<PAGE>
Prospectus supplement dated March 22, 2000 (to prospectus dated June 16, 1999)
$451,710,000
RESIDENTIAL FUNDING MORTGAGE SECURITIES II, INC.
DEPOSITOR
HOME LOAN TRUST 2000-HI2
ISSUER
RESIDENTIAL FUNDING CORPORATION
MASTER SERVICER
HOME LOAN-BACKED NOTES, SERIES 2000-HI2
<TABLE>
<S> <C>
OFFERED NOTES The trust will issue six classes of notes backed by two
pools of closed-end, primarily second lien fixed rate home
loans with high combined loan-to- value ratios.
CREDIT ENHANCEMENT Credit enhancement for the notes consists of:
excess interest and overcollateralization; and
a guaranty insurance policy issued by Ambac Assurance
Corporation.
</TABLE>
[Logo]
Bear, Stearns & Co. Inc. and PaineWebber Incorporated 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 underwritten notes will be
approximately 99.68% of the principal balance of the notes plus accrued
interest, before deducting expenses.
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-8 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.
BEAR, STEARNS & CO. INC. PAINEWEBBER INCORPORATED
UNDERWRITERS
<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:
the prospectus, which provides general information, some of which may not
apply to your series of notes; and
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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary......................... S-3
Risk Factors.................... S-8
Introduction.................... S-12
Description of the Home Loan
Pool.......................... S-12
General..................... S-12
Payments on the Simple
Interest Home Loans....... S-13
Balloon Home Loans.......... S-13
Home Loan Pool
Characteristics........... S-14
Credit Scores............... S-25
Underwriting Standards...... S-26
Representations and
Warranties................ S-26
Additional Information...... S-26
The Issuer...................... S-27
The Owner Trustee............... S-27
The Indenture Trustee........... S-27
The Credit Enhancer............. S-27
Description of the Securities... S-29
General..................... S-29
Book-Entry Notes............ S-29
Glossary of Terms........... S-31
Payments.................... S-33
Interest Payments on the
Notes..................... S-33
Determination of LIBOR...... S-34
Principal Payments on the
Notes..................... S-34
Allocation of Payments on
the Home Loans............ S-35
The Paying Agent............ S-35
Maturity and Optional
Redemption................ S-35
Description of the Policy....... S-36
Certain Yield and Prepayment
Considerations................ S-37
General..................... S-37
Description of the Home Loan
Purchase Agreement............ S-44
Purchase of Home Loans...... S-44
Representations and
Warranties................ S-44
Description of the Servicing
Agreement..................... S-45
The Master Servicer......... S-45
The Initial Subservicers.... S-46
Delinquency and Loss
Experience of the Master
Servicer's Portfolio...... S-46
Servicing and Other
Compensation and Payment
of Expenses............... S-47
Principal and Interest
Collections............... S-47
Release of Lien; Refinancing
of Senior Lien............ S-48
Collection and Liquidation
Practices; Loss
Mitigation................ S-48
Optional Repurchase of
Defaulted Home Loans...... S-48
Description of the Trust
Agreement and Indenture....... S-49
The Trust Fund.............. S-49
Reports to Holders.......... S-49
Certain Covenants........... S-49
Modification of Indenture... S-50
Certain Matters Regarding
the Indenture Trustee and
the Issuer................ S-50
Material Federal Income Tax
Consequences.................. S-51
ERISA Considerations............ S-51
Legal Investment................ S-51
Method of Distribution.......... S-52
Experts......................... S-53
Legal Matters................... S-53
Ratings......................... S-53
ANNEX I......................... I-1
</TABLE>
S-2
<PAGE>
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 accompanying prospectus.
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<S> <C>
Issuer or Trust........................... Home Loan Trust 2000-HI2.
Title of the offered securities........... Home Loan-Backed Notes, Series 2000-HI2.
Depositor................................. Residential Funding Mortgage Securities II,
Inc., an affiliate of Residential Funding
Corporation.
Master servicer........................... Residential Funding Corporation.
Owner trustee............................. Wilmington Trust Company.
Indenture trustee......................... The Chase Manhattan Bank.
Credit enhancer........................... Ambac Assurance Corporation.
Home loan pool............................ 12,663 fixed rate home loans with an aggregate
principal balance of approximately
$451,711,096 as of the close of business on
the day prior to the cut-off date, secured
primarily by second liens on one- to
four-family residential properties.
Cut-off date.............................. March 1, 2000.
Closing date.............................. On or about March 29, 2000.
Payment dates............................. Beginning in April 2000 on the 25th of each
month or, if the 25th is not a business day,
on the next business day.
Form of notes............................. Book-entry.
See 'Description of the Securities -- Book
Entry Notes' in this prospectus supplement.
Minimum denominations..................... $25,000.
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.
</TABLE>
S-3
<PAGE>
NOTES
<TABLE>
- -------------------------------------------------------------------------------------
INITIAL
INITIAL RATING
NOTE NOTE (MOODY'S/ FINAL SCHEDULED
CLASS RATE BALANCE S&P) PAYMENT DATE DESIGNATIONS
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
A-I-1 Adjustable $ 83,812,000 Aaa/AAA January 25, 2008 Senior/Adjustable
Rate/Sequential
- -------------------------------------------------------------------------------------
A-I-2 7.62% $ 57,339,000 Aaa/AAA November 25, 2010 Senior/Fixed
Rate/Sequential
- -------------------------------------------------------------------------------------
A-I-3 7.90% $129,255,000 Aaa/AAA February 25, 2015 Senior/Fixed
Rate/Sequential
- -------------------------------------------------------------------------------------
A-I-4 8.28% $ 78,901,000 Aaa/AAA June 25, 2020 Senior/Fixed
Rate/Sequential
- -------------------------------------------------------------------------------------
A-I-5 8.35% $ 83,204,000 Aaa/AAA March 25, 2025 Senior/Fixed
Rate/Sequential
- -------------------------------------------------------------------------------------
Total Class A-I
Notes: $432,511,000
- -------------------------------------------------------------------------------------
A-II 8.12% $ 19,199,000 Aaa/AAA March 25, 2025 Senior/Fixed
Rate/Pass-Through
- -------------------------------------------------------------------------------------
Total Class A-II $ 19,199,000
Notes:
- -------------------------------------------------------------------------------------
Total Class A Notes:$451,710,000
- -------------------------------------------------------------------------------------
Total Notes: $451,710,000
- -------------------------------------------------------------------------------------
</TABLE>
OTHER INFORMATION:
CLASS A-I-1
The note rate on the Class A-I-1 Notes on any payment date will equal the lesser
of:
LIBOR plus 0.12%; and
10.00% per annum.
CLASS A-I-5 NOTES AND CLASS A-II NOTES:
The note rate on the Class A-I-5 Notes and Class A-II Notes will increase by
0.50% per annum on the first payment date after the first possible optional
termination date.
S-4
<PAGE>
THE TRUST
The depositor will establish Home Loan Trust 2000-HI2, a Delaware business trust
to issue the Home Loan Backed Notes, Series 2000-HI2. The assets of the trust
will consist of the home loans and related assets.
THE HOME LOAN POOL
The home loans to be deposited in the trust consist of two groups, group I and
group II, of which 99.88% and 100.00%, respectively, are secured by second
mortgages or deeds of trust. The remainder of the home loans are secured by
first mortgages or deeds of trust.
The group I loans have the following aggregate characteristics as of the cut-off
date:
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<CAPTION>
WEIGHTED
RANGE AVERAGE
----- --------
<S> <C> <C>
Principal balance $9,676 to $100,000 $35,129
Loan rate 8.10% to 18.38% 13.8289%
Original term to
maturity (months) 48 to 301 232
Remaining term to
stated maturity
(months) 40 to 300 231
Combined loan-to-
value ratio 11% to 126% 115.21%
</TABLE>
Principal balance is an average.
The group II loans have the following aggregate characteristics as of the
cut-off date:
<TABLE>
<CAPTION>
WEIGHTED
RANGE AVERAGE
----- --------
<S> <C> <C>
Principal balance $15,963 to $100,000 $54,700
Loan rate 9.00% to 17.99% 13.3048%
Original term to
maturity (months) 120 to 300 249
Remaining term to
stated maturity
(months) 118 to 300 247
Combined loan-to-
value ratio 69% to 125% 112.34%
</TABLE>
Principal balance is an average.
See 'Description of the Home Loan Pool' in this prospectus supplement.
THE CERTIFICATES
The trust will also issue Home Loan-Backed Certificates, Series 2000-HI2, which
are not offered by this prospectus supplement.
PAYMENTS ON THE NOTES
Amount available for monthly distribution. On each monthly payment date, the
indenture trustee will make distributions to investors. The amounts available
for distribution will include:
collections of monthly payments of principal and interest on the home loans,
including prepayments and other unscheduled collections,
plus
amounts from any draws on the policy and any payments under the limited
reimbursement agreement,
minus
fees and expenses of the trust.
See 'Description of the Servicing Agreement -- Principal and Interest
Collections' in this prospectus supplement.
Payments. Payments to noteholders will be made from amounts available for
distribution as follows:
Distribution of interest to the notes
Distribution of principal to the notes
Distribution of principal to the notes to cover specified losses
Payment to the credit enhancer of its premium for the policy
Reimbursement to the credit enhancer for specified prior draws made on the
policy
Distribution of additional principal to the notes if the level of
overcollateralization is below what is required
S-5
<PAGE>
Payment to the credit enhancer for any other amounts owed
Distribution of any remaining funds to the certificates
Each of the Class A-I Notes and Class A-II Notes represents rights to receive
principal primarily from its respective loan group. 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 applicable note rate, any
unpaid losses allocated to the notes and amounts due on the notes on the payment
date in March, 2025.
CREDIT ENHANCEMENT
The credit enhancement for the benefit of the notes consists of:
EXCESS INTEREST. Because the mortgagors are required to pay more interest on the
home loans than is necessary to pay the interest on the notes, along with fees
and expenses of the trust each month, there may be excess interest. Some of this
excess interest may be used to protect the notes against most types of losses by
making an additional payment of principal up to the amount of the losses.
OVERCOLLATERALIZATION. Excess interest that is not needed to cover losses in the
current period will be used to make additional principal payments on the notes
as described in this prospectus supplement, until the aggregate principal
balance of the home loans exceeds the aggregate principal amount of notes by a
specified amount. This excess will represent overcollateralization, which may
absorb some losses on the home loans, if they are not covered by excess
interest. If the level of overcollateralization falls below what is required,
the excess interest described above will be paid to the notes as additional
principal in order to maintain the required level of overcollateralization.
POLICY. On the closing date, the credit enhancer will issue the guaranty
insurance policy in favor of the indenture trustee. The policy will
unconditionally and irrevocably guarantee interest on the notes at the
applicable note rate, will cover all losses allocated to the notes not covered
by excess interest or overcollateralization and will guarantee amounts due on
the notes on the payment date in March, 2025. Some payments that are covered by
the policy may be paid directly to the indenture trustee from a limited
reimbursement agreement in favor of the credit enhancer, instead of by a draw
under the policy.
OPTIONAL TERMINATION
On any payment date on which the aggregate principal balance of the home loans,
after applying payments received in the related collection period, is less than
10% of the aggregate principal balance of the home loans as of the cut-off date,
the master servicer will have the option to purchase some or all of the
remaining home loans.
Under an optional purchase of the home loans, a dollar amount of the notes equal
to the amount of home loans purchased will be paid in full with accrued
interest.
RATINGS
When issued, the notes will receive ratings not lower than those listed on page
S-4 of this prospectus supplement. A security rating is not a recommendation to
buy, sell or hold a security and the assigning rating agency may change or
withdraw the rating at any time. The ratings also do not address the rate of
S-6
<PAGE>
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.
LEGAL INVESTMENT
The notes will not be 'mortgage related securities' for purposes of SMMEA. 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. ERISA 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
will not be subject to tax.
See 'Material Federal Income Tax Consequences' in this prospectus supplement and
in the accompanying prospectus.
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:
<TABLE>
<S> <C>
RISKS ASSOCIATED WITH THE HOME LOANS
The return on your notes Approximately 99.88% of the group I loans and all of the group II loans
may be reduced by losses on respectively are secured by second liens, rather than first liens. In the
the home loans, which are case of second liens, proceeds from liquidation of the mortgaged property
more likely because they will be available to satisfy the home loans only if the claims of any
are junior liens. senior mortgages have been satisfied in full. When it is uneconomical to
foreclose on a mortgaged property or engage in other loss mitigation
procedures, the master servicer may write off the entire outstanding
balance of the home loan as a bad debt. These are risks particularly
applicable to home loans secured by second liens that have high combined
loan-to-value ratios or have small balances relative to the total
indebtedness of the borrower because it is more likely that the master
servicer would determine foreclosure to be uneconomical for those types
of home loans than for first lien mortgage loans with low loan-to-value
ratios. As of the cut-off date, the weighted average combined
loan-to-value ratio of the home loans is 115.09%, and approximately 90.9%
of the home loans will have combined loan-to-value ratios in excess of
100.00%.
Delays in payment on your The master servicer is not obligated to advance scheduled monthly
notes may result because payments of principal and interest on home loans that are delinquent or
the master servicer is not in default. The rate of delinquency and default of second mortgage loans
required to advance. may be greater than that of mortgage loans secured by first liens on
comparable properties.
The return on your notes Mortgage loans similar to those included in the home loan pool have been
may be reduced in an originated for a limited period of time. During this time, economic
economic downturn. 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 home loans.
</TABLE>
S-8
<PAGE>
<TABLE>
<S> <C>
Origination disclosure 60.3% and 39.6% of the group I loans and group II loans, respectively,
practices for the home are subject to special rules, disclosure requirements and other
loans could create regulatory provisions because they are high cost loans. Purchasers or
liabilities that may affect assignees of these high cost loans, including the trust, could be exposed
your notes. 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 'Description of the Home Loan
Pool -- Home Loan Pool Characteristics' in this prospectus supplement and
'Certain Legal Aspects of the Trust Assets and Related Matters' in the
prospectus.
The underwriting standards The underwriting standards under which the home loans were underwritten
for the home loans are more are analogous to credit lending, rather than mortgage lending, since
sensitive to risks relating underwriting decisions were based primarily on the borrower's credit
to borrower credit- history and capacity to repay rather than on the value of the collateral.
worthiness and less The underwriting standards allow loans to be approved with combined
sensitive to risks relating loan-to-value ratios of up to 125%. See 'Description of the Home Loan
to collateral value Pool -- Underwriting Standards' in this prospectus supplement. Because of
compared to first lien the relatively high combined loan-to-value ratios of the home loans and
loans. the fact that the home loans are primarily secured by junior liens,
losses on the home loans will likely be higher than on first lien
mortgage loans.
The return on your notes The concentration of the related mortgaged properties in one or more
may be particularly geographic regions may increase the risk of loss to the notes.
sensitive to changes in Approximately 11.3% and 38.1% of the cut-off date principal balance of
real estate markets in the group I loans and group II loans, respectively, are located in
specific regions. 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 home loans, the home loans related to
properties in that region may experience increased rates of delinquency,
which may result in losses on the home loans. 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.
Debt incurred by the With respect to home loans which were used for debt consolidation, there
borrowers in addition to can be no assurance that the borrower will not incur further debt in
the home loans could addition to the home loan. This additional debt could impair the ability
increase your risk. of borrowers to service their debts, which in turn could result in higher
rates of delinquency and loss on the home loans.
</TABLE>
S-9
<PAGE>
<TABLE>
<S> <C>
Servicing Practices
Loss mitigation practices The master servicer may use a wide variety of practices to limit losses
or the release of a lien on defaulted home loans, including writing off part of the debt, reducing
may increase your risk. future payments, and deferring the collection of past due payments. The
servicing agreement also permits the master servicer to release the lien
on a limited number of mortgaged properties. See 'Description of the
Servicing Agreement -- Release of Lien; Refinancing of Senior Lien' and
' -- Collection and Liquidation Practices; Loss Mitigation' in this
prospectus supplement.
Limited Obligations
Payments on the home loans, Credit enhancement for the notes includes excess interest,
together with the guaranty overcollateralization and the guaranty insurance policy. None of the
insurance policy, are the depositor, the master servicer or any of their affiliates will have any
sole source of payments on obligation to replace this credit enhancement, or to take any other
your notes. action to maintain any rating of the notes. If any losses are incurred on
the home loans that are not covered by this credit enhancement, the
holders of the notes will bear the risk of these losses.
Liquidity Risks
You may have to hold your A secondary market for your notes may not develop. Even if a secondary
notes to maturity if their market does develop, it may not continue, or it may be illiquid.
marketability is limited. Illiquidity means you may not be able to find a buyer to buy your
securities readily or at prices that will enable you to realize a desired
yield. Illiquidity can have an adverse effect on the market value of your
notes.
SPECIAL YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity on The yield to maturity of your notes will depend on a variety of factors,
your notes will vary including:
depending on the rate of the rate and timing of principal payments on the related home loans,
prepayments. including prepayments, defaults and liquidations, and repurchases due to
breaches of representations or warranties;
the note rate on your note; and
the purchase price you paid for your note.
The rates of prepayments and defaults are two 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
</TABLE>
S-10
<PAGE>
<TABLE>
<S> <C>
slowly than you assumed at the time of purchase, your yield will be lower
than anticipated.
The Class A-I Notes will receive principal payments primarily from the
group I loans. The Class A-II Notes will receive principal payments
primarily from the group II loans. Therefore, the yields on the
Class A-I Notes and Class A-II Notes will be sensitive to the rate and
timing of principal payments on the home loans primarily in their
respective loan groups.
The rate of prepayments on Since mortgagors can generally prepay their home loans at any time, the
the home loans will vary rate and timing of principal payments on the notes are highly uncertain.
depending on future market Generally, when market interest rates increase, mortgagors are less
conditions and other likely to prepay their home loans. This could result in a slower return
factors. 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 note rate. On the other
hand, when market interest rates decrease, borrowers are generally more
likely to prepay their home loans. This could result in a faster return
of principal to 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. These programs may be conducted by the
master servicer or any of its affiliates, the subservicers or an
unaffiliated third party.
55.4% and 57.1% of the group I loans and group II loans, respectively,
provide for payment of a prepayment charge during a specific period.
Prepayment charges may reduce the rate of prepayment on the home loans
until the end of the related prepayment charge period. See 'Description
of the Home Loan Pool -- Home Loan Pool Characteristics' in this
prospectus supplement and 'Maturity and Prepayment Considerations' in the
prospectus.
</TABLE>
S-11
<PAGE>
INTRODUCTION
The trust will be formed under an amended and restated trust agreement, to
be dated as of the closing date, between the depositor and the owner trustee.
The issuer will issue $451,710,000 aggregate principal amount of Home
Loan-Backed Notes, Series 2000-HI2. 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 one class of
Home Loan-Backed Certificates, Series 2000-HI2. 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 definitions for capitalized terms used in this prospectus
supplement under the caption 'Glossary' beginning on page 80 in the prospectus
or on page S-31 under the caption 'Description of the Securities -- 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 approximately $451,711,096 as of the close of business on
the business day prior to the cut-off date. 99.89% 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 and
balloon payment home loans with terms to maturity of approximately five, ten,
fifteen, twenty or twenty-five years with respect to 0.30%, 3.52%, 42.82%,
14.27% and 39.09% 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:
debt consolidation,
home improvement,
the partial refinancing of the related mortgaged property,
to provide a limited amount of cash to the borrower, or
a combination of any of the above.
The mortgagor for each home loan 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, 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.
The home loans were acquired by Residential Funding Corporation, as seller,
under its home equity 125 loan program from unaffiliated sellers as described in
this prospectus supplement and in the prospectus, except in the case of 5.2% of
the home loans which were purchased by the seller through its affiliate
HomeComings Financial Network, Inc. No unaffiliated seller sold more than 19.6%
of the home loans to Residential Funding Corporation. 96.6% and 3.4% of the home
loans will be subserviced by GMAC Mortgage Corporation, an affiliate of the
depositor and of the master servicer, and Master Financial, Inc., a California
corporation, respectively. See 'Description of the Servicing Agreement -- The
Initial Subservicers' in this prospectus supplement.
The home loans were underwritten as described under ' -- Underwriting
Standards.'
The seller will make 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.
S-12
<PAGE>
As to any date, the pool balance will be equal to the aggregate of the
principal balances of all home loans owned by the trust as of that date. The
principal balance of a home loan, other than a liquidated home loan, on any day
is equal to its principal balance as of the cut-off date, minus all collections
credited against the principal balance of the home loan in accordance with the
related mortgage note prior to that day. The principal balance of a liquidated
home loan after final recovery of substantially all of the related liquidation
proceeds which the master servicer reasonably expects to receive will be zero.
PAYMENTS ON THE SIMPLE INTEREST HOME LOANS
2.2% and 1.0% of Group I Loans and Group II Loans, respectively, provide for
simple interest payments and are referred to as the simple interest home loans.
These loans require that each monthly payment consist of an installment of
interest which is calculated according to the simple interest method. This
method calculates interest using the basis of the outstanding principal balance
of the home loan multiplied by the loan rate and further multiplied by a
fraction, the numerator of which is the number of days in the period elapsed
since the preceding payment of interest was made and the denominator of which is
the number of days in the annual period for which interest accrues on the home
loan. As payments are received on the home loans, the amount received is applied
first to interest accrued to the date of payment and the balance is applied to
reduce the unpaid principal balance.
Accordingly, if a mortgagor pays a fixed monthly installment before its
scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be less than it would have been
had the payment been made as scheduled, and the portion of the payment applied
to reduce the unpaid principal balance will be correspondingly greater. However,
the next succeeding payment will result in a greater portion of the payment
allocated to interest if that payment is made on its scheduled due date.
Alternatively, 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 beginning of this 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.
97.8% and 99.0% of the Group I Loans and Group II Loans, respectively, are
actuarial home loans, on which 30 days of interest is owed each month
irrespective of the day on which the payment is received.
BALLOON HOME LOANS
0.5% and 2.7% of the Group I Loans and Group II Loans, respectively, are
balloon home 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 due and payable on the respective scheduled maturity
date. The existence of a balloon payment in most cases requires the related
mortgagor to refinance the mortgage loan or 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 several 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,
the indenture trustee or the owner trustee is obligated to refinance any balloon
home loan. The policy issued by the credit enhancer will provide coverage on any
losses allocable to the notes incurred upon liquidation of a balloon loan
arising out of or in connection with the failure of a mortgagor to make its
balloon payment.
During a temporary period the monthly payments received on some of the home
loans were applied in a manner that reduced the rate of principal amortization.
As a result, 1.2% of the Group I Loans and 0.3% of the Group II Loans may have
an unpaid principal amount on their scheduled maturity dates, assuming no
prepayments, of greater than 1 time and not more than 5 times the related
monthly payment. It is not clear whether the related mortgagor will be legally
obligated to pay the unpaid principal amount.
S-13
<PAGE>
HOME LOAN POOL CHARACTERISTICS
The Group I Loans have the following characteristics:
The Group I Loans will bear interest at the loan rate stated in the related
mortgage note which will be at least 8.10% per annum but no more than
18.38% per annum, with a weighted average loan rate of approximately
13.8289% per annum as of the cut-off date.
None of the Group I Loans were originated prior to May 1997 or will have a
maturity date later than March 2025.
No Group I Loan will have a remaining term to stated maturity as of the
cut-off date of less than 40 months.
The weighted average original term to maturity of the Group I Loans as of
the cut-off date will be approximately 232 months.
The weighted average remaining term to stated maturity of the Group I Loans
as of the cut-off date will be approximately 231 months.
0.3% of the Group I Loans will have original terms to maturity of
approximately five years, with a weighted average remaining term to stated
maturity as of the cut-off date of approximately 59 months.
3.6% of the Group I Loans will have original terms to maturity of
approximately ten years, with a weighted average remaining term to stated
maturity as of the cut-off date of approximately 117 months.
42.9% of the Group I Loans will have original terms to maturity of
approximately fifteen years, with a weighted average remaining term to
stated maturity as of the cut-off date of approximately 178 months.
14.1% of the Group I Loans will have original terms to maturity of
approximately twenty years, with a weighted average remaining term to
stated maturity as of the cut-off date of approximately 238 months.
38.6% of the Group I Loans will have original terms to maturity of
approximately twenty-five years, with a weighted average remaining term to
stated maturity as of the cut-off date of approximately 299 months.
The Group I Loans have principal and interest payable monthly on each due
date specified in the mortgage note.
90.9% of the Group I 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%.
0.5% of the Group I Loans are balloon loans, which have original terms to
maturity of approximately 15 years based on a 30 year amortization
schedule, with a weighted average remaining term to stated maturity as of
the cut-off date of approximately 179 months.
S-14
<PAGE>
Below is a description of some additional characteristics of the Group I
Loans which are given as of the cut-off date unless otherwise indicated. All
percentages of the Group I Loans are approximate percentages unless otherwise
indicated by the cut-off date balance. A percentage of 0.00% represents less
than 0.01% of the cut-off date balance. Unless otherwise specified, all
principal balances of the Group I Loans are as of the cut-off date and are
rounded to the nearest dollar.
LOAN RATES OF THE GROUP I LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
GROUP I LOANS
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
RANGE OF LOAN RATES (%) HOME LOANS BALANCE BALANCE
- ----------------------- ---------- ------- -------
<S> <C> <C> <C>
8.001 to 8.500..................................... 1 $ 9,864 0.00%
8.501 to 9.000..................................... 4 58,715 0.01
9.001 to 9.500..................................... 46 1,116,531 0.26
9.501 to 10.000..................................... 113 2,639,080 0.61
10.001 to 10.500..................................... 156 3,861,050 0.89
10.501 to 11.000..................................... 285 7,406,378 1.71
11.001 to 11.500..................................... 189 5,955,980 1.38
11.501 to 12.000..................................... 576 21,161,460 4.89
12.001 to 12.500..................................... 762 29,231,797 6.76
12.501 to 13.000..................................... 2,063 79,026,969 18.27
13.001 to 13.500..................................... 1,421 53,276,850 12.32
13.501 to 14.000..................................... 2,090 76,173,813 17.61
14.001 to 14.500..................................... 1,077 39,176,737 9.06
14.501 to 15.000..................................... 1,462 50,439,754 11.66
15.001 to 15.500..................................... 281 9,600,324 2.22
15.501 to 16.000..................................... 305 9,397,702 2.17
16.001 to 16.500..................................... 233 7,018,082 1.62
16.501 to 17.000..................................... 701 20,972,830 4.85
17.001 to 17.500..................................... 373 10,977,506 2.54
17.501 to 18.000..................................... 170 4,900,313 1.13
18.001 to 18.500..................................... 4 109,654 0.03
------ ------------ ------
Total............................................ 12,312 $432,511,388 100.00%
------ ------------ ------
------ ------------ ------
</TABLE>
The weighted average loan rate of the Group I Loans will be approximately
13.8289% per annum.
ORIGINAL GROUP I LOAN STATED PRINCIPAL BALANCE
<TABLE>
<CAPTION>
PERCENTAGE OF
GROUP I LOANS
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
RANGE OF ORIGINAL STATED PRINCIPAL BALANCES HOME LOANS BALANCE BALANCE
- ------------------------------------------- ---------- ------- -------
<S> <C> <C> <C>
$ 0.01 to $ 25,000.00............................. 2,564 $ 53,017,463 12.26%
25,000.01 to 50,000.00............................ 8,542 306,088,313 70.77
50,000.01 to 75,000.00............................ 1,199 72,792,318 16.83
75,000.01 to 100,000.00............................ 7 613,293 0.14
------ ------------ ------
Total............................................ 12,312 $432,511,388 100.00%
------ ------------ ------
------ ------------ ------
</TABLE>
The average cut-off date balance of the Group I Loans will be approximately
$35,129.
S-15
<PAGE>
ORIGINAL COMBINED LTV RATIOS OF THE GROUP I LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
GROUP I LOANS
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
RANGE OF COMBINED LTV RATIOS (%) HOME LOANS BALANCE BALANCE
- -------------------------------- ---------- ------- -------
<S> <C> <C> <C>
10.01 to 20.00..................................... 6 $ 137,729 0.03%
20.01 to 30.00..................................... 2 44,174 0.01
30.01 to 40.00..................................... 2 30,363 0.01
40.01 to 50.00..................................... 10 325,040 0.08
50.01 to 60.00..................................... 14 349,807 0.08
60.01 to 70.00..................................... 36 894,029 0.21
70.01 to 75.00..................................... 71 1,798,934 0.42
75.01 to 80.00..................................... 391 10,012,149 2.31
80.01 to 85.00..................................... 81 1,976,811 0.46
85.01 to 90.00..................................... 171 4,425,613 1.02
90.01 to 95.00..................................... 247 6,545,458 1.51
95.01 to 100.00..................................... 445 12,756,715 2.95
100.01 to 105.00..................................... 666 21,401,255 4.95
105.01 to 110.00..................................... 1,245 41,336,899 9.56
110.01 to 115.00..................................... 1,932 67,744,003 15.66
115.01 to 120.00..................................... 2,339 85,541,277 19.78
120.01 to 125.00..................................... 4,645 176,819,062 40.88
125.01 to 130.00..................................... 9 372,071 0.09
------ ------------ ------
Total............................................ 12,312 $432,511,388 100.00%
------ ------------ ------
------ ------------ ------
</TABLE>
The weighted average combined LTV ratio, or LTV ratio in the case of the
Group I Loans secured by first liens on the related mortgaged properties, at
origination of the Group I Loans will be approximately 115.21%.
JUNIOR RATIOS OF THE GROUP I LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
GROUP I LOANS
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
RANGE OF JUNIOR RATIOS (%) HOME LOANS BALANCE BALANCE
- -------------------------- ---------- ------- -------
<S> <C> <C> <C>
5.01 to 10.00...................................... 67 $ 1,007,813 0.23%
10.01 to 15.00...................................... 569 12,122,096 2.81
15.01 to 20.00...................................... 1,906 52,116,530 12.06
20.01 to 25.00...................................... 2,870 93,488,514 21.64
25.01 to 30.00...................................... 2,603 94,820,249 21.95
30.01 to 40.00...................................... 3,126 126,595,288 29.30
40.01 to 50.00...................................... 893 39,380,874 9.12
50.01 to 60.00...................................... 193 9,078,049 2.10
60.01 to 70.00...................................... 58 2,755,923 0.64
70.01 to 80.00...................................... 7 269,109 0.06
80.01 to 90.00...................................... 6 292,086 0.07
90.01 to 100.00...................................... 2 66,787 0.02
------ ------------ ------
Total............................................ 12,300 $431,993,318 100.00%
------ ------------ ------
------ ------------ ------
</TABLE>
The preceding table excludes Group I Loans secured by first liens. A junior
ratio is the ratio of the original amount of a Group I Loan secured by a second
lien to the sum of (1) the original amount of the Group I Loan and (2) the
unpaid principal balance of any senior lien balance at the time of the
origination of the Group I Loans.
The weighted average junior ratio of the Group I Loans by original loan
balance will be approximately 29.15%.
S-16
<PAGE>
REMAINING TERM TO STATED MATURITY OF THE GROUP I LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
GROUP I LOANS
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
RANGE OF MONTHS REMAINING TO STATED MATURITY HOME LOANS BALANCE BALANCE
- -------------------------------------------- ---------- ------- -------
<S> <C> <C> <C>
01 to 096........................................... 70 $ 1,758,084 0.41%
097 to 108........................................... 2 60,325 0.01
109 to 120........................................... 531 15,014,456 3.47
121 to 144........................................... 7 256,014 0.06
145 to 156........................................... 7 267,356 0.06
157 to 168........................................... 27 908,311 0.21
169 to 180........................................... 5,755 186,178,317 43.05
181 to 288........................................... 1,658 61,524,670 14.22
289 to 300........................................... 4,255 166,543,856 38.51
------ ------------ ------
Total............................................ 12,312 $432,511,388 100.00%
------ ------------ ------
------ ------------ ------
</TABLE>
The weighted average remaining term to stated maturity of the Group I Loans
will be approximately 231 months.
YEAR OF ORIGINATION OF THE GROUP I LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
GROUP I LOANS
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
YEAR OF ORIGINATION HOME LOANS BALANCE BALANCE
- ------------------- ---------- ------- -------
<S> <C> <C> <C>
1997................................................. 8 $ 308,076 0.07%
1998................................................. 24 975,180 0.23
1999................................................. 6,773 237,243,505 54.85
2000................................................. 5,507 193,984,627 44.85
------ ------------ ------
Total............................................ 12,312 $432,511,388 100.00%
------ ------------ ------
------ ------------ ------
</TABLE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES OF THE GROUP I LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
GROUP I LOANS
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
STATE HOME LOANS BALANCE BALANCE
- ----- ---------- ------- -------
<S> <C> <C> <C>
California........................................... 1,285 $ 48,901,377 11.31%
Florida.............................................. 836 28,400,125 6.57
Maryland............................................. 708 25,790,461 5.96
Virginia............................................. 607 22,269,968 5.15
Pennsylvania......................................... 621 21,263,515 4.92
Ohio................................................. 519 17,447,214 4.03
Georgia.............................................. 495 17,236,987 3.99
North Carolina....................................... 447 14,982,241 3.46
Indiana.............................................. 439 14,859,829 3.44
Arizona.............................................. 420 14,210,649 3.29
Illinois............................................. 393 14,166,326 3.28
Colorado............................................. 351 13,402,606 3.10
New York............................................. 347 12,018,290 2.78
Michigan............................................. 321 11,358,174 2.63
Missouri............................................. 332 10,684,818 2.47
Alabama.............................................. 309 10,385,693 2.40
Washington........................................... 274 9,901,203 2.29
Other................................................ 3,608 125,231,913 28.95
------ ------------ ------
Total............................................ 12,312 $432,511,388 100.00%
------ ------------ ------
------ ------------ ------
</TABLE>
The reference to 'Other' in the preceding table includes states and the
District of Columbia that contain mortgaged properties for less than 2% of the
Group I Loans.
S-17
<PAGE>
MORTGAGED PROPERTY TYPES OF THE GROUP I LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
GROUP I LOANS
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
PROPERTY TYPE HOME LOANS BALANCE BALANCE
- ------------- ---------- ------- -------
<S> <C> <C> <C>
Single Family Residence.............................. 11,163 $391,738,839 90.57%
PUD Detached......................................... 429 17,323,290 4.01
Condominium.......................................... 457 13,430,098 3.11
PUD Attached......................................... 129 5,121,145 1.18
Townhouse/Rowhouse Attached.......................... 70 2,565,130 0.59
Multifamily (2-4 Units).............................. 46 1,714,679 0.40
Townhouse/Rowhouse Detached.......................... 15 446,667 0.10
Modular.............................................. 2 100,665 0.02
Site Condominium..................................... 1 70,874 0.02
------ ------------ ------
Total............................................ 12,312 $432,511,388 100.00%
------ ------------ ------
------ ------------ ------
</TABLE>
LOAN PURPOSE OF THE GROUP I LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
GROUP I LOANS
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
PURPOSE HOME LOANS BALANCE BALANCE
- ------- ---------- ------- -------
<S> <C> <C> <C>
Debt Consolidation................................... 10,483 $373,427,892 86.34%
Cash................................................. 1,217 39,323,825 9.09
Home Improvement/Debt Consolidation.................. 377 12,853,427 2.97
Convenience.......................................... 74 1,949,978 0.45
Rate/Term Refinance.................................. 44 1,519,544 0.35
Home Improvement..................................... 13 433,219 0.10
Education............................................ 3 96,946 0.02
Purchase Money....................................... 2 39,442 0.01
Other................................................ 99 2,867,115 0.66
------ ------------ ------
Total............................................ 12,312 $432,511,388 100.00%
------ ------------ ------
------ ------------ ------
</TABLE>
LIEN PRIORITY OF THE GROUP I LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
GROUP I LOANS
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
LIEN PRIORITY HOME LOANS BALANCE BALANCE
- ------------- ---------- ------- -------
<S> <C> <C> <C>
First Lien........................................... 12 $ 518,070 0.12%
Second Lien.......................................... 12,300 431,993,318 99.88
------ ------------ ------
Total............................................ 12,312 $432,511,388 100.00%
------ ------------ ------
------ ------------ ------
</TABLE>
S-18
<PAGE>
DEBT-TO-INCOME RATIOS AS OF DATE OF ORIGINATION OF THE GROUP I LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
GROUP I LOANS
RANGE OF DEBT-TO-INCOME RATIOS AS OF DATE OF NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
ORIGINATION OF THE GROUP I LOANS (%) HOME LOANS BALANCE BALANCE
- ------------------------------------ ---------- ------- -------
<S> <C> <C> <C>
5.01 to 10.00....................................... 2 $ 31,959 0.01%
10.01 to 15.00....................................... 9 232,011 0.05
15.01 to 20.00....................................... 82 2,507,133 0.58
20.01 to 25.00....................................... 359 11,472,310 2.65
25.01 to 30.00....................................... 1,019 33,554,224 7.76
30.01 to 35.00....................................... 1,925 63,946,507 14.78
35.01 to 40.00....................................... 2,879 97,689,026 22.59
40.01 to 45.00....................................... 4,334 151,499,261 35.03
45.01 to 50.00....................................... 1,703 71,578,957 16.55
------ ------------ ------
Total............................................ 12,312 $432,511,388 100.00%
------ ------------ ------
------ ------------ ------
</TABLE>
The weighted average debt-to-income ratio as of the date of origination of
the Group I Loans will be approximately 39.65%.
The Group II Loans have the following characteristics:
The Group II Loans will bear interest at the loan rate stated in the
related mortgage note which will be at least 9.00% per annum but no more
than 17.99% per annum, with a weighted average loan rate of approximately
13.3048% per annum as of the cut-off date.
None of the Group II Loans were originated prior to June 1998 or will have
a maturity date later than March 2025.
No Group II Loan will have a remaining term to stated maturity as of the
cut-off date of less than 118 months.
The weighted average original term to maturity of the Group II Loans as of
the cut-off date will be approximately 249 months.
The weighted average remaining term to stated maturity of the Group II
Loans as of the cut-off date will be approximately 247 months.
2.2% of the Group II Loans will have original terms to maturity of
approximately ten years, with a weighted average remaining term to stated
maturity as of the cut-off date of approximately 119 months.
27.6% of the Group II Loans will have original terms to maturity of
approximately fifteen years, with a weighted average remaining term to
stated maturity as of the cut-off date of approximately 178 months.
18.3% of the Group II Loans will have original terms to maturity of
approximately twenty years, with a weighted average remaining term to
stated maturity as of the cut-off date of approximately 238 months.
49.3% of the Group II Loans will have original terms to maturity of
approximately twenty-five years, with a weighted average remaining term to
stated maturity as of the cut-off date of approximately 299 months.
The Group II Loans have principal and interest payable monthly on each due
date specified in the mortgage note.
89.9% of the Group II 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%.
2.7% of the Group II Loans are balloon loans with a weighted average
remaining term to stated maturity as of the cut-off date of approximately
177 months.
S-19
<PAGE>
Below is a description of some additional characteristics of the Group II
Loans which are given as of the cut-off date unless otherwise indicated. All
percentages of the Group II Loans are approximate percentages unless otherwise
indicated by the cut-off date balance. A percentage of 0.00% represents less
than 0.01% of the cut-off date balance. Unless otherwise specified, all
principal balances of the Group II Loans are as of the cut-off date and are
rounded to the nearest dollar.
LOAN RATES OF THE GROUP II LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
GROUP II LOANS
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
RANGE OF LOAN RATES (%) HOME LOANS BALANCE BALANCE
- ----------------------- ---------- ------- -------
<S> <C> <C> <C>
8.501 to 9.000...................................... 1 $ 29,921 0.16%
9.501 to 10.000...................................... 5 143,000 0.74
10.001 to 10.500...................................... 1 15,963 0.08
10.501 to 11.000...................................... 3 172,511 0.90
11.001 to 11.500...................................... 7 508,126 2.65
11.501 to 12.000...................................... 29 1,728,623 9.00
12.001 to 12.500...................................... 37 2,232,972 11.63
12.501 to 13.000...................................... 75 4,379,013 22.81
13.001 to 13.500...................................... 43 2,531,207 13.18
13.501 to 14.000...................................... 68 3,695,447 19.25
14.001 to 14.500...................................... 32 1,649,221 8.59
14.501 to 15.000...................................... 27 1,231,961 6.42
15.001 to 15.500...................................... 7 296,451 1.54
15.501 to 16.000...................................... 3 92,851 0.48
16.001 to 16.500...................................... 1 34,992 0.18
16.501 to 17.000...................................... 8 315,596 1.64
17.001 to 17.500...................................... 1 29,373 0.15
17.501 to 18.000...................................... 3 112,481 0.59
--- ----------- ------
Total............................................. 351 $19,199,708 100.00%
--- ----------- ------
--- ----------- ------
</TABLE>
The weighted average loan rate of the Group II Loans will be approximately
13.3048% per annum.
ORIGINAL GROUP II LOAN STATED PRINCIPAL BALANCE
<TABLE>
<CAPTION>
PERCENTAGE OF
GROUP II LOANS
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
RANGE OF ORIGINAL STATED PRINCIPAL BALANCES HOME LOANS BALANCE BALANCE
- ------------------------------------------- ---------- ------- -------
<S> <C> <C> <C>
$ 0.001 to $ 25,000.00.............................. 13 $ 288,780 1.50%
25,000.01 to 50,000.00............................. 148 6,264,095 32.63
50,000.01 to 75,000.00............................. 178 11,569,963 60.26
75,000.01 to 100,000.00............................. 12 1,076,869 5.61
--- ----------- ------
Total............................................. 351 $19,199,708 100.00%
--- ----------- ------
--- ----------- ------
</TABLE>
The average cut-off date balance of the Group II Loans will be approximately
$54,700.
S-20
<PAGE>
ORIGINAL COMBINED LTV RATIOS OF THE GROUP II LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
GROUP II LOANS
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
RANGE OF COMBINED LTV RATIOS (%) HOME LOANS BALANCE BALANCE
- -------------------------------- ---------- ------- -------
<S> <C> <C> <C>
60.01 to 70.00...................................... 1 $ 25,000 0.13%
70.01 to 75.00...................................... 2 47,940 0.25
75.01 to 80.00...................................... 3 123,908 0.65
80.01 to 85.00...................................... 1 20,000 0.10
85.01 to 90.00...................................... 3 105,934 0.55
90.01 to 95.00...................................... 6 274,279 1.43
95.01 to 100.00...................................... 22 1,349,251 7.03
100.01 to 105.00...................................... 43 2,073,903 10.80
105.01 to 110.00...................................... 71 3,501,174 18.24
110.01 to 115.00...................................... 79 4,557,146 23.74
115.01 to 120.00...................................... 54 3,016,143 15.71
120.01 to 125.00...................................... 66 4,105,030 21.38
--- ----------- ------
Total............................................. 351 $19,199,708 100.00%
--- ----------- ------
--- ----------- ------
</TABLE>
The weighted average combined LTV ratio, or LTV ratio in the case of the
Group II Loans secured by first liens on the related mortgaged properties, at
origination of the Group II Loans will be approximately 112.34%.
JUNIOR RATIOS OF THE GROUP II LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
GROUP II LOANS
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
RANGE OF JUNIOR RATIOS (%) HOME LOANS BALANCE BALANCE
- -------------------------- ---------- ------- -------
<S> <C> <C> <C>
5.01 to 10.00........................................ 19 $ 506,277 2.64%
10.01 to 15.00........................................ 62 2,408,878 12.55
15.01 to 20.00........................................ 117 6,215,502 32.37
20.01 to 25.00........................................ 96 5,986,746 31.18
25.01 to 30.00........................................ 45 3,229,930 16.82
30.01 to 40.00........................................ 12 852,375 4.44
--- ----------- ------
Total............................................. 351 $19,199,708 100.00%
--- ----------- ------
--- ----------- ------
</TABLE>
The preceding table excludes Group II Loans secured by first liens. A junior
ratio is the ratio of the original amount of a Group II Loan secured by a second
lien to the sum of (1) the original amount of the Group II Loan and (2) the
unpaid principal balance of any senior lien balance at the time of the
origination of the Group II Loans.
The weighted average junior ratio of the Group II Loans by original loan
balance will be approximately 20.87%.
REMAINING TERM TO STATED MATURITY OF THE GROUP II LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
GROUP II LOANS
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
RANGE OF MONTHS REMAINING TO STATED MATURITY HOME LOANS BALANCE BALANCE
- -------------------------------------------- ---------- ------- -------
<S> <C> <C> <C>
109 to 120............................................ 10 $ 413,729 2.15%
121 to 144............................................ 1 20,324 0.11
157 to 168............................................ 1 71,876 0.37
169 to 180............................................ 109 5,718,129 29.78
181 to 288............................................ 61 3,508,361 18.27
289 to 300............................................ 169 9,467,289 49.31
--- ----------- ------
Total............................................. 351 $19,199,708 100.00%
--- ----------- ------
--- ----------- ------
</TABLE>
The weighted average remaining term to stated maturity of the Group II Loans
will be approximately 247 months.
S-21
<PAGE>
YEAR OF ORIGINATION OF THE GROUP II LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
GROUP II LOANS
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
YEAR OF ORIGINATION HOME LOANS BALANCE BALANCE
- ------------------- ---------- ------- -------
<S> <C> <C> <C>
1998.................................................. 2 $ 145,972 0.76%
1999.................................................. 202 10,808,575 56.30
2000.................................................. 147 8,245,161 42.94
--- ----------- ------
Total............................................. 351 $19,199,708 100.00%
--- ----------- ------
--- ----------- ------
</TABLE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES OF THE GROUP II LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
GROUP II LOANS
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
STATE HOME LOANS BALANCE BALANCE
- ----- ---------- ------- -------
<S> <C> <C> <C>
California............................................ 132 $ 7,306,693 38.06%
Maryland.............................................. 36 1,967,606 10.25
Virginia.............................................. 26 1,522,294 7.93
Colorado.............................................. 15 907,808 4.73
Florida............................................... 13 610,610 3.18
Washington............................................ 10 538,369 2.80
Georgia............................................... 9 511,320 2.66
Arizona............................................... 9 480,182 2.50
Illinois.............................................. 9 402,321 2.10
New Jersey............................................ 7 389,402 2.03
Other................................................. 85 4,563,105 23.77
--- ----------- ------
Total............................................. 351 $19,199,708 100.00%
--- ----------- ------
--- ----------- ------
</TABLE>
The reference to 'Other' in the preceding table includes states and the
District of Columbia that contain mortgaged properties for less than 2% of the
Group II Loans.
MORTGAGED PROPERTY TYPES OF THE GROUP II LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
GROUP II LOANS
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
PROPERTY TYPE HOME LOANS BALANCE BALANCE
- ------------- ---------- ------- -------
<S> <C> <C> <C>
Single Family Residence............................... 281 $15,230,638 79.33%
PUD Detached.......................................... 48 2,752,261 14.33
PUD Attached.......................................... 8 489,534 2.55
Multifamily (2-4 Units)............................... 5 343,414 1.79
Condominium........................................... 7 268,388 1.40
Townhouse/Rowhouse Attached........................... 2 115,473 0.60
--- ----------- ------
Total............................................. 351 $19,199,708 100.00%
--- ----------- ------
--- ----------- ------
</TABLE>
S-22
<PAGE>
LOAN PURPOSE OF THE GROUP II LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
GROUP II LOANS
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
PURPOSE HOME LOANS BALANCE BALANCE
- ------- ---------- ------- -------
<S> <C> <C> <C>
Debt Consolidation.................................... 295 $16,132,164 84.02%
Cash.................................................. 35 1,954,267 10.18
Home Improvement/Debt Consolidation................... 9 446,033 2.32
Home Improvement...................................... 4 276,209 1.44
Rate/Term Refinance................................... 2 119,975 0.62
Education............................................. 1 64,977 0.34
Purchase Money........................................ 1 30,000 0.16
Other................................................. 4 176,083 0.92
--- ----------- ------
Total............................................. 351 $19,199,708 100.00%
--- ----------- ------
--- ----------- ------
</TABLE>
LIEN PRIORITY OF THE GROUP II LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
GROUP II LOANS
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
LIEN PRIORITY HOME LOANS BALANCE BALANCE
- ------------- ---------- ------- -------
<S> <C> <C> <C>
Second Lien........................................... 351 $19,199,708 100.00%
--- ----------- ------
Total............................................. 351 $19,199,708 100.00%
--- ----------- ------
--- ----------- ------
</TABLE>
DEBT-TO-INCOME RATIOS AS OF DATE OF ORIGINATION OF THE GROUP II LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
GROUP II LOANS
RANGE OF DEBT-TO-INCOME RATIOS AS OF DATE OF NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
ORIGINATION OF THE GROUP II LOANS (%) HOME LOANS BALANCE BALANCE
- ------------------------------------- ---------- ------- -------
<S> <C> <C> <C>
15.01 to 20.00........................................ 2 $ 93,437 0.49%
20.01 to 25.00........................................ 5 295,761 1.54
25.01 to 30.00........................................ 21 1,115,393 5.81
30.01 to 35.00........................................ 40 2,150,701 11.20
35.01 to 40.00........................................ 62 3,308,529 17.23
40.01 to 45.00........................................ 121 6,539,739 34.06
45.01 to 50.00........................................ 100 5,696,148 29.67
--- ----------- ------
Total............................................. 351 $19,199,708 100.00%
--- ----------- ------
--- ----------- ------
</TABLE>
The weighted average debt-to-income ratio as of the date of origination of
the Group II Loans will be approximately 41.46%.
As to each home loan, the combined LTV ratio, in most cases, will be the
ratio, expressed as a percentage, of (1) the sum of (A) the original principal
balance of the home loan, and (B) any outstanding principal balance, at
origination of the home loan, of all other mortgage loans, if any, secured by
senior or subordinate liens on the related mortgaged property, to (2) the
appraised value, or, if permitted by the origination guidelines of Residential
Funding Corporation, a statistical valuation or 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 49.9% and 6.2% of the Group I
Loans and Group II Loans, respectively, 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:
S-23
<PAGE>
the use of leasehold estates for residential properties is an accepted
practice in the area where the related mortgaged property is located;
residential property in the area consisting of leasehold estates is readily
marketable;
the lease is recorded and no party is in any way in breach of any provision
of the lease;
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
the remaining term of the lease does not terminate less than five years
after the maturity date of the home loan.
Approximately 55.4% and 57.1% of the Group I Loans and Group II Loans,
respectively, provide for payment of a prepayment charge, if these loans prepay
within a specified time period. The prepayment charge, in most cases, is the
maximum amount permitted under applicable state law. 50.1% of the Group I Loans
and 54.7% of the Group II Loans provide for payment of a prepayment charge for
full prepayments made within approximately three years of the origination of
such mortgage loans in an amount calculated in accordance with the terms of the
related mortgage note. However, some state laws restrict the imposition of
prepayment charges even when the mortgage loans expressly provide for the
collection of those charges. Although the Alternative Mortgage Transactions
Parity Act permits the collection of prepayment charges in connection with some
types of eligible mortgage loans preempting any contrary state law prohibitions,
some states may not recognize the preemptive authority of the Parity Act. As a
result, it is possible that prepayment charges may not be collected even on home
loans that provide for the payment of these charges. The master servicer will be
entitled to all prepayment charges and late payment charges received on the home
loans and these amounts will not be available for payment on the notes.
As of the cut-off date, no home loan will be 30 days or more delinquent in
payment of principal and interest. As used in this prospectus supplement, a home
loan is considered to be '30 to 59 days' or '30 or more days' delinquent when a
payment due on any due date remains unpaid as of the close of business on the
next following monthly due date. However, since the determination as to whether
a home loan falls into this category is made as of the close of business on the
last business day of each month, a home loan with a payment due on October 1
that remained unpaid as of the close of business on October 31 would still be
considered current as of October 31. If that payment remained unpaid as of the
close of business on November 30, 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, 60.3% and 39.6% of the Group I Loans and Group II
Loans, respectively, were High Cost Loans. The High Cost Loans may have been
originated with points and fees substantially in excess of 8% of their related
loan amount. Purchasers or assignees of any High Cost Loan, including the trust,
could be liable under federal law for all claims and subject to all defenses
that the borrower could assert against the originator of a High Cost Loan.
Remedies available to the borrower include monetary penalties, as well as
recission rights if appropriate disclosures were not given as required. The
maximum damages that may be recovered under these provisions from an assignee,
including the trust, is the remaining amount of indebtedness plus the total
amount paid by the borrower in connection with the home loan. 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.
In addition to federal law, some states have enacted, or may enact, laws or
regulations that prohibit inclusion of some provisions in home loans that have
interest rates or origination costs in excess of prescribed levels, and require
that borrowers be given certain disclosures prior to the consummation of the
home loans. An originators' failure to comply with these laws could subject the
trust fund (and other assignees of the home loans) to monetary penalties and
could result in the borrowers rescinding the home loans against either the trust
fund or subsequent holders of the home loans.
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.
S-24
<PAGE>
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. 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, 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 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 tables provide 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 SCORES AS OF THE DATE OF ORIGINATION OF THE GROUP I LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
GROUP I LOANS
RANGE OF CREDIT SCORES AS OF THE DATE OF NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
ORIGINATION OF THE GROUP I HOME LOANS HOME LOANS BALANCE BALANCE
- ------------------------------------- ---------- ------- -------
<S> <C> <C> <C>
620 to 639........................................... 9 $ 272,424 0.06%
640 to 659........................................... 1,469 43,744,155 10.11
660 to 679........................................... 3,240 113,163,512 26.16
680 to 699........................................... 3,148 111,704,839 25.83
700 to 719........................................... 2,384 89,638,847 20.73
720 to 739........................................... 1,276 46,829,972 10.83
740 to 759........................................... 570 19,816,515 4.58
760 to 779........................................... 171 5,866,155 1.36
780 to 799........................................... 45 1,474,968 0.34
------ ------------ ------
Total............................................ 12,312 $432,511,388 100.00%
------ ------------ ------
------ ------------ ------
</TABLE>
CREDIT SCORES AS OF THE DATE OF ORIGINATION OF THE GROUP II LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
GROUP I LOANS
RANGE OF CREDIT SCORES AS OF THE DATE OF NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
ORIGINATION OF THE GROUP II HOME LOANS HOME LOANS BALANCE BALANCE
- -------------------------------------- ---------- ------- -------
<S> <C> <C> <C>
640 to 659............................................ 9 $ 349,809 1.82%
660 to 679............................................ 74 3,439,811 17.92
680 to 699............................................ 113 6,054,798 31.54
700 to 719............................................ 75 4,639,773 24.17
720 to 739............................................ 44 2,729,145 14.21
740 to 759............................................ 23 1,247,314 6.50
760 to 779............................................ 9 540,159 2.81
780 to 799............................................ 3 148,943 0.78
800 or greater........................................ 1 49,956 0.26
--- ----------- ------
Total............................................. 351 $19,199,708 100.00%
--- ----------- ------
--- ----------- ------
</TABLE>
S-25
<PAGE>
UNDERWRITING STANDARDS
The following is a brief description of the various underwriting standards
and procedures applicable to the home loans.
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 and 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 50%. 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.
REPRESENTATIONS AND WARRANTIES
Each person that sold home loans to Residential Funding Corporation made
limited representations and warranties regarding the related home loans as of
the date they are purchased by Residential Funding Corporation. However, those
representations and warranties will not be assigned to the owner trustee or the
indenture trustee for the benefit of the holders of the securities, so a breach
of those representations and warranties will not be enforceable on behalf of the
trust.
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 business day prior to 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
S-26
<PAGE>
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 2000-HI2 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:
acquiring and holding the home loans and the other assets of the issuer and
related proceeds,
issuing the notes and the certificates,
making payments on the notes and the certificates, and
engaging in other activities that are necessary, suitable or convenient to
accomplish the foregoing.
The issuer's principal offices are in Wilmington, Delaware, in care of
Wilmington Trust Company, as owner trustee, at Rodney Square North, 1100 North
Market Street, Wilmington, Delaware 19890-0001.
THE OWNER TRUSTEE
Wilmington Trust Company is the owner trustee under the trust agreement. The
owner trustee is a Delaware banking corporation and its principal offices are
located at Rodney Square North, 1100 North Market Street, Wilmington, Delaware
19890-0001.
Neither the owner trustee nor any director, officer or employee of the owner
trustee will be under any liability to the issuer or the securityholders for any
action taken or for refraining from the taking of any action in good faith under
the trust agreement or for errors in judgment. However, none of the owner
trustee, 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
The Chase Manhattan Bank is the indenture trustee under the indenture. The
principal offices of the indenture trustee are located in New York, New York.
THE CREDIT ENHANCER
The following information has been supplied by Ambac Assurance Corporation,
the credit enhancer, for inclusion in this prospectus supplement. No
representation is made by the depositor, the master servicer, the underwriters
or any of their affiliates as to the accuracy or completeness of the
information.
The credit enhancer is a Wisconsin-domiciled stock insurance corporation
regulated by the Office of the Commissioner of Insurance of the State of
Wisconsin and licensed to do business in 50 states, the District of Columbia,
the Commonwealth of Puerto Rico and the Territory of Guam. The credit enhancer
primarily insures newly-issued municipal and structured finance obligations. The
credit enhancer is a wholly owned subsidiary of Ambac Financial Group, Inc.
(formerly, AMBAC Inc.), a 100% publicly-held company. Moody's, Standard & Poor's
and Fitch have each assigned a triple-A financial strength rating to the credit
enhancer.
The consolidated financial statements of the credit enhancer and
subsidiaries as of December 31, 1999 and December 31, 1998 and for each of the
years in the three-year period ended December 31, 1999 prepared in accordance
with generally accepted accounting principles, included in the Current Report on
Form 8-K of Ambac Financial Group, Inc. (which was filed with the Commission on
March 13, 2000; Commission File Number 1-10777), 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
S-27
<PAGE>
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 subsidiaries included in
documents filed by Ambac Financial Group, Inc. with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the 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 capitalization of the credit enhancer as
of December 31, 1998 and December 31, 1999, in conformity with generally
accepted accounting principles.
AMBAC ASSURANCE CORPORATION
CAPITALIZATION TABLE
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
---- ----
<S> <C> <C>
Unearned premiums........................................... $1,303 $1,442
Other liabilities........................................... 548 524
------ ------
Total liabilities....................................... 1,851 1,966
------ ------
Stockholder's equity:
Common Stock............................................ 82 82
Additional paid-in capital.............................. 541 752
Accumulated other comprehensive income (loss)........... 138 (92)
Retained earnings....................................... 1,405 1,674
------ ------
Total stockholder's equity.............................. 2,166 2,416
------ ------
Total liabilities and stockholder's equity.............. $4,017 $4,382
------ ------
------ ------
</TABLE>
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 by reference and copies of the credit enhancer's annual
statement for the year ended December 31, 1999 prepared in accordance with
statutory accounting standards are available, without charge, from the credit
enhancer. The address of the credit enhancer's administrative offices and its
telephone number are One State Street Plaza, 19th Floor, New York, New York
10004 and (212) 668-0340.
The credit enhancer makes no representation regarding the notes or the
advisability of investing in the notes and makes no representation regarding,
nor has it participated in the preparation of, this prospectus supplement other
than the information supplied by the credit enhancer and presented under the
headings 'The Credit Enhancer' and 'Description of the Policy' in this
prospectus supplement and in the financial statements incorporated in this
prospectus supplement by reference.
S-28
<PAGE>
DESCRIPTION OF THE SECURITIES
GENERAL
The notes will be issued under 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:
the home loans;
all amounts on deposit in the Payment Account;
the policy; and
proceeds of the above.
The Class A-I Notes correspond primarily to the Group I Loans and the
Class A-II Notes correspond primarily to the Group II Loans. The Loan Groups are
described in the tables shown under 'Description of the Home Loan Pool -- Home
Loan Pool Characteristics.'
BOOK-ENTRY NOTES
The notes will initially be issued as book-entry notes. Note owners in the
United States may elect to hold their notes through the Depository Trust
Company, or DTC, if they are participants in that system, or indirectly through
organizations which are participants in that system. Noteholders in Europe may
elect to hold their notes through Euroclear or Clearstream Banking, societe
anonyme, formerly known as Cedelbank SA, or Clearstream, if they are
participants of these systems, or indirectly through organizations which are
participants in these 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.
Clearstream and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in Clearstream'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 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 Clearstream 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
S-29
<PAGE>
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 DTC's 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
Clearstream or Euroclear will be credited to the cash accounts of Clearstream
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 notes are
credited, to the extent that the actions are taken on behalf of financial
intermediaries whose holdings include the book-entry notes. Clearstream 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 Clearstream
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 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 representing at least a
majority of the aggregate note balance of the notes advise DTC through the
financial intermediaries and the DTC participants in writing that the
continuation of a book-entry system through DTC, or a successor 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, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of notes among participants of DTC,
Clearstream 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.
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 & Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to the beneficial ownership interests.
For additional information regarding DTC, Clearstream, Euroclear and the
notes, see Annex I to this prospectus supplement and 'Description of the
Notes -- Form of Notes' in the prospectus.
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GLOSSARY OF TERMS
The following terms are given the meanings shown below to help describe the
cash flows on the notes:
COLLECTION PERIOD -- As to any payment date, the calendar month preceding
the month of that payment date.
EXCESS LOSS AMOUNT -- As of any payment date, the sum of the following for
the related Collection Period:
any Liquidation Loss Amounts, other than those described in the next three
bullet points, which, when added to the aggregate of the Liquidation Loss
Amounts for all preceding Collection Periods, exceed $144,547,551;
any Special Hazard Losses in excess of the Special Hazard Amount;
any Fraud Losses in excess of the Fraud Loss Amount; and
any Extraordinary Losses.
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 on a pro
rata basis to the notes based on their outstanding note balances.
FRAUD LOSS AMOUNT -- Initially, $22,585,555. As of any date of determination
after the cut-off date, the Fraud Loss Amount shall equal:
prior to the first anniversary of the cut-off date, an amount equal to 5%
of the aggregate of the principal balances of the home loans as of the
cut-off date minus the aggregate of any Liquidation Loss Amounts on the
home loans due to Fraud Losses up to the date of determination;
from the first to the second anniversary of the cut-off date, an amount
equal to (1) the lesser of (a) the Fraud Loss Amount as of the most recent
anniversary of the cut-off date and (b) 3% of the aggregate of the
principal balances of the home loans as of the most recent anniversary of
the cut-off date minus (2) the aggregate of any Liquidation Loss Amounts on
the home loans due to Fraud Losses since the most recent anniversary of the
cut-off date up to the date of determination; and
from the second to the fifth anniversary of the cut-off date, an amount
equal to (1) the lesser of (a) the Fraud Loss Amount as of the most recent
anniversary of the cut-off date and (b) 2% of the aggregate of the
principal balances of the home loans as of the most recent anniversary of
the cut-off date minus (2) the aggregate of any Liquidation Loss Amounts on
the home loans due to Fraud Losses since the most recent anniversary of the
cut-off date up to the date of determination. On and after the fifth
anniversary of the cut-off date, the Fraud Loss Amount shall be zero.
GROUP I LOANS -- The home loans that correspond primarily to the Class A-I
Notes as further described in 'Description of the Home Loan Pool -- Home Loan
Pool Characteristics' in this prospectus supplement.
GROUP II LOANS -- The home loans that correspond primarily to the
Class A-II Notes as further described in 'Description of the Home Loan
Pool -- Home Loan Pool Characteristics' in this prospectus supplement.
INTEREST COLLECTIONS -- As to any payment date, an amount equal to the sum
of:
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 expenses of the trust;
the 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
the interest portion of the repurchase price for any deleted home loans and
the cash purchase price paid in connection with any optional purchase of
the home loans by the master servicer.
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.
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LIQUIDATION LOSS AMOUNT -- As to any Liquidated Home Loan, the unrecovered
principal balance of the Liquidated Home Loan and any of its unpaid accrued
interest at the end of the Collection Period in which the home loan became a
Liquidated Home Loan, after giving effect to the Net Liquidation Proceeds
allocable to the principal balance. 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 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 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 -- 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. The Outstanding Reserve Amount will be
increased by distributions of the Reserve Increase Amount, if any, to the notes.
On each payment date, the Outstanding Reserve Amount, as in effect immediately
prior to the payment date, if any, shall be deemed to be reduced by an amount
equal to any Liquidation Loss Amounts, other than any Excess Loss Amounts, for
the payment date, except to the extent that Liquidation Loss Amounts were
covered on the payment date by a Liquidation Loss Distribution Amount, which
amount would be 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.
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, the
total 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.
PRINCIPAL COLLECTIONS -- As to any payment date, an amount equal to the sum
of:
the principal portion of all scheduled monthly payments on the home loans
received in the related Collection Period; and
all 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.
RESERVE AMOUNT TARGET -- As to any payment date prior to the Stepdown Date,
an amount equal to 2.00% of the aggregate cut-off date pool 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) 4.00% of the
aggregate pool balance after applying payments received in the related
Collection Period, but not lower than $2,258,555, which is 0.50% of the
aggregate cut-off date pool balance. However, any scheduled reduction to the
Reserve Amount
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Target described in the preceding sentence shall not be made as of any payment
date unless certain loss and delinquency tests set forth in the indenture are
met.
In addition, the Reserve Amount Target may be reduced with the prior written
consent of the credit enhancer and notice to the rating agencies.
RESERVE INCREASE AMOUNT -- As to any payment date, other than the payment
date in April 2000, the amount necessary to bring the Outstanding Reserve Amount
up to the Reserve Amount Target, and as to the payment date in April 2000, an
amount equal to zero.
SPECIAL HAZARD AMOUNT -- Initially, $4,517,111. 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:
the payment date in April 2003, and
the payment date on which the pool balance after applying payments received
in the related Collection Period is less than 50% of the aggregate cut-off
date pool balance.
PAYMENTS
Payments on the notes will be made by the indenture trustee or the paying
agent beginning in April 2000 on the 25th day of each month or the following
business day if the 25th is not a business day. Each of these dates 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 last day of the
prior calendar month. See 'Description of the Notes -- Payments' in the
prospectus. Payments will be made by check or money order mailed to the address
of the person which appears on the security register, or upon the request of a
holder owning notes having denominations aggregating at least $1,000,000, by
wire transfer or otherwise. In the case of book-entry notes, payments will be
made by wire transfer to DTC or its nominee in amounts calculated on the
determination date as described in this prospectus supplement. 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 in
the State of California, Minnesota, New York, Pennsylvania, Illinois or Delaware
are required or authorized by law to be closed.
INTEREST PAYMENTS ON THE NOTES
Interest payments will be made on the notes on each payment date at the
related note rate. The note rate for the Class A-I-1 Notes for any accrual
period will be the lesser of (a) LIBOR plus 0.12% and (b) 10.00% per annum. The
note rate for the Class A-I-2 Notes, Class A-I-3 Notes, Class A-I-4 Notes,
Class A-I-5 Notes and Class A-II Notes will be 7.62%, 7.90%, 8.28%, 8.35% and
8.12% per annum, respectively; provided, however, that the note rate on the
Class A-I-5 Notes and Class A-II Notes will increase by 0.50% per annum on the
payment date following the first payment date on which the master servicer can
exercise its option to purchase the home loans from the trust as described in
' -- Maturity and Optional Redemption' herein.
Interest on the notes relating to any payment date will accrue for the
related accrual period on the note balance. The accrual period for the
Class A-I-1 Notes shall be (a) as to the payment date in April 2000, the period
commencing on the closing date and ending on the day preceding the payment date
in April 2000, and (b) as to any payment date after the payment date in April
2000, the period commencing on the payment date in the month immediately
preceding the month in which that payment date occurs and ending on the day
preceding that payment date. The accrual period for any payment date for the
Class A-I-2 Notes, Class A-I-3 Notes, Class A-I-4 Notes, Class A-I-5 Notes and
Class A-II Notes will be the calendar month preceding the month in which the
related payment date occurs. Interest for the Class A-I-1 Notes will be based on
the actual number of days in the related accrual period and a 360-day year.
Interest for the Class A-I-2 Notes, Class A-I-3 Notes, Class A-I-4 Notes,
Class A-I-5 Notes and Class A-II Notes will be based on a 30-day month and a
360-day year.
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Interest payments on the notes will be funded from payments on the home loans
and, if necessary, from draws on the policy.
DETERMINATION OF LIBOR
The note rate on the Class A-I-1 Notes for any accrual period, including the
initial accrual period, will be determined on the second LIBOR business day
prior to the first day of that accrual period -- the LIBOR rate adjustment date.
On each LIBOR rate adjustment date, LIBOR shall be established by the
indenture trustee and as to any accrual period, LIBOR will equal the rate for
United States dollar deposits for one month which appears on the Dow Jones
Telerate Screen Page 3750 as of 11:00 A.M., London time, on that LIBOR rate
adjustment date. Telerate Screen Page 3750 means the display designated as page
3750 on the Telerate Service or any other page as may replace page 3750 on that
service for the purpose of displaying London interbank offered rates of major
banks. If the rate does not appear on that page or any other page as may replace
that page on that service, or if the service is no longer offered, any other
service for displaying LIBOR or comparable rates as may be selected by the
indenture trustee after consultation with the master servicer and the credit
enhancer, the rate will be the reference bank rate.
The reference bank rate will be determined on the basis of the rates at
which deposits in the U.S. Dollars are offered by the reference banks, which
shall be three major banks that are engaged in transactions in the London
interbank market, selected by the indenture trustee after consultation with the
master servicer and the credit enhancer. The reference bank rate will be
determined as of 11:00 A.M., London time, on the LIBOR rate adjustment date to
prime banks in the London interbank market for a period of one month in amounts
approximately equal to the note balance of the Class A-I-1 Notes. The indenture
trustee will request the principal London office of each of the reference banks
to provide a quotation of its rate. If at least two quotations are provided, the
rate will be the arithmetic mean of the quotations. If on that date fewer than
two quotations are provided as requested, the rate will be the arithmetic mean
of the rates quoted by one or more major banks in New York City, selected by the
indenture trustee after consultation with the master servicer and the credit
enhancer, as of 11:00 A.M., New York City time, on that date for loans in U.S.
Dollars to leading European banks for a period of one month in amounts
approximately equal to the note balance of the Class A-I-1 Notes. If no
quotations can be obtained, the rate will be LIBOR for the prior payment date;
provided however, if, under the priorities listed previously in this paragraph,
LIBOR for a payment date would be based on LIBOR for the previous payment date
for the third consecutive payment date, the indenture trustee shall select an
alternative comparable index over which the indenture trustee has no control,
used for determining one-month Eurodollar lending rates that is calculated and
published or otherwise made available by an independent party. LIBOR business
day means any day other than (a) a Saturday or a Sunday or (b) a day on which
banking institutions in the city of London, England are required or authorized
by law to be closed.
The establishment of LIBOR by the indenture trustee and the indenture
trustee's subsequent calculation of the note rate applicable to the Class A-I-1
Notes for the relevant accrual period, in the absence of manifest error, will be
final and binding.
PRINCIPAL PAYMENTS ON THE NOTES
On each payment date, other than the payment date in March 2025, principal
payments will be due and payable on the notes in a total amount equal to the
aggregate of the following:
the Principal Collection Distribution Amount,
any Reserve Increase Amounts,
any Liquidation Loss Distribution Amounts and
any amount drawn on the policy or paid to the trustee on behalf of the
credit enhancer under the limited reimbursement agreement in respect of
principal for that payment date.
These amounts will be distributed concurrently to (a) the Class A-I Notes in the
aggregate and (b) the Class A-II Notes, in each case allocated in proportion to
the percentage of the Principal Collections derived from the related loan group
for that payment date, until the note balances of the Class A-I Notes in the
aggregate or Class A-II Notes have been reduced to zero. From then on, these
amounts will be distributed to the remaining
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class or classes of Class A Notes until their note balances have been reduced to
zero. All distributions to the Class A-I Notes will be allocated among the
Class A-I Notes in accordance with the priorities described in the next section.
On the payment date in March 2025, principal will be due and payable on each
class of notes in amounts equal to the related note balance, if any. In no event
will principal payments on any class of notes on any payment date exceed the
related note balance on that date.
Principal payments on the notes made in accordance with the preceding
paragraph may result in excess Interest Collections from one loan group being
applied to cover principal losses and build overcollateralization in the other
loan group.
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 Collections 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 Collections and Interest Collections will be
allocated from the Payment Account in the following order of priority:
first, to pay accrued interest due on the note balance of the notes;
second, to pay as principal on the notes, an amount equal to the Principal
Collection Distribution Amount for that payment date;
third, to pay as principal on the notes, an amount equal to the Liquidation
Loss Distribution Amount for that payment date;
fourth, to pay the credit enhancer the premium for the policy, any
previously unpaid premiums for the policy with interest and any payments in
connection with the limited reimbursement agreement;
fifth, to reimburse the credit enhancer for prior draws made on the policy,
other than those attributable to Excess Loss Amounts or amounts which are
required to be paid to the credit enhancer or to the trust pursuant to the
limited reimbursement agreement described in this prospectus supplement,
with interest;
sixth, to pay as principal on the notes, an amount equal to the Reserve
Increase Amount for that payment date;
seventh, to pay the credit enhancer any other amounts owed under the
insurance agreement; and
eighth, to pay any remaining amounts to the holders of the certificates.
Any payments of principal allocable to the Class A-I Notes shall be paid to
the Class A-I-1 Notes, Class A-I-2 Notes, Class A-I-3 Notes, Class A-I-4 Notes
and Class A-I-5 Notes, in that order, in each case until the outstanding note
balance of each of these notes has been reduced to zero.
Any payments of principal allocable to the Class A-II Notes shall be paid to
the Class A-II Notes until the outstanding note balance of the Class A-II Notes
is reduced to zero.
THE PAYING AGENT
The paying agent shall initially be the indenture trustee, together with any
successor thereto. The paying agent shall have the revocable power to withdraw
funds from the Payment Account for the purpose of making payments to the
noteholders.
MATURITY AND OPTIONAL REDEMPTION
Each class of notes will be payable in full on the payment date in March
2025, in each case to the extent of any accrued and unpaid interest and 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 upon the exercise by the
master servicer of its option to purchase all or a portion of the home loans and
related assets. This option may be exercised on any payment date on which the
aggregate principal balance of the home loans, after applying payments received
in the related Collection Period, is reduced to an amount less than $45,171,110,
which is 10% of the aggregate cut-off date pool balance. In the event that all
of the home loans are purchased by the master servicer, the purchase
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price will be equal to the sum of the outstanding pool balance and any accrued
and unpaid interest at the weighted average of the loan rates through the day
preceding the payment date on which the purchase occurs together with all
amounts due and owing to the credit enhancer.
In the event that a portion of the home loans are purchased by the master
servicer, the purchase price will be equal to the sum of the aggregate principal
balances of the home loans so purchased and any 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 conditions
specified in the servicing agreement, including:
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;
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 so purchased; and
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 specified payments on the notes. On each payment date,
a draw will be made on the policy equal to the sum of:
the amount by which accrued interest on the notes at the related note rates
on that payment date exceeds the amount on deposit in the Payment Account
available for interest distributions on that payment date,
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
any Excess Loss Amount for that payment date.
Notwithstanding the foregoing, the amount of the draw under the policy will be
reduced by any amount paid directly to the trust under the limited reimbursement
agreement described in the second following paragraph. 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 assets 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 March 2025. 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.
THE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND
SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
The credit enhancer has entered into a limited reimbursement agreement
whereby some amounts otherwise payable under the policy will be reimbursed to
the credit enhancer, or if directed by the credit enhancer, will be paid
directly to the trust by a third party. The trust is not a party to the limited
reimbursement agreement and has no rights with respect to it. In the event those
amounts are not paid to the trust under the limited reimbursement agreement, the
credit enhancer will nevertheless remain obligated to make all payments required
to be made under the policy as described in this section.
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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 primarily in the related loan group 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. 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 principal
prepayments on the home loans 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 further described
in this prospectus supplement and in the prospectus under 'Yield and Prepayment
Considerations', no assurance can be given as to the rate or the timing of
principal payments on the notes.
The home loans in most cases may be prepaid by the mortgagors at any time.
However, in some circumstances, some of the home loans will be subject to a
prepayment charge. See 'Description of the Home Loan Pool' in this prospectus
supplement. In addition, as described under 'Description of the Home Loan
Pool -- 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 repurchases 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 deteriorating
S-37
<PAGE>
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 rates on the notes,
other than the Class A-I-1 Notes, are fixed as set forth under 'Description of
the Securities -- Interest Payments on the Notes' in this prospectus supplement,
these 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 notes were to rise, the market value of the notes may decline.
The Class A-I-1 Notes may not always receive interest at a rate equal to
LIBOR plus 0.12%. If LIBOR plus 0.12% increases to greater than 10.00% per
annum, the note rate on the Class A-I-1 Notes will still be subject to a fixed
interest rate cap of 10.00% per annum.
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 related note rate.
The extent to which the yield to maturity of a note is sensitive to prepayments
will depend, in part, upon the degree to which it is purchased at a discount or
premium. In general, if notes are purchased at a premium and principal
distributions on the notes occur at a rate faster than assumed at the time of
purchase, the investor's actual yield to maturity will be lower than 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 assumed at the
time of purchase, the investor's actual yield to maturity will be lower than
anticipated at the time of purchase. For additional considerations relating to
the yield on the notes, see 'Yield and Prepayment Considerations' in the
prospectus.
The rate and timing of principal payments on and the weighted average lives
of the Class A-I Notes and Class A-II Notes will be affected primarily by the
rate and timing of principal payments (including prepayments, defaults,
liquidations and purchases) on the home loans in the related loan group.
The notes are subject to various priorities for payment of principal as
described in this prospectus supplement. Distributions of principal on classes
having an earlier priority of payment will be affected by the rates of
prepayment of the home loans early in the life of the home loan pool. The timing
of commencement of principal distributions and the weighted average lives of
notes with a later priority of payment will be affected by the rates of
prepayment of the home loans both before and after the commencement of principal
distributions on those classes.
Final Scheduled Payment Dates: Using the structuring assumptions and
assuming a 0% prepayment assumption, no losses or delinquencies on the home
loans, and that the Reserve Amount Target is 0% of the aggregate cut-off date
pool balance, the final scheduled payment date on each class of notes other than
the Class A-I-5 Notes and Class A-II Notes will be as follows:
for the Class A-I-1 Notes, the payment date in January 2008;
for the Class A-I-2 Notes, the payment date in November 2010;
for the Class A-I-3 Notes, the payment date in February 2015; and
for the Class A-I-4 Notes, the payment date in June 2020.
The final scheduled payment date with respect to the Class A-I-5 Notes and
Class A-II Notes will be March 25, 2025 which is the payment date immediately
following the latest scheduled maturity date for any home loan in the related
loan group.
Due to losses and prepayments on the home loans, the final scheduled payment
date on each class of notes may be substantially earlier than the dates
indicated in the preceding two paragraphs. In addition, the actual final payment
date may be later than the final scheduled payment date, except with respect to
the Class A-I-5 Notes and Class A-II Notes.
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
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<PAGE>
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 tables below have been prepared on the basis of specific assumptions as
described below in this paragraph regarding the weighted average characteristics
of the home loans that are expected to be included in the trust as described
under 'Description of the Home Loan Pool' in this prospectus supplement and the
performance of the home loans. The tables assume, among other things, that:
the Group I Loans consist of nine groups of home loans, with the home loans
in each group having the following aggregate characteristics as of the
cut-off date:
<TABLE>
<CAPTION>
REMAINING
LOAN RATE ORIGINAL TERM
AGGREGATE NET OF AMORTIZATION TO
PRINCIPAL SERVICING TERM MATURITY
GROUP BALANCE LOAN RATE FEES (MONTHS) (MONTHS)
- ----- ------- --------- ---- -------- --------
<S> <C> <C> <C> <C> <C>
I-1 $ 2,260,256.62 11.123% 10.543% 360 359
I-2 16,323,466.09 13.472 12.892 114 113
I-3 181,257,526.74 13.710 13.130 180 179
I-4 58,112,139.27 13.871 13.291 240 238
I-5 159,784,661.06 13.996 13.416 300 299
I-6 509,398.72 14.152 13.072 120 114
I-7 4,029,241.09 14.044 12.964 180 175
I-8 2,890,806.35 14.414 13.334 239 235
I-9 7,343,891.74 14.069 12.989 300 295
</TABLE>
the first group above consists of balloon loans with a remaining term to
stated maturity of 179 months;
the Group II Loans consist of six groups of home loans, with the home loans
in each group having the following aggregate characteristics as of the
cut-off date:
<TABLE>
<CAPTION>
REMAINING
LOAN RATE ORIGINAL TERM
AGGREGATE NET OF AMORTIZATION TO
PRINCIPAL SERVICING TERM MATURITY
GROUP BALANCE LOAN RATE FEES (MONTHS) (MONTHS)
- ----- ------- --------- ---- -------- --------
<S> <C> <C> <C> <C> <C>
II-1 $ 520,730.09 11.890% 11.310% 360 357
II-2 413,729.42 13.532 12.952 120 119
II-3 5,103,114.25 13.226 12.646 180 178
II-4 3,453,451.05 13.148 12.568 240 238
II-5 9,273,084.89 13.453 12.873 300 299
II-6 435,598.52 13.800 12.720 241 236
</TABLE>
the first group above consists of balloon loans with a remaining term to
stated maturity of 177 months.
In addition, the following assumptions apply to the Group I Loans and Group
II Loans:
the scheduled monthly payment for each home loan has been based on its
outstanding principal 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;
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 tables;
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<PAGE>
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;
there is no prepayment interest shortfall or any other interest shortfall
in any month;
the home loans, including the simple interest home loans, pay on the basis
of a 30-day month and a 360-day year;
payments on the notes will be received on the 25th day of each month,
commencing in April 2000;
the expenses described under 'Description of the Securities -- Allocation
of Payments on the Home Loans' will be paid out of the trust, and there are
no additional ongoing trust expenses payable out of the trust;
one month LIBOR remains constant at 6.00375%; and
the notes will be purchased on March 29, 2000.
This list of assumptions is referred to as the structuring assumptions.
The actual characteristics and performance of the home loans will differ
from the assumptions used in constructing the tables below, which are
hypothetical in nature and are provided only to give a general sense of how the
principal cash flows might behave under varying prepayment 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 tables at the various constant
percentages of the prepayment assumption, 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 tables
indicate the weighted average life of the notes, and list 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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<PAGE>
PERCENT OF INITIAL NOTE BALANCE OUTSTANDING AT THE FOLLOWING PERCENTAGES OF THE
PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
CLASS A-I-1 CLASS A-I-2
-------------------------------------- ---------------------------------------
DISTRIBUTION DATE 0% 50% 75% 100% 125% 150% 0% 50% 75% 100% 125% 150%
- ----------------- -- --- --- ---- ---- ---- -- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial
Percentage......... 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
March 2001.......... 82 61 50 40 29 18 100 100 100 100 100 100
March 2002.......... 73 17 0 0 0 0 100 100 85 46 9 0
March 2003.......... 63 0 0 0 0 0 100 64 5 0 0 0
March 2004.......... 51 0 0 0 0 0 100 7 0 0 0 0
March 2005.......... 38 0 0 0 0 0 100 0 0 0 0 0
March 2006.......... 23 0 0 0 0 0 100 0 0 0 0 0
March 2007.......... 5 0 0 0 0 0 100 0 0 0 0 0
March 2008.......... 0 0 0 0 0 0 78 0 0 0 0 0
March 2009.......... 0 0 0 0 0 0 45 0 0 0 0 0
March 2010.......... 0 0 0 0 0 0 9 0 0 0 0 0
March 2011.......... 0 0 0 0 0 0 0 0 0 0 0 0
March 2012.......... 0 0 0 0 0 0 0 0 0 0 0 0
March 2013.......... 0 0 0 0 0 0 0 0 0 0 0 0
March 2014.......... 0 0 0 0 0 0 0 0 0 0 0 0
March 2015.......... 0 0 0 0 0 0 0 0 0 0 0 0
March 2016.......... 0 0 0 0 0 0 0 0 0 0 0 0
March 2017.......... 0 0 0 0 0 0 0 0 0 0 0 0
March 2018.......... 0 0 0 0 0 0 0 0 0 0 0 0
March 2019.......... 0 0 0 0 0 0 0 0 0 0 0 0
March 2020.......... 0 0 0 0 0 0 0 0 0 0 0 0
March 2021.......... 0 0 0 0 0 0 0 0 0 0 0 0
March 2022.......... 0 0 0 0 0 0 0 0 0 0 0 0
March 2023.......... 0 0 0 0 0 0 0 0 0 0 0 0
March 2024.......... 0 0 0 0 0 0 0 0 0 0 0 0
March 2025.......... 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life to Maturity in
Years.............. 3.8 1.3 1.0 0.9 0.8 0.7 8.8 3.3 2.5 2.0 1.7 1.5
</TABLE>
- ---------
The weighted average life to maturity of a note is determined by (i) multiplying
the net reduction, if any, of the note balance by the number of years from the
date of issuance of the note to the related payment date, (ii) adding the
results, and (iii) dividing the sum by the aggregate of the net reduction of the
note balance described in (i) above.
THIS TABLE HAS BEEN PREPARED BASED ON THE STRUCTURING ASSUMPTIONS, WHICH MAY
DIFFER FROM THE ACTUAL CHARACTERISTICS AND PERFORMANCE OF THE HOME LOANS. THIS
TABLE SHOULD BE READ IN CONJUNCTION WITH THESE STRUCTURING ASSUMPTIONS.
* Indicates a number that is greater than zero but less than 0.5%.
S-41
<PAGE>
PERCENT OF INITIAL NOTE BALANCE OUTSTANDING AT THE FOLLOWING PERCENTAGES OF THE
PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
CLASS A-I-3 CLASS A-I-4
-------------------------------------- ---------------------------------------
DISTRIBUTION DATE 0% 50% 75% 100% 125% 150% 0% 50% 75% 100% 125% 150%
- ----------------- -- --- --- ---- ---- ---- -- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
March 2001.......... 100 100 100 100 100 100 100 100 100 100 100 100
March 2002.......... 100 100 100 100 100 88 100 100 100 100 100 100
March 2003.......... 100 100 100 78 56 35 100 100 100 100 100 100
March 2004.......... 100 100 71 42 18 0 100 100 100 100 100 93
March 2005.......... 100 79 43 13 0 0 100 100 100 100 80 44
March 2006.......... 100 57 19 0 0 0 100 100 100 81 40 7
March 2007.......... 100 36 0 0 0 0 100 100 96 47 8 0
March 2008.......... 100 17 0 0 0 0 100 100 65 18 0 0
March 2009.......... 100 0 0 0 0 0 100 98 38 0 0 0
March 2010.......... 100 0 0 0 0 0 100 71 14 0 0 0
March 2011.......... 87 0 0 0 0 0 100 46 0 0 0 0
March 2012.......... 68 0 0 0 0 0 100 23 0 0 0 0
March 2013.......... 46 0 0 0 0 0 100 0 0 0 0 0
March 2014.......... 21 0 0 0 0 0 100 0 0 0 0 0
March 2015.......... 0 0 0 0 0 0 90 0 0 0 0 0
March 2016.......... 0 0 0 0 0 0 76 0 0 0 0 0
March 2017.......... 0 0 0 0 0 0 60 0 0 0 0 0
March 2018.......... 0 0 0 0 0 0 42 0 0 0 0 0
March 2019.......... 0 0 0 0 0 0 20 0 0 0 0 0
March 2020.......... 0 0 0 0 0 0 0 0 0 0 0 0
March 2021.......... 0 0 0 0 0 0 0 0 0 0 0 0
March 2022.......... 0 0 0 0 0 0 0 0 0 0 0 0
March 2023.......... 0 0 0 0 0 0 0 0 0 0 0 0
March 2024.......... 0 0 0 0 0 0 0 0 0 0 0 0
March 2025.......... 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life to Maturity in
Years.............. 12.8 6.4 4.9 3.9 3.2 2.8 17.4 10.9 8.6 7.0 5.8 5.0
</TABLE>
- ---------
The weighted average life to maturity of a note is determined by (i) multiplying
the net reduction, if any, of the note balance by the number of years from the
date of issuance of the note to the related payment date, (ii) adding the
results, and (iii) dividing the sum by the aggregate of the net reduction of the
note balance described in (i) above.
THIS TABLE HAS BEEN PREPARED BASED ON THE STRUCTURING ASSUMPTIONS, WHICH MAY
DIFFER FROM THE ACTUAL CHARACTERISTICS AND PERFORMANCE OF THE HOME LOANS. THIS
TABLE SHOULD BE READ IN CONJUNCTION WITH THESE STRUCTURING ASSUMPTIONS.
* Indicates a number that is greater than zero but less than 0.5%.
S-42
<PAGE>
PERCENT OF INITIAL NOTE BALANCE OUTSTANDING AT THE FOLLOWING PERCENTAGES OF THE
PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
CLASS A-I-5 CLASS A-II
-------------------------------------- ---------------------------------------
DISTRIBUTION DATE 0% 50% 75% 100% 125% 150% 0% 50% 75% 100% 125% 150%
- ----------------- -- --- --- ---- ---- ---- -- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial
Percentage......... 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
March 2001.......... 100 100 100 100 100 100 97 93 90 88 86 84
March 2002.......... 100 100 100 100 100 100 96 84 79 74 69 64
March 2003.......... 100 100 100 100 100 100 94 76 69 61 54 48
March 2004.......... 100 100 100 100 100 100 92 69 59 51 43 37
March 2005.......... 100 100 100 100 100 100 90 62 51 42 34 28
March 2006.......... 100 100 100 100 100 100 88 56 44 35 27 21
March 2007.......... 100 100 100 100 100 79 85 50 38 29 21 16
March 2008.......... 100 100 100 100 83 58 82 45 33 24 17 12
March 2009.......... 100 100 100 94 64 42 79 40 28 19 13 9
March 2010.......... 100 100 100 75 48 30 75 35 23 16 10 6
March 2011.......... 100 100 93 59 36 21 70 30 20 12 8 4
March 2012.......... 100 100 75 45 26 14 66 26 16 10 6 3
March 2013.......... 100 100 59 34 18 9 60 22 13 8 4 2
March 2014.......... 100 79 45 24 12 5 54 19 11 6 3 1
March 2015.......... 100 60 31 16 7 2 46 15 8 4 2 1
March 2016.......... 100 51 25 12 5 1 42 12 6 3 1 *
March 2017.......... 100 42 20 9 3 0 39 10 5 2 1 0
March 2018.......... 100 34 15 6 1 0 34 8 4 1 * 0
March 2019.......... 100 27 11 4 * 0 29 6 3 1 * 0
March 2020.......... 98 20 7 2 0 0 24 5 2 * 0 0
March 2021.......... 83 15 5 1 0 0 20 4 1 * 0 0
March 2022.......... 66 10 3 0 0 0 16 3 1 0 0 0
March 2023.......... 45 6 1 0 0 0 11 1 * 0 0 0
March 2024.......... 22 1 0 0 0 0 6 * 0 0 0 0
March 2025.......... 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life to Maturity in
Years.............. 22.7 17.0 14.5 12.3 10.6 9.1 14.5 8.3 6.6 5.4 4.5 3.9
Weighted Average
Life to Call in
Years**............ 22.2 15.3 12.9 10.9 9.2 7.9 14.4 7.8 6.2 5.0 4.2 3.6
</TABLE>
- ---------
The weighted average life to maturity and to call of a note is determined by (i)
multiplying the net reduction, if any, of the note balance by the number of
years from the date of issuance of the note to the related payment date,
(ii) adding the results, and (iii) dividing the sum by the aggregate of the net
reduction of the note balance described in (i) above.
THIS TABLE HAS BEEN PREPARED BASED ON THE STRUCTURING ASSUMPTIONS, WHICH MAY
DIFFER FROM THE ACTUAL CHARACTERISTICS AND PERFORMANCE OF THE HOME LOANS. THIS
TABLE SHOULD BE READ IN CONJUNCTION WITH THESE STRUCTURING ASSUMPTIONS.
* Indicates a number that is greater than zero but less than 0.5%.
** Assumes an optional termination is exercised on the first payment date when
the aggregate pool balance is less than 10% of the aggregate cut-off date
balance.
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<PAGE>
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 March 1, 2000 between the seller and the depositor. The
following summary describes the primary 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 notes, mortgages and other related documents. The purchase
prices for the home loans are specified percentages of their 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:
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
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:
the home loan purchase agreement constitutes a legal, valid and binding
obligation of the seller, and
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 trustee.
Within 90 days of the closing date, Norwest Bank Minnesota, N.A., the
custodian, will review or cause to be reviewed the home loans and the related
documents. If any home loan or related document is found to be missing or
defective, and the defect or omission materially and adversely affects 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
or omission 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. Any removed home loan is 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 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
principal balance of the related deleted loan to be removed from the trust over
the principal balance of the eligible substitute loan.
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<PAGE>
An eligible substitute loan is a home loan substituted by the seller for a
deleted loan which must, on the date of the substitution:
have an outstanding principal balance, or in the case of a substitution of
more than one home loan for a deleted loan, an aggregate principal balance,
not in excess of the principal balance relating to the deleted loan;
have a loan rate no lower than and not more than 1% in excess of the loan
rate of the deleted loan;
have a combined LTV ratio at the time of substitution no higher than that
of the deleted loan at the time of substitution;
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;
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;
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
satisfy 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 March 29, 2000 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 Group, Inc. and an affiliate of the depositor, will be responsible for
master servicing the home loans under the servicing agreement. Residential
Funding Corporation will also be responsible for servicing the home loans in
accordance with its servicing guide directly or through one or more
subservicers. Responsibilities of Residential Funding Corporation will include
the receipt of funds from subservicers, the reconciliation of servicing
activity, investor reporting and remittances to the indenture trustee and the
owner trustee to accommodate payments to securityholders. 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.
In addition, Residential Funding Corporation will undertake collection
activity and default management of any home loans currently subserviced by GMAC
Mortgage Corporation, if such home loans become delinquent. Also, with respect
to the home loans currently subserviced by Master Financial, Residential Funding
Corporation will review the management and liquidation of delinquent mortgaged
properties acquired by foreclosure or deed in lieu of foreclosure, as well as
other loss mitigation procedures conducted by Master Financial. 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
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<PAGE>
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.
THE INITIAL SUBSERVICERS
Primary servicing for 96.6% 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.
GMAC Mortgage Corporation's executive offices are located at 100 Witmer
Road, Horsham, Pennsylvania 19044-0963.
Primary servicing for 3.4% of the home loans will be provided by Master
Financial under a subservicing agreement with the master servicer. Master
Financial is a California corporation that is a mortgage lender engaged in the
business of originating, purchasing, selling and servicing home loans generally
secured by one-to four-family residential properties, with an emphasis on
non-conforming junior lien loans.
Master Financial has its principal offices at 333 South Anita Drive, Orange,
California 92868.
Although Master Financial is not an affiliate of Residential Funding
Corporation, Master Financial 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 Master Financial in
accordance with specified terms and conditions.
DELINQUENCY AND LOSS EXPERIENCE OF THE MASTER SERVICER'S PORTFOLIO
The following tables summarize the delinquency and loss experience of the
master servicer for all loans originated or acquired by the master servicer
under its home equity 125 loan program. 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 home loans will be similar to that set
forth in the tables below.
The information in the tables below has not been adjusted to eliminate the
effect of the significant growth in the size of the master servicer's home
equity 125 loan portfolio during the periods shown. Accordingly, loss and
delinquency as percentages of aggregate principal balance of the home equity 125
loans serviced for each period would be higher than those shown if some of the
home loans were artificially isolated at a point in time and the information
showed the activity only as to those home equity 125 loans.
There can be no assurance that the delinquency experience set forth in the
tables below will be representative of the results that may be experienced by
the home loans serviced by the initial subservicers.
As used herein, a loan is considered to be '30 to 59 days' or '30 or more
days' delinquent when a payment due on any due date remains unpaid as of the
close of business on the next following monthly due date. However, since the
determination as to whether a loan falls into this category is made as of the
close of business on the last business day of each month, a loan with a payment
due on July 1 that remained unpaid as of the close of business on July 31 would
still be considered current as of July 31. If that payment remained unpaid as of
the close of business on August 31, the loan would then be considered to be 30
to 59 days delinquent. Delinquency information presented herein as of the
cut-off date is determined and prepared as of the close of business on the last
business day immediately prior to the cut-off date.
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<PAGE>
<TABLE>
<CAPTION>
HOME EQUITY 125 LOAN PORTFOLIO DELINQUENCY EXPERIENCE
-----------------------------------------------------------------------
AT DECEMBER 31, 1997 AT DECEMBER 31, 1998 AT DECEMBER 31, 1999
--------------------- --------------------- -----------------------
BY NO. BY DOLLAR BY NO. BY DOLLAR BY NO. BY DOLLAR
OF AMOUNT OF OF AMOUNT OF OF AMOUNT OF
LOANS LOANS LOANS LOANS LOANS LOANS
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Total Active Portfolio.................... 8,071 $280,367,320 21,801 $766,661,924 72,221 $2,563,539,307
Total Portfolio (Fund Amt)................ 8,201 $286,183,607 23,615 $839,480,133 77,912 $2,802,042,641
Period of Delinquency
30-59 days............................. 136 $ 4,459,706 205 $ 6,352,595 392 $ 12,851,232
60-89 days............................. 28 $ 847,488 45 $ 1,496,715 180 $ 5,815,745
90+ days............................... 22 $ 800,326 200 $ 6,720,291 442 $ 15,337,068
Total Delinquent Loans.................... 186 $ 6,107,520 450 $ 14,569,601 1,014 $ 34,004,046
Percent of Portfolio...................... 2.30% 2.18% 2.06% 1.90% 1.40% 1.33%
Completed Foreclosures.................... 0 $ -- 0 $ -- 1 $ 56,774
Foreclosure %............................. 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Completed Chargeoffs...................... 0 $ -- 56 $ 1,651,587 343 $ 10,229,167
Chargeoff %............................... 0.00% 0.00% 0.24% 0.20% 0.44% 0.37%
Approved/Pending Foreclosures............. n/a n/a 6 $ 268,086 10 $ 346,072
Approved/Pending Foreclosure %............ n/a n/a 0.03% 0.03% 0.01% 0.01%
Approved/Pending Chargeoffs............... n/a n/a 71 $ 2,146,794 275 $ 8,831,539
Approved/Pending Chargeoff %.............. n/a n/a 0.33% 0.28% 0.38% 0.34%
</TABLE>
Because collection activity and default management of the home loans
subserviced by GMAC Mortgage Corporation will be transferred to Residential
Funding Corporation immediately upon delinquency, the loss and delinquency
experience of GMAC Mortgage Corporation is not relevant to this transaction and
is therefore not included in this prospectus supplement. Also, Master Financial,
Inc. has not had sufficient experience in servicing the types of home loans
comprising the home loan pool (with similar underwriting guidelines, loans terms
and conditions) to provide meaningful disclosure of its delinquency and loss
experience with respect to such home loans.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The servicing fee for each home loan is payable out of the interest payments
on the home loan. The weighted average servicing fee as of the cut-off date for
each home loan will be approximately 0.60% 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
subservicers, 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 0.08% 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 subservicers 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 on or after the cut-off date. The Custodial Account shall be an
Eligible Account. On each determination date, which is the 20th day of each
month, or if that day is not a business day, the following business day, the
master servicer will notify the paying agent and the indenture trustee of the
aggregate amounts required to be withdrawn from the Custodial Account and
deposited into the Payment Account prior to the close of business on the
business day following the 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.
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<PAGE>
The master servicer will make the following withdrawals from the Custodial
Account and deposit the amounts as follows:
on the business day prior to each payment date, to the Payment Account, an
amount equal to Principal Collections and Interest Collections for the
preceding Collection Period; and
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 Principal Collections and Interest Collections.
As to unscheduled collections, the master servicer may elect to treat the
amounts as included in Principal Collections and Interest 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.
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 limited circumstances if the
home loan is current in payment. A release may be made in any case where the
borrower simultaneously delivers a mortgage on a substitute 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 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 specified conditions in the servicing agreement
are met.
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
repurchase from the trust any home loan which is 60 days or more delinquent at a
purchase price equal to its principal balance plus accrued interest.
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<PAGE>
DESCRIPTION OF THE TRUST AGREEMENT AND INDENTURE
The following summary describes the primary terms of the trust agreement and
the indenture. The summary does not purport to be complete and is subject to,
and qualified in its entirety by reference to, the provisions of the trust
agreement and the indenture. See 'The Agreements' in the prospectus.
THE TRUST FUND
Simultaneously with the issuance of the notes, the issuer will pledge the
assets of the trust 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:
the amount of principal payable on the payment date to the holders of
securities;
the amount of interest payable on the payment date to the holders of
securities;
the aggregate note balance of the notes after giving effect to the payment
of principal on the payment date;
Principal Collections and Interest Collections for the related Collection
Period;
the aggregate principal balance of the home loans as of the end of the
preceding Collection Period;
the Outstanding Reserve Amount as of the end of the related Collection
Period; and
the amount paid, if any, under the policy for the payment date.
In the case of information furnished under the 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
The indenture will provide that the issuer may not consolidate with or merge
into any other entity, unless:
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,
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,
no event of default shall have occurred and be continuing immediately after
the merger or consolidation,
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,
any action that is necessary to maintain the lien and security interest
created by the indenture is taken,
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
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:
except as expressly permitted by the indenture, sell, transfer, exchange or
otherwise dispose of any of the assets of the issuer,
S-49
<PAGE>
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,
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
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.
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:
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;
impair the right to institute suit for the enforcement of some provisions
of the indenture regarding payment;
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;
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;
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;
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
permit the creation of any lien ranking prior to or, except as otherwise
contemplated by the indenture, on a parity with the lien of the indenture
with respect to any of the collateral for the notes or, except as otherwise
permitted or contemplated in the indenture, terminate the lien of the
indenture on any collateral or deprive the holder of any note of the
security afforded by the lien of the indenture.
The issuer and the indenture trustee may also enter into supplemental
indentures, with the consent of the credit enhancer and without obtaining the
consent of the noteholders, for the purpose of, among other things, curing any
ambiguity or correcting or supplementing any provision in the indenture that may
be inconsistent with any other provision in this prospectus supplement.
CERTAIN MATTERS REGARDING THE INDENTURE TRUSTEE AND THE ISSUER
Neither the indenture trustee nor any director, officer or employee of the
indenture trustee will be under any liability to the issuer or the related
noteholders for any action taken or for refraining from the taking of any action
in good faith under the indenture or for errors in judgment. None of the
indenture trustee and any director, officer or employee of the indenture trustee
will be protected against any liability which would
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<PAGE>
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 Thacher Proffitt & Wood, 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 classified as an association taxable as a corporation, a publicly
traded partnership within the meaning of Section 7704 of the Internal Revenue
Code, a corporation or a taxable mortgage pool.
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 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:
has investment or administrative discretion with respect to the ERISA
plan's assets;
has authority or responsibility to give, or regularly gives, investment
advice regarding the ERISA plan's 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's assets and will be based on
the particular investment needs for the ERISA plan; or
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 as to whether the notes
constitute legal
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<PAGE>
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
March 22, 2000, Bear, Stearns & Co. Inc. and PaineWebber Incorporated, as
underwriters, have agreed to purchase and the depositor has agreed to sell to
each underwriter the principal amount of notes opposite its name in the tables
below:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF:
----------------------------------------
UNDERWRITER CLASS A-I-1 CLASS A-I-2 CLASS A-I-3
----------- ----------- ----------- -----------
<S> <C> <C> <C>
Bear, Stearns & Co. Inc...................... $41,906,000 $28,670,000 $ 64,628,000
PaineWebber Incorporated..................... $41,906,000 $28,669,000 $ 64,627,000
----------- ----------- ------------
Total.................................... $83,812,000 $57,339,000 $129,255,000
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF:
---------------------------------------
UNDERWRITER CLASS A-I-4 CLASS A-I-5 CLASS A-II
----------- ----------- ----------- ----------
<S> <C> <C> <C>
Bear, Stearns & Co. Inc....................... $39,451,000 $41,602,000 $ 9,600,000
PaineWebber Incorporated...................... $39,450,000 $41,602,000 $ 9,599,000
----------- ----------- -----------
Total..................................... $78,901,000 $83,204,000 $19,199,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
In connection with the notes, the underwriters have agreed, in accordance
with the terms and conditions of the underwriting agreement, to purchase all of
the notes if any of the notes are purchased thereby.
The distribution of the underwritten notes by the underwriters 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 99.68% of the aggregate principal balance of
the notes plus accrued interest thereon from the cut-off date, except with
respect to the Class A-I-1 Notes.
The underwriters 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 underwriters
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 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.
It is expected that delivery of the notes will be made only in book-entry
form through DTC, Clearstream and Euroclear as discussed in this prospectus
supplement, on or about March 29, 2000 against payment in immediately available
funds.
In addition, the underwriting agreement provides that the obligations of the
underwriters to pay for and accept delivery of the related 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 underwriting agreement provides that the depositor will indemnify the
related underwriters and that under limited circumstances the related
underwriter will indemnify the depositor against some liabilities, including
liabilities under the Securities Act of 1933, or contribute to payments the
related underwriter may be required to make for these liabilities.
There can be no assurance that a secondary market for the notes will develop
or, if it does develop, that it will continue. The primary source of information
available to investors concerning the notes will be the monthly statements
discussed in this prospectus supplement under 'Description of the Trust
Agreement and Indenture -- Reports to Holders' and in the prospectus under
'Description of the Notes -- Reports to Noteholders,'which will include
information as to the outstanding principal balance of the notes. There can be
no assurance that any
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additional information regarding the notes will be available through any other
source. In addition, the depositor is not aware of any source through which
price information about the notes will be generally available on an ongoing
basis. The limited nature of this type of information regarding the notes may
adversely affect the liquidity of the notes, even if a secondary market for the
notes becomes available.
EXPERTS
The consolidated financial statements of Ambac Assurance Corporation and
subsidiaries, as of December 31, 1999 and 1998 and for each of the years in the
three-year period ended December 31, 1999 are incorporated by reference in this
prospectus supplement and in the registration statement in reliance upon the
report of KPMG LLP, independent certified public accountants, incorporated by
reference in this prospectus supplement, and upon the authority of said firm as
experts in accounting and auditing.
LEGAL MATTERS
Legal matters concerning the notes will be passed upon for the depositor by
Thacher Proffitt & Wood, New York, New York and for Bear, Stearns & Co. Inc. and
PaineWebber Incorporated by Brown & Wood LLP, New York, New York.
RATINGS
It is a condition to issuance that the notes be rated not less than 'Aaa' by
Moody's and 'AAA' by Standard & Poor's. The depositor has not requested a rating
on the notes by any rating agency other than Moody's and Standard & Poor's.
However, there can be no assurance as to whether any other rating agency will
rate the 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 Moody's and Standard
& Poor's. 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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<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION
PROCEDURES
Except in certain limited circumstances, the globally offered Residential
Funding Mortgage Securities II, Inc., Home Loan-Backed Notes, Series 2000-HI2,
which are referred to as the global securities, will be available only in
book-entry form. Investors in the global securities may hold interests in these
global securities through any of DTC, Clearstream or Euroclear. Initial
settlement and all secondary trades will settle in same day funds.
Secondary market trading between investors holding interests in global
securities through Clearstream and Euroclear will be conducted in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice. Secondary market trading between investors
holding interests in global securities through DTC will be conducted according
to the rules and procedures applicable to U.S. corporate debt obligations.
Secondary cross-market trading between investors holding interests in global
securities through Clearstream or Euroclear and investors holding interests in
global securities through DTC participants will be effected on a
delivery-against-payment basis through the respective depositories of
Clearstream and Euroclear, in such capacity, and other DTC participants.
Although DTC, Euroclear and Clearstream are expected to follow the
procedures described below in order to facilitate transfers of interests in the
global securities among participants of DTC, Euroclear and Clearstream, they are
under no obligation to perform or continue to perform those procedures, and
those procedures may be discontinued at any time. Neither the depositor, the
master servicer nor the trustee will have any responsibility for the performance
by DTC, Euroclear and Clearstream or their respective participants or indirect
participants of their respective obligations under the rules and procedures
governing their obligations.
Non-U.S. holders of global securities will be subject to U.S. withholding
taxes unless those holders meet certain requirements and deliver appropriate
U.S. tax documents to the securities clearing organizations or their
participants.
INITIAL SETTLEMENT
The global securities will be registered 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. Clearstream and Euroclear will hold positions on
behalf of their participants through their respective depositories, which in
turn will hold such positions in accounts as DTC participants.
Investors electing to hold interests in global securities through DTC
participants, rather than through Clearstream or Euroclear accounts, will be
subject to the settlement practices applicable to similar issues of pass-through
certificates. Investors' securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold interests in global securities through
Clearstream 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. Interests in 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.
Transfers between DTC Participants. Secondary market trading between DTC
participants will be settled using the DTC procedures applicable to similar
issues of prior mortgage loan backed notes in same-day funds.
Transfers between Clearstream and/or Euroclear Participants. Secondary
market trading between Clearstream participants or Euroclear participants and/or
investors holding interests in global securities through them will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
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Transfers between DTC seller and Clearstream or Euroclear purchaser. When
interests in global securities are to be transferred on behalf of a seller from
the account of a DTC participant to the account of a Clearstream participant or
a Euroclear participant for a purchaser, the purchaser will send instructions to
Clearstream or Euroclear through a Clearstream participant or Euroclear
participant at least one business day prior to settlement. Clearstream or the
Euroclear operator will instruct its respective depository to receive an
interest in the global securities against payment. Payment will include interest
accrued on the global securities from and including the last distribution date
to but excluding the settlement date. Payment will then be made by the
respective depository to the DTC participant's account against delivery of an
interest in the global securities. After this settlement has been completed, the
interest will be credited to the respective clearing system, and by the clearing
system, in accordance with its usual procedures, to the Clearstream
participant's or Euroclear participant's account. The credit of this interest
will appear on the next business day and the cash debit 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 through DTC on the intended value date, i.e., the
trade fails, the Clearstream or Euroclear cash debit will be valued instead as
of the actual settlement date.
Clearstream participants and Euroclear participants will need to make
available to the respective clearing system the funds necessary to process
same-day funds settlement. The most direct means of doing so is to pre-position
funds for settlement from cash on hand, in which case the Clearstream
participants or Euroclear participants will take on credit exposure to
Clearstream or the Euroclear operator until interests in the global securities
are credited to their accounts one day later.
As an alternative, if Clearstream or the Euroclear operator has extended a
line of credit to them, Clearstream participants or Euroclear participants can
elect not to pre-position funds and allow that credit line to be drawn upon.
Under this procedure, Clearstream participants or Euroclear participants
receiving interests in global securities for purchasers would incur overdraft
charges for one day, to the extent they cleared the overdraft when interests in
the global securities were credited to their accounts. However, interest on the
global securities would accrue from the value date. Therefore, the investment
income on the interest in the global securities earned during that one-day
period would tend to offset the amount of these overdraft charges, although this
result will depend on each Clearstream participant's or Euroclear participant's
particular cost of funds.
Since the settlement through DTC will take place during New York business
hours, DTC participants are subject to DTC procedures for transferring interests
in global securities to the respective depository of Clearstream or Euroclear
for the benefit of Clearstream participants or Euroclear participants. The sale
proceeds will be available to the DTC seller on the settlement date. Thus, to
the seller settling the sale through a DTC participant, a cross-market
transaction will settle no differently than a sale to a purchaser settling
through a DTC participant.
Finally, intra-day traders that use Clearstream participants or Euroclear
participants to purchase interests in global securities from DTC participants or
sellers settling through them for delivery to Clearstream participants or
Euroclear participants should note that these trades will automatically fail on
the sale side unless affirmative action is taken. At least three techniques
should be available to eliminate this potential condition:
borrowing interests in global securities through Clearstream or Euroclear
for one day, until the purchase side of the intra-day trade is reflected in
the relevant Clearstream or Euroclear accounts, in accordance with the
clearing system's customary procedures;
borrowing interests in global securities in the United States from a DTC
participant no later than one day prior to settlement, which would give
sufficient time for such interests to be reflected in the relevant
Clearstream or Euroclear accounts in order to settle the sale side of the
trade; or
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 Clearstream participant or
Euroclear participant.
Transfers between Clearstream or Euroclear seller and DTC purchaser. Due to
time zone differences in their favor, Clearstream participants and Euroclear
participants may employ their customary procedures for transactions in which
interests in global securities are to be transferred by the respective clearing
system, through the respective depository, to a DTC participant. The seller will
send instructions to Clearstream or the Euroclear operator through a Clearstream
participant or Euroclear participant at least one business day prior to
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settlement. Clearstream or Euroclear will instruct its respective depository, to
credit an interest in 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 distribution date to but excluding the settlement
date. The payment will then be reflected in the account of the Clearstream
participant or Euroclear participant the following business day, and receipt of
the cash proceeds in the Clearstream participant's or Euroclear participant's
account would be back-valued to the value date, which would be the preceding
day, when settlement occurred through DTC in New York. If settlement is not
completed on the intended value date, i.e., the trade fails, receipt of the cash
proceeds in the Clearstream participant's or Euroclear participant's account
would instead be valued as of the actual settlement date.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of global securities holding securities through
Clearstream 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 typically applies
to payments of interest, including original issue discount, on registered debt
issued by U.S. persons, unless:
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
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 or Form W-8BEN. 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, or Certificate of Foreign Status, or Form W-8BEN, or Certificate
of Foreign Status of Beneficial Owner for United States Tax
Withholding. If the information shown on Form W-8 or Form W-8BEN
changes, a new Form W-8 or Form W-8BEN must be filed within 30 days of
the change. After December 31, 2000, only Form W-8BEN will be
acceptable.
Exemption for Non-U.S. persons with effectively connected
income -- Form 4224 or Form W-8ECI. 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, or Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the
United States, or Form W-8ECI, or Certificate of Foreign Person's Claim
for Exemption from Withholding 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 or Form W-8BEN. 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, or Holdership, Exemption or Reduced Rate Certificate, or
Form W-8BEN. Form 1001 or Form W-8BEN may be filed by Bond Holders or
their agent. After December 31, 2000, only Form W-8BEN will be
acceptable.
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, or
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, Form 1001 and Form 4224 are effective
until December 31, 2000. Form W-8BEN and Form W-8ECI are effective until the
third succeeding calendar year from the date the form is signed. The term 'U.S.
person' means:
a citizen or resident of the United States;
a corporation, partnership or other entity treated as a corporation or a
partnership for United States federal income tax purposes, organized in or
under the laws of the United States or any state thereof,
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including for this purpose the District of Columbia, unless, in the case of
a partnership, future Treasury regulations provide otherwise;
an estate that is subject to U.S. federal income tax regardless of the
source of its income; or
a trust if a court within the United States is able to exercise primary
supervision of the administration of the trust and one or more United
States persons have the authority to control all substantial decisions of
the trust.
Certain trusts not described in the final bullet of the preceding sentence in
existence on August 20, 1996 that elect to be treated as a United States Person
will also be a U.S. person. The term 'Non-U.S. person' means any person who is
not a U.S. person. This summary does not deal with all aspects of U.S. Federal
income tax withholding that may be relevant to foreign holders of the global
securities. Investors are advised to consult their own tax advisors for specific
tax advice concerning their holding and disposing of the global securities.
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<PAGE>
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:
one- to four-family first or junior lien home equity revolving lines of
credit;
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;
home improvement installment sales contracts and loan agreements, either
unsecured or secured;
manufactured housing installment sales contracts and loan agreements;
partial balances of their assets; and
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.
June 16, 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:
this prospectus, which provides general information, some of which may not
apply to your series of notes; and
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 80.
- ----------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Introduction.................................... 4
The Trusts...................................... 4
Revolving Credit Loans..................... 7
The Contracts.............................. 9
Trust Asset Program............................. 9
Underwriting Standards Applicable to the
Loans.................................... 9
Qualifications of Sellers.................. 13
Representations Relating to Trust Assets... 13
Subservicing............................... 16
Description of the Notes........................ 17
Form of Notes.............................. 17
Assignment of the Trust Assets............. 19
Review of Trust Assets..................... 20
Excess Spread and Excluded Spread.......... 21
Payments on Trust Assets; Deposits to
Payment Account.......................... 21
Withdrawals from the Custodial Account..... 23
Payments................................... 23
Funding Account............................ 25
Reports to Noteholders..................... 25
Hazard Insurance and Related Claims........ 26
Description of Credit Enhancement............... 27
Financial Guaranty Insurance Policy........ 28
Letter of Credit........................... 28
Subordination.............................. 28
Overcollateralization...................... 29
Reserve Funds.............................. 29
Maintenance of Credit Enhancement.......... 30
Reduction or Substitution of Credit
Enhancement.............................. 30
Other Financial Obligations Related to the
Notes......................................... 32
Swaps and Yield Supplement Agreements...... 32
Purchase Obligations....................... 32
Description of FHA Insurance Under Title I...... 32
The Depositor................................... 34
Residential Funding Corporation................. 34
Servicing of Trust Assets....................... 35
Subservicing............................... 35
Collection and Other Servicing
Procedures............................... 36
Special Servicing and Special Servicing
Agreements............................... 37
Realization Upon Defaulted Loans........... 38
Servicing Compensation and Payment of
Expenses................................. 39
Evidence as to Compliance.................. 39
Certain Matters Regarding the Master
Servicer and the Depositor............... 40
The Agreements.................................. 41
Events of Default; Rights Upon Event of
Default.................................. 41
Amendment.................................. 43
Termination; Redemption of Notes........... 43
The Owner Trustee.......................... 44
The Indenture Trustee...................... 44
<CAPTION>
PAGE
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<S> <C>
Yield and Prepayment Considerations............. 45
Certain Legal Aspects of the Trust Assets and
Related Matters............................... 50
Trust Assets Secured by Mortgages on
Mortgaged Property....................... 50
Cooperative Loans.......................... 50
Tax Aspects of Cooperative Ownership....... 52
Manufactured Housing Contracts............. 52
Foreclosure on Loans and Certain
Contracts................................ 54
Foreclosure on Mortgaged Properties Located
in the Commonwealth of Puerto Rico....... 55
Foreclosure on Shares of Cooperatives...... 55
Repossession with Respect to Manufactured
Housing Contracts........................ 56
Rights of Redemption....................... 58
Notice of Sale; Redemption Rights with
Respect to Manufactured Homes............ 58
Anti-Deficiency Legislation and Other
Limitations on Lenders................... 58
Environmental Legislation.................. 59
Consumer Protection Laws with Respect to
Manufactured Housing Contracts........... 60
Enforceability of Certain Provisions....... 61
Transfer of Manufactured Homes............. 62
The Home Improvement Contracts............. 62
Applicability of Usury Laws................ 64
Alternative Mortgage Instruments........... 65
Formaldehyde Litigation with Respect to
Manufactured Housing Contracts........... 65
Soldiers' and Sailors' Civil Relief Act of
1940..................................... 66
Forfeitures in Drug and RICO Proceedings... 66
Junior Mortgages; Rights of Senior
Mortgagees............................... 66
Negative Amortization Loans................ 67
Material Federal Income Tax Consequences........ 69
State and Other Tax Consequences................ 74
ERISA Considerations............................ 74
ERISA Plan Asset Regulations............... 75
Prohibited Transaction Exemptions.......... 76
Insurance Company General Accounts......... 76
Representation from ERISA Plans Investing
in Notes with 'Substantial Equity
Features'................................ 76
Tax Exempt Investors....................... 77
Consultation with Counsel.................. 77
Legal Investment Matters........................ 77
Use of Proceeds................................. 78
Methods of Distribution......................... 78
Legal Matters................................... 79
Financial Information........................... 79
Additional Information.......................... 79
Reports to Noteholders.......................... 79
Incorporation of Certain Information by
Reference..................................... 79
Glossary........................................ 80
</TABLE>
<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:
one- to four-family first or junior lien home equity revolving lines of
credit acquired under the home equity program, or revolving credit loans;
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;
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;
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;
manufactured housing installment sales contracts and installment loan
agreements, or manufactured housing contracts, secured by security
interests in manufactured homes;
partial balances of any of the assets described above; and/or
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, 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:
revolving credit loans, home loans, home equity loans and, if applicable,
contracts may include Cooperative Loans,
mortgaged properties may include shares in the related Cooperative and the
related proprietary leases or occupancy agreements securing Cooperative
Notes,
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mortgage notes may include Cooperative Notes, and
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.
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:
the aggregate principal balance of the trust assets,
the type of property securing the trust assets and related lien priority,
if any,
the original or modified and/or remaining terms to maturity of the trust
assets,
the earliest origination or modification date and latest maturity date of
the trust assets,
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<PAGE>
the loan-to-value ratios, or LTV ratios, or combined LTV ratios of the
trust assets, as applicable,
the loan rate or range of loan rates borne by the trust assets,
the applicable index, the range of gross margins, the weighted average
gross margin, the frequency of adjustments and maximum loan rate,
the geographical distribution of the mortgaged properties,
the aggregate credit limits of the related credit line agreements,
the number and percentage of contracts that are partially insured by the
FHA under Title I,
the weighted average junior ratio and credit utilization rate,
the range of debt-to-income ratios,
the distribution of loan purposes, and
the range of Credit Scores.
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, the LTV ratio, in most cases, 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, 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.
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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. 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:
the weekly average yield on U.S. Treasury securities adjusted to a
constant maturity of either six months or one year,
the weekly auction average investment yield of U.S. Treasury bills of six
months,
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the daily bank prime loan rate made available by the Federal Reserve
Board,
the cost of funds of member institutions for the Federal Home Loan Bank of
San Francisco,
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
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:
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,
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
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 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
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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:
mortgages on one- to four-family residential properties that are generally
subordinate to other mortgages on the same mortgaged property, or
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) 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
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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.
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
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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
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
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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, 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 LTV ratios 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
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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 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
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they are sold to the depositor. The representations and warranties will, in most
cases, include, among other things, that:
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;
Residential Funding Corporation was the sole holder and owner of the trust
assets free and clear of any and all liens and security interests;
each trust asset complied in all material respects with all applicable
local, state and federal laws;
except as otherwise indicated in the accompanying prospectus supplement,
no trust asset is one month or more delinquent in payment of principal and
interest;
there is no delinquent tax, or to the best of Residential Funding
Corporation's knowledge, assessment lien against any mortgaged property;
and
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:
liens of real property taxes and assessments not yet due and payable,
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,
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
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 master servicer, the designated seller or
Residential Funding Corporation, as the case
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may be, will be obligated to purchase the trust asset at a purchase 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 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.
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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 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 servicing agreement
applicable to any series of notes will provide that, if for any reason the
master servicer for the series of notes is no longer the master servicer of the
related trust assets, any successor master servicer must recognize the
subservicer's rights and obligations under the subservicing agreement. For
further information relating to subservicing see 'Servicing of Trust
Assets -- Subservicing' in this prospectus.
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DESCRIPTION OF THE NOTES
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:
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;
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;
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;
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
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
registrar 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.
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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:
DTC ceases to act as depository for that note and a successor depository
is not obtained, or
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 beneficial owners will be able to
exercise their rights as owners of their notes only indirectly through DTC,
participants and indirect participants. Any beneficial owner that desires to
purchase, sell or otherwise transfer any interest in book-entry notes may do so
only through DTC, either directly if the beneficial owner is a participant or
indirectly through participants and, if applicable, indirect participants. Under
the procedures of DTC, transfers of the beneficial ownership of any book-entry
notes will be required to be made in minimum denominations specified in the
accompanying prospectus supplement. The ability of a beneficial owner to pledge
book-entry notes to persons or entities that are not participants in the DTC
system, or to otherwise act 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 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
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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 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:
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;
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;
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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;
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
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.
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,
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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 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:
payments on account of principal on the trust assets comprising a trust;
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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;
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;
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;'
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 in the fourth paragraph below; and
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:
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,
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 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,
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,
in the case of the Payment Account, a trust account or accounts maintained
with the indenture trustee, or
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:
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
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.
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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.
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:
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;
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;
to pay to itself or any subservicer unpaid servicing fees and subservicing
fees, out of payments or collections of interest on each trust asset;
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;
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;
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;
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;
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;
to withdraw any amount deposited in the Custodial Account that was not
required to be deposited in that Custodial Account;
to pay to itself or any subservicer for the funding of any draws made on
the revolving credit loans, if applicable;
to make deposits to the funding account in the amounts and in the manner
provided in the related agreement, if applicable; and
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
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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 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.
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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:
the aggregate amount of interest collections and principal collections;
the amount, if any, of the payment allocable to principal;
the amount, if any, of the payment allocable to interest, and the amount,
of any shortfall in the amount of interest and principal;
the aggregate unpaid principal balance of the trust assets after giving
effect to the payment of principal on the payment date;
the outstanding principal balance or notional amount of each class of
notes after giving effect to the payment of principal on the payment date;
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;
the book value of any property acquired by the trust through foreclosure
or grant of a deed in lieu of foreclosure;
the balance of the reserve fund, if any, at the close of business on the
payment date;
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;
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;
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;
the aggregate amount of draws;
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for any series of notes as to which the trust includes private securities,
additional information as required under the related agreement; and
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 listed
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 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:
the maximum insurable value of the mortgaged property, or
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 in the 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.
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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:
subordination provided by the related certificates, and by any other class
of subordinated securities related to a series of notes;
overcollateralization;
a reserve fund;
a financial guaranty insurance policy;
derivatives products;
a letter of credit;
mortgage repurchase bond, mortgage pool insurance policy, special hazard
insurance policy, bankruptcy bond or other types of insurance policies, or
a secured or unsecured corporate guaranty, as described in the
accompanying prospectus supplement; or
in 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:
a Defaulted Mortgage Loss;
a Special Hazard Loss as described in the accompanying prospectus
supplement;
a Bankruptcy Loss; and
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:
the amount payable under the credit enhancement arrangement, if any,
provided for a series;
any conditions to payment thereunder not otherwise described in this
prospectus;
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
the material provisions of any agreement relating to the credit support.
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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
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,
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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 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.
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Amounts deposited in any reserve fund for a series will be invested in
Permitted Investments by, or at the direction of, and for the benefit of the
master servicer or any other person named in the 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.
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:
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
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
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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.
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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 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 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
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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:
the net unpaid principal amount and the uncollected interest earned to the
date of default,
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,
uncollected court costs,
title examination costs,
fees for required inspections by the lenders or its agents, up to $75, and
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.
Under Title I, the FHA maintains an FHA insurance coverage reserve account,
referred to as an 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.
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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:
the amount of FHA insurance claims approved for payment related to those
loans, and
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.
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
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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.
SUBSERVICING
In connection with any series of securities the master servicer may enter
into one or more subservicing agreements. See 'Trust Asset
Program -- Subservicing.' Each subservicer generally will be required to perform
the customary functions of a servicer, including but not limited to:
collection of payments from mortgagors and remittance of those collections
to the master servicer;
maintenance of escrow or impoundment accounts of mortgagors for payment of
taxes, insurance and other items required to be paid by the mortgagor
under the trust asset, if applicable;
processing of assumptions or 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;
attempting to cure delinquencies;
supervising foreclosures;
inspection and management of mortgaged properties under various
circumstances; and
maintaining accounting records relating to the trust assets.
The subservicer may be required to make Advances to the holder of any related
first mortgage loan to avoid or cure any delinquencies to the extent that doing
so would be prudent and necessary to protect the interests of the
securityholders. A subservicer also may be obligated to make Advances to the
master servicer 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.
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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 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:
a new appraisal is obtained,
the new combined LTV ratio is less than or equal to the original combined
LTV ratio,
verbal verification of employment is obtained, and
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 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.'
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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.
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:
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
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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;
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;
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
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 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
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
paragraphs, 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 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.
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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 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
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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.
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
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servicing agreement to any person reasonably satisfactory to the depositor and
the indenture trustee and meeting the requirements described in the related
servicing agreement. In the case of an assignment, the master servicer will be
released from its obligations under the servicing agreement, exclusive of
liabilities and obligations incurred by it prior to the time of the assignment.
THE AGREEMENTS
The following summaries describe provisions of the trust agreement, the
indenture and servicing agreement relating to a series of notes. 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:
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;
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;
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
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.
Indenture
An event of default under the indenture for each series of notes, in most
cases, will include:
a default for five days or more in the payment of any principal of or
interest on any note of the series;
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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;
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;
some events of bankruptcy, insolvency, receivership or liquidation of the
depositor or the trust; or
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:
the holders of 100% of the then aggregate outstanding amount of the notes
of the series consent to that sale,
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
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.
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:
the holder previously has given to the indenture trustee written notice of
default and the continuance of that default,
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,
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the indenture trustee has neglected or refused to institute that
proceeding for 60 days after receipt of that request and indemnity, and
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:
cure any ambiguity;
correct or supplement any provision in that agreement which may be
inconsistent with any other provision in that agreement or to correct any
error;
change the timing and/or nature of deposits in the Custodial Account or
the Payment Account or to change the name in which the Custodial Account
is maintained, except that (a) deposits to the Payment Account may not
occur later than the related payment date, (b) 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;
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
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:
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,
impair the right of any securityholder to institute suit for the
enforcement of the provisions of the agreements, or
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:
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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
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.
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.
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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 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,
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may be relatively more sensitive to the rate of principal payments on the
related trust assets, net of draws if applicable, than other classes of notes.
The outstanding principal balances of manufactured housing contracts, home
equity loans, revolving credit loans, home improvement loans and home
improvement contracts are, in 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 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.
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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 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.
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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, 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:
the rate of Principal Prepayments of the trust assets in the pool may be
higher than would otherwise be the case,
the average credit or collateral quality of the trust assets remaining in
the pool may decline, and
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:
will not increase those loan rates over a fixed maximum rate during the
life of any trust asset, and
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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 of prepayments 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.
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
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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:
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
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 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.'
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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.
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.
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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.
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.
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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.
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 the 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
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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
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 mortgaged 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
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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 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:
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
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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.
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.
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
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.
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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.
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
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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 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
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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.
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.
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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 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,
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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 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.
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Security Interests in Home Improvements
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
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,
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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 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
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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:
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,
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
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, 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:
the seller breached its obligation to repurchase the contract in the event
an obligor is successful in asserting this type of claim, and
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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 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:
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 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,
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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 or other casualty, or in the event the property is
taken by condemnation, the mortgagee or beneficiary under underlying senior
mortgages will have the prior right to collect any insurance proceeds payable
under a hazard insurance policy and any award of damages in connection with the
condemnation and to apply the same to the indebtedness secured by the senior
mortgages. Proceeds in excess of the amount of senior mortgage indebtedness, in
most cases, may be applied to the indebtedness of junior mortgages in the order
of their priority. Another provision sometimes found in the form of the mortgage
or deed of trust used by institutional lenders obligates the mortgagor to:
pay before delinquency all taxes and assessments on the property and, when
due, all encumbrances, charges and liens on the property which are prior
to the mortgage or deed of trust,
to provide and maintain fire insurance on the property,
to maintain and repair the property and not to commit or permit any waste
of the property, and
to appear in and defend any action or proceeding purporting to affect the
property or the rights of the mortgagee under the mortgage.
Upon a failure of the mortgagor to perform any of these obligations, the
mortgagee or beneficiary is given the right under some mortgages or deeds of
trust to perform the obligation itself, at its election, with the mortgagor
agreeing to reimburse the mortgagee for any sums expended by the mortgagee on
behalf of the mortgagor. All sums so expended by a senior mortgagee become part
of the indebtedness secured by the senior mortgage.
The form of credit line trust deed or mortgage used by most institutional
lenders which make revolving credit loans typically contains a 'future advance'
clause, which provides, in essence, that additional amounts advanced to or on
behalf of the borrower by the beneficiary or lender are to be secured by the
deed of trust or mortgage. The priority of the lien securing any advance made
under the clause may depend in most states on whether the deed of trust or
mortgage is designated as a credit line deed of trust or mortgage. If the
beneficiary or lender advances additional amounts, the advance is entitled to
receive the same priority as amounts initially advanced under the trust deed or
mortgage, notwithstanding the fact that there may be junior trust deeds or
mortgages and other liens which intervene between the date of recording of the
trust deed or mortgage and the date of the future advance, and notwithstanding
that the beneficiary or lender had actual knowledge of these intervening junior
trust deeds or mortgages and other liens at the time of the advance. In most
states, the trust deed or mortgage lien securing mortgage loans of the type
which includes revolving credit loans applies retroactively to the date of the
original recording of the trust deed or mortgage, provided that the total amount
of advances under the credit limit does not exceed the maximum specified
principal amount of the recorded trust deed or mortgage, except as to advances
made after receipt by the lender of a written notice of lien from a judgment
lien creditor of the trustor.
NEGATIVE AMORTIZATION LOANS
A recent case decided by the United States Court of Appeals, First Circuit,
held that state restrictions on the compounding of interest are not preempted by
the provisions of the Depository Institutions Deregulation and Monetary Control
Act of 1980, 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
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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.
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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.
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.
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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 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.
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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.
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:
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
the daily portions of original issue discount for all days during the
accrual period prior to that day, less
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 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
current 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.
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However, market discount for a note will be considered to be de minimis for
purposes of 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
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
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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 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 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 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-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. Such plans,
together with plans subject to ERISA, are referred to as ERISA 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.
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 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.
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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:
the entity is an operating company;
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
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 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
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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 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
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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:
the transferee is an insurance company,
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
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, 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
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notes. Accordingly, all investors whose investment activities are subject to
legal investment laws and regulations, regulatory capital requirements or review
by regulatory authorities should consult with their legal advisors in
determining whether and to what extent the notes of any class constitute legal
investments or are subject to investment, capital or other restrictions.
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of notes
will be applied by the depositor to finance the purchase of, or to repay
short-term loans incurred to finance the purchase of, the trust assets
underlying the notes or will be used by the depositor for general corporate
purposes. The depositor expects that it will make additional sales of securities
similar to the notes from time to time, but the timing and amount of any
additional offerings will be dependent upon a number of factors, including the
volume of mortgage loans purchased by the depositor, prevailing note rates,
availability of funds and general market conditions.
METHODS OF DISTRIBUTION
The notes offered by this prospectus and by the accompanying prospectus
supplements will be offered in series through one or more of the methods
described 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:
by negotiated firm commitment or best efforts underwriting and public
re-offering by underwriters;
by placements by the depositor with institutional investors through
dealers; and
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, or the Securities Act.
It is anticipated that the underwriting agreement pertaining to the sale of
any series of notes will provide that the obligations of the underwriters will
be subject to some conditions precedent, that the underwriters will be obligated
to purchase all of the notes if any are purchased, other than in connection with
an underwriting on a best efforts basis, and that, in limited circumstances, the
depositor will indemnify the several underwriters and the underwriters will
indemnify the depositor against some civil liabilities, including liabilities
under the Securities Act, 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.
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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, 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, New York, New York, 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.
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.
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.
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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.
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.
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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:
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
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 the 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 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.
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RESIDENTIAL FUNDING MORTGAGE SECURITIES II, INC.
$451,710,000
HOME LOAN-BACKED NOTES,
SERIES 2000-HI2
PROSPECTUS SUPPLEMENT
BEAR, STEARNS & CO. INC. PAINEWEBBER INCORPORATED
UNDERWRITERS
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 underwriter of the notes offered hereby and with respect to its unsold
allotment or subscription. In addition, all dealers selling the notes, whether
or not participating in this offering, may be required to deliver a prospectus
supplement and prospectus until June 21, 2000.
