mortgages; Rights of Senior Mortgagees
The mortgage loans or mortgage securities included in the trust for a
series will be secured by mortgages or deeds of trust which are revolving credit
loans or closed-end loans which may be junior to other mortgages or deeds of
trust held by other lenders or institutional investors. The rights of the trust,
and therefore the certificateholders, as mortgagee under a junior mortgage, are
subordinate to those of the mortgagee under the senior mortgage, including the
prior rights of the senior mortgagee to receive hazard insurance and
condemnation proceeds and to cause the property securing the mortgage loan to be
sold upon default of the mortgagor, which may extinguish the junior mortgagee's
lien unless the junior mortgagee asserts its subordinate interest in the
property in foreclosure litigation and, in a number of cases, either reinitiates
or satisfies the defaulted senior loan or loans. A junior mortgagee may satisfy
a defaulted senior loan in full or, in some states, may cure the default and
bring the senior loan current thereby reinstating the senior loan, in either
event usually adding the amounts expended to the balance due on the junior loan.
In most states, absent a provision in the mortgage or deed of trust, no notice
of default is required to be given to a junior mortgagee. Where applicable law
or the terms of the senior mortgage or deed of trust do not require notice of
default to the junior mortgagee, the lack of notice may prevent the junior
mortgagee from exercising any right to reinstate the loan which applicable law
may provide.
The standard form of the mortgage or deed of trust used by most
institutional lenders confers on the mortgagee the right both to receive all
proceeds collected under any hazard insurance policy and all awards made in
connection with condemnation proceedings, and to apply the proceeds and awards
to any indebtedness secured by the mortgage or deed of trust, in the order as
the mortgagee may determine. Thus, in the event improvements on the property are
damaged or destroyed by fire or other casualty, or in the event the property is
taken by condemnation, the mortgagee or beneficiary under underlying senior
mortgages will have the prior right to collect any insurance proceeds payable
under a hazard insurance policy and any award of damages in connection with the
condemnation and to apply the same to the indebtedness secured by the senior
mortgages. Proceeds in excess of the amount of senior mortgage indebtedness, in
most cases, may be applied to the indebtedness of junior mortgages in the order
of their priority.
Another provision sometimes found in the form of the mortgage or deed of
trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which are prior to the mortgage
or deed of trust, to provide and maintain fire insurance on the property, to
maintain and repair the property and not to commit or permit any waste thereof,
and to appear in and defend any action or proceeding purporting to affect the
property or the rights of the mortgagee under the mortgage. Upon a failure of
the mortgagor to perform any of these obligations, the mortgagee or beneficiary
is given the right under some mortgages or deeds of trust to perform the
obligation itself, at its election, with the mortgagor agreeing to reimburse the
mortgagee for any sums expended by the mortgagee on behalf of the mortgagor. All
sums so expended by a senior mortgagee become part of the indebtedness secured
by the senior mortgage.
The form of credit line trust deed or mortgage used by most institutional
lenders which make revolving credit loans typically contains a "future advance"
clause, which provides, in essence, that additional amounts advanced to or on
behalf of the borrower by the beneficiary or lender are to be secured by the
deed of trust or mortgage. The priority of the lien securing any advance made
under the clause may depend in most states on whether the deed of trust or
mortgage is designated as a credit line deed of trust or mortgage. If the
beneficiary or lender advances additional amounts, the advance is entitled to
receive the same priority as amounts initially advanced under the trust deed or
mortgage, notwithstanding the fact that there may be junior trust deeds or
mortgages and other liens which intervene between the date of recording of the
trust deed or mortgage and the date of the future advance, and notwithstanding
that the beneficiary or lender had actual knowledge of these intervening junior
trust deeds or mortgages and other liens at the time of the advance. In most
states, the trust deed or mortgage lien securing mortgage
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loans of the type which includes revolving credit loans applies retroactively to
the date of the original recording of the trust deed or mortgage, provided that
the total amount of advances under the credit limit does not exceed the maximum
specified principal amount of the recorded trust deed or mortgage, except as to
advances made after receipt by the lender of a written notice of lien from a
judgment lien creditor of the trustor.
Negative Amortization Loans
A recent case decided by the United States Court of Appeals, First
Circuit, held that state restrictions on the compounding of interest are not
preempted by the provisions of the Depository Institutions Deregulation and
Monetary Control Act of 1980, or DIDMC, and as a result, a mortgage loan that
provided for negative amortization violated New Hampshire's requirement that
first mortgage loans provide for computation of interest on a simple interest
basis. The holding was limited to the effect of DIDMC on state laws regarding
the compounding of interest and the court did not address the applicability of
the Alternative Mortgage Transaction Parity Act of 1982, which authorizes a
lender to make residential mortgage loans that provide for negative
amortization. As a result, the enforceability of compound interest on mortgage
loans that provide for negative amortization is unclear. The First Circuit's
decision is binding authority only on Federal District Courts in Maine, New
Hampshire, Massachusetts, Rhode Island and Puerto Rico.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
General
The following is a general discussion of anticipated material federal
income tax consequences of the purchase, ownership and disposition of the
certificates offered by this prospectus. This discussion has been prepared with
the advice of Thacher Proffitt & Wood, Orrick, Herrington & Sutcliffe LLP and
Stroock & Stroock & Lavan, counsel to the depositor. This discussion is directed
solely to certificateholders that hold the certificates as capital assets within
the meaning of Section 1221 of the Internal Revenue Code and does not purport to
discuss all federal income tax consequences that may be applicable to particular
categories of investors, some of which, including banks, insurance companies and
foreign investors, may be subject to special rules. Further, the authorities on
which this discussion, and the opinion referred to below, are based are subject
to change or differing interpretations, which could apply retroactively.
Taxpayers and preparers of tax returns, including those filed by any REMIC or
other issuer, should be aware that under applicable Treasury regulations a
provider of advice on specific issues of law is not considered an income tax
return preparer unless the advice:
o 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
o is directly relevant to the determination of an entry on a tax
return.
Accordingly, taxpayers should consult their tax advisors and tax return
preparers regarding the preparation of any item on a tax return, even where the
anticipated tax treatment has been discussed in this prospectus. In addition to
the federal income tax consequences described in this prospectus, potential
investors should consider the state and local tax consequences, if any, of the
purchase, ownership and disposition of the certificates. See "State and Other
Tax Consequences." Certificateholders are advised to consult their tax advisors
concerning the federal, state, local or other tax consequences to them of the
purchase, ownership and disposition of the certificates offered by this
prospectus.
Unless otherwise specified in the related prospectus supplement, as to
each series of certificates, the master servicer will cause an election to be
made to have the related trust treated as a REMIC under Sections 860A through
860G of the Internal Revenue Code. If a REMIC election or elections will be made
for the related trust, the related prospectus supplement for each series of
certificates will identify all "regular interests" and "residual interests" in
the REMIC. If a REMIC election will not be made for a trust, the federal income
tax consequences of the purchase, ownership and disposition of the related
certificates will be described in the related prospectus supplement. For
purposes of this tax discussion, references to a "certificateholder" or a
"holder" are to the beneficial owner of a certificate.
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The following discussion is based in part upon the rules governing
original issue discount that are described in Sections 1271-1273 and 1275 of the
Code and in the Treasury regulations issued thereunder, which are referred to in
this prospectus as the OID regulations, and in part upon the REMIC provisions
and the Treasury regulations issued thereunder, or the REMIC regulations. The
OID regulations, which are effective with respect to debt instruments issued on
or after April 4, 1994, do not adequately address various issues relevant to,
and in some instances provide that they are not applicable to, securities like
the certificates.
REMICS
Classification of REMICS
Upon the issuance of each series of REMIC certificates, either Thacher
Proffitt & Wood, Orrick, Herrington & Sutcliffe LLP or Stroock & Stroock &
Lavan, counsel to the depositor, will deliver its opinion to the effect that,
assuming compliance with all provisions of the related pooling and servicing
agreement, the related trust, or each applicable portion thereof, will qualify
as a REMIC and the REMIC certificates offered with respect thereto will be
considered to evidence ownership of "regular interests" or "residual interests"
in that REMIC within the meaning of the REMIC provisions.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Internal Revenue Code for this status
during any taxable year, the Internal Revenue Code provides that the entity will
not be treated as a REMIC for that year and thereafter. In that event, the
entity may be taxable as a separate corporation under Treasury regulations, and
the related REMIC certificates may not be accorded the status or given the tax
treatment described below. Although the Internal Revenue Code authorizes the
Treasury Department to issue regulations providing relief in the event of an
inadvertent termination of REMIC status, no regulations have been issued. Any
relief, moreover, may be accompanied by sanctions, such as the imposition of a
corporate tax on all or a portion of the trust's income for the period in which
the requirements for that status are not satisfied. The pooling and servicing
agreement with respect to each REMIC will include provisions designed to
maintain the trust's status as a REMIC under the REMIC provisions. It is not
anticipated that the status of any trust as a REMIC will be terminated.
In general, a Swap or Yield Supplement Agreement may not be an asset of a
REMIC. If a trust of a particular series contains a Swap or Yield Supplement
Agreement, the related prospectus supplement will disclose the tax treatment of
such an arrangement.
Characterization of Investments in REMIC Certificates
In general, the REMIC certificates will be "real estate assets" within the
meaning of Section 856(c)(5)(A) of the Internal Revenue Code and assets
described in Section 7701(a)(19)(C) of the Internal Revenue Code in the same
proportion that the assets of the REMIC underlying the certificates would be so
treated. Moreover, if 95% or more of the assets of the REMIC qualify for any of
the foregoing treatments at all times during a calendar year, the REMIC
certificates will qualify for the corresponding status in their entirety for
that calendar year. Interest, including original issue discount, on the REMIC
regular certificates and income allocated to the class of REMIC residual
certificates will be interest described in Section 856(c)(3)(B) of the Internal
Revenue Code to the extent that those certificates are treated as "real estate
assets" within the meaning of Section 856(c)(4)(A) of the Internal Revenue Code.
In addition, the REMIC regular certificates will be "qualified mortgages" within
the meaning of Section 860G(a)(3) of the Internal Revenue Code if transferred to
another REMIC on its startup day in exchange for regular or residual interests
in that REMIC. The determination as to the percentage of the REMIC's assets that
constitute assets described in the foregoing sections of the Internal Revenue
Code will be made with respect to each calendar quarter based on the average
adjusted basis of each category of the assets held by the REMIC during that
calendar quarter. The master servicer will report those determinations to
certificateholders in the manner and at the times required by applicable
Treasury regulations.
The assets of the REMIC will include, in addition to mortgage loans,
payments on mortgage loans held pending distribution on the REMIC certificates
and property acquired by foreclosure held pending sale, and may
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include amounts in reserve accounts. It is unclear whether property acquired by
foreclosure held pending sale and amounts in reserve accounts would be
considered to be part of the mortgage loans, or whether the assets, to the
extent not invested in assets described in the foregoing sections, otherwise
would receive the same treatment as the mortgage loans for purposes of all of
the foregoing sections. In addition, in some instances mortgage loans may not be
treated entirely as assets described in the foregoing sections. The REMIC
regulations do provide, however, that payments on mortgage loans held pending
distribution are considered part of the mortgage loans for purposes of Section
856(c)(4)(A) of the Internal Revenue Code. Furthermore, foreclosure property
will qualify as "real estate assets" under Section 856(c)(4)(A) of the Internal
Revenue Code.
Tiered REMIC Structures
For some series of REMIC certificates, two or more separate elections may
be made to treat designated portions of the related trust as REMICs, or tiered
REMICs, for federal income tax purposes. Upon the issuance of this type of
series of REMIC certificates, Thacher Proffitt & Wood, Orrick, Herrington &
Sutcliffe LLP, or Stroock & Stroock & Lavan, counsel to the depositor, will
deliver their opinion to the effect that, assuming compliance with all
provisions of the related pooling and servicing agreement, the tiered REMICs
will each qualify as a REMIC and the REMIC certificates issued by the tiered
REMICs, respectively, will be considered to evidence ownership of REMIC regular
certificates or REMIC residual certificates in the related REMIC within the
meaning of the REMIC provisions.
Solely for purposes of determining whether the REMIC certificates will be
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Internal
Revenue Code, and "loans secured by an interest in real property" under Section
7701(a)(19)(C) of the Internal Revenue Code, and whether the income on the
certificates is interest described in Section 856(c)(3)(B) of the Internal
Revenue Code, the tiered REMICs will be treated as one REMIC.
Taxation of Owners of REMIC Regular Certificates
General. Except as otherwise stated in this discussion, REMIC regular
certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Moreover, holders of REMIC regular certificates that otherwise report income
under a cash method of accounting will be required to report income with respect
to REMIC regular certificates under an accrual method.
Some REMIC regular certificates may be issued with "original issue
discount" within the meaning of Section 1273(a) of the Internal Revenue Code.
Any holders of REMIC regular certificates issued with original issue discount
typically will be required to include original issue discount in income as it
accrues, in accordance with the method described below, in advance of the
receipt of the cash attributable to that income. In addition, Section 1272
(a)(6) of the Internal Revenue Code provides special rules applicable to REMIC
regular certificates and various other debt instruments issued with original
issue discount. Regulations have not been issued under that section.
The Internal Revenue Code requires that a prepayment assumption be used
with respect to mortgage loans held by a REMIC in computing the accrual of
original issue discount on REMIC regular certificates issued by that REMIC, and
that adjustments be made in the amount and rate of accrual of the discount to
reflect differences between the actual prepayment rate and the prepayment
assumption. The prepayment assumption is to be determined in a manner prescribed
in Treasury regulations; as noted above, those regulations have not been issued.
The Conference Committee Report accompanying the Tax Reform Act of 1986,
indicates that the regulations will provide that the prepayment assumption used
with respect to a REMIC regular certificate must be the same as that used in
pricing the initial offering of the REMIC regular certificate. The prepayment
assumption used by the master servicer in reporting original issue discount for
each series of REMIC regular certificates will be consistent with this standard
and will be disclosed in the related prospectus supplement. However, neither the
depositor nor the master servicer will make any representation that the mortgage
loans will in fact prepay at a rate conforming to the prepayment assumption or
at any other rate.
The original issue discount, if any, on a REMIC regular certificate will
be the excess of its stated redemption price at maturity over its issue price.
The issue price of a particular class of REMIC regular certificates will be the
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first cash price at which a substantial amount of REMIC regular certificates of
that class is sold, excluding sales to bond houses, brokers and underwriters. If
less than a substantial amount of a particular class of REMIC regular
certificates is sold for cash on or prior to the date of their initial issuance,
the issue price for the class will be treated as the fair market value of that
class on the closing date. Under the OID regulations, the stated redemption
price of a REMIC regular certificate is equal to the total of all payments to be
made on that certificate other than "qualified stated interest." "Qualified
stated interest" includes interest that is unconditionally payable at least
annually at a single fixed rate, or in the case of a variable rate debt
instrument, at a "qualified floating rate," an "objective rate," a combination
of a single fixed rate and one or more "qualified floating rates" or one
"qualified inverse floating rate," or a combination of "qualified floating
rates" that generally does not operate in a manner that accelerates or defers
interest payments on a REMIC regular certificate.
In the case of REMIC regular certificates bearing adjustable interest
rates, the determination of the total amount of original issue discount and the
timing of the inclusion of the original issue discount will vary according to
the characteristics of the REMIC regular certificates. In general terms,
original issue discount is accrued by treating the interest rate of the
certificates as fixed and making adjustments to reflect actual interest rate
adjustments.
Some classes of the REMIC regular certificates may provide for the first
interest payment with respect to their certificates to be made more than one
month after the date of issuance, a period which is longer than the subsequent
monthly intervals between interest payments. Assuming the "accrual period" for
original issue discount is each monthly period that ends on a distribution date,
in some cases, as a consequence of this "long first accrual period," some or all
interest payments may be required to be included in the stated redemption price
of the REMIC regular certificate and accounted for as original issue discount.
Because interest on REMIC regular certificates must in any event be accounted
for under an accrual method, applying this analysis would result in only a
slight difference in the timing of the inclusion in income of the yield on the
REMIC regular certificates.
In addition, if the accrued interest to be paid on the first distribution
date is computed with respect to a period that begins prior to the closing date,
a portion of the purchase price paid for a REMIC regular certificate will
reflect the accrued interest. In these cases, information returns to the
certificateholders and the Internal Revenue Service, or IRS, will be based on
the position that the portion of the purchase price paid for the interest
accrued with respect to periods prior to the closing date is treated as part of
the overall purchase price of the REMIC regular certificate, and not as a
separate asset the purchase price of which is recovered entirely out of interest
received on the next distribution date, and that portion of the interest paid on
the first distribution date in excess of interest accrued for a number of days
corresponding to the number of days from the closing date to the first
distribution date should be included in the stated redemption price of the REMIC
regular certificate. However, the OID regulations state that all or some portion
of the accrued interest may be treated as a separate asset the cost of which is
recovered entirely out of interest paid on the first distribution date. It is
unclear how an election to do so would be made under the OID regulations and
whether that election could be made unilaterally by a certificateholder.
Notwithstanding the general definition of original issue discount,
original issue discount on a REMIC regular certificate will be considered to be
de minimis if it is less than 0.25% of the stated redemption price of the REMIC
regular certificate multiplied by its weighted average maturity. For this
purpose, the weighted average maturity of the REMIC regular certificate is
computed as the sum of the amounts determined, as to each payment included in
the stated redemption price of the REMIC regular certificate, by multiplying:
o the number of complete years, rounding down for partial years, from
the issue date until the payment is expected to be made, presumably
taking into account the prepayment assumption, by
o a fraction, the numerator of which is the amount of the payment, and
the denominator of which is the stated redemption price at maturity
of the REMIC regular certificate.
Under the OID regulations, original issue discount of only a de minimis
amount, other than de minimis original issue discount attributable to a
so-called "teaser" interest rate or an initial interest holiday, will be
included in income as each payment of stated principal is made, based on the
product of the total amount of the de minimis original issue discount and a
fraction, the numerator of which is the amount of the principal payment and the
denominator of which is the outstanding stated principal amount of the REMIC
regular certificate. The OID regulations also would permit a certificateholder
to elect to accrue de minimis original issue discount into income
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currently based on a constant yield method. See "Taxation of Owners of REMIC
Regular Certificates -- Market Discount" for a description of that election
under the OID regulations.
If original issue discount on a REMIC regular certificate is in excess of
a de minimis amount, the holder of the certificate must include in ordinary
gross income the sum of the "daily portions" of original issue discount for each
day during its taxable year on which it held the REMIC regular certificate,
including the purchase date but excluding the disposition date. In the case of
an original holder of a REMIC regular certificate, the daily portions of
original issue discount will be determined as follows.
As to each "accrual period," that is, unless otherwise stated in the
related prospectus supplement, each period that ends on a date that corresponds
to a distribution date and begins on the first day following the immediately
preceding accrual period, or in the case of the first accrued period, begins on
the closing date, a calculation will be made of the portion of the original
issue discount that accrued during that accrual period. The portion of original
issue discount that accrues in any accrual period will equal the excess, if any,
of:
o the sum of:
o the present value, as of the end of the accrual period, of all
of the distributions remaining to be made on the REMIC regular
certificate, if any, in future periods and
o the distributions made on the REMIC regular certificate during
the accrual period of amounts included in the stated
redemption price, over
o the adjusted issue price of the REMIC regular certificate at the
beginning of the accrual period.
The present value of the remaining distributions referred to in the
preceding sentence will be calculated assuming that distributions on the REMIC
regular certificate will be received in future periods based on the mortgage
loans being prepaid at a rate equal to the prepayment assumption and using a
discount rate equal to the original yield to maturity of the certificate. For
these purposes, the original yield to maturity of the certificate will be
calculated based on its issue price and assuming that distributions on the
certificate will be made in all accrual periods based on the mortgage loans
being prepaid at a rate equal to the prepayment assumption. The adjusted issue
price of a REMIC regular certificate at the beginning of any accrual period will
equal the issue price of the certificate, increased by the aggregate amount of
original issue discount that accrued with respect to that certificate in prior
accrual periods, and reduced by the amount of any distributions made on that
REMIC regular certificate in prior accrual periods of amounts included in its
stated redemption price. The original issue discount accruing during any accrual
period, computed as described above, will be allocated ratably to each day
during the accrual period to determine the daily portion of original issue
discount for that day.
A subsequent purchaser of a REMIC regular certificate that purchases the
certificate at a price, excluding any portion of that price attributable to
accrued qualified stated interest, less than its remaining stated redemption
price will also be required to include in gross income the daily portions of any
original issue discount with respect to that certificate. However, each daily
portion will be reduced, if the cost is in excess of its "adjusted issue price,"
in proportion to the ratio excess bears to the aggregate original issue discount
remaining to be accrued on the REMIC regular certificate. The adjusted issue
price of a REMIC regular certificate on any given day equals the sum of the
adjusted issue price, or, in the case of the first accrual period, the issue
price, of the certificate at the beginning of the accrual period which includes
that day, and the daily portions of original issue discount for all days during
the accrual period prior to that day.
Market Discount
A certificateholder that purchases a REMIC regular certificate at a market
discount, that is, in the case of a REMIC regular certificate issued without
original issue discount, at a purchase price less than its remaining stated
principal amount, or in the case of a REMIC regular certificate issued with
original issue discount, at a purchase price less than its adjusted issue price
will recognize income upon receipt of each distribution representing stated
redemption price. In particular, under Section 1276 of the Internal Revenue Code
the certificateholder will be required to allocate the portion of each
distribution representing stated redemption price first to accrued market
discount not previously included in income, and to recognize ordinary income to
that extent.
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A certificateholder may elect to include market discount in income
currently as it accrues rather than including it on a deferred basis in
accordance with the foregoing. If made, the election will apply to all market
discount bonds acquired by certificateholder on or after the first day of the
first taxable year to which the election applies. In addition, the OID
regulations permit a certificateholder to elect to accrue all interest,
discount, including de minimis market or original issue discount, and premium in
income as interest, based on a constant yield method. If the election were made
with respect to a REMIC regular certificate with market discount, the
certificateholder would be deemed to have made an election to include market
discount in income currently with respect to all other debt instruments having
market discount that the certificateholder acquires during the taxable year of
the election or thereafter, and possibly previously acquired instruments.
Similarly, a certificateholder that made this election for a certificate that is
acquired at a premium would be deemed to have made an election to amortize bond
premium with respect to all debt instruments having amortizable bond premium
that the certificateholder owns or acquires. See "Taxation of Owners of REMIC
Regular Certificates -- Premium." Each of these elections to accrue interest,
discount and premium with respect to a certificate on a constant yield method or
as interest would be irrevocable.
However, market discount with respect to a REMIC regular certificate will
be considered to be de minimis for purposes of Section 1276 of the Code if the
market discount is less than 0.25% of the remaining stated redemption price of
the REMIC regular certificate multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect to
market discount, presumably taking into account the prepayment assumption. If
market discount is treated as de minimis under this rule, it appears that the
actual discount would be treated in a manner similar to original issue discount
of a de minimis amount. See "Taxation of Owners of REMIC Regular Certificates --
Original Issue Discount." This treatment would result in discount being included
in income at a slower rate than discount would be required to be included in
income using the method described above.
Internal Revenue 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, a
number of rules described in the Committee Report apply. The Committee Report
indicates that in each accrual period market discount on REMIC regular
certificates should accrue, at the certificateholder's option:
o on the basis of a constant yield method
o in the case of a REMIC regular certificate issued without original
issue discount, in an amount that bears the same ratio to the total
remaining market discount as the stated interest paid in the accrual
period bears to the total amount of stated interest remaining to be
paid on the REMIC regular certificate as of the beginning of the
accrual period, or
o in the case of a REMIC regular certificate issued with original
issue discount, in an amount that bears the same ratio to the total
remaining market discount as the original issue discount accrued in
the accrual period bears to the total original issue discount
remaining on the REMIC regular certificate at the beginning of the
accrual period.
Moreover, the prepayment assumption used in calculating the accrual of
original issue discount is to be used in calculating the accrual of market
discount. Because the regulations referred to in the preceding paragraph have
not been issued, it is not possible to predict what effect those regulations
might have on the tax treatment of a REMIC regular certificate purchased at a
discount in the secondary market.
To the extent that REMIC regular certificates provide for monthly or other
periodic distributions throughout their term, the effect of these rules may be
to require market discount to be includible in income at a rate that is not
significantly slower than the rate at which the discount would accrue if it were
original issue discount. Moreover, in any event a holder of a REMIC regular
certificate generally will be required to treat a portion of any gain on the
sale or exchange of that certificate as ordinary income to the extent of the
market discount accrued to the date of disposition under one of the foregoing
methods, less any accrued market discount previously reported as ordinary
income.
Further, under Section 1277 of the Code a holder of a REMIC regular
certificate may be required to defer a
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portion of its interest deductions for the taxable year attributable to any
indebtedness incurred or continued to purchase or carry a REMIC regular
certificate purchased with market discount. For these purposes, the de minimis
rule referred to above applies. Any deferred interest expense would not exceed
the market discount that accrues during that taxable year and is, in general,
allowed as a deduction not later than the year in which the market discount is
includible in income. If the holder elects to include market discount in income
currently as it accrues on all market discount instruments acquired by that
holder in that taxable year or thereafter, the interest deferral rule described
above will not apply.
Premium
A REMIC regular certificate purchased at a cost, excluding any portion of
that cost attributable to accrued qualified stated interest, greater than its
remaining stated redemption price will be considered to be purchased at a
premium. The holder of a REMIC regular certificate may elect under Section 171
of the Code to amortize that premium under the constant yield method over the
life of the certificate. If this election is made, it will apply to all debt
instruments having amortizable bond premium that the holder owns or subsequently
acquires. Amortizable premium will be treated as an offset to interest income on
the related REMIC regular certificate, rather than as a separate interest
deduction. The OID regulations also permit certificateholders to elect to
include all interest, discount and premium in income based on a constant yield
method, further treating the certificateholder as having made the election to
amortize premium generally. See "Taxation of Owners of REMIC Regular
Certificates -- Market Discount." The Committee Report states that the same
rules that apply to accrual of market discount, which rules will require use of
a prepayment assumption in accruing market discount with respect to REMIC
regular certificates without regard to whether those certificates have original
issue discount, will also apply in amortizing bond premium under Section 171 of
the Internal Revenue Code.
Realized Losses
Under Internal Revenue Code Section 166 both corporate holders of the
REMIC regular certificates and noncorporate holders of the REMIC regular
certificates that acquire those certificates in connection with a trade or
business should be allowed to deduct, as ordinary losses, any losses sustained
during a taxable year in which their certificates become wholly or partially
worthless as the result of one or more realized losses on the mortgage loans.
However, it appears that a noncorporate holder that does not acquire a REMIC
regular certificate in connection with a trade or business will not be entitled
to deduct a loss under Section 166 of the Internal Revenue Code until the
holder's certificate becomes wholly worthless (i.e., until its outstanding
principal balance has been reduced to zero) and that the loss will be
characterized as a short-term capital loss.
Each holder of a REMIC regular certificate will be required to accrue
interest and original issue discount with respect to that certificate, without
giving effect to any reductions in distributions attributable to defaults or
delinquencies on the mortgage loans or the underlying certificates until it can
be established that any reduction ultimately will not be recoverable. As a
result, the amount of taxable income reported in any period by the holder of a
REMIC regular certificate could exceed the amount of economic income actually
realized by the holder in that period. Although the holder of a REMIC regular
certificate eventually will recognize a loss or reduction in income attributable
to previously accrued and included income that, as the result of a realized
loss, ultimately will not be realized, the law is unclear with respect to the
timing and character of the loss or reduction in income.
Taxation of Owners of REMIC Residual Certificates
General. As residual interests, the REMIC residual certificates will be
subject to tax rules that differ significantly from those that would apply if
the REMIC residual certificates were treated for federal income tax purposes as
direct ownership interests in the mortgage loans or as debt instruments issued
by the REMIC.
A holder of a REMIC residual certificate typically will be required to
report its daily portion of the taxable income or, subject to the limitations
noted in this discussion, the net loss of the REMIC for each day during a
calendar quarter that the holder owned the REMIC residual certificate. For this
purpose, the taxable income or net loss of the REMIC will be allocated to each
day in the calendar quarter ratably using a "30 days per month/90 days
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per quarter/360 days per year" convention unless otherwise disclosed in the
related prospectus supplement. The daily amounts will then be allocated among
the REMIC residual certificateholders in proportion to their respective
ownership interests on that day. Any amount included in the gross income or
allowed as a loss of any REMIC residual certificateholder by virtue of this
allocation will be treated as ordinary income or loss. The taxable income of the
REMIC will be determined under the rules described below in "Taxable Income of
the REMIC" and will be taxable to the REMIC residual certificateholders without
regard to the timing or amount of cash distributions by the REMIC. Ordinary
income derived from REMIC residual certificates will be "portfolio income" for
purposes of the taxation of taxpayers subject to limitations under Section 469
of the Internal Revenue Code on the deductibility of "passive losses."
A holder of a REMIC residual certificate that purchased the certificate
from a prior holder of that certificate also will be required to report on its
federal income tax return amounts representing its daily portion of the taxable
income or net loss of the REMIC for each day that it holds the REMIC residual
certificate. These daily portions will equal the amounts of taxable income or
net loss determined as described above. The Committee Report indicates that
modifications of the general rules may be made, by regulations, legislation or
otherwise, to reduce, or increase, the income or loss of a holder of a REMIC
residual certificateholder that purchased the REMIC residual certificate from a
prior holder of the certificate at a price greater than, or less than, the
adjusted basis, the REMIC residual certificate would have had in the hands of an
original holder of the certificate. The REMIC regulations, however, do not
provide for any modifications.
Any payments received by a holder of a REMIC residual certificate in
connection with the acquisition of that REMIC residual certificate will be taken
into account in determining the income of the holder for federal income tax
purposes. Although it appears likely that the payment would be includible in
income immediately upon its receipt, the IRS might assert that the payment
should be included in income over time according to an amortization schedule or
according to some other method. Because of the uncertainty concerning the
treatment of these payments, holders of REMIC residual certificates should
consult their tax advisors concerning the treatment of these payments for income
tax purposes.
The amount of income REMIC residual certificateholders will be required to
report, or the tax liability associated with that income, may exceed the amount
of cash distributions received from the REMIC for the corresponding period.
Consequently, REMIC residual certificateholders should have other sources of
funds sufficient to pay any federal income taxes due as a result of their
ownership of REMIC residual certificates or unrelated deductions against which
income may be offset, subject to the rules relating to "excess inclusions,"
residual interests without "significant value" and "noneconomic" residual
interests discussed below. The fact that the tax liability associated with the
income allocated to REMIC residual certificateholders may exceed the cash
distributions received by the REMIC residual certificateholders for the
corresponding period may significantly adversely affect the REMIC residual
certificateholders' after-tax rate of return.
Taxable Income of the REMIC. The taxable income of the REMIC will equal
the income from the mortgage loans and other assets of the REMIC plus any
cancellation of indebtedness income due to the allocation of realized losses to
REMIC regular certificates, less the deductions allowed to the REMIC for
interest, including original issue discount and reduced by the amortization of
any premium received on issuance, on the REMIC regular certificates, and any
other class of REMIC certificates constituting "regular interests" in the REMIC
not offered by this prospectus, amortization of any premium on the mortgage
loans, bad debt deductions with respect to the mortgage loans and, except as
described below, for servicing, administrative and other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate basis in its assets equal to their fair market value
immediately after their transfer to the REMIC. For this purpose, the master
servicer intends to treat the fair market value of the mortgage loans as being
equal to the aggregate issue prices of the REMIC regular certificates and REMIC
residual certificates. The aggregate basis will be allocated among the mortgage
loans collectively and the other assets of the REMIC in proportion to their
respective fair market values. The issue price of any REMIC certificates offered
by this prospectus will be determined in the manner described above under "
- --Taxation of Owners of REMIC Regular Certificates -- Original Issue Discount."
Accordingly, if one or more classes of REMIC certificates are retained initially
rather than sold, the master servicer may be required to estimate the fair
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market value of those interests in order to determine the basis of the REMIC in
the mortgage loans and other property held by the REMIC.
Subject to the possible application of the de minimis rules, the method of
accrual by the REMIC of original issue discount income and market discount
income with respect to mortgage loans that it holds will be equivalent to the
method of accruing original issue discount income for REMIC regular
certificateholders, that is, under the constant yield method taking into account
the prepayment assumption. However, a REMIC that acquires loans at a market
discount must include the discount in income currently, as it accrues, on a
constant interest basis. See " --Taxation of Owners of REMIC Regular
Certificates" above, which describes a method of accruing discount income that
is analogous to that required to be used by a REMIC as to mortgage loans with
market discount that it holds.
A mortgage loan will be deemed to have been acquired with discount, or
premium, to the extent that the REMIC's basis in the mortgage loan, determined
as described in the preceding paragraph, is less than, or greater than, its
stated redemption price. Any discount will be includible in the income of the
REMIC as it accrues, in advance of receipt of the cash attributable to that
income, under a method similar to the method described above for accruing
original issue discount on the REMIC regular certificates. It is anticipated
that each REMIC will elect under Section 171 of the Internal Revenue Code to
amortize any premium on the mortgage loans. Premium on any mortgage loan to
which the election applies may be amortized under a constant yield method,
presumably taking into account a prepayment assumption.
A REMIC will be allowed deductions for interest, including original issue
discount, on the REMIC regular certificates, including any other class of REMIC
certificates constituting "regular interests" in the REMIC not offered by this
prospectus, equal to the deductions that would be allowed if the REMIC regular
certificates, including any other class of REMIC certificates constituting
"regular interests" in the REMIC not offered by this prospectus, were
indebtedness of the REMIC. Original issue discount will be considered to accrue
for this purpose as described above under " -- Taxation of Owners of REMIC
Regular Certificates -- Original Issue Discount," except that the de minimis
rule and the adjustments for subsequent holders of REMIC regular certificates,
including any other class of certificates constituting "regular interests" in
the REMIC not offered by this prospectus, described in that section will not
apply.
If a class of REMIC regular certificates is issued at an Issue Premium,
the REMIC will have an additional item of income in an amount equal to the
portion of the Issue Premium that is considered to be amortized or repaid in
that year. Although the matter is not entirely certain, it is likely that Issue
Premium would be amortized under a constant yield method in a manner analogous
to the method of accruing original issue discount described above under " --
Taxation of Owners of REMIC Regular Certificates -- Original Issue Discount."
As a general rule, the taxable income of the REMIC is required to be
determined in the same manner as if the REMIC were an individual having the
calendar year as its taxable year and using the accrual method of accounting.
However, no item of income, gain, loss or deduction allocable to a prohibited
transaction will be taken into account. See " -- Prohibited Transactions and
Other Possible REMIC Taxes" below. Further, the limitation on miscellaneous
itemized deductions imposed on individuals by Section 67 of the Internal Revenue
Code, which allows those deductions only to the extent they exceed in the
aggregate two percent of the taxpayer's adjusted gross income, will not be
applied at the REMIC level so that the REMIC will be allowed deductions for
servicing, administrative and other non-interest expenses in determining its
taxable income. All of these expenses will be allocated as a separate item to
the holders of REMIC certificates, subject to the limitation of Section 67 of
the Internal Revenue Code and the rules relating to the alternative minimum tax.
See " -- Possible Pass-Through of Miscellaneous Itemized Deductions." If the
deductions allowed to the REMIC exceed its gross income for a calendar quarter,
the excess will be the net loss for the REMIC for that calendar quarter.
Basis Rules, Net Losses and Distributions. The adjusted basis of a REMIC
residual certificate will be equal to the amount paid for that REMIC residual
certificate, increased by amounts included in the income of the REMIC residual
certificateholder and decreased, but not below zero, by distributions made, and
by net losses allocated, to the REMIC residual certificateholder.
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A REMIC residual certificateholder is not allowed to take into account any
net loss for any calendar quarter to the extent the net loss exceeds the REMIC
residual certificateholder's adjusted basis in its REMIC residual certificate as
of the close of that calendar quarter, determined without regard to the net
loss. Any loss that is not currently deductible by reason of this limitation may
be carried forward indefinitely to future calendar quarters and, subject to the
same limitation, may be used only to offset income from the REMIC residual
certificate. The ability of REMIC residual certificateholders to deduct net
losses may be subject to additional limitations under the Internal Revenue Code,
as to which REMIC residual certificateholders should consult their tax advisors.
Any distribution on a REMIC residual certificate will be treated as a
non-taxable return of capital to the extent it does not exceed the holder's
adjusted basis in the REMIC residual certificate. To the extent a distribution
on a REMIC residual certificate exceeds the adjusted basis, it will be treated
as gain from the sale of the REMIC residual certificate. Holders of REMIC
residual certificates may be entitled to distributions early in the term of the
related REMIC under circumstances in which their bases in the REMIC residual
certificates will not be sufficiently large that distributions will be treated
as nontaxable returns of capital. Their bases in the REMIC residual certificates
will initially equal the amount paid for the REMIC residual certificates and
will be increased by their allocable shares of taxable income of the trust.
However, their basis increases may not occur until the end of the calendar
quarter, or perhaps the end of the calendar year, with respect to which the
REMIC taxable income is allocated to the REMIC residual certificateholders. To
the extent the REMIC residual certificateholders' initial bases are less than
the distributions to the REMIC residual certificateholders, and increases in the
initial bases either occur after the distributions or, together with their
initial bases, are less than the amount of the distributions, gain will be
recognized to the REMIC residual certificateholders on those distributions and
will be treated as gain from the sale of their REMIC residual certificates.
The effect of these rules is that a Residual certificateholder may not
amortize its basis in a REMIC residual certificate, but may only recover its
basis through distributions, through the deduction of its share of any net
losses of the REMIC or upon the sale of its REMIC residual certificate. See " --
Sales of REMIC Certificates." For a discussion of possible modifications of
these rules that may require adjustments to income of a holder of a REMIC
residual certificate other than an original holder in order to reflect any
difference between the cost of the REMIC residual certificate to the holder and
the adjusted basis the REMIC residual certificate would have had in the hands of
the original holder, see " -- Taxation of Owners of REMIC Residual Certificates
- -- General."
Excess Inclusions. Any "excess inclusions" with respect to a REMIC
residual certificate will be subject to federal income tax in all events.
In general, the "excess inclusions" with respect to a REMIC residual
certificate for any calendar quarter will be the excess, if any, of:
o the sum of the daily portions of REMIC taxable income allocable to
the REMIC residual certificate
over
o the sum of the "daily accruals" for each day during that quarter
that the REMIC residual certificate was held by the REMIC residual
certificateholder.
The daily accruals of a REMIC residual certificateholder will be
determined by allocating to each day during a calendar quarter its ratable
portion of the product of the "adjusted issue price" of the REMIC residual
certificate at the beginning of the calendar quarter and 120% of the "long-term
Federal rate" in effect on the closing date. For this purpose, the adjusted
issue price of a REMIC residual certificate as of the beginning of any calendar
quarter will be equal to the issue price of the REMIC residual certificate,
increased by the sum of the daily accruals for all prior quarters and decreased,
but not below zero, by any distributions made with respect to the REMIC residual
certificate before the beginning of that quarter. The issue price of a REMIC
residual certificate is the initial offering price to the public, excluding bond
houses, brokers and underwriters, at which a substantial amount of the REMIC
residual certificates were sold. If less than a substantial amount of REMIC
residual certificates is sold for cash on or prior to the closing date, the
issue price for those REMIC residual certificates will be treated as the fair
market value of those REMIC residual certificates on the Closing Date. The
"long-term Federal rate" is an average of current yields on Treasury securities
with a remaining term of greater than nine years, computed and published monthly
by the IRS. Although it has not done so, the Treasury has authority to issue
regulations that would treat the entire amount of
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income accruing on a REMIC residual certificate as an excess inclusion if the
REMIC residual certificates are considered not to have "significant value."
For REMIC residual certificateholders, an excess inclusion:
o will not be permitted to be offset by deductions, losses or loss
carryovers from other activities
o will be treated as "unrelated business taxable income" to an
otherwise tax-exempt organization and
o will not be eligible for any rate reduction or exemption under any
applicable tax treaty with respect
to the 30% United States withholding tax imposed on distributions to
REMIC residual certificateholders that are foreign investors. See,
however, " -- Foreign Investors in REMIC Certificates," below.
Furthermore, for purposes of the alternative minimum tax:
o excess inclusions will not be permitted to be offset by the
alternative tax net operating loss deduction
and
o alternative minimum taxable income may not be less than the
taxpayer's excess inclusions; provided, however, that for purposes
of this clause, alternative minimum taxable income is determined
without regard to the special rule that taxable income cannot be
less than excess inclusions. The latter rule has the effect of
preventing nonrefundable tax credits from reducing the taxpayer's
income tax to an amount lower than the alternative minimum tax on
excess inclusions.
In the case of any REMIC residual certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to the REMIC
residual certificates, reduced, but not below zero, by the real estate
investment trust taxable income, within the meaning of Section 857(b)(2) of the
Internal Revenue Code, excluding any net capital gain, will be allocated among
the shareholders of the trust in proportion to the dividends received by the
shareholders from the trust, and any amount so allocated will be treated as an
excess inclusion with respect to a REMIC residual certificate as if held
directly by the shareholder. Treasury regulations yet to be issued could apply a
similar rule to regulated investment companies, common trust funds and a number
of cooperatives; the REMIC Regulations currently do not address this subject.
Noneconomic REMIC Residual Certificates. Under the REMIC Regulations,
transfers of "noneconomic" REMIC residual certificates will be disregarded for
all federal income tax purposes if "a significant purpose of the transfer was to
enable the transferor to impede the assessment or collection of tax." If the
transfer is disregarded, the purported transferor will continue to remain liable
for any taxes due with respect to the income on the "noneconomic" REMIC residual
certificate. The REMIC regulations provide that a REMIC residual certificate is
noneconomic unless, based on the prepayment assumption and on any required or
permitted clean up calls, or required qualified liquidation provided for in the
REMIC's organizational documents:
o the present value of the expected future distributions, discounted
using the "applicable Federal rate" for obligations whose term ends
on the close of the last quarter in which excess inclusions are
expected to accrue with respect to the REMIC residual certificate,
which rate is computed and published monthly by the IRS, on the
REMIC residual certificate equals at least the present value of the
expected tax on the anticipated excess inclusions, and
o the transferor reasonably expects that the transferee will receive
distributions with respect to the REMIC residual certificate at or
after the time the taxes accrue on the anticipated excess inclusions
in an amount sufficient to satisfy the accrued taxes.
Accordingly, all transfers of REMIC residual certificates that may
constitute noneconomic residual interests will be subject to restrictions under
the terms of the related pooling and servicing agreement that are intended to
reduce the possibility of any transfer being disregarded. The restrictions will
require each party to a transfer to provide an affidavit that no purpose of the
transfer is to impede the assessment or collection of tax, including
representations as to the financial condition of the prospective transferee, as
to which the transferor also is required to make a reasonable investigation to
determine the transferee's historic payment of its debts and ability to continue
to pay its debts as they come due in the future. Prior to purchasing a REMIC
residual certificate, prospective purchasers should consider the possibility
that a purported transfer of the REMIC residual certificate by this type of a
purchaser to another purchaser at some future date may be disregarded in
accordance with the above-described rules
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which would result in the retention of tax liability by that purchaser.
The related prospectus supplement will disclose whether offered REMIC
residual certificates may be considered "noneconomic" residual interests under
the REMIC Regulations. Any disclosure that a REMIC residual certificate will not
be considered "noneconomic" will be based upon a number of assumptions, and the
depositor will make no representation that a REMIC residual certificate will not
be considered "noneconomic" for purposes of the above-described rules. See " --
Foreign Investors in REMIC Certificates -- REMIC Residual Certificates" below
for additional restrictions applicable to transfers of REMIC residual
certificates to foreign persons.
Mark-to-Market Rules. On December 24, 1996, the IRS released the
Mark-to-Market Regulations. The mark-to-market requirement applies to all
securities owned by a dealer, except to the extent that the dealer has
specifically identified a security as held for investment. The Mark-to-Market
Regulations provide that for purposes of this mark-to-market requirement, a
REMIC residual certificate acquired after January 4, 1995 is not treated as a
security and thus may not be marked to market. Prospective purchasers of a REMIC
residual certificate should consult their tax advisors regarding the possible
application of the mark-to-market requirement to REMIC residual certificates.
Possible Pass-Through of Miscellaneous Itemized Deductions. Fees and
expenses of a REMIC typically will be allocated to the holders of the related
REMIC residual certificates. The applicable Treasury regulations indicate,
however, that in the case of a REMIC that is similar to a single class grantor
trust, all or a portion of those fees and expenses should be allocated to the
holders of the related REMIC regular certificates. Unless otherwise stated in
the related prospectus supplement, fees and expenses will be allocated to
holders of the related REMIC residual certificates in their entirety and not to
the holders of the related REMIC regular certificates.
With respect to REMIC residual certificates or REMIC regular certificates
the holders of which receive an allocation of fees and expenses in accordance
with the preceding discussion, if any holder thereof is an individual, estate or
trust, or a "pass-through entity" beneficially owned by one or more individuals,
estates or trusts:
o an amount equal to the individual's, estate's or trust's share of
fees and expenses will be added to the gross income of that holder
and
o the individual's, estate's or trust's share of fees and expenses
will be treated as a miscellaneous itemized deduction allowable
subject to the limitation of Section 67 of the Internal Revenue
Code, which permits those deductions only to the extent they exceed
in the aggregate two percent of a taxpayer's adjusted gross income.
In addition, Section 68 of the Internal Revenue Code provides that the
amount of itemized deductions otherwise allowable for an individual whose
adjusted gross income exceeds a specified amount will be reduced by the lesser
of:
o 3% of the excess of the individual's adjusted gross income over that
amount or
o 80% of the amount of itemized deductions otherwise allowable for the
taxable year.
The amount of additional taxable income reportable by REMIC
certificateholders that are subject to the limitations of either Section 67 or
Section 68 of the Internal Revenue Code may be substantial. Furthermore, in
determining the alternative minimum taxable income of this type of holder of a
REMIC certificate that is an individual, estate or trust, or a "pass-through
entity" beneficially owned by one or more individuals, estates or trusts, no
deduction will be allowed for the holder's allocable portion of servicing fees
and other miscellaneous itemized deductions of the REMIC, even though an amount
equal to the amount of fees and other deductions will be included in the
holder's gross income. Accordingly, the REMIC certificates may not be
appropriate investments for individuals, estates, or trusts, or pass-through
entities beneficially owned by one or more individuals, estates or trusts. Any
prospective investors should consult with their tax advisors prior to making an
investment in these certificates.
Sales of REMIC Certificates
If a REMIC certificate is sold, the selling certificateholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and its adjusted basis in the REMIC certificate. The adjusted basis of
a REMIC regular certificate typically will equal the cost of that REMIC regular
certificate to that certificateholder,
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increased by income reported by the certificateholder with respect to that REMIC
regular certificate, including original issue discount and market discount
income, and reduced, but not below zero, by distributions on the REMIC regular
certificate received by the certificateholder and by any amortized premium. The
adjusted basis of a REMIC residual certificate will be determined as described
under " -- Taxation of Owners of REMIC Residual Certificates -- Basis Rules, Net
Losses and Distributions." Except as described below, any gain or loss in most
cases will be capital gain or loss.
Gain from the sale of a REMIC regular certificate that might otherwise be
capital gain will be treated as ordinary income to the extent the gain does not
exceed the excess, if any, of:
o the amount that would have been includible in the seller's income
with respect to the REMIC regular certificate had income accrued
thereon at a rate equal to 110% of the "applicable Federal rate",
which is typically a rate based on an average of current yields on
Treasury securities having a maturity comparable to that of the
certificate, which rate is computed and published monthly by the
IRS, determined as of the date of purchase of the REMIC regular
certificate, over
o the amount of ordinary income actually includible in the seller's
income prior to the sale.
In addition, gain recognized on the sale of a REMIC regular certificate by
a seller who purchased the REMIC regular certificate at a market discount will
be taxable as ordinary income to the extent of any accrued and previously
unrecognized market discount that accrued during the period the certificate was
held. See " -- Taxation of Owners of REMIC Regular Certificates -- Market
Discount."
REMIC certificates will be "evidences of indebtedness" within the meaning
of Section 582(c)(1) of the Internal Revenue Code, so that gain or loss
recognized from the sale of a REMIC certificate by a bank or thrift institution
to which that section applies will be ordinary income or loss.
A portion of any gain from the sale of a REMIC regular certificate that
might otherwise be capital gain may be treated as ordinary income to the extent
that the certificate is held as part of a "conversion transaction" within the
meaning of Section 1258 of the Internal Revenue Code. A conversion transaction
generally is one in which the taxpayer has taken two or more positions in
certificates or similar property that reduce or eliminate market risk, if
substantially all of the taxpayer's return is attributable to the time value of
the taxpayer's net investment in the transaction. The amount of gain so realized
in a conversion transaction that is recharacterized as ordinary income in most
cases will not exceed the amount of interest that would have accrued on the
taxpayer's net investment at 120% of the appropriate "applicable Federal rate",
which rate is computed and published monthly by the IRS, at the time the
taxpayer enters into the conversion transaction, subject to appropriate
reduction for prior inclusion of interest and other ordinary income items from
the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include any net capital
gain in total net investment income for the taxable year, for purposes of the
limitation on the deduction of interest on indebtedness incurred to purchase or
carry property held for investment to a taxpayer's net investment income.
If the seller of a REMIC residual certificate reacquires the certificate,
any other residual interest in a REMIC or any similar interest in a "taxable
mortgage pool", as defined in Section 7701(i) of the Internal Revenue Code,
within six months of the date of the sale, the sale will be subject to the "wash
sale" rules of Section 1091 of the Internal Revenue Code. In that event, any
loss realized by the REMIC residual certificateholder on the sale will not be
deductible, but instead will be added to the REMIC residual certificateholder's
adjusted basis in the newly-acquired asset.
Prohibited Transactions and Other Possible REMIC Taxes
The Code imposes a tax on REMICs equal to 100% of the net income derived
from "prohibited transactions". In general, subject to specified exceptions a
prohibited transaction means the disposition of a mortgage loan, the receipt of
income from a source other than a mortgage loan or other permitted investments,
the receipt of compensation for services, or gain from the disposition of an
asset purchased with the payments on the mortgage
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loans for temporary investment pending distribution on the REMIC certificates.
It is not anticipated that any REMIC will engage in any prohibited transactions
in which it would recognize a material amount of net income.
In addition, some types of contributions to a REMIC made after the day on
which the REMIC issues all of its interests could result in the imposition of a
tax on the REMIC equal to 100% of the value of the contributed property. Each
pooling and servicing agreement will include provisions designed to prevent the
acceptance of any contributions that would be subject to the tax.
REMICs also are subject to federal income tax at the highest corporate
rate on "net income from foreclosure property," determined by reference to the
rules applicable to real estate investment trusts. "Net income from foreclosure
property" generally means gain from the sale of a foreclosure property that is
inventory property and gross income from foreclosure property other than
qualifying rents and other qualifying income for a real estate investment trust.
Unless otherwise disclosed in the related prospectus supplement, it is not
anticipated that any REMIC will recognize "net income from foreclosure property"
subject to federal income tax.
Unless otherwise stated in the related prospectus supplement, and to the
extent permitted by then applicable laws, any prohibited transactions tax,
contributions tax, tax on "net income from foreclosure property" or state or
local income or franchise tax that may be imposed on the REMIC will be borne by
the related master servicer or trustee in either case out of its own funds,
provided that the master servicer or the trustee, as the case may be, has
sufficient assets to do so, and provided further that the tax arises out of a
breach of the master servicer's or the trustee's obligations, as the case may
be, under the related pooling and servicing agreement and relating to compliance
with applicable laws and regulations. Any tax not borne by the master servicer
or the trustee will be payable out of the related trust resulting in a reduction
in amounts payable to holders of the related REMIC certificates.
Tax and Restrictions on Transfers of REMIC Residual Certificates to Certain
Organizations
If a REMIC residual certificate is transferred to a "disqualified
organization", a tax would be imposed in an amount, determined under the REMIC
Regulations, equal to the product of:
o the present value, discounted using the "applicable Federal rate"
for obligations whose term ends on the close of the last quarter in
which excess inclusions are expected to accrue with respect to the
certificate, which rate is computed and published monthly by the
IRS, of the total anticipated excess inclusions with respect to the
REMIC residual certificate for periods after the transfer and
o the highest marginal federal income tax rate applicable to
corporations.
The anticipated excess inclusions must be determined as of the date that
the REMIC residual certificate is transferred and must be based on events that
have occurred up to the time of transfer, the prepayment assumption and any
required or permitted clean up calls or required liquidation provided for in the
REMIC's organizational documents. This tax generally would be imposed on the
transferor of the REMIC residual certificate, except that where the transfer is
through an agent for a disqualified organization, the tax would instead be
imposed on that agent. However, a transferor of a REMIC residual certificate
would in no event be liable for the tax with respect to a transfer if the
transferee furnishes to the transferor an affidavit that the transferee is not a
disqualified organization and, as of the time of the transfer, the transferor
does not have actual knowledge that the affidavit is false. Moreover, an entity
will not qualify as a REMIC unless there are reasonable arrangements designed to
ensure that:
o residual interests in the entity are not held by disqualified
organizations and
o information necessary for the application of the tax described in
this prospectus will be made available.
Restrictions on the transfer of REMIC residual certificates and a number
of other provisions that are intended to meet this requirement will be included
in the pooling and servicing agreement, and will be discussed more fully in any
prospectus supplement relating to the offering of any REMIC residual
certificate.
In addition, if a "pass-through entity" includes in income excess
inclusions with respect to a REMIC residual certificate, and a disqualified
organization is the record holder of an interest in that entity, then a tax will
be imposed
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on it equal to the product of:
o the amount of excess inclusions on the REMIC residual certificate
that are allocable to the interest in the pass-through entity held
by the disqualified organization and
o the highest marginal federal income tax rate imposed on
corporations.
A pass-through entity will not be subject to this tax for any period,
however, if each record holder of an interest in that pass-through entity
furnishes to that pass-through entity the holder's social security number and a
statement under penalties of perjury that the social security number is that of
the record holder, or a statement under penalties of perjury that the record
holder is not a disqualified organization.
For these purposes, a "disqualified organization" means
o the United States, any State or political subdivision thereof, any
foreign government, any international organization, or any agency or
instrumentality of the foregoing, but would not include
instrumentalities described in Section 168(h)(2)(D) of the Code or
the Federal Home Loan Mortgage Corporation
o any organization, other than a cooperative described in Section 521
of the Internal Revenue Code, that is exempt from federal income
tax, unless it is subject to the tax imposed by Section 511 of the
Internal Revenue Code or
o any organization described in Section 1381 (a)(2)(C) of the Internal
Revenue Code.
For these purposes, a "pass-through entity" means any regulated investment
company, real estate investment trust, trust, partnership or other entities
described in Section 860E (e)(6) of the Internal Revenue Code. In addition, a
person holding an interest in a pass-through entity as a nominee for another
person will, with respect to that interest, be treated as a pass-through entity.
Termination
A REMIC will terminate immediately after the distribution date following
receipt by the REMIC of the final payment from of the mortgage loans or upon a
sale of the REMIC's assets following the adoption by the REMIC of a plan of
complete liquidation. The last distribution on a REMIC regular certificate will
be treated as a payment in retirement of a debt instrument. In the case of a
REMIC residual certificate, if the last distribution on the REMIC residual
certificate is less than the REMIC residual certificateholder's adjusted basis
in the certificate, the REMIC residual certificateholder should be treated as
realizing a loss equal to the amount of the difference. The loss may be subject
to the "wash sale" rules of Section 1091 of the Internal Revenue Code. See " --
Sales of REMIC Certificates." The character of this loss as ordinary or capital
is uncertain.
Reporting and Other Administrative Matters
Solely for purposes of the administrative provisions of the Internal
Revenue Code, the REMIC will be treated as a partnership and REMIC residual
certificateholders will be treated as partners. Unless otherwise stated in the
related prospectus supplement, the master servicer will file REMIC federal
income tax returns on behalf of the related REMIC, will be designated as and
will act as the "tax matters person" with respect to the REMIC in all respects,
and will hold at least a nominal amount of REMIC residual certificates.
As the tax matters person, the master servicer will have the authority to
act on behalf of the REMIC and the REMIC residual certificateholders in
connection with the administrative and judicial review of items of income,
deduction, gain or loss of the REMIC, as well as the REMIC's classification.
REMIC residual certificateholders will be required to report the REMIC items
consistently with their treatment on the related REMIC's tax return and may in
some circumstances be bound by a settlement agreement between the master
servicer, as tax matters person, and the IRS concerning the REMIC item.
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Adjustments made to the REMIC tax return may require a REMIC residual
certificateholder to make corresponding adjustments on its return, and an audit
of the REMIC's tax return, or the adjustments resulting from an audit, could
result in an audit of a REMIC residual certificateholder's return. No REMIC will
be registered as a tax shelter under Section 6111 of the Internal Revenue Code
because it is not anticipated that any REMIC will have a net loss for any of the
first five taxable years of its existence. Any person that holds a REMIC
residual certificate as a nominee for another person may be required to furnish
to the related REMIC, in a manner to be provided in Treasury regulations, the
name and address of that person and other information.
Reporting of interest income, including any original issue discount, with
respect to REMIC regular certificates is required annually, and may be required
more frequently under Treasury regulations. These information reports are
required to be sent to individual holders of REMIC regular interests and the
IRS; holders of REMIC regular certificates that are corporations, trusts,
securities dealers and other non-individuals will be provided interest and
original issue discount income information and the information set forth in the
following paragraph upon request in accordance with the requirements of the
applicable regulations. The information must be provided by the later of 30 days
after the end of the quarter for which the information was requested, or two
weeks after the receipt of the request. The REMIC must also comply with rules
requiring a REMIC regular certificate issued with original issue discount to
disclose on its face information including the amount of original issue discount
and the issue date, and requiring this information to be reported to the IRS.
Reporting with respect to the REMIC residual certificates, including income,
excess inclusions, investment expenses and relevant information regarding
qualification of the REMIC's assets will be made as required under the Treasury
regulations, typically on a quarterly basis.
As applicable, the REMIC regular certificate information reports will
include a statement of the adjusted issue price of the REMIC regular certificate
at the beginning of each accrual period. In addition, the reports will include
information required by regulations with respect to computing the accrual of any
market discount. Because exact computation of the accrual of market discount on
a constant yield method requires information relating to the holder's purchase
price that the master servicer will not have, the regulations only require that
information pertaining to the appropriate proportionate method of accruing
market discount be provided. See "Taxation of Owners of REMIC Regular
Certificates -- Market Discount."
The responsibility for complying with the foregoing reporting rules will
be borne by the master servicer. Certificateholders may request any information
with respect to the returns described in Section 1.6049-7(e)(2) of the Treasury
regulations. Any request should be directed to the master servicer at
Residential Funding Corporation, 8400 Normandale Lake Boulevard, Suite 600,
Minneapolis, Minnesota 55437.
Backup Withholding With Respect to REMIC Certificates
Payments of interest and principal, as well as payments of proceeds from
the sale of REMIC certificates, may be subject to the "backup withholding tax"
under Section 3406 of the Internal Revenue Code at a rate of 31% if recipients
of payments fail to furnish to the payor information, including their taxpayer
identification numbers, or otherwise fail to establish an exemption from the
tax. Any amounts deducted and withheld from a distribution to a recipient would
be allowed as a credit against the recipient's federal income tax. Furthermore,
penalties may be imposed by the IRS on a recipient of payments that is required
to supply information but that does not do so in the proper manner.
Foreign Investors in REMIC Certificates
A REMIC regular certificateholder that is not a "United States person" and
is not subject to federal income tax as a result of any direct or indirect
connection to the United States in addition to its ownership of a REMIC regular
certificate will not be subject to United States federal income or withholding
tax on a distribution on a REMIC regular certificate, provided that the holder
complies to the extent necessary with identification requirements, including
delivery of a statement, signed by the certificateholder under penalties of
perjury, certifying that the certificateholder is not a United States person and
providing the name and address of the certificateholder. For these purposes,
"United States person" means a citizen or resident of the United States, a
corporation, partnership, including an entity treated as a corporation or
partnership for federal income tax purposes, created or organized in,
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or under the laws of, the United States or any state thereof or the District of
Columbia except, in the case of a partnership, to the extent provided in
regulations, or an estate whose income is subject to United States federal
income tax regardless of its source, or a trust if a court within the United
States is able to exercise primary supervision over the administration of the
trust and one or more United States persons have the authority to control all
substantial decisions of the trust. To the extent prescribed in regulations by
the Secretary of the Treasury, which have not yet been issued, a trust which was
in existence on August 20, 1996, other than a trust treated as owned by the
grantor under subpart E of part I of subchapter J of chapter 1 of the Internal
Revenue Code, and which was treated as a United States person on August 20, 1996
may elect to continue to be treated as a United States person notwithstanding
the previous sentence. It is possible that the IRS may assert that the foregoing
tax exemption should not apply with respect to a REMIC regular certificate held
by a REMIC residual certificateholder that owns directly or indirectly a 10% or
greater interest in the REMIC residual certificates. If the holder does not
qualify for exemption, distributions of interest, including distributions of
accrued original issue discount, to the holder may be subject to a tax rate of
30%, subject to reduction under any applicable tax treaty.
In addition, the foregoing rules will not apply to exempt a United States
shareholder of a controlled foreign corporation from taxation on the United
States shareholder's allocable portion of the interest income received by the
controlled foreign corporation.
Further, it appears that a REMIC regular certificate would not be included
in the estate of a non-resident alien individual and would not be subject to
United States estate taxes. However, certificateholders who are non-resident
alien individuals should consult their tax advisors concerning this question.
Unless otherwise stated in the related prospectus supplement, transfers of
REMIC residual certificates to investors that are not United States persons will
be prohibited under the related pooling and servicing agreement.
New Withholding Regulations
The Treasury Department has issued new regulations which make
modifications to the withholding, backup withholding and information reporting
rules described above. The new withholding regulations attempt to unify
certification requirements and modify reliance standards. The new withholding
regulations will generally be effective for payments made after December 31,
1999, subject to transition rules. Prospective investors are urged to consult
their tax advisors regarding the new withholding regulations.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Material
Federal Income Tax Consequences," potential investors should consider the state
and local tax consequences of the acquisition, ownership, and disposition of the
certificates offered hereunder. State tax law may differ substantially from the
corresponding federal tax law, and the discussion above does not purport to
describe any aspect of the tax laws of any state or other jurisdiction.
Therefore, prospective investors should consult their tax advisors with respect
to the various tax consequences of investments in the certificates offered
hereunder.
ERISA CONSIDERATIONS
Sections 404 and 406 of the Employee Retirement Income Security Act of
1974, as amended, or ERISA, impose fiduciary and prohibited transaction
restrictions on employee pension and welfare benefit plans subject to ERISA and
on various other retirement plans and arrangements, including individual
retirement accounts and annuities, Keogh plans, bank collective investment funds
and insurance company general and separate accounts in which those ERISA Plans
are invested. Section 4975 of the Internal Revenue Code imposes essentially the
same prohibited transaction restrictions on tax-qualified retirement plans
described in Section 401(a) of the Internal Revenue Code and on Individual
Retirement Accounts described in Section 408 of the Internal Revenue Code.
Some employee benefit plans, including governmental plans, as defined in
Section 3(32) of ERISA, and, if
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no election has been made under Section 410(d) of the Internal Revenue Code,
church plans, as defined in Section 3(33) of ERISA, are not subject to the ERISA
requirements discussed in this prospectus. Accordingly, assets of these plans
may be invested in certificates without regard to the ERISA considerations
described below, subject to the provisions of applicable federal and state law.
Any plan that is qualified and exempt from taxation under Sections 401(a) and
501(a) of the Internal Revenue Code, however, is subject to the prohibited
transaction rules in Section 503(b) of the Internal Revenue 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 Internal Revenue Code prohibit a broad
range of transactions involving assets of ERISA plans and tax-favored plans,
which are collectively referred to in this prospectus as plans, and "parties in
interest" under ERISA or "disqualified persons" under the Internal Revenue Code,
which are collectively referred to in this prospectus as "parties in interest",
who have specified relationships to the plans, unless a statutory or
administrative exemption is available. Some parties in interest that participate
in a prohibited transaction may be subject to a penalty, or an excise tax,
imposed under Section 502(i) of ERISA or Section 4975 of the Internal Revenue
Code, unless a statutory or administrative exemption is available with respect
to any transaction of this sort.
Plan Asset Regulations
An investment of the assets of a plan in certificates may cause the
underlying mortgage loans, mortgage securities or any other assets included in a
trust to be deemed plan assets of the plan. The U.S. Department of Labor, or
DOL, has promulgated regulations at 29 C.F.R. ss. 2510.3-101 concerning whether
or not a plan's assets would be deemed to include an interest in the underlying
assets of an entity, including a trust, for purposes of applying the general
fiduciary responsibility provisions of ERISA and the prohibited transaction
provisions of ERISA and the Internal Revenue Code, when a plan acquires an
"equity interest", such as a certificate, in that entity. Exceptions contained
in the DOL regulations provide that a plan's assets will not include an
undivided interest in each asset of an entity in which it makes an equity
investment if the entity:
o is an operating company
o 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
o "benefit plan investors" do not own 25% or more in value of any
class of equity securities issued by the entity. For this purpose,
"benefit plan investors" include plans, as well as any "employee
benefit plan" as defined in Section 3(3) or ERISA which is not
subject to Title I of ERISA, such as governmental plans, as defined
in Section 3(32) of ERISA, and church plans, as defined in Section
3(33) of ERISA, which have not made an election under Section 410(d)
of the Internal Revenue Code, foreign plans and any entity whose
underlying assets include plan assets by reason of a plan's
investment in the entity.
Because of the factual nature of the rules described in the DOL
regulations, plan assets either may be deemed to include an interest in the
assets of an entity, such as a trust, or may be deemed merely to include its
interest in the instrument evidencing the equity interest, such as a
certificate. Therefore, neither plans nor the entities should acquire or hold
certificates in reliance upon the availability of any exception under the DOL
regulations. For purposes of this section "ERISA Considerations," the term "plan
assets" or "assets of a plan" has the meaning specified in the DOL regulations
and includes an undivided interest in the underlying assets of entities in which
a plan invests.
The prohibited transaction provisions of Section 406 of ERISA and Section
4975 of the Internal Revenue Code may apply to a trust and cause the depositor,
the master servicer, any subservicer, the trustee, the obligor under any credit
enhancement mechanism or affiliates of those entities to be considered or become
parties in interest with respect to an investing plan, or of a plan holding an
interest in that entity. If so, the acquisition or holding of certificates by or
on behalf of the investing plan could also give rise to a prohibited transaction
under ERISA and the Internal Revenue Code, unless some statutory or
administrative exemption is available. Certificates acquired by a plan would be
assets of that plan. Under the DOL regulations, a trust, including the mortgage
loans, mortgage
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securities or any other assets held in the trust, may also be deemed to be
assets of each plan that acquires certificates. Special caution should be
exercised before plan assets are used to acquire a certificate in those
circumstances, especially if, with respect to the assets, the depositor, the
master servicer, any subservicer, the trustee, the obligor under any credit
enhancement mechanism or an affiliate thereof either:
o has investment discretion with respect to the investment of plan
assets or
o has authority or responsibility to give, or regularly gives,
investment advice with respect to plan assets for a fee under an
agreement or understanding that this advice will serve as a primary
basis for investment decisions with respect to the plan assets.
Any person who has discretionary authority or control with respect to the
management or disposition of plan assets and any person who provides investment
advice with respect to the plan assets for a fee is a fiduciary of the investing
plan. If the mortgage loans, the mortgage securities or any other assets in a
trust were to constitute plan assets, then any party exercising management or
discretionary control with respect to those plan assets may be deemed to be a
plan "fiduciary," and thus subject to the fiduciary requirements of ERISA and
the prohibited transaction provisions of ERISA and Section 4975 of the Internal
Revenue Code with respect to any investing plan. In addition, if the mortgage
loans, mortgage securities or any other assets in a trust were to constitute
plan assets, then the acquisition or holding of certificates by or on behalf of
a plan or with plan assets, as well as the operation of the trust, may
constitute or involve a prohibited transaction under ERISA and the Internal
Revenue Code.
Prohibited Transaction Exemptions
The DOL issued an individual exemption, Prohibited Transaction Exemption
94-29 (59 Fed. Reg. 14674, March 29, 1994) as amended by PTE 97-34, 62 Fed. Reg.
39021 (July 21, 1997), to Residential Funding and a number of its affiliates,
which exempts from the application of some of the prohibited transaction
provisions of Section 406 of ERISA, and the excise taxes imposed on the
prohibited transactions under Section 4975(a) and (b) of the Internal Revenue
Code, various transactions, among others, relating to the servicing and
operation of mortgage pools and the purchase, sale and holding of pass-through
certificates issued by that trust as to which
o the depositor or any of its affiliates is the sponsor, and any
entity which has received from the DOL an individual prohibited
transaction exemption which is similar to the Exemption is the sole
underwriter, or manager or co-manager of the underwriting syndicate
or a seller or placement agent, or
o the depositor or an affiliate is the underwriter, provided that
conditions described in the Exemption are satisfied.
For purposes of this section, the term "underwriter" shall include
o the depositor and a number of its affiliates
o any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control
with the depositor and a number of its affiliates
o any member of the underwriting syndicate or selling group of which a
person described in the first two clauses above is a manager or
co-manager with respect to a class of certificates, or
o any entity which has received an exemption from the DOL relating to
certificates which is similar to the Exemption.
The Exemption sets forth six general conditions which must be satisfied
for a transaction involving the purchase, sale and holding of certificates to be
eligible for exemptive relief thereunder:
o the acquisition of certificates by a plan or with plan assets must
be on terms that are at least as favorable to the plan as they would
be in an arm's-length transaction with an unrelated party;
o the Exemption only applies to certificates evidencing rights and
interests that are not subordinated to the rights and interests
evidenced by the other certificates of the same trust;
o the certificates at the time of acquisition by a plan or with plan
assets must be rated in one of the three highest generic rating
categories by Standard & Poor's, a division of The McGraw-Hill
Companies, Inc., Moody's Investors Service, Inc., Duff & Phelps
Credit Rating Co. or Fitch IBCA, Inc., which are collectively
referred to as the exemption rating agencies;
o the trustee cannot be an affiliate of any member of the "Restricted
Group" which consists of any
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underwriter, the depositor, the master servicer, any subservicer and
any mortgagor with respect to assets of a trust constituting more
than 5% of the aggregate unamortized principal balance of the assets
in the related trust as of the date of initial issuance of the
certificates;
o the sum of all payments made to and retained by the underwriters
must represent not more than reasonable compensation for
underwriting the certificates, the sum of all payments made to and
retained by the depositor under the assignment of the assets to the
related trust must represent not more than the fair market value of
those obligations, and the sum of all payments made to and retained
by the master servicer and any subservicer must represent not more
than reasonable compensation for that person's services under the
related pooling and servicing agreement and reimbursement of that
person's reasonable expenses in connection therewith; and
o the Exemption states that the investing plan or plan-asset investor
must be an accredited investor as defined in Rule 501(a)(1) of
Regulation D of the Commission under the Securities Act.
In addition, except as otherwise specified in the related prospectus
supplement, the exemptive relief afforded by the Exemption may not apply to any
certificates where the related trust contains a Swap.
The Exemption also requires that each trust meet the following
requirements:
o the trust must consist solely of assets of the type that have been
included in other investment pools;
o certificates evidencing interests in those other investment pools
must have been rated in one of the three highest categories of one
of the exemption rating agencies for at least one year prior to the
acquisition of certificates by or on behalf of a plan or with plan
assets; and
o certificates in the other investment pools must have been purchased
by investors other than plans for at least one year prior to any
acquisition of certificates by or on behalf of a plan or with plan
assets.
A fiduciary or other investor of plan assets contemplating purchasing a
certificate must make its own determination that the general conditions
described above will be satisfied with respect to that certificate.
If the general conditions of the Exemption are satisfied, the Exemption
may provide an exemption from the restrictions imposed by Sections 406(a) and
407(a) of ERISA, as well as the excise taxes imposed by Sections 4975(a) and (b)
of the Internal Revenue Code by reason of Sections 4975(c)(1)(A) through (D) of
the Internal Revenue Code, in connection with the direct or indirect sale,
exchange, transfer, holding or the direct or indirect acquisition or disposition
in the secondary market of certificates by a plan or with plan assets. However,
no exemption is provided from the restrictions of Sections 406(a)(1)(E) and
406(a)(2) of ERISA for the acquisition or holding of a certificate by an
excluded plan or with plan assets of an excluded plan by any person who has
discretionary authority or renders investment advice with respect to plan assets
of the excluded plan. For purposes of the certificates, an "excluded plan" is a
plan sponsored by any member of the restricted group.
If specific conditions of the Exemption are also satisfied, the Exemption
may provide an exemption from the restrictions imposed by Sections 406(b)(1) and
(b)(2) of ERISA, as well as the excise taxes imposed by Section 4975(a) and (b)
of the Internal Revenue Code by reason of Section 4975(c)(1)(E) of the Internal
Revenue Code, in connection with:
o the direct or indirect sale, exchange or transfer of certificates in
the initial issuance of certificates between the depositor or an
underwriter and a plan when the person who has discretionary
authority or renders investment advice with respect to the
investment of the relevant plan assets in the certificates is:
o a mortgagor with respect to 5% or less of the fair market
value of the assets of a trust or
o an affiliate of that type of person, provided that, with
respect to the acquisition of certificates in connection with
the initial issuance of the certificates, a number of
quantitative restrictions described in the Exemption are met
o the direct or indirect acquisition or disposition in the secondary
market of certificates by a plan or with plan assets and
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o the holding of certificates by a plan or with plan assets.
Additionally, if specific conditions of the Exemption are satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(a), 406(b) and 407(a) of ERISA, as well as the taxes imposed by Sections
4975(a) and (b) of the Internal Revenue Code by reason of Section 4975(c) of the
Internal Revenue Code, for transactions in connection with the servicing,
management and operation of the mortgage pools. Unless otherwise described in
the related prospectus supplement, the depositor expects that the specific
conditions of the Exemption required for this purpose will be satisfied with
respect to the certificates so that the Exemption would provide an exemption
from the restrictions imposed by Sections 406(a) and (b) of ERISA, as well as
the excise taxes imposed by Sections 4975(a) and (b) of the Internal Revenue
Code by reason of Section 4975(c) of the Internal Revenue Code, for transactions
in connection with the servicing, management and operation of the mortgage
pools, provided that the general conditions of the Exemption are satisfied.
The Exemption also may provide an exemption from the restrictions imposed
by Sections 406(a) and 407(a) of ERISA, as well as the taxes imposed by Section
4975(a) and (b) of the Internal Revenue Code by reason of Sections 4975(c)(1)(A)
through (D) of the Internal Revenue Code, if those restrictions are deemed to
otherwise apply merely because a person is deemed to be a party in interest with
respect to an investing plan, or the investing entity holding plan assets, by
virtue of providing services to the plan or by virtue of having specified
relationships to such a person, solely as a result of the plan's ownership of
certificates.
Before purchasing a certificate, a fiduciary or other investor of plan
assets should itself confirm that the certificates constitute "certificates" for
purposes of the Exemption and the specific and general conditions described in
the Exemption and the other requirements described in the Exemption would be
satisfied. In addition to making its own determination as to the availability of
the exemptive relief provided in the Exemption, the fiduciary or other plan
asset investor should consider its general fiduciary obligations under ERISA in
determining whether to purchase any certificates with plan assets.
Any fiduciary or other plan asset investor that proposes to purchase
certificates on behalf of a plan or with plan assets should consult with its
counsel with respect to the potential applicability of ERISA and the Internal
Revenue Code to that investment and the availability of the Exemption or any
other DOL prohibited transaction exemption in connection therewith. In
particular, in connection with a contemplated purchase of certificates
representing a beneficial ownership interest in a pool of single-family
residential first mortgage loans, the fiduciary or other plan asset investor
should consider the availability of the Exemption or Prohibited Transaction
Class Exemption, or PTCE, 83-1 for various transactions involving mortgage pool
investment trusts. However, PTCE 83-1 does not provide exemptive relief with
respect to certificates evidencing interests in trust funds which include
Cooperative Loans or some types of mortgage securities. In addition, the
fiduciary or other plan asset investor should consider the availability of other
class exemptions granted by the DOL, which provide relief from a number of the
prohibited transaction provisions of ERISA and the related excise tax provisions
of Section 4975 of the Internal Revenue Code, including Sections I and III of
PTCE 95-60, regarding transactions by insurance company general accounts. The
related prospectus supplement may contain additional information regarding the
application of the Exemption, PTCE 83-1, PTCE 95-60 or other DOL class exemption
with respect to the certificates offered thereby. There can be no assurance that
any of these exemptions will apply with respect to any particular plan's or
other plan asset investor's investment in the certificates or, even if an
exemption were deemed to apply, that any exemption would apply to all prohibited
transactions that may occur in connection with this form of an investment.
Insurance Company General Accounts
In addition to any exemptive relief that may be available under PTCE 95-60
for the purchase and holding of the certificates by an insurance company general
account, the Small Business Job Protection Act of 1996 added a new Section
401(c) to ERISA, which provides exemptive relief from the provisions of Part 4
of Title I of ERISA and Section 4975 of the Internal Revenue Code, including the
prohibited transaction restrictions imposed by ERISA and the related excise
taxes imposed by Section 4975 of the Internal Revenue Code, for transactions
involving an insurance company general account. Under Section 401(c) of ERISA,
the DOL published proposed regulations on December 22, 1997, but the required
final regulations have not been issued as of the date hereof. The 401(c)
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regulations are to provide guidance for the purpose of determining, in cases
where insurance policies or annuity contracts supported by an insurer's general
account are issued to or for the benefit of a plan on or before December 31,
1998, which general account assets constitute plan assets. Section 401(c) of
ERISA generally provides that, until the date which is 18 months after the
401(c) regulations become final, no person shall be subject to liability under
Part 4 of Title I of ERISA or Section 4975 of the Internal Revenue Code on the
basis of a claim that the assets of an insurance company general account
constitute plan assets, unless:
o as otherwise provided by the Secretary of Labor in the 401(c)
regulations to prevent avoidance of the regulations or
o an action is brought by the Secretary of Labor for various breaches
of fiduciary duty which would also constitute a violation of federal
or state criminal law.
Any assets of an insurance company general account which support insurance
policies or annuity contracts issued to a plan after December 31, 1998 or issued
to plans on or before December 31, 1998 for which the insurance company does not
comply with the 401(c) regulations may be treated as plan assets. In addition,
because Section 401(c) does not relate to insurance company separate accounts,
separate account assets are still treated as plan assets of any plan invested in
the separate account. Insurance companies contemplating the investment of
general account assets in the certificates should consult with their legal
counsel with respect to the applicability of Sections I and III of PTCE 95-60
and Section 401(c) of ERISA, including the general account's ability to continue
to hold the certificates after the date which is 18 months after the date the
401(c) regulations become final.
Representation from Investing Plans
It is not clear whether certificates backed by revolving credit loans with
respect to which a number of Trust Balances of revolving credit loans are
included in the related trust would constitute "certificates" for purposes of
the Exemption. In promulgating the Exemption, the DOL did not have under
consideration interests in mortgage pools of the exact nature described in this
paragraph and accordingly, unless otherwise provided in the related prospectus
supplement, certificates representing interests as described in this paragraph
should not be purchased by or on behalf of a plan or with plan assets based
solely upon the Exemption. In addition, the exemptive relief afforded by the
Exemption will not apply to the purchase, sale or holding of any class of
subordinate certificates and may not apply to any certificates where the related
trust contains a Funding Account during the period in which additional mortgage
loans are permitted to be transferred to the trust.
To the extent certificates are backed by revolving credit loans or are
subordinate certificates or the related trust contains a Funding Account, except
as otherwise specified in the respective prospectus supplement, transfers of the
certificates to a plan, to a trustee or other person acting on behalf of any
plan, or to any other person using the plan assets to effect the acquisition
will not be registered by the trustee unless the transferee provides the
depositor, the trustee and the master servicer with an opinion of counsel
satisfactory to the depositor, the trustee and the master servicer, which
opinion will not be at the expense of the depositor, the trustee or the master
servicer that the purchase of the certificates by or on behalf of the plan:
o is permissible under applicable law
o will not constitute or result in any non-exempt prohibited
transaction under ERISA or Section 4975 of the Internal Revenue Code
and
o will not subject the depositor, the trustee and the master servicer
to any obligation in addition to those undertaken in the pooling and
servicing agreement.
In lieu of an opinion of counsel, the transferee may provide a
certification of facts substantially to the effect that the purchase of
certificates by or on behalf of plan:
o is permissible under applicable law
o will not constitute or result in a non-exempt prohibited transaction
under ERISA or Section 4975 of the Internal Revenue Code
o will not subject the depositor, the trustee or the master servicer
to any obligation in addition to those undertaken in the pooling and
servicing agreement, and
o the following conditions are met:
o the source of funds used to purchase that certificates is an
"insurance company general
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account", as that term is defined in PTCE 95-60, and
o the conditions described in Section I and Section III of PTCE
95-60 have been satisfied as of the date of the acquisition of
the certificates.
Tax Exempt Investors
A plan that is a Tax-Exempt Investor nonetheless will be subject to
federal income taxation to the extent that its income is "unrelated business
taxable income", or UBTI, within the meaning of Section 512 of the Internal
Revenue Code. All "excess inclusions" of a REMIC allocated to a REMIC residual
certificate held by a Tax-Exempt Investor will be considered UBTI and thus will
be subject to federal income tax. See "Material Federal Income Tax Consequences
- -- Taxation of Owners of REMIC Residual Certificates -- Excess Inclusions."
Consultation with Counsel
There can be no assurance that the Exemption or any other DOL exemption
will apply with respect to any particular plan that acquires the certificates
or, even if all the conditions specified in the Exemption were satisfied, that
the exemption would apply to transactions involving a trust. Prospective plan
investors should consult with their legal counsel concerning the impact of ERISA
and the Internal Revenue Code and the potential consequences to their specific
circumstances prior to making an investment in the certificates.
Before purchasing a certificate, a fiduciary of a plan should itself
confirm that all the specific and general conditions described in the Exemption
or in one of the Class Exemptions would be satisfied, and, in the case of a
certificate purchased under the Exemption, the certificate constitutes a
"certificate" for purposes of the Exemption. In addition to making its own
determination as to the availability of the exemptive relief provided in the
Exemption or in any of the Class Exemptions, the plan fiduciary should consider
its general fiduciary obligations under ERISA in determining whether to purchase
a certificate on behalf of a plan.
LEGAL INVESTMENT MATTERS
Each class of certificates offered hereby and by the related prospectus
supplement will be rated at the date of issuance in one of the four highest
rating categories by at least one rating agency. Unless otherwise specified in
the related prospectus supplement, each class of certificates will evidence an
interest in mortgage loans primarily secured by second or more junior liens, and
therefore will not constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984, as amended, or SMMEA.
Accordingly, investors whose investment authority is subject to legal
restrictions should consult their legal advisors to determine whether and to
what extent the certificates constitute legal investments for them.
All depository institutions considering an investment in the certificates
should review the Federal Financial Institutions Examination Council's
Supervisory Policy Statement on the Selection of Securities Dealers and
Unsuitable Investment Practices, to the extent adopted by their respective
regulators, setting forth, in relevant part, a number investment practices
deemed to be unsuitable for an institution's investment portfolio, as well as
guidelines for investing in various types of mortgage related securities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements governing
investments made by a particular investor, including, but not limited to,
"prudent investor" provisions, percentage-of-assets limits and provisions which
may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying."
There may be other restrictions on the ability of some investors either to
purchase some classes of certificates or to purchase any class of certificates
representing more than a specified percentage of the investors' assets. The
depositor will make no representations as to the proper characterization of any
class of certificates for legal investment or other purposes, or as to the
ability of particular investors to purchase any class of certificates under
applicable legal investment restrictions. These uncertainties may adversely
affect the liquidity of any class of certificates. Accordingly, all investors
whose investment activities are subject to legal investment laws and
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regulations, regulatory capital requirements or review by regulatory authorities
should consult with their legal advisors in determining whether and to what
extent the certificates of any class constitute legal investments or are subject
to investment, capital or other restrictions.
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of
certificates will be applied by the depositor to finance the purchase of, or to
repay short-term loans incurred to finance the purchase of, the mortgage loans
or mortgage securities underlying the certificates or will be used by the
depositor for general corporate purposes. The depositor expects that it will
make additional sales of securities similar to the certificates from time to
time, but the timing and amount of any additional offerings will be dependent
upon a number of factors, including the volume of mortgage loans purchased by
the depositor, prevailing interest rates, availability of funds and general
market conditions.
METHODS OF DISTRIBUTION
The certificates offered hereby and by the related prospectus supplements
will be offered in series through one or more of the methods described below.
The prospectus supplement prepared for each series will describe the method of
offering being utilized for that series and will state the net proceeds to the
depositor from that sale.
The depositor intends that certificates will be offered through the
following methods from time to time and that offerings may be made concurrently
through more than one of these methods or that an offering of a particular
series of certificates may be made through a combination of two or more of the
following methods:
o by negotiated firm commitment or best efforts underwriting and
public re-offering by underwriters;
o by placements by the depositor with institutional investors through
dealers; and
o by direct placements by the depositor with institutional investors.
In addition, if specified in the related prospectus supplement, a series
of certificates may be offered in whole or in part to the seller of the related
mortgage loans, and other assets, if applicable, that would comprise the
mortgage pool securing the certificates.
If underwriters are used in a sale of any certificates, other than in
connection with an underwriting on a best efforts basis, the certificates will
be acquired by the underwriters for their own account and may be resold from
time to time in one or more transactions, including negotiated transactions, at
fixed public offering prices or at varying prices to be determined at the time
of sale or at the time of commitment therefor. These underwriters may be
broker-dealers affiliated with the depositor whose identities and relationships
to the depositor will be as described in the related prospectus supplement. The
managing underwriter or underwriters with respect to the offer and sale of a
particular series of certificates will be described on the cover of the
prospectus supplement relating to that series and the members of the
underwriting syndicate, if any, will be named in the related prospectus
supplement.
In connection with the sale of the certificates, underwriters may receive
compensation from the depositor or from purchasers of the certificates in the
form of discounts, concessions or commissions. Underwriters and dealers
participating in the distribution of the certificates may be deemed to be
underwriters in connection with the certificates, and any discounts or
commissions received by them from the depositor and any profit on the resale of
certificates by them may be deemed to be underwriting discounts and commissions
under the Securities Act.
It is anticipated that the underwriting agreement pertaining to the sale
of any series of certificates will provide that the obligations of the
underwriters will be subject to conditions precedent, that the underwriters will
be obligated to purchase all of the certificates if any are purchased, other
than in connection with an underwriting on a best efforts basis, and that, in
limited circumstances, the depositor will indemnify the several underwriters and
the underwriters will indemnify the depositor against a number of civil
liabilities, including liabilities under the Securities Act, or will
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contribute to payments required to be made.
The prospectus supplement with respect to any series offered by placements
through dealers will contain information regarding the nature of the offering
and any agreements to be entered into between the depositor and purchasers of
certificates of that series.
The depositor anticipates that the certificates offered hereby will be
sold primarily to institutional investors or sophisticated non-institutional
investors. Purchasers of certificates, including dealers, may, depending on the
facts and circumstances of the purchases, be deemed to be "underwriters" within
the meaning of the Securities Act, in connection with reoffers and sales by them
of certificates. Holders of certificates should consult with their legal
advisors in this regard prior to any reoffer or sale.
LEGAL MATTERS
Certain legal matters, including a number of federal income tax matters,
will be passed upon for the depositor by Thacher Proffitt & Wood, New York, New
York, Orrick, Herrington & Sutcliffe LLP, New York, New York, or by Stroock &
Stroock & Lavan, as specified in the prospectus supplement.
FINANCIAL INFORMATION
The depositor has determined that its financial statements are not
material to the offering made hereby. The certificates do not represent an
interest in or an obligation of the depositor. The depositor's only obligations
with respect to a series of certificates will be to repurchase mortgage loans or
mortgage securities upon any breach of the limited representations and
warranties made by the depositor, or as otherwise provided in the applicable
prospectus supplement.
ADDITIONAL INFORMATION
The depositor has filed the registration statement with the Commission.
The depositor is also subject to some of the information requirements of the
Securities Exchange Act of 1934, as amended, and, accordingly, will file reports
thereunder with the Commission. The registration statement and its exhibits, and
reports and other information filed by the depositor under the Exchange Act can
be inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at some of its
Regional Offices located as follows: Chicago Regional Office, Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and Northeast
Regional Office, 7 World Trade Center, Suite 1300, New York, New York 10048 and
electronically through the Commission's Electronic Data Gathering, Analysis and
Retrieval System at the Securities and Exchange Commission's Web Site
(http://www.sec.gov).
REPORTS TO CERTIFICATEHOLDERS
Monthly reports which contain information concerning the trust for a
series of certificates will be sent by or on behalf of the master servicer or
the trustee to each holder of record of the certificates of the related series.
See "Description of the Certificates--Reports to Certificateholders." Reports
forwarded to holders will contain financial information that has not been
examined or reported upon by an independent certified public accountant. The
depositor will file with the Commission the periodic reports with respect to the
trust for a series of certificates as are required under the Exchange Act.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
With respect to each series of certificates offered by this prospectus,
there are incorporated in this prospectus and in the related prospectus
supplement by reference all documents and reports filed or caused to be filed by
the depositor under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior
to the termination of the offering of the related series of certificates, that
relate specifically to the related series of certificates. The depositor will
provide or cause to be provided without charge to each person to whom this
prospectus and related prospectus supplement is
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delivered in connection with the offering of one or more classes of that series
of certificates, upon written or oral request of the person, a copy of any or
all reports incorporated in this prospectus by reference, in each case to the
extent those reports relate to one or more of those classes of that series of
certificates, other than the exhibits to the documents, unless the exhibits are
specifically incorporated by reference in the documents. Requests should be
directed in writing to Residential Funding Mortgage Securities II, Inc., 8400
Normandale Lake Boulevard, Suite 600, Minneapolis, Minnesota 55437, or by
telephone at (612) 832-7000.
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GLOSSARY
Actuarial Mortgage Loan -- A mortgage loan that provides for payments in
monthly installments including interest equal to one-twelfth of the applicable
mortgage rate times the unpaid principal balance, with any remainder of the
payment applied to principal.
Additional Balance -- A Draw.
Advance -- As to any mortgage loan and any distribution date, an amount
equal to the aggregate of all scheduled payments of principal, except with
respect to simple interest mortgage loans and other than any Balloon Amount in
the case of a Balloon Loan, and interest at the applicable pass-through rate or
Net Mortgage Rate, as the case may be.
Balloon Amount -- The full outstanding principal balance on a Balloon Loan
due and payable on the maturity date.
Balloon Loans -- Fixed-rate closed-end loans having original or modified
terms to maturity of generally 15 years as described in the related prospectus
supplement, with level monthly payments of principal and interest based on a
30-year amortization schedule. The amount of the monthly payment will remain
constant until the maturity date, when the Balloon Amount will be due and
payable.
Bankruptcy Loss -- A Realized Loss attributable to some actions which may
be taken by a bankruptcy court in connection with a mortgage loan, including a
reduction by a bankruptcy court of the principal balance of or the mortgage rate
on a mortgage loan or an extension of its maturity.
Certificate Account -- An account established and maintained by the master
servicer, in the name of the trustee for the benefit of the holders of each
series of certificates, for the disbursement of payments on the mortgage loans
evidenced by each series of certificates.
Cooperative --With respect to a Cooperative Loan, the corporation that
owns the related apartment building.
Cooperative Loans -- Cooperative apartment loans evidenced by 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.
Cooperative Notes --A promissory note with respect to a Cooperative Loan.
Credit Scores --A measurement of the relative degree of risk a borrower
represents to a lender obtained from credit reports utilizing, among other
things, payment history, delinquencies on accounts, levels of outstanding
indebtedness, length of credit history, types of credit, and bankruptcy
experience.
Credit Utilization Rate -- For any Reducing Credit Loan, the cut-off date
principal balance of the revolving credit mortgage loan divided by the credit
limit of the related credit line agreement.
Custodial Account -- The custodial account or accounts created and
maintained pursuant to the pooling and servicing agreement in the name of a
depositary institution, as custodian for the holders of the certificates, for
the holders of certain other interests in mortgage loans serviced or sold by the
master servicer and for the master servicer, into which the amounts shall be
deposited directly. Any Custodial Account shall be an Eligible Account.
Debt Service Reduction -- Modifications of the terms of a mortgage loan
resulting from a bankruptcy proceeding, including a reduction in the amount of
the monthly payment on the related mortgage loan, but not any permanent
forgiveness of principal. Together with Deficient Valuations, Debt Service
Reductions are referred to in this prospectus as Bankruptcy Losses.
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Defaulted Mortgage Loss -- A Realized Loss 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.
Deficient Valuation -- In connection with the personal bankruptcy of a
mortgagor, the difference between the then outstanding principal balance of the
first and junior loans secured by the mortgaged property, as established by the
bankruptcy court.
Designated Seller Transaction -- A transaction in which the mortgage loans
are provided either directly or indirectly to the depositor by one or more
sellers identified in the related prospectus supplement, concurrently with the
issuance of the related series of certificates.
Distribution Amount -- For a class of certificates for any distribution
date, the portion, if any, of the amount to be distributed to that class for
that distribution date of principal, plus, if that class is entitled to payments
of interest on the distribution date, one month's interest at the applicable
pass-through rate on the principal balance or notional amount of that class
specified in the applicable prospectus supplement, less certain interest
shortfalls, which will include:
o any deferred interest added to the principal balance of the mortgage
loans and/or the outstanding balance of one or more classes of
certificates on the related due date
o any other interest shortfalls, including, without limitation,
shortfalls resulting from application of the Relief Act or similar
legislation or regulations as in effect from time to time, allocable
to certificateholders which are not covered by advances or the
applicable credit enhancement and
o Prepayment Interest Shortfalls in collections of interest on
closed-end loans resulting from mortgagor prepayments during the
month preceding the month of distribution, in each case in the
amount that is allocated to the class on the basis contained in the
prospectus supplement.
Draw -- Money drawn by the mortgagor on a revolving credit loan under the
related credit line agreement at any time during the Draw Period.
Draw Period -- The period specified in the related credit line agreement
when a mortgagor on a revolving credit loan may make a Draw.
Eligible Account -- An account acceptable to any applicable rating agency.
Environmental Lien -- A lien imposed by federal or state statute, for any
cleanup costs incurred by that state on the property that is the subject of the
cleanup costs.
Excess Interest -- The extent by which interest collections on the
mortgage loans, or the Trust Balances of the related revolving credit loans, as
applicable, exceed interest distributions on the certificates for the related
distribution date.
Excess Spread -- A specified portion of the interest payable on the
mortgage loans and transferred as part of the assets to the related trust.
Excluded Balance -- That portion of the principal balance of any revolving
credit loan not included in the Trust Balance at any time, which will include
balances attributable to Draws after the cut-off date and may include a portion
of the principal balance outstanding as of the cut-off date.
Excluded Spread -- The portion of interest payable on the mortgage loans,
excluded from the assets transferred to the related trust.
Extraordinary Loss -- A Realized Loss occasioned by war, civil
insurrection, some governmental actions, nuclear reaction and certain other
risks.
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Fraud Loss -- A Realized Loss incurred on defaulted mortgage loans as to
which there was fraud in the origination of the mortgage loans.
Funding Account -- An account established, if so specified in the related
prospectus supplement, a pooling and servicing agreement or other agreement, to
allow for the transfer by the sellers of additional mortgage loans to the
related trust after the closing date for the related certificates.
High Cost Loans -- Mortgage loans that are subject to special rules,
disclosure requirements and other provisions that were added to the federal
Truth-in-Lending Act by the Homeownership and Equity Protection Act of 1994,
which were originated on or after October 1, 1995, and are not mortgage loans
made to finance the purchase of the mortgaged property and do not have interest
rates or origination costs in excess of prescribed levels.
Insurance Proceeds -- All proceeds of any special hazard insurance policy,
bankruptcy bond, hazard or other insurance policy or guaranty covering any
mortgage loan in the mortgage pool, together with any payments under any letter
of credit.
Issue Premium -- As to a class of REMIC regular certificates, a price in
excess of the stated redemption price of that class.
Junior Ratio -- As to each mortgage loan, the ratio, expressed as a
percentage, of:
o the original principal balance or the credit limit, as applicable,
of the mortgage loan to
o the sum of:
o the original principal balance or the credit limit, as
applicable, of the mortgage loan and
o the principal balance of any related senior mortgage loan at
origination of the mortgage loan.
Liquidated Mortgage Loan -- A defaulted mortgage loan for which the
related mortgaged property has been sold by the related trust and all
recoverable Liquidation Proceeds and Insurance Proceeds have been received.
Liquidation Proceeds -- Amounts received and retained in connection with
the liquidation of any defaulted mortgage loan, by foreclosure or otherwise.
Mark-to-Market Regulations -- The final regulations of the IRS, released
on December 24, 1996, relating to the requirement that a securities dealer
mark-to-market securities held for sale to customers.
Net Mortgage Rate -- As to any mortgage loan, the mortgage rate net of
servicing fees and any Excess Spread or Excluded Spread.
Nonrecoverable Advance --Any Advance previously made which the master
servicer has determined to not be ultimately recoverable from Liquidation
Proceeds, Insurance Proceeds or otherwise.
Permitted Investments -- United States government securities and other
investments that are rated, at the time of acquisition, in one of the categories
permitted by the related pooling and servicing agreement.
Prepayment Interest Shortfall--With respect to a mortgage loan that is
subject to a mortgage prepayment or liquidation, the amount that equals the
difference between a full month's interest due with respect to that mortgage
loan and the amount of interest paid or recovered with respect thereto.
Realized Loss -- With respect to any defaulted mortgage loan that is
finally liquidated, the amount of loss realized, if any (as described in the
related pooling and servicing agreement), equal to the portion of the Stated
Principal Balance remaining after application of all amounts recovered, net of
amounts reimbursable to the master servicer for related Advances, if applicable,
and expenses allocable to the trust, towards interest and principal owing on the
mortgage loan.
REO Mortgage Loan--A mortgage loan where title to the related mortgaged
property has been obtained
[TPW: NY05:7019374.2] 16069-00524 06/02/99 07:26PM
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by the trustee or its nominee on behalf of certificateholders of the related
series.
Repayment Period -- With respect to a revolving credit loan, the period
from the end of the related Draw Period to the related maturity date.
Senior Percentage -- At any given time, the percentage of the outstanding
principal balances of all of the certificates evidenced by the senior
certificates, determined in the manner described in the related prospectus
supplement.
Servicing Advances -- Amounts advanced on any mortgage loan to cover
taxes, insurance premiums or similar expenses.
Simple Interest Mortgage Loan -- A mortgage loan that provides for
payments that are allocated to principal and interest according to the daily
simple interest method.
Special Hazard Loss -- A Realized Loss incurred, to the extent that the
loss was attributable to:
o direct physical damage to a mortgaged property other than any loss
of a type covered by a hazard insurance policy or a flood insurance
policy, if applicable, and
o any shortfall in insurance proceeds for partial damage due to the
application of the co-insurance clauses contained in hazard
insurance policies.
Stated Principal Balance -- As to any mortgage loan as of any date of
determination, the principal balance thereof as of the cut-off date, after
application of all scheduled principal payments due on or before the cut-off
date whether received or not, reduced by all amounts allocable to principal that
are distributed to certificateholders on or before the date of determination,
and further reduced to the extent that any Realized Loss thereon has been
allocated to any certificates on or before that date.
Stated Value -- The value of the mortgaged property as stated by the
related mortgagor in his or her application.
Statistical Valuation -- The value of the mortgaged property as determined
by a form of appraisal which uses a statistical model to estimate the value of a
property.
Swaps --Interest rate swaps and related caps, floors and collars utilized
to minimize the risk of certificateholders from adverse changes in interest
rates.
Tax-Exempt Investor -- A tax-qualified retirement plan exempt from federal
income taxation under Section 501 of the Internal Revenue Code.
Trust Balance -- A specified portion of the total principal balance of
each revolving credit loan outstanding at any time, which will consist of the
principal balance thereof as of the cut-off date minus the portion of all
payments and losses thereafter that are allocated to the Trust Balance, and will
not include any portion of the principal balance attributable to Draws made
after the cut-off date.
Yield Supplement Agreements -- Collectively, Swaps and other yield
supplement agreements or similar yield maintenance arrangements that do not
involve swap agreements or other notional principal contracts.
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- --------------------------------------------------------------------------------
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
- --------------------------------------------------------------------------------
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS SUPPLEMENT DATED JUNE 4, 1999
Prospectus supplement dated _________, ____ (to prospectus dated ________, ____)
$____________________
Residential Funding Mortgage Securities II, Inc.
Depositor
RFMSII Series ________ Trust
Issuer
Residential Funding Corporation
Master Servicer
Home Equity Loan Pass-Through Certificates, Series ______
Offered Certificates The trust will issue eight classes of senior
certificates offered under this prospectus supplement,
backed by a pool of closed-end, primarily second lien
fixed rate home equity mortgage loans
Credit Enhancement Credit enhancement for the certificates consists of:
o excess interest and overcollateralization; and
o a certificate guaranty insurance policy issued by
_________________.
[Insurer's logo]
- --------------------------------------------------------------------------------
You should consider carefully the risk factors beginning on page S-_ in this
prospectus supplement.
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the offered certificates or determined
that this prospectus supplement or the prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
The Attorney General of the State of New York has not passed on or endorsed the
merits of this offering. Any representation to the contrary is unlawful.
_________ will offer the certificates to the public, at varying prices to be
determined at the time of sale. The proceeds to the depositor from the sale of
the certificates will be approximately _____% of the principal balance of the
certificates plus accrued interest, before deducting expenses.
[Name of Underwriter]
Underwriter
<PAGE>
Important notice about information presented in this prospectus supplement and
the accompanying prospectus
We provide information to you about the offered certificates in two separate
documents that provide progressively more detail:
o the accompanying prospectus, which provides general information, some of
which may not apply to your series of certificates; and
o this prospectus supplement, which describes the specific terms of your
series of certificates.
If the description of your certificates in this prospectus supplement differs
from the related description in the accompanying prospectus, you should rely on
the information in this prospectus supplement.
The depositor's principal offices are located at 8400 Normandale Lake Boulevard,
Suite 600, Minneapolis, Minnesota 55437 and its telephone number is (612)
832-7000.
<PAGE>
Table of Contents
Summary.......................................................................S-
Risk Factors..................................................................S-
Risks Associated with the Mortgage Loans................................S-
Limited Obligations.....................................................S-
Liquidity Risks.........................................................S-
Special Yield and Prepayment Considerations.............................S-
Introduction..................................................................S-
Description of the Mortgage Pool..............................................S-
General.................................................................S-
Payments on the Simple Interest Mortgage Loans..........................S-
Balloon Loans...........................................................S-
Mortgage Pool Characteristics...........................................S-
Underwriting Standards..................................................S-
Optional Repurchase of Defaulted Mortgage
Loans..............................................................S-
The Initial Subservicer.................................................S-
Residential Funding.....................................................S-
Delinquency and Loss Experience of the
Master Servicer's Portfolio........................................S-
Additional Information..................................................S-
Description of the Certificates ..............................................S-
General.................................................................S-
Book-Entry Registration of the Offered
Certificates.......................................................S-
Distributions...........................................................S-
Available Distribution Amount...........................................S-
Interest Distributions..................................................S-
Principal Distributions.................................................S-
Overcollateralization Provisions........................................S-
Excess Loss Amounts.....................................................S-
Certificate Guaranty Insurance Policy...................................S-
The Credit Enhancer...........................................................S-
Year 2000 Considerations......................................................S-
Overview of the Year 2000 Issue.........................................S-
Overview of Residential Funding's Y2K
Project............................................................S-
Y2K Project Status......................................................S-
Risks Related to Y2K....................................................S-
Material Yield and Prepayment Considerations..................................S-
General.................................................................S-
Fixed Strip Certificate Yield Considerations............................S-
Pooling and Servicing Agreement...............................................S-
General.................................................................S-
The Master Servicer.....................................................S-
Servicing and Other Compensation and
Payment of Expenses................................................S-
Refinancing of Senior Lien .............................................S-
Collection and Liquidation Practices; Loss
Mitigation.........................................................S-
Voting Rights...........................................................S-
Termination.............................................................S-
Material Federal Income Tax Consequences......................................S-
Method of Distribution........................................................S-
Legal Opinions................................................................S-
Experts ...................................................................S-
Ratings ...................................................................S-
Legal Investment..............................................................S-
ERISA Considerations..........................................................S-
Annex I: Global Clearance, Settlement
and Tax Documentation Procedures.............................I-1
S-2
<PAGE>
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SUMMARY
The following summary is a very general overview of the offered
certificates and does not contain all of the information that you should
consider in making your investment decision. To understand the terms of the
certificates, you should read carefully this entire document and the prospectus.
Issuer or Trust .......................RFMSII Series ________ Trust.
Title of the
offered securities.................Home Equity Loan Pass-Through
Certificates, Series ____________.
Depositor .............................Residential Funding Mortgage Securities
II, Inc., an affiliate of Residential
Funding Corporation.
Master servicer .......................Residential Funding Corporation.
Trustee................................______________.
Credit enhancer .......................______________.
Mortgage pool ........................._____ closed end, fixed-rate,
fully-amortizing and balloon payment home
equity mortgage loans with an aggregate
principal balance of approximately
______________ as of the close of
business on the day prior to the cut-off
date. The mortgage loans are secured
primarily by second liens on one- to
four-family residential properties.
Cut-off date ..........................______________.
Closing date ..........................On or about ______________.
Payment dates .........................Beginning in ______________ on the ___ of
each month or, if the ___ is not a
business day, on the next business day.
Scheduled final distribution date .....______________. The actual final
distribution date could be substantially
earlier.
Form of certificates ..................Book-entry.
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S-3
<PAGE>
- --------------------------------------------------------------------------------
See "Description of the
Certificates--Book-Entry Registration" in
this prospectus supplement.
Minimum denominations .................[Class A] Certificates: $______________.
[Class IO] Certificates: $____________
(notional balance).
Legal investment ......................The certificates will not be "mortgage
related securities" for purposes of the
Secondary Mortgage Market Enhancement Act
of 1984.
See "Legal Investment" in this prospectus
supplement and the prospectus.
- --------------------------------------------------------------------------------
S-4
<PAGE>
- --------------------------------------------------------------------------------
Offered Certificates
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Pass-
Through Initial Principal Initial Rating
Class Rate Balance _____/_____ Designation
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
[Class A-I] Certificates:
- ----------------------------------------------------------------------------------------------------------------
[A-I-1 _____% $__________ AAA/AAA Senior/Fixed Rate]
- ----------------------------------------------------------------------------------------------------------------
[A-I-2 _____% $__________ AAA/AAA Senior/Fixed Rate]
- ----------------------------------------------------------------------------------------------------------------
[A-I-3 _____% $__________ AAA/AAA Senior/Fixed Rate]
- ----------------------------------------------------------------------------------------------------------------
[A-I-4 _____% $__________ AAA/AAA Senior/Fixed Rate]
- ----------------------------------------------------------------------------------------------------------------
[A-I-5 _____% $__________ AAA/AAA Senior/Fixed Rate]
- ----------------------------------------------------------------------------------------------------------------
[A-I-6 _____% $__________ AAA/AAA Senior/Lockout/Fixed Rate]
- ----------------------------------------------------------------------------------------------------------------
Total [Class A-I]
Certificates: $__________
- ----------------------------------------------------------------------------------------------------------------
[Class A-II] Certificates:
- ----------------------------------------------------------------------------------------------------------------
Senior/Fixed Rate/Pass-
[A-II _____% $__________ AAA/AAA Through]
- ----------------------------------------------------------------------------------------------------------------
Total Class A
Certificates: $__________
- ----------------------------------------------------------------------------------------------------------------
[Class IO] Certificates:
- ----------------------------------------------------------------------------------------------------------------
Senior/Interest Only/Fixed
[IO _____% _____ AAA/AAAr Rate]
- ----------------------------------------------------------------------------------------------------------------
Total offered
certificates: $__________
- ----------------------------------------------------------------------------------------------------------------
Non-offered Certificates
- ----------------------------------------------------------------------------------------------------------------
Class R Certificates:
- ----------------------------------------------------------------------------------------------------------------
R[-I] _____% $ NA/NA Subordinate/Residual
- ----------------------------------------------------------------------------------------------------------------
[R-II _____% $ NA/NA Subordinate/Residual]
- ----------------------------------------------------------------------------------------------------------------
Total offered and non-
offered certificates: $__________
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
S-5
<PAGE>
- --------------------------------------------------------------------------------
The Trust
The depositor will establish RFMSII Series ______ Trust, a Delaware business
trust to issue the Home Equity Loan Pass-Through Certificates, Series _____. The
trust will be established, and the certificates will be issued by the trust,
under a pooling and servicing agreement. The assets of the trust will consist of
the home loans and related assets.
The Mortgage Pool
The mortgage loans consist of two groups, group I and group II, of which ______%
and ______%, respectively, are secured by second mortgages or deeds of trust and
the remainder are secured by first mortgages or deeds of trust. The group I
loans have the following characteristics as of the cut-off date:
- -------------------------------------------------------
Minimum principal
balance $_____
Maximum principal
balance $_____
Average principal balance _____
Range of loan rates _____% to _____%
Weighted Average loan
rate _____%
Range of original terms to _____ to _____
maturity months
Weighted average original
term to maturity _____ months
Range of remaining terms _____ to _____
to maturity months
Weighted average
remaining term to
maturity _____ months
Range of combined loan-
to-value ratios _____% to _____%
Weighted average
combined loan-to-value
ratios _____%
- -------------------------------------------------------
The group II loans have the following characteristics as of the cut-off date:
- -------------------------------------------------------
Minimum principal
balance $_____
Maximum principal
balance $_____
Average principal balance _____
Range of loan rates _____% to _____%
Weighted Average loan
rate _____%
Range of original terms to _____ to _____
maturity months
Weighted average original
term to maturity _____ months
Range of remaining terms _____ to _____
to maturity months
Weighted average
remaining term to
maturity _____ months
Range of combined loan-
to-value ratios _____% to _____%
Weighted average
combined loan-to-value
ratios _____%
- -------------------------------------------------------
See "Description of the Mortgage Pool" in this prospectus supplement.
Distributions on the Certificates
Amount available for monthly distribution. On each monthly distribution date,
the trustee will make distributions to investors. The amounts available for
distribution include:
o collections of monthly payments on the mortgage loans, including
prepayments and other unscheduled collections minus
o fees and expenses of the subservicers and the master servicer.
See "Description of the Certificates--Available Distribution Amount" in this
prospectus supplement.
- --------------------------------------------------------------------------------
S-6
<PAGE>
- --------------------------------------------------------------------------------
Distributions. Distributions to certificateholders will be made from principal
and interest collections as follows:
o Distribution of interest to the certificates
o Distribution of principal to the certificates
o Distribution of principal to the certificates to cover some losses
o Payment to the credit enhancer its premium for the policy
o Reimbursement to the credit enhancer for some prior draws made on
the policy
o Distribution of additional principal to the certificates if the
level of overcollateralization falls below what is required
o Payment to the credit enhancer for any other amounts owed
o Distribution of any remaining funds to the Residual Certificates
Principal payments on the certificates will be as described under "Description
of the Certificates--Principal Distributions" in this prospectus supplement.
In addition, payments on the certificates will be made on each distribution date
from draws on the certificate guaranty insurance policy, if necessary. Draws
will cover shortfalls in amounts available to pay interest on the certificates
at the pass-through rates plus any unpaid losses allocated to the certificates.
Credit Enhancement
The credit enhancement for the benefit of the certificates consists of:
Excess Interest. Because more interest is paid by the mortgagors than is
necessary to pay the interest on the certificates each month, there will be
excess interest. Some of this excess interest may be used to protect the
certificates against some losses, by making an additional payment of principal
up to the amount of the losses.
Overcollateralization. Although the aggregate principal balance of the mortgage
loans is $__________, the trust is issuing only $__________ aggregate principal
amount of certificates. The excess amount of the balance of the mortgage loans
represents overcollateralization, which may absorb some losses on the mortgage
loans, if not covered by excess interest. If the level of overcollateralization
falls below what is required, the excess interest described above will also be
paid to the certificates as principal. This will reduce the principal balance of
the certificates faster than the principal balance of the mortgage loans so that
the required level of overcollateralization is reached.
Policy. On the closing date, the credit enhancer will issue the certificate
guaranty insurance policy in favor of the trustee. The policy will
unconditionally and irrevocably guarantee interest on the certificates at the
related pass-through rates and will cover any losses allocated to the
certificates if not covered by excess interest or overcollateralizations.
Optional Termination
- --------------------------------------------------------------------------------
S-7
<PAGE>
- --------------------------------------------------------------------------------
On any payment date on which the principal balance of the mortgage loans is less
than __% of the principal balance as of the cut-off date, the master servicer
will have the option to purchase the remaining mortgage loans.
Under an optional purchase, the outstanding principal balance of the
certificates will be paid in full with accrued interest.
Ratings
When issued, the certificates will receive the ratings listed on page S-__ of
this prospectus supplement. A security rating is not a recommendation to buy,
sell or hold a security and may be changed or withdrawn at any time by the
assigning rating agency. The ratings also do not address the rate of principal
prepayments on the mortgage loans. The rate of prepayments, if different than
originally anticipated, could adversely affect the yield realized by holders of
the certificates.
Legal Investment
The certificates will not be "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984. You should consult your legal
advisors in determining whether and to what extent the certificates constitute
legal investments for you.
ERISA Considerations
The certificates may be eligible for purchase by persons investing assets of
employee benefit plans or individual retirement accounts. Plans should consult
with their legal advisors before investing in the certificates.
See "ERISA Considerations" in this prospectus supplement and in the accompanying
prospectus.
Tax Status
For federal income tax purposes, the trust will be treated as two real estate
mortgage investment conduits. The certificates will represent ownership of
regular interests in the trust and will be treated as debt for federal income
tax purposes. The trust itself will not be subject to tax.
See "Material Federal Income Tax Consequences" in this prospectus supplement and
in the accompanying prospectus.
- --------------------------------------------------------------------------------
S-8
<PAGE>
RISK FACTORS
The certificates are not suitable investments for all investors. In
particular, you should not purchase the certificates unless you understand the
prepayment, credit, liquidity and market risks associated with the certificates.
The certificates are complex securities. You should possess, either alone
or together with an investment advisor, the expertise necessary to evaluate the
information contained in this prospectus supplement and the accompanying
prospectus in the context of your financial situation and tolerance for risk.
You should carefully consider, among other things, the following factors
in connection with the purchase of the certificates:
Risks Associated with the Mortgage Loans
The return on your certificates may be reduced by losses on the mortgage loans,
which are more likely because they are junior liens.
______% of the mortgage loans included in the mortgage loan pool are secured by
second mortgages or deeds of trust. Proceeds from liquidation of the property
will be available to satisfy the mortgage loans only if the claims of any senior
mortgages have been satisfied in full. When it is uneconomical to foreclose on
the mortgaged property or engage in other loss mitigation procedures, the master
servicer may write off the entire outstanding balance of the mortgage loan as a
bad debt. The foregoing risks are particularly applicable to mortgage loans
secured by second liens that have high combined loan-to-value ratios or low
junior ratios because it is comparatively more likely that the master servicer
would determine foreclosure to be uneconomical. As of the cut-off date, the
weighted average combined loan-to-value ratio of the mortgage loans is ______%,
and approximately ______% of the mortgage loans will have combined loan-to-value
ratios in excess of ______%.
Delays in payment on your certificates may result because the master servicer is
not required to advance delinquent monthly payments on the mortgage loans.
The master servicer is not obligated to advance scheduled monthly payments of
principal and interest on mortgage loans that are delinquent or in default. The
rate of delinquency and default of second mortgage loans may be greater than
that of mortgage loans secured by first liens on comparable properties.
S-9
<PAGE>
The return on your pool certificates may be reduced in an economic downturn.
Mortgage loans similar to those included in the mortgage loan 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 adversely affect the
ability and willingness of mortgagors to repay their loans. No prediction can be
made as to the effect of an economic downturn on the rate of delinquencies and
losses on the mortgage loans.
The origination disclosure practices for the mortgage loans could create
liabilities that may affect your certificates.
______% of the mortgage loans included in the mortgage loan pool are subject to
special rules, disclosure requirements and other regulatory provisions because
they are high cost loans.
Purchasers or assignees of these mortgage loans, including the trust, could be
exposed to all claims and defenses that the mortgagors could assert against the
originators of the mortgage loans. Remedies available to a mortgagor include
monetary penalties, as well as rescission rights if the appropriate disclosures
were not given as required. See "Certain Legal Aspects of Mortgage Loans and
Related Matters" in the prospectus.
Your certificates may be adversely affected by changes in bankruptcy laws.
In October 1997, a bankruptcy review commission recommended that Congress amend
the Bankruptcy Code by treating a claim secured by a junior security interest in
a borrower's principal residence as protected only to the extent that the claim
was secured when the security interest was made. Additionally, the commission
recommended that a creditor's secured claim in real property should be
determined by the property's fair market value, less hypothetical costs of sale.
Congress adjourned in 1998 without passing any legislation addressing these
issues. However, Congress continues to consider bankruptcy law changes that may
affect future bankruptcies and therefore could affect the rate and timing of
payments on the mortgage loans. Any changes to the Bankruptcy Code could have a
negative effect on the mortgage loans and the enforcement of rights.
The underwriting standards for the mortgage loans create greater risks to you,
compared to those for first lien loans.
The underwriting standards under which the mortgage loans were underwritten are
analogous to credit lending, rather than mortgage lending, since underwriting
decisions were based primarily on the borrower's credit history and capacity to
repay rather than on the value of the collateral upon foreclosure. The
underwriting standards allow loans to be approved with combined loan-to-value
ratios of up to 125%. See "Description of the Mortgage Pool--Underwriting
S-10
<PAGE>
Standards" in this prospectus supplement. Because of the relatively high
combined loan-to-value ratios of the mortgage loans and the fact that the
mortgage loans are secured by junior liens, losses on the mortgage loans will
likely be higher than on first lien mortgage loans.
The return on your certificates may be particularly sensitive to changes in real
estate markets in specific areas.
One risk of investing in the certificates is created by concentration of the
related mortgaged properties in one or more geographic regions. Approximately
____% of the cut-off date principal balance of the mortgage loans are located in
California. If the regional economy or housing market weakens in California, or
in any other region having a significant concentration of the properties
underlying the mortgage loans, the mortgage loans related to properties in that
region may experience high rates of loss and delinquency, resulting in losses to
certificateholders. A region's economic condition and housing market may be
adversely affected by a variety of events, including natural disasters such as
earthquakes, hurricanes, floods and eruptions, and civil disturbances such as
riots.
The reloading of debt could increase your risk.
With respect to mortgage loans which were used for debt consolidation, there can
be no assurance that the borrower will not incur further debt. This reloading of
debt could impair the ability of borrowers to service their debts, which in turn
could result in higher rates of delinquency and loss on the mortgage loans.
Loss Mitigation Practices
The release of a lien may increase your risk.
The master servicer may use a wide variety of practices to limit losse on the
mortgage loans. The servicing agreement permits the master servicer to release
the lien on a limited number of mortgaged properties securing the mortgage
loans, if the mortgage loan is current in payment. See "Pooling and Servicing
Agreement - Refinancing of Senior Lien" and "- Collection and Liquidation
Practices; Loss Mitigation" in this prospectus supplement.
Limited Obligations
Payments on the mortgage loans, together with the certificate guaranty insurance
policy, are the sole source of payments on your certificates.
Credit enhancement includes excess interest, overcollateralization and the
certificate guaranty insurance policy. None of the depositor, the master
servicer or any of their affiliates will have any obligation to replace or
supplement the credit enhancement, or to take any other action to maintain any
rating of the certificates. If any losses are incurred on the mortgage loans
that are not covered by the credit enhancement, the holders of the certificates
will bear the risk of these losses.
S-11
<PAGE>
Liquidity Risks
You may have to hold your certificates to maturity if their marketability is
limited.
A secondary market for your certificates may not develop. Even if a secondary
market does develop, it may not continue, or it may be illiquid. Illiquidity
means you may not be able to find a buyer to buy your securities readily or at
prices that will enable you to realize a desired yield. Illiquidity can have an
adverse effect on the market value of the certificates.
Special Yield and Prepayment Considerations
The yield to maturity on your certificates will vary depending on the rate of
prepayments.
The yield to maturity of the certificates will depend on a variety of factors,
including:
o the rate and timing of principal payments on the mortgage loans, including
prepayments, defaults and liquidations, and repurchases due to breaches of
representations or warranties;
o the pass-through rate for that class; and
o the purchase price.
The rate of prepayments is one of the most important and least predictable of
these factors.
In general, if you purchase a certificate at a price higher than its outstanding
principal balance and principal payments occur faster than you assumed at the
time of purchase, your yield will be lower than anticipated. Conversely, if you
purchase a certificate at a price lower than its outstanding principal balance
and principal payments occur more slowly than you assumed at the time of
purchase, your yield will be lower than anticipated.
S-12
<PAGE>
The rate of prepayments on the mortgage loans will vary depending on future
market conditions, and other factors.
Since mortgagors can generally prepay their mortgage loans at any time, the rate
and timing of principal payments on the certificates are highly uncertain.
Generally, when market interest rates increase, mortgagors are less likely to
prepay their mortgage loans. This could result in a slower return of principal
to you at a time when you might have been able to reinvest those funds at a
higher rate of interest than the pass-through rate on your class of
certificates. On the other hand, when market interest rates decrease, borrowers
are generally more likely to prepay their mortgage loans. This could result in a
faster return of principal to you at a time when you might not be able to
reinvest those funds at an interest rate as high as the pass-through rate on
your class of certificates.
Refinancing programs, which may involve soliciting all or some of the mortgagors
to refinance their mortgage loans, may increase the rate of prepayments on the
mortgage loans.
______% of the mortgage loans provide for payment of a prepayment charge.
Prepayment charges may reduce the rate of prepayment on the mortgage loans until
the end of the related prepayment period. See "Description of the Mortgage
Pool--Mortgage Pool Characteristics" in this prospectus supplement and "Yield
and Prepayment Considerations" in the prospectus.
The yield on your certificates will be affected by the e specific forms that
apply to that class discussed below.
The offered certificates of each class have different yield considerations and
different sensitivities to the rate and timing of principal distributions. The
following is a general discussion of som yield considerations and prepayment
sensitivities of each class.
See "Material Yield and Prepayment Considerations" in this prospectus
supplement.
[Class A-I Certificates and Class A-II Certificates
The Class A-I Certificates will receive principal payments primarily from the
group I mortgage loans. The Class A-II Certificates will receive principal
payments primarily from the group II loans. Therefore, the yields on the Class
A-I Certificates and Class A-II Certificates will be sensitive to the rate and
timing of principal prepayments and defaults on the mortgage loans in their
respective loan groups.]
[Class A-I Certificates
The Class A-I Certificates are subject to various priorities for payment of
principal as described in this prospectus supplement. Distributions of principal
on the Class A-I Certificates having an earlier priority of
S-13
<PAGE>
payment will be affected by the rates of prepayment of the group I loans early
in the life of the mortgage pool. Those classes of Class A-I Certificates with a
later priority of payment will be affected by the rates of prepayment of the
group I loans experienced both before and after the commencement of principal
distributions on those classes.]
See "Description of the Certificates--Principal Distributions" in this
prospectus supplement.
[Class A-I-6 Certificates
It is not expected that the Class A-I-6 Certificates will receive any
distributions of principal until the distribution date in __________. Until the
distribution date in ____________, the Class A-I-6 Certificates may receive a
portion of principal prepayments that is smaller than its pro rata share of
principal payments from the mortgage loans.]
[Class IO Certificates
An extremely rapid rate of principal prepayments on the mortgage loans could
result in the failure of investors in the Class IO Certificates to fully recover
their initial investments.]
See "Material Yield and Prepayment Considerations" and especially "--Fixed Strip
Certificate Yield Considerations" in this prospectus supplement.
S-14
<PAGE>
INTRODUCTION
The depositor will establish a trust with respect to Series _______ on the
closing date, under a pooling and servicing agreement among the depositor, the
master servicer and the trustee, dated as of the cut-off date. On the closing
date, the depositor will deposit into the trust a pool of mortgage loans, that
in the aggregate will constitute a mortgage pool, secured by closed end,
fixed-rate, fully amortizing and Balloon Loans.
Some capitalized terms used in this prospectus supplement have the
meanings given below under "Description of the Certificates--Glossary of Terms"
or in the prospectus under "Glossary."
DESCRIPTION OF THE MORTGAGE POOL
General
The mortgage pool will consist of approximately _______ mortgage loans
having an aggregate principal balance outstanding as of the close of business on
the day prior to the cut-off date of $_______. The mortgage pool will consist of
two groups of mortgage loans, Loan Group I and Loan Group II, and each, a Loan
Group, designated as the Group I Loans and Group II Loans. _______% of the
mortgage loans are secured by second liens on fee simple or leasehold interests
in one- to four-family residential real properties and the remainder are secured
by first liens. In each case, the property securing the mortgage loan is
referred to as the mortgaged property. The mortgage loans will consist of
fixed-rate, fully-amortizing and balloon payment mortgage loans with terms to
maturity of approximately five, ten, fifteen, twenty or twenty-five years with
respect to __%, __%, __%, __% and __% of the mortgage loans, respectively, from
the date of origination or modification. With respect to mortgage loans which
have been modified, references in this prospectus supplement to the date of
origination shall be deemed to be the date of the most recent modification. All
percentages of the mortgage loans described in this prospectus supplement are
approximate percentages by aggregate cut-off date balance unless otherwise
indicated.
All of the mortgage loans were purchased by the depositor through its
affiliate, Residential Funding Corporation in that capacity, the seller from
banks, savings and loan associations, mortgage bankers, investment banking firms
and other home equity loan originators and sellers, under the seller's Home
Equity Program, on a servicing released basis. __% of the mortgage loans were
acquired by the seller from HomeComings Financial Network, Inc., an affiliate of
the seller. No unaffiliated seller sold more than __% of the mortgage loans to
Residential Funding. All of the mortgage loans will be serviced by GMAC Mortgage
Corporation. See "--The Initial Subservicer" below.
All of the mortgage loans were underwritten in conformity with or in a
manner generally consistent with the Home Equity Program. See "--Underwriting
Standards" below.
S-15
<PAGE>
The depositor and Residential Funding will make some limited
representations and warranties regarding the mortgage loans as of the closing
date. The depositor and Residential Funding will be required to repurchase or
substitute for any mortgage loan as to which a breach of its representations and
warranties with respect to that mortgage loan occurs if the breach materially
adversely affects the interests of the certificateholders or the credit enhancer
under "Description of the Certificates-Certificate Guaranty Insurance Policy" in
that mortgage loan. Each seller has made or will make some limited
representations and warranties regarding the related mortgage loans, as of the
date of their purchase by Residential Funding. However, the representations and
warranties will not be assigned to the trustee for the benefit of the holders of
the certificates, and therefore a breach of the representations and warranties
will not be enforceable on behalf of the trust. See "Mortgage Loan
Program--Qualifications of Sellers" and "--Representations Relating to Mortgage
Loans" and "Description of the Certificates--Review of Mortgage Loans" in the
prospectus.
Payments on the Simple Interest Mortgage Loans
__% and __% of the Group I Loans and Group II Loans, respectively, are
Simple Interest Mortgage Loans, which require that each monthly payment consist
of an installment of interest which is calculated according to the simple
interest method on the basis of the outstanding principal balance of that
mortgage loan multiplied by the mortgage rate and further multiplied by a
fraction, the numerator of which is the number of days in the period elapsed
since the preceding payment of interest was made and the denominator of which is
the number of days in the annual period for which interest accrues on that
mortgage loan. As payments are received, the amount received is applied first to
interest accrued to the date of payment and the balance is applied to reduce the
unpaid principal balance.
Accordingly, if a mortgagor pays a fixed monthly installment before its
scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be less than it would have been
had the payment been made as scheduled, and the portion of the payment applied
to reduce the unpaid principal balance will be correspondingly greater. However,
the next succeeding payment will result in an allocation of a greater portion of
the payment allocated to interest if that payment is made on its scheduled due
date.
On the other hand, if a mortgagor pays a fixed monthly installment after
its scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be greater than it would have
been had the payment been made as scheduled, and the remaining portion, if any,
of the payment applied to reduce the unpaid principal balance will be
correspondingly less. If each scheduled payment is made on or prior to its
scheduled due date, the principal balance of the mortgage loan will amortize in
the manner described in the preceding paragraph. However, if the mortgagor
consistently makes scheduled payments after the scheduled due date the mortgage
loan will amortize more slowly than scheduled. Any remaining unpaid principal is
payable on the final maturity date of the mortgage loan.
S-16
<PAGE>
The remaining __% and __% of the Group I Loans and Group II Loans,
respectively, are Actuarial Mortgage Loans, on which 30 days of interest is owed
each month irrespective of the day on which the payment is received.
Balloon Loans
__% and __% of the Group I Loans and Group II Loans, respectively, are
Balloon Loans, which require monthly payments of principal based on a 30-year
amortization schedule and have scheduled maturity dates of approximately fifteen
years from the due date of the first monthly payment, in each case leaving a
Balloon Payment on the respective scheduled maturity date. The existence of a
Balloon Payment will require the related mortgagor to refinance the mortgage
loan or to sell the mortgaged property on or prior to the scheduled maturity
date. The ability of a mortgagor to accomplish either of these goals will be
affected by a number of factors, including the level of available mortgage rates
at the time of sale or refinancing, the mortgagor's equity in the related
mortgaged property, the financial condition of the mortgagor, tax laws,
prevailing general economic conditions and the terms of any related first lien
mortgage loan. None of the depositor, the master servicer or the trustee is
obligated to refinance any Balloon Loan. The policy issued by the credit
enhancer will provide coverage on any losses incurred upon liquidation of a
Balloon Loan arising out of or in connection with the failure of a mortgagor to
make its Balloon Payment. See "Description of the Certificates--Certificate
Guaranty Insurance Policy" in this prospectus supplement.
Mortgage Pool Characteristics
All of the mortgage loans have principal and interest payable monthly on
various days of each month as specified in the mortgage note, each a due date.
In connection with each mortgage loan that is secured by a leasehold
interest, the related seller will have represented to Residential Funding that,
among other things:
o the use of leasehold estates for residential properties is an
accepted practice in the area where the related mortgaged property
is located;
o residential property in the area consisting of leasehold estates is
readily marketable;
o the lease is recorded and no party is in any way in breach of any
provision of the lease;
o the leasehold is in full force and effect and is not subject to any
prior lien or encumbrance by which the leasehold could be terminated
or subject to any charge or penalty; and
o the remaining term of the lease does not terminate less than ten
years after the maturity date of that mortgage loan.
S-17
<PAGE>
__% of the Group I Loans and __% of the Group II Loans provide for payment
of a prepayment charge, if these loans prepay within a specified time period.
The prepayment charge generally is the maximum amount permitted under applicable
state law. __% of the Group I Loans and __% of the Group II Loans provide for
payment of a prepayment charge for full prepayments made within approximately
three years of the origination of the mortgage loans in an amount calculated in
accordance with the terms of the related mortgage note. With respect to the
remainder of the mortgage loans with a prepayment charge, the prepayment charge
is calculated in a different manner. No prepayment charges or late payment
charges received on the mortgage loans will be available for payment on the
certificates.
As of the cut-off date, no mortgage loan will be 30 days or more
delinquent in payment of principal and interest. For a description of the
methodology used to categorize mortgage loans as delinquent, see "--Delinquency
and Loss Experience of the Master Servicer's Portfolio," below.
As of the cut-off date, __% and __% of the Group I Loans and Group II
Loans, respectively, were High Cost Loans. Purchasers or assignees of any High
Cost Loan, including the trust, could be liable for all claims and subject to
all defenses that the borrower could assert against the originator of the loan.
Remedies available to the borrower include monetary penalties, as well as
rescission rights if appropriate disclosures were not given as required. See
"Risk Factors--Risk of Loss" in this prospectus supplement and "Material Legal
Aspects of Mortgage Loans and Related Matters--Anti-Deficiency Legislation and
Other Limitations on Lenders" in the prospectus.
No mortgage loan provides for deferred interest, negative amortization or
future advances.
With respect to each mortgage loan, the combined LTV ratio will be the
ratio, expressed as a percentage, of:
o the sum of:
o the original principal balance of the mortgage loan and
o any outstanding principal balance, at the time of origination
of the mortgage loan, of all other mortgage loans, if any,
secured by senior or subordinate liens on the related
mortgaged property, to
o the appraised value, or, to the extent permitted by Residential
Funding's Client Guide, the Stated Value.
The appraised value for any mortgage loan will be the appraised value of
the related mortgaged property determined in the appraisal used in the
origination of the mortgage loan, which may have been obtained at an earlier
time; provided that if the mortgage loan was originated simultaneously with or
not more than 12 months after a senior lien on the related mortgaged property,
the appraised value shall be the lesser of the appraised value at the
origination of the senior lien and the sales price for the mortgaged property.
S-18
<PAGE>
With respect to not more than __% and __% of the Group I Loans and Group
II Loans, respectively, the Stated Value will not be the appraised value, but
will be the value of the mortgaged property as stated by the related mortgagor
in his or her loan application. See "Mortgage Loan Program--Underwriting
Standards" in the prospectus and "Description of the Mortgage Pool--Underwriting
Standards" in this prospectus supplement.
__% and __% of the Group I Loans and Group II Loans, respectively, were
originated under full documentation underwriting programs.
Group I Loans
None of the Group I Loans were originated prior to ____________ or has a
maturity date later than ____________. No Group I Loan has a remaining term to
stated maturity as of the cut-off date of less than __ months. The weighted
average remaining term to stated maturity of the Group I Loans as of the cut-off
date is approximately __ months. The weighted average original term to stated
maturity of the Group I Loans as of the cut-off date is approximately __ months.
__% of the Group I Loans are fully amortizing and have original terms to
maturity of approximately five years, with a weighted average remaining term to
stated maturity of these Group I Loans of __ months. __% of the Group I Loans
are fully amortizing and have original terms of maturity of approximately ten
years, with a weighted average remaining term to stated maturity of these Group
I Loans of __ months. __% of the Group I Loans are fully amortizing and have
original terms to maturity of approximately fifteen years, with a weighted
average remaining term to stated maturity of these Group I Loans of __ months.
__% of the Group I Loans are fully amortizing and have original terms to
maturity of approximately twenty years, with a weighted average remaining term
to stated maturity of these Group I Loans of __ months. __% of the Group I Loans
are fully amortizing and have original terms to maturity of approximately
twenty-five years, with a weighted average remaining term to stated maturity of
these Group I Loans of __ months. The Balloon Loans in Loan Group I have
original terms to maturity of approximately fifteen years based on 30-year
amortization schedules, with a weighted average remaining term to stated
maturity of __ months.
Below is a description of some additional characteristics of the Group I
Loans as of the cut-off date, unless otherwise indicated. Unless otherwise
specified, all principal balances of the Group I Loans are approximate
percentages by aggregate principal balance of the Group I Loans as of the
cut-off date and are rounded to the nearest dollar.
Original Mortgage Loan Principal Balances of the Group I Loans
<TABLE>
<CAPTION>
Number of
Original Mortgage Loan Principal Mortgage Cut-off Date Percent of
Balances Loans Balance Group I Loans
- ------------------------------------------- --------------------- --------------------- -------------------------
<S> <C> <C> <C> <C>
$ - $ $ %
</TABLE>
S-19
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
$ - $ %
$ - $ %
$ - $ %
$ - $ %
$ - $ %
$ - $ %
$ - $ %
$ - $ %
$ - $ %
Greater than $ $ %
---------- --------------- -------------
Total.............................. $ %
========== ============== =============
</TABLE>
As of the cut-off date, the average unpaid principal balance of the Group
I Loans was approximately $_____.
Mortgage Rates of the Group I Loans
<TABLE>
<CAPTION>
Number of
Mortgage Cut-off Date Percent of
Mortgage Rate(%) Loans Balance Group I Loans
- ------------------------------------------- --------------------- --------------------- -------------------------
<S> <C> <C> <C>
- $ %
- %
- %
- %
- %
- %
- %
- %
- %
- %
- %
</TABLE>
S-20
<PAGE>
<TABLE>
<S> <C> <C> <C>
- %
- %
- %
---------- ----------------- ---------
Total.................... $ %
========== ================= =========
</TABLE>
As of the cut-off date, the weighted average mortgage rate of the Group I
Loans was approximately _____% per annum.
Original Combined LTV Ratios of the Group I Loans
<TABLE>
<CAPTION>
Number of
Mortgage Cut-off Date Percent of
Combined LTV Ratio(%) Loans Balance Group I Loans
- ------------------------------------------- --------------------- --------------------- -------------------------
<S> <C> <C> <C>
- $ %
- %
- %
- %
- %
- %
- %
- %
- %
- %
- %
------- --------------------- ---------
Total..................... $ %
======= ===================== =========
</TABLE>
The weighted average original combined LTV ratio of the Group I Loans was
approximately __% as of the cut-off date.
Junior Ratios of the Group I Loans
S-21
<PAGE>
<TABLE>
<CAPTION>
Number of
Mortgage Cut-off Date Percent of
Junior Ratio(%) Loans Balance Group I Loans
- ------------------------------------------- --------------------- --------------------- -------------------------
<S> <C> <C> <C>
- $ %
- %
- %
- %
- %
- %
- %
- %
- %
- %
---------- ---------- ---------
Total....................... $ %
========== ========== =========
</TABLE>
- ------------------
o Excludes mortgage loans secured by first liens on the related
mortgaged property. With respect to each mortgage loan secured by a
second lien on the related mortgaged property, the Junior Ratio is
the ratio of the original principal balance of the mortgage loan to
the sum of (i) the original principal balance of that mortgage loan,
and (ii) the unpaid principal balance of any senior lien at the time
of the origination of that mortgage loan.
The weighted average Junior Ratio as of the cut-off date was
approximately __%.
Geographic Distribution of Mortgaged Properties of the Group I Loans
<TABLE>
<CAPTION>
Number of
Mortgage Cut-off Date Percent of
State Loans Balance Group I Loans
- ------------------------------------------- --------------------- --------------------- -------------------------
<S> <C> <C> <C>
</TABLE>
S-22
<PAGE>
<TABLE>
<S> <C> <C> <C>
California....................................... $ %
Virginia......................................... %
Maryland......................................... %
New Jersey....................................... %
Colorado......................................... %
Other............................................ %
----- ----- -----
Total....................................... $ %
===== ===== =====
</TABLE>
o "Other" includes states and the District of Columbia that contain
less than 2.00% of the Group I Loans.
Mortgaged Property Types of the Group I Loans
<TABLE>
<CAPTION>
Number of
Mortgage Cut-off Date Percent of
Property Loans Balance Group I Loans
- ------------------------------------------- --------------------- --------------------- -------------------------
<S> <C> <C> <C>
Single Family Residence.................... $ %
PUD Detached............................... %
PUD Attached............................... %
Condominium................................ %
Multifamily (2-4 Units).................... %
Townhouse/Rowhouse Attached................ %
Townhouse/Rowhouse Detached................ %
Manufactured Home.......................... %
----- ----- -----
Total...................................... $ %
===== ===== ===========
</TABLE>
S-23
<PAGE>
Occupancy Types of the Group I Loans
<TABLE>
<CAPTION>
Number of
Mortgage Cut-off Date Percent of
Occupancy (as indicated by martgagor) Loans Balance Group I Loans
- ------------------------------------------- ------------------- ----------------- ----------------
<S> <C> <C> <C>
Primary Residence........................... $ %
----- ---------- ---
Total....................................... $ %
===== ========== ===
</TABLE>
Lien Priority of the Group I Loans
<TABLE>
<CAPTION>
Number of
Mortgage Cut-off Date Percent of
Lien Priority Loans Balance Group I Loans
- ------------------------------------------- ------------------- ----------------- ----------------
<S> <C> <C> <C>
Second Lien................................ $ %
----- ---------- ---
Total............................ $ %
===== ========== ===
</TABLE>
Remaining Term of Scheduled Maturity of the Group I Loans
<TABLE>
<CAPTION>
Number of
Months Remaining to Scheduled Mortgage Cut-off Date Percent of
Maturity Loans Balance Group I Loans
- ------------------------------------------- ------------------- ----------------- ----------------
<S> <C> <C> <C>
$ %
%
%
%
%
%
</TABLE>
S-24
<PAGE>
<TABLE>
<S> <C> <C> <C>
%
----- ---------- ---
Total......................... $ %
===== ========== ===
</TABLE>
The weighted average remaining term to maturity of the Group I Loans
as of the cut-off date was approximately ___ months.
Year of Origination of the Group I Loans
<TABLE>
<CAPTION>
Number of
Mortgage Cut-off Date Percent of
Year of Origination Loans Balance Group I Loans
- ------------------------------------------- ------------------- ----------------- ----------------
<S> <C> <C> <C>
$ %
%
%
%
%
----- ---------- ---
Total............................ $ %
===== ========== ===
</TABLE>
Group II Loans
None of the Group II Loans were originated prior to _______ or has a
maturity date later than _______. No Group II Loan has a remaining term to
stated maturity as of the cut-off date of less than __ months. The weighted
average remaining term to stated maturity of the Group II Loans as of the
cut-off date is approximately __ months. The weighted average original term to
stated maturity of the Group II Loans as of the cut-off date is approximately __
months. __% of the Group II Loans are fully amortizing and have original terms
to maturity of approximately five years, with a weighted average remaining term
to stated maturity of these Group II Loans of __ months. __% of the Group II
Loans are fully amortizing and have original terms of maturity of approximately
ten years, with a weighted average remaining term to stated maturity of these
Group II Loans of __ months. __% of the Group II Loans are fully amortizing and
have original terms to maturity of
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<PAGE>
approximately fifteen years, with a weighted average remaining term to stated
maturity of these Group II Loans of __ months. __% of the Group II Loans are
fully amortizing and have original terms to maturity of approximately twenty
years, with a weighted average remaining term to stated maturity of these Group
II Loans of __ months. __% of the Group II Loans are fully amortizing have
original terms to maturity of approximately twenty-five years, with a weighted
average remaining term to stated maturity of these Group II Loans of __ months.
The Balloon Loans in Loan Group II have original terms to maturity of
approximately fifteen years based on 30-year amortization schedules, with a
weighted average remaining term to stated maturity of __ months.
Below is a description of some additional characteristics of the Group II
Loans as of the cut-off date unless otherwise indicated. Unless otherwise
specified, all principal balances of the Group II Loans are approximate
percentages by aggregate principal balance of the Group II Loans as of the
cut-off date and are rounded to the nearest dollar.
Original Mortgage Loan Principal Balances of the Group II Loans
<TABLE>
<CAPTION>
Percent of
Original Mortgage Loan Principal Number of Cut-off Date Group II
Balances Mortgage Loans Balance Loans
- ---------------------------------------- -------------- ------------ -----------
<S> <C> <C> <C>
$ - $ $ %
$ - $
$ - $
$ - $
$ - $
$ - $
$ - $
$ - $
$ - $
$ - $
Greater than $
------- ----------- ----------
Total.................................... $ %
======= =========== ==========
</TABLE>
S-26
<PAGE>
As of the cut-off date, the average unpaid principal balance of the Group
II Loans was approximately $____.
Mortgage Rates of the Group II Loans
<TABLE>
<CAPTION>
Percent of
Number of Cut-off Date Group II
Mortgage Rate (%) Mortgage-Loans Balance Loans
- ----------------- -------------- ------------ ----------
<S> <C> <C> <C>
$ %
-------------- ------------ ----------
Total.................... $ %
============== ============ ==========
</TABLE>
As of the cut-off date, the weighted average mortgage rate of the Group II
Loans was approximately ___% per annum.
S-27
<PAGE>
Original Combined LTV Ratios of the Group II Loans
<TABLE>
<CAPTION>
Percent of
Number of Cut-off Date Group II
Combined LTV Ratio (%) Mortgage-Loans Balance Loans
- ---------------------- -------------- ------------ ----------
<S> <C> <C> <C>
$ %
-------------- ------------ ----------
Total.................... $ %
============== ============ ==========
</TABLE>
The weighted average original combined LTV ratio of the Group II Loans was
approximately ___% as of the cut-off date.
Junior Ratios of the Group II Loans
<TABLE>
<CAPTION>
Percent of
Number of Cut-off Date Group-II
Junior Ratio (%) Mortgage-Loans Balance Loans
- ----------------- -------------- ------------ ----------
<S> <C> <C> <C>
$ %
</TABLE>
S-28
<PAGE>
<TABLE>
<S> <C> <C> <C>
-------------- ------------ ----------
Total.................... $ %
============== ============ ==========
</TABLE>
- ----------
o Excludes mortgage loans secured by first liens on the related
mortgaged property. With respect to each mortgage loan secured by a
second lien on the related mortgaged property, the Junior Ratio is
the ratio of the original principal balance of the mortgage loan to
the sum of (i) the original principal balance of that mortgage loan,
and (ii) the unpaid principal balance of any senior lien at the time
of the origination of that mortgage loan.
The weighted average Junior Ratio of the Group II Loans as of the cut-off
date was approximately ___%.
Geographic Distribution of Mortgaged Properties of the Group II Loans
<TABLE>
<CAPTION>
Percent of
Number of Cut-off Date Group II
State Mortgage-Loans Balance Loans
- ------------------------------- -------------- ------------ ----------
<S> <C> <C> <C>
California.................... $ %
Virginia......................
</TABLE>
S-29
<PAGE>
<TABLE>
<S> <C> <C> <C>
Maryland......................
Washington....................
Florida.......................
Colorado......................
Michigan......................
Georgia.......................
Other.........................
-------------- ------------ ----------
Total.................... $ %
============== ============ ==========
</TABLE>
o "Other" includes states and the District of Columbia that contain
less than ___% of the Group II Loans.
Mortgaged Property Types of the Group II Loans
<TABLE>
<CAPTION>
Percent of
Number of Cut-off Date Group II
Property Mortgage-Loans Balance Loans
- ------------------------------- -------------- ------------ ----------
<S> <C> <C> <C>
Single Family Residence........ $ %
PUD Detached...................
Condominium....................
PUD Attached...................
Townhouse/Rowhouse Attached....
Manufactured Home..............
-------------- ------------ ----------
Total.................... $ %
============== ============ ==========
</TABLE>
Occupancy Types of the Group II Loans
S-30
<PAGE>
<TABLE>
<CAPTION>
Percent of
Number of Cut-off Date Group II
Occupancy (as indicated by mortgagor) Mortgage-Loans Balance Loans
- ------------------------------------- -------------- ------------ ----------
<S> <C> <C> <C>
Primary........................ $ %
Second/Vacation................
-------------- ------------ ----------
Total.................... $ %
============== ============ ==========
</TABLE>
Lien Priority of the Group II Loans
<TABLE>
<CAPTION>
Percent of
Number of Cut-off Date Group II
Lien Priority Mortgage-Loans Balance Loans
- ------------------------------------- -------------- ------------ ----------
<S> <C> <C> <C>
First Lien..................... $ %
Second Lien....................
-------------- ------------ ----------
Total.................... $ %
============== ============ ==========
</TABLE>
Remaining Term of Scheduled Maturity of the Group II Loans
<TABLE>
<CAPTION>
Percent of
Months Remaining to Scheduled Number of Cut-off Date Group II
Maturity Mortgage-Loans Balance Loans
- ------------------------------------- -------------- ------------ ----------
<S> <C> <C> <C>
$ %
</TABLE>
S-31
<PAGE>
<TABLE>
<S> <C> <C> <C>
-------------- ------------ ----------
Total.................... $ %
============== ============ ==========
</TABLE>
The weighted average remaining term to maturity of the Group II Loans of
the cut-off date was approximately ___ months.
Year of Origination of the Group II Loans
<TABLE>
<CAPTION>
Percent of
Number of Cut-off Date Group II
Year of Origination Mortgage-Loans Balance Loans
- ------------------------------------- -------------- ------------ ----------
<S> <C> <C> <C>
$ %
-------------- ------------ ----------
Total.................... $ %
============== ============ ==========
</TABLE>
Credit Scores are obtained by many mortgage lenders in connection with
mortgage loan applications to help assess a borrower's credit-worthiness. In
addition, Credit Scores may be obtained by Residential Funding after the
origination of a mortgage loan if the seller does not provide to Residential
Funding a Credit Score. Credit Scores are obtained from credit reports provided
by various credit reporting organizations, each of which may employ
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<PAGE>
differing computer models and methodologies. The Credit Score is designed to
assess a borrower's credit history at a single point in time, using objective
information currently on file for the borrower at a particular credit reporting
organization. Information utilized to create a Credit Score may include, among
other things, payment history, delinquencies on accounts, levels of outstanding
indebtedness, length of credit history, types of credit, and bankruptcy
experience. Credit Scores range from approximately 350 to approximately 840,
with higher scores indicating an individual with a more favorable credit history
compared to an individual with a lower score. However, a Credit Score purports
only to be a measurement of the relative degree of risk a borrower represents to
a lender, i.e., a borrower with a higher score is statistically expected to be
less likely to default in payment than a borrower with a lower score. In
addition, it should be noted that Credit Scores were developed to indicate a
level of default probability over a two-year period, which does not correspond
to the life of a mortgage loan. Furthermore, Credit Scores were not developed
specifically for use in connection with mortgage loans, but for consumer loans
in general, and assess only the borrower's past credit history. Therefore, a
Credit Score does not take into consideration the differences between mortgage
loans and consumer loans generally, or the specific characteristics of the
related mortgage loan, for example, the combined LTV ratio, the collateral for
the mortgage loan, or the debt to income ratio. There can be no assurance that
the Credit Scores of the mortgagors will be an accurate predictor of the
likelihood of repayment of the related mortgage loans or that any mortgagor's
Credit Score would not be lower if obtained as of the date of this prospectus
supplement.
The following tables described information as to the Credit Scores of the
related mortgagors as used in the origination of the Group I Loans and Group II
Loans.
Credit Score Distribution of the Group I Loans
<TABLE>
<CAPTION>
Percent of
Number of Cut-off Date Group I
Credit Score Range Mortgage-Loans Balance Loans
- ------------------------------------- -------------- ------------ ----------
<S> <C> <C> <C>
$ %
</TABLE>
S-33
<PAGE>
<TABLE>
<S> <C> <C> <C>
%
-------------- ------------ ----------
Total for Loan Group I........ $ %
============== ============ ==========
</TABLE>
Credit Score Distribution of the Group II Loans
<TABLE>
<CAPTION>
Percent of
Number of Cut-off Date Group II
Credit Score Range Mortgage-Loans Balance Loans
- ------------------------------------- -------------- ------------ ----------
<S> <C> <C> <C>
$ %
-------------- ------------ ----------
Total for Loan Group II....... $ %
============== ============ ==========
</TABLE>
S-34
<PAGE>
Underwriting Standards
The following is a brief description of the various underwriting standards
and procedures applicable to the mortgage loans. For a more detailed description
of the underwriting standards and procedures applicable to the mortgage loans,
see "Mortgage Loan Program--Underwriting Standards" in the prospectus.
Residential Funding's underwriting standards with respect to the mortgage
loans generally will conform to those published in the Client Guide, including
the provisions of the Client Guide applicable to the Home Equity Program. The
underwriting standards as described in the Client Guide are continuously revised
based on prevailing conditions in the residential mortgage market and the market
for mortgage securities. Under the Client Guide, the mortgage loans are
generally underwritten by the related seller or by a designated third party, and
Residential Funding or a designated third party may perform only sample quality
assurance reviews to determine whether mortgage loans purchased by it were
underwritten in accordance with applicable standards.
Each seller is an entity approved by Residential Funding for participation
in the Home Equity Program. Each seller was required at the time of its approval
to meet eligibility requirements, including minimum origination and net worth
levels determined by Residential Funding. However, there can be no assurance
that any seller currently meets these standards. In most cases, the seller will
have originated the mortgage loans sold by it to Residential Funding either
directly or through correspondents or loan brokers, and will have underwritten
each mortgage loan prior to funding.
The underwriting standards described in the Client Guide with respect to
mortgage loans originated under the Home Equity Program generally require that
the mortgage loans be fully documented or that the mortgage loans be supported
by alternative documentation. For fully documented loans, a prospective borrower
is required to fill out a detailed application providing pertinent credit
information. For alternatively documented loans, a borrower may demonstrate
income and employment directly by providing alternative documentation in the
form of copies of the borrower's own records relating thereto, rather than by
having the originator obtain independent verifications from third parties,
including the borrower's employer or mortgage servicer.
In determining the adequacy of the mortgaged property as collateral for a
mortgage loan originated under the Home Equity Program, an appraisal is made of
each property considered for financing. Mortgage loans included in the mortgage
pool typically were originated subject to a maximum combined LTV ratio of 100%.
The mortgage loans were also subject to a maximum total monthly debt to income
ratio of 55%. There can be no assurance that the combined LTV ratio or the debt
to income ratio for any mortgage loans will not increase from the levels
established at origination.
The underwriting standards described in the Client Guide with respect to
mortgage loans originated under the Home Equity Program may be varied in
appropriate cases. There can be no
S-35
<PAGE>
assurance that every mortgage loan was originated in conformity with the
applicable underwriting standards in all material respects, or that the quality
or performance of the mortgage loans will be equivalent under all circumstances.
Optional Repurchase of Defaulted Mortgage Loans
Under the pooling and servicing agreement, the master servicer will have
the option to purchase from the trust any mortgage loan that is 60 days or more
delinquent at a purchase price equal to the unpaid principal balance of the
mortgage loan plus its accrued interest.
The Initial Subservicer
GMAC Mortgage Corporation, an affiliate of the depositor and the master
servicer, is the initial subservicer of the mortgage loans. GMAC Mortgage will
act as initial subservicer for the mortgage loans under a subservicing agreement
with the master servicer. GMAC Mortgage is a wholly-owned indirect subsidiary of
General Motors Acceptance Corporation. GMAC Mortgage is engaged in the mortgage
banking business, including the origination, purchase, sale and servicing of
residential loans.
GMAC Mortgage's executive offices are located at 100 Witmer Road, Horsham,
Pennsylvania 19044-0963.
Residential Funding
Residential Funding will be responsible for master servicing the mortgage
loans. Responsibilities of Residential Funding will include the receipt of funds
from subservicers, the reconciliation of servicing activity, investor reporting
and remittances to the trustee to accommodate distributions to
certificateholders. In addition, Residential Funding will take over the primary
servicing of any mortgage loans currently subserviced by GMAC Mortgage, if the
mortgage loans become delinquent. Residential Funding is not required to make
advances relating to delinquent payments of principal and interest on the
mortgage loans.
For information regarding foreclosure procedures, see "Description of the
Certificates--Realization Upon Defaulted Mortgage Loans" in the prospectus.
Servicing and charge-off policies and collection practices may change over time
in accordance with the Residential Funding's business judgment, changes in
Residential Funding's portfolio of real estate secured home equity mortgage
loans that it services for its clients and applicable laws and regulations, and
other considerations.
S-36
<PAGE>
Delinquency and Loss Experience of the Master Servicer's Portfolio
The following tables summarize the delinquency and loss experience for all
closed-end home equity loans originated or acquired by the master servicer. The
data presented in the following tables are for illustrative purposes only, and
there is no assurance that the delinquency and loss experience of the mortgage
loans will be similar to that described below.
As used in this prospectus supplement, a loan is considered to be "30 to
59 days" or "30 or more days" delinquent when a payment due on any due date
remains unpaid as of the close of business on the next following monthly due
date. However, since the determination as to whether a loan falls into this
category is made as of the close of business on the last business day of each
month, a loan with a payment due on July 1 that remained unpaid as of the close
of business on July 31 would still be considered current as of July 31. If that
payment remained unpaid as of the close of business on August 31, the loan would
then be considered to be 30 to 59 days delinquent. Delinquency information
presented in this prospectus supplement as of the cut-off date is determined and
prepared as of the close of business on the last business day immediately prior
to the cut-off date.
The information in the tables below has not been adjusted to eliminate the
effect of the significant growth in the size of the master servicer's home
equity mortgage loan portfolio during the periods shown. Accordingly, loss and
delinquency as percentages of aggregate principal balance of these home equity
mortgage loans serviced for each period would be higher than those shown if some
of the home equity mortgage loans were artificially isolated at a point in time
and the information showed the activity only with respect to the home equity
mortgage loans.
There can be no assurance that the delinquency experience described below
will be representative of the results that may be experienced with respect to
the mortgage loans serviced by GMAC Mortgage.
[INSERT DELINQUENCY TABLES HERE]
Additional Information
The description in this prospectus supplement of the mortgage pool and the
mortgaged properties is based upon the mortgage pool as constituted at the close
of business on the cut-off date. Prior to the issuance of the offered
certificates, mortgage loans may be removed from the mortgage pool as a result
of incomplete documentation or otherwise, if the depositor deems the removal
necessary or appropriate. A limited number of other mortgage loans may be added
to the mortgage pool prior to the issuance of the certificates offered by this
prospectus supplement. The depositor believes that the information in this
prospectus supplement will be substantially representative of the
characteristics of the mortgage pool as it will be constituted at the time the
certificates offered hereby
S-37
<PAGE>
are issued although the range of mortgage rates and maturities and some other
characteristics of the mortgage loans in the mortgage pool may vary.
A current report on Form 8-K will be available to purchasers of the
certificates offered hereby and will be filed, together with the pooling and
servicing agreement, with the Securities and Exchange Commission within fifteen
days after the initial issuance of the certificates. In the event mortgage loans
are removed from or added to the mortgage pool as described in the preceding
paragraph, that removal or addition will be noted in the current report.
DESCRIPTION OF THE CERTIFICATES
General
The Series _______ Home Equity Loan Pass-Through Certificates will include
the following seven classes of Class A Certificates and one Class of Class IO
Certificates:
[ o Class A-I-1 Certificates
o Class A-I-2 Certificates
o Class A-I-3 Certificates
o Class A-I-4 Certificates
o Class A-I-5 Certificates
o Class A-I-6 Certificates or the Lockout Certificates; and
together with the Class A-I-1 Certificates, Class A-I-2
Certificates, Class A-I-3 Certificates, Class A-I-4
Certificates and Class A-I-5 Certificates, the Class A-I
Certificates
o Class A-II Certificates; and
o Class IO Certificates, or the Fixed Strip Certificates.
In addition to the offered certificates, the Series _______ Home Equity
Loan Pass-Through Certificates will include two classes of subordinate
certificates which are designated as the Class R-I Certificates and Class R-II
Certificates, together, the Residual Certificates. Only the Class A Certificates
and the Class IO Certificates are offered by this prospectus supplement.
The certificates will evidence the entire beneficial ownership interest in
the trust. The trust will consist of:
o the mortgage loans
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<PAGE>
o the assets as from time to time that are identified as
deposited in respect of the mortgage loans in the Custodial
Account and in the Certificate Account and belonging to the
trust
o property acquired by foreclosure of the mortgage loans or deed
in lieu of foreclosure
o any applicable insurance policies
o the policy; and
o all proceeds of the foregoing.
The Class A-I Certificates and Class A-II Certificates correspond to the
Group I Loans and Group II Loans, respectively, as described in the tables in
this prospectus supplement under "Description of the Mortgage Pool--Mortgage
Pool Characteristics."
The Class A Certificates will be issued in minimum denominations of
$25,000, or a $2,000,000 Notional Amount, in the case of the Fixed Strip
Certificates, and integral multiples of $1 in excess thereof.
Book-Entry Registration of the Offered Certificates
General. Holders of the Class A Certificates, so long as the Class A
Certificates are registered in the name of Cede & Co., are collectively referred
to as the DTC registered certificates. The DTC registered certificateholders may
elect to hold their DTC registered certificates through DTC in the United
States, or Cedelbank, formerly Cedel Bank, societe anonyme, a professional
depository which holds securities for its participating organizations, or Cedel
customers, or Euroclear in Europe, if they are Euroclear participants or Cedel
customers, as applicable, of their systems, or indirectly through organizations
which are participants or customers, as applicable, in their systems.
The DTC registered certificates will be issued in one or more securities
which equal the aggregate Certificate Principal Balance or Notional Amount of
the DTC registered certificates and will initially be registered in the name of
Cede & Co., the nominee of DTC. Cedelbank and Euroclear will hold omnibus
positions on behalf of their participants through customers' securities accounts
in Cedelbank's and Euroclear's names on the books of their respective
depositaries, in those capacities, individually referred to as the relevant
depositary and collectively referred to as the European depositaries, which in
turn will hold these positions in customers' securities accounts in the
depositories' names on the books of DTC. Except as described below, no DTC
registered certificateholder will be entitled to receive a physical certificate
in fully registered form, or a definitive certificate, representing that
security. Unless and until definitive certificates are issued for the DTC
registered certificates under the limited circumstances described in this
prospectus supplement, all references to actions by certificateholders with
respect to the DTC registered certificates shall refer to actions taken by DTC
upon instructions from its participants, and all references in this prospectus
supplement to distributions, notices, reports and statements to
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<PAGE>
certificateholders with respect to the DTC registered certificates shall refer
to distributions, notices, reports and statements to DTC or Cede & Co., as the
registered holder of the DTC registered certificates, for distribution to
beneficial owners by DTC in accordance with DTC procedures. DTC registered
certificateholders will not be "Holders" as that term is used in the pooling and
servicing agreement.
The DTC registered certificateholder's ownership of a DTC registered
certificate will be recorded on the records of the brokerage firm, bank, thrift
institution or other financial intermediary that maintains the DTC registered
certificateholder's account for that purpose. In turn, the financial
intermediary's ownership of the DTC registered certificates will be recorded on
the records of DTC, or of a firm that is a participant and acts as agent for the
financial intermediary, whose interest will in turn be recorded on the records
of DTC, if the DTC registered certificateholder's financial intermediary is not
a DTC participant and on the records of Cedelbank or Euroclear, as appropriate.
DTC registered certificateholders will receive all payments of principal
and interest on the DTC registered certificates from the trustee through DTC and
DTC participants. While the DTC registered certificates are outstanding , except
under the circumstances described below, under the rules, regulations and
procedures creating and affecting DTC and its operations, DTC is required to
make book-entry transfers among participants on whose behalf it acts with
respect to the DTC registered certificates and is required to receive and
transmit payments of principal and interest on the DTC registered certificates.
Participants and indirect participants with whom DTC registered
certificateholders have accounts with respect to DTC registered certificates are
similarly required to make book-entry transfers and receive and transmit the
payments on behalf of their respective DTC registered certificateholders.
Accordingly, although DTC registered certificateholders will not possess
physical certificates, the rules provide a mechanism by which DTC registered
certificateholders will receive payments and will be able to transfer their
interest.
Unless and until definitive certificates are issued, DTC registered
certificateholders who are not participants may transfer ownership of DTC
registered certificates only through participants and Indirect participants by
instructing the participants and indirect participants to transfer the DTC
registered certificates, by book-entry transfer, through DTC for the account of
the purchasers of the DTC registered certificates, which account is maintained
with their respective participants. Under the rules and in accordance with DTC's
normal procedures, transfers of ownership of DTC registered certificates will be
executed through DTC and the accounts of the respective participants at DTC will
be debited and credited. Similarly, the participants and indirect participants
will make debits or credits, as the case may be, on their records on behalf of
the selling and purchasing DTC registered certificateholders.
Under a book-entry format, DTC registered certificateholders of the DTC
registered certificates may experience some delay in their receipt of payments,
since the payments will be forwarded by the trustee to Cede & Co.. Payments with
respect to DTC registered certificates held through Cedelbank or Euroclear will
be credited to the cash accounts of Cedelbank customer or Euroclear participants
in accordance with the relevant system's rules and procedures, to the extent
S-40
<PAGE>
received by the relevant depositary. The payments will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
Because DTC can only act on behalf of financial intermediaries, the ability of a
DTC registered certificateholder to pledge DTC registered certificates to
persons or entities that do not participate in the Depositary system, or
otherwise take actions relating to the DTC registered certificates, may be
limited due to the lack of physical certificates for the DTC registered
certificates. In addition, issuance of the DTC registered certificates in
book-entry form may reduce the liquidity of the DTC registered certificates in
the secondary market since some potential investors may be unwilling to purchase
securities for which they cannot obtain physical certificates.
DTC has advised the trustee that, unless and until definitive certificates
are issued, DTC will take any action permitted to be taken by the holders of the
DTC registered certificates under the pooling and servicing agreement only at
the direction of one or more financial intermediaries to whose DTC accounts the
DTC registered certificates are credited, to the extent that the actions are
taken on behalf of financial intermediaries whose holdings include the DTC
registered certificates. Cedelbank or the Euroclear operator, as the case may
be, will take any other action permitted to be taken by holders of DTC
registered certificates under the pooling and servicing agreement on behalf of a
Cedelbank customer or Euroclear participant only in accordance with its relevant
rules and procedures and subject to the ability of the relevant depositary to
effect the actions on its behalf through DTC. DTC may take actions, at the
direction of the related participants, with respect to some DTC registered
certificates which conflict with actions taken with respect to other DTC
registered certificates.
Definitive certificates will be issued to DTC registered
certificateholders of the DTC registered certificates, or their nominees, rather
than to DTC, if:
o the trustee determines that the DTC is no longer willing,
qualified or able to discharge properly its responsibilities
as nominee and depository with respect to the DTC registered
certificates and the trustee is unable to locate a qualified
successor,
o the trustee elects to terminate a book-entry system through
DTC or
o after the occurrence of an event of default, under the pooling
and servicing agreement, DTC registered certificateholders of
any class aggregating at least a majority of the outstanding
voting rights of the DTC registered certificates advise the
DTC through the financial intermediaries and the DTC
participants in writing that the continuation of a book-entry
system through DTC, or a successor thereto, is no longer in
the best interests of the DTC registered certificateholders.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the trustee will be required to notify all DTC registered
certificateholders of the occurrence of the event and the availability through
DTC of definitive certificates. Upon surrender by DTC of the global certificate
or certificates representing the DTC registered certificates and instructions
for re-registration, the trustee will issue and authenticate definitive
certificates, and thereafter the trustee will recognize the holders of the
definitive certificates as holders under the pooling and servicing agreement.
S-41
<PAGE>
Although DTC, Cedelbank and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of DTC registered certificates among
participants of DTC, Cedelbank and Euroclear, they are under no obligation to
perform or continue to perform the procedures and the procedures may be
discontinued at any time. See Annex I hereto and "Description of the
Certificates--Form of Certificates" in the prospectus.
DTC has advised the depositor that management of DTC is aware that some
computer applications, systems and the like for processing data that are
dependent upon calendar dates, including dates before, on and after January 1,
2000, may encounter Y2K problems. DTC has informed its participants and other
members of the financial community that it has developed and is implementing a
program so that its systems, as they relate to DTC services continue to function
appropriately. This program includes a technical assessment and a remediation
plan, each of which is complete. Additionally, DTC's plan includes a testing
phase, which, DTC has advised the Industry, is expected to be completed within
appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to issuers and their agents, as
well as DTC's participants and third party vendors from whom DTC licenses
software and hardware, and third party vendors on whom DTC relies for
information or the provision of services, including telecommunication and
electrical utility service providers, among others. DTC has informed the
industry that it is contacting and will continue to contact third party vendors
from whom DTC acquires services to
o impress upon them the importance of those services being Y2K
compliant; and
o determine the extent of their efforts for Y2K remediation and,
as appropriate, testing of their services. In addition, DTC is
in the process of developing any contingency plans as it deems
appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided to the industry for informational purposes only and is not intended to
serve as a representation, warranty or contract modification of any kind.
None of the depositor, the master servicer or the trustee will have any
liability for any actions taken by DTC or its nominee, including, without
limitation, actions for any aspect of the records relating to or payments made
on account of beneficial ownership interests in the DTC registered certificates
held by Cede & Co., as nominee for DTC, or for maintaining, supervising or
reviewing any records relating to the beneficial ownership interests.
For additional information regarding DTC and the DTC registered
certificates, see "Description of the Certificates--Form of Certificates" in the
prospectus.
Glossary of Terms
S-42
<PAGE>
Accrued Certificate Interest --With respect to any distribution date, an
amount equal to:
o in the case of each class of offered certificates, other than
the Fixed Strip Certificates, interest accrued during the
related Interest Accrual Period on the Certificate Principal
Balance of the certificates of that class immediately prior to
that distribution date at the per annum rate at which interest
accrues on that class, or pass-through rate; and
o in the case of the Fixed Strip Certificates, interest accrued
during the related Interest Accrual Period on the Notional
Amount thereof for that distribution date at the pass-through
rate on that class for that distribution date, in each case
less interest shortfalls from the mortgage loans, if any,
allocated thereto for that distribution date, including:
o any Prepayment Interest Shortfall to the extent not
covered by Excess Cash Flow;
o the interest portions of Realized Losses; and
o any other interest shortfalls on the mortgage loans,
including interest shortfalls relating to the Soldiers'
and Sailors' Civil Relief Act of 1940 or similar
legislation or regulations, all allocated as described
below;
provided, however, that in the event that any shortfall described in the
immediately preceding three clauses above is allocated to the offered
certificates, or the Available Distribution Amount on any distribution date is
less than the Senior Interest Distribution Amount for that date, the amount of
any shortfall will be drawn under the policy and distributed to the holders of
the offered certificates. Notwithstanding the foregoing, if payments are not
made as required under the policy, any interest shortfalls may be allocated to
the certificates as described above. See "--Certificate Guaranty Insurance
Policy" below. Accrued Certificate Interest on each class of offered
certificates will be distributed on a pro rata basis. Accrued Certificate
Interest on each class of certificates is calculated on the basis of a 360-day
year consisting of twelve 30-day months.
Available Distribution Amount -- For any distribution date, an amount
equal to:
o the aggregate amount of actual payments on the mortgage loans
received during the related Collection Period after deduction
of the related servicing fees and any subservicing fees and
o some unscheduled collections, including mortgagor prepayments
on the mortgage loans, Insurance Proceeds, Liquidation
Proceeds and proceeds from repurchases of, and some amounts
received in connection with any substitutions for, the
mortgage loans, received during the related collection period.
Bankruptcy Amount -- As of any date of determination, an amount equal to
$________ less the sum of any Realized Losses on the mortgage loans due to
Bankruptcy Losses up to that date of determination.
S-43
<PAGE>
Certificate Principal Balance -- For any class of Class A Certificates as
of any date of determination, the initial Certificate Principal Balance of that
certificate, reduced by the aggregate of:
o all amounts allocable to principal previously distributed with
respect to that certificate and
o any reductions in the Certificate Principal Balance thereof
deemed to have occurred in connection with allocations of
Realized Losses in the manner described in this prospectus
supplement, unless these amounts have been paid under the
policy.
The Certificate Principal Balance of the Class R-II Certificates in the
aggregate, as of any date of determination, is equal to the excess, if any, of
the then aggregate Stated Principal Balance of the mortgage loans over the then
aggregate Certificate Principal Balance of the Class A Certificates. The Class
R[-I] Certificates will have no Certificate Principal Balance.
Class A Principal Distribution Amount -- An amount equal to the lesser of:
(a) the excess of (i) the Available Distribution Amount over (ii)
the Senior Interest Distribution Amount; and
(b) the sum of:
(i) the portion allocable to principal of all scheduled monthly
payments on the mortgage loans received with respect to the related collection
period;
(ii) the principal portion of all proceeds of the repurchase of any
mortgage loans, or, in the case of a substitution, some amounts representing a
principal adjustment, as required by the pooling and servicing agreement during
the related collection period;
(iii) the principal portion of all other unscheduled collections
received on the mortgage loans during the related collection period, or deemed
to be received during the related collection period, including, without
limitation, full and partial principal prepayments made by the respective
mortgagors, to the extent not previously distributed;
(iv) the amount of any Realized Loss Distribution Amount for that
distribution date; and
(v) the amount of any Reserve Increase Amount for that distribution
date;
minus
S-44
<PAGE>
(vi) the amount of any Reserve Reduction Amount for that
distribution date.
In no event will the Class A Principal Distribution Amount with respect to
any distribution date be less than zero or greater than the then outstanding
Certificate Principal Balances of the Class A Certificates.
Excess Cash Flow -- For any distribution date, the excess of:
o the Available Distribution Amount for the distribution date
over
o the sum of:
o the Senior Interest Distribution Amount payable to the
Class A Certificateholders on that distribution date and
o the sum of the amounts relating to the mortgage loans
described in clauses (b)(i)-(iii) of the definition of
Class A Principal Distribution Amount.
Excess Loss Amount -- On any distribution date, an amount equal to the sum
of:
o any Realized Losses, other than as described in the next three
succeeding clauses below, for the related collection period
which, when added to the aggregate of the Realized Losses for
all preceding collection periods exceed $________,
o any Special Hazard Losses in excess of the Special Hazard
Amount,
o any Fraud Losses in excess of the Fraud Loss Amount,
o any Bankruptcy Losses in excess of the Bankruptcy Loss Amount,
and
o Extraordinary Losses.
Excess Reserve Amount -- With respect to any distribution date, the
excess, if any, of:
o the Outstanding Reserve Amount on that distribution date over
o the Reserve Amount Target.
Fraud Loss Amount -- As of any date of determination after the cut-off
date, an amount equal to:
o prior to the first anniversary of the cut-off date, an amount
equal to __% of the aggregate Stated Principal Balance of the
mortgage loans as of the cut-off date minus the aggregate of
any Realized Losses on the mortgage loans due to Fraud Losses
up to that date of determination;
o from the first to the second anniversary of the cut-off date,
an amount equal to:
o the lesser of :
o the Fraud Loss Amount as of the most recent
anniversary of the cut-off date and
S-45
<PAGE>
o __% of the aggregate Stated Principal Balance of
the mortgage loans as of the most recent
anniversary of the cut-off date minus
o the aggregate of any Realized Losses on the mortgage
loans due to Fraud Losses since the most recent
anniversary of the cut-off date up to that date of
determination; and
o from the second to the fifth anniversary of the cut-off date,
an amount equal to:
o the lesser of:
o the Fraud Loss Amount as of the most recent
anniversary of the cut- off date and
o __% of the aggregate Stated Principal Balance of
the mortgage loans as of the most recent
anniversary of the cut-off date minus
o the aggregate of any Realized Losses on the mortgage
loans due to Fraud Losses since the most recent
anniversary of the cut-off date up to that date of
determination.
On and after the fifth anniversary of the cut-off date, the Fraud Loss Amount
shall be zero.
Interest Accrual Period -- For all classes of certificates, the calendar
month preceding the month in which the distribution date occurs.
Lockout Certificate Percentage -- A percentage calculated for each
distribution date equal to the aggregate Certificate Principal Balance of the
Lockout Certificates divided by the sum of the aggregate Certificate Principal
Balances of the Class A-I Certificates.
Lockout Distribution Percentage -- For any distribution date occurring
prior to the distribution date in _________ , 0%. The Lockout Distribution
Percentage for any distribution date occurring after the first three years
following the closing date will be as follows:
o for any distribution date during the fourth and fifth years
after the closing date, 45%
o for any distribution date during the sixth year after the
closing date, 80%
o for any distribution date during the seventh year after the
closing date, 100%
o for any distribution date thereafter, the lesser of:
o 300% of the Lockout Certificate Percentage and
o 100%.
Notwithstanding the foregoing, if the Certificate Principal Balances of the
Class A-I Certificates, other than the Lockout Certificates, have been reduced
to zero, the Lockout Distribution Percentage will be equal to 100%.
Notional Amount -- With respect to the Fixed Strip Certificates as of any
distribution date prior to the distribution date in _______, the sum of:
S-46
<PAGE>
o the lesser of:
o $________ and
o the aggregate Certificate Principal Balance of the Class
A-I Certificates on that distribution date and
o the lesser of
o $_________ an
o the aggregate Certificate Principal Balance of the
[Class A-II] Certificates on that distribution date.
The Notional Amount of the Fixed Strip Certificates as of any distribution
date after the distribution date in ________ will be equal to $0. References in
this prospectus supplement to the Notional Amount are used solely for some
calculations and do not represent the right of the Fixed Strip Certificates to
receive distributions allocable to principal.
Outstanding Reserve Amount -- With respect to any distribution date, the
excess, if any, of:
o the aggregate Stated Principal Balances of the mortgage loans
immediately following that distribution date over
o the Certificate Principal Balance of the Class A Certificates
as of that date, after taking into account the payment to the
Class A Certificates of the amounts described in clauses
(b)(i)-(iv) of the definition of Class A Principal
Distribution Amount on that distribution date.
Realized Loss Distribution Amount -- For any distribution date, to the
extent covered by Excess Cash Flow for that distribution date, as described in
this prospectus supplement under "--Overcollateralization Provisions", (A) 100%
of the principal portion of any Realized Losses, other than Excess Loss Amounts,
incurred, or deemed to have been incurred, on any mortgage loans in the related
collection period, plus (B) any Realized Losses, other than any Excess Loss
Amounts, remaining undistributed from any preceding distribution date, together
with interest from the date initially distributable to the date paid, provided,
that any Realized Losses shall not be required to be paid to the extent that the
Realized Losses were paid on the Class A Certificates by means of a draw on the
policy or were reflected in the reduction of the Outstanding Reserve Amount.
Reserve Amount Target -- The required level of the Outstanding Reserve
Amount with respect to a distribution date.
Reserve Increase Amount -- Any amount of Excess Cash Flow actually applied
as an accelerated payment of principal on the Class A Certificates.
Reserve Reduction Amount -- For any distribution date, the lesser of :
o the Excess Reserve Amount and
S-47
<PAGE>
o the amount available for distribution specified in clauses
(b)(i)-(iii) of the definition of Class A Principal
Distribution Amount on that distribution date.
Senior Interest Distribution Amount -- On any distribution date, the
aggregate amount of Accrued Certificate Interest to be distributed to the
holders of the offered certificates for that distribution date.
Special Hazard Amount --As of any date of determination following the
cut-off date, the an amount equal to $________ less the sum of:
o the aggregate of any Realized Losses on the mortgage loans due
to Special Hazard Losses and
o an adjustment amount calculated under the terms of the pooling
and servicing agreement.
Distributions
Distributions on the certificates will be made by the trustee on the 25th
day of each month or, if that day is not a business day, then the next
succeeding business day, commencing in _______ 1999. Distributions on the
certificates will be made to the persons in whose names the certificates are
registered at the close of business on the day prior to each distribution date
or, if the certificates are no longer DTC registered certificates, on the record
date. See "Description of the Certificates--Distributions" in the prospectus.
Distributions will be made by check or money order mailed, or upon the request
of a certificateholder owning certificates having denominations, by principal
balance or notional amount, aggregating at least $1,000,000, by wire transfer or
otherwise, to the address of the person entitled to the distribution, which, in
the case of DTC registered certificates, will be DTC or its nominee, as it
appears on the trustee's register in amounts calculated as described in this
prospectus supplement on the determination date. However, the final distribution
relating to the certificates will be made only upon presentation and surrender
thereof at the office or the agency of the trustee specified in the notice to
certificateholders of the final distribution. A business day is any day other
than:
o a Saturday or Sunday or
o a day on which banking institutions in the State of
California, Minnesota, New York, Pennsylvania, Illinois or
Delaware are required or authorized by law to be closed.
Available Distribution Amount
The master servicer may elect to treat unscheduled collections, not
including mortgagor prepayments, as amounts included in the Available
Distribution Amount for the distribution date in the month of receipt, but is
not obligated to do so. As described in this prospectus supplement, under
"--Principal Distributions," any amount with respect to which this election is
so made shall be
S-48
<PAGE>
treated as having been received on the last day of the related collection period
for the purposes of calculating the amount of principal and interest
distributions to any class of certificates. With respect to any distribution
date, the collection period is the calendar month preceding the month in which
that distribution date occurs.
Interest Distributions
Holders of each class of offered certificates will be entitled to receive
interest distributions in an amount equal to the Accrued Certificate Interest on
that class on each distribution date to the extent described in this prospectus
supplement.
Prepayment Interest Shortfalls will result because interest on prepayments
in full is distributed only to the date of prepayment, and because no interest
is distributed on prepayments in part, as these prepayments in part are applied
to reduce the outstanding principal balance of the related mortgage loans as of
the due date in the month of prepayment. However, with respect to any
distribution date, any Prepayment Interest Shortfalls during the related
collection period will be offset first by Excess Cash Flow to the extent
available and then by the policy.
The pass-through rates on all classes of offered certificates are fixed
and are listed on page S-__ hereof. The pass-through rates on all classes of the
Class A Certificates will increase by __% per annum for each distribution date
after the first distribution date on which the master servicer and the depositor
are permitted to exercise their option to purchase the mortgage loans from the
trust as described under "Pooling and Servicing Agreement--Termination," in this
prospectus supplement. Notwithstanding the foregoing, the pass-through rates on
the Class A Certificates will not increase as described above if proceeds for
optional termination are available for payment to the certificateholders on or
prior to any distribution date. The holders of the Fixed Strip Certificates will
not be entitled to any distributions of principal and will not be entitled to
any distributions of interest after the distribution date in _________.
Principal Distributions
Holders of the Class A Certificates will be entitled to receive on each
distribution date, in the priority described in this prospectus supplement and
to the extent of the portion of the Available Distribution Amount remaining
after the Senior Interest Distribution Amount for that distribution date is
distributed, the Class A Principal Distribution Amount.
On any distribution date, if:
o Realized Losses, other than Excess Loss Amounts, have occurred
during the related collection period that are not covered by the
Realized Loss Distribution Amount or the Outstanding Reserve Amount,
or
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<PAGE>
o there is an Excess Loss Amount with respect to that distribution
date
a draw will be made on the policy and these amounts will be distributed to the
Class A Certificateholders on that distribution date, in reduction of the
Certificate Principal Balances thereof, in the manner described below. In
addition, if on the distribution date in _______, the aggregate Stated Principal
Balance of the mortgage loans is less than the aggregate Certificate Principal
Balance of the Certificates, after giving effect to distributions to be made on
that distribution date, the amount of the deficiency, or the
undercollateralization amount, will be drawn on the policy and will be
distributed to the Class A Certificateholders on that distribution date, in
reduction of its Certificate Principal Balances, in the manner described below.
On each distribution date, the credit enhancer shall be entitled to
receive, after payment to the Senior Certificateholders of the Senior Interest
Distribution Amount and the Class A Principal Distribution Amount for the
certificates, as applicable, for that distribution date ,but before application
of any Reserve Increase Amount, from the Excess Cash Flow after Prepayment
Interest Shortfalls and some Realized Losses are allocated thereto, the sum of:
o the premium payable to the credit enhancer with respect to the
policy on that distribution date and any previously unpaid premiums
with respect to the policy, together with its interest, and
o the cumulative insurance payments by the credit enhancer under the
policy to the extent not previously reimbursed, plus its interest.
On each distribution date, the amount of the premium payable to the credit
enhancer with respect to the policy is equal to one-twelfth of the product of a
percentage specified in the insurance and indemnity agreement, dated ________,
among the credit enhancer, the depositor, the master servicer and the trustee,
and the Certificate Principal Balance of the Class A Certificates.
Distributions of principal on the Class A Certificates on each
distribution date will be made after distribution of the Senior Interest
Distribution Amount as described under "--Interest Distributions" above. The
Class A Principal Distribution Amount plus any amount drawn on the policy
relating to principal shall be distributed concurrently to the Class A-I
Certificates and Class A-II Certificates, in each case in accordance with the
percentage of the amounts described in clauses (b)(i) through (iii) in the
definition of the Class A Principal Distribution Amount derived from the related
Loan Group, until the Certificate Principal Balances of the Class A-I
Certificates or Class A-II Certificates have been reduced to zero. Thereafter,
the Class A Principal Distribution Amount shall be distributed to the remaining
class or classes of Class A Certificates, and in the case of the Class A-I
Certificates, in accordance with the priorities described below, until its
Certificate Principal Balances have been reduced to zero.
The Class A Principal Distribution Amount plus any amount drawn on the
policy relating to principal distributable to the Class A-I Certificates shall
be distributed as follows:
(a) first, to the Lockout Certificates, in reduction of its
Certificate Principal Balance, an amount equal to the Lockout Distribution
Percentage of the Class A Principal Distribution
S-50
<PAGE>
Amount distributable to the Class A-I Certificates, until its Certificate
Principal Balance has been reduced to zero;
(b) second, the balance of the Class A Principal Distribution Amount
distributable to the Class A-I Certificates remaining after the distribution, if
any, described in clause (A) above, shall be distributed as follows:
(i) first, to the Class A-I-1 Certificates, until its Certificate
Principal Balance has been reduced to zero;
(ii) second, to the Class A-I-2 Certificates, until its Certificate
Principal Balance has been reduced to zero;
(iii) third, to the Class A-I-3 Certificates, until its Certificate
Principal Balance has been reduced to zero;
(iv) fourth, to the Class A-I-4 Certificates, until its Certificate
Principal Balance has been reduced to zero;
(v) fifth, to the Class A-I-5 Certificates, until its Certificate
Principal Balance has been reduced to zero; and
(vi) sixth, to the Lockout Certificates, until its Certificate
Principal Balance has been reduced to zero.
The Class A Principal Distribution Amount distributable to the Class A-II
Certificates shall be distributed to the Class A-II Certificates, until its
Certificate Principal Balance has been reduced to zero.
The master servicer may elect to treat Insurance Proceeds, Liquidation
Proceeds and other unscheduled collections, not including prepayments by the
mortgagors, received in any calendar month as included in the Available
Distribution Amount and the Class A Principal Distribution Amount for the
distribution date in the month of receipt, but is not obligated to do so. If the
master servicer so elects, these amounts will be deemed to have been received,
and any related Realized Loss shall be deemed to have occurred, on the last day
of the month prior to its receipt.
Overcollateralization Provisions
S-51
<PAGE>
On each distribution date, Excess Cash Flow, if any, is applied on that
distribution date as an accelerated payment of principal on the Class A
Certificates, but only in the manner and to the extent hereafter described. The
Excess Cash Flow for any distribution date will derive primarily from the amount
of interest collected on the mortgage loans in excess of the sum of:
o the Senior Interest Distribution Amount,
o the premium payable on the policy and
o accrued servicing fees,
in each case relating to that distribution date. Excess Cash Flow will be
applied on any distribution date; first, to pay Prepayment Interest Shortfalls;
second, to pay the Realized Loss Distribution Amount for that distribution date;
third, to the payment of the premium fee with respect to that distribution date
and any previous distribution date, to the extent not previously paid, together
with its interest; fourth, to the payment of cumulative insurance payments plus
its interest; fifth, to pay any Reserve Increase Amount; sixth, to pay some
other reimbursement amounts owed to the credit enhancer; and last, to pay to the
holder of the Class R-II Certificates.
The Excess Cash Flow, to the extent available as described above, will be
applied as an accelerated payment of principal on the Class A Certificates to
the extent that the Reserve Amount Target exceeds the Outstanding Reserve Amount
as of that distribution date.
As to any distribution date prior to the distribution date in ________,
the Reserve Amount Target will be __% of the aggregate cut-off date balance. As
to any distribution date on or after the distribution date in _________, the
Reserve Amount Target will be equal to the lesser of:
o the Reserve Amount Target as of the cut-off date and
o __% of the aggregate Stated Principal Balance of the mortgage loans
immediately preceding that distribution date,
but not lower than $________, __% of the aggregate cut-off date balance, plus
__% of the outstanding Stated Principal Balance of all of the mortgage loans
that are 90 or more days delinquent as of that distribution date; provided,
however, that any scheduled reduction to the Reserve Amount Target described
above shall not be made as of any distribution date unless:
o the outstanding Stated Principal Balance of the mortgage loans
delinquent 90 days or more averaged over the last six months as a
percentage of the aggregate outstanding Stated Principal Balance of
all the mortgage loans averaged over the last six months does not
exceed __%,
o the aggregate cumulative Realized Losses on the mortgage loans prior
to any distribution date occurring during the first year and the
second year, or any year thereafter, after the distribution date in
______ are less than __% and __%, respectively, of the aggregate
cut-off date balance and
o there has been no draw on the policy on that distribution date that
remains unreimbursed.
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<PAGE>
In addition, the Reserve Amount Target may be reduced with the prior written
consent of the credit enhancer and the rating agencies.
In the event that the Reserve Amount Target is permitted to decrease or
"step down" on a distribution date in the future, a portion of the principal
which would otherwise be distributed to the holders of the Class A Certificates
on that distribution date shall not be distributed to the holders of the Class A
Certificates on that distribution date. This has the effect of decelerating the
amortization of the Class A Certificates relative to the amortization of the
mortgage loans, and of reducing the Outstanding Reserve Amount. If, on any
distribution date, the Excess Reserve Amount is, or, after taking into account
all other distributions to be made on that distribution date would be, greater
than zero, i.e., the Outstanding Reserve Amount is or would be greater than the
related Reserve Amount Target, then any amounts relating to principal which
would otherwise be distributed to the holders of the Class A Certificates on
that distribution date shall instead be distributed to the holders of the Class
R-II Certificates in an amount equal to the Reserve Reduction Amount.
The aggregate cut-off date balance will be $_______ less than the
aggregate Certificate Principal Balance of the certificates. If, on the
distribution date in _____, after application of the Class A Principal
Distribution Amount and any amounts drawn on the policy to be distributed on
that distribution date, the Stated Principal Balance of the mortgage loans would
be less than the Certificate Principal Balance of the Class A Certificates, the
credit enhancer will be required to deposit in the Certificate Account the
amount of that difference, unless available funds are on deposit in the
Certificate Account. These funds will be distributed to the Class A
Certificateholders entitled to receive a distribution of principal on that
distribution date, in proportion to the amount of the Class A Principal
Distribution Amount payable to the certificateholders on that distribution date,
in reduction of the their Certificate Principal Balances.
Excess Loss Amounts
Excess Loss Amounts will not be covered by any Realized Loss Distribution
Amount or by a reduction in the Outstanding Reserve Amount. Any Excess Loss
Amounts, however, will be covered by the policy, and in the event payments are
not made as required under the policy, these losses will be allocated to the
certificates pro rata based on their outstanding Certificate Principal Balances.
The Special Hazard Amount shall initially be equal to $________.
The Fraud Loss Amount shall initially be equal to $________.
The Bankruptcy Amount will initially be equal to $________.
S-53
<PAGE>
With respect to any defaulted mortgage loan that is finally liquidated,
through foreclosure sale, disposition of the related mortgaged property if
acquired on behalf of the certificateholders by deed in lieu of foreclosure, or
otherwise, the amount of loss realized, if any, will equal the portion of the
Stated Principal Balance remaining, if any, plus its interest through the last
day of the month in which that mortgage loan was finally liquidated, after
application of all amounts recovered, net of amounts reimbursable to the master
servicer or the subservicer for expenses, including attorneys' fees, towards
interest and principal owing on the mortgage loan. The master servicer will
treat any mortgage loan that is 180 days or more delinquent as having been
finally liquidated.
Certificate Guaranty Insurance Policy
On the closing date, __________, the credit enhancer, will issue its
certificate guaranty insurance policy, or policy, in favor of the trustee on
behalf of the certificateholders. The policy will unconditionally and
irrevocably guarantee some payments on the certificates. On each distribution
date, a draw will be made on the policy equal to the sum of:
o the amount by which accrued interest on the certificates at the
respective pass-through rates for that distribution date exceeds the
amount on deposit in the Certificate Account available for interest
distributions on that distribution date,
o any Realized Losses, other than any Excess Loss Amount, for that
distribution date, to the extent not currently covered by a Realized
Loss Distribution Amount or a reduction in the Outstanding Reserve
Amount and
o any Excess Loss Amount for that distribution date.
In addition, on the distribution date in _______, a draw will be made on
the policy to cover the undercollateralization amount, if any, if that amount is
not otherwise available in the Certificate Account.
In addition, the policy will guarantee the payment of the outstanding
Certificate Principal Balance of the certificates on the final distribution
date. In the absence of payments under the policy, certificateholders will
directly bear the credit risks associated with their investment to the extent
these risks are not covered by the Outstanding Reserve Amount or otherwise.
The policy is being issued under and pursuant to and shall be construed
under, the laws of the State of New York, without giving effect to its conflict
of laws principles.
The policy is not cancelable for any reason. The premium on the policy is
not refundable for any reason including payment, or provision being made for
payment, prior to maturity of the offered certificates.
S-54
<PAGE>
THE CREDIT ENHANCER
The following information has been supplied by the credit enhancer for
inclusion in this prospectus supplement. No representation is made by the
depositor, ________ or any of their affiliates as to the accuracy or
completeness of this information.
The credit enhancer is a ________-domiciled stock insurance corporation
regulated by the Office of the Commissioner of Insurance of the State of _______
and licensed to do business in 50 states, the District of Columbia, the
Commonwealth of Puerto Rico and the Territory of Guam. The credit enhancer
primarily insures newly issued municipal and structured finance obligations. The
credit enhancer is a wholly owned subsidiary of ___________, a 100% publicly
held company. Moody's Investors Service, Standard & Poor's, a division of The
McGraw-Hill Companies, Inc. and Fitch IBCA, Inc. have each assigned a triple-A
financial strength rating to the credit enhancer.
The consolidated financial statements of the credit enhancer and its
subsidiaries as of December 31, 1998 and 1997, and for each of the years in the
three-year period ended December 31, 1998, prepared in accordance with generally
accepted accounting principles, included in the Current Report on Form 8-K of
___________ (which was filed with the Commission on _________; Commission File
Number _________), are hereby incorporated by reference into this prospectus
supplement and shall be deemed to be a part of this prospectus supplement. Any
statement contained in a document incorporated in this prospectus supplement by
reference shall be modified or superseded for the purposes of this prospectus
supplement to the extent that a statement contained in this prospectus
supplement by reference in this prospectus supplement also modifies or
supersedes that statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
prospectus supplement.
All financial statements of the credit enhancer and its subsidiaries
included in documents filed ____________ with the Commission under Section
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended,
subsequent to the date of this prospectus supplement and prior to the
termination of the offering of the certificates shall be deemed to be
incorporated by reference into this prospectus supplement and to be a part of
this prospectus supplement from the respective dates of filing those documents.
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The following table describe the credit enhancer's capitalization as of
December 31, 1996, December 31, 1997 and December 31, 1998, respectively, in
conformity with generally accepted accounting principles.
Consolidated Capitalization Table
(Dollars in Millions)
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Unearned premiums........................................... $ $ $
Other liabilities...........................................
------------ ------------ ------------
Total liabilities...........................................
------------ ------------ ------------
Stockholder's equity:(1)....................................
Common Stock...........................................
Additional paid-in capital.............................
Accumulated other comprehensive income.................
Retained earnings......................................
------------ ------------ ------------
Total stockholder's equity..................................
------------ ------------ ------------
Total liabilities and stockholder's equity.................. $ $ $
============ ============ ============
</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.
For additional financial information concerning the credit enhancer, see
the audited financial statements of the credit enhancer incorporated by
reference in this prospectus supplement. Copies of the financial statements of
the credit enhancer incorporated in this prospectus supplement by
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<PAGE>
reference and copies of the credit enhancer's annual statement for the year
ended December 31, 1998 prepared in accordance with statutory accounting
standards are available, without charge, from the credit enhancer. The address
of the credit enhancer's administrative offices and its telephone number are
______________________.
The credit enhancer makes no representation regarding the certificates or
the advisability of investing in the certificates and makes no representation
regarding, nor has it participated in the preparation of, this prospectus
supplement other than the information supplied by the credit enhancer and
presented under the headings "The Credit Enhancer" and "Description of the
Certificates--Certificate Guaranty Insurance Policy" and in the financial
statements incorporated in this prospectus supplement by reference.
YEAR 2000 CONSIDERATIONS
Overview of the Year 2000 Issue
The Y2K issue is the term 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
subservicers relating to the mortgage loans, calculating the Available
Distribution Amount for each distribution date, remitting that amount to the
trustee prior to each distribution date, calculating the amount of principal and
interest payments to be made to the certificateholders on each distribution
date, and preparing the monthly statement to be sent to certificateholders on
each distribution date.
Overview of Residential Funding's Y2K Project
In January 1997, Residential Funding commenced activities to determine the
impact of Y2K on its critical computer systems. In April 1998, Residential
Funding established a formal Y2K project team 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
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<PAGE>
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 throughout the
organization. Residential Funding's components primarily consist of the
following:
o hardware, including mainframe computers, desktop computers and
network devices;
o facilities equipment, including elevators, telephone systems,
heating systems and security systems;
o software applications, including vendor purchased
applications, in-house developed applications and end-user
developed applications;
o business partner communication links, which primarily provide
data transmissions to and from business partners; and
o business partners data systems, which primarily process data
for Residential Funding.
The six phases by which the Y2K project team will seek to achieve Y2K
readiness throughout Residential Funding are as follows:
----------------------------------------------------------------------
Phase Objective
----------------------------------------------------------------------
Phase I -- Awareness To promote Y2K awareness throughout
Residential Funding. Emphasis has
been placed on ensuring that
components recently purchased or to
be purchased by business units are
Y2K-ready prior to the
implementation of those components.
----------------------------------------------------------------------
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<PAGE>
----------------------------------------------------------------------
Phase II -- Inventory To create an inventory of all
components and assess the Y2K risks
associated with those components.
----------------------------------------------------------------------
Phase III -- Assessment To determine which components are
not Y2K-ready and decide whether
those components should be
replaced, retired or repaired.
----------------------------------------------------------------------
Phase IV -- Renovation To execute component replacement,
retirement or repair to ensure Y2K
readiness.
----------------------------------------------------------------------
Phase V -- Validation To test components that have been
repaired to ensure Y2K readiness
and validate "mission critical"
components that were assessed as
Y2K-ready in Phase III.
----------------------------------------------------------------------
Phase VI -- Implementation To deploy repaired and validated
components.
----------------------------------------------------------------------
In order to execute the six-phase plan, a combination of internal
resources and external contractors have been, and will be, employed by the Y2K
project team.
Y2K Project Status
As of November 30, 1998, the Y2K project team had substantially completed
the six phases for internal "mission critical" components. However, several
software applications used by Residential Funding in its role as master servicer
are still in the final three phases of the six-phase management plan.
Residential Funding expects that all phases with respect to those applications
will be substantially completed by January 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:
o renovation and validation of any non-mission critical
components that the Y2K project team and related business
units determine to be necessary
o validation of any remaining "mission critical" components that
are either completing in-house remediation or waiting for a
vendor upgrade, and
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<PAGE>
o Y2K business continuity planning activities discussed below.
The potential impact on Residential Funding of problems related to Y2K,
however, will not depend solely on the corrective measures undertaken by the Y2K
project team. The manner in which Y2K issues are addressed by business partners,
governmental agencies and other entities that provide data to, or receive data
from, Residential Funding, or whose financial condition or operational
capability is important to Residential Funding and its ability to act as master
servicer, will have a significant impact upon Residential Funding. These
entities include, among others, subservicers, the trustee, the custodian and
some depositary institutions, as well as their respective suppliers and vendors.
Accordingly, Residential Funding is communicating with some of these parties to
assess their Y2K readiness and evaluate any potential impact on Residential
Funding.
Due to the various dates by which Residential Funding's business partners
anticipate being Y2K ready, it is expected that the Y2K project team will
continue to spend significant time assessing Y2K business partner issues
throughout 1999. Any business partner, including any subservicer, the trustee
and the custodian, that:
o has not provided Residential Funding appropriate documentation
supporting its Y2K efforts
o has not responded in a timely manner to Residential Funding's
inquiries regarding their Y2K efforts or
o does not expect to be Y2K-ready until after June 30, 1999
has been, and will be, placed in an "at risk" category. Residential Funding will
carefully monitor the efforts and progress of its "at risk" business partners,
and if additional steps are necessary Residential Funding will reassess the risk
and act accordingly.
During 1998, Residential Funding also commenced a formal business
continuity plan that is designed to address potential Y2K problems and other
possible disruptions. Residential Funding's business continuity plan has the
following four phases:
----------------------------------------------------------------------
Phase Objective
----------------------------------------------------------------------
Phase I -- Business Impact To assess the impact upon
Assessment 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.
----------------------------------------------------------------------
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<PAGE>
----------------------------------------------------------------------
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 To develop detailed procedures on
Planning how Residential Funding and
individual business units will
continue to operate in the
aftermath of a natural disaster or
other type of disruption, including
as a result of Y2K.
----------------------------------------------------------------------
Phase IV -- Validation To test the plans developed in
Phases II and III above.
----------------------------------------------------------------------
As of December 15, 1998, Residential Funding had substantially completed
Phases I and II of its business continuity plan. Residential Funding anticipates
that Phase III will be substantially complete by March 31, 1999 and Phase IV
will be substantially complete by June 30, 1999.
Risks related to Y2K
Although Residential Funding's remediation efforts are directed at
eliminating its Y2K exposure, there can be no assurance that these efforts will
fully mitigate the effect of all Y2K problems. If Residential Funding fails to
identify or correct any material Y2K problem, there could be significant
disruptions in its normal business operations. Such disruptions could have a
material adverse effect on Residential Funding's ability to
o collect, and monitor any subservicer's collection of, payments
on the mortgage loans
o distribute those collections to the trustee and
o provide reports to certificateholders as described in this
prospectus supplement.
Furthermore, if any subservicer, the trustee or any other business partner or
any of their respective vendors or third party service providers are not
Y2K-ready, the ability to (a) service the mortgage loans in the case of any
subservicer or any of their respective vendors or third party service providers
and (b) make distributions to certificateholders in the case of the trustee or
any of its vendors or third party service providers, may be materially and
adversely affected.
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<PAGE>
This section entitled "Year 2000 Considerations" contains forward-looking
statements within the meaning of Section 27A of the Securities Act. All
statements in this section that are not statements of historical fact are
forward-looking statements. Forward-looking statements made in this Y2K
discussion are subject to some risks and uncertainties. Important factors that
could cause results to differ materially from the forward-looking statements
include, among other things, the ability of Residential Funding to successfully
identify components that may pose Y2K problems, the nature and amount of
programming required to fix the affected components, the costs of labor and
consultants related to these efforts, the continued availability of resources,
both personnel and technology, and the ability of business partners that
interface with Residential Funding to successfully address their Y2K issues.
MATERIAL YIELD AND PREPAYMENT CONSIDERATIONS
General
The yields to maturity and the aggregate amount of distributions on
the offered certificates will be affected by the rate and timing of principal
payments on the mortgage loans and the amount and timing of mortgagor defaults
resulting in Realized Losses. The rate of default of mortgage loans secured by
second liens may be greater than that of mortgage loans secured by first liens.
In addition, the yields may be adversely affected by a higher or lower than
anticipated rate of principal payments on the mortgage loans in the trust. The
rate of principal payments on the mortgage loans will in turn be affected by the
amortization schedules of the mortgage loans, the rate and timing of principal
prepayments on the mortgage loans by the mortgagors, liquidations of defaulted
mortgage loans and repurchases of mortgage loans due to some breaches of
representations.
The timing of changes in the rate of prepayments, liquidations and
repurchases of the mortgage loans may, and the timing of Realized Losses will,
significantly affect the yield to an investor, even if the average rate of
principal payments experienced over time is consistent with an investor's
expectation. Since the rate and timing of principal payments on the mortgage
loans will depend on future events and on a variety of factors, as described
more fully in this prospectus supplement and in the prospectus under "Yield and
Prepayment Considerations", no assurance can be given as to the rate or the
timing of principal payments on the Class A Certificates.
A subservicer may allow the refinancing of a mortgage loan by accepting
prepayments on the mortgage loan and permitting a new loan secured by a mortgage
on the same property, which may be originated by the Subservicer or the master
servicer or any of their respective affiliates or by an unrelated entity. In the
event of such a refinancing, the new loan would not be included in the trust
and, therefore, the refinancing would have the same effect as a prepayment in
full of the related
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<PAGE>
mortgage loan. A subservicer or the master servicer may, from time to time,
implement refinancing or modification programs designed to encourage
refinancing. The programs may include, without limitation, modifications of
existing loans, general or targeted solicitations, the offering of pre-approved
applications, reduced origination fees or closing costs, or other financial
incentives. Targeted solicitations may be based on a variety of factors,
including the credit of the borrower or the location of the mortgaged property.
In addition, subservicers or the master servicer may encourage assumptions of
mortgage loans, including defaulted mortgage loans, under which creditworthy
borrowers assume the outstanding indebtedness of those mortgage loans which may
be removed from the trust. As a result of these programs, the rate of principal
prepayments of the mortgage loans may be higher than would otherwise be the
case, and, in some cases, the average credit or collateral quality of the
mortgage loans remaining in the trust may decline.
The mortgage loans in most cases may be prepaid by the mortgagors at any
time. However, in some circumstances the prepayment of some of the mortgage
loans will be subject to a prepayment penalty, which may discourage mortgagors
from prepaying their mortgage loans during the period during which the
prepayment penalty applies.
Most of the mortgage loans contain due-on-sale clauses. As described under
"Description of the Certificates--Principal Distributions" in this prospectus
supplement, during specified periods all or a disproportionately large
percentage of principal collections on the mortgage loans will be allocated
among the Class A Certificates, other than the Lockout Certificates, and during
some periods no principal collections or a disproportionately small portion of
principal collections will be distributed on the Lockout Certificates.
Prepayments, liquidations and purchases of the mortgage loans will result in
distributions to holders of the Class A Certificates of principal amounts which
would otherwise be distributed over the remaining terms of the mortgage loans.
Factors affecting prepayment, including defaults and liquidations, of mortgage
loans include changes in mortgagors' housing needs, job transfers, unemployment,
mortgagors' net equity in the mortgaged properties, changes in the value of the
mortgaged properties, mortgage market interest rates, solicitations and
servicing decisions. In addition, if prevailing mortgage rates fell
significantly below the mortgage rates on the mortgage loans, the rate of
prepayments, including refinancings, would be expected to increase. On the other
hand, if prevailing mortgage rates rose significantly above the mortgage rates
on the mortgage loans, the rate of prepayments on the mortgage loans would be
expected to decrease. Furthermore, since mortgage loans secured by second liens
are not generally viewed by borrowers as permanent financing and generally carry
a high rate of interest, the mortgage loans may experience a higher rate of
prepayments than traditional first lien mortgage loans. Prepayment of the
related first lien may also affect the rate of prepayments on the mortgage
loans.
The Class A Certificates are subject to various priorities for payment of
principal as described in this prospectus supplement. Distributions of principal
on classes of Class A Certificates having an earlier priority of payment will be
affected by the rates of prepayment of the mortgage loans early in the life of
the mortgage pool. The timing of commencement of principal distributions and the
weighted average lives of classes of Class A Certificates with a later priority
of payment will be affected by the rates of prepayment of the mortgage loans
both before and after the commencement of principal distributions on those
classes. In addition, the yield to maturity of the Class A
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<PAGE>
Certificates will depend on whether, to what extent, and the timing with respect
to which, Excess Cash Flow is used to accelerate payments of principal on the
Class A Certificates or any Reserve Reduction Amount is released. See
"Description of the Certificates--Overcollateralization Provisions" in this
prospectus supplement.
The rate of defaults on the mortgage loans will also affect the rate and
timing of principal payments on the mortgage loans. In general, defaults on
mortgage loans are expected to occur with greater frequency in their early
years. The rate of default of mortgage loans secured by second liens is likely
to be greater than that of mortgage loans secured by traditional first lien
mortgage loans, particularly in the case of mortgage loans with high combined
LTV ratios or low Junior Ratios. Furthermore, the rate and timing of
prepayments, defaults and liquidations on the mortgage loans will be affected by
the general economic condition of the region of the country in which the related
mortgaged properties are located. The risk of delinquencies and loss is greater
and prepayments are less likely in regions where a weak or deteriorating economy
exists, as may be evidenced by, among other factors, increasing unemployment or
falling property values. See "Yield and Prepayment Considerations" and "Risk
Factors" in the prospectus. In addition, because borrowers of Balloon Loans are
required to make a relatively large single payment upon maturity, it is possible
that the default risk associated with Balloon Loans is greater than that
associated with fully-amortizing mortgage loans. See "Risk Factors" in this
prospectus supplement.
To the extent that any losses are incurred on any of the mortgage loans
that are not covered by the Realized Loss Distribution Amount, a reduction in
the Outstanding Reserve Amount or the policy, holders of the certificates will
bear all risk of the losses resulting from default by mortgagors. See "Risk
Factors--Limitations, Reduction and Substitution of Credit Enhancement" in the
prospectus. Even where the policy covers all losses incurred on the mortgage
loans, this coverage may accelerate principal payments on the Class A
Certificates, thus reducing the weighted average life of the Class A
Certificates.
Because the mortgage rates on the mortgage loans and the pass-through
rates on the offered certificates are fixed, the rates will not change in
response to changes in market interest rates. Accordingly, if market interest
rates or market yields for securities similar to the offered certificates were
to rise, the market value of the offered certificates may decline.
Class A-I Certificates and Class A-II Certificates: The rate and timing of
principal payments on and the weighted average lives of the Class A-I
Certificates and Class A-II Certificates will be affected primarily by the rate
and timing of principal payments, including prepayments, defaults, liquidations
and purchases, on the mortgage loans in the related Loan Group.
Sequentially Paying Classes: The Class A-I Certificates, other than the
Fixed Strip Certificates, are subject to various priorities for payment of
principal as described in this prospectus supplement. Distributions of principal
on classes of Class A-I Certificates having an earlier priority of payment will
be affected by the rates of prepayment of the Group I Loans early in the life of
the mortgage pool. The timing of commencement of principal distributions and the
weighted average
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<PAGE>
lives of classes of Class A-I Certificates with a later priority of payment will
be affected by the rates of prepayment of the Group I Loans experienced both
before and after the commencement of principal distributions on these classes.
Lockout Certificates: Investors in the Lockout Certificates should be
aware that because the Lockout Certificates do not receive any payments of
principal prior to the distribution date occurring in ________ and prior to the
distribution date occurring in ________ will receive a disproportionately small
portion of payments of principal, unless the Certificate Principal Balances of
the Class A-I Certificates, other than the Lockout Certificates, have been
reduced to zero, the weighted average lives of the Lockout Certificates will be
longer than would otherwise be the case, and the effect on the market value of
the Lockout Certificates of changes in market interest rates or market yields
for similar securities will be greater than for other classes of certificates
entitled to these distributions. However, beginning with the distribution date
occurring in _______, the Lockout Certificates may receive a disproportionately
large percentage of principal collections until their Certificate Principal
Balance is reduced to zero.
In addition, the yield to maturity on each class of the offered
certificates will depend on, among other things, the price paid by the holders
of the offered certificates and the related pass-through rate. The extent to
which the yield to maturity of an offered certificate is sensitive to
prepayments will depend, in part, upon the degree to which it is purchased at a
discount or premium. In general, if a class of offered certificates is purchased
at a premium and its principal distributions occur at a rate faster than assumed
at the time of purchase, the investor's actual yield to maturity will be lower
than that anticipated at the time of purchase. On the other hand, if a class of
offered certificates is purchased at a discount and principal distributions on
that class of offered certificates occur at a rate slower than that assumed at
the time of purchase, the investor's actual yield to maturity will be lower than
that anticipated at the time of purchase. For additional considerations relating
to the yield on the certificates, see "Yield and Prepayment Considerations" in
the prospectus.
Assumed Final Distribution Date: The assumed final distribution date with
respect to the Class A Certificates is __________, which date is six months
after the distribution date immediately following the latest scheduled maturity
date for any mortgage loan. No event of default, change in the priorities for
distribution among the various classes or other provisions under the pooling and
servicing agreement will arise or become applicable solely by reason of the
failure to retire the entire Certificate Principal Balance of any class of
certificates on or before its assumed final distribution date.
The actual final distribution date with respect to each class of Class A
Certificates could occur significantly earlier than the assumed final
distribution date for that class because:
o Excess Cash Flow will be used to make accelerated payments of
principal, i.e. Reserve Increase Amounts, to the holders of
the Class A Certificates, which payments will have the effect
of shortening the weighted average lives of the Class A
Certificates of each class,
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<PAGE>
o prepayments are likely to occur, which will also have the
effect of shortening the weighted average lives of the Class A
Certificates and
o the master servicer or the depositor may cause a termination
of the trust when the aggregate Stated Principal Balance of
the mortgage loans in the trust is less than 10% of the
aggregate cut-off date balance.
Weighted Average Life: Weighted average life refers to the average amount
of time that will elapse from the date of issuance of a security to the date of
distribution to the investor of each dollar distributed in reduction of
principal of that security, assuming no losses. The weighted average life of the
offered certificates will be influenced by, among other things, the rate at
which principal of the mortgage loans is paid, which may be in the form of
scheduled amortization, prepayments or liquidations.
The prepayment model used in this prospectus supplement represents an
assumed rate of prepayment each month relative to the then outstanding principal
balance of a pool of mortgage loans. A 100% prepayment assumption assumes a
constant prepayment rate of 4% per annum of the then outstanding principal
balance of the mortgage loans in the first month of the life of the mortgage
loans and an additional 2.1818182% per annum in each month thereafter until the
twelfth month. Beginning in the twelfth month and in each month thereafter
during the life of the mortgage loans, a 100% prepayment assumption assumes a
CPR of 28% per annum each month. As used in the table below, a 50% prepayment
assumption assumes prepayment rates equal to 50% of the prepayment assumption.
Correspondingly, a 150% prepayment assumption assumes prepayment rates equal to
150% of the prepayment assumption, and so forth. The prepayment assumption does
not purport to be a historical description of prepayment experience or a
prediction of the anticipated rate of prepayment of any pool of mortgage loans,
including the mortgage loans.
The tables below entitled "Percent of Initial Principal Balance
Outstanding of the Class A-I Certificates at the Following Percentages of the
Prepayment Assumption" and "Percent of Initial Certificate Principal Balance
Outstanding of the Class A-II Certificates at the Following Percentages of the
Prepayment Assumption" have been prepared on the basis of some assumptions as
described below regarding the weighted average characteristics of the mortgage
loans that are expected to be included in the trust as described under
"Description of the Mortgage Pool" in this prospectus supplement and their
performance. The tables assume, among other things, that:
o as of the date of issuance of the Class A Certificates, the
mortgage loans have the following structuring assumptions:
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Group I Loans
<TABLE>
<CAPTION>
Original Remaining
Term to Term to
Range of Original Terms to Aggregate Maturity Maturity
Maturity Principal Mortgage (in (in
(in years) Balance Rate months) months)
-------------------------- --------- -------- -------- ---------
<S> <C> <C> <C> <C>
$ %
$ %
$ %
$ %
$ %
$ %
</TABLE>
<TABLE>
<CAPTION>
Original Remaining
Term to Term to
Range of Original Terms to Aggregate Maturity Maturity
Maturity Principal Mortgage (in (in
(in years) Balance Rate months) months)
-------------------------- --------- -------- -------- ---------
<S> <C> <C> <C> <C>
$ %
$ %
$ %
$ %
$ %
$ %
</TABLE>
o with respect to each mortgage loan, the aggregate servicing
fee rate and policy premium rate will be __% per annum;
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<PAGE>
o except with respect to the Balloon Loans, the scheduled
monthly payment for each mortgage loan has been based on its
outstanding balance, interest rate and remaining term to
maturity, so that the mortgage loan will amortize in amounts
sufficient for its repayment over its remaining term to
maturity;
o none of the sellers, the master servicer or the depositor will
repurchase any mortgage loan, as described under "Mortgage
Loan Program--Representations Relating to Mortgage Loans" and
"Description of the Certificates--Assignment of Trust Fund
Assets" in the prospectus, and neither the master servicer nor
the depositor exercises any option to purchase the mortgage
loans and thereby cause a termination of the trust;
o there are no delinquencies or Realized Losses on the mortgage
loans, and principal payments on the mortgage loans will be
timely received together with prepayments, if any, at the
respective constant percentages of the prepayment assumption
described in the table;
o there is no Prepayment Interest Shortfall or any other
interest shortfall in any month;
o payments on the certificates will be received on the 25th day
of each month, commencing ____________;
o payments on the mortgage loans earn no reinvestment return;
o there are no additional ongoing trust expenses payable out of
the trust; and
o the certificates will be purchased on ____________.
The actual characteristics and performance of the mortgage loans will
differ from the assumptions used in constructing the tables below, which are
hypothetical in nature and is provided only to give a general sense of how the
principal cash flows might behave under varying prepayment scenarios. For
example, it is very unlikely that the mortgage loans will prepay at a constant
level of the prepayment assumption until maturity or that all of the mortgage
loans will prepay at the same level of the prepayment assumption. Moreover, the
diverse remaining terms to maturity of the mortgage loans could produce slower
or faster principal distributions than indicated in the tables at the various
constant percentages of the prepayment assumption specified, even if the
weighted average remaining term to maturity of the mortgage loans is as assumed.
Any difference between the assumptions and the actual characteristics and
performance of the mortgage loans, or actual prepayment or loss experience, will
affect the percentages of initial Certificate Principal Balances outstanding
over time and the weighted average lives of the classes of Class A Certificates.
Subject to the foregoing discussion and assumptions, the following tables
indicate the weighted average life of each class of Class A Certificates, and
describe the percentages of the initial Certificate Principal Balance of each
class of Class A Certificates that would be outstanding after each of the dates
shown at various percentages of the prepayment assumption.
[Insert DEC Tables here]
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Fixed Strip Certificate Yield Considerations
Investors should note that the Fixed Strip Certificates are only entitled
to distributions prior to the Distribution Date in _________. The yield to
investors on the Fixed Strip Certificates will be extremely sensitive to the
rate and timing of principal payments on the mortgage loans, including
prepayments, defaults and liquidations, under some extremely rapid rate of
prepayment scenarios. In addition, if prior to the distribution date in
_________, the master servicer or the depositor effects an optional termination
of the mortgage loans, the Fixed Strip Certificates will receive no further
distributions. Investors in the Fixed Strip Certificates should fully consider
the risk that an extremely rapid rate of prepayments on the mortgage loans could
result in the failure of these investors to fully recover their investments.
The following table indicates the sensitivity of the pre-tax yield to
maturity on the Fixed Strip Certificates to various constant rates of prepayment
on the mortgage loans by projecting the monthly aggregate payments of interest
on the Fixed Strip Certificates and computing the corresponding pre-tax yields
to maturity on a corporate bond equivalent basis, based on the structuring
assumptions, including the assumptions regarding the characteristics and
performance of the mortgage loans which differ from the actual characteristics
and performance thereof and assuming the aggregate purchase price described
below. Any differences between the assumptions and the actual characteristics
and performance of the mortgage loans and of the Fixed Strip Certificates may
result in yields being different from those shown in the table. Discrepancies
between assumed and actual characteristics and performance underscore the
hypothetical nature of the table, which is provided only to give a general sense
of the sensitivity of yields in varying prepayment scenarios.
Pre-Tax Yield to Maturity of the Fixed Strip Certificates
at the Following Percentages of the Prepayment Assumption
Assumed Purchase % % % %
Price -------- --------- -------- --------
- ----------------
% % % %
Each pre-tax yield to maturity described in the preceding table was
calculated by determining the monthly discount rate which, when applied to the
assumed stream of cash flows to be paid on the Fixed Strip Certificates, would
cause the discounted present value of that assumed stream of cash flows to equal
the assumed purchase price listed in the table. Accrued interest is included in
the assumed purchase price and is used in computing the corporate bond
equivalent yields shown. These yields do not take into account the different
interest rates at which investors may be able to reinvest funds received by them
as distributions on the Fixed Strip Certificates, and thus do not reflect the
return on any investment in the Fixed Strip Certificates when any reinvestment
rates other than the discount rates are considered.
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Notwithstanding the assumed prepayment rates reflected in the preceding
table, it is highly unlikely that the mortgage loans will be prepaid according
to one particular pattern. For this reason, and because the timing of cash flows
is critical to determining yields, the pre-tax yield to maturity on the Fixed
Strip Certificates may differ from those shown in the table, even if all of the
mortgage loans prepay at the indicated constant percentages of the prepayment
assumption over any given time period or over the entire life of the
certificates.
There can be no assurance that the mortgage loans will prepay at any
particular rate or that the yield on the Fixed Strip Certificates will conform
to the yields described in this prospectus supplement. Moreover, the various
remaining terms to maturity of the mortgage loans could produce slower or faster
principal distributions than indicated in the preceding table at the various
constant percentages of the prepayment assumption specified, even if the
weighted average remaining term to maturity of the mortgage loans is as assumed.
Investors are urged to make their investment decisions based on their
determinations as to anticipated rates of prepayment under a variety of
scenarios. Investors in the Fixed Strip Certificates should fully consider the
risk that an extremely rapid rate of prepayments on the mortgage loans could
result in the failure of the investors to fully recover their investments.
For additional considerations relating to the yield on the certificates,
see "Yield and Prepayment Considerations" in the prospectus.
POOLING AND SERVICING AGREEMENT
General
The certificates will be issued under a pooling and servicing agreement
dated as of ________, among the depositor, the master servicer and the trustee.
Reference is made to the prospectus for important information in addition to
that described in this prospectus supplement regarding the terms and conditions
of the pooling and servicing agreement and the certificates. The trustee, or any
of its affiliates, in its individual or any other capacity, may become the owner
or pledgee of certificates with the same rights as it would have if it were not
trustee. The trustee will appoint _____________ to serve as custodian in
connection with the certificates. The certificates will be transferable and
exchangeable at the corporate trust office of the trustee, which will serve as
certificate registrar and paying agent. The depositor will provide a prospective
or actual Certificateholder, without charge, on written request, a copy, without
exhibits, of the pooling and servicing agreement. Requests should be addressed
to the President, Residential Funding Mortgage Securities II, Inc., 8400
Normandale Lake Boulevard, Suite 600, Minneapolis, Minnesota 55437. In addition
to the circumstances described in the prospectus, the depositor may terminate
the trustee for cause under some circumstances. See "The Pooling and Servicing
Agreement--The Trustee" in the prospectus.
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The Master Servicer
Residential Funding, an indirect wholly-owned subsidiary of GMAC Mortgage
and an affiliate of the depositor, will act as master servicer for the
certificates under the pooling and servicing agreement. For a general
description of Residential Funding and its activities, see "Residential Funding
Corporation" in the prospectus and "Description of the Mortgage
Pool--Residential Funding" in this prospectus supplement.
Servicing and Other Compensation and Payment of Expenses
The servicing fees for each mortgage loan are payable out of the interest
payments on that mortgage loan. The weighted average servicing fee as of the
cut-off date will be approximately __% per annum. The servicing fees consist of
servicing compensation payable to the master servicer relating to its master
servicing activities, and subservicing and other related compensation payable to
the Subservicer. The master servicer is obligated to pay some ongoing expenses
associated with the trust and incurred by the master servicer in connection with
its responsibilities under the pooling and servicing agreement. See "The Pooling
and Servicing Agreement--Servicing and Administration" in the prospectus for
information regarding other possible compensation to the master servicer and the
Subservicers and for information regarding expenses payable by the master
servicer.
Refinancing of Senior Lien
The master servicer may permit the refinancing of any existing lien senior
to a mortgage loan, provided that some conditions described in the pooling and
servicing agreement are satisfied and the resulting combined LTV ratio does not
exceed 100%.
Collection and Liquidation Practices; Loss Mitigation
The master servicer is authorized to engage in a wide variety of loss
mitigation practices with respect to the mortgage loans, including waivers,
modifications, payment forbearances, partial forgiveness, entering into
repayment schedule arrangements, and capitalization of arrearages; provided in
any case that the master servicer determines that the action is not materially
adverse to the interests of the holder of the offered certificates or the credit
enhancer and is generally consistent with the master servicer's policies with
respect to similar loans; and provided further that some of the modifications,
including reductions in the mortgage rate, partial forgiveness or a maturity
extension, may only be taken if the mortgage loan is in default or if default is
reasonably foreseeable. With respect to mortgage loans that come into and
continue in default, the master servicer may take a variety of actions including
foreclosure on the mortgaged property, writing off the balance of the mortgage
loan as bad debt, taking a deed in lieu of foreclosure, accepting a short sale,
permitting a
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short refinancing, arranging for a repayment plan, modifications as described
above, or taking an unsecured note. See "Description of the
Certificates--Collection and Other Servicing Procedures" and "--Realization Upon
Defaulted Mortgage Loans" in the prospectus.
Voting Rights
Some actions specified in the prospectus that may be taken by holders of
certificates evidencing a specified percentage of all undivided interests in the
trust may be taken by holders of certificates entitled in the aggregate to that
percentage of the outstanding voting rights. __% of all voting rights will be
allocated among all holders of the Class A Certificates in proportion to their
then outstanding Certificate Principal Balances, and __%, __% and __% of all
voting rights will be allocated among holders of the Fixed Strip Certificates,
the Class R-I Certificates and the Class R-II Certificates, respectively, in
proportion to the percentage interests evidenced by their respective
certificates. So long as there does not exist a failure by the credit enhancer
to make a required payment under the policy, a credit enhancer default, the
credit enhancer shall have the right to exercise all rights of the holders of
the offered certificates under the pooling and servicing agreement without any
consent of the holders, and the holders may exercise their rights only with the
prior written consent of the credit enhancer except as provided in the pooling
and servicing agreement.
Termination
The circumstances under which the obligations created by the pooling and
servicing agreement will terminate relating to the offered certificates are
described in "The Pooling and Servicing Agreement--Termination; Retirement of
Certificates" in the prospectus. The master servicer or the depositor will have
the option on any distribution date on which the aggregate Stated Principal
Balance of the mortgage loans is less than 10% of the aggregate cut-off date
balance:
o to purchase all remaining mortgage loans and other assets in the
trust, except for the policy, thereby effecting early retirement of
the offered certificates, or
o to purchase in whole, but not in part, the certificates. Any
purchase of mortgage loans and other assets of the trust shall be
made at a price equal to the sum of:
o 100% of the unpaid principal balance of each mortgage loan, or
the fair market value of the related underlying mortgaged
properties with respect to defaulted mortgage loans as to
which title to the mortgaged properties has been acquired if
the fair market value is less than the unpaid principal
balance, as of the date of repurchase plus
o its accrued interest at the Net Mortgage Rate to, but not
including, the first day of the month in which the repurchase
price is distributed and
o any amounts due to the credit enhancer under the insurance and
indemnity agreement.
Distributions on the certificates relating to any optional termination
will be paid, first, to the offered certificates, in an amount equal to the
Certificate Principal Balance of each class plus one
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month's interest accrued on those offered certificates at the related
pass-through rate, plus any previously unpaid Accrued Certificate Interest and
second, except as described in the pooling and servicing agreement, to the
Residual Certificates. Any purchase of mortgage loans and termination of the
trust requires the consent of the credit enhancer if it would result in a draw
on the policy. Any purchase of the certificates, will be made at a price equal
to 100% of its Certificate Principal Balance plus the sum of one month's
interest accrued on those certificates at the applicable pass-through rate and
any previously unpaid Accrued Certificate Interest. Upon the purchase of the
certificates or at any time thereafter, at the option of the master servicer or
the depositor, the mortgage loans may be sold, thereby effecting a retirement of
the certificates and the termination of the trust, or the certificates so
purchased may be held or resold by the master servicer or the depositor.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the offered certificates, ____________, counsel to
the depositor, will deliver an opinion to the effect that, assuming compliance
with all provisions of the pooling and servicing agreement, for federal income
tax purposes, REMIC I and REMIC II will each qualify as a REMIC under the
Internal Revenue Code.
For federal income tax purposes:
o the Class R-I Certificates will constitute the sole class of
"residual interests" in REMIC I
o each class of offered certificates will represent ownership of
"regular interests" in REMIC II and will generally be treated
as debt instruments of REMIC II and
o the Class R-II Certificates will constitute the sole class of
"residual certificates" in REMIC II.
See "Material Federal Income Tax Consequences--REMICS" in the prospectus.
For federal income tax reporting purposes, the offered certificates, other
than the [Class A-I-1 Certificates and Fixed Strip Certificates], will not and
the [Class A-I-1 Certificates and Fixed Strip Certificates] will be treated as
having been issued with original issue discount. The prepayment assumption that
will be used in determining the rate of accrual of original issue discount,
market discount and premium, if any, for federal income tax purposes will be
based on the assumption that, subsequent to the date of any determination the
mortgage loans will prepay at a rate equal to __% of the prepayment assumption.
No representation is made that the mortgage loans will prepay at that rate or at
any other rate. See "Material Federal Income Tax Consequences--General" and
"--REMICS--Taxation of Owners of REMIC Regular Certificates--Original Issue
Discount" in the prospectus.
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If the method for computing original issue discount described in the
prospectus results in a negative amount for any period with respect to a
certificateholder, in particular the Fixed Strip Certificates, the amount of
original issue discount allocable to that period would be zero and the
certificateholder will be permitted to offset that negative amount only against
future original issue discount, if any, attributable to those certificates.
In some circumstances OID regulations permit the holder of a debt
instrument to recognize original issue discount under a method that differs from
that used by the issuer. Accordingly, it is possible that the holder of a
certificate may be able to select a method for recognizing original issue
discount that differs from that used by the master servicer in preparing reports
to the certificateholders and the IRS.
Some classes of the offered certificates may be treated for federal income
tax purposes as having been issued at a premium. Whether any holder of one of
those classes of certificates will be treated as holding a certificate with
amortizable bond premium will depend on the certificateholder's purchase price
and the distributions remaining to be made on the certificate at the time of its
acquisition by the certificateholder. Holders of those classes of certificates
should consult their tax advisors regarding the possibility of making an
election to amortize the premium. See "Material Federal Income Tax
Consequences--REMICS--Taxation of Owners of REMIC Regular Certificates" and
"--Premium" in the prospectus.
The offered certificates will be treated as assets described in Section
7701(a)(19)(C) of the Internal Revenue Code and "real estate assets" under
Section 856(c)(4)(A), formerly Section 856(c)(5)(A), of the Internal Revenue
Code generally in the same proportion that the assets of the trust would be so
treated. In addition, interest on the offered certificates will be treated as
"interest on obligations secured by mortgages on real property" under Section
856(c)(3)(B) of the Internal Revenue Code generally to the extent that the
offered certificates are treated as "real estate assets" under Section
856(c)(4)(A) of the Internal Revenue Code. Moreover, the offered certificates
will be "qualified mortgages" within the meaning of Section 860G(a)(3) of the
Internal Revenue Code if transferred to another REMIC on its startup day in
exchange for a regular or residual interest therein. However, prospective
investors in offered certificates that will be generally treated as assets
described in Section 860G(a)(3) of the Internal Revenue Code should note that,
notwithstanding that treatment, any repurchase of certificate under the right of
the master servicer or the depositor to repurchase the offered certificates may
adversely affect any REMIC that holds the offered certificates if the repurchase
is made under circumstances giving rise to a prohibited transaction tax. See
"The Pooling and Servicing Agreement--Termination" in this prospectus supplement
and "Material Federal Income Tax Consequences--REMICS--Characterization of
Investments in REMIC Certificates" in the prospectus.
Residential Funding will be designated as the "tax matters person" with
respect to REMIC I and REMIC II as defined in the REMIC provisions, and in
connection therewith will be required to hold not less than 0.01% of each of the
Class R-I Certificates and Class R-II Certificates.
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New Withholding Regulations
The Treasury Department has issued new regulations which make some
modifications to the withholding, backup withholding and information reporting
rules described above. The new regulations attempt to unify certification
requirements and modify reliance standards. The new regulations will generally
be effective for payments made after December 31, 1999, subject to some
transition rules. Prospective investors are urged to consult their own tax
advisors regarding the new regulations.
For further information regarding federal income tax consequences of
investing in the offered certificates, see "Material Federal Income Tax
Consequences--REMICS" in the prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions of an underwriting agreement, dated
________, __________ has agreed to purchase and the depositor has agreed to sell
the Class A Certificates and Class IO Certificates. It is expected that delivery
of the certificates will be made only in book-entry form through the Same Day
Funds Settlement System of DTC on or about _____________, against payment
therefor in immediately available funds.
In connection with the offered certificates, the underwriter has agreed,
subject to the terms and conditions of the underwriting agreement, to purchase
all of the offered certificates if any of its offered certificates are purchased
thereby.
The underwriting agreement provides that the obligations of the
underwriter to pay for and accept delivery of the offered certificates is
subject to, among other things, the receipt of legal opinions and to the
conditions, among others, that no stop order suspending the effectiveness of the
depositor's registration statement shall be in effect, and that no proceedings
for that purpose shall be pending before or threatened by the Commission.
The distribution of the offered certificates by the underwriter may be
effected from time to time in one or more negotiated transactions, or otherwise,
at varying prices to be determined at the time of sale. Proceeds to the
depositor from the sale of the offered certificates, before deducting expenses
payable by the depositor, will be approximately __% of the aggregate Certificate
Principal Balance of the offered certificates plus its accrued interest from the
cut-off date.
The underwriter may effect these transactions by selling the offered
certificates to or through dealers, and those dealers may receive compensation
in the form of underwriting discounts, concessions or commissions from the
underwriter for whom they act as agent. In connection with
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the sale of the offered certificates, the underwriter may be deemed to have
received compensation from the depositor in the form of underwriting
compensation. The underwriter and any dealers that participate with the
underwriter in the distribution of the offered certificates may be deemed to be
underwriters and any profit on the resale of the offered certificates positioned
by them may be deemed to be underwriting discounts and commissions under the
Securities Act of 1933, as amended.
The underwriting agreement provides that the depositor will indemnify the
underwriter, and that under limited circumstances the underwriter will indemnify
the depositor, against some civil liabilities under the Securities Act, or
contribute to payments required to be made in respect thereof.
There is currently no secondary market for the offered certificates. The
underwriter intends to make a secondary market in the offered certificates but
is not obligated to do so. There can be no assurance that a secondary market for
the offered certificates will develop or, if it does develop, that it will
continue. The offered certificates will not be listed on any securities
exchange.
The primary source of information available to investors concerning the
offered certificates will be the monthly statements discussed in the prospectus
under "Description of the Certificates--Reports to Certificateholders," which
will include information as to the outstanding principal balance of the offered
certificates. There can be no assurance that any additional information
regarding the offered certificates will be available through any other source.
In addition, the depositor is not aware of any source through which price
information about the offered certificates will be available on an ongoing
basis. The limited nature of this information regarding the offered certificates
may adversely affect the liquidity of the offered certificates, even if a
secondary market for the offered certificates becomes available.
LEGAL OPINIONS
Material legal matters relating to the offered certificates will be passed
upon for the depositor by ________________ and for the underwriter by
_________________.
EXPERTS
The consolidated financial statements of ____________ and subsidiaries, as
of December 31, 1998 and 1997 and for each of the years in the three-year period
ended December 31, 1998 are incorporated by reference in this prospectus
supplement and in the registration statement in reliance upon the report of
__________, independent certified public accountants, incorporated by reference
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in this prospectus supplement, and upon the authority of said firm as experts in
accounting and auditing.
RATINGS
It is a condition to the issuance of the Class A Certificates that they be
rated "AAA" by _______________. and _________________. It is a condition to the
issuance of the Fixed Strip Certificates that they be rated "AAAr" by
_____________ and "AAA" by ______________.
[The ratings assigned by _____________ to mortgage pass-through
certificates address the likelihood of the receipt by certificateholders of
payments required under the pooling and servicing agreement. ____________'s
ratings take into consideration the credit quality of the mortgage pool,
structural and legal aspects associated with the offered certificates, and the
extent to which the payment stream in the mortgage pool is adequate to make
payments required under the offered certificates. ___________'s rating on the
offered certificates does not, however, constitute a statement regarding
frequency of prepayments on the mortgages. See "Material Yield and Prepayment
Considerations" in this prospectus supplement. The "r" of the "AAAr" rating of
the Fixed Strip Certificates by ___________ is attached to highlight derivative,
hybrid, and some other obligations that _____________ believes may experience
high volatility or high variability in expected returns due to non-credit risks.
Examples of these obligations are:
o securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and
options; and
o interest only and principal only mortgage securities.
The absence of an "r" symbol should not be taken as an indication that an
obligation will exhibit no volatility or variability in total return.]
[The ratings assigned by _____________ to mortgage pass-through
certificates address the likelihood of the receipt by certificateholders of all
distributions to which they are entitled under the transaction structure.
__________'s ratings reflect its analysis of the riskiness of the underlying
mortgage loans and the structure of the transaction described in the operative
documents. ___________'s ratings do not address the effect on the certificates'
yield attributable to prepayments or recoveries on the underlying mortgage
loans. Further, the rating on the Fixed Strip Certificates does not address
whether investors therein will recoup their initial investments.]
The depositor has not requested a rating on the offered certificates by
any rating agency other than________ and ___________. However, there can be no
assurance as to whether any other rating agency will rate the offered
certificates, or, if it does, what rating would be assigned by any other rating
agency. A rating on the offered certificates by another rating agency, if
assigned at all, may be lower than the ratings assigned to the offered
certificates by ___________ and ____________.
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A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. The ratings of the Fixed Strip Certificates do not
address the possibility that the holders of those certificates may fail to
recover fully their initial investments. In the event that the ratings initially
assigned to the offered certificates are subsequently lowered for any reason, no
person or entity is obligated to provide any additional support or credit
enhancement with respect to the offered certificates.
LEGAL INVESTMENT
The offered certificates will not constitute "mortgage related securities"
for purposes of SMMEA because the mortgage pool includes mortgage loans that are
secured by subordinate liens on the related mortgaged properties. Institutions
whose investment activities are subject to legal investment laws and regulations
or to review by regulatory authorities should consult with their own legal
advisors in determining whether and to what extent the offered certificates are
subject to restrictions on investment, capital requirements or otherwise. See
"Legal Investment Matters" in the prospectus.
One or more classes of the offered certificates may be viewed as 'complex
securities" under TB 13a, which applies to thrift institutions regulated by the
OTS.
The depositor makes no representations as to the proper characterization
of any class of the offered certificates for legal investment or other purposes,
or as to the ability of particular investors to purchase any class of the
offered certificates under applicable legal investment restrictions. These
uncertainties may adversely affect the liquidity of any class of offered
certificates. Accordingly, all institutions whose investment activities are
subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their legal
advisors in determining whether and to what extent any class of the offered
certificates constitutes a legal investment or is subject to investment, capital
or other restrictions.
See "Legal Investment Matters" in the prospectus.
ERISA CONSIDERATIONS
A fiduciary of any ERISA plan or any insurance company, whether through
its general or separate accounts, or any other person investing ERISA plan
assets of any ERISA plan, as defined under "ERISA Considerations-ERISA Plan
Asset Regulations" in the prospectus, should carefully review with its legal
advisors whether the purchase or holding of offered certificates could give rise
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to a transaction prohibited or not otherwise permissible under ERISA or Section
4975 of the Internal Revenue Code. The purchase or holding of the offered
certificates by, on behalf of or with ERISA plan assets of an ERISA plan may
qualify for exemptive relief under the Exemption, as described under "ERISA
Considerations-Prohibited Transaction Exemptions" in the prospectus. However,
the Exemption contains a number of conditions which must be met for the
Exemption to apply, including the requirement that any ERISA plan must be an
"accredited investor" as defined in Rule 501(a)(1) of Regulation D of the
Commission under the Securities Act. See "ERISA Considerations" in the
prospectus.
Insurance companies contemplating the investment of general account assets
in the offered certificates should consult with their legal advisors with
respect to the applicability of Section 401(c) of ERISA, as described under
"ERISA Considerations--Insurance Company General Accounts" in the prospectus.
The DOL issued proposed regulations under Section 401(c) on December 22, 1997,
but the required final regulations have not been issued as of the date of this
prospectus supplement.
Any fiduciary or other investor of ERISA plan assets that proposes to
acquire or hold the offered certificates on behalf of or with ERISA plan assets
of any ERISA plan should consult with its counsel with respect to:
o whether the specific and general conditions and the other
requirements in the Exemption would be satisfied, or whether any
other prohibited transaction exemption would apply, and
o the potential applicability of the general fiduciary responsibility
provisions of ERISA and the prohibited transaction provisions of
ERISA and Section 4975 of the Internal Revenue Code to the proposed
investment.
The sale of any of the offered certificates to an ERISA plan is in no
respect a representation by the depositor or the underwriter that such an
investment meets all relevant legal requirements relating to investments by
ERISA plans generally or any particular ERISA plan, or that such an investment
is appropriate for ERISA plans generally or any particular ERISA plan.
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX
DOCUMENTATION PROCEDURES
Except in some limited circumstances, the globally offered Residential
Funding Mortgage Securities II, Inc., Home Equity Loan Pass-Through
Certificates, Series _______: [Class A-I-1, Class A-I-2, Class A-I-3, Class
A-I-4, Class A-I-5, Class A-I-6, Class A-II and Class IO] Certificates, or
Global Securities, will be available only in book-entry form. Investors in the
Global Securities may hold these Global Securities through any of DTC, Cedelbank
or Euroclear. The Global Securities will be tradable as home market instruments
in both the European and U.S. domestic markets. Initial settlement and all
secondary trades will settle in same-day funds.
Secondary market trading between investors through Cedelbank and Euroclear
will be conducted in the ordinary way in accordance with the normal rules and
operating procedures of Cedelbank and Euroclear and in accordance with
conventional eurobond practice, i.e., seven calendar day settlement.
Secondary market trading between investors through DTC will be conducted
according to DTC's rules and procedures applicable to U.S. corporate debt
obligations.
Secondary cross-market trading between Cedelbank customers or Euroclear
and DTC participants holding the Global Securities will be effected on a
delivery-against-payment basis through the respective depositaries of Cedelbank
and Euroclear, in that capacity, and as DTC participants.
Beneficial owners of Global Securities that are Non-U.S. Persons will be
subject to U.S. withholding taxes unless the beneficial owners meet some
requirements and deliver appropriate U.S. tax documents to the securities
clearing organizations or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the name
of Cede & Co. as nominee of DTC. Investors' interests in the Global Securities
will be represented through financial institutions acting on their behalf as
participants and indirect participants in DTC. As a result, Cedelbank and
Euroclear will hold positions on behalf of their customers and participants,
respectively, through their relevant depositary which in turn will hold these
positions in their accounts as DTC participants.
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Investors electing to hold their Global Securities through DTC will follow
DTC settlement practices. Investor securities custody accounts will be credited
with their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedelbank or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
Secondary Market Trading
Because the purchaser determines the place of delivery, it is important to
establish at the time of the trading of any Global Securities where both the
purchaser's and the seller's accounts are located to ensure that settlement can
be made on the desired value date.
Trading between DTC Participants. Secondary market trading between DTC
participants will be settled using the procedures applicable to prior mortgage
loan asset-backed certificates issues in same-day funds.
Trading between Cedelbank Customers and/or Euroclear Participants.
Secondary market trading between Cedelbank customers and/or Euroclear
participants will be settled using the procedures applicable to conventional
eurobonds in same-day funds.
Trading between DTC Participant Sellers and Cedelbank Customer Purchasers
or Euroclear Participant Purchasers. When Global Securities are to be
transferred from the account of a DTC participant to the account of a Cedelbank
customer or a Euroclear participant, the purchaser must send instructions to
Cedelbank or Euroclear through a Cedelbank customer or Euroclear participant at
least one business day prior to settlement. Cedelbank or Euroclear, as the case
may be, will instruct the relevant depositary, to receive the Global Securities
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment date to and excluding the settlement
date, on the basis of the actual number of days in the accrual period and a year
assumed to consist of 360 days. For transactions settling on the 31st of the
month, payment will include interest accrued to and excluding the first day of
the following month. Payment will then be made by the relevant depositary to the
DTC participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Cedelbank customer's or Euroclear participant's
account. The securities credit will appear the next day, European time, and the
cash debt will be back-valued to, and the interest on the Global Securities will
accrue from, the value date, which would be the preceding day when settlement
occurred in New York. If settlement is not completed on the intended value date,
i.e., the trade fails, the Cedelbank or Euroclear cash debt will be valued
instead as of the actual settlement date.
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Cedelbank customers and Euroclear participants will need to provide the
funds necessary to process same-day funds settlement to the respective clearing
systems. The most direct means of providing the funds is to pre-position funds
for settlement, either from cash on hand or from existing lines of credit, as
would be done for any settlement occurring within Cedelbank or Euroclear. Under
this approach, a purchaser may take on credit exposure to Cedelbank or Euroclear
until the Global Securities are credited to its account one day later.
Alternatively, if Cedelbank or Euroclear has extended a line of credit to a
purchaser, Cedelbank customers or Euroclear participants can elect not to
pre-position funds and instead to finance settlement by drawing upon that line
of credit. Under this procedure, Cedelbank customers or Euroclear participants
purchasing Global Securities would incur overdraft charges for one day, assuming
they cleared the overdraft when the Global Securities were credited to their
accounts. However, interest on the Global Securities would accrue from the value
date. Therefore, in many cases the investment income on the Global Securities
earned during that one-day period may substantially reduce or offset the amount
of the overdraft charges, although the result will depend on each Cedelbank
customer's or Euroclear participant's particular cost of funds. Because
settlements occur during New York business hours, DTC participants can employ
their usual procedures for crediting Global Securities to the applicable
European depositary for the benefit of Cedelbank customers or Euroclear
participants. The sale proceeds will be available to the DTC seller on the
settlement date. Thus, to the DTC participants a cross-market transaction will
settle no differently than a trade between two DTC participants.
Trading between Cedelbank Customer Sellers or Euroclear Participant
Sellers and DTC Participant Purchasers. Due to time zone differences in their
favor, Cedelbank customers and Euroclear participants may employ their customary
procedures for transactions in which Global Securities are to be transferred by
the applicable clearing system, through the applicable depositary, to a DTC
participant. The seller must send instructions to Cedelbank or Euroclear through
a Cedelbank customer or Euroclear participant at least one business day prior to
settlement. Cedelbank or Euroclear will instruct the applicable depositary, to
credit the Global Securities to the DTC participant's account against payment.
Payment will include interest accrued on the Global Securities from and
including the last coupon payment to and excluding the settlement date on the
basis of the actual number of days in the accrual period and a year assumed to
consist to 360 days. For transactions settling on the 31st of a given month,
payment will include interest accrued to and excluding the first day of the
following month. Payment will be reflected in the account of the Cedelbank
customer or Euroclear participant the following business day, and receipt of the
cash proceeds in the Cedelbank customer's or Euroclear participant's account
will be back-valued to the value date, which would be the preceding day, when
settlement occurred in New York. If the Cedelbank customer or Euroclear
participant has a line of credit with its clearing system and elects to draw on
that line of credit in anticipation of receipt of the sale proceeds in its
account, the back-valuation may be substantially reduce or offset any overdraft
charges incurred during that one-day period. If settlement is not completed on
the intended value date, receipt of the cash proceeds in the Cedelbank
customer's or Euroclear participant's account would instead be valued as of the
actual settlement date.
Finally, day traders that use Cedelbank or Euroclear and purchase Global
Securities from DTC participants for delivery to Cedelbank customers or
Euroclear participants should note that
I-3
<PAGE>
these trades will automatically fail on the sale side unless affirmative action
is taken. At least three techniques should be readily available to eliminate
this potential problem:
o borrowing through Cedelbank or Euroclear for one day, until the
purchase side of the trade is reflected in their Cedelbank or
Euroclear accounts, in accordance with the clearing system's
customary procedures;
o borrowing the Global Securities in the U.S. from a DTC participant
no later than one day prior to settlement, which would give the
Global Securities sufficient time to be reflected in the Cedelbank
or Euroclear account in order to settle the sale side of the trade;
or
o staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC participant is
at least one day prior to the value date for the sale to the
Cedelbank customer or Euroclear participant.
Material U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding these securities through
Cedelbank or Euroclear, or through DTC if the holder has an address outside the
U.S., will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest, including original issue discount, on registered debt
issued by U.S. Persons, unless:
o each clearing system, bank or other financial institution that holds
customers' securities in the ordinary course of its trade or
business in the chain of intermediaries between the beneficial owner
and the U.S. entity required to withhold tax complies with
applicable certification requirements and
o the beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
Exemption for Non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are Non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status) or
any successor form. If the information shown on Form W-8 changes, a new Form W-8
must be filed within 30 days of the change.
Exemption for Non-U.S. Persons with effectively connected income (Form
4224). A Non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States) or any successor form.
Exemption or reduced rate for Non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons residing in a country that has a tax
treaty with the United States can obtain an exemption or reduced tax rate,
depending on the treaty terms, by filing Form 1001 (Holdership,
I-4
<PAGE>
Exemption or Reduced Rate Certificate) or any successor form. If the treaty
provides only for a reduced rate, withholding tax will be imposed at that rate
unless the filer alternatively files Form W- 8 or any successor form. Form 1001
may be filed by certificateholders or their agent. Exemption for U.S. Persons
(Form W-9). U.S. Persons can obtain a complete exemption from the withholding
tax by filing Form W-9 (Payer's Request for Taxpayer Identification Number and
Certification).
U.S. Federal Income Tax Reporting Procedure. The holder of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his or her agent,
files by submitting the appropriate form to the person through whom it holds the
security, the clearing agency, in the case of persons holding directly on the
books of the clearing agency. Form W-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one calendar year. The term "U.S.
Person" means:
o a citizen or resident of the United States,
o a corporation, partnership or other entity created or organized in,
or under the laws of, the United States, any state thereof, or the
District of Columbia, except in the case of a partnership, to the
extent provided in Treasury regulations, or any political
subdivision thereof, or
o an estate that is described in Section 7701(a)(30)(D) of the
Internal Revenue Code, or a trust that is described in Section
7701(a)(30)(E) of the Internal Revenue Code.
The term "Non-U.S. Person" means any person who is not a U.S. Person. This
summary does not address all aspects of U.S. Federal income tax withholding that
may be relevant to foreign beneficial owners of the Global Securities. Investors
are advised to consult their own tax advisors for specific tax advice concerning
their holding and disposing of the Global Securities.
I-5
<PAGE>
Residential Funding Mortgage Securities II, Inc.
$___________
Home Equity Loan Pass-Through Certificates,
Series _______
Prospectus Supplement
---------------------
[Underwriter]
You should rely only on the information contained or incorporated by reference
in this prospectus supplement and the accompanying prospectus. We have not
authorized anyone to provide you with different information.
We are not offering the certificates offered in this prospectus supplement in
any state where the offer is not permitted.
Dealers will be required to deliver a prospectus supplement and prospectus when
acting as underwriters of the certificates offered hereby and with respect to
their unsold allotments or subscriptions. In addition, all dealers selling the
certificates, whether or not participating in this offering, may be required to
deliver a prospectus supplement and prospectus until _____________.
<PAGE>
- --------------------------------------------------------------------------------
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
- --------------------------------------------------------------------------------
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION June 4, 1999
Prospectus
Asset-Backed Notes
Residential Funding Mortgage Securities II, Inc.
Depositor
Offered Notes The notes of any series will represent debt of that trust and
will be paid only from the assets of that trust. Each series
may include multiple classes of notes with differing payment
terms and priorities. Credit enhancement will be provided for
all notes.
The depositor may periodically form separate trusts to issue notes in series,
secured by the assets of that trust.
Trust Assets Each trust will consist primarily of:
o one- to four-family first or junior lien home equity revolving lines
of credit;
o one- to four-family first or junior lien closed end home equity
loans acquired under the home equity program or under the 125 loan
program;
o home improvement installment sales contracts and loan agreements,
either unsecured or secured;
o manufactured housing installment sales contracts and loan
agreements;
o partial balances of their assets; and
o securities and whole or partial participations in their assets.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these notes or determined that this
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
________________, 1999
<PAGE>
Important notice about information presented in this
prospectus and the accompanying prospectus supplement
We provide information to you about the notes in two separate documents that
provide progressively more detail:
o this prospectus, which provides general information, some of which
may not apply to your series of notes; and
o the accompanying prospectus supplement, which describes the specific
terms of your series of notes.
If the description of your notes in the accompanying prospectus supplement
differs from the related description in this prospectus, you should rely on the
information in that prospectus supplement.
You should rely only on the information provided in this prospectus and the
accompanying prospectus supplement, including the information incorporated by
reference. See "Additional Information," "Reports to Noteholders" and
"Incorporation of Certain Information by Reference" in this prospectus. You can
request information incorporated by reference from Residential Funding Mortgage
Securities II, Inc. by calling us at (612) 832-7000 or writing to us at 8400
Normandale Lake Boulevard, Suite 600, Minneapolis, Minnesota 55437. We have not
authorized anyone to provide you with different information. We are not offering
the notes in any state where the offer is not permitted.
You can find a listing of definitions for capitalized terms used in this
prospectus under the caption "Glossary" beginning on page 94.
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<PAGE>
TABLE OF CONTENTS
INTRODUCTION.................................................................1
THE TRUSTS...................................................................1
Revolving Credit Loans.......................................................5
TRUST ASSET PROGRAM..........................................................8
Qualifications of Sellers...................................................12
Representations Relating to Trust Assets....................................13
Subservicing................................................................16
DESCRIPTION OF THE NOTES....................................................17
Form of Notes...............................................................17
Assignment of the Trust Assets..............................................20
Review of Trust Assets......................................................21
Excess Spread and Excluded Spread...........................................22
Payments on Trust Assets; Deposits to Payment Account.......................23
Withdrawals from the Custodial Account......................................26
Payments....................................................................27
Funding Account.............................................................28
Reports to Noteholders......................................................28
Hazard Insurance and Related Claims.........................................29
DESCRIPTION OF CREDIT ENHANCEMENT...........................................30
Financial Guaranty Insurance Policy.........................................32
Letter of Credit............................................................32
Subordination...............................................................33
Overcollateralization.......................................................33
Reserve Funds...............................................................33
Maintenance of Credit Enhancement...........................................34
Reduction or Substitution of Credit Enhancement.............................35
OTHER FINANCIAL OBLIGATIONS RELATED TO THE NOTES............................36
Swaps and Yield Supplement Agreements.......................................36
Purchase Obligations........................................................36
DESCRIPTION OF FHA INSURANCE UNDER TITLE I..................................37
THE DEPOSITOR...............................................................39
RESIDENTIAL FUNDING CORPORATION.............................................39
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SERVICING OF TRUST ASSETS...................................................40
Subservicing................................................................40
Collection and Other Servicing Procedures...................................41
Special Servicing and Special Servicing Agreements..........................43
Realization Upon Defaulted Loans............................................44
Servicing Compensation and Payment of Expenses..............................45
Evidence as to Compliance...................................................45
Certain Matters Regarding the Master Servicer and the Depositor.............46
THE AGREEMENTS..............................................................47
Events of Default; Rights Upon Event of Default.............................47
Amendment...................................................................50
Termination; Redemption of Notes............................................51
The Owner Trustee...........................................................51
The Indenture Trustee.......................................................51
YIELD AND PREPAYMENT CONSIDERATIONS.........................................52
CERTAIN LEGAL ASPECTS OF THE TRUST ASSETS
AND RELATED MATTERS...................................................58
Trust Assets Secured by Mortgages on Mortgaged Property.....................58
Cooperative Loans...........................................................59
Tax Aspects of Cooperative Ownership........................................60
Manufactured Housing Contracts..............................................60
Foreclosure on Loans and Certain Contracts .................................62
Foreclosure on Shares of Cooperatives.......................................64
Repossession with Respect to Manufactured Housing Contracts ................65
Rights of Redemption........................................................67
Notice of Sale; Redemption Rights with Respect to Manufactured Homes .......67
Anti-Deficiency Legislation and Other Limitations on Lenders................68
Environmental Legislation...................................................69
Consumer Protection Laws with Respect to Manufactured Housing Contracts.....70
Enforceability of Certain Provisions........................................71
Transfer of Manufactured Homes..............................................72
The Home Improvement Contracts..............................................73
Security Interests in Home Improvements.....................................73
Applicability of Usury Laws.................................................75
Alternative Mortgage Instruments............................................76
Formaldehyde Litigation with Respect to Manufactured Housing Contracts .....76
Soldiers' and Sailors' Civil Relief Act of 1940.............................77
Forfeitures in Drug and RICO Proceedings....................................77
Junior Mortgages; Rights of Senior Mortgagees...............................78
MATERIAL FEDERAL INCOME TAX CONSEQUENCES....................................79
STATE AND OTHER TAX CONSEQUENCES............................................86
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<PAGE>
ERISA CONSIDERATIONS........................................................86
ERISA Plan Asset Regulations................................................87
Prohibited Transaction Exemptions...........................................88
Insurance Company General Accounts..........................................88
Representation from ERISA Plans Investing in Notes with "Substantial
Equity Features" .....................................................89
Tax Exempt Investors........................................................90
Consultation with Counsel...................................................90
LEGAL INVESTMENT MATTERS....................................................90
USE OF PROCEEDS.............................................................91
METHODS OF DISTRIBUTION.....................................................91
LEGAL MATTERS...............................................................92
FINANCIAL INFORMATION.......................................................92
ADDITIONAL INFORMATION......................................................92
REPORTS TO NOTEHOLDERS......................................................93
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE...........................93
GLOSSARY....................................................................94
iii
<PAGE>
INTRODUCTION
The notes offered by this prospectus may be sold from time to time in
series, as described in the related prospectus supplement. Each series of notes
in the aggregate will represent indebtedness, excluding any interest retained by
the depositor or any other entity specified in the accompanying prospectus
supplement, in a trust consisting primarily of trust assets described in the
following paragraph. The trust assets were acquired by the depositor from one or
more affiliated or unaffiliated institutions. The trust assets will be held in a
trust under a trust agreement and pledged under an indenture to secure a series
of notes as described in this prospectus and in the accompanying prospectus
supplement. The ownership of the trust fund will be evidenced by certificates
issued under the trust agreement, which are not offered by this prospectus.
THE TRUSTS
As specified in the accompanying prospectus supplement, the trust for a
series of notes and the related certificates will consist primarily of a
segregated pool of assets. The trust assets will primarily include:
o one- to four-family first or junior lien home equity revolving lines
of credit acquired under the home equity program, or revolving
credit loans;
o one- to four-family first or junior lien closed end home equity
loans acquired under the home equity program, or home equity loans
or closed-end loans;
o one- to four-family first or junior lien closed end home loans
acquired under the 125 loan program, or home loans or closed-end
loans;
o home improvement installment sales contracts and installment loan
agreements, or 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 by those home improvement contracts;
o manufactured housing installment sales contracts and installment
loan agreements, or manufactured housing contracts, secured by
security interests in manufactured homes;
o partial balances of any of the assets described above; and/or
o private securities which represent interests in any of the assets
described above, including pass-through certificates or other
instruments evidencing interest in or secured by these assets, or
all or a portion of balances of any of these assets.
The revolving credit loans and the closed-end loans are sometimes referred
to in this prospectus as the loans. The home equity program and the 125 loan
program are described in this prospectus under "Trust Asset
Program--Underwriting Standard Applicable to the Loans."
To the extent specified in the accompanying prospectus supplement, the
contracts may be partially insured by the Federal Housing Administration or the
FHA under Title I. The loans and, if applicable, contracts will be evidenced by
mortgage notes secured by mortgages or deeds of trust or other similar security
instruments creating first or junior liens on one- to four-family residential
properties. The mortgaged properties will consist primarily of owner-occupied
attached or detached one-family dwelling units, two- to four-family dwelling
units, condominiums, townhouses, row houses, individual units in planned-unit
developments, modular pre-cut/panelized housing,
1
<PAGE>
manufactured homes which are permanently affixed to the real property on which
they are located and the fee, leasehold or other interests in the underlying
real property. The underlying mortgaged property will be located in any of the
fifty states, the District of Columbia or the commonwealth of Puerto Rico and
may include vacation, second and non-owner-occupied homes. If specified in the
accompanying prospectus supplement relating to a series of notes, a pool may
contain Cooperative Loans evidenced by cooperative notes which are secured by
security interests in shares issued by Cooperatives and in the related
proprietary leases or occupancy agreements granting exclusive rights to occupy
specific dwelling units in the related buildings. As used in this prospectus,
unless otherwise specified:
o revolving credit loans, home loans, home equity loans and, if
applicable, contracts may include Cooperative Loans,
o mortgaged properties may include shares in the related Cooperative
and the related proprietary leases or occupancy agreements securing
Cooperative Notes,
o mortgage notes may include Cooperative Notes, and
o mortgages may include a security agreement relating to a Cooperative
Note.
Each trust asset will be selected by the depositor for inclusion in a pool
from among those purchased by the depositor, either directly or through its
affiliates, including Residential Funding Corporation, GMAC Mortgage
Corporation, Residential Money Centers, Inc. and HomeComings Financial Network,
Inc., or from banks, savings and loan associations, mortgage bankers, investment
banking firms, the FDIC and other mortgage loan originators or sellers not
affiliated with the depositor. These sellers are described in this prospectus
under "Trust Asset Program." If a pool is composed of trust assets acquired by
the depositor directly from sellers other than Residential Funding Corporation,
the accompanying prospectus supplement will specify the extent of trust assets
so acquired. The characteristics of the trust assets are as described in the
accompanying prospectus supplement. No more than five percent (5%) of the trust
assets that comprise the trust as of the cut-off date by aggregate principal
balance will have characteristics that deviate from those characteristics
described in the accompanying prospectus supplement. Other trust assets
available for purchase by the depositor may have characteristics which would
make them eligible for inclusion in a pool but were not selected for inclusion
in a pool at that time.
The trust assets may be delivered either directly or indirectly to the
depositor under a Designated Seller Transaction. These notes may be sold in
whole or in part to any seller identified in the accompanying prospectus
supplement in exchange for the related trust assets, or may be offered under any
of the other methods described in this prospectus under "Methods of
Distribution." The accompanying prospectus supplement for a Designated Seller
Transaction will include information, provided by the related seller, about the
designated seller, the trust assets and the underwriting standards applicable to
these trust assets. None of the depositor, Residential Funding Corporation, GMAC
Mortgage Group, Inc. or any of their affiliates will make any representation or
warranty as to these trust assets, or any representation as to the accuracy or
completeness of the information provided by the designated seller.
If specified in the accompanying prospectus supplement, the trust securing
a series of notes may include private securities. The private securities may
have been issued previously by the depositor or an affiliate, a financial
institution or other entity engaged in the business of mortgage lending or a
limited purpose corporation organized for the purpose of, among other things,
acquiring and depositing mortgage loans into trusts, and selling beneficial
interests in trusts. In this case, the accompanying prospectus supplement will
include a description of any private securities and any related credit
enhancement, and the assets underlying the private securities will be described
together with any other trust assets included in the pool relating to the
series.
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<PAGE>
In addition, as to any series of notes secured by private securities, the
private securities may consist of an ownership interest in a structuring entity
formed by the depositor for the limited purpose of holding the trust assets
relating to the series of notes. This 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 the special
purpose entity will restrict the special purpose entity from engaging in or
conducting any business other than the holding of trust assets and any related
assets and the issuance of ownership interests in the trust assets and some
incidental activities. Any ownership interest will evidence an ownership
interest in the related trust assets as well as the right to receive specified
cash flows derived from the trust assets, as described in the accompanying
prospectus supplement. The obligations of the depositor as to any ownership
interest will be limited to some representations and warranties relating to the
trust assets, as described in this prospectus. Credit support of any of the
types described in this prospectus under "Description of Credit Enhancement" may
be provided for the benefit of any ownership interest, if so specified in the
accompanying prospectus supplement.
The prospectus supplement for each series of notes will contain
information appropriate to describe the type of trust assets which will be
included in the related pool. Each prospectus supplement applicable to a series
of notes will include information to the extent then available to the depositor,
as of the related cut-off date, if appropriate, on an approximate basis. The
information may include, if applicable:
o the aggregate principal balance of the trust assets,
o the type of property securing the trust assets and related lien
priority, if any,
o the original or modified and/or remaining terms to maturity of the
trust assets,
o the earliest origination or modification date and latest maturity
date of the trust assets,
o the loan-to-value ratios, or LTV ratios, or combined LTV ratios of
the trust assets, as applicable,
o the loan rate or range of loan rates borne by the trust assets,
o the applicable index, the range of gross margins, the weighted
average gross margin, the frequency of adjustments and maximum loan
rate,
o the geographical distribution of the mortgaged properties,
o the aggregate credit limits of the related credit line agreements,
o the number and percentage of contracts that are partially insured by
the FHA under Title I,
o the weighted average junior ratio and credit utilization rate,
o the range of debt-to-income ratios,
o the distribution of loan purposes, and
o the range of Credit Scores.
3
<PAGE>
A Current Report on Form 8-K will be available upon request to holders of the
related series of notes and will be filed, together with the related trust
agreement, with the Securities and Exchange Commission, or the Commission,
within fifteen days after the initial issuance of the notes. The composition and
characteristics of a pool that contains revolving credit loans may change from
time to time as a result of any draws made after the related cut-off date under
the related credit line agreements that are included in the pool. If trust
assets are added to or deleted from the trust after the date of the accompanying
prospectus supplement other than as a result of any draws relating to the
revolving credit loans, the addition or deletion will be noted in the Current
Report on Form 8-K. Additions or deletions of this type, if any, will be made
prior to the closing date.
As to each loan, the combined LTV ratio, in most cases, will be the ratio,
expressed as a percentage, of (A) the sum of (1) the original principal balance
or the credit limit, as applicable, and (2) the principal balance of any related
senior mortgage loan at origination of the loan together with any mortgage loan
subordinate to it, to (B) the appraised value of the related mortgaged property,
or, if permitted by the Guide, a statistical valuation or the stated value. The
appraised value for any loan will be the appraised value of the related
mortgaged property determined in the appraisal used in the origination of the
loan, which may have been obtained at an earlier time. However, if the loan was
originated simultaneously with or not more than 12 months after a senior lien on
the related mortgaged property, the appraised value will be the lesser of the
appraised value at the origination of the senior lien and the sales price for
the mortgaged property. The statistical valuation will be the value of the
property as determined by a form of appraisal which uses a statistical model to
estimate the value of a property. The stated value will be value of the property
as stated by the related mortgagor in his or her application.
As to each loan, the junior ratio will be the ratio, expressed as a
percentage, of the original principal balance or the credit limit, as
applicable, of the loan to the sum of (1) the original principal balance or the
credit limit, as applicable, of the loan and (2) the principal balance of any
related senior mortgage loan at origination of the loan. As to each contract,
the combined LTV ratio and junior ratio will be computed in the manner described
in the accompanying prospectus supplement. The credit utilization rate for any
revolving credit loan is determined by dividing the cut-off date principal
balance of the revolving credit loan by the credit limit of the related credit
line agreement.
As to each loan, LTV ratio, in most caes, will be the ratio, expressed as
a percentage, of (A) the original principal balance or the credit limit, as
applicable, to (B) the appraised value of the related mortgaged property loan,
or, if permitted by the Guide, a statistical valuation or the stated value.
As specified in the prospectus supplement, a pool may include Balloon
Loans. The amount of the monthly payment will remain constant until the maturity
date, upon which the Balloon Amount will be due and payable.
Mortgaged properties consisting of modular housing, also known as
pre-assembled, prefabricated, sectional or pre-built homes, are factory built
and constructed in two or more three dimensional sections, including interior
and exterior finish, plumbing, wiring and mechanical systems. Upon completion,
the modular home is transported to the property site to be joined together on a
permanent foundation.
Mortgaged properties consisting of manufactured homes must be legally
classified as real estate, have the wheels and axles removed and be attached to
a permanent foundation and may not be located in a mobile home park. The
manufactured homes will also have other characteristics as specified in the
prospectus supplement.
A pool may include trust assets that have been modified. The modifications
may include conversions from an adjustable to a fixed loan rate or other changes
in the related mortgage note.
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<PAGE>
If a trust asset is a modified trust asset, references to origination shall be
deemed to be references to the date of modification.
The depositor will cause the trust assets constituting each pool to be
assigned to the owner trustee named in the accompanying prospectus supplement,
for the benefit of the holders of all of the securities of a series. The master
servicer named in the accompanying prospectus supplement will service the trust
assets, either directly or through subservicers under a servicing agreement and
will receive a fee for its services. See "Trust Asset Program" and "Description
of the Notes." As to those trust assets serviced by the master servicer through
a subservicer, the master servicer will remain liable for its servicing
obligations under the related servicing agreement as if the master servicer
alone were servicing the trust assets. In addition to or in place of the master
servicer for a series of notes, the accompanying prospectus supplement may
identify an Administrator for the trust. The Administrator may be an affiliate
of the depositor. All references in this prospectus to the master servicer and
any discussions of the servicing and administration functions of the master
servicer will also apply to the Administrator to the extent applicable.
The depositor's assignment of the trust assets to the owner trustee on
behalf of the trust will be without recourse. See "Description of the
Notes--Assignment of Trust Assets." The master servicer's obligations relating
to the trust assets will consist principally of its contractual servicing
obligations under the related servicing agreement, including its obligation to
enforce purchase obligations of Residential Funding Corporation or any
designated seller and other obligations of subservicers, as described in this
prospectus under "Trust Asset Program--Representations Relating to Trust
Assets," and "--Subservicing" and "Description of the Notes--Assignment of Trust
Assets" or under the terms of any private securities. Residential Funding
Corporation, or other entity specified in the accompanying prospectus
supplement, will be obligated to advance funds to mortgagors for draws made
after the related cut-off date.
A mortgaged property securing a loan and, if applicable, a contract may be
subject to the senior liens of one or more conventional mortgage loans at the
time of origination and may be subject to one or more junior liens at the time
of origination or after that origination. A mortgage loan secured by any junior
lien or senior lien will likely not be included in the related pool, but the
depositor, an affiliate of the depositor or an unaffiliated seller may have an
interest in the mortgage loan. Loans and contracts that are secured by junior
liens will not be required by the depositor to be covered by a primary mortgage
guaranty insurance policy insuring against default on the trust assets.
Revolving Credit Loans
The revolving credit loans will be originated under credit line agreements
subject to a credit limit. Interest on each revolving credit loan will be
calculated based on the average daily balance outstanding during the billing
cycle and the billing cycle, in most cases, will be the calendar month preceding
a due date. Each revolving credit loan will have a loan rate that is subject to
adjustment on the day specified in the related mortgage note, which may be daily
or monthly, equal to the sum of (a) the index on the day specified in the
accompanying prospectus supplement, and (b) a fixed percentage, or gross margin,
as specified in the related mortgage note, subject to the maximum rate specified
in the mortgage note and permitted by applicable law. Notwithstanding the
foregoing, if so specified in the accompanying prospectus supplement, a
revolving credit loan may have an introductory rate that is lower than the rate
that would be in effect if the applicable index and gross margin were used to
determine the loan rate, known as teaser loans, and as a result of the
introductory rate, interest payments on the notes may initially be lower than
expected. Commencing on their first adjustment date, the loan rates on the
teaser loans will be based on the applicable index and gross margin.
The index for a particular pool will be specified in the accompanying
prospectus supplement and may include one of the following indexes:
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o the weekly average yield on U.S. Treasury securities adjusted to a
constant maturity of either six months or one year,
o the weekly auction average investment yield of U.S. Treasury bills
of six months,
o the daily bank prime loan rate made available by the Federal Reserve
Board,
o the cost of funds of member institutions for the Federal Home Loan
Bank of San Francisco,
o the interbank offered rates for U.S. dollar deposits in the London
market, each calculated as of a date prior to each scheduled note
rate adjustment date which will be specified in the accompanying
prospectus supplement, or
o the weekly average of secondary market note rates on six-month
negotiable certificates of deposit.
Unless specified in the accompanying prospectus supplement, each revolving
credit loan will have a term to maturity from the date of origination of not
more than 25 years. The mortgagor for each revolving credit loan may draw money
under the related credit line agreement at any time In most cases, the draw
period will not be more than 15 years. If the draw period is less than the full
term of the revolving credit loan, the related mortgagor will not be permitted
to make any draw during the period from the end of the related draw period to
the related maturity date, known as the repayment period. The mortgagor for each
revolving credit loan will be obligated to make monthly payments on the
revolving credit loan in a minimum amount as specified in the related mortgage
note, which usually will not be less than the finance charge for the related
billing cycle. The mortgagor for each revolving credit loan will be obligated to
payoff the remaining account balance on the related maturity date, which may be
a substantial principal amount. The maximum amount of any draw is equal to the
excess, if any, of the credit limit over the principal balance outstanding under
the mortgage note at the time of the draw.
Unless specified in the accompanying prospectus supplement:
o the finance charge for any billing cycle, in most cases, will be
equal to interest accrued on the average daily principal balance of
the revolving credit loan for the billing cycle at the related loan
rate,
o the account balance on any day, in most cases, will be the aggregate
of the unpaid principal of the revolving credit loan outstanding at
the beginning of the day, plus all related draws funded on that day,
plus the sum of any unpaid finance charges and any unpaid fees,
insurance premiums and other charges that are due on the revolving
credit loan minus the aggregate of all payments and credits that are
applied to the repayment of any draws on that day, and
o the principal balance on any day usually will be the related account
balance minus the sum of any unpaid finance charges and additional
charges that are due on the revolving credit loan.
Payments made by or on behalf of the mortgagor for each revolving credit loan,
in most cases, will be the applicable loan rate times the unpaid principal
balance, with any remainder of the payment applied to principal. This is known
as an actuarial loan.
A simple interest loan provides the amortization of the amount financed
under the loan over a series of equal monthly payments except, in the case of a
Balloon Loan, the final payment. Each
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monthly payment consists of an installment of interest which is calculated on
the basis of the outstanding principal balance of the loan multiplied by the
stated loan rate and further multiplied by a fraction, with the numerator equal
to the number of days in the period elapsed since the preceding payment of
interest was made and the denominator equal to the number of days in the annual
period for which interest accrues on the loan. As payments are received under a
simple interest loan, the amount received is applied first to interest accrued
to the date of payment and then the remaining amount is applied to pay any
unpaid fees and then to reduce the unpaid principal balance. Accordingly, if a
borrower pays a fixed monthly installment on a simple interest loan before its
scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be less than it would have been
had the payment been made as scheduled, and the portion of the payment applied
to reduce the unpaid principal balance will be correspondingly greater.
Conversely, if a borrower pays a fixed monthly installment after its scheduled
due date, the portion of the payment allocable to interest for the period since
the preceding payment was made will be greater than it would have been had the
payment been made as scheduled, and the remaining portion, if any, of the
payment applied to reduce the unpaid principal balance will be correspondingly
less. If each scheduled payment under a simple interest loan is made on or prior
to its scheduled due date, the principal balance of the loan will amortize more
quickly than scheduled. However, if the borrower consistently makes scheduled
payments after the scheduled due date, the loan will amortize more slowly than
scheduled. If a simple interest loan is prepaid, the borrower is required to pay
interest only to the date of prepayment. Those variable allocations among
principal and interest of a simple interest loan may affect the distributions of
principal and interest on the notes, as described in the accompanying prospectus
supplement.
The closed-end loans may provide for payment of a prepayment charge if the
related mortgagor prepays the closed-end loan within a specified time period.
The Contracts
In most cases, the contracts will be fully amortizing and may have fixed
loan rates or adjustable loan rates and may provide for other payment
characteristics as described in the accompanying prospectus supplement.
The manufactured housing contracts will be secured by manufactured homes,
located in any of the fifty states, the District of Columbia or the Commonwealth
of Puerto Rico. As specified in the accompanying prospectus supplement, the home
improvement contracts will either be unsecured or secured primarily by:
o mortgages on one- to four-family residential properties that are
generally subordinate to other mortgages on the same mortgaged
property, or
o purchase money security interests in the home improvements financed
by those contracts. The contracts will be conventional contracts or
contracts partially insured by the FHA under Title I.
The home improvements securing the home improvement contracts may include,
but are not limited to, replacement windows, house siding, new roofs, swimming
pools, satellite dishes, kitchen and bathroom remodeling goods and solar heating
panels. The proceeds of loans under the Title I Program may be used only for
permitted purposes, including, but not limited to, the alteration, repair or
improvement of residential property, the purchase of a manufactured home and/or
lot on which to place that home, or cooperative interest in the home and/or lot.
As specified in the accompanying prospectus supplement, the manufactured
homes underlying the manufactured housing contracts will consist of manufactured
homes within the meaning of Title 42 of the United States Internal Revenue Code,
Section 5402(6). Section 5402(6)
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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, in
most cases, depreciate in value. Consequently, at any time after origination it
is possible, especially in the case of contracts with high LTV ratios at
origination, that the market value of a manufactured home or home improvement
may be lower than the principal amount outstanding under the related contract.
TRUST ASSET PROGRAM
The trust assets will have been purchased by the depositor, either
directly or indirectly through Residential Funding Corporation from sellers. The
loans will, in most cases, have been originated in accordance with the
depositor's underwriting standards or alternative underwriting criteria as
described under "Underwriting Standards Applicable to the Loans" or as described
in the accompanying prospectus supplement. The contracts, in most cases, will
have been originated in accordance with the underwriting standards described in
the accompanying prospectus supplement.
Underwriting Standards Applicable to the Loans
General Standards
The depositor's underwriting standards for the loans will, in most cases,
conform to those published in Residential Funding Corporation's Client Guide and
Servicer Guide, referred to together as the Guide, including the provisions of
the Guide applicable to the depositor's home equity program or the 125 loan
program, as applicable. The home equity program may include revolving credit
loans and home equity loans. The 125 loan program may include home loans and
home improvement contracts. The underwriting standards contained in the Guide
are continuously revised based on opportunities and prevailing conditions in the
residential mortgage market, the consumer lending market and the market for
mortgage securities. The loans may be underwritten by Residential Funding
Corporation or by a designated third party. In some circumstances, however, the
loans may be underwritten only by the seller with little or no review performed
by Residential Funding Corporation. See "Underwriting Standards Applicable to
the Loans--Guide Standards" and "Qualifications of Sellers." Residential Funding
Corporation or a designated third party may perform only sample quality
assurance reviews to determine whether the loans in any pool were underwritten
in accordance with applicable standards.
The depositor's underwriting standards, as well as any other underwriting
standards that may be applicable to any loans, generally include a set of
specific criteria under which the underwriting evaluation is made. However, the
application of the underwriting standards does not imply that each specific
criterion was satisfied individually. Rather, a loan will be considered to be
originated in accordance with a given set of underwriting standards if, based on
an overall qualitative evaluation, the loan is in substantial compliance with
the underwriting standards. For example, a loan may be considered to comply with
a set of underwriting standards, even if one or more specific criteria included
in the underwriting standards were not satisfied, if other factors compensated
for the criteria that were not satisfied.
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In addition, the depositor purchases loans which do not conform to the
underwriting standards contained in the Guide. A portion of the loans may be
purchased in negotiated transactions, and those negotiated transactions may be
governed by agreements, known as master commitments, relating to ongoing
purchases of loans by Residential Funding Corporation, from sellers who will
represent that the loans have been originated in accordance with underwriting
standards agreed to by Residential Funding Corporation. Residential Funding
Corporation, on behalf of the depositor or a designated third party, will
normally review only a limited portion of the loans in any delivery from the
related seller for conformity with the applicable underwriting standards. A
portion of loans may be purchased from sellers who may represent that the loans
were originated under underwriting standards acceptable to Residential Funding
Corporation.
The level of review, if any, by Residential Funding Corporation or the
depositor of any loan for conformity with the applicable underwriting standards
will vary depending on a number of factors, including factors relating to the
experience and status of the seller, and factors relating to the specific loan,
including the original principal balance or credit limit, as applicable, the
combined LTV ratio, the loan type or loan program, and the applicable Credit
Score of the related mortgagor used in connection with the origination of the
loan, as determined based on a credit scoring model acceptable to the depositor.
Credit scoring models provide a means for evaluating the information about a
prospective borrower that is available from a credit reporting agency. The
underwriting criteria applicable to any program under which the loans may be
originated may provide that qualification for the loan, the level of review of
the loan's documentation, or the availability of various loan features,
including maximum loan amount, maximum LTV ratio, property type and use, and
documentation level may depend on the mortgagor's Credit Score.
The underwriting standards utilized in negotiated transactions and master
commitments and the underwriting standards applicable to loans underlying
private securities may vary substantially from the underwriting standards
contained in the Guide. Those underwriting standards are, in most cases,
intended to provide an underwriter with information to evaluate the borrower's
repayment ability and the value of the mortgaged property as collateral. Due to
the variety of underwriting standards and review procedures that may be
applicable to the loans included in any pool, the accompanying prospectus
supplement, in most cases, will not distinguish among the various underwriting
standards applicable to the loans nor describe any review for compliance with
applicable underwriting standards performed by the depositor or Residential
Funding Corporation. Moreover, there can be no assurance that every loan was
originated in conformity with the applicable underwriting standards in all
material respects, or that the quality or performance of loans underwritten
under varying standards as described above will be equivalent under all
circumstances. In the case of a Designated Seller Transaction, the applicable
underwriting standards will be those of the designated seller or of the
originator of the loans, and will be described in the accompanying prospectus
supplement.
The depositor, either directly or indirectly through Residential Funding
Corporation, will also purchase loans from its affiliates, including GMAC
Mortgage Corporation, Residential Money Centers, Inc. and HomeComings Financial
Network, Inc., with underwriting standards in accordance with the Guide or as
otherwise agreed to by the depositor. However, in some limited circumstances,
the loans may be employee or preferred customer loans for which, in accordance
with the affiliate's mortgage loan programs, income, asset and employment
verifications and appraisals may not have been required. As to loans made under
any employee loan program maintained by Residential Funding Corporation, or its
affiliates, in limited circumstances preferential note rates may be allowed.
Neither the depositor nor Residential Funding Corporation will review any
affiliate's loans for conformity with the underwriting standards contained in
the Guide.
Guide Standards
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The following is a brief description of the underwriting standards under
both the home equity program and the 125 loan program described in the Guide for
full documentation loan programs. Initially, a prospective borrower, other than
a trust if the trust is the borrower, is required to fill out a detailed
application providing pertinent credit information. As part of the application,
the borrower is required to provide a statement of income and expenses, as well
as an authorization to apply for a credit report which summarizes the borrower's
credit history with merchants and lenders and any record of bankruptcy. Under
the home equity program, the borrower normally must show, among other things, a
minimum of two years' credit history reported on the credit report and under the
125 loan program, the borrower normally must show a minimum of three years'
credit history. Under both programs, the borrower normally must show that no
mortgage delinquencies, which are thirty days or greater, in the past 12 months
existed. Under both programs, borrowers who have less than a 12 month first
mortgage payment history may be subject to additional lending restrictions. In
addition, borrowers with a previous foreclosure or bankruptcy within the past
seven years may not be allowed and a borrower generally must satisfy all
judgments, liens and other legal actions with an original amount of $1,000 or
greater prior to closing. In addition, an employment verification is obtained
which reports the borrower's current salary and may contain the length of
employment and an indication as to whether it is expected that the borrower will
continue that employment in the future. If a prospective borrower is
self-employed, the borrower may be required to submit copies of signed tax
returns. The borrower may also be required to authorize verification of deposits
at 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.
In most cases, the value of the mortgaged property securing each loan will
be determined by either an appraisal, or if permitted by the Guide, a
statistical valuation or the stated value. Appraisals may be performed by
appraisers independent from or affiliated with the depositor, Residential
Funding Corporation or their affiliates. The appraiser is required to inspect
the property and verify that it is in good condition and that construction, if
new, has been completed. In some circumstances, the appraiser is only required
to perform an exterior inspection of the property. The appraisal is based on
various factors, including the market value of comparable homes and the cost of
replacing the improvements. Under both programs, each appraisal is required to
be dated no more than 360 days prior to the date of origination of the loan.
Depending on the original principal balance or the credit limit, as applicable,
an earlier appraisal may be used if the appraisal was made not earlier than two
years prior to the date of origination of the loan and the related appraiser
certifies that the value of the related mortgaged property has not declined
since the date of the original appraisal or if a field review or statistical
valuation is obtained. However, appraisals, statistical valuations, or stated
values will not establish that the mortgaged properties provide assurance of
repayment of the loans. Title searches are undertaken in most cases, and title
insurance is required on all loans with an original principal balance or credit
limit in excess of $100,000.
The Credit Scores for a portion of the loans underlying each series of
notes will be supplied in the accompanying prospectus supplement. Credit Scores
are obtained by many lenders in connection with loan applications to help assess
a borrower's credit-worthiness. In addition, Credit Scores may be obtained by
Residential Funding Corporation after the origination of a loan if the seller
does not provide to Residential Funding Corporation a Credit Score. Credit
Scores are obtained from credit reports provided by various credit reporting
organizations, each of which may employ differing computer models and
methodologies. The Credit Score is designed to assess a borrower's credit
history at a single point in time, using objective information currently on file
for the borrower at a particular credit reporting organization. Information
utilized to create a Credit Score may include, among other things, payment
history, delinquencies on accounts, levels of outstanding indebtedness, length
of credit history, types of credit, and bankruptcy experience. Credit Scores
range from approximately 350 to approximately 840, with higher scores indicating
an individual with a more favorable credit history compared to an individual
with a lower score. However, a Credit Score purports only to be a measurement of
the relative degree of risk a borrower
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represents to a lender, that is, a borrower with a higher score is statistically
expected to be less likely to default in payment than a borrower with a lower
score. In addition, it should be noted that Credit Scores were developed to
indicate a level of default probability over a two-year period, which does not
correspond to the life of a mortgage loan. Furthermore, Credit Scores were not
developed specifically for use in connection with mortgage loans, but for
consumer loans in general, and assess only the borrower's past credit history.
Therefore, a Credit Score does not take into consideration the differences
between mortgage loans and consumer loans in general, or the specific
characteristics of the related loan, for example, the LTV ratio, the collateral
for the mortgage loan, or the debt-to-income ratio. There can be no assurance
that the Credit Scores of the mortgagors will be an accurate predictor of the
likelihood of repayment of the related loans or that any mortgagor's Credit
Score would not be lower if obtained as of the date of the accompanying
prospectus supplement.
Once all applicable employment, credit and property information is
received, a determination is made as to whether the prospective borrower has
sufficient monthly income available to meet the borrower's monthly obligations
on the proposed mortgage loan and other expenses related to the home if
applicable, such as property taxes and hazard insurance, as well as other
financial obligations, including debt service on any mortgage loan secured by a
senior lien on the related mortgaged property. In most cases, the monthly
payment used to qualify borrowers for a revolving credit loan will be assumed to
be an amount equal to 1.00% times the applicable credit limit. In most cases,
the loan rate in effect from the origination date of a revolving credit loan to
the first adjustment date will be lower, and may be significantly lower, than
the sum of the then applicable index and gross margin. The monthly payment used
to qualify borrowers for a Closed End Loan is a fully amortized fixed payment
which is added to the housing expenses and other monthly debt to calculate the
debt-to-income ratio. The loans, in most cases, do not, but may provide for
negative amortization. Payment of the full outstanding principal balance, if
any, at maturity may depend on the borrower's ability to obtain refinancing or
to sell the mortgaged property prior to the maturity of the loan, and there can
be no assurance that refinancing will be available to the borrower or that a
sale will be possible.
The underwriting standards presented in the Guide also allow for loans to
be supported by alternative documentation. For alternatively documented loans, a
borrower may demonstrate income and employment directly by providing alternative
documentation in the form of copies of the borrower's own records relating to
income and employment, rather than by having the originator obtain independent
verifications from third parties, such as the borrower's employer or mortgage
servicer.
The underwriting standards contained in the Guide may be varied in
appropriate cases, including in "limited" or "reduced loan documentation"
mortgage loan programs. Limited documentation programs normally permit fewer
supporting documents to be obtained or waive income, asset and employment
documentation requirements, and normally compensate for increased credit risk by
placing greater emphasis on either the review of the property to be financed or
the borrower's ability to repay the loan. For example, under Residential Funding
Corporation's stated income limited mortgage loan documentation program, some
submission requirements regarding income verification and debt-to-income ratios
are removed, but the seller is still required to perform a thorough credit
underwriting of the mortgage loan. Normally, in order to be eligible for a
reduced loan documentation program, a mortgagor must have a good credit history,
and other compensating factors, including a relatively low combined LTV ratio,
or other favorable underwriting factors, must be present. The borrower's
eligibility for the program may also be determined by use of a credit scoring
model.
The home equity program provides some limitations on the combined LTV
ratio for the revolving credit loans and the home equity loans and restrictions
on any related underlying first mortgage loan. The underwriting guidelines for
the home equity program normally permit combined
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LTV ratio's as high as 100%; however, the maximum permitted combined LTV ratio
may be reduced due to various underwriting criteria. In areas where property
values are considered to be declining, the maximum permitted combined LTV ratio
is 75%. The underwriting guidelines for the 125 Loan Program normally permit
combined LTV ratios as high as 125%; however, the maximum permitted combined LTV
ratio may be reduced due to various underwriting criteria. The underwriting
guidelines for both programs also include restrictions based on the borrower's
debt-to-income ratio. In addition to the conditions described above, an
evaluation of the prospective borrower's credit quality will be made based on a
credit scoring model approved by Residential Funding Corporation. Underwriting
guidelines for both programs include minimum credit score levels that may apply
depending on other factors relating to the loan. The required yields for
fixed-rate closed-end loans and required gross margins for revolving credit
loans purchased under the home equity program, as announced from time to time,
vary based on a number of factors including combined LTV ratio, original
principal balance or credit limit, documentation level, property type, and
borrower debt-to-income ratio and credit score.
In its evaluation of mortgage loans which have twenty-four or more months
of payment experience, Residential Funding Corporation 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 in the case of Designated Seller Transactions or as specified in
the accompanying prospectus supplement, each seller, other than the Federal
Deposit Insurance Corporation, or the FDIC, and investment banking firms, will
have been approved by Residential Funding Corporation for participation in
Residential Funding Corporation's loan purchase program. In determining whether
to approve a seller for participation in the loan purchase program, Residential
Funding Corporation will consider, among other things, the financial status,
including the net worth, of the seller, the previous experience of the seller in
originating home equity, revolving credit, home improvement, manufactured
housing or first mortgage loans, the prior delinquency and loss experience of
the seller, the underwriting standards employed by the seller and the quality
control and, if applicable, servicing operations established by the seller.
There can be no assurance that any seller presently meets any qualifications or
will continue to meet any qualifications at the time of inclusion of mortgage
loans sold by it in the trust for a series of notes, or thereafter. If a seller
becomes subject to the direct or indirect control of the FDIC, or if a seller's
net worth, financial performance or delinquency and foreclosure rates
deteriorate, that institution may continue to be treated as a seller. Any event
of this type may adversely affect the ability of any seller to repurchase the
trust asset in the event of a breach of a representation or warranty which has
not been cured.
Residential Funding Corporation monitors sellers that it knows to be under
control of the FDIC or are insolvent, otherwise in receivership or
conservatorship or financially distressed. Any seller that is under control of
the FDIC or insolvent may make no representations and warranties relating 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 relating to the trust assets sold, or only
limited representations and warranties may be made, for example, that the
related legal documents are enforceable. The FDIC may have no obligation to
repurchase any trust asset for a breach of a representation and warranty.
As specified in the accompanying prospectus supplement, the qualifications
required of sellers for approval by Residential Funding Corporation as
participants in its loan purchase programs may not apply to designated sellers.
To the extent the designated seller fails to or is unable to repurchase the
trust asset due to a breach of representation and warranty, neither the
depositor, Residential Funding Corporation nor any other entity will have
assumed the representations and
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warranties, and any related losses will be borne by the noteholders or by the
credit enhancement, if any.
Representations Relating to Trust Assets
Except as described in the second preceding paragraph, each seller will
have made representations and warranties to Residential Funding Corporation
relating to the trust assets sold by it. However, unless provided in the
accompanying prospectus supplement, the representations and warranties of the
seller will not be assigned to the indenture trustee for the benefit of the
holders of the related series of notes, and therefore a breach of the
representations and warranties of the seller, in most cases, will not be
enforceable on behalf of the trust.
In the case of a pool consisting of trust assets purchased by the
depositor from sellers through Residential Funding Corporation, Residential
Funding Corporation, except in the case of a Designated Seller Transaction or as
to trust assets underlying any private securities or as specified in the
accompanying prospectus supplement, will have made limited representations and
warranties regarding the trust assets to the depositor at the time that they are
sold to the depositor. The representations and warranties will, in most cases,
include, among other things, that:
o as of the cut-off date, the information contained in a listing of
the related trust assets is true and correct in all material
respects;
o Residential Funding Corporation was the sole holder and owner of the
trust assets free and clear of any and all liens and security
interests;
o each trust asset complied in all material respects with all
applicable local, state and federal laws;
o except as otherwise indicated in the accompanying prospectus
supplement, no trust asset is one month or more delinquent in
payment of principal and interest;
o there is no delinquent tax, or to the best of Residential Funding
Corporation's knowledge, assessment lien against any mortgaged
property; and
o to the best of Residential Funding Corporation's knowledge, any
contract that is partially insured by the FHA under Title I was
originated in accordance with applicable FHA regulations and is
insured, without set-off, surcharge or defense by the FHA.
In the event of a breach of a representation or warranty made by
Residential Funding Corporation that materially adversely affects the interests
of the Noteholders in a trust asset, Residential Funding Corporation will be
obligated to repurchase or substitute for the affected trust asset as described
below. In addition, Residential Funding Corporation will be obligated to
repurchase or substitute for any trust asset secured by a lien on mortgaged
property as to which it is discovered that the related mortgage is not a valid
lien on the related mortgaged property having at least the priority maintained
for the trust asset, as applicable, in the listing of related trust assets,
subject only to:
o liens of real property taxes and assessments not yet due and
payable,
o covenants, conditions and restrictions, rights of way, easements and
other matters of public record as of the date of recording of the
mortgage and other permissible title exceptions,
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o 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
o if applicable, the liens of the related senior mortgage loans.
In addition, as to any trust asset as to which the depositor delivers to the
indenture trustee or the custodian an affidavit certifying that the original
mortgage note has been lost or destroyed, if the trust asset subsequently is in
default and the enforcement of that default or of the related mortgage is
materially adversely affected by the absence of the original mortgage note,
Residential Funding Corporation will be obligated to repurchase or substitute
for the trust asset, in the manner described in the second paragraph below.
However, Residential Funding Corporation will not be required to repurchase or
substitute for any trust asset as described above if the circumstances giving
rise to the requirement also constitute fraud in the origination of the related
trust asset. Furthermore, because the listing of the related trust assets, in
most cases, contains information about the trust assets as of the cut-off date,
prepayments and, in some limited circumstances, modifications to the note rate
and principal and interest payments may have been made on one or more of the
related trust assets between the cut-off date and the closing date. Residential
Funding Corporation will not be required to purchase or substitute for any trust
asset as a result of the prepayment or modification.
In a Designated Seller Transaction, as specified in the accompanying
prospectus supplement, the designated seller will have made specific
representations and warranties regarding the trust assets to the depositor
generally similar to those made in the preceding paragraph by Residential
Funding Corporation.
The depositor will assign to the owner trustee, or the special purpose
entity, if applicable, all of its right, title and interest in each agreement by
which it purchased a trust asset from Residential Funding Corporation or a
designated seller, insofar as the agreement relates to the representations and
warranties made by a designated seller or Residential Funding Corporation, as
the case may be, regarding the trust asset and any remedies provided for any
breach of the representations and warranties. If a designated seller or
Residential Funding Corporation, as the case may be, cannot cure a breach of any
representation or warranty made by it relating to a trust asset which materially
and adversely affects the interests of the noteholders in the trust asset,
within 90 days after notice from the mster servicer, the designated seller or
Residential Funding Corporation, as the case may be, will be obligated to
purchase the trust asset at a pruchase price contained in the related agreement,
which purchase price, in most cases, will be equal to the principal balance of
that trust asset as of the date of purchase plus accrued and unpaid interest to
the first day of the month following the month of repurchase at the loan rate,
less the amount, expressed as a percentage per annum, payable for master
servicing compensation or subservicing compensation, as applicable, and if
applicable, the Excluded Spread.
Unless specified in the accompanying prospectus supplement, as to any
trust asset required to be purchased by Residential Funding Corporation as
provided in the preceding paragraph, rather than purchase the trust asset,
Residential Funding Corporation may, at its sole option, remove the trust asset
from the trust, or from the assets underlying any private securities, if
applicable, and cause the depositor to substitute in its place another trust
asset of like kind. The accompanying prospectus supplement will describe the
conditions of any eligible substitute loan. The related agreement may include
additional requirements or additional provisions relating to meeting the
foregoing requirements on an aggregate basis where a number of substitutions
occur contemporaneously.
The master servicer will be required under the servicing agreement to use
its best reasonable efforts to enforce this purchase or substitution obligation
for the benefit of the indenture trustee and the noteholders, using practices it
would employ in its good faith business judgment and which are normal and usual
in its general mortgage servicing activities. However, this purchase or
substitution
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obligation will not become an obligation of the master servicer in the event the
designated seller or Residential Funding Corporation, as the case may be, fails
to honor its obligation. The master servicer will be entitled to reimbursement
for any costs and expenses incurred in pursuing a purchase or substitution
obligation, including but not limited to any costs or expenses associated with
litigation. In instances where a designated seller is unable, or disputes its
obligation, to purchase affected trust assets, the master servicer, employing
the standards contained in the preceding sentence, may negotiate and enter into
one or more settlement agreements with the designated seller that may provide
for, among other things, the purchase of only a portion of the affected trust
assets or coverage of only some loss amounts. Any settlement could lead to
losses on the trust assets which would be borne by the credit enhancement
supporting the related series of notes, and to the extent not available, by the
noteholders of the series. Furthermore, if applicable, the master servicer may
pursue foreclosure, or similar remedies, concurrently with pursuing any remedy
for a breach of a representation and warranty. However, the master servicer is
not required to continue to pursue both remedies if it determines that one
remedy is more likely to result in a greater recovery. In accordance with the
above described practices, the master servicer will not be required to enforce
any purchase of a designated seller arising from any misrepresentation by the
designated seller, if the master servicer determines in the reasonable exercise
of its business judgment that the matters related to the misrepresentation did
not directly cause or are not likely to directly cause a loss on the related
trust asset. If the designated seller fails to repurchase and no breach of
either the depositor's or Residential Funding Corporation's representations has
occurred, the designated seller's purchase obligation will not become an
obligation of the depositor or Residential Funding Corporation. In most cases,
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 Corporation in its capacity as a
seller of trust assets to the depositor, or for any other event giving rise to
the obligations as described in this paragraph.
Neither the depositor nor the master servicer will be obligated to
purchase a trust asset if a designated seller defaults on its obligation to do
so, and no assurance can be given that a designated seller will carry out its
obligations relating to trust assets. The default by a designated seller is not
a default by the depositor or by the master servicer. Any trust asset not so
purchased or substituted for shall remain in the related trust and any losses
related to that trust asset shall be allocated to the related credit
enhancement, and to the extent not available to the related notes.
However, if any designated seller requests Residential Funding
Corporation's consent to transfer subservicing rights for any related trust
assets to a successor servicer, Residential Funding Corporation may release the
designated seller from liability under its representations and warranties
described in the second preceding paragraph, upon the assumption of the
successor servicer of the designated seller's liability for the representations
and warranties as of the date they were made. In that event, Residential Funding
Corporation's rights under the instrument by which the successor servicer
assumes the designated seller's liability will be assigned to the owner trustee,
or the special purpose entity, if applicable, and the successor servicer will be
deemed to be the designated seller for purposes of the foregoing provisions.
Subservicing
In most cases, the servicing for each trust asset will either be retained
by the seller, or its designee approved by the master servicer, as subservicer,
or will be released by the seller to the master servicer and will be
subsequently transferred to a subservicer approved by the master servicer, and
in either case will then be serviced by the subservicer under an subservicing
agreement between the master servicer and the subservicer. The master servicer
may, but is not obligated to, assign the subservicing to designated subservicers
which will be qualified sellers and which may include GMAC Mortgage Corporation
or its affiliates. While the subservicing agreement will be a contract solely
between the master servicer and the subservicer, the servicing agreement
applicable to any series of notes will provide that, if for any reason the
master servicer for the series of notes is no
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longer the master servicer of the related trust assets, any successor master
servicer must recognize the subservicer's rights and obligations under the
subservicing agreement. For further information relating to subservicing see
"Servicing of Trust Assets--Subservicing" in this prospectus.
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DESCRIPTION OF THE NOTES
The notes will be issued in series. Each series of notes will be issued
under an indenture between the related trust and the entity named in the
accompanying prospectus supplement as indenture trustee for the series. A form
of indenture has been filed as an exhibit to the registration statement under
the Securities Act of 1933, as amended, for the notes 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" as well as other pertinent
information included elsewhere in this prospectus, and subject to the
accompanying prospectus supplement, do not describe all terms of the notes but
reflect the material provisions relating to the notes common to each agreement.
Each series of notes may consist of a single class of notes or any
combination of the following:
o two or more classes of notes, of which one or more classes of notes
may be senior in right of payment to any class or classes of notes,
and as to which some classes of senior, or subordinate notes may be
senior to other classes of senior, or subordinate, notes, as
described in the accompanying prospectus supplement;
o one or more classes of mezzanine notes which are subordinate notes
but which are senior to other classes of subordinate notes as to
distributions or losses;
o one or more classes of notes which will be entitled to (a) principal
distributions, with disproportionate, nominal or no interest
distributions or (b) interest distributions, with disproportionate,
nominal or no principal distributions, known as a strip note;
o two or more classes of notes which differ as to the timing,
sequential order, rate, pass-through rate or amount of distributions
of principal or interest or both, or as to which distributions of
principal or interest or both on any class may be made upon the
occurrence of specified events, in accordance with a schedule or
formula, including "planned amortization classes" and "targeted
amortization classes" and "very accurately defined maturity
classes", or on the basis of collections from designated portions of
the pool, which series may include one or more classes of notes for
which accrued interest will not be distributed but rather will be
added to the principal balance of those classes of notes on the
payment date specified in the accompanying prospectus supplement; or
o other types of classes of notes, as described in the accompanying
prospectus supplement.
Credit support for each series of notes will be provided by a financial
guaranty insurance policy, derivative products, special hazard insurance policy,
bankruptcy bond, letter of credit, reserve fund, surety bond, by the
subordination of one or more classes of notes, overcollateralization or other
credit enhancement as described under "Description of Credit Enhancement," or by
any combination of the foregoing.
Form of Notes
As specified in the accompanying prospectus supplement, the notes of each
series will be issued either as physical certificates or in book-entry form. If
issued as physical certificates, the notes will be in fully registered form only
in the denominations specified in the accompanying prospectus supplement, and
will be transferrable and exchangeable at the corporate trust office of the note
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register who is appointed under the related agreement to register the notes. No
service charge will be made for any registration of exchange or transfer of
notes, but the indenture trustee may require payment of a sum sufficient to
cover any tax or other governmental charge. The term noteholder as used in this
prospectus refers to the entity whose name appears on the records of the note
registrar or, if applicable, a transfer agent, as the registered holder of a
note.
If issued in book-entry form, the classes of a series of notes will be
initially issued through the book-entry facilities of The Depository Trust
Company, or DTC, or Cedelbank, societe anonyme, or Cedel, or the Euroclear
System in Europe known as Euroclear. Noteholders may hold book entry notes
directly through these facilities if they are participants of those systems, or
indirectly through organizations which are participants in those systems, or
through any other depository or facility as may be specified in the accompanying
prospectus supplement. Any class of book entry notes will list DTC's nominee as
the record holder. Cedel and Euroclear will hold omnibus positions on behalf of
their participants through customers' securities accounts in Cedel's and
Euroclear's names on the books of their respective depositaries, which in turn
will hold those positions in customers' securities accounts in the depositaries'
names on the books of DTC.
DTC is a limited-purpose trust company organized under the laws of the
State of New York, which holds securities for its participants and facilitates
the clearance and settlement of securities transactions between participants
through electronic book-entry changes in the accounts of participants.
Participants include securities brokers and dealers, banks, trust companies and
clearing corporations and may include other organizations. Other institutions
that are not participants but clear through or maintain a custodial relationship
with participants, known as indirect participants, have indirect access to DTC's
clearance system.
Unless specified in the accompanying prospectus supplement, no beneficial
owner of book-entry notes will be entitled to receive a note representing that
interest in registered, certificated form, unless either:
o DTC ceases to act as depository for that note and a successor
depository is not obtained, or
o the indenture trustee elects in its sole discretion to discontinue
the registration of the notes through DTC.
Prior to any of these events, 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 benificial owners will be able to
exercise their rights as owners of their notes only indirectly through DTC,
Participants and indirect participants. Any beneficial owner that desires to
purchase, sell or otherwise transfer any interest in book-entry notes may do so
only through DTC, either directly if the beneficial owner is a participant or
indirectly through participants and, if applicable, indirect participants. Under
the procedures of DTC, transfers of the beneficial ownership of any book-entry
notes will be required to be made in minimum denominations specified in the
accompanying prospectus supplement. The ability of a benieicial owner to pledge
book-entry notes to persons or entities that are not participants in the DTC
system, or to otherwise act as to the notes, may be limited because of the lack
of physical certificates evidencing the notes and because DTC may act only on
behalf of participants.
Because of time zone differences, the securities account of a Cedel or
Euroclear participant as a result of a transaction with a DTC participant, other
than a depositary holding on behalf of Cedel or Euroclear, will be credited
during subsequent securities settlement processing day, immediately following
the DTC settlement date, which must be a business day for Cedel or Euroclear, as
the case may be. Credits or any transactions in those securities settled during
this processing will be reported to the relevant Euroclear participant or Cedel
participants on that business day. Cash received in
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Cedel or Euroclear as a result of sales of securities by or through a Cedel
participant or Euroclear participant to a DTC participant, other than the
depositary for Cedel or Euroclear, will be received with value on the DTC
settlement date, but will be available in the relevant Cedel or Euroclear cash
account only as of the business day following settlement in DTC.
Transfers between participants will occur in accordance with DTC rules.
Transfers between Cedel participants and Euroclear participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
participants or Euroclear participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the relevant depositaries; however, these cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in that system in accordance
with its rules and procedures and within its established deadlines, European
time. The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to its
depositary to take action to effect final settlement on its behalf by delivering
or receiving securities in DTC, and making or receiving payment in accordance
with normal procedures for same day funds settlement applicable to DTC. Cedel
participants and Euroclear participants may not deliver instructions directly to
the depositaries.
Cedel, as a professional depository, holds securities for its 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 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 referred to as the clearance cooperative. All
operations are conducted by the Euroclear operator, and all Euroclear securities
clearance accounts and Euroclear cash accounts are accounts with the Euroclear
operator, not the clearance cooperative. The clearance cooperative establishes
policy for Euroclear on behalf of Euroclear participants. The Euroclear operator
is the Belgian branch of a New York banking corporation which is a member bank
of the Federal Reserve System. As a result, it is regulated and examined by the
Board of Governors of the Federal Reserve System and the New York State Banking
Department, as well as the Belgian Banking Commission. Securities clearance
accounts and cash accounts with the Euroclear operator are governed by the Terms
and Conditions Governing Use of Euroclear and the related Operating Procedures
of the Euroclear System and applicable Belgian law. The Terms and Conditions
govern transfers of securities and cash within Euroclear, withdrawals of
securities and cash from Euroclear, and receipts of payments relating to
securities in Euroclear. All securities in Euroclear are held on a fungible
basis without attribution of specific certificates to specific securities
clearance accounts.
Payments on the book-entry notes will be forwarded by the indenture
trustee to DTC, and DTC will be responsible for forwarding those payments to
participants, each of which will be responsible for disbursing the payments to
the beneficial owners it represents or, if applicable, to indirect participants.
Accordingly, beneficial owners may experience delays in the receipt of payments
on 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
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represent no less than any minimum amount of percentage interests or voting
rights required therefor. DTC may take conflicting actions regarding any action
of noteholders of any class to the extent that participants authorize those
actions. None of the master servicer, the depositor, the indenture trustee, the
owner trustee or any of their respective affiliates will have any liability for
any aspect of the records relating to or payments made on account of beneficial
ownership interests in the book-entry notes, or for maintaining, supervising or
reviewing any records relating to those beneficial ownership interests.
Assignment of the Trust Assets
At the time of issuance of a series of notes, the depositor will cause the
trust assets and any other assets being included in the related trust to be
assigned without recourse to the owner trustee or its nominee, which may be the
custodian, on behalf of the related trust, together with, unless specified in
the accompanying prospectus supplement, all principal and interest received on
the trust assets after the cut-off date, other than principal and interest due
on or before the cut-off date and any Excluded Spread. The owner trustee will,
concurrently with that assignment, grant a security interest in the related
trust to the indenture trustee to secure the notes. Each trust asset will be
identified in a schedule appearing as an exhibit to the related agreement. The
schedule will include, among other things, information as to the principal
balance of each trust asset as of the cut-off date, as well as information
respecting the Loan Rate, the currently scheduled monthly payment of principal
and interest, the maturity of the mortgage note and the combined LTV ratio at
origination or modification.
If so specified in the accompanying prospectus supplement, and subject to
the rules of membership of Merscorp, Inc. and/or Mortgage Electronic
Registration Systems, Inc., referred to together as MERS, assignments of the
mortgages for any trust asset in the related trust will be registered
electronically through Mortgage Electronic Registration Systems, Inc. known as
the MERS(R) System. As to trust assets registered through the MERS(R) System,
MERS shall serve as mortgagee of record solely as a nominee in an administrative
capacity on behalf of the trustee and shall not have any interest in any of
those trust assets.
The depositor will, as to each trust asset other than trust assets
underlying any private securities, deliver to an entity specified in the
accompanying prospectus supplement, which may be the indenture trustee, a
custodian or another entity appointed by the indenture trustee, the legal
documents relating to those trust assets that are in possession of the
depositor. The legal documents may include, as applicable, depending upon
whether that trust asset is secured by a lien on mortgaged property:
o the mortgage note and any modification or amendment made to the
mortgage note, endorsed without recourse either in blank or to the
order of the owner trustee or the indenture trustee or a nominee;
o the mortgage, except for any mortgage not returned from the public
recording office, with evidence of recording indicated thereon or,
in the case of a Cooperative Loan, the respective security
agreements and any applicable UCC financing statements;
o an assignment in recordable form of the mortgage, or evidence that
the mortgage is held for the trustee through the MERS(R) System or,
as to a Cooperative Loan, an assignment of the respective security
agreements, any applicable UCC financing statements, recognition
agreements, relevant stock certificates, related blank stock powers
and the related proprietary leases or occupancy agreements;
o if applicable, any riders or modifications to the mortgage note and
mortgage, together with any other documents at those times described
in the related agreement; and
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o if applicable, the original contract and copies of documents and
instruments related to each contract and, other than in the case of
unsecured contracts, the security interest in the property securing
the contract.
The assignments may be blanket assignments covering mortgages secured by
mortgaged properties located in the same county, if permitted by law. If so
specified in the accompanying prospectus supplement, the depositor may not be
required to deliver one or more of the documents if those documents are missing
from the files of the party from whom the revolving credit loans, home equity
loans and contracts were purchased.
In the event that, as to any revolving credit loan, home equity loan or
contract secured by a lien on mortgaged property, the depositor cannot deliver
the mortgage or any assignment with evidence of recording on that mortgage or
assignment concurrently with the execution and delivery of the related trust
agreement because of a delay caused by the public recording office, the
depositor will deliver or cause to be delivered to the indenture trustee, the
custodian or another entity appointed by the indenture trustee a true and
correct photocopy of the mortgage or assignment. The depositor will deliver or
cause to be delivered to the indenture trustee or the custodian the mortgage or
assignment with evidence of recording indicated thereon after receipt thereof
from the public recording office or from the related subservicer.
As to any Puerto Rico trust assets, the mortgages for those trust assets
either secure a specific obligation for the benefit of a specified person,
referred to as direct Puerto Rico mortgage or secure an instrument transferable
by endorsement, referred to as endorsable Puerto Rico mortgage. Endorsable
Puerto Rico Mortgages do not require an assignment to transfer the related lien.
Rather, transfer of those mortgages follows an effective endorsement of the
related mortgage note and, therefore, delivery of an assignment of mortgage
would be inapplicable. Direct Puerto Rico Mortgages, however, require an
assignment to be recorded for any transfer of the related lien and the
assignment would be delivered to the trustee, or the custodian.
Assignments of the loans and contracts secured by a lien on mortgaged
property will be recorded in the appropriate public recording office, except for
mortgages held under the MERS(R) System or in states where, in the opinion of
counsel acceptable to the indenture trustee or owner trustee, the recording is
not required to protect the indenture trustee's or owner trustee's interests in
the loans and contracts against the claim of any subsequent transferee or any
successor to or creditor of the depositor or the originator of the loans or
contracts, or except as otherwise specified in the accompanying prospectus
supplement.
Under some circumstances, as to any series of notes, the depositor may
have the option to repurchase trust assets from the trust for cash, or in
exchange for other trust assets or Permitted Investments. Alternatively, for any
series of notes secured by private securities, the depositor may have the right
to repurchase loans and/or contracts from the entity that issued the private
securities. All provisions relating to these optional repurchase provisions will
be described in the accompanying prospectus supplement.
Review of Trust Assets
The indenture trustee will be authorized to appoint one or more custodians
under a custodial agreement to maintain possession of and review documents
relating to the trust assets as the agent of the indenture trustee or, following
payment in full of the notes and discharge of the indenture, the owner trustee.
The identity of the custodian, if any, will be described in the accompanying
prospectus supplement.
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The indenture trustee or the custodian will hold those documents in trust
for the benefit of the securityholders and, normally will review those documents
within 90 days after receipt. If any document is found to be defective in any
material respect, the indenture trustee or the custodian shall notify the master
servicer and the depositor, and the master servicer, the depositor or the
indenture trustee shall notify Residential Funding Corporation or the designated
seller. If Residential Funding Corporation or, in a Designated Seller
Transaction, the designated seller cannot cure the defect within the period
specified in the accompanying prospectus supplement after notice of the defect
is given to Residential Funding Corporation or, if applicable, the designated
seller, Residential Funding Corporation or, if applicable, the designated seller
is required to, within the period specified in the accompanying prospectus
supplement, either repurchase the related trust asset or any property acquired
for it from the indenture trustee, or if permitted substitute for the trust
asset a new trust asset in accordance with the standards described in this
prospectus. The master servicer will be obligated to enforce this obligation of
Residential Funding Corporation or the designated seller to the extent described
above under "Trust Asset Program--Representations Relating to Trust Assets," but
that obligation is subject to the provisions described 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 in the second preceding sentence. In most cases, neither
Residential Funding Corporation, the master servicer nor the depositor will be
obligated to purchase or substitute for that trust asset if the designated
seller defaults on its obligation to do so. The obligation to repurchase or
substitute for a trust asset constitutes the sole remedy available to the
noteholders or the indenture trustee for a material defect in a constituent
document. Any trust asset not so purchased or substituted for shall remain in
the related trust.
The master servicer will make representations and warranties regarding its
authority to enter into, and its ability to perform its obligations under the
servicing agreement. Upon a breach of any of these representations of the master
servicer which materially adversely affects the interests of the securityholders
in a trust asset, the master servicer will be obligated either to cure the
breach in all material respects or to purchase the trust asset at its purchase
price, less unreimbursed Advances, if applicable, made by the master servicer in
connection with the trust asset or, as specified in the accompanying prospectus
supplement, to substitute for that trust asset an eligible substitute loan in
accordance with the provisions for that substitution described above under
"Trust Asset Program--Representations Relating to Trust Assets." This purchase
obligation will constitute the sole remedy available to noteholders or the
indenture trustee for a breach of this type of representation by the master
servicer. Any trust asset not so purchased or substituted for shall remain in
the related trust.
Excess Spread and Excluded Spread
The depositor, the master servicer or any of their affiliates, or any
other entity specified in the accompanying prospectus supplement may retain or
be paid a portion of interest due on the related trust assets. The payment of
any portion of interest in this manner will be disclosed in the accompanying
prospectus supplement. This payment may be in addition to any other payment,
including a servicing fee, that any specified entity is otherwise entitled to
receive in connection with the trust assets. Any of these payments generated
from the trust assets will represent the Excess Spread or will be excluded from
the assets transferred to the related trust, referred to as the Excluded Spread.
The interest portion of a Realized Loss or extraordinary loss and any partial
recovery of interest on the trust assets will be allocated between the owners of
any Excess Spread or Excluded Spread and the noteholders entitled to payments of
interest as provided in the applicable agreement.
Payments on Trust Assets; Deposits to Payment Account
Each subservicer servicing a trust asset under a subservicing agreement
will establish and maintain a Subservicing Account which materially meets the
requirements described in the Guide from time to time or is approved by
Residential Funding Corporation. A subservicer is required to
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deposit into its Subservicing Account on a daily basis all amounts that are
received by it relating to 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 for trust assets that are required to be so remitted on a periodic basis
not less frequently than monthly. If so specified in the accompanying prospectus
supplement, the subservicer may also be required to Advance on the scheduled
date of remittance any monthly installment of principal and interest, or
interest only, in the case of simple interest mortgage loans, less its servicing
or other compensation, on any trust asset for which payment was not received
from the mortgagor.
The master servicer will deposit or will cause to be deposited into a
Custodial Account payments and collections received by it subsequent to the
cut-off date, other than payments due on or before the cut-off date, as
described in the related agreement, which, in most cases, will include the
following:
o payments on account of principal on the trust assets comprising a
trust;
o payments on account of interest on the trust assets comprising that
trust, net of the portion of each payment of interest retained by
the subservicer, if any, as its servicing or other compensation;
o Liquidation Proceeds, including all Insurance Proceeds or proceeds
from any alternative arrangements established in lieu of that
insurance and described in the applicable prospectus supplement,
other than proceeds to be applied to the restoration of the related
property or released to the mortgagor in accordance with the master
servicer's normal servicing procedures;
o proceeds of any trust asset in the trust purchased, or, in the case
of a substitution, amounts representing a principal adjustment, by
the master servicer, the depositor, Residential Funding Corporation,
any subservicer or seller or any other person under the terms of the
related agreement. See "Trust Asset Program--Representations
Relating to Trust Assets," and "--Assignment of Trust Assets";
o any amount required to be deposited by the master servicer in
connection with losses realized on investments of funds held in the
Custodial Account, as described fourth paragraph below; and
o any amounts required to be transferred from the Payment Account to
the Custodial Account.
In addition to the Custodial Account, the master servicer will establish
and maintain, in the name of the indenture trustee for the benefit of the
holders of each series of notes, a Payment Account for the disbursement of
payments on the trust assets evidenced by each series of notes. Both the
Custodial Account and the Payment Account must be either:
o maintained with a depository institution whose debt obligations at
the time of any deposit to the account are rated by any rating
agency that rated any notes of the related series not less than a
specified level comparable to the rating category of the notes,
o an account or accounts the deposits in which are fully insured to
the limits established by the FDIC. Any deposits not so insured
shall be otherwise maintained such that, as evidenced by an opinion
of counsel, the noteholders have a claim as to
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the funds in those accounts or a perfected first priority security
interest in any collateral securing those funds that is superior to
the claims of any other depositors or creditors of the depository
institution with which those accounts are maintained,
o in the case of the Custodial Account, a trust account or accounts
maintained in either the corporate trust department or the corporate
asset services department of a financial institution which has debt
obligations that meet various rating criteria,
o in the case of the Payment Account, a trust account or accounts
maintained with the indenture trustee, or
o any other account or accounts acceptable to any applicable rating
agency.
The collateral that is eligible to secure amounts in that Eligible Account is
limited to 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.
On the day described in the accompanying prospectus supplement, the master
servicer will withdraw from the Custodial Account and deposit into the
applicable Payment Account, in immediately available funds, the amount to be
paid from that account to noteholders on the payment date, except as otherwise
provided in the accompanying prospectus supplement. The master servicer or the
indenture trustee will also deposit or cause to be deposited into the Payment
Account:
o any payments under any letter of credit, financial guaranty
insurance policy, derivative product, and any amounts required to be
transferred to the Payment Account from a reserve fund, as described
under "Credit Enhancement" in this prospectus, or
o any amounts required to be paid by the master servicer out of its
own funds due to the operation of a deductible clause in any blanket
policy maintained by the master servicer to cover hazard losses on
the trust assets as described under "Description of the
Notes--Hazard Insurance and Related Claims" in this prospectus, any
payments received on any private securities included in the trust
and any other amounts as described in the related agreement.
The portion of any payment received by the master servicer for a trust
asset that is allocable to Excess Spread or Excluded Spread, as applicable,
will, in most cases, 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. In most cases, all income and gain realized from any investment
will be for the account of the master servicer as additional servicing
compensation. The amount of any loss incurred in connection with any investment
must be deposited in the Custodial Account or in the Payment Account, as the
case may be, by the master servicer out of its own funds upon realization of the
loss.
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Withdrawals from the Custodial Account
The master servicer may, from time to time, make withdrawals from the
Custodial Account for various purposes, as specifically described in the related
agreement, which, in most cases, will include the following:
o to make deposits to the Payment Account in the amounts and in the
manner provided in the related agreement and described above under
"--Payments on Trust Assets; Deposits to Payment Account" or in the
accompanying prospectus supplement;
o to reimburse itself or any subservicer for any Servicing Advances as
to any mortgaged property, out of late payments, Insurance Proceeds,
Liquidation Proceeds or collections on the trust asset for which
those Servicing Advances were made;
o to pay to itself or any subservicer unpaid servicing fees and
subservicing fees, out of payments or collections of interest on
each trust asset;
o to pay to itself as additional servicing compensation any investment
income on funds deposited in the Custodial Account, any amounts
remitted by subservicers as interest for partial prepayments on the
trust assets, and, if so provided in the servicing agreement, any
profits realized upon disposition of a mortgaged property acquired
by deed in lieu of foreclosure or repossession or otherwise allowed
under the agreement;
o to pay to itself, a subservicer, Residential Funding Corporation,
the depositor or the seller all amounts received in connection with
each trust asset purchased, repurchased or removed under the terms
of the related agreement and not required to be paid as of the date
on which the related purchase price is determined;
o to pay the depositor or its assignee, or any other party named in
the accompanying prospectus supplement all amounts allocable to the
Excluded Spread, if any, out of collections or payments which
represent interest on each trust asset, including any trust asset as
to which title to the underlying mortgaged property was acquired;
o to reimburse itself or the depositor for other expenses incurred for
which it or the depositor is entitled to reimbursement, including
reimbursement in connection with enforcing any repurchase,
substitution or indemnification obligation of any designated seller;
o to reimburse itself or the depositor for payment of FHA insurance
premiums, if applicable, or against which it or the depositor is
indemnified under the related agreement;
o to withdraw any amount deposited in the Custodial Account that was
not required to be deposited in that Custodial Account;
o to pay to itself or any subservicer for the funding of any draws
made on the revolving credit loans, if applicable;
o to make deposits to the funding account in the amounts and in the
manner provided in the related agreement, if applicable; and
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o to clear the Custodial Account of amounts relating to the
corresponding trust assets in connection with the termination of the
trust.
Payments
On each payment date, payments of principal and/or interest, as
applicable, on each class of notes entitled to those payments 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. Payments will be made to the persons who
are registered as the holders of those notes at the close of business on the day
prior to each payment date or, if the notes are no longer book-entry, to the
persons in whose names the notes are registered at the close of business on the
last business day of the preceding month, referred to as 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 for that form of payment, if that 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 that form of payment, or
by check mailed to the address of the person entitled thereto as it appears on
the note register. The final payment in redemption of the notes will be made
only upon presentation and surrender of the notes at the office or agency of the
indenture trustee specified in the notice to noteholders. Payments will be made
to each noteholder in accordance with the holder's percentage interest in a
particular class. The percentage interest represented by a note of a particular
class will be equal to the percentage obtained by dividing the initial principal
balance or notional amount of the note by the aggregate initial amount or
notional balance of all the notes of the related class. In addition, amounts
remaining in the Payment Account on each payment date after payments on the
notes will be applied for the purposes described in the agreements, as described
in the accompanying prospectus supplement, including distributions on the
related certificates. Any amounts so distributed on the certificates will be
released from the lien of the indenture.
Principal and Interest on the Notes
The method of determining, and the amount of, payments of principal and
interest or, where applicable, of principal only or interest only, on a
particular series of notes will be described in the accompanying prospectus
supplement. Payments of interest on each class of notes will be made prior to
payments of principal on those notes. Each class of notes, other than some
classes of strip notes, may have a different specified note rate, which may be a
fixed, variable or adjustable note rate, or any combination of two or more note
rates. The accompanying prospectus supplement will specify the note rate or
rates for each class, or the initial note rate or rates and the method for
determining the note rate or rates. As specified in the accompanying prospectus
supplement, interest on the notes will be calculated on the basis of either a
360-day year consisting of twelve 30-day months or the actual number of days in
the related interest period and a 360-day year.
On each payment date for a series of notes, the indenture trustee or the
master servicer on behalf of the indenture trustee will pay or cause the paying
agent to pay, as the case may be, principal and interest to each holder of
record on the record date of a class of notes.
In the case of a series of notes which includes two or more classes of
notes, the timing, sequential order, priority of payment or amount of payments
of principal, and any schedule or formula or other provisions applicable to the
determination thereof shall be as described in the accompanying prospectus
supplement. Payments of principal of any class of notes will be made on a pro
rata basis among all of the notes of that class unless otherwise described in
the accompanying prospectus supplement. In addition, as specified in the
accompanying prospectus supplement, payments of principal on the notes will be
limited to monthly principal payments on the trust assets, any excess interest,
if applicable, applied as principal payments on the notes and any amount paid as
a payment of principal under the related form of credit enhancement. If so
specified in the
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accompanying prospectus supplement, a series of notes may provide for a
revolving period during which all or a portion of the principal collections on
the trust assets otherwise available for payment to the notes are reinvested in
additional balances or additional trust assets or accumulated in a trust account
pending the commencement of an amortization period specified in the accompanying
prospectus supplement or the occurrence of events specified in the accompanying
prospectus supplement.
On the day of the month specified in the accompanying prospectus
supplement as 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
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.
Those additional trust assets will be required to conform to the requirements
provided in the related agreement or other agreement providing for the transfer.
As specified in the accompanying prospectus supplement, the transfer may be
funded by the establishment of a funding account. 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
relating to principal will be deposited in the funding account to be released as
additional trust assets are transferred. As specified in the accompanying
prospectus supplement, a funding account will be required to be maintained as an
Eligible Account, all amounts in that funding account will be required to be
invested in Permitted Investments and the amount held in that account shall at
no time exceed 25% of the aggregate outstanding principal balance of the notes.
As specified in the accompanying prospectus supplement, the related agreement or
other agreement providing for the transfer of additional trust assets will
provide that all the transfers must be made within 9 months, as to amounts
representing proceeds of the sale of the securities, or 12 months, as to amounts
representing all or a portion of principal collections on the trust assets,
after the closing date, and that amounts set aside to fund those transfers,
whether in a funding account or otherwise, and not so applied within the
required period of time will be deemed to be Principal Prepayments and applied
in the manner described in the prospectus supplement.
Reports to Noteholders
On each payment date, the master servicer will forward or cause to be
forwarded to each noteholder of record a statement or statements relating to the
related trust listing the information described in the related agreement. Except
as otherwise provided in the related agreement, that information will include
the following, as applicable:
o the aggregate amount of interest collections and principal
collections;
o the amount, if any, of the payment allocable to principal;
o the amount, if any, of the payment allocable to interest, and the
amount, of any shortfall in the amount of interest and principal;
o the aggregate unpaid principal balance of the trust assets after
giving effect to the payment of principal on the payment date;
o the outstanding principal balance or notional amount of each class
of notes after giving effect to the payment of principal on the
payment date;
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o based on the most recent reports furnished by subservicers, the
number of trust assets in the related pool that are delinquent (a)
one month, (b) two months and (c) three months, and that are in
foreclosure, and the aggregate principal balances of these groups of
trust assets;
o the book value of any property acquired by the trust through
foreclosure or grant of a deed in lieu of foreclosure;
o the balance of the reserve fund, if any, at the close of business on
the payment date;
o the amount of credit enhancement remaining or credit enhancement
payments made to cover default risk as of the close of business on
the applicable determination date and a description of any credit
enhancement substituted therefor;
o if applicable, any limited amounts available under the applicable
credit support to cover Special Hazard Losses, Fraud Losses and
Bankruptcy Losses, as of the close of business on the applicable
payment date and a description of any change in the calculation of
those amounts, as well as the aggregate amount of each type of loss;
o in the case of notes benefitting from alternative credit enhancement
arrangements described in a prospectus supplement, the amount of
coverage under alternative arrangements as of the close of business
on the applicable determination date;
o the aggregate amount of draws;
o for any series of notes as to which the trust includes private
securities, additional information as required under the related
agreement; and
o the FHA insurance amount.
Each amount listed under the first and second clauses above will be
expressed as a dollar amount per single note. As to a particular class of notes,
a single note, in most cases, will evidence a percentage interest obtained by
dividing $1,000 by the initial principal balance or notional balance of all the
notes of a class, except as otherwise provided in the related agreement. In
addition to the information described above, reports to noteholders will contain
other information as is listed in the applicable agreement, which may include,
without limitation, reimbursements to subservicers and the master servicer and
losses borne by the related trust.
In addition, to the extent described in the related agreement, within a
reasonable period of time after the end of each calendar year, the master
servicer will furnish a report to each holder of record of a class of notes at
any time during that calendar year. The report will include information as to
the aggregate of amounts reported under the first and second clauses above for
the calendar year or, in the event that person was a holder of record of a class
of notes during a portion of the calendar year, for the applicable portion of
the year.
Hazard Insurance and Related Claims
Unless specified in the accompanying prospectus supplement, each loan and
contract that is secured by a lien on a mortgaged property, in each case, other
than a Cooperative Loan, will be required to be covered by a hazard insurance
policy, as described in the next paragraph The following summary, as well as
other pertinent information included elsewhere in this prospectus, does not
describe all terms of a hazard insurance policy but will reflect all material
terms thereof
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relevant to an investment in the notes. The insurance is subject to underwriting
and approval of individual trust assets by the respective insurers. The
descriptions of any insurance policies described in this prospectus or any
prospectus supplement and the coverage under those insurance policies do not
purport to be complete and are qualified in their entirety by reference to the
forms of policies.
In most cases, 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. That coverage, in most cases, will be in an amount equal to the lesser
of:
o the maximum insurable value of the mortgaged property, or
o the outstanding balance of the related loan or contract plus the
outstanding balance on any mortgage loan senior to that loan or
contract except that, if generally available, that coverage must not
be less than the minimum amount required under the terms of that
loan or contract to fully compensate for any damage or loss on a
replacement cost basis. The ability of the master servicer to ensure
that hazard insurance proceeds are appropriately applied may be
dependent on its being named as an additional insured under any
hazard insurance policy or upon the extent to which information in
this regard is furnished to the master servicer by mortgagors or
subservicers.
As described preceding paragraph, 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
those trust assets. If that 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 in that account but for that
clause.
Since the amount of hazard insurance that mortgagors are required to
maintain on the improvements securing the loans and contracts may decline as the
principal balances owing thereon decrease, and since residential properties have
historically appreciated in value over time, hazard insurance proceeds could be
insufficient to restore fully the damaged property in the event of a partial
loss.
DESCRIPTION OF CREDIT ENHANCEMENT
As described in the accompanying prospectus supplement, the credit support
provided for each series of notes will include one or more of the following:
o subordination provided by the related certificates, and by any other
class of subordinated securities related to a series of notes;
o overcollateralization;
o a reserve fund;
o a financial guaranty insurance policy;
o derivatives products;
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o a letter of credit;
o mortgage repurchase bond, mortgage pool insurance policy, special
hazard insurance policy, bankruptcy bond or other types of insurance
policies, or a secured or unsecured corporate guaranty, as described
in the accompanying prospectus supplement; or
o in another form as may be described in the accompanying prospectus
supplement.
If so specified in the accompanying prospectus supplement, the contracts may be
partially insured by the FHA under Title I.
As to each series of notes, each element of the credit support will cover
losses or shortfalls incurred on the trust assets, or losses or shortfalls
allocated to or borne by the notes, as and to the extent described in the
accompanying prospectus supplement and at the times as described in that
prospectus supplement. If so provided in the accompanying prospectus supplement,
any element of the credit support may not be subject to limitations relating to
the specific type of loss or shortfall incurred as to any trust asset.
Alternatively, if so provided in the accompanying prospectus supplement, the
coverage provided by any element of the credit support may be comprised of one
or more of the components described in this section. Each component may have a
dollar limit and will, in most cases, provide coverage for Realized Losses that
are, as applicable:
o a Defaulted Loan Loss;
o a Special Hazard Loss as described in the accompanying prospectus
supplement;
o a Bankruptcy Loss; and
o a Fraud Loss.
Most forms of credit support will not provide protection against all risks
of loss and will not guarantee repayment of the entire outstanding principal
balance of the notes and interest thereon. If losses occur which exceed the
amount covered by credit support or which are not covered by the credit support,
noteholders will bear their allocable share of deficiencies. In particular, if
so provided in the accompanying prospectus supplement, 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.
For any defaulted trust asset that is finally liquidated, the Realized
Loss, if any as described in the related agreement, will equal the portion of
the Stated Principal Balance remaining after application of all amounts
recovered, net of expenses allocable to the trust, towards interest and
principal owing on the trust asset. As to a trust asset the principal balance of
which has been reduced in connection with bankruptcy proceedings, the amount of
that reduction will be treated as a Realized Loss.
Each prospectus supplement will include a description of:
o the amount payable under the credit enhancement arrangement, if any,
provided for a series;
o any conditions to payment thereunder not otherwise described in this
prospectus;
o the conditions under which the amount payable under the credit
support may be reduced and under which the credit support may be
terminated or replaced; and
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o the material provisions of any agreement relating to the credit
support.
Additionally, the accompanying prospectus supplement will describe
information about the issuer of any third-party credit enhancement , referred to
as a credit enhancer. As to any series of notes, the related agreements may be
modified from the descriptions in this prospectus to provide for reimbursement
rights, control rights or other provisions that may be required by the credit
enhancer.
The descriptions of any insurance policies, bonds or other instruments
described in this prospectus or any prospectus supplement and the coverage
thereunder do not describe all terms thereof but will reflect all relevant terms
thereof material to an investment in the notes. Copies of the instruments will
be included as exhibits to the Form 8-K to be filed with the Commission in
connection with the issuance of the related series of notes.
Financial Guaranty Insurance Policy
If so specified in the accompanying prospectus supplement, a financial
guaranty insurance policy may be obtained and maintained for a class or series
of notes. The insurer of the financial guaranty insurance policy will be
described in the accompanying prospectus supplement and a copy of the form of
financial guaranty insurance policy will be filed with the related Current
Report on Form 8-K.
Unless specified in the accompanying prospectus supplement, a financial
guaranty insurance policy will be unconditional and irrevocable and will
guarantee to holders of the applicable notes that an amount equal to the full
amount of payments due to these holders will be received by the indenture
trustee or its agent on behalf of the holders for payment on each payment date.
The specific terms of any financial guaranty insurance policy will be described
in the accompanying prospectus supplement. A financial guaranty insurance policy
may have limitations and, in most cases, will not insure the obligation of the
sellers or the master servicer to purchase or substitute for a defective trust
asset and will not guarantee any specific rate of Principal Prepayments or cover
specific interest shortfalls. In most cases, 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, a letter of credit bank will deliver to the
indenture trustee an irrevocable letter of credit. The letter of credit may
provide direct coverage for the trust assets. The letter of credit bank, the
amount available under the letter of credit as to each component of credit
enhancement, the expiration date of the letter of credit, and a more detailed
description of the letter of credit will be specified in the accompanying
prospectus supplement. On or before each payment date, the letter of credit bank
will be required to make payments after notification from the indenture trustee,
to be deposited in the related Payment Account relating to the coverage provided
by that letter of credit.
Subordination
For each series of notes, the related certificates will be subordinate to
those notes as described in the prospectus supplement. A senior/subordinate
series of notes will consist of one or more classes of senior notes and one or
more classes of subordinate securities, as described in the accompanying
prospectus supplement. For any senior/subordinate series, the total amount
available for payment on each payment date, as well as the method for allocating
the available amount among the various classes of notes included in the series,
will be described in the accompanying prospectus supplement. In most cases, for
any senior/subordinate series the amount available for payment will be allocated
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first to interest on the senior notes of the series, and then to principal of
the senior notes up to the amounts described in the accompanying prospectus
supplement, prior to allocation of any amounts to the subordinate securities of
the series.
Realized Losses will be allocated to the subordinate securities of the
related series in the order specified in the accompanying prospectus supplement
until the outstanding principal balance of each specified class has been reduced
to zero. Additional Realized Losses, if any, will be allocated to the senior
notes. If the series includes more than one class of notes, the additional
Realized Losses will be allocated either on a pro rata basis among all of the
senior notes in proportion to their respective outstanding principal balances or
as otherwise described in the accompanying prospectus supplement. The respective
amounts of specified types of losses, including Special Hazard Losses, Fraud
Losses and Bankruptcy Losses, that may be borne solely by the subordinate
securities may be limited to an amount described in the accompanying prospectus
supplement. In this case, losses in excess of these amounts would be allocated
on a pro rata basis among all outstanding classes of notes. In most cases, any
allocation of a Realized Loss to a note will be made by reducing the outstanding
principal balance of that note as of the payment date following the calendar
month in which the Realized Loss was incurred.
To the extent provided in the accompanying prospectus supplement, amounts
otherwise payable on any payment date to holders of subordinate securities may
be deposited into a reserve fund. Amounts held in any reserve fund may be
applied as described under "Description of Credit Enhancement -- Reserve Funds"
in the accompanying prospectus supplement.
For any senior/subordinate series, the terms and provisions of the
subordination may vary from those described above. Any variation and any
additional credit enhancement will be described in the accompanying prospectus
supplement.
Overcollateralization
If so specified in the accompanying prospectus supplement, interest
collections on the trust assets may exceed interest payments on the securities
for the related payment date, referred to as excess interest. The excess
interest may be deposited into a reserve fund or applied as a payment of
principal on the notes. To the extent excess interest is applied as principal
payments on the notes, the effect will be to reduce the principal balance of the
notes relative to the outstanding balance of the trust assets, creating
overcollateralization and additional protection to the noteholders, as specified
in the accompanying prospectus supplement.
Reserve Funds
If so specified in the accompanying prospectus supplement, the depositor
will deposit or cause to be deposited in a reserve fund any combination of cash
or Permitted Investments in specified amounts, or any other instrument
satisfactory to the rating agency or agencies, which will be applied and
maintained in the manner and under the conditions specified in the accompanying
prospectus supplement and related agreement. In the alternative or in addition
to that deposit, to the extent described in the accompanying prospectus
supplement, a reserve fund may be funded through application of all or a portion
of amounts otherwise payable on any related securities, from the Excess Spread,
Excluded Spread or otherwise. A reserve fund for a series of notes which is
funded over time by depositing in that reserve fund a portion of the interest
payment on each trust asset may be referred to as a spread account in the
accompanying prospectus supplement and related agreement. To the extent that the
funding of the reserve fund is dependent on amounts otherwise payable on related
subordinate securities, Excess Spread, Excluded Spread or other cash flows
attributable to the related trust assets or on reinvestment income, the reserve
fund may provide less coverage than initially expected if the cash flows or
reinvestment income on which the funding is dependent are lower than
anticipated. For any series of notes as to which credit enhancement
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includes a letter of credit, if so specified in the accompanying prospectus
supplement, under specified circumstances the remaining amount of the letter of
credit may be drawn by the indenture trustee and deposited in a reserve fund.
Amounts in a reserve fund may be paid to noteholders, or applied to
reimburse the master servicer for outstanding Advances, or may be used for other
purposes, in the manner and to the extent specified in the accompanying
prospectus supplement. In most cases, that reserve fund will not be deemed to be
part of the related trust. A reserve fund may provide coverage to more than one
series of notes if described in the accompanying prospectus supplement. If so
specified in the accompanying prospectus supplement, reserve funds may be
established to provide limited protection against only specific types of losses
and shortfalls. Following each payment date amounts in a reserve fund in excess
of any amount required to be maintained in that reserve fund may be released
from the reserve fund under the conditions and to the extent specified in the
accompanying prospectus supplement and will not be available for further
application to the notes.
The indenture trustee will have a perfected security interest for the
benefit of the noteholders in the assets in the reserve fund, unless the assets
are owned by the related trust. However, to the extent that the depositor, any
affiliate of the depositor or any other entity has an interest in any reserve
fund, in the event of the bankruptcy, receivership or insolvency of that entity,
there could be delays in withdrawals from the reserve fund and the corresponding
payments to the noteholders. These delays could adversely affect the yield to
investors on the related notes.
Amounts deposited in any reserve fund for a series will be invested in
Permitted Investments by, or at the direction of, and for the benefit of the
master servicer or any other person named in the accompanying prospectus
supplement. As specified in the accompanying prospectus supplement, any
reinvestment income or other gain from those investments will be credited to the
related reserve fund for the series, and any loss resulting from those
investments will be charged to that reserve fund. However, the reinvestment
income may be payable to the master servicer or another service provider as
additional compensation.
Maintenance of Credit Enhancement
If credit enhancement has been obtained for a series of notes, the
indenture trustee or master servicer, as specified in the related agreement,
will be obligated to exercise its best reasonable efforts to keep or cause to be
kept the credit enhancement in full force and effect throughout the term of the
applicable agreements, unless coverage under that credit enhancement has been
exhausted through payment of claims or otherwise, or substitution for that
credit enhancement is made, or as otherwise described under "--Reduction or
Substitution of Credit Enhancement." The master servicer, on behalf of itself,
the indenture trustee and noteholders, will provide the indenture trustee
information required for the indenture trustee to draw any applicable credit
enhancement.
The master servicer or any other entity specified in the accompanying
prospectus supplement will agree to pay the premiums for each financial guaranty
insurance policy on a timely basis. In the event the related insurer ceases to
be a Qualified Insurer because it ceases to be qualified under applicable law to
transact the insurance business or coverage is terminated for any reason other
than exhaustion of that coverage, the master servicer will use its best
reasonable efforts to obtain from another Qualified Insurer a comparable
replacement insurance policy or bond with a total coverage equal to the then
outstanding coverage of the original policy or bond. If the cost of the
replacement policy is greater than the cost of the original policy or bond, the
coverage of the replacement policy or bond will, unless otherwise agreed to by
the depositor, be reduced to a level so that its premium rate does not exceed
the premium rate on the original insurance policy. Any losses in market value of
the notes associated with any reduction or withdrawal in rating by an applicable
rating agency shall be borne by the noteholders.
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For trust assets secured by a lien on mortgaged property, if any property
securing a defaulted trust asset is damaged and proceeds, if any, from the
related hazard insurance policy are insufficient to restore the damaged property
to a condition sufficient to permit recovery under any letter of credit, the
master servicer is not required to expend its own funds to restore the damaged
property unless it determines:
o that restoration will increase the proceeds to one or more classes
of noteholders on liquidation of that trust asset after
reimbursement of the master servicer for its expenses, and
o that the expenses will be recoverable by it through Liquidation
Proceeds or Insurance Proceeds.
If recovery under any letter of credit or other credit enhancement is not
available because the master servicer has been unable to make the above
determinations, has made the determinations incorrectly or recovery is not
available for any other reason, the master servicer is nevertheless obligated to
follow whatever normal practices and procedures, subject to the preceding
sentence, as it deems necessary or advisable to realize upon the defaulted trust
asset and in the event this determination has been incorrectly made, is entitled
to reimbursement of its expenses in connection with that restoration.
Reduction or Substitution of Credit Enhancement
The amount of credit support provided for any series of notes and relating
to various types of losses incurred may be reduced under specified
circumstances. In most cases, the amount available as credit support will be
subject to periodic reduction on a non-discretionary basis in accordance with a
schedule or formula described in the related agreement. Additionally, in most
cases, the credit support may be replaced, reduced or terminated, and the
formula used in calculating the amount of coverage for Bankruptcy Losses,
Special Hazard Losses or Fraud Losses may be changed, without the consent of the
noteholders, upon the written assurance from each applicable rating agency that
the then-current rating of the related series of notes will not be adversely
affected thereby. Furthermore, in the event that the credit rating of any
obligor under any applicable credit enhancement is downgraded, the credit rating
of each class of the related notes may be downgraded to a corresponding level,
and, unless specified in the accompanying prospectus supplement, neither the
master servicer nor the depositor will be obligated to obtain replacement credit
support in order to restore the rating of the notes. The master servicer will
also be permitted to replace any credit support with other credit enhancement
instruments issued by obligors whose credit ratings are equivalent to the
downgraded level and in lower amounts which would satisfy the downgraded level,
provided that the then-current rating of each class of the related series of
notes is maintained. Where the credit support is in the form of a reserve fund,
a permitted reduction in the amount of credit enhancement will result in a
release of all or a portion of the assets in the reserve fund to the depositor,
the master servicer or any other person that is entitled to those assets. Any
assets so released and any amount by which the credit enhancement is reduced
will not be available for payments in future periods.
OTHER FINANCIAL OBLIGATIONS RELATED TO THE NOTES
Swaps and Yield Supplement Agreements
The trustee on behalf of the trust may enter into interest rate swaps and
related caps, floors and collars to minimize the risk of noteholders from
adverse changes in interest rates, which are collectively referred to as swaps,
and other yield supplement agreements or similar yield
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maintenance arrangements that do not involve swap agreements or other notional
principal contracts, which are collectively referred to as yield supplement
agreements.
An interest rate swap is an agreement between two parties to exchange a
stream of interest payments on an agreed hypothetical or "notional" principal
amount. No principal amount is exchanged between the counterparties to an
interest rate swap. In the typical swap, one party agrees to pay a fixed rate on
a notional principal amount, while the counterparty pays a floating rate based
on one or more reference interest rates including the London Interbank Offered
Rate, or LIBOR, a specified bank's prime rate or U.S. Treasury Bill rates.
Interest rate swaps also permit counterparties to exchange a floating rate
obligation based upon one reference interest rate, such as LIBOR, for a floating
rate obligation based upon another referenced interest rate, such as U.S.
Treasury Bill rates.
Yield supplement agreements may be entered into to supplement the interest
rate or other rates on one or more classes of the notes of any series.
Additionally, agreements relating to other types of derivative products that are
designed to provide credit enhancement to the related series may be entered into
by a trust and one or more counterparties. The terms of any derivative product
agreement and any counterparties will be described in the accompanying
prospectus supplement.
There can be no assurance that the trust will be able to enter into or
offset swaps or enter into yield supplement agreements or derivative product
agreements at any specific time or at prices or on other terms that are
advantageous. In addition, although the terms of the swaps and yield supplement
agreements may provide for termination under various circumstances, there can be
no assurance that the trust will be able to terminate a swap or yield supplement
agreement when it would be economically advantageous to the trust to do so.
Purchase Obligations
Some types of trust assets and some classes of notes of any series, as
specified in the accompanying prospectus supplement, may be subject to a
purchase obligation that would become applicable on one or more specified dates,
or upon the occurrence of one or more specified events, or on demand made by or
on behalf of the applicable noteholders. A purchase obligation may be in the
form of a conditional or unconditional purchase commitment, liquidity facility,
remarketing agreement, maturity guaranty, put option or demand feature. The
terms and conditions of each purchase obligation, including the purchase price,
timing and payment procedure, will be described in the accompanying prospectus
supplement. A purchase obligation relating to trust assets may apply to those
trust assets or to the related notes. Each purchase obligation may be a secured
or unsecured obligation of the provider thereof, which may include a bank or
other financial institution or an insurance company. Each purchase obligation
will be evidenced by an instrument delivered to the trustee for the benefit of
the applicable noteholders of the related series. As specified in the
accompanying prospectus supplement, each purchase obligation relating 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 that obligation relate.
DESCRIPTION OF FHA INSURANCE UNDER TITLE I
Some of the contracts contained in a trust may be Title I loans which are
insured under the Title I Program as described in this section and in the
accompanying prospectus supplement. The regulations, rules and procedures
promulgated by the FHA under the Title I, or FHA Regulations, contain the
requirements under which lenders approved for participation in the Title I
Program may obtain insurance against a portion of losses incurred on eligible
loans that have been originated and serviced in accordance with FHA Regulations,
subject to the amount of insurance coverage available in those Title I lender's
FHA reserve, as described in this section and in the accompanying
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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 , or 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 some 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 for defaulted loans for which insurance claims have been filed by a
Title I Lender prior to any review of those 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 that loan have been paid to
that 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 that lender. FHA Regulations permit the FHA to disallow an insurance claim
for any loan that does not qualify for insurance for a period of up to two years
after the claim is made and to require the Title I lender that has submitted the
insurance claim to repurchase the loan.
The proceeds of loans under the Title I Program may be used only for
permitted purposes, including, but not limited to, the alteration, repair or
improvement of residential property, the purchase of a manufactured home and/or
lot, or cooperative interest in a manufactured home and/or lot, on which to
place that home.
Subject to the limitations described below, eligible Title I loans are
generally insured by the FHA for 90% of an amount equal to the sum of:
o the net unpaid principal amount and the uncollected interest earned
to the date of default,
o 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,
o uncollected court costs,
o title examination costs,
o fees for required inspections by the lenders or its agents, up to
$75, and
o 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 that 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 various
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
that 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.
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Under Title I, the FHA maintains an FHA insurance coverage reserve
account, referred to as 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 some adjustments
permitted or required by FHA Regulations. The balance of that 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 those loans for FHA
insurance coverage within its FHA reserve by delivering a transfer report or
through an electronic submission to the FHA in the form prescribed under the FHA
Regulations. The increase in the FHA insurance coverage for those loans in the
Title I lender's FHA reserve will occur on the date following the receipt and
acknowledgment by the FHA of the transfer report for those loans. The insurance
available to any trust will be subject to the availability, from time to time,
of amounts in each Title I lender's FHA reserve, which will initially be limited
to the FHA insurance amount as specified in the accompanying prospectus
supplement.
Under the Title I, the FHA will reduce the insurance coverage available in
a Title I lender's FHA reserve relating to loans insured under that Title I
lender's contract of insurance by:
o the amount of FHA insurance claims approved for payment related to
those loans, and
o the amount of reduction of the Title I lender's FHA reserve by
reason of the sale, assignment or transfer of loans registered under
the Title I lender's contract of insurance.
This 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 most cases, 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 various 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 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 that event, the master servicer or other entity as specified in
the accompanying prospectus supplement will seek to obtain payment by or a
judgment against the borrower, and may resubmit the claim to FHA following that
judgment.
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THE DEPOSITOR
The depositor is an indirect wholly-owned subsidiary of GMAC Mortgage
Group, Inc., which is a wholly-owned subsidiary of General Motors Acceptance
Corporation. The depositor was incorporated in the State of Delaware on May 5,
1995. The depositor was organized for the purpose of acquiring first or junior
lien home equity mortgage loans, home improvement contracts, home loans,
manufactured housing contracts and mortgage securities and issuing securities
backed by these mortgage loans, contracts and mortgage securities. The depositor
anticipates that it will in many cases have acquired trust assets indirectly
through Residential Funding Corporation, which is also an indirect wholly-owned
subsidiary of GMAC Mortgage Group, Inc. The depositor does not have, nor is it
expected in the future to have, any significant assets.
The notes do not represent an interest in or an obligation of the
depositor. The depositor's only obligations relating to a series of notes will
be limited to specific representations and warranties made by the depositor or
as otherwise provided in the accompanying prospectus supplement.
The depositor maintains its principal office at 8400 Normandale Lake
Boulevard, Suite 600, Minneapolis, Minnesota 55437. Its telephone number is
(612) 832-7000.
RESIDENTIAL FUNDING CORPORATION
If specified in the accompanying prospectus supplement, Residential
Funding Corporation, an affiliate of the depositor, will act as the master
servicer or Administrator for a series of notes.
Residential Funding Corporation, either directly or through affiliates,
buys mortgage loans under several loan purchase programs from mortgage loan
originators or sellers nationwide, including affiliates, that meet its
seller/servicer eligibility requirements and services mortgage loans for its own
account and for others. Residential Funding Corporation'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
Corporation conducts operations from its headquarters in Minneapolis and from
offices located in California, Colorado, Connecticut, Florida, Georgia,
Maryland, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island and
Texas. At December 31, 1998, Residential Funding Corporation was master
servicing a first lien loan portfolio of approximately $55.0 billion and a
second lien loan portfolio of approximately $2.9 billion.
Residential Funding Corporation's delinquency, foreclosure and loan loss
experience as of the end of the most recent calendar quarter for which
information is available on the portfolio of loans for which it acts as master
servicer, including loans that were originated under its modified loan purchase
criteria, will be summarized in each prospectus supplement relating to a
mortgage pool for which Residential Funding Corporation will act as master
servicer. There can be no assurance that this experience will be representative
of the results that may be experienced as to any particular series of
certificates.
SERVICING OF TRUST ASSETS
The master servicer will be required to service and administer the trust
assets in a manner consistent with the terms of the servicing agreement entered
into by the master servicer with the depositor, an affiliate of the depositor or
other applicable entity and the Guide relating to the loans or to a Designated
Seller Transaction, as specified in the accompanying prospectus supplement.
As to any series of notes secured by private securities, the applicable
procedures for servicing of the related loans, home improvement contracts and
manufactured housing contracts will be described in the accompanying prospectus
supplement.
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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:
o collection of payments from mortgagors and remittance of those
collections to the master servicer;
o maintenance of escrow or impoundment accounts of mortgagors for
payment of taxes, insurance and other items required to be paid by
the mortgagor under the trust asset, if applicable;
o processing of assumptions or substitution, although, as specified in
the accompanying prospectus supplement, the master servicer is, in
most cases, required to exercise due-on-sale clauses to the extent
that exercise is permitted by law and would not adversely affect
insurance coverage;
o attempting to cure delinquencies;
o supervising foreclosures;
o inspection and management of mortgaged properties under various
circumstances; and
o 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 for various taxes and insurance premiums not paid on a timely
basis by mortgagors. In addition, the subservicer is required to Advance funds
to cover any draws made on a revolving credit loan subject to reimbursement by
the entity specified in the accompanying prospectus supplement. No assurance can
be given that the subservicers will carry out their Advance or payment
obligations relating to the trust assets.
Unless specified in the accompanying prospectus supplement, a subservicer
may transfer its servicing obligations to another entity that has been approved
for participation in Residential Funding Corporation'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 for its employees and other persons acting on its behalf or
on behalf of the master servicer.
Each subservicer will be required to service each trust asset under the
terms of the subservicing agreement for the entire term of that trust asset,
unless the subservicing agreement is earlier terminated by the master servicer
or unless servicing is released to the master servicer. Subject to applicable
law, the master servicer may have the right to terminate a subservicing
agreement immediately upon giving notice upon specified events, including the
violation of that subservicing agreement by the subservicer, or up to ninety
days' notice to the subservicer without cause upon payment of specified amounts
described in the subservicing agreement. Upon termination
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of a subservicing agreement, the master servicer may act as servicer of the
related trust assets or enter into one or more new subservicing agreements. The
master servicer may agree with a subservicer to amend a subservicing agreement.
Any amendments to a subservicing agreement or to a new subservicing agreement
may contain provisions different from those described above which are in effect
in the original subservicing agreements.
The master servicer may either assume the primary servicing responsibility
from the related subservicer, and may perform all collections, loss mitigation
and other servicing functions relating to any delinquent loan or foreclosure
proceeding, or may review the loss mitigation procedures conducted for any
delinquent loan, as well as the management and liquidation of any delinquent
mortgaged properties acquired by foreclosure or deed-in-lieu of foreclosure.
Collection and Other Servicing Procedures
The master servicer will have the option to allow a credit limit increase
applicable to any revolving credit loan in limited circumstances. The master
servicer will have an unlimited ability to obtain increases provided that the
following conditions are met:
o a new appraisal is obtained,
o the new combined LTV ratio is less than or equal to the original
combined LTV ratio,
o verbal verification of employment is obtained, and
o 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 combined LTV
ratio 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 those
revolving credit loans exceed 10% of the current pool balance. However, for
revolving credit loans with original combined LTV ratios in excess of 80%, the
combined LTV ratio resulting from that credit limit increase must be less than
or equal to the original combined LTV ratio and at no time shall the aggregate
principal balance of the revolving credit loans exceed 5% of the current pool
balance.
The master servicer, directly or through subservicers, as the case may be,
will make reasonable efforts to collect all payments called for under the trust
assets and will, consistent with the related servicing agreement and any
applicable insurance policy, FHA insurance or other credit enhancement, follow
collection procedures which shall be normal and usual in its general mortgage
servicing activities relating 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 that trust asset or any coverage provided by any
alternative credit enhancement will not be adversely affected by that waiver or
extension. For any series of notes as to which the trust includes private
securities, the master servicer's servicing and administration obligations will
be governed by the terms of those private securities.
The master servicer, in its discretion, may, or may allow a subservicer
to, extend relief to mortgagors whose payments become delinquent. The master
servicer or subservicer, without the prior approval of the master servicer, may
grant a period of temporary indulgence, in most cases, up to three months, to a
mortgagor or may enter into a liquidating plan providing for repayment by the
mortgagor of delinquent amounts within six months from the date of execution of
the plan. Other
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types of forbearance generally require master servicer approval. Neither
indulgence nor forbearance as to a trust asset will affect the note rate or
rates used in calculating payments to securityholders.
See "Description of the Notes--Payments."
In instances in which a trust asset is in default, or if default is
reasonably foreseeable, and if determined by the master servicer to be in the
best interests of the related noteholders, the master servicer may engage in a
wide variety of loss mitigation practices including waivers, modifications,
payment forbearances, partial forgiveness, entering into repayment schedule
arrangements, and capitalization of arrearages rather than proceeding with
foreclosure or repossession, if applicable. In making that determination, the
estimated Realized Loss that might result if the trust asset were liquidated
would be taken into account. Modifications may have the effect of reducing the
loan rate or extending the final maturity date of the trust asset. Any modified
trust asset may remain in the related trust, and the reduction in collections
resulting from a modification may result in reduced distributions of interest or
other amounts on, or may extend the final maturity of, one or more classes of
the related notes.
In any case in which property subject to a trust asset is being conveyed
by the mortgagor, the master servicer, directly or through a subservicer, shall,
in most cases, be obligated, to the extent it has knowledge of the conveyance,
to exercise its rights to accelerate the maturity of that trust asset under any
due-on-sale clause applicable to that trust asset, but only if the exercise of
those rights is permitted by applicable law and only to the extent it would not
adversely affect or jeopardize coverage under any applicable credit enhancement
arrangements. If the master servicer or subservicer is prevented from enforcing
the due-on-sale clause under applicable law or if the master servicer or
subservicer determines that it is reasonably likely that a legal action would be
instituted by the related mortgagor to avoid enforcement of the due-on-sale
clause, the master servicer or subservicer will enter into an assumption and
modification agreement with the person to whom the property has been or is about
to be conveyed, under which the person will become liable under the mortgage
note subject to specified conditions. The original mortgagor may be released
from liability on a trust asset if the master servicer or subservicer shall have
determined in good faith that the release will not adversely affect the
likelihood of full and timely collections on the related trust asset. Any fee
collected by the master servicer or subservicer for entering into an assumption
or substitution of liability agreement will be retained by the master servicer
or subservicer as additional servicing compensation unless otherwise described
in the accompanying prospectus supplement. See "Certain Legal Aspects of Trust
Assets and Related Matters--Enforceability of Certain Provisions" in this
prospectus. In connection with any assumption, the loan rate borne by the
related mortgage note may not be altered.
Mortgagors may, from time to time, request partial releases of the
mortgaged properties, easements, consents to alteration or demolition and other
similar matters. The master servicer or the related subservicer may approve that
request if it has determined, exercising its good faith business judgment in the
same manner as it would if it were the owner of the related trust asset, that
the approval will not adversely affect the security for, and the timely and full
collectability of, the related trust asset. Any fee collected by the master
servicer or the subservicer for processing that request will be retained by the
master servicer or subservicer as additional servicing compensation.
The master servicer is required to maintain a fidelity bond and errors and
omissions policy for its officers and employees and other persons acting on
behalf of the master servicer in connection with its activities under the
servicing agreement. The master servicer may be subject to restrictions under
the servicing agreement for the refinancing of a lien senior to a loan or a
contract secured by a lien on the related mortgaged property.
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Special Servicing and Special Servicing Agreements
The servicing agreement for a series of notes may name a Special Servicer,
which will be responsible for the servicing of some delinquent trust assets. The
Special Servicer may have discretion to extend relief to some mortgagors whose
payments become delinquent. The Special Servicer may be permitted to grant a
period of temporary indulgence to a mortgagor or may enter into a repayment plan
providing for repayment of arrearages by that mortgagor, in each case without
the prior approval of the master servicer or the subservicer. Other types of
forbearance generally may require the approval of the master servicer or
subservicer, as applicable.
In addition, the master servicer may enter into various agreements with
holders of one or more classes of subordinate notes or of a class of securities
representing interests in one or more classes of subordinate notes. Under the
terms of these agreements, the holder may, as to some delinquent trust assets:
o instruct the master servicer to commence or delay foreclosure
proceedings, provided that the holder deposits a specified amount of
cash with the master servicer which will be available for
distribution to noteholders in the event that liquidation proceeds
are less than they otherwise may have been had the master servicer
acted under its normal servicing procedures;
o instruct the master servicer to purchase those trust assets from the
trust prior to the commencement of foreclosure proceedings at the
purchase price and to resell those trust assets to that holder, in
which case any subsequent loss on those trust assets will not be
allocated to the noteholders;
o become, or designate a third party to become, a subservicer for the
trust assets so long as (a) the master servicer has the right to
transfer the subservicing rights and obligations of those trust
assets to another subservicer at any time or (b) that holder or its
servicing designee is required to service the trust assets according
to the master servicer's servicing guidelines; or
o the accompanying prospectus supplement may provide for the other
types of special servicing arrangements.
Realization Upon Defaulted Loans
For a loan or a contract secured by a lien on a mortgaged property in
default, the master servicer or the related subservicer may take a variety of
actions including foreclosing upon the mortgaged property or as to that trust
asset, write off the principal balance of the trust asset as a bad debt, take a
deed in lieu of foreclosure, accept a short sale, permit a short refinancing,
arrange for a repayment plan or modification as described above, or take an
unsecured note. Realization on other defaulted contracts may be accomplished
through repossession and subsequent resale of the underlying manufactured home
or home improvement. In connection with that 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 that foreclosure or repossession and
resale to determine whether a foreclosure proceeding or a repossession and
resale is appropriate. To the extent that a loan or a contract secured by a lien
on a mortgaged property is junior to another lien on the related mortgaged
property, following any default thereon, unless foreclosure proceeds for that
trust asset are expected to at least satisfy the related senior mortgage loan in
full and to pay foreclosure costs, it is likely that that trust asset will be
written off as bad debt with no foreclosure proceeding. In the event that title
to any mortgaged property is acquired in
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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 that acquisition of title and cancellation of
the related trust asset, the REO Loan or contract secured by a lien on a
mortgaged property will be considered for most purposes to be an outstanding
trust asset held in the trust until such time as the mortgaged property is sold
and all recoverable Liquidation Proceeds and Insurance Proceeds have been
received in connection with that Liquidated Loan. To the extent provided in the
related agreement and related servicing agreement, any income, net of expenses
and other than gains described in the following two paragraghs, received by the
subservicer or the master servicer on that mortgaged property, prior to its
disposition will be deposited in the Custodial Account upon receipt and will be
available at that time for making payments to noteholders.
For a loan or a contract secured by a lien on a mortgaged property in
default, the master servicer may pursue foreclosure, or similar remedies,
subject to any senior lien positions and other restrictions pertaining to junior
loans as described under "Certain Legal Aspects of Trust Assets and Related
Matters--Foreclosure on Loans and Certain Contracts" concurrently with pursuing
any remedy for a breach of a representation and warranty. However, the master
servicer is not required to continue to pursue both of those remedies if it
determines that one that remedy is more likely to result in a greater recovery.
Upon the first to occur of final liquidation and a repurchase or substitution
under a breach of a representation and warranty, that trust asset will be
removed from the related trust. 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 with that liquidation have been
received. Any additional liquidation expenses relating to that trust asset
incurred after that initial liquidation 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 that 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 that defaulted
trust asset.
For some series of notes, if so provided in the accompanying prospectus
supplement, the applicable form of credit enhancement may provide, to the extent
of coverage under that credit enhancement, that a defaulted trust asset or REO
Loan will be removed from the trust prior to the final liquidation of that trust
asset or REO Loan. In addition, the master servicer will generally have the
option to purchase from the trust any defaulted trust asset after a specified
period of delinquency. If a defaulted trust asset or REO Loan is not so removed
from the trust, then, upon the final liquidation that trust asset or REO Loan,
if a loss is realized which is not covered by any applicable form of credit
enhancement or other insurance, the noteholders will bear that 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 that gain as additional servicing compensation unless the
accompanying prospectus supplement provides otherwise. For a description of the
master servicer's obligations to maintain and make claims under applicable forms
of credit enhancement and insurance relating to the trust assets, see
"Description of Credit Enhancement" and "Description of the Securities-- Hazard
Insurance and Related Claims."
Servicing Compensation and Payment of Expenses
The principal servicing compensation to be paid to the master servicer for
its master servicing activities for each series of notes will be equal to the
percentage per annum described in the accompanying prospectus supplement. As
compensation for its servicing duties, a subservicer or, if there is no
subservicer, the master servicer will be entitled to a monthly servicing fee as
described in the accompanying prospectus supplement, which may vary under some
circumstances from the amounts described in the prospectus supplement. Some
subservicers may also receive additional compensation in the amount of all or a
portion of the interest due and payable on the applicable trust
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asset which is over and above the note rate specified at the time the depositor
or Residential Funding Corporation, as the case may be, committed to purchase
the trust asset. See "Trust Asset Program --Subservicing." subservicers will be
required to pay to the master servicer an amount equal to one month's interest,
net of its servicing or other compensation, on the amount of any partial
Principal Prepayment. As specified in the accompanying prospectus supplement,
the master servicer will retain those amounts to the extent collected from
subservicers. The master servicer or a subservicer will retain all prepayment
charges, assumption fees and late payment charges, to the extent collected from
mortgagors, and any benefit which may accrue as a result of the investment of
funds in the Custodial Account or the applicable Payment Account, as specified
in the accompanying prospectus supplement, or in a Subservicing Account, as the
case may be. In addition, some duties of the master servicer may be performed by
an affiliate of the master servicer who will be entitled to reasonable
compensation for those duties from the trust.
The master servicer or, if specified in the related agreement, the
indenture trustee on behalf of the applicable trust, will pay or cause to be
paid various ongoing expenses associated with each trust and incurred by it in
connection with its responsibilities under the servicing agreement. This
includes, without limitation, payment of any fee or other amount payable for
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 limited circumstances. In addition, as indicated in the preceding
section, the master servicer will be entitled to reimbursements for expenses
incurred by it in connection with Liquidated Loans and in connection with the
restoration of mortgaged properties, the right of reimbursement being prior to
the rights of noteholders to receive any related Liquidation Proceeds, including
Insurance Proceeds.
Evidence as to Compliance
Each servicing agreement will provide for delivery, on or before a
specified date in each year, to the indenture trustee of an annual statement
signed by an officer of the master servicer to the effect that the master
servicer has fulfilled in all material respects the minimum servicing standards
described in the audit guide for audits of non-supervised mortgagees approved by
the HUD 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 referred to as an
Audit Guide, throughout the preceding year or, if there has been a material
default in the fulfillment of any obligation, the statement shall specify each
known default and the nature and status of that default. The 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 date that is at least a specified number
of months after the cut-off date, a firm of independent public accountants will
furnish a statement to the depositor and the indenture trustee to the effect
that, on the basis of an examination by that firm conducted substantially in
compliance with the standards established by the American Institute of Certified
Public Accountants, the servicing of mortgage loans under agreements, including
the related servicing agreement, was conducted substantially in compliance with
the minimum servicing standards described in the related Audit Guide, to the
extent that procedures in that Audit Guide are applicable to the servicing
obligations described in those agreements, except for those significant
exceptions or errors in records that shall be reported in that statement. In
rendering its statement that 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 that statement, of firms of
independent public accountants for those subservicers which also have been the
subject of that examination.
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Copies of the annual statement of an officer of the master servicer may be
obtained by noteholders without charge upon written request to the master
servicer, at the address indicated in the monthly statement to noteholders.
Certain Matters Regarding the Master Servicer and the Depositor
The servicing agreement for each series of notes will provide that the
master servicer may not resign from its obligations and duties under that
servicing agreement except upon a determination that performance of its duties
is no longer permissible under applicable law or except in connection with a
permitted transfer of servicing. No resignation will become effective until the
indenture trustee or a successor servicer has assumed the master servicer's
obligations and duties under the servicing agreement.
Each servicing agreement will also provide that, except as described in
this paragraph, neither the master servicer, the depositor nor any director,
officer, employee or agent of the master servicer or the depositor will be under
any liability to the trust or the noteholders for any action taken or for
refraining from the taking of any action in good faith under the servicing
agreement, or for errors in judgment. However, each servicing agreement will
provide that neither the master servicer, the depositor nor any such person will
be protected against any liability which would otherwise be imposed by reason of
willful misfeasance, bad faith or gross negligence in the performance of duties
or by reason of reckless disregard of obligations and duties under that
servicing agreement. Each servicing agreement will further provide that the
master servicer, the depositor and any director, officer, employee or agent of
the master servicer or the depositor is entitled to indemnification by the
trust, or the special purpose entity, if applicable, and will be held harmless
against any loss, liability or expense incurred in connection with any legal
action relating to the servicing agreement or the related series of notes, other
than any loss, liability or expense incurred by reason of willful misfeasance,
bad faith or gross negligence in the performance of duties under that servicing
agreement or by reason of reckless disregard of obligations and duties under
that servicing agreement. In addition, each servicing agreement will provide
that the master servicer and the depositor will not be under any obligation to
appear in, prosecute or defend any legal or administrative action that is not
incidental to its respective duties under the servicing agreement and which in
its opinion may involve it in any expense or liability. The master servicer or
the depositor may, however, in its discretion undertake any action which it may
deem necessary or desirable for the servicing agreement and the rights and
duties of the parties to that servicing agreement and the interests of the
noteholders under that servicing agreement. In that event, the legal expenses
and costs of an action and any liability resulting from that action will be
expenses, costs and liabilities of the trust, or the special purpose entity, if
applicable, and the master servicer or the depositor, as the case may be will be
entitled to be reimbursed for that action out of funds otherwise payable to
noteholders.
Any person into which the master servicer may be merged or consolidated,
any person resulting from any merger or consolidation to which the master
servicer is a party or any person succeeding to the business of the master
servicer will be the successor of the master servicer under the servicing
agreement, provided that the person meets the requirements described in the
servicing agreement. In addition, notwithstanding the prohibition on its
resignation, the master servicer may assign its rights and delegate its duties
and obligations under a servicing agreement to any person reasonably
satisfactory to the depositor and the indenture trustee and meeting the
requirements described in the related servicing agreement. In the case of an
assignment, the master servicer will be released from its obligations under the
servicing agreement, exclusive of liabilities and obligations incurred by it
prior to the time of the assignment.
THE AGREEMENTS
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The following summaries describe provisions of the trust agreement, the
indenture and servicing agreement relating to a series of notes. The summaries
do not purport to be complete and are qualified entirely by reference to the
actual terms of those agreements relating to a series of notes.
Events of Default; Rights Upon Event of Default
Servicing Agreement
A servicing default under the servicing agreement for a series of
securities, in most cases, will include:
o any failure by the master servicer to make a required deposit to the
Custodial Account or the Payment Account or, if the master servicer
is the paying agent, to pay to the holders of any class of
securities of a series any required payment which continues
unremedied for five business days after the giving of written notice
of that failure to the master servicer by the indenture trustee or
the issuer, or the majority holder of the ownership interest in the
trust or the credit enhancer, if applicable;
o any failure by the master servicer duly to observe or perform in any
material respect any other of its covenants or agreements in the
servicing agreement relating to a series of securities which
continues unremedied for 45 days after the giving of written notice
of failure to the master servicer by the indenture trustee or the
issuer, or the majority holder of the ownership interest in the
trust or the credit enhancer, if applicable;
o events of insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings regarding the master servicer
and actions by the master servicer indicating its insolvency or
inability to pay its obligations; and
o any other servicing default as described in the servicing agreement.
A default under the terms of any servicing agreement relating to any private
securities included in any trust will not constitute an event of default under
the related trust agreement or indenture.
So long as a servicing default remains unremedied, either the depositor or
the indenture trustee may, except as otherwise provided for in the related
agreement as to the special purpose entity or the credit enhancer, if
applicable, by written notification to the master servicer and to the issuer or
the indenture trustee or trust, as applicable, terminate all of the rights and
obligations of the master servicer under the servicing agreement, other than any
right of the master servicer as securityholder and other than the right to
receive servicing compensation, expenses for servicing the trust assets during
any period prior to the date of that termination, and other reimbursement of
amounts the master servicer is entitled to withdraw from the Custodial Account.
The indenture trustee will succeed to all responsibilities, duties and
liabilities of the master servicer under that servicing agreement, other than
the obligation to purchase trust assets under some circumstances, and will be
entitled to similar compensation arrangements. In the event that the indenture
trustee would be obligated to succeed the master servicer but is unwilling so to
act, it may appoint, or if it is unable so to act, it shall appoint, or petition
a court of competent jurisdiction for the appointment of an approved mortgage
servicing institution with a net worth of at least $10,000,000 to act as
successor to the master servicer under the servicing agreement unless otherwise
described in the servicing agreement. Pending any appointment, the indenture
trustee is obligated to act in that capacity. The indenture trustee and any
successor may agree upon the servicing compensation to be paid, which in no
event may be greater than the compensation to the initial master servicer under
the servicing agreement.
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Indenture
An event of default under the indenture for each series of notes, in most
cases, will include:
o a default for five days or more in the payment of any principal of
or interest on any note of the series;
o failure to perform any other covenant of the depositor or the trust
in the indenture which continues for a period of thirty days after
notice of that failure is given in accordance with the procedures
described in the accompanying prospectus supplement;
o any representation or warranty made by the depositor or the trust in
the indenture or in any certificate or other writing delivered
pursuant thereto or in connection therewith as to or affecting the
series having been incorrect in a material respect as of the time
made, and the breach is not cured within thirty days after notice of
that error is given in accordance with the procedures described in
the accompanying prospectus supplement;
o some events of bankruptcy, insolvency, receivership or liquidation
of the depositor or the trust; or
o any other event of default provided for notes of that series.
If an event of default as to the notes of any series at the time
outstanding occurs and is continuing, either the indenture trustee, the credit
enhancer, if applicable, or the holders of a majority of the then aggregate
outstanding amount of the notes of the series may declare the principal amount,
or, if the notes of that series are accrual notes, that portion of the principal
amount as may be specified in the terms of that series, of all the notes of the
series to be due and payable immediately. That declaration may, under some
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 for any series of notes, the notes of
the series have been declared to be due and payable, the indenture trustee, with
the consent of the credit enhancer, if applicable, may, in its discretion,
notwithstanding that acceleration, elect to maintain possession of the
collateral securing the notes of that series and to continue to apply payments
on that collateral as if there had been no declaration of acceleration if that
collateral continues to provide sufficient funds for the payment of principal of
and interest on the notes of the series as they would have become due if there
had not been a declaration. In addition, the indenture trustee may not sell or
otherwise liquidate the collateral securing the notes of a series following an
event of default, unless:
o the holders of 100% of the then aggregate outstanding amount of the
notes of the series consent to that sale,
o the proceeds of the sale or liquidation are sufficient to pay in
full the principal of and accrued interest, due and unpaid, on the
outstanding notes of the series, and to reimburse the credit
enhancer, if applicable, at the date of that sale, or
o the indenture trustee determines that the collateral would not be
sufficient on an ongoing basis to make all payments on those notes
as those payments would have become due if those notes had not been
declared due and payable, and the indenture trustee obtains the
consent of the holders of 66 2/3% of the then aggregate outstanding
amount of the notes of the series and the credit enhancer, if
applicable.
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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 that liquidation for unpaid
fees and expenses. As a result, upon the occurrence of that event of default,
the amount available for payments to the noteholders would be less than would
otherwise be the case. However, the indenture trustee may not institute a
proceeding for the enforcement of its lien except in connection with a
proceeding for the enforcement of the lien of the indenture for the benefit of
the noteholders after the occurrence of an event of default.
If so specified in the accompanying prospectus supplement, in the event
the principal of the notes of a series is declared due and payable, as described
in the second preceding paragraph, the holders of any notes issued at a discount
from par may be entitled to receive no more than an amount equal to the unpaid
principal amount of those notes less the amount of the discount that is
unamortized.
In most cases, no securityholder will have any right under a trust
agreement or indenture to institute any proceeding in connection with the
agreement unless:
o the holder previously has given to the indenture trustee written
notice of default and the continuance of that default,
o the holders of securities of any class evidencing not less than 25%
of the aggregate percentage interests constituting the class (1)
have made written request upon the indenture trustee to institute
that proceeding in its own name as indenture trustee thereunder and
(2) have offered to the indenture trustee reasonable indemnity,
o the indenture trustee has neglected or refused to institute that
proceeding for 60 days after receipt of that request and indemnity,
and
o no direction inconsistent with that written request has been given
to the indenture trustee during that 60 day period by the holders of
a majority of the security balances of that class, except as
otherwise provided for in the related agreement regarding the credit
enhancer.
However, the indenture trustee will be under no obligation to exercise any of
the trusts or powers vested in it by the applicable agreement or to institute,
conduct or defend any litigation thereunder or in relation thereto at the
request, order or direction of any of the holders of securities covered by the
agreement, unless the securityholders have offered to the indenture trustee
reasonable security or indemnity against the costs, expenses and liabilities
which may be incurred in or by exercise of that power.
Amendment
In most cases, each agreement may be amended by the parties to the
agreement, except as otherwise provided for in the related agreement as to
credit enhancer, without the consent of the related noteholders to:
o cure any ambiguity;
o correct or supplement any provision in that agreement which may be
inconsistent with any other provision in that agreement or to
correct any error;
o change the timing and/or nature of deposits in the Custodial Account
or the Payment Account or to change the name in which the Custodial
Account is maintained, except
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that (a) deposits to the Payment Account may not occur later than
the related payment date, (b) that change may not adversely affect
in any material respect the interests of any securityholder, as
evidenced by an opinion of counsel, and (c) that change may not
adversely affect the then-current rating of any rated securities, as
evidenced by a letter from each applicable rating agency, unless
specified in the accompanying prospectus supplement;
o make any other provisions for matters or questions arising under
that agreement which are not materially inconsistent with the
provisions of that agreement, so long as that action will not
adversely affect in any material respect the interests of any
securityholder; or
o amend any provision that is not material to holders of any class of
related notes.
In most cases, each agreement may also be amended by the parties to the
agreement, except as otherwise provided for in the related agreement as to the
credit enhancer, with the consent of the holders of securities of each class
affected thereby evidencing, in each case, not less than 66% of the aggregate
percentage interests constituting the class for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
the agreement or of modifying in any manner the rights of the related
securityholders, except that no amendment may:
o reduce in any manner the amount of, or delay the timing of, payments
received on trust assets which are required to be paid on a security
of any class without the consent of the holder of the security,
o impair the right of any securityholder to institute suit for the
enforcement of the provisions of the agreements, or
o reduce the percentage of securities of any class the holders of
which are required to consent to any amendment unless the holders of
all securities of that class have consented to the change in the
percentage.
Termination; Redemption of Notes
Trust Agreement
The primary obligations created by the trust agreement for each series of
securities, other than some limited payment and notice obligations of the owner
trustee and the depositor, respectively, will terminate upon the payment to the
related securityholders, including the notes issued under the related indenture,
of all amounts held by the master servicer and required to be paid to those
securityholders following the earlier of:
o the final payment or other liquidation or disposition, or any
related Advance, of the last trust asset subject thereto and all
property acquired upon foreclosure or deed in lieu of foreclosure of
any trust asset; and
o the purchase by the master servicer or the depositor from the trust,
or from the special purpose entity, if applicable, for a series of
all remaining trust assets and all property acquired relating to the
trust assets.
Any option to purchase described in the second item above will be limited
to cases in which the aggregate Stated Principal Balance of the remaining trust
assets is less than or equal to ten percent (10%) of the initial aggregate
Stated Principal Balance of the trust assets.
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Indenture
The indenture will be discharged as to a series of notes, except for some
continuing rights specified in the indenture, upon the distribution to
noteholders of all amounts required to be distributed under the indenture.
The Owner Trustee
The owner trustee under the trust agreement will be named in the
accompanying prospectus supplement. The commercial bank or trust company serving
as owner trustee may have normal banking relationships with the depositor and/or
its affiliates, including Residential Funding Corporation.
The owner trustee may resign at any time, in which case the Administrator
or the indenture trustee will be obligated to appoint a successor owner trustee
as described in the agreements. The Administrator or the indenture trustee may
also remove the owner trustee if the owner trustee ceases to be eligible to
continue as such under the trust agreement or if the owner trustee becomes
insolvent. Upon becoming aware of those circumstances, the Administrator or the
indenture trustee will be obligated to appoint a successor owner trustee. Any
resignation or removal of the owner trustee and appointment of a successor owner
trustee will not become effective until acceptance of the appointment by the
successor owner trustee.
The Indenture Trustee
The indenture trustee under the indenture will be named in the
accompanying prospectus supplement. The commercial bank or trust company serving
as indenture trustee may have normal banking relationships with the depositor
and/or its affiliates, including Residential Funding Corporation.
The indenture trustee may resign at any time, in which case the depositor,
the owner trustee or the Administrator will be obligated to appoint a successor
indenture trustee as described in the indenture. The depositor, the owner
trustee or the Administrator as described in the indenture may also remove the
indenture trustee if the indenture trustee ceases to be eligible to continue as
such under the indenture or if the indenture trustee becomes insolvent. Upon
becoming aware of those circumstances, the depositor, the owner trustee or the
Administrator will be obligated to appoint a successor indenture trustee. If so
specified in the indenture, the indenture trustee may also be removed at any
time by the holders of a majority by principal balance of the notes. Any
resignation or removal of the indenture trustee and appointment of a successor
indenture trustee will not become effective until acceptance of the appointment
by the successor indenture trustee.
YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity of a note will depend on the price paid by the
holder for the note, the note rate on that note entitled to payments of
interest, the rate, timing of principal payments, including payments in excess
of required installments, prepayments or terminations, liquidations and
repurchases, on the trust assets, the rate and timing of draws, if applicable,
and the allocation of principal payments to reduce the principal balance of the
note, or notional amount thereof, if applicable.
The amount of interest payments on a trust asset made monthly to holders
of a class of notes entitled to payments of interest will be calculated on the
basis of that class' specified percentage of each those payments of interest, or
accrual in the case of accrual notes, and will be expressed as a fixed,
adjustable or variable note rate payable on the outstanding principal balance or
notional amount of that note, or any combination of those note rates, calculated
as described in this prospectus
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and in the accompanying prospectus supplement. See "Description of the Notes
- --Payments." Holders of strip notes or a class of notes having a note rate that
varies based on the weighted average loan rate of the underlying trust assets
will be affected by disproportionate prepayments and repurchases of trust assets
having higher Net Loan Rates or rates applicable to the strip notes, as
applicable.
The effective yield to maturity to each holder of notes entitled to
payments of interest will be below that otherwise produced by the applicable
note rate and purchase price of the note to the extent that interest accrues on
each trust asset during the calendar month or a period preceding a payment date
instead of through the day immediately preceding the payment date.
A class of notes may be entitled to payments of interest at a variable or
adjustable note rate, or any combination of those note rates, as specified in
the accompanying prospectus supplement. A variable note rate may be calculated
based on the weighted average of the Net Loan Rates, which are equal to the loan
rate less servicing fees and any Excess Spread or Excluded Spread, or balances
of that weighted average 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 on a class of notes, 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 breaches of
representations made as to those trust assets. See "Trust Asset
Program--Representations Relating to Trust Assets" and "Description of the
Notes--Assignment of Trust Assets." In addition, if the index used to determine
the note rate for the notes is different than the index applicable to the loan
rates, the yield on the notes will be sensitive to changes in the index related
to the note rate and the yield on the notes may be reduced by application of a
cap on the note rate based on the weighted average of the Net Loan Rates or
other formulas as may be described in the accompanying prospectus supplement.
In most cases, if a note is purchased at a premium over its face amount
and payments of principal on that 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 that 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 of those 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 some circumstances, rapid principal payments
on the trust assets, net of draws, if applicable, may result in the failure of
those 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 those strip notes. In addition, the total return to investors of notes
evidencing a right to payments of interest at a rate that is based on the
weighted average Net Loan Rate of the trust assets from time to time will be
adversely affected by principal payments on trust assets with loan rates higher
than the weighted average loan rate on the trust assets. In most cases, mortgage
loans with higher loan rates or gross margins are likely to prepay at a faster
rate than mortgage loans with lower loan rates or gross margins. In addition,
the yield to maturity on other types of classes of notes, including accrual
notes, notes with a note rate that fluctuates inversely with or at a multiple of
an index or 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, revolving credit loans, home improvement loans and home
improvement contracts are, in most cases, much smaller than traditional first
lien mortgage loan balances, and the original terms to maturity of those loans
and contracts are often shorter than those of traditional first lien mortgage
loans. As a result, changes in interest rates will not affect the monthly
payments on those loans or contracts to the same degree that changes in mortgage
interest rates will affect the monthly payments on traditional first lien
mortgage loans. Consequently, the effect of changes in prevailing interest rates
on the prepayment rates on shorter-term, smaller balance loans and contracts may
not be similar to the effects of those changes on traditional first lien
mortgage loan prepayment rates, or those effects may be similar to the effects
of those 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 most cases, the earlier a payment of principal on a
note, the greater will be the effect on an investor's yield to maturity. As a
result, the effect on an investor's yield of principal payments occurring at a
rate higher, or lower, than the rate anticipated by the investor during the
period immediately following the issuance of a series of notes would not be
fully offset by a subsequent like reduction, or increase, in the rate of
principal payments.
The rate and timing of defaults on the trust assets will also affect the
rate and timing of principal payments on the trust assets and thus the yield on
the related notes. There can be no assurance as to the rate of losses or
delinquencies on any of the trust assets, however, those 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 other classes
of the series, will bear all risk of those losses resulting from default by
mortgagors. Even where the applicable credit enhancement covers all losses
incurred on the trust assets, the effect of losses may be to increase prepayment
experience on the trust assets, thus reducing average weighted life and
affecting yield to maturity.
For some trust assets, the loan rate at origination may be below the rate
that would result from the sum of the then-applicable index and gross margin.
Under the applicable underwriting standards, mortgagors are, in most cases,
qualified based on an assumed payment which reflects a rate significantly lower
than the maximum rate. The repayment of any trust asset may thus be dependent on
the ability of the mortgagor to make larger interest payments following the
adjustment of the loan rate.
Some of the revolving credit loans are not expected to significantly
amortize prior to maturity. As a result, a borrower will, in most cases, be
required to pay a substantial principal amount at the maturity of a revolving
credit loan. Those 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 those revolving credit loans or to sell the
mortgaged property prior to the maturity of the revolving credit loan. The
ability to obtain refinancing will depend on a number of factors prevailing at
the time refinancing or sale is required, including, without limitation, the
mortgagor's personal economic circumstances, the mortgagor's equity in the
related mortgaged property, real estate values, prevailing market interest
rates, tax laws and national and regional economic conditions. Neither the
depositor, Residential Funding Corporation, GMAC Mortgage Group, Inc. nor any of
their affiliates will be obligated to refinance or repurchase any trust asset or
to sell any mortgaged property, unless that obligation is specified in the
accompanying prospectus supplement.
For any loans and any contracts secured by junior mortgages, any inability
of the mortgagor to pay off the balance of those junior mortgages may also
affect the ability of the mortgagor to obtain
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refinancing at any time of any related senior mortgage loan, preventing a
potential improvement in the mortgagor's circumstances. Furthermore, if so
specified in the accompanying prospectus supplement, under the servicing
agreement the master servicer may be restricted or prohibited from consenting to
any refinancing of any related senior mortgage loan, which in turn could
adversely affect the mortgagor's circumstances or result in a prepayment or
default under the corresponding junior loan or contract, as applicable.
In addition to the mortgagor's personal economic circumstances, a number
of factors, including homeowner mobility, job transfers, changes in the
mortgagor's housing needs, the mortgagor's net equity in the mortgaged property,
changes in the value of the mortgaged property, national and regional economic
conditions, enforceability of due-on-sale clauses, prevailing market interest
rates, servicing decisions, solicitations and the availability of mortgage
funds, seasonal purchasing and payment habits of borrowers or changes in the
deductibility for federal income tax purposes of interest payments on home
equity loans, may affect the rate and timing of principal payments on the trust
assets or draws on the revolving credit loans. There can be no assurance as to
the rate of principal payments or draws on the revolving credit loans. In most
cases, the revolving credit loans may be prepaid in full or in part without
penalty. The closed-end loans may provide for a prepayment charge. The
prospectus supplement will specify whether trust assets may not be prepaid in
full or in part without penalty. The depositor has no significant experience
regarding 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 other trust assets due to the
possibility of increased property value resulting from the home improvement and
greater refinance options. The depositor generally expects that prepayments on
manufactured housing contracts will be lower than on other trust assets because
manufactured housing contracts may have less refinance options. The rate of
principal payments and the rate of draws, if applicable, may fluctuate
substantially from time to time. In most cases, 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
those 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 some
circumstances over the term of the loan. In extremely high market interest rate
scenarios, notes backed by trust assets with adjustable rates subject to
substantially higher maximum rates than typically apply to adjustable rate first
mortgage loans may experience rates of default and liquidation substantially
higher than those that have been experienced on other adjustable rate mortgage
loan pools.
The yield to maturity of the notes of any series, or the rate and timing
of principal payments on the trust assets or draws on the related revolving
credit loans and corresponding payments on the notes, will also be affected by
the specific terms and conditions applicable to the notes. For example, if the
index used to determine the note rates for a series of notes is different from
the index applicable to the loan rates of the underlying trust assets, the yield
on the notes may be reduced by application of a cap on the note rates based on
the weighted average of the loan rates. Depending on applicable cash flow
allocation provisions, changes in the relationship between the two indexes may
also affect the timing of some 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
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the payment of principal on the notes if so provided in the prospectus
supplement. For any series of notes backed by revolving credit loans, provisions
governing whether future draws on the revolving credit loans will be included in
the trust will have a significant effect on the rate and timing of principal
payments on the notes. The yield to maturity of the notes of any series, or the
rate and timing of principal payments on the trust assets may also be affected
by the risks associated with other trust assets.
As a result of the payment terms of the revolving credit loans or of the
note provisions relating to future draws, there may be no principal payments on
those 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 of principal on those revolving credit loans for the related period. If
specified in the accompanying prospectus supplement, a series of notes may
provide for a period during which all or a portion of the principal collections
on the revolving credit loans are reinvested in additional balances or are
accumulated in a trust account pending commencement of an amortization period
relating to the notes.
Revolving credit loans, in most cases, will and closed-end loans and
contracts may contain due-on-sale provisions permitting the mortgagee to
accelerate the maturity of that trust asset upon sale or various transfers by
the mortgagor of the underlying mortgaged property. Unless the accompanying
prospectus supplement indicates otherwise, the master servicer will generally
enforce any due-on-sale clause to the extent it has knowledge of the conveyance
or proposed conveyance of the underlying mortgaged property and it is entitled
to do so under applicable law. However, that the master servicer will not take
any action in relation to the enforcement of any due-on-sale provision that
would adversely affect or jeopardize coverage under any applicable insurance
policy. Adjustable rate loans and contracts may be assumable under some
conditions if the proposed transferee of the related mortgaged property
establishes its ability to repay that trust asset and, in the reasonable
judgment of the master servicer or the related subservicer, the security for
that trust asset would not be impaired by the assumption. The extent to which
trust assets are assumed by purchasers of the mortgaged properties rather than
prepaid by the related mortgagors in connection with the sales of the mortgaged
properties may affect the weighted average life of the related series of notes.
See "Servicing of Trust Assets--Collection and Other Servicing Procedures" and
"Certain Legal Aspects of the Trust Assets and Related Matters --Enforceability
of Certain Provisions" for a description of provisions of the servicing
agreement and other legal developments that may affect the prepayment experience
on the trust assets.
In addition, some 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 an
extent, depend on the interest rates on those underlying trust assets.
A subservicer or the master servicer may, from time to time, implement
refinancing or modification programs designed to encourage refinancing. A
subservicer or the master servicer, including an affiliate of the master
servicer, may also aggressively pursue refinancing or loan modification programs
that could require little or no cost and significantly decreased documentation
from the borrower. Those programs may include, without limitation, general or
targeted solicitations, the offering of pre-approved applications, reduced
origination fees or closing costs, or other financial incentives. Targeted
solicitations may be based on a variety of factors, including the credit of the
borrower, the location of the mortgaged property, or the subservicer's or master
servicer's judgment as to the likelihood of a borrower refinancing. In addition,
subservicers or the master servicer may encourage assumptions of trust assets,
including defaulted trust assets, under which creditworthy borrowers assume the
outstanding indebtedness of those trust assets which may be removed from the
related pool. As a result of these programs, as to the pool underlying any
trust:
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o the rate of Principal Prepayments of the trust assets in the pool
may be higher than would otherwise be the case,
o the average credit or collateral quality of the trust assets
remaining in the pool may decline, and
o weighted average interest rate on the trust assets that remain in
the trust may be lower, thus reducing the rate of prepayments on the
trust assets in the future.
In addition, a subservicer may allow the refinancing of a trust asset by
accepting prepayments on that trust asset and permitting a new loan or contract
secured by a mortgage on the same property, which may be originated by the
subservicer or the master servicer or any of their respective affiliates or by
an unrelated entity. In the event of that refinancing, the new loan or contract
would not be included in the related trust and, therefore, the refinancing would
have the same effect as a prepayment in full of the related trust assets.
If the applicable agreement for a series of notes provides for a funding
account or other means of funding the transfer of additional trust assets to the
related trust, as described under "Description of the Notes--Funding Account" in
this prospectus, and the trust is unable to acquire those additional trust
assets within any applicable time limit, the amounts set aside for that purpose
may be applied as principal payments on one or more classes of notes of those
series. In addition, if the trust for a series of notes includes additional
balances and the rate at which those additional balances are generated
decreases, the rate and timing of principal payments on the notes will be
affected and the weighted average life of the notes will vary accordingly. The
rate at which additional balances are generated may be affected by a variety of
factors.
Although the loan rates on revolving credit loans will and some other
trust assets may be subject to periodic adjustments, those adjustments, in most
cases:
o will not increase those loan rates over a fixed maximum rate during
the life of any trust asset, and
o 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 some circumstances, and which may be
different from margins being used at the time for newly originated
adjustable rate mortgage loans.
As a result, the loan rates on the trust assets in any pool at any time may not
equal the prevailing rates for similar, newly originated adjustable rate home
equity mortgage loans, lines of credit, home improvement loans or manufactured
housing contracts and accordingly the rate of principal payments and draws, if
applicable, may be lower or higher than would otherwise be anticipated. In some
rate environments, the prevailing rates on fixed-rate mortgage loans may be
sufficiently low in relation to the then-current loan rates on trust assets that
the rate of prepayment may increase as a result of refinancings. There can be no
certainty as to the rate of principal payments on the trust assets or draws on
the revolving credit loans during any period or over the life of any series of
notes.
For any index used in determining the note rates for a series of notes or
loan rates of the underlying trust assets, a number of factors affect the
performance of that index and may cause that index to move in a manner different
from other indices. To the extent that the index may reflect changes in the
general level of interest rates less quickly than other indices, in a period of
rising interest rates, increases in the yield to noteholders due to those rising
interest rates may occur later than that which would be produced by other
indices, and in a period of declining rates, that index may remain higher than
other market interest rates which may result in a higher level prepayments
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of the trust assets, which adjust in accordance with that index, than of
mortgage loans which adjust in accordance with other indices.
Under some circumstances, the master servicer, the depositor or, if
specified in the accompanying prospectus supplement, another person may have the
option to purchase the trust assets in a trust, thus resulting in the early
retirement of the related notes. See "The Agreements--Termination; Redemption of
Notes."
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CERTAIN LEGAL ASPECTS OF THE TRUST ASSETS
AND RELATED MATTERS
The following discussion contains summaries of legal aspects of the trust
assets that are general in nature. Because these legal aspects are governed in
part by state law, and laws may differ substantially from state to state, the
summaries do not purport to be complete, to reflect the laws of any particular
state or to encompass the laws of all states in which the trust assets may be
situated. These legal aspects are in addition to the requirements of any
applicable FHA Regulations described in "Description of FHA Insurance" in this
prospectus and in the accompanying prospectus supplement regarding the contracts
partially insured by FHA under Title I. The summaries are qualified in their
entirety by reference to the applicable federal and state laws governing the
revolving credit loans, home equity loans, home loans, home improvement
contracts and manufactured housing contracts.
Trust Assets Secured by Mortgages on Mortgaged Property
The loans will and, if applicable, contracts, in each case other than
Cooperative Loans, may be secured by either deeds of trust, mortgages or deeds
to secure debt, depending upon the prevailing practice in the state in which the
related mortgaged property is located, and may have first, second or third
priority. mortgages and deeds to secure debt are referred to in this prospectus
as "mortgages." Manufactured housing contracts evidence both the obligation of
the obligor to repay the loan evidenced by those contracts and grant a security
interest in the related manufactured homes to secure repayment of the loan.
However, as manufactured homes have become larger and often have been attached
to their sites without any apparent intention by the borrowers to move them,
courts in many states have held that manufactured homes may, under some
circumstances become subject to real estate title and recording laws. See "--
Manufactured Housing Contracts" in this section. 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, that
is, the payment of the indebtedness secured by that mortgage or deed of trust.
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 mostly on the order of recordation of the mortgage in
the appropriate recording office.
There are two parties to a mortgage, the mortgagor, who is the borrower
and homeowner, and the mortgagee, who is the lender. Under the mortgage
instrument, the mortgagor delivers to the mortgagee a note or bond and the
mortgage. In some states, three parties may be involved in a mortgage financing
when title to the property is held by a land trustee who is the land trustee
under a land trust agreement of which the borrower is the beneficiary. At
origination of a mortgage loan, the land trustee, as fee owner of the property,
executes the mortgage and the borrower executes (1) a separate undertaking to
make payments on the mortgage note and (2) an assignment of leases and rents.
Although a deed of trust is similar to a mortgage, a deed of trust has three
parties: the trustor who is the borrower-homeowner; the beneficiary who is the
lender; and a third-party grantee called the trustee. Under a deed of trust, the
borrower grants the property, irrevocably until the debt is paid, in trust, in
most cases, with a power of sale, to the trustee to secure payment of the
obligation. A deed to secure debt typically has two parties, under which the
borrower, or grantor, conveys title to the real property to the grantee, or
lender, typically with a power of sale, until the time when the debt is repaid.
The trustee's authority under a deed of trust, the grantee's authority under a
deed to secure debt and the mortgagee's authority under a mortgage are governed
by the law of the state in which the real property is located, the express
provisions of the deed of trust, mortgage, or deed to secure debt, and, in some
deed of trust transactions, the directions of the beneficiary.
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Cooperative Loans
If specified in the prospectus supplement relating to a series of notes,
the loans and contracts may include Cooperative Loans. Each Cooperative Note
evidencing a Cooperative Loan will be secured by a security interest in shares
issued by a Cooperative that owns the related apartment building, which is a
corporation entitled to be treated as a housing cooperative under federal tax
law, and in the related proprietary lease or occupancy agreement granting
exclusive rights to occupy a specific dwelling unit in the Cooperative's
building. The security agreement will create a lien upon, or grant a security
interest in, the Cooperative shares and proprietary leases or occupancy
agreements, the priority of which will depend on, among other things, the terms
of the particular security agreement as well as the order of recordation and/or
filing of the agreement, or the filing of related financing statements, in the
appropriate recording office or the taking of possession of the Cooperative
shares, depending on the law of the state in which the Cooperative is located.
This type of lien or security interest is not, in most cases, prior to liens in
favor of the cooperative corporation for unpaid assessments or common charges.
In most cases, each Cooperative owns in fee or has a leasehold interest in
all the real property and owns in fee or leases the building and all separate
dwelling units in the building. The Cooperative is directly responsible for
property management and, in most cases, payment of real estate taxes, other
governmental impositions and hazard and liability insurance. If there is an
underlying mortgage, or mortgages, on the Cooperative's building or underlying
land, as is typically the case, or an underlying lease of the land, as is the
case in some instances, the Cooperative, as mortgagor or lessee, as the case may
be, is also responsible for fulfilling the mortgage or rental obligations.
An underlying mortgage loan is ordinarily obtained by the Cooperative in
connection with either the construction or purchase of the Cooperative's
building or the obtaining of capital by the Cooperative. The interest of the
occupant under proprietary leases or occupancy agreements as to which that
Cooperative is the landlord is, in most cases, 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:
o 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
o arising under its land lease, the holder of the landlord's interest
under the land lease could terminate it and all subordinate
proprietary leases and occupancy agreements.
In addition, an underlying mortgage on a Cooperative may provide financing in
the form of a mortgage that does not fully amortize, with a significant portion
of principal being due in one final payment at maturity. The inability of the
Cooperative to refinance a mortgage and its consequent inability to make the
final payment could lead to foreclosure by the mortgagee. Similarly, a land
lease has an expiration date and the inability of the Cooperative to extend its
term or, in the alternative, to purchase the land, could lead to termination of
the Cooperative's interest in the property and termination of all proprietary
leases and occupancy agreements. In either event, a foreclosure by the holder of
an underlying mortgage or the termination of the underlying lease could
eliminate or significantly diminish the value of any collateral held by the
lender who financed the purchase by an individual tenant-stockholder of shares
of the Cooperative or, in the case of the revolving credit loans and the home
equity loans, the collateral securing the Cooperative Loans.
Each Cooperative is owned by shareholders, referred to as
tenant-stockholders, who, through ownership of stock or shares in the
Cooperative, receive proprietary leases or occupancy agreements which confer
exclusive rights to occupy specific dwellings. In most cases, a
tenant-stockholder of
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a Cooperative must make a monthly rental payment to the Cooperative under the
proprietary lease, which rental payment represents the tenant-stockholder's pro
rata share of the Cooperative's payments for its underlying mortgage, real
property taxes, maintenance expenses and other capital or ordinary expenses. An
ownership interest in a Cooperative and accompanying occupancy rights may be
financed through a Cooperative Loan evidenced by a Cooperative Note and secured
by an assignment of and a security interest in the occupancy agreement or
proprietary lease and a security interest in the related shares of the related
Cooperative. The lender, in most cases, takes possession of the share
certificate and a counterpart of the proprietary lease or occupancy agreement
and a financing statement covering the proprietary lease or occupancy agreement
and the Cooperative shares is filed in the appropriate state and local offices
to perfect the lender's interest in its collateral. Subject to the limitations
discussed under "--Foreclosure on Shares of Cooperatives," 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."
Tax Aspects of Cooperative Ownership
In general, a "tenant-stockholder," as defined in Section 216(b)(2) of the
Internal Revenue Code, of a corporation that qualifies as a "cooperative housing
corporation" within the meaning of Section 216(b)(1) of the Internal Revenue
Code is allowed a deduction for amounts paid or accrued within his taxable year
to the corporation representing his proportionate share of certain interest
expenses and real estate taxes allowable as a deduction under Section 216(a) of
the Internal Revenue Code to the corporation under Sections 163 and 164 of the
Internal Revenue Code. In order for a corporation to qualify under Section
216(b)(1) of the Internal Revenue Code for its taxable year in which those items
are allowable as a deduction to the corporation, the section requires, among
other things, that at least 80% of the gross income of the corporation be
derived from its tenant-stockholders. By virtue of this requirement, the status
of a corporation for purposes of Section 216(b)(1) of the Internal Revenue Code
must be determined on a year-to-year basis. Consequently, there can be no
assurance that Cooperatives relating to the Cooperative Loans will qualify under
this section for any particular year. In the event that a Cooperative fails to
qualify for one or more years, the value of the collateral securing any related
Cooperative Loans could be significantly impaired because no deduction would be
allowable to tenant-stockholders under Section 216(a) of the Internal Revenue
Code as 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 Internal Revenue Code, the likelihood that this type of failure would be
permitted to continue over a period of years appears remote.
Manufactured Housing Contracts
Except as described in the next paragraph, under the laws of most states,
manufactured housing constitutes personal property and is subject to the motor
vehicle registration laws of the state or other jurisdiction in which the unit
is located. In the few states in which certificates of title are not required
for manufactured homes, security interests are perfected by the filing of a
financing statement under Article 9 of the UCC, which has been adopted by all
states. Those financing statements are effective for five years and must be
renewed prior to the end of each five year period. The certificate of title laws
adopted by the majority of states provide that ownership of motor vehicles and
manufactured housing shall be evidenced by a certificate of title issued by the
motor vehicles department, or a similar entity, of the state. In the states that
have enacted certificate of title laws, a security interest in a unit of
manufactured housing, so long as it is not attached to land in so permanent a
fashion as to become a fixture, is, in most cases, perfected by the recording of
the 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 the office, depending on state law.
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The master servicer will be required under the related agreement to effect
the notation or delivery of the required documents and fees, and to obtain
possession of the certificate of title, as appropriate under the laws of the
state in which any manufactured home is registered. In the event the master
servicer fails, due to clerical errors or otherwise, to effect the notation or
delivery, or files the security interest under the wrong law, for example, under
a motor vehicle title statute rather than under the UCC, in a few states, the
indenture trustee may not have a first priority perfected security interest in
the manufactured home securing a manufactured housing contract. As manufactured
homes have become larger and often have been attached to their sites without any
apparent intention by the borrowers to move them, courts in many states have
held that manufactured homes may, under some circumstances, become subject to
real estate title and recording laws. As a result, a security interest in a
manufactured home could be rendered subordinate to the interests of other
parties claiming an interest in the manufactured home under applicable state
real estate law. In order to perfect a security interest in a manufactured home
under real estate laws, the holder of the security interest must file either a
"fixture filing" under the provisions of the UCC or a real estate mortgage under
the real estate laws of the state where the home is located. These filings must
be made in the real estate records office of the county where the home is
located. Substantially all of the manufactured housing contracts will contain
provisions prohibiting the obligor from permanently attaching the manufactured
home to its site. So long as the obligor does not violate this agreement, a
security interest in the manufactured home will be governed by the certificate
of title laws or the UCC, and the notation of the security interest on the
certificate of title or the filing of a UCC financing statement will be
effective to maintain the priority of the security interest in the manufactured
home. If, however, a manufactured home is permanently attached to its site,
other parties could obtain an interest in the manufactured home that is prior to
the security interest originally retained by the seller and transferred to the
depositor.
The depositor will assign or cause to be assigned a security interest in
the manufactured homes to the indenture trustee, on behalf of the
securityholders. In most cases, neither the depositor, the master servicer nor
the indenture trustee will amend the certificates of title, or file UCC-3
statements, to identify the indenture trustee, on behalf of the securityholders,
as the new secured party, and neither the depositor nor the master servicer will
deliver the certificates of title to the indenture trustee or note thereon the
interest of the indenture trustee. Accordingly, the depositor or the seller will
continue to be named as the secured party on the certificates of title relating
to the manufactured homes. In most states, the assignment is an effective
conveyance of the security interest without amendment of any lien noted on the
related certificate of title and the new secured party succeeds to the
depositor's rights as the secured party. However, in some states there exists a
risk that, in the absence of an amendment to the certificate of title, or the
filing of a UCC-3 statement, the assignment of the security interest in the
manufactured home might not be held to be effective or the security interest may
not be perfected. In the absence of the notation or delivery to the indenture
trustee, the assignment of the security interest in the manufactured home may
not be effective against creditors of the depositor or seller or a trustee in
bankruptcy of the depositor or seller.
In the absence of fraud, forgery, permanent affixation of the manufactured
home to its site, or administrative error by state recording officials, the
notation of the lien of the depositor on the certificate of title or delivery of
the required documents and fees would be sufficient to protect the indenture
trustee against the rights of subsequent purchasers of a manufactured home or
subsequent lenders who take a security interest in the manufactured home. If
there are any manufactured homes as to which the depositor has failed to perfect
or cause to be perfected the security interest assigned to the trust fund, the
security interest would be subordinate to, among others, subsequent purchasers
for value of the manufactured home and holders of perfected security interests
in the manufactured home. There also exists a risk in not identifying the
indenture trustee, on behalf of the securityholders, as the new secured party on
the certificate of title that, through fraud or negligence, the security
interest of the indenture trustee could be released.
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In the event that the owner of a manufactured home moves the house to a
state other than the state in which the manufactured home initially is
registered, under the laws of most states the perfected security interest in the
manufactured home would continue for four months after the relocation and after
that period only if and after the owner re-registers the manufactured home in
the new state. If the owner were to relocate a manufactured home to another
state and re-register the manufactured home in that state, and if the depositor
did not take steps to re-perfect its security interest in that state, the
security interest in the manufactured home would cease to be perfected. A
majority of states generally require surrender of a certificate of title to
re-register a manufactured home; accordingly, the depositor must surrender
possession if it holds the certificate of title to the manufactured home or, in
the case of manufactured homes registered in states that provide for notation of
lien, the depositor would receive notice of surrender if the security interest
in the manufactured home is noted on the certificate of title. Accordingly, the
depositor would have the opportunity to re-perfect its security interest in the
manufactured home in the state of relocation. In states that do not require a
certificate of title for registration of a manufactured home, re-registration
could defeat perfection. In the ordinary course of servicing the manufactured
housing contracts, the master servicer takes steps to effect the re-perfection
upon receipt of notice of re-registration or information from the obligor as to
relocation. Similarly, when an obligor under a manufactured housing conditional
sales contract sells a manufactured home, the obligee must surrender possession
of the certificate of title or it will receive notice as a result of its lien
noted thereon and accordingly will have an opportunity to require satisfaction
of the related manufactured housing conditional sales contract before release of
the lien. Under each related agreement, the master servicer will be obligated to
take steps, at the master servicer's expense, necessary to maintain perfection
of security interests in the manufactured homes.
Under the laws of most states, liens for repairs performed on a
manufactured home and liens for personal property taxes take priority even over
a prior perfected security interest in the manufactured home. The depositor will
obtain the representation of the seller that it has no knowledge of any liens on
any manufactured home securing a manufactured housing contract. However, these
liens could arise at any time during the term of a manufactured housing
contract. No notice will be given to the indenture trustee or noteholders in the
event this type of lien arises.
Foreclosure on Loans and Certain Contracts
Although a deed of trust or deed to secure debt may also be foreclosed by
judicial action, foreclosure of a deed of trust or deed to secure debt is
typically accomplished by a non-judicial trustee's or grantee's, as applicable,
sale under a specific provision in the deed of trust or deed to secure debt
which authorizes the trustee or grantee, as applicable, to sell the property
upon any default by the borrower under the terms of the note or deed of trust or
deed to secure debt. In addition to any notice requirements contained in a deed
of trust or deed to secure debt, in some states, prior to a sale the trustee or
grantee, as applicable, must record a notice of default and send a copy to the
borrower/trustor and to any person who has recorded a request for a copy of
notice of default and notice of sale. In addition, in some states, prior to the
sale, the trustee or grantee, as applicable, must provide notice to any other
individual having an interest of record in the real property, including any
junior lienholders. If the deed of trust or deed to secure deed is not
reinstated within a specified period, a notice of sale must be posted in a
public place and, in most states, published for a specific period of time in one
or more newspapers in a specified manner prior to the date of trustee's sale. In
addition, some states' laws require that a copy of the notice of sale be posted
on the property and sent to all parties having an interest of record in the real
property.
In some states, the borrower-trustor has the right to reinstate the loan
at any time following default until shortly before the trustee's sale. In most
cases, in those states, the borrower, or any other person having a junior
encumbrance on the real estate, may, during a reinstatement period, cure the
default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation.
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Foreclosure of a mortgage generally is accomplished by judicial action. In
most cases, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure may occasionally result from difficulties in locating and
serving necessary parties, including borrowers located outside the jurisdiction
in which the mortgaged property is located. If the mortgagee's right to
foreclose is contested, the legal proceedings necessary to resolve the issue can
be time consuming.
In the case of foreclosure under a mortgage, a deed of trust, or a deed to
secure debt the sale by the referee or other designated officer or by the
trustee or grantee, as applicable, is a public sale. However, because of the
difficulty a potential third-party buyer at the sale might have in determining
the exact status of title, and because the physical condition of the property
may have deteriorated during the foreclosure proceedings, it is uncommon for a
third party to purchase the property at a foreclosure sale. Rather, it is common
for the lender to purchase the property from the trustee or referee, or grantee,
as applicable, for a credit bid less than or equal to the unpaid principal
amount of note plus the accrued and unpaid interest and the expense of
foreclosure, in which case the mortgagor's debt will be extinguished unless the
lender purchases the property for a lesser amount in order to preserve its right
against a borrower to seek a deficiency judgment and the remedy is available
under state law and the related loan documents. In the same states, there is a
statutory minimum purchase price which the lender may offer for the property and
generally, state law controls the amount of foreclosure costs and expenses,
including attorneys' fees, which may be recovered by a lender. After that
redemption period, subject to the right of the borrower in some states to remain
in possession during the redemption period, the lender will assume the burdens
of ownership, including obtaining hazard insurance, paying taxes and making
repairs at its own expense that are necessary to render the property suitable
for sale. In most cases, the lender will obtain the services of a real estate
broker and pay the broker's commission in connection with the sale of the
property. Depending upon market conditions, the ultimate proceeds of the sale of
the property may not equal the lender's investment in the property and, in some
states, the lender may be entitled to a deficiency judgment. In some cases, a
deficiency judgment may be pursued in lieu of foreclosure. Any loss may be
reduced by the receipt of any mortgage insurance proceeds or other forms of
credit enhancement for a series of 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, for
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
some governmental liens. The proceeds received by the referee or trustee from
the sale are applied first to the costs, fees and expenses of sale and then in
satisfaction of the indebtedness secured by the mortgage or deed of trust under
which the sale was conducted. Any remaining proceeds are in most cases payable
to the holders of junior mortgages or deeds of trust and other liens and claims
in order of their priority, whether or not the borrower is in default. Any
additional proceeds are typically payable to the mortgagor or trustor. The
payment of the proceeds to the holders of junior mortgages may occur in the
foreclosure action of the senior mortgagee or may require the institution of
separate legal proceedings. See "Risk Factors--Special Features of Certain Trust
Assets Secured by Junior Liens on Mortgaged Properties" and "Servicing of Trust
Assets--Realization Upon Defaulted Loans" in this prospectus.
Foreclosure on Mortgaged Properties Located in the Commonwealth of Puerto Rico
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Under the laws of the Commonwealth of Puerto Rico the foreclosure of a
real estate mortgage usually follows an ordinary "civil action" filed in the
Superior Court for the district where the mortgage property is located. If the
defendant does not contest the action filed, a default judgment is rendered for
the plaintiff and the mortgaged property is sold at public auction, after
publication of the sale for two weeks, by posting written notice in three public
places in the municipality where the auction will be held, in the tax collection
office and in the public school of the municipality where the mortgagor resides,
if known. If the residence of the mortgagor is not known, publication in one of
the newspapers of general circulation in the Commonwealth of Puerto Rico must be
made at least once a week for two weeks. There may be as many as three public
sales of the mortgaged property. If the defendant contests the foreclosure, the
case may be tried and judgment rendered based on the merits of the case.
There are no redemption rights after the public sale of a foreclosed
property under the laws of the Commonwealth of Puerto Rico. Commonwealth of
Puerto Rico law provides for a summary proceeding for the foreclosure of a
mortgage, but it is very seldom used because of concerns regarding the validity
of those actions. The process may be expedited if the mortgagee can obtain the
consent of the defendant to the execution of a deed in lieu of foreclosure.
Under Commonwealth of Puerto Rico law, in the case of the public sale upon
foreclosure of a mortgaged property that (a) is subject to a mortgage loan that
was obtained for a purpose other than the financing or refinancing of the
acquisition, construction or improvement of the property and (b) is occupied by
the mortgagor as his principal residence, the mortgagor of the property has a
right to be paid the first $1,500 from the proceeds obtained on the public sale
of the property. The mortgagor can claim this sum of money from the mortgagee at
any time prior to the public sale or up to one year after the sale. This payment
would reduce the amount of sales proceeds available to satisfy the loan and/or
contract and may increase the amount of the loss.
Foreclosure on Shares of Cooperatives
The Cooperative shares owned by the tenant-stockholder, together with the
rights of the tenant-stockholder under the proprietary lease or occupancy
agreement, are pledged to the lender and are, in almost all cases, subject to
restrictions on transfer as described in the Cooperative's certificate of
incorporation and by-laws, as well as in the proprietary lease or occupancy
agreement. The proprietary lease or occupancy agreement, even while pledged, may
be canceled by the Cooperative for failure by the tenant-stockholder to pay rent
or other obligations or charges owed by the tenant-stockholder, including
mechanics' liens against the Cooperative's building incurred by the
tenant-stockholder.
In most cases, rent and other obligations and charges arising under a
proprietary lease or occupancy agreement which are owed to the Cooperative are
made liens upon the shares to which the proprietary lease or occupancy agreement
relates. In addition, the proprietary lease or occupancy agreement, in most
cases, permits the Cooperative to terminate the lease or agreement in the event
the borrower defaults in the performance of covenants under that proprietary
lease or occupancy agreement. 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.
In most cases, the recognition agreement provides that, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate the lease or
agreement until the lender has been provided with notice of and an opportunity
to cure the default. The recognition agreement typically
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provides that if the proprietary lease or occupancy agreement is terminated, the
Cooperative will recognize the lender's lien against proceeds from a sale of the
shares and the proprietary lease or occupancy agreement allocated to the
dwelling, subject, however, to the Cooperative's right to sums due under the
proprietary lease or occupancy agreement or which have become liens on the
shares relating to the proprietary lease or occupancy agreement. The total
amount owed to the Cooperative by the tenant-stockholder, which the lender, in
most cases, cannot restrict and does not monitor, could reduce the amount
realized upon a sale of the collateral below the outstanding principal balance
of the Cooperative Loan and its accrued and unpaid interest.
In most cases, recognition agreements also provide that in the event the
lender succeeds to the tenant-shareholder's shares and proprietary lease or
occupancy agreement as the result of realizing upon its collateral for a
Cooperative Loan, the lender must obtain the approval or consent of the board of
directors of the Cooperative as required by the proprietary lease before
transferring the Cooperative shares and/or assigning the proprietary lease. This
approval or consent is usually based on the prospective purchaser's income and
net worth, among other factors, and may significantly reduce the number of
potential purchasers, which could limit the ability of the lender to sell and
realize upon the value of the collateral. In most cases, the lender is not
limited in any rights it may have to dispossess the tenant-stockholder.
Because of the nature of Cooperative Loans, lenders do not require the
tenant-stockholder, that is, 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.
Foreclosure on the Cooperative shares is accomplished by public sale in
accordance with the provisions of Article 9 of the Uniform Commercial Code, or
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. In most cases, 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, in most cases, 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."
Repossession with Respect to Manufactured Housing Contracts
Repossession of manufactured housing is governed by state law. A few
states have enacted legislation that requires that the debtor be given an
opportunity to cure its default, typically 30 days to bring the account current,
before repossession can commence. So long as a manufactured home has not become
so attached to real estate that it would be treated as a part of the real estate
under the law of the state where it is located, repossession of the home in the
event of a default by the obligor will generally be governed by the UCC, except
in Louisiana. Article 9 of the UCC provides the statutory framework for the
repossession of manufactured housing units. While the UCC as adopted by the
various states may vary in some small particulars, the general repossession
procedure established by the UCC is as follows:
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o Except in those states where the debtor must receive notice of the
right to cure a default, repossession can commence immediately upon
default without prior notice. Repossession may be effected either
through self-help, which is peaceable retaking without court order,
voluntary repossession or through judicial process, which is
repossession under court-issued order. The self-help and/or
voluntary repossession methods are more commonly employed, and are
accomplished simply by retaking possession of the manufactured home.
In cases in which the debtor objects or raises a defense to
repossession, a court order must be obtained from the appropriate
state court, and the manufactured home must then be repossessed in
accordance with that order. Whether the method employed is
self-help, voluntary repossession or judicial repossession, the
repossession can be accomplished either by an actual physical
removal of the manufactured home to a secure location for
refurbishment and resale or by removing the occupants and their
belongings from the manufactured home and maintaining possession of
the manufactured home on the location where the occupants were
residing. Various factors may affect whether the manufactured home
is physically removed or left on location, such as the nature and
term of any lease of the site on which it is located and the
condition of the unit. In many cases, leaving the manufactured home
on location is preferable, in the event that the home is already
constructed, in order to avoid the cost of removing the structure.
However, in cases where the home is not moved, expenses for site
rentals will usually be incurred.
o Once repossession has been achieved, preparation for the subsequent
disposition of the manufactured home can commence. This disposition
may be by public or private sale provided the method, manner, time,
place and terms of the sale are commercially reasonable.
o Sale proceeds will be applied first to repossession expenses,
including expenses incurred in repossessing, storing, preparing for
sale, refurbishing and selling costs, and then to satisfaction of
the indebtedness. While some states impose prohibitions or
limitations on deficiency judgments if the net proceeds from resale
do not cover the full amount of the indebtedness, the remainder may
be sought from the debtor in the form of a deficiency judgment in
those states that do not prohibit or limit those judgments. The
deficiency judgment is a personal judgment against the debtor for
the deficiency. Occasionally, after resale of a manufactured home
and payment of all expenses and indebtedness, there is a surplus of
funds. In this event, the UCC requires the party suing for the
deficiency judgment to remit the surplus to the debtor. Because the
defaulting owner of a manufactured home, in most cases, has very
little capital or income available following repossession, a
deficiency judgment is generally not sought or, if obtained, will be
settled at a significant discount in light of the defaulting owner's
limited financial condition.
Louisiana Law. Any contract secured by a manufactured home located in
Louisiana will be governed by Louisiana law rather than Article 9 of the UCC.
Louisiana laws provide similar mechanisms for perfection and enforcement of
security interests in manufactured housing used as collateral for an installment
sale contract or installment loan agreement.
Under Louisiana law, a manufactured home that has been permanently affixed
to real estate will nevertheless remain subject to the motor vehicle
registration laws unless the obligor and any holder of a security interest in
the property execute and file in the real estate records for the parish in which
the property is located a document converting the unit into real property. A
manufactured home that is converted into real property but is then removed from
its site can be converted back to personal property governed by the motor
vehicle registration laws if the obligor executes and files various documents in
the appropriate real estate records and all mortgagees under real estate
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mortgages on the property and the land to which it was affixed file releases
with the motor vehicle commission.
So long as a manufactured home remains subject to the Louisiana motor
vehicle laws, liens are recorded on the certificate of title by the motor
vehicle commissioner and repossession can be accomplished by voluntary consent
of the obligor, executory process, repossession proceedings which must be
initiated through the courts but which involve minimal court supervision, or a
civil suit for possession. In connection with a voluntary surrender, the obligor
must be given a full release from liability for all amounts due under the
contract. In executory process repossessions, a sheriff's sale without court
supervision is permitted, unless the obligor brings suit to enjoin the sale, and
the lender is prohibited from seeking a deficiency judgment against the obligor
unless the lender obtained an appraisal of the manufactured home prior to the
sale and the property was sold for at least two-thirds of its appraised value.
Rights of Redemption
In some states, after sale under a deed of trust or deed to secure debt or
foreclosure of a mortgage, the borrower and foreclosed junior lienors or other
parties are given a statutory period, typically ranging from six months to two
years, in which to redeem the property from the foreclosure sale. In some
states, redemption may occur only upon payment of the entire principal balance
of the loan, accrued interest and expenses of foreclosure. In other states,
redemption may be authorized if the former borrower pays only a portion of the
sums due. In some states, the right to redeem is an equitable right. The equity
of redemption, which is a non-statutory right that must be exercised prior to a
foreclosure sale, should be distinguished from statutory rights of redemption.
The effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The rights of redemption would defeat
the title of any purchaser subsequent to foreclosure or sale under a deed of
trust or deed to secure debt. Consequently, the practical effect of the
redemption right is to force the lender to maintain the property and pay the
expenses of ownership until the redemption period has expired.
Notice of Sale; Redemption Rights with Respect to Manufactured Homes
While state laws do not usually require notice to be given to debtors
prior to repossession, many states require delivery of a notice of default and
notice of the debtor's right to cure defaults before repossession. The law in
most states also requires that the debtor be given notice of sale prior to the
resale of the home so that the owner may redeem at or before resale. In
addition, the sale must comply with the requirements of the UCC.
Anti-Deficiency Legislation and Other Limitations on Lenders
Some states have imposed statutory prohibitions which limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage or a
grantee under a deed to secure debt. In some states, including California,
statutes limit the right of the beneficiary, mortgagee or grantee to obtain a
deficiency judgment against the borrower following foreclosure. A deficiency
judgment is a personal judgment against the former borrower equal in most cases
to the difference between the net amount realized upon the public sale of the
real property and the amount due to the lender. In the case of a loan and a
contract secured by a property owned by a trust where the mortgage note is
executed on behalf of the trust, a deficiency judgment against the trust
following foreclosure or sale under a deed of trust or deed to secure debt, even
if obtainable under applicable law, may be of little value to the beneficiary,
grantee or mortgagee if there are no trust assets against which the deficiency
judgment may be executed. Some state statutes require the beneficiary, grantee
or mortgagee to exhaust the security afforded under a deed of trust, deed to
secure debt or mortgage by foreclosure in an attempt to satisfy the full debt
before bringing a personal action against the borrower.
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In other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting the security; however,
in some of these states, the lender, following judgment on the personal action,
may be deemed to have elected a remedy and may be precluded from exercising
remedies as to the security. Consequently, the practical effect of the election
requirement, in those states permitting this election, is that lenders will
usually proceed against the security first rather than bringing a personal
action against the borrower.
Finally, in other states, statutory provisions limit any deficiency
judgment against the borrower following a foreclosure to the excess of the
outstanding debt over the fair market value of the property at the time of the
public sale. The purpose of these statutes is generally to prevent a
beneficiary, grantee or mortgagee from obtaining a large deficiency judgment
against the former borrower as a result of low or no bids at the judicial sale.
In most cases, Article 9 of the UCC governs foreclosure on Cooperative
shares and the related proprietary lease or occupancy agreement. Some courts
have interpreted Article 9 to prohibit or limit a deficiency award in some
circumstances, including circumstances where the disposition of the collateral,
which, in the case of a Cooperative Loan, would be the shares of the Cooperative
and the related proprietary lease or occupancy agreement, was not conducted in a
commercially reasonable manner.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other federal and state statutory provisions, including the federal bankruptcy
laws and state laws affording relief to debtors, may interfere with or affect
the ability of the secured mortgage lender to realize upon its collateral and/or
enforce a deficiency judgment. For example, under the federal bankruptcy law,
all actions against the debtor, the debtor's property and any co-debtor are
automatically stayed upon the filing of a bankruptcy petition. Moreover, a court
having federal bankruptcy jurisdiction may permit a debtor through its Chapter
11 or Chapter 13 rehabilitative plan to cure a monetary default relating to a
mortgage loan on the debtor's residence by paying arrearages within a reasonable
time period and reinstating the original mortgage loan payment schedule, even
though the lender accelerated the mortgage loan and final judgment of
foreclosure had been entered in state court, provided no sale of the residence
had yet occurred, prior to the filing of the debtor's petition. Some courts with
federal bankruptcy jurisdiction have approved plans, based on the particular
facts of the reorganization case, that effected the curing of a mortgage loan
default by permitting the borrower to pay arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property which is not the principal
residence of the debtor may be modified. These courts have allowed modifications
that include reducing the amount of each monthly payment, changing the rate of
interest, altering the repayment schedule, forgiving all or a portion of the
debt and reducing the lender's security interest to the value of the residence,
thus leaving the lender a general unsecured creditor for the difference between
the value of the residence and the outstanding balance of the loan. In most
cases, however, the terms of a mortgage loan secured only by a mortgage on real
property that is the debtor's principal residence may not be modified under a
plan confirmed under Chapter 13 except for 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.
Some tax liens arising under the Internal Revenue Code may, in some
circumstances, have priority over the lien of a mortgage, deed to secure debt or
deed of trust. This may have the effect of delaying or interfering with the
enforcement of rights as 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
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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.
Purchasers or assignees of any High Cost Loan, including any trust fund,
could be liable for all claims and subject to all defenses arising under these
provisions that the borrower could assert against the originator of the High
Cost Loan. Remedies available to the borrower include monetary penalties, as
well as recission rights if the appropriate disclosures were not given as
required.
Environmental Legislation
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, or CERCLA, and under state law in some
states, a secured party which takes a deed-in-lieu of foreclosure, purchases a
mortgaged property at a foreclosure sale, or operates a mortgaged property may
become liable in some circumstances for the costs of cleaning up hazardous
substances regardless of whether they have contaminated the property. CERCLA
imposes strict, as well as joint and several, liability on several classes of
potentially responsible parties, including current owners and operators of the
property who did not cause or contribute to the contamination. Furthermore,
liability under CERCLA is not limited to the original or unamortized principal
balance of a loan or to the value of the property securing a loan. Lenders may
be held liable under CERCLA as owners or operators unless they qualify for the
secured creditor exemption to CERCLA. This exemption exempts from the definition
of owners and operators those who, without participating in the management of a
facility, hold evidence of ownership primarily to protect a security interest in
the facility.
The Asset Conservation, Lender Liability and Deposit Insurance Act of
1996, as amended, or the Conservation Act, among other things, the provisions of
CERCLA relating to lender liability and the secured creditor exemption. The
Conservation Act offers substantial protection to lenders by defining the
activities in which a lender can engage and still have the benefit of the
secured creditor exemption. In order for a lender to be deemed to have
participated in the management of a mortgaged property, the lender must actually
participate in the operational affairs of the mortgaged property. The
Conservation Act provides that "merely having the capacity to influence, or
unexercised right to control" operations does not constitute participation in
management. A lender will lose the protection of the secured creditor exemption
only if it exercises decision-making control over the borrower's environmental
compliance and hazardous substance handling and disposal practices, or assumes
day-to-day management of substantially all of the operational functions of the
mortgaged property. The Conservation Act also provides that a lender will
continue to have the benefit of the secured creditor exemption even if it
forecloses on a mortgaged property, purchases it at a foreclosure sale or
accepts a deed-in-lieu of foreclosure provided that the lender seeks to sell the
mortgaged property at the earliest practicable commercially reasonable time on
commercially reasonable terms.
Other federal and state laws in some circumstances may impose liability on
a secured party which takes a deed-in-lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, or operates a mortgaged property on which
contaminants other than CERCLA hazardous substances are present, including
petroleum, agricultural chemicals, hazardous wastes, asbestos, radon, and
lead-based paint. These cleanup costs may be substantial. It is possible that
the cleanup costs could become a liability of a trust fund and reduce the
amounts otherwise distributable to the holders of the related series of notes.
Moreover, some federal statutes and some states by statute impose an
Environmental Lien for any cleanup costs incurred by that state on the property
that is the subject of the cleanup costs. All subsequent liens on that property
usually are subordinated to an Environmental Lien and, in some states, even
prior recorded liens are subordinated to Environmental Liens. In the latter
states, the security interest of the trustee in a related parcel of real
property that is subject to an Environmental Lien could be adversely affected.
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Traditionally, many residential mortgage lenders have not taken steps to
evaluate whether contaminants are present on any mortgaged property prior to the
origination of the mortgage loan or prior to foreclosure or accepting a
deed-in-lieu of foreclosure. Accordingly, the depositor has not made and will
not make these evaluations prior to the origination of the secured contracts.
Neither the depositor nor any replacement servicer will be required by any
agreement to undertake any of these evaluations prior to foreclosure or
accepting a deed-in-lieu of foreclosure. The depositor does not make any
representations or warranties or assume any liability for the absence or effect
of contaminants on any related real property or any casualty resulting from the
presence or effect of contaminants. However, the depositor will not be obligated
to foreclose on related real property or accept a deed-in-lieu of foreclosure if
it knows or reasonably believes that there are material contaminated conditions
on the property. A failure so to foreclose may reduce the amounts otherwise
available to noteholders of the related series.
Consumer Protection Laws with Respect to Manufactured Housing Contracts
Numerous federal and state consumer protection laws impose substantial
requirements upon creditors involved in consumer finance. These laws include the
federal Truth-in-Lending Act, Regulation "Z", the Equal Credit Opportunity Act,
Regulation "B", the Fair Credit Reporting Act and related statutes. These laws
can impose specific statutory liabilities upon creditors who fail to comply with
their provisions. In some cases, this liability may affect an assignee's ability
to enforce the related contract. In addition, some of the contracts may be
subject to special rules, disclosure requirements and other provisions that are
applicable to High Cost Loans discussed in the fifth preceding paragraph.
Manufactured housing contracts often contain provisions requiring the
obligor to pay late charges if payments are not timely made. In some cases,
federal and state law may specifically limit the amount of late charges that may
be collected. Unless otherwise provided in the accompanying prospectus
supplement, under the related agreement, late charges will be retained by the
master servicer as additional servicing compensation and any inability to
collect these amounts will not affect payments to noteholders.
Courts have imposed general equitable principles upon repossession and
litigation involving deficiency balances. These equitable principles are
generally designed to relieve a consumer from the legal consequences of a
default.
In several cases, consumers have asserted that the remedies provided to
secured parties under the UCC and related laws violate the due process
protections provided under the 14th Amendment to the Constitution of the United
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,
or the FTC Rule has the effect of subjecting a seller, and some related
creditors and their assignees, in a consumer credit transaction and any assignee
of the creditor to all claims and defenses that the debtor in the transaction
could assert against the seller of the goods. Liability under the FTC Rule is
limited to the amounts paid by a debtor on the contract, and the holder of the
contract may also be unable to collect amounts still due under that contract.
Most of the manufactured housing contracts in a trust fund will be subject
to the requirements of the FTC Rule. Accordingly, the indenture trustee, as
holder of the manufactured housing contracts, will be subject to any claims or
defenses that the purchaser of the related manufactured home may assert against
the seller of the manufactured home, subject to a maximum liability equal to the
amounts paid by the obligor on the manufactured housing contract. If an obligor
is successful in asserting any claim or defense, and if the seller had or should
have had knowledge of the claim
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or defense, the master servicer will have the right to require the seller to
repurchase the manufactured housing contract because of a breach of its seller's
representation and warranty that no claims or defenses exist that would affect
the obligor's obligation to make the required payments under the manufactured
housing contract. The seller would then have the right to require the
originating dealer to repurchase the manufactured housing contract from it and
might also have the right to recover from the dealer any losses suffered by the
seller for which the dealer would have been primarily liable to the obligor.
Enforceability of Certain Provisions
The loans and, as applicable, contracts typically contain due-on-sale
clauses. These clauses permit the lender to accelerate the maturity of the loan
if the borrower sells, transfers or conveys the property without the prior
consent of the mortgagee. The enforceability of these clauses has been the
subject of legislation or litigation in many states, and in some cases the
enforceability of these clauses has been limited or denied. However, the Garn-St
Germain Depository Institutions Act of 1982, or the Garn-St Germain Act, subject
to some exceptions, preempts state constitutional, statutory and case law that
prohibits the enforcement of due-on-sale clauses and permits lenders to enforce
these clauses in accordance with their terms. The Garn-St Germain Act does
"encourage" lenders to permit assumption of loans at the original rate of
interest or at some other rate less than the average of the original rate and
the market rate.
The Garn-St Germain Act also describes nine specific instances in which a
mortgage lender covered by the Garn-St Germain Act may not exercise a
due-on-sale clause, notwithstanding the fact that a transfer of the property may
have occurred. These include intra-family transfers, some transfers by operation
of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St Germain Act also prohibit
the imposition of a prepayment penalty upon the acceleration of a loan under a
due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a mortgage
loan bearing an interest rate below the current market rate being assumed by a
new home buyer rather than being paid off, which may have an impact upon the
average life of the related trust assets and the number of trust assets which
may be outstanding until maturity.
Forms of notes and mortgages used by lenders may contain provisions
obligating the borrower to pay a late charge or additional interest if payments
are not timely made, and in some circumstances may provide for prepayment fees
or yield maintenance penalties if the obligation is paid prior to maturity. In
addition to limitations imposed by FHA Regulations relating to contracts
partially insured by the FHA under Title I, in some states, there are or may be
specific limitations upon the late charges that a lender may collect from a
borrower for delinquent payments. Some states also limit the amounts that a
lender may collect from a borrower as an additional charge if the loan is
prepaid. In addition, the enforceability of provisions that provide for
prepayment fees or penalties upon an involuntary prepayment is unclear under the
laws of many states. Most conventional single-family mortgage loans may be
prepaid in full or in part without penalty. The regulations of the Federal Home
Loan Bank Board, as succeeded by the Office of Thrift Supervision, or OTS,
prohibit the imposition of a prepayment penalty or equivalent fee for or in
connection with the acceleration of a loan by exercise of a due-on-sale clause.
A mortgagee to whom a prepayment in full has been tendered may be compelled to
give either a release of the mortgage or an instrument assigning the existing
mortgage. The absence of a restraint on prepayment, particularly relating to
loans and/or contracts having higher interest rates, may increase the likelihood
of refinancing or other early retirements of the revolving credit loans, home
equity loans and/or contracts.
In foreclosure actions, courts have imposed general equitable principles.
These equitable principles are, in most cases, 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
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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, deeds to secure debt, or mortgages receive notices in addition
to the statutorily prescribed minimum. For the most part, these cases have
upheld the notice provisions as being reasonable or have found that the sale by
a trustee under a deed of trust or grantee under a deed to secure debt, or a
mortgagee having a power of sale, does not involve sufficient state action to
afford constitutional protections to the borrower.
Transfer of Manufactured Homes
In most cases, manufactured housing contracts contain provisions
prohibiting the sale or transfer of the related manufactured homes without the
consent of the obligee on the contract and permitting the acceleration of the
maturity of the contracts by the obligee on the contract upon any sale or
transfer to which consent has not been given. Unless otherwise provided in the
accompanying prospectus supplement, the master servicer will, to the extent it
has knowledge of the conveyance or proposed conveyance, exercise or cause to be
exercised its rights to accelerate the maturity of the related manufactured
housing contracts through enforcement of due-on-sale clauses, subject to
applicable state law. In some cases, the transfer may be made by a delinquent
obligor in order to avoid a repossession proceeding for a manufactured home.
In the case of a transfer of a manufactured home as to which the master
servicer desires to accelerate the maturity of the related contract, the master
servicer's ability to do so will depend on the enforceability under state law of
the related due-on-sale clause. The Garn-St Germain Act preempts, subject to
some exceptions and conditions, state laws prohibiting enforcement of
due-on-sale clauses applicable to the manufactured homes. Consequently, in some
cases the master servicer may be prohibited from enforcing a due-on-sale clause
relating to some manufactured homes.
The Home Improvement Contracts
General
The home improvement contracts, other than those home improvement
contracts that are unsecured or secured by mortgages on real estate, in most
cases, are "chattel paper" or constitute "purchase money security interests"
each as defined in the UCC. Those home improvement contracts are referred to in
this section as "contracts". Under the UCC, the sale of chattel paper is treated
in a manner similar to perfection of a security interest in chattel paper. Under
the related agreement, the depositor will transfer physical possession of the
contracts to the indenture trustee or a designated custodian or may retain
possession of the contracts as custodian for the indenture trustee. In addition,
the depositor will make an appropriate filing of a UCC-1 financing statement in
the appropriate states to give notice of the indenture trustee's ownership of
the contracts. Unless specified in the accompanying prospectus supplement, the
contracts will not be stamped or otherwise marked to reflect their assignment
from the depositor to the indenture trustee. Therefore, if through negligence,
fraud or otherwise, a subsequent purchaser were able to take physical possession
of the contracts without notice of the assignment, the indenture trustee's
interest in the contracts could be defeated.
Security Interests in Home Improvements
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The contracts that are secured by the home improvements financed by those
contracts grant to the originator of the contracts a purchase money security
interest in the home improvements to secure all or part of the purchase price of
the home improvements and related services. A financing statement generally is
not required to be filed to perfect a purchase money security interest in
consumer goods. These purchase money security interests are assignable. In most
cases, a purchase money security interest grants to the holder a security
interest that has priority over a conflicting security interest in the same
collateral and the proceeds of the collateral. However, to the extent that the
collateral subject to a purchase money security interest becomes a fixture, in
order for the related purchase money security interest to take priority over a
conflicting interest in the fixture, the holder's interest in the home
improvement must generally be perfected by a timely fixture filing. In most
cases, under the UCC, a security interest does not exist under the UCC in
ordinary building material incorporated into an improvement on land. Home
improvement contracts that finance lumber, bricks, other types of ordinary
building material or other goods that are deemed to lose this characterization,
upon incorporation of these materials into the related property, will not be
secured by a purchase money security interest in the home improvement being
financed.
Enforcement of Security Interest in Home Improvements
So long as the home improvement has not become subject to the real estate
law, a creditor can repossess a home improvement securing a contract by
voluntary surrender, "self-help" repossession that is "peaceful", that is,
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 this type of sale. The law in most states
also requires that the debtor be given notice of any sale prior to resale of the
related property so that the debtor may redeem it at or before the resale.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a debtor for any deficiency on repossession and
resale of the property securing the debtor's loan. However, some states impose
prohibitions or limitations on deficiency judgments and in many cases the
defaulting borrower would have no assets with which to pay a judgment.
Some other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equity principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
Consumer Protection Laws
The FTC Rule is intended to defeat the ability of the transferor of a
consumer credit contract that is the seller of goods which gave rise to the
transaction, and some related lenders and assignees, to transfer the contract
free of notice of claims by the debtor under that contract. The effect of this
rule is to subject the assignee of this type of contract to all claims and
defenses that the debtor could assert against the seller of goods. Liability
under this rule is limited to amounts paid under a contract. However, the
obligor also may be able to assert the rule to set off remaining amounts due as
a defense against a claim brought by the indenture trustee against the obligor.
Numerous other federal and state consumer protections laws impose requirements
applicable to the origination and lending under the contracts, including the
Truth in Lending Act, the Federal Trade Commission Act, the Fair Credit Billing
Act, the Fair Credit Reporting Act, the Equal Credit Opportunity Act, the Fair
Debt Collection Practices Act and the Uniform Consumer Credit Code. In the case
of some of these laws, the failure to comply with their provisions may affect
the enforceability of the related contract.
Applicability of Usury Laws
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Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, or Title V, provides that, subject to the following conditions,
state usury limitations shall not apply to any contract that is secured by a
first lien on some kinds of consumer goods. The contracts would be covered if
they satisfy some conditions, among other things, governing the terms of any
prepayments, late charges and deferral fees and requiring a 30-day notice period
prior to instituting any action leading to repossession of the related unit.
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision that expressly rejects application of the federal law. Fifteen states
adopted this type of prior to the April 1, 1983 deadline. In addition, even
where Title V was not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
Title V also provides that, subject to the following conditions, state
usury limitations shall not apply to any loan that is secured by a first lien on
some kinds of manufactured housing. The contracts would be covered if they
satisfy some conditions, among other things, governing the terms of any
prepayments, late charges and deferral fees and requiring a 30-day notice period
prior to instituting any action leading to repossession of or foreclosure 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 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 the seller, referred to in this section as the "lender",
retains legal title to the property and enters into an agreement with the
purchaser, referred to in this section as the "borrower", for the payment of the
purchase price, plus interest, over the term of the contract. Only after full
performance by the borrower of the installment contract is the lender obligated
to convey title to the property to the purchaser. As with mortgage or deed of
trust financing, during the effective period of the installment contract, the
borrower is in most cases responsible for the maintaining the property in good
condition and for paying real estate taxes, assessments and hazard insurance
premiums associated with the property.
The method of enforcing the rights of the lender under an installment
contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able under state statute, to enforce the contract
strictly according to its terms. The terms of installment contracts generally
provide that upon a default by the borrower, the borrower loses his or her right
to occupy the property, the entire indebtedness is accelerated and the buyer's
equitable interest in the property is forfeited. The lender in this situation is
not required to foreclose in order to obtain title to the property, although in
some cases a quiet title action is in order if the borrower has filed the
installment contract in local land records and an ejectment action may be
necessary to recover possession. In a few states, particularly in cases of
borrower default during the early years of an installment contract, the courts
will permit ejectment of the buyer and a forfeiture of his or her interest in
the property. However, most state legislatures have enacted provisions by
analogy to mortgage law protecting borrowers under installment contracts from
the harsh consequences of forfeiture. Under those statutes, a judicial or
nonjudicial foreclosure may be required, the lender may be required to give
notice of default and the borrower may be granted some grace period during which
the installment contract may be reinstated upon full payment of the defaulted
amount and the
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borrower may have a post-foreclosure statutory redemption right. In other
states, courts in equity may permit a borrower with significant investment in
the property under an installment contract for the sale of real estate to share
in the proceeds of sale of the property after the indebtedness is repaid or may
otherwise refuse to enforce the forfeiture clause. Nevertheless, the lender's
procedures for obtaining possession and clear title under an installment
contract in a given state are simpler and less time consuming and costly than
are the procedures for foreclosing and obtaining clear title to a property
subject to one or more liens.
Applicability of Usury Laws
Title V provides that state usury limitations shall not apply to some
types of residential first mortgage loans, including cooperative loans
originated by some lenders after March 31, 1980. A similar federal statute was
in effect for mortgage loans made during the first three months of 1980. The OTS
is authorized to issue rules and regulations and to publish interpretations
governing implementation of Title V. The statute authorized any state to impose
interest rate limits by adopting, before April 1, 1983, a law or constitutional
provision which expressly rejects application of the federal law. In addition,
even where Title V is not so rejected, any state is authorized by the law to
adopt a provision limiting discount points or other charges on mortgage loans
covered by Title V. Some states have taken action to reimpose interest rate
limits or to limit discount points or other charges.
Usury limits apply to junior mortgage loans in many states. Any applicable
usury limits in effect at origination will be reflected in the maximum interest
rates for the trust assets, as described in the accompanying prospectus
supplement.
In most cases, each seller of a loan and a contract will have represented
that the loan or contract was originated in compliance with then applicable
state laws, including usury laws, in all material respects. However, the
interest rates on the loans will be subject to applicable usury laws as in
effect from time to time.
Alternative Mortgage Instruments
Alternative mortgage instruments, including adjustable rate mortgage loans
and adjustable rate cooperative loans, and early ownership mortgage loans,
originated by non-federally chartered lenders have historically been subjected
to a variety of restrictions. These restrictions differed from state to state,
resulting in difficulties in determining whether a particular alternative
mortgage instrument originated by a state-chartered lender was in compliance
with applicable law. These difficulties were alleviated substantially as a
result of the enactment of Title VIII of the Garn-St Germain Act, or Title VIII.
Title VIII provides that, notwithstanding any state law to the contrary:
o state-chartered banks may originate alternative mortgage instruments
in accordance with regulations promulgated by the Comptroller of the
Currency relating to the origination of alternative mortgage
instruments by national banks,
o state-chartered credit unions may originate alternative mortgage
instruments in accordance with regulations promulgated by the
National Credit Union Administration relating to origination of
alternative mortgage instruments by federal credit unions, and
o 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,
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predecessor to the OTS, relating to origination of alternative
mortgage instruments by federal savings and loan associations.
Title VIII also provides that any state may reject applicability of the
provisions of Title VIII by adopting, prior to October 15, 1985, a law or
constitutional provision expressly rejecting the applicability of these
provisions. Some states have taken this action.
Formaldehyde Litigation with Respect to Manufactured Housing Contracts
A number of lawsuits are pending in the United States alleging personal
injury from exposure to the chemical formaldehyde, which is present in many
building materials, including components of manufactured housing such as plywood
flooring and wall paneling. Some of these lawsuits are pending against
manufacturers of manufactured housing, suppliers of component parts and related
persons in the distribution process. The depositor is aware of a limited number
of cases in which plaintiffs have won judgments in these lawsuits.
Under the FTC Rule, which is described under "--Consumer Protection Laws"
and "Consumer Protection Laws with Respect to Manufactured Housing Contracts,"
the holder of any contract secured by a manufactured home for which a
formaldehyde claim has been successfully asserted may be liable to the obligor
for the amount paid by the obligor on the related contract and may be unable to
collect amounts still due under the contract. The successful assertion of this
type of claim constitutes a breach of a representation or warranty of the
seller, and the related trust fund would suffer a loss only to the extent that:
o the seller breached its obligation to repurchase the contract in the
event an obligor is successful in asserting this type of claim, and
o the seller, the depositor or the indenture trustee were unsuccessful
in asserting any claim of contribution or subrogation on behalf of
the noteholders against the manufacturer or other persons who were
directly liable to the plaintiff for the damages.
Typical products liability insurance policies held by manufacturers and
component suppliers of manufactured homes may not cover liabilities arising from
formaldehyde in manufactured housing, with the result that recoveries from
manufacturers, suppliers or other persons may be limited to their corporate
assets without the benefit of insurance.
Soldiers' and Sailors' Civil Relief Act of 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended, or the Relief Act, a mortgagor who enters military service after the
origination of the mortgagor's loan and some contracts, including a mortgagor
who was in reserve status and is called to active duty after origination of the
loan and some contracts, may not be charged interest, including fees and
charges, above an annual rate of 6% during the period of the mortgagor's active
duty status, unless a court orders otherwise upon application of the lender. The
Relief Act applies to mortgagors who are members of the Air Force, Army,
Marines, Navy, National Guard, Reserves, Coast Guard, and officers of the U.S.
Public Health Service assigned to duty with the military. Because the Relief Act
applies to mortgagors who enter military service, including reservists who are
called to active duty, after origination of the related loan and related
contract, no information can be provided as to the number of loans that may be
affected by the Relief Act. Application of the Relief Act would adversely
affect, for an indeterminate period of time, the ability of the master servicer
to collect full amounts of interest on some of the loans and contracts. Any
shortfall in interest collections resulting from the application of the Relief
Act or similar legislation or regulations, which would not be recoverable from
the related loans and contracts, would result in a reduction of the amounts
payable
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to the holders of the related notes, and may not be covered by the applicable
form of credit enhancement provided in connection with the related series of
notes. In addition, the Relief Act imposes limitations that would impair the
ability of the master servicer to foreclose on an affected loan or contract
during the mortgagor's period of active duty status, and, under some
circumstances, during an additional three month period after the period of
active duty status. Thus, in the event that the Relief Act or similar
legislation or regulations applies to any loan and contract which goes into
default, there may be delays in payment and losses on the related notes in
connection therewith. Any other interest shortfalls, deferrals or forgiveness of
payments on the loans and contracts resulting from similar legislation or
regulations may result in delays in payments or losses to noteholders of the
related series.
Forfeitures in Drug and RICO Proceedings
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations, or RICO, statute can be seized by the government if the
property was used in, or purchased with the proceeds of, those crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984, or 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:
o its mortgage was executed and recorded before commission of the
crime upon which the forfeiture is based, or
o the lender was, at the time of execution of the mortgage,
"reasonably without cause to believe" that the property was used in,
or purchased with the proceeds of, illegal drug or RICO activities.
Junior Mortgages; Rights of Senior Mortgagees
The loans, as well as some contracts or private securities, included in
the trust fund for a series will be secured by mortgages or deeds of trust which
in most cases will be junior to other mortgages or deeds of trust held by other
lenders or institutional investors. The rights of the trust fund, and therefore
the noteholders, as mortgagee under a junior mortgage, are subordinate to those
of the mortgagee under the senior mortgage, including the prior rights of the
senior mortgagee to receive hazard insurance and condemnation proceeds and to
cause the property securing the loan or contract to be sold upon default of the
mortgagor, which may extinguish the junior mortgagee's lien unless the junior
mortgagee asserts its subordinate interest in the property in foreclosure
litigation and, in some cases, either reinitiates or satisfies the defaulted
senior loan or loans. A junior mortgagee may satisfy a defaulted senior loan in
full or, in some states, may cure the default and bring the senior loan current
thereby reinstating the senior loan, in either event usually adding the amounts
expended to the balance due on the junior loan. In most states, absent a
provision in the mortgage or deed of trust, no notice of default is required to
be given to a junior mortgagee. Where applicable law or the terms of the senior
mortgage or deed of trust do not require notice of default to the junior
mortgagee, the lack of any notice may prevent the junior mortgagee from
exercising any right to reinstate the loan which applicable law may provide.
The standard form of the mortgage or deed of trust used by most
institutional lenders confers on the mortgagee the right both to receive all
proceeds collected under any hazard insurance policy and all awards made in
connection with condemnation proceedings, and to apply the proceeds and awards
to any indebtedness secured by the mortgage or deed of trust, in the order as
the mortgagee may determine. Thus, in the event improvements on the property are
damaged or destroyed by fire
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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:
o 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,
o to provide and maintain fire insurance on the property,
o to maintain and repair the property and not to commit or permit any
waste of the property, and
o to appear in and defend any action or proceeding purporting to
affect the property or the rights of the mortgagee under the
mortgage.
Upon a failure of the mortgagor to perform any of these obligations, the
mortgagee or beneficiary is given the right under some mortgages or deeds of
trust to perform the obligation itself, at its election, with the mortgagor
agreeing to reimburse the mortgagee for any sums expended by the mortgagee on
behalf of the mortgagor. All sums so expended by a senior mortgagee become part
of the indebtedness secured by the senior mortgage.
The form of credit line trust deed or mortgage used by most institutional
lenders which make revolving credit loans typically contains a "future advance"
clause, which provides, in essence, that additional amounts advanced to or on
behalf of the borrower by the beneficiary or lender are to be secured by the
deed of trust or mortgage. The priority of the lien securing any advance made
under the clause may depend in most states on whether the deed of trust or
mortgage is designated as a credit line deed of trust or mortgage. If the
beneficiary or lender advances additional amounts, the advance is entitled to
receive the same priority as amounts initially advanced under the trust deed or
mortgage, notwithstanding the fact that there may be junior trust deeds or
mortgages and other liens which intervene between the date of recording of the
trust deed or mortgage and the date of the future advance, and notwithstanding
that the beneficiary or lender had actual knowledge of these intervening junior
trust deeds or mortgages and other liens at the time of the advance. In most
states, the trust deed or mortgage lien securing mortgage loans of the type
which includes revolving credit loans applies retroactively to the date of the
original recording of the trust deed or mortgage, provided that the total amount
of advances under the credit limit does not exceed the maximum specified
principal amount of the recorded trust deed or mortgage, except as to advances
made after receipt by the lender of a written notice of lien from a judgment
lien creditor of the trustor.
Negative Amortization Loans
A recent case decided by the United States Court of Appeals, First
Circuit, held that state restrictions on the compounding of interest are not
preempted by the provisions of the Depository Institutions Deregulation and
Monetary Control Act of 1980, or DIDMC, and as a result, a mortgage loan that
provided for negative amortization violated New Hampshire's requirement that
first mortgage loans provide for computation of interest on a simple interest
basis. The holding was limited to the effect of DIDMC on state laws regarding
the compounding of interest and the court did not address the applicability of
the Alternative Mortgage Transaction Parity Act of 1982, which authorizes a
lender to make residential mortgage loans that provide for negative
amortization. As a result, the enforceability of compound interest on mortgage
loans that provide for negative
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amortization is unclear. The First Circuit's decision is binding authority only
on Federal District Courts in Maine, New Hampshire, Massachusetts, Rhode Island
and Puerto Rico.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of anticipated material federal
income tax consequences of the purchase, ownership and disposition of the notes
offered under this prospectus. This discussion has been prepared with the advice
of Thacher Proffitt & Wood, Orrick, Herrington & Sutcliffe LLP and Stroock &
Stroock & Lavan, each as counsel to the depositor. This discussion is directed
solely to noteholders that hold the notes as capital assets within the meaning
of Section 1221 of the Internal Revenue Code and does not purport to discuss all
federal income tax consequences that may be applicable to particular categories
of investors, some of which may be subject to special rules, including banks,
insurance companies, foreign investors, tax-exempt organizations, dealers in
securities or currencies, mutual funds, real estate investment trusts, natural
persons, cash method taxpayers, S corporations, estates and trusts, investors
that hold the notes as part of a hedge, straddle or, an integrated or conversion
transaction, or holders whose "functional currency" is not the United States
dollar. Also, it does not address alternative minimum tax consequences or the
indirect effects on the holders of equity interests in a noteholder. Further,
the authorities on which this discussion, and the opinion referred to below, 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 (a) is given
as to events that have occurred at the time the advice is rendered and is not
given as to the consequences of contemplated actions, and (b) is directly
relevant to the determination of an entry on a tax return. Accordingly,
taxpayers should consult their tax advisors and tax return preparers regarding
the preparation of any item on a tax return, even where the anticipated tax
treatment has been discussed in this prospectus. In addition to the federal
income tax consequences described in this prospectus, potential investors should
consider the state and local tax consequences, if any, of the purchase,
ownership and disposition of the notes. See "State and Other Tax Consequences."
Noteholders are advised to consult their tax advisors concerning the federal,
state, local or other tax consequences to them of the purchase, ownership and
disposition of the notes offered under this prospectus.
Upon the issuance of the notes, Thacher Proffitt & Wood, Orrick,
Herrington & Sutcliffe LLP or Stroock & Stroock & Lavan, as tax counsel to the
depositor, will deliver its opinion generally to the effect that, for federal
income tax purposes, assuming compliance with all provisions of the indenture,
trust agreement and related documents, (a) the notes will be treated as
indebtedness and (b) the issuer, as created under the terms and conditions of
the trust agreement, will not be characterized as an association, or publicly
traded partnership within the meaning of Internal Revenue Code section 7704,
taxable as a corporation or as a taxable mortgage pool within the meaning of
Internal Revenue Code section 7701(i). The following discussion is based in part
upon the rules governing original issue discount that are described in Internal
Revenue Code sections 1271-1273 and 1275 and in the Treasury regulations issued
under these sections, referred to as the OID Regulations. The OID Regulations do
not adequately address various 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
Notes held by a domestic building and loan association will not constitute
"loans . . . secured by an interest in real property" within the meaning of
Internal Revenue Code section 7701(a)(19)(C)(v); and notes held by a real estate
investment trust will not constitute "real estate assets" within the meaning of
Internal Revenue Code section 856(c)(4)(A) and interest on notes will not be
considered "interest on obligations secured by mortgages on real property"
within the meaning of Internal Revenue Code section 856(c)(3)(B).
Original Issue Discount
The notes are not expected to be considered issued with original issue
discount since the principal amount of the notes will not exceed their issue
price by more than a de minimis amount. The stated interest thereon will be
taxable to a noteholder as ordinary interest income when received or accrued in
accordance with the noteholder's method of tax accounting. Under the OID
Regulations, a holder of a note issued with a de minimis amount of original
issue discount must include the discount in income, on a pro rata basis, as
principal payments are made on the note.
The original issue discount, if any, on a note would be the excess of its
stated redemption price at maturity over its issue price. The issue price of a
particular class of notes will be the first cash price at which a substantial
amount of notes of that class is sold, excluding sales to bond houses, brokers
and underwriters, on the closing date. If less than a substantial amount of a
particular class of notes is sold for cash on or prior to the closing date, the
issue price of the class will be treated as the fair market value of that class
on the closing date. Under the OID Regulations, the stated redemption price of a
note is equal to the total of all payments to be made on the note other than
"qualified stated interest." "Qualified stated interest" includes interest that
is unconditionally payable at least annually at a single fixed rate, or in the
case of a variable rate debt instrument, at a "qualified floating rate," an
"objective rate," a combination of a single fixed rate and one or more
"qualified floating rates" or one "qualified inverse floating rate," or a
combination of "qualified floating rates" that typically does not operate in a
manner that accelerates or defers interest payments on the note.
In the case of notes bearing adjustable note rates, the determination of
the total amount of original issue discount and the timing of the inclusion of
original issue discount will vary according to the characteristics of the notes.
In general terms original issue discount is accrued by treating the note rate of
the notes as fixed and making adjustments to reflect actual note rate payments.
Some classes of the notes may provide for the first interest payment on
these notes to be made more than one month after the date of issuance, a period
which is longer than the subsequent monthly intervals between interest payments.
Assuming the "accrual period", as defined in the fourth paragraph 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 for a period that begins prior to the closing date, a portion
of the purchase price paid for a note will reflect the accrued interest. In
those cases, information returns to the noteholders and the IRS will be based on
the position that the portion of the purchase price paid for the interest
accrued during periods prior to the closing date is treated as part of the
overall purchase price of the note, and not as a separate asset the purchase
price of which is recovered entirely out of interest received on the next
distribution date, and that portion of the interest paid on the first
distribution date in excess of interest accrued for a number of days
corresponding to the number of days from the closing date to the first
distribution date should be included in the stated redemption price of the note.
However, the
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OID Regulations state that all or some portion of the accrued interest may be
treated as a separate asset the cost of which is recovered entirely out of
interest paid on the first distribution date. It is unclear how an election to
do so would be made under the OID Regulations and whether the election could be
made unilaterally by a noteholder.
Notwithstanding the general definition of original issue discount,
original issue discount on a note will be considered to be de minimis if it is
less than 0.25% of the stated redemption price of the note multiplied by its
weighted average maturity. For this purpose, the weighted average maturity of
the note is computed as the sum of the amounts determined, as to each payment
included in the stated redemption price of the note, by multiplying (a) the
number of complete years, rounding down for partial years, from the issue date
until the payment is expected to be made, possibly taking into account a
prepayment assumption, by (b) a fraction, the numerator of which is the amount
of the payment, and the denominator of which is the stated redemption price at
maturity of the note. Under the OID Regulations, original issue discount of only
a de minimis amount, other than de minimis original issue discount attributable
to a so-called "teaser" interest rate or an initial interest holiday, will be
included in income as each payment of stated principal is made, based on the
product of the total amount of the de minimis original issue discount and a
fraction, the numerator of which is the amount of the principal payment and the
denominator of which is the outstanding stated principal amount of the note. The
OID Regulations also would permit a noteholder to elect to accrue de minimis
original issue discount into income currently based on a constant yield method.
See "--Market Discount" for a description of the election under the OID
Regulations.
If original issue discount on a note is in excess of a de minimis amount,
the holder of the note must include in ordinary gross income the sum of the
"daily portions" of original issue discount for each day during its taxable year
on which it held the note, including the purchase date but excluding the
disposition date. In the case of an original holder of a note, the daily
portions of original issue discount will be determined as follows.
As to each "accrual period," that is, unless otherwise stated in the
accompanying prospectus supplement, each period that ends on a date that
corresponds to a distribution date and begins on the first day following the
immediately preceding accrual period, or in the case of the first period, begins
on the closing date, a calculation will be made of the portion of the original
issue discount that accrued during this accrual period. The portion of original
issue discount that accrues in any accrual period will equal the excess, if any,
of (1) the sum of (A) the present value, as of the end of the accrual period, of
all of the distributions remaining to be made on the note, if any, in future
periods and (B) the distributions made on the note during the accrual period of
amounts included in the stated redemption price, over (2) the adjusted issue
price of the note at the beginning of the accrual period. The present value of
the remaining distributions referred to in the preceding sentence will be
calculated using a discount rate equal to the original yield to maturity of the
notes, and possibly assuming that distributions on the note will be received in
future periods based on the trust assets being prepaid at a rate equal to a
prepayment assumption. For these purposes, the original yield to maturity of the
note would be calculated based on its issue price and possibly assuming that
distributions on the note will be made in all accrual periods based on the trust
assets being prepaid at a rate equal to a prepayment assumption. The adjusted
issue price of a note at the beginning of any accrual period will equal the
issue price of the note, increased by the aggregate amount of original issue
discount that accrued on the note in prior accrual periods, and reduced by the
amount of any distributions made on the note in prior accrual periods of amounts
included in its stated redemption price. The original issue discount accruing
during any accrual period, computed as described above, will be allocated
ratably to each day during the accrual period to determine the daily portion of
original issue discount for that day. Although the issuer will calculate
original issue discount, if any, based on its determination of the accrual
periods, a noteholder may, subject to some restrictions, elect other accrual
periods.
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A subsequent purchaser of a note that purchases the note at a price,
excluding any portion of the price attributable to accrued qualified stated
interest, less than its remaining stated redemption price will also be required
to include in gross income the daily portions of any original issue discount
relating to the note. However, each daily portion will be reduced, if the cost
is in excess of its "adjusted issue price," in proportion to the ratio that
excess bears to the aggregate original issue discount remaining to be accrued on
the note. The adjusted issue price of a note on any given day equals:
o the adjusted issue price, or, in the case of the first accrual
period, the issue price, of the note at the beginning of the accrual
period which includes that day, plus
o the daily portions of original issue discount for all days during
the accrual period prior to that day, less
o any principal payments made during the accrual period relating to
the 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 Internal
Revenue Code section 1276 the noteholder, in most cases, will be required to
allocate the portion of each distribution representing stated principal first to
accrued market discount not previously included in income, and to recognize
ordinary income to that extent.
A noteholder may elect to include market discount in income currently as
it accrues rather than including it on a deferred basis in accordance with the
foregoing. If made, the election will apply to all market discount bonds
acquired by the noteholder on or after the first day of the first taxable year
to which the election applies. In addition, the OID Regulations permit a
noteholder to elect to accrue all interest, discount, including de minimis
market or original issue discount, and premium in income as interest, based on a
constant yield method. If this election were made for a note with market
discount, the noteholder would be deemed to have made an election to include
currently market discount in income for all other debt instruments having market
discount that the noteholder acquires during the taxable year of the election or
after that year, 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 for all debt
instruments having amortizable bond premium that the noteholder owns or
acquires. See "--Premium." Each of these elections to accrue interest, discount
and premium for a note on a constant yield method would be irrevocable.
However, market discount for a note will be considered to be de minimis
for purposes Internal Revenue Code section 1276 if the market discount is less
than 0.25% of the remaining principal amount of the note multiplied by the
number of complete years to maturity remaining after the date of its purchase.
In interpreting a similar rule for 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 for
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."
Internal Revenue Code section 1276(b)(3) specifically authorizes the
Treasury Department to issue regulations providing for the method for accruing
market discount on debt instruments, the principal of which is payable in more
than one installment. Until regulations are issued by the Treasury Department,
some rules described in the legislative history to the Internal Revenue Code
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section 1276, or the Committee Report, apply. The Committee Report indicates
that in each accrual period market discount on notes should accrue, at the
noteholder's option: (a) on the basis of a constant yield method, or (b) in the
case of a note issued without original issue discount, in an amount that bears
the same ratio to the total remaining market discount as the stated interest
paid in the accrual period bears to the total amount of stated interest
remaining to be paid on the notes as of the beginning of the accrual period.
Moreover, any prepayment assumption used in calculating the accrual of original
issue discount is also used in calculating the accrual of market discount.
Because the regulations referred to in this paragraph have not been issued, it
is not possible to predict what effect these regulations might have on the tax
treatment of a note purchased at a discount in the secondary market. Further, it
is uncertain whether a prepayment assumption would be required to be used for
the notes if they were issued with original issue discount.
To the extent that notes provide for monthly or other periodic
distributions throughout their term, the effect of these rules may be to require
market discount to be includible in income at a rate that is not significantly
slower than the rate at which the discount would accrue if it were original
issue discount. Moreover, in any event a holder of a note typically will be
required to treat a portion of any gain on the sale or exchange of the note as
ordinary income to the extent of the market discount accrued to the date of
disposition under one of the foregoing methods, less any accrued market discount
previously reported as ordinary income.
Further, under Internal Revenue 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 in the third preceding paragraph applies. Any deferred interest
expense would not exceed the market discount that accrues during that taxable
year and is, in most cases, allowed as a deduction not later than the year in
which the market discount is includible in income. If the holder elects to
include market discount in income currently as it accrues on all market discount
instruments acquired by that holder in that taxable year or after that year, the
interest deferral rule described above will not apply.
Premium
If a holder purchases a note for an amount greater than its remaining
principal amount, the holder will be considered to have purchased the note with
amortizable bond premium equal in amount to the excess, and may elect to
amortize the premium using a constant yield method over the remaining term of
the note and to offset interest otherwise to be required to be included in
income relating to that note by the premium amortized in that taxable year. If
this election is made, it will apply to all debt instruments having amortizable
bond premium that the holder owns or subsequently acquires. The OID Regulations
also permit noteholders to elect to include all interest, discount and premium
in income based on a constant yield method. See "--Market Discount." 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 for notes without regard to whether the notes have original
issue discount, would also apply in amortizing bond premium under Internal
Revenue Code section 171.
Realized Losses
Under Internal Revenue Code section 166 both corporate and noncorporate
holders of the notes that acquire those notes in connection with a trade or
business should be allowed to deduct, as ordinary losses, any losses sustained
during a taxable year in which their notes become wholly or partially worthless
as the result of one or more Realized Losses on the trust assets. However, it
appears that a noncorporate holder that does not acquire a note in connection
with a trade or business will not be entitled to deduct a loss under Section 166
of the Internal Revenue Code until the
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holder's note becomes wholly worthless, that is., 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 for that note, without giving effect to any reductions in
distributions attributable to defaults or delinquencies on the trust assets
until it can be established that any reduction ultimately will not be
recoverable. As a result, the amount of taxable income reported in any period by
the holder of a note could exceed the amount of economic income actually
realized by the holder in that period. Although the holder of a note eventually
will recognize a loss or reduction in income attributable to previously accrued
and included income that, as the result of a Realized Loss, ultimately will not
be realized, the law is unclear as to the timing and character of the loss or
reduction in income.
Sales of Notes
If a note is sold, the selling noteholder will recognize gain or loss
equal to the difference between the amount realized on the sale and its adjusted
basis in the note. The adjusted basis of a note, in most cases, will equal the
cost of that note to that noteholder, increased by the amount of any original
issue discount or market discount previously reported by the noteholder for that
note and reduced by any amortized premium and any principal payment received by
the noteholder. Except as provided in the following three paragraphs, any gain
or loss will be capital gain or loss, provided the note is held as a capital
asset, in most cases, property held for investment, within the meaning of
Internal Revenue Code section 1221.
Gain recognized on the sale of a note by a seller who purchased the note
at a market discount will be taxable as ordinary income in an amount not
exceeding the portion of the discount that accrued during the period the note
was held by the holder, reduced by any market discount included in income under
the rules described above under "--Market Discount" and "--Premium."
A portion of any gain from the sale of a note that might otherwise be
capital gain may be treated as ordinary income to the extent that the note is
held as part of a "conversion transaction" within the meaning of Section 1258 of
the Internal Revenue Code. A conversion transaction generally is one in which
the taxpayer has taken two or more positions in the same or similar property
that reduce or eliminate market risk, if substantially all of the taxpayer's
return is attributable to the time value of the taxpayer's net investment in the
transaction. The amount of gain so realized in a conversion transaction that is
recharacterized as ordinary income generally will not exceed the amount of
interest that would have accrued on the taxpayer's net investment at 120% of the
appropriate "applicable Federal rate", which rate is computed and published
monthly by the IRS, at the time the taxpayer enters into the conversion
transaction, subject to appropriate reduction for prior inclusion of interest
and other ordinary income items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include any net capital
gain in total net investment income for the taxable year, for purposes of the
rule that limits the deduction of interest on indebtedness incurred to purchase
or carry property held for investment to a taxpayer's net investment income.
Backup Withholding
Payments of interest and principal, as well as payments of proceeds from
the sale of notes, may be subject to the "backup withholding tax" under Section
3406 of the Internal Revenue Code at a rate of 31% if recipients of the payments
fail to furnish to the payor information, including their taxpayer
identification numbers, or otherwise fail to establish an exemption from the
tax. Any amounts deducted and withheld from a distribution to a recipient would
be allowed as a credit against the recipient's federal income tax. Furthermore,
penalties may be imposed by the IRS on a
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recipient of payments that is required to supply information but that does not
do so in the proper manner.
The issuer will report to the holders and to the IRS for each calendar
year the amount of any "reportable payments" during that year and the amount of
tax withheld, if any, relating 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, known as nonresidents, will normally qualify as
portfolio interest and will be exempt from federal income tax, except, in
general, where (a) the recipient is a holder, directly or by attribution, of 10%
or more of the capital or profits interest in the issuer, or (b) the recipient
is a controlled foreign corporation to which the issuer is a related person.
Upon receipt of appropriate ownership statements, the issuer normally will be
relieved of obligations to withhold tax from the interest payments. These
provisions supersede the generally applicable provisions of United States law
that would otherwise require the issuer to withhold at a 30% rate, unless this
rate were reduced or eliminated by an applicable tax treaty, on, among other
things, interest and other fixed or determinable, annual or periodic income paid
to nonresidents. For these purposes a noteholder may be considered to be related
to the issuer by holding a certificate or by having common ownership with any
other holder of a certificate or any affiliate of that holder.
New Withholding Regulations
The Treasury Department has issued new regulations referred to as the New
Withholding Regulations, which make modifications to the withholding, backup
withholding and information reporting rules described above in the three
preceding paragraphs. The New Withholding Regulations attempt to unify
certification requirements and modify reliance standards. The New Withholding
Regulations will generally be effective for payments made after December 31,
1999, subject to transition rules. Prospective investors are urged to consult
their tax advisors regarding the New Withholding Regulations.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Material
Federal Income Tax Consequences," potential investors should consider the state
and local tax consequences of the acquisition, ownership, and disposition of the
notes offered by this prospectus. State tax law may differ substantially from
the corresponding federal tax law, and the discussion above does not purport to
describe any aspect of the tax laws of any state or other jurisdiction.
Therefore, prospective investors should consult their tax advisors about the
various tax consequences of investments in the notes offered by this prospectus.
ERISA CONSIDERATIONS
Sections 404 and 406 of ERISA impose fiduciary and prohibited transaction
restrictions on employee pension and welfare benefit plans subject to ERISA,
referred to as ERISA plans, and on other retirement plans and arrangements,
including individual retirement accounts and annuities, Keogh plans, bank
collective investment funds and insurance company general and separate accounts
in which those ERISA plans are invested. Section 4975 of the Internal Revenue
Code imposes essentially the same prohibited transaction restrictions on Tax
Favored Plans.
Some employee benefit plans, including governmental plans, as defined in
Section 3(32) of ERISA, and, if no election has been made under Section 410(d)
of the Internal Revenue Code, church plans, as defined in Section 3(33) of
ERISA, are not subject to the ERISA requirements discussed in this prospectus.
Accordingly, assets of these plans may be invested in notes without regard to
the ERISA considerations described below, subject to the provisions of
applicable federal and state law. Any plan that is qualified and exempt from
taxation under Sections 401(a) and 501(a) of the Internal Revenue Code, however,
is subject to the prohibited transaction rules in Section 503 of the Internal
Revenue Code.
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In addition to imposing general fiduciary requirements, including those of
investment prudence and diversification and the requirement that an ERISA plan's
investment be made in accordance with the documents governing the ERISA plan,
Section 406 of ERISA and Section 4975 of the Internal Revenue Code prohibit a
broad range of transactions involving assets of ERISA plans and Tax-Favored
Plans and Parties in Interest who have specified relationships to the ERISA
plans, unless a statutory or administrative exemption is available. Some Parties
in Interest that participate in a prohibited transaction may be subject to a
penalty, or an excise tax, imposed under Section 502(i) of ERISA or Section 4975
of the Internal Revenue Code, unless a statutory or administrative exemption is
available for any transaction of this sort.
ERISA Plan Asset Regulations
An investment of the assets of an ERISA plan in notes may cause the
underlying trust assets and other assets included in the trust to be deemed
"Plan Assets" of the ERISA plan. The U.S. Department of Labor, or DOL, has
promulgated regulations at 29 C.F.R. Section 2510.3-101, or 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 Internal Revenue Code. Under the DOL Regulations,
generally, when an ERISA plan acquires an "equity interest" in another entity,
including a trust, the underlying assets of that entity may be considered to be
ERISA plan assets unless some exceptions apply. Exceptions contained in the DOL
Regulations provide that a ERISA plan's assets will not include an undivided
interest in each asset of an entity in which it makes an equity investment if:
o the entity is an operating company;
o the equity investment made by the ERISA 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
o 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 ERISA 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 Internal Revenue
Code, foreign plans and any entity whose underlying assets include ERISA plan
assets by reason of an ERISA plan's investment in the entity. The DOL
Regulations provide that the term "equity interest" means any interest in an
entity other than an instrument which is treated as indebtedness under
applicable local law and which has no "substantial equity features."
Because of the factual nature of some of the rules governing the
applicability of the above-described exceptions under the DOL Regulations, ERISA
plans or persons investing ERISA plan assets should not acquire any note which
may be deemed in the respective prospectus supplement to have "substantial
equity features" in reliance upon the availability of any exception. For
purposes of this section "ERISA Considerations," the term "Plan Assets" or
"assets of a Plan" has the meaning specified in the DOL Regulations and includes
an undivided interest in the underlying assets of some entities in which a ERISA
plan invests.
The prohibited transaction provisions of Section 406 of ERISA and Section
4975 of the Internal Revenue Code may apply to a trust and cause the depositor,
the master servicer, any subservicer, any Administrator, the indenture trustee,
the owner trustee, the obligor under any credit
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enhancement mechanism or some affiliates of those entities to be considered or
become Parties in Interest as to an investing ERISA plan, or of an ERISA plan
holding an interest in an investing entity. If so, the acquisition or holding of
notes by or on behalf of the investing ERISA plan could also give rise to a
prohibited transaction under ERISA and Section 4975 of the Internal Revenue
Code, unless a statutory or administrative exemption is available. notes
acquired by an ERISA plan may be assets of that ERISA plan. Under the DOL
Regulations, the trust, including the trust assets and the other assets held in
the trust, may also be deemed to be assets of each ERISA plan that acquires
notes. Special caution should be exercised before ERISA plan assets are used to
acquire a note in those circumstances, especially if, as to the assets, the
depositor, the master servicer, any subservicer, any Administrator, the
indenture trustee, the owner trustee, the obligor under any credit enhancement
mechanism or an affiliate of those entities either (1) has investment discretion
as to the investment of ERISA plan assets or (2) has authority or responsibility
to give, or regularly gives, investment advice regarding ERISA plan assets for a
fee under an agreement or understanding that any advice will serve as a primary
basis for investment decisions as to the ERISA plan assets.
Any person who has discretionary authority or control as to the management
or disposition of ERISA plan assets and any person who provides investment
advice as to the ERISA plan assets for a fee, in the manner described above, is
a fiduciary of the investing ERISA plan. If the trust assets or other assets in
a trust were to constitute ERISA plan assets, then any party exercising
management or discretionary control over those ERISA plan assets may be deemed
to be an ERISA plan "fiduciary," and thus subject to the fiduciary
responsibility requirements of ERISA and the prohibited transaction provisions
of ERISA and Section 4975 of the Internal Revenue Code regarding any investing
ERISA plan. Therefore, if the trust assets and other assets included in a trust
were to constitute ERISA plan assets, then the acquisition or holding of notes
by or on behalf of an ERISA plan or with ERISA plan assets, as well as the
operation of the trust, may constitute or involve a prohibited transaction under
ERISA and Section 4975 of the Internal Revenue Code, unless a statutory or
administrative exemption is available.
Prohibited Transaction Exemptions
An ERISA plan fiduciary or other ERISA plan assets investor should
consider the availability of some class exemptions granted by the DOL, which
provide relief from some of the prohibited transaction provisions of ERISA and
the related excise tax provisions of the Internal Revenue Code, including
Prohibited Transaction Class Exemption (PTCE) 95-60, regarding transactions by
insurance company general accounts; PTCE 84-14, regarding transactions effected
by a "qualified professional asset manager"; PTCE 90-1, regarding transactions
by insurance company pooled separate accounts; PTCE 91-38, regarding investments
by bank collective investment funds; and PTCE 96-23, regarding transactions
effected by an "in-house asset manager." The respective prospectus supplement
may contain additional information regarding the application of PTCE 95-60 or
other DOL class exemptions for the notes offered by this prospectus.
Insurance Company General Accounts
In addition to any exemption that may be available under PTCE 95-60 for
the purchase and holding of the notes by an insurance company general account,
the Small Business Job Protection Act of 1996 added a new Section 401(c) to
ERISA, which provides some exemptive relief from the provisions of Part 4 of
Title I of ERISA and Section 4975 of the Internal Revenue Code, including the
prohibited transaction restrictions imposed by ERISA and the related excise
taxes imposed by Section 4975 of the Internal Revenue Code, for transactions
involving an insurance company general account. Under Section 401(c) of ERISA,
the DOL published proposed regulations on December 22, 1997, but the 401(c)
Regulations have not been issued as of the date of this prospectus. The 401(c)
Regulations are to provide guidance for the purpose of determining, in cases
where insurance policies or annuity contracts supported by an insurer's general
account are issued to or for the benefit of an ERISA plan on or before December
31, 1998, which general account assets constitute ERISA
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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
Internal Revenue Code on the basis of a claim that the assets of an insurance
company general account constitute ERISA plan assets, unless (a) as otherwise
provided by the Secretary of Labor in the 401(c) Regulations to prevent
avoidance of the regulations or (b) an action is brought by the Secretary of
Labor for some breaches of fiduciary duty which would also constitute a
violation of federal or state criminal law. Any assets of an insurance company
general account which support insurance policies issued to an ERISA plan after
December 31, 1998 or issued to ERISA plans on or before December 31, 1998 for
which the insurance company does not comply with the 401(c) Regulations may be
treated as ERISA plan assets. In addition, because Section 401(c) does not
relate to insurance company separate accounts, separate account assets are still
treated as ERISA plan assets of any ERISA plan invested in the separate account.
Insurance companies contemplating the investment of general account assets in
the notes should consult with their legal counsel about 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 ERISA Plans Investing in Notes with "Substantial Equity
Features"
If the accompanying prospectus supplement provides that any of the notes
being issued have "substantial equity features" within the meaning of the DOL
Regulations, transfers of the notes to an ERISA plan, to a trustee or other
person acting on behalf of any ERISA plan, or to any other person using the
assets of any ERISA plan to effect the acquisition will not be registered by the
indenture trustee unless the transferee provides the depositor, the indenture
trustee and the master servicer with an opinion of counsel satisfactory to the
depositor, the indenture trustee and the master servicer, which opinion will not
be at the expense of the depositor, the indenture trustee or the master
servicer, that the purchase of the notes by or on behalf of the ERISA plan is
permissible under applicable law and will not subject the depositor, the
indenture trustee or the master servicer to any obligation in addition to those
undertaken in the trust agreement. In lieu of the opinion of counsel, the
transferee may provide a certification of facts substantially to the effect that
(x) the purchase of notes by or on behalf of the ERISA plan is permissible under
applicable law, will not constitute or result in any non-exempt prohibited
transaction under ERISA or Section 4975 of the Internal Revenue Code and will
not subject the depositor, the indenture trustee or the master servicer to any
obligation in addition to those undertaken in the trust agreement, and (y) the
following statements are correct:
o the transferee is an insurance company,
o the source of funds used to purchase the notes is an "insurance
company general account," as the term is defined in PTCE 95-60, and
o the conditions described in Section I and Section III of PTCE 95-60
have been satisfied as of the date of the acquisition of the notes.
Tax Exempt Investors
A Tax-Exempt Investor nonetheless will be subject to federal income
taxation to the extent that its income is "unrelated business taxable income,"
or UBTI, within the meaning of Section 512 of the Internal Revenue Code.
Consultation with Counsel
There can be no assurance that any DOL exemption will apply for any
particular ERISA plan that acquires the notes or, even if all the conditions
specified in the DOL exemption were satisfied,
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that the exemption would apply to transactions involving the trust. Prospective
ERISA plan investors should consult with their legal counsel concerning the
impact of ERISA and Section 4975 of the Internal Revenue 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 an ERISA plan or other ERISA plan asset investor
should itself confirm that all of the specific and general conditions described
in the exemption or Section 401(c) of ERISA would be satisfied. In addition to
making its own determination as to the availability of the exemptive relief
provided in the exemption, an ERISA plan fiduciary should consider its general
fiduciary obligations under ERISA in determining whether to purchase a note on
behalf of an ERISA plan.
LEGAL INVESTMENT MATTERS
Each class of notes offered by this prospectus and by the accompanying
prospectus supplement will be rated at the date of issuance in one of the four
highest rating categories by at least one rating agency. As specified in the
accompanying prospectus supplement, each class of notes will evidence an
interest in trust assets primarily secured by second or more junior liens, and
therefore will not constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984, as amended, or 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, some investment practices deemed to be
unsuitable for an institution's investment portfolio, as well as guidelines for
investing in some types of mortgage
related securities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits and provisions
which may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying."
There may be other restrictions on the ability of some investors either to
purchase some classes of notes or to purchase any class of notes representing
more than a specified percentage of the investors' assets. The depositor will
make no representations as to the proper characterization of any class of notes
for legal investment or other purposes, or as to the ability of particular
investors to purchase any class of notes under applicable legal investment
restrictions. These uncertainties may adversely affect the liquidity of any
class of notes. Accordingly, all investors whose investment activities are
subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their legal
advisors in determining whether and to what extent the notes of any class
constitute legal investments or are subject to investment, capital or other
restrictions.
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USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of
notes will be applied by the depositor to finance the purchase of, or to repay
short-term loans incurred to finance the purchase of, the trust assets
underlying the notes or will be used by the depositor for general corporate
purposes. The depositor expects that it will make additional sales of securities
similar to the notes from time to time, but the timing and amount of any
additional offerings will be dependent upon a number of factors, including the
volume of mortgage loans purchased by the depositor, prevailing note rates,
availability of funds and general market conditions.
METHODS OF DISTRIBUTION
The notes offered by this prospectus and by the accompanying prospectus
supplements will be offered in series through one or more of the methods
described in the following paragraph. The prospectus supplement prepared for
each series will describe the method of offering being utilized for that series
and will state the net proceeds to the depositor from that sale.
The depositor intends that notes will be offered through the following
methods from time to time and that offerings may be made concurrently through
more than one of these methods or that an offering of a particular series of
notes may be made through a combination of two or more of the following methods:
o by negotiated firm commitment or best efforts underwriting and
public re-offering by underwriters;
o by placements by the depositor with institutional investors
through dealers; and
o by direct placements by the depositor with institutional
investors.
In addition, if specified in the accompanying prospectus supplement, a
series of notes may be offered in whole or in part to the seller of the related
trust assets and other assets, if applicable, that would comprise the pool
securing the notes.
If underwriters are used in a sale of any notes, other than in connection
with an underwriting on a best efforts basis, the notes will be acquired by the
underwriters for their own account and may be resold from time to time in one or
more transactions, including negotiated transactions, at fixed public offering
prices or at varying prices to be determined at the time of sale or at the time
of commitment therefor. These underwriters may be broker-dealers affiliated with
the depositor whose identities and relationships to the depositor will be as
described in the accompanying prospectus supplement. The managing underwriter or
underwriters for the offer and sale of a particular series of notes will be
described on the cover of the prospectus supplement relating to that series and
the members of the underwriting syndicate, if any, will be named in the
accompanying prospectus supplement.
In connection with the sale of the notes, underwriters may receive
compensation from the depositor or from purchasers of the notes in the form of
discounts, concessions or commissions. Underwriters and dealers participating in
the distribution of the notes may be deemed to be underwriters in connection
with the notes, and any discounts or commissions received by them from the
depositor and any profit on the resale of notes by them may be deemed to be
underwriting discounts and commissions under the Securities Act of 1933, as
amended.
It is anticipated that the underwriting agreement pertaining to the sale
of any series of notes will provide that the obligations of the underwriters
will be subject to some conditions precedent,
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that the underwriters will be obligated to purchase all of the notes if any are
purchased, other than in connection with an underwriting on a best efforts
basis, and that, in limited circumstances, the depositor will indemnify the
several underwriters and the underwriters will indemnify the depositor against
some civil liabilities, including liabilities under the Securities Act of 1933,
as amended, or will contribute to distribution required to be made for these
liabilities.
The prospectus supplement for any series offered by placements through
dealers will contain information regarding the nature of the offering and any
agreements to be entered into between the depositor and purchasers of notes of
that series.
The depositor anticipates that the notes offered hereby will be sold
primarily to institutional investors or sophisticated non-institutional
investors. Purchasers of notes, including dealers, may, depending on the facts
and circumstances of the purchases, be deemed to be "underwriters" within the
meaning of the Securities Act of 1933, as amended, in connection with reoffers
and sales by them of notes. Holders of notes should consult with their legal
advisors in this regard prior to any reoffer or sale.
LEGAL MATTERS
Specific legal matters, including a number of federal income tax matters,
will be passed upon for the depositor by Thacher Proffitt & Wood, New York, New
York, by Orrick, Herrington & Sutcliffe LLP, New York, New York or by Stroock &
Stroock & Lavan, as specified in the prospectus supplement.
FINANCIAL INFORMATION
The depositor has determined that its financial statements are not
material to the offering made by this prospectus. The notes do not represent an
interest in or an obligation of the depositor. The depositor's only obligations
as to a series of notes will be to repurchase trust assets upon any breach of
the limited representations and warranties made by the depositor, or as
otherwise provided in the applicable prospectus supplement.
ADDITIONAL INFORMATION
The depositor has filed the registration statement with the Commission.
The depositor is also subject to some of the information requirements of the
Securities Exchange Act of 1934, as amended, or the Exchange Act, and,
accordingly, will file reports thereunder with the Commission. The registration
statement and the exhibits thereto, and reports and other information filed by
the depositor under the Exchange Act can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at some of its Regional Offices located as follows:
Chicago Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511; and Northeast Regional Office, 7 World Trade
Center, Suite 1300, New York, New York 10048 and electronically through the
Commission's Electronic Data Gathering, Analysis and Retrieval System at the
Commission's Web Site (http://www.sec.gov).
REPORTS TO NOTEHOLDERS
Monthly reports which contain information concerning the trust for a
series of notes will be sent by or on behalf of the master servicer or the
indenture trustee to each holder of record of the notes of the related series.
See "Description of the Notes--Reports to Noteholders." Reports forwarded to
holders will contain financial information that has not been examined or
reported upon by an independent certified public accountant. The depositor will
file with the Commission those periodic reports relating to the trust for a
series of notes as are required under the Exchange Act.
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INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The SEC allows the depositor to "incorporate by reference" the information
filed with the SEC by the depositor, under Section 13(a), 13(c), 14 or 15(d) of
the Exchange Act, that relates to the trust fund for the notes. This means that
the depositor can disclose important information to any investor by referring
the investor to these documents. The information incorporated by reference is an
important part of this prospectus, and information filed by the depositor with
the SEC that relates to the trust fund for the notes will automatically update
and supersede this information.
The depositor will provide or cause to be provided without charge to each
person to whom this prospectus and accompanying prospectus supplement is
delivered in connection with the offering of one or more classes of the related
series of notes, upon written or oral request of that person, a copy of any or
all the reports incorporated in this prospectus by reference, in each case to
the extent the reports relate to one or more of the classes of the series of
notes, other than the exhibits to those documents, unless the exhibits are
specifically incorporated by reference in the 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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GLOSSARY
1998 Policy Statement-- The revised supervisory statement listing the
guidelines for investments in "high risk mortgage securities", and adopted by
the Federal Reserve Board, the Office of the Comptroller of the Currency, the
FDIC, the National Credit Union Administration and the OTS with an effective
date of May 26, 1998.
401(C) Regulations--The proposed regulations of the DOL published on
December 22, 1997, under Section 401(c) of ERISA.
Administrator--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. The administrator may be an affiliate of the depositor or the
master servicer.
Advance--As to any mortgage loan and any distribution date, an amount
equal to the scheduled payments of principal, other than any Balloon Amount in
the case of a Balloon Loan, and interest at the applicable pass-through rate
which were delinquent as of the close of business on the business day preceding
the determination date on the mortgage loans.
Balloon Amount--The full outstanding principal balance on a Balloon Loan
due and payable on the maturity date.
Balloon Loans--Fixed rate loans having original or modified terms to
maturity of 5 or 7 years in most cases, with level monthly payments of principal
and interest based on a 30 year amortization schedule.
Bankruptcy Amount--The amount of Bankruptcy Losses that may be borne
solely by the subordinate securities of the related series.
Bankruptcy Losses--A Realized Loss attributable to actions which may be
taken by a bankruptcy court in connection with a loan, including a reduction by
a bankruptcy court of the principal balance of or the mortgage rate on a
mortgage loan or an extension of its maturity.
Compensating Interest--As to any loan that prepaid in full during the
related prepayment period an additional payment made by the master servicer, to
the extent funds are available from the servicing fee, equal to the amount of
interest at the mortgage rate, less the servicing fee and Excluded Spread, if
any, for that loan from the date of the prepayment to the related due date.
Cooperative--As to a Cooperative Loan, the corporation that owns the
related apartment building.
Cooperative Loans--Cooperative apartment loans evidenced by 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.
Cooperative Notes--A promissory note relating to a Cooperative Loan.
Credit Scores--A measurement of the relative degree of risk a borrower
represents to a lender obtained from credit reports utilizing, among other
things, payment history, delinquencies on accounts, levels of outstanding
indebtedness, length of credit history, types of credit, and bankruptcy
experience.
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Custodial Account--The custodial account or accounts created and
maintained by the master servicer in the name of a depository institution, as
custodian for the holders of the securities, for the holders of other interests
in loans serviced or sold by the master servicer and for the master servicer,
into which the amounts shall be deposited directly. That account or accounts
shall be an Eligible Account.
Defaulted Mortgage Losses--A Realized Loss 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.
Designated Seller Transaction--A transaction in which the mortgage loans
are provided by an unaffiliated seller described in the prospectus supplement.
Direct Puerto Rico Mortgage--As to any Puerto Rico loan, a mortgage to
secure a specific obligation for the benefit of a specified person.
Eligible Account--An account acceptable to the applicable rating agency.
Endorsable Puerto Rico Mortgage--As to any Puerto Rico loan, a mortgage to
secure an instrument transferable by endorsement.
Environmental Lien--A lien imposed by federal or state statute, for any
cleanup costs incurred by a state on the property that is the subject of the
cleanup costs.
Excess Spread--A portion of interest due on the loans or securities
transferred as part of the assets of the related trust.
Excluded Spread--A portion of interest due on the loans or securities,
excluded from the assets transferred to the related trust.
Extraordinary Losses--Realized Losses occasioned by war, civil
insurrection, various governmental actions, nuclear reaction and other similar
risks.
Fraud Loss Amount--The amount of Fraud Losses that may be borne solely by
the subordinate securities of the related series.
Fraud Losses--A Realized Loss incurred on defaulted loans as to which
there was fraud in the origination of the loans.
High Cost Loans--Loans that are subject to the special rules, disclosure
requirements and other provisions that were added to the federal
Truth-in-Lending Act by the Homeownership and Equity Protection Act of 1994,
which were originated on or after October 1, 1995, are not loans made to finance
the purchase of the mortgaged property and have interest rates or origination
costs in excess of prescribed levels.
Insurance Proceeds--Proceeds of any special hazard insurance policy,
bankruptcy policy, mortgage pool insurance policy, primary insurance policy and
any title, hazard or other insurance policy or guaranty covering any loan in the
pool together with any payments under any letter of credit.
Liquidated Loan--A defaulted loan for which the related mortgaged property
has been sold by the related trust and all recoverable Liquidation Proceeds and
Insurance Proceeds have been received.
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Liquidation Proceeds--Amounts collected by the subservicer in connection
with the liquidation of a mortgage loan, by foreclosure or otherwise.
Net Loan Rate--As to a loan, the mortgage rate net of servicing fees,
other administrative fees and any Excess Spread or Excluded Spread.
Parties in Interest--As to an ERISA plan, persons who have specified
relationships to the ERISA plan, either "parties in interest" within the meaning
of ERISA or "disqualified persons" within the meaning of the Internal Revenue
Code.
Payment Account--An account established and maintained by the master
servicer in the name of the indenture trustee for the benefit of the holders of
each series of notes, for the disbursement of payments on the loans evidenced by
each series of notes.
Permitted Investments--United States government securities and other
investment grade obligations specified in the related agreement.
Principal Prepayments--Any principal payments received for a loan, in
advance of the scheduled due date and not accompanied by a payment of interest
for any period following the date of payment.
Qualified Insurer--As to a mortgage pool insurance policy, special hazard
insurance policy, bankruptcy policy, certificate insurance policy or surety
bond, an insurer qualified under applicable law to transact the insurance
business or coverage as applicable.
Realized Loss--As to any defaulted loan that is finally liquidated, the
amount of loss realized, if any, as described in the related pooling and
servicing agreement, will equal the portion of the Stated Principal Balance
remaining after application of all amounts recovered, net of amounts
reimbursable to the master servicer for related Advances and expenses, towards
interest and principal owing on the loan. As to a loan the principal balance of
which has been reduced in connection with bankruptcy proceedings, the amount of
the reduction will be treated as a Realized Loss.
REO Loan--A loan where title to the related mortgaged property has been
obtained by the trustee or its nominee on behalf of securityholders of the
related series.
Servicing Advances--Amounts advanced on any loan to cover taxes, insurance
premiums or similar expenses.
Special Hazard Amount--The amount of Special Hazard Losses that may be
allocated to the subordinate securities of the related series.
Special Hazard Losses--A Realized Loss incurred, to the extent that the
loss was attributable to:
o direct physical damage to a mortgaged property other than any loss
of a type covered by a hazard insurance policy or a flood insurance
policy, if applicable, and
o any shortfall in insurance proceeds for partial damage due to the
application of the co-insurance clauses contained in hazard
insurance policies.
The amount of the Special Hazard Loss is limited to he lesser of the cost of
repair or replacement of the mortgaged property; any loss above that amount
would be a Defaulted Mortgage Loss or other applicable type of loss. Special
Hazard Losses does not include losses occasioned by war, civil
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insurrection, some governmental actions, errors in design, faulty workmanship or
materials except under some circumstances, nuclear reaction, chemical
contamination or waste by the mortgagor.
Special Servicer--A special servicer named pursuant to the servicing
agreement for a series of notes, which will be responsible for the servicing of
delinquent loans.
Stated Principal Balance--As to any loan as of any date of determination,
its principal balance as of the cut-off date, after application of all scheduled
principal payments due on or before the cut-off date, whether received or not,
reduced by all amounts allocable to principal that are distributed to
securityholders on or before the date of determination, and as further reduced
to the extent that any Realized Loss has been allocated to any notes on or
before that date.
Subservicing Account--An account established and maintained by a
subservicer which meets the requirements described in the Guide and is otherwise
acceptable to the master servicer.
Tax-Exempt Investor--Tax-qualified retirement plans described in Section
401(a) of the Internal Revenue Code and on individual retirement accounts
described in Section 408 of the Internal Revenue Code.
Tax-Favored Plans--An ERISA plan that is exempt from federal income
taxation under Section 501 of the Internal Revenue Code.
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The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
- --------------------------------------------------------------------------------
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS SUPPLEMENT DATED JUNE 4, 1999
Prospectus supplement dated ________, ____ (to prospectus dated _________, ____)
$ _________________
Residential Funding Mortgage Securities II, Inc.
Depositor
Home Loan Trust ________
Issuer
Residential Funding Corporation
Master Servicer
Home Loan-Backed Notes, Series ______
Offered Notes The trust will issue notes backed by a pool of
closed-end, primarily second lien fixed rate home loans
Credit Enhancement Credit enhancement for the notes consists of:
o excess interest and overcollateralization; and
o a guaranty insurance policy issued by _________.
[Insurer's logo]
- --------------------------------------------------------------------------------
You should consider carefully the risk factors beginning on page S-_ in this
prospectus supplement.
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the offered 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.
_________ will offer the notes to the public, at varying prices to be determined
at the time of sale. The proceeds to the depositor from the sale of the notes
will be approximately _____% of the principal balance of the notes plus accrued
interest, before deducting expenses.
[Name of Underwriter]
Underwriter
<PAGE>
Important notice about information presented in this prospectus supplement and
the accompanying prospectus
We provide information to you about the notes in two separate documents that
provide progressively more detail:
o the prospectus, which provides general information, some of which
may not apply to your series of notes; and
o this prospectus supplement, which describes the specific terms of
your series of notes.
If the description of your notes in this prospectus supplement differs from the
related description in the accompanying prospectus, you should rely on the
information in this prospectus supplement.
The Depositor's principal offices are located at 8400 Normandale Lake Boulevard,
Suite 600, Minneapolis, Minnesota 55437 and its phone number is (612) 832-7000.
TABLE OF CONTENTS
SUMMARY......................................................................S-3
RISK FACTORS.................................................................S-8
INTRODUCTION................................................................S-13
DESCRIPTION OF THE HOME
LOAN POOL..........................................................S-13
General............................................................S-13
Payments on the Simple Interest Home Loans.........................S-14
Home Loan Pool Characteristics.....................................S-15
Credit Scores......................................................S-26
Underwriting Standards.............................................S-27
The Initial Subservicers...........................................S-28
Residential Funding Corporation....................................S-29
Additional Information ............................................S-30
THE ISSUER..................................................................S-30
THE OWNER TRUSTEE...........................................................S-31
THE INDENTURE TRUSTEE.......................................................S-31
THE CREDIT ENHANCER.........................................................S-31
DESCRIPTION OF THE SECURITIES...............................................S-34
General............................................................S-34
Book-Entry Notes...................................................S-34
Payments...........................................................S-37
Glossary of Terms..................................................S-38
Interest Payments on the Notes.....................................S-41
Principal Payments on the Notes....................................S-41
Allocation of Payments on the Home Loans........................S-43
The Paying Agent...................................................S-43
Maturity and Optional Redemption...................................S-43
DESCRIPTION OF THE POLICY...................................................S-44
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS.................................S-45
DESCRIPTION OF THE HOME LOAN PURCHASE AGREEMENT.............................S-52
DESCRIPTION OF THE SERVICING AGREEMENT......................................S-54
DESCRIPTION OF THE TRUST AGREEMENT AND INDENTURE............................S-57
MATERIAL FEDERAL INCOME TAX CONSEQUENCES....................................S-62
ERISA CONSIDERATIONS........................................................S-63
LEGAL INVESTMENT............................................................S-63
METHOD OF DISTRIBUTION .....................................................S-64
EXPERTS.....................................................................S-65
LEGAL MATTERS...............................................................S-65
RATINGS.....................................................................S-65
ANNEX I......................................................................I-1
S-2
<PAGE>
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SUMMARY
The following summary is a very general overview of the offered notes and
does not contain all of the information that you should consider in making your
investment decision. To understand the terms of the notes, you should read
carefully this entire document and the prospectus.
Issuer or Trust ..............Home Loan Trust ________.
Title of the
offered securities........Home Loan-Backed Notes, Series ________.
Initial principal balance.....$__________.
Note interest rate............____% per annum.
Ratings.......................When issued, the notes will be rated "____" by
____________ and "____" by ______________.
Depositor ....................Residential Funding Mortgage Securities II, Inc.,
an affiliate of Residential Funding Corporation.
Master servicer ..............Residential Funding Corporation.
Owner trustee.................______________.
Indenture trustee ............______________.
Credit enhancer ..............______________.
Home loan pool ..............._____ fixed rate home loans with an aggregate
principal balance of approximately ______________
as of the close of business on the day prior to
the cut-off date, secured primarily by second
liens on one- to four-family residential
properties.
Cut-off date .................______________.
Closing date .................On or about ______________.
Payment dates ................Beginning in ______________ on the ___ of each
month or, if the ___ is not a business day, on the
next business day.
Scheduled final payment date..______________. The actual final payment date
could be substantially earlier.
Form of notes Book-entry.
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S-3
<PAGE>
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See "Description of the Notes--Book-Entry
Registration" in this prospectus supplement.
Minimum denominations ........$______________.
Legal investment .............The notes will not be "mortgage related
securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984. See "Legal
Investment" in this prospectus supplement and the
prospectus.
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S-4
<PAGE>
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The Trust
The depositor will establish Home Loan Trust _____, a Delaware business trust to
issue the Home Loan Backed Notes, Series _____. The trust will be established
under a trust agreement. The trust will issue the notes under an indenture. The
assets of the trust will consist of the home loans and related assets.
The Home Loan Pool
______% of the home loans are secured by second mortgages or deeds of trust and
the remainder are secured by first mortgages or deeds of trust. In addition, the
home loans have the following characteristics as of the cut-off date:
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Minimum principal balance $_____
Maximum principal balance $_____
Average principal balance _____
Range of loan rates _____% to _____%
Weighted Average loan rate _____%
Range of original terms to maturity _____ to _____ months
Weighted average original term to maturity _____ months
Range of remaining terms to maturity _____ to _____ months
Weighted average remaining term to maturity _____ months
Range of combined loan-to-value ratios _____% to _____%
Weighted average combined loan-to-value ratios _____%
- --------------------------------------------------------------------------------
See "Description of the Home Loan Pool" in this prospectus supplement.
The Certificates
The trust will also issue Home Loan-Backed Certificates, Series _____, which are
not offered by this prospectus supplement.
Payments on the Notes
Amount available for monthly distribution. On each monthly payment date, the
trustee will make distributions to investors. The amounts available for
distribution include:
o collections of monthly payments on the home loans, including
prepayments and other unscheduled collections minus
o fees and expenses of the subservicers and the master servicer.
See "Description of the Servicing Agreement--P&I Collections" in this prospectus
supplement.
Payments. Payments to noteholders will be made from principal and interest
collections as follows:
o Distribution of interest to the notes
o Distribution of principal to the notes
o Distribution of principal to the notes to cover some losses
o Payment to the credit enhancer its premium for the policy
o Reimbursement to the credit enhancer for some prior draws made on
the policy
o Distribution of additional principal to the notes if the level of
overcollateralization falls below what is required
o Payment to the credit enhancer for any other amounts owed
o Distribution of any remaining funds to the certificates
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S-5
<PAGE>
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Principal payments on the notes will be as described under "Description of the
Securities--Principal Payments on the Notes" in this prospectus supplement.
In addition, payments on the notes will be made on each payment date from draws
on the guaranty insurance policy, if necessary. Draws will cover shortfalls in
amounts available to pay interest on the notes at the note rate plus any unpaid
losses allocated to the notes.
Credit Enhancement
The credit enhancement for the benefit of the notes consists of:
Excess Interest. Because more interest is paid by the mortgagors than is
necessary to pay the interest on the notes each month, there will be excess
interest. Some of this excess interest may be used to protect the notes against
some losses, by making an additional payment of principal up to the amount of
the losses.
Overcollateralization. Although the aggregate principal balance of the home
loans is $__________, the trust is issuing only $__________ aggregate principal
amount of notes. The excess amount of the balance of the home loans represents
overcollateralization, which may absorb some losses on the home loans, if not
covered by excess interest. If the level of overcollateralization falls below
what is required, the excess interest described above will also be paid to the
notes as principal. This will reduce the principal balance of the notes faster
than the principal balance of the home loans so that the required level of
overcollateralization is reached.
Policy. On the closing date, the credit enhancer will issue the guaranty
insurance policy in favor of the indenture trustee. The policy will
unconditionally and irrevocably guarantee interest on the notes at the note rate
and will cover any losses allocated to the notes if not covered by excess
interest or overcollateralizations.
Optional Termination
On any payment date on which the principal balance of the home loans is less
than __% of the principal balance as of the cut-off date, the master servicer
will have the option to purchase the remaining home loans.
Under an optional purchase, the outstanding principal balance of the notes will
be paid in full with accrued interest.
Ratings
When issued, the notes will receive the ratings listed on page S-__ of this
prospectus supplement. A security rating is not a recommendation to buy, sell or
hold a security and may be changed or withdrawn at any time by the assigning
rating agency. The ratings also do not address the rate of principal prepayments
on the home loans. The rate of prepayments, if different than originally
anticipated, could adversely affect the yield realized by holders of the notes.
- --------------------------------------------------------------------------------
S-6
<PAGE>
- --------------------------------------------------------------------------------
Legal Investment
The notes will not be "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984. You should consult your legal
advisors in determining whether and to what extent the notes constitute legal
investments for you.
ERISA Considerations
The 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 notes.
See "ERISA Considerations" in this prospectus supplement and in the accompanying
prospectus.
Tax Status
For federal income tax purposes, the notes will be treated as debt. The trust
itself will not be subject to tax.
See "Material Federal Income Tax Consequences" in this prospectus supplement and
in the accompanying prospectus.
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S-7
<PAGE>
RISK FACTORS
The notes are not suitable investments for all investors. In particular,
you should not purchase the notes unless you understand the prepayment, credit,
liquidity and market risks associated with the notes.
The notes are complex securities. You should possess, either alone or
together with an investment advisor, the expertise necessary to evaluate the
information contained in this prospectus supplement and the accompanying
prospectus in the context of your financial situation and tolerance for risk.
You should carefully consider, among other things, the following factors
in connection with the purchase of the notes:
Risks Associated with the Home Loans
The return on your ______% of the home loans included in the home
notes may be loan pool are secured by second mortgages or deeds
reduced by losses of trust. Proceeds from liquidation of the
on the home property will be available to satisfy the home
loans, which are loans only if the claims of any senior mortgages
more likely have been satisfied in full. When it is
because they are uneconomical to foreclose on the mortgaged
junior liens. property or engage in other loss mitigation
procedures, the master servicer may write off the
entire outstanding balance of the home loan as a
bad debt. The foregoing risks are particularly
applicable to home loans secured by second liens
that have high combined loan-to-value ratios or
low junior ratios because it is comparatively more
likely that the master servicer would determine
foreclosure to be uneconomical. As of the cut-off
date, the weighted average combined loan-to-value
ratio of the home loans is ______%, and
approximately ______% of the home loans will have
combined loan-to-value ratios in excess of
______%.
Delays in payment The Master Servicer is not obligated to advance
on your notes may scheduled monthly payments of principal and
result because the interest on home loans that are delinquent or in
master servicer is default. The rate of delinquency and default of
not required to second mortgage loans may be greater than that of
advance mortgage loans secured by first liens on
delinquent monthly comparable properties.
payments on the
home loans.
The return on your Mortgage loans similar to those included in the
home loan pool have
S-8
<PAGE>
notes may be been originated for a limited period of time.
reduced in an During this time, economic conditions nationally
economic and in most regions of the country have been
downturn. generally favorable. However, a deterioration in
economic conditions could adversely affect the
ability and willingness of mortgagors to repay
their loans. No prediction can be made as to the
effect of an economic downturn on the rate of
delinquencies and losses on the home loans.
The origination ______% of the home loans included in the home
disclosure loan pool are subject to special rules, disclosure
practices for the requirements and other regulatory provisions
home loans could because they are high cost loans:
create liabilities
that may affect Purchasers or assignees of these home loans,
your notes. including the trust, could be exposed to all
claims and defenses that the mortgagors could
assert against the originators of the home loans.
Remedies available to a mortgagor include monetary
penalties, as well as rescission rights if the
appropriate disclosures were not given as
required. See "Certain Legal Aspects of the Trust
Assets and Related Matters" in the prospectus.
Your notes may be In October 1997, a bankruptcy review commission
adversely affected recommended that Congress amend the Bankruptcy
by changes in Code by treating a claim secured by a junior
bankruptcy laws. security interest in a borrower's principal
residence as protected only to the extent that the
claim was secured when the security interest was
made. Additionally, the commission recommended
that a creditor's secured claim in real property
should be determined by the property's fair market
value, less hypothetical costs of sale. Congress
adjourned in 1998 without passing any legislation
addressing these issues. However, Congress
continues to consider bankruptcy law changes that
may affect future bankruptcies and therefore could
affect the rate and timing of payments on the home
loans. Any changes to the Bankruptcy Code could
have a negative effect on the home loans and the
enforcement of rights.
The underwriting The underwriting standards under which the home
standards for the loans were underwritten are analogous to credit
home loans create lending, rather than mortgage lending, since
greater risks to underwriting decisions were based primarily on the
you, compared to borrower's credit history and capacity to repay
those for first lien rather than on the value of the collateral upon
loans. foreclosure. The underwriting standards allow
loans to be approved with combined loan-to-value
ratios of up to 125%. See "Description of the Home
Loan Pool--Underwriting Standards" in this
prospectus supplement. Because of the relatively
high combined loan-to-value ratios of the home
loans and the fact that
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<PAGE>
the home loans are secured by junior liens, losses
on the home loans will likely be higher than on
first lien mortgage loans.
The return on your One risk of investing in the notes is created by
notes may be concentration of the related mortgaged properties
particularly in one or more geographic regions. Approximately
sensitive to ____% of the cut-off date principal balance of the
changes in real home loans are located in California. If the
estate markets in regional economy or housing market weakens in
specific areas. California, or in any other region having a
significant concentration of the properties
underlying the home loans, the home loans related
to properties in that region may experience high
rates of loss and delinquency, resulting in losses
to noteholders. 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 reloading of With respect to home loans which were used for
debt could debt consolidation, there can be no assurance that
increase your risk. the borrower will not incur further debt. This
reloading of debt could impair the ability of
borrowers to service their debts, which in turn
could result in higher rates of delinquency and
loss on the home loans.
Loss Mitigation
Practices
The release of a The master servicer may use a wide variety of
lien may increase practices to limit losses on the home loans. The
your risk. servicing agreement permits the master servicer to
release the lien on a limited number of mortgaged
properties securing the home loans, if the home
loan is current in payment. See "Description of
the Servicing Agreement - Release of Lien;
Refinancing of Senior Lien" and "- Collection and
Liquidation Practices; Loss Mitigation" in this
prospectus supplement.
Limited Obligations
Payments on the Credit enhancement includes excess interest,
home loans, overcollateralization and the guaranty insurance
together with the policy. None of the depositor, the master servicer
guaranty insurance or any of their affiliates will have any
policy, are the sole obligation to replace or supplement the credit
source of enhancement, or to take any other action to
payments on your maintain any rating of the notes. If any losses
are incurred on the home loans that are not
covered by the credit enhancement, the holders of
the notes will bear the risk of these losses.
S-10
<PAGE>
notes.
Liquidity Risks
You may have to A secondary market for your notes may not develop.
hold your notes to Even if a secondary market does develop, it may
maturity if their not continue, or it may be illiquid. Illiquidity
marketability is means you may not be able to find a buyer to buy
limited. your securities readily or at prices that will
enable you to realize a desired yield. Illiquidity
can have an adverse effect on the market value of
the notes.
Special Yield and Prepayment Considerations
The yield to The yield to maturity of the notes will depend on
maturity on your a variety of factors, including:
notes will vary
depending on the o the rate and timing of principal payments on
rate of the home loans, including prepayments,
prepayments. defaults and liquidations, and repurchases
due to breaches of representations or
warranties;
o the note rate; and
o the purchase price.
The rate of prepayments is one of the most
important and least predictable of these factors.
In general, if you purchase a note at a price
higher than its outstanding principal balance and
principal payments occur faster than you assumed
at the time of purchase, your yield will be lower
than anticipated. Conversely, if you purchase a
note at a price lower than its outstanding
principal balance and principal payments occur
more slowly than you assumed at the time of
purchase, your yield will be lower than
anticipated.
The rate of Since mortgagors can generally prepay their home
prepayments on loans at any time, the rate and timing of
the home loans principal payments on the notes are highly
will vary uncertain. Generally, when market interest rates
increase, mortgagors are less likely to prepay
their home loans. This could result in a
S-11
<PAGE>
depending on slower return of principal to you at a time when
future market you might have been able to reinvest those funds
conditions, and at a higher rate of interest than the note rate.
other factors. On the other hand, when market interest rates
decrease, borrowers are generally more likely to
prepay their home loans. This could result in a
faster return of principal to you at a time when
you might not be able to reinvest those funds at
an interest rate as high as the note rate.
Refinancing programs, which may involve soliciting
all or some of the mortgagors to refinance their
home loans, may increase the rate of prepayments
on the home loans.
______% of the home loans provide for payment of a
prepayment charge. Prepayment charges may reduce
the rate of prepayment on the home loans until the
end of the related prepayment period. See
"Description of the Home Loan Pool--Home Loan Pool
Characteristics" in this prospectus supplement and
"Maturity and Prepayment Considerations" in the
prospectus.
S-12
<PAGE>
INTRODUCTION
The trust will be formed under a trust agreement, as amended by the
amended and restated trust agreement, to be dated as of the closing date,
between the depositor and the owner trustee. The issuer will issue $___________
aggregate principal amount of Home Loan-Backed Notes, Series _________. These
notes will be issued under an indenture, to be dated as of the closing date
between the issuer and the indenture trustee. Under the trust agreement, the
issuer will issue ____ class[es] of Home Loan-Backed Certificates,
_____________. The notes and the certificates are collectively referred to in
this prospectus supplement as the securities. Only the notes are offered by this
prospectus supplement. On the closing date, the depositor will transfer to the
issuer a pool of home loans secured by one- to four-family residential
properties.
You can find a listing of definitions for capitalized terms used both in
the prospectus and this prospectus supplement under the caption "Glossary"
beginning on page 94 in the prospectus and under the caption "Glossary of Terms"
in this prospectus supplement.
DESCRIPTION OF THE HOME LOAN POOL
General
The home loan pool will consist of home loans with an aggregate unpaid
principal balance of $___________ as of the close of business on the business
day prior to the cut-off date. ___% of the home loans are secured by second
liens on fee simple or leasehold interests in one- to four-family residential
properties and the remainder are secured by first liens. The home loans will
consist of conventional, closed-end, fixed-rate, fully-amortizing home loans
with terms to maturity of approximately five, ten, fifteen, twenty or
twenty-five years with respect to __%, __%, __%, __% and __% of the home loans,
respectively, from the date of origination or modification. The proceeds of the
home loans generally were used by the related borrowers for:
o debt consolidation,
o home improvement,
o the partial refinancing of the related mortgaged property,
o to provide a limited amount of cash to the borrower, or
o a combination of the foregoing.
As to each home loan the mortgagor represented at the time of origination that
the related mortgaged property would be owner occupied as a primary home. As to
home loans which have been modified,
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<PAGE>
references in this prospectus supplement to the date of origination shall be
deemed to be the date of the most recent modification. All percentages of the
home loans described in this prospectus supplement are approximate percentages
determined by cut-off date balance, unless otherwise indicated.
All of the home loans were acquired by Residential Funding Corporation, as
seller, under its 125 loan program from unaffiliated sellers as described in
this prospectus supplement and in the prospectus, except in the case of __% of
the home loans which were purchased by the seller through its affiliate
HomeComings Financial Network, Inc. No unaffiliated seller sold more than __% of
the home loans to Residential Funding Corporation. __% and __% of the home loans
will be subserviced by GMAC Mortgage Corporation, an affiliate of the depositor
and the master servicer, and Master Financial, Inc., a California corporation,
respectively. See "--The Initial Subservicers" in this prospectus supplement.
All of the home loans were, in most instances, underwritten as described
under "--Underwriting Standards."
The seller will make some representations and warranties regarding the
home loans sold by it as of the date of issuance of the notes. Further, the
seller will be required to repurchase or substitute for any home loan sold by it
as to which a breach of its representations and warranties relating to that home
loan occurs if the breach materially adversely affects the interests of the
securityholders or the credit enhancer in the home loan. See "Description of the
Home Loan Purchase Agreement" in this prospectus supplement and "Trust Asset
Program--Qualifications of Sellers" and "--Representations Relating to the Trust
Assets" and "Description of the Notes--Review of Trust Assets" in the
prospectus.
As to any date, the pool balance will be equal to the aggregate of the
Stated Principal Balances of all home loans as of that date owned by the trust.
The Stated Principal Balance of a home loan, other than a Liquidated Home Loan,
on any day is equal to the cut-off date balance of the home loan, minus all
collections credited against the Stated Principal Balance of the home loan in
accordance with the related mortgage note prior to that day. The Stated
Principal Balance of a Liquidated Home Loan after final recovery of
substantially all of the related Liquidation Proceeds which the master servicer
reasonably expects to receive shall be zero.
Payments on the Simple Interest Home Loans
__% of the home loans provide for simple interest payments and are
referred to as the simple interest home loans which require that each monthly
payment consist of an installment of interest which is calculated according to
the simple interest method. This method calculates interest using the basis of
the outstanding principal balance of the home loan multiplied by the loan rate
and further multiplied by a fraction, the numerator of which is the number of
days in the period elapsed since the preceding payment of interest was made and
the denominator of which is the number of days in the annual period for which
interest accrues on the home loan. As payments are received on the home loans,
the amount received is applied first to interest accrued to the date of payment
and the balance is applied to reduce the unpaid principal balance. Accordingly,
if a mortgagor pays a fixed monthly installment before its scheduled due date,
the portion of the payment allocable to interest for the period since the
preceding
S-14
<PAGE>
payment was made will be less than it would have been had the payment been made
as scheduled, and the portion of the payment applied to reduce the unpaid
principal balance will be correspondingly greater. However, the next succeeding
payment will result in a greater portion of the payment allocated to interest if
that payment is made on its scheduled due date.
On the other hand, if a mortgagor pays a fixed monthly installment after
its scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be greater than it would have
been had the payment been made as scheduled, and the remaining portion, if any,
of the payment applied to reduce the unpaid principal balance will be
correspondingly less. If each scheduled payment is made on or prior to its
scheduled due date, the principal balance of the home loan will amortize in the
manner described in the preceding paragraph. However, if the mortgagor
consistently makes scheduled payments after the scheduled due date the home loan
will amortize more slowly than scheduled. Any remaining unpaid principal is
payable on the final maturity date of the home loan.
__% of the home loans are actuarial home loans, on which 30 days of
interest is owed each month irrespective of the day on which the payment is
received.
Home Loan Pool Characteristics
The home loans will bear interest at the loan rate stated in the related
mortgage note which will be at least __% per annum but no more than __% per
annum, with a weighted average loan rate of approximately __% per annum as of
the cut-off date. None of the home loans were originated prior to _______ or
will have a maturity date later than __________. No home loan will have a
remaining term from __________ to the stated maturity of the home loan of less
than __ months. The weighted average remaining term of the home loans as of the
cut-off date will be approximately __ months. The weighted average original term
to stated maturity of the home loans as of the cut-off date will be
approximately __ months. __% of the home loans will have original terms to
maturity of approximately five years, with a weighted average remaining term of
approximately __ months. __% of the home loans will have original terms to
maturity of approximately ten years, with a weighted average remaining term of
approximately __ months. __% of the home loans will have original terms of
maturity of approximately fifteen years, with a weighted average remaining term
of approximately __ months. __% of the home loans will have original terms of
maturity of approximately twenty years, with a weighted average remaining term
of approximately __ months. __% of the home loans will have original terms to
maturity of approximately twenty-five years, with a weighted average remaining
term of approximately __ months. All of the home loans have principal and
interest payable monthly on each due date specified in the mortgage note. __% of
the home loans will be secured by mortgages or deeds of trust on property in
which the borrower has little or no equity because the related combined LTV
ratio at the time of origination exceeds 100%.
As to each home loan, the combined LTV ratio, in most cases, will be the
ratio, expressed as a percentage, of (1) (A) the original principal balance of
the home loan, and (B) any outstanding principal balance, at origination of the
home loan, of all other mortgage loans, if any, secured by senior
S-15
<PAGE>
or subordinate liens on the related mortgaged property, to (2) the appraised
value, or, if permitted by the Guide, the stated value. The appraised value for
any home loan will be the appraised value of the related mortgaged property
determined in the appraisal used in the origination of the home loan, which may
have been obtained at an earlier time. If the home loan was originated
simultaneously with or not more than 12 months after a senior lien on the
related mortgaged property, the appraised value shall be the lesser of the
appraised value at the origination of the senior lien and the sales price for
the mortgaged property. However, for not more than __% of the home loans, the
stated value will be the value of the property as stated by the related
mortgagor in his or her application. See "Description of the Home Loan
Pool--Underwriting Standards" in this prospectus supplement.
In connection with each home loan that is secured by a leasehold interest,
the seller will have represented that, among other things:
o the use of leasehold estates for residential properties is an
accepted practice in the area where the related mortgaged property
is located;
o residential property in the area consisting of leasehold estates is
readily marketable;
o the lease is recorded and no party is in any way in breach of any
provision of the lease;
o the leasehold is in full force and effect and is not subject to any
prior lien or encumbrance by which the leasehold could be
terminated; and
o the remaining term of the lease does not terminate less than five
years after the maturity date of the home loan.
Approximately _____% of the home loans provide for payment of a prepayment
charge, if the loans prepay within a specified time period. The prepayment
charge, in most cases, is the maximum amount permitted under applicable state
law. Or, if no maximum prepayment charge is specified, the prepayment charge
generally is calculated in the following sentence. __%, __%, __% and __% of the
home loans, by cut-off date balance of the home loans, with a prepayment charge
provision provide for payment of a prepayment charge for full prepayments made
within approximately one year, two years, three years and five years,
respectively, of the origination of the home loan calculated in accordance with
the terms of the related mortgage note. As to the remainder of the home loans
with a prepayment charge provision, the prepayment charge is calculated in a
different manner. The initial subservicers will be entitled to all prepayment
charges and late payment charges received on the home loans and these amounts
will not be available for payment on the notes.
As of the cut-off date, no home loan will be 30 days or more delinquent in
payment of principal and interest. As used in this prospectus supplement, a home
loan is considered to be "30 to 59 days" or "30 or more days" delinquent when a
payment due on any due date remains unpaid as of the close of business on the
next following monthly due date. However, since the determination as to whether
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<PAGE>
a home loan falls into this category is made as of the close of business on the
last business day of each month, a home loan with a payment due on July 1 that
remained unpaid as of the close of business on July 31 would still be considered
current as of July 31. If that payment remained unpaid as of the close of
business on August 31, the home loan would then be considered to be 30 to 59
days delinquent. Delinquency information presented in this prospectus supplement
as of the cut-off date is determined and prepared as of the close of business on
the last business day immediately prior to the cut-off date.
As of the cut-off date, __% of the home loans were High Cost Loans.
Purchasers or assignees of any High Cost Loan, including the trust, could be
liable for all claims and subject to all defenses that the borrower could assert
against the originator of the High Cost Loan. Remedies available to the borrower
include monetary penalties, as well as recission rights if appropriate
disclosures were not given as required. See "Risk Factors--Risks Associated with
the Home Loans" in this prospectus supplement and "Certain Legal Aspects of the
Trust Assets and Related Matters--Anti-Deficiency Legislation and Other
Limitations on Lenders" in the prospectus.
As to __% of the home loans, during a temporary period the monthly
payments received on the home loans were applied in a manner that reduced the
rate of principal amortization. As a result, the home loan may have an unpaid
principal amount on its scheduled maturity date, assuming no prepayments, of
greater than 1 time and not more than 6 times the related monthly payment. It is
not clear whether the related mortgagor will be legally obligated to pay the
unpaid principal amount.
All of the home loans were originated under full documentation programs.
No home loan provides for deferred interest, negative amortization or
future advances.
All of the mortgaged properties underlying the home loans were
owner-occupied.
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<PAGE>
Below is a description of some additional characteristics of the home
loans as of the cut-off date unless otherwise indicated. All percentages of the
home loans are approximate percentages unless otherwise indicated by the cut-off
date balance. Unless otherwise specified, all principal balances of the home
loans are as of the cut-off date and are rounded to the nearest dollar.
Loan Rates
Percentage of
Number of Home Loan Pool
Range of Home Cut-off Date by Cut-off Date
Loan Rates(%) Loans Balance Balance
- ------------- ----- ------- -------
$ %
Totals..........
As of the cut-off date, the weighted average loan rate of the home loans
will be approximately __% per annum.
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<PAGE>
Original Home Loan Stated Principal Balances
Percentage of
Number of Home Loan Pool
Range of Original Home Cut-off Date by Cut-off
Stated Principal Balances Loans Balance Balance
------------------------- ----- ------- -------
$ %
Total.......................
As of the cut-off date, the average cut-off date balance of the home loans
will be approximately $_________.
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<PAGE>
Original Combined LTV Ratios
Percentage of
Home Loan Pool
Number of by Cut-off Date
Range of Combined Home Cut-off Date Stated Principal
LTV Ratios(%) Loans Balance Balance
- ------------- ----- ------- -------
$ %
Total..........
The weighted average combined LTV ratio, or LTV ratio, as to the home
loans secured by first liens on the related mortgaged properties, at origination
of the home loans will be approximately __%.
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<PAGE>
Junior Ratios
Percentage of
Home Loan Pool
Range of Junior Number of Cut-off Date by Cut-off
Mortgage Ratios(%) Home Loans Balance Date Balance
- ------------------ ---------- ------- ------------
Total..........
The preceding table exclude home loans secured by first liens. A Junior
ratio is the ratio of the original amount of the home loans secured by the
second lien to the sum of (1) the original amount of the home loan and (2)
the unpaid principal balance of any senior lien balance at the time of the
home loan.
The weighted average junior ratio by original loan balance will be
approximately __%.
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<PAGE>
Remaining Term to Scheduled Maturity
Percentage of
Number of Home Loan Pool
Range of Months Remaining Home Cut-off Date by Cut-off
to Scheduled Maturity Loans Balance Date Balance
- --------------------- ----- ------- ------------
Total..................
The weighted average remaining term to maturity as of the cut-off date
will be approximately __ months.
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<PAGE>
Year of Origination
Percentage of
Home Loan Pool
Number of Cut-off Date by Cut-off
Year of Origination Home Loans Balance Date Balance
- ------------------- ---------- ------- ------------
Total...............
Geographic Distribution of Mortgaged Properties
Percentage of
Home Loan Pool
Number of Cut-off Date by Cut-off
State Home Loans Balance Date Balance
- ----- ---------- ------- ------------
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<PAGE>
Total............
The reference to "Other" in the preceding table includes states and the
District of Columbia that contain mortgaged properties for less than __% of the
home loan pool.
Mortgaged Property Types
Percentage of
Home Loan Pool
Number of Cut-off Date by Cut-off
Property Type Home Loans Balance Date Balance
- ------------- ---------- ------- ------------
Single Family Residence.........
PUD Detached....................
Condominium.....................
PUD Attached....................
Townhouse/Rowhouse Attached.....
Multifamily (2-4 Units).........
Townhouse/Rowhouse Detached.....
Manufactured Home...............
Total.....................
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Loan Purpose
Percentage of
Home Loan Pool
Number of Cut-off Date by Cut-off
Purpose Home Loans Balance Date Balance
- ------- ---------- --------- ------------
Debt Consolidation.....................
Cash...................................
Home Improvement/Debt Consolidation....
Other..................................
Rate/Term Refinance....................
Home Improvement.......................
Convenience............................
Education..............................
Purchase Money.........................
Medical................................
Total............................
Lien Priority
Percentage of
Home Loan Pool
Number of Cut-off Date by Cut-off
Lien Property Home Loans Balance Date Balance
- ------------- ---------- ------- ------------
First Lien.............................
Second Lien............................
Total............................
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<PAGE>
Debt-to-Income Ratios as of Date of Origination of the Home Loan
Percentage of
Range of Debt-to-Income Home Loan Pool
Ratios as of Date of Number of Cut-off Date by Cut-off
Origination of the Home Loan (%) Home Loans Balance Date Balance
- -------------------------------- ---------- ------- ------------
Total.....................
As of the cut-off date, the weighted average debt-to-income ratio as of
the date of origination of the home loans will be approximately __%.
Credit Scores
"Credit Scores" are obtained by many lenders in connection with home loan
applications to help assess a borrower's creditworthiness. Credit Scores are
obtained from credit reports provided by various credit reporting organizations,
each of which may employ differing computer models and methodologies. The Credit
Score is designed to assess a borrower's credit history at a single point in
time, using objective information currently on file for the borrower at a
particular credit reporting organization. Information used to create a Credit
Score may include, among other things, payment history, delinquencies on
accounts, levels of outstanding indebtedness, length of credit history, types of
credit, and bankruptcy experience. The Credit Scores of the home loans range
from approximately ___ to approximately ___, with higher scores indicating an
individual with a more favorable credit history compared to an individual with a
lower score. However, a Credit Score purports only to be a measurement of the
relative degree of risk a borrower represents to a lender, that is, 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
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developed to indicate a level of default probability over a two-year period,
which does not correspond to the life of a mortgage loan. Furthermore, Credit
Scores were not developed specifically for use in connection with home loans,
but for consumer loans in general, and assess only the borrower's past credit
history. Therefore, a Credit Score does not take into consideration the
differences between home loans and consumer loans generally or the specific
characteristics of the related home loan for example, the combined LTV ratio,
the collateral for the home loan, or the debt to income ratio. There can be no
assurance that the Credit Scores of the mortgagors will be an accurate predictor
of the likelihood of repayment of the related home loans.
The following table provides information as to the Credit Scores of the
related mortgagors as used in the origination of the home loans.
Credit Scores as of the Date of Origination of the Home Loans
Percentage of
Range of Credit Scores Home Loan Pool
as of the Date of Number of Cut-off Date by Cut-off
Origination of the Home Loans Home Loans Balance Date Balance
- ----------------------------- ---------- ------- ------------
Totals.................
Underwriting Standards
The following is a brief description of the various underwriting standards
and procedures applicable to the home loans.
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In most cases, the underwriting standards of Residential Funding
Corporation as to the home loans originated or purchased by it place a greater
emphasis on the creditworthiness and debt service capacity of the borrower than
on the underlying collateral in evaluating the likelihood that a borrower will
be able to repay the related home loan.
Residential Funding Corporation relies on a number of guidelines to assist
underwriters in the credit review and decision process. The underwriting
criteria provide for the evaluation of a loan applicant's creditworthiness
through the use of a consumer credit report, verification of employment and a
review of the debt-to-income ratio of the applicant. Income is verified through
various means, including without limitation applicant interviews, written
verifications with employers, review of pay stubs or tax returns. The borrower
must demonstrate sufficient levels of disposable income to satisfy debt
repayment requirements.
The underwriting standards require the home loans originated or purchased
by Residential Funding Corporation to have been fully documented. A prospective
borrower is required to complete a detailed application providing pertinent
credit information.
In determining the adequacy of the mortgaged property as collateral for
home loans included in the home loan pool, an appraisal is made of each property
considered for financing or, if permitted by the underwriting standards, the
value of the related mortgaged property will be the stated value. The home loans
purchased by Residential Funding Corporation and included in the home loan pool
generally were originated subject to a maximum combined LTV ratio of 125%, and
the related borrowers may have been permitted to retain a limited amount of the
proceeds of the home loans. In addition, the home loans were generally subject
to a maximum loan amount of $75,000 and a maximum total monthly debt-to-income
ratio of 55%. There can be no assurance that the combined LTV ratio or the
debt-to-income ratio for any home loan will not increase from the levels
established at origination.
The underwriting standards of Residential Funding Corporation may be
varied in appropriate cases. There can be no assurance that every home loan in
the home loan pool was originated in conformity with the applicable underwriting
standards in all material respects, or that the quality or performance of the
home loans will be equivalent under all circumstances.
The Initial Subservicers
Primary servicing for __% of the home loans will be provided by GMAC
Mortgage Corporation under a subservicing agreement with the master servicer.
GMAC Mortgage Corporation is an indirect wholly-owned subsidiary of General
Motors Acceptance Corporation. GMAC Mortgage Corporation is engaged in the
mortgage banking business, including the origination, purchase, sale and
servicing of residential loans.
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GMAC Mortgage Corporation's executive offices are located at 100 Witmer
Road, Horsham, Pennsylvania 19044-0963.
Primary servicing for __% of the home loans will be provided by __________
under a subservicing agreement with the __________. __________ is a __________
corporation that is a mortgage lender engaged in the business of originating,
purchasing, selling and servicing home loans generally secured by one- to
four-family residential properties, with an emphasis on non-conforming junior
lien loans.
__________ has its principal offices at __________.
Although _________ is not an affiliate of Residential Funding Corporation,
_________ has a lending arrangement with Residential Funding Corporation, and in
connection with that arrangement, Residential Funding Corporation has the right
to acquire an equity interest in _________________ in accordance with specified
terms and conditions.
The initial subservicers have not had sufficient experience in servicing
the types of mortgage loans comprising the home loan pool to provide meaningful
disclosure of its delinquency and loss experience relating to the mortgage
loans.
Residential Funding Corporation
Residential Funding Corporation will be responsible for master servicing
the home loans. Responsibilities of Residential Funding Corporation will include
the receipt of funds from subservicers, the reconciliation of servicing
activity, investor reporting, remittances to the indenture trustee and the owner
trustee to accommodate payments to securityholders and consulting with
subservicers of home loans that are delinquent and as to the related servicing
policies, notices and other responsibilities. Management and liquidation of
mortgaged properties acquired by foreclosure or deed in lieu of foreclosure, as
well as other loss mitigation procedures conducted by any subservicer, will be
reviewed by Residential Funding Corporation. Neither the master servicer nor any
subservicer will be required to make advances relating to delinquent payments of
principal and interest on the home loans.
For information regarding foreclosure procedures, see "Servicing of Trust
Assets--Realization Upon Defaulted Loans" in the prospectus. Servicing and
charge-off policies and collection practices may change over time in accordance
with Residential Funding Corporation's business judgment, changes in Residential
Funding Corporation's portfolio of home loans of the types included in the home
loan pool that it services for its clients and applicable laws and regulations,
and other considerations.
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Residential Funding Corporation has not had sufficient experience in
master servicing the types of mortgage loans comprising the home loan pool to
provide meaningful disclosure of its delinquency and loss experience relating to
the mortgage loans.
Additional Information
The description in this prospectus supplement of the home loan pool and
the mortgaged properties is based upon the home loan pool as constituted at the
close of business on the cut-off date, except as otherwise noted. Prior to the
issuance of the notes, home loans may be removed from the home loan pool as a
result of incomplete documentation or otherwise, if the depositor deems that
removal necessary or appropriate. A limited number of other home loans may be
added to the home loan pool prior to the issuance of the notes. The depositor
believes that the information in this prospectus supplement will be
substantially representative of the characteristics of the home loan pool as it
will be constituted at the time the notes are issued although the range of loan
rates and maturities and some other characteristics of the home loans in the
home loan pool may vary.
A Current Report on Form 8-K will be available to purchasers of the notes
and will be filed, together with the servicing agreement, the indenture, the
trust agreement and the home loan purchase agreement, with the Commission within
fifteen days after the initial issuance of the notes. In the event home loans
are removed from or added to the home loan pool as described in the preceding
paragraph, that removal or addition will be noted in the Current Report on Form
8-K.
THE ISSUER
The Home Loan Trust _______ is a business trust formed under the laws of
the State of Delaware under the trust agreement for the purposes described in
this prospectus supplement. The trust agreement constitutes the "governing
instrument" under the laws of the State of Delaware relating to business trusts.
After its formation, the issuer will not engage in any activity other than:
o acquiring and holding the home loans and the other assets of the
issuer and related proceeds,
o issuing the notes and the certificates,
o making payments on the notes and the certificates, and
o engaging in other activities that are necessary, suitable or
convenient to accomplish the foregoing.
The issuer's principal offices are in _________, in care of ____________,
as owner trustee, at ____________________.
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THE OWNER TRUSTEE
____________ is the owner trustee under the trust agreement. The owner
trustee is a _________ banking corporation and its principal offices are located
at _________________.
Neither the owner trustee nor any director, officer or employee of the
owner trustee will be under any liability to the issuer or the securityholders
for any action taken or for refraining from the taking of any action in good
faith under the trust agreement or for errors in judgment. However, that none of
the owner trustee and any director, officer or employee of the owner trustee
will be protected against any liability which would otherwise be imposed by
reason of willful malfeasance, bad faith or negligence in the performance of
duties or by reason of reckless disregard of obligations and duties under the
trust agreement. All persons into which the owner trustee may be merged or with
which it may be consolidated or any person resulting from the merger or
consolidation shall be the successor of the owner trustee under the trust
agreement.
THE INDENTURE TRUSTEE
_________________, is the indenture trustee under the indenture. The
principal offices of the indenture trustee are located in _______________.
THE CREDIT ENHANCER
The following information has been supplied by _____________, the credit
enhancer, for inclusion in this prospectus supplement. No representation is made
by the depositor, the master servicer, the underwriter or any of their
affiliates as to the accuracy or completeness of the information.
[The credit enhancer is a __________-domiciled stock insurance corporation
regulated by the Office of the Commissioner of Insurance of the State of
_________ and licensed to do business in 50 states, the District of Columbia,
the Commonwealth of Puerto Rico and Guam. The credit enhancer primarily insures
newly issued municipal and structured finance obligations. The credit enhancer
is a wholly owned subsidiary of __________ (formerly, _________.) a 100%
publicly-held company. _______________________________ have each assigned a
triple-A claims-paying ability rating to the credit enhancer.
The consolidated financial statements of the credit enhancer and its
subsidiaries as of ______________ and ______________, and for the three years
ended ______________, prepared in accordance with generally accepted accounting
principles, included in the Annual Report on Form
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10-K of ______________ (which was filed with the Commission on ______________;
Commission File Number ______________) and the consolidated financial statements
of the credit enhancer and its subsidiaries as of ______________ and for the
periods ending ______________ and ______________ included in the Quarterly
Report on Form 10-Q of ______________ for the period ended ______________ (which
was filed with the Commission on ______________), are hereby incorporated by
reference into this prospectus supplement and shall be deemed to be a part of
this prospectus supplement. Any statement contained in a document incorporated
in this prospectus supplement by reference shall be modified or superseded for
the purposes of this prospectus supplement to the extent that a statement
contained in this prospectus supplement by reference in this prospectus
supplement also modifies or supersedes the statement. Any statement so modified
or superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this prospectus supplement.
All financial statements of the credit enhancer and its subsidiaries
included in documents filed by ______________ with the Commission under Section
13(a), 13(c), 14 or 15(d) of the Exchange Act, subsequent to the date of this
prospectus supplement and prior to the termination of the offering of the notes
shall be deemed to be incorporated by reference into this prospectus supplement
and to be a part hereof from the respective dates of filing the documents.
The following table sets forth the credit enhancer's capitalization as of
______________, ______________, ______________ and ______________, respectively,
in conformity with generally accepted accounting principles.
Consolidated Capitalization Table
(Dollars in Millions)
[Date] [Date] [Date] [Date]
------ ------ ------ ------
(Unaudited)
Unearned premiums...........................
Other liabilities...........................
Total liabilities.........................
Stockholder's equity:
Common Stock..............................
Additional paid-in capital................
Accumulated other comprehensive income....
Retained earnings.........................
Total stockholder's equity................
Total liabilities and stockholder's equity
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For additional financial information concerning the credit enhancer, see
the audited and unaudited financial statements of the credit enhancer
incorporated by reference in this prospectus supplement. Copies of the financial
statements of the credit enhancer incorporated in this prospectus supplement by
reference and copies of the credit enhancer's annual statement for the year
ended ___________ prepared in accordance with statutory accounting standards are
available, without charge, from the credit enhancer. The address of the credit
enhancer's administrative offices and its telephone number are ____________.
The credit enhancer makes no representation regarding the notes or the
advisability of investing in the notes and makes no representation regarding,
nor has it participated in the preparation of, this prospectus supplement other
than the information supplied by the credit enhancer and presented under the
headings "The Credit Enhancer" and "Description of the Policy" and in the
financial statements incorporated in this prospectus supplement by reference.]
THE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND
SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
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DESCRIPTION OF THE SECURITIES
General
The notes will be issued under to the Indenture. The certificates will be
issued under the trust agreement. The following summaries describe provisions of
the securities, the indenture and the trust agreement. The summaries do not
purport to be complete and are subject to, and qualified in their entirety by
reference to, the provisions of the applicable agreement.
The notes will be secured by the assets of the trust pledged by the issuer
to the indenture trustee under the indenture which will consist of:
o the home loans;
o all amounts on deposit in the Payment Account;
o the policy; and
o proceeds of the foregoing.
Book-Entry Notes
The notes will initially be issued as book-entry notes. Noteowners may
elect to hold their notes through DTC in the United States, or Cedel or
Euroclear, in Europe if they are participants of their systems, or indirectly
through organizations which are participants in their systems. The book-entry
notes will be issued in one or more securities which equal the aggregate
principal balance of the notes and will initially be registered in the name of
Cede & Co., the nominee of DTC. Cedel and Euroclear will hold omnibus positions
on behalf of their participants through customers' securities accounts in
Cedel's and Euroclear's names on the books of their respective depositaries
which in turn will hold the positions in customers' securities accounts in the
depositaries' names on the books of DTC. Investors may hold the beneficial
interests in the book-entry notes in minimum denominations of $25,000 and in
integral multiples of $1 in excess of $25,000. Except as described below, no
beneficial owner of the notes will be entitled to receive a physical
certificate, or definitive note, representing the security. Unless and until
definitive notes are issued, it is anticipated that the only holder of the notes
will be Cede & Co., as nominee of DTC. Note owners will not be holders as that
term is used in the indenture.
The beneficial owner's ownership of a book-entry note will be recorded on
the records of the brokerage firm, bank, thrift institution or other financial
intermediary that maintains the beneficial owner's account for that purpose. In
turn, the financial intermediary's ownership of the book-entry notes will be
recorded on the records of DTC, or of a participating firm that acts as agent
for the
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financial intermediary, whose interest will in turn be recorded on the records
of DTC, if the beneficial owner's financial intermediary is not a DTC
participant and on the records of Cedel or Euroclear, as appropriate.
Note owners will receive all payments of principal and interest on the
notes from the indenture trustee through DTC and DTC participants. While the
notes are outstanding, except under the circumstances described below, under the
DTC rules, regulations and procedures, DTC is required to make book-entry
transfers among participants on whose behalf it acts in connection with the
notes and is required to receive and transmit payments of principal and interest
on the notes.
Participants and indirect participants with whom note owners have accounts
for notes are similarly required to make book-entry transfers and receive and
transmit the payments on behalf of their respective note owners. Accordingly,
although note owners will not possess physical certificates, the DTC rules
provide a mechanism by which note owners will receive payments and will be able
to transfer their interest.
Note owners will not receive or be entitled to receive definitive notes
representing their respective interests in the notes, except under the limited
circumstances described below. Unless and until definitive notes are issued,
note owners who are not participants may transfer ownership of notes only
through participants and indirect participants by instructing the participants
and indirect participants to transfer the notes, by book-entry transfer, through
DTC for the account of the purchasers of the notes, which account is maintained
with their respective participants. Under the DTC rules and in accordance with
DTC's normal procedures, transfers of ownership of notes will be executed
through DTC and the accounts of the respective participants at DTC will be
debited and credited. Similarly, the participants and indirect participants will
make debits or credits, as the case may be, on their records on behalf of the
selling and purchasing note owners.
Under a book-entry format, beneficial owners of the book-entry notes may
experience some delay in their receipt of payments, since the payments will be
forwarded by the indenture trustee to Cede & Co. Payments on notes held through
Cedel or Euroclear will be credited to the cash accounts of Cedel participants
or Euroclear participants in accordance with the relevant system's rules and
procedures, to the extent received by the relevant depositary. The payments will
be subject to tax reporting in accordance with relevant United States tax laws
and regulations. Because DTC can only act on behalf of financial intermediaries,
the ability of a beneficial owner to pledge book-entry notes to persons or
entities that do not participate in the depositary system, or otherwise take
actions relating to the book-entry notes, may be limited due to the lack of
physical certificates for the book-entry notes. In addition, issuance of the
book-entry notes in book-entry form may reduce the liquidity of the notes in the
secondary market since some potential investors may be unwilling to purchase
securities for which they cannot obtain physical certificates.
DTC has advised the indenture trustee that, unless and until definitive
notes are issued, DTC will take any action permitted to be taken by the holders
of the book-entry notes under the indenture only at the direction of one or more
financial intermediaries to whose DTC accounts the book-entry
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notes are credited, to the extent that the actions are taken on behalf of
financial intermediaries whose holdings include the book-entry notes. Cedel or
the Euroclear operator, as the case may be, will take any other action permitted
to be taken by noteholders under the indenture on behalf of a Cedel participant
or Euroclear participant only in accordance with its relevant rules and
procedures and subject to the ability of the relevant depositary to effect the
actions on its behalf through DTC. DTC may take actions, at the direction of the
related participants, with respect to some notes which conflict with actions
taken relating to other notes.
Definitive notes will be issued to beneficial owners of the book-entry
notes, or their nominees, rather than to DTC, if (a) the indenture trustee
determines that the DTC is no longer willing, qualified or able to discharge
properly its responsibilities as nominee and depository with respect to the
book-entry notes and the indenture trustee is unable to locate a qualified
successor, (b) the indenture trustee elects to terminate a book-entry system
through DTC or (c) after the occurrence of an event of default under the
indenture, beneficial owners having percentage interests aggregating at least a
majority of the note balance of the notes advise the DTC through the financial
intermediaries and the DTC participants in writing that the continuation of a
book-entry system through DTC, or a successor to DTC, is no longer in the best
interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the indenture trustee will be required to notify all
beneficial owners of the occurrence of this event and the availability through
DTC of definitive notes. Upon surrender by DTC of the global certificate or
certificates representing the book-entry notes and instructions for
re-registration, the indenture trustee will issue and authenticate definitive
notes, and subsequently, the indenture trustee will recognize the holders of the
definitive notes as holders under the indenture.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of notes among participants of DTC, Cedel and
Euroclear, they are under no obligation to perform or continue to perform the
procedures and the procedures may be discontinued at any time. See Annex I to
this prospectus supplement.
DTC has advised the depositor that management of DTC is aware that some
computer applications, systems and the like for processing data 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 that it has developed and is
implementing a program so that its systems, as they relate to the timely payment
of distributions, including principal and income payments, to securityholders,
book-entry deliveries and settlement of trades with DTC continue to function
appropriately. This program includes a technical assessment and a remediation
plan, each of which is complete. Additionally, DTC's plan includes a testing
phase, which, DTC has advised its participants and other members of the
financial community, is expected to be completed within appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to issuers and their agents, as
well as DTC's participants and third party
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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 its participants and other members of the financial community that
it is contacting and will continue to contact third party vendors from whom DTC
acquires services to:
o impress upon them the importance of those services being Year 2000
compliant; and
o determine the extent of their efforts for Year 2000 remediation and,
as appropriate, testing of their services.
In addition, DTC is in the process of developing any contingency plans as it
deems appropriate.
According to DTC, the foregoing information about DTC has been provided to
its participants and other members of the financial community for informational
purposes only and is not intended to serve as a representation, warranty or
contract modification of any kind.
None of the depositor, the master servicer or the indenture trustee will
have any liability for any actions taken by DTC or its nominee, including,
without limitation, actions for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the notes held by
Cede, as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to the beneficial ownership interests.
For additional information regarding DTC, Cedel, Euroclear and the notes,
see "Description of the Notes--Form of Notes" in the prospectus.
Payments
Payments on the notes will be made by the indenture trustee or the paying
agent on the 25th day of each month or, if not a business day, then the next
succeeding business day, commencing in _______________, each of which is
referred to as a payment date. Payments on the notes will be made to the persons
in whose names the notes are registered at the close of business on the day
prior to each payment date or, if the notes are no longer book-entry notes, on
the record date. See "Description of the Notes--Payments" in the prospectus.
Payments will be made by check or money order mailed, or upon the request of a
holder owning notes having denominations aggregating at least $1,000,000, by
wire transfer or otherwise, to the address of the person which, in the case of
book-entry notes, will be DTC or its nominee as it appears on the security
register in amounts calculated as described in this prospectus supplement on the
determination date. However, the final payment relating to the notes will be
made only upon presentation and surrender of the notes at the office or the
agency of the indenture trustee specified in the notice to holders of the final
payment. A business day is any day other than a Saturday or Sunday or a day on
which banking institutions
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in the State of California, Minnesota, New York, Pennsylvania, Illinois or
Delaware are required or authorized by law to be closed.
Glossary of Terms
The following terms are given the meanings shown below to help describe
the cash flows on the notes:
Excess Loss Amount--As of any payment date, an amount will be equal to the
sum of:
o any Liquidation Loss Amounts, other than as described in clauses
second through fourth below, for the related collection period
which, when added to the aggregate of the Liquidation Loss Amounts
for all preceding collection periods exceed $_________,
o any Special Hazard Losses in excess of the Special Hazard Amount,
o any Fraud Losses in excess of the Fraud Loss Amount, and
o some losses occasioned by war, civil insurrection, some governmental
actions, nuclear reaction and some other risks as described in the
indenture.
Excess Loss Amounts will not be covered by any Liquidation Loss Distribution
Amount or by a reduction in the Outstanding Reserve Amount. Any Excess Loss
Amounts however, will be covered by the policy, and in the event payments are
not made as required under the policy, the losses will be allocated to the
notes.
Fraud Loss Amount--An amount equal to $_________. As of any date of
determination after the cut-off date, the Fraud Loss Amount shall equal:
o prior to the first anniversary of the cut-off date, an amount equal
to 5% of the aggregate of the Stated Principal Balances of the home
loans as of the cut-off date minus the aggregate of any Liquidation
Loss Amounts on the home loans due to Fraud Losses up to the date of
determination;
o from the first to the second anniversary of the cut-off date, an
amount equal to (1) the lesser of (a) the Fraud Loss Amount as of
the most recent anniversary of the cut-off date and (b) 3% of the
aggregate of the Stated Principal Balances of the home loans as of
the most recent anniversary of the cut-off date minus (2) the
aggregate of any Liquidation Loss Amounts on the home loans due to
Fraud Losses since the most recent anniversary of the cut-off date
up to the date of determination; and
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o from the second to the fifth anniversary of the cut-off date, an
amount equal to (1) the lesser of (a) the Fraud Loss Amount as of
the most recent anniversary of the cut-off date and (b) 2% of the
aggregate of the Stated Principal Balances of the home loans as of
the most recent anniversary of the cut-off date minus (2) the
aggregate of any Liquidation Loss Amounts on the home loans due to
Fraud Losses since the most recent anniversary of the cut-off date
up to the date of determination. On and after the fifth anniversary
of the cut-off date, the Fraud Loss Amount shall be zero.
Liquidated Home Loan--As to any payment date, any home loan which the
master servicer has determined, based on the servicing procedures specified in
the servicing agreement, as of the end of the preceding collection period that
all liquidation proceeds which it expects to recover in connection with the
disposition of the related mortgaged property have been recovered. The master
servicer will treat any home loan that is 180 days or more delinquent as having
been finally liquidated.
Liquidation Loss Amount--As to any Liquidated Home Loan, the unrecovered
Stated Principal Balance of the Liquidated Home Loan and any of its unpaid
accrued interest at the end of the related collection period in which the home
loan became a Liquidated Home Loan, after giving effect to the Net Liquidation
Proceeds allocable to the Stated Principal Balance. Any Liquidation Loss Amount
shall not be required to be paid to the extent that a Liquidation Loss Amount
was paid on the notes by means of a draw on the policy or was reflected in the
reduction of the Outstanding Reserve Amount.
Liquidation Loss Distribution Amount--As to any payment date, an amount
equal to the sum of (A) 100% of the Liquidation Loss Amounts, other than any
Excess Loss Amounts, on the payment date, plus (B) any Liquidation Loss Amounts,
other than any Excess Loss Amounts, remaining undistributed from any preceding
payment date, together with its interest from the date initially distributable
to the date paid.
Net Liquidation Proceeds--As to a home loan, the proceeds, excluding
amounts drawn on the policy, received in connection with the liquidation of any
home loan, whether through trustee's sale, foreclosure sale or otherwise,
reduced by related expenses, but not including the portion, if any, of the
amount that exceeds the Stated Principal Balance of the home loan at the end of
the collection period immediately preceding the collection period in which the
home loan became a Liquidated Home Loan.
Outstanding Reserve Amount--an amount initially be approximately _____% of
the cut-off date balance. The Outstanding Reserve Amount will be increased by
distributions of the Reserve Increase Amount, if any, to the notes. On each
payment date, the Outstanding Reserve Amount, as in effect immediately prior to
the payment date, if any, shall be deemed to be reduced by an amount equal to
any Liquidation Loss Amounts, other than any Excess Loss Amounts, for the
payment date,
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except to the extent that Liquidation Loss Amounts were covered on the payment
date by a Liquidation Loss Distribution Amount, which amount would be so
distributed, if available, from any excess interest collections for that payment
date. Any Liquidation Loss Amounts not so covered will be covered by draws on
the policy to the extent provided in this prospectus supplement. However, any
Excess Loss Amounts are required to be covered by a draw on the policy in all
cases, without regard to the availability of the Outstanding Reserve Amount, and
the Outstanding Reserve Amount will not be reduced by any Excess Loss Amount
under any circumstances. The Outstanding Reserve Amount available on any payment
date is the amount, if any, by which the pool balance, after applying payments
received in the related collection period, exceeds the aggregate note balance of
the notes on the payment date, after application of principal collections for
that date.
To the extent that the Outstanding Reserve Amount is insufficient or not
available to absorb Liquidation Loss Amounts that are not covered by the
Liquidation Loss Distribution Amount, and if payments are not made under the
policy as required, a noteholder may incur a loss.
Principal Collection Distribution Amount--As to any payment date, an
amount equal principal collections for that payment date; provided however, on
any payment date as 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 the excess until
the Outstanding Reserve Amount equals the Reserve Amount Target. To the extent
the Reserve Amount Target decreases on any payment date, the amount of the
Principal Collection Distribution Amount will be reduced on that payment date
and on each subsequent payment date to the extent the remaining Outstanding
Reserve Amount is in excess of the reduced Reserve Amount Target until the
Outstanding Reserve Amount equals the Reserve Amount Target.
Reserve Amount Target--As to any payment date prior to the Stepdown Date,
an amount equal to _____% of the cut-off date balance. On or after the Stepdown
Date, the Reserve Amount Target will be equal to the lesser of (a) the Reserve
Amount Target as of the cut-off date and (b) _____% of the pool balance before
applying payments received in the related collection period, but not lower than
$__________, which is _____% of the cut-off date balance. However, any scheduled
reduction to the Reserve Amount Target described in the preceding sentence shall
not be made as of any payment date unless:
o (a) the aggregate cumulative Liquidation Loss Amounts on the home
loans prior to any payment date occurring during the first year, the
second year or the third year, or any year thereafter, after the
Stepdown Date are less than ____%, ____% and ____% respectively, of
the cut-off date pool balance or (b) the average Liquidation Loss
Amount on the home loans for the current and five previous payment
dates is less than half of the amount remaining in the Payment
Account on the payment date following distributions under clauses
first through fifth of the second paragraph under "--Allocation of
Payments on the Home Loans" above, other than clause third in that
section, and
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o there has been no draw on the policy on the payment date that
remains unreimbursed. In addition, the Reserve Amount Target may be
reduced with the prior written consent of the credit enhancer and
the rating agencies.
Reserve Increase Amount--As to any payment date, the amount necessary to
bring the Outstanding Reserve Amount up to the Reserve Amount Target.
Special Hazard Amount--An amount equal to $________. As of any date of
determination following the cut-off date, the Special Hazard Amount shall equal
the initial Special Hazard Amount less the sum of (A) the aggregate of any
Liquidation Loss Amounts on the home loans due to Special Hazard Losses and (B)
the Adjustment Amount. The Adjustment Amount will be equal to an amount
calculated under the terms of the indenture.
Stepdown Date--The later of:
o the payment date in ________________, and
o the payment date on which the pool balance before applying payments
received in the related collection period is less than 50% of the
cut-off date balance.
Interest Payments on the Notes
Interest payments will be made on the notes on each payment date at the
note rate. The note rate for the notes will be _____% per annum.
Interest on the notes relating to any payment date will accrue for the
related accrual period on the note balance. The accrual period for any payment
date will be the calendar month preceding the month in which the related payment
date occurs, or in the case of the first payment date beginning on the closing
date and ending the last day of the month in which the closing date occurs.
Interest will be based on a 30-day month and a 360-day year. Interest payments
on the notes will be funded from payments on the home loans and, if necessary,
from draws on the policy.
Principal Payments on the Notes
On each payment date, other than the payment date in _____________,
principal payments will be due and payable on the notes in an amount equal to
the aggregate of the Principal Collection Distribution Amount, together with any
Reserve Increase Amounts and Liquidation Loss Distribution Amounts for the
payment date, as and to the extent described below. On the payment date in
___________, principal will be due and payable on the notes in amounts equal to
the note balance, if any. In no event will principal payments on the notes on
any payment date exceed the note balance on that date.
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Allocation of Payments on the Home Loans
The master servicer on behalf of the trust will establish a Payment
Account into which the master servicer will deposit principal and interest
collections for each payment date on the business day prior to that payment
date. The Payment Account will be an Eligible Account and amounts on deposit in
the Payment Account will be invested in permitted investments.
On each payment date, principal and interest collections will be allocated
from the Payment Account in the following order of priority:
o first, to pay accrued interest due on the note balance of the notes;
o second, to pay principal in an amount equal to the Principal
Collection Distribution Amount for that payment date on the notes;
o third, to pay as principal on the notes, an amount equal to the
liquidation loss Distribution Amount. ;
o fourth, to pay the credit enhancer the premium for the policy and
any previously unpaid premiums for the policy, with its interest;
o fifth, to reimburse the credit enhancer for prior draws made on the
policy, other than those attributable to Excess Loss Amounts, with
its interest;
o sixth, to pay principal on the notes, the Reserve Increase Amount;
o seventh, to pay the credit enhancer any other amounts owed under the
insurance agreement; and
o eighth, any remaining amounts to the holders of the certificates.
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
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The notes will be payable in full on the payment date in __________, to
the extent of the outstanding note balance on that date, if any. In addition, a
principal payment may be made in partial or full redemption of the notes after
the aggregate Stated Principal Balance after applying payments received in the
related collection period is reduced to an amount less than or equal to
$_____________ 10% of the cut-off date balance, upon the exercise by the master
servicer of its option to purchase all or a portion of the home loans and
related assets. In the event that all of the home loans are purchased by the
master servicer, the purchase price will be equal to the sum of the outstanding
pool balance and its accrued and unpaid interest at the weighted average of the
loan rates through the day preceding the payment date on which the purchase
occurs together with all amounts due and owing to the credit enhancer.
In the event that a portion of the home loans are purchased by the master
servicer, the purchase price will be equal to the sum of the aggregate Stated
Principal Balances of the home loans so purchased and its accrued and unpaid
interest at the weighted average of the related loan rates on the home loans
through the day preceding the payment date on which the purchase occurs,
together with all amounts due and owing to the credit enhancer in connection
with the home loans so purchased. Any purchase will be subject to satisfaction
of some conditions specified in the servicing agreement, including:
o the master servicer shall have delivered to the indenture trustee a
home loan schedule containing a list of all home loans remaining in
the trust after removal;
o the master servicer shall represent and warrant that no selection
procedures reasonably believed by the master servicer to be adverse
to the interests of the securityholders or the credit enhancer were
used by the master servicer in selecting the home loans; and
o each rating agency shall have been notified of the proposed
retransfer and shall not have notified the master servicer that the
retransfer would result in a reduction or withdrawal of the ratings
of the notes without regard to the policy.
DESCRIPTION OF THE POLICY
On the closing date, the credit enhancer will issue the policy in favor of
the indenture trustee on behalf of the issuer. The policy will unconditionally
and irrevocably guarantee most payments on the notes. On each payment date, a
draw will be made on the policy equal to the sum of:
o the amount by which accrued interest on the notes at the note rate
on that payment date exceeds the amount on deposit in the Payment
Account available for interest distributions on that payment date,
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o any Liquidation Loss Amount, other than any Excess Loss Amount, for
that payment date, to the extent not currently covered by a
Liquidation Loss Distribution Amount or a reduction in the
Outstanding Reserve Amount and
o any Excess Loss Amount for that payment date.
For purposes of the foregoing, amounts in the Payment Account available for
interest distributions on any payment date shall be deemed to include all
amounts available in the Payment Account for that payment date, other than the
Principal Collection Distribution Amount and the Liquidation Loss Distribution
Amount, if any. Under the terms of the indenture, draws under the policy
relating to any Liquidation Loss Amount will be paid to the notes by the paying
agent, as principal, to the extent the notes would have been paid that amount.
In addition, a draw will be made on the policy to cover some shortfalls in
amounts allocable to the noteholders following the sale, liquidation or other
disposition of the assets of the trust in connection with the liquidation of the
trust fund as permitted under the indenture following an event of default under
the indenture. In addition, the policy will guarantee the payment of the
outstanding note balance of each note on the payment date in ___________. In the
absence of payments under the policy, noteholders will directly bear the credit
risks associated with their investment to the extent the risks are not covered
by the Outstanding Reserve Amount or otherwise.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
General
The yields to maturity and the aggregate amount of distributions on the
notes will be affected by the rate and timing of principal payments on the home
loans and the amount and timing of mortgagor defaults resulting in Liquidation
Loss Amounts. The rate of default of home loans secured by second liens may be
greater than that of home loans secured by first liens. In addition, yields may
be adversely affected by a higher or lower than anticipated rate of principal
payments on the home loans in the trust fund. The rate of principal payments on
the home loans will in turn be affected by the amortization schedules of the
home loans, the rate and timing of its principal prepayments by the mortgagors,
liquidations of defaulted home loans and repurchases of home loans due to
breaches of representations.
The timing of changes in the rate of prepayments, liquidations and
repurchases of the home loans may, and the timing of Liquidation Loss Amounts
will, significantly affect the yield to an investor, even if the average rate of
principal payments experienced over time is consistent with an investor's
expectation. Since the rate and timing of principal payments on the home loans
will depend on future events and on a variety of factors, as described more
fully in this prospectus supplement and in the prospectus under "Yield and
Prepayment Considerations", no assurance can be given as to the rate or the
timing of principal payments on the notes.
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The home loans in most cases may be prepaid by the mortgagors at any time.
However, in some circumstances, some of the home loans will be subject to a
prepayment charge. See "Description of the Home Loan Pool" in this prospectus
supplement. In addition, as described under "Description of the Home Loans--Home
Loan Pool Characteristics," some of the home loans may be assumable under the
terms of the mortgage note, and the remainder are subject to customary
due-on-sale provisions. The master servicer shall enforce any due-on-sale clause
contained in any mortgage note or mortgage, to the extent permitted under
applicable law and governmental regulations. However, if the master servicer
determines that it is reasonably likely that any mortgagor will bring, or if any
mortgagor does bring, legal action to declare invalid or otherwise avoid
enforcement of a due-on-sale clause contained in any mortgage note or mortgage,
the master servicer shall not be required to enforce the due-on-sale clause or
to contest the action. The extent to which some of the home loans are assumed by
purchasers of the mortgaged properties rather than prepaid by the related
mortgagors in connection with the sales of the mortgaged properties will affect
the weighted average life of the notes and may result in a prepayment experience
on the home loans that differs from that on other conventional home loans. See
"Yield and Prepayment Considerations" in the prospectus.
Prepayments, liquidations and purchases of the home loans will result in
distributions to holders of the notes of principal amounts which would otherwise
be distributed over the remaining terms of the home loans. Factors affecting
prepayment, including defaults and liquidations, of home loans include changes
in mortgagors' housing needs, job transfers, unemployment, mortgagors' net
equity in the mortgaged properties, changes in the value of the mortgaged
properties, mortgage market interest rates, solicitations and servicing
decisions. In addition, if prevailing mortgage rates fell significantly below
the loan rates on the home loans, the rate of prepayments, including
refinancings, would be expected to increase. Conversely, if prevailing mortgage
rates rose significantly above the loan rates on the home loans, the rate of
prepayments on the home loans would be expected to decrease. Prepayment of the
related first lien may also affect the rate of prepayments on the home loans.
The yield to maturity of the notes will depend, in part, on whether, to
what extent, and the timing with respect to which, any Reserve Amount Increase
is used to accelerate payments of principal on the notes or the Reserve Amount
Target is reduced. See "Description of the Securities--Allocation of Payments on
the Home Loans" in this prospectus supplement.
The rate of defaults on the home loans will also affect the rate and
timing of principal payments on the home loans. In general, defaults on home
loans are expected to occur with greater frequency in their early years. The
rate of default of home loans secured by second liens is likely to be greater
than that of home loans secured by first liens on comparable properties. The
rate of default on home loans which are refinance home loans, and on home loans
with high combined LTV ratios, may be higher than for other types of home loans.
Furthermore, the rate and timing of prepayments, defaults and liquidations on
the home loans will be affected by the general economic condition of the region
of the country in which the related mortgaged properties are located. The risk
of delinquencies and loss is greater and prepayments are less likely in regions
where a weak or
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deteriorating economy exists, as may be evidenced by, among other factors,
increasing unemployment or falling property values. See "Yield and Prepayment
Considerations" in the prospectus.
Because the loan rates on the home loans and the note rate on the notes
are fixed, the rate will not change in response to changes in market interest
rates. Accordingly, if market interest rates or market yields for securities
similar to the notes were to rise, the market value of the notes may decline.
In addition, the yield to maturity on the notes will depend on, among
other things, the price paid by the holders of the notes and the note rate. The
extent to which the yield to maturity of a note is sensitive to prepayments will
depend, in part, upon the degree to which it is purchased at a discount or
premium. In most cases, if notes are purchased at a premium and principal
distributions on the notes occur at a rate faster than assumed at the time of
purchase, the investor's actual yield to maturity will be lower than that
anticipated at the time of purchase. Conversely, if notes are purchased at a
discount and principal distributions on the notes occur at a rate slower than
that assumed at the time of purchase, the investor's actual yield to maturity
will be lower than that anticipated at the time of purchase. For additional
considerations relating to the yield on the notes, see "Yield and Prepayment
Considerations" in the prospectus.
Weighted Average Life: Weighted average life refers to the average amount
of time that will elapse from the date of issuance of a security to the date of
distribution to the investor of each dollar distributed in reduction of
principal of the security, assuming no losses. The weighted average life of the
notes will be influenced by, among other things, the rate at which principal of
the home loans is paid, which may be in the form of scheduled amortization,
prepayments or liquidations.
[The prepayment model used in this prospectus supplement, or prepayment
assumption, represents an assumed rate of prepayment each month relative to the
then outstanding principal balance of a pool of home loans. A 100% prepayment
assumption assumes a constant prepayment rate of 2% per annum of the then
outstanding principal balance of the home loans in the first month of the life
of the home loans and an additional 0.9286% per annum in each month thereafter
until the fifteenth month. Beginning in the fifteenth month and in each month
thereafter during the life of the home loans, a 100% prepayment assumption
assumes a constant prepayment rate of 15% per annum each month.] As used in the
table below, a 50% prepayment assumption assumes prepayment rates equal to 50%
of the prepayment assumption. Correspondingly, a 150% prepayment assumption
assumes prepayment rates equal to 150% of the prepayment assumption, and so
forth. The prepayment assumption does not purport to be a historical description
of prepayment experience or a prediction of the anticipated rate of prepayment
of any pool of home loans, including the home loans.
The table below has been prepared on the basis of assumptions as described
below in this paragraph regarding the weighted average characteristics of the
home loans that are expected to be
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included in the trust as described under "Description of the Home Loan Pool" in
this prospectus supplement and the performance of the home loans. The table
assumes, among other things, that:
o the home loan pool consists of ten groups of home loans, with the
home loans in each group having the following aggregate
characteristics as of the cut-off date:
Aggregate
Stated Principal Net Loan Original Term Remaining Term
Group Balance Loan Rate Rate to Maturity to Maturity
- ----- ------- --------- ---- ----------- -----------
o the scheduled monthly payment for each home loan has been based on
its outstanding balance, interest rate and remaining term to
maturity, so that the home loan will amortize in amounts sufficient
for its repayment over its remaining term to maturity;
o none of the seller, the master servicer or the depositor will
repurchase any home loan, as described under "Trust Asset
Program--Representations Relating to Trust Assets" and "Description
of the Notes--Assignment of the Trust Assets" in the prospectus, and
the master servicer does not exercise its option to purchase the
home loans and, as a result, cause a termination of the trust except
as indicated in the table;
o there are no delinquencies or Liquidation Loss Amounts on the home
loans, and principal payments on the home loans will be timely
received together with prepayments, if any, on the last day of the
month and at the respective constant percentages of the prepayment
assumption in the table;
o there is no prepayment interest shortfall or any other interest
shortfall in any month;
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o the home loans, including the simple interest home loans, pay on the
basis on a 30-day month and a 360-day year;
o payments on the notes will be received on the 25th day of each
month, commencing in ______________;
o payments on the home loans earn no reinvestment return;
o there are no additional ongoing trust expenses payable out of the
trust;
o the notes will be purchased on ______________; and
o the amount of interest collected on the home loans during the
collection period for the first payment date is $____________
The foregoing list of assumptions are referred to as the structuring
assumptions.
The actual characteristics and performance of the home loans will differ
from the assumptions used in constructing the table below, which is hypothetical
in nature and is provided only to give a general sense of how the principal cash
flows might behave under varying prepayment scenarios. For example, it is very
unlikely that the home loans will prepay at a constant level of the prepayment
assumption until maturity or that all of the home loans will prepay at the same
level of the prepayment assumption. Moreover, the diverse remaining terms to
maturity of the home loans could produce slower or faster principal
distributions than indicated in the table at the various constant percentages of
the prepayment assumption specified, even if the weighted average remaining term
to maturity of the home loans is as assumed. Any difference between the
assumptions and the actual characteristics and performance of the home loans, or
actual prepayment or loss experience, will affect the percentage of initial note
balance outstanding over time and the weighted average lives of the notes.
Subject to the foregoing discussion and assumptions, the following table
indicates the weighted average life of the notes, and lists the percentage of
the initial note balance of the notes that would be outstanding after each of
the payment dates shown at various percentages of the prepayment assumption.
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Percent of Initial Stated Principal Balance Outstanding at the
Following Percentages of the Prepayment Assumption
- --------------------------------------------------------------------------------
Payment Date 0% 50% 100% 150% 200%
- ------------ -- --- ---- ---- ----
Initial Percentage..........................
__________..................................
__________..................................
__________..................................
__________..................................
__________..................................
__________..................................
__________..................................
__________..................................
__________..................................
__________..................................
__________..................................
__________..................................
__________..................................
__________..................................
Weighted Average Life to Maturity
in Years....................................
Weighted Average Life Assuming
Optional Repurchase in Years................
The weighted average life of a note is determined by:
o 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,
o adding the results, and
o dividing the sum by the aggregate of the net reductions of the note
balance described in the first clause above.
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This table has been prepared based on the assumptions described in the forth
paragraph preceding this table, including the assumptions regarding the
characteristics and performance of the home loans, which differ from their
actual characteristics and performance, and should be read in conjunction
therewith.
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DESCRIPTION OF THE HOME LOAN PURCHASE AGREEMENT
The home loans to be deposited in the trust by the depositor will be
purchased by the depositor from the seller under the home loan purchase
agreement dated as of ______________ between the seller and the depositor. The
following summary describes some terms of the home loan purchase agreement and
is qualified in its entirety by reference to the home loan purchase agreement.
Purchase of Home Loans
Under the home loan purchase agreement, the seller will transfer and
assign to the depositor all of its right, title and interest in and to the home
loans and the mortgage note, mortgages and other related documents. The purchase
prices for the home loans are specified percentages of its face amounts as of
the time of transfer and are payable by the depositor as provided in the home
loan purchase agreement.
The home loan purchase agreement will require that, within the time period
specified in this prospectus supplement, the seller deliver to the indenture
trustee, or the custodian, the home loans sold by the seller and the related
documents described in the preceding paragraph for the home loans. In lieu of
delivery of original mortgages, the seller may deliver true and correct copies
of the mortgages which have been certified as to authenticity by the appropriate
county recording office where the mortgage is recorded.
Representations and Warranties
The seller will also represent and warrant with respect to the home loans
that, among other things:
o the information with respect to the home loans in the schedule
attached to the home loan purchase agreement is true and correct in
all material respects, and
o immediately prior to the sale of the home loans to the depositor,
the seller was the sole owner and holder of the home loans free and
clear of any and all liens and security interests.
The seller will also represent and warrant that, among other things, as of the
closing date:
o the home loan purchase agreement constitutes a legal, valid and
binding obligation of the seller, and
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o the home loan purchase agreement constitutes a valid transfer and
assignment of all right, title and interest of the seller in and to
the home loans and the proceeds of the home loans.
The benefit of the representations and warranties made by the seller will be
assigned to the indenture trust.
Within 90 days of the closing date, _________________ the custodian will
review or cause to be reviewed the home loans and the related documents, and if
any home loan or related document is found to be defective in any material
respect, which may materially and adversely affect the value of the related home
loan, or the interests of the indenture trustee, as pledgee of the home loans,
the securityholders or the credit enhancer in the home loan and the defect is
not cured within 90 days following notification of the defect to the seller and
the trust by the custodian, the seller will be obligated under the home loan
purchase agreement to deposit the repurchase price into the Custodial Account.
In lieu of any deposit, the seller may substitute an eligible substitute loan;
provided that the substitution may be subject to the delivery of an opinion of
counsel regarding tax matters. Any purchase or substitution will result in the
removal of the home loan required to be removed from the trust. The removed home
loans are referred to as a deleted loan. The obligation of the seller to remove
deleted loans sold by it from the trust is the sole remedy regarding any defects
in the home loans sold by the seller and related documents for the home loans
available against the seller.
As to any home loan, the repurchase price referred to in the preceding
paragraph is equal to the Stated Principal Balance of the home loan at the time
of any removal described in the preceding paragraph plus its accrued and unpaid
interest to the date of removal. In connection with the substitution of an
eligible substitute loan, the seller will be required to deposit in the
Custodial Account a substitution adjustment amount equal to the excess of the
Stated Principal Balance of the related deleted loan to be removed from the
trust over the Stated Principal Balance of the eligible substitute loan.
An eligible substitute loan is a home loan substituted by the seller for a
deleted loan which must, on the date of the substitution:
o have an outstanding Stated Principal Balance, or in the case of a
substitution of more than one home loan for a deleted loan, an
aggregate Stated Principal Balance, not in excess of the Stated
Principal Balance relating to the deleted loan;
o have a loan rate no lower than and not more than 1% in excess of the
loan rate of the deleted loan;
o have a combined LTV ratio at the time of substitution no higher than
that of the deleted loan at the time of substitution;
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o have, at the time of substitution, a remaining term to maturity not
more than one year earlier and not later than the remaining term to
maturity of the deleted loan;
o comply with each representation and warranty as to the home loans in
the home loan purchase agreement, deemed to be made as of the date
of substitution;
o be ineligible for inclusion in a REMIC if the deleted loan was a
REMIC ineligible loan, generally, because (a) the value of the real
property securing the deleted loan was not at least equal to eighty
percent of the original principal balance of the deleted loan,
calculated by subtracting the amount of any liens that are senior to
the loan and a proportionate amount of any lien of equal priority
from the value of the property when the loan was originated and (b)
substantially all of the proceeds of the deleted loan were not used
to acquire, improve or protect an interest in the real property
securing the loan; and
o satisfy some other conditions specified in the indenture.
In addition, the seller will be obligated to deposit the repurchase price
or substitute an eligible substitute loan for a home loan as to which there is a
breach of a representation or warranty in the home loan purchase agreement and
the breach is not cured by the seller within the time provided in the home loan
purchase agreement.
DESCRIPTION OF THE SERVICING AGREEMENT
The following summary describes terms of the servicing agreement, dated as
of _____________ among the Trust, the indenture trustee and the master servicer.
The summary does not purport to be complete and is subject to, and qualified in
its entirety by reference to, the provisions of the servicing agreement.
Whenever particular defined terms of the servicing agreement are referred to,
the defined terms are incorporated in this prospectus supplement by reference.
See "The Agreements" in the prospectus.
The Master Servicer
Residential Funding Corporation, an indirect wholly-owned subsidiary of
GMAC Mortgage Corporation and an affiliate of the depositor, will act as master
servicer for the home loans under the servicing agreement. For a general
description of Residential Funding Corporation and its activities, see "The Home
Loan Pool--Residential Funding Corporation" in this prospectus supplement and
"Residential Funding Corporation" in the prospectus.
Servicing and Other Compensation and Payment of Expenses
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The Servicing Fee for each home loan is payable out of the interest
payments on the home loan. The weighted average Servicing Fee as of the cut-off
date for each home loan will be approximately ____% per annum of the outstanding
principal balance of the home loan. The Servicing Fees consist of (a) servicing
compensation payable to the master servicer relating to its master servicing
activities, and (b) subservicing and other related compensation payable to the
Subservicer, including the compensation paid to the master servicer as the
direct servicer of a home loan for which there is no subservicer. The primary
compensation to be paid to the master servicer relating to its master servicing
activities will be _____% per annum of the outstanding principal balance of each
home loan. The master servicer is obligated to pay some ongoing expenses
associated with the trust and incurred by the master servicer in connection with
its responsibilities under the servicing agreement. See "Servicing of Trust
Assets" in the prospectus for information regarding other possible compensation
to the master servicer and the subservicer and for information regarding
expenses payable by the master servicer.
Principal and Interest Collections
The master servicer shall establish and maintain a Custodial Account in
which the master servicer shall deposit or cause to be deposited any amounts
representing payments on and any collections received relating to the home loans
received by it subsequent to the cut-off date. The Custodial Account shall be an
Eligible Account. On the 20th day of each month or if that day is not a business
day, the next succeeding business day, which is referred to as the determination
date, the master servicer will notify the paying agent and the indenture trustee
of the amount of aggregate amounts required to be withdrawn from the Custodial
Account and deposited into the Payment Account prior to the close of business on
the business day next succeeding each determination date.
Permitted investments are specified in the servicing agreement and are
limited to investments which meet the criteria of the rating agencies from time
to time as being consistent with their then-current ratings of the securities.
The master servicer will make the following withdrawals from the Custodial
Account and deposit the amounts as follows:
o to the Payment Account, an amount equal to the principal and
interest collections on the business day prior to each payment date;
and
o to pay to itself or the seller various reimbursement amounts and
other amounts as provided in the servicing agreement.
All collections on the home loans will generally be allocated in
accordance with the mortgage notes between amounts collected relating to
interest and amounts collected relating to principal. As to any payment date,
interest collections will be equal to the sum of:
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o the portion allocable to interest of all scheduled monthly payments
on the home loans received during the related collection period,
minus the Servicing Fees and the fees payable to the owner trustee
and the indenture trustee, which are collectively referred to as the
administrative fees,
o the interest portion of all Net Liquidation Proceeds allocated to
interest under the terms of the mortgage notes, reduced by the
administrative fees for that collection period, and
o the interest portion of the repurchase price for any deleted loans
and the cash purchase price paid in connection with any optional
purchase of the home loans by the master servicer.
However, on the first payment date, an amount, referred to as the excluded
interest amount, will be excluded from the interest collections equal to the sum
of 70% of first and second listed item above. As to any payment date, principal
collections will be equal to the sum of:
o the principal portion of all scheduled monthly payments on the home
loans received in the related collection period; and
o some unscheduled collections, including full and partial mortgagor
prepayments on the home loans, Insurance Proceeds, Liquidation
Proceeds and proceeds from repurchases of, and some amounts received
in connection with any substitutions for, the home loans, received
or deemed received during the related collection period, to the
extent the amounts are allocable to principal.
As to unscheduled collections, the master servicer may elect to treat the
amounts as included in interest collections and principal collections for the
payment date in the month of receipt, but is not obligated to do so. As
described in this prospectus supplement under "Description of the
Securities--Principal Payments on the notes," any amount for which the election
is so made shall be treated as having been received on the last day of the
related collection period for the purposes of calculating the amount of
principal and interest distributions to the notes.
As to any payment date other than the first payment date, the collection
period is the calendar month preceding the month of that payment date.
Release of Lien; Refinancing of Senior Lien
The servicing agreement permits the master servicer to release the lien on
the mortgaged property securing a home loan under some circumstances, if the
home loan is current in payment. A release may be made in any case where the
borrower simultaneously delivers a mortgage on a
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substitute mortgaged property, if the combined LTV ratio is not increased. A
release may also be made, in connection with a simultaneous substitution of the
mortgaged property, if the combined LTV ratio would be increased to not more
than the lesser of (a) 125% and (b) 105% times the combined LTV ratio previously
in effect, if the master servicer determines that appropriate compensating
factors are present. Furthermore, a release may also be permitted in cases where
no substitute mortgaged property is provided, causing the home loan to become
unsecured, subject to some limitations in the servicing agreement. At the time
of the release, some terms of the home loan may be modified, including a loan
rate increase or a maturity extension, and the terms of the home loan may be
further modified in the event that the borrower subsequently delivers a mortgage
on a substitute mortgaged property.
The master servicer may permit the refinancing of any existing lien senior
to a home loan, provided that the resulting combined LTV ratio may not exceed
the greater of (a) the combined LTV ratio previously in effect, or (b) 70% or,
if the borrower satisfies credit score criteria, 80%.
Collection and Liquidation Practices; Loss Mitigation
The master servicer is authorized to engage in a wide variety of loss
mitigation practices with respect to the home loans, including waivers,
modifications, payment forbearances, partial forgiveness, entering into
repayment schedule arrangements, and capitalization of arrearages; provided in
any case that the master servicer determines that the action is not materially
adverse to the interests of the indenture trustee as pledgee of the mortgage
loans and is generally consistent with the master servicer's policies with
respect to similar loans; and provided further that some modifications,
including reductions in the loan rate, partial forgiveness or a maturity
extension, may only be taken if the home loan is in default or if default is
reasonably foreseeable. For home loans that come into and continue in default,
the master servicer may take a variety of actions including foreclosure upon the
mortgaged property, writing off the balance of the home loan as bad debt, taking
a deed in lieu of foreclosure, accepting a short sale, permitting a short
refinancing, arranging for a repayment plan, modifications as described above,
or taking an unsecured note. See "Servicing of Trust Assets" in the prospectus.
Optional Repurchase of Defaulted Home Loans
Under the servicing agreement, the master servicer will have the option to
purchase from the trust any home loan which is 60 days or more delinquent at a
purchase price equal to its Stated Principal Balance plus its accrued interest.
DESCRIPTION OF THE TRUST AGREEMENT AND INDENTURE
The following summary describes terms of the trust agreement and the
indenture. The summary does not purport to be complete and is subject to, and
qualified in its entirety by reference
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to, the provisions of the trust agreement and the indenture. Whenever particular
defined terms of the indenture are referred to, the defined terms are
incorporated by reference in this prospectus supplement. See "The Agreements" in
the prospectus.
The Trust Fund
Simultaneously with the issuance of the notes, the issuer will pledge the
trust fund to the indenture trustee as collateral for the notes. As pledgee of
the home loans, the indenture trustee will be entitled to direct the trust in
the exercise of all rights and remedies of the trust against the seller under
the home loan purchase agreement and against the master servicer under the
servicing agreement.
Reports To Holders
The indenture trustee will mail to each holder of notes, at its address
listed on the security register maintained with the indenture trustee, a report
setting forth amounts relating to the notes for each payment date, among other
things:
o the amount of principal payable on the payment date to the holders
of securities;
o the amount of interest payable on the payment date to the holders of
securities;
o the aggregate note balance of the notes after giving effect to the
payment of principal on the payment date;
o principal and interest collections for the related collection
period;
o the aggregate Stated Principal Balance of the home loans as of the
end of the preceding collection period;
o the Outstanding Reserve Amount as of the end of the related
collection period; and
o the amount paid, if any, under the policy for the payment date.
In the case of information furnished under first and second listed clause
above relating to the notes, the amounts shall be expressed as a dollar amount
per $1,000 in face amount of notes.
Certain Covenants
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The indenture will provide that the issuer may not consolidate with or
merge into any other entity, unless:
o the entity formed by or surviving the consolidation or merger is
organized under the laws of the United States, any state or the
District of Columbia,
o the entity expressly assumes, by an indenture supplemental to the
indenture, the issuer's obligation to make due and punctual payments
upon the notes and the performance or observance of any agreement
and covenant of the issuer under the indenture,
o no event of default shall have occurred and be continuing
immediately after the merger or consolidation,
o the issuer has received consent of the credit enhancer and has been
advised that the ratings of the securities, without regard to the
policy, then in effect would not be reduced or withdrawn by any
rating agency as a result of the merger or consolidation,
o any action that is necessary to maintain the lien and security
interest created by the indenture is taken, and
o the issuer has received an opinion of counsel to the effect that the
consolidation or merger would have no material adverse tax
consequence to the issuer or to any noteholder or certificateholder,
and
o the issuer has delivered to the indenture trustee an officer's
certificate and an opinion of counsel each stating that the
consolidation or merger and the supplemental indenture comply with
the indenture and that all conditions precedent, as provided in the
indenture, relating to the transaction have been complied with.
The issuer will not, among other things:
o except as expressly permitted by the indenture, sell, transfer,
exchange or otherwise dispose of any of the assets of the issuer,
o claim any credit on or make any deduction from the principal and
interest payable relating to the notes, other than amounts withheld
under the Internal Revenue 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,
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o 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 by the indenture, or
o permit any lien, charge, excise, claim, security interest, mortgage
or other encumbrance to be created on or extend to or otherwise
arise upon or burden the assets of the issuer or any part of its
assets, or any of its interest or the proceeds of its assets.
The issuer may not engage in any activity other than as specified under "The
Issuer" in this prospectus supplement.
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Modification of Indenture
With the consent of the holders of a majority of the outstanding notes and
the credit enhancer, the issuer and the indenture trustee may execute a
supplemental indenture to add provisions to, change in any manner or eliminate
any provisions of, the indenture, or modify, except as provided below, in any
manner the rights of the noteholders. Without the consent of the holder of each
outstanding note affected by that modification and the credit enhancer, however,
no supplemental indenture will:
o change the due date of any installment of principal of or interest
on any note or reduce its principal amount, its interest rate
specified or change any place of payment where or the coin or
currency in which any note or any of its interest is payable;
o impair the right to institute suit for the enforcement of some
provisions of the indenture regarding payment;
o reduce the percentage of the aggregate amount of the outstanding
notes, the consent of the holders of which is required for any
supplemental indenture or the consent of the holders of which is
required for any waiver of compliance with some provisions of the
indenture or of some defaults thereunder and their consequences as
provided for in the indenture;
o 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;
o decrease the percentage of the aggregate principal amount of notes
required to amend the sections of the indenture which specify the
applicable percentage of aggregate principal amount of the notes
necessary to amend the indenture or some other related agreements;
o modify any of the provisions of the indenture in a manner as to
affect the calculation of the amount of any payment of interest or
principal due on any note, including the calculation of any of the
individual components of the calculation; or
o permit the creation of any lien ranking prior to or, except as
otherwise contemplated by the indenture, on a parity with the lien
of the indenture with respect to any of the collateral for the notes
or, except as otherwise permitted or contemplated in the indenture,
terminate the lien of the indenture on any collateral or deprive the
holder of any note of the security afforded by the lien of the
indenture.
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The issuer and the indenture trustee may also enter into supplemental
indentures, with the consent of the credit enhancer and without obtaining the
consent of the noteholders, for the purpose of, among other things, curing any
ambiguity or correcting or supplementing any provision in the indenture that may
be inconsistent with any other provision in this prospectus supplement.
Certain Matters Regarding the Indenture Trustee and the Issuer
Neither the indenture trustee nor any director, officer or employee of the
indenture trustee will be under any liability to the issuer or the related
noteholders for any action taken or for refraining from the taking of any action
in good faith under the indenture or for errors in judgment. None of the
indenture trustee and any director, officer or employee of the indenture trustee
will be protected against any liability which would otherwise be imposed by
reason of willful malfeasance, bad faith or negligence in the performance of
duties or by reason of reckless disregard of obligations and duties under the
indenture. Subject to limitations in the indenture, the indenture trustee and
any director, officer, employee or agent of the indenture trustee shall be
indemnified by the issuer and held harmless against any loss, liability or
expense incurred in connection with investigating, preparing to defend or
defending any legal action, commenced or threatened, relating to the indenture
other than any loss, liability or expense incurred by reason of willful
malfeasance, bad faith or negligence in the performance of its duties under the
indenture or by reason of reckless disregard of its obligations and duties under
the indenture. All persons into which the indenture trustee may be merged or
with which it may be consolidated or any person resulting from a merger or
consolidation shall be the successor of the indenture trustee under the
indenture.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
In the opinion of ____________________, counsel to the depositor, for
federal income tax purposes, the notes will be characterized as indebtedness and
the issuer, as created under the terms and conditions of the trust agreement,
will not be characterized as an association, or publicly traded partnership
within the meaning of section 7704 of the Internal Revenue Code, taxable as a
corporation or as a taxable mortgage pool within the meaning of section 7701(i)
of the Internal Revenue Code.
For federal income tax purposes, the notes will not be treated as having
been issued with "original issue discount," as described in the prospectus. See
"Material Federal Income Tax Consequences" in the prospectus.
The notes will not be treated as assets described in Section
7701(a)(19)(C) of the Internal Revenue Code and will not be treated as "real
estate assets" under Section 856(c)(4)(A) of the Internal Revenue Code. In
addition, interest on the notes will not be treated as "interest on obligations
secured by mortgages on real property" under Section 856(c)(3)(B) of the
Internal
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Revenue Code. The notes also will not be treated as "qualified mortgages" under
Section 860G(a)(3)(C) of the Internal Revenue Code.
Prospective investors in the notes should see "Material Federal Income Tax
Consequences" and "State and Other Tax Consequences" in the prospectus for a
discussion of the application of federal income and state and local tax laws to
the issuer and purchasers of the notes.
ERISA CONSIDERATIONS
Any fiduciary or other investor of ERISA plan assets that proposes to
acquire or hold the notes on behalf of or with ERISA plan assets of any ERISA
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 Internal Revenue Code to the proposed
investment. See "ERISA Considerations" in the prospectus.
Each purchaser of a note, by its acceptance of the note, shall be deemed
to have represented that the acquisition of the note by the purchaser does not
constitute or give rise to a prohibited transaction under section 406 of ERISA
or section 4975 of the Internal Revenue Code, for which no statutory, regulatory
or administrative exemption is available. See "ERISA Considerations" in the
prospectus.
The notes may not be purchased with the assets of an ERISA plan if the
depositor, the master servicer, the indenture trustee, the owner trustee or any
of their affiliates:
o has investment or administrative discretion with respect to the
ERISA plan assets;
o has authority or responsibility to give, or regularly gives,
investment advice regarding the ERISA plan assets, for a fee and
under an agreement or understanding that the advice will serve as a
primary basis for investment decisions regarding the ERISA plan
assets and will be based on the particular investment needs for the
ERISA plan; or
o is an employer maintaining or contributing to the ERISA plan.
LEGAL INVESTMENT
The notes will not constitute "mortgage related securities" for purposes
of SMMEA. Accordingly, many institutions with legal authority to invest in
mortgage related securities may not be legally authorized to invest in the
notes. No representation is made in this prospectus supplement
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as to whether the notes constitute legal investments for any entity under any
applicable statute, law, rule, regulation or order. Prospective purchasers are
urged to consult with their counsel concerning the status of the notes as legal
investments for the purchasers prior to investing in notes.
METHOD OF DISTRIBUTION
Subject to the terms and conditions of an underwriting agreement, dated
_________________ between ____________________, as the underwriter, has agreed
to purchase and the depositor has agreed to sell the notes. It is expected that
delivery of the notes will be made only in book-entry form through the Same Day
Funds Settlement System of DTC on or about __________________ against payment
therefor in immediately available funds.
In connection with the notes, the underwriter has agreed, subject to the
terms and conditions of the underwriting agreement, to purchase all of its notes
if any of its notes are purchased by the underwriting agreement.
In addition, the underwriting agreement provides that the obligation of
the underwriter to pay for and accept delivery of the notes is subject to, among
other things, the receipt of legal opinions and to the conditions, among others,
that no stop order suspending the effectiveness of the depositor's Registration
Statement shall be in effect, and that no proceedings for that purpose shall be
pending before or threatened by the Commission.
The distribution of the notes by the underwriter may be effected from time
to time in one or more negotiated transactions, or otherwise, at varying prices
to be determined at the time of sale. Proceeds to the depositor from the sale of
the notes, before deducting expenses payable by the depositor, will be
approximately _______% of the aggregate Stated Principal Balance of the notes
plus its accrued interest from the cut-off date.
The underwriter may effect these transactions by selling the notes to or
through dealers, and those dealers may receive compensation in the form of
underwriting discounts, concessions or commissions from the underwriter for whom
they act as agent. In connection with the sale of the notes, the underwriter may
be deemed to have received compensation from the depositor in the form of
underwriting compensation. The underwriter and any dealers that participate with
the underwriter in the distribution of the related notes may be deemed to be
underwriters and any profit on the resale of the notes positioned by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933, as amended.
The depositor has been advised by the underwriter that it presently
intends to make a market in the notes offered hereby; however, it is not
obligated to do so, any market-making may be discontinued at any time, and there
can be no assurance that an active public market for the notes will develop.
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The underwriting agreement provides that the depositor will indemnify the
underwriter and that under limited circumstances the underwriter will indemnify
the depositor against some liabilities, including liabilities under the
Securities Act of 1933, or contribute to payments the underwriter may be
required to make for these liabilities.
EXPERTS
The consolidated financial statements of _____________, as of December 31,
1998 and 1997 and for each of the years in the three-year period ended December
31, 1998 are incorporated by reference in this prospectus supplement and in the
registration statement in reliance upon the report of ______________,
independent certified public accountants, incorporated by reference in this
prospectus supplement, and upon the authority of the firm as experts in
accounting and auditing.
LEGAL MATTERS
Legal matters concerning the notes will be passed upon for the depositor
and the underwriter by _________________, New York, New York.
RATINGS
It is a condition to issuance that the notes be rated "___" by _________
and "____" by __________________. The depositor has not requested a rating on
the notes by any rating agency other than ___________ and ___________. However,
there can be no assurance as to whether any other rating agency will rate the
notes, or, if it does, what rating would be assigned by any other rating agency.
A rating on the notes by another rating agency, if assigned at all, may be lower
than the ratings assigned to the notes by ____________ and ____________. A
securities rating addresses the likelihood of the receipt by holders of notes of
distributions on the home loans. The rating takes into consideration the
structural and legal aspects associated with the notes. The ratings on the notes
do not, however, constitute statements regarding the possibility that holders
might realize a lower than anticipated yield. A securities rating is not a
recommendation to buy, sell or hold securities and may be subject to revision or
withdrawal at any time by the assigning rating organization. Each securities
rating should be evaluated independently of similar ratings on different
securities.
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in limited circumstances, the globally offered Residential Funding
Mortgage Securities II, Inc., Home Loan-Backed Notes, Series ____________, which
are referred to as the global securities, will be available only in book-entry
form. Investors in the global securities may hold the global securities through
any of DTC, Cedel or Euroclear. The global securities will be tradeable as home
market instruments in both the European and U.S. domestic markets. Initial
settlement and all secondary trades will settle in same-day funds.
Secondary market trading between investors through Cedel and Euroclear
will be conducted in the ordinary way in accordance with the normal rules and
operating procedures of Cedel and Euroclear and in accordance with conventional
eurobond practice, that is, seven calendar day settlement.
Secondary market trading between investors through DTC will be conducted
according to DTC's rules and procedures applicable to U.S. corporate debt
obligations.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding notes will be effected on a delivery-against-payment basis
through the respective depositaries of Cedel and Euroclear, in that capacity,
and as DTC participants.
Non-U.S. holders of global securities will be subject to U.S. withholding
taxes unless the holders meet some requirements and deliver appropriate U.S. tax
documents to the securities clearing organizations or their participants.
Initial Settlement
All global securities will be held in book-entry form by DTC in the name
of Cede & Co. as nominee of DTC. Investors' interests in the global securities
will be represented through financial institutions acting on their behalf as
direct and indirect participants in DTC. As a result, Cedel and Euroclear will
hold positions on behalf of their participants through their relevant depositary
which in turn will hold these positions in their accounts as DTC participants.
Investors electing to hold their global securities through DTC will follow
DTC settlement practices. Investor securities custody accounts will be credited
with their holdings against payment in same-day funds on the settlement date.
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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 notes issues in same-day funds. Trading between Cedel and/or
Euroclear participants. Secondary market trading between Cedel participants or
Euroclear participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds. Trading between DTC, seller and Cedel
or Euroclear participants. When global securities are to be transferred from the
account of a DTC participant to the account of a Cedel participant or a
Euroclear participant, the purchaser will send instructions to Cedel or
Euroclear through a Cedel participant or Euroclear participant at least one
business day prior to settlement. Cedel or Euroclear will instruct the relevant
depositary, as the case may be, to receive the global securities against
payment. Payment will include interest accrued on the global securities from and
including the last coupon payment date to and excluding the settlement date, on
the basis of the actual number of days in that accrual period and a year assumed
to consist of 360 days. For transactions settling on the 31st of the month,
payment will include interest accrued to and excluding the first day of the
following month. Payment will then be made by the relevant depositary to the DTC
participant's account against delivery of the global securities. After
settlement has been completed, the global securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Cedel participant's or Euroclear participant's account.
The securities credit will appear the next day, European time, and the cash debt
will be back-valued to, and the interest on the global securities will accrue
from, the value date, which would be the preceding day when settlement occurred
in New York. If settlement is not completed on the intended value date, i.e.,
the trade fails, the Cedel or Euroclear cash debt will be valued instead as of
the actual settlement date.
Cedel participants and Euroclear participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within Cedel or Euroclear. Under this approach,
they may take on credit exposure to Cedel or Euroclear until the global
securities are credited to their account one day later. As an alternative, if
Cedel or Euroclear has extended a line of credit to them, Cedel participants or
Euroclear participants can elect not to preposition funds and allow that credit
line to be drawn upon to finance settlement. Under this procedure, Cedel
participants or Euroclear participants purchasing global securities would incur
overdraft charges for one day, assuming they
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cleared the overdraft when the global securities were credited to their
accounts. However, interest on the global securities would accrue from the value
date. Therefore, in many cases the investment income on the global securities
earned during that one-day period may substantially reduce or offset the amount
of the overdraft charges, although the result will depend on each Cedel
participant's or Euroclear participant's particular cost of funds. Since the
settlement is taking place during New York business hours, DTC participants can
employ their usual procedures for crediting global securities to the respective
European depositary for the benefit of Cedel participants or Euroclear
participants. The sale proceeds will be available to the DTC seller on the
settlement date. Thus, to the DTC participants a cross-market transaction will
settle no differently than a trade between two DTC participants.
Trading between Cedel or Euroclear Seller and DTC Purchaser. Due to time
zone differences in their favor, Cedel participants and Euroclear participants
may employ their customary procedures for transactions in which global
securities are to be transferred by the respective clearing system, through the
respective depositary, to a DTC participant. The seller will send instructions
to Cedel or Euroclear through a Cedel participant or Euroclear participant at
least one business day prior to settlement. In these cases Cedel or Euroclear
will instruct the respective depositary, as appropriate, to credit the global
securities to the DTC participant's account against payment. Payment will
include interest accrued on the global securities from and including the last
coupon payment to and excluding the settlement date on the basis of the actual
number of days in that accrual period and a year assumed to consist to 360 days.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. The
payment will then be reflected in the account of Cedel participant or Euroclear
participant the following day, and receipt of the cash proceeds in the Cedel
participant's or Euroclear participant's account would be back-valued to the
value date, which would be the preceding day, when settlement occurred in New
York. Should the Cedel participant or Euroclear participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date, i.e., the trade fails, receipt of
the cash proceeds in the Cedel participant's or Euroclear participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase global
securities from DTC participants for delivery to Cedel participants or Euroclear
participants should note that these trades would automatically fail on the sale
side unless affirmative action is taken. At least three techniques should be
readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day, until the
purchase side of the trade is reflected in their Cedel or Euroclear
accounts, in accordance with the clearing system's customary procedures;
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(b) borrowing the global securities in the U.S. from a DTC
participant no later than one day prior to settlement, which would give
the global securities sufficient time to be reflected in their Cedel or
Euroclear account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the
trade so that the value date for the purchase from the DTC participant is
at least one day prior to the value date for the sale to the Cedel
participant or Euroclear participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of global securities holding securities through Cedel
or Euroclear, or through DTC if the holder has an address outside the U.S., will
be subject to the 30% U.S. withholding tax that generally applies to payments of
interest, including original issue discount, on registered debt issued by U.S.
Persons, unless:
o each clearing system, bank or other financial institution that holds
customers' securities in the ordinary course of its trade or
business in the chain of intermediaries between the beneficial owner
and the U.S. entity required to withhold tax complies with
applicable certification requirements, and
o the beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate: Exemption for Non-U.S. Persons (Form
W-8).
Beneficial holders of global securities that are Non-U.S. persons can obtain a
complete exemption from the withholding tax by filing a signed Form W-8
(Certificate of Foreign Status). If the information shown on Form W-8 changes, a
new Form W-8 must be filed within 30 days of the change.
Exemption for Non-U.S. persons with effectively connected income (Form
4224). A Non-U.S. person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224, the Exemption from Withholding of Tax on
Income Effectively Connected with the Conduct of a Trade or Business in the
United States.
Exemption or reduced rate for Non-U.S. persons resident in treaty
countries (Form 1001). Non-U.S. persons residing in a country that has a tax
treaty with the United States can obtain an exemption or reduced tax rate,
depending on the treaty terms, by filing Form 1001, Holdership, Exemption or
Reduced Rate Certificate. If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Form 1001 may be filed by note holders or their agent. Exemption
for U.S. Persons (Form W-9). U.S. Persons can obtain a
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complete exemption from the withholding tax by filing Form W-9, the 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:
o a citizen or resident of the United States,
o a corporation, partnership or other entity organized in or under the
laws of the United States or any of its political subdivisions,
unless, in the case of a partnership, future Treasury regulations
provide otherwise,
o an estate that is subject to U.S. federal income tax regardless of
the source of its income, or
o a trust if a court within the United States is able to exercise
primary supervision of the administration of the trust and one or
more United States persons have the authority to control all
substantial decisions of the trust.
Some trusts not described in last clause above in existence on August 20, 1996
that elect to be treated as a United States Person will also be a U.S. Person.
The term "Non-U.S. Person" means any person who is not a U.S. Person. This
summary does not deal with all aspects of U.S. Federal income tax withholding
that may be relevant to foreign holders of the global securities. Investors are
advised to consult their own tax advisors for specific tax advice concerning
their holding and disposing of the global securities.
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Residential Funding Mortgage Securities II, Inc.
$___________
Home Loan-Backed Notes,
Series _______
Prospectus Supplement
_____________________
[Underwriter]
You should rely only on the information contained or incorporated by reference
in this prospectus supplement and the accompanying prospectus. We have not
authorized anyone to provide you with different information.
We are not offering the notes offered in this prospectus supplement in any state
where the offer is not permitted.
Dealers will be required to deliver a prospectus supplement and prospectus when
acting as underwriters of the notes offered hereby and with respect to their
unsold allotments or subscriptions. In addition, all dealers selling the notes,
whether or not participating in this offering, may be required to deliver a
prospectus supplement and prospectus until _____________.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION (ITEM 14 OF FORM S-3).
The expenses expected to be incurred in connection with the issuance
and distribution of the Securities being registered, other than underwriting
compensation, are as set forth below. All such expenses, except for the filing
fee, are estimated.
Filing Fee for Registration Statement................ $ 0
Legal Fees and Expenses.............................. 50,000
Accounting Fees and Expenses......................... 20,000
Trustee's Fees and Expenses
(including counsel fees)...................... 25,000
Blue Sky Fees........................................ 20,000
Printing and Engraving Fees.......................... 20,000
Rating Agency Fees................................... 75,000
Miscellaneous...................................... 20,000
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Total .............................................. $ 230,000
============
INDEMNIFICATION OF DIRECTORS AND OFFICERS (ITEM 15 OF FORM S-3).
Any underwriters who execute one of the Underwriting Agreements in the
form filed as Exhibit 1.1 or Exhibit 1.2 to this Registration Statement will
agree to indemnify the Registrant's directors and its officers who signed this
Registration Statement against certain liabilities which might arise under the
Securities Act of 1933 from certain information furnished to the Registrant by
or on behalf of such indemnifying party.
Subsection (a) of Section 145 of the General Corporation Law of
Delaware empowers a corporation to indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, employee or agent of the corporation or is or
was serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
cause to believe his conduct was unlawful.
<PAGE>
-2-
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation and except that no indemnification may be made
in respect to any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine that despite the adjudication of liability such person is fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper.
Section 145 further provides that to the extent a director, officer,
employee or agent of a corporation has been successful in the defense of any
action, suit or proceeding referred to in subsections (a) and (b) or in the
defense of any claim, issue or matter therein, he shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection therewith; that indemnification or advancement of expenses provided
for by Section 145 shall not be deemed exclusive of any other rights to which
the indemnified party may be entitled; and empowers the corporation to purchase
and maintain insurance on behalf of a director, officer, employee or agent of
the corporation against any liability asserted against him or incurred by him in
any such capacity or arising out of his status as such whether or not the
corporation would have the power to indemnify him against such liabilities under
Section 145.
The By-Laws of the Registrant provide, in effect, that to the extent
and under the circumstances permitted by subsections (a) and (b) of Section 145
of the General Corporation Law of the State of Delaware, the Registrant (i)
shall indemnify and hold harmless each person who was or is a party or is
threatened to be made a party to any action, suit or proceeding described in
subsections (a) and (b) by reason of the fact that he is or was a director or
officer, or his testator or intestate is or was a director or officer of the
Registrant, against expenses, judgments, fines and amounts paid in settlement,
and (ii) shall indemnify and hold harmless each person who was or is a party or
is threatened to be made a party to any such action, suit or proceeding if such
person is or was serving at the request of the Registrant as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise.
In addition, the Pooling and Servicing Agreements and the Indentures
and Trust Agreements, as the case may be, will provide that no director,
officer, employee or agent of the Registrant is liable to the Trust Fund or the
Securityholders, except for such person's own willful misfeasance, bad faith,
gross negligence in the performance of duties or reckless disregard of
obligations and duties. The Pooling and Servicing Agreements and the Indentures,
as the case may be, will further provide that, with the exceptions stated above,
a director, officer, employee or agent of the Registrant is entitled to be
indemnified against any loss, liability or expense incurred
<PAGE>
-3-
in connection with legal action relating to such Pooling and Servicing
Agreements and Indentures and related Securities other than such expenses
related to particular Mortgage Loans.
Certain controlling persons of the Registrant may also be entitled to
indemnification from General Motors Acceptance Corporation, an indirect parent
of the Registrant. Under sections 7015 and 7018-7023 of the New York Banking
Law, General Motors Acceptance Corporation may or shall, subject to various
exceptions and limitation, indemnify its directors or officers and may purchase
and maintain insurance as follows:
(a) If the director is made or threatened to be made a party to
an action by or in the right of General Motors Acceptance Corporation
to procure a judgment in its favor, by reason of the fact that such
person is or was a director or officer of General Motors Acceptance
Corporation or is or was servicing at the request of General Motors
Acceptance Corporation as a director or officer of some other
enterprise, General Motors Acceptance Corporation may indemnify such
person against amounts paid in settlement of such action or an appeal
therein, if such director or officer acted, in good faith, for a
purpose which such person reasonably believed to be in (or, in the case
of service for any other enterprise, not opposed to) the best interests
of General Motors Acceptance Corporation, except that no
indemnification is available under such statutory provisions in respect
of a threatened action or a pending action which is settled or
otherwise disposed of, or any claim or issue or matter as to which such
person is found liable to General Motors Acceptance Corporation, unless
in each such case a court determined that such person is fairly and
reasonably entitled to indemnity for such amount as the court deems
proper.
(b) With respect to any action or proceeding other than one by
or in the right of General Motors Acceptance Corporation to procure a
judgment in its favor, if a director or officer is made or threatened
to be made a party by reason of the fact that such person was a
director or officer of General Motors Acceptance Corporation, or served
some other enterprise at the request of General Motors Acceptance
Corporation, General Motors Acceptance Corporation may indemnify such
person against judgments, fines, amounts paid in settlement and
reasonable expenses, including attorneys' fees, incurred as a result of
such action or proceeding or an appeal therein, if such person acted in
good faith for a purpose which such person reasonably believed to be in
(or, in the case of service for any other enterprise, not opposed to)
the best interests of General Motors Acceptance Corporation and, in
criminal actions or proceedings, in addition, had no reasonable cause
to believe that such person's conduct was unlawful.
(c) A director or officer who has been wholly successful, on the
merits or otherwise, in the defense of a civil or criminal action or
proceeding of the character described in paragraphs (a) or (b) above,
shall be entitled to indemnification as authorized in such paragraphs.
<PAGE>
-4-
(d) General Motors Acceptance Corporation may purchase and
maintain insurance to indemnify directors and officers in instances in
which they may not otherwise be indemnified by General Motors
Acceptance Corporation under the provisions of the New York Banking
Law, provided hat the contract of insurance provides for a retention
amount and for co-insurance, except that no such insurance may provide
for any payment, other than cost of defense, to or on behalf of any
director or officer if a judgment or other final adjudication adverse
to such director or officer establishes that such person's acts of
active and deliberate dishonesty were material to the cause of action
so adjudicated or that such person personally gained in fact a
financial profit or other advantage to which such person was not
legally entitled.
The foregoing statement is subject to the detailed provisions of
sections 7015 and 7018- 7023 of the New York Banking Law.
As a subsidiary of General Motors Corporation, General Motors
Acceptance Corporation is insured against liabilities which it may incur by
reason of the foregoing provisions of the New York Banking Law and directors and
officers of General Motors Acceptance Corporation are insured against some
liabilities which might arise out of their employment and not be subject to
indemnification under said Banking Law.
Pursuant to resolutions adopted by the Board of Directors of General
Motors Corporation, that company to the fullest extent permissible under law
will indemnify, and has purchased insurance on behalf of, directors or officers
of the company, or any of them, who incur or are threatened with personal
liability, including expenses, under Employee Retirement Income Security Act of
1974 or any amendatory or comparable legislation or regulation thereunder.
<PAGE>
-5-
EXHIBITS (ITEM 16 OF FORM S-3).
Exhibits--
1.1* -- Form of Underwriting Agreement for the Home Equity Loan Pass-
Through Certificates
1.2* -- Form of Underwriting Agreement for the Asset-Backed Notes
3.1* -- Certificate of Incorporation of Residential Funding Mortgage
Securities II, Inc. ("RFMSII")
3.2* -- By-Laws of RFMSII
4.1* -- Form of Pooling and Servicing Agreement for Closed-End Loans
4.2* -- Form of Pooling and Servicing Agreement for Revolving Credit Loans
4.3* -- Form of Servicing Agreement 4.4* --Form of Trust Agreement
4.5* -- Form of Indenture 5.1** -- Opinion of Thacher Proffitt & Wood with
respect to legality relating to the Home Equity Loan Pass-Through
Certificates
5.2** -- Opinion of Thacher Proffitt & Wood with respect to legality relating
to the Asset-Backed Notes
5.3** -- Opinion of Orrick, Herrington & Sutcliffe with respect to legality
relating to the Home Equity Loan Pass-Through Certificates and
Asset-Backed Notes
5.4** -- Opinion of Stroock & Stroock & Lavan with respect to legality relating
to the Home Equity Loan Pass-Through Certificates and Asset-Backed
Notes
8.1** -- Opinion of Thacher Proffitt & Wood with respect to certain tax matters
relating to the Home Equity Loan Pass-Through Certificates (included
as part of Exhibit 5.1) 8.2**-- Opinion of Thacher Proffitt & Wood
with respect to certain tax matters relating to the Asset-Backed Notes
(included as part of Exhibit 5.2) 8.3**-- Opinion of Orrick,
Herrington & Sutcliffe with respect to certain tax matters relating to
the Home Equity Loan Pass-Through Certificates and Asset-Backed Notes
8.4**-- Opinion of Stroock & Stroock & Lavan with respect to certain
tax matters relating to the Home Equity Loan Pass-Through Certificates
and Asset- Backed Notes (included as part of Exhibit 5.4) 10.1* --
Form of Mortgage Loan Purchase Agreement 23.1**-- Consent of Thacher
Proffitt & Wood relating to the Home Equity Loan Pass-Through
Certificates (included as part of Exhibit 5.1) 23.2**-- Consent of
Thacher Proffitt & Wood relating to the Asset-Backed Notes (included
as part of Exhibit 5.2) 23.3**-- Consent of Orrick, Herrington &
Sutcliffe relating to the Home Equity Loan Pass-Through Certificates
and Asset-Backed Notes (included as part of Exhibit 5.3)
<PAGE>
-6-
23.4** -- Consent of Stroock & Stroock & Lavan relating to the Home Equity Loan
Pass-Through Certificates and Asset-Backed Notes (included as part of
Exhibit 5.4)
24.1** -- Power of Attorney
- ------
* Incorporated by reference from the Registration Statement on Form S-3
(File No. 33-80419.
** Incorporated by reference from the Registration Statement on Form S-3
(File No. 333-77561)
UNDERTAKINGS (ITEM 17 OF FORM S-3).
A. UNDERTAKINGS PURSUANT TO RULE 415.
The Registrant hereby undertakes:
(a)(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this Registration
Statement;
(i) to include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in this Registration Statement; and
(iii) to include any material information with respect to
the plan of distribution not previously disclosed in this
Registration Statement or any material change to such information in
this Registration Statement;
PROVIDED HOWEVER, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the Registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in this
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial BONA FIDE offering thereof.
<PAGE>
-7-
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) The Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the Registrant's
annual report pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in this Registration Statement shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
B. UNDERTAKING IN RESPECT OF INDEMNIFICATION.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933, as amended, and will be governed by the final
adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Residential Funding
Mortgage Securities II, Inc. certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-3, reasonably
believes that the security rating requirement contained in Transaction
Requirement B.5 of Form S-3 will be met by the time of the sale of the
securities registered hereunder, and has duly caused this Amendment No. 1 to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Minneapolis, State of Minnesota, as of the 4th
day of June, 1999.
RESIDENTIAL FUNDING MORTGAGE SECURITIES II, INC.
By: /s/ Teresa R. Farley *
----------------------
Christopher J. Nordeen
President
Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1
to the Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Teresa R. Farley * President and Chief Executive June 4, 1999
- ----------------------------- Officer (Principal Executive
Christopher J. Nordeen Officer)
/s/ Teresa R. Farley * Director and Chief Financial June 4, 1999
- ----------------------------- Officer (Principal Financial
Davee L. Olson Officer)
/s/ Teresa R. Farley * Director June 4, 1999
- -----------------------------
Bruce J. Paradis
/s/ Teresa R. Farley * Controller (Principal June 4, 1999
- ----------------------------- Accounting Officer)
Jack R. Katzmark
/s/ Teresa R. Farley * Director June 4, 1999
- -----------------------------
Dennis W. Sheehan, Jr.
*By: /s/Teresa R. Farley
---------------------------
Teresa R. Farley
Attorney-in-fact
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
NUMBER DESCRIPTION LOCATION OF EXHIBIT
IN SEQUENTIAL
NUMBERING SYSTEM
<S> <C> <C>
1.1* Form of Underwriting Agreement for the Home Equity Loan Pass-
Through Certificates
1.2* Form of Underwriting Agreement for the Asset-Backed Notes
3.1* Certificate of Incorporation of Residential Funding Mortgage
Securities II, Inc. ("RFMSII")
3.2* By-Laws of RFMSII
4.1* Form of Pooling and Servicing Agreement for Closed-End Loans
4.2* Form of Pooling and Servicing Agreement for Revolving Credit
Loans
4.3* Form of Servicing Agreement
4.4* Form of Trust Agreement
4.5* Form of Indenture
5.1** Opinion of Thacher Proffitt & Wood with respect to legality
relating to the Home Equity Loan Pass-Through Certificates
5.2** Opinion of Thacher Proffitt & Wood with respect to legality relating
to the Asset-Backed Notes
5.3** Opinion of Orrick, Herrington & Sutcliffe with respect to
legality relating to the Home Equity Loan Pass-Through
Certificates and Asset-Backed Notes
5.4** Opinion of Stroock & Stroock & Lavan with respect to legality
relating to the Home Equity Loan Pass-Through Certificates and
Asset-Backed Notes
8.1** Opinion of Thacher Proffitt & Wood with respect to certain tax
matters relating to the Home Equity Loan Pass-Through
Certificates (included as part of Exhibit 5.1)
8.2** Opinion of Thacher Proffitt & Wood with respect to certain tax
matters relating to the Asset-Backed Notes (included as part of
Exhibit 5.2)
8.3** Opinion of Orrick, Herrington & Sutcliffe with respect to
certain tax matters relating to the Home Equity Loan
Pass-Through Certificates and Asset-Backed Notes
<PAGE>
8.4** Opinion of Stroock & Stroock & Lavan with respect to certain tax
matters relating to the Home Equity Loan Pass-Through
Certificates and Asset-Backed Notes (included as part of Exhibit
5.4)
10.1* Form of Mortgage Loan Purchase Agreement
23.1** Consent of Thacher Proffitt & Wood relating to the Home Equity
Loan Pass-Through Certificates (included as part of Exhibit 5.1)
23.2** Consent of Thacher Proffitt & Wood relating to the Asset-Backed
Notes (included as part of Exhibit 5.2)
23.3** Consent of Orrick, Herrington & Sutcliffe relating to the Home
Equity Loan Pass-Through Certificates and Asset-Backed Notes
(included as part of Exhibit 5.3)
23.4** Consent of Stroock & Stroock & Lavan relating to the Home Equity
Loan Pass-Through Certificates and Asset-Backed Notes (included as
part of Exhibit 5.4)
24.1** Power of Attorney
</TABLE>
* Incorporated by reference from the Registration Statement on Form S-3 (File
No. 33-80419).
** Incorporated by reference from the Registration Statement on Form S-3 (File
No. 333-77561).
