May 10, 2000
Mr. Mark Green
Division of Corporation Finance
United States Securities
and Exchange Commission
450 Fifth Street, N.W.
Mail Stop 3-10
Washington, D.C. 20549
Re: Residential Funding Mortgage Securities II, Inc.
Registration Statement on Form S-3/A, Amendment No. 1
Commission File No. 333-36244
Dear Mr. Green:
On behalf of Residential Funding Mortgage Securities II, Inc. (the
"Depositor"), we have filed with the Securities and Exchange Commission today
(via the EDGAR system) Amendment No. 1 (the "Amendment") to the referenced
Registration Statement. A copy of this letter is being transmitted via EDGAR
contemporaneously with the filing of the Amendment. Also included is an
Acceleration Request of the Depositor, requesting effectiveness at 9:00 a.m. on
May 12, 2000 or as soon as practicable thereafter.
In addition, a paper copy of this letter is being delivered to you via
Federal Express together with the Form S-3/A and Part II. Only the appropriate
dates and fees have been changed in the Amendment. There are no other changes in
the filing from the filing of the Form S-3 previously submitted. Accordingly, we
are not enclosing a complete paper copy of this filing.
If you should have any questions concerning this letter, please do not
hesitate to call the undersigned at (212) 912-7450, David Ansel at (212)
912-7881 or Marlo Young at (212) 912-7950.
Very truly yours,
/s/Stephen S. Kudenholdt
Stephen S. Kudenholdt
Enclosures
<PAGE>
REGISTRATION NO. 333-36244
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3/A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
RESIDENTIAL FUNDING MORTGAGE SECURITIES II, INC.
(Exact name of registrant as specified in governing instruments)
Delaware
(State of Incorporation)
41-1808858
(I.R.S. Employer Identification Number)
8400 Normandale Lake Boulevard
Minneapolis, Minnesota 55437
(612) 832-7000
(Address and telephone number of Registrant's principal executive offices)
Christopher J. Nordeen, President
Residential Funding Mortgage Securities II, Inc.
8400 Normandale Lake Boulevard
Minneapolis, Minnesota 55437
(612) 832-7000
(Name, address and telephone number of agent for service)
Copies to:
Robert L. Schwartz, Esq.
GMAC Mortgage Corporation
3031 West Grand Boulevard
Detroit, Michigan 48232
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<S> <C> <C>
Stephen S. Kudenholdt, Esq. Katherine I. Crost, Esq. Robert C. Wipperman, Esq.
Paul D. Tvetenstrand, Esq. Orrick, Herrington & Sutcliffe Stroock & Stroock & Lavan
Thacher Proffitt & Wood 666 Fifth Avenue 180 Maiden Lane
Two World Trade Center New York, New York 10103-0001 New York, New York 10038
New York, New York 10048
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Approximate date of commencement of proposed sale to the public: From time
to time on or after the effective date of this Registration Statement, as
determined by market conditions.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, please check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
Proposed Proposed
Maximum Maximum
Amount Offering Aggregate Amount of
Title of Securities Being to be Registered Price Offering Registration
Registered (1) Per Unit (2) Price (2) Fee (1)
____________________________________________________________________________________________________________
<S> <C> <C> <C> <C>
Home Equity Loan Pass-Through $5,000,000,000 100% $4,999,000,000 $1,319,736
Certificates and Asset-Backed
Notes (Issuable in Series)
=========================== ==================== ================ =================== ====================
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(1) $538,233,846.57 aggregate principal amount of securities registered by the
Registrant under Registration Statement No. 333-77561 referred to below and not
previously sold are consolidated in this Registration Statement pursuant to Rule
429. All registration fees in connection with such unsold amount of securities
have been previously paid by the Registrant under the foregoing Registration
Statement. Accordingly, the total amount registered under the Registration
Statement as so consolidated as of the date of this filing is $5,538,233,846.57.
In addition, the registration fee in connection with the $1,000,000.00 aggregate
principal amount of Home Equity Loan Pass-Through Certificates and Asset- Backed
Notes to be registered by the Registrant under this Registration Statement has
been previously paid by the Registrant in connection with the original filing on
May 4, 2000.
(2) Estimated solely for the purpose of calculating the registration fee.
__________________________
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission acting pursuant to said Section 8(a),
may determine.
Pursuant to Rule 429 of the Securities Act of 1933, the prospectus which is part
of this Registration Statement is a combined prospectus and includes all the
information currently required in a prospectus relating to the securities
covered by Registration Statement No. 333-77561 previously filed by the
Registrant. This Registration Statement which relates to $5,538,233,846.57
aggregate principal amount of securities, constitutes Post-Effective Amendment
No. 2 to Registration Statement 333-77561.
<PAGE>
EXPLANATORY NOTE
This Registration Statement includes (i) a basic prospectus relating to Home
Equity Loan Pass- Through Certificates and Asset-Backed Notes, (ii) an
illustrative form of prospectus supplement for use in an offering of Home Equity
Loan Pass-Through Certificates and (iii) an illustrative form of prospectus
supplement for use in an offering of Asset-Backed Notes.
<PAGE>
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, Dated May 10, 2000
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Prospectus
Home Equity Loan Pass-Through Certificates and Asset-Backed Notes
Residential Funding Mortgage Securities II, Inc.
Depositor
The depositor may periodically form separate trusts to issue certificates or
notes in series, backed by the assets of that trust.
Offered Securities The securities of any series will
consist of certificates or notes representing
interests in a trust and will be paid only from the
assets of that trust. Each series may include
multiple classes of securities with differing
payment terms and priorities. Credit enhancement
will be provided for all offered securities.
Trust Assets Each trust will consist primarily of:
o home equity revolving lines of credit
secured by first or junior liens on one- to
four-family residential properties acquired
under the home equity program;
o closed end home equity loans secured by
first or junior liens on one- to four-family
residential properties acquired under the
home equity program or under the 125 loan
program;
o home improvement installment sales contracts and loan
agreements, either unsecured or secured;
o manufactured housing installment sales contracts and loan
agreements;
o partial balances of these assets; and
o securities and whole or partial interests in these assets.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined that
this prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
______________________, 2000
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Important notice about information presented in this
prospectus and the accompanying prospectus supplement
We provide information to you about the securities in two separate documents
that provide progressively more detail:
o this prospectus, which provides general information, some of which may
not apply to your series of securities; and
o the accompanying prospectus supplement, which describes the specific
terms of your series of securities.
If the description of your securities 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 Securityholders" 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 securities in any state where the offer is not permitted.
Some capitalized terms used in this prospectus are defined in the Glossary
beginning on page 141.
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TABLE OF CONTENTS
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Introduction.................................................................................3
The Trusts...................................................................................3
Characteristics of the Loans.................................................................6
Revolving Credit Loans.......................................................................9
The Contracts...............................................................................12
Trust Asset Program.........................................................................16
Underwriting Standards......................................................................17
Guide Standards.............................................................................18
Qualifications of Sellers...................................................................22
Description of the Securities...............................................................22
Form of Securities..........................................................................24
Assignment of the Trust Assets..............................................................26
Review of Trust Assets......................................................................28
Representations Relating to Loans...........................................................29
Repurchases of Loans........................................................................30
Limited Right of Substitution...............................................................31
Excess Spread and Excluded Spread...........................................................33
Subservicing................................................................................34
Payments on Trust Assets....................................................................34
Withdrawals from the
Custodial Account...................................................................37
Distributions of Principal and Interest on the
Securities..........................................................................38
Funding Account.............................................................................39
Reports to Securityholders..................................................................39
Servicing and Administration of Trust
Assets..............................................................................41
Description of Credit Enhancement...........................................................50
General ....................................................................................50
Financial Guaranty Insurance Policies;
Surety Bonds........................................................................52
Letters of Credit...........................................................................52
Subordination...............................................................................52
Overcollateralization.......................................................................54
Reserve Funds...............................................................................54
Mortgage Pool Insurance Policies............................................................55
Special Hazard Insurance Policies...........................................................57
Bankruptcy Bonds............................................................................57
Maintenance of Credit Enhancement...........................................................58
Reduction or Substitution of Credit
Enhancement.........................................................................59
Other Financial Obligations Related To
The Securities......................................................................59
Swaps and Yield Supplement Agreements
...................................................................................59
Purchase Obligations........................................................................60
Insurance Policies on Loans.................................................................60
Hazard Insurance and Related Claims.........................................................60
Description of FHA Insurance
Under Title I.......................................................................62
The Depositor...............................................................................64
Residential Funding Corporation.............................................................64
The Agreements..............................................................................65
Events of Default; Rights Upon Event of
Default.............................................................................65
Amendment...................................................................................68
Termination; Redemption of Securities.......................................................70
The Trustee.................................................................................71
The Owner Trustee...........................................................................71
The Indenture Trustee.......................................................................72
Yield and Prepayment Considerations.........................................................72
Certain Legal Aspects of the Trust Assets and Related Matters...............................80
Trust Assets Secured by Mortgages on Mortgaged Property.....................................81
Manufactured Housing Contracts..............................................................91
The Home Improvement Contracts..............................................................96
Enforceability of Certain Provisions........................................................98
Applicability of Usury Laws................................................................100
Environmental Legislation..................................................................100
Alternative Mortgage Instruments...........................................................101
Leasehold Considerations...................................................................102
Soldiers' and Sailors' Civil Relief Act of 1940............................................102
Forfeitures in Drug and RICO
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Proceedings................................................................................103
Junior Mortgages; Rights of Senior Mortgagees..............................................103
Material Federal Income Tax Consequences...................................................105
General ...................................................................................105
REMICs and FASITs..........................................................................106
State and Other Tax Consequences...........................................................127
ERISA Considerations.......................................................................127
Plan Asset Regulations.....................................................................128
Considerations for ERISA Plans Regarding the Purchase of Certificates......................129
Considerations for ERISA Plans Regarding the Purchase of Notes.............................134
Tax Exempt Investors.......................................................................136
Consultation with Counsel..................................................................136
Legal Investment Matters...................................................................136
Use of Proceeds............................................................................137
Methods of Distribution....................................................................137
Legal Matters..............................................................................138
Financial Information......................................................................138
Additional Information.....................................................................139
Reports to Securityholders.................................................................139
Incorporation of Certain Information by Reference..........................................139
Glossary...................................................................................141
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ii
<PAGE>
Introduction
The securities offered may be sold from time to time in series. The
securities will consist of certificates or notes. Each series of certificates
will represent in the aggregate the entire beneficial ownership interest in, and
each series of notes in the aggregate will represent indebtedness of, a trust
consisting primarily of the trust assets described in the following section. The
trust assets will have been acquired by the depositor from one or more
affiliated or unaffiliated institutions. Each series of certificates will be
issued under a pooling and servicing agreement among the depositor, the trustee
and the master servicer, or a trust agreement between the depositor and the
trustee, all as specified in the accompanying prospectus supplement. Each series
of notes will be issued under an indenture between the related trust and the
indenture trustee specified in the accompanying prospectus supplement. Unless
the context indicates otherwise, references in this prospectus to the trustee
refer to the indenture trustee in the case of a series of notes. The trust
assets for each series of notes will be held in a trust under a trust agreement
and pledged under the indenture to secure a series of notes as described in this
prospectus and in the accompanying prospectus supplement. The ownership of the
trust fund for each series of notes will be evidenced by certificates issued
under the trust agreement, which certificates are not offered by this
prospectus.
The Trusts
General
As specified in the accompanying prospectus supplement, the trust for a
series of securities will consist primarily of a segregated pool of assets. The
trust assets will primarily include one of, or any combination of, the
following:
o revolving credit loans, which are first or junior lien home
equity revolving lines of credit acquired under the home equity
program;
o home equity loans, which are first or junior lien closed end home
equity loans acquired under the home equity program;
o home loans, which are first or junior lien closed end home loans
acquired under the 125 loan program;
o home improvement contracts, which are home improvement
installment sales contracts and installment loan agreements, that
are either unsecured or secured by first or junior liens on one-
to four-family residential properties or by purchase money
security interests in the home improvements financed by those
home improvement contracts;
o manufactured housing contracts, which are manufactured housing
installment sales contracts and installment loan agreements,
secured by security interests in manufactured homes;
o partial balances of any of the assets described above;
o Agency Securities and private securities, which as used in this
prospectus, are mortgage-backed or asset-backed securities issued
by entities other than Freddie Mac, Fannie Mae or Ginnie Mae that
represent interests in any of the assets described above,
including pass-through certificates or other instruments
evidencing interests in or that are secured by these assets, or
all or a portion of balances of any of these assets;
3
<PAGE>
o all payments and collections derived from the trust assets
described above after the related cut-off date, other than
Excluded Spread or other interest retained by the depositor or
any of its affiliates with respect to any trust asset, as from
time to time are identified as deposited in the Custodial Account
and in the related Payment Account;
o property acquired by foreclosure on the mortgaged properties or
other security for the trust assets or deed in lieu of
foreclosure; and/or
o any one or a combination, if applicable and to the extent
specified in the accompanying prospectus supplement, of a letter
of credit, purchase obligation, mortgage pool insurance policy,
contract pool insurance policy, special hazard insurance policy,
bankruptcy bond, financial guaranty insurance policy, derivative
products, surety bond or other type of credit enhancement as
described under "Description of Credit Enhancement" in this
prospectus.
Unless the context indicates otherwise, as used in this prospectus
supplement:
o contracts refer to manufactured housing contracts and home
improvement contracts;
o closed end loans refer to home equity loans or home loans; and
o loans refer to revolving credit loans, closed-end loans and
contracts.
In connection with a series of securities backed by revolving credit loans, if
the accompanying prospectus supplement indicates that the pool consists of
specified balances of the revolving credit loans, then the term revolving credit
loans in this prospectus refers only to those balances. 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 of the
National Housing Act, or Title I. The home equity program and the 125 loan
program are described in this prospectus under "Trust Asset
Program--Underwriting Standards."
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. In addition, if specified in the accompanying prospectus supplement
relating to a series of securities, a pool may contain Cooperative Loans
evidenced by Cooperative Notes that are secured by security interests in shares
issued by Cooperatives and in the related proprietary leases or occupancy
agreements granting exclusive rights to occupy specific dwelling units in the
related buildings. As used in this prospectus, unless otherwise specified:
o revolving credit loans, home loans, home equity loans and, if
applicable, contracts may include Cooperative Loans;
o mortgaged properties may include shares in the related
Cooperative and the related proprietary leases or occupancy
agreements securing Cooperative Notes;
o mortgage notes may include Cooperative Notes; and
o mortgages may include a security agreement relating to a
Cooperative Note.
If specified in the accompanying prospectus supplement, the trust
securing a series of securities may include Agency Securities or private
securities. For any series of securities backed by Agency Securities or private
securities, the entity that administers the private securities or Agency
Securities may be referred to as the manager, if stated in the accompanying
prospectus supplement.
4
<PAGE>
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 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 securities 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 securities. 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 securities 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.
Each trust asset will be selected by the depositor for inclusion in a
pool from among those purchased by the depositor from any of the following
sources:
o directly or through its affiliates, including Residential Funding
Corporation;
o sellers who are affiliates of the depositor, including
HomeComings Financial Network, Inc., Residential Money Centers,
Inc. and GMAC Mortgage Corporation; or
o savings banks, savings and loan associations, commercial banks,
credit unions, insurance companies or similar institutions that
are supervised and/or examined by a federal or state authority,
lenders approved by the United States Department of Housing and
Urban Development, known as HUD, mortgage bankers, investment
banking firms, the Federal Deposit Insurance Corporation, known
as the FDIC, state or local government housing finance agencies
and other regulated and unregulated loan originators or sellers,
including brokers, not affiliated with the depositor.
If described in the accompanying prospectus supplement, the depositor
may issue one or more classes of securities to a seller as consideration for the
purchase of trust assets securing that series of securities. 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 trust assets may be delivered either directly or indirectly to the
depositor under a Designated Seller Transaction. These securities may be sold in
whole or in part to any designated 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
designated seller about the designated seller, the trust assets and the
underwriting standards applicable to these trust assets. None of the depositor,
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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.
Any seller, including any designated seller, or Residential Funding
Corporation may retain or acquire any Excluded Balances with respect to any
related revolving credit loans, or any loan secured by a mortgage senior or
subordinate to any loan included in any pool of trust assets backing a series of
securities.
The depositor will cause the trust assets constituting each pool to be
assigned without recourse to the trustee named in the accompanying prospectus
supplement, for the benefit of the holders of all of the securities of a series.
See "Description of the Securities--Assignment of the Trust Assets" in this
prospectus. For a series of notes, the trust assets will be assigned to the
owner trustee by the depositor, and then pledged to the indenture trustee by the
issuer. 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 Securities" in this prospectus. 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
securities, 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 master servicer's obligations relating to the trust assets will
consist principally of its contractual servicing obligations under the related
pooling and servicing agreement or servicing agreement, including its obligation
to use its best efforts to enforce purchase obligations of Residential Funding
Corporation or any designated seller and other obligations of subservicers, as
described in this prospectus under "Description of the
Securities--Representations Relating to Loans," "--Servicing and Administration
of Trust Assets--Subservicing" and "--Assignment of the Trust Assets" or under
the terms of any private securities included in the trust.
Residential Funding Corporation, or another entity specified in the
accompanying prospectus supplement, will be obligated to advance funds to
borrowers for Draws made after the related cut-off date subject to
reimbursement. If the master servicer is obligated to make principal and
interest advances on the closed-end loans, that obligation will be limited to
amounts which the master servicer believes ultimately would be reimbursable out
of the proceeds of liquidation of the closed- end loans or any applicable form
of credit support. See "Description of the Securities--Servicing and
Administration of Trust Assets--Advances" in this prospectus.
The proceeds of the loans may be used by the borrower to purchase or
improve the related mortgaged properties, may be retained by the related
borrowers or may be used for purposes unrelated to the mortgaged properties.
A mortgaged property securing a loan and, if applicable, a contract may
be subject to the senior liens of one or more conventional 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. It is unlikely that more than one loan
secured by a single mortgaged property will be included in the same pool, but
the depositor, an affiliate of the depositor or an unaffiliated seller may have
an interest in the 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.
Characteristics of the Loans
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The accompanying prospectus supplement for each series of securities
will provide information concerning the types and characteristics of the loans
that will be included in the related pool. Each prospectus supplement applicable
to a series of securities will include information to the extent then available
to the depositor, as of the related cut-off date, if appropriate, on an
approximate basis. 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 that would make them eligible for
inclusion in a pool but were not selected for inclusion in a pool at that time.
The information may include, if applicable:
o the aggregate principal balance of the trust assets;
o the type of property securing the trust assets and related lien
priority, if any;
o the original or modified and/or remaining terms to maturity of
the trust assets;
o the range of principal balances of the loans at origination or
modification;
o the range of the years of origination of the trust assets;
o the earliest origination or modification date and latest maturity
date of the trust assets;
o the loan-to-value ratios, known as LTV ratios, or combined LTV
ratios of the trust assets, as applicable;
o the loan rate or range of loan rates borne by the trust assets;
o the applicable index, the range of Gross Margins, the weighted
average Gross Margin, the frequency of adjustments and maximum
loan rate;
o the geographical distribution of the mortgaged properties;
o the aggregate credit limits and the range of credit limits of the
related credit line agreements;
o the weighted average junior ratio and credit utilization rate;
o the number and percentage of contracts that are partially insured
by the FHA under Title I;
o the range of debt-to-income ratios;
o the distribution of loan purposes; and
o the range of Credit Scores.
A Current Report on Form 8-K will be available upon request to holders
of the related series of securities and will be filed, together with the related
pooling and servicing agreement or trust agreement, for each series of
certificates, or the related home loan purchase agreement, servicing agreement,
trust agreement and indenture, for each series of notes, with the Securities and
Exchange Commission, known as the Commission, within fifteen days after the
initial issuance of the securities. 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
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related credit line agreements. 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.
Prepayments on the Loans
Some closed-end loans may provide for payment of a prepayment charge if
the related borrower prepays the loan within a specified time period. In most
cases, revolving credit loans may be prepaid in full or in part at any time and
without penalty, and the related borrower will have the right during the related
Draw Period to make a Draw in the amount of any prepayment made with respect to
the loan. The mortgage note or mortgage related to each revolving credit loan
will usually contain a customary "due-on-sale" clause. The prospectus supplement
will disclose whether a material portion of the loans provide for payment of a
prepayment charge if the borrower prepays within a specified time period. This
charge may affect the rate of prepayment. The master servicer will be entitled
to all prepayment charges and late payment charges received on the loans and
those amounts will not be available for payment on the securities. However, some
states' laws restrict the imposition of prepayment charges even when the loans
expressly provide for the collection of those charges. As a result, it is
possible that prepayment charges may not be collected even on loans that provide
for the payment of these charges.
Modified Loans
A pool may include trust assets that have been modified subsequent to
their origination. If a trust asset is a modified trust asset, references to
origination shall be deemed to be references to the date of modification.
Balloon Loans
As specified in the prospectus supplement, a pool may include Balloon
Loans. Balloon Loans generally require a monthly payment of a pre-determined
amount that will not fully amortize the loan until the maturity date, at which
time the Balloon Amount will be due and payable. Payment of the Balloon Amount,
which, based on the amortization schedule of those loans, may be a substantial
amount, will typically depend on the borrower's ability to obtain refinancing of
the related mortgage loan or to sell the mortgaged property prior to the
maturity of the Balloon Loan. The ability to obtain refinancing will depend on a
number of factors prevailing at the time refinancing or sale is required,
including, without limitation, real estate values, the borrower's financial
situation, the level of available loan interest rates, the borrower's equity in
the related mortgaged property, tax laws, prevailing general economic conditions
and the terms of any related first lien loan. Neither the depositor, the master
servicer, the trustee nor any of their affiliates will be obligated to refinance
or repurchase any loan or to sell the mortgaged property.
Actuarial Loans
Monthly payments made by or on behalf of the borrower for some
closed-end loans will be one-twelfth of the applicable loan rate times the
unpaid principal balance, with any remainder of the payment applied to
principal. These types of closed end loans are known as actuarial loans.
Simple Interest Loans
Some loans may be simple interest loans. 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
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stated loan rate and further multiplied by a fraction, with the numerator equal
to the number of days in the period elapsed since the preceding payment of
interest was made and the denominator equal to the number of days in the annual
period for which interest accrues on the loan. As payments are received under a
simple interest loan, the amount received is applied first to interest accrued
to the date of payment and then the remaining amount is applied to pay any
unpaid fees and then to reduce the unpaid principal balance. Accordingly, if a
borrower pays a fixed monthly installment on a simple interest loan before its
scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be less than it would have been
had the payment been made as scheduled, and the portion of the payment applied
to reduce the unpaid principal balance will be correspondingly greater.
Conversely, if a borrower pays a fixed monthly installment after its scheduled
due date, the portion of the payment allocable to interest for the period since
the preceding payment was made will be greater than it would have been had the
payment been made as scheduled, and the remaining portion, if any, of the
payment applied to reduce the unpaid principal balance will be correspondingly
less. If each scheduled payment under a simple interest loan is made on or prior
to its scheduled due date, the principal balance of the loan will amortize more
quickly than scheduled. However, if the borrower consistently makes scheduled
payments after the scheduled due date, the loan will amortize more slowly than
scheduled. If a simple interest loan is prepaid, the borrower is required to pay
interest only to the date of prepayment. Those variable allocations among
principal and interest of a simple interest loan may affect the distributions of
principal and interest on the securities, as described in the accompanying
prospectus supplement.
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. As specified in the related mortgage note and described
in the accompanying prospectus supplement, the loan rate will be equal to the
sum of (a) the index as of that day and (b) the Gross Margin which may vary
under some circumstances, subject to the maximum rate specified in the mortgage
note and permitted by applicable law. If specified in the accompanying
prospectus supplement, some revolving credit loans, known as teaser loans, 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. As a
result of the introductory rate, interest collections on these loans will
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:
o the weekly average yield on U.S. Treasury securities adjusted to
a constant maturity of either six months or one year;
o the weekly auction average investment yield of U.S. Treasury
bills of six months;
o the daily bank prime loan rate made available by the Federal
Reserve Board;
o the cost of funds of member institutions for the Federal Home
Loan Bank of San Francisco;
o the interbank offered rates for U.S. dollar deposits in the
London market, each calculated as of a date prior to each
scheduled note rate adjustment date which will be specified in
the accompanying prospectus supplement; or
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o the weekly average of secondary market note rates on six-month
negotiable certificates of deposit.
Unless specified in the accompanying prospectus supplement, each
revolving credit loan will have a term to maturity from the date of origination
of not more than 25 years. The borrower under each revolving credit loan may
make Draws under the related credit line agreement at any time during the Draw
Period. 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
borrower 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 borrower under 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 borrower under each revolving credit
loan will be obligated to pay off the remaining account balance on the related
maturity date, which may be a substantial principal amount. The maximum amount
of any Draw 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.
Draws will be funded by the master servicer or another entity specified in the
accompanying prospectus supplement.
Unless specified in the accompanying prospectus supplement:
o the finance charge for any billing cycle, in most cases, will be
equal to interest accrued on the average daily principal balance
of the revolving credit loan for the billing cycle at the related
loan rate;
o the account balance on any day, in most cases, will be the
aggregate of the unpaid principal of the revolving credit loan
outstanding at the beginning of the day, plus all related Draws
funded on that day, plus the sum of any unpaid finance charges
and any unpaid fees, insurance premiums and other charges that
are due on the revolving credit loan minus the aggregate of all
payments and credits that are applied to the repayment of any
Draws on that day; and
o the principal balance on any day usually will be the related
account balance minus the sum of any unpaid finance charges and
additional charges that are due on the revolving credit loan.
Payments made by or on behalf of the borrower for each revolving credit
loan, in most cases, will be applied, first, to any unpaid finance charges that
are due on the revolving credit loan, second, to any unpaid additional charges
that are due thereon, and third, to any principal outstanding.
As to each revolving credit loan, the borrower's rights to receive Draws
during the Draw Period may be suspended, or the credit limit may be reduced, for
cause under a limited number of circumstances, including, but not limited to:
o a materially adverse change in the borrower's financial
circumstances;
o a decline in the value of the mortgaged property significantly
below its appraised value at origination; or
o a payment default by the borrower.
However, as to each revolving credit loan, the suspension or reduction usually
will not affect the payment terms for previously drawn balances. The master
servicer will have no obligation to
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investigate as to whether any of those circumstances have occurred or may have
no knowledge of their occurrence. Therefore, there can be no assurance that any
borrower's ability to receive Draws will be suspended or reduced if the
foregoing circumstances occur. In the event of default under a revolving credit
loan, at the discretion of the master servicer, the revolving credit loan may be
terminated and declared immediately due and payable in full. For this purpose, a
default includes but is not limited to:
o the borrower's failure to make any payment as required;
o any action or inaction by the borrower that materially and
adversely affects the mortgaged property or the rights in the
mortgaged property; or
o any fraud or material misrepresentation by a borrower in
connection with the revolving credit loan.
The master servicer will have the option to allow an increase in the
credit limit or an extension of the Draw Period applicable to any revolving
credit loan subject to the limitations described in the related agreement.
The mortgaged property securing each revolving credit loan will be
subject to the lien created by the related mortgage in respect of any related
Excluded Balance, whether made on or prior to the related cut-off date or
thereafter. The lien will be the same rank as the lien created by the mortgage
in respect of the revolving credit loan, and monthly payments, collections and
other recoveries under the credit line agreement related to the revolving credit
loan will be allocated as described in the accompanying prospectus supplement
among the revolving credit loan and the Excluded Balance. The depositor, an
affiliate of the depositor or an unaffiliated seller may have an interest in any
Draw or portion thereof excluded from the pool. If any entity with an interest
in a Draw or portion thereof excluded from the pool or any other Excluded
Balance were to become a debtor under the Bankruptcy Code and regardless of
whether the transfer of the related revolving credit loan constitutes an
absolute assignment, a bankruptcy trustee or creditor of such entity or such
entity as a debtor-in-possession could assert that such entity retains rights in
the related revolving credit loan and therefore compel the sale of such
revolving credit loan, including any Trust Balance, over the objection of the
trust and the securityholders. If that occurs, delays and reductions in payments
to the trust and the securityholders could result.
Allocation of Revolving Credit Loan Balances
With respect to any series of securities backed by revolving credit
loans, the related trust may include either:
o the entire principal balance of each revolving credit loan
outstanding at any time, including balances attributable to Draws
made after the related cut-off date; or
o the Trust Balance of each revolving credit loan.
The accompanying prospectus supplement will describe the specific
provisions by which payments and losses on any revolving credit loan will be
allocated as between the Trust Balance and any Excluded Balance. Typically, the
provisions:
o may provide that principal payments made by the borrower will be
allocated between the Trust Balance and any Excluded Balance
either:
o on a pro rata basis;
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o first to the Trust Balance until reduced to zero, then to the
Excluded Balance; or
o in accordance with other priorities specified in the accompanying
prospectus supplement; and
o may provide that interest payments, as well as liquidation
proceeds or similar proceeds following a default and any Realized
Losses, will be allocated between the Trust Balance and any
Excluded Balance on a pro rata basis or according to other
priorities specified in the accompanying prospectus supplement.
Even where a trust initially includes the entire principal balance of
the revolving credit loans, the pooling and servicing agreement may provide that
after a specified date or upon the occurrence of specified events, the trust may
not include balances attributable to additional Draws made after that time. The
accompanying prospectus supplement will describe these provisions as well as the
related allocation provisions that would be applicable.
The Contracts
Home Improvement Contracts
The trust for a series may include a contract pool evidencing interests
in home improvement contracts. The home improvement contracts may be
conventional home improvement contracts or, to the extent specified in the
accompanying prospectus supplement, the home improvement contracts may be
partially insured by the FHA under Title I.
In most cases, the home improvement 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.
As specified in the accompanying prospectus supplement, the home
improvement contracts will either be unsecured or secured primarily by:
o mortgages on one- to four-family residential properties that are
typically subordinate to other mortgages on the same mortgaged
property; or
o purchase money security interests in the home improvements
financed by those home improvement contracts.
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 contracts 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.
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 home improvement contracts with high LTV ratios at
origination, that the market value of a home improvement may be lower than the
principal amount outstanding under the related contract. In addition, because
the home improvement contracts included in the trust are typically subordinate
to other mortgages on the same mortgaged property, the rights of the related
securityholders, as mortgagee under that junior mortgage, are subordinate to
those of the mortgagees under any senior mortgage. See "Certain Legal
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Aspects of the Trust Assets and Related Matters--Trust Assets Secured by
Mortgages on Mortgaged Property--Junior Mortgages; Rights of Senior Mortgagees.
Manufactured Housing Contracts
The trust for a series may include a contract pool evidencing interests
in manufactured housing contracts originated by one or more manufactured housing
dealers, or the other entity or entities described in the accompanying
prospectus supplement. The manufactured housing contracts may be conventional
manufactured housing contracts or manufactured housing contracts partially
insured by the FHA under Title I. Each manufactured housing contract will be
secured by a manufactured home. The manufactured housing contracts will be fully
amortizing or, if specified in the accompanying prospectus supplement, Balloon
Loans.
The manufactured homes securing the manufactured housing contracts will
consist of "manufactured homes" within the meaning of 42 U.S.C. ss. 5402(6),
which are treated as "single family residences" for the purposes of the REMIC
provisions of the Internal Revenue Code of 1986, or Internal Revenue Code.
Accordingly, a manufactured home will be a structure built on a permanent
chassis, which is transportable in one or more sections and customarily used at
a fixed location, has a minimum of 400 square feet of living space and minimum
width in excess of 8 1/2 feet, is 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 in that manufactured home.
Manufactured homes, unlike mortgaged properties, in most cases,
depreciate in value. Consequently, at any time after origination it is possible,
especially in the case of manufactured housing contracts with high LTV ratios at
origination, that the market value of a manufactured home may be lower than the
principal amount outstanding under the related contract.
The Mortgaged Properties
The mortgaged properties will consist primarily of attached or detached
individual dwellings, Cooperative dwellings, individual or adjacent
condominiums, townhouses, duplexes, row houses, modular housing, manufactured
homes, individual units or two-to four-unit dwellings in planned unit
developments and two- to four-family dwellings. Each mortgaged property, other
than a Cooperative dwelling, will be located on land owned by the borrower or,
if specified in the accompanying prospectus supplement, land leased by the
borrower. Attached dwellings may include structures where each borrower owns the
land on which the unit is built with the remaining adjacent land owned in
common. Mortgaged properties may also include dwelling units subject to a
proprietary lease or occupancy agreement in an apartment building owned by a
Cooperative. The proprietary lease or occupancy agreement securing a Cooperative
Loan is subordinate, in most cases, to any blanket mortgage on the related
cooperative apartment building or on the underlying land. Additionally, in the
case of a Cooperative Loan, the proprietary lease or occupancy agreement may be
terminated and the cooperative shares may be cancelled by the Cooperative if the
tenant-stockholder fails to pay maintenance or other obligations or charges owed
by the tenant-stockholder. See "Certain Legal Aspects of the Trust Assets and
Related Matters" in this prospectus.
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. On 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.
The mortgaged properties may be located in any of the fifty states, the
District of Columbia or the Commonwealth of Puerto Rico.
The mortgaged properties may be owner occupied or non-owner occupied and
may include vacation homes, second homes and investment properties. The
percentage of loans secured by mortgaged properties that are owner-occupied will
be disclosed in the accompanying prospectus supplement. The basis for any
statement that a given percentage of the loans are secured by mortgaged
properties that are owner-occupied will be one of the following:
o the making of a representation by the borrower at origination of
a loan that the borrower intends to use the mortgaged property as
a primary residence for at least the first six months of
occupancy;
o a representation by the originator of the loan, which may be
based solely on the above clause; or
o the fact that the mailing address for the borrower is the same as
the address of the mortgaged property.
Any representation and warranty regarding owner-occupancy may be based
solely on this information. Loans secured by investment properties, including
two- to four-unit dwellings, may also be secured by an assignment of leases and
rents and operating or other cash flow guarantees relating to the loans.
A mortgaged property securing a loan may be subject to the senior liens
securing one or more conventional 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. Loans evidencing liens junior or senior to the loans in the trust
will likely not be included in the same trust, but the depositor, an affiliate
of the depositor or an unaffiliated seller may have an interest in the junior or
senior loan.
The Agency Securities
Government National Mortgage Association
Ginnie Mae is a wholly-owned corporate instrumentality of the United
States within HUD. Section 306(g) of Title III of the National Housing Act of
1934, as amended, referred to in this prospectus as the Housing Act, authorizes
Ginnie Mae to guarantee the timely payment of the principal of and interest on
securities representing interests in a pool of mortgages insured by the FHA,
under the Housing Act or under Title V of the Housing Act of 1949, or partially
guaranteed by the VA under the Servicemen's Readjustment Act of 1944, as
amended, or under Chapter 37 of Title 38, United States Code.
Section 306(g) of the Housing Act provides that "the full faith and
credit of the United States is pledged to the payment of all amounts which may
be required to be paid under any guarantee under this subsection." In order to
meet its obligations under that guarantee, Ginnie Mae may, under Section 306(d)
of the Housing Act, borrow from the United States Treasury an amount that is at
any time sufficient to enable Ginnie Mae to perform its obligations under its
guarantee. See "Additional Information" for the availability of further
information regarding Ginnie Mae and Ginnie Mae securities.
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Ginnie Mae Securities
In most cases, each Ginnie Mae security relating to a series, which may
be a Ginnie Mae I Certificate or a Ginnie Mae II Certificate as referred to by
Ginnie Mae, will be a "fully modified pass-through" mortgage-backed certificate
issued and serviced by a mortgage banking company or other financial concern
approved by Ginnie Mae, except any stripped mortgage backed securities
guaranteed by Ginnie Mae or any REMIC securities issued by Ginnie Mae. The
characteristics of any Ginnie Mae securities included in the trust for a series
of securities will be described in the accompanying prospectus supplement.
Federal Home Loan Mortgage Corporation
Freddie Mac is a corporate instrumentality of the United States created
under Title III of the Emergency Home Finance Act of 1970, as amended, or the
Freddie Mac Act. Freddie Mac was established primarily for the purpose of
increasing the availability of mortgage credit for the financing of needed
housing. The principal activity of Freddie Mac currently consists of purchasing
first-lien, conventional, residential loans or participation interests in loans
and reselling the loans so purchased in the form of guaranteed private
securities, primarily Freddie Mac securities. In 1981, Freddie Mac initiated its
Home Mortgage Guaranty Program under which it purchases loans from sellers with
Freddie Mac securities representing interests in the loans so purchased. All
loans purchased by Freddie Mac must meet certain standards set forth in the
Freddie Mac Act. Freddie Mac is confined to purchasing, so far as practicable,
loans that it deems to be of the quality and type that generally meets the
purchase standards imposed by private institutional mortgage investors. See
"Additional Information" for the availability of further information regarding
Freddie Mac and Freddie Mac securities. Neither the United States nor any agency
thereof is obligated to finance Freddie Mac's operations or to assist Freddie
Mac in any other manner.
Freddie Mac Securities
In most cases, each Freddie Mac security relating to a series will
represent an undivided interest in a pool of loans that typically consists of
conventional loans, but may include FHA loans and VA loans, purchased by Freddie
Mac, except any stripped mortgage backed securities issued by Freddie Mac. Each
of those pools will consist of loans, substantially all of which are secured by
one- to four-family residential properties or, if specified in the accompanying
prospectus supplement, are secured by multi-family residential properties. The
characteristics of any Freddie Mac securities included in the trust for a series
of securities will be described in the accompanying prospectus supplement.
Federal National Mortgage Association
Fannie Mae is a federally chartered and privately owned corporation
organized and existing under the Federal National Mortgage Association Charter
Act (12 U.S.C. ss. 1716 et seq.). It is the nation's largest supplier of
residential mortgage funds. Fannie Mae was originally established in 1938 as a
United States government agency to provide supplemental liquidity to the
mortgage market and was transformed into a stockholder-owned and privately
managed corporation by legislation enacted in 1968. Fannie Mae provides funds to
the mortgage market primarily by purchasing home loans from local lenders,
thereby replenishing their funds for additional lending. See "Additional
Information" for the availability of further information respecting Fannie Mae
and Fannie Mae securities. Although the Secretary of the Treasury of the United
States has authority to lend Fannie Mae up to $2.25 billion outstanding at any
time, neither the United States nor any agency thereof is obligated to finance
Fannie Mae's operations or to assist Fannie Mae in any other manner.
Fannie Mae Securities
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In most cases, each Fannie Mae security relating to a series will
represent a fractional undivided interest in a pool of loans formed by Fannie
Mae, except any stripped mortgage backed securities issued by Fannie Mae. Loans
underlying Fannie Mae securities will consist of fixed, variable or adjustable
rate conventional loans or fixed-rate FHA loans or VA loans. Those loans may be
secured by either one- to four-family or multi-family residential properties.
The characteristics of any Fannie Mae securities included in the trust for a
series of securities will be described in the accompanying prospectus
supplement.
Private Securities
Any private securities underlying any securities will (i) either (a)
have been previously registered under the Securities Act of 1933, as amended, or
the Securities Act, or (b) will be eligible for sale under Rule 144(k) under the
Securities Act, and (ii) will be acquired in secondary market transactions from
persons other than the issuer or its affiliates. Alternatively, if the private
securities were acquired from their issuer or its affiliates, or were issued by
the depositor or any of its affiliates, then the private securities will be
registered under the Securities Act, at the same time as the securities.
References in this prospectus to Advances to be made and other actions
to be taken by the master servicer in connection with the loans may include
advances made and other actions taken under the terms of the private securities.
Each security offered by this prospectus will evidence an interest in only the
related pool and corresponding trust described in the accompanying prospectus
supplement for an offered security, and not in any other pool or trust related
to securities issued in this prospectus.
In addition, as to any series of securities 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 a series of securities. 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 securities 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 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
stated in the accompanying prospectus supplement.
Trust Asset Program
Except in the case of a Designated Seller Transaction, the trust assets
will have been purchased by the depositor, either directly or indirectly through
Residential Funding Corporation from sellers. In the case of a Designated Seller
Transaction, the depositor may purchase the trust assets directly from the
designated seller. 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" in this
prospectus 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.
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Underwriting Standards
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, referred to as the Guide, as modified from time to time, including the
provisions of the Guide applicable to the depositor's home equity program or the
125 loan program, as applicable. The home equity program may include revolving
credit loans and home equity loans. The 125 loan program may include home loans
and 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
private 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--Guide
Standards" and "Qualifications of Sellers" in this prospectus. 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 that 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:
o the original principal balance or credit limit, as applicable;
o the LTV or combined LTV ratio;
o the loan type or loan program; and
o the applicable Credit Score of the related borrower used in
connection with the origination of the loan, as determined based
on a credit scoring model acceptable to the depositor.
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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 borrower's Credit Score. See "--Guide
Standards" in this prospectus.
The underwriting standards used 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 HomeComings
Financial Network, Inc., Residential Money Centers, Inc. and GMAC Mortgage
Corporation, with underwriting standards in accordance with the Guide or as
otherwise agreed to by the depositor. However, in some limited circumstances,
the loans may be employee or preferred customer loans for which, in accordance
with the affiliate's 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
Loan Documentation
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 borrower that is a trust, is required to fill out a detailed application
providing pertinent credit information. As part of the description of the
borrower's financial condition, the borrower will have furnished information,
which may or may not be verified, describing the borrower's assets, liabilities,
income, credit history and employment history, and furnished an authorization to
apply for a credit report that summarizes the borrower's available credit
history with local merchants and lenders and any record of bankruptcy. The
borrower may also have been required to authorize verifications of deposits at
financial institutions where the borrower had demand or savings accounts. In the
case of investment properties, only income derived from the mortgaged property
may have been considered for underwriting purposes, rather than the income of
the borrower from other sources. For mortgaged property consisting of vacation
or second homes, no income derived from the property will typically have been
considered for underwriting purposes. 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
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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 may report the borrower's current
salary and 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 loan secured by a property owned by a trust, the
foregoing procedures may be waived where the mortgage note is executed on behalf
of the trust.
The 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" 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 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 loan. Normally, in order to be eligible for a reduced loan
documentation program, a borrower 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.
Appraisals
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;
provided that, depending on the original principal balance or the credit limit,
as applicable, an earlier appraisal may be used if the appraisal was made not
earlier than two years prior to the date of origination of the loan and the
related appraiser certifies that the value of the related mortgaged property has
not declined since the date of the original appraisal or if a field review or
statistical valuation is obtained. However, appraisals, statistical valuations,
or stated values will not establish that the mortgaged properties provide
assurance of repayment of the loans. See "Risk Factors" in the accompanying
prospectus supplement. 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.
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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 borrower in his or her
application.
Loan-to-Value, Combined Loan-to-Value and Junior Ratios
As to each loan, 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 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 loan at origination of the loan together with any 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.
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 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.
Credit Scores
The Credit Scores for a portion of the loans underlying each series of
securities may 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 creditworthiness. 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 current 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 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. Although each scoring model
varies, typically 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 in most
cases does not correspond to the life of a loan. Furthermore, many Credit Scores
were not developed specifically for use in connection with the types of loans
described in this prospectus, but for consumer loans in general, and assess only
the borrower's past credit history. Therefore, in many
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cases, a Credit Score may not take into consideration the differences between
the types of loans described in this prospectus and consumer loans in general,
or the specific characteristics of the related loan, including the LTV ratio or
combined LTV ratio, as applicable, the collateral for the loan, or the
debt-to-income ratio of the borrower. There can be no assurance that the Credit
Scores of the borrowers will be an accurate predictor of the likelihood of
repayment of the related loans or that any borrower's Credit Score would not be
lower if obtained as of the date of the accompanying prospectus supplement.
Application of Underwriting Standards
Once all applicable employment, credit and property information is
received, a determination is made by the original lender as to whether the
prospective borrower has sufficient monthly income available to meet the
borrower's monthly obligations on the proposed loan and other expenses related
to the home if applicable, such as property taxes, hazard insurance and
maintenance fees or other levies assessed by a Cooperative, if applicable, as
well as other financial obligations, including debt service on any 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 many 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. For these loans or Balloon Loans, 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.
In some circumstances, the loans have been made to employees or
preferred customers of the originator for which, in accordance with the
originator's 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, GMAC Mortgage Corporation
or any of their affiliates, in limited circumstances preferential loan rates may
be allowed.
The home equity program provides some limitations on the combined LTV
ratio for the loans and restrictions on any related underlying first lien loan.
The underwriting guidelines for the home equity program normally permit combined
LTV ratio's as high as 100%; however, the maximum permitted combined LTV ratio
may be reduced due to various underwriting criteria. In areas where property
values are considered to be declining, the maximum permitted combined LTV ratio
is 75%. The underwriting guidelines for the 125 Loan Program normally permit
combined LTV ratios as high as 125%; however, the maximum permitted combined LTV
ratio may be reduced due to various underwriting criteria. The underwriting
guidelines for both programs also include restrictions based on the borrower's
debt-to-income ratio. In addition to the conditions described above, an
evaluation of the prospective borrower's credit quality will be made based on a
credit scoring model approved by Residential Funding Corporation. Underwriting
guidelines for both programs include minimum credit score levels that may apply
depending on other factors relating to the loan. The required yields for
fixed-rate closed-end loans and required Gross Margins for revolving credit
loans purchased under the home equity program, as announced from time to time,
vary based on a number of factors including combined LTV ratio, original
principal balance or credit limit, documentation level, property type, and
borrower debt-to-income ratio and credit score.
In its evaluation of loans that have twenty-four or more months of
payment experience, Residential Funding Corporation generally places greater
weight on payment history and may take
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into account market and other economic trends while placing less weight on
underwriting factors generally applied to newly originated 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:
o the financial status, including the net worth, of the seller;
o the previous experience of the seller in originating home equity,
revolving credit, home improvement, manufactured housing or first
loans;
o the prior delinquency and loss experience of the seller;
o the underwriting standards and the quality control procedures
employed by the seller; and
o 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 loans sold
by it in the trust for a series of securities, 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. To the extent the 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 securityholders or by the credit enhancement, if any.
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 securityholders or by the credit enhancement, if any.
Description of the Securities
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The securities will be issued in series. Each series of certificates or,
in some instances, two or more series of certificates, will be issued under a
pooling and servicing agreement or, in the case of certificates backed by
private securities, a trust agreement, similar to one of the forms filed as an
exhibit to the registration statement for these securities. 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 for
these securities. In the case of each series of notes, the depositor, the
related trust and the entity named in the accompanying prospectus supplement as
master servicer for the series will enter into a separate servicing agreement.
Each pooling and servicing agreement, trust agreement, servicing agreement and
indenture will be filed with the Securities and Exchange Commission as an
exhibit to a Form 8-K.
The following summaries, together with additional summaries under "The
Agreements" in this prospectus, describe all material terms and provisions
relating to the securities common to each agreement. All references to an
"agreement" and any discussion of the provisions of any agreement applies to
pooling and servicing agreements, trust agreements, servicing agreements and
indentures, as applicable. The summaries do not purport to be complete and are
subject to, and are qualified in their entirety by reference to, all of the
provisions of related agreement for each trust and the accompanying prospectus
supplement.
Each series of securities may consist of any one or a combination of the
following:
o a single class of securities;
o one or more classes of senior securities, of which one or more
classes of securities may be senior in right of payment to any
other class or classes of securities subordinate to it, and as to
which some classes of senior or subordinate securities may be
senior to other classes of senior or subordinate securities, as
described in the accompanying prospectus supplement;
o one or more classes of mezzanine securities which are subordinate
securities but which are senior to other classes of subordinate
securities in terms of distributions or losses;
o one or more classes of strip securities 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;
o two or more classes of securities 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 accrual securities for which some accrued
interest will not be distributed but rather will be added to the
principal balance of those classes of securities on the
distribution date specified in the accompanying prospectus
supplement; or
o other types of classes of securities, as described in the
accompanying prospectus supplement.
Credit support for each series of securities will be provided by any one
or a combination of the following:
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o subordination of one or more classes of securities;
o financial guaranty insurance policies;
o excess spread;
o overcollateralization;
o surety bonds;
o reserve funds;
o purchase obligations;
o derivative products;
o bankruptcy bonds;
o special hazard insurance policies;
o letters of credit;
o mortgage pool insurance policies; or
o other credit enhancement as described under "Description of
Credit Enhancement" in this prospectus.
Form of Securities
As specified in the accompanying prospectus supplement, the securities
of each series will be issued either as physical certificates or in book-entry
form. If issued as physical certificates, the securities 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 securities registrar who is appointed under the
related agreement to register the securities. No service charge will be made for
any registration of exchange or transfer of securities, but the trustee may
require payment of a sum sufficient to cover any tax or other governmental
charge. The term securityholder as used in this prospectus refers to the entity
whose name appears on the records of the securities 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 securities will
be initially issued through the book-entry facilities of The Depository Trust
Company, or DTC, or Clearstream Banking, societe anonyme, formerly known as
Cedelbank SA, or Clearstream, or the Euroclear System in Europe known as
Euroclear. Securityholders may hold book entry securities 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 securities will list DTC's nominee as the
record holder. 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 those positions in customers' securities accounts in the
depositaries' names on the books of DTC.
DTC is a limited-purpose trust company organized under the laws of the
State of New York, which holds securities for its participants and facilitates
the clearance and settlement of securities transactions between participants
through electronic book-entry changes in the accounts of
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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 securities will be entitled to receive a
security representing that interest in registered, certificated form, unless
either:
o DTC ceases to act as depository for that security and a successor
depository is not obtained; or
o the trustee elects in its sole discretion to discontinue the
registration of the securities through DTC.
Prior to any of these events, beneficial owners will not be recognized by the
trustee or the master servicer as holders of the related securities for purposes
of the related agreement, and beneficial owners will be able to exercise their
rights as owners of their securities only indirectly through DTC participants
and indirect participants. Any beneficial owner that desires to purchase, sell
or otherwise transfer any interest in book-entry securities 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
securities 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 securities to persons or entities that are not participants in the
DTC system, or to otherwise act as to the securities, may be limited because of
the lack of physical certificates evidencing the securities and because DTC may
act only on behalf of participants.
Because of time zone differences, the securities account of a
Clearstream or Euroclear participant as a result of a transaction with a DTC
participant, other than a depositary holding on behalf of Clearstream or
Euroclear, will be credited during subsequent securities settlement processing
day, immediately following the DTC settlement date, which must be a business day
for Clearstream 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 Clearstream participants on that business day. Cash
received in Clearstream or Euroclear as a result of sales of securities by or
through a Clearstream participant or Euroclear participant to a DTC participant,
other than the depositary for Clearstream or Euroclear, will be received with
value on the DTC settlement date, but will be available in the relevant
Clearstream 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 Clearstream 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 Clearstream
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.
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Clearstream participants and Euroclear participants may not deliver instructions
directly to the depositaries.
Clearstream, as a professional depository, holds securities for its
participants and facilitates the clearance and settlement of securities
transactions between Clearstream participants through electronic book-entry
changes in accounts of Clearstream participants, thereby eliminating the need
for physical movement of certificates. As a professional depository, Clearstream
is subject to regulation by the Luxembourg Monetary Institute.
Euroclear was created to hold securities for participants of Euroclear
and to clear and settle transactions between Euroclear participants through
simultaneous electronic book-entry delivery against payment, thereby eliminating
the need for physical movement of certificates and any risk from lack of
simultaneous transfers of securities and cash. Euroclear is operated by the
Brussels, Belgium office of Morgan Guaranty Trust Company of New York, the
Euroclear operator, under contract with Euroclear Clearance Systems S.C., a
Belgian co-operative corporation referred to as the clearance cooperative. All
operations are conducted by the Euroclear operator, and all Euroclear securities
clearance accounts and Euroclear cash accounts are accounts with the Euroclear
operator, not the clearance cooperative.
The clearance cooperative establishes policy for Euroclear on behalf of
Euroclear participants. The Euroclear operator is the Belgian branch of a New
York banking corporation which is a member bank of the Federal Reserve System.
As a result, it is regulated and examined by the Board of Governors of the
Federal Reserve System and the New York State Banking Department, as well as the
Belgian Banking Commission. Securities clearance accounts and cash accounts with
the Euroclear operator are governed by the Terms and Conditions Governing Use of
Euroclear and the related Operating Procedures of the Euroclear System and
applicable Belgian law. The Terms and Conditions govern transfers of securities
and cash within Euroclear, withdrawals of securities and cash from Euroclear,
and receipts of payments relating to securities in Euroclear. All securities in
Euroclear are held on a fungible basis without attribution of specific
certificates to specific securities clearance accounts.
Distributions on the book-entry securities will be forwarded by the
trustee to DTC, and DTC will be responsible for forwarding those payments to
participants, each of which will be responsible for disbursing the payments to
the beneficial owners it represents or, if applicable, to indirect participants.
Accordingly, beneficial owners may experience delays in the receipt of payments
on their securities. Under DTC's procedures, DTC will take actions permitted to
be taken by holders of any class of book-entry securities under the related
agreement only at the direction of one or more participants to whose account the
book-entry securities 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
securityholders of any class to the extent that participants authorize those
actions. None of the master servicer, the depositor, the 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 securities, 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 securities, the depositor will
cause the trust assets and any other assets being included in the related trust
to be assigned without recourse to the trustee or its nominee, which may be the
custodian on behalf of the related trust. This assignment will include, 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. In the case
of a series of notes, the depositor's assignment will be
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made to the owner trustee and, concurrently with that assignment, the owner
trustee will 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 of the cut-off date for each loan regarding
the principal balance, the loan rate, the amount of the monthly payment of
principal and interest, the maturity of the mortgage note and the LTV or
combined LTV ratio and junior mortgage ratio, as applicable, 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.
Except as provided below for some securities backed by Trust Balances of
revolving credit loans, the depositor will, as to each loan that is a trust
asset other than loans underlying any private securities, deliver to an entity
specified in the accompanying prospectus supplement, which may be the trustee, a
custodian or another entity appointed by the trustee, the legal documents
relating to those trust assets that are in possession of the depositor. The
legal documents may include, as applicable, depending upon whether that trust
asset is secured by a lien on mortgaged property:
o the mortgage note and any modification or amendment made to the
mortgage note, endorsed without recourse either in blank or to
the order of the trustee or the owner trustee or a nominee, or a
lost note affidavit, together with a copy of the related mortgage
note;
o the mortgage, except for any mortgage not returned from the
public recording office, with evidence of recording indicated
thereon or, in the case of a Cooperative Loan, the respective
security agreements and any applicable UCC financing statements;
o an assignment, except for any assignment not returned from the
public recording office, in recordable form of the mortgage, or
evidence that the mortgage is held for the related trustee
through the MERS(R) System or, as to a Cooperative Loan, an
assignment of the respective security agreements, any applicable
UCC financing statements, recognition agreements, relevant stock
certificates, related blank stock powers and the related
proprietary leases or occupancy agreements;
o if applicable, any riders or modifications to the mortgage note
and mortgage, together with any other documents at those times
described in the related agreement; and
o if applicable, the original contract and copies of documents and
instruments related to each contract and, other than in the case
of unsecured contracts, the security interest in the property
securing the contract.
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 trustee, the owner trustee or the rating agencies, the
recording is not required to protect the 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.
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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 case of contracts, the depositor or the master servicer will
cause a financing statement to be executed by the depositor identifying the
trustee as the secured party and identifying all contracts as collateral.
However, unless otherwise specified in the accompanying prospectus supplement,
the contracts will not be stamped or otherwise marked to reflect their
assignment from the depositor to the trust and no recordings or filings will be
made in the jurisdictions in which the manufactured homes are located. See
"Certain Legal Aspects of the Trust Assets and Related Matters--Manufactured
Housing Contracts" and "--The Home Improvement Contracts" in this prospectus.
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.
If, as to any 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 agreement because of a delay caused by the public
recording office, the depositor will deliver or cause to be delivered to the
trustee, the custodian or another entity appointed by the trustee a true and
correct photocopy of the mortgage or assignment. The depositor will deliver or
cause to be delivered to the trustee or the custodian the mortgage or assignment
with evidence of recording indicated thereon after receipt thereof from the
public recording office or from the master servicer.
Review of Trust Assets
The 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 trustee or, following payment in full of
the securities and discharge of the related agreement, the owner trustee or the
master servicer, as applicable. The identity of the custodian, if any, will be
described in the accompanying prospectus supplement.
The trustee or the custodian will hold these documents in trust for the
benefit of the securityholders and, in most cases will review those documents
within 90 days after receipt. The trustee or the custodian shall notify the
master servicer and the depositor of any omissions or defects in respect of its
review. If any omission or defect reported materially and adversely affects the
interests of the securityholders in the related loan, the master servicer or the
depositor shall notify Residential Funding Corporation or the designated seller.
If Residential Funding Corporation or, in a Designated Seller Transaction, the
designated seller cannot cure the defect within the period specified in the
accompanying prospectus supplement after notice of the defect is given to
Residential Funding Corporation or, if applicable, the designated seller,
Residential Funding Corporation or, if applicable, the designated seller is
required to, within the period specified in the accompanying prospectus
supplement, either repurchase the related loan or any property acquired from it
from the trustee, or if permitted, substitute for that loan a new loan in
accordance with the standards described in this prospectus. The master servicer
will be obligated to enforce this
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obligation of Residential Funding Corporation or the designated seller to the
extent described under "Description of the Securities--Representations Relating
to Loans" in this prospectus, but that obligation is subject to the provisions
described under "Description of the Securities--Servicing and Administration of
Trust Assets--Realization Upon Defaulted Loans" in this prospectus. There can be
no assurance that the applicable designated seller will fulfill its obligation
to purchase any loan 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 loan if the
designated seller defaults on its obligation to do so. The obligation to
repurchase or substitute for a loan constitutes the sole remedy available to the
securityholders or the trustee for a material defect in a constituent document.
Any loan not so purchased or substituted for shall remain in the related trust.
For any series of securities backed by Trust Balances of revolving
credit loans, the foregoing documents in most cases will have been delivered to
an entity specified in the accompanying prospectus supplement, which may be the
trustee, a custodian or another entity appointed by the trustee. That entity
shall hold those documents as or on behalf of the trustee for the benefit of the
securityholders, with respect to the Trust Balances of these loans, and on
behalf of any other applicable entity with respect to any Excluded Balance of
these loans, as their respective interests may appear. In those cases, the
review of the related documents need not be performed if a similar review has
previously been performed by the entity holding the documents for an Excluded
Balance and that review covered all documentation for the Trust Balance.
Under some circumstances, as to any series of securities, 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 securities 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.
Representations Relating to Loans
Except as described in the second paragraph under "Trust Asset
Program--Qualification of Sellers", each seller will have made representations
and warranties to Residential Funding Corporation relating to the loans sold by
it. However, unless provided in the accompanying prospectus supplement, the
representations and warranties of the seller will not be assigned to the trustee
for the benefit of the holders of the related series of securities, 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 loans 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
loans underlying any private securities or as specified in the accompanying
prospectus supplement, will have made limited representations and warranties
regarding the loans to the depositor at the time that they are sold to the
depositor. The representations and warranties will, in most cases, include,
among other things, that:
o as of the cut-off date, the information contained in a listing of
the related loans is true and correct in all material respects;
o Residential Funding Corporation was the sole holder and owner of
the loans free and clear of any and all liens and security
interests;
o each loan complied in all material respects with all applicable
local, state and federal laws at the time of origination;
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o except as otherwise indicated in the accompanying prospectus
supplement, no loan is one month or more delinquent in payment of
principal and interest;
o to the best of Residential Funding Corporation's knowledge, there
is no delinquent tax or assessment lien against any mortgaged
property; and
o to the best of Residential Funding Corporation's knowledge, any
contract that is partially insured by the FHA under Title I was
originated in accordance with applicable FHA regulations and is
insured, without set-off, surcharge or defense by the FHA.
In a Designated Seller Transaction, as specified in the accompanying
prospectus supplement, the designated seller will have made specific
representations and warranties regarding the loans to the depositor generally
similar to those made in the preceding paragraph by Residential Funding
Corporation.
Repurchases of Loans
The depositor will assign to the trustee all of its right, title and
interest in each agreement by which it purchased a loan 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 loan 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 loan that
materially and adversely affects the interests of the securityholders in the
loan, within 90 days after notice from the master servicer, the designated
seller or Residential Funding Corporation, as the case may be, will be obligated
to repurchase the loan at a repurchase price contained in the related agreement,
which repurchase price, in most cases, will be equal to the principal balance of
that loan as of the date of repurchase 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.
In addition, except in the case of a Designated Seller Transaction,
unless otherwise specified in the accompanying prospectus supplement,
Residential Funding Corporation will be obligated to repurchase or substitute
for any loan 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 loan, as
applicable, in the listing of related loans, subject only to:
o liens of real property taxes and assessments not yet due and
payable;
o covenants, conditions and restrictions, rights of way, easements
and other matters of public record as of the date of recording of
the mortgage and other permissible title exceptions;
o other matters to which like properties are commonly subject which
do not materially adversely affect the value, use, enjoyment or
marketability of the mortgaged property; and
o if applicable, the liens of the related senior loans.
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For any loan as to which the depositor delivers to the trustee or the custodian
an affidavit certifying that the original mortgage note has been lost or
destroyed, if the loan 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 loan, in the manner described in
the preceding paragraph. However, Residential Funding Corporation will not be
required to repurchase or substitute for any loan as described above if the
circumstances giving rise to the requirement also constitute fraud in the
origination of the related loan. Furthermore, because the listing of the related
loans, in most cases, contains information about the loans 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 loans between the cut-off date and the closing date. Residential
Funding Corporation will not be required to purchase or substitute for any loan
as a result of the prepayment or modification.
Limited Right of Substitution
In the case of a loan required to be repurchased by Residential Funding
Corporation as provided in "Repurchases of Loans" in this prospectus,
Residential Funding Corporation may, at its sole option, rather than purchase
the loan, remove the loan from the trust, or from the assets underlying any
private securities, if applicable, and cause the depositor to substitute in its
place another loan of like kind. The accompanying prospectus supplement will
describe the conditions of any eligible substitute loan. Any substitution must
be effected within 120 days of the date of the initial issuance of the
securities of a trust for which no REMIC election is made. In the case of a
trust for which a REMIC election is made, except as otherwise provided in the
accompanying prospectus supplement, substitution of a defective loan must be
effected within two years of the date of the initial issuance of the securities,
and may not be made if the substitution would cause the trust to not qualify as
a REMIC or result in a prohibited transaction tax under the Internal Revenue
Code. In most cases, any qualified substitute loan will, on the date of
substitution:
o have an outstanding principal balance, after deduction of the
principal portion of the monthly payment due in the month of
substitution, not in excess of the outstanding principal balance
of the deleted loan--the amount of any shortfall to be deposited
in the related Custodial Account in the month of substitution for
distribution to the securityholders;
o have a loan rate and a Net Loan Rate not less than, and not more
than one percentage point greater than, the loan rate and Net
Loan Rate, respectively, of the deleted loan as of the date of
substitution;
o have a LTV ratio or a combined LTV ratio at the time of
substitution no higher than that of the deleted loan at the time
of substitution;
o have a remaining term to maturity not greater than, and not more
than one year less than, that of the deleted loan; and
o comply with all of the applicable representations and warranties
contained in the related pooling and servicing agreement or loan
purchase agreement as to individual loans as of the date of
substitution.
The related pooling and servicing agreement or loan purchase agreement
may include additional requirements relating to revolving credit loans or other
specific types of loans, or additional provisions relating to meeting the
foregoing requirements on an aggregate basis where a number of substitutions
occur contemporaneously. Unless otherwise specified in the accompanying
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prospectus supplement, a designated seller will have no option to substitute for
a loan that it is obligated to repurchase in connection with a breach of a
representation and warranty.
The master servicer will be required under the related agreement to use
its best reasonable efforts to enforce this purchase or substitution obligation
for the benefit of the trustee and the securityholders, 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 if 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 loans, 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 loans or coverage of only some
loss amounts. Any settlement could lead to losses on the loans that would be
borne by the credit enhancement supporting the related series of securities, and
to the extent not available, by the securityholders 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 loan. 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 securityholders or the 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 loan 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 loans. The default by a designated seller is not a
default by the depositor or by the master servicer. Any loan not so purchased or
substituted for shall remain in the related trust and any losses related to that
loan shall be allocated to the related credit enhancement, and to the extent not
available to the related securities.
However, if any designated seller requests Residential Funding
Corporation's consent to transfer subservicing rights for any related trust
assets to a successor subservicer, 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 subservicer 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 subservicer assumes the designated seller's liability will be assigned
to the trustee or the owner trustee, or the special purpose entity, if
applicable, and the successor subservicer will be deemed to be the designated
seller for purposes of the foregoing provisions.
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Certain Insolvency and Bankruptcy Issues
Each seller, including a designated seller, and the depositor will
represent and warrant that its respective transfer of trust assets constitutes a
valid sale and assignment of all of its right, title and interest in and to such
trust assets, except to the extent that the seller or the depositor retains any
security. Nevertheless, if a seller were to become a debtor in a bankruptcy case
and a creditor or bankruptcy trustee of that seller, or the seller as a
debtor-in-possession, were to assert that the sale of the trust assets from that
seller to the depositor should be recharacterized as a pledge of the trust
assets to secure a borrowing by such seller, then delays in payments to the
depositor (and therefore to the trust and the securityholders) could occur and
possible reductions in the amount of such payments could result. In addition, if
a court were to recharacterize the transfer as a pledge and a subsequent
assignee were to take physical possession of any mortgage notes, through
negligence, fraud or otherwise, the trustee's interest in such mortgage notes
could be defeated.
If an entity with an interest in a loan of which only a partial balance
has been transferred to the trust were to become a debtor under the Bankruptcy
Code and regardless of whether the transfer of the related loan constitutes an
absolute assignment, a bankruptcy trustee or creditor of such entity or such
entity as a debtor-in-possession could assert that such entity retains rights in
the related loan and therefore compel the sale of such loan, including any
partial balance included in the trust, over the objection of the trust and the
securityholders. If that occurs, delays and reductions in payments to the trust
and the securityholders could result.
The depositor has been structured such that (i) the filing of a
voluntary or involuntary petition for relief by or against the depositor under
the Bankruptcy Code and (ii) the substantive consolidation of the assets and
liabilities of the depositor with those of an affiliated seller is unlikely. The
certificate of incorporation of the depositor restricts the nature of the
depositor's business and the ability of the depositor to commence a voluntary
case or proceeding under such laws without the prior unanimous consent of all
directors.
Assignment of Agency or Private Securities
The depositor will transfer, convey and assign to the trustee or its
nominee, which may be the custodian, all right, title and interest of the
depositor in the Agency Securities or private securities and other property to
be included in the trust for a series. The assignment will include all principal
and interest due on or for the Agency Securities or private securities after the
cut-off date specified in the accompanying prospectus supplement, except for any
Excluded Spread. The depositor will cause the Agency Securities or private
securities to be registered in the name of the trustee or its nominee, and the
trustee will concurrently authenticate and deliver the securities. Unless
otherwise specified in the accompanying prospectus supplement, the trustee will
not be in possession of or be assignee of record of any underlying assets for an
Agency Security or private security. Each Agency Security or private security
will be identified in a schedule appearing as an exhibit to the related
agreement, which will specify as to each Agency Security or private security
information regarding the original principal amount and outstanding principal
balance of each Agency Security or private security as of the cut-off date, as
well as the annual pass-through rate or interest rate for each Agency Security
or private security conveyed to the trustee.
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
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Spread. Those excluded from the assets transferred to the related trust are
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
securityholders entitled to payments of interest as provided in the applicable
agreement.
Subservicing
In most cases, the servicing for each loan 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 securities will provide that, if for any reason the master
servicer for the series of securities 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 "Description of the
Securities--Servicing and Administration of Trust Assets--Subservicing" in this
prospectus.
Payments on Trust Assets
Collection of Payments on Loans
Each subservicer servicing a trust asset under a subservicing agreement
will establish and maintain a Subservicing Account. 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 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 loans, less its
servicing or other compensation, on any closed-end loan for which payment was
not received from the borrower.
The master servicer will deposit or will cause to be deposited into a
Custodial Account payments and collections received by it subsequent to the
cut-off date, other than payments due on or before the cut-off date, as
described in the related agreement, which, in most cases, will include the
following:
o payments on account of principal on the loans comprising a trust;
o payments on account of interest on the loans comprising that
trust, net of the portion of each payment of interest retained by
the master servicer, subservicer or other specified entity, if
any, as Excluded Spread, or as servicing or other compensation;
o Liquidation Proceeds, net of any unreimbursed liquidation
expenses and insured expenses incurred, and unreimbursed
servicing advances, if any, made by any subservicer, including
all Insurance Proceeds or proceeds from any alternative
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arrangements established in lieu of that insurance and described
in the accompanying prospectus supplement, other than proceeds to
be applied to the restoration of the related property or released
to the borrower in accordance with the master servicer's normal
servicing procedures;
o proceeds of any loan 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, seller or designated seller or any other person
under the terms of the related agreement. See "Description of the
Securities--Representations Relating to Loans," and "--Assignment
of the Trust Assets";
o any amount required to be deposited by the master servicer in
connection with losses realized on investments of funds held in
the Custodial Account, as described in the fifth paragraph below;
and
o any amounts required to be transferred from the Payment Account
to the Custodial Account.
In addition to the Custodial Account, the master servicer will establish
and maintain, in the name of the trustee for the benefit of the holders of each
series of securities, a Payment Account for the disbursement of payments on the
trust assets evidenced by each series of securities. Both the Custodial Account
and the Payment Account must be either:
o maintained with a depository institution whose debt obligations
at the time of any deposit to the account are rated by any rating
agency that rated any securities of the related series not less
than a specified level comparable to the rating category of the
securities;
o an account or accounts the deposits in which are fully insured to
the limits established by the FDIC. Any deposits not so insured
shall be otherwise maintained such that, as evidenced by an
opinion of counsel, the securityholders 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;
o in the case of the Custodial Account, a trust account or accounts
maintained in either the corporate trust department or the
corporate asset services department of a financial institution
which has debt obligations that meet various rating criteria;
o in the case of the Payment Account, a trust account or accounts
maintained with the trustee; or
o any other Eligible Account.
The collateral that is eligible to secure amounts in an Eligible Account is
limited to Permitted Investments.
A Payment Account may be maintained as an interest-bearing or
non-interest-bearing account. The Custodial Account may contain funds relating
to more than one series of securities as well as payment received on other loans
and assets master serviced by the master servicer that have been deposited into
the Custodial Account.
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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 securityholders on the distribution date, except as
otherwise provided in the accompanying prospectus supplement. The master
servicer or the trustee will also deposit or cause to be deposited into the
Payment Account:
o any payments under any letter of credit, financial guaranty
insurance policy, derivative product, and any amounts required to
be transferred to the Payment Account from a reserve fund, as
described under "Credit Enhancement" in this prospectus;
o any amounts required to be paid by the master servicer out of its
own funds due to the operation of a deductible clause in any
blanket policy maintained by the master servicer to cover hazard
losses on the loans as described under "Insurance Policies on
Loans--Hazard Insurance and Related Claims" in this prospectus;
o any payments received on any Agency Securities or private
securities included in the trust;
o the amount of any Advances on closed-end loans, if applicable,
made by the master servicer as described in this prospectus under
"Description of the Securities--Servicing and Administration of
Trust Assets--Advances"; or
o 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
securities and will be paid as provided in the related agreement.
Funds on deposit in the Custodial Account may be invested in Permitted
Investments maturing in general not later than the business day preceding the
next distribution date, and funds on deposit in the related Payment Account may
be invested in Permitted Investments maturing, in general, no later than the
distribution 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 these
investments 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.
Collection of Payments on Agency Securities or Private Securities
The trustee will deposit in the Payment Account all payments on the
Agency Securities or private securities as they are received after the cut-off
date. If the trustee has not received a distribution for any Agency Security or
private security by the second business day after the date on which such
distribution was due and payable, the trustee will request the issuer or
guarantor, if any, of such Agency Security or private security to make such
payment as promptly as possible and legally permitted. The trustee may take any
legal action against the related issuer or guarantor as is appropriate under the
circumstances, including the prosecution of any claims in connection therewith.
The reasonable legal fees and expenses incurred by the trustee in connection
with the prosecution of any legal action will be reimbursable to the trustee out
of the proceeds of the action and will be retained by the trustee prior to the
deposit of any remaining proceeds in the Payment Account pending distribution
thereof to the securityholders of the affected series. If the trustee has reason
to believe that the proceeds of the legal action may be insufficient to cover
its projected legal fees and expenses, the trustee will notify the related
securityholders that it is not obligated to pursue
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any available remedies unless adequate indemnity for its legal fees and expenses
is provided by the securityholders.
Withdrawals from the Custodial Account
The master servicer may, from time to time, make withdrawals from the
Custodial Account for various purposes, as specifically described in the related
agreement, which in most cases will include the following:
o to make deposits to the Payment Account in the amounts and in the
manner provided in the related agreement and described above
under "--Payments on Trust Assets; Collection of Payments on
Loans" or in the accompanying prospectus supplement;
o to reimburse itself or any subservicer for any Advances or any
Servicing Advances as to any mortgaged property, out of late
payments, Insurance Proceeds, Liquidation Proceeds or collections
on the loan for which those Advances or Servicing Advances were
made;
o to pay to itself or any subservicer unpaid servicing fees and
subservicing fees, out of payments or collections of interest on
each loan;
o to pay to itself as additional servicing compensation any
investment income on funds deposited in the Custodial Account,
any amounts remitted by subservicers as interest for partial
prepayments on the trust assets, and, if so provided in the
servicing agreement, any profits realized upon disposition of a
mortgaged property acquired by deed in lieu of foreclosure or
repossession or otherwise allowed under the agreement;
o to pay to itself, a subservicer, Residential Funding Corporation,
the depositor, the seller or the designated 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
repurchase price is determined;
o to pay the depositor or its assignee, or any other party named in
the accompanying prospectus supplement all amounts allocable to
the Excluded Spread, if any, out of collections or payments which
represent interest on each trust asset, including any loan as to
which title to the underlying mortgaged property was acquired;
o to reimburse itself or any subservicer for any Nonrecoverable
Advance, limited by the terms of the related agreement as
described in the accompanying prospectus supplement;
o to reimburse itself or the depositor for other expenses incurred
for which it or the depositor is entitled to reimbursement,
including reimbursement in connection with enforcing any
repurchase, substitution or indemnification obligation of any
designated seller, or against which it or the depositor is
indemnified under the related agreement;
o to reimburse itself or the depositor for payment of FHA insurance
premiums, if applicable;
o to withdraw any amount deposited in the Custodial Account that
was not required to be deposited in that Custodial Account;
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o to pay to itself or any subservicer for the funding of any Draws
made on the revolving credit loans, if applicable;
o to make deposits to the funding account in the amounts and in the
manner provided in the related agreement, if applicable; and
o to clear the Custodial Account of amounts relating to the
corresponding trust assets in connection with the termination of
the trust, as described in "The Agreements--Termination;
Redemption of Securities" in this prospectus.
Distributions of Principal and Interest on the Securities
Beginning on the distribution date in the month after the month in which
the cut-off date occurs, or any other date specified in the accompanying
prospectus supplement, for a series of securities, distributions of principal
and interest, or, where applicable, of principal only or interest only, on each
class of securities entitled to such payments will be made either by the trustee
or the master servicer acting on behalf of the trustee, or by a paying agent
appointed by the trustee. The distributions will be made to the persons who are
registered as the holders of the securities at the close of business on the last
business day of the preceding month or on any other day specified in the
accompanying prospectus supplement.
Distributions will be made in immediately available funds, by wire
transfer or otherwise, to the account of a securityholder at a bank or other
entity having appropriate facilities, if the securityholder has so notified the
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 to such payment as it appears on the
securities register. Except as otherwise provided in the related agreement, the
final distribution in retirement of the securities will be made only on the
presentation and surrender of the securities at the office or agency of the
trustee specified in the notice to the securityholders. Distributions will be
made to each securityholder in accordance with that holder's percentage interest
in a particular class.
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 securities will be described in the accompanying prospectus
supplement. Distributions of interest on each class of securities will be made
prior to distributions of principal. Each class of securities, other than
classes of principal only securities, may have a different specified interest
rate, or pass-through rate, which may be a fixed, variable or adjustable
pass-through rate, or any combination of two or more pass-through rates. The
accompanying prospectus supplement will specify the pass-through rate or rates
for each class, or the initial pass-through rate or rates, the interest accrual
period and the method for determining the pass-through rate or rates. Unless
otherwise specified in the accompanying prospectus supplement, interest on the
securities will accrue during each calendar month and will be payable on the
distribution date in the following calendar month. If stated in the accompanying
prospectus supplement, interest on any class of securities for any distribution
date may be limited to the extent of available funds for that distribution date.
Interest on the securities will be calculated on the basis of a 360-day year
consisting of twelve 30-day months or, if specified in the accompanying
prospectus supplement, the actual number of days in the related interest period
and a 360 or 365/366-day year.
On each distribution date for a series of securities, the trustee or the
master servicer, on behalf of the trustee will distribute or cause the paying
agent to distribute, as the case may be, to each holder of record on the record
date of a class of securities specified in the accompanying prospectus
supplement, an amount equal to the percentage interest represented by the
security held by that holder multiplied by that class's Distribution Amount.
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In the case of a series of securities which includes two or more classes
of securities, the timing, sequential order, priority of distribution or amount
of distributions of principal, and any schedule or formula or other provisions
applicable to that determination, including distributions among multiple classes
of senior securities or subordinate securities, will be described in the
accompanying prospectus supplement. Distributions of principal on any class of
securities will be made on a pro rata basis among all of the securities 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
loans, 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 stated 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 loans otherwise available for payment to the
notes are reinvested in additional balances or additional loans 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. To the extent the trust contains
Balloon Loans that require no monthly payments and non-amortizing mortgage loans
that require only small principal payments in proportion to the principal
balance of the mortgage loan, the amount of principal distributions on the
securities generally will be less than the amount that would otherwise be
distributable on a similar pool of conventional loans.
On the day of the month specified in the accompanying prospectus
supplement as the determination date, the master servicer will determine the
amounts of principal and interest which will be paid to securityholders on the
immediately succeeding distribution date. Prior to the close of business on the
business day next succeeding each determination date, the master servicer will
furnish a statement to the trustee, setting forth, among other things, the
amount to be paid on the next succeeding distribution date.
Funding Account
The pooling and servicing agreement, 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
providing for the transfer. If 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 securities 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. Unless specified in the accompanying prospectus supplement, a
funding account will be required to be maintained as an Eligible Account. All
amounts in the funding account will be required to be invested in Permitted
Investments and the amount held in the account shall at no time exceed 25% of
the aggregate outstanding principal balance of the securities. Unless specified
in the accompanying prospectus supplement, the related agreement providing for
the transfer of additional trust assets will provide that all the transfers must
be made within a specified period, 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 Securityholders
On each distribution date, the master servicer will forward or cause to
be forwarded to each securityholder of record a statement or statements for the
related trust listing the information described in the related agreement. Except
as otherwise provided in the related agreement, that information will in most
cases, include the following, as applicable:
o the aggregate amount of interest collections and principal
collections;
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o the amount, if any, of the distribution allocable to principal;
o the amount, if any, of the distribution allocable to interest,
and the amount of any shortfall in the amount of interest and
principal;
o the aggregate unpaid principal balance of the trust assets after
giving effect to the distribution of principal on the
distribution date;
o the outstanding principal balance or notional amount of each
class of securities after giving effect to the payment of
principal on the distribution date;
o based on the most recent reports furnished by subservicers, the
number and aggregate principal balance of loans in the related
pool that are delinquent (a) one month, (b) two months and (c)
three months, and that are in foreclosure;
o the book value of any property acquired by the trust through
foreclosure or grant of a deed in lieu of foreclosure;
o the balance of the reserve fund, if any, at the close of business
on the distribution date;
o the amount of credit enhancement remaining or credit enhancement
payments made to cover default risk as of the close of business
on the applicable determination date and a description of any
credit enhancement substituted therefor;
o the percentage of the outstanding principal balance of the senior
securities, if applicable, after giving effect to the
distributions on the distribution date;
o if applicable, the Special Hazard Amount, Fraud Loss Amount and
Bankruptcy Amount, as of the close of business on the applicable
distribution date and a description of any change in the
calculation of those amounts, as well as the aggregate amount of
each type of loss;
o in the case of securities benefitting from alternative credit
enhancement arrangements described in a prospectus supplement,
the amount of coverage under alternative arrangements as of the
close of business on the applicable determination date;
o the aggregate amount of Draws;
o the servicing fee payable to the master servicer and any
subservicers;
o the FHA insurance amount; and
o any additional information required under the related agreement
for any series of securities which includes Agency Securities or
private securities as trust assets.
Each amount listed under the second and third clauses above will be
expressed both as an aggregate amount per each class of securities, and for all
classes in aggregate, and as a dollar amount per single security. As to a
particular class of securities, a single security, in most cases, will evidence
a percentage interest obtained by dividing $1,000 by the initial principal
balance or notional balance of all the securities of a class, except as
otherwise provided in the related agreement. In addition to the information
described above, reports to securityholders will contain other information as is
listed in the applicable agreement, which may include, without limitation,
information as to
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Advances, 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 securities
at any time during that calendar year. The report will include information
describing the aggregate principal and interest distributions for that calendar
year or, in the event that person was a holder of record of a class of
securities during a portion of the calendar year, for the applicable portion of
the year.
Servicing and Administration of Trust Assets
General
The master servicer will be required to service and administer the trust
assets in a manner consistent with the terms of the related agreement. The
master servicer may be an affiliate of the depositor.
For any series of securities secured by Agency Securities or private
securities, the applicable procedures for servicing of the related underlying
assets will be described in the accompanying prospectus supplement.
Subservicing
In connection with any series of securities the master servicer may
enter into subservicing agreements with one or more subservicers who will agree
to perform certain functions for the master servicer relating to the servicing
and administration of the loans included in the trust relating to the
subservicing agreement. A subservicer may be an affiliate of the depositor. See
"Trust Asset Program--Subservicing" in this prospectus. Each subservicer
typically will be required to perform the customary functions of a servicer,
including but not limited to:
o collection of payments from borrowers and remittance of those
collections to the master servicer;
o maintenance of escrow or impoundment accounts of borrowers for
payment of taxes, insurance and other items required to be paid
by the borrower under the trust asset, if applicable;
o processing of assumptions or substitutions, although, as
specified in the accompanying prospectus supplement, the master
servicer is, in most cases, required to exercise due-on-sale
clauses to the extent that exercise is permitted by law and would
not adversely affect insurance coverage;
o attempting to cure delinquencies;
o supervising foreclosures;
o inspection and management of mortgaged properties under various
circumstances; and
o maintaining accounting records relating to the trust assets.
The subservicer may be required to make Advances as described under
"--Servicing and Administration of Trust Assets--Advances" in this prospectus.
In addition, the subservicer generally
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shall be responsible for collection activity and default management with respect
to any delinquent loan unless undertaken by the master servicer as described in
the accompanying prospectus supplement. The master servicer will remain liable
for its obligations that are delegated to a subservicer as if the master
servicer alone were servicing those loans.
A subservicer may, in most cases, transfer its servicing obligations to
another entity that has been approved for participation in Residential Funding
Corporation's loan purchase programs, but only with the approval of the master
servicer.
Each subservicer will be required to agree to indemnify the master
servicer for any liability or obligation sustained by the master servicer in
connection with any act or failure to act by the subservicer in its servicing
capacity. Each subservicer is required to maintain a fidelity bond and an errors
and omissions policy for its employees and other persons acting on its behalf or
on behalf of the master servicer.
Each subservicer will be required to service each trust asset under the
terms of the subservicing agreement for the entire term of that trust asset,
unless the subservicing agreement is earlier terminated by the master servicer
or unless servicing is released to the master servicer. Subject to applicable
law, the master servicer may have the right to terminate a subservicing
agreement immediately upon giving notice upon specified events, including the
violation of that subservicing agreement by the subservicer, or up to ninety
days' notice to the subservicer without cause upon payment of specified amounts
described in the subservicing agreement. Upon termination 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. However, any pooling and servicing agreement or
servicing agreement relating to a trust will provide that any amendment or new
agreement may not be inconsistent with or violate the pooling and servicing
agreement or servicing agreement in a manner which would materially and
adversely affect the interest of the securityholders.
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.
In the event of a bankruptcy, receivership or conservatorship of the
master servicer or any subservicer, the bankruptcy court or the receiver or
conservator may have the power to prevent both the appointment of a successor to
service the trust assets and the transfer of collections commingled with funds
of the master servicer or subservicer at the time of its bankruptcy,
receivership or conservatorship. In addition, if the master servicer or any
subservicer were to become a debtor in a bankruptcy case, its rights under the
related agreement, including the right to service the trust assets, would be
property of its bankruptcy estate and therefore, under the Bankruptcy Code,
subject to its right to assume or reject such agreement.
Collection and Other Servicing Procedures
The master servicer, directly or through subservicers, as the case may
be, will make reasonable efforts to collect all payments called for under the
trust assets and will, consistent with the related pooling and servicing
agreement or servicing agreement and any applicable insurance policy, FHA
insurance or other credit enhancement, follow the collection procedures which
shall be normal and usual in its general loan servicing activities relating to
loans comparable to those included in the trust. Consistent with the previous
sentence, the master servicer may in its discretion
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waive any prepayment charge in connection with the prepayment of a loan or
extend the due dates for payments due on a mortgage note, provided that the
insurance coverage for that loan or any coverage provided by any alternative
credit enhancement will not be adversely affected by that waiver or extension.
The master servicer may also waive or modify any term of a loan so long as the
master servicer has determined that the waiver or modification is not materially
adverse to any securityholders, taking into account any estimated loss that may
result absent that action. The master servicer will have the option to allow a
credit limit increase or an extension of the Draw Period applicable to any
revolving credit loan subject to the limitations described in the related
agreement. The master servicer may be subject to restrictions under the pooling
and servicing agreement or servicing agreement for the refinancing of a lien
senior to a loan or a contract secured by a lien on the related mortgaged
property. For any series of securities 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 borrowers 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
borrower or may enter into a liquidating plan providing for repayment by the
borrower 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 interest
rate or rates used in calculating payments to securityholders. See "Description
of the Securities--Payments on Trust Assets" in this prospectus.
Under some circumstances, as to any series of securities, the master
servicer may have the option to repurchase loans from the trust for cash, or in
exchange for other loans or Permitted Investments. All provisions relating to
these optional repurchase provisions will be described in the accompanying
prospectus supplement.
In instances in which a loan is in default, or if default is reasonably
foreseeable, and if determined by the master servicer to be in the best
interests of the related securityholders, 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 loan were liquidated would be
taken into account. These modifications may have the effect of reducing the loan
rate or extending the final maturity date of the loan. Any modified loan may
remain in the related trust, and the reduction in collections resulting from a
modification may result in reduced distributions of interest or other amounts
on, or may extend the final maturity of, one or more classes of the related
securities.
In connection with any significant partial prepayment of a loan, the
master servicer, to the extent not inconsistent with the terms of the mortgage
note and local law and practice, may permit the loan to be re-amortized so that
the monthly payment is recalculated as an amount that will fully amortize its
remaining principal amount by the original maturity date based on the original
loan rate, provided that the re-amortization shall not be permitted if it would
constitute a significant modification of the loan for federal income tax
purposes.
Advances
If specified in the accompanying prospectus supplement, the master
servicer will agree to make Advances on specified closed-end loans, either out
of its own funds, funds advanced to it by subservicers or funds being held in
the Custodial Account for future payment, for the benefit of the
securityholders, on or before each distribution date, of monthly payments on the
loans that were delinquent as of the close of business on the business day
preceding the determination date on the
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loans in the related pool. Advances will be made only to the extent that the
Advances would, in the judgment of the master servicer be recoverable out of
late payments by the borrowers, Liquidation Proceeds, Insurance Proceeds or
otherwise. Advances will not be made in connection with revolving credit loans,
except as otherwise provided in the accompanying prospectus supplement. As
specified in the accompanying prospectus supplement for any series of securities
as to which the trust includes private securities, the master servicer's
advancing obligations will be under the terms of such private securities, as may
be supplemented by the terms of the applicable agreement, and may differ from
the provisions relating to Advances described in this prospectus. Unless
specified in the accompanying prospectus supplement, the master servicer will
not make any advance with respect to principal on any simple interest loan, or
the Balloon Amount in the case of a Balloon Loan.
The amount of any Advance will be determined based on the amount payable
under the loan as adjusted from time to time and as may be modified as described
in this prospectus under "Description of the Securities--Servicing and
Administration of Trust Assets--Collection and Other Servicing Procedures," and
no Advance will be required in connection with any reduction in amounts payable
under the Relief Act or as a result of actions taken by a bankruptcy court.
Advances are intended to maintain a regular flow of scheduled interest
and, if applicable, principal payments to related securityholders. Advances do
not represent an obligation of the master servicer to guarantee or insure
against losses. If Advances have been made by the master servicer from cash
being held for future payment to securityholders, those funds will be required
to be replaced on or before any future distribution date to the extent that
funds in the Payment Account on that distribution date would be less than
payments required to be made to securityholders. Any Advances will be
reimbursable to the master servicer out of recoveries on the related loans for
which those amounts were advanced, including, for example, late payments made by
the related borrower, any related Liquidation Proceeds and Insurance Proceeds,
proceeds of any applicable form of credit enhancement, or proceeds of any other
loans included in the trust.
Advances will also be reimbursable from cash otherwise distributable to
securityholders to the extent that the master servicer determines that any
Advances previously made are not ultimately recoverable as described in the
preceding paragraph. For any senior/subordinate series, so long as the related
subordinate securities remain outstanding and except for Special Hazard Losses,
Fraud Losses, Bankruptcy Losses and Extraordinary Losses, the Advances may also
be reimbursable out of amounts otherwise distributable to holders of the
subordinate securities, if any.
No assurance can be given that the subservicers will carry out their
Advance or payment obligations relating to the trust assets. The master servicer
will remain liable for its advancing obligations that are delegated to a
subservicer as if the master servicer alone were servicing those loans.
The master servicer's obligation to make Advances may be supported by
another entity, the trustee, a financial guaranty insurance policy, a letter of
credit or other method as may be described in the related agreement. If the
short-term or long-term obligations of the provider of the support are
downgraded by a rating agency rating the related securities or if any collateral
supporting such obligation is not performing or is removed under the terms of
any agreement described in the accompanying prospectus supplement, the
securities may also be downgraded.
The master servicer may also be obligated to make Servicing Advances, to
the extent recoverable out of Liquidation Proceeds or otherwise, relating to
real estate taxes and insurance premiums not paid by borrowers on a timely
basis, or for expenses to acquire, preserve, restore or dispose of the related
mortgaged property. In addition, the master servicer may be obligated to make
Servicing Advances to the holders of any related first lien loan or cure any
delinquencies to the extent that doing so would be prudent and necessary to
protect the interests of the securityholders.
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Servicing Advances will be reimbursable to the master servicer to the extent
permitted by the related agreement.
In the case of revolving credit loans, the master servicer 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,
provided that as specified in the accompanying prospectus supplement during any
revolving period associated with the related series of securities, Draws may be
covered first from principal collections on the other loans in the pool.
Enforcement of "Due on Sale" Clauses
In any case in which property subject to a loan, is being conveyed by
the borrower, 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 loan under any
due-on-sale clause applicable to that loan, 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 borrower 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 borrower may be released from
liability on a loan 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 loan. 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--Trust Assets Secured by Mortgages on Mortgage Property--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.
Borrowers 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 loan, that the
approval will not adversely affect the security for, and the timely and full
collectability of, the related loan. 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.
Realization Upon Defaulted Loans
If a loan or a contract secured by a lien on a mortgaged property is in
default, the master servicer or the related subservicer may take a variety of
actions including foreclosing upon the mortgaged property relating to that loan,
writing off the principal balance of the loan as a bad debt, taking a deed in
lieu of foreclosure, accepting a short sale, permitting a short refinancing,
arranging for a repayment plan or modification as described above, or taking 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
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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 loan in full and to pay foreclosure costs, it
is likely that the trust asset will be written off as bad debt with no
foreclosure proceeding. If title to any mortgaged property is acquired in
foreclosure or by deed in lieu of foreclosure, the deed or certificate of sale
will be issued to the trustee or to its nominee on behalf of securityholders
and, if applicable, the holder of any Excluded Balance. Any REO Loan or REO
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, manufactured home or home improvement is sold and the
REO Loan or REO Contract has been converted into a Liquidated Loan.
If a REMIC election has been made, any mortgaged property so acquired by
the trust must be disposed of in accordance with applicable federal income tax
regulations and consistent with the status of the trust as a REMIC. To the
extent provided in the related agreement, any income, net of expenses and other
than gains described in the second paragraph below, received by the subservicer
or the master servicer on the mortgaged property prior to its disposition will
be deposited in the Custodial Account upon receipt and will be available at that
time for making payments to securityholders.
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--Trust Assets Secured by Mortgages on Mortgage Property--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 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, the loan will be
removed from the related trust. The master servicer may elect to treat a
defaulted loan 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
the initial liquidation will be reimbursable to the master servicer, or any
subservicer, from any amounts otherwise distributable to the related
securityholders, or may be offset by any subsequent recovery related to that
loan. Alternatively, for purposes of determining the amount of related
Liquidation Proceeds to be distributed to securityholders, the amount of any
Realized Loss or the amount required to be drawn under any applicable form of
credit enhancement, the master servicer may take into account minimal amounts of
additional receipts expected to be received, as well as estimated additional
liquidation expenses expected to be incurred in connection with the defaulted
loan. Upon foreclosure of a revolving credit loan, the related Liquidation
Proceeds will be allocated among the Trust Balances and Excluded Balances as
described in the prospectus supplement.
For some series of securities, the applicable form of credit enhancement
may provide, to the extent of coverage, that a defaulted loan or REO Loan will
be removed from the trust prior to its final liquidation. In addition, the
master servicer or the holder of the most subordinate class of securities in a
series may have the option to purchase from the trust any defaulted loan after a
specified period of delinquency. If a defaulted trust asset or REO Loan is not
so removed from the trust, then, upon its final liquidation, if a loss is
realized which is not covered by any applicable form of credit enhancement or
other insurance, the securityholders 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 borrower, 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 "Insurance
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Policies on Loans--Hazard Insurance and Related Claims" in this prospectus. If a
final liquidation of a loan resulted in a Realized Loss and within two years
thereafter the master servicer receives a subsequent recovery specifically
related to that loan, in connection with a related breach of a representation or
warranty or otherwise, the subsequent recovery shall be distributed to the
then-current securityholders of any outstanding class to which the Realized Loss
was allocated, with the amounts to be distributed allocated among such classes
in the same proportions as such Realized Loss was allocated, provided that no
such distribution shall result in distributions on the securities of any class
in excess of the total amount of the Realized Loss that was allocated to that
class.
Special Servicing and Special Servicing Agreements
The pooling and servicing agreement or servicing agreement for a series
of securities 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 borrowers whose payments become delinquent.
The Special Servicer may be permitted to grant a period of temporary indulgence
to a borrower or may enter into a repayment plan providing for repayment of
arrearages by that borrower, 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 securities or of a class of
securities representing interests in one or more classes of subordinate
securities. Under the terms of these agreements, the holder may, as to some
delinquent loans:
o instruct the master servicer to commence or delay foreclosure
proceedings, provided that the holder deposits a specified amount
of cash with the master servicer which will be available for
distribution to securityholders in the event that liquidation
proceeds are less than they otherwise may have been had the
master servicer acted under its normal servicing procedures;
o instruct the master servicer to purchase those loans from the
trust prior to the commencement of foreclosure proceedings at the
repurchase price and to resell those trust assets to that holder,
in which case any subsequent loss on those loans will not be
allocated to the securityholders;
o become, or designate a third party to become, a subservicer for
the trust assets so long as (a) the master servicer has the right
to transfer the subservicing rights and obligations of those
trust assets to another subservicer at any time or (b) that
holder or its servicing designee is required to service the trust
assets according to the master servicer's servicing guidelines;
or
o the accompanying prospectus supplement may provide for the other
types of special servicing arrangements.
Servicing Compensation and Payment of Expenses
The master servicer will be paid monthly compensation for the
performance of its servicing obligations at the percentage per annum of the
outstanding principal balance of each loan as described in the accompanying
prospectus supplement. Any subservicer will also be entitled to a monthly
servicing fee which may vary under some circumstances from amounts as described
in the accompanying prospectus supplement. Except as otherwise provided in the
accompanying prospectus supplement, the master servicer will deduct the
servicing fee for the loans underlying the securities of a series in the amount
specified in the accompanying prospectus supplement. The
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servicing fees may be fixed or variable. In addition, the master servicer or the
relevant subservicers, if any, will be entitled to servicing compensation in the
form of assumption fees, late payment charges or excess proceeds following
disposition of property in connection with defaulted loans and any earnings on
investments held in the Payment Account or any Custodial Account. Any Excess
Spread or Excluded Spread retained by a seller or the master servicer will not
constitute part of the servicing fee. However, for a series of securities as to
which the trust includes private securities, the compensation payable to the
master servicer for servicing and administering such private securities on
behalf of the holders of such securities may be based on a percentage per annum
described in the accompanying prospectus supplement of the outstanding balance
of such private securities and may be retained from distributions of interest
thereon, if stated in the accompanying prospectus supplement. In addition, some
reasonable duties of the master servicer may be performed by an affiliate of the
master servicer who will be entitled to compensation for performance of those
duties.
The master servicer or, if specified in the related agreement, the
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 related 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 any trustee, any custodian appointed by the
trustee, the security registrar and any paying agent, and payment of expenses
incurred in enforcing the obligations of subservicers and 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 under "Realization upon Defaulted Loans," 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
securityholders to receive any related Liquidation Proceeds, including Insurance
Proceeds.
Evidence as to Compliance
Unless otherwise provided in the accompanying prospectus supplement,
each pooling and servicing agreement or servicing agreement will provide that,
for each series of securities, the master servicer will deliver to the trustee,
on or before the date in each year specified in the related agreement, 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 lenders
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 will
specify each known default and the nature and status of that default. The
statement may be provided as a single form making the required statements for
more than one servicing agreement.
Unless otherwise provided in the accompanying prospectus supplement,
each pooling and servicing agreement or servicing agreement will also provide
that on or before a specified date in each year, beginning the first date that
is at least a specified number of months after the cut-off date, a firm of
independent public accountants will furnish a statement to the depositor and the
trustee to the effect that, on the basis of an examination by that firm
conducted substantially in compliance with the standards established by the
American Institute of Certified Public Accountants, the servicing of loans under
agreements, including the related pooling and servicing agreement or 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 loans by
subservicers, upon
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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 securityholders without charge upon written request to the master
servicer, at the address indicated in the monthly statement to securityholders.
Certain Matters Regarding the Master Servicer and the Depositor
The master servicer may not resign from its obligations and duties under
the pooling and servicing agreement or servicing agreement for each series of
securities except upon a determination that performance of its duties is no
longer permissible under applicable law or except in connection with a permitted
transfer of servicing. No resignation will become effective until the trustee or
a successor master servicer has assumed the master servicer's obligations and
duties under the related pooling and servicing agreement or servicing agreement.
Each pooling and servicing agreement or 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
securityholders for any action taken or for refraining from the taking of any
action in good faith under the related agreement, or for errors in judgment.
However, 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 the related
agreement. Each pooling and servicing agreement or 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 pooling and servicing agreement
or servicing agreement or the related series of securities, other than any loss,
liability or expense incurred by reason of willful misfeasance, bad faith or
gross negligence in the performance of duties under the related agreement or by
reason of reckless disregard of obligations and duties under related agreement.
Any indemnification provided by the trust as described in the preceding sentence
will result in the application of a loss to the offered securities if the amount
of indemnification exceeds the amount of available credit enhancement. In
addition, each pooling and servicing agreement or 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 related 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 related agreement and the
rights and duties of the parties to that pooling and servicing agreement or
servicing agreement and the interests of the securityholders under that
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 distributable to securityholders.
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
pooling and servicing agreement or servicing agreement.
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
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the pooling and servicing agreement or servicing agreement, provided that the
person meets the requirements described in the related agreement. In addition,
notwithstanding the prohibition on its resignation, the master servicer may
assign its rights and delegate its duties and obligations under a pooling and
servicing agreement or servicing agreement to any person reasonably satisfactory
to the depositor and the trustee and meeting the requirements described in the
related agreement. In the case of an assignment, the master servicer will be
released from its obligations under the related agreement, exclusive of
liabilities and obligations incurred by it prior to the time of the assignment.
Description of Credit Enhancement
General
As described in the accompanying prospectus supplement, the credit
support provided for each series of securities will include one or any
combination of the following:
o subordination provided by any class of subordinated securities
related to a series of securities;
o overcollateralization;
o a reserve fund;
o a financial guaranty insurance policy or surety bond;
o derivatives products;
o a letter of credit;
o a mortgage repurchase bond, mortgage pool insurance policy,
special hazard insurance policy, bankruptcy bond or other types
of insurance policies, or a secured or unsecured corporate
guaranty, as described in the accompanying prospectus supplement;
or
o another form of credit support as may be described in the
accompanying prospectus supplement.
If specified in the accompanying prospectus supplement, the contracts may be
partially insured by the FHA under Title I.
The credit support may also be provided by an assignment of the right to
receive cash amounts, a deposit of cash into a reserve fund or other pledged
assets, or by banks, insurance companies, guarantees or any combination thereof
identified in the accompanying prospectus supplement.
As to each series of securities, 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 securities, as and to the extent described in the
accompanying prospectus supplement and at the times described in that prospectus
supplement. If so provided in the accompanying prospectus supplement, any
element of the credit support may 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:
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o Defaulted Loan Losses;
o Special Hazard Losses;
o Bankruptcy Losses; and
o Fraud Losses.
Most forms of credit support will not provide protection against all
risks of loss and will not guarantee repayment of the entire outstanding
principal balance of the securities and interest thereon. If losses occur which
exceed the amount covered by credit support or which are not covered by the
credit support, securityholders 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 securities is exhausted or unavailable for any
reason, the securityholders will bear all further risks of loss not otherwise
insured against.
For any series of securities backed by Trust Balances of revolving
credit loans, the credit enhancement provided with respect to the securities
will cover any portion of any Realized Losses allocated to the Trust Balances,
subject to any limitations described in this prospectus and in the accompanying
prospectus supplement. See "The Trust--Characteristics of the Loans--Revolving
Credit Loans--Allocation of Revolving Credit Loan Balances" in this prospectus.
For any defaulted trust asset that is finally liquidated, the Realized
Loss, if any as described in the related agreement, will equal the portion of
the Stated Principal Balance remaining after application of all amounts
recovered, net of expenses allocable to the trust, towards interest and
principal owing on the trust asset. As to a trust asset the principal balance of
which has been reduced in connection with bankruptcy proceedings, the amount of
that reduction will be treated as a Realized Loss.
Each prospectus supplement will include a description of:
o the amount payable under the credit enhancement arrangement, if
any, provided for a series;
o any conditions to payment thereunder not otherwise described in
this prospectus;
o the conditions under which the amount payable under the credit
support may be reduced and under which the credit support may be
terminated or replaced; and
o the material provisions of any agreement relating to the credit
support.
Additionally, each prospectus supplement will contain information for
the issuer of any third-party credit enhancement, if applicable. The related
agreement or other documents may be modified in connection with the provisions
of any credit enhancement arrangement to provide for reimbursement rights,
control rights or other provisions that may be required by the credit enhancer.
To the extent provided in the applicable agreement, the credit enhancement
arrangements may be periodically modified, reduced and substituted for based on
the performance of or on the aggregate outstanding principal balance of the
loans covered thereby. See "Description of Credit Enhancement--Reduction or
Substitution of Credit Enhancement" in this prospectus. If specified in the
applicable prospectus supplement, credit support for a series of securities may
cover one or more other series of securities.
The descriptions of any insurance policies, bonds or other instruments
described in this prospectus or any prospectus supplement and the coverage they
provide do not include all terms of
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these instruments, but will reflect all relevant terms material to an investment
in the securities. 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 securities.
Financial Guaranty Insurance Policies; Surety Bonds
The depositor may obtain and maintain one or more financial guaranty
insurance policies or guarantees, or one or more surety bonds, or one or more
guarantees issued by insurers or other parties acceptable to the rating agency
or agencies rating the securities offered insuring the holders of one or more
classes of securities the payment of specified amounts due in accordance with
the terms of that class or those classes of securities. Any financial guaranty
insurance policy, surety bond or guaranty will have the characteristics, and
will be in accordance with any limitations and expectations, described in the
accompanying prospectus supplement. 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 securities that an amount equal to the
full amount of payments due to these holders will be received by the trustee or
its agent on behalf of the holders for payment on each distribution 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.
Letters of Credit
If any component of credit enhancement as to any series of securities is
to be provided by a letter of credit from a bank, the bank issuing the letter of
credit will deliver to the trustee an irrevocable letter of credit. The letter
of credit may provide direct coverage for the trust assets. The bank issuing the
letter of credit, the amount available under the letter of credit for 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 distribution date, the
letter of credit bank after notification from the trustee will be required to
make payments, to be deposited in the related Payment Account relating to the
coverage provided by that letter of credit.
Subordination
A senior/subordinate series of securities will consist of one or more
classes of senior securities and one or more classes of subordinate securities,
as described in the accompanying prospectus supplement. Subordination of the
subordinate securities of any senior/subordinate series will be effected by the
following method, unless an alternative method is specified in the accompanying
prospectus supplement. In addition, some classes of senior or subordinate
securities may be senior to other classes of senior subordinate securities, as
specified in the accompanying prospectus supplement.
For any senior/subordinate series, the total amount available for
distribution on each distribution date, as well as the method for allocating the
available amount among the various classes of securities included in the series,
will be described in the accompanying prospectus supplement. In most cases, for
any senior/subordinate series, the amount available for distribution will be
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allocated first to interest on the senior securities of the series, and then to
principal of the senior securities up to the amounts described in the
accompanying prospectus supplement, prior to allocation of any amounts to the
subordinate securities of the series.
In the event of any Realized Losses not in excess of the limitations
described below (other than Extraordinary Losses), the rights of the subordinate
securityholders to receive distributions will be subordinate to the rights of
the senior securityholders and the owner of Excluded Spread and, as to certain
classes of subordinated securities, may be subordinate to the rights of other
subordinate securityholders.
Except as noted in the following paragraph, 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 securities. If the
series includes more than one class of senior securities, the additional
Realized Losses will be allocated either on a pro rata basis among all of the
senior securities 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 amounts described in the
accompanying prospectus supplement. The subordinate securities may provide no
coverage for Extraordinary Losses or other types of losses specified in the
accompanying prospectus supplement. In these cases, losses in excess of these
amounts would be allocated on a pro rata basis among all outstanding classes of
securities in proportion to their outstanding principal balances, or as
otherwise described in the accompanying prospectus supplement. Each of the
Special Hazard Amount, Fraud Loss Amount and Bankruptcy Amount may be subject to
periodic reductions and may be subject to further reduction or termination,
without the consent of the securityholders, on the written confirmation from
each applicable rating agency that the then-current rating of the classes of the
related series of securities will not be adversely affected.
In most cases, any allocation of a Realized Loss including a Special
Hazard Loss, Fraud Loss or Bankruptcy Loss to a class of securities in a
senior/subordinate series will be made by reducing the outstanding principal
balance of that class as of the distribution date following the calendar month
in which the Realized Loss was incurred.
The rights of holders of the various classes of securities of any series
to receive distributions of principal and interest are determined by the
aggregate outstanding principal balance of each class or, if applicable, the
related notional amount. The outstanding principal balance of any security will
be reduced by all amounts previously distributed on that security representing
principal, and by any Realized Losses allocated to that security. If there are
no Realized Losses or Principal Prepayments on any loan, the respective rights
of the holders of securities of any series to future distributions in most cases
would not change. However, to the extent described in the accompanying
prospectus supplement, holders of senior securities may be entitled to receive a
disproportionately larger amount of prepayments received during specified
periods, which will have the effect, absent offsetting losses, of accelerating
the amortization of the senior securities and increasing the respective
percentage ownership interest evidenced by the subordinate securities in the
related trust, with a corresponding decrease in the percentage of the
outstanding principal balances of the senior securities, thereby preserving the
availability of the subordination provided by the subordinate securities. In
addition, some Realized Losses will be allocated first to subordinate securities
by reduction of their outstanding principal balance, which will have the effect
of increasing the respective ownership interest evidenced by the senior
securities in the related trust.
If so provided in the related agreement, the master servicer may be
permitted, under some circumstances, to purchase any loan that is two or more
months delinquent in payments of principal
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and interest, at the repurchase price. Any Realized Loss subsequently incurred
in connection with any such loan or the related Trust Balance may be borne by
the then current securityholders of the class or classes that would have borne
that Realized Loss if the loan or Trust Balance had not been so purchased,
unless that purchase was made upon the request of the holder of the most junior
class of securities of the related series. See "Description of the
Securities--Servicing and Administration of Trust Assets--Special Servicing and
Special Servicing Agreements" in this prospectus.
To the extent provided in the accompanying prospectus supplement,
amounts otherwise payable on any distribution 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.
In lieu of the foregoing provisions, subordination may be effected in
the following manner, or in any other manner as may be described in the
accompanying prospectus supplement. The rights of the holders of subordinate
securities to receive the Subordinate Amount will be limited to the extent
described in the accompanying prospectus supplement. As specified in the
accompanying prospectus supplement, the Subordinate Amount may be reduced based
on the amount of losses borne by the holders of the subordinate securities as a
result of the subordination, a specified schedule or other method of reduction
as the prospectus supplement may specify.
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 specified in the accompanying prospectus supplement, interest
collections on the trust assets may exceed the interest payments required to be
made on the securities and other fees and expenses of the trust for the related
distribution date. The amount of this excess is referred to as excess interest.
The excess interest may be deposited into a reserve fund or applied as a payment
of principal on the securities. To the extent excess interest is applied as
principal payments on the securities, the effect will be a reduction of the
principal balance of the securities relative to the outstanding balance of the
trust assets, creating overcollateralization and additional protection to the
securityholders, as specified in the accompanying prospectus supplement.
Reserve Funds
If 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 subordinate securities, from the
Excess Spread or otherwise. A reserve fund for a series of securities 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 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
securities as to which credit enhancement includes a letter of credit, under
circumstances specified in the accompanying prospectus supplement, the remaining
amount of the letter of credit may be drawn by the trustee and deposited in a
reserve fund.
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Amounts in a reserve fund may be distributed to securityholders, 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 securities if described in the accompanying prospectus
supplement. If 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 distribution 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 securities.
The trustee will have a perfected security interest for the benefit of
the securityholders in the assets of 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 securityholders. These delays could adversely affect the yield
to investors on the related securities.
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.
Mortgage Pool Insurance Policies
Any insurance policy covering losses on a loan pool obtained by the
depositor for a trust will be issued by the mortgage pool insurer. Each mortgage
pool insurance policy, in accordance with the limitations described in this
prospectus and in the prospectus supplement, if any, will cover Defaulted
Mortgage Losses in an amount specified in the prospectus supplement. As
described under "--Maintenance of Credit Enhancement," the master servicer will
use its best reasonable efforts to maintain the mortgage pool insurance policy
and to present claims under that policy to the pool insurer on behalf of itself,
the trustee and the securityholders. The mortgage pool insurance policies,
however, are not blanket policies against loss, since claims under those
policies may only be made respecting particular defaulted loans and only on
satisfaction of specified conditions precedent described in the succeeding
paragraph. Unless specified in the accompanying prospectus supplement, the
mortgage pool insurance policies may not cover losses due to a failure to pay or
denial of a claim under a primary insurance policy, irrespective of the reason
therefor.
Each mortgage pool insurance policy will provide that no claims may be
validly presented under the policy unless, among other things:
o any required primary insurance policy is in effect for the
defaulted loan and a claim under the policy has been submitted
and settled;
o hazard insurance on the property securing the loan has been kept
in force and real estate taxes and other protection and
preservation expenses have been paid by the master servicer;
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o if there has been physical loss or damage to the mortgaged
property, it has been restored to its condition, reasonable wear
and tear excepted, at the cut-off date; and
o the insured has acquired good and merchantable title to the
mortgaged property free and clear of liens except permitted
encumbrances.
On satisfaction of these conditions, the pool insurer will have the
option either (a) to purchase the property securing the defaulted loan at a
price equal to its outstanding principal balance plus accrued and unpaid
interest at the applicable loan rate to the date of purchase and some expenses
incurred by the master servicer on behalf of the trustee and securityholders, or
(b) to pay the amount by which the sum of the outstanding principal balance of
the defaulted loan plus accrued and unpaid interest at the loan rate to the date
of payment of the claim and the aforementioned expenses exceeds the proceeds
received from an approved sale of the mortgaged property, in either case net of
some amounts paid or assumed to have been paid under any related primary
insurance policy.
Securityholders may experience a shortfall in the amount of interest
payable on the related securities in connection with the payment of claims under
a mortgage pool insurance policy because the pool insurer is only required to
remit unpaid interest through the date a claim is paid rather than through the
end of the month in which the claim is paid. In addition, the securityholders
may also experience losses for the related securities in connection with
payments made under a mortgage pool insurance policy to the extent that the
master servicer expends funds to cover unpaid real estate taxes or to repair the
related mortgaged property in order to make a claim under a mortgage pool
insurance policy, as those amounts will not be covered by payments under the
policy and will be reimbursable to the master servicer from funds otherwise
payable to the securityholders. If any mortgaged property securing a defaulted
loan is damaged and proceeds, if any (see "--Special Hazard Insurance Policies"
in this prospectus for risks which are not covered by those policies), from the
related hazard insurance policy or applicable special hazard insurance policy
are insufficient to restore the damaged property to a condition sufficient to
permit recovery under the mortgage pool insurance policy, the master servicer is
not required to expend its own funds to restore the damaged property unless it
determines that (a) restoration will increase the proceeds to securityholders on
liquidation of the mortgage loan after reimbursement of the master servicer for
its expenses and (b) the expenses will be recoverable by it through Liquidation
Proceeds or Insurance Proceeds.
A mortgage pool insurance policy and some primary insurance policies
will likely not insure against loss sustained by reason of a default arising
from, among other things, fraud or negligence in the origination or servicing of
a mortgage loan, including misrepresentation by the borrower, the seller or
other persons involved in the origination thereof, failure to construct a
mortgaged property in accordance with plans and specifications or bankruptcy,
unless, if specified in the accompanying prospectus supplement, an endorsement
to the mortgage pool insurance policy provides for insurance against that type
of loss. Depending on the nature of the event, a breach of representation made
by a seller may also have occurred. That breach, if it materially and adversely
affects the interests of securityholders and cannot be cured, would give rise to
a repurchase obligation on the part of the seller, as described under
"Description of the Securities--Repurchases of Loans" in this prospectus.
However, such an event would not give rise to a breach of a representation and
warranty or a repurchase obligation on the part of the depositor or Residential
Funding Corporation.
The original amount of coverage under each mortgage pool insurance
policy will be reduced over the life of the related series of securities by the
aggregate amount of claims paid less the aggregate of the net amounts realized
by the pool insurer on disposition of all foreclosed properties. The amount of
claims paid includes some expenses incurred by the master servicer as well as
accrued interest on delinquent mortgage loans to the date of payment of the
claim. See "Certain Legal Aspects of the Trust Assets and Related Matters" in
this prospectus. Accordingly, if aggregate net claims paid under any mortgage
pool insurance policy reach the original policy limit, coverage under that
mortgage pool insurance policy will be exhausted and any further losses will be
borne by
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the related securityholders. In addition, unless the master servicer determines
that an Advance relating to a delinquent mortgage loan would be recoverable to
it from the proceeds of the liquidation of the mortgage loan or otherwise, the
master servicer would not be obligated to make an Advance respecting any
delinquency since the Advance would not be ultimately recoverable to it from
either the mortgage pool insurance policy or from any other related source. See
"Description of the Securities--Servicing and Administration of Trust
Assets--Advances"
Since each mortgage pool insurance policy will require that the property
subject to a defaulted mortgage loan be restored to its original condition prior
to claiming against the pool insurer, the policy will not provide coverage
against hazard losses. As described under "Insurance Policies on Loans--Standard
Hazard Insurance on Mortgaged Properties," the hazard policies covering the
mortgage loans typically exclude from coverage physical damage resulting from a
number of causes and, even when the damage is covered, may afford recoveries
which are significantly less than full replacement cost of those losses.
Additionally, no coverage for Special Hazard Losses, Fraud Losses or Bankruptcy
Losses will cover all risks, and the amount of any such coverage will be
limited. See "--Special Hazard Insurance Policies" in this prospectus. As a
result, certain hazard risks will not be insured against and may be borne by
securityholders.
Contract pools may be covered by pool insurance policies that are
similar to the mortgage pool insurance policies described above.
Special Hazard Insurance Policies
Any insurance policy covering Special Hazard Losses obtained by the
depositor for a trust will be issued by the insurer named in the accompanying
prospectus supplement. Each special hazard insurance policy will, subject to
limitations described in the accompanying prospectus supplement, if any, protect
the related securityholders from Special Hazard Losses.
A special hazard insurance policy will not cover losses occasioned by
war, civil insurrection, certain governmental actions, errors in design, faulty
workmanship or materials, except under certain circumstances, nuclear reaction,
chemical contamination or waste by the borrower. Aggregate claims under a
special hazard insurance policy will be limited to the amount described in the
related agreement and will be subject to reduction as described in that
agreement. A special hazard insurance policy will provide that no claim may be
paid unless hazard and, if applicable, flood insurance on the property securing
the loan has been kept in force and other protection and preservation expenses
have been paid by the master servicer.
In accordance with the foregoing limitations, a special hazard insurance
policy will provide that, where there has been damage to property securing a
foreclosed loan, title to which has been acquired by the insured, and to the
extent the damage is not covered by the hazard insurance policy or flood
insurance policy, if any, maintained by the borrower or the master servicer, the
insurer will pay the lesser of (i) the cost of repair or replacement of the
related property or (ii) on transfer of the property to the insurer, the unpaid
principal balance of the loan at the time of acquisition of the related property
by foreclosure or deed in lieu of foreclosure, plus accrued interest at the loan
rate to the date of claim settlement and certain expenses incurred by the master
servicer for the related property.
To the extent described in the accompanying prospectus supplement,
coverage in respect of Special Hazard Losses for a series of securities may be
provided, in whole or in part, by a type of special hazard coverage other than a
special hazard insurance policy or by means of a representation of the depositor
or Residential Funding Corporation.
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Bankruptcy Bonds
In the event of a personal bankruptcy of a borrower, a bankruptcy court
may establish a Deficient Valuation. The amount of the secured debt could then
be reduced to that value, and, thus, the holders of the first and junior loans
would become unsecured creditors to the extent the outstanding principal balance
of those loans exceeds the value assigned to the mortgaged property by the
bankruptcy court.
In addition, other modifications of the terms of a loan can result from
a bankruptcy proceeding, including a Debt Service Reduction. See "Certain Legal
Aspects of Trust Assets and Related Matters--Trust Assets Secured by Mortgages
on Mortgaged Property--Anti-Deficiency Legislation and Other Limitations on
Lenders" in this prospectus. Any bankruptcy bond to provide coverage for
Bankruptcy Losses resulting from proceedings under the federal Bankruptcy Code
obtained by the depositor for a trust will be issued by an insurer named in the
accompanying prospectus supplement. The level of coverage under each bankruptcy
bond will be stated in the accompanying prospectus supplement.
Maintenance of Credit Enhancement
If credit enhancement has been obtained for a series of securities, the
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, as described below under "--Reduction or Substitution of
Credit Enhancement" in this prospectus. The master servicer, on behalf of
itself, the trustee and securityholders, will provide the information required
for the 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 mortgage pool
insurance policy, special hazard insurance policy, bankruptcy policy, financial
guaranty insurance policy or surety bond, as applicable, on a timely basis,
unless the premiums are paid directly by the trust. As to mortgage pool
insurance policies generally, if the related insurer ceases to be a Qualified
Insurer, the master servicer or another entity specified in the accompanying
prospectus supplement 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 policy or bond.
If the cost of the replacement policy is greater than the cost of the existing
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. If the
insurer under a mortgage pool insurance policy ceases to be a Qualified Insurer
because it ceases to be approved as an insurer by Freddie Mac or Fannie Mae or
any successor entity, the master servicer or another entity specified in the
accompanying prospectus supplement will review, not less often than monthly, the
financial condition of the pool insurer with a view toward determining whether
recoveries under the mortgage pool insurance policy are jeopardized for reasons
related to the financial condition of the pool insurer. If the master servicer
or the other entity specified in the accompanying prospectus supplement
determines that recoveries are so jeopardized, it will exercise its best
reasonable efforts to obtain from another Qualified Insurer a replacement
insurance policy as described above, at the same cost limit. For all forms of
credit enhancement other than a mortgage pool insurance policy, the master
servicer will have no obligation to replace or substitute the credit enhancement
for any reason, including the non-performance or downgrading of the provider of
the credit enhancement. Any losses in market value of the securities associated
with any reduction or withdrawal in rating by an applicable rating agency shall
be borne by the securityholders.
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If any property securing a defaulted loan is damaged and proceeds, if
any, from the related hazard insurance policy are insufficient to restore the
damaged property to a condition sufficient to permit recovery under any letter
of credit, the master servicer is not required to expend its own funds to
restore the damaged property unless it determines:
o that restoration will increase the proceeds to one or more
classes of securityholders on liquidation of that trust asset
after reimbursement of the master servicer for its expenses; and
o that the expenses will be recoverable by it through Liquidation
Proceeds or Insurance Proceeds.
If recovery under any letter of credit or other credit enhancement is not
available because the master servicer has been unable to make the above
determinations, has made the determinations incorrectly or recovery is not
available for any other reason, the master servicer is nevertheless obligated to
follow whatever normal practices and procedures, subject to the preceding
sentence, as it deems necessary or advisable to realize upon the defaulted trust
asset and in the event this determination has been incorrectly made, is entitled
to reimbursement of its expenses in connection with that restoration.
Reduction or Substitution of Credit Enhancement
The amount of credit support provided for any series of securities 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
securityholders, upon the written assurance from each applicable rating agency
that the then-current rating of the related series of securities will not be
adversely affected thereby.
Furthermore, if the credit rating of any obligor under any applicable
credit enhancement is downgraded or the amount of credit enhancement is no
longer sufficient to support the rating on the related securities, the credit
rating of each class of the related securities may be downgraded to a
corresponding level, and, unless specified in the accompanying prospectus
supplement, neither the master servicer nor the depositor will be obligated to
obtain replacement credit support in order to restore the rating of the
securities. 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 securities is maintained. Where the credit
support is in the form of a reserve fund, a permitted reduction in the amount of
credit enhancement will result in a release of all or a portion of the assets in
the reserve fund to the depositor, the master servicer or any other person that
is entitled to those assets. Any assets so released and any amount by which the
credit enhancement is reduced will not be available for payments in future
periods.
Other Financial Obligations Related To The Securities
Swaps and Yield Supplement Agreements
The trustee on behalf of the trust may enter into interest rate swaps
and related caps, floors and collars, collectively referred to as swaps, to
minimize the risk to securityholders of adverse changes in interest rates, and
other yield supplement agreements, similar yield maintenance
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arrangements or other notional principal contracts, that do not involve swap
agreements, 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 securities 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.
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 securities 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 securityholders. 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 repurchase
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 securities. Each purchase obligation may
be a secured or unsecured obligation of its provider, 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 securityholders of the related series. Unless 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
securityholders of the related series. Other purchase obligations may be payable
to the trustee or directly to the holders of the securities to which that
obligation relates.
Insurance Policies on Loans
Hazard Insurance and Related Claims
The terms of each loan and contract that is secured by a lien on a
mortgaged property, other than a Cooperative Loan, require each borrower to
maintain a hazard insurance policy covering the related mortgaged property 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
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of the policy relevant to an investment in the securities. The insurance is
subject to underwriting and approval of individual trust assets by the
respective insurers.
In most cases, the servicing agreement will require the master servicer
to cause to be maintained for each mortgaged property a hazard insurance policy
providing for no less than the coverage of the standard form of fire insurance
policy with extended coverage customary in the state in which the property is
located. That coverage, in most cases, will be in an amount equal to the lesser
of:
o the maximum insurable value of the mortgaged property; or
o the sum of the outstanding balance of the related loan or
contract plus the outstanding balance on any loan senior to that
loan or contract.
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 borrowers or
subservicers.
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 borrower in accordance with the master servicer's
normal servicing procedures, will be deposited initially in the Custodial
Account and ultimately in the Payment Account. If loans secured by junior liens
on the related mortgaged property are included within any trust, investors
should consider the application of hazard insurance proceeds discussed in this
prospectus under "Certain Legal Aspects of the Trust Assets and Related
Matters--Trust Assets Secured by Mortgages on Mortgaged Property--Junior
Mortgages; Rights of Senior Mortgagees.
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.
Unless otherwise specified in the accompanying prospectus supplement,
the master servicer shall also cause to be maintained on property acquired upon
foreclosure, or deed in lieu of foreclosure, of any loan, fire insurance with
extended coverage in an amount which is at least equal to the amount necessary
to avoid the application of any co-insurance clause contained in the related
hazard insurance policy. The standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightning, explosion, smoke, windstorm, hail, riot, strike and civil
commotion, in accordance with the conditions and exclusions specified in each
policy. The policies relating to the mortgage loans will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms and therefore will not contain identical terms and
conditions, the basic terms of which are dictated by respective state laws.
These policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement, including earthquakes, landslides and mudflows, nuclear
reactions, wet or dry rot, vermin, rodents, insects or domestic animals, theft
and, in some cases, vandalism. The foregoing list is merely indicative of some
kinds of uninsured risks and is not intended to be all-inclusive. Where the
improvements securing a loan or contract are located in a federally designated
flood area at the time of origination of that loan or contract, the pooling and
servicing agreement or servicing agreement typically requires the master
servicer to cause to be maintained for each such loan or contract serviced,
flood insurance, to the extent available, in an amount equal to the lesser of
the amount
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required to compensate for any loss or damage on a replacement cost basis or the
maximum insurance available under the federal flood insurance program.
Since the amount of hazard insurance that borrowers 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. See "Description of Credit Enhancement--Subordination" in this prospectus
for a description of when subordination is provided, the protection, limited to
the Special Hazard Amount as described in the accompanying prospectus
supplement, afforded by subordination, and "Description of Credit
Enhancement--Special Hazard Insurance Policies" for a description of the limited
protection afforded by any special hazard insurance policy against losses
occasioned by hazards which are otherwise uninsured against.
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 that 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. FHA Regulations permit the Secretary
of 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 substantially complied with FHA
Regulations in good faith and has credited the borrower for any excess charges.
In general, an insurance claim against the FHA will be denied if the Title I
loan to which it relates does not strictly satisfy the requirements of the
National Housing Act and FHA Regulations.
Unlike some other government loan insurance programs, loans under the
Title I Program other than loans in excess of $25,000, are not subject to prior
review by the FHA. Under the Title I Program, the FHA disburses insurance
proceeds for defaulted loans for which insurance claims have been filed by a
Title I lender prior to any review of those loans. A Title I lender is required
to repurchase a Title I loan from the FHA that is determined to be ineligible
for insurance after insurance claim payments for that loan have been paid to
that lender. Under the FHA Regulations, if the Title I lender's obligation to
repurchase the Title I loan is unsatisfied, the FHA is permitted to offset the
unsatisfied obligation against future insurance claim payments owed by the FHA
to that lender. FHA Regulations permit the FHA to disallow an insurance claim
for any loan that does not qualify for insurance for a period of up to two years
after the claim is made and to require the Title I lender that has submitted the
insurance claim to repurchase the loan.
The proceeds of loans under the Title I Program may be used only for
permitted purposes, including, but not limited to, the alteration, repair or
improvement of residential property, the purchase of a manufactured home and/or
lot, or cooperative interest in a manufactured home and/or lot, on which to
place that home.
Subject to the limitations described below, eligible Title I loans are
generally insured by the FHA for 90% of an amount equal to the sum of:
o the net unpaid principal amount and the uncollected interest
earned to the date of default;
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o interest on the unpaid loan obligation from the date of default
to the date of the initial submission of the insurance claim,
plus 15 calendar days, the total period not to exceed nine
months, at a rate of 7% per annum;
o uncollected court costs;
o amount of attorney's fees on an hourly basis for time actually
expended and billed not to exceed $500; and
o amount of expenses for recording the assignment of the security
to the United States.
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 available 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. For each eligible loan reported and
acknowledged for insurance, the FHA charges a fee, the FHA insurance premium. If
a loan is prepaid during the year, the FHA will not refund the FHA insurance
premium paid for that year.
Under the Title I, the FHA will reduce the insurance coverage available
in a Title I lender's FHA reserve relating to loans insured under that Title I
lender's contract of insurance by:
o the amount of FHA insurance claims approved for payment related
to those loans; and
o the amount of reserves related to a loan which have been:
o sold, assigned or transferred; or
o prepaid during the first year they were registered for
insurance under the Title I lender's contract.
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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.
As a result, for any Title I Loans backing any series of securities, the
availability of FHA insurance may be reduced or eliminated due to losses on
other loans or other actions by the related Title I lender.
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 $60,000 or an average
amount of $12,000 per family unit 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 subservicer, 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 limited purpose of acquiring first or
junior lien home equity loans, home improvement contracts, home loans,
manufactured housing contracts, Agency Securities and private securities and
issuing securities backed by these loans, contracts, Agency Securities and
private 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 securities do not represent an interest in or an obligation of the
depositor. The depositor's only obligations relating to a series of securities
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.
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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 securities.
Residential Funding Corporation, either directly or through affiliates,
buys loans under several loan purchase programs from loan originators or sellers
nationwide, including affiliates, that meet its seller/servicer eligibility
requirements and services loans for its own account and for others. Residential
Funding Corporation's principal executive offices are located at 8400 Normandale
Lake Boulevard, Suite 600, Minneapolis, Minnesota 55437. Its telephone number is
(612) 832-7000. Residential Funding Corporation conducts operations from its
headquarters in Minneapolis and primarily from offices located in California,
Maryland, Pennsylvania and Texas.
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
securities.
The Agreements
As described in this prospectus under "Introduction" and "Description of
the Securities," each series of certificates will be issued under a pooling and
servicing agreement or trust agreement, as applicable, and each series of notes
will be issued under an indenture, each as described in that section. In the
case of each series of notes, the provisions relating to the servicing of the
trust assets will be contained in the related servicing agreements. The
following summaries describe additional provisions common to each pooling and
servicing agreement and trust agreement relating to a series of certificates,
and each indenture and servicing agreement relating to a series of notes.
Events of Default; Rights Upon Event of Default
Pooling and Servicing Agreement; Servicing Agreement
Events of default under the related pooling and servicing agreement or
servicing agreement for a series of securities will include:
o any failure by the master servicer to make a required deposit to
the Custodial Account or the Payment Account or, if the master
servicer is the paying agent, to distribute to the holders of any
class of securities of a series any required distribution, and
the failure continues unremedied for five business days after the
giving of written notice of that failure to the master servicer
by the trustee or the depositor, or to the master servicer, the
depositor and the trustee by the holders of securities of that
class evidencing not less than 25% of the aggregate percentage
interests constituting that class or the credit enhancer, if
applicable;
o any failure by the master servicer duly to observe or perform in
any material respect any other of its covenants or agreements in
the related agreement for that series of securities which
continues unremedied for 45 days, or 15 days in the case of a
failure to pay the premium for any insurance policy which is
required to be maintained under the related pooling and servicing
agreement or servicing agreement, after the giving of written
notice of failure to the master servicer by the trustee or the
depositor, or to the master servicer, the depositor and the
trustee be, by the holders of securities of
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that class evidencing not less than 25%, 33% in the case of a
trust including private securities, or a majority in the case of
a series of notes, of the aggregate percentage interests
constituting that class, or the credit enhancer, if applicable;
o specified events of insolvency, readjustment of debt, marshalling
of assets and liabilities or similar proceedings regarding the
master servicer and specified actions by the master servicer
indicating its insolvency or inability to pay its obligations;
and
o any other servicing default as described in the pooling and
servicing agreement or servicing agreement.
A default under the terms of any pooling and servicing agreement or servicing
agreement relating to any private securities included in any trust will not
constitute an event of default under the related agreement.
So long as an event of default remains unremedied, either the depositor
or the trustee may, except as otherwise provided for in the related agreement as
to the special purpose entity or the credit enhancer, if applicable, and, in the
case of an event of default under a pooling and servicing agreement, at the
direction of the holders of securities evidencing not less than 51% of the
aggregate voting rights in the related trust, the trustee, shall, by written
notification to the master servicer and to the depositor or the trustee
terminate all of the rights and obligations of the master servicer under the
related agreement, other than any right of the master servicer as
securityholder, and, in the case of termination under a servicing agreement,
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 trustee or, on notice to the depositor and with the
depositor's consent, its designee, will succeed to all responsibilities, duties
and liabilities of the master servicer under the related agreement, other than
the obligation to purchase loans under some circumstances, and will be entitled
to similar compensation arrangements. If the trustee would be obligated to
succeed the master servicer but is unwilling to act, it may appoint, or if it is
unable 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 related agreement unless otherwise described in the agreement. Pending any
appointment, the trustee is obligated to act in that capacity. The 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 related agreement.
No securityholder will have any right under a pooling and servicing
agreement, except as otherwise provided for in the related pooling and servicing
agreement with respect to the credit enhancer, to institute any proceeding with
respect to the pooling and servicing agreement unless:
o such holder previously has given to the trustee written notice of
default and the continuance thereof;
o the holders of securities of any class evidencing not less than
25% of the aggregate percentage interests constituting that
class:
o have made written request upon the trustee to institute the
proceeding in its own name as trustee under the agreement;
and
o have offered to the trustee reasonable indemnity and
o the trustee has neglected or refused to institute any proceeding
of this sort for 60 days after receipt of the request and
indemnity.
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However, the trustee will be under no obligation to exercise any of the trusts
or powers vested in it by the pooling and servicing agreement or to institute,
conduct or defend any litigation under the agreement or in relation to that
agreement at the request, order or direction of any of the securityholders
covered by the pooling and servicing agreement, unless the securityholders have
offered to the trustee reasonable security or indemnity against the costs,
expenses and liabilities which may be incurred by or in connection with that
agreement.
Indenture
An event of default under the indenture for each series of notes, in
most cases, will include:
o a default for five days or more in the distribution of any
principal of or interest on any note of the series;
o failure to perform any other covenant of the depositor or the
trust in the indenture which continues for a period of thirty
days after notice of that failure is given in accordance with the
procedures described in the accompanying prospectus supplement;
o any representation or warranty made by the depositor or the trust
in the indenture or in any certificate or other writing delivered
under or in connection with the indenture relating to or
affecting the series, having been incorrect in a material respect
as of the time made, and the breach is not cured within thirty
days after notice of that error is given in accordance with the
procedures described in the accompanying prospectus supplement;
o some events of bankruptcy, insolvency, or similar events relating
to the depositor or the trust; or
o any other event of default provided for notes of that series.
If an event of default as to the notes of any series at the time
outstanding occurs and is continuing, either the trustee, the credit enhancer,
if applicable, or the holders of a majority of the then aggregate outstanding
amount of the notes of the series, with the written consent of the credit
enhancer, may declare the principal amount, or, if the notes of that series are
accrual notes, that portion of the principal amount as may be specified in the
terms of that series, of all the notes of the series to be due and payable
immediately. That declaration may, under some circumstances, be rescinded and
annulled by the holders of a majority in aggregate outstanding amount of the
related notes.
If, following an event of default for any series of notes, the notes of
the series have been declared to be due and payable, the indenture trustee, with
the consent of the credit enhancer, if applicable, may, in its discretion,
notwithstanding that acceleration, elect to maintain possession of the
collateral securing the notes of that series and to continue to apply payments
on that collateral as if there had been no declaration of acceleration if that
collateral continues to provide sufficient funds for the payment of principal of
and interest on the notes of the series as they would have become due if there
had not been a declaration. In addition, the indenture trustee may not sell or
otherwise liquidate the collateral securing the notes of a series following an
event of default, unless:
o the holders of 100% of the then aggregate outstanding amount of
the notes of the series consent to that sale;
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o the proceeds of the sale or liquidation are sufficient to pay in
full the principal of and accrued interest, due and unpaid, on
the outstanding notes of the series, and to reimburse the credit
enhancer, if applicable, at the date of that sale; or
o the indenture trustee determines that the collateral would not be
sufficient on an ongoing basis to make all payments on those
notes as those payments would have become due if those notes had
not been declared due and payable, and the indenture trustee
obtains the consent of the holders of 66 2/3% of the then
aggregate outstanding amount of the notes of the series and the
credit enhancer, if applicable.
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 distributions to the securityholders 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 securityholders after the occurrence of an event of default.
If 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 an indenture
to institute any proceeding in connection with the agreement unless:
o the holder previously has given to the indenture trustee written
notice of default and the continuance of that default;
o the holders of securities of any class evidencing not less than
25% of the aggregate percentage interests constituting the class
(1) have made written request upon the indenture trustee to
institute that proceeding in its own name as indenture trustee
and (2) have offered to the indenture trustee reasonable
indemnity;
o the indenture trustee has neglected or refused to institute that
proceeding for 60 days after receipt of that request and
indemnity; and
o no direction inconsistent with that written request has been
given to the indenture trustee during that 60 day period by the
holders of a majority of the security balances of that class,
except as otherwise provided for in the related agreement
regarding the credit enhancer.
However, the indenture trustee will be under no obligation to exercise any of
the trusts or powers vested in it by the applicable agreement or to institute,
conduct or defend any litigation under or in relation to the indenture at the
request, order or direction of any of the securityholders 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
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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 the
credit enhancer, without the consent of the related securityholders to:
o cure any ambiguity;
o correct or supplement any provision in that agreement which may
be inconsistent with any other provision in that agreement or to
correct any error;
o change the timing and/or nature of deposits in the Custodial
Account or the Payment Account or to change the name in which the
Custodial Account is maintained, except that (a) deposits to the
Payment Account may not occur later than the related distribution
date, (b) the change may not adversely affect in any material
respect the interests of any securityholder, as evidenced by an
opinion of counsel, and (c) the change may not adversely affect
the then-current rating of any rated classes of securities, as
evidenced by a letter from each applicable rating agency, unless
specified in the accompanying prospectus supplement;
o if an election to treat the related trust as a "real estate
mortgage investment conduit" or REMIC has been made, modify,
eliminate or add to any of its provisions
o to the extent necessary to maintain the qualification of
the trust as a REMIC or to avoid or minimize the risk of
imposition of any tax on the related trust, provided that
the trustee has received an opinion of counsel to the
effect that
o the action is necessary or desirable to maintain the
qualification or to avoid or minimize the risk; and
o the action will not adversely affect in any material
respect the interests of any related securityholder; or
o to modify the provisions regarding the transferability of
the REMIC Residual Certificates, provided that the
depositor has determined that the change would not
adversely affect the applicable ratings of any classes of
the securities, as evidenced by a letter from each
applicable rating agency, and that any amendment will not
give rise to any tax with respect to the transfer of the
REMIC Residual Certificates to a non-permitted transferee;
o make any other provisions for matters or questions arising under
that agreement which are not materially inconsistent with the
provisions of that agreement, so long as that action will not
adversely affect in any material respect the interests of any
securityholder; or
o amend any provision that is not material to holders of any class
of related securities.
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%, in the case of a
series of securities issued under a pooling and servicing agreement, or a
majority, in the case of a series of securities issued under an indenture, 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 related agreement or of modifying in any manner the rights of
the related securityholders, except that no amendment may:
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o reduce in any manner the amount of, or delay the timing of,
payments received on trust assets which are required to be
distributed on a security of any class without the consent of the
holder of the security;
o impair the right of any securityholder to institute suit for the
enforcement of the provisions of the agreements (in the case of
an indenture);
o adversely affect in any material respect the interests of the
holders of any class of securities in a manner other than as
described in the first clause above, without the consent of the
holders of securities of that class evidencing not less than 66%,
in the case of a series of securities issued under a pooling and
servicing agreement, or a majority, in the case of a series of
securities issued under an indenture, of the aggregate
outstanding principal amount of the securities of each class of
that series affected by that amendment; or
o reduce the percentage of securities of any class the holders of
which are required to consent to any amendment unless the holders
of all securities of that class have consented to the change in
the percentage.
Regardless of the foregoing, if a REMIC election has been made with
respect to the related trust, the trustee will not be entitled to consent to any
amendment to a pooling and servicing agreement without having first received an
opinion of counsel to the effect that the amendment or the exercise of any power
granted to the master servicer, the depositor or the trustee in accordance with
the amendment will not result in the imposition of a tax on the related trust or
cause the trust to fail to qualify as a REMIC.
Termination; Redemption of Securities
The primary obligations created by the trust agreement or pooling and
servicing agreement for each series of securities, including the securities
issued under any related indenture in the case of a series of notes, other than
some limited payment and notice obligations of the trustee and the depositor,
respectively, will terminate upon the distribution to the related
securityholders, of all amounts held in the Payment Account or by the master
servicer and required to be paid to those securityholders following the earlier
of:
o the final payment or other liquidation or disposition, or any
related Advance, of the last trust asset subject to the related
agreement and all property acquired upon foreclosure or deed in
lieu of foreclosure of any loan; and
o the purchase by the master servicer or the depositor, or, if
specified in the accompanying prospectus supplement, by the
holder of the REMIC Residual Certificates 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. See "Material Federal Income Tax Consequences" in
this prospectus.
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. In addition to the
foregoing, the master servicer or the depositor may have the option to purchase,
in whole but not in part, the securities specified in the accompanying
prospectus supplement in the manner described in the accompanying prospectus
supplement. At the time of the purchase of the securities or at any time after
the purchase, at the option of the master servicer or the depositor, the loans
may be sold, thereby effecting a retirement of the securities and the
termination of the trust, or the securities so purchased may be held or resold
by the master servicer or the depositor. Written notice of
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termination of the related agreement will be given to each securityholder, and
the final distribution will be made only at the time of the surrender and
cancellation of the securities at an office or agency appointed by the trustee
which will be specified in the notice of termination. If the securityholders are
permitted to terminate the trust under the applicable agreement, a penalty may
be imposed on the securityholders based on the fee that would be foregone by the
master servicer because of the related termination.
Any purchase of loans and property acquired from the loans evidenced by
a series of securities shall be made at the option of the master servicer, the
depositor or, if applicable, the holder of the REMIC Residual Certificates at
the price specified in the accompanying prospectus supplement. The exercise of
that right will effect early retirement of the securities of that series, but
the right of any entity to purchase the loans and related property will be
subject to the criteria, and will be at the price, indicated in the accompanying
prospectus supplement. Any early termination may adversely affect the yield to
holders of some classes of the securities. If a REMIC election has been made,
the termination of the related trust will be effected in a manner consistent
with applicable federal income tax regulations and its status as a REMIC.
In addition to the optional repurchase of the property in the related
trust, if stated in the accompanying prospectus supplement, a holder of the Call
Class will have the right, solely at its discretion, to terminate the related
trust and thereby effect early retirement of the securities of the series, on
any distribution date after the distribution date specified in the accompanying
prospectus supplement and until the date when the optional termination rights of
the master servicer and the depositor become exercisable. The Call Class will
not be offered by the prospectus supplement. Any such call will be of the entire
trust at one time; multiple calls for any series of securities will not be
permitted. In the case of a call, the holders of the securities will be paid a
price equal to the Call Price. To exercise the call, the holder of the Call
Security must remit to the related trustee for distribution to the
securityholders, funds equal to the Call Price. If those funds are not deposited
with the related trustee, the securities of that series will remain outstanding.
In addition, in the case of a trust for which a REMIC election or elections have
been made, this termination will be effected in a manner consistent with
applicable Federal income tax regulations and its status as a REMIC. In
connection with a call by the holder of a Call Security, the final payment to
the securityholders will be made at the time of surrender of the related
securities to the trustee. Once the securities have been surrendered and paid in
full, there will not be any further liability to securityholders.
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 Trustee
The trustee under each pooling and servicing agreement will be named in
the accompanying prospectus supplement. The commercial bank or trust company
serving as trustee may have normal banking relationships with the depositor
and/or its affiliates, including Residential Funding Corporation.
The trustee may resign at any time, in which event the depositor will be
obligated to appoint a successor trustee. The depositor may also remove the
trustee if the trustee ceases to be eligible to continue as trustee under the
pooling and servicing agreement or if the trustee becomes insolvent. After
becoming aware of those circumstances, the depositor will be obligated to
appoint a successor trustee. The trustee may also be removed at any time by the
holders of securities evidencing not less than 51% of the aggregate voting
rights in the related trust. Any resignation or removal of the trustee and
appointment of a successor trustee will not become effective until acceptance of
the appointment by the successor trustee.
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The Owner Trustee
The owner trustee under each 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 owner trustee under the trust agreement or if the owner
trustee becomes insolvent. After 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 indenture trustee under the indenture or if the indenture trustee becomes
insolvent. After becoming aware of those circumstances, the depositor, the owner
trustee or the Administrator will be obligated to appoint a successor indenture
trustee. If so specified in the indenture, the indenture trustee may also be
removed at any time by the holders of a majority by principal balance of the
notes. Any resignation or removal of the indenture trustee and appointment of a
successor indenture trustee will not become effective until acceptance of the
appointment by the successor indenture trustee.
Yield and Prepayment Considerations
The yield to maturity of a security will depend on various factors,
including:
o the price paid by the holder for the security;
o the interest rate, referred to as the security rate, on any
security entitled to payments of interest, which may vary if
specified in the accompanying prospectus supplement; and
o the rate and timing of principal payments on the trust assets,
including payments in excess of required installments,
prepayments or terminations, liquidations and repurchases, the
rate and timing of Draws, if applicable, and the allocation of
principal payments to reduce the principal or notional balance of
the security.
The amount of interest payments on a trust asset made, or accrued in the
case of accrual securities, monthly to holders of a class of securities entitled
to payments of interest will be calculated on the basis of that class' specified
percentage of each payment of interest, or accrual amounts in the case of
accrual securities, and will be expressed as a fixed, adjustable or variable
security rate payable on the outstanding principal or notional balance of that
security, or any
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combination of those security rates, calculated as described in this prospectus
and in the accompanying prospectus supplement. See "Description of the
Securities--Distributions of Principal and Interest on the Securities" in this
prospectus. A variable security rate may be calculated based on the weighted
average of the Net Loan Rates of the related loans or certain balances of the
loans, which may be weighted in accordance with the balances for the month
preceding the distribution date. An adjustable security rate may be calculated
by reference to an index or otherwise. Holders of interest only securities or a
class of securities having a security rate that varies based on the weighted
average loan rate of the underlying loans will be affected by disproportionate
prepayments and repurchases of loans having higher Net Loan Rates or higher
rates applicable to the interest only securities, as applicable.
The effective yield to maturity to each holder of securities entitled to
payments of interest may be below that otherwise produced by the applicable
security rate and purchase price of the security because, while interest will
accrue on each loan during the calendar month or a specified period preceding a
distribution date, the distribution of interest will be made on the distribution
date in the month following the month of accrual as specified in the
accompanying prospectus supplement.
The aggregate payments of interest on a class of securities, and the
yield to maturity on a class of securities, will be affected by the rate of
payment of principal on the securities, or the rate of reduction in the notional
amount of securities entitled to payments of interest only and, in the case of
securities evidencing interests in revolving credit loans, by changes in the Net
Loan Rates on the revolving credit loans due to fluctuations in the related
index or changes in the Gross Margin. See "The Trust--Characteristics of the
Loans--Revolving Credit Loans" in this prospectus. The yield on the securities
will also be affected by liquidations of loans following borrower defaults and
by repurchases of loans in the event of breaches of representations made for
those loans. See "Description of the Securities--Representations Relating to
Loans" and "--Assignment of the Trust Assets" in this prospectus. In addition,
if the index used to determine the note rate for the securities is different
than the index applicable to the loan rates, the yield on the securities will be
sensitive to changes in the index related to the note rate and the yield on the
securities 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 security is purchased at a premium over its face
amount and payments of principal on that security occur at a rate faster than
anticipated at the time of purchase, the purchaser's actual yield to maturity
will be lower than assumed at the time of purchase. Conversely, if a security is
purchased at a discount from its face amount and payments of principal on that
security occur at a rate slower than that anticipated at the time of purchase,
the purchaser's actual yield to maturity will be lower than assumed at the time
of purchase. If strip securities are issued evidencing a right to payments of
interest only or disproportionate payments of interest, Principal Prepayments on
the loans, net of Draws, if applicable, liquidations, purchases and repurchases
will negatively affect the total return to investors in any of those securities.
In addition, the total return to investors in securities evidencing a right to
payments of interest at a rate that is based on the weighted average Net Loan
Rate from time to time will be adversely affected by principal payments on loans
with loan rates higher than the weighted average loan rate on the loans. In most
cases, loans with higher loan rates or Gross Margins are likely to prepay at a
faster rate than loans with lower loan rates or Gross Margins. 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 securities 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 securities. In
addition, the yield to maturity on other types of classes of securities,
including accrual securities, securities with a security rate that fluctuates
inversely with or at a multiple of an index or other classes in a series
including more than one class of securities, may be relatively more sensitive
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to the rate of principal payments on the related trust assets, net of Draws if
applicable, than other classes of securities.
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 loan balances, and the original terms to maturity of those loans and
contracts are often shorter than those of traditional first lien 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 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 loan prepayment rates, or
those effects may be similar to the effects of those changes on loan prepayment
rates, but to a smaller degree.
The timing of changes in the rate of principal payments on a class of
securities entitled to principal 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 class of securities entitled to principal,
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 securities 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 securities. 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
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 securities
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 borrowers.
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.
In general, defaults on loans are expected to occur with greater
frequency in their early years. The rate of default on cash out or limited
documentation loans, and on loans with high LTV ratios or combined LTV ratios,
as applicable, may be higher than for other types of loans. A trust may include,
if specified in the accompanying prospectus, loans that are one month or more
delinquent at the time of offering of the related series of securities or which
have recently been several months delinquent. The rate of default on delinquent
loans or loans with a recent history of delinquency is more likely to be higher
than the rate of default on loans that have a current payment status. In
addition, the rate and timing of prepayments, defaults and liquidations on the
loans will be affected by the general economic condition of the region of the
country or the locality in which the related mortgaged properties are located.
The risk of delinquencies and loss is greater and prepayments are less likely in
regions where a weak or deteriorating economy exists, as may be evidenced by,
among other factors, increasing unemployment or falling property values. The
yield on any class of securities and the timing of principal payments on that
class may also be affected by modifications or actions that may be taken or
approved by the master servicer or any of its affiliates as described in this
prospectus under "Description of the Securities--Servicing and Administration of
Trust Assets," in connection with a loan that is in default, or if a default is
reasonably foreseeable.
The risk of loss on loans secured by mortgaged properties located in
Puerto Rico may be greater than on loans that are made to borrowers who are
United States residents and citizens or that
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are secured by properties located in the United States. See "Certain Legal
Aspects of the Trust Assets and Related Matters" in this prospectus.
If credit enhancement for a series of securities is provided by a third
party as described under "Description of Credit Enhancement" in this prospectus
that subsequently suffers financial difficulty, such credit enhancement may not
provide the level of support that was anticipated at the time an investor
purchased its security. In the event of a default by the third party credit
enhancer, any Realized Losses on the loans not covered by the credit enhancement
will be applied to a series of securities in the manner described in the
accompanying prospectus supplement and may reduce an investor's anticipated
yield to maturity.
The accompanying prospectus supplement may set forth other factors
concerning the loans securing a series of securities or the structure of such
series that will affect the yield on the securities.
When a full prepayment is made on a loan, the borrower is charged
interest on the principal amount of the loan for the number of days in the month
actually elapsed up to the date of the prepayment, at a daily rate determined by
dividing the loan rate by 365. As a result, prepayments in full or final
liquidations of loans may reduce the amount of interest collections available to
the trust in the following month to holders of securities entitled to
distributions of interest. See "Description of the Securities--Distributions of
Principal and Interest on the Securities" in this prospectus. A partial
prepayment of principal is applied so as to reduce the outstanding principal
balance on a loan, other than a simple interest loan or a revolving credit loan,
as of the first day of the month in which the partial prepayment is received. A
partial prepayment on a simple interest loan or a revolving credit loan is
applied as of the day the partial prepayment is received. As a result, the
effect of a partial prepayment on a loan, other than a simple interest loan,
will be to reduce the amount of interest collections available to the trust in
the month following the receipt of the partial prepayment by an amount equal to
one month's interest at the applicable pass-through rate or Net Loan Rate, as
the case may be, on the prepaid amount. See "Description of the
Securities--Payment on Trust Assets" in this prospectus. Neither full or partial
Principal Prepayments nor Liquidation Proceeds will be distributed until the
distribution date in the month following receipt.
For some loans, 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, borrowers 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 borrower 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. Similarly, a borrower under a Balloon Loan will be required to pay
the Balloon Amount at maturity. Those loans pose a greater risk of default than
fully-amortizing revolving credit loans, because the borrower's ability to make
such a substantial payment at maturity will generally depend on the borrower's
ability to obtain refinancing of those loans or to sell the mortgaged property
prior to the maturity of the 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 borrower's personal economic circumstances,
the borrower'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 loan or to sell any mortgaged property, unless that obligation
is specified in the accompanying prospectus supplement.
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For any loans and any contracts secured by junior liens on the related
mortgaged property, any inability of the borrower to pay off the balance of
those junior liens may also affect the ability of the borrower to obtain
refinancing of any related senior loan, which may prevent a potential
improvement in the borrower's circumstances. Furthermore, as specified in the
accompanying prospectus supplement, under the related agreement the master
servicer may be restricted or prohibited from consenting to any refinancing of
any related senior loan, which in turn could adversely affect the borrower's
circumstances or result in a prepayment or default under the corresponding
junior loan or contract, as applicable.
The holder of a loan secured by a junior lien on the related mortgaged
property will be subject to a loss of its mortgage if the holder of a senior
mortgage is successful in foreclosure of its mortgage and its claim, including
any related foreclosure costs, is not paid in full, since no junior liens or
encumbrances survive such a foreclosure. Also, due to the priority of the senior
mortgage, the holder of a loan secured by a junior lien on the related mortgaged
property may not be able to control the timing, method or procedure of any
foreclosure action relating to the mortgaged property. Investors should be aware
that any liquidation, insurance or condemnation proceeds received relating to
any loans secured by junior liens on the related mortgaged property will be
available to satisfy the outstanding balance of such loans only to the extent
that the claims of the holders of the senior mortgages have been satisfied in
full, including any related foreclosure costs. For loans secured by junior liens
that have low junior mortgage ratios, foreclosure costs may be substantial
relative to the outstanding balance of the loan, and therefore the amount of any
Liquidation Proceeds available to securityholders may be smaller as a percentage
of the outstanding balance of the loan than would be the case in a typical pool
of first lien residential loans. In addition, the holder of a loan secured by a
junior lien on the related mortgaged property may only foreclose on the property
securing the related loan subject to any senior mortgages, in which case the
holder must either pay the entire amount due on the senior mortgages to the
senior mortgagees at or prior to the foreclosure sale or undertake the
obligation to make payments on the senior mortgages.
As indicated under "The Trusts--Characteristics of the Loans," the
original terms to maturity of the loans in a given trust will vary depending on
the type of loans included in the trust. The prospectus supplement for a series
of securities will contain information for the types and maturities of the loans
in the related trust. The prepayment experience, the timing and rate of
repurchases and the timing and amount of liquidations for the related loans will
affect the life and yield of the related series of securities.
Prepayments on loans are commonly measured relative to a prepayment
standard or model. The prospectus supplement for each series of securities may
describe one or more prepayment standard or model and may contain tables
describing the projected yields to maturity on each class of securities or the
weighted average life of each class of securities and the percentage of the
original principal amount of each class of securities of that series that would
be outstanding on specified payment dates for the series based on the
assumptions stated in the accompanying prospectus supplement, including
assumptions that prepayments on the loans are made at rates corresponding to
various percentages of the prepayment standard or model. There is no assurance
that prepayment of the loans underlying a series of securities will conform to
any level of the prepayment standard or model specified in the accompanying
prospectus supplement.
In addition to the borrower's personal economic circumstances, the
following is a list of factors that may affect the rate and timing of principal
payments on the trust assets or Draws on the revolving credit loans:
o homeowner mobility;
o job transfers;
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o changes in the borrower's housing needs;
o the borrower's net equity in the mortgaged property;
o changes in the value of the mortgaged property;
o national and regional economic conditions;
o enforceability of due-on-sale clauses;
o prevailing market interest rates;
o servicing decisions;
o solicitations and the availability of mortgage funds;
o seasonal purchasing and payment habits of borrowers; or
o changes in the deductibility for federal income tax purposes of
interest payments on home equity loans.
All statistics known to the depositor that have been compiled for
prepayment experience on loans indicate that while some loans may remain
outstanding until their stated maturities, a substantial number will be paid
significantly earlier than their respective stated maturities. In general,
however, if prevailing interest rates fall significantly below the loan rates on
the loans underlying a series of securities, the prepayment rate of such loans
is likely to be significantly higher than if prevailing rates remain at or above
the rates borne by those loans. Conversely, when prevailing interest rates
increase, borrowers are less likely to prepay their loans.
Depending on the borrower's use of the revolving credit loan and payment
patterns, during the repayment period, a borrower under a revolving credit loan
may be obligated to make payments that are higher than that for which the
borrower originally qualified.
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 in most cases
expects that Principal 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 more 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
fewer 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 borrowers as permanent financing.
Accordingly, closed-end loans may experience a higher rate of prepayment than
typical first lien loans. For revolving credit loans, due to the unpredictable
nature of both principal payments and Draws, the rates of principal payments net
of Draws for those loans may be much more volatile than for typical first lien
loans.
The yield to maturity of the securities of any series, or the rate and
timing of principal payments or Draws, if applicable, on the related loans, may
also be affected by a wide variety of specific terms and conditions applicable
to the respective programs under which the loans were originated. For example,
the revolving credit loans may provide for future Draws to be made only
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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 loans 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,
securities backed by revolving credit loans with rates subject to substantially
higher maximum rates than typically apply to revolving credit loans may
experience rates of default and liquidation substantially higher than those that
have been experienced on other revolving credit loan pools.
The yield to maturity of the securities 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 securities, will also
be affected by the specific terms and conditions applicable to the securities.
For example, if the index used to determine the note rates for a series of
securities is different from the index applicable to the loan rates of the
underlying trust assets, the yield on the securities 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 securities, 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 securities if so provided in
the prospectus supplement.
For any series of securities 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 securities. The yield to maturity of the securities 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 securities
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 securities 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 securities.
The loans, in most cases, will contain due-on-sale provisions permitting
the mortgagee to accelerate the maturity of that loan upon sale or various
transfers by the borrower of the underlying mortgaged property. Unless the
accompanying prospectus supplement indicates otherwise, the master servicer will
usually 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 be
permitted to 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. While most manufactured housing contracts will
contain "due-on-sale" provisions permitting the holder of the manufactured
housing contract to accelerate the maturity of the manufactured housing contract
on conveyance by the borrower, the master servicer may permit assumptions of
manufactured housing contracts where the proposed buyer of the manufactured home
meets the underwriting standards described under "Trust Asset
Program--Underwriting Standards" in this prospectus. Such assumption would have
the effect of extending the average life of the manufactured housing contract.
The extent to which trust assets are assumed by purchasers of the mortgaged
properties rather than prepaid by the related borrowers in connection with the
sales of the mortgaged properties may affect the weighted average life of the
related series of securities. See "Description of the Securities--Servicing and
Administration of Trust Assets--Collection and Other Servicing Procedures" and
"Certain Legal Aspects of the Trust
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Assets and Related Matters--Trust Assets Secured by Mortgages on Mortgage
Property--Enforceability of Certain Provisions" for a description of provisions
of the related 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 securities will, to an
extent, depend on the interest rates on those underlying trust assets.
A subservicer, the master servicer, or an affiliate of the master
servicer, may also, from time to time, implement refinancing or modification
programs designed to encourage refinancing. These programs could require little
or no cost and decreased documentation from the borrower. In addition, these
programs may include, without limitation, general or targeted solicitations, the
offering of pre-approved applications, reduced origination fees or closing
costs, or other financial incentives. Targeted solicitations may be based on a
variety of factors, including the credit of the borrower, the location of the
mortgaged property, or the subservicer's or master servicer's judgment as to the
likelihood of a borrower refinancing. In addition, subservicers or the master
servicer may encourage assumptions of loans, including defaulted loans, under
which creditworthy borrowers assume the outstanding indebtedness of those loans
which may be removed from the related pool. As a result of these programs, as to
the pool underlying any trust:
o the rate of Principal Prepayments of the loans in the pool may be
higher than would otherwise be the case;
o the average credit or collateral quality of the loans remaining
in the pool may decline; and
o the weighted average interest rate on the loans that remain in
the trust may be lower, thus reducing the rate of prepayments on
the loans in the future.
In addition, the master servicer or a subservicer may allow the refinancing of a
trust asset by accepting Principal 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 securities 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
Securities--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 distributions on
one or more classes of securities of that series. In addition, if the trust for
a series of securities includes additional balances and the rate at which those
additional balances are generated decreases, the rate and timing of principal
payments on the securities will be affected and the weighted average life of the
securities will vary accordingly. The rate at which additional balances are
generated may be affected by a variety of factors.
Although the loan rates on revolving credit loans will and some other
trust assets may be subject to periodic adjustments, those adjustments, in most
cases:
o will not increase those loan rates over a fixed maximum rate
during the life of any trust asset; and
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o will be based on an index, which may not rise and fall
consistently with prevailing market interest rates, plus the
related Gross Margin, which may vary under some circumstances,
and which may be different from margins being used at the time
for newly originated revolving credit 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 home equity loans,
lines of credit, home improvement loans, home improvement contracts 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 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 securities.
For any index used in determining the note rates for a series of
securities 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 securityholders
due to those rising interest rates may occur later than increases 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 loans which adjust in accordance with other indices.
No assurance can be given that the value of the mortgaged property
securing a loan has remained or will remain at the level existing on the date of
origination. If the residential real estate market should experience an overall
decline in property values such that the outstanding balances of the loans and
any subordinate financing on the mortgaged properties in a particular pool
become equal to or greater than the value of the mortgaged properties, the
actual rates of delinquencies, foreclosures and losses could be higher than
those now generally experienced in the mortgage lending industry. The value of
property securing Cooperative Loans and the delinquency rates for Cooperative
Loans could be adversely affected if the current favorable tax treatment of
cooperative tenant stockholders were to become less favorable. See "Certain
Legal Aspects of the Trust Assets and Related Matters" in this prospectus.
To the extent that losses resulting from delinquencies, foreclosures or
repossession of mortgaged property for loans included in a trust for a series of
securities are not covered by the methods of credit enhancement described in
this prospectus under "Description of Credit Enhancement" or in the accompanying
prospectus supplement, the losses will be borne by holders of the securities of
the related series. Even where credit enhancement covers all Realized Losses
resulting from delinquency and foreclosure or repossession, the effect of
foreclosures and repossessions may be to increase prepayment experience on the
loans, thus reducing average weighted life and affecting yield to maturity.
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 securities. See "The Agreements--Termination;
Redemption of Securities" in this prospectus.
Certain Legal Aspects of the Trust Assets
and Related Matters
The following discussion contains summaries of various legal aspects of
the trust assets that are general in nature. Because those legal aspects are
governed in part by state law, and laws may
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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
"Insurance Policies on Loans--Description of FHA Insurance under Title I" 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 trust assets.
Trust Assets Secured by Mortgages on Mortgaged Property
General
The loans will and, if applicable, contracts, in each case other than
Cooperative Loans, will be secured by deeds of trust, mortgages or deeds to
secure debt depending upon the prevailing practice in the state in which the
related mortgaged property is located and may have first, second or third
priority. Mortgages, deeds of trust 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,
deed of trust or deed to secure debt creates a lien upon the real property
encumbered by the mortgage, deed of trust or deed to secure debt. 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,
deed of trust or deed to secure debt 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 borrower, who is the borrower
and homeowner, and the mortgagee, who is the lender. Under the mortgage
instrument, the borrower 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 loan, the land trustee, as fee owner of the property, executes
the mortgage and the borrower executes a separate undertaking to make payments
on the mortgage note and an assignment of leases and rents. Although a deed of
trust is similar to a mortgage, a deed of trust has three parties:
o the trustor who is the borrower-homeowner;
o the beneficiary who is the lender; and
o a third-party grantee called the trustee.
Under a deed of trust, the borrower grants the property, irrevocably until the
debt is paid, in trust, typically, with a power of sale, to the trustee to
secure payment of the obligation. A deed to secure debt typically has two
parties, under which the borrower, or grantor, conveys title to the real
property to the grantee, or lender, typically with a power of sale, until the
time when the debt is repaid. The trustee's authority under a deed of trust, the
grantee's authority under a deed to secure debt and the mortgagee's authority
under a mortgage are governed by the law of the state in which the real
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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
securities, 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 the Cooperative that owns the related apartment
building, which is a corporation entitled to be treated as a housing cooperative
under federal tax law, and in the related proprietary lease or occupancy
agreement granting exclusive rights to occupy a specific dwelling unit in the
Cooperative's building. The security agreement will create a lien upon, or grant
a security interest in, the Cooperative shares and proprietary leases or
occupancy agreements, the priority of which will depend on, among other things,
the terms of the particular security agreement as well as the order of
recordation and/or filing of the agreement, or the filing of related financing
statements, in the appropriate recording office or the taking of possession of
the Cooperative shares, depending on the law of the state in which the
Cooperative is located. This type of lien or security interest is not, general,
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 borrower or lessee, as the case may
be, is also responsible for fulfilling the mortgage or rental obligations.
An underlying loan is ordinarily obtained by the Cooperative in
connection with either the construction or purchase of the Cooperative's
building or the obtaining of capital by the Cooperative. The interest of the
occupant under proprietary leases or occupancy agreements as to which that
Cooperative is the landlord is, in most cases, subordinate to the interest of
the holder of an underlying mortgage and to the interest of the holder of a land
lease. If the Cooperative is unable to meet the payment obligations:
o arising under an underlying mortgage, the mortgagee holding an
underlying mortgage could foreclose on that mortgage and
terminate all subordinate proprietary leases and occupancy
agreements; or
o arising under its land lease, the holder of the landlord's
interest under the land lease could terminate it and all
subordinate proprietary leases and occupancy agreements.
In addition, an underlying mortgage on a Cooperative may provide financing in
the form of a mortgage that does not fully amortize, with a significant portion
of principal being due in one final payment at maturity. The inability of the
Cooperative to refinance a mortgage and its consequent inability to make the
final payment could lead to foreclosure by the mortgagee. Similarly, a land
lease has an expiration date and the inability of the Cooperative to extend its
term or, in the alternative, to purchase the land, could lead to termination of
the Cooperative's interest in the property and termination of all proprietary
leases and occupancy agreements. In either event, a foreclosure by the holder of
an underlying mortgage or the termination of the underlying lease could
eliminate or significantly diminish the value of any collateral held by the
lender who financed the purchase by an individual tenant-stockholder of shares
of the Cooperative or, in the case of the revolving credit loans and the home
equity loans, the collateral securing the Cooperative Loans.
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Each Cooperative is owned by shareholders, referred to as
tenant-stockholders, who, through ownership of stock or shares in the
Cooperative, receive proprietary leases or occupancy agreements which confer
exclusive rights to occupy specific dwellings. 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 usually takes possession of the
share certificate and a counterpart of the proprietary lease or occupancy
agreement and a financing statement covering the proprietary lease or occupancy
agreement and the Cooperative shares is filed in the appropriate state and local
offices to perfect the lender's interest in its collateral. Subject to the
limitations discussed below, upon default of the tenant-stockholder, the lender
may sue for judgment on the Cooperative Note, dispose of the collateral at a
public or private sale or otherwise proceed against the collateral or
tenant-stockholder as an individual as provided in the security agreement
covering the assignment of the proprietary lease or occupancy agreement and the
pledge of Cooperative shares. See "--Foreclosure on Shares of Cooperatives" in
this prospectus.
Tax Aspects of Cooperative Ownership
In general, a "tenant-stockholder," as defined in Section 216(b)(2) of
the Internal Revenue Code, of a corporation that qualifies as a "cooperative
housing corporation" within the meaning of Section 216(b)(1) of the Internal
Revenue Code is allowed a deduction for amounts paid or accrued within his
taxable year to the corporation representing his proportionate share of various
interest expenses and real estate taxes allowable as a deduction under Section
216(a) of the Internal Revenue Code to the corporation under Sections 163 and
164 of the Internal Revenue Code. In order for a corporation to qualify under
Section 216(b)(1) of the Internal Revenue Code for its taxable year in which
those items are allowable as a deduction to the corporation, the section
requires, among other things, that at least 80% of the gross income of the
corporation be derived from its tenant-stockholders. By virtue of this
requirement, the status of a corporation for purposes of Section 216(b)(1) of
the Internal Revenue Code must be determined on a year-to-year basis.
Consequently, there can be no assurance that Cooperatives relating to the
Cooperative Loans will qualify under this section for any particular year. If 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.
Foreclosure on Loans and Certain Contracts
Although a deed of trust or a deed to secure debt may also be foreclosed
by judicial action, foreclosure of a deed of trust or a deed to secure debt is
typically accomplished by a non-judicial trustee's or grantee's sale, as
applicable, under a specific provision in the deed of trust or a deed to secure
debt which authorizes the trustee or grantee, as applicable, to sell the
property upon any default by the borrower under the terms of the note or deed of
trust or deed to secure debt. In addition to any notice requirements contained
in a deed of trust or deed to secure debt, in some states, prior to a sale the
trustee or grantee, as applicable, must record a notice of default and send a
copy to the borrower/trustor and to any person who has recorded a request for a
copy of notice of default and notice of sale. In addition, in some states, prior
to the sale, the trustee or grantee, as applicable, must provide notice to any
other individual having an interest of record in the real property, including
any junior lienholders. If the deed of trust or deed to secure debt is not
reinstated within a specified period, a notice of sale must be posted in a
public place and, in most states, published for a specific
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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 note plus the accrued and unpaid interest and the expense of
foreclosure, in which case the borrower'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 securities. See "Description of Credit
Enhancement" in this prospectus.
Foreclosure on Junior Loans
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 borrower is
in default thereunder, in either event adding the amounts expended to the
balance due on the junior loan, and may be subrogated to the rights of the
senior mortgagees. In addition, in the event that the foreclosure by a junior
mortgagee triggers the enforcement of a "due-on-sale" clause in a senior
mortgage, the junior mortgagee may be required to pay the full amount of the
senior mortgages to the senior mortgagees to avoid foreclosure. Accordingly, if
the junior 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
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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 usually payable to the
borrower 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 "Description of the
Securities--Servicing and Administration of Trust Assets--Realization Upon
Defaulted Loans" in this prospectus.
Foreclosure on Mortgaged Properties Located in the Commonwealth of Puerto Rico
Under the laws of the Commonwealth of Puerto Rico the foreclosure of a
real estate mortgage usually follows an ordinary "civil action" filed in the
Superior Court for the district where the mortgage property is located. If the
defendant does not contest the action filed, a default judgment is rendered for
the plaintiff and the mortgaged property is sold at public auction, after
publication of the sale for two weeks, by posting written notice in three public
places in the municipality where the auction will be held, in the tax collection
office and in the public school of the municipality where the borrower resides,
if known. If the residence of the borrower 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 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 borrower as his principal residence, the borrower 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 borrower 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
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agreement. Typically, the lender and the Cooperative enter into a recognition
agreement which, together with any lender protection provisions contained in the
proprietary lease or occupancy agreement, establishes the rights and obligations
of both parties in the event of a default by the tenant-stockholder on its
obligations under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
In most cases, the recognition agreement provides that, in the event
that the tenant-stockholder has defaulted under the proprietary lease or
occupancy agreement, the Cooperative will take no action to terminate the lease
or agreement until the lender has been provided with notice of and an
opportunity to cure the default. The recognition agreement typically 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" in this
prospectus.
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Rights of Redemption
In some states, after sale under a deed of trust or a deed to secure
debt or foreclosure of a mortgage, the borrower and foreclosed junior lienors or
other parties are given a statutory period, typically ranging from six months to
two years, in which to redeem the property from the foreclosure sale. In some
states, redemption may occur only upon payment of the entire principal balance
of the loan, accrued interest and expenses of foreclosure. In other states,
redemption may be authorized if the former borrower pays only a portion of the
sums due. In some states, the right to redeem is an equitable right. The equity
of redemption, which is a non-statutory right that must be exercised prior to a
foreclosure sale, should be distinguished from statutory rights of redemption.
The effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The rights of redemption would defeat
the title of any purchaser subsequent to foreclosure or sale under a deed of
trust or a deed to secure debt. Consequently, the practical effect of the
redemption right is to force the lender to maintain the property and pay the
expenses of ownership until the redemption period has expired.
Notice of Sale; Redemption Rights with Respect to Manufactured Housing Contracts
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, 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.
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In most cases, Article 9 of the UCC governs foreclosure on Cooperative
shares and the related proprietary lease or occupancy agreement. Some courts
have interpreted Article 9 to prohibit or limit a deficiency award in some
circumstances, including circumstances where the disposition of the collateral,
which, in the case of a Cooperative Loan, would be the shares of the Cooperative
and the related proprietary lease or occupancy agreement, was not conducted in a
commercially reasonable manner.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other federal and state statutory provisions, including the federal
bankruptcy laws and state laws affording relief to debtors, may interfere with
or affect the ability of the secured mortgage lender to realize upon its
collateral and/or enforce a deficiency judgment. For example, under the federal
bankruptcy law, all actions by the secured mortgage lender 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 loan on the
debtor's residence by paying arrearages within a reasonable time period and
reinstating the original loan payment schedule, even though the lender
accelerated the 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 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 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 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 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 loans and who fail to comply with the provisions of the
law. In some cases, this liability may affect assignees of the loans. In
particular, an originators' failure to comply with the federal Truth-in-Lending
Act could subject the trust fund (and other assignees of the home loans) to
monetary penalties and could result in the borrowers rescinding the loans
against either the trust fund or subsequent holders of the loans.
High Cost Loans
Some loans and contracts, known as High Cost Loans, may be subject to
special rules, disclosure requirements and other provisions that were added to
the federal Truth-in-Lending Act by the Home Ownership and Equity Protection Act
of 1994, or Homeownership Act, if such trust assets were originated on or after
October 1, 1995, are not loans made to finance the purchase of the
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mortgaged property and have interest rates or origination costs in excess of
certain prescribed levels. The Homeownership Act requires certain additional
disclosures, specifies the timing of those disclosures and limits or prohibits
inclusion of certain provisions in mortgages subject to the Homeownership Act.
Purchasers or assignees of any High Cost Loan, including any trust fund, could
be liable under federal law for all claims and subject to all defenses that the
borrower could assert against the originator of the High Cost Loan, under the
federal Truth-in-Lending Act or any other law, unless the purchaser or assignee
did not know and could not with reasonable diligence have determined that the
loan was subject to the provisions of the Homeownership Act. Remedies available
to the borrower include monetary penalties, as well as recission rights if
appropriate disclosures were not given as required or if the particular mortgage
includes provisions prohibited by the law. 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. 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.
Alternative Mortgage Instruments
Alternative mortgage instruments, including adjustable rate loans and
adjustable rate cooperative loans, and early ownership loans, originated by
non-federally chartered lenders have historically been subjected to a variety of
restrictions. These restrictions differed from state to state, resulting in
difficulties in determining whether a particular alternative mortgage instrument
originated by a state-chartered lender was in compliance with applicable law.
These difficulties were alleviated substantially as a result of the enactment of
Title VIII of the Garn-St Germain Act, or Title VIII. Title VIII provides that,
notwithstanding any state law to the contrary:
o state-chartered banks may originate alternative mortgage
instruments in accordance with regulations promulgated by the
Comptroller of the Currency relating to the origination of
alternative mortgage instruments by national banks;
o state-chartered credit unions may originate alternative mortgage
instruments in accordance with regulations promulgated by the
National Credit Union Administration relating to origination of
alternative mortgage instruments by federal credit unions; and
o all other non-federally chartered housing creditors, including
state-chartered savings and loan associations, state-chartered
savings banks and mutual savings banks and mortgage banking
companies, may originate alternative mortgage instruments in
accordance with the regulations promulgated by the Federal Home
Loan Bank Board, 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.
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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 securityholders, as mortgagee under a junior mortgage, are subordinate to
those of the mortgagee under the senior mortgage, including the prior rights of
the senior mortgagee to receive hazard insurance and condemnation proceeds and
to cause the property securing the loan or contract to be sold upon default of
the borrower, 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 borrower to:
o pay before delinquency all taxes and assessments on the property
and, when due, all encumbrances, charges and liens on the
property which are prior to the mortgage or deed of trust;
o to provide and maintain fire insurance on the property;
o to maintain and repair the property and not to commit or permit
any waste of the property; and
o to appear in and defend any action or proceeding purporting to
affect the property or the rights of the mortgagee under the
mortgage.
Upon a failure of the borrower 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 borrower
agreeing to reimburse the mortgagee for any sums expended by the mortgagee on
behalf of the borrower. 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
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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 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.
When the borrower encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the borrower
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the borrower (as junior loans often do) and the
senior loan does not, a borrower may be more likely to repay sums due on the
junior loan than those on the senior loan. Second, acts of the senior lender
that prejudice the junior lender or impair the junior lender's security may
create a superior equity in favor of the junior lender. For example, if the
borrower and the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior lender may lose its
priority to the extent an existing junior lender is harmed or the borrower is
additionally burdened. Third, if the borrower defaults on the senior loan and/or
any junior loan or loans, the existence of junior loans and actions taken by
junior lenders can impair the security available to the senior lender and can
interfere with or delay the taking of action by the senior lender. Moreover, the
bankruptcy of a junior lender may operate to stay foreclosure or similar
proceeds by the senior lender.
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
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
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interest in the manufactured home under applicable state real estate law. In
order to perfect a security interest in a manufactured home under real estate
laws, the holder of the security interest must file either a "fixture filing"
under the provisions of the UCC or a real estate mortgage under the real estate
laws of the state where the home is located. These filings must be made in the
real estate records office of the county where the home is located.
Substantially all of the manufactured housing contracts will contain provisions
prohibiting the obligor from permanently attaching the manufactured home to its
site. So long as the obligor does not violate this agreement, a security
interest in the manufactured home will be governed by the certificate of title
laws or the UCC, and the notation of the security interest on the certificate of
title or the filing of a UCC financing statement will be effective to maintain
the priority of the security interest in the manufactured home. If, however, a
manufactured home is permanently attached to its site, other parties could
obtain an interest in the manufactured home that is prior to the security
interest originally retained by the seller and transferred to the depositor.
The depositor will assign or cause to be assigned a security interest in
the manufactured homes to the trustee, on behalf of the securityholders. In most
cases, neither the depositor, the master servicer nor the trustee will amend the
certificates of title, or file UCC-3 statements, to identify the 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
trustee or note thereon the interest of the 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 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 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
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 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
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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 trustee or securityholders in the event
this type of lien arises.
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:
o except in those states where the debtor must receive notice of
the right to cure a default, repossession can commence
immediately upon default without prior notice. Repossession may
be effected either through self-help, which is peaceable retaking
without court order, voluntary repossession or through judicial
process, which is repossession under court-issued order. The
self-help and/or voluntary repossession methods are more commonly
employed, and are accomplished simply by retaking possession of
the manufactured home. In cases in which the debtor objects or
raises a defense to repossession, a court order must be obtained
from the appropriate state court, and the manufactured home must
then be repossessed in accordance with that order. Whether the
method employed is self-help, voluntary repossession or judicial
repossession, the repossession can be accomplished either by an
actual physical removal of the manufactured home to a secure
location for refurbishment and resale or by removing the
occupants and their belongings from the manufactured home and
maintaining possession of the manufactured home on the location
where the occupants were residing. Various factors may affect
whether the manufactured home is physically removed or left on
location, such as the nature and term of any lease of the site on
which it is located and the condition of the unit. In many cases,
leaving the manufactured home on location is preferable, in the
event that the home is already constructed, in order to avoid the
cost of removing the structure. However, in cases where the home
is not moved, expenses for site rentals will usually be incurred;
o once repossession has been achieved, preparation for the
subsequent disposition of the manufactured home can commence.
This disposition may be by public or private
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sale provided the method, manner, time, place and terms of the
sale are commercially reasonable; and
o sale proceeds will be applied first to repossession expenses,
including expenses incurred in repossessing, storing, preparing
for sale, refurbishing and selling costs, and then to
satisfaction of the indebtedness. While some states impose
prohibitions or limitations on deficiency judgments if the net
proceeds from resale do not cover the full amount of the
indebtedness, the remainder may be sought from the debtor in the
form of a deficiency judgment in those states that do not
prohibit or limit those judgments. The deficiency judgment is a
personal judgment against the debtor for the deficiency.
Occasionally, after resale of a manufactured home and payment of
all expenses and indebtedness, there is a surplus of funds. In
this event, the UCC requires the party suing for the deficiency
judgment to remit the surplus to the debtor. Because the
defaulting owner of a manufactured home, in most cases, has very
little capital or income available following repossession, a
deficiency judgment is generally not sought or, if obtained, will
be settled at a significant discount in light of the defaulting
owner's limited financial condition.
Louisiana Law. Any contract secured by a manufactured home located in
Louisiana will be governed by Louisiana law rather than Article 9 of the UCC.
Louisiana laws provide similar mechanisms for perfection and enforcement of
security interests in manufactured housing used as collateral for an installment
sale contract or installment loan agreement.
Under Louisiana law, a manufactured home that has been permanently
affixed to real estate will nevertheless remain subject to the motor vehicle
registration laws unless the obligor and any holder of a security interest in
the property execute and file in the real estate records for the parish in which
the property is located a document converting the unit into real property. A
manufactured home that is converted into real property but is then removed from
its site can be converted back to personal property governed by the motor
vehicle registration laws if the obligor executes and files various documents in
the appropriate real estate records and all mortgagees under real estate
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.
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 as discussed under "--Anti-Deficiency Legislation
and Other Limitations on Lenders" in this prospectus.
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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 securityholders.
Courts have imposed general equitable principles upon repossession and
litigation involving deficiency balances. These equitable principles are
generally designed to relieve a consumer from the legal consequences of a
default.
In several cases, consumers have asserted that the remedies provided to
secured parties under the UCC and related laws violate the due process
protections provided under the 14th Amendment to the Constitution of the United
States. For the most part, courts have upheld the notice provisions of the UCC
and related laws as reasonable or have found that the repossession and resale by
the creditor does not involve sufficient state action to afford constitutional
protection to consumers.
The so-called "Holder-in-Due-Course" Rule of the Federal Trade
Commission, or the FTC Rule has the effect of subjecting a seller, and some
related creditors and their assignees, in a consumer credit transaction and any
assignee of the creditor to all claims and defenses that the debtor in the
transaction could assert against the seller of the goods. Liability under the
FTC Rule is limited to the amounts paid by a debtor on the contract, and the
holder of the contract may also be unable to collect amounts still due under
that contract.
Most of the manufactured housing contracts in a trust fund will be
subject to the requirements of the FTC Rule. Accordingly, the 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.
Transfer of Manufactured Housing Contracts
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
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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.
Formaldehyde Litigation with Respect to Manufactured Housing Contracts
A number of lawsuits are pending in the United States alleging personal
injury from exposure to the chemical formaldehyde, which is present in many
building materials, including components of manufactured housing such as plywood
flooring and wall paneling. Some of these lawsuits are pending against
manufacturers of manufactured housing, suppliers of component parts and related
persons in the distribution process. The depositor is aware of a limited number
of cases in which plaintiffs have won judgments in these lawsuits.
Under the FTC Rule, which is described under "--Consumer Protection
Laws" and "Consumer Protection Laws with Respect to Manufactured Housing
Contracts," the holder of any contract secured by a manufactured home for which
a formaldehyde claim has been successfully asserted may be liable to the obligor
for the amount paid by the obligor on the related contract and may be unable to
collect amounts still due under the contract. The successful assertion of this
type of claim constitutes a breach of a representation or warranty of the
seller, and the related trust fund would suffer a loss only to the extent that:
o the seller breached its obligation to repurchase the contract in
the event an obligor is successful in asserting this type of
claim; and
o the seller, the depositor or the trustee were unsuccessful in
asserting any claim of contribution or subrogation on behalf of
the securityholders 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.
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 trustee or a designated custodian or may retain possession of
the contracts as custodian for the 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 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 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 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 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
ability of the related contract.
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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, 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 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
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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.
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 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 loans may be prepaid in
full or in part without penalty. The regulations of the Federal Home Loan Bank
Board, as succeeded by the Office of Thrift Supervision, or OTS, prohibit the
imposition of a prepayment penalty or equivalent fee for or in connection with
the acceleration of a loan by exercise of a due-on-sale clause. A mortgagee to
whom a prepayment in full has been tendered may be compelled to give either a
release of the mortgage or an instrument assigning the existing mortgage. The
absence of a restraint on prepayment, particularly relating to loans and/or
contracts having higher interest rates, may increase the likelihood of
refinancing or other early retirements of the revolving credit loans, home
equity loans and/or contracts.
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Some state laws restrict the imposition of prepayment charges even when
the 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 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 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 loans and these amounts will
not be available for payment on the securities.
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.
Applicability of Usury Laws
Title V provides that state usury limitations shall not apply to some
types of residential first loans, including cooperative loans originated by some
lenders after March 31, 1980. A similar federal statute was in effect for 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 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 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.
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
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well as joint and several, liability on several classes of potentially
responsible parties, including current owners and operators of the property who
did not cause or contribute to the contamination. Furthermore, liability under
CERCLA is not limited to the original or unamortized principal balance of a loan
or to the value of the property securing a loan. Lenders may be held liable
under CERCLA as owners or operators unless they qualify for the secured creditor
exemption to CERCLA. This exemption exempts from the definition of owners and
operators those who, without participating in the management of a facility, hold
evidence of ownership primarily to protect a security interest in the facility.
The Asset Conservation, Lender Liability and Deposit Insurance Act of
1996, as amended, or the Conservation Act, among other things, the provisions of
CERCLA relating to lender liability and the secured creditor exemption. The
Conservation Act offers substantial protection to lenders by defining the
activities in which a lender can engage and still have the benefit of the
secured creditor exemption. In order for a lender to be deemed to have
participated in the management of a mortgaged property, the lender must actually
participate in the operational affairs of the mortgaged property. The
Conservation Act provides that "merely having the capacity to influence, or
unexercised right to control" operations does not constitute participation in
management. A lender will lose the protection of the secured creditor exemption
only if it exercises decision-making control over the borrower's environmental
compliance and hazardous substance handling and disposal practices, or assumes
day-to-day management of substantially all of the operational functions of the
mortgaged property. The Conservation Act also provides that a lender will
continue to have the benefit of the secured creditor exemption even if it
forecloses on a mortgaged property, purchases it at a foreclosure sale or
accepts a deed-in-lieu of foreclosure provided that the lender seeks to sell the
mortgaged property at the earliest practicable commercially reasonable time on
commercially reasonable terms.
Other federal and state laws in some circumstances may impose liability
on a secured party which takes a deed-in-lieu of foreclosure, purchases a
mortgaged property at a foreclosure sale, or operates a mortgaged property on
which contaminants other than CERCLA hazardous substances are present, including
petroleum, agricultural chemicals, hazardous wastes, asbestos, radon, and
lead-based paint. These cleanup costs may be substantial. It is possible that
the cleanup costs could become a liability of a trust fund and reduce the
amounts otherwise distributable to the holders of the related series of
securities. 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 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 securityholders of the related series.
Alternative Mortgage Instruments
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Alternative mortgage instruments, including adjustable rate loans and
adjustable rate cooperative loans, and early ownership loans, originated by
non-federally chartered lenders have historically been subjected to a variety of
restrictions. These restrictions differed from state to state, resulting in
difficulties in determining whether a particular alternative mortgage instrument
originated by a state-chartered lender was in compliance with applicable law.
These difficulties were alleviated substantially as a result of the enactment of
Title VIII of the Garn-St Germain Act, or Title VIII. Title VIII provides that,
notwithstanding any state law to the contrary:
o state-chartered banks may originate alternative mortgage
instruments in accordance with regulations promulgated by the
Comptroller of the Currency relating to the origination of
alternative mortgage instruments by national banks;
o state-chartered credit unions may originate alternative mortgage
instruments in accordance with regulations promulgated by the
National Credit Union Administration relating to origination of
alternative mortgage instruments by federal credit unions; and
o all other non-federally chartered housing creditors, including
state-chartered savings and loan associations, state-chartered
savings banks and mutual savings banks and mortgage banking
companies, may originate alternative mortgage instruments in
accordance with the regulations promulgated by the Federal Home
Loan Bank Board, 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.
Leasehold Considerations
The loans may contain leasehold mortgages which are each secured by a
lien on the related borrower's leasehold interest in the related mortgaged
property. Loans secured by a lien on the borrower's leasehold interest under a
ground lease are subject to certain risks not associated with loans secured by a
lien on the fee estate of the borrower. The most significant of these risks is
that if the borrower's leasehold were to be terminated (for example, as a result
of a lease default or the bankruptcy of the ground lessor or the borrower/ground
lessee), the leasehold mortgagee would be left without its security. In the case
of each loan secured by a lien on the related borrower's leasehold interest
under a ground lease, the ground lease contains provisions protective of the
leasehold mortgagee, such as a provision that requires the ground lessor to give
the leasehold mortgagee notices of lessee defaults and an opportunity to cure
them, a provision that permits the leasehold estate to be assigned to the
leasehold mortgagee or the purchaser at a foreclosure sale and thereafter to be
assigned by the leasehold mortgagee or the related purchaser at a foreclosure
sale to any financially responsible third party that executes an agreement
obligating itself to comply with the terms and conditions of the ground lease
and a provision that gives the leasehold mortgagee the right to enter into a new
ground lease with the ground lessor on the same terms and conditions as the old
ground lease upon any termination of the old ground lease.
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 borrower who enters military service after the
origination of the borrower's loan and some contracts, including a borrower 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 borrower's active duty
status, unless a court
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orders otherwise upon application of the lender. The Relief Act applies to
borrowers 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 borrowers 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 securities, and may not be covered by the applicable form
of credit enhancement provided in connection with the related series of
securities. 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 borrower'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 securities 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 securityholders 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 loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that:
o its mortgage was executed and recorded before commission of the
crime upon which the forfeiture is based; or
o the lender was, at the time of execution of the mortgage,
"reasonably without cause to believe" that the property was used
in, or purchased with the proceeds of, illegal drug or RICO
activities.
Junior Mortgages; Rights of Senior Mortgagees
The loans, as well as some contracts or private securities, included in
the trust fund for a series will be secured by mortgages or deeds of trust which
in most cases will be junior to other mortgages or deeds of trust held by other
lenders or institutional investors. The rights of the trust fund, and therefore
the securityholders, as mortgagee under a junior mortgage, are subordinate to
those of the mortgagee under the senior mortgage, including the prior rights of
the senior mortgagee to receive hazard insurance and condemnation proceeds and
to cause the property securing the loan or contract to be sold upon default of
the borrower, 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
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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 borrower to:
o pay before delinquency all taxes and assessments on the property
and, when due, all encumbrances, charges and liens on the
property which are prior to the mortgage or deed of trust;
o to provide and maintain fire insurance on the property;
o to maintain and repair the property and not to commit or permit
any waste of the property; and
o to appear in and defend any action or proceeding purporting to
affect the property or the rights of the mortgagee under the
mortgage.
Upon a failure of the borrower 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 borrower
agreeing to reimburse the mortgagee for any sums expended by the mortgagee on
behalf of the borrower. 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 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.
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When the borrower encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the borrower
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the borrower (as junior loans often do) and the
senior loan does not, a borrower may be more likely to repay sums due on the
junior loan than those on the senior loan. Second, acts of the senior lender
that prejudice the junior lender or impair the junior lender's security may
create a superior equity in favor of the junior lender. For example, if the
borrower and the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior lender may lose its
priority to the extent an existing junior lender is harmed or the borrower is
additionally burdened. Third, if the borrower defaults on the senior loan and/or
any junior loan or loans, the existence of junior loans and actions taken by
junior lenders can impair the security available to the senior lender and can
interfere with or delay the taking of action by the senior lender. Moreover, the
bankruptcy of a junior lender may operate to stay foreclosure or similar
proceeds by the senior lender.
Material Federal Income Tax Consequences
General
The following is a general discussion of anticipated material federal
income tax consequences of the purchase, ownership and disposition of the
securities offered by this prospectus. This discussion has been prepared with
the advice of Thacher Proffitt & Wood, Orrick, Herrington & Sutcliffe LLP and
Stroock & Stroock & Lavan, counsel to the depositor. This discussion is directed
solely to securityholders that hold the securities 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 securities 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 securityholder. Further, the authorities on which this
discussion, and the opinion referred to below, are based are subject to change
or differing interpretations, which could apply retroactively. Taxpayers and
preparers of tax returns, including those filed by any REMIC, FASIT or other
issuer, should be aware that under applicable Treasury regulations a provider of
advice on specific issues of law is not considered an income tax return preparer
unless the advice:
o is given with respect to events that have occurred at the time
the advice is rendered and is not given with respect to the
consequences of contemplated actions; and
o is directly relevant to the determination of an entry on a tax
return.
Accordingly, taxpayers should consult their tax advisors and tax return
preparers regarding the preparation of any item on a tax return, even where the
anticipated tax treatment has been discussed in this prospectus. In addition to
the federal income tax consequences described in this prospectus, potential
investors should consider the state and local tax consequences, if any, of the
purchase, ownership and disposition of the securities. See "State and Other Tax
Consequences" in this prospectus. Securityholders 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 securities offered by
this prospectus.
This prospectus discusses two types of securities, (1) notes or
certificates issued by an issuer for which a REMIC or FASIT election is in
effect, and (2) notes issued by an issuer for which no REMIC or FASIT election
is in effect. See "REMICs and FASITs" and "Notes" in this prospectus.
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The following discussion is based in part upon the rules governing
original issue discount that are described in Sections 1271-1273 and 1275 of the
Code and in the Treasury regulations issued thereunder, which are referred to in
this prospectus as the OID regulations, in part upon the REMIC provisions and
the Treasury regulations issued thereunder, or the REMIC regulations, and in
part upon the FASIT provisions and the proposed Treasury regulations appearing
in the Federal Register on February 7, 2000, or the proposed FASIT regulations.
With the exception of rules relating to anti- abuse and governing transition
entities, the proposed FASIT regulations will not be binding until those
regulations are filed as final regulations with the Federal Register. The
proposed FASIT regulations provide that the effective date for rules relating to
anti-abuse and governing transition entities is February 4, 2000. The OID
regulations, which are effective with respect to debt instruments issued on or
after April 4, 1994, do not adequately address various issues relevant to, and
in some instances provide that they are not applicable to, securities like the
securities.
REMICs and FASITs
Unless otherwise specified in the accompanying prospectus supplement, as
to each series of certificates, the master servicer will cause an election to be
made to have the related trust treated as a REMIC under Sections 860A through
860G of the Internal Revenue Code, or as a FASIT under Sections 860H through
860L of the Internal Revenue Code. Unless otherwise specified in the
accompanying prospectus supplement, no election to have the related trust
treated as a REMIC or FASIT will be made for each series of notes. If a REMIC or
FASIT election or elections will be made for the related trust, the accompanying
prospectus supplement for each series of securities will identify all "regular
interests" and "residual interests" in the REMIC, and all "regular interests"
and "high-yield regular interests" in the FASIT. If interests in a FASIT
ownership interest are offered for sale, the accompanying prospectus supplement
will describe the federal income tax consequences of the purchase, holding and
disposition of those interests. If a REMIC or FASIT election will not be made
for a trust and a series of certificates, the federal income tax consequences of
the purchase, ownership and disposition of the certificates will be described in
the accompanying prospectus supplement. If a REMIC or FASIT election will not be
made for a trust and a series of notes, the federal income tax consequences of
the purchase, ownership and disposition of the notes will be as described in
"Notes," unless specified otherwise in the accompanying prospectus supplement.
For purposes of this tax discussion, references to a "securityholder" or a
"holder" are to the beneficial owner of a certificate or note.
Classification of REMICs and FASITs
Upon the issuance of each series of REMIC or FASIT securities, either
Thacher Proffitt & Wood, Orrick, Herrington & Sutcliffe LLP or Stroock & Stroock
& Lavan, counsel to the depositor, will deliver its opinion to the effect that,
assuming compliance with all provisions of the related pooling and servicing
agreement, the related trust, or each applicable portion thereof, will qualify
as a REMIC or FASIT, as the case may be, and the securities offered with respect
thereto will be considered to evidence ownership of "regular interests" or
"residual interests" in the related REMIC, or "regular interests" or "ownership
interests" in the related FASIT.
The Proposed FASIT Regulations contain an "anti-abuse" rule that, among
other things, enables the IRS to disregard a FASIT election, treat one or more
of the assets of a FASIT as held by a person other than the holder of the
ownership interest in the FASIT, treat a FASIT regular interest as other than a
debt instrument or treat a regular interest held by any person as having the tax
characteristics of one or more of the assets held by the FASIT, if a principal
purpose of forming or using the FASIT was to achieve results inconsistent with
the intent of the FASIT provisions and the Proposed FASIT Regulations based on
all the facts and circumstances. Among the requirements that the Proposed FASIT
Regulations state for remaining within the intent of the FASIT provisions is
that
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no FASIT provision be used to obtain a federal tax result that could not be
obtained without the use of that provision unless the provision clearly
contemplates that result. The only general intent that the Proposed FASIT
Regulations attribute to the FASIT provisions is to promote the spreading of
credit risk on debt instruments by facilitating their securitization. Although
any FASIT whose securities are offered pursuant to this prospectus will be
structured to reduce the likelihood that the IRS would recharacterize the tax
treatment of the offered securities, the anti-abuse provisions of the Proposed
FASIT Regulations are sufficiently broad and vague that the avoidance of
recharacterization cannot be assured. Investors should be cautious in purchasing
any of the securities for which a FASIT election has been made and should
consult with their tax advisors in determining the federal, state, local and
other tax consequences to them for the purchase, holding and disposition of
those securities.
If an entity electing to be treated as a REMIC or FASIT fails to comply
with one or more of the ongoing requirements of the Internal Revenue Code for
this status during any taxable year, the Internal Revenue Code provides that the
entity will not be treated as a REMIC or FASIT for that year and thereafter. In
that event, the entity may be taxable as a separate corporation under Treasury
regulations, and the related REMIC or FASIT securities may not be accorded the
status or given the tax treatment described below. Although the Internal Revenue
Code authorizes the Treasury Department to issue regulations providing relief in
the event of an inadvertent termination of REMIC or FASIT status, no regulations
have been issued. Any relief, moreover, may be accompanied by sanctions, such as
the imposition of a corporate tax on all or a portion of the trust's income for
the period in which the requirements for that status are not satisfied. The
proposed FASIT regulations provide that, upon the termination of a FASIT, FASIT
regular interest holders are treated as exchanging their FASIT regular interests
for new interests in the trust. The new interests are characterized under
general tax principals, and the deemed exchange of the FASIT regular interests
for new interests in the trust may require the FASIT regular interest holders to
recognize gain, but not loss. The pooling and servicing agreement with respect
to each REMIC or FASIT will include provisions designed to maintain the trust's
status as a REMIC or FASIT under the applicable provisions of the Internal
Revenue Code. It is not anticipated that the status of any trust as a REMIC or
FASIT will be terminated prior to termination of the trust.
In general, a swap or yield supplement agreement may not be an asset of
a REMIC. If a trust of a particular series contains a swap or yield supplement
agreement, the accompanying prospectus supplement will disclose the tax
treatment of such an arrangement. In contrast, a swap or yield supplement
agreement may be an asset of a FASIT, but only if it is reasonably required to
hedge or guarantee against the FASIT's risks associated with being the obligor
on the interests that the FASIT has issued.
Characterization of Investments in REMIC and FASIT Securities
In general, REMIC regular and residual securities, and FASIT regular
securities, will be "real estate assets" within the meaning of Section
856(c)(4)(A) of the Internal Revenue Code and assets described in Section
7701(a)(19)(C) of the Internal Revenue Code in the same proportion that the
assets of the REMIC or FASIT underlying the securities would be so treated.
Moreover, if 95% or more of the assets of the REMIC or FASIT qualify for any of
the foregoing treatments at all times during a calendar year, those securities
will qualify for the corresponding status in their entirety for that calendar
year. Interest, including original issue discount, on the REMIC or FASIT regular
securities and income allocated to the class of REMIC residual securities will
be interest described in Section 856(c)(3)(B) of the Internal Revenue Code to
the extent that those securities are treated as "real estate assets" within the
meaning of Section 856(c)(4)(A) of the Internal Revenue Code. In addition, REMIC
regular securities will be "qualified mortgages" within the meaning of Section
860G(a)(3) of the Internal Revenue Code, as will FASIT regular securities if 95%
or more of the value of the FASIT is at all times attributable to qualified
mortgages, if transferred to another REMIC on its startup day in exchange for
regular or residual interests in that REMIC, and REMIC
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or FASIT regular securities will be "permitted assets"within the meaning of
Section 860L(c) of the Internal Revenue Code. The determination as to the
percentage of the REMIC's or FASIT's assets that constitute assets described in
the foregoing sections of the Internal Revenue Code will be made with respect to
each calendar quarter based on the average adjusted basis of each category of
the assets held by the REMIC or FASIT during that calendar quarter. The master
servicer will report those determinations to securityholders in the manner and
at the times required by applicable Treasury regulations.
The assets of the REMIC or FASIT will include, in addition to loans,
payments on loans held pending distribution on the REMIC or FASIT securities and
property acquired by foreclosure held pending sale, and may include amounts in
reserve accounts. It is unclear whether property acquired by foreclosure held
pending sale and amounts in reserve accounts would be considered to be part of
the loans, or whether the assets, to the extent not invested in assets described
in the foregoing sections, otherwise would receive the same treatment as the
loans for purposes of all of the foregoing sections. In addition, in some
instances loans may not be treated entirely as assets described in the foregoing
sections. The REMIC regulations do provide, however, that payments on loans held
pending distribution are considered part of the loans for purposes of Section
856(c)(4)(A) of the Internal Revenue Code. Furthermore, foreclosure property
will qualify as "real estate assets" under Section 856(c)(4)(A) of the Internal
Revenue Code.
Tiered REMIC and FASIT Structures
For some series of REMIC or FASIT securities, two or more separate
elections may be made to treat designated portions of the related trust as
REMICs or FASITs, or tiered REMICs or FASITs, for federal income tax purposes.
Upon the issuance of this type of series of REMIC or FASIT securities, Thacher
Proffitt & Wood, Orrick, Herrington & Sutcliffe LLP, or Stroock & Stroock &
Lavan, counsel to the depositor, will deliver their opinion to the effect that,
assuming compliance with all provisions of the related pooling and servicing
agreement, the tiered REMICs or FASITs will each qualify as a REMIC or FASIT, as
the case may be, and the REMIC or FASIT securities issued by the tiered REMICs
or FASITs, respectively, will be considered to evidence ownership of "regular
interests" or "residual interests" in the related REMIC, or "regular interests"
or "ownership interests" in the related FASIT.
Solely for purposes of determining whether the REMIC or FASIT securities
will be "real estate assets" within the meaning of Section 856(c)(4)(A) of the
Internal Revenue Code, and "loans secured by an interest in real property" under
Section 7701(a)(19)(C) of the Internal Revenue Code, and whether the income on
the securities is interest described in Section 856(c)(3)(B) of the Internal
Revenue Code, the tiered REMICs or FASITs will be treated as, respectively, one
REMIC or FASIT.
Taxation of Owners of REMIC and FASIT Regular Securities
General. Except as otherwise stated in this discussion, REMIC or FASIT
regular securities will be treated for federal income tax purposes as debt
instruments issued by the related REMIC or FASIT and not as ownership interests
in the REMIC or FASIT, or in the assets of the REMIC or FASIT. Moreover, holders
of REMIC or FASIT regular securities that otherwise report income under a cash
method of accounting will be required to report income with respect to REMIC or
FASIT regular securities under an accrual method. In the following discussion,
"regular securities" refers to regular interests of a REMIC or FASIT.
Original Issue Discount
Some regular securities may be issued with "original issue discount"
within the meaning of Section 1273(a) of the Internal Revenue Code. Any holders
of regular securities issued with original issue discount typically will be
required to include original issue discount in income as it accrues,
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in accordance with the method described below, in advance of the receipt of the
cash attributable to that income. In addition, Section 1272 (a)(6) of the
Internal Revenue Code provides special rules applicable to regular securities
and various other debt instruments issued with original issue discount.
Regulations have not been issued under that section.
The Internal Revenue Code requires that a prepayment assumption be used
with respect to loans held by a REMIC or FASIT in computing the accrual of
original issue discount on regular securities issued by that REMIC or FASIT, and
that adjustments be made in the amount and rate of accrual of the discount to
reflect differences between the actual prepayment rate and the prepayment
assumption. The prepayment assumption is to be determined in a manner prescribed
in Treasury regulations; as noted above, those regulations have not been issued.
The Conference Committee Report accompanying the Tax Reform Act of 1986,
indicates that the regulations will provide that the prepayment assumption used
with respect to a regular security must be the same as that used in pricing the
initial offering of the regular security. The prepayment assumption used by the
master servicer in reporting original issue discount for each series of regular
securities will be consistent with this standard and will be disclosed in the
accompanying prospectus supplement. However, neither the depositor nor the
master servicer will make any representation that the loans will in fact prepay
at a rate conforming to the prepayment assumption or at any other rate.
The original issue discount, if any, on a regular security will be the
excess of its stated redemption price at maturity over its issue price. The
issue price of a particular class of regular securities will be the first cash
price at which a substantial amount of regular securities of that class is sold,
excluding sales to bond houses, brokers and underwriters. If less than a
substantial amount of a particular class of regular securities is sold for cash
on or prior to the date of their initial issuance, the issue price for the class
will be treated as the fair market value of that class on the closing date.
Under the OID regulations, the stated redemption price of a regular security is
equal to the total of all payments to be made on that security other than
"qualified stated interest." "Qualified stated interest" includes interest that
is unconditionally payable at least annually at a single fixed rate, or in the
case of a variable rate debt instrument, at a "qualified floating rate," an
"objective rate," a combination of a single fixed rate and one or more
"qualified floating rates" or one "qualified inverse floating rate," or a
combination of "qualified floating rates" that generally does not operate in a
manner that accelerates or defers interest payments on a regular security.
In the case of regular securities bearing adjustable interest rates, the
determination of the total amount of original issue discount and the timing of
the inclusion of the original issue discount will vary according to the
characteristics of the regular securities. In general terms, original issue
discount is accrued by treating the interest rate of the securities as fixed and
making adjustments to reflect actual interest rate adjustments.
Some classes of the regular securities may provide for the first
interest payment with respect to their securities to be made more than one month
after the date of issuance, a period which is longer than the subsequent monthly
intervals between interest payments. Assuming the "accrual period" for original
issue discount is each monthly period that ends on a distribution date, in some
cases, as a consequence of this "long first accrual period," some or all
interest payments may be required to be included in the stated redemption price
of the regular security and accounted for as original issue discount. Because
interest on regular securities must in any event be accounted for under an
accrual method, applying this analysis would result in only a slight difference
in the timing of the inclusion in income of the yield on the regular securities.
In addition, if the accrued interest to be paid on the first
distribution date is computed with respect to a period that begins prior to the
closing date, a portion of the purchase price paid for a regular security will
reflect the accrued interest. In these cases, information returns to the
securityholders and the Internal Revenue Service, or IRS, will be based on the
position that the portion of the purchase price paid for the interest accrued
with respect to periods prior to the closing
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date is treated as part of the overall purchase price of the regular security,
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
regular security. However, the OID regulations state that all or some portion of
the accrued interest may be treated as a separate asset the cost of which is
recovered entirely out of interest paid on the first distribution date. It is
unclear how an election to do so would be made under the OID regulations and
whether that election could be made unilaterally by a securityholder.
Notwithstanding the general definition of original issue discount,
original issue discount on a regular security will be considered to be de
minimis if it is less than 0.25% of the stated redemption price of the regular
security multiplied by its weighted average maturity. For this purpose, the
weighted average maturity of the regular security is computed as the sum of the
amounts determined, as to each payment included in the stated redemption price
of the regular security, by multiplying:
o the number of complete years, rounding down for partial years,
from the issue date until the payment is expected to be made,
presumably taking into account the prepayment assumption; by
o a fraction, the numerator of which is the amount of the payment,
and the denominator of which is the stated redemption price at
maturity of the regular security.
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 regular
security. The OID regulations also would permit a securityholder to elect to
accrue de minimis original issue discount into income currently based on a
constant yield method. See "Taxation of Owners of REMIC and FASIT Regular
Securities -- Market Discount" for a description of that election under the OID
regulations.
If original issue discount on a regular security is in excess of a de
minimis amount, the holder of the security 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 regular security, including the purchase
date but excluding the disposition date. In the case of an original holder of a
regular security, the daily portions of original issue discount will be
determined as follows.
As to each "accrual period," that is, unless otherwise stated in the
accompanying prospectus supplement, each period that ends on a date that
corresponds to a distribution date and begins on the first day following the
immediately preceding accrual period, or in the case of the first accrued
period, begins on the closing date, a calculation will be made of the portion of
the original issue discount that accrued during that accrual period. The portion
of original issue discount that accrues in any accrual period will equal the
excess, if any, of:
o the sum of:
o the present value, as of the end of the accrual period, of all of
the distributions remaining to be made on the regular security,
if any, in future periods; and
o the distributions made on the regular security during the accrual
period of amounts included in the stated redemption price; over
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o the adjusted issue price of the regular security at the beginning
of the accrual period.
The present value of the remaining distributions referred to in the
preceding sentence will be calculated assuming that distributions on the regular
security will be received in future periods based on the loans being prepaid at
a rate equal to the prepayment assumption and using a discount rate equal to the
original yield to maturity of the security. For these purposes, the original
yield to maturity of the security will be calculated based on its issue price
and assuming that distributions on the security will be made in all accrual
periods based on the loans being prepaid at a rate equal to the prepayment
assumption. The adjusted issue price of a regular security at the beginning of
any accrual period will equal the issue price of the security, increased by the
aggregate amount of original issue discount that accrued with respect to that
security in prior accrual periods, and reduced by the amount of any
distributions made on that regular security in prior accrual periods of amounts
included in its stated redemption price. The original issue discount accruing
during any accrual period, computed as described above, will be allocated
ratably to each day during the accrual period to determine the daily portion of
original issue discount for that day.
A subsequent purchaser of a regular security that purchases the security
at a price, excluding any portion of that price attributable to accrued
qualified stated interest, less than its remaining stated redemption price will
also be required to include in gross income the daily portions of any original
issue discount with respect to that security. However, each daily portion will
be reduced, if the cost is in excess of its "adjusted issue price," in
proportion to the ratio excess bears to the aggregate original issue discount
remaining to be accrued on the regular security. The adjusted issue price of a
regular security on any given day equals the sum of the adjusted issue price,
or, in the case of the first accrual period, the issue price, of the security at
the beginning of the accrual period which includes that day, and the daily
portions of original issue discount for all days during the accrual period prior
to that day.
Market Discount
A securityholder that purchases a regular security at a market discount,
that is, in the case of a regular security issued without original issue
discount, at a purchase price less than its remaining stated principal amount,
or in the case of a regular security issued with original issue discount, at a
purchase price less than its adjusted issue price will recognize income upon
receipt of each distribution representing stated redemption price. In
particular, under Section 1276 of the Internal Revenue Code the securityholder
will be required to allocate the portion of each distribution representing
stated redemption price first to accrued market discount not previously included
in income, and to recognize ordinary income to that extent.
A securityholder 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 securityholder on or after the first day of the first
taxable year to which the election applies. In addition, the OID regulations
permit a securityholder to elect to accrue all interest, discount, including de
minimis market or original issue discount, and premium in income as interest,
based on a constant yield method. If the election were made with respect to a
regular security with market discount, the securityholder would be deemed to
have made an election to include market discount in income currently with
respect to all other debt instruments having market discount that the
securityholder acquires during the taxable year of the election or thereafter,
and possibly previously acquired instruments. Similarly, a securityholder that
made this election for a security that is acquired at a premium would be deemed
to have made an election to amortize bond premium with respect to all debt
instruments having amortizable bond premium that the securityholder owns or
acquires. See "Taxation of Owners of REMIC and FASIT Regular Securities --
Premium" in this prospectus. Each of these elections to accrue interest,
discount and premium with respect to a security on a constant yield method or as
interest would be irrevocable.
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However, market discount with respect to a regular security will be
considered to be de minimis for purposes of Section 1276 of the Code if the
market discount is less than 0.25% of the remaining stated redemption price of
the regular security multiplied by the number of complete years to maturity
remaining after the date of its purchase. In interpreting a similar rule with
respect to original issue discount on obligations payable in installments, the
OID regulations refer to the weighted average maturity of obligations, and it is
likely that the same rule will be applied with respect to market discount,
presumably taking into account the prepayment assumption. If market discount is
treated as de minimis under this rule, it appears that the actual discount would
be treated in a manner similar to original issue discount of a de minimis
amount. See "Taxation of Owners of REMIC and FASIT Regular Securities --
Original Issue Discount" in this prospectus. This treatment would result in
discount being included in income at a slower rate than discount would be
required to be included in income using the method described above.
Internal Revenue Code Section 1276(b)(3) specifically authorizes the
Treasury Department to issue regulations providing for the method for accruing
market discount on debt instruments, the principal of which is payable in more
than one installment. Until regulations are issued by the Treasury Department, a
number of rules described in the Committee Report apply. The Committee Report
indicates that in each accrual period market discount on regular securities
should accrue, at the securityholder's option:
o on the basis of a constant yield method;
o in the case of a regular security 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 regular security as of the beginning
of the accrual period; or
o in the case of a regular security issued with original issue
discount, in an amount that bears the same ratio to the total
remaining market discount as the original issue discount accrued
in the accrual period bears to the total original issue discount
remaining on the regular security at the beginning of the accrual
period.
Moreover, the prepayment assumption used in calculating the accrual of
original issue discount is to be used in calculating the accrual of market
discount. Because the regulations referred to in the preceding paragraph have
not been issued, it is not possible to predict what effect those regulations
might have on the tax treatment of a regular security purchased at a discount in
the secondary market.
To the extent that regular securities 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 regular security
generally will be required to treat a portion of any gain on the sale or
exchange of that security as ordinary income to the extent of the market
discount accrued to the date of disposition under one of the foregoing methods,
less any accrued market discount previously reported as ordinary income.
Further, under Section 1277 of the Code a holder of a regular security
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 regular security purchased with market discount. For these purposes, the de
minimis rule referred to above applies. Any deferred interest expense would not
exceed the market discount that accrues during that taxable year and is, in
general, allowed as a deduction not later than the year in which the market
discount is includible in income. If the holder elects to include market
discount in income currently as it accrues on all market discount instruments
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acquired by that holder in that taxable year or thereafter, the interest
deferral rule described above will not apply.
Premium
A regular security purchased at a cost, excluding any portion of that
cost attributable to accrued qualified stated interest, greater than its
remaining stated redemption price will be considered to be purchased at a
premium. The holder of a regular security may elect under Section 171 of the
Code to amortize that premium under the constant yield method over the life of
the security. If this election is made, it will apply to all debt instruments
having amortizable bond premium that the holder owns or subsequently acquires.
Amortizable premium will be treated as an offset to interest income on the
related regular security, rather than as a separate interest deduction. The OID
regulations also permit securityholders to elect to include all interest,
discount and premium in income based on a constant yield method, further
treating the securityholder as having made the election to amortize premium
generally. See "Taxation of Owners of REMIC and FASIT Regular Securities --
Market Discount" in this prospectus. The Committee Report states that the same
rules that apply to accrual of market discount, which rules will require use of
a prepayment assumption in accruing market discount with respect to regular
securities without regard to whether those securities have original issue
discount, will also apply in amortizing bond premium under Section 171 of the
Internal Revenue Code.
Realized Losses
Under Internal Revenue Code Section 166 both corporate holders of the
regular securities and noncorporate holders of the regular securities that
acquire those securities in connection with a trade or business should be
allowed to deduct, as ordinary losses, any losses sustained during a taxable
year in which their securities become wholly or partially worthless as the
result of one or more realized losses on the loans. However, it appears that a
noncorporate holder that does not acquire a regular security 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 security becomes wholly worthless
(i.e., until its outstanding principal balance has been reduced to zero) and
that the loss will be characterized as a short-term capital loss.
Each holder of a regular security will be required to accrue interest
and original issue discount with respect to that security, without giving effect
to any reductions in distributions attributable to defaults or delinquencies on
the loans or the underlying securities 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 regular security could exceed
the amount of economic income actually realized by the holder in that period.
Although the holder of a regular security eventually will recognize a loss or
reduction in income attributable to previously accrued and included income that,
as the result of a realized loss, ultimately will not be realized, the law is
unclear with respect to the timing and character of the loss or reduction in
income.
Special Rules for FASIT High-Yield Regular Securities
General. A high-yield interest in a FASIT is a subcategory of a FASIT
regular security. A FASIT high-yield regular security is a FASIT regular
security that either (i) has an issue price that exceeds 125% of its stated
principal amount, (ii) has a yield to maturity equal to or greater than a
specified amount (generally 500 basis points above the appropriate applicable
federal rate), or (iii) is an interest-only obligation whose interest payments
consist of a non-varying specified portion of the interest payments on permitted
assets. A holder of a FASIT high-yield regular security is subject to treatment,
described above, applicable to FASIT regular securities, generally.
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Limitations on Utilization of Losses. The holder of a FASIT high-yield
regular security may not offset its income derived thereon by any unrelated
losses. Thus, the taxable income of the holder will be at least equal to the
taxable income derived from that security (which includes gain or loss from the
sale of that security), from any security representing a FASIT ownership
interest, and from any excess inclusions income derived from any security
representing a REMIC residual interest. Thus, income from those securities
generally cannot be offset by current net operating losses or net operating loss
carryovers. Similarly, the alternative minimum taxable income of the holder of a
high-yield regular security cannot be less than the holder's taxable income
determined solely for those securities. For purposes of these provisions, all
members of an affiliated group filing a consolidated return are treated as one
taxpayer. Accordingly, the consolidated taxable income of the group cannot be
less than the group's "tainted" income (thereby preventing losses of one member
from offsetting the tainted income of another member). However, to avoid doubly
penalizing income, net operating loss carryovers are determined without regard
to that income for both regular tax and alternative minimum tax purposes.
Transfer Restrictions. Transfers of FASIT high-yield regular securities
to certain "disqualified holders" will (absent the satisfaction of certain
conditions) be disregarded for federal income tax purposes. In that event, the
most recent eligible holder (generally the transferring holder) will continue to
be taxed as if it were the holder of the security (although the disqualified
holder (and not the most recent eligible holder) would be taxable on any gain
recognized by that holder for that security). Although not free from doubt, the
tax ownership of a FASIT high-yield regular security may (absent the
satisfaction of certain conditions) revert to a prior holder even if the
transferee becomes a disqualified holder after the relevant transfer. Each
applicable pooling and servicing agreement, trust agreement or indenture
requires, as a prerequisite to any transfer of a FASIT high- yield regular
security, the delivery to the trustee of an affidavit of the transferee to the
effect that it is not a disqualified holder and contains certain other
provisions designed to preclude the automatic reversion of the tax ownership of
that security. For these purposes, a "disqualified holder" is any person other
than a (i) FASIT or (ii) domestic C corporation (other than a corporation that
is exempt from (or not subject to) federal income tax); provided, however, that
all (a) regulated investment companies subject to the provisions of Part I of
subchapter M of the Internal Revenue Code, (b) real estate investment trusts
subject to the provisions of Part II of subchapter M of the Internal Revenue
Code, (c) REMICs, and (d) cooperatives described in Section 1381(a) of the
Internal Revenue Code are also "disqualified holders."
Pass-through Entities Holding FASIT Regular Securities
If a pass-through entity issues a high-yielding debt or equity interest
that is supported by any FASIT regular security, that entity will be subject to
an excise tax unless no principal purpose of that resecuritization was the
avoidance of the rules relating to FASIT high-yield regular securities
(pertaining to eligible holders of those securities). See "Taxation of Owners of
REMIC and FASIT Regular Securities-- Special Rules for FASIT High-Yield Regular
Securities-- Transfer Restrictions". The tax will apply if the original yield to
maturity of the debt or equity interest in the pass-through entity exceeds the
greater of (i) the sum of (a) the applicable federal rate in effect for the
calendar month in which the debt or equity interest is issued) and (b) five
percentage points or (ii) the yield to maturity to that entity on the FASIT
regular security (determined as of the date that the entity acquired that
interest). The Internal Revenue Code provides that Treasury regulations will be
issued to provide the manner in which to determine the yield to maturity of any
equity interest. No such regulations have yet been issued. If such tax did
apply, the tax would equal the product of (i) the highest corporate tax rate and
(ii) the income of the holder of the debt or equity interest that is properly
attributable to the FASIT regular security supporting that interest.
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Taxation of Owners of REMIC Residual Securities
General. As residual interests, the REMIC residual securities will be
subject to tax rules that differ significantly from those that would apply if
the REMIC residual securities were treated for federal income tax purposes as
direct ownership interests in the loans or as debt instruments issued by the
REMIC.
A holder of a REMIC residual security typically will be required to
report its daily portion of the taxable income or, subject to the limitations
noted in this discussion, the net loss of the REMIC for each day during a
calendar quarter that the holder owned the REMIC residual security. For this
purpose, the taxable income or net loss of the REMIC will be allocated to each
day in the calendar quarter ratably using a "30 days per month/90 days per
quarter/360 days per year" convention unless otherwise disclosed in the
accompanying prospectus supplement. The daily amounts will then be allocated
among the REMIC residual securityholders in proportion to their respective
ownership interests on that day. Any amount included in the gross income or
allowed as a loss of any REMIC residual securityholder by virtue of this
allocation will be treated as ordinary income or loss. The taxable income of the
REMIC will be determined under the rules described below in "Taxable Income of
the REMIC" and will be taxable to the REMIC residual securityholders without
regard to the timing or amount of cash distributions by the REMIC. Ordinary
income derived from REMIC residual securities will be "portfolio income" for
purposes of the taxation of taxpayers subject to limitations under Section 469
of the Internal Revenue Code on the deductibility of "passive losses."
A holder of a REMIC residual security that purchased the security from a
prior holder of that security also will be required to report on its federal
income tax return amounts representing its daily portion of the taxable income
or net loss of the REMIC for each day that it holds the REMIC residual security.
These daily portions will equal the amounts of taxable income or net loss
determined as described above. The Committee Report indicates that modifications
of the general rules may be made, by regulations, legislation or otherwise, to
reduce, or increase, the income or loss of a holder of a REMIC residual
securityholder that purchased the REMIC residual security from a prior holder of
the security at a price greater than, or less than, the adjusted basis, the
REMIC residual security would have had in the hands of an original holder of the
security. The REMIC regulations, however, do not provide for any modifications.
Any payments received by a holder of a REMIC residual security in
connection with the acquisition of that REMIC residual security will be taken
into account in determining the income of the holder for federal income tax
purposes. Although it appears likely that the payment would be includible in
income immediately upon its receipt, the IRS might assert that the payment
should be included in income over time according to an amortization schedule or
according to some other method. Because of the uncertainty concerning the
treatment of these payments, holders of REMIC residual securities should consult
their tax advisors concerning the treatment of these payments for income tax
purposes.
The amount of income REMIC residual securityholders will be required to
report, or the tax liability associated with that income, may exceed the amount
of cash distributions received from the REMIC for the corresponding period.
Consequently, REMIC residual securityholders should have other sources of funds
sufficient to pay any federal income taxes due as a result of their ownership of
REMIC residual securities or unrelated deductions against which income may be
offset, subject to the rules relating to "excess inclusions," residual interests
without "significant value" and "noneconomic" residual interests discussed
below. The fact that the tax liability associated with the income allocated to
REMIC residual securityholders may exceed the cash distributions received by the
REMIC residual securityholders for the corresponding period may significantly
adversely affect the REMIC residual securityholders' after-tax rate of return.
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Taxable Income of the REMIC. The taxable income of the REMIC will equal
the income from the loans and other assets of the REMIC plus any cancellation of
indebtedness income due to the allocation of realized losses to REMIC regular
securities, less the deductions allowed to the REMIC for interest, including
original issue discount and reduced by the amortization of any premium received
on issuance, on the REMIC regular securities, and any other class of REMIC
securities constituting "regular interests" in the REMIC not offered by this
prospectus, amortization of any premium on the loans, bad debt deductions with
respect to the loans and, except as described below, for servicing,
administrative and other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate basis in its assets equal to their fair market value
immediately after their transfer to the REMIC. For this purpose, the master
servicer intends to treat the fair market value of the loans as being equal to
the aggregate issue prices of the REMIC regular securities and REMIC residual
securities. The aggregate basis will be allocated among the loans collectively
and the other assets of the REMIC in proportion to their respective fair market
values. The issue price of any REMIC securities offered by this prospectus will
be determined in the manner described above under " -- Taxation of Owners of
REMIC and FASIT Regular Securities -- Original Issue Discount" in this
prospectus. Accordingly, if one or more classes of REMIC securities are retained
initially rather than sold, the master servicer may be required to estimate the
fair market value of those interests in order to determine the basis of the
REMIC in the loans and other property held by the REMIC.
Subject to the possible application of the de minimis rules, the method
of accrual by the REMIC of original issue discount income and market discount
income with respect to loans that it holds will be equivalent to the method of
accruing original issue discount income for REMIC regular securityholders, that
is, under the constant yield method taking into account the prepayment
assumption. However, a REMIC that acquires loans at a market discount must
include the discount in income currently, as it accrues, on a constant interest
basis. See " -- Taxation of Owners of REMIC and FASIT Regular Securities" above,
which describes a method of accruing discount income that is analogous to that
required to be used by a REMIC as to loans with market discount that it holds.
A loan will be deemed to have been acquired with discount, or premium,
to the extent that the REMIC's basis in the loan, determined as described in the
preceding paragraph, is less than, or greater than, its stated redemption price.
Any discount will be includible in the income of the REMIC as it accrues, in
advance of receipt of the cash attributable to that income, under a method
similar to the method described above for accruing original issue discount on
the REMIC regular securities. It is anticipated that each REMIC will elect under
Section 171 of the Internal Revenue Code to amortize any premium on the loans.
Premium on any loan to which the election applies may be amortized under a
constant yield method, presumably taking into account a prepayment assumption.
A REMIC will be allowed deductions for interest, including original
issue discount, on the REMIC regular securities, including any other class of
REMIC securities constituting "regular interests" in the REMIC not offered by
this prospectus, equal to the deductions that would be allowed if the REMIC
regular securities, including any other class of REMIC securities constituting
"regular interests" in the REMIC not offered by this prospectus, were
indebtedness of the REMIC. Original issue discount will be considered to accrue
for this purpose as described above under " -- Taxation of Owners of REMIC and
FASIT Regular Securities -- Original Issue Discount," except that the de minimis
rule and the adjustments for subsequent holders of REMIC regular securities,
including any other class of securities constituting "regular interests" in the
REMIC not offered by this prospectus, described in that section will not apply.
If a class of REMIC regular securities is issued at an Issue Premium,
the REMIC will have an additional item of income in an amount equal to the
portion of the Issue Premium that is considered to be amortized or repaid in
that year. Although the matter is not entirely certain, it is
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likely that Issue Premium would be amortized under a constant yield method in a
manner analogous to the method of accruing original issue discount described
above under " -- Taxation of Owners of REMIC and FASIT Regular Securities --
Original Issue Discount" in this prospectus.
As a general rule, the taxable income of the REMIC is required to be
determined in the same manner as if the REMIC were an individual having the
calendar year as its taxable year and using the accrual method of accounting.
However, no item of income, gain, loss or deduction allocable to a prohibited
transaction will be taken into account. See " -- Prohibited Transactions and
Other Possible REMIC Taxes" in this prospectus. Further, the limitation on
miscellaneous itemized deductions imposed on individuals by Section 67 of the
Internal Revenue Code, which allows those deductions only to the extent they
exceed in the aggregate two percent of the taxpayer's adjusted gross income,
will not be applied at the REMIC level so that the REMIC will be allowed
deductions for servicing, administrative and other non-interest expenses in
determining its taxable income. All of these expenses will be allocated as a
separate item to the holders of REMIC residual securities, subject to the
limitation of Section 67 of the Internal Revenue Code and the rules relating to
the alternative minimum tax. See " -- Possible Pass-Through of Miscellaneous
Itemized Deductions" in this prospectus. If the deductions allowed to the REMIC
exceed its gross income for a calendar quarter, the excess will be the net loss
for the REMIC for that calendar quarter.
Basis Rules, Net Losses and Distributions. The adjusted basis of a REMIC
residual security will be equal to the amount paid for that REMIC residual
security, increased by amounts included in the income of the REMIC residual
securityholder and decreased, but not below zero, by distributions made, and by
net losses allocated, to the REMIC residual securityholder.
A REMIC residual securityholder is not allowed to take into account any
net loss for any calendar quarter to the extent the net loss exceeds the REMIC
residual securityholder's adjusted basis in its REMIC residual security as of
the close of that calendar quarter, determined without regard to the net loss.
Any loss that is not currently deductible by reason of this limitation may be
carried forward indefinitely to future calendar quarters and, subject to the
same limitation, may be used only to offset income from the REMIC residual
security. The ability of REMIC residual securityholders to deduct net losses may
be subject to additional limitations under the Internal Revenue Code, as to
which REMIC residual securityholders should consult their tax advisors.
Any distribution on a REMIC residual security will be treated as a
non-taxable return of capital to the extent it does not exceed the holder's
adjusted basis in the REMIC residual security. To the extent a distribution on a
REMIC residual security exceeds the adjusted basis, it will be treated as gain
from the sale of the REMIC residual security. Holders of REMIC residual
securities may be entitled to distributions early in the term of the related
REMIC under circumstances in which their bases in the REMIC residual securities
will not be sufficiently large that distributions will be treated as nontaxable
returns of capital. Their bases in the REMIC residual securities will initially
equal the amount paid for the REMIC residual securities and will be increased by
their allocable shares of taxable income of the trust. However, their basis
increases may not occur until the end of the calendar quarter, or perhaps the
end of the calendar year, with respect to which the REMIC taxable income is
allocated to the REMIC residual securityholders. Gain will be recognized to the
REMIC residual securityholder on a distribution to the extent that, at the time
the distribution is made, the amount of the distribution exceeds the
securityholder's initial basis in the residual security together with any net
increases in that basis. The gain so recognized will be treated as gain from the
sale of the REMIC residual security.
The effect of these rules is that a Residual securityholder may not
amortize its basis in a REMIC residual security, but may only recover its basis
through distributions, through the deduction of its share of any net losses of
the REMIC or upon the sale of its REMIC residual security. See " -- Sales of
REMIC Securities" in this prospectus. For a discussion of possible modifications
of these rules that may require adjustments to income of a holder of a REMIC
residual security other
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than an original holder in order to reflect any difference between the cost of
the REMIC residual security to the holder and the adjusted basis the REMIC
residual security would have had in the hands of the original holder, see " --
Taxation of Owners of REMIC Residual Securities -- General" in this prospectus.
Excess Inclusions. Any "excess inclusions" with respect to a REMIC residual
security will be subject to federal income tax in all events.
In general, the "excess inclusions" with respect to a REMIC residual
security for any calendar quarter will be the excess, if any, of:
o the sum of the daily portions of REMIC taxable income allocable
to the REMIC residual security; over
o the sum of the "daily accruals" for each day during that quarter
that the REMIC residual security was held by the REMIC residual
securityholder.
The daily accruals of a REMIC residual securityholder will be determined
by allocating to each day during a calendar quarter its ratable portion of the
product of the "adjusted issue price" of the REMIC residual security at the
beginning of the calendar quarter and 120% of the "long-term Federal rate" in
effect on the closing date. For this purpose, the adjusted issue price of a
REMIC residual security as of the beginning of any calendar quarter will be
equal to the issue price of the REMIC residual security, increased by the sum of
the daily accruals for all prior quarters and decreased, but not below zero, by
any distributions made with respect to the REMIC residual security before the
beginning of that quarter. The issue price of a REMIC residual security is the
initial offering price to the public, excluding bond houses, brokers and
underwriters, at which a substantial amount of the REMIC residual securities
were sold. If less than a substantial amount of REMIC residual securities is
sold for cash on or prior to the closing date, the issue price for those REMIC
residual securities will be treated as the fair market value of those REMIC
residual securities on the Closing Date. The "long-term Federal rate" is an
average of current yields on Treasury securities with a remaining term of
greater than nine years, computed and published monthly by the IRS. Although it
has not done so, the Treasury has authority to issue regulations that would
treat the entire amount of income accruing on a REMIC residual security as an
excess inclusion if the REMIC residual securities are considered not to have
"significant value."
For REMIC residual securityholders, an excess inclusion:
o will not be permitted to be offset by deductions, losses or loss
carryovers from other activities;
o will be treated as "unrelated business taxable income" to an
otherwise tax-exempt organization; and
o will not be eligible for any rate reduction or exemption under
any applicable tax treaty with respect to the 30% United States
withholding tax imposed on distributions to REMIC residual
securityholders that are foreign investors. See, however, " --
Foreign Investors in REMIC Securities" in this prospectus.
Furthermore, for purposes of the alternative minimum tax:
o excess inclusions will not be permitted to be offset by the
alternative tax net operating loss deduction; and
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o alternative minimum taxable income may not be less than the
taxpayer's excess inclusions; provided, however, that for
purposes of this clause, alternative minimum taxable income is
determined without regard to the special rule that taxable income
cannot be less than excess inclusions. The latter rule has the
effect of preventing nonrefundable tax credits from reducing the
taxpayer's income tax to an amount lower than the alternative
minimum tax on excess inclusions.
In the case of any REMIC residual securities held by a real estate
investment trust, the aggregate excess inclusions with respect to the REMIC
residual securities, reduced, but not below zero, by the real estate investment
trust taxable income, within the meaning of Section 857(b)(2) of the Internal
Revenue Code, excluding any net capital gain, will be allocated among the
shareholders of the trust in proportion to the dividends received by the
shareholders from the trust, and any amount so allocated will be treated as an
excess inclusion with respect to a REMIC residual security as if held directly
by the shareholder. Treasury regulations yet to be issued could apply a similar
rule to regulated investment companies, common trust funds and a number of
cooperatives; the REMIC Regulations currently do not address this subject.
Noneconomic REMIC Residual Securities. Under the REMIC regulations,
transfers of "noneconomic" REMIC residual securities will be disregarded for all
federal income tax purposes if "a significant purpose of the transfer was to
enable the transferor to impede the assessment or collection of tax." If the
transfer is disregarded, the purported transferor will continue to remain liable
for any taxes due with respect to the income on the "noneconomic" REMIC residual
security. The REMIC regulations provide that a REMIC residual security is
noneconomic unless, based on the prepayment assumption and on any required or
permitted clean up calls, or required qualified liquidation provided for in the
REMIC's organizational documents:
o the present value of the expected future distributions,
discounted using the "applicable Federal rate" for obligations
whose term ends on the close of the last quarter in which excess
inclusions are expected to accrue with respect to the REMIC
residual security, which rate is computed and published monthly
by the IRS, on the REMIC residual security equals at least the
present value of the expected tax on the anticipated excess
inclusions; and
o the transferor reasonably expects that the transferee will
receive distributions with respect to the REMIC residual security
at or after the time the taxes accrue on the anticipated excess
inclusions in an amount sufficient to satisfy the accrued taxes.
Accordingly, all transfers of REMIC residual securities that may
constitute noneconomic residual interests will be subject to restrictions under
the terms of the related pooling and servicing agreement that are intended to
reduce the possibility of any transfer being disregarded. The restrictions will
require each party to a transfer to provide an affidavit that no purpose of the
transfer is to impede the assessment or collection of tax, including
representations as to the financial condition of the prospective transferee, as
to which the transferor also is required to make a reasonable investigation to
determine the transferee's historic payment of its debts and ability to continue
to pay its debts as they come due in the future. Prior to purchasing a REMIC
residual security, prospective purchasers should consider the possibility that a
purported transfer of the REMIC residual security by this type of a purchaser to
another purchaser at some future date may be disregarded in accordance with the
above-described rules which would result in the retention of tax liability by
that purchaser.
The IRS has issued proposed changes to the REMIC regulations that would
add to the conditions necessary to assure that a transfer of a noneconomic
residual interest would be respected. The proposed additional condition would
require that the amount received by the transferee be no less on a present value
basis than the present value of the net tax detriment attributable to holding
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a residual interest reduced by the present value of the projected payments to be
received on the residual interest. The change is proposed to be effective for
transfers of residual interests occurring after February 4, 2000.
The accompanying prospectus supplement will disclose whether offered
REMIC residual securities may be considered "noneconomic" residual interests
under the REMIC regulations. Any disclosure that a REMIC residual security will
not be considered "noneconomic" will be based upon a number of assumptions, and
the depositor will make no representation that a REMIC residual security will
not be considered "noneconomic" for purposes of the above-described rules. See "
- -- Foreign Investors in REMIC Securities -- REMIC Residual Securities" in this
prospectus for additional restrictions applicable to transfers of REMIC residual
securities to foreign persons.
Mark-to-Market Rules. On December 24, 1996, the IRS released the
Mark-to-Market Regulations. The mark-to-market requirement applies to all
securities owned by a dealer, except to the extent that the dealer has
specifically identified a security as held for investment. The Mark-to- Market
Regulations provide that for purposes of this mark-to-market requirement, a
REMIC residual security acquired after January 4, 1995 is not treated as a
security and thus may not be marked to market. Prospective purchasers of a REMIC
residual security should consult their tax advisors regarding the possible
application of the mark-to-market requirement to REMIC residual securities.
Possible Pass-Through of Miscellaneous Itemized Deductions. Fees and
expenses of a REMIC typically will be allocated to the holders of the related
REMIC residual securities. The applicable Treasury regulations indicate,
however, that in the case of a REMIC that is similar to a single class grantor
trust, all or a portion of those fees and expenses should be allocated to the
holders of the related REMIC regular securities. Unless otherwise stated in the
accompanying prospectus supplement, fees and expenses will be allocated to
holders of the related REMIC residual securities in their entirety and not to
the holders of the related REMIC regular securities.
With respect to REMIC residual securities or REMIC regular securities
the holders of which receive an allocation of fees and expenses in accordance
with the preceding discussion, if any holder thereof is an individual, estate or
trust, or a "pass-through entity" beneficially owned by one or more individuals,
estates or trusts:
o an amount equal to the individual's, estate's or trust's share of
fees and expenses will be added to the gross income of that
holder; and
o the individual's, estate's or trust's share of fees and expenses
will be treated as a miscellaneous itemized deduction allowable
subject to the limitation of Section 67 of the Internal Revenue
Code, which permits those deductions only to the extent they
exceed in the aggregate two percent of a taxpayer's adjusted
gross income.
In addition, Section 68 of the Internal Revenue Code provides that the
amount of itemized deductions otherwise allowable for an individual whose
adjusted gross income exceeds a specified amount will be reduced by the lesser
of:
o 3% of the excess of the individual's adjusted gross income over
that amount; or
o 80% of the amount of itemized deductions otherwise allowable for
the taxable year.
The amount of additional taxable income reportable by REMIC
securityholders that are subject to the limitations of either Section 67 or
Section 68 of the Internal Revenue Code may be substantial. Furthermore, in
determining the alternative minimum taxable income of this type of holder of a
REMIC security that is an individual, estate or trust, or a "pass-through
entity" beneficially owned by one or more individuals, estates or trusts, no
deduction will be allowed for the
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holder's allocable portion of servicing fees and other miscellaneous itemized
deductions of the REMIC, even though an amount equal to the amount of fees and
other deductions will be included in the holder's gross income. Accordingly, the
REMIC securities may not be appropriate investments for individuals, estates, or
trusts, or pass-through entities beneficially owned by one or more individuals,
estates or trusts. Any prospective investors should consult with their tax
advisors prior to making an investment in these securities.
Sales of REMIC and FASIT Securities
If a REMIC or FASIT security is sold, the selling securityholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and its adjusted basis in the REMIC or FASIT security. The adjusted
basis of a regular security typically will equal the cost of that regular
security to that securityholder, increased by income reported by the
securityholder with respect to that regular security, including original issue
discount and market discount income, and reduced, but not below zero, by
distributions on the regular security received by the securityholder and by any
amortized premium. The adjusted basis of a REMIC residual security will be
determined as described under " -- Taxation of Owners of REMIC Residual
Securities -- Basis Rules, Net Losses and Distributions" in this prospectus.
Except as described below, any gain or loss in most cases will be capital gain
or loss.
Gain from the sale of a REMIC regular security (but not a FASIT regular
security) that might otherwise be capital gain will be treated as ordinary
income to the extent the gain does not exceed the excess, if any, of:
o the amount that would have been includible in the seller's income
with respect to the REMIC regular security had income accrued
thereon at a rate equal to 110% of the "applicable Federal rate",
which is typically a rate based on an average of current yields
on Treasury securities having a maturity comparable to that of
the security, which rate is computed and published monthly by the
IRS, determined as of the date of purchase of the REMIC regular
security; over
o the amount of ordinary income actually includible in the seller's
income prior to the sale.
In addition, gain recognized on the sale of a regular security by a
seller who purchased the regular security at a market discount will be taxable
as ordinary income to the extent of any accrued and previously unrecognized
market discount that accrued during the period the security was held. See " --
Taxation of Owners of REMIC and FASIT Regular Securities -- Market Discount" in
this prospectus.
REMIC securities and FASIT securities will be "evidences of
indebtedness" within the meaning of Section 582(c)(1) of the Internal Revenue
Code, so that gain or loss recognized from the sale of a regular security by a
bank or thrift institution to which that section applies will be ordinary income
or loss.
A portion of any gain from the sale of a regular security that might
otherwise be capital gain may be treated as ordinary income to the extent that
the security 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 securities or
similar property that reduce or eliminate market risk, if substantially all of
the taxpayer's return is attributable to the time value of the taxpayer's net
investment in the transaction. The amount of gain so realized in a conversion
transaction that is recharacterized as ordinary income in most cases will not
exceed the amount of interest that would have accrued on the taxpayer's net
investment at 120% of the appropriate "applicable Federal rate", which rate is
computed and published monthly by the
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IRS, at the time the taxpayer enters into the conversion transaction, subject to
appropriate reduction for prior inclusion of interest and other ordinary income
items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include any net capital
gain in total net investment income for the taxable year, for purposes of the
limitation on the deduction of interest on indebtedness incurred to purchase or
carry property held for investment to a taxpayer's net investment income.
If the seller of a REMIC residual security reacquires the security, any
other residual interest in a REMIC or any similar interest in a "taxable
mortgage pool", as defined in Section 7701(i) of the Internal Revenue Code,
within six months of the date of the sale, the sale will be subject to the "wash
sale" rules of Section 1091 of the Internal Revenue Code. In that event, any
loss realized by the REMIC residual securityholder on the sale will not be
deductible, but instead will be added to the REMIC residual securityholder's
adjusted basis in the newly-acquired asset.
Prohibited Transactions and Other Possible Taxes
The Code imposes a tax on REMICs equal to 100% of the net income derived
from "prohibited transactions". In general, subject to specified exceptions a
prohibited transaction means the disposition of a loan, the receipt of income
from a source other than a loan or other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the loans for temporary investment pending distribution on
the REMIC securities. It is not anticipated that any REMIC will engage in any
prohibited transactions in which it would recognize a material amount of net
income.
In addition, some types of contributions to a REMIC made after the day
on which the REMIC issues all of its interests could result in the imposition of
a tax on the REMIC equal to 100% of the value of the contributed property. Each
pooling and servicing agreement will include provisions designed to prevent the
acceptance of any contributions that would be subject to the tax.
REMICs also are subject to federal income tax at the highest corporate
rate on "net income from foreclosure property," determined by reference to the
rules applicable to real estate investment trusts. "Net income from foreclosure
property" generally means gain from the sale of a foreclosure property that is
inventory property and gross income from foreclosure property other than
qualifying rents and other qualifying income for a real estate investment trust.
Unless otherwise disclosed in the accompanying prospectus supplement, it is not
anticipated that any REMIC will recognize "net income from foreclosure property"
subject to federal income tax.
Unless otherwise stated in the accompanying prospectus supplement, and
to the extent permitted by then applicable laws, any prohibited transactions
tax, contributions tax, tax on "net income from foreclosure property" or state
or local income or franchise tax that may be imposed on the REMIC will be borne
by the related master servicer or trustee in either case out of its own funds,
provided that the master servicer or the trustee, as the case may be, has
sufficient assets to do so, and provided further that the tax arises out of a
breach of the master servicer's or the trustee's obligations, as the case may
be, under the related pooling and servicing agreement and relating to compliance
with applicable laws and regulations. Any tax not borne by the master servicer
or the trustee will be payable out of the related trust resulting in a reduction
in amounts payable to holders of the related REMIC securities.
In the case of a FASIT, the holder of the ownership interest and not the
FASIT itself will be subject to any prohibited transaction taxes.
Tax and Restrictions on Transfers of REMIC Residual Securities to Certain
Organizations
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If a REMIC residual security is transferred to a "disqualified
organization", a tax would be imposed in an amount, determined under the REMIC
regulations, equal to the product of:
o the present value, discounted using the "applicable Federal rate"
for obligations whose term ends on the close of the last quarter
in which excess inclusions are expected to accrue with respect to
the security, which rate is computed and published monthly by the
IRS, of the total anticipated excess inclusions with respect to
the REMIC residual security for periods after the transfer; and
o the highest marginal federal income tax rate applicable to
corporations.
The anticipated excess inclusions must be determined as of the date that
the REMIC residual security is transferred and must be based on events that have
occurred up to the time of transfer, the prepayment assumption and any required
or permitted clean up calls or required liquidation provided for in the REMIC's
organizational documents. This tax generally would be imposed on the transferor
of the REMIC residual security, except that where the transfer is through an
agent for a disqualified organization, the tax would instead be imposed on that
agent. However, a transferor of a REMIC residual security would in no event be
liable for the tax with respect to a transfer if the transferee furnishes to the
transferor an affidavit that the transferee is not a disqualified organization
and, as of the time of the transfer, the transferor does not have actual
knowledge that the affidavit is false. Moreover, an entity will not qualify as a
REMIC unless there are reasonable arrangements designed to ensure that:
o residual interests in the entity are not held by disqualified
organizations; and
o information necessary for the application of the tax described in
this prospectus will be made available.
Restrictions on the transfer of REMIC residual securities and a number
of other provisions that are intended to meet this requirement will be included
in the pooling and servicing agreement, and will be discussed more fully in any
prospectus supplement relating to the offering of any REMIC residual security.
In addition, if a "pass-through entity" includes in income excess
inclusions with respect to a REMIC residual security, and a disqualified
organization is the record holder of an interest in that entity, then a tax will
be imposed on it equal to the product of:
o the amount of excess inclusions on the REMIC residual security
that are allocable to the interest in the pass-through entity
held by the disqualified organization; and
o the highest marginal federal income tax rate imposed on
corporations.
A pass-through entity will not be subject to this tax for any period,
however, if each record holder of an interest in that pass-through entity
furnishes to that pass-through entity the holder's social security number and a
statement under penalties of perjury that the social security number is that of
the record holder, or a statement under penalties of perjury that the record
holder is not a disqualified organization.
For these purposes, a "disqualified organization" means
o the United States, any State or political subdivision thereof,
any foreign government, any international organization, or any
agency or instrumentality of the foregoing, but would not include
instrumentalities described in Section 168(h)(2)(D) of the Code
or the Federal Home Loan Mortgage Corporation;
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o any organization, other than a cooperative described in Section
521 of the Internal Revenue Code, that is exempt from federal
income tax, unless it is subject to the tax imposed by Section
511 of the Internal Revenue Code; or
o any organization described in Section 1381 (a)(2)(C) of the
Internal Revenue Code.
For these purposes, a "pass-through entity" means any regulated
investment company, real estate investment trust, trust, partnership or other
entities described in Section 860E (e)(6) of the Internal Revenue Code. In
addition, a person holding an interest in a pass-through entity as a nominee for
another person will, with respect to that interest, be treated as a pass-through
entity.
Termination
A REMIC will terminate immediately after the distribution date following
receipt by the REMIC of the final payment from of the loans or upon a sale of
the REMIC's assets following the adoption by the REMIC of a plan of complete
liquidation. The last distribution on a REMIC regular security will be treated
as a payment in retirement of a debt instrument. In the case of a REMIC residual
security, if the last distribution on the REMIC residual security is less than
the REMIC residual securityholder's adjusted basis in the security, the REMIC
residual securityholder should be treated as realizing a loss equal to the
amount of the difference. The loss may be subject to the "wash sale" rules of
Section 1091 of the Internal Revenue Code. See " -- Sales of REMIC Securities"
in this prospectus. The character of this loss as ordinary or capital is
uncertain.
The inadvertent termination of a REMIC or FASIT may have other
consequences. See "REMICs and FASITs-- Classification of REMICs and FASITs" in
this prospectus.
Reporting and Other Administrative Matters
Solely for purposes of the administrative provisions of the Internal
Revenue Code, the REMIC will be treated as a partnership and REMIC residual
securityholders will be treated as partners. Unless otherwise stated in the
accompanying prospectus supplement, the master servicer will file REMIC federal
income tax returns on behalf of the related REMIC, will be designated as and
will act as the "tax matters person" with respect to the REMIC in all respects,
and will hold at least a nominal amount of REMIC residual securities.
As the tax matters person, the master servicer will have the authority
to act on behalf of the REMIC and the REMIC residual securityholders in
connection with the administrative and judicial review of items of income,
deduction, gain or loss of the REMIC, as well as the REMIC's classification.
REMIC residual securityholders will be required to report the REMIC items
consistently with their treatment on the related REMIC's tax return and may in
some circumstances be bound by a settlement agreement between the master
servicer, as tax matters person, and the IRS concerning the REMIC item.
Adjustments made to the REMIC tax return may require a REMIC residual
securityholder to make corresponding adjustments on its return, and an audit of
the REMIC's tax return, or the adjustments resulting from an audit, could result
in an audit of a REMIC residual securityholder's return. No REMIC will be
registered as a tax shelter under Section 6111 of the Internal Revenue Code
because it is not anticipated that any REMIC will have a net loss for any of the
first five taxable years of its existence. Any person that holds a REMIC
residual security as a nominee for another person may be required to furnish to
the related REMIC, in a manner to be provided in Treasury regulations, the name
and address of that person and other information.
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Reporting of interest income, including any original issue discount,
with respect to REMIC regular securities is required annually, and may be
required more frequently under Treasury regulations. These information reports
are required to be sent to individual holders of REMIC regular interests and the
IRS; holders of REMIC regular securities that are corporations, trusts,
securities dealers and other non-individuals will be provided interest and
original issue discount income information and the information set forth in the
following paragraph upon request in accordance with the requirements of the
applicable regulations. The information must be provided by the later of 30 days
after the end of the quarter for which the information was requested, or two
weeks after the receipt of the request. The REMIC must also comply with rules
requiring a REMIC regular security issued with original issue discount to
disclose on its face information including the amount of original issue discount
and the issue date, and requiring this information to be reported to the IRS.
Reporting with respect to the REMIC residual securities, including income,
excess inclusions, investment expenses and relevant information regarding
qualification of the REMIC's assets will be made as required under the Treasury
regulations, typically on a quarterly basis.
As applicable, the REMIC regular security information reports will
include a statement of the adjusted issue price of the REMIC regular security at
the beginning of each accrual period. In addition, the reports will include
information required by regulations with respect to computing the accrual of any
market discount. Because exact computation of the accrual of market discount on
a constant yield method requires information relating to the holder's purchase
price that the master servicer will not have, the regulations only require that
information pertaining to the appropriate proportionate method of accruing
market discount be provided. See "Taxation of Owners of REMIC and FASIT Regular
Securities -- Market Discount" in this prospectus.
The responsibility for complying with the foregoing reporting rules will
be borne by the master servicer. Securityholders may request any information
with respect to the returns described in Section 1.6049-7(e)(2) of the Treasury
regulations. Any request should be directed to the master servicer at
Residential Funding Corporation, 8400 Normandale Lake Boulevard, Suite 600,
Minneapolis, Minnesota 55437.
A FASIT is treated as a branch of the holder of the ownership interest
in the FASIT. Thus, all assets, liabilities, and items of income, gain,
deduction, loss, and credit of a FASIT are treated as assets, liabilities, and
such items of the holder of the ownership interest in the FASIT. Because the
holder of the ownership interest in a FASIT includes the FASIT's tax items in
determining its taxable income and credits, the proposed FASIT regulations make
the holder of the ownership interest in the FASIT (rather than the FASIT)
responsible for reporting those items on its federal income tax return.
Backup Withholding With Respect to REMIC and FASIT Securities
Payments of interest and principal, as well as payments of proceeds from
the sale of REMIC or FASIT securities, may be subject to the "backup withholding
tax" under Section 3406 of the Internal Revenue Code at a rate of 31% if
recipients of payments fail to furnish to the payor information, including their
taxpayer identification numbers, or otherwise fail to establish an exemption
from the tax. Any amounts deducted and withheld from a distribution to a
recipient would be allowed as a credit against the recipient's federal income
tax. Furthermore, penalties may be imposed by the IRS on a recipient of payments
that is required to supply information but that does not do so in the proper
manner.
Foreign Investors in REMIC and FASIT Securities
A REMIC or FASIT regular securityholder (other than a holder of a FASIT
high-yield regular security) that is not a "United States person" and is not
subject to federal income tax as a result of any direct or indirect connection
to the United States in addition to its ownership of a regular security
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will not be subject to United States federal income or withholding tax on a
distribution on a regular security, provided that the holder complies to the
extent necessary with identification requirements, including delivery of a
statement, signed by the securityholder under penalties of perjury, certifying
that the securityholder is not a United States person and providing the name and
address of the securityholder. For these purposes, "United States person" means
a citizen or resident of the United States, a corporation, partnership,
including an entity treated as a corporation or partnership for federal income
tax purposes, created or organized in, or under the laws of, the United States
or any state thereof or the District of Columbia except, in the case of a
partnership, to the extent provided in regulations, or an estate whose income is
subject to United States federal income tax regardless of its source, or a trust
if a court within the United States is able to exercise primary supervision over
the administration of the trust and one or more United States persons have the
authority to control all substantial decisions of the trust. To the extent
prescribed in regulations by the Secretary of the Treasury, a trust which was in
existence on August 20, 1996, other than a trust treated as owned by the grantor
under subpart E of part I of subchapter J of chapter 1 of the Internal Revenue
Code, and which was treated as a United States person on August 20, 1996 may
elect to continue to be treated as a United States person notwithstanding the
previous sentence. It is possible that the IRS may assert that the foregoing tax
exemption should not apply with respect to a REMIC regular security held by a
REMIC residual securityholder that owns directly or indirectly a 10% or greater
interest in the REMIC residual securities or a FASIT regular security held by
the owner of a 10% or greater interest in the holder of the FASIT ownership
interest. Further, the Proposed FASIT Regulations treat all interest received by
a foreign holder of a FASIT regular interest as ineligible for the foregoing
exemption from withholding tax if the FASIT receives or accrues interest from a
United States resident in which the foreign holder has a 10% or more ownership
interest or as to which the foreign holder is a controlled foreign corporation
to which the United States resident is related. If the holder does not qualify
for exemption, distributions of interest, including distributions of accrued
original issue discount, to the holder may be subject to a tax rate of 30%,
subject to reduction under any applicable tax treaty.
In addition, the foregoing rules will not apply to exempt a United
States shareholder of a controlled foreign corporation from taxation on the
United States shareholder's allocable portion of the interest income received by
the controlled foreign corporation.
Further, it appears that a regular security would not be included in the
estate of a non-resident alien individual and would not be subject to United
States estate taxes. However, securityholders who are non-resident alien
individuals should consult their tax advisors concerning this question.
Unless otherwise stated in the accompanying prospectus supplement,
transfers of REMIC residual securities to investors that are not United States
persons will be prohibited under the related pooling and servicing agreement.
New Withholding Regulations
The Treasury Department has issued new regulations which make
modifications to the withholding, backup withholding and information reporting
rules described above. The new withholding regulations attempt to unify
certification requirements and modify reliance standards. The new withholding
regulations will generally be effective for payments made after December 31,
2000, subject to transition rules. Prospective investors are urged to consult
their tax advisors regarding the new withholding regulations.
Notes
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
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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).
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).
Taxation of Noteholders
Notes generally will be subject to the same rules of taxation as REMIC
and FASIT regular securities, as described above, except that (i) income
reportable on the notes is not required to be reported under the accrual method
unless the holder otherwise used the accrual method and (ii) the special rule
treating a portion of the gain on sale or exchange of a REMIC regular security
as ordinary income is inapplicable to the notes. See "REMICs and FASITs --
Taxation of Owners of REMIC and FASIT Securities" and "REMICs and FASITs --
Sales of REMIC and FASIT Securities". Except as otherwise stated in the
accompanying prospectus supplement, the notes will not be 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. See REMICs and FASITs -- Taxation
of Owners of REMIC and FASIT Securities -- Original Issue Discount". Also,
interest paid on a note to noteholder that is not a United States person will
normally qualify for the exception from United States withholding tax described
in "REMICs and FASITs -- Foreign Investors in REMIC and FASIT Securities"
except, in addition to the exceptions noted in that section, where the recipient
is a holder, directly or by attribution, of 10% or more of the capital or
profits interest in the issuer.
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 securities offered hereunder. State tax law may differ
substantially from the corresponding federal tax law, and the discussion above
does not purport to describe any aspect of the tax laws of any state or other
jurisdiction. Therefore, prospective investors should consult their tax advisors
with respect to the various tax consequences of investments in the securities
offered hereunder.
ERISA Considerations
Sections 404 and 406 of the Employee Retirement Income Security Act of
1974, as amended, or ERISA, impose fiduciary and prohibited transaction
restrictions on employee pension and welfare benefit plans subject to ERISA and
on various other retirement plans and arrangements, including bank collective
investment funds and insurance company general and separate accounts in which
those employee benefit plans and arrangements are invested. Section 4975 of the
Internal Revenue Code imposes essentially the same prohibited transaction
restrictions on certain tax-favored plans, including tax-qualified retirement
plans described in Section 401(a) of the Internal Revenue Code and individual
retirement accounts described in Section 408 of the Internal Revenue Code.
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Some employee benefit plans, including governmental plans, as defined in
Section 3(32) of ERISA, and, if no election has been made under Section 410(d)
of the 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 securities without regard
to the ERISA considerations described below, subject to the provisions of
applicable federal and state law. Any plan that is qualified and exempt from
taxation under Sections 401(a) and 501(a) of the Internal Revenue Code, however,
is subject to the prohibited transaction rules in Section 503(b) of the Internal
Revenue Code.
Section 404 of ERISA imposes general fiduciary requirements, including
those of investment prudence and diversification and the requirement that a
plan's investment be made in accordance with the documents governing the plan.
In addition, Section 406 of ERISA and Section 4975 of the Internal Revenue Code
prohibit a broad range of transactions involving assets of employee benefit
plans and arrangements and tax-favored plans, which are collectively referred to
in this prospectus as "ERISA plans," and persons, called "parties in interest"
under ERISA or "disqualified persons" under the Internal Revenue Code, which are
collectively referred to in this prospectus as "parties in interest," who have
specified relationships to the ERISA plans, unless a statutory, regulatory 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, regulatory or administrative exemption is available
with respect to any transaction of this sort.
Plan Asset Regulations
An investment of the assets of an ERISA plan in securities may cause the
underlying loans, private securities or any other assets included in a trust or
other entity to be deemed ERISA plan assets of the ERISA plan. The U.S.
Department of Labor, or DOL, has promulgated regulations at 29 C.F.R. ss.
2510.3-101 concerning whether or not an ERISA plan's assets would be deemed to
include an interest in the underlying assets of an entity, including a trust,
for purposes of applying the general fiduciary responsibility provisions of
ERISA and the prohibited transaction provisions of ERISA and the Internal
Revenue Code, when an ERISA plan acquires an "equity interest," such as a
certificate, in that entity. Exceptions contained in the DOL regulations provide
that an ERISA plan's assets will not include an undivided interest in each asset
of an entity in which it makes an equity investment if:
o the entity is an operating company;
o the equity investment made by the ERISA plan is either a
"publicly-offered security" that is "widely held," both as
defined in the DOL regulations, or a security issued by an
investment company registered under the Investment Company Act of
1940, as amended; or
o "benefit plan investors" do not own 25% or more in value of any
class of equity securities issued by the entity. For this
purpose, "benefit plan investors" include ERISA plans, as well as
any "employee benefit plan," as defined in Section 3(3) of ERISA,
which is not subject to Title I of ERISA, such as governmental
plans, as defined in Section 3(32) of ERISA, and church plans, as
defined in Section 3(33) of ERISA, which have not made an
election under Section 410(d) of the Internal Revenue Code,
foreign plans and any entity whose underlying assets include
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."
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Under the DOL regulations, depending on the facts and circumstances,
ERISA plan assets may be deemed to include an interest in the assets of an
entity, such as a trust, rather than merely the ERISA plan's interest in the
instrument evidencing the equity interest, such as a certificate. Therefore,
unless the accompanying prospectus supplement indicates otherwise, ERISA plans
should not acquire or hold certificates, or notes which may be deemed in the
respective prospectus supplement to have "substantial equity features," in
reliance upon the availability of any exception under the DOL regulations stated
in the preceding paragraph. For purposes of this section "ERISA Considerations,"
the terms "ERISA plan assets" and "assets of an ERISA plan" have the meanings
assigned by the DOL regulations to, respectively, "plan assets" and "assets of a
plan," and include an undivided interest in the underlying assets of entities in
which an ERISA plan invests.
Under the DOL regulations, the prohibited transaction provisions of
Section 406 of ERISA and Section 4975 of the Internal Revenue Code may apply to
the assets of a trust and cause the depositor, the master servicer, any
subservicer, the trustee, the obligor under any credit enhancement mechanism or
affiliates of those entities to be considered or become parties in interest with
respect to an investing ERISA plan or an ERISA plan holding an interest in that
entity. If so, the acquisition or holding of securities 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 some statutory,
regulatory or administrative exemption is available. Securities acquired by an
ERISA plan would be assets of that ERISA plan. Under the DOL regulations, a
trust, including the loans, private securities or any other assets held in the
trust, may also be deemed to be assets of each ERISA plan that acquires
securities. Special caution should be exercised before ERISA plan assets are
used to acquire a security in those circumstances, especially if, with respect
to the assets, the depositor, the master servicer, any subservicer, the trustee,
the obligor under any credit enhancement mechanism or an affiliate thereof
either:
o has investment discretion with respect to the investment of ERISA
plan assets; or
o has authority or responsibility to give, or regularly gives,
investment advice with respect to ERISA plan assets for a fee
under an agreement or understanding that this advice will serve
as a primary basis for investment decisions with respect to the
ERISA plan assets.
Any person who has discretionary authority or control with respect to
the management or disposition of ERISA plan assets and any person who provides
investment advice with respect to the ERISA plan assets for a fee is a fiduciary
of the investing ERISA plan. If the loans, the private securities or any other
assets in a trust were to constitute ERISA plan assets, then any party
exercising management or discretionary control with respect to those ERISA plan
assets may be deemed to be an ERISA plan "fiduciary," and thus subject to the
general fiduciary responsibility provisions of ERISA and the prohibited
transaction provisions of ERISA and Section 4975 of the Internal Revenue Code
with respect to any investing ERISA plan. In addition, if the loans, private
securities or any other assets in a trust were to constitute ERISA plan assets,
then the acquisition or holding of securities 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.
Considerations for ERISA Plans Regarding the Purchase of Certificates
Prohibited Transaction Exemptions
The DOL issued an individual exemption, Prohibited Transaction Exemption
94-29 (59 Fed. Reg. 14675, March 29, 1994), as amended by PTE 97-34, 62 Fed.
Reg. 39021 (July 21, 1997), to Residential Funding Corporation and a number of
its affiliates, which exempts from the application of some of the prohibited
transaction provisions of Section 406 of ERISA, and the excise taxes
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imposed on the prohibited transactions under Section 4975(a) and (b) of the
Internal Revenue Code, various transactions, among others, relating to the
servicing and operation of mortgage pools and the purchase, sale and holding of
pass-through certificates issued by that trust as to which:
o the depositor or any of its affiliates is the sponsor, and any
entity which has received from the DOL an individual prohibited
transaction exemption which is similar to the Exemption is the
sole underwriter, manager or co-manager of the underwriting
syndicate or a seller or placement agent; or
o the depositor or an affiliate is the underwriter, provided that
the conditions described in the Exemption are satisfied.
For purposes of this section, the term "underwriter" shall include:
o the depositor and a number of its affiliates;
o any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common
control with the depositor and a number of its affiliates;
o any member of the underwriting syndicate or selling group of
which a person described in the first two clauses above is a
manager or co-manager with respect to a class of certificates; or
o any entity which has received an exemption from the DOL relating
to certificates which is similar to the Exemption.
The Exemption sets forth six general conditions which must be satisfied
for a transaction involving the purchase, sale and holding of certificates to be
eligible for exemptive relief thereunder:
o the acquisition of certificates by an ERISA plan or with ERISA
plan assets must be on terms that are at least as favorable to
the ERISA plan as they would be in an arm's-length transaction
with an unrelated party;
o the Exemption only applies to certificates evidencing rights and
interests that are not subordinated to the rights and interests
evidenced by the other certificates of the same trust;
o the certificates at the time of acquisition by an ERISA plan or
with ERISA plan assets must be rated in one of the three highest
generic rating categories by Standard & Poor's, a division of The
McGraw-Hill Companies, Inc., Moody's Investors Service, Inc.,
Duff & Phelps Credit Rating Co. or Fitch IBCA, Inc., which are
collectively referred to as the "exemption rating agencies";
o the trustee cannot be an affiliate of any other member of the
"restricted group" which consists of the trustee, any
underwriter, the depositor, the master servicer, any subservicer
and any borrower with respect to assets of a trust constituting
more than 5% of the aggregate unamortized principal balance of
the assets in the related trust as of the date of initial
issuance of the certificates;
o the sum of all payments made to and retained by the underwriters
must represent not more than reasonable compensation for
underwriting the certificates, the sum of all payments made to
and retained by the depositor under the assignment of the assets
to the related trust must represent not more than the fair market
value of those
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obligations, and the sum of all payments made to and retained by
the master servicer and any subservicer must represent not more
than reasonable compensation for that person's services under the
related pooling and servicing agreement and reimbursement of that
person's reasonable expenses in connection therewith; and
o the investing ERISA plan or ERISA plan asset investor must be an
accredited investor as defined in Rule 501(a)(1) of Regulation D
of the Commission under the Securities Act.
In addition, except as otherwise specified in the accompanying
prospectus supplement, the exemptive relief afforded by the Exemption may not
apply to any certificates where the related trust contains revolving credit
loans, unsecured loans, certain purchase obligations or a swap.
The Exemption also requires that each trust meet the following
requirements:
o the trust must consist solely of assets of the type that have
been included in other investment pools;
o certificates evidencing interests in those other investment pools
must have been rated in one of the three highest categories of
one of the exemption rating agencies for at least one year prior
to the acquisition of certificates by or on behalf of an ERISA
plan or with ERISA plan assets; and
o certificates in the other investment pools must have been
purchased by investors other than ERISA plans for at least one
year prior to any acquisition of certificates by or on behalf of
an ERISA plan or with ERISA plan assets.
A fiduciary or other investor of ERISA plan assets contemplating
purchasing a certificate must make its own determination that the general
conditions described above will be satisfied with respect to that certificate.
If the general conditions of the Exemption are satisfied, the Exemption
may provide an exemption from the restrictions imposed by Sections 406(a) and
407(a) of ERISA, as well as the excise taxes imposed by Sections 4975(a) and (b)
of the Internal Revenue Code by reason of Sections 4975(c)(1)(A) through (D) of
the Internal Revenue Code, in connection with the direct or indirect sale,
exchange, transfer, holding or the direct or indirect acquisition or disposition
in the secondary market of certificates by an ERISA plan or with ERISA plan
assets. However, no exemption is provided from the restrictions of Sections
406(a)(1)(E) and 406(a)(2) of ERISA for the acquisition or holding of a
certificate by an excluded ERISA plan or with ERISA plan assets of an excluded
ERISA plan by any person who has discretionary authority or renders investment
advice with respect to ERISA plan assets of the excluded ERISA plan. For
purposes of the certificates, an "excluded ERISA plan" is an ERISA plan
sponsored by any member of the restricted group.
If specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (b)(2) of ERISA, as well as the excise taxes imposed by Section
4975(a) and (b) of the Internal Revenue Code by reason of Section 4975(c)(1)(E)
of the Internal Revenue Code, in connection with:
o the direct or indirect sale, exchange or transfer of certificates in
the initial issuance of certificates between the depositor or an
underwriter and an ERISA plan when the person who has discretionary
authority or renders investment advice with respect to the investment
of the relevant ERISA plan assets in the certificates is:
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o a borrower with respect to 5% or less of the fair market
value of the assets of a trust; or
o an affiliate of that borrower;
provided that, with respect to the acquisition of certificates in
connection with the initial issuance of the certificates, a
number of quantitative restrictions described in the Exemption
are met;
o the direct or indirect acquisition or disposition in the secondary
market of certificates by an ERISA plan or with ERISA plan assets; and
o the holding of certificates by an ERISA plan or with ERISA plan
assets.
Additionally, if specific conditions of the Exemption are satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(a), 406(b) and 407(a) of ERISA, as well as the taxes imposed by Sections
4975(a) and (b) of the Internal Revenue Code by reason of Section 4975(c) of the
Internal Revenue Code, for transactions in connection with the servicing,
management and operation of the mortgage pools. Unless otherwise described in
the accompanying prospectus supplement, the depositor expects that the specific
conditions of the Exemption required for this purpose will be satisfied with
respect to the certificates so that the Exemption would provide an exemption
from the restrictions imposed by Sections 406(a) and (b) of ERISA, as well as
the excise taxes imposed by Sections 4975(a) and (b) of the Internal Revenue
Code by reason of Section 4975(c) of the Internal Revenue Code, for transactions
in connection with the servicing, management and operation of the mortgage
pools, provided that the general conditions of the Exemption are satisfied.
The Exemption also may provide an exemption from the restrictions
imposed by Sections 406(a) and 407(a) of ERISA, as well as the taxes imposed by
Section 4975(a) and (b) of the Internal Revenue Code by reason of Sections
4975(c)(1)(A) through (D) of the Internal Revenue Code, if those restrictions
are deemed to otherwise apply merely because a person is deemed to be a party in
interest with respect to an investing ERISA plan, or the investing entity
holding ERISA plan assets, by virtue of providing services to the ERISA plan or
by virtue of having specified relationships to such a person, solely as a result
of the ERISA plan's ownership of certificates.
Before purchasing a certificate, a fiduciary or other investor of ERISA
plan assets should itself confirm that the certificates constitute
"certificates" for purposes of the Exemption and that the specific and general
conditions described in the Exemption and the other requirements described in
the Exemption would be satisfied. In addition to making its own determination as
to the availability of the exemptive relief provided in the Exemption, the
fiduciary or other ERISA plan asset investor should consider its general
fiduciary obligations under ERISA in determining whether to purchase any
certificates with ERISA plan assets.
Any fiduciary or other ERISA plan asset investor that proposes to
purchase certificates on behalf of an ERISA plan or with ERISA plan assets
should consult with its counsel with respect to the potential applicability of
ERISA and the Internal Revenue Code to that investment and the availability of
the Exemption or any other DOL prohibited transaction exemption in connection
therewith. In particular, in connection with a contemplated purchase of
certificates representing a beneficial ownership interest in a pool of
single-family residential first loans, the fiduciary or other ERISA plan asset
investor should consider the availability of the Exemption or of Prohibited
Transaction Class Exemption, or PTCE, 83-1 for various transactions involving
mortgage pool investment trusts. However, PTCE 83-1 does not provide exemptive
relief with respect to certificates evidencing interests in trust funds which
include Cooperative Loans or some types of mortgage certificates. In addition,
the fiduciary or other ERISA plan asset investor should consider the
availability of other class exemptions granted by the DOL, which provide relief
from a number of
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the prohibited transaction provisions of ERISA and the related excise tax
provisions of Section 4975 of the Internal Revenue Code, including Sections I
and III of PTCE 95-60, regarding transactions by insurance company general
accounts. The accompanying prospectus supplement may contain additional
information regarding the application of the Exemption, PTCE 83-1, PTCE 95-60 or
other DOL class exemption with respect to the certificates offered thereby.
There can be no assurance that any of these exemptions will apply with respect
to any particular ERISA plan's or other ERISA plan asset investor's investment
in the certificates or, even if an exemption were deemed to apply, that any
exemption would apply to all prohibited transactions that may occur in
connection with this form of an investment.
Insurance Company General Accounts
In addition to any exemptive relief that may be available under PTCE
95-60 for the purchase and holding of the certificates by an insurance company
general account, Section 401(c) of ERISA provides exemptive relief from the
provisions of Part 4 of Title I of ERISA and Section 4975 of the Internal
Revenue Code, including the prohibited transaction restrictions imposed by ERISA
and the related excise taxes imposed by Section 4975 of the Internal Revenue
Code, for certain transactions involving an insurance company general account.
Pursuant to Section 401(c) of ERISA, the DOL published final regulations on
January 5, 2000. These final regulations, the 401(c) regulations, are generally
applicable on July 5, 2001. The 401(c) regulations 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 or 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:
o except as otherwise provided by the Secretary of Labor in the 401(c)
regulations to prevent avoidance of the regulations; or
o unless an action is brought by the Secretary of Labor for various
breaches of fiduciary duty which would also constitute a violation of
federal or state criminal law.
Any assets of an insurance company general account which support
insurance policies or annuity contracts issued to 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 certificates should consult with their legal counsel with respect to the
applicability of Sections I and III of PTCE 95-60 and Section 401(c) of ERISA,
including the general account's ability to continue to hold the certificates
after July 5, 2001.
Representation from Investing ERISA Plans
It is not clear whether certificates backed by revolving credit loans
with respect to which a number of Trust Balances of revolving credit loans are
included in the related trust would constitute "certificates" for purposes of
the Exemption. In promulgating the Exemption, the DOL did not have under
consideration interests in mortgage pools of the exact nature described in this
paragraph and accordingly, unless otherwise provided in the accompanying
prospectus supplement, certificates representing interests as described in this
paragraph should not be purchased by or on behalf of an ERISA plan or with ERISA
plan assets based solely upon the Exemption. In addition, the exemptive relief
afforded by the Exemption will not apply to the purchase, sale or holding of any
class of
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subordinate certificates, and may not apply to any certificates where the
related trust contains a funding account during the period in which additional
loans are permitted to be transferred to the trust unless the funding account
meets the requirements stated in the Exemption.
To the extent certificates are backed by revolving credit loans or are
subordinate certificates or the related trust contains a funding account that
does not meet the requirements of the Exemption, except as otherwise specified
in the respective prospectus supplement, transfers of the certificates to an
ERISA plan, to a trustee or other person acting on behalf of any ERISA plan, or
to any other person using the ERISA plan assets to effect the acquisition will
not be registered by the trustee unless the transferee provides the depositor,
the trustee and the master servicer with an opinion of counsel satisfactory to
the depositor, the trustee and the master servicer, which opinion will not be at
the expense of the depositor, the trustee or the master servicer, that the
purchase of the certificates by or on behalf of the ERISA plan:
o is permissible under applicable law;
o will not constitute or result in any non-exempt prohibited transaction
under ERISA or Section 4975 of the Internal Revenue Code; and
o will not subject the depositor, the trustee or the master servicer to
any obligation in addition to those undertaken in the pooling and
servicing agreement.
In lieu of an opinion of counsel, the transferee may provide a
certification of facts substantially to the effect that the purchase of
subordinate certificates by or on behalf of the ERISA plan:
o is permissible under applicable law;
o will not constitute or result in a non-exempt prohibited transaction
under ERISA or Section 4975 of the Internal Revenue Code;
o will not subject the depositor, the trustee or the master servicer to
any obligation in addition to those undertaken in the pooling and
servicing agreement; and
o the following conditions are met:
o the source of funds used to purchase that certificates is an
"insurance company general account," as that term is defined in PTCE
95-60; and
o the conditions described in Section I and Section III of PTCE 95-60
have been satisfied as of the date of the acquisition of the
certificates.
Considerations for ERISA Plans Regarding the Purchase of Notes
Prohibited Transaction Exemptions
An ERISA plan fiduciary or other ERISA plan assets investor considering
an investment in notes 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 PTCE 95-60; 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
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manager." The respective prospectus supplement may contain additional
information regarding the application of PTCE 95-60 or other DOL exemptions for
the notes offered by this prospectus.
Insurance Company General Accounts
In addition to any exemptive relief that may be available under PTCE
95-60 for the purchase and holding of the notes by an insurance company general
account, Section 401(c) of ERISA provides exemptive relief from the provisions
of Part 4 of Title I of ERISA and Section 4975 of the Internal Revenue Code,
including the prohibited transaction restrictions imposed by ERISA and the
related excise taxes imposed by Section 4975 of the Internal Revenue Code, for
certain transactions involving an insurance company general account. Pursuant to
Section 401(c) of ERISA, the DOL published final regulations on January 5, 2000.
These final regulations, the 401(c) regulations, are generally applicable on
July 5, 2001. The 401(c) regulations 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 or Section 4975 of the
Internal Revenue Code on the basis of a claim that the assets of an insurance
company general account constitute plan assets:
o except as otherwise provided by the Secretary of Labor in the 401(c)
regulations to prevent avoidance of the regulations; or
o unless an action is brought by the Secretary of Labor for various
breaches of fiduciary duty which would also constitute a violation of
federal or state criminal law.
Any assets of an insurance company general account which support
insurance policies or annuity contracts issued to a plan after December 31, 1998
or issued to 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 with respect to the applicability of PTCE 95-60
and Section 401(c) of ERISA, including the general account's ability to continue
to hold the notes after July 5, 2001.
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, will not constitute or give rise to a
prohibited transaction, and will not subject the depositor, the indenture
trustee or the master servicer to any obligation in addition to those undertaken
in the trust agreement. In lieu of the opinion of counsel, the transferee may
provide a certification of facts substantially to the effect that (x) the
purchase of notes by or on behalf of the ERISA plan or any other benefit plan
investor 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:
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o the transferee is an insurance company;
o the source of funds used to purchase the notes is an "insurance
company general account," as the term is defined in PTCE 95-60; and
o the conditions described in Section I of PTCE 95-60 have been
satisfied as of the date of the acquisition of the notes.
Tax Exempt Investors
An ERISA plan that is a Tax-Exempt Investor nonetheless will be subject
to federal income taxation to the extent that its income is "unrelated business
taxable income," or UBTI, within the meaning of Section 512 of the Internal
Revenue Code. All "excess inclusions" of a REMIC allocated to a REMIC residual
certificate held by a Tax-Exempt Investor will be considered UBTI and thus will
be subject to federal income tax. See "Material Federal Income Tax Consequences
- -- REMICs and FASITs -- Taxation of Owners of REMIC Residual Securities-- Excess
Inclusions" in this prospectus. In addition, income as to certificates and other
equity interests of a trust that has issued notes would be "debt-financed
income" and therefore would be UBTI.
Consultation with Counsel
There can be no assurance that the Exemption will apply with respect to
any particular ERISA plan that acquires certificates, even if all the conditions
specified in the Exemption were satisfied, or that any other DOL exemption will
apply with respect to any particular ERISA plan that acquires securities, even
if all the conditions specified in a DOL exemption were satisfied. Prospective
ERISA plan investors should consult with their legal counsel concerning the
impact of ERISA and the Internal Revenue Code and the potential consequences to
their specific circumstances prior to making an investment in the securities.
Before purchasing a certificate, a fiduciary of an ERISA plan should
itself confirm that all the specific and general conditions described in the
Exemption or in one of the DOL exemptions would be satisfied, and, in the case
of a certificate purchased under the Exemption, that the certificate constitutes
a "certificate" for purposes of the Exemption. 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 or in any other DOL exemption,
the ERISA plan fiduciary should consider its general fiduciary obligations under
ERISA in determining whether to purchase a security on behalf of an ERISA plan.
Legal Investment Matters
Each class of securities offered by this prospectus and by the
accompanying prospectus supplements 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 securities
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 securities constitute legal investments for them.
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All depository institutions considering an investment in the securities
should review the Federal Financial Institutions Examination Council's
Supervisory Policy Statement on the Selection of Securities Dealers and
Unsuitable Investment Practices, to the extent adopted by their respective
regulators, setting forth, in relevant part, a number of investment practices
deemed to be unsuitable for an institution's investment portfolio, as well as
guidelines for investing in various types of mortgage related securities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements 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 securities or to purchase any class of securities
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 securities for legal investment or other purposes, or as to the ability
of particular investors to purchase any class of securities under applicable
legal investment restrictions. These uncertainties may adversely affect the
liquidity of any class of securities. 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
securities 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
securities 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 securities 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 securities 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 loans purchased by the depositor, prevailing note rates, availability
of funds and general market conditions.
Methods of Distribution
The securities 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 securities 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 securities may be made through a combination of two or more of the
following methods:
o by negotiated firm commitment or best efforts underwriting and public
re-offering by underwriters;
o by placements by the depositor with institutional investors through
dealers; and
o by direct placements by the depositor with institutional investors.
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In addition, if specified in the accompanying prospectus supplement, a
series of securities 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 securities.
If underwriters are used in a sale of any securities, other than in
connection with an underwriting on a best efforts basis, the securities 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 securities 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 securities, underwriters may receive
compensation from the depositor or from purchasers of the securities in the form
of discounts, concessions or commissions. Underwriters and dealers participating
in the distribution of the securities may be deemed to be underwriters in
connection with the securities, and any discounts or commissions received by
them from the depositor and any profit on the resale of securities by them may
be deemed to be underwriting discounts and commissions under the Securities Act.
It is anticipated that the underwriting agreement pertaining to the sale
of any series of securities will provide that the obligations of the
underwriters will be subject to conditions precedent, that the underwriters will
be obligated to purchase all of the securities if any are purchased, other than
in connection with an underwriting on a best efforts basis, and that, in limited
circumstances, the depositor will indemnify the several underwriters and the
underwriters will indemnify the depositor against a number of civil liabilities,
including liabilities under the Securities Act, or will contribute to payments
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 securities
of that series.
The depositor anticipates that the securities offered hereby will be
sold primarily to institutional investors or sophisticated non-institutional
investors. Purchasers of securities, 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 securities. Holders of securities should consult with their legal advisors in
this regard prior to any reoffer or sale.
Legal Matters
Specific legal matters, including a number of federal income tax
matters, will be passed upon for the depositor by Thacher Proffitt & Wood, New
York, New York, by Orrick, Herrington & Sutcliffe LLP, New York, New York or by
Stroock & Stroock & Lavan, as specified in the prospectus supplement.
Financial Information
The depositor has determined that its financial statements are not
material to the offering made by this prospectus. The securities do not
represent an interest in or an obligation of the depositor. The depositor's only
obligations as to a series of securities will be to repurchase trust
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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 its exhibits, and reports and other information filed by the
depositor under the Exchange Act can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at some of its Regional Offices located as follows:
Chicago Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511; and Northeast Regional Office, 7 World Trade
Center, Suite 1300, New York, New York 10048 and electronically through the
Securities and Exchange Commission's Electronic Data Gathering, Analysis and
Retrieval System at the Commission's Web Site (http://www.sec.gov).
Copies of Ginnie Mae's information statement and annual report can be
obtained by writing or calling the United States Department of Housing and Urban
Development, 451-7th Street S.W., Room 6210, Washington, D.C. 20410-9000
(202-708-3649). Copies of Freddie Mac's most recent offering circular for
Freddie Mac Certificates, Freddie Mac's information statement and most recent
supplement to that information statement and any quarterly report made available
by Freddie Mac can be obtained by writing or calling the Investor Relations
Department of Freddie Mac at Post Office Box 4112, Reston, Virginia 22090
(outside the Washington, D.C. metropolitan area, telephone 800-424-5401, ext.
8160; within the Washington, D.C. metropolitan area, telephone 703-759-8160).
Copies of Fannie Mae's most recent prospectus for Fannie Mae Certificates and
Fannie Mae's annual report and quarterly financial statements, as well as other
financial information, are available from the Director of Investor Relations of
Fannie Mae, 3900 Wisconsin Avenue, N.W., Washington, D.C. 20016 (202-537-7115).
The depositor does not, and will not, participate in the preparation of Ginnie
Mae's information statements or annual reports, Freddie Mac's offering
circulars, information statements or any supplements thereto or any of its
quarterly reports or Fannie Mae's prospectuses or any of its reports, financial
statements or other information and, accordingly, makes no representations as to
the accuracy or completeness of the information set forth in those documents.
Reports to Securityholders
Monthly reports which contain information concerning the trust for a
series of securities will be sent by or on behalf of the master servicer or the
trustee to each holder of record of the securities of the related series. See
"Description of the Securities--Reports to Securityholders" in this prospectus.
Reports forwarded to holders will contain financial information that has not
been examined or reported upon by an independent certified public accountant.
The depositor will file with the Commission the periodic reports relating to the
trust for a series of securities 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 securities.
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 securities will
automatically update and supersede this information.
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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 series
of securities, upon written or oral request of that person, a copy of any or all
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 securities,
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 private 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.
Administrator--In addition to or in lieu of the master servicer for a
series of securities, 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 closed-end loan and any distribution date, an amount
equal to the scheduled payment of interest and, if specified in the accompanying
prospectus supplement, principal, other than any Balloon Amount in the case of a
Balloon Loan, which was delinquent as of the close of business on the business
day preceding the related determination date.
Agency Security--Any security issued by Freddie Mac, Fannie Mae or
Ginnie Mae. Such Agency Securities may represent whole or partial interests in
pools of (1) loans or (2) Agency Securities. Unless otherwise set forth in the
accompanying prospectus supplement, all Ginnie Mae securities will be backed by
the full faith and credit of the United States. None of the Freddie Mac
securities or Fannie Mae securities will be backed, directly or indirectly, by
the full faith and credit of the United States. Agency Securities may be backed
by fixed or adjustable rate mortgage loans or other types of loans specified in
the accompanying prospectus supplement.
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, 7 or 15 years in most cases as described in the accompanying
prospectus supplement, with level monthly payments of principal and interest
based on a 30 year amortization schedule. The amount of the monthly payment will
remain constant until the maturity date, when the Balloon Amount will be due and
payable.
Bankruptcy Amount--The amount of Bankruptcy Losses that may be borne
solely by the credit enhancement 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 loan or
an extension of its maturity.
Call Class--A class of securities under which the holder will have the
right, at its sole discretion, to terminate the related trust, resulting in
early retirement of the securities of the series.
Call Price--In the case of a call with respect to a Call Class, a price
equal to 100% of the principal balance of the related securities as of the day
of that purchase plus accrued interest at the applicable pass-through rate.
Call Security--Any security evidencing an interest in a Call Class.
Cooperative--As to a Cooperative Loan, the corporation that owns the
related apartment building.
Cooperative Loans--Cooperative apartment loans evidenced by Cooperative
Securities secured by security interests in shares issued by Cooperatives and in
the related proprietary leases
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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.
Debt Service Reduction--Modifications of the terms of a loan resulting
from a bankruptcy proceeding, including a reduction in the amount of the monthly
payment on the related loan, but not any permanent forgiveness of principal.
Together with Deficient Valuations, Debt Service Reductions are referred to in
this prospectus as Bankruptcy Losses.
Defaulted Mortgage Losses--A Realized Loss attributable to the
borrower's failure to make any payment of principal or interest as required
under the mortgage note, but not including Special Hazard Losses, Extraordinary
Losses or other losses resulting from damage to a mortgaged property, Bankruptcy
Losses or Fraud Losses.
Deficient Valuation--In connection with the personal bankruptcy of a
borrower, the difference between the then outstanding principal balance of the
first and junior loans secured by the mortgaged property and a lower value as
established by the bankruptcy court.
Designated Seller Transaction--A transaction in which the loans are
provided directly to the depositor by an unaffiliated seller described in the
accompanying 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.
Distribution Amount--As to a class of securities for any distribution
date, the portion, if any, of the amount to be distributed to that class for
that distribution date of principal, plus, if the class is entitled to payments
of interest on that distribution date, interest accrued during the related
interest accrual period at the applicable security rate on the principal balance
or notional amount of that class specified in the applicable prospectus
supplement, less certain interest shortfalls if specified in the accompanying
prospectus supplement, which will include:
o any deferred interest added to the principal balance of the loans
and/or the outstanding balance of one or more classes of securities on
the related due date;
o any other interest shortfalls, including, without limitation,
shortfalls resulting from application of the Relief Act or similar
legislation or regulations as in effect from time to time, allocable
to securityholders which are not covered by advances or the applicable
credit enhancement; and
o prepayment interest shortfalls in collections of interest on
closed-end loans resulting from Principal Prepayments made by the
borrower during the month preceding the month in which the
distribution date occurs and are not covered by Advances, in each
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case in an amount that is allocated to that class on the basis
set forth in the prospectus supplement.
Draw--Money drawn by the borrower in most cases with either checks or
credit cards, subject to applicable law, on a revolving credit loan under the
related credit line agreement at any time during the Draw Period.
Draw Period--The period specified in the related credit line agreement
when a borrower on a revolving credit loan may make a Draw.
Eligible Account--An account acceptable to the applicable rating agency.
Endorsable Puerto Rico Mortgage--As to any Puerto Rico loan, a mortgage
to secure an instrument transferable by endorsement.
Environmental Lien--A lien imposed by federal or state statute, for any
cleanup costs incurred by a state on the property that is the subject of the
cleanup costs.
Excess Spread--A portion of interest due on the loans or securities
transferred as part of the assets of the related trust.
Excluded Balance--That portion of the principal balance of any revolving
credit loan not included in the Trust Balance at any time, which may include
balances attributable to Draws after the cut-off date and may include a portion
of the principal balance outstanding as of the cut-off date.
Excluded Spread--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 credit enhancement 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.
Gross Margin--For a revolving credit loan, a fixed or variable
percentage described in the related mortgage note, which when added to the
related index, provides the loan rate for the revolving credit loan.
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.
Issue Premium--As to a class of REMIC regular securities, the issue
price in excess of the stated redemption price of that class.
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Liquidated Loan--A defaulted loan or contract 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 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.
Nonrecoverable Advance--Any Advance previously made which the master
servicer has determined to not be ultimately recoverable from Liquidation
Proceeds, Insurance Proceeds or otherwise.
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 related trustee for the benefit of the holders of
each series of securities, for the disbursement of payments on the loans
evidenced by each series of securities.
Permitted Investments--United States government securities and other
investments that at the time of acquisition are rated in one of the categories
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 Contract--A manufactured housing contract or home improvement
contract where title to the related mortgaged property has been obtained by the
trustee or its nominee on behalf of securityholders of the related series.
REO Loan--A loan where title to the related mortgaged property has been
obtained by the trustee or its nominee on behalf of securityholders of the
related series.
Servicing Advances--Amounts advanced on any loan to cover taxes,
insurance premiums or similar expenses, any amounts advanced on any loan to
acquire, preserve, restore or protect the related mortgaged property, or any
amount advanced in respect of a senior lien on the related mortgaged property.
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Special Hazard Amount--The amount of Special Hazard Losses that may be
allocated to the credit enhancement of the related series.
Special Hazard Losses--A Realized Loss incurred, to the extent that the
loss was attributable to:
o direct physical damage to a mortgaged property other than any
loss of a type covered by a hazard insurance policy or a flood
insurance policy, if applicable; and
o any shortfall in insurance proceeds for partial damage due to the
application of the co-insurance clauses contained in hazard
insurance policies.
The amount of the Special Hazard Loss is limited to he lesser of the cost of
repair or replacement of the mortgaged property; any loss above that amount
would be a Defaulted Mortgage Loss or other applicable type of loss. Special
Hazard Losses does not include losses occasioned by war, civil insurrection,
some governmental actions, errors in design, faulty workmanship or materials
except under some circumstances, nuclear reaction, chemical contamination or
waste by the borrower.
Special Servicer--A special servicer named pursuant to the servicing
agreement for a series of securities, 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
securities on or before that date.
Subordinate Amount--A specified portion of subordinated distributions
with respect to the loans, allocated to the holders of the subordinate
securities as set forth in the accompanying prospectus supplement.
Subservicing Account--An account established and maintained by a
subservicer which meets the requirements described in the Guide and is otherwise
acceptable to the master servicer.
Tax-Exempt Investor--Tax-qualified retirement plans described in Section
401(a) of the Internal Revenue Code and on individual retirement accounts
described in Section 408 of the Internal Revenue Code.
Tax-Favored Plans--An ERISA plan that is exempt from federal income
taxation under Section 501 of the Internal Revenue Code.
Trust Balance--As described in the accompanying prospectus supplement, a
specified portion of the total principal balance of each revolving credit loan
outstanding at any time, which will consist of the principal balance thereof as
of the cut-off date minus the portion of all payments and losses thereafter that
are allocated to the Trust Balance and minus the portion of the principal
balance that has been transferred to another trust fund prior to the cut-off
date, and will not include any portion of the principal balance attributable to
Draws made after the cut-off date.
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The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS SUPPLEMENT DATED MAY 10, 2000
Prospectus supplement dated ____________, ____ (to prospectus dated
____________, ____)
$ _________________
Residential Funding Mortgage Securities II, Inc.
Depositor
Home Loan Trust ________
Issuer
Residential Funding Corporation
Master Servicer
Home Loan-Backed Notes, Series ______
Offered Notes The trust will issue notes backed by a pool of
closed-end, primarily second lien fixed rate home loans
Credit Enhancement Credit enhancement for the notes consists of:
o excess interest and overcollateralization; and
o a guaranty insurance policy issued by ______________.
[Insurer's logo]
You should consider carefully the risk factors beginning on page S-_ in this
prospectus supplement.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the offered notes or determined that
this prospectus supplement or the prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
The Attorney General of the State of New York has not passed on or endorsed the
merits of this offering. Any representation to the contrary is unlawful.
_________ will offer the notes to the public, at varying prices to be determined
at the time of sale. The proceeds to the depositor from the sale of the notes
will be approximately _____% of the principal balance of the notes plus accrued
interest, before deducting expenses.
[Name of Underwriter]
Underwriter
S-1
<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>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
SUMMARY .........................................................................................S-3
RISK FACTORS.....................................................................................S-8
INTRODUCTION.....................................................................................S-13
DESCRIPTION OF THE HOME
LOAN POOL................................................................................S-13
General .................................................................................S-13
Payments on the Simple Interest
Home Loans........................................................................S-14
Home Loan Pool Characteristic............................................................S-15
Credit Scores............................................................................S-26
Underwriting Standards...................................................................S-27
The Initial Subservicers.................................................................S-28
Residential Funding Corporation..........................................................S-29
Additional Information ..................................................................S-30
THE ISSUER.......................................................................................S-30
THE OWNER TRUSTEE ...............................................................................S-31
THE INDENTURE TRUSTEE............................................................................S-31
THE CREDIT ENHANCER..............................................................................S-31
DESCRIPTION OF THE
SECURITIES...............................................................................S-34
General..................................................................................S-34
Book-Entry Notes.........................................................................S-34
Payments.................................................................................S-37
Glossary of Terms........................................................................S-38
Interest Payments on the Notes...........................................................S-41
Principal Payments on the Notes..........................................................S-41
Allocation of Payments on
the Home Loans ...................................................................S-43
The Paying Agent ........................................................................S-43
Maturity and Optional Redemption.........................................................S-43
DESCRIPTION OF THE POLICY .......................................................................S-44
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS .....................................................S-45
DESCRIPTION OF THE HOME LOAN PURCHASE AGREEMENT .................................................S-52
DESCRIPTION OF THE SERVICING AGREEMENT...........................................................S-54
DESCRIPTION OF THE TRUST AGREEMENT AND INDENTURE.................................................S-57
MATERIAL FEDERAL INCOME TAX CONSEQUENCES ........................................................S-62
ERISA CONSIDERATIONS ............................................................................S-63
LEGAL INVESTMENT ................................................................................S-63
METHOD OF DISTRIBUTION ..........................................................................S-64
EXPERTS .........................................................................................S-65
LEGAL MATTERS....................................................................................S-65
RATINGS .........................................................................................S-65
ANNEX I ..........................................................................................I-1
</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 prospectus.
Issuer or Trust Home Loan Trust ________.
Title of the
offered securities..............Home Loan-Backed Notes, Series ________.
Initial principal balance...........$__________.
Note interest rate..................____% per annum.
Ratings.............................When issued, the notes will be rated "____"
by ____________ and "____" by ______________.
Depositor ..........................Residential Funding Mortgage Securities II,
Inc., an affiliate of Residential Funding Corporation.
Master servicer ....................Residential Funding Corporation.
Owner trustee.......................______________.
Indenture trustee ..................______________.
Credit enhancer ....................______________.
Home loan pool ....................._____ fixed rate home loans with
an aggregate principal balance of
approximately ______________ as of the close
of business on the day prior to the cut-off
date, secured primarily by second liens on
one- to four-family residential properties.
Cut-off date .......................______________.
Closing date .......................On or about ______________.
Payment dates ......................Beginning in ______________ on the ___
of each month or, if the ___ is not a
business day, on the next business day.
Scheduled final payment date .....______________. The
actual final payment date could be
substantially earlier.
Form of notes ......................Book-entry.
See "Description of the Notes--Book-Entry
Registration" in this prospectus supplement.
S-3
<PAGE>
Minimum denominations $______________.
Legal investment ...................The notes will not be "mortgage
related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of
1984. See "Legal Investment" in this
prospectus supplement and the prospectus.
S-4
<PAGE>
The Trust
The depositor will establish Home Loan Trust _____, a Delaware business trust to
issue the Home Loan Backed Notes, Series _____. The trust will be established
under a trust agreement. The trust will issue the notes under an indenture. The
assets of the trust will consist of the home loans and related assets.
The Home Loan Pool
______% of the home loans are secured by second mortgages or deeds of trust and
the remainder are secured by first mortgages or deeds of trust. In addition, the
home loans have the following characteristics as of the cut-off date:
Minimum principal
balance $_____
Maximum principal
balance $_____
Average principal balance _____
Range of loan rates _____% to _____%
Weighted Average loan
rate _____%
Range of original terms to _____ to _____
maturity months
Weighted average original
term to maturity _____ months
Range of remaining terms _____ to _____
to maturity months
Weighted average
remaining term to
maturity _____ months
Range of combined loan-
to-value ratios _____% to _____%
Weighted average _____%
combined loan-to-value
ratios
See "Description of the Home Loan Pool"
in this prospectus supplement.
The Certificates
The trust will also issue Home Loan-Backed Certificates, Series _____, which are
not offered by this prospectus supplement.
Payments on the Notes
Amount available for monthly distribution. On each monthly payment date, the
trustee will make distributions to investors. The amounts available for
distribution include:
-collections of monthly payments on the home loans, including prepayments and
other unscheduled collections minus ofees and expenses of the subservicers and
the master servicer.
See "Description of the Servicing Agreement--P&I Collections" in this prospectus
supplement.
Payments. Payments to noteholders will be made from principal and interest
collections as follows:
- -Distribution of interest to the notes
- -Distribution of principal to the notes
- -Distribution of principal to the notes to cover some losses
- -Payment to the credit enhancer its premium for the policy
- -Reimbursement to the credit enhancer for some prior draws made on the policy
- -Distribution of additional principal to the notes if the level of
overcollateralization falls below what is required
- -Payment to the credit enhancer for any other amounts owed
- -Distribution of any remaining funds to the certificates
Principal payments on the notes will be as described under "Description of the
Securities--Principal Payments on the Notes" in this prospectus supplement.
In addition, payments on the notes will be made on each payment date from draws
on the guaranty insurance policy, if necessary. Draws will cover shortfalls in
amounts
S-5
<PAGE>
available to pay interest on the notes at the note rate plus any unpaid losses
allocated to the notes.
Credit Enhancement
The credit enhancement for the benefit of the notes consists of:
Excess Interest. Because more interest is paid by the mortgagors than is
necessary to pay the interest on the notes each month, there will be excess
interest. Some of this excess interest may be used to protect the notes against
some losses, by making an additional payment of principal up to the amount of
the losses.
Overcollateralization. Although the aggregate principal balance of the home
loans is $__________, the trust is issuing only $__________ aggregate principal
amount of notes. The excess amount of the balance of the home loans represents
overcollateralization, which may absorb some losses on the home loans, if not
covered by excess interest. If the level of overcollateralization falls below
what is required, the excess interest described above will also be paid to the
notes as principal. This will reduce the principal balance of the notes faster
than the principal balance of the home loans so that the required level of
overcollateralization is reached.
Policy. On the closing date, the credit enhancer will issue the guaranty
insurance policy in favor of the indenture trustee. The policy will
unconditionally and irrevocably guarantee interest on the notes at the note rate
and will cover any losses allocated to the notes if not covered by excess
interest or overcollateralizations.
Optional Termination
On any payment date on which the principal balance of the home loans is less
than __% of the principal balance as of the cut-off date, the master servicer
will have the option to purchase the remaining home loans.
Under an optional purchase, the outstanding principal balance of the notes will
be paid in full with accrued interest.
Ratings
When issued, the notes will receive the ratings listed on page S-__ of this
prospectus supplement. A security rating is not a recommendation to buy, sell or
hold a security and may be changed or withdrawn at any time by the assigning
rating agency. The ratings also do not address the rate of principal prepayments
on the home loans. The rate of prepayments, if different than originally
anticipated, could adversely affect the yield realized by holders of the notes.
Legal Investment
The notes will not be "mortgage related securities" for purposes of the 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
S-6
<PAGE>
For federal income tax purposes, the notes will be treated as debt. The trust
itself will not be subject to tax.
See "Material Federal Income Tax Consequences" in this prospectus supplement and
in the accompanying prospectus.
S-7
<PAGE>
RISK FACTORS
The notes are not suitable investments for all investors. In particular,
you should not purchase the notes unless you understand the prepayment, credit,
liquidity and market risks associated with the notes.
The notes are complex securities. You should possess, either alone or
together with an investment advisor, the expertise necessary to evaluate the
information contained in this prospectus supplement and the accompanying
prospectus in the context of your financial situation and tolerance for risk.
You should carefully consider, among other things, the following factors
in connection with the purchase of the notes:
Risks Associated with the Home Loans
The return on your notes may be reduced by losses on the home loans, which are
more likely because they are junior liens.
______% of the home loans included in the home loan pool are secured by
second mortgages or deeds of trust. Proceeds from liquidation of the
property will be available to satisfy the home loans only if the claims of
any senior mortgages have been satisfied in full. When it is uneconomical
to foreclose on the mortgaged property or engage in other loss mitigation
procedures, the master servicer may write off the entire outstanding
balance of the home loan as a bad debt. The foregoing risks are
particularly applicable to home loans secured by second liens that have
high combined loan-to-value ratios or low junior ratios because it is
comparatively more likely that the master servicer would determine
foreclosure to be uneconomical. As of the cut-off date, the weighted
average combined loan-to-value ratio of the home loans is ______%, and
approximately ______% of the home loans will have combined loan-to-value
ratios in excess of ______%.
Delays in payment on your notes may result because the master servicer is not
required to advance delinquent monthly payments on the home loans.
The Master Servicer is not obligated to advance scheduled monthly
payments of principal and interest on home loans that are delinquent
or in default. The rate of delinquency and default of second mortgage
loans may be greater than that of mortgage loans secured by first liens
on comparable properties.
S-8
<PAGE>
The return on your notes may be redued in an economic downturn.
Mortgage loans similar to those included in the home loan pool have been
originated for a limited period of time. During this time, economic
conditions nationally and in most regions of the country have been
generally favorable. However, a deterioration in 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.
Origination disclosure practices for the home loans could create liabilities
that may affect your notes.
______% of the home loans included in the home loan pool are
subject to special rules, disclosure requirements and other regulatory
provisions because they are high cost loans:
Purchasers or assignees of these home loans, including the trust, could be
exposed to all claims and defenses that the mortgagors could assert against
the originators of the home loans. Remedies available to a mortgagor
include monetary penalties, as well as rescission rights if the appropriate
disclosures were not given as required. See "Certain Legal Aspects of the
Trust Assets and Related Matters" in the prospectus.
The underwriting standards for the home loans are more sensitive to risks
relating to borrower credit- worthiness and less sensitive to risks relating to
collateral value compared to first lien loans.
The underwriting standards under which the home loans were underwritten are
analogous to credit lending, rather than mortgage lending, since
underwriting decisions were based primarily on the borrower's credit
history and capacity to repay rather than on the value of the collateral
upon foreclosure. The underwriting standards allow loans to be approved
with combined loan-to-value ratios of up to 125%. See "Description of the
Home Loan Pool--Underwriting Standards" in this prospectus supplement.
Because of the relatively high combined loan-to-value ratios of the home
loans and the fact that the home loans are secured by junior liens, losses
on the home loans will likely be higher than on first lien mortgage loans.
The return on your notes may be particularly sensitive to changes in real estate
markets in specific regions.
The concentration of the related mortgaged properties in one or more
geographic regions may increase the risk of loss to the notes.
Approximately ____% of the cut-off date principal balance of the home loans
are located in California. If the regional economy or housing market
weakens in California, or in any other region having a significant
concentration of the properties underlying the 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.
S-9
<PAGE>
Debt incurred by the borrowers in addition to the home loans could increase your
risk.
With respect to home loans which were used for debt consolidation, there
can be no assurance that the borrower will not incur further debt in
addition to the home loan. This additional debt could impair the ability of
borrowers to service their debts, which in turn could result in higher
rates of delinquency and loss on the home loans.
Servicing Practices
Loss mitigation practices or the release of a lien may increase your risk.
The master servicer may use a wide variety of practices to limit losses on
defaulted home loans, including writing off part of the debt, reducing
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, together with the guaranty insurance policy, are the
sole source of payments on your notes.
Credit enhancement includes excess interest, overcollateralization and
the guaranty insurance policy. None of the depositor, the master
servicer or any of their affiliates will have any obligation to replace or
supplement the credit enhancement, or to take any other action to
maintain any rating of the notes. If any losses are incurred on the home
loans that are not covered by the credit enhancement, the holders of
the notes will bear the risk of these losses.
Liquidity Risks
You may have to hold your notes to maturity if their marketability is limited.
A secondary market for your notes may not develop. Even if a secondary
market does develop, it may not continue, or it may be illiquid.
Illiquidity means you may not be able to find a buyer to buy your
securities readily or at prices that will enable you to realize a desired
yield. Illiquidity can have an adverse effect on the market value of the
notes.
Special Yield and Prepayment Considerations
S-10
<PAGE>
The yield to maturity on your notes will vary depending on the rate of
prepayments.
The yield to maturity of the notes will depend on a variety of factors,
including:
o the rate and timing of principal payments on the home loans,
including prepayments, defaults and liquidations, and repurchases
due to breaches of representations or warranties;
o the note rate; and
o the purchase price.
The rate of prepayments is one of the most important
and least predictable of these factors.
In general, if you purchase a note at a price higher
than its outstanding principal balance and principal
payments occur faster than you assumed at the time of
purchase, your yield will be lower than anticipated.
Conversely, if you purchase a note at a price lower
than its outstanding principal balance and principal
payments occur more slowly than you assumed at the time
of purchase, your yield will be lower than anticipated.
The rate of prepayments on the home loans will vary depending on future market
conditions, and other factors.
Since mortgagors can generally prepay their home loans at any time, the
rate and timing of principal payments on the notes are highly uncertain.
Generally, when market interest rates increase, mortgagors are less likely
to prepay their home loans. This could result in a slower return of
principal to 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.
______% of the home loans provide for payment of a prepayment charge.
Prepayment charges may reduce the rate of prepayment on the home loans
until the end of the related prepayment period. See "Description of the
Home Loan Pool--Home Loan Pool Characteristics" in this prospectus
supplement and "Maturity and Prepayment Considerations" in the prospectus.
S-11
<PAGE>
INTRODUCTION
The trust will be formed under a trust agreement, as amended by the
amended and restated trust agreement, to be dated as of the closing date,
between the depositor and the owner trustee. The issuer will issue $___________
aggregate principal amount of Home Loan-Backed Notes, Series _________. These
notes will be issued under an indenture, to be dated as of the closing date
between the issuer and the indenture trustee. Under the trust agreement, the
issuer will issue ____ class[es] of Home Loan-Backed Certificates,
_____________. The notes and the certificates are collectively referred to in
this prospectus supplement as the securities. Only the notes are offered by this
prospectus supplement. On the closing date, the depositor will transfer to the
issuer a pool of home loans secured by one- to four-family residential
properties.
You can find a listing of definitions for capitalized terms used both in
the prospectus and this prospectus supplement under the caption "Glossary"
beginning on page 94 in the prospectus and under the caption "Glossary of Terms"
in this prospectus supplement.
DESCRIPTION OF THE HOME LOAN POOL
General
The home loan pool will consist of home loans with an aggregate unpaid
principal balance of $___________ as of the close of business on the business
day prior to the cut-off date. ___% of the home loans are secured by second
liens on fee simple or leasehold interests in one- to four-family residential
properties and the remainder are secured by first liens. The home loans will
consist of conventional, closed-end, fixed-rate, fully-amortizing home loans
with terms to maturity of approximately five, ten, fifteen, twenty or
twenty-five years with respect to __%, __%, __%, __% and __% of the home loans,
respectively, from the date of origination or modification. The proceeds of the
home loans generally were used by the related borrowers for:
-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 the foregoing.
As to each home loan the mortgagor represented at the time of origination that
the related mortgaged property would be owner occupied as a primary home. As to
home loans which have been modified, 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.
S-12
<PAGE>
All of the home loans were acquired by Residential Funding Corporation,
as seller, under its 125 loan program from unaffiliated sellers as described in
this prospectus supplement and in the prospectus, except in the case of __% of
the home loans which were purchased by the seller through its affiliate
HomeComings Financial Network, Inc. No unaffiliated seller sold more than __% of
the home loans to Residential Funding Corporation. __% and __% of the home loans
will be subserviced by GMAC Mortgage Corporation, an affiliate of the depositor
and the master servicer, and Master Financial, Inc., a California corporation,
respectively. See "--The Initial Subservicers" in this prospectus supplement.
All of the home loans were, in most instances, underwritten as described
under "--Underwriting Standards."
The seller will make some representations and warranties regarding the
home loans sold by it as of the date of issuance of the notes. Further, the
seller will be required to repurchase or substitute for any home loan sold by it
as to which a breach of its representations and warranties relating to that home
loan occurs if the breach materially adversely affects the interests of the
securityholders or the credit enhancer in the home loan. See "Description of the
Home Loan Purchase Agreement" in this prospectus supplement and "Trust Asset
Program--Qualifications of Sellers" and "--Representations Relating to the Trust
Assets" and "Description of the Securities--Review of Trust Assets" in the
prospectus.
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
__% of the home loans provide for simple interest payments and are
referred to as the simple interest home loans which require that each monthly
payment consist of an installment of interest which is calculated according to
the simple interest method. This method calculates interest using the basis of
the outstanding principal balance of the home loan multiplied by the loan rate
and further multiplied by a fraction, the numerator of which is the number of
days in the period elapsed since the preceding payment of interest was made and
the denominator of which is the number of days in the annual period for which
interest accrues on the home loan. As payments are received on the home loans,
the amount received is applied first to interest accrued to the date of payment
and the balance is applied to reduce the unpaid principal balance. Accordingly,
if a mortgagor pays a fixed monthly installment before its scheduled due date,
the portion of the payment allocable to interest for the period since the
preceding 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.
S-13
<PAGE>
On the other hand, if a mortgagor pays a fixed monthly installment after
its scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be greater than it would have
been had the payment been made as scheduled, and the remaining portion, if any,
of the payment applied to reduce the unpaid principal balance will be
correspondingly less. If each scheduled payment is made on or prior to its
scheduled due date, the principal balance of the home loan will amortize in the
manner described in the preceding paragraph. However, if the mortgagor
consistently makes scheduled payments after the scheduled due date the home loan
will amortize more slowly than scheduled. Any remaining unpaid principal is
payable on the final maturity date of the home loan.
__% of the home loans are actuarial home loans, on which 30 days of
interest is owed each month irrespective of the day on which the payment is
received.
Home Loan Pool Characteristics
The home loans have the following characteristics:
o The home loans will bear interest at the loan rate stated in the
related mortgage note which will be at least __% per annum but no
more than __% per annum, with a weighted average loan rate of
approximately __% per annum as of the cut-off date.
o None of the home loans were originated prior to _______ or will
have a maturity date later than __________.
o No home loan will have a remaining term from __________ to the
stated maturity of the home loan of less than __ months.
o The weighted average remaining term of the home loans as of the
cut-off date will be approximately __ months.
o The weighted average original term to stated maturity of the home
loans as of the cut- off date will be approximately __ months.
o __% of the home loans will have original terms to maturity of
approximately five years, with a weighted average remaining term
of approximately __ months.
o __% of the home loans will have original terms to maturity of
approximately ten years, with a weighted average remaining term
of approximately __ months.
o __% of the home loans will have original terms of maturity of
approximately fifteen years, with a weighted average remaining
term of approximately __ months.
o __% of the home loans will have original terms of maturity of
approximately twenty years, with a weighted average remaining
term of approximately __ months.
S-14
<PAGE>
o __% of the home loans will have original terms to maturity of
approximately twenty- five years, with a weighted average
remaining term of approximately __ months.
o All of the home loans have principal and interest payable monthly
on each due date specified in the mortgage note.
o __% of the home loans will be secured by mortgages or deeds of
trust on property in which the borrower has little or no equity
because the related combined LTV ratio at the time of origination
exceeds 100%.
As to each home loan, the combined LTV ratio, in most cases, will be the
ratio, expressed as a percentage, of (1) 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 __% of the home loans, the
stated value will be the value of the property as stated by the related
mortgagor in his or her application. See "Description of the Home Loan
Pool--Underwriting Standards" in this prospectus supplement.
In connection with each home loan that is secured by a leasehold
interest, the seller will have represented that, among other things:
o the use of leasehold estates for residential properties is an
accepted practice in the area where the related mortgaged
property is located;
o residential property in the area consisting of leasehold estates
is readily marketable;
o the lease is recorded and no party is in any way in breach of any
provision of the lease;
o the leasehold is in full force and effect and is not subject to
any prior lien or encumbrance by which the leasehold could be
terminated; and
o the remaining term of the lease does not terminate less than five
years after the maturity date of the home loan.
Approximately _____% of the home loans provide for payment of a
prepayment charge, if the loans prepay within a specified time period. The
prepayment charge, in most cases, is the maximum amount permitted under
applicable state law. Or, if no maximum prepayment charge is specified, the
prepayment charge generally is calculated in the following sentence. __%, __%,
__% and __% of the home loans, by cut-off date balance of the home loans, with a
prepayment charge provision provide for payment of a prepayment charge for full
prepayments made within
S-15
<PAGE>
approximately one year, two years, three years and five years, respectively, of
the origination of the home loan calculated in accordance with the terms of the
related mortgage note. 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 July 1
that remained unpaid as of the close of business on July 31 would still be
considered current as of July 31. If that payment remained unpaid as of the
close of business on August 31, the home loan would then be considered to be 30
to 59 days delinquent. Delinquency information presented in this prospectus
supplement as of the cut-off date is determined and prepared as of the close of
business on the last business day immediately prior to the cut-off date.
As of the cut-off date, __% of the home loans were High Cost Loans.
Purchasers or assignees of any High Cost Loan, including the trust, could be
liable for all claims and subject to all defenses that the borrower could assert
against the originator of the High Cost Loan. Remedies available to the borrower
include monetary penalties, as well as recission rights if appropriate
disclosures were not given as required. See "Risk Factors--Risks Associated with
the Home Loans" in this prospectus supplement and "Certain Legal Aspects of the
Trust Assets and Related Matters--Anti-Deficiency Legislation and Other
Limitations on Lenders" in the prospectus.
As to __% of the home loans, during a temporary period the monthly
payments received on the home loans were applied in a manner that reduced the
rate of principal amortization. As a result, the home loan may have an unpaid
principal amount on its scheduled maturity date, assuming no prepayments, of
greater than 1 time and not more than 6 times the related monthly payment. It is
not clear whether the related mortgagor will be legally obligated to pay the
unpaid principal amount.
All of the home loans were originated under full documentation programs.
No home loan provides for deferred interest, negative amortization or
future advances.
All of the mortgaged properties underlying the home loans were
owner-occupied.
S-16
<PAGE>
Below is a description of some additional characteristics of the home
loans as of the cut-off date unless otherwise indicated. All percentages of the
home loans are approximate percentages unless otherwise indicated by the cut-off
date balance. Unless otherwise specified, all principal balances of the home
loans are as of the cut-off date and are rounded to the nearest dollar.
<TABLE>
<CAPTION>
Loan Rates
Percentage of
Number of Home Loan Pool
Range of Home Cut-off Date by Cut-off Date
Loan Rates(%) Loans Balance Balance
- ------------- ------- --------- -------
<S> <C> <C>
$ %
</TABLE>
Totals......................
As of the cut-off date, the weighted average loan rate of the home loans
will be approximately __% per annum.
S-17
<PAGE>
<TABLE>
<CAPTION>
Original Home Loan Stated Principal Balances
Percentage of
Number of Home Loan Pool
Range of Original Home Cut-off Date by Cut-off
Stated Principal Balances Loans Balance Balance
- ------------------------------- ------- --------- -------
<S> <C> <C>
$ %
</TABLE>
Total.......................
As of the cut-off date, the average cut-off date balance of the home
loans will be approximately $_________.
S-18
<PAGE>
<TABLE>
<CAPTION>
Original Combined LTV Ratios
Percentage of
Home Loan Pool
Number of by Cut-off Date
Range of Combined Home Cut-off Date Stated Principal
LTV Ratios(%) Loans Balance Balance
- --------------- ------- --------- -------
<S> <C> <C>
$ %
</TABLE>
Total.......................
The weighted average combined LTV ratio, or LTV ratio, as to the home
loans secured by first liens on the related mortgaged properties, at origination
of the home loans will be approximately __%.
S-19
<PAGE>
<TABLE>
<CAPTION>
Junior Ratios
Percentage of
Home Loan Pool
Range of Junior Number of Cut-off Date by Cut-off
Mortgage Ratios(%) Home Loans Balance Date Balance
- --------------- ------- --------- -------
<S> <C>
</TABLE>
Total.......................
The preceding table exclude home loans secured by first liens. A Junior ratio is
the ratio of the original amount of the home loans secured by the second lien to
the sum of (1) the original amount of the home loan and (2) the unpaid principal
balance of any senior lien balance at the time of the home loan.
The weighted average junior ratio by original loan balance will be approximately
__%.
S-20
<PAGE>
<TABLE>
<CAPTION>
Remaining Term to Scheduled Maturity
Percentage of
Number of Home Loan Pool
Range of Months Remaining Home Cut-off Date by Cut-off
to Scheduled Maturity Loans Balance Date Balance
<S> <C>
Total........................
</TABLE>
The weighted average remaining term to maturity as of the cut-off date will
be approximately __ months.
S-21
<PAGE>
<TABLE>
<CAPTION>
Year of Origination
Percentage of
Home Loan Pool
Number of Cut-off Date by Cut-off
Year of Origination Home Loans Balance Date Balance
<S> <C>
</TABLE>
Total............................
<TABLE>
<CAPTION>
Geographic Distribution of Mortgaged Properties
Percentage of
Home Loan Pool
Number of Cut-off Date by Cut-off
State Home Loans Balance Date Balance
<S> <C>
</TABLE>
S-22
<PAGE>
Total............................
The reference to "Other" in the preceding table includes states and the
District of Columbia that contain mortgaged properties for less than __% of the
home loan pool.
<TABLE>
<CAPTION>
Mortgaged Property Types
Percentage of
Home Loan Pool
Number of Cut-off Date by Cut-off
Property Type Home Loans Balance Date Balance
- ------------- ---------- --------- ------------
<S> <C>
Single Family Residence..............
PUD Detached.........................
Condominium..........................
PUD Attached.........................
Townhouse/Rowhouse Attached..........
Multifamily (2-4 Units)..............
Townhouse/Rowhouse Detached..........
Manufactured Home....................
Total.............
</TABLE>
S-23
<PAGE>
<TABLE>
<CAPTION>
Loan Purpose
Percentage of
Home Loan Pool
Number of Cut-off Date by Cut-off
Purpose Home Loans Balance Date Balance
- ------- ---------- --------- ------------
<S> <C>
Debt Consolidation...................
Cash.................................
Home Improvement/Debt
Consolidation...........
Other................................
Rate/Term Refinance..................
Home Improvement.....................
Convenience..........................
Education............................
Purchase Money.......................
Medical..............................
Total................
</TABLE>
<TABLE>
<CAPTION>
Lien Priority
Percentage of
Home Loan Pool
Number of Cut-off Date by Cut-off
Lien Property Home Loans Balance Date Balance
- ------------- ---------- --------- ------------
<S> <C>
First Lien...........................
Second Lien..........................
Total.............
</TABLE>
S-24
<PAGE>
<TABLE>
<CAPTION>
Debt-to-Income Ratios as of Date of Origination of the Home Loan
Percentage of
Range of Debt-to-Income Home Loan Pool
Ratios as of Date of Number of Cut-off Date by Cut-off
Origination of the Home Loan (%) Home Loans Balance Date Balance
<S> <C>
Total..............
</TABLE>
As of the cut-off date, the weighted average debt-to-income ratio as of
the date of origination of the home loans will be approximately __%.
Credit Scores
"Credit Scores" are obtained by many lenders in connection with home
loan applications to help assess a borrower's creditworthiness. Credit Scores
are obtained from credit reports provided by various credit reporting
organizations, each of which may employ differing computer models and
methodologies. The Credit Score is designed to assess a borrower's credit
history at a single point in time, using objective information currently on file
for the borrower at a particular credit reporting organization. Information used
to create a Credit Score may include, among other things, payment history,
delinquencies on accounts, levels of outstanding indebtedness, length of credit
history, types of credit, and bankruptcy experience. The Credit Scores of the
home loans range from approximately ___ to approximately ___, with higher scores
indicating an individual with a more favorable credit history compared to an
individual with a lower score. However, a Credit Score purports only to be a
measurement of the relative degree of risk a borrower represents to a lender,
that is, a borrower with a higher score is statistically expected to be less
likely to default in payment than a borrower with a lower score. In addition, it
should be noted that Credit Scores were 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
S-25
<PAGE>
specifically for use in connection with home loans, but for consumer loans in
general, and assess only the borrower's past credit history. Therefore, a Credit
Score does not take into consideration the differences between home loans and
consumer loans generally or the specific characteristics of the related home
loan for example, the combined LTV ratio, the collateral for the home loan, or
the debt to income ratio. There can be no assurance that the Credit Scores of
the mortgagors will be an accurate predictor of the likelihood of repayment of
the related home loans.
The following table provides information as to the Credit Scores of the
related mortgagors as used in the origination of the home loans.
<TABLE>
<CAPTION>
Credit Scores as of the Date of Origination of the Home Loans
Percentage of
Range of Credit Scores Home Loan Pool
as of the Date of Number of Cut-off Date by Cut-off
Origination of the Home Loans Home Loans Balance Date Balance
- ----------------------------- ---------- --------- ------------
<S> <C>
</TABLE>
Totals.............
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.
S-26
<PAGE>
Residential Funding Corporation relies on a number of guidelines to
assist underwriters in the credit review and decision process. The underwriting
criteria provide for the evaluation of a loan applicant's creditworthiness
through the use of a consumer credit report, verification of employment and a
review of the debt-to-income ratio of the applicant. Income is verified through
various means, including without limitation applicant interviews, written
verifications with employers, review of pay stubs or tax returns. The borrower
must demonstrate sufficient levels of disposable income to satisfy debt
repayment requirements.
The underwriting standards require the home loans originated or
purchased by Residential Funding Corporation to have been fully documented. A
prospective borrower is required to complete a detailed application providing
pertinent credit information.
In determining the adequacy of the mortgaged property as collateral for
home loans included in the home loan pool, an appraisal is made of each property
considered for financing or, if permitted by the underwriting standards, the
value of the related mortgaged property will be the stated value. The home loans
purchased by Residential Funding Corporation and included in the home loan pool
generally were originated subject to a maximum combined LTV ratio of 125%, and
the related borrowers may have been permitted to retain a limited amount of the
proceeds of the home loans. In addition, the home loans were generally subject
to a maximum loan amount of $75,000 and a maximum total monthly debt-to-income
ratio of 55%. There can be no assurance that the combined LTV ratio or the
debt-to-income ratio for any home loan will not increase from the levels
established at origination.
The underwriting standards of Residential Funding Corporation may be
varied in appropriate cases. There can be no assurance that every home loan in
the home loan pool was originated in conformity with the applicable underwriting
standards in all material respects, or that the quality or performance of the
home loans will be equivalent under all circumstances.
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.
The Initial Subservicers
Primary servicing for __% of the home loans will be provided by GMAC
Mortgage Corporation under a subservicing agreement with the master servicer.
GMAC Mortgage Corporation is an indirect wholly-owned subsidiary of General
Motors Acceptance Corporation. GMAC Mortgage Corporation is engaged in the
mortgage banking business, including the origination, purchase, sale and
servicing of residential loans.
S-27
<PAGE>
GMAC Mortgage Corporation's executive offices are located at 100 Witmer
Road, Horsham, Pennsylvania 19044-0963.
Primary servicing for __% of the home loans will be provided by
__________ under a subservicing agreement with the __________. __________ is a
__________ corporation that is a mortgage lender engaged in the business of
originating, purchasing, selling and servicing home loans generally secured by
one- to four-family residential properties, with an emphasis on non-conforming
junior lien loans.
__________ has its principal offices at __________.
Although _________ is not an affiliate of Residential Funding
Corporation, _________ has a lending arrangement with Residential Funding
Corporation, and in connection with that arrangement, Residential Funding
Corporation has the right to acquire an equity interest in _________________ in
accordance with specified terms and conditions.
The initial subservicers have not had sufficient experience in servicing
the types of mortgage loans comprising the home loan pool to provide meaningful
disclosure of its delinquency and loss experience relating to the mortgage
loans.
Residential Funding Corporation
Residential Funding Corporation will be responsible for master servicing
the home loans. Responsibilities of Residential Funding Corporation will include
the receipt of funds from subservicers, the reconciliation of servicing
activity, investor reporting, remittances to the indenture trustee and the owner
trustee to accommodate payments to securityholders and consulting with
subservicers of home loans that are delinquent and as to the related servicing
policies, notices and other responsibilities. Management and liquidation of
mortgaged properties acquired by foreclosure or deed in lieu of foreclosure, as
well as other loss mitigation procedures conducted by any subservicer, will be
reviewed by Residential Funding Corporation. Neither the master servicer nor any
subservicer will be required to make advances relating to delinquent payments of
principal and interest on the home loans.
For information regarding foreclosure procedures, see "Servicing and
Administration of Trust Assets--Realization Upon Defaulted Loans" in the
prospectus. Servicing and charge-off policies and collection practices may
change over time in accordance with Residential Funding Corporation's business
judgment, changes in Residential Funding Corporation's portfolio of home loans
of the types included in the home loan pool that it services for its clients and
applicable laws and regulations, and other considerations.
Residential Funding Corporation has not had sufficient experience in
master servicing the types of mortgage loans comprising the home loan pool to
provide meaningful disclosure of its delinquency and loss experience relating to
the mortgage loans.
S-28
<PAGE>
Additional Information
The description in this prospectus supplement of the home loan pool and
the mortgaged properties is based upon the home loan pool as constituted at the
close of business on the cut-off date, except as otherwise noted. Prior to the
issuance of the notes, home loans may be removed from the home loan pool as a
result of incomplete documentation or otherwise, if the depositor deems that
removal necessary or appropriate. A limited number of other home loans may be
added to the home loan pool prior to the issuance of the notes. The depositor
believes that the information in this prospectus supplement will be
substantially representative of the characteristics of the home loan pool as it
will be constituted at the time the notes are issued although the range of loan
rates and maturities and some other characteristics of the home loans in the
home loan pool may vary.
A Current Report on Form 8-K will be available to purchasers of the
notes and will be filed, together with the servicing agreement, the indenture,
the trust agreement and the home loan purchase agreement, with the Commission
within fifteen days after the initial issuance of the notes. In the event home
loans are removed from or added to the home loan pool as described in the
preceding paragraph, that removal or addition will be noted in the Current
Report on Form 8-K.
THE ISSUER
The Home Loan Trust _______ is a business trust formed under the laws of
the State of Delaware under the trust agreement for the purposes described in
this prospectus supplement. The trust agreement constitutes the "governing
instrument" under the laws of the State of Delaware relating to business trusts.
After its formation, the issuer will not engage in any activity other than:
o acquiring and holding the home loans and the other assets of the
issuer and related proceeds,
o issuing the notes and the certificates, making payments on the
notes and the certificates, and
o engaging in other activities that are necessary, suitable or
convenient to accomplish the foregoing.
The issuer's principal offices are in _________, in care of ____________,
as owner trustee, at ____________________.
THE OWNER TRUSTEE
____________ is the owner trustee under the trust agreement. The owner
trustee is a _________ banking corporation and its principal offices are located
at _________________.
S-29
<PAGE>
Neither the owner trustee nor any director, officer or employee of the
owner trustee will be under any liability to the issuer or the securityholders
for any action taken or for refraining from the taking of any action in good
faith under the trust agreement or for errors in judgment. However, that none of
the owner trustee and any director, officer or employee of the owner trustee
will be protected against any liability which would otherwise be imposed by
reason of willful malfeasance, bad faith or negligence in the performance of
duties or by reason of reckless disregard of obligations and duties under the
trust agreement. All persons into which the owner trustee may be merged or with
which it may be consolidated or any person resulting from the merger or
consolidation shall be the successor of the owner trustee under the trust
agreement.
THE INDENTURE TRUSTEE
_________________, is the indenture trustee under the indenture. The
principal offices of the indenture trustee are located in _______________.
THE CREDIT ENHANCER
The following information has been supplied by _____________, the credit
enhancer, for inclusion in this prospectus supplement. No representation is made
by the depositor, the master servicer, the underwriter or any of their
affiliates as to the accuracy or completeness of the information.
[The credit enhancer is a __________-domiciled stock insurance
corporation regulated by the Office of the Commissioner of Insurance of the
State of _________ and licensed to do business in 50 states, the District of
Columbia, the Commonwealth of Puerto Rico and Guam. The credit enhancer
primarily insures newly issued municipal and structured finance obligations. The
credit enhancer is a wholly owned subsidiary of __________ (formerly,
_________.) a 100% publicly-held company. _______________________________ have
each assigned a triple-A claims-paying ability rating to the credit enhancer.
The consolidated financial statements of the credit enhancer and its
subsidiaries as of ______________ and ______________, and for the three years
ended ______________, prepared in accordance with generally accepted accounting
principles, included in the Annual Report on Form 10-K of ______________ (which
was filed with the Commission on ______________; Commission File Number
______________) and the consolidated financial statements of the credit enhancer
and its subsidiaries as of ______________ and for the periods ending
______________ and ______________ included in the Quarterly Report on Form 10-Q
of ______________ for the period ended ______________ (which was filed with the
Commission on ______________), are hereby incorporated by reference into this
prospectus supplement and shall be deemed to be a part of this prospectus
supplement. Any statement contained in a document incorporated in this
prospectus supplement by reference shall be modified or superseded for the
purposes of this prospectus supplement to the extent that a statement contained
in this prospectus supplement by reference in this prospectus supplement also
modifies or supersedes the statement. Any statement so modified
S-30
<PAGE>
or superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this prospectus supplement.
All financial statements of the credit enhancer and its subsidiaries
included in documents filed by ______________ with the Commission under Section
13(a), 13(c), 14 or 15(d) of the Exchange Act, subsequent to the date of this
prospectus supplement and prior to the termination of the offering of the notes
shall be deemed to be incorporated by reference into this prospectus supplement
and to be a part hereof from the respective dates of filing the documents.
The following table sets forth the credit enhancer's capitalization as
of ______________, ______________, ______________ and ______________,
respectively, in conformity with generally accepted accounting principles.
<TABLE>
<CAPTION>
Consolidated Capitalization Table
(Dollars in Millions)
[Date] [Date] [Date] [Date]
(Unaudited)
<S> <C>
Unearned premiums........................
Other liabilities........................
Total liabilities....................
Stockholder's equity:
Common Stock.........................
Additional paid-in capital...........
Accumulated other comprehensive income
Retained earnings....................
Total stockholder's equity...........
Total liabilities and stockholder's equity
</TABLE>
For additional financial information concerning the credit enhancer, see
the audited and unaudited financial statements of the credit enhancer
incorporated by reference in this prospectus supplement. Copies of the financial
statements of the credit enhancer incorporated in this prospectus supplement by
reference and copies of the credit enhancer's annual statement for the year
ended ___________ prepared in accordance with statutory accounting standards are
available, without charge, from the credit enhancer. The address of the credit
enhancer's administrative offices and its telephone number are ____________.
The credit enhancer makes no representation regarding the notes or the
advisability of investing in the notes and makes no representation regarding,
nor has it participated in the preparation of, this prospectus supplement other
than the information supplied by the credit enhancer and presented under the
headings "The Credit Enhancer" and "Description of the Policy" and in the
financial statements incorporated in this prospectus supplement by reference.]
S-31
<PAGE>
THE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY
FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
S-32
<PAGE>
DESCRIPTION OF THE SECURITIES
General
The notes will be issued under to the Indenture. The certificates will
be issued under the trust agreement. The following summaries describe provisions
of the securities, the indenture and the trust agreement. The summaries do not
purport to be complete and are subject to, and qualified in their entirety by
reference to, the provisions of the applicable agreement.
The notes will be secured by the assets of the trust pledged by the
issuer to the indenture trustee under the indenture which will consist of:
o the home loans;
o all amounts on deposit in the Payment Account;
o the policy; and
o proceeds of the foregoing.
Book-Entry Notes
The notes will initially be issued as book-entry notes. Noteowners 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
S-33
<PAGE>
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 indirect participants by instructing the participants
and indirect participants to transfer the notes, by book-entry transfer, through
DTC for the account of the purchasers of the notes, which account is maintained
with their respective participants. Under the DTC rules and in accordance with
DTC's normal procedures, transfers of ownership of notes will be executed
through DTC and the accounts of the respective participants at DTC will be
debited and credited. Similarly, the participants and indirect participants will
make debits or credits, as the case may be, on their records on behalf of the
selling and purchasing note owners.
Under a book-entry format, beneficial owners of the book-entry notes may
experience some delay in their receipt of payments, since the payments will be
forwarded by the indenture trustee to Cede & Co. Payments on notes held through
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
S-34
<PAGE>
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 the DTC is no longer willing, qualified or able to discharge
properly its responsibilities as nominee and depository with respect to the
book-entry notes and the indenture trustee is unable to locate a qualified
successor, (b) the indenture trustee elects to terminate a book-entry system
through DTC or (c) after the occurrence of an event of default under the
indenture, beneficial owners having percentage interests aggregating at least a
majority of the note balance of the notes advise the DTC through the financial
intermediaries and the DTC participants in writing that the continuation of a
book-entry system through DTC, or a successor to DTC, is no longer in the best
interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the indenture trustee will be required to notify all
beneficial owners of the occurrence of this event and the availability through
DTC of definitive notes. Upon surrender by DTC of the global certificate or
certificates representing the book-entry notes and instructions for
re-registration, the indenture trustee will issue and authenticate definitive
notes, and subsequently, the indenture trustee will recognize the holders of the
definitive notes as holders under the indenture.
Although DTC, 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, 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 "Description of the Securities--Form of Securities" in the
prospectus.
Payments
Payments on the notes will be made by the indenture trustee or the
paying agent on the 25th day of each month or, if not a business day, then the
next succeeding business day, commencing in _______________, each of which is
referred to as a payment date. Payments on the notes will be made to the persons
in whose names the notes are registered at the close of business on the day
prior to each payment date or, if the notes are no longer book-entry notes, on
the record date. See "Description of the Securities--Payments on Loans" in the
prospectus. Payments will be made by check or money order mailed, or upon the
request of a holder owning notes having denominations
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<PAGE>
aggregating at least $1,000,000, by wire transfer or otherwise, to the address
of the person which, in the case of book-entry notes, will be DTC or its nominee
as it appears on the security register in amounts calculated as described in
this prospectus supplement on the determination date. However, the final payment
relating to the notes will be made only upon presentation and surrender of the
notes at the office or the agency of the indenture trustee specified in the
notice to holders of the final payment. A business day is any day other than a
Saturday or Sunday or a day on which banking institutions in the State of
California, Minnesota, New York, Pennsylvania, Illinois or Delaware are required
or authorized by law to be closed.
Glossary of Terms
The following terms are given the meanings shown below to help describe
the cash flows on the notes:
Excess Loss Amount--As of any payment date, an amount will be equal to
the sum of:
oany Liquidation Loss Amounts, other than as described in clauses second
through fourth below, for the related collection period which, when
added to the aggregate of the Liquidation Loss Amounts for all preceding
collection periods exceed $_________,
oany Special Hazard Losses in excess of the Special Hazard Amount,
oany Fraud Losses in excess of the Fraud Loss Amount, and
osome losses occasioned by war, civil insurrection, some governmental
actions, nuclear reaction and some other risks as described in the
indenture.
Excess Loss Amounts will not be covered by any Liquidation Loss Distribution
Amount or by a reduction in the Outstanding Reserve Amount. Any Excess Loss
Amounts however, will be covered by the policy, and in the event payments are
not made as required under the policy, the losses will be allocated to the
notes.
Fraud Loss Amount--An amount equal to $_________. As of any date of
determination after the cut-off date, the Fraud Loss Amount shall equal:
o prior to the first anniversary of the cut-off date, an amount
equal to 5% of the aggregate of the Stated Principal Balances of
the home loans as of the cut-off date minus the aggregate of any
Liquidation Loss Amounts on the home loans due to Fraud Losses up
to the date of determination;
o from the first to the second anniversary of the cut-off date, an
amount equal to (1) the lesser of (a) the Fraud Loss Amount as of
the most recent anniversary of the cut-off date and (b) 3% of the
aggregate of the Stated Principal Balances of the home loans as
of the most recent anniversary of the cut-off date minus (2) the
aggregate of any Liquidation Loss Amounts on
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the home loans due to Fraud Losses since the most recent
anniversary of the cut-off date up to the date of determination;
and
o from the second to the fifth anniversary of the cut-off date, an
amount equal to (1) the lesser of (a) the Fraud Loss Amount as of
the most recent anniversary of the cut-off date and (b) 2% of the
aggregate of the Stated Principal Balances of the home loans as
of the most recent anniversary of the cut-off date minus (2) the
aggregate of any Liquidation Loss Amounts on the home loans due
to Fraud Losses since the most recent anniversary of the cut-off
date up to the date of determination. On and after the fifth
anniversary of the cut-off date, the Fraud Loss Amount shall be
zero.
Liquidated Home Loan--As to any payment date, any home loan which the
master servicer has determined, based on the servicing procedures specified in
the servicing agreement, as of the end of the preceding collection period that
all liquidation proceeds which it expects to recover in connection with the
disposition of the related mortgaged property have been recovered. The master
servicer will treat any home loan that is 180 days or more delinquent as having
been finally liquidated.
Liquidation Loss Amount--As to any Liquidated Home Loan, the unrecovered
Stated Principal Balance of the Liquidated Home Loan and any of its unpaid
accrued interest at the end of the related collection period in which the home
loan became a Liquidated Home Loan, after giving effect to the Net Liquidation
Proceeds allocable to the Stated Principal Balance. Any Liquidation Loss Amount
shall not be required to be paid to the extent that a Liquidation Loss Amount
was paid on the notes by means of a draw on the policy or was reflected in the
reduction of the Outstanding Reserve Amount.
Liquidation Loss Distribution Amount--As to any payment date, an amount
equal to the sum of (A) 100% of the Liquidation Loss Amounts, other than any
Excess Loss Amounts, on the payment date, plus (B) any Liquidation Loss Amounts,
other than any Excess Loss Amounts, remaining undistributed from any preceding
payment date, together with its interest from the date initially distributable
to the date paid.
Net Liquidation Proceeds--As to a home loan, the proceeds, excluding
amounts drawn on the policy, received in connection with the liquidation of any
home loan, whether through trustee's sale, foreclosure sale or otherwise,
reduced by related expenses, but not including the portion, if any, of the
amount that exceeds the Stated Principal Balance of the home loan at the end of
the collection period immediately preceding the collection period in which the
home loan became a Liquidated Home Loan.
Outstanding Reserve Amount--an amount initially be approximately _____%
of the cut- off date balance. The Outstanding Reserve Amount will be increased
by distributions of the Reserve Increase Amount, if any, to the notes. On each
payment date, the Outstanding Reserve Amount, as in effect immediately prior to
the payment date, if any, shall be deemed to be reduced by an amount equal to
any Liquidation Loss Amounts, other than any Excess Loss Amounts, for the
payment date, except to the extent that Liquidation Loss Amounts were covered on
the payment date by a
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Liquidation Loss Distribution Amount, which amount would be so distributed, if
available, from any excess interest collections for that payment date. Any
Liquidation Loss Amounts not so covered will be covered by draws on the policy
to the extent provided in this prospectus supplement. However, any Excess Loss
Amounts are required to be covered by a draw on the policy in all cases, without
regard to the availability of the Outstanding Reserve Amount, and the
Outstanding Reserve Amount will not be reduced by any Excess Loss Amount under
any circumstances. The Outstanding Reserve Amount available on any payment date
is the amount, if any, by which the pool balance, after applying payments
received in the related collection period, exceeds the aggregate note balance of
the notes on the payment date, after application of principal collections for
that date.
To the extent that the Outstanding Reserve Amount is insufficient or not
available to absorb Liquidation Loss Amounts that are not covered by the
Liquidation Loss Distribution Amount, and if payments are not made under the
policy as required, a noteholder may incur a loss.
Principal Collection Distribution Amount--As to any payment date, an
amount equal principal collections for that payment date; provided however, on
any payment date as to which the Outstanding Reserve Amount that would result
without regard to this proviso exceeds the Reserve Amount Target, the Principal
Collection Distribution Amount will be reduced by the amount of the excess until
the Outstanding Reserve Amount equals the Reserve Amount Target. To the extent
the Reserve Amount Target decreases on any payment date, the amount of the
Principal Collection Distribution Amount will be reduced on that payment date
and on each subsequent payment date to the extent the remaining Outstanding
Reserve Amount is in excess of the reduced Reserve Amount Target until the
Outstanding Reserve Amount equals the Reserve Amount Target.
Reserve Amount Target--As to any payment date prior to the Stepdown
Date, an amount equal to _____% of the cut-off date balance. On or after the
Stepdown Date, the Reserve Amount Target will be equal to the lesser of (a) the
Reserve Amount Target as of the cut-off date and (b) _____% of the pool balance
before applying payments received in the related collection period, but not
lower than $__________, which is _____% of the cut-off date balance. However,
any scheduled reduction to the Reserve Amount Target described in the preceding
sentence shall not be made as of any payment date unless 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, the amount necessary to
bring the Outstanding Reserve Amount up to the Reserve Amount Target.
Special Hazard Amount--An amount equal to $________. As of any date of
determination following the cut-off date, the Special Hazard Amount shall equal
the initial Special Hazard Amount less the sum of (A) the aggregate of any
Liquidation Loss Amounts on the home loans due to Special Hazard Losses and (B)
the Adjustment Amount. The Adjustment Amount will be equal to an amount
calculated under the terms of the indenture.
Stepdown Date--The later of:
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othe payment date in ________________, and
othe payment date on which the pool balance before applying payments
received in the related collection period is less than 50% of the
cut-off date balance.
Interest Payments on the Notes
Interest payments will be made on the notes on each payment date at the
note rate. The note rate for the notes will be _____% per annum.
Interest on the notes relating to any payment date will accrue for the
related accrual period on the note balance. The accrual period for any payment
date will be the calendar month preceding the month in which the related payment
date occurs, or in the case of the first payment date beginning on the closing
date and ending the last day of the month in which the closing date occurs.
Interest will be based on a 30-day month and a 360-day year. Interest payments
on the notes will be funded from payments on the home loans and, if necessary,
from draws on the policy.
Principal Payments on the Notes
On each payment date, other than the payment date in _____________,
principal payments will be due and payable on the notes in an amount equal to
the aggregate of the Principal Collection Distribution Amount, together with any
Reserve Increase Amounts and Liquidation Loss Distribution Amounts for the
payment date, as and to the extent described below. On the payment date in
___________, principal will be due and payable on the notes in amounts equal to
the note balance, if any. In no event will principal payments on the notes on
any payment date exceed the note balance on that date.
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Allocation of Payments on the Home Loans
The master servicer on behalf of the trust will establish a Payment
Account into which the master servicer will deposit principal and interest
collections for each payment date on the business day prior to that payment
date. The Payment Account will be an Eligible Account and amounts on deposit in
the Payment Account will be invested in permitted investments.
On each payment date, principal and interest collections will be
allocated from the Payment Account in the following order of priority:
o first, to pay accrued interest due on the note balance of the
notes;
o second, to pay principal in an amount equal to the Principal
Collection Distribution Amount for that payment date on the
notes;
o third, to pay as principal on the notes, an amount equal to the
liquidation loss Distribution Amount. ;
o fourth, to pay the credit enhancer the premium for the policy and
any previously unpaid premiums for the policy, with its interest;
o fifth, to reimburse the credit enhancer for prior draws made on
the policy, other than those attributable to Excess Loss Amounts,
with its interest;
o sixth, to pay principal on the notes, the Reserve Increase
Amount;
o seventh, to pay the credit enhancer any other amounts owed under
the insurance agreement; and
o eighth, any remaining amounts to the holders of the certificates.
The Paying Agent
The paying agent shall initially be the indenture trustee, together with
any successor thereto. The paying agent shall have the revocable power to
withdraw funds from the Payment Account for the purpose of making payments to
the noteholders.
Maturity and Optional Redemption
The notes will be payable in full on the payment date in __________, to
the extent of the outstanding note balance on that date, if any. In addition, a
principal payment may be made in partial or full redemption of the notes after
the aggregate Stated Principal Balance after applying payments received in the
related collection period is reduced to an amount less than or equal to
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$_____________ 10% of the cut-off date balance, upon the exercise by the master
servicer of its option to purchase all or a portion of the home loans and
related assets. In the event that all of the home loans are purchased by the
master servicer, the purchase price will be equal to the sum of the outstanding
pool balance and its accrued and unpaid interest at the weighted average of the
loan rates through the day preceding the payment date on which the purchase
occurs together with all amounts due and owing to the credit enhancer.
In the event that a portion of the home loans are purchased by the
master servicer, the purchase price will be equal to the sum of the aggregate
Stated Principal Balances of the home loans so purchased and its accrued and
unpaid interest at the weighted average of the related loan rates on the home
loans through the day preceding the payment date on which the purchase occurs,
together with all amounts due and owing to the credit enhancer in connection
with the home loans so purchased. Any purchase will be subject to satisfaction
of some conditions specified in the servicing agreement, including:
othe 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;
othe master servicer shall represent and warrant that no selection
procedures reasonably believed by the master servicer to be adverse to
the interests of the securityholders or the credit enhancer were used by
the master servicer in selecting the home loans; and
o each rating agency shall have been notified of the proposed retransfer
and shall not have notified the master servicer that the retransfer
would result in a reduction or withdrawal of the ratings of the notes
without regard to the policy.
DESCRIPTION OF THE POLICY
On the closing date, the credit enhancer will issue the policy in favor
of the indenture trustee on behalf of the issuer. The policy will
unconditionally and irrevocably guarantee most payments on the notes. On each
payment date, a draw will be made on the policy equal to the sum of:
o the amount by which accrued interest on the notes at the note
rate on that payment date exceeds the amount on deposit in the
Payment Account available for interest distributions on that
payment date,
o any Liquidation Loss Amount, other than any Excess Loss Amount,
for that payment date, to the extent not currently covered by a
Liquidation Loss Distribution Amount or a reduction in the
Outstanding Reserve Amount and
o any Excess Loss Amount for that payment date.
For purposes of the foregoing, amounts in the Payment Account available for
interest distributions on any payment date shall be deemed to include all
amounts available in the Payment Account for
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that payment date, other than the Principal Collection Distribution Amount and
the Liquidation Loss Distribution Amount, if any. Under the terms of the
indenture, draws under the policy relating to any Liquidation Loss Amount will
be paid to the notes by the paying agent, as principal, to the extent the notes
would have been paid that amount. In addition, a draw will be made on the policy
to cover some shortfalls in amounts allocable to the noteholders following the
sale, liquidation or other disposition of the assets of the trust in connection
with the liquidation of the trust fund as permitted under the indenture
following an event of default under the indenture. In addition, the policy will
guarantee the payment of the outstanding note balance of each note on the
payment date in ___________. In the absence of payments under the policy,
noteholders will directly bear the credit risks associated with their investment
to the extent the risks are not covered by the Outstanding Reserve Amount or
otherwise.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
General
The yields to maturity and the aggregate amount of distributions on the
notes will be affected by the rate and timing of principal payments on the home
loans and the amount and timing of mortgagor defaults resulting in Liquidation
Loss Amounts. The rate of default of home loans secured by second liens may be
greater than that of home loans secured by first liens. In addition, yields may
be adversely affected by a higher or lower than anticipated rate of principal
payments on the home loans in the trust fund. The rate of principal payments on
the home loans will in turn be affected by the amortization schedules of the
home loans, the rate and timing of its principal prepayments by the mortgagors,
liquidations of defaulted home loans and repurchases of home loans due to
breaches of representations.
The timing of changes in the rate of prepayments, liquidations and
repurchases of the home loans may, and the timing of Liquidation Loss Amounts
will, significantly affect the yield to an investor, even if the average rate of
principal payments experienced over time is consistent with an investor's
expectation. Since the rate and timing of principal payments on the home loans
will depend on future events and on a variety of factors, as described more
fully in this prospectus supplement and in the prospectus under "Yield and
Prepayment Considerations", no assurance can be given as to the rate or the
timing of principal payments on the notes.
The home loans in most cases may be prepaid by the mortgagors at any
time. However, in some circumstances, some of the home loans will be subject to
a prepayment charge. See "Description of the Home Loan Pool" in this prospectus
supplement. In addition, as described under "Description of the Home Loans--Home
Loan Pool Characteristics," some of the home loans may be assumable under the
terms of the mortgage note, and the remainder are subject to customary due-
on-sale provisions. The master servicer shall enforce any due-on-sale clause
contained in any mortgage note or mortgage, to the extent permitted under
applicable law and governmental regulations. However, if the master servicer
determines that it is reasonably likely that any mortgagor will bring, or if any
mortgagor does bring, legal action to declare invalid or otherwise avoid
enforcement of a due-on-sale clause contained in any mortgage note or mortgage,
the master servicer shall not be required to enforce the due-on-sale clause or
to contest the action. The extent to which some of the home loans are assumed by
purchasers of the mortgaged properties rather than
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prepaid by the related mortgagors in connection with the sales of the mortgaged
properties will affect the weighted average life of the notes and may result in
a prepayment experience on the home loans that differs from that on other
conventional home loans. See "Yield and Prepayment Considerations" in the
prospectus.
Prepayments, liquidations and purchases of the home loans will result in
distributions to holders of the notes of principal amounts which would otherwise
be distributed over the remaining terms of the home loans. Factors affecting
prepayment, including defaults and liquidations, of home loans include changes
in mortgagors' housing needs, job transfers, unemployment, mortgagors' net
equity in the mortgaged properties, changes in the value of the mortgaged
properties, mortgage market interest rates, solicitations and servicing
decisions. In addition, if prevailing mortgage rates fell significantly below
the loan rates on the home loans, the rate of prepayments, including
refinancings, would be expected to increase. Conversely, if prevailing mortgage
rates rose significantly above the loan rates on the home loans, the rate of
prepayments on the home loans would be expected to decrease. Prepayment of the
related first lien may also affect the rate of prepayments on the home loans.
The yield to maturity of the notes will depend, in part, on whether, to
what extent, and the timing with respect to which, any Reserve Amount Increase
is used to accelerate payments of principal on the notes or the Reserve Amount
Target is reduced. See "Description of the Securities--Allocation of Payments on
the Home Loans" in this prospectus supplement.
The rate of defaults on the home loans will also affect the rate and
timing of principal payments on the home loans. In general, defaults on home
loans are expected to occur with greater frequency in their early years. The
rate of default of home loans secured by second liens is likely to be greater
than that of home loans secured by first liens on comparable properties. The
rate of default on home loans which are refinance home loans, and on home loans
with high combined LTV ratios, may be higher than for other types of home loans.
Furthermore, the rate and timing of prepayments, defaults and liquidations on
the home loans will be affected by the general economic condition of the region
of the country in which the related mortgaged properties are located. The risk
of delinquencies and loss is greater and prepayments are less likely in regions
where a weak or deteriorating economy exists, as may be evidenced by, among
other factors, increasing unemployment or falling property values. See "Yield
and Prepayment Considerations" in the prospectus.
Because the loan rates on the home loans and the note rate on the notes
are fixed, the rate will not change in response to changes in market interest
rates. Accordingly, if market interest rates or market yields for securities
similar to the notes were to rise, the market value of the notes may decline.
In addition, the yield to maturity on the notes will depend on, among
other things, the price paid by the holders of the notes and the note rate. The
extent to which the yield to maturity of a note is sensitive to prepayments will
depend, in part, upon the degree to which it is purchased at a discount or
premium. In most cases, if notes are purchased at a premium and principal
distributions on the notes occur at a rate faster than assumed at the time of
purchase, the investor's actual yield to maturity will be lower than that
anticipated at the time of purchase. Conversely, if notes are
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purchased at a discount and principal distributions on the notes occur at a rate
slower than that assumed at the time of purchase, the investor's actual yield to
maturity will be lower than that anticipated at the time of purchase. For
additional considerations relating to the yield on the notes, see "Yield and
Prepayment Considerations" in the prospectus.
Weighted Average Life: Weighted average life refers to the average
amount of time that will elapse from the date of issuance of a security to the
date of distribution to the investor of each dollar distributed in reduction of
principal of the security, assuming no losses. The weighted average life of the
notes will be influenced by, among other things, the rate at which principal of
the home loans is paid, which may be in the form of scheduled amortization,
prepayments or liquidations.
[The prepayment model used in this prospectus supplement, or prepayment
assumption, represents an assumed rate of prepayment each month relative to the
then outstanding principal balance of a pool of home loans. A 100% prepayment
assumption assumes a constant prepayment rate of 2% per annum of the then
outstanding principal balance of the home loans in the first month of the life
of the home loans and an additional 0.9286% per annum in each month thereafter
until the fifteenth month. Beginning in the fifteenth month and in each month
thereafter during the life of the home loans, a 100% prepayment assumption
assumes a constant prepayment rate of 15% per annum each month.] As used in the
table below, a 50% prepayment assumption assumes prepayment rates equal to 50%
of the prepayment assumption. Correspondingly, a 150% prepayment assumption
assumes prepayment rates equal to 150% of the prepayment assumption, and so
forth. The prepayment assumption does not purport to be a historical description
of prepayment experience or a prediction of the anticipated rate of prepayment
of any pool of home loans, including the home loans.
The table below has been prepared on the basis of assumptions as
described below in this paragraph regarding the weighted average characteristics
of the home loans that are expected to be included in the trust as described
under "Description of the Home Loan Pool" in this prospectus supplement and the
performance of the home loans. The table assumes, among other things, that:
o the home loan pool consists of ten groups of home loans, with the
home loans in each group having the following aggregate
characteristics as of the cut-off date:
Aggregate
Group Stated Principal Net Loan Original Term Remaining Term
Balance Loan Rate Rate to Maturity to Maturity
_______________________________________________________________________________
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o the scheduled monthly payment for each home loan has been based
on its outstanding balance, interest rate and remaining term to
maturity, so that the home loan will amortize in amounts
sufficient for its repayment over its remaining term to maturity;
o none of the seller, the master servicer or the depositor will
repurchase any home loan, as described under "Trust Asset
Program--Representations Relating to Loans" and "Description of
the Securities--Assignment of the Trust Assets" in the
prospectus, and the master servicer does not exercise its option
to purchase the home loans and, as a result, cause a termination
of the trust except as indicated in the table;
o there are no delinquencies or Liquidation Loss Amounts on the
home loans, and principal payments on the home loans will be
timely received together with prepayments, if any, on the last
day of the month and at the respective constant percentages of
the prepayment assumption in the table;
o there is no prepayment interest shortfall or any other interest
shortfall in any month;
o the home loans, including the simple interest home loans, pay on
the basis on a 30-day month and a 360-day year;
o payments on the notes will be received on the 25th day of each
month, commencing in --------------;
o payments on the home loans earn no reinvestment return;
o there are no additional ongoing trust expenses payable out of the
trust;
o the notes will be purchased on ______________; and
o the amount of interest collected on the home loans during the
collection period for the first payment date is $____________
The foregoing list of assumptions are referred to as the structuring
assumptions.
The actual characteristics and performance of the home loans will differ
from the assumptions used in constructing the table below, which is hypothetical
in nature and is provided
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only to give a general sense of how the principal cash flows might behave under
varying prepayment scenarios. For example, it is very unlikely that the home
loans will prepay at a constant level of the prepayment assumption until
maturity or that all of the home loans will prepay at the same level of the
prepayment assumption. Moreover, the diverse remaining terms to maturity of the
home loans could produce slower or faster principal distributions than indicated
in the table at the various constant percentages of the prepayment assumption
specified, even if the weighted average remaining term to maturity of the home
loans is as assumed. Any difference between the assumptions and the actual
characteristics and performance of the home loans, or actual prepayment or loss
experience, will affect the percentage of initial note balance outstanding over
time and the weighted average lives of the notes.
Subject to the foregoing discussion and assumptions, the following table
indicates the weighted average life of the notes, and lists the percentage of
the initial note balance of the notes that would be outstanding after each of
the payment dates shown at various percentages of the prepayment assumption.
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Percent of Initial Stated Principal Balance Outstanding at the
Following Percentages of the Prepayment Assumption
- -------------------------------------------------------------------------------
Payment Date 0% 50% 100% 150% 200%
- ------------ -- --- ---- ---- ----
Initial Percentage....................
__________............................
__________............................
__________............................
__________............................
__________............................
__________............................
__________............................
__________............................
__________............................
__________............................
__________............................
__________............................
__________............................
__________............................
Weighted Average Life to Maturity
in Years..............................
Weighted Average Life Assuming
Optional Repurchase in Years..........
The weighted average life of a note is determined by:
o multiplying the net reduction, if any, of the note balance by the
number of years from the date of issuance of the note to the
related payment date,
o adding the results, and
o dividing the sum by the aggregate of the net reductions of the
note balance described in the first clause above.
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This table has been prepared based on the assumptions described in the forth
paragraph preceding this table, including the assumptions regarding the
characteristics and performance of the home loans, which differ from their
actual characteristics and performance, and should be read in conjunction
therewith.
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DESCRIPTION OF THE HOME LOAN PURCHASE AGREEMENT
The home loans to be deposited in the trust by the depositor will be
purchased by the depositor from the seller under the home loan purchase
agreement dated as of ______________ between the seller and the depositor. The
following summary describes some terms of the home loan purchase agreement and
is qualified in its entirety by reference to the home loan purchase agreement.
Purchase of Home Loans
Under the home loan purchase agreement, the seller will transfer and assign
to the depositor all of its right, title and interest in and to the home loans
and the mortgage note, mortgages and other related documents. The purchase
prices for the home loans are specified percentages of its face amounts as of
the time of transfer and are payable by the depositor as provided in the home
loan purchase agreement.
The home loan purchase agreement will require that, within the time period
specified in this prospectus supplement, the seller deliver to the indenture
trustee, or the custodian, the home loans sold by the seller and the related
documents described in the preceding paragraph for the home loans. In lieu of
delivery of original mortgages, the seller may deliver true and correct copies
of the mortgages which have been certified as to authenticity by the appropriate
county recording office where the mortgage is recorded.
Representations and Warranties
The seller will also represent and warrant with respect to the home loans
that, among other things:
o the information ith respect to the home loans in the schedule attached
to the home loan purchase agreement is true and correct in all
material respects, and
o immediately prior to the holder of the home loans free and clear of
any and all liens and security interests.
The seller will also represent and warrant that, among other things, as of the
closing date:
o the home loan purchase agreement constitutes a legal, valid and
binding obligation of the seller, and
o the home loan purchase agreement constitutes a valid transfer and
assignment of all right, title and interest of the seller in and to
the home loans and the proceeds of the home loans.
The benefit of the representations and warranties made by the seller will be
assigned to the indenture trust.
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Within 90 days of the closing date, _________________ the custodian will
review or cause to be reviewed the home loans and the related documents, and if
any home loan or related document is found to be defective in any material
respect, which may materially and adversely affect the value of the related home
loan, or the interests of the indenture trustee, as pledgee of the home loans,
the securityholders or the credit enhancer in the home loan and the defect is
not cured within 90 days following notification of the defect to the seller and
the trust by the custodian, the seller will be obligated under the home loan
purchase agreement to deposit the repurchase price into the Custodial Account.
In lieu of any deposit, the seller may substitute an eligible substitute loan;
provided that the substitution may be subject to the delivery of an opinion of
counsel regarding tax matters. Any purchase or substitution will result in the
removal of the home loan required to be removed from the trust. The removed home
loans are referred to as a deleted loan. The obligation of the seller to remove
deleted loans sold by it from the trust is the sole remedy regarding any defects
in the home loans sold by the seller and related documents for the home loans
available against the seller.
As to any home loan, the repurchase price referred to in the preceding
paragraph is equal to the Stated Principal Balance of the home loan at the time
of any removal described in the preceding paragraph plus its accrued and unpaid
interest to the date of removal. In connection with the substitution of an
eligible substitute loan, the seller will be required to deposit in the
Custodial Account a substitution adjustment amount equal to the excess of the
Stated Principal Balance of the related deleted loan to be removed from the
trust over the Stated Principal Balance of the eligible substitute loan.
An eligible substitute loan is a home loan substituted by the seller for a
deleted loan which must, on the date of the substitution:
o have an outstanding Stated Principal Balance, or in the case of a
substitution of more than one home loan for a deleted loan, an
aggregate Stated Principal Balance, not in excess of the Stated
Principal Balance relating to the deleted loan;
o have a loan rate no lower than and not more than 1% in excess of the
loan rate of the deleted loan;
o have a combined LTV ratio at the time of substitution no higher than
that of the deleted loan at the time of substitution;
o have, at the time of substitution, a remaining term to maturity not
more than one year earlier and not later than the remaining term to
maturity of the deleted loan;
o comply with each representation and warranty as to the home loans in
the home loan purchase agreement, deemed to be made as of the date of
substitution;
o be ineligible for inclusion in a REMIC if the deleted loan was a REMIC
ineligible loan, generally, because (a) the value of the real property
securing the deleted loan was not at least equal to eighty percent of
the original principal balance of the deleted loan, calculated by
subtracting the amount of
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any liens that are senior to the loan and a proportionate amount of any
lien of equal priority from the value of the property when the loan was
originated and (b) substantially all of the proceeds of the deleted loan
were not used to acquire, improve or protect an interest in the real
property securing the loan; and
o satisfy some other conditions specified in the indenture.
In addition, the seller will be obligated to deposit the repurchase price or
substitute an eligible substitute loan for a home loan as to which there is a
breach of a representation or warranty in the home loan purchase agreement and
the breach is not cured by the seller within the time provided in the home loan
purchase agreement.
DESCRIPTION OF THE SERVICING AGREEMENT
The following summary describes terms of the servicing agreement, dated as
of _____________ among the Trust, the indenture trustee and the master servicer.
The summary does not purport to be complete and is subject to, and qualified in
its entirety by reference to, the provisions of the servicing agreement.
Whenever particular defined terms of the servicing agreement are referred to,
the defined terms are incorporated in this prospectus supplement by reference.
See "The Agreements" in the prospectus.
The Master Servicer
Residential Funding Corporation, an indirect wholly-owned subsidiary of GMAC
Mortgage 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. Neither the master
servicer nor any subservicer will be required to make advances relating to
delinquent payments of principal and interest on the home loans.
For information regarding foreclosure procedures, see "Servicing of Trust
Assets--Realization Upon Defaulted Loans" in the prospectus. Servicing and
charge-off policies and collection practices may change over time in accordance
with Residential Funding Corporation's business judgment, changes in Residential
Funding Corporation's portfolio of home loans of the types included in the home
loan pool that it services for its clients and applicable laws and regulations,
and other considerations.
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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.
[INSERT SERVICING 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.
Servicing and Other Compensation and Payment of Expenses
The Servicing Fee for each home loan is payable out of the interest payments
on the home loan. The weighted average Servicing Fee as of the cut-off date for
each home loan will be approximately ____% per annum of the outstanding
principal balance of the home loan. The Servicing Fees consist of (a) servicing
compensation payable to the master servicer relating to its master servicing
activities, and (b) subservicing and other related compensation payable to the
Subservicer, including the compensation paid to the master servicer as the
direct servicer of a home loan for which there is no subservicer. The primary
compensation to be paid to the master servicer
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relating to its master servicing activities will be _____% per annum of the
outstanding principal balance of each home loan. The master servicer is
obligated to pay some ongoing expenses associated with the trust and incurred by
the master servicer in connection with its responsibilities under the servicing
agreement. See "Description of the Securities--Servicing and Administration of
Trust Assets" in the prospectus for information regarding other possible
compensation to the master servicer and the subservicer and for information
regarding expenses payable by the master servicer.
Principal and Interest Collections
The master servicer shall establish and maintain a Custodial Account in
which the master servicer shall deposit or cause to be deposited any amounts
representing payments on and any collections received relating to the home loans
received by it subsequent to the cut-off date. The Custodial Account shall be an
Eligible Account. On the 20th day of each month or if that day is not a business
day, the next succeeding business day, which is referred to as the determination
date, the master servicer will notify the paying agent and the indenture trustee
of the amount of aggregate amounts required to be withdrawn from the Custodial
Account and deposited into the Payment Account prior to the close of business on
the business day next succeeding each determination date.
Permitted investments are specified in the servicing agreement and are
limited to investments which meet the criteria of the rating agencies from time
to time as being consistent with their then- current ratings of the securities.
The master servicer will make the following withdrawals from the Custodial
Account and deposit the amounts as follows:
o to the Payment Account, an amount equal to the principal and interest
collections on the business day prior to each payment date; and
o to pay to itself or the seller various reimbursement amounts and other
amounts as provided in the servicing agreement.
All collections on the home loans will generally be allocated in accordance
with the mortgage notes between amounts collected relating to interest and
amounts collected relating to principal. As to any payment date, interest
collections will be equal to the sum of:
o the portion allocable to interest of all scheduled monthly
payments on the home loans received during the related
collection period, minus the Servicing Fees and the fees
payable to the owner trustee and the indenture trustee, which
are collectively referred to as the administrative fees,
o the interest portion of all Net Liquidation Proceeds allocated
to interest under the terms of the mortgage notes, reduced by
the administrative fees for that collection period, and
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o the interest portion of the repurchase price for any deleted
loans and the cash purchase price paid in connection with any
optional purchase of the home loans by the master servicer.
However, on the first payment date, an amount, referred to as the excluded
interest amount, will be excluded from the interest collections equal to the sum
of 70% of first and second listed item above. As to any payment date, principal
collections will be equal to the sum of:
o the principal portion of all scheduled monthly payments on the
home loans received in the related collection period; and
o some unscheduled collections, including full and partial
mortgagor prepayments on the home loans, Insurance Proceeds,
Liquidation Proceeds and proceeds from repurchases of, and some
amounts received in connection with any substitutions for, the
home loans, received or deemed received during the related
collection period, to the extent the amounts are allocable to
principal.
As to unscheduled collections, the master servicer may elect to treat the
amounts as included in interest collections and principal collections for the
payment date in the month of receipt, but is not obligated to do so. As
described in this prospectus supplement under "Description of the
Securities--Principal Payments on the notes," any amount for which the election
is so made shall be treated as having been received on the last day of the
related collection period for the purposes of calculating the amount of
principal and interest distributions to the notes.
As to any payment date other than the first payment date, the collection
period is the calendar month preceding the month of that payment date.
Release of Lien; Refinancing of Senior Lien
The servicing agreement permits the master servicer to release the lien on
the mortgaged property securing a home loan under some circumstances, if the
home loan is current in payment. A release may be made in any case where the
borrower simultaneously delivers a mortgage on a substitute mortgaged property,
if the combined LTV ratio is not increased. A release may also be made, in
connection with a simultaneous substitution of the mortgaged property, if the
combined LTV ratio would be increased to not more than the lesser of (a) 125%
and (b) 105% times the combined LTV ratio previously in effect, if the master
servicer determines that appropriate compensating factors are present.
Furthermore, a release may also be permitted in cases where no substitute
mortgaged property is provided, causing the home loan to become unsecured,
subject to some limitations in the servicing agreement. At the time of the
release, some terms of the home loan may be modified, including a loan rate
increase or a maturity extension, and the terms of the home loan may be further
modified in the event that the borrower subsequently delivers a mortgage on a
substitute mortgaged property.
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The master servicer may permit the refinancing of any existing lien senior
to a home loan, provided that the resulting combined LTV ratio may not exceed
the greater of (a) the combined LTV ratio previously in effect, or (b) 70% or,
if the borrower satisfies credit score criteria, 80%.
Collection and Liquidation Practices; Loss Mitigation
The master servicer is authorized to engage in a wide variety of loss
mitigation practices with respect to the home loans, including waivers,
modifications, payment forbearances, partial forgiveness, entering into
repayment schedule arrangements, and capitalization of arrearages; provided in
any case that the master servicer determines that the action is not materially
adverse to the interests of the indenture trustee as pledgee of the mortgage
loans and is generally consistent with the master servicer's policies with
respect to similar loans; and provided further that some modifications,
including reductions in the loan rate, partial forgiveness or a maturity
extension, may only be taken if the home loan is in default or if default is
reasonably foreseeable. For home loans that come into and continue in default,
the master servicer may take a variety of actions including foreclosure upon the
mortgaged property, writing off the balance of the home loan as bad debt, taking
a deed in lieu of foreclosure, accepting a short sale, permitting a short
refinancing, arranging for a repayment plan, modifications as described above,
or taking an unsecured note. See "Servicing and Administration of Trust Assets"
in the prospectus.
Optional Repurchase of Defaulted Home Loans
Under the servicing agreement, the master servicer will have the option to
purchase from the trust any home loan which is 60 days or more delinquent at a
purchase price equal to its Stated Principal Balance plus its accrued interest.
DESCRIPTION OF THE TRUST AGREEMENT AND INDENTURE
The following summary describes terms of the trust agreement and the
indenture. The summary does not purport to be complete and is subject to, and
qualified in its entirety by reference to, the provisions of the trust agreement
and the indenture. Whenever particular defined terms of the indenture are
referred to, the defined terms are incorporated by reference in this prospectus
supplement. See "The Agreements" in the prospectus.
The Trust Fund
Simultaneously with the issuance of the notes, the issuer will pledge the
trust fund to the indenture trustee as collateral for the notes. As pledgee of
the home loans, the indenture trustee will be entitled to direct the trust in
the exercise of all rights and remedies of the trust against the seller under
the home loan purchase agreement and against the master servicer under the
servicing agreement.
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Reports To Holders
The indenture trustee will mail to each holder of notes, at its address
listed on the security register maintained with the indenture trustee, a report
setting forth amounts relating to the notes for each payment date, among other
things:
o the amount of principal payable on the payment date to the
holders of securities;
o the amount of interest payable on the payment date to the holders
of securities;
o the aggregate note balance of the notes after giving effect to
the payment of principal on the payment date;
o principal and interest collections for the related collection
period;
o the aggregate Stated Principal Balance of the home loans as of
the end of the preceding collection period;
o the Outstanding Reserve Amount as of the end of the related
collection period; and
o the amount paid, if any, under the policy for the payment date.
In the case of information furnished under first and second listed clause
above relating to the notes, the amounts shall be expressed as a dollar amount
per $1,000 in face amount of notes.
Certain Covenants
The indenture will provide that the issuer may not consolidate with or merge
into any other entity, unless:
o the entity formed by or surviving the consolidation or merger is
organized under the laws of the United States, any state or the
District of Columbia,
o the entity expressly assumes, by an indenture supplemental to the
indenture, the issuer's obligation to make due and punctual
payments upon the notes and the performance or observance of any
agreement and covenant of the issuer under the indenture,
o no event of default shall have occurred and be continuing
immediately after the merger or consolidation,
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o the issuer has received consent of the credit enhancer and has
been advised that the ratings of the securities, without regard
to the policy, then in effect would not be reduced or withdrawn
by any rating agency as a result of the merger or consolidation,
o any action that is necessary to maintain the lien and security
interest created by the indenture is taken, and
o the issuer has received an opinion of counsel to the effect that
the consolidation or merger would have no material adverse tax
consequence to the issuer or to any noteholder or
certificateholder, and
o the issuer has delivered to the indenture trustee an officer's
certificate and an opinion of counsel each stating that the
consolidation or merger and the supplemental indenture comply
with the indenture and that all conditions precedent, as provided
in the indenture, relating to the transaction have been complied
with.
The issuer will not, among other things:
o except as expressly permitted by the indenture, sell, transfer,
exchange or otherwise dispose of any of the assets of the issuer,
o claim any credit on or make any deduction from the principal and
interest payable relating to the notes, other than amounts
withheld under the Internal Revenue Code or applicable state law,
or assert any claim against any present or former holder of notes
because of the payment of taxes levied or assessed upon the
issuer,
o permit the validity or effectiveness of the indenture to be
impaired or permit any person to be released from any covenants
or obligations with respect to the notes under the indenture
except as may be expressly permitted by the indenture, or
o permit any lien, charge, excise, claim, security interest,
mortgage or other encumbrance to be created on or extend to or
otherwise arise upon or burden the assets of the issuer or any
part of its assets, or any of its interest or the proceeds of its
assets.
The issuer may not engage in any activity other than as specified under "The
Issuer" in this prospectus supplement.
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Modification of Indenture
With the consent of the holders of a majority of the outstanding notes and
the credit enhancer, the issuer and the indenture trustee may execute a
supplemental indenture to add provisions to, change in any manner or eliminate
any provisions of, the indenture, or modify, except as provided below, in any
manner the rights of the noteholders. Without the consent of the holder of each
outstanding note affected by that modification and the credit enhancer, however,
no supplemental indenture will:
o change the due date of any installment of principal of or interest on
any note or reduce its principal amount, its interest rate specified
or change any place of payment where or the coin or currency in which
any note or any of its interest is payable;
o impair the right to institute suit for the enforcement of some
provisions of the indenture regarding payment;
o reduce the percentage of the aggregate amount of the outstanding
notes, the consent of the holders of which is required for any
supplemental indenture or the consent of the holders of which is
required for any waiver of compliance with some provisions of the
indenture or of some defaults thereunder and their consequences as
provided for in the indenture;
o modify or alter the provisions of the indenture regarding the voting
of notes held by the issuer, the depositor or an affiliate of any of
them;
o decrease the percentage of the aggregate principal amount of notes
required to amend the sections of the indenture which specify the
applicable percentage of aggregate principal amount of the notes
necessary to amend the indenture or some other related agreements;
o modify any of the provisions of the indenture in a manner as to affect
the calculation of the amount of any payment of interest or principal
due on any note, including the calculation of any of the individual
components of the calculation; or
o permit the creation of any lien ranking prior to or, except as
otherwise contemplated by the indenture, on a parity with the lien of
the indenture with respect to any of the collateral for the notes or,
except as otherwise permitted or contemplated in the indenture,
terminate the lien of the indenture on any collateral or deprive the
holder of any note of the security afforded by the lien of the
indenture.
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
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Neither the indenture trustee nor any director, officer or employee of the
indenture trustee will be under any liability to the issuer or the related
noteholders for any action taken or for refraining from the taking of any action
in good faith under the indenture or for errors in judgment. None of the
indenture trustee and any director, officer or employee of the indenture trustee
will be protected against any liability which would otherwise be imposed by
reason of willful malfeasance, bad faith or negligence in the performance of
duties or by reason of reckless disregard of obligations and duties under the
indenture. Subject to limitations in the indenture, the indenture trustee and
any director, officer, employee or agent of the indenture trustee shall be
indemnified by the issuer and held harmless against any loss, liability or
expense incurred in connection with investigating, preparing to defend or
defending any legal action, commenced or threatened, relating to the indenture
other than any loss, liability or expense incurred by reason of willful
malfeasance, bad faith or negligence in the performance of its duties under the
indenture or by reason of reckless disregard of its obligations and duties under
the indenture. All persons into which the indenture trustee may be merged or
with which it may be consolidated or any person resulting from a merger or
consolidation shall be the successor of the indenture trustee under the
indenture.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
In the opinion of ____________________, counsel to the depositor, for
federal income tax purposes, the notes will be characterized as indebtedness and
the issuer, as created under the terms and conditions of the trust agreement,
will not be 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
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respect to the potential applicability of the fiduciary responsibility
provisions of ERISA and the prohibited transaction provisions of ERISA and the
Internal Revenue Code to the proposed investment. See "ERISA Considerations" in
the prospectus.
Each purchaser of a note, by its acceptance of the note, shall be deemed to
have represented that the acquisition of the note by the purchaser does not
constitute or give rise to a prohibited transaction under section 406 of ERISA
or section 4975 of the Internal Revenue Code, for which no statutory, regulatory
or administrative exemption is available. See "ERISA Considerations" in the
prospectus.
The notes may not be purchased with the assets of an ERISA plan if the
depositor, the master servicer, the indenture trustee, the owner trustee or any
of their affiliates:
o has investment or administrative discretion with respect to the ERISA
plan assets;
o has authority or responsibility to give, or regularly gives,
investment advice regarding the ERISA plan assets, for a fee and under
an agreement or understanding that the advice will serve as a primary
basis for investment decisions regarding the ERISA plan assets and
will be based on the particular investment needs for the ERISA plan;
or
o is an employer maintaining or contributing to the ERISA plan.
LEGAL INVESTMENT
The notes will not constitute "mortgage related securities" for purposes of
SMMEA. Accordingly, many institutions with legal authority to invest in mortgage
related securities may not be legally authorized to invest in the notes. No
representation is made in this prospectus supplement as to whether the notes
constitute legal investments for any entity under any applicable statute, law,
rule, regulation or order. Prospective purchasers are urged to consult with
their counsel concerning the status of the notes as legal investments for the
purchasers prior to investing in notes.
METHOD OF DISTRIBUTION
Subject to the terms and conditions of an underwriting agreement, dated
_________________ between ____________________, as the underwriter, has agreed
to purchase and the depositor has agreed to sell the notes. It is expected that
delivery of the notes will be made only in book-entry form through the Same Day
Funds Settlement System of DTC on or about __________________ against payment
therefor in immediately available funds.
In connection with the notes, the underwriter has agreed, subject to the
terms and conditions of the underwriting agreement, to purchase all of its notes
if any of its notes are purchased by the underwriting agreement.
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In addition, the underwriting agreement provides that the obligation of the
underwriter to pay for and accept delivery of the notes is subject to, among
other things, the receipt of legal opinions and to the conditions, among others,
that no stop order suspending the effectiveness of the depositor's registration
statement shall be in effect, and that no proceedings for that purpose shall be
pending before or threatened by the Commission.
The distribution of the notes by the underwriter may be effected from time
to time in one or more negotiated transactions, or otherwise, at varying prices
to be determined at the time of sale. Proceeds to the depositor from the sale of
the notes, before deducting expenses payable by the depositor, will be
approximately _______% of the aggregate Stated Principal Balance of the notes
plus its accrued interest from the cut-off date.
The underwriter may effect these transactions by selling the notes to or
through dealers, and those dealers may receive compensation in the form of
underwriting discounts, concessions or commissions from the underwriter for whom
they act as agent. In connection with the sale of the notes, the underwriter may
be deemed to have received compensation from the depositor in the form of
underwriting compensation. The underwriter and any dealers that participate with
the underwriter in the distribution of the related notes may be deemed to be
underwriters and any profit on the resale of the notes positioned by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933, as amended.
The depositor has been advised by the underwriter that it presently intends
to make a market in the notes offered hereby; however, it is not obligated to do
so, any market-making may be discontinued at any time, and there can be no
assurance that an active public market for the notes will develop.
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 ____________ against payment in immediately available
funds.
The underwriting agreement provides that the depositor will indemnify the
underwriter and that under limited circumstances the underwriter will indemnify
the depositor against some liabilities, including liabilities under the
Securities Act of 1933, or contribute to payments the underwriter may be
required to make for these liabilities.
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 Securities--Reports to Securityholders,"which will include
information as to the outstanding principal balance of the notes. There can be
no assurance that any 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.
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EXPERTS
The consolidated financial statements of _____________, as of December 31,
1998 and 1997 and for each of the years in the three-year period ended December
31, 1998 are incorporated by reference in this prospectus supplement and in the
registration statement in reliance upon the report of ______________,
independent certified public accountants, incorporated by reference in this
prospectus supplement, and upon the authority of the firm as experts in
accounting and auditing.
LEGAL MATTERS
Legal matters concerning the notes will be passed upon for the depositor and
the underwriter by _________________, New York, New York.
RATINGS
It is a condition to issuance that the notes be rated "___" by _________ and
"____" by __________________. The depositor has not requested a rating on the
notes by any rating agency other than ___________ and ___________. However,
there can be no assurance as to whether any other rating agency will rate the
notes, or, if it does, what rating would be assigned by any other rating agency.
A rating on the notes by another rating agency, if assigned at all, may be lower
than the ratings assigned to the notes by ____________ and ____________. A
securities rating addresses the likelihood of the receipt by holders of notes of
distributions on the home loans. The rating takes into consideration the
structural and legal aspects associated with the notes. The ratings on the notes
do not, however, constitute statements regarding the possibility that holders
might realize a lower than anticipated yield. A securities rating is not a
recommendation to buy, sell or hold securities and may be subject to revision or
withdrawal at any time by the assigning rating organization. Each securities
rating should be evaluated independently of similar ratings on different
securities.
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION
PROCEDURES
Except in certain limited circumstances, the globally offered Residential
Funding Mortgage Securities II, Inc., Home Loan-Backed Notes, Series
____________, which are referred to as the global securities, will be available
only in book-entry form. Investors in the global securities may hold 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
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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.
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
I-2
<PAGE>
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:
o 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;
o 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
o staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC participant is at
least one day prior to the value date for the sale to the 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
I-3
<PAGE>
Euroclear participant at least one business day prior to 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:
o each clearing system, bank or other financial institution that holds
customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between the beneficial owner and the
U.S. entity required to withhold tax complies with applicable
certification requirements; and
o the beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
o 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.
o 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.
I-4
<PAGE>
o 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.
o 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:
o a citizen or resident of the United States;
o 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, including for this purpose the District of Columbia, unless,
in the case of a partnership, future Treasury regulations provide
otherwise;
o an estate that is subject to U.S. federal income tax regardless of the
source of its income; or
o a trust if a court within the United States is able to exercise
primary supervision of the administration of the trust and one or
more United States persons have the authority to control all
substantial decisions of the trust.
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.
I-5
<PAGE>
Residential Funding Mortgage Securities II, Inc.
$_______________
Home Loan-Backed Notes,
Series _______
Prospectus Supplement
__________________________
[Underwriter]
You should rely only on the information contained or incorporated by reference
in this prospectus supplement and the accompanying prospectus. We have not
authorized anyone to provide you with different information.
We are not offering the notes offered in this prospectus supplement in any state
where the offer is not permitted.
Dealers will be required to deliver a prospectus supplement and prospectus when
acting as underwriters of the notes offered hereby and with respect to their
unsold allotments or subscriptions. In addition, all dealers selling the notes,
whether or not participating in this offering, may be required to deliver a
prospectus supplement and prospectus until _____________.
I-6
<PAGE>
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS SUPPLEMENT DATED MAY 10, 2000
Prospectus supplement dated ____________, ____ (to prospectus dated
____________, ____)
$ ___________________
Residential Funding Mortgage Securities II, Inc.
Depositor
RFMSII Series ________ Trust
Issuer
Residential Funding Corporation
Master Servicer
Home Equity Loan Pass-Through Certificates, Series ______
Offered Certificates The trust will issue eight classes of
senior certificates offered under this prospectus
supplement, backed by a pool of closed-end, primarily
second lien fixed rate home equity mortgage loans
Credit Enhancement Credit enhancement for the certificates consists of:
o excess interest and overcollateralization; and
o a certificate guaranty insurance policy issued by
_____________________.
[Insurer's logo]
You should consider carefully the risk factors beginning on page S-_ in this
prospectus supplement.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the offered certificates or determined
that this prospectus supplement or the prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
The Attorney General of the State of New York has not passed on or endorsed the
merits of this offering. Any representation to the contrary is unlawful.
_________ will offer the certificates to the public, at varying prices to be
determined at the time of sale. The proceeds to the depositor from the sale of
the certificates will be approximately _____% of the principal balance of the
certificates plus accrued interest, before deducting expenses.
[Name of Underwriter]
Underwriter
S-1
<PAGE>
Important notice about information presented in this prospectus supplement and
the accompanying prospectus
We provide information to you about the offered certificates in two separate
documents that provide progressively more detail:
o the accompanying prospectus, which provides general information, some of
which may not apply to your series of certificates; and
o this prospectus supplement, which describes the specific terms of your
series of certificates.
If the description of your certificates in this prospectus supplement differs
from the related description in the accompanying prospectus, you should rely on
the information in this prospectus supplement.
The depositor's principal offices are located at 8400 Normandale Lake Boulevard,
Suite 600, Minneapolis, Minnesota 55437 and its telephone number is (612)
832-7000.
S-1
<PAGE>
<TABLE>
<CAPTION>
Table of Contents
<S> <C>
Summary.....................................................................................S-
Risk Factors................................................................................S-
Risks Associated with the Mortgage Loans................................................S-
Limited Obligations.....................................................................S-
Liquidity Risks.........................................................................S-
Special Yield and Prepayment Considerations.............................................S-
Introduction................................................................................S-
Description of the Mortgage Pool............................................................S-
General.................................................................................S-
Payments on the Simple Interest Mortgage Loans..........................................S-
Balloon Loans...........................................................................S-
Mortgage Pool Characteristics...........................................................S-
Underwriting Standards..................................................................S-
Optional Repurchase of Defaulted Mortgage
Loans...............................................................................S-
The Initial Subservicer.................................................................S-
Residential Funding.....................................................................S-
Delinquency and Loss Experience of the
Master Servicer's Portfolio.........................................................S-
Additional Information..................................................................S-
Description of the Certificates ............................................................S-
General.................................................................................S-
Book-Entry Registration of the Offered
Certificates........................................................................S-
Distributions...........................................................................S-
Available Distribution Amount...........................................................S-
Interest Distributions..................................................................S-
Principal Distributions.................................................................S-
Overcollateralization Provisions........................................................S-
Excess Loss Amounts.....................................................................S-
Certificate Guaranty Insurance Policy...................................................S-
The Credit Enhancer.........................................................................S-
Year 2000 Considerations....................................................................S-
Overview of the Year 2000 Issue.........................................................S-
Overview of Residential Funding's Y2K
Project.............................................................................S-
Y2K Project Status......................................................................S-
Risks Related to Y2K....................................................................S-
Material Yield and Prepayment Considerations................................................S-
General.................................................................................S-
Fixed Strip Certificate Yield Considerations............................................S-
Pooling and Servicing Agreement.............................................................S-
General.................................................................................S-
The Master Servicer.....................................................................S-
Servicing and Other Compensation and
Payment of Expenses.................................................................S-
Refinancing of Senior Lien .............................................................S-
Collection and Liquidation Practices; Loss
Mitigation..........................................................................S-
Voting Rights...........................................................................S-
Termination.............................................................................S-
Material Federal Income Tax Consequences....................................................S-
Method of Distribution......................................................................S-
Legal Opinions..............................................................................S-
Experts ....................................................................................S-
Ratings ....................................................................................S-
Legal Investment............................................................................S-
ERISA Considerations........................................................................S-
Annex I: Global Clearance, Settlement
and Tax Documentation Procedures...............................................I-1
</TABLE>
S-2
<PAGE>
SUMMARY
The following summary is a very general overview of the offered certificates
and does not contain all of the information that you should consider in making
your investment decision. To understand the terms of the certificates, you
should read carefully this entire document and the prospectus.
Issuer or Trust ....................RFMSII Series ________ Trust.
Titleof the offered securities..............Home Equity Loan Pass-Through
Certificates, Series _____________.
Depositor ..........................Residential Funding Mortgage Securities II,
Inc., an affiliate of Residential Funding Corporation.
Master servicer ....................Residential Funding Corporation.
Trustee.............................______________.
Credit enhancer ....................______________.
Mortgage pool ..................... _____ closed end, fixed-rate,
fully-amortizing and balloon payment home equity mortgage loans with an
aggregate principal balance of approximately ______________ as of the close
of business on the day prior to the cut-off date. The mortgage loans are
secured primarily by second liens on one- to four-family residential
properties.
Cut-off date .......................______________.
Closing date .......................On or about ______________.
Payment dates ......................Beginning in ______________ on the ___
of each month or, if the ___ is not a
business day, on the next business day.
Scheduled final distribution date ..______________. The
actual final distribution date could be
substantially earlier.
Form of certificates ...............Book-entry.
S-3
<PAGE>
See "Description of the
Certificates--Book-Entry Registration of the
Offered Certificates" in this prospectus
supplement.
Minimum denominations ..............[Class A] Certificates: $______________.
[Class IO] Certificates: $____________
(notional balance).
Legal investment ...................The certificates will not be
"mortgage related securities" for purposes
of the Secondary Mortgage Market Enhancement
Act of 1984.
See "Legal Investment" in this prospectus
supplement and the prospectus.
S-4
<PAGE>
<TABLE>
<CAPTION>
Offered Certificates
Pass-
Through Initial Principal Initial Rating
Class Rate Balance _____/_____ Designation
- ---------------------- --------------------------- ---------------------------------------------
[Class A-I] Certificates:
- -------------------------------------------------- ---------------------------------------------
<S> <C> <C>
[A-I-1 _____% $_________ AAA/AAA Senior/Fixed Rate]
- ---------------------- --------------------------- ---------------------------------------------
[A-I-2 _____% $_________ AAA/AAA Senior/Fixed Rate]
- ---------------------- --------------------------- ---------------------------------------------
[A-I-3 _____% $_________ AAA/AAA Senior/Fixed Rate]
- ---------------------- --------------------------- ---------------------------------------------
[A-I-4 _____% $_________ AAA/AAA Senior/Fixed Rate]
- ---------------------- --------------------------- ---------------------------------------------
[A-I-5 _____% $_________ AAA/AAA Senior/Fixed Rate]
- ---------------------- --------------------------- ---------------------------------------------
[A-I-6 _____% $_________ AAA/AAA Senior/Lockout/Fixed Rate]
- ---------------------- --------------------------- ---------------------------------------------
Total [Class A-I]
Certificates: $_________
- ---------------------- --------------------------- ---------------------------------------------
[Class A-II] Certificates:
Senior/Fixed Rate/Pass-
[A-II _____% $_________ AAA/AAA Through]
- ---------------------- --------------------------- ---------------------------------------------
Total Class A
Certificates: $_________
- ---------------------- --------------------------- ---------------------------------------------
[Class IO] Certificates:
- -------------------------------------------------- ---------------------------------------------
Senior/Interest Only/Fixed
[IO _____% $_______ AAA/AAAr Rate]
- ---------------------- --------------------------- ---------------------------------------------
Total offered
certificates: $_______
- ---------------------- --------------------------- ---------------------------------------------
Non-offered Certificates
- ------------------------------------------------------------------------------------------------
Class R Certificates:
- -------------------------------------------------- ---------------------------------------------
R[-I] _____% $_______ NA/NA Subordinate/Residual
- ---------------------- --------------------------- ---------------------------------------------
[R-II _____% $_______ NA/NA Subordinate/Residual]
- ---------------------- --------------------------- ---------------------------------------------
Total offered and non-
offered certificates: $_______
- ---------------------- --------------------------- ---------------------------------------------
</TABLE>
S-5
<PAGE>
The Trust
The depositor will establish RFMSII Series ______ Trust, a Delaware business
trust to issue the Home Equity Loan Pass-Through Certificates, Series _____. The
trust will be established, and the certificates will be issued by the trust,
under a pooling and servicing agreement. The assets of the trust will consist of
the home loans and related assets.
The Mortgage Pool
The mortgage loans consist of two groups, group I and group II, of which ______%
and ______%, respectively, are secured by second mortgages or deeds of trust and
the remainder are secured by first mortgages or deeds of trust. The group I
loans have the following characteristics as of the cut-off date:
Minimum principal
balance $_____
Maximum principal
balance $_____
Average principal balance _____
Range of loan rates _____% to _____%
Weighted Average loan
rate _____%
Range of original terms to _____ to _____
maturity months
Weighted average original
term to maturity _____ months
Range of remaining terms _____ to _____
to maturity months
Weighted average
remaining term to
maturity _____ months
Range of combined loan-
to-value ratios _____% to _____%
Weighted average _____%
combined loan-to-value
ratios
The group II loans have the following characteristics as of the cut-off date:
Minimum principal
balance $_____
Maximum principal
balance $_____
Average principal balance _____
Range of loan rates _____% to _____%
Weighted Average loan
rate _____%
Range of original terms t _____ to _____
maturity months
Weighted average original
term to maturity _____ months
Range of remaining terms _____ to _____
to maturity months
Weighted average
remaining term to
maturity _____ months
Range of combined loan-
to-value ratios _____% to _____%
Weighted average _____%
combined loan-to-value
ratios
See "Description of the Mortgage Pool" in this prospectus supplement.
Distributions on the Certificates
Amount available for monthly distribution. On each monthly distribution date,
the trustee will make distributions to investors. The amounts available for
distribution include:
o collections of monthly payments on
the mortgage loans, including
prepayments and other unscheduled
collections minus
o fees and expenses of the subservicers
and the master servicer.
See "Description of the Certificates--Available Distribution Amount" in this
prospectus supplement.
S-6
<PAGE>
Distributions. Distributions to
certificateholders will be made from principal
and interest collections as follows:
o Distribution of interest to the
certificates
o Distribution of principal to the
certificates
o Distribution of principal to the
certificates to cover some losses
o Payment to the credit enhancer its
premium for the policy
o Reimbursement to the credit enhancer
for some prior draws made on the
policy
o Distribution of additional principal to
the certificates if the level of
overcollateralization falls below what
is required
o Payment to the credit enhancer for any
other amounts owed
o Distribution of any remaining funds to
the Residual Certificates
Principal payments on the certificates will be as described under "Description
of the Certificates--Principal Distributions" in this prospectus supplement.
In addition, payments on the certificates will be made on each distribution date
from draws on the certificate guaranty insurance policy, if necessary. Draws
will cover shortfalls in amounts available to pay interest on the certificates
at the pass-through rates plus any unpaid losses allocated to the certificates.
Credit Enhancement
The credit enhancement for the benefit of the certificates consists of:
Excess Interest. Because more interest is paid by the mortgagors than is
necessary to pay the interest on the certificates each month, there will be
excess interest. Some of this excess interest may be used to protect the
certificates against some losses, by making an additional payment of principal
up to the amount of the losses.
Overcollateralization. Although the aggregate principal balance of the mortgage
loans is $__________, the trust is issuing only $__________ aggregate principal
amount of certificates. The excess amount of the balance of the mortgage loans
represents overcollateralization, which may absorb some losses on the mortgage
loans, if not covered by excess interest. If the level of overcollateralization
falls below what is required, the excess interest described above will also be
paid to the certificates as principal. This will reduce the principal balance of
the certificates faster than the principal balance of the mortgage loans so that
the required level of overcollateralization is reached.
Policy. On the closing date, the credit enhancer will issue the certificate
guaranty insurance policy in favor of the trustee. The policy will
unconditionally and irrevocably guarantee interest on the certificates at the
related pass-through rates and will cover any losses allocated to the
certificates if not covered by excess interest or overcollateralizations.
Optional Termination
On any payment date on which the principal balance of the mortgage loans is less
than __% of the principal balance as of the cut-off date,
S-7
<PAGE>
the master servicer will have the option to purchase the remaining mortgage
loans.
Under an optional purchase, the outstanding principal balance of the
certificates will be paid in full with accrued interest.
Ratings
When issued, the certificates will receive the ratings listed on page S-__ of
this prospectus supplement. A security rating is not a recommendation to buy,
sell or hold a security and may be changed or withdrawn at any time by the
assigning rating agency. The ratings also do not address the rate of principal
prepayments on the mortgage loans. The rate of prepayments, if different than
originally anticipated, could adversely affect the yield realized by holders of
the certificates.
Legal Investment
The certificates will not be "mortgage related securities" for purposes of the
SMMEA. You should consult your legal advisors in determining whether and to what
extent the certificates constitute legal investments for you.
ERISA Considerations
The certificates may be eligible for purchase by persons investing assets of
employee benefit plans or individual retirement accounts. Plans should consult
with their legal advisors before investing in the certificates.
See "ERISA Considerations" in this
prospectus supplement and in the
accompanying prospectus.
Tax Status
For federal income tax purposes, the trust will be treated as two real estate
mortgage investment conduits. The certificates will represent ownership of
regular interests in the trust and will be treated as debt for federal income
tax purposes. The trust itself will not be subject to tax.
See "Material Federal Income Tax Consequences" in this prospectus supplement and
in the accompanying prospectus.
RISK FACTORS
S-8
<PAGE>
The certificates are not suitable investments for all investors. In
particular, you should not purchase the certificates unless you understand the
prepayment, credit, liquidity and market risks associated with the certificates.
The certificates are complex securities. You should possess, either
alone or together with an investment advisor, the expertise necessary to
evaluate the information contained in this prospectus supplement and the
accompanying prospectus in the context of your financial situation and tolerance
for risk.
You should carefully consider, among other things, the following factors
in connection with the purchase of the certificates:
Risks Associated with the Mortgage Loans
The return on your certificates may be reduced by losses on the mortgage loans,
which are more likely because they are junior liens.
______% of the mortgage loans included in the mortgage loan pool are
secured by second mortgages or deeds of trust. Proceeds from liquidation of
the property will be available to satisfy the mortgage loans only if the
claims of any senior mortgages have been satisfied in full. When it is
uneconomical to foreclose on the mortgaged property or engage in other loss
mitigation procedures, the master servicer may write off the entire
outstanding balance of the mortgage loan as a bad debt. The foregoing risks
are particularly applicable to mortgage loans secured by second liens that
have high combined loan-to-value ratios or low junior ratios because it is
comparatively more likely that the master servicer would determine
foreclosure to be uneconomical. As of the cut-off date, the weighted
average combined loan-to-value ratio of the mortgage loans is ______%, and
approximately ______% of the mortgage loans will have combined
loan-to-value ratios in excess of ________%.
Delays in payment on your certificates may result because the master servicer is
not required to advance delinquent monthly payments on the
mortgage loans.
The master servicer is not obligated to advance scheduled monthly payments
of principal and interest on mortgage loans that are delinquent or in
default. The rate of delinquency and default of second mortgage loans may
be greater than that of mortgage loans secured by first liens on comparable
properties.
S-9
<PAGE>
The return on your certificates may be reduced in an economic downturn.
Mortgage loans similar to those included in the mortgage loan pool have
been originated for a limited period of time. During this time, economic
conditions nationally and in most regions of the country economic have been
generally favorable. However, a deterioration in conditions could adversely
affect the ability and willingness of mortgagors to repay their loans. No
prediction can be made as to the effect of an economic downturn on the rate
of delinquencies and losses on the mortgage loans.
The origination disclosure practices for the mortgage loans could create
liabilities that may affect your certificates.
______% of the mortgage loans included in the mortgage loan pool are
subject to special rules, disclosure requirements and other regulatory
provisions because they are high cost loans.
Purchasers or assignees of these mortgage loans, including the trust, could
be exposed to all claims and defenses that the mortgagors could assert
against the originators of the mortgage loans. Remedies available to a
mortgagor include monetary penalties, as well as rescission rights if the
appropriate disclosures were not given as required. See "Certain Legal
Aspects of the Trust Assets and Related Matters" in the prospectus.
The underwriting standards for the mortgage loans create greater risks to you,
compared to those for first lien loans.
The underwriting standards under which the mortgage loans were underwritten
are analogous to credit lending, rather than mortgage lending, since
underwriting decisions were based primarily on the borrower's credit
history and capacity to repay rather than on the value of the collateral
upon foreclosure. The underwriting standards allow loans to be approved
with combined loan-to-value ratios of up to 125%. See "Description of the
Mortgage Pool--Underwriting Standards" in this prospectus supplement.
Because of the relatively high combined loan-to-value ratios of the
mortgage loans and the fact that the mortgage loans are secured by junior
liens, losses on the mortgage loans will likely be higher than on first
lien mortgage loans.
S-10
<PAGE>
The return on your certificates may be particularly sensitive to changes in real
estate markets in specific areas.
One risk of investing in the certificates is created by concentration of
the related mortgaged properties in one or more geographic regions.
Approximately ____% of the cut-off date principal balance of the mortgage
loans are located in California. If the regional economy or housing market
weakens in California, or in any other region having a significant
concentration of the properties underlying the mortgage loans, the mortgage
loans related to properties in that region may experience high rates of
loss and delinquency, resulting in losses to certificateholders. A region's
economic condition and housing market may be adversely affected by a
variety of events, including natural disasters such as earthquakes,
hurricanes, floods and eruptions, and civil disturbances such as riots.
The reloading of debt could increase your risk.
With respect to mortgage loans which were used for debt consolidation,
there can be no assurance that the borrower will not incur further debt.
This reloading of debt could impair the ability of borrowers to service
their debts, which in turn could result in higher rates of delinquency and
loss on the mortgage loans.
Loss Mitigation
Practices
The release of a lien may increase your risk.
The master servicer may use a wide variety of practices to limit losses on
the mortgage loans. The servicing agreement permits the master servicer to
release the lien on a limited number of mortgaged properties securing the
mortgage loans, if the mortgage loan is current in payment. See "Pooling
and Servicing Agreement--Refinancing of Senior Lien" and "--Collection and
Liquidation Practices; Loss Mitigation" in this prospectus supplement.
Limited Obligations
Payments on the mortgage loans, together with the certificate guaranty insurance
policy, are the sole source of payments on your certificates.
Credit enhancement includes excess interest, overcollateralization and
the certificate guaranty insurance policy. None of the depositor, the
master servicer or any of their affiliates will have any obligation to
replace or supplement the credit enhancement, or to take any other
action to maintain any rating of the certificates. If any losses are
incurred on the mortgage loans that are not covered by the credit
enhancement, the holders of the certificates will bear the risk of these
losses.
S-11
<PAGE>
Liquidity Risks
You may have to hold your certificates to maturity if their marketability is
limited.
A secondary market for your certificates may not develop. Even if a
secondary market does develop, it may not continue, or it may be illiquid.
Illiquidity means you may not be able to find a buyer to buy your
securities readily or at prices that will enable you to realize a desired
yield. Illiquidity can have an adverse effect on the market value of the
certificates.
Special Yield and Prepayment Considerations
The yield to maturity on your certificates will vary depending on the rate of
prepayments.
The yield to maturity of the certificates will depend on a variety of
factors, including:
o the rate and timing of principal payments on the mortgage loans,
including prepayments, defaults and liquidations, and repurchases
due to breaches of representations or warranties;
o the pass-through rate for that class; and
o the purchase price.
The rate of prepayments is one of the most important
and least predictable of these factors.
In general, if you purchase a certificate at a price
higher than its outstanding principal balance and
principal payments occur faster than you assumed at the
time of purchase, your yield will be lower than
anticipated. Conversely, if you purchase a certificate
at a price lower than its outstanding principal balance
and principal payments occur more slowly than you
assumed at the time of purchase, your yield will be
lower than anticipated.
S-12
<PAGE>
The rate of prepayments on the mortgage loans will vary depending on future
market conditions and other factors.
Since mortgagors can generally prepay their mortgage loans at any time, the
rate and timing of principal payments on the certificates are highly
uncertain. Generally, when market interest rates increase, mortgagors are
less likely to prepay their mortgage loans. This could result in a slower
return of principal to you at a time when you might have been able to
reinvest those funds at a higher rate of interest than the pass-through
rate on your class of certificates. On the other hand, when market interest
rates decrease, borrowers are generally more likely to prepay their
mortgage loans. This could result in a faster return of principal to you at
a time when you might not be able to reinvest those funds at an interest
rate as high as the pass-through rate on your class of certificates.
Refinancing programs, which may involve soliciting all or some of the
mortgagors to refinance their mortgage loans, may increase the rate of
prepayments on the mortgage loans.
______% of the mortgage loans provide for payment of a prepayment charge.
Prepayment charges may reduce the rate of prepayment on the mortgage loans
until the end of the related prepayment period. See "Description of the
Mortgage Pool--Mortgage Pool Characteristics" in this prospectus supplement
and "Yield and Prepayment Considerations" in the prospectus.
The yield on your certificates will be affected by the specific forms that apply
to that class discussed below. [Class A-I Certificates and Class A-II
Certificates
The offered certificates of each class have different yield considerations
and different sensitivities to the rate and timing of principal
distributions. The following is a general discussion of some yield
considerations and prepayment sensitivities of each class.
See "Material Yield and Prepayment Considerations" in this prospectus
supplement.
[Class A-I Certificates and Class A-II Certificates]
The Class A-I Certificates will receive principal payments primarily from
the group I mortgage loans. The Class A-II Certificates will receive
principal payments primarily from the group II loans. Therefore, the yields
on the Class A-I Certificates and Class A-II Certificates will be sensitive
to the rate and timing of principal prepayments and defaults on the
mortgage loans in their respective loan groups.]
S-13
<PAGE>
[Class A-I Certificates
The Class A-I Certificates are subject to various priorities for payment of
principal as described in this prospectus supplement. Distributions of
principal on the Class A-I Certificates having a earlier priority of
payment will be affected by the rates of prepayment of the group I loans
early in the life of the mortgage pool. Those classes of Class A-I
Certificates with a later priority of payment will be affected by the rates
of prepayment of the group I loans experienced both before and after the
commencement of principal distributions on those classes.]
See "Description of the Certificates--Principal Distributions" in this
prospectus supplement.
[Class A-I-6 Certificates
It is not expected that the Class A-I-6 Certificates will receive any
distributions of principal until the distribution date in __________. Until
the distribution date in ____________, the Class A-I-6 Certificates may
receive a portion of principal prepayments that is smaller than its pro
rata share of principal payments from the mortgage loans.]
[Class IO Certificates
An extremely rapid rate of principal prepayments on the mortgage loans
could result in the failure of investors in the Class IO Certificates to
fully recover their initial investments.]
See "Material Yield and Prepayment Considerations" and especially "--Fixed
Strip Certificate Yield Considerations" in this prospectus supplement.
S-14
<PAGE>
INTRODUCTION
The depositor will establish a trust with respect to Series _______ on
the closing date, under a pooling and servicing agreement among the depositor,
the master servicer and the trustee, dated as of the cut-off date. On the
closing date, the depositor will deposit into the trust a pool of mortgage
loans, that in the aggregate will constitute a mortgage pool, secured by closed
end, fixed-rate, fully amortizing and Balloon Loans.
Some capitalized terms used in this prospectus supplement have the
meanings given below under "Description of the Certificates--Glossary of Terms"
or in the prospectus under "Glossary."
DESCRIPTION OF THE MORTGAGE POOL
General
The mortgage pool will consist of approximately _______ mortgage loans
having an aggregate principal balance outstanding as of the close of business on
the day prior to the cut-off date of $_______. The mortgage pool will consist of
two groups of mortgage loans, Loan Group I and Loan Group II, and each, a Loan
Group, designated as the Group I Loans and Group II Loans. _______% of the
mortgage loans are secured by second liens on fee simple or leasehold interests
in one- to four-family residential real properties and the remainder are secured
by first liens. In each case, the property securing the mortgage loan is
referred to as the mortgaged property. The mortgage loans will consist of
fixed-rate, fully-amortizing and balloon payment mortgage loans with terms to
maturity of approximately five, ten, fifteen, twenty or twenty-five years with
respect to __%, __%, __%, __% and __% of the mortgage loans, respectively, from
the date of origination or modification. With respect to mortgage loans which
have been modified, references in this prospectus supplement to the date of
origination shall be deemed to be the date of the most recent modification. All
percentages of the mortgage loans described in this prospectus supplement are
approximate percentages by aggregate cut-off date balance unless otherwise
indicated.
All of the mortgage loans were purchased by the depositor through its
affiliate, Residential Funding Corporation in that capacity, the seller from
banks, savings and loan associations, mortgage bankers, investment banking firms
and other home equity loan originators and sellers, under the seller's Home
Equity Program, on a servicing released basis. __% of the mortgage loans were
acquired by the seller from HomeComings Financial Network, Inc., an affiliate of
the seller. No unaffiliated seller sold more than __% of the mortgage loans to
Residential Funding. All of the mortgage loans will be serviced by GMAC Mortgage
Corporation. See "--The Initial Subservicer" below.
All of the mortgage loans were underwritten in conformity with or in a
manner generally consistent with the Home Equity Program. See "--Underwriting
Standards" below.
S-15
<PAGE>
The depositor and Residential Funding will make some limited
representations and warranties regarding the mortgage loans as of the closing
date. The depositor and Residential Funding will be required to repurchase or
substitute for any mortgage loan as to which a breach of its representations and
warranties with respect to that mortgage loan occurs if the breach materially
adversely affects the interests of the certificateholders or the credit enhancer
under "Description of the Certificates-Certificate Guaranty Insurance Policy" in
that mortgage loan. Each seller has made or will make some limited
representations and warranties regarding the related mortgage loans, as of the
date of their purchase by Residential Funding. However, the representations and
warranties will not be assigned to the trustee for the benefit of the holders of
the certificates, and therefore a breach of the representations and warranties
will not be enforceable on behalf of the trust. See "Mortgage Loan
Program--Qualifications of Sellers" and "--Representations Relating to Mortgage
Loans" and "Description of the Securities--Review of Trust Assets" in the
prospectus.
Payments on the Simple Interest Mortgage Loans
__% and __% of the Group I Loans and Group II Loans, respectively, are
Simple Interest Mortgage Loans, which require that each monthly payment consist
of an installment of interest which is calculated according to the simple
interest method on the basis of the outstanding principal balance of that
mortgage loan multiplied by the mortgage rate and further multiplied by a
fraction, the numerator of which is the number of days in the period elapsed
since the preceding payment of interest was made and the denominator of which is
the number of days in the annual period for which interest accrues on that
mortgage loan. As payments are received, the amount received is applied first to
interest accrued to the date of payment and the balance is applied to reduce the
unpaid principal balance.
Accordingly, if a mortgagor pays a fixed monthly installment before its
scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be less than it would have been
had the payment been made as scheduled, and the portion of the payment applied
to reduce the unpaid principal balance will be correspondingly greater. However,
the next succeeding payment will result in an allocation of a greater portion of
the payment allocated to interest if that payment is made on its scheduled due
date.
On the other hand, if a mortgagor pays a fixed monthly installment after
its scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be greater than it would have
been had the payment been made as scheduled, and the remaining portion, if any,
of the payment applied to reduce the unpaid principal balance will be
correspondingly less. If each scheduled payment is made on or prior to its
scheduled due date, the principal balance of the mortgage loan will amortize in
the manner described in the preceding paragraph. However, if the mortgagor
consistently makes scheduled payments after the scheduled due date the mortgage
loan will amortize more slowly than scheduled. Any remaining unpaid principal is
payable on the final maturity date of the mortgage loan.
S-16
<PAGE>
The remaining __% and __% of the Group I Loans and Group II Loans,
respectively, are Actuarial Mortgage Loans, on which 30 days of interest is owed
each month irrespective of the day on which the payment is received.
Balloon Loans
__% and __% of the Group I Loans and Group II Loans, respectively, are
Balloon Loans, which require monthly payments of principal based on a 30-year
amortization schedule and have scheduled maturity dates of approximately fifteen
years from the due date of the first monthly payment, in each case leaving a
Balloon Payment on the respective scheduled maturity date. The existence of a
Balloon Payment will require the related mortgagor to refinance the mortgage
loan or to sell the mortgaged property on or prior to the scheduled maturity
date. The ability of a mortgagor to accomplish either of these goals will be
affected by a number of factors, including the level of available mortgage rates
at the time of sale or refinancing, the mortgagor's equity in the related
mortgaged property, the financial condition of the mortgagor, tax laws,
prevailing general economic conditions and the terms of any related first lien
mortgage loan. None of the depositor, the master servicer or the trustee is
obligated to refinance any Balloon Loan. The policy issued by the credit
enhancer will provide coverage on any losses incurred upon liquidation of a
Balloon Loan arising out of or in connection with the failure of a mortgagor to
make its Balloon Payment. See "Description of the Certificates--Certificate
Guaranty Insurance Policy" in this prospectus supplement.
Mortgage Pool Characteristics
All of the mortgage loans have principal and interest payable monthly on
various days of each month as specified in the mortgage note, each a due date.
In connection with each mortgage loan that is secured by a leasehold
interest, the related seller will have represented to Residential Funding that,
among other things:
o the use of leasehold estates for residential properties is an accepted
practice in the area where the related mortgaged property is located;
o residential property in the area consisting of leasehold estates is readily
marketable;
o the lease is recorded and no party is in any way in breach of any provision
of the lease;
o the leasehold is in full force and effect and is not subject to any prior
lien or encumbrance by which the leasehold could be terminated or subject
to any charge or penalty; and
o the remaining term of the lease does not terminate less than ten years
after the maturity date of that mortgage loan.
S-17
<PAGE>
__% of the Group I Loans and __% of the Group II Loans provide for
payment of a prepayment charge, if these loans prepay within a specified time
period. The prepayment charge generally is the maximum amount permitted under
applicable state law. __% of the Group I Loans and __% of the Group II Loans
provide for payment of a prepayment charge for full prepayments made within
approximately three years of the origination of the mortgage loans in an amount
calculated in accordance with the terms of the related mortgage note. The master
servicer will be entitled to all prepayment charges and late payment charges
received on the mortgage loans and these amounts will not be available for
payment on the certificates.
As of the cut-off date, no mortgage loan will be 30 days or more
delinquent in payment of principal and interest. For a description of the
methodology used to categorize mortgage loans as delinquent, see "--Delinquency
and Loss Experience of the Master Servicer's Portfolio," below.
As of the cut-off date, __% and __% of the Group I Loans and Group II
Loans, respectively, were High Cost Loans. Purchasers or assignees of any High
Cost Loan, including the trust, could be liable for all claims and subject to
all defenses that the borrower could assert against the originator of the loan.
Remedies available to the borrower include monetary penalties, as well as
rescission rights if appropriate disclosures were not given as required. See
"Risk Factors--Risk of Loss" in this prospectus supplement and "Certain Legal
Aspects of the Trust Assets and Related Matters--Anti-Deficiency Legislation and
Other Limitations on Lenders" in the prospectus.
No mortgage loan provides for deferred interest, negative amortization
or future advances.
With respect to each mortgage loan, the combined LTV ratio will be the
ratio, expressed as a percentage, of:
o the sum of:
o the original principal balance of the mortgage loan and
o any outstanding principal balance, at the time of
origination of the mortgage loan, of all other mortgage
loans, if any, secured by senior or subordinate liens on
the related mortgaged property, to
o the appraised value, or, to the extent permitted by Residential
Funding's Client Guide, the Stated Value.
The appraised value for any mortgage loan will be the appraised value of
the related mortgaged property determined in the appraisal used in the
origination of the mortgage loan, which may have been obtained at an earlier
time; provided that if the mortgage loan was originated simultaneously with or
not more than 12 months after a senior lien on the related mortgaged property,
the appraised value shall be the lesser of the appraised value at the
origination of the senior lien and the sales price for the mortgaged property.
With respect to not more than __% and __% of the Group I Loans and Group
II Loans, respectively, the Stated Value will not be the appraised value, but
will be the value of the mortgaged
S-18
<PAGE>
property as stated by the related mortgagor in his or her loan application. See
"Trust Asset Program--Underwriting Standards" in the prospectus and "Description
of the Mortgage Pool--Underwriting Standards" in this prospectus supplement.
__% and __% of the Group I Loans and Group II Loans, respectively, were
originated under full documentation underwriting programs.
Group I Loans
None of the Group I Loans were originated prior to ____________ or has a
maturity date later than ____________. No Group I Loan has a remaining term to
stated maturity as of the cut-off date of less than __ months. The weighted
average remaining term to stated maturity of the Group I Loans as of the cut-off
date is approximately __ months. The weighted average original term to stated
maturity of the Group I Loans as of the cut-off date is approximately __ months.
__% of the Group I Loans are fully amortizing and have original terms to
maturity of approximately five years, with a weighted average remaining term to
stated maturity of these Group I Loans of __ months. __% of the Group I Loans
are fully amortizing and have original terms of maturity of approximately ten
years, with a weighted average remaining term to stated maturity of these Group
I Loans of __ months. __% of the Group I Loans are fully amortizing and have
original terms to maturity of approximately fifteen years, with a weighted
average remaining term to stated maturity of these Group I Loans of __ months.
__% of the Group I Loans are fully amortizing and have original terms to
maturity of approximately twenty years, with a weighted average remaining term
to stated maturity of these Group I Loans of __ months. __% of the Group I Loans
are fully amortizing and have original terms to maturity of approximately
twenty-five years, with a weighted average remaining term to stated maturity of
these Group I Loans of __ months. The Balloon Loans in Loan Group I have
original terms to maturity of approximately fifteen years based on 30-year
amortization schedules, with a weighted average remaining term to stated
maturity of __ months.
Below is a description of some additional characteristics of the Group I
Loans as of the cut- off date, unless otherwise indicated. Unless otherwise
specified, all principal balances of the Group I Loans are approximate
percentages by aggregate principal balance of the Group I Loans as of the
cut-off date and are rounded to the nearest dollar.
<TABLE>
<CAPTION>
Original Mortgage Loan Principal Balances of the Group I Loans
Number of
Original Mortgage Loan Principal Mortgage Cut-off Date Percent of
Balances Loans Balance Group I Loans
_______________________________________________________________________________________________
<S> <C>
$ - $ $ %
$ - $ %
S-19
<PAGE>
$ - $ %
$ - $ %
$ - $ %
$ - $ %
$ - $ %
$ - $ %
$ - $ %
$ - $ %
Greater than $ $ %
---------- --------------- ---------
Total............................. $ %
========== ========== =========
</TABLE>
As of the cut-off date, the average unpaid principal balance of the
Group I Loans was approximately $_____.
<TABLE>
<CAPTION>
Mortgage Rates of the Group I Loans
Number of
Mortgage Cut-off Date Percent of
Mortgage Rate (%) Loans Balance Group I Loans
_______________________________________________________________________________________________
<S> <C>
- $ %
- %
- %
- %
- %
- %
- %
- %
- %
- %
- %
- %
S-20
<PAGE>
- %
- %
------- ------- --------
Total..................... $ %
======= ================= ======
</TABLE>
As of the cut-off date, the weighted average mortgage rate of the Group
I Loans was approximately _____% per annum.
<TABLE>
<CAPTION>
Original Combined LTV Ratios of the Group I Loans
Number of
Mortgage Cut-off Date Percent of
Combined LTV Ration(%) Loans Balance Group I Loans
_______________________________________________________________________________________________
<S> <C>
- $ %
- %
- %
- %
- %
- %
- %
- %
- %
- %
- %
------- ------- ------
Total..................... $ %
======= ========================
</TABLE>
The weighted average original combined LTV ratio of the Group I Loans
was approximately __% as of the cut-off date.
<TABLE>
<CAPTION>
Junior Ratios of the Group I Loans
S-21
<PAGE>
Number of
Mortgage Cut-off Date Percent of
Junior Ratio (%) Loans Balance Group I Loans
_______________________________________________________________________________________________
<S> <C>
- $ %
- %
- %
- %
- %
- %
- %
- %
- %
- %
------- ------- ------
Total....................... $ %
======= ======= ======
</TABLE>
_____________________
o Excludes mortgage loans secured by first liens on the related
mortgaged property. With respect to each mortgage loan secured by
a second lien on the related mortgaged property, the Junior Ratio
is the ratio of the original principal balance of the mortgage
loan to the sum of (i) the original principal balance of that
mortgage loan, and (ii) the unpaid principal balance of any
senior lien at the time of the origination of that mortgage loan.
The weighted average Junior Ratio as of the cut-off date was approximately __%.
<TABLE>
<CAPTION>
Geographic Distribution of Mortgaged Properties of the Group I
Loans
Number of
Mortgage Cut-off Date Percent of
State Loans Balance Group I Loans
_______________________________________________________________________________________________
S-22
<PAGE>
<S> <C>
California................................. $ %
Virginia................................... %
Maryland................................... %
New Jersey................................. %
Colorado................................... %
Other...................................... %
--- --- ---
Total.................................. $ %
=== === ===
</TABLE>
o "Other" includes states and the District of Columbia that contain less
than 2.00% of the Group I Loans.
<TABLE>
<CAPTION>
Mortgaged Property Types of the Group I Loans
Number of
Mortgage Cut-off Date Percent of
Property Loans Balance Group I Loans
_______________________________________________________________________________________________
<S> <C>
Single Family Residence.................... $ %
PUD Detached............................... %
PUD Attached............................... %
Condominium................................ %
Multifamily (2-4 Units).................... %
Townhouse/Rowhouse Attached................ %
Townhouse/Rowhouse Detached................ %
Manufactured Home.......................... %
--- --- ---
Total...................................... $ %
=== === ===========
</TABLE>
S-23
<PAGE>
<TABLE>
<CAPTION>
Occupancy Types of the Group I Loans
Number of
Mortgage Cut-off Date Percent of
Occupancy (as indicated by mortgagor) Loans Balance Group I Loans
_______________________________________________________________________________________________
<S> <C>
Primary Residence.......................... $ %
--- --- ---
Total...................................... $ %
=== === ===
Lien Priority of the Group I Loans
Number of
Mortgage Cut-off Date Percent of
Lien Property Loans Balance Group I Loans
_______________________________________________________________________________________________
Second Lien................................ $ %
--- --- ---
Total............................... $ %
=== === ===
</TABLE>
<TABLE>
<CAPTION>
Remaining Term of Scheduled Maturity of the Group I Loans
Number of
Mortgage Cut-off Date Percent of
Months Remaining to Scheduled Maturity Loans Balance Group I Loans
_______________________________________________________________________________________________
<S> <C>
$
%
%
%
%
%
S-24
<PAGE>
%
Total.............................. $ %
=========================================
</TABLE>
The weighted average remaining term to maturity of the Group I Loans as
of the cut-off date was approximately ___ months.
<TABLE>
<CAPTION>
Year of Origination of the Group I Loans
Number of
Mortgage Cut-off Date Percent of
Year of Origination Loans Balance Group I Loans
_______________________________________________________________________________________________
<S> <C>
$ %
%
%
%
Total............................... $ %
=== === ==========
</TABLE>
Group II Loans
None of the Group II Loans were originated prior to _______ or has a
maturity date later than _______. No Group II Loan has a remaining term to
stated maturity as of the cut-off date of less than __ months. The weighted
average remaining term to stated maturity of the Group II Loans as of the
cut-off date is approximately __ months. The weighted average original term to
stated maturity of the Group II Loans as of the cut-off date is approximately __
months. __% of the Group II Loans are fully amortizing and have original terms
to maturity of approximately five years, with a weighted average remaining term
to stated maturity of these Group II Loans of __ months. __% of the Group II
Loans are fully amortizing and have original terms of maturity of approximately
ten years, with a weighted average remaining term to stated maturity of these
Group II Loans of __ months. __% of the Group II Loans are fully amortizing and
have original terms to maturity of
S-25
<PAGE>
approximately fifteen years, with a weighted average remaining term to stated
maturity of these Group II Loans of __ months. __% of the Group II Loans are
fully amortizing and have original terms to maturity of approximately twenty
years, with a weighted average remaining term to stated maturity of these Group
II Loans of __ months. __% of the Group II Loans are fully amortizing have
original terms to maturity of approximately twenty-five years, with a weighted
average remaining term to stated maturity of these Group II Loans of __ months.
The Balloon Loans in Loan Group II have original terms to maturity of
approximately fifteen years based on 30-year amortization schedules, with a
weighted average remaining term to stated maturity of __ months.
Below is a description of some additional characteristics of the Group
II Loans as of the cut- off date unless otherwise indicated. Unless otherwise
specified, all principal balances of the Group II Loans are approximate
percentages by aggregate principal balance of the Group II Loans as of the
cut-off date and are rounded to the nearest dollar.
<TABLE>
<CAPTION>
Original Mortgage Loan Principal Balances of the Group II Loans
Number of
Mortgage Cut-off Date Percent of
Original Mortgage Loan Principal Balances Loans Balance Group II Loans
_______________________________________________________________________________________________
<S> <C> <C>
$ - $ $ %
$ - $
$ - $
$ - $
$ - $
$ - $
$ - $
$ - $
$ - $
$ - $
Greater than $
Total........................... $ %
========== ========== ---------
</TABLE>
S-26
<PAGE>
As of the cut-off date, the average unpaid principal balance of the
Group II Loans was approximately $____.
<TABLE>
<CAPTION>
Mortgage Rates of the Group II Loans
Number of
Mortgage Cut-off Date Percent of
Mortgage Rates (%) Loans Balance Group II Loans
_______________________________________________________________________________________________
<S> <C>
$ %
Total.......................... $ %
========================================
</TABLE>
As of the cut-off date, the weighted average mortgage rate of the Group
II Loans was approximately ___% per annum.
S-27
<PAGE>
<TABLE>
Original Combined LTV Ratios of the Group II Loans
Number of
Mortgage Cut-off Date Percent of
Combined LTV Ratio (%) Loans Balance Group II Loans
_______________________________________________________________________________________________
<S> <C>
$ %
Total.......................... $ %
=======================================
</TABLE>
The weighted average original combined LTV ratio of the Group II Loans
was approximately ___% as of the cut-off date.
<TABLE>
<CAPTION>
Junior Ratios of the Group II Loans
Number of
Mortgage Cut-off Date Percent of
Junior Ratio (%) Loans Balance Group II Loans
_______________________________________________________________________________________________
<S> <C>
$ %
S-28
<PAGE>
Total........................... $ %
=====================================
</TABLE>
- ------------------
o Excludes mortgage loans secured by first liens on the related mortgaged
property. With respect to each mortgage loan secured by a second lien on
the related mortgaged property, the Junior Ratio is the ratio of the
original principal balance of the mortgage loan to the sum of (i) the
original principal balance of that mortgage loan, and (ii) the unpaid
principal balance of any senior lien at the time of the origination of
that mortgage loan.
The weighted average Junior Ratio of the Group II Loans as of the
cut-off date was approximately ___%.
<TABLE>
<CAPTION>
Geographic Distribution of Mortgaged Properties of the Group II
Loans
Number of
Mortgage Cut-off Date Percent of
State Loans Balance Group II Loans
_______________________________________________________________________________________________
<S> <C>
California................................. $ %
Virginia...................................
S-29
<PAGE>
Maryland...................................
Washington.................................
Florida....................................
Colorado...................................
Michigan...................................
Georgia....................................
Other......................................
Total................................. $ %
================================================
</TABLE>
o "Other" includes states and the District of Columbia that contain
less than ___% of the Group II Loans.
<TABLE>
<CAPTION>
Mortgaged Property Types of the Group II Loans
Number of
Mortgage Cut-off Date Percent of
Property Loans Balance Group II Loans
_______________________________________________________________________________________________
<S> <C>
Single Family Residence.................... $ %
PUD Detached...............................
Condominium................................
PUD Attached...............................
Townhouse/Rowhouse Attached................
Manufactured Home..........................
Total...................................... $ %
=================================================
</TABLE>
Occupancy Types of the Group II Loans
S-30
<PAGE>
<TABLE>
<CAPTION>
Number of
Mortgage Cut-off Date Percent of
Occupancy (as indicated by mortgagor) Loans Balance Group II Loans
_______________________________________________________________________________________________
<S> <C>
Primary.................................... $ %
Second/Vacation............................
Total................................. $ %
================================================
Lien Priority of the Group II Loans
Number of
Mortgage Cut-off Date Percent of
Lien Priority Loans Balance Group II Loans
_______________________________________________________________________________________________
First Lien................................. $ %
Second Lien................................
Total................................. $ %
===============================================
</TABLE>
<TABLE>
<CAPTION>
Remaining Term of Scheduled Maturity of the Group II Loans
Number of
Mortgage Cut-off Date Percent of
Months Remaining to Scheduled Maturity Loans Balance Group II Loans
_______________________________________________________________________________________________
<S> <C>
$ %
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<PAGE>
Total.............................. $ %
========================================
</TABLE>
The weighted average remaining term to maturity of the Group II Loans of
the cut-off date was approximately ___ months.
<TABLE>
<CAPTION>
Year of Origination of the Group II Loans
Number of
Mortgage Cut-off Date Percent of
Year Of Origination Loans Balance Group II Loans
_______________________________________________________________________________________________
<S> <C>
$ %
Total...................................... $ %
========================================
</TABLE>
Credit Scores are obtained by many mortgage lenders in connection with
mortgage loan applications to help assess a borrower's credit-worthiness. In
addition, Credit Scores may be obtained by Residential Funding after the
origination of a mortgage loan if the seller does not provide to Residential
Funding a Credit Score. Credit Scores are obtained from credit reports provided
by various credit reporting organizations, each of which may employ
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<PAGE>
differing computer models and methodologies. The Credit Score is designed to
assess a borrower's credit history at a single point in time, using objective
information currently on file for the borrower at a particular credit reporting
organization. Information utilized to create a Credit Score may include, among
other things, payment history, delinquencies on accounts, levels of outstanding
indebtedness, length of credit history, types of credit, and bankruptcy
experience. Credit Scores range from approximately 350 to approximately 840,
with higher scores indicating an individual with a more favorable credit history
compared to an individual with a lower score. However, a Credit Score purports
only to be a measurement of the relative degree of risk a borrower represents to
a lender, i.e., a borrower with a higher score is statistically expected to be
less likely to default in payment than a borrower with a lower score. In
addition, it should be noted that Credit Scores were developed to indicate a
level of default probability over a two-year period, which does not correspond
to the life of a mortgage loan. Furthermore, Credit Scores were not developed
specifically for use in connection with mortgage loans, but for consumer loans
in general, and assess only the borrower's past credit history. Therefore, a
Credit Score does not take into consideration the differences between mortgage
loans and consumer loans generally, or the specific characteristics of the
related mortgage loan, for example, the combined LTV ratio, the collateral for
the mortgage loan, or the debt to income ratio. There can be no assurance that
the Credit Scores of the mortgagors will be an accurate predictor of the
likelihood of repayment of the related mortgage loans or that any mortgagor's
Credit Score would not be lower if obtained as of the date of this prospectus
supplement.
The following tables described information as to the Credit Scores of
the related mortgagors as used in the origination of the Group I Loans and Group
II Loans.
<TABLE>
<CAPTION>
Credit Score Distribution of the Group I Loans
Number of
Mortgage Cut-off Date Percent of
Credit Score Range Loans Balance Group I Loans
_______________________________________________________________________________________________
<S> <C>
$ %
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<PAGE>
%
Total for Loan Group I..................... $ %
=============================================
</TABLE>
<TABLE>
<CAPTION>
Credit Score Distribution of the Group II Loans
Number of
Mortgage Cut-off Date Percent of
Credit Score Range Loans Balance Group II Loans
_______________________________________________________________________________________________
<S> <C>
$ %
Total for Loan Group II............... $ %
==============================================
</TABLE>
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<PAGE>
Underwriting Standards
The following is a brief description of the various underwriting
standards and procedures applicable to the mortgage loans. For a more detailed
description of the underwriting standards and procedures applicable to the
mortgage loans, see "Trust Asset Program--Underwriting Standards" in the
prospectus.
Residential Funding's underwriting standards with respect to the
mortgage loans generally will conform to those published in the Client Guide,
including the provisions of the Client Guide applicable to the Home Equity
Program. The underwriting standards as described in the Client Guide are
continuously revised based on prevailing conditions in the residential mortgage
market and the market for mortgage securities. Under the Client Guide, the
mortgage loans are generally underwritten by the related seller or by a
designated third party, and Residential Funding or a designated third party may
perform only sample quality assurance reviews to determine whether mortgage
loans purchased by it were underwritten in accordance with applicable standards.
Each seller is an entity approved by Residential Funding for
participation in the Home Equity Program. Each seller was required at the time
of its approval to meet eligibility requirements, including minimum origination
and net worth levels determined by Residential Funding. However, there can be no
assurance that any seller currently meets these standards. In most cases, the
seller will have originated the mortgage loans sold by it to Residential Funding
either directly or through correspondents or loan brokers, and will have
underwritten each mortgage loan prior to funding.
The underwriting standards described in the Client Guide with respect to
mortgage loans originated under the Home Equity Program generally require that
the mortgage loans be fully documented or that the mortgage loans be supported
by alternative documentation. For fully documented loans, a prospective borrower
is required to fill out a detailed application providing pertinent credit
information. For alternatively documented loans, a borrower may demonstrate
income and employment directly by providing alternative documentation in the
form of copies of the borrower's own records relating thereto, rather than by
having the originator obtain independent verifications from third parties,
including the borrower's employer or mortgage servicer.
In determining the adequacy of the mortgaged property as collateral for
a mortgage loan originated under the Home Equity Program, an appraisal is made
of each property considered for financing. Mortgage loans included in the
mortgage pool typically were originated subject to a maximum combined LTV ratio
of 100%. The mortgage loans were also subject to a maximum total monthly debt to
income ratio of 55%. There can be no assurance that the combined LTV ratio or
the debt to income ratio for any mortgage loans will not increase from the
levels established at origination.
The underwriting standards described in the Client Guide with respect to
mortgage loans originated under the Home Equity Program may be varied in
appropriate cases. There can be no
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<PAGE>
assurance that every mortgage loan was originated in conformity with the
applicable underwriting standards in all material respects, or that the quality
or performance of the mortgage loans will be equivalent under all circumstances.
Optional Repurchase of Defaulted Mortgage Loans
Under the pooling and servicing agreement, the master servicer will have
the option to purchase from the trust any mortgage loan that is 60 days or more
delinquent at a purchase price equal to the unpaid principal balance of the
mortgage loan plus its accrued interest.
The Initial Subservicer
GMAC Mortgage Corporation, an affiliate of the depositor and the master
servicer, is the initial subservicer of the mortgage loans. GMAC Mortgage will
act as initial subservicer for the mortgage loans under a subservicing agreement
with the master servicer. GMAC Mortgage is a wholly-owned indirect subsidiary of
General Motors Acceptance Corporation. GMAC Mortgage is engaged in the mortgage
banking business, including the origination, purchase, sale and servicing of
residential loans.
GMAC Mortgage's executive offices are located at 100 Witmer Road,
Horsham, Pennsylvania 19044-0963.
Residential Funding
Residential Funding will be responsible for master servicing the
mortgage loans. Responsibilities of Residential Funding will include the receipt
of funds from subservicers, the reconciliation of servicing activity, investor
reporting and remittances to the trustee to accommodate distributions to
certificateholders. In addition, Residential Funding will take over the primary
servicing of any mortgage loans currently subserviced by GMAC Mortgage, if the
mortgage loans become delinquent. Residential Funding is not required to make
advances relating to delinquent payments of principal and interest on the
mortgage loans.
For information regarding foreclosure procedures, see "Description of
the Securities--Servicing and Administration of Trust Assets--Realization Upon
Defaulted Loans" in the prospectus. Servicing and charge-off policies and
collection practices may change over time in accordance with the Residential
Funding's business judgment, changes in Residential Funding's portfolio of real
estate secured home equity mortgage loans that it services for its clients and
applicable laws and regulations, and other considerations.
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<PAGE>
Delinquency and Loss Experience of the Master Servicer's Portfolio
The following tables summarize the delinquency and loss experience for
all closed-end home equity loans originated or acquired by the master servicer.
The data presented in the following tables are for illustrative purposes only,
and there is no assurance that the delinquency and loss experience of the
mortgage loans will be similar to that described below.
As used in this prospectus supplement, a loan is considered to be "30 to
59 days" or "30 or more days" delinquent when a payment due on any due date
remains unpaid as of the close of business on the next following monthly due
date. However, since the determination as to whether a loan falls into this
category is made as of the close of business on the last business day of each
month, a loan with a payment due on July 1 that remained unpaid as of the close
of business on July 31 would still be considered current as of July 31. If that
payment remained unpaid as of the close of business on August 31, the loan would
then be considered to be 30 to 59 days delinquent. Delinquency information
presented in this prospectus supplement as of the cut-off date is determined and
prepared as of the close of business on the last business day immediately prior
to the cut-off date.
The information in the tables below has not been adjusted to eliminate
the effect of the significant growth in the size of the master servicer's home
equity mortgage loan portfolio during the periods shown. Accordingly, loss and
delinquency as percentages of aggregate principal balance of these home equity
mortgage loans serviced for each period would be higher than those shown if some
of the home equity mortgage loans were artificially isolated at a point in time
and the information showed the activity only with respect to the home equity
mortgage loans.
There can be no assurance that the delinquency experience described
below will be representative of the results that may be experienced with respect
to the mortgage loans serviced by GMAC Mortgage.
[INSERT DELINQUENCY TABLES HERE]
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.
Additional Information
The description in this prospectus supplement of the mortgage pool and
the mortgaged properties is based upon the mortgage pool as constituted at the
close of business on the cut-off date. Prior to the issuance of the offered
certificates, mortgage loans may be removed from the mortgage
S-37
<PAGE>
pool as a result of incomplete documentation or otherwise, if the depositor
deems the removal necessary or appropriate. A limited number of other mortgage
loans may be added to the mortgage pool prior to the issuance of the
certificates offered by this prospectus supplement. The depositor believes that
the information in this prospectus supplement will be substantially
representative of the characteristics of the mortgage pool as it will be
constituted at the time the certificates offered hereby are issued although the
range of mortgage rates and maturities and some other characteristics of the
mortgage loans in the mortgage pool may vary.
A current report on Form 8-K will be available to purchasers of the
certificates offered hereby and will be filed, together with the pooling and
servicing agreement, with the Securities and Exchange Commission within fifteen
days after the initial issuance of the certificates. In the event mortgage loans
are removed from or added to the mortgage pool as described in the preceding
paragraph, that removal or addition will be noted in the current report.
DESCRIPTION OF THE CERTIFICATES
General
The Series _______ Home Equity Loan Pass-Through Certificates will
include the following seven classes of Class A Certificates and one Class of
Class IO Certificates:
[ o Class A-I-1 Certificates
o Class A-I-2 Certificates
o Class A-I-3 Certificates
o Class A-I-4 Certificates
o Class A-I-5 Certificates
o Class A-I-6 Certificates or the Lockout Certificates; and
together with the Class A-I-1 Certificates, Class A-I-2
Certificates, Class A-I-3 Certificates, Class A-I-4
Certificates and Class A-I-5 Certificates, the Class A-I
Certificates
o Class A-II Certificates; and
o Class IO Certificates, or the Fixed Strip Certificates.
In addition to the offered certificates, the Series _______ Home Equity
Loan Pass-Through Certificates will include two classes of subordinate
certificates which are designated as the Class R-I Certificates and Class R-II
Certificates, together, the Residual Certificates. Only the Class A Certificates
and the Class IO Certificates are offered by this prospectus supplement.
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<PAGE>
The certificates will evidence the entire beneficial ownership interest
in the trust. The trust will consist of:
o the mortgage loans
o the assets as from time to time that are identified as
deposited in respect of the mortgage loans in the
Custodial Account and in the Certificate Account and
belonging to the trust
o property acquired by foreclosure of the mortgage loans or
deed in lieu of foreclosure
o any applicable insurance policies
o the policy; and
o all proceeds of the foregoing.
The Class A-I Certificates and Class A-II Certificates correspond to the
Group I Loans and Group II Loans, respectively, as described in the tables in
this prospectus supplement under "Description of the Mortgage Pool--Mortgage
Pool Characteristics."
The Class A Certificates will be issued in minimum denominations of
$25,000, or a $2,000,000 Notional Amount, in the case of the Fixed Strip
Certificates, and integral multiples of $1 in excess thereof.
Book-Entry Registration of the Offered Certificates
General. Holders of the Class A Certificates, so long as the Class A
Certificates are registered in the name of Cede & Co., are collectively referred
to as the DTC registered certificates. The DTC registered certificateholders may
elect to hold their DTC registered certificates through DTC in the United
States, or Clearstream Banking, societe anonyme, formerly CedelBank SA, or
Clearstream, a professional depository which holds securities for its
participating organizations, or Clearstream customers, or Euroclear in Europe,
if they are Euroclear participants or Clearstream customers, as applicable, of
their systems, or indirectly through organizations which are participants or
customers, as applicable, in their systems.
The DTC registered certificates will be issued in one or more securities
which equal the aggregate Certificate Principal Balance or Notional Amount of
the DTC registered certificates and will initially be registered in the name of
Cede & Co., the nominee of DTC. 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, in those capacities, individually referred to as the relevant
depositary and collectively referred to as the European depositaries, which in
turn will hold these positions in customers' securities accounts in the
depositories' names on the books of DTC. Except as described below, no DTC
registered certificateholder will be entitled to receive a physical certificate
in fully registered form, or a definitive certificate, representing that
security. Unless and until definitive certificates are issued for
S-39
<PAGE>
the DTC registered certificates under the limited circumstances described in
this prospectus supplement, all references to actions by certificateholders with
respect to the DTC registered certificates shall refer to actions taken by DTC
upon instructions from its participants, and all references in this prospectus
supplement to distributions, notices, reports and statements to
certificateholders with respect to the DTC registered certificates shall refer
to distributions, notices, reports and statements to DTC or Cede & Co., as the
registered holder of the DTC registered certificates, for distribution to
beneficial owners by DTC in accordance with DTC procedures. DTC registered
certificateholders will not be "Holders" as that term is used in the pooling and
servicing agreement.
The DTC registered certificateholder's ownership of a DTC registered
certificate will be recorded on the records of the brokerage firm, bank, thrift
institution or other financial intermediary that maintains the DTC registered
certificateholder's account for that purpose. In turn, the financial
intermediary's ownership of the DTC registered certificates will be recorded on
the records of DTC, or of a firm that is a participant and acts as agent for the
financial intermediary, whose interest will in turn be recorded on the records
of DTC, if the DTC registered certificateholder's financial intermediary is not
a DTC participant and on the records of Clearstream or Euroclear, as
appropriate.
DTC registered certificateholders will receive all payments of principal
and interest on the DTC registered certificates from the trustee through DTC and
DTC participants. While the DTC registered certificates are outstanding , except
under the circumstances described below, under the rules, regulations and
procedures creating and affecting DTC and its operations, DTC is required to
make book-entry transfers among participants on whose behalf it acts with
respect to the DTC registered certificates and is required to receive and
transmit payments of principal and interest on the DTC registered certificates.
Participants and indirect participants with whom DTC registered
certificateholders have accounts with respect to DTC registered certificates are
similarly required to make book-entry transfers and receive and transmit the
payments on behalf of their respective DTC registered certificateholders.
Accordingly, although DTC registered certificateholders will not possess
physical certificates, the rules provide a mechanism by which DTC registered
certificateholders will receive payments and will be able to transfer their
interest.
Unless and until definitive certificates are issued, DTC registered
certificateholders who are not participants may transfer ownership of DTC
registered certificates only through participants and Indirect participants by
instructing the participants and indirect participants to transfer the DTC
registered certificates, by book-entry transfer, through DTC for the account of
the purchasers of the DTC registered certificates, which account is maintained
with their respective participants. Under the rules and in accordance with DTC's
normal procedures, transfers of ownership of DTC registered certificates will be
executed through DTC and the accounts of the respective participants at DTC will
be debited and credited. Similarly, the participants and indirect participants
will make debits or credits, as the case may be, on their records on behalf of
the selling and purchasing DTC registered certificateholders.
S-40
<PAGE>
Under a book-entry format, DTC registered certificateholders of the DTC
registered certificates may experience some delay in their receipt of payments,
since the payments will be forwarded by the trustee to Cede & Co.. Payments with
respect to DTC registered certificates held through Clearstream or Euroclear
will be credited to the cash accounts of Clearstream customer or Euroclear
participants in accordance with the relevant system's rules and procedures, to
the extent received by the relevant depositary. The payments will be subject to
tax reporting in accordance with relevant United States tax laws and
regulations. Because DTC can only act on behalf of financial intermediaries, the
ability of a DTC registered certificateholder to pledge DTC registered
certificates to persons or entities that do not participate in the Depositary
system, or otherwise take actions relating to the DTC registered certificates,
may be limited due to the lack of physical certificates for the DTC registered
certificates. In addition, issuance of the DTC registered certificates in
book-entry form may reduce the liquidity of the DTC registered certificates in
the secondary market since some potential investors may be unwilling to purchase
securities for which they cannot obtain physical certificates.
DTC has advised the trustee that, unless and until definitive
certificates are issued, DTC will take any action permitted to be taken by the
holders of the DTC registered certificates under the pooling and servicing
agreement only at the direction of one or more financial intermediaries to whose
DTC accounts the DTC registered certificates are credited, to the extent that
the actions are taken on behalf of financial intermediaries whose holdings
include the DTC registered certificates. Clearstream or the Euroclear operator,
as the case may be, will take any other action permitted to be taken by holders
of DTC registered certificates under the pooling and servicing agreement on
behalf of a Clearstream customer or Euroclear participant only in accordance
with its relevant rules and procedures and subject to the ability of the
relevant depositary to effect the actions on its behalf through DTC. DTC may
take actions, at the direction of the related participants, with respect to some
DTC registered certificates which conflict with actions taken with respect to
other DTC registered certificates.
Definitive certificates will be issued to DTC registered
certificateholders of the DTC registered certificates, or their nominees, rather
than to DTC, if:
o the trustee determines that the DTC is no longer willing,
qualified or able to discharge properly its responsibilities as
nominee and depository with respect to the DTC registered
certificates and the trustee is unable to locate a qualified
successor,
o the trustee elects to terminate a book-entry system through DTC
or
o after the occurrence of an event of default, under the pooling
and servicing agreement, DTC registered certificateholders of any
class aggregating at least a majority of the outstanding voting
rights of the DTC registered certificates advise the DTC through
the financial intermediaries and the DTC participants in writing
that the continuation of a book-entry system through DTC, or a
successor thereto, is no longer in the best interests of the DTC
registered certificateholders.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the trustee will be required to notify all DTC registered
certificateholders of the occurrence of the
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<PAGE>
event and the availability through DTC of definitive certificates. Upon
surrender by DTC of the global certificate or certificates representing the DTC
registered certificates and instructions for re- registration, the trustee will
issue and authenticate definitive certificates, and thereafter the trustee will
recognize the holders of the definitive certificates as holders under the
pooling and servicing agreement.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of DTC registered certificates 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 hereto and "Description of the
Securities--Form of Securities" in the prospectus.
DTC has advised the depositor that management of DTC is aware that some
computer applications, systems and the like for processing data that are
dependent upon calendar dates, including dates before, on and after January 1,
2000, may encounter Y2K problems. DTC has informed its participants and other
members of the financial community that it has developed and is implementing a
program so that its systems, as they relate to DTC services continue to function
appropriately. This program includes a technical assessment and a remediation
plan, each of which is complete. Additionally, DTC's plan includes a testing
phase, which, DTC has advised the Industry, is expected to be completed within
appropriate time frames.
However, DTC's ability to perform properly its services is also
dependent upon other parties, including but not limited to issuers and their
agents, as well as DTC's participants and third party vendors from whom DTC
licenses software and hardware, and third party vendors on whom DTC relies for
information or the provision of services, including telecommunication and
electrical utility service providers, among others. DTC has informed the
industry that it is contacting and will continue to contact third party vendors
from whom DTC acquires services to
o impress upon them the importance of those services being Y2K
compliant; and
o determine the extent of their efforts for Y2K remediation and, as
appropriate, testing of their services. In addition, DTC is in
the process of developing any contingency plans as it deems
appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided to the industry for informational purposes only and is not intended to
serve as a representation, warranty or contract modification of any kind.
None of the depositor, the master servicer or the trustee will have any
liability for any actions taken by DTC or its nominee, including, without
limitation, actions for any aspect of the records relating to or payments made
on account of beneficial ownership interests in the DTC registered certificates
held by Cede & Co., as nominee for DTC, or for maintaining, supervising or
reviewing any records relating to the beneficial ownership interests.
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<PAGE>
For additional information regarding DTC and the DTC registered
certificates, see "Description of the Securities--Form of Securities" in the
prospectus.
Glossary of Terms
Accrued Certificate Interest --With respect to any distribution date, an
amount equal to:
o in the case of each class of offered certificates, other than the
Fixed Strip Certificates, interest accrued during the related
Interest Accrual Period on the Certificate Principal Balance of
the certificates of that class immediately prior to that
distribution date at the per annum rate at which interest accrues
on that class, or pass-through rate; and
o in the case of the Fixed Strip Certificates, interest accrued
during the related Interest Accrual Period on the Notional Amount
thereof for that distribution date at the pass- through rate on
that class for that distribution date, in each case less interest
shortfalls from the mortgage loans, if any, allocated thereto for
that distribution date, including: o any Prepayment Interest
Shortfall to the extent not covered by Excess Cash Flow;
o the interest portions of Realized Losses; and
o any other interest shortfalls on the mortgage loans, including
interest shortfalls relating to the Soldiers' and Sailors' Civil
Relief Act of 1940 or similar legislation or regulations, all
allocated as described below;
provided, however, that in the event that any shortfall described in the
immediately preceding three clauses above is allocated to the offered
certificates, or the Available Distribution Amount on any distribution date is
less than the Senior Interest Distribution Amount for that date, the amount of
any shortfall will be drawn under the policy and distributed to the holders of
the offered certificates. Notwithstanding the foregoing, if payments are not
made as required under the policy, any interest shortfalls may be allocated to
the certificates as described above. See "--Certificate Guaranty Insurance
Policy" below. Accrued Certificate Interest on each class of offered
certificates will be distributed on a pro rata basis. Accrued Certificate
Interest on each class of certificates is calculated on the basis of a 360-day
year consisting of twelve 30-day months.
Available Distribution Amount -- For any distribution date, an amount equal
to:
o the aggregate amount of actual payments on the mortgage loans
received during the related Collection Period after deduction of
the related servicing fees and any subservicing fees and
o some unscheduled collections, including mortgagor prepayments on
the mortgage loans, Insurance Proceeds, Liquidation Proceeds and
proceeds from repurchases of, and some amounts received in
connection with any substitutions for, the mortgage loans,
received during the related collection period.
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<PAGE>
Bankruptcy Amount -- As of any date of determination, an amount equal to
$________ less the sum of any Realized Losses on the mortgage loans due to
Bankruptcy Losses up to that date of determination.
Certificate Principal Balance -- For any class of Class A Certificates
as of any date of determination, the initial Certificate Principal Balance of
that certificate, reduced by the aggregate of:
o all amounts allocable to principal previously distributed with
respect to that
certificate and
o any reductions in the Certificate Principal Balance thereof
deemed to have occurred in connection with allocations of
Realized Losses in the manner described in this prospectus
supplement, unless these amounts have been paid under the policy.
The Certificate Principal Balance of the Class R-II Certificates in the
aggregate, as of any date of determination, is equal to the excess, if any, of
the then aggregate Stated Principal Balance of the mortgage loans over the then
aggregate Certificate Principal Balance of the Class A Certificates. The Class
R[-I] Certificates will have no Certificate Principal Balance.
Class A Principal Distribution Amount -- An amount equal to the lesser
of:
(a) the excess of (i) the Available Distribution Amount over
(ii) the Senior Interest Distribution Amount; and
(b) the sum of:
(i) the portion allocable to principal of all scheduled monthly
payments on the mortgage loans received with respect to the related collection
period;
(ii) the principal portion of all proceeds of the repurchase of
any mortgage loans, or, in the case of a substitution, some amounts representing
a principal adjustment, as required by the pooling and servicing agreement
during the related collection period;
(iii) the principal portion of all other unscheduled collections
received on the mortgage loans during the related collection period, or deemed
to be received during the related collection period, including, without
limitation, full and partial principal prepayments made by the respective
mortgagors, to the extent not previously distributed;
(iv) the amount of any Realized Loss Distribution Amount for that
distribution date; and
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<PAGE>
(v) the amount of any Reserve Increase Amount for that distribution date;
minus
(vi) the amount of any Reserve Reduction Amount for that distribution date.
In no event will the Class A Principal Distribution Amount with respect
to any distribution date be less than zero or greater than the then outstanding
Certificate Principal Balances of the Class A Certificates.
Excess Cash Flow -- For any distribution date, the excess of:
o the Available Distribution Amount for the distribution date over
o the sum of:
o the Senior Interest Distribution Amount payable to the Class
A Certificateholders on that distribution date and
o the sum of the amounts relating to the mortgage loans
described in clauses (b)(i)-(iii) of the definition of Class
A Principal Distribution Amount.
Excess Loss Amount -- On any distribution date, an amount equal to the sum
of:
o any Realized Losses, other than as described in the next
three succeeding clauses below, for the related collection
period which, when added to the aggregate of the Realized
Losses for all preceding collection periods exceed
$________,
o any Special Hazard Losses in excess of the Special Hazard
Amount, o any Fraud Losses in excess of the Fraud Loss
Amount, o any Bankruptcy Losses in excess of the Bankruptcy
Loss Amount, and o Extraordinary Losses.
Excess Reserve Amount --With respect to any distribution date, the
excess, if any, of:
o the Outstanding Reserve Amount on that distribution
date over
o the Reserve Amount Target.
Fraud Loss Amount -- As of any date of determination after the cut-off
date, an amount equal to:
o prior to the first anniversary of the cut-off date, an
amount equal to __% of the aggregate Stated Principal
Balance of the mortgage loans as of the cut-off date
minus the aggregate of any Realized Losses on the
mortgage loans due to Fraud Losses up to that date of
determination;
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<PAGE>
o from the first to the second anniversary of the cut-off date, an
amount equal to:
o the lesser of :
o the Fraud Loss Amount as of the most recent anniversary
of the cut- off date and
o __% of the aggregate Stated Principal Balance of the
mortgage loans as of the most recent anniversary of the
cut-off date minus
o the aggregate of any Realized Losses on the mortgage
loans due to Fraud Losses since the most recent
anniversary of the cut-off date up to that date of
determination; and
o from the second to the fifth anniversary of the cut-off date, an
amount equal to:
o the lesser of:
o the Fraud Loss Amount as of the most recent anniversary
of the cut- off date and
o __% of the aggregate Stated Principal Balance of the
mortgage loans as of the most recent anniversary of the
cut-off date minus
o the aggregate of any Realized Losses on the mortgage
loans due to Fraud Losses since the most recent
anniversary of the cut-off date up to that date of
determination.
On and after the fifth anniversary of the cut-off date, the Fraud Loss Amount
shall be zero.
Interest Accrual Period -- For all classes of certificates, the calendar
month preceding the month in which the distribution date occurs.
Lockout Certificate Percentage -- A percentage calculated for each
distribution date equal to the aggregate Certificate Principal Balance of the
Lockout Certificates divided by the sum of the aggregate Certificate Principal
Balances of the Class A-I Certificates.
Lockout Distribution Percentage -- For any distribution date occurring
prior to the distribution date in _________ , 0%. The Lockout Distribution
Percentage for any distribution date occurring after the first three years
following the closing date will be as follows:
o for any distribution date during the fourth and fifth
years after the closing date, 45%
o for any distribution date during the sixth year after
the closing date, 80% o for any distribution date
during the seventh year after the closing date, 100% o
for any distribution date thereafter, the lesser of:
o 300% of the Lockout Certificate Percentage and
o 100%.
S-46
<PAGE>
Notwithstanding the foregoing, if the Certificate Principal Balances of the
Class A-I Certificates, other than the Lockout Certificates, have been reduced
to zero, the Lockout Distribution Percentage will be equal to 100%.
Notional Amount -- With respect to the Fixed Strip Certificates as of
any distribution date prior to the distribution date in _______, the sum of:
o the lesser of:
o $________ and
o the aggregate Certificate Principal Balance of the Class A-I
Certificates on that distribution date and o the lesser of o
$_________ an
o the aggregate Certificate Principal Balance of the [Class
A-II] Certificates on that distribution date.
The Notional Amount of the Fixed Strip Certificates as of any
distribution date after the distribution date in ________ will be equal to $0.
References in this prospectus supplement to the Notional Amount are used solely
for some calculations and do not represent the right of the Fixed Strip
Certificates to receive distributions allocable to principal.
Outstanding Reserve Amount -- With respect to any distribution date, the
excess, if any, of:
o the aggregate Stated Principal Balances of the mortgage
loans immediately following
that distribution date over
o the Certificate Principal Balance of the Class A
Certificates as of that date, after taking into account the
payment to the Class A Certificates of the amounts described
in clauses (b)(i)-(iv) of the definition of Class A
Principal Distribution Amount on that distribution date.
Realized Loss Distribution Amount -- For any distribution date, to the
extent covered by Excess Cash Flow for that distribution date, as described in
this prospectus supplement under "--Overcollateralization Provisions", (A) 100%
of the principal portion of any Realized Losses, other than Excess Loss Amounts,
incurred, or deemed to have been incurred, on any mortgage loans in the related
collection period, plus (B) any Realized Losses, other than any Excess Loss
Amounts, remaining undistributed from any preceding distribution date, together
with interest from the date initially distributable to the date paid, provided,
that any Realized Losses shall not be required to be paid to the extent that the
Realized Losses were paid on the Class A Certificates by means of a draw on the
policy or were reflected in the reduction of the Outstanding Reserve Amount.
Reserve Amount Target -- The required level of the Outstanding Reserve
Amount with respect to a distribution date.
S-47
<PAGE>
Reserve Increase Amount -- Any amount of Excess Cash Flow actually
applied as an accelerated payment of principal on the Class A Certificates.
Reserve Reduction Amount -- For any distribution date, the lesser of :
o the Excess Reserve Amount and
o the amount available for distribution specified in clauses
(b)(i)-(iii) of the definition of Class A Principal Distribution
Amount on that distribution date.
Senior Interest Distribution Amount -- On any distribution date, the
aggregate amount of Accrued Certificate Interest to be distributed to the
holders of the offered certificates for that distribution date.
Special Hazard Amount --As of any date of determination following the
cut-off date, the an amount equal to $________ less the sum of:
o the aggregate of any Realized Losses on the mortgage loans
due to Special Hazard Losses and
o an adjustment amount calculated under the terms of the
pooling and servicing agreement.
Distributions
Distributions on the certificates will be made by the trustee on the
25th day of each month or, if that day is not a business day, then the next
succeeding business day, commencing in _______ 1999. Distributions on the
certificates will be made to the persons in whose names the certificates are
registered at the close of business on the day prior to each distribution date
or, if the certificates are no longer DTC registered certificates, on the record
date. See "Description of the Certificates--Distributions" in the prospectus.
Distributions will be made by check or money order mailed, or upon the request
of a certificateholder owning certificates having denominations, by principal
balance or notional amount, aggregating at least $1,000,000, by wire transfer or
otherwise, to the address of the person entitled to the distribution, which, in
the case of DTC registered certificates, will be DTC or its nominee, as it
appears on the trustee's register in amounts calculated as described in this
prospectus supplement on the determination date. However, the final distribution
relating to the certificates will be made only upon presentation and surrender
thereof at the office or the agency of the trustee specified in the notice to
certificateholders of the final distribution. A business day is any day other
than:
o a Saturday or Sunday or
o a day on which banking institutions in the State of California,
Minnesota, New York, Pennsylvania, Illinois or Delaware are
required or authorized by law to be closed.
Available Distribution Amount
S-48
<PAGE>
The master servicer may elect to treat unscheduled collections, not
including mortgagor prepayments, as amounts included in the Available
Distribution Amount for the distribution date in the month of receipt, but is
not obligated to do so. As described in this prospectus supplement, under
"--Principal Distributions," any amount with respect to which this election is
so made shall be treated as having been received on the last day of the related
collection period for the purposes of calculating the amount of principal and
interest distributions to any class of certificates. With respect to any
distribution date, the collection period is the calendar month preceding the
month in which that distribution date occurs.
Interest Distributions
Holders of each class of offered certificates will be entitled to
receive interest distributions in an amount equal to the Accrued Certificate
Interest on that class on each distribution date to the extent described in this
prospectus supplement.
Prepayment Interest Shortfalls will result because interest on
prepayments in full is distributed only to the date of prepayment, and because
no interest is distributed on prepayments in part, as these prepayments in part
are applied to reduce the outstanding principal balance of the related mortgage
loans as of the due date in the month of prepayment. However, with respect to
any distribution date, any Prepayment Interest Shortfalls during the related
collection period will be offset first by Excess Cash Flow to the extent
available and then by the policy.
The pass-through rates on all classes of offered certificates are fixed
and are listed on page S-__ hereof. The pass-through rates on all classes of the
Class A Certificates will increase by __% per annum for each distribution date
after the first distribution date on which the master servicer and the depositor
are permitted to exercise their option to purchase the mortgage loans from the
trust as described under "Pooling and Servicing Agreement--Termination," in this
prospectus supplement. Notwithstanding the foregoing, the pass-through rates on
the Class A Certificates will not increase as described above if proceeds for
optional termination are available for payment to the certificateholders on or
prior to any distribution date. The holders of the Fixed Strip Certificates will
not be entitled to any distributions of principal and will not be entitled to
any distributions of interest after the distribution date in _________.
Principal Distributions
Holders of the Class A Certificates will be entitled to receive on each
distribution date, in the priority described in this prospectus supplement and
to the extent of the portion of the Available Distribution Amount remaining
after the Senior Interest Distribution Amount for that distribution date is
distributed, the Class A Principal Distribution Amount.
On any distribution date, if:
S-49
<PAGE>
o Realized Losses, other than Excess Loss Amounts, have occurred
during the related collection period that are not covered by the
Realized Loss Distribution Amount or the Outstanding Reserve
Amount, or
o there is an Excess Loss Amount with respect to that distribution date
a draw will be made on the policy and these amounts will be distributed to the
Class A Certificateholders on that distribution date, in reduction of the
Certificate Principal Balances thereof, in the manner described below. In
addition, if on the distribution date in _______, the aggregate Stated Principal
Balance of the mortgage loans is less than the aggregate Certificate Principal
Balance of the Certificates, after giving effect to distributions to be made on
that distribution date, the amount of the deficiency, or the
undercollateralization amount, will be drawn on the policy and will be
distributed to the Class A Certificateholders on that distribution date, in
reduction of its Certificate Principal Balances, in the manner described below.
On each distribution date, the credit enhancer shall be entitled to
receive, after payment to the Senior Certificateholders of the Senior Interest
Distribution Amount and the Class A Principal Distribution Amount for the
certificates, as applicable, for that distribution date ,but before application
of any Reserve Increase Amount, from the Excess Cash Flow after Prepayment
Interest Shortfalls and some Realized Losses are allocated thereto, the sum of:
o the premium payable to the credit enhancer with respect to the
policy on that distribution date and any previously unpaid
premiums with respect to the policy, together with its interest,
and
o the cumulative insurance payments by the credit enhancer under
the policy to the extent not previously reimbursed, plus its
interest.
On each distribution date, the amount of the premium payable to the
credit enhancer with respect to the policy is equal to one-twelfth of the
product of a percentage specified in the insurance and indemnity agreement,
dated ________, among the credit enhancer, the depositor, the master servicer
and the trustee, and the Certificate Principal Balance of the Class A
Certificates.
Distributions of principal on the Class A Certificates on each
distribution date will be made after distribution of the Senior Interest
Distribution Amount as described under "--Interest Distributions" above. The
Class A Principal Distribution Amount plus any amount drawn on the policy
relating to principal shall be distributed concurrently to the Class A-I
Certificates and Class A-II Certificates, in each case in accordance with the
percentage of the amounts described in clauses (b)(i) through (iii) in the
definition of the Class A Principal Distribution Amount derived from the related
Loan Group, until the Certificate Principal Balances of the Class A-I
Certificates or Class A- II Certificates have been reduced to zero. Thereafter,
the Class A Principal Distribution Amount shall be distributed to the remaining
class or classes of Class A Certificates, and in the case of the Class A-I
Certificates, in accordance with the priorities described below, until its
Certificate Principal Balances have been reduced to zero.
The Class A Principal Distribution Amount plus any amount drawn on the
policy relating to principal distributable to the Class A-I Certificates shall
be distributed as follows:
S-50
<PAGE>
(a) first, to the Lockout Certificates, in reduction of its
Certificate Principal Balance, an amount equal to the Lockout Distribution
Percentage of the Class A Principal Distribution Amount distributable to the
Class A-I Certificates, until its Certificate Principal Balance has been reduced
to zero;
(b) second, the balance of the Class A Principal Distribution
Amount distributable to the Class A-I Certificates remaining after the
distribution, if any, described in clause (A) above, shall be distributed as
follows:
(i) first, to the Class A-I-1 Certificates, until its Certificate Principal
Balance has been reduced to zero;
(ii) second, to the Class A-I-2 Certificates, until its Certificate
Principal Balance has been reduced to zero;
(iii) third, to the Class A-I-3 Certificates, until its Certificate
Principal Balance has been reduced to zero;
(iv) fourth, to the Class A-I-4 Certificates, until its Certificate
Principal Balance has been reduced to zero;
(v) fifth, to the Class A-I-5 Certificates, until its Certificate Principal
Balance has been reduced to zero; and
(vi) sixth, to the Lockout Certificates, until its Certificate
Principal Balance has been reduced to zero.
The Class A Principal Distribution Amount distributable to the Class A-II
Certificates shall be distributed to the Class A-II Certificates, until its
Certificate Principal Balance has been reduced to zero.
The master servicer may elect to treat Insurance Proceeds, Liquidation
Proceeds and other unscheduled collections, not including prepayments by the
mortgagors, received in any calendar month as included in the Available
Distribution Amount and the Class A Principal Distribution Amount for the
distribution date in the month of receipt, but is not obligated to do so. If the
master servicer so elects, these amounts will be deemed to have been received,
and any related Realized Loss shall be deemed to have occurred, on the last day
of the month prior to its receipt.
Overcollateralization Provisions
S-51
<PAGE>
On each distribution date, Excess Cash Flow, if any, is applied on that
distribution date as an accelerated payment of principal on the Class A
Certificates, but only in the manner and to the extent hereafter described. The
Excess Cash Flow for any distribution date will derive primarily from the amount
of interest collected on the mortgage loans in excess of the sum of:
o the Senior Interest Distribution Amount,
o the premium payable on the policy and
o accrued servicing fees,
in each case relating to that distribution date. Excess Cash Flow will be
applied on any distribution date; first, to pay Prepayment Interest Shortfalls;
second, to pay the Realized Loss Distribution Amount for that distribution date;
third, to the payment of the premium fee with respect to that distribution date
and any previous distribution date, to the extent not previously paid, together
with its interest; fourth, to the payment of cumulative insurance payments plus
its interest; fifth, to pay any Reserve Increase Amount; sixth, to pay some
other reimbursement amounts owed to the credit enhancer; and last, to pay to the
holder of the Class R-II Certificates.
The Excess Cash Flow, to the extent available as described above, will
be applied as an accelerated payment of principal on the Class A Certificates to
the extent that the Reserve Amount Target exceeds the Outstanding Reserve Amount
as of that distribution date.
As to any distribution date prior to the distribution date in ________,
the Reserve Amount Target will be __% of the aggregate cut-off date balance. As
to any distribution date on or after the distribution date in _________, the
Reserve Amount Target will be equal to the lesser of:
o the Reserve Amount Target as of the cut-off date and
o __% of the aggregate Stated Principal Balance of the mortgage
loans immediately preceding that distribution date,
but not lower than $________, __% of the aggregate cut-off date balance, plus
__% of the outstanding Stated Principal Balance of all of the mortgage loans
that are 90 or more days delinquent as of that distribution date; provided,
however, that any scheduled reduction to the Reserve Amount Target described
above shall not be made as of any distribution date unless:
o the outstanding Stated Principal Balance of the mortgage loans
delinquent 90 days or more averaged over the last six months as a
percentage of the aggregate outstanding Stated Principal Balance
of all the mortgage loans averaged over the last six months does
not exceed __%,
o the aggregate cumulative Realized Losses on the mortgage loans
prior to any distribution date occurring during the first year
and the second year, or any year thereafter, after the
distribution date in ______ are less than __% and __%,
respectively, of the aggregate cut-off date balance and
o there has been no draw on the policy on that distribution date
that remains
unreimbursed.
S-52
<PAGE>
In addition, the Reserve Amount Target may be reduced with the prior written
consent of the credit enhancer and the rating agencies.
In the event that the Reserve Amount Target is permitted to decrease or
"step down" on a distribution date in the future, a portion of the principal
which would otherwise be distributed to the holders of the Class A Certificates
on that distribution date shall not be distributed to the holders of the Class A
Certificates on that distribution date. This has the effect of decelerating the
amortization of the Class A Certificates relative to the amortization of the
mortgage loans, and of reducing the Outstanding Reserve Amount. If, on any
distribution date, the Excess Reserve Amount is, or, after taking into account
all other distributions to be made on that distribution date would be, greater
than zero, i.e., the Outstanding Reserve Amount is or would be greater than the
related Reserve Amount Target, then any amounts relating to principal which
would otherwise be distributed to the holders of the Class A Certificates on
that distribution date shall instead be distributed to the holders of the Class
R-II Certificates in an amount equal to the Reserve Reduction Amount.
The aggregate cut-off date balance will be $_______ less than the
aggregate Certificate Principal Balance of the certificates. If, on the
distribution date in _____, after application of the Class A Principal
Distribution Amount and any amounts drawn on the policy to be distributed on
that distribution date, the Stated Principal Balance of the mortgage loans would
be less than the Certificate Principal Balance of the Class A Certificates, the
credit enhancer will be required to deposit in the Certificate Account the
amount of that difference, unless available funds are on deposit in the
Certificate Account. These funds will be distributed to the Class A
Certificateholders entitled to receive a distribution of principal on that
distribution date, in proportion to the amount of the Class A Principal
Distribution Amount payable to the certificateholders on that distribution date,
in reduction of the their Certificate Principal Balances.
Excess Loss Amounts
Excess Loss Amounts will not be covered by any Realized Loss
Distribution Amount or by a reduction in the Outstanding Reserve Amount. Any
Excess Loss Amounts, however, will be covered by the policy, and in the event
payments are not made as required under the policy, these losses will be
allocated to the certificates pro rata based on their outstanding Certificate
Principal Balances.
The Special Hazard Amount shall initially be equal to $________.
The Fraud Loss Amount shall initially be equal to $________.
The Bankruptcy Amount will initially be equal to $________.
S-53
<PAGE>
With respect to any defaulted mortgage loan that is finally liquidated,
through foreclosure sale, disposition of the related mortgaged property if
acquired on behalf of the certificateholders by deed in lieu of foreclosure, or
otherwise, the amount of loss realized, if any, will equal the portion of the
Stated Principal Balance remaining, if any, plus its interest through the last
day of the month in which that mortgage loan was finally liquidated, after
application of all amounts recovered, net of amounts reimbursable to the master
servicer or the subservicer for expenses, including attorneys' fees, towards
interest and principal owing on the mortgage loan. The master servicer will
treat any mortgage loan that is 180 days or more delinquent as having been
finally liquidated.
Certificate Guaranty Insurance Policy
On the closing date, __________, the credit enhancer, will issue its
certificate guaranty insurance policy, or policy, in favor of the trustee on
behalf of the certificateholders. The policy will unconditionally and
irrevocably guarantee some payments on the certificates. On each distribution
date, a draw will be made on the policy equal to the sum of:
o the amount by which accrued interest on the certificates at the
respective pass- through rates for that distribution date exceeds
the amount on deposit in the Certificate Account available for
interest distributions on that distribution date,
o any Realized Losses, other than any Excess Loss Amount, for that
distribution date, to the extent not currently covered by a
Realized Loss Distribution Amount or a reduction in the
Outstanding Reserve Amount and
o any Excess Loss Amount for that distribution date.
In addition, on the distribution date in _______, a draw will be made on
the policy to cover the undercollateralization amount, if any, if that amount is
not otherwise available in the Certificate Account.
In addition, the policy will guarantee the payment of the outstanding
Certificate Principal Balance of the certificates on the final distribution
date. In the absence of payments under the policy, certificateholders will
directly bear the credit risks associated with their investment to the extent
these risks are not covered by the Outstanding Reserve Amount or otherwise.
The policy is being issued under and pursuant to and shall be construed
under, the laws of the State of New York, without giving effect to its conflict
of laws principles.
The policy is not cancelable for any reason. The premium on the policy
is not refundable for any reason including payment, or provision being made for
payment, prior to maturity of the offered certificates.
S-54
<PAGE>
THE CREDIT ENHANCER
The following information has been supplied by _____________, the credit
enhancer, for inclusion in this prospectus supplement. No representation is made
by the depositor, the master servicer, the underwriter or any of their
affiliates as to the accuracy or completeness of the information.
[The credit enhancer is a __________-domiciled stock insurance
corporation regulated by the Office of the Commissioner of Insurance of the
State of _________ and licensed to do business in 50 states, the District of
Columbia, the Commonwealth of Puerto Rico and Guam. The credit enhancer
primarily insures newly issued municipal and structured finance obligations. The
credit enhancer is a wholly owned subsidiary of __________ (formerly,
_________.) a 100% publicly-held company. _______________________________ have
each assigned a triple-A claims-paying ability rating to the credit enhancer.
The consolidated financial statements of the credit enhancer and its
subsidiaries as of ______________ and ______________, and for the three years
ended ______________, prepared in accordance with generally accepted accounting
principles, included in the Annual Report on Form 10-K of ______________ (which
was filed with the Commission on ______________; Commission File Number
______________) and the consolidated financial statements of the credit enhancer
and its subsidiaries as of ______________ and for the periods ending
______________ and ______________ included in the Quarterly Report on Form 10-Q
of ______________ for the period ended ______________ (which was filed with the
Commission on ______________), are hereby incorporated by reference into this
prospectus supplement and shall be deemed to be a part of this prospectus
supplement. Any statement contained in a document incorporated in this
prospectus supplement by reference shall be modified or superseded for the
purposes of this prospectus supplement to the extent that a statement contained
in this prospectus supplement by reference in this prospectus supplement also
modifies or supersedes the statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this prospectus supplement.
All financial statements of the credit enhancer and its subsidiaries
included in documents filed by ______________ with the Commission under Section
13(a), 13(c), 14 or 15(d) of the Exchange Act, subsequent to the date of this
prospectus supplement and prior to the termination of the offering of the notes
shall be deemed to be incorporated by reference into this prospectus supplement
and to be a part hereof from the respective dates of filing the documents.
The following table sets forth the credit enhancer's capitalization as
of ______________, ______________, ______________ and ______________,
respectively, in conformity with generally accepted accounting principles.
S-55
<PAGE>
Consolidated Capitalization Table
(Dollars in Millions)
[Date] [Date] [Date] [Date]
(Unaudited)
Unearned premiums........................
Other liabilities........................
Total liabilities....................
Stockholder's equity:
Common Stock.........................
Additional paid-in capital...........
Accumulated other comprehensive income
Retained earnings....................
Total stockholder's equity...........
Total liabilities and stockholder's equity
For additional financial information concerning the credit enhancer, see
the audited and unaudited financial statements of the credit enhancer
incorporated by reference in this prospectus supplement. Copies of the financial
statements of the credit enhancer incorporated in this prospectus supplement by
reference and copies of the credit enhancer's annual statement for the year
ended ___________ prepared in accordance with statutory accounting standards are
available, without charge, from the credit enhancer. The address of the credit
enhancer's administrative offices and its telephone number are ____________.
The credit enhancer makes no representation regarding the notes or the
advisability of investing in the notes and makes no representation regarding,
nor has it participated in the preparation of, this prospectus supplement other
than the information supplied by the credit enhancer and presented under the
headings "The Credit Enhancer" and "Description of the Certificates--Certificate
Guaranty Insurance Policy" and in the financial statements incorporated in this
prospectus supplement by reference.]
THE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY
FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
MATERIAL YIELD AND PREPAYMENT CONSIDERATIONS
General
S-56
<PAGE>
The yields to maturity and the aggregate amount of distributions on the
offered certificates will be affected by the rate and timing of principal
payments on the mortgage loans and the amount and timing of mortgagor defaults
resulting in Realized Losses. The rate of default of mortgage loans secured by
second liens may be greater than that of mortgage loans secured by first liens.
In addition, the yields may be adversely affected by a higher or lower than
anticipated rate of principal payments on the mortgage loans in the trust. The
rate of principal payments on the mortgage loans will in turn be affected by the
amortization schedules of the mortgage loans, the rate and timing of principal
prepayments on the mortgage loans by the mortgagors, liquidations of defaulted
mortgage loans and repurchases of mortgage loans due to some breaches of
representations.
The timing of changes in the rate of prepayments, liquidations and
repurchases of the mortgage loans may, and the timing of Realized Losses will,
significantly affect the yield to an investor, even if the average rate of
principal payments experienced over time is consistent with an investor's
expectation. Since the rate and timing of principal payments on the mortgage
loans will depend on future events and on a variety of factors, as described
more fully in this prospectus supplement and in the prospectus under "Yield and
Prepayment Considerations", no assurance can be given as to the rate or the
timing of principal payments on the Class A Certificates.
A subservicer may allow the refinancing of a mortgage loan by accepting
prepayments on the mortgage loan and permitting a new loan secured by a mortgage
on the same property, which may be originated by the Subservicer or the master
servicer or any of their respective affiliates or by an unrelated entity. In the
event of such a refinancing, the new loan would not be included in the trust
and, therefore, the refinancing would have the same effect as a prepayment in
full of the related mortgage loan. A subservicer or the master servicer may,
from time to time, implement refinancing or modification programs designed to
encourage refinancing. The programs may include, without limitation,
modifications of existing loans, general or targeted solicitations, the offering
of pre- approved applications, reduced origination fees or closing costs, or
other financial incentives. Targeted solicitations may be based on a variety of
factors, including the credit of the borrower or the location of the mortgaged
property. In addition, subservicers or the master servicer may encourage
assumptions of mortgage loans, including defaulted mortgage loans, under which
creditworthy borrowers assume the outstanding indebtedness of those mortgage
loans which may be removed from the trust. As a result of these programs, the
rate of principal prepayments of the mortgage loans may be higher than would
otherwise be the case, and, in some cases, the average credit or collateral
quality of the mortgage loans remaining in the trust may decline.
The mortgage loans in most cases may be prepaid by the mortgagors at any
time. However, in some circumstances, some of the mortgage loans will be subject
to a prepayment charge. See "Description of the Mortgage Pool" in this
prospectus supplement.
Most of the mortgage loans contain due-on-sale clauses. As described
under "Description of the Certificates--Principal Distributions" in this
prospectus supplement, during specified periods all or a disproportionately
large percentage of principal collections on the mortgage loans will be
allocated among the Class A Certificates, other than the Lockout Certificates,
and during some
S-57
<PAGE>
periods no principal collections or a disproportionately small portion of
principal collections will be distributed on the Lockout Certificates.
Prepayments, liquidations and purchases of the mortgage loans will result in
distributions to holders of the Class A Certificates of principal amounts which
would otherwise be distributed over the remaining terms of the mortgage loans.
Factors affecting prepayment, including defaults and liquidations, of mortgage
loans include changes in mortgagors' housing needs, job transfers, unemployment,
mortgagors' net equity in the mortgaged properties, changes in the value of the
mortgaged properties, mortgage market interest rates, solicitations and
servicing decisions. In addition, if prevailing mortgage rates fell
significantly below the mortgage rates on the mortgage loans, the rate of
prepayments, including refinancings, would be expected to increase. On the other
hand, if prevailing mortgage rates rose significantly above the mortgage rates
on the mortgage loans, the rate of prepayments on the mortgage loans would be
expected to decrease. Furthermore, since mortgage loans secured by second liens
are not generally viewed by borrowers as permanent financing and generally carry
a high rate of interest, the mortgage loans may experience a higher rate of
prepayments than traditional first lien mortgage loans. Prepayment of the
related first lien may also affect the rate of prepayments on the mortgage
loans.
The Class A Certificates are subject to various priorities for payment
of principal as described in this prospectus supplement. Distributions of
principal on classes of Class A Certificates having an earlier priority of
payment will be affected by the rates of prepayment of the mortgage loans early
in the life of the mortgage pool. The timing of commencement of principal
distributions and the weighted average lives of classes of Class A Certificates
with a later priority of payment will be affected by the rates of prepayment of
the mortgage loans both before and after the commencement of principal
distributions on those classes. In addition, the yield to maturity of the Class
A Certificates will depend on whether, to what extent, and the timing with
respect to which, Excess Cash Flow is used to accelerate payments of principal
on the Class A Certificates or any Reserve Reduction Amount is released. See
"Description of the Certificates--Overcollateralization Provisions" in this
prospectus supplement.
The rate of defaults on the mortgage loans will also affect the rate and
timing of principal payments on the mortgage loans. In general, defaults on
mortgage loans are expected to occur with greater frequency in their early
years. The rate of default of mortgage loans secured by second liens is likely
to be greater than that of mortgage loans secured by traditional first lien
mortgage loans, particularly in the case of mortgage loans with high combined
LTV ratios or low Junior Ratios. Furthermore, the rate and timing of
prepayments, defaults and liquidations on the mortgage loans will be affected by
the general economic condition of the region of the country in which the related
mortgaged properties are located. The risk of delinquencies and loss is greater
and prepayments are less likely in regions where a weak or deteriorating economy
exists, as may be evidenced by, among other factors, increasing unemployment or
falling property values. See "Yield and Prepayment Considerations" and "Risk
Factors" in the prospectus. In addition, because borrowers of Balloon Loans are
required to make a relatively large single payment upon maturity, it is possible
that the default risk associated with Balloon Loans is greater than that
associated with fully-amortizing mortgage loans. See "Risk Factors" in this
prospectus supplement.
S-58
<PAGE>
To the extent that any losses are incurred on any of the mortgage loans
that are not covered by the Realized Loss Distribution Amount, a reduction in
the Outstanding Reserve Amount or the policy, holders of the certificates will
bear all risk of the losses resulting from default by mortgagors. See "Risk
Factors--Limitations, Reduction and Substitution of Credit Enhancement" in the
prospectus. Even where the policy covers all losses incurred on the mortgage
loans, this coverage may accelerate principal payments on the Class A
Certificates, thus reducing the weighted average life of the Class A
Certificates.
Because the mortgage rates on the mortgage loans and the pass-through
rates on the offered certificates are fixed, the rates will not change in
response to changes in market interest rates. Accordingly, if market interest
rates or market yields for securities similar to the offered certificates were
to rise, the market value of the offered certificates may decline.
Class A-I Certificates and Class A-II Certificates: The rate and timing
of principal payments on and the weighted average lives of the Class A-I
Certificates and Class A-II Certificates will be affected primarily by the rate
and timing of principal payments, including prepayments, defaults, liquidations
and purchases, on the mortgage loans in the related Loan Group.
Sequentially Paying Classes: The Class A-I Certificates, other than the
Fixed Strip Certificates, are subject to various priorities for payment of
principal as described in this prospectus supplement. Distributions of principal
on classes of Class A-I Certificates having an earlier priority of payment will
be affected by the rates of prepayment of the Group I Loans early in the life of
the mortgage pool. The timing of commencement of principal distributions and the
weighted average lives of classes of Class A-I Certificates with a later
priority of payment will be affected by the rates of prepayment of the Group I
Loans experienced both before and after the commencement of principal
distributions on these classes.
Lockout Certificates: Investors in the Lockout Certificates should be
aware that because the Lockout Certificates do not receive any payments of
principal prior to the distribution date occurring in ________ and prior to the
distribution date occurring in ________ will receive a disproportionately small
portion of payments of principal, unless the Certificate Principal Balances of
the Class A-I Certificates, other than the Lockout Certificates, have been
reduced to zero, the weighted average lives of the Lockout Certificates will be
longer than would otherwise be the case, and the effect on the market value of
the Lockout Certificates of changes in market interest rates or market yields
for similar securities will be greater than for other classes of certificates
entitled to these distributions. However, beginning with the distribution date
occurring in _______, the Lockout Certificates may receive a disproportionately
large percentage of principal collections until their Certificate Principal
Balance is reduced to zero.
In addition, the yield to maturity on each class of the offered
certificates will depend on, among other things, the price paid by the holders
of the offered certificates and the related pass- through rate. The extent to
which the yield to maturity of an offered certificate is sensitive to
prepayments will depend, in part, upon the degree to which it is purchased at a
discount or premium.
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In general, if a class of offered certificates is purchased at a premium and its
principal distributions occur at a rate faster than assumed at the time of
purchase, the investor's actual yield to maturity will be lower than that
anticipated at the time of purchase. On the other hand, if a class of offered
certificates is purchased at a discount and principal distributions on that
class of offered certificates occur at a rate slower than that assumed at the
time of purchase, the investor's actual yield to maturity will be lower than
that anticipated at the time of purchase. For additional considerations relating
to the yield on the certificates, see "Yield and Prepayment Considerations" in
the prospectus.
Assumed Final Distribution Date: The assumed final distribution date
with respect to the Class A Certificates is __________, which date is six months
after the distribution date immediately following the latest scheduled maturity
date for any mortgage loan. No event of default, change in the priorities for
distribution among the various classes or other provisions under the pooling and
servicing agreement will arise or become applicable solely by reason of the
failure to retire the entire Certificate Principal Balance of any class of
certificates on or before its assumed final distribution date.
The actual final distribution date with respect to each class of Class A
Certificates could occur significantly earlier than the assumed final
distribution date for that class because:
o Excess Cash Flow will be used to make accelerated payments of
principal, i.e. Reserve Increase Amounts, to the holders of the
Class A Certificates, which payments will have the effect of
shortening the weighted average lives of the Class A Certificates
of each class,
o prepayments are likely to occur, which will also have the effect
of shortening the weighted average lives of the Class A
Certificates and
o the master servicer or the depositor may cause a termination of
the trust when the aggregate Stated Principal Balance of the
mortgage loans in the trust is less than 10% of the aggregate
cut-off date balance.
Weighted Average Life: Weighted average life refers to the average
amount of time that will elapse from the date of issuance of a security to the
date of distribution to the investor of each dollar distributed in reduction of
principal of that security, assuming no losses. The weighted average life of the
offered certificates will be influenced by, among other things, the rate at
which principal of the mortgage loans is paid, which may be in the form of
scheduled amortization, prepayments or liquidations.
The prepayment model used in this prospectus supplement, or prepayment
assumption, represents an assumed rate of prepayment each month relative to the
then outstanding principal balance of a pool of mortgage loans. A 100%
prepayment assumption assumes a constant prepayment rate of 4% per annum of the
then outstanding principal balance of the mortgage loans in the first month of
the life of the mortgage loans and an additional 2.1818182% per annum in each
month thereafter until the twelfth month. Beginning in the twelfth month and in
each month thereafter during the life of the mortgage loans, a 100% prepayment
assumption assumes a CPR of
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28% per annum each month. As used in the table below, a 50% prepayment
assumption assumes prepayment rates equal to 50% of the prepayment assumption.
Correspondingly, a 150% prepayment assumption assumes prepayment rates equal to
150% of the prepayment assumption, and so forth. The prepayment assumption does
not purport to be a historical description of prepayment experience or a
prediction of the anticipated rate of prepayment of any pool of mortgage loans,
including the mortgage loans.
The tables below entitled "Percent of Initial Principal Balance
Outstanding of the Class A-I Certificates at the Following Percentages of the
Prepayment Assumption" and "Percent of Initial Certificate Principal Balance
Outstanding of the Class A-II Certificates at the Following Percentages of the
Prepayment Assumption" have been prepared on the basis of some assumptions as
described below regarding the weighted average characteristics of the mortgage
loans that are expected to be included in the trust as described under
"Description of the Mortgage Pool" in this prospectus supplement and their
performance. The tables assume, among other things, that:
o as of the date of issuance of the Class A Certificates, the
mortgage loans have the following structuring assumptions:
Group I Loans
<TABLE>
<CAPTION>
Original Remaining
Term to Term to
Range of Original Terms to Aggregate Maturity Maturity
Maturity Principal Mortgage (in (in
(in years) Balance Rate months) months)
_______________________________________________________________________________________________
<S> <C>
$ %
$ %
$ %
$ %
$ %
$ %
</TABLE>
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<TABLE>
<CAPTION>
Original Remaining
Term to Term to
Range of Original Terms to Aggregate Maturity Maturity
Maturity Principal Mortgage (in (in
(in years) Balance Rate months) months)
_______________________________________________________________________________________________
<S> <C>
$ %
$ %
$ %
$ %
$ %
$ %
</TABLE>
o with respect to each mortgage loan, the aggregate servicing fee
rate and policy premium rate will be __% per annum;
o except with respect to the Balloon Loans, the scheduled monthly
payment for each mortgage loan has been based on its outstanding
balance, interest rate and remaining term to maturity, so that
the mortgage loan will amortize in amounts sufficient for its
repayment over its remaining term to maturity;
o none of the sellers, the master servicer or the depositor will
repurchase any mortgage loan, as described under "Mortgage Loan
Program--Representations Relating to Mortgage Loans" and
"Description of the Certificates--Assignment of Trust Fund
Assets" in the prospectus, and neither the master servicer nor
the depositor exercises any option to purchase the mortgage loans
and thereby cause a termination of the trust;
o there are no delinquencies or Realized Losses on the mortgage
loans, and principal payments on the mortgage loans will be
timely received together with prepayments, if any, at the
respective constant percentages of the prepayment assumption
described in the table;
o there is no Prepayment Interest Shortfall or any other interest
shortfall in any month;
o payments on the certificates will be received on the 25th day of
each month, commencing ____________;
o payments on the mortgage loans earn no reinvestment return;
o there are no additional ongoing trust expenses payable out of the
trust; and
o the certificates will be purchased on ____________.
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The actual characteristics and performance of the mortgage loans will
differ from the assumptions used in constructing the tables below, which are
hypothetical in nature and is provided only to give a general sense of how the
principal cash flows might behave under varying prepayment scenarios. For
example, it is very unlikely that the mortgage loans will prepay at a constant
level of the prepayment assumption until maturity or that all of the mortgage
loans will prepay at the same level of the prepayment assumption. Moreover, the
diverse remaining terms to maturity of the mortgage loans could produce slower
or faster principal distributions than indicated in the tables at the various
constant percentages of the prepayment assumption specified, even if the
weighted average remaining term to maturity of the mortgage loans is as assumed.
Any difference between the assumptions and the actual characteristics and
performance of the mortgage loans, or actual prepayment or loss experience, will
affect the percentages of initial Certificate Principal Balances outstanding
over time and the weighted average lives of the classes of Class A Certificates.
Subject to the foregoing discussion and assumptions, the following
tables indicate the weighted average life of each class of Class A Certificates,
and describe the percentages of the initial Certificate Principal Balance of
each class of Class A Certificates that would be outstanding after each of the
dates shown at various percentages of the prepayment assumption.
[Insert DEC Tables here]
Fixed Strip Certificate Yield Considerations
Investors should note that the Fixed Strip Certificates are only
entitled to distributions prior to the Distribution Date in _________. The yield
to investors on the Fixed Strip Certificates will be extremely sensitive to the
rate and timing of principal payments on the mortgage loans, including
prepayments, defaults and liquidations, under some extremely rapid rate of
prepayment scenarios. In addition, if prior to the distribution date in
_________, the master servicer or the depositor effects an optional termination
of the mortgage loans, the Fixed Strip Certificates will receive no further
distributions. Investors in the Fixed Strip Certificates should fully consider
the risk that an extremely rapid rate of prepayments on the mortgage loans could
result in the failure of these investors to fully recover their investments.
The following table indicates the sensitivity of the pre-tax yield to
maturity on the Fixed Strip Certificates to various constant rates of prepayment
on the mortgage loans by projecting the monthly aggregate payments of interest
on the Fixed Strip Certificates and computing the corresponding pre- tax yields
to maturity on a corporate bond equivalent basis, based on the structuring
assumptions, including the assumptions regarding the characteristics and
performance of the mortgage loans which differ from the actual characteristics
and performance thereof and assuming the aggregate purchase price described
below. Any differences between the assumptions and the actual characteristics
and performance of the mortgage loans and of the Fixed Strip Certificates may
result in yields being different from those shown in the table. Discrepancies
between assumed and actual characteristics
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and performance underscore the hypothetical nature of the table, which is
provided only to give a general sense of the sensitivity of yields in varying
prepayment scenarios.
Pre-Tax Yield to Maturity of the Fixed Strip Certificates
at the Following Percentages of the Prepayment Assumption
Assumed Purchase % % % %
Price
________________________________________________________________________________
% % % %
Each pre-tax yield to maturity described in the preceding table was
calculated by determining the monthly discount rate which, when applied to the
assumed stream of cash flows to be paid on the Fixed Strip Certificates, would
cause the discounted present value of that assumed stream of cash flows to equal
the assumed purchase price listed in the table. Accrued interest is included in
the assumed purchase price and is used in computing the corporate bond
equivalent yields shown. These yields do not take into account the different
interest rates at which investors may be able to reinvest funds received by them
as distributions on the Fixed Strip Certificates, and thus do not reflect the
return on any investment in the Fixed Strip Certificates when any reinvestment
rates other than the discount rates are considered.
Notwithstanding the assumed prepayment rates reflected in the preceding
table, it is highly unlikely that the mortgage loans will be prepaid according
to one particular pattern. For this reason, and because the timing of cash flows
is critical to determining yields, the pre-tax yield to maturity on the Fixed
Strip Certificates may differ from those shown in the table, even if all of the
mortgage loans prepay at the indicated constant percentages of the prepayment
assumption over any given time period or over the entire life of the
certificates.
There can be no assurance that the mortgage loans will prepay at any
particular rate or that the yield on the Fixed Strip Certificates will conform
to the yields described in this prospectus supplement. Moreover, the various
remaining terms to maturity of the mortgage loans could produce slower or faster
principal distributions than indicated in the preceding table at the various
constant percentages of the prepayment assumption specified, even if the
weighted average remaining term to maturity of the mortgage loans is as assumed.
Investors are urged to make their investment decisions based on their
determinations as to anticipated rates of prepayment under a variety of
scenarios. Investors in the Fixed Strip Certificates should fully consider the
risk that an extremely rapid rate of prepayments on the mortgage loans could
result in the failure of the investors to fully recover their investments.
For additional considerations relating to the yield on the certificates,
see "Yield and Prepayment Considerations" in the prospectus.
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POOLING AND SERVICING AGREEMENT
General
The certificates will be issued under a pooling and servicing agreement
dated as of ________, among the depositor, the master servicer and the trustee.
Reference is made to the prospectus for important information in addition to
that described in this prospectus supplement regarding the terms and conditions
of the pooling and servicing agreement and the certificates. The trustee, or any
of its affiliates, in its individual or any other capacity, may become the owner
or pledgee of certificates with the same rights as it would have if it were not
trustee. The trustee will appoint _____________ to serve as custodian in
connection with the certificates. The certificates will be transferable and
exchangeable at the corporate trust office of the trustee, which will serve as
certificate registrar and paying agent. The depositor will provide a prospective
or actual Certificateholder, without charge, on written request, a copy, without
exhibits, of the pooling and servicing agreement. Requests should be addressed
to the President, Residential Funding Mortgage Securities II, Inc., 8400
Normandale Lake Boulevard, Suite 600, Minneapolis, Minnesota 55437. In addition
to the circumstances described in the prospectus, the depositor may terminate
the trustee for cause under some circumstances. See "The Agreements--The
Trustee" in the prospectus.
The Master Servicer
Residential Funding, an indirect wholly-owned subsidiary of GMAC
Mortgage and an affiliate of the depositor, will act as master servicer for the
certificates under the pooling and servicing agreement. For a general
description of Residential Funding and its activities, see "Residential Funding
Corporation" in the prospectus and "Description of the Mortgage
Pool--Residential Funding" in this prospectus supplement.
Servicing and Other Compensation and Payment of Expenses
The servicing fees for each mortgage loan are payable out of the
interest payments on that mortgage loan. The weighted average servicing fee as
of the cut-off date will be approximately __% per annum. The servicing fees
consist of servicing compensation payable to the master servicer relating to its
master servicing activities, and subservicing and other related compensation
payable to the Subservicer. The master servicer is obligated to pay some ongoing
expenses associated with the trust and incurred by the master servicer in
connection with its responsibilities under the pooling and servicing agreement.
See "Description of the Securities--Servicing and Administration of Trust
Assets--Servicing Compensation and Payment of Expenses" 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.
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Refinancing of Senior Lien
The master servicer may permit the refinancing of any existing lien
senior to a mortgage loan, provided that some conditions described in the
pooling and servicing agreement are satisfied and the resulting combined LTV
ratio does not exceed 100%.
Collection and Liquidation Practices; Loss Mitigation
The master servicer is authorized to engage in a wide variety of loss
mitigation practices with respect to the mortgage loans, including waivers,
modifications, payment forbearances, partial forgiveness, entering into
repayment schedule arrangements, and capitalization of arrearages; provided in
any case that the master servicer determines that the action is not materially
adverse to the interests of the holder of the offered certificates or the credit
enhancer and is generally consistent with the master servicer's policies with
respect to similar loans; and provided further that some of the modifications,
including reductions in the mortgage rate, partial forgiveness or a maturity
extension, may only be taken if the mortgage loan is in default or if default is
reasonably foreseeable. With respect to mortgage loans that come into and
continue in default, the master servicer may take a variety of actions including
foreclosure on the mortgaged property, writing off the balance of the mortgage
loan as bad debt, taking a deed in lieu of foreclosure, accepting a short sale,
permitting a short refinancing, arranging for a repayment plan, modifications as
described above, or taking an unsecured note. See ""Description of the
Securities--Servicing and Administration of Trust Assets--Collection and Other
Servicing Procedures" and "--Realization Upon Defaulted Mortgage Loans" in the
prospectus.
Voting Rights
Some actions specified in the prospectus that may be taken by holders of
certificates evidencing a specified percentage of all undivided interests in the
trust may be taken by holders of certificates entitled in the aggregate to that
percentage of the outstanding voting rights. __% of all voting rights will be
allocated among all holders of the Class A Certificates in proportion to their
then outstanding Certificate Principal Balances, and __%, __% and __% of all
voting rights will be allocated among holders of the Fixed Strip Certificates,
the Class R-I Certificates and the Class R-II Certificates, respectively, in
proportion to the percentage interests evidenced by their respective
certificates. So long as there does not exist a failure by the credit enhancer
to make a required payment under the policy, a credit enhancer default, the
credit enhancer shall have the right to exercise all rights of the holders of
the offered certificates under the pooling and servicing agreement without any
consent of the holders, and the holders may exercise their rights only with the
prior written consent of the credit enhancer except as provided in the pooling
and servicing agreement.
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Termination
The circumstances under which the obligations created by the pooling and
servicing agreement will terminate relating to the offered certificates are
described in "The Agreements--Termination; Redemption of Securities" in the
prospectus. The master servicer or the depositor will have the option on any
distribution date on which the aggregate Stated Principal Balance of the
mortgage loans is less than 10% of the aggregate cut-off date balance:
o to purchase all remaining mortgage loans and other assets in the
trust, except for the policy, thereby effecting early retirement
of the offered certificates, or
o to purchase in whole, but not in part, the certificates. Any
purchase of mortgage loans and other assets of the trust shall be
made at a price equal to the sum of:
o 100% of the unpaid principal balance of each mortgage loan,
or the fair market value of the related underlying mortgaged
properties with respect to defaulted mortgage loans as to
which title to the mortgaged properties has been acquired if
the fair market value is less than the unpaid principal
balance, as of the date of repurchase plus
o its accrued interest at the Net Mortgage Rate to, but not
including, the first day of the month in which the
repurchase price is distributed and
o any amounts due to the credit enhancer under the insurance
and indemnity agreement.
Distributions on the certificates relating to any optional termination
will be paid, first, to the offered certificates, in an amount equal to the
Certificate Principal Balance of each class plus one month's interest accrued on
those offered certificates at the related pass-through rate, plus any previously
unpaid Accrued Certificate Interest and second, except as described in the
pooling and servicing agreement, to the Residual Certificates. Any purchase of
mortgage loans and termination of the trust requires the consent of the credit
enhancer if it would result in a draw on the policy. Any purchase of the
certificates, will be made at a price equal to 100% of its Certificate Principal
Balance plus the sum of one month's interest accrued on those certificates at
the applicable pass-through rate and any previously unpaid Accrued Certificate
Interest. Upon the purchase of the certificates or at any time thereafter, at
the option of the master servicer or the depositor, the mortgage loans may be
sold, thereby effecting a retirement of the certificates and the termination of
the trust, or the certificates so purchased may be held or resold by the master
servicer or the depositor.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the offered certificates, ____________, counsel to
the depositor, will deliver an opinion to the effect that, assuming compliance
with all provisions of the pooling and servicing agreement, for federal income
tax purposes, REMIC I and REMIC II will each qualify as a REMIC under the
Internal Revenue Code.
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For federal income tax purposes:
o the Class R-I Certificates will constitute the sole class of
"residual interests" in REMIC I
o each class of offered certificates will represent
ownership of "regular interests" in REMIC II and will
generally be treated as debt instruments of REMIC II and
o the Class R-II Certificates will constitute the sole class
of "residual certificates" in REMIC II.
See "Material Federal Income Tax Consequences--REMICs and FASITs" in the
prospectus.
For federal income tax reporting purposes, the offered certificates,
other than the [Class A-I-1 Certificates and Fixed Strip Certificates], will not
and the [Class A-I-1 Certificates and Fixed Strip Certificates] will be treated
as having been issued with original issue discount. The prepayment assumption
that will be used in determining the rate of accrual of original issue discount,
market discount and premium, if any, for federal income tax purposes will be
based on the assumption that, subsequent to the date of any determination the
mortgage loans will prepay at a rate equal to __% of the prepayment assumption.
No representation is made that the mortgage loans will prepay at that rate or at
any other rate. See "Material Federal Income Tax Consequences--General" and
"--REMICs and FASITs--Taxation of Owners of REMIC and FASIT Regular Securities"
and "--REMICs and FASITs--Original Issue Discount" in the prospectus.
If the method for computing original issue discount described in the
prospectus results in a negative amount for any period with respect to a
certificateholder, in particular the Fixed Strip Certificates, the amount of
original issue discount allocable to that period would be zero and the
certificateholder will be permitted to offset that negative amount only against
future original issue discount, if any, attributable to those certificates.
In some circumstances OID regulations permit the holder of a debt
instrument to recognize original issue discount under a method that differs from
that used by the issuer. Accordingly, it is possible that the holder of a
certificate may be able to select a method for recognizing original issue
discount that differs from that used by the master servicer in preparing reports
to the certificateholders and the IRS.
Some classes of the offered certificates may be treated for federal
income tax purposes as having been issued at a premium. Whether any holder of
one of those classes of certificates will be treated as holding a certificate
with amortizable bond premium will depend on the certificateholder's purchase
price and the distributions remaining to be made on the certificate at the time
of its acquisition by the certificateholder. Holders of those classes of
certificates should consult their tax advisors regarding the possibility of
making an election to amortize the premium. See "Material Federal Income Tax
Consequences--REMICs and FASITS--Taxation of Owners of REMIC and FASIT Regular
Securities" and "--Premium" in the prospectus.
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The offered certificates will be treated as assets described in Section
7701(a)(19)(C) of the Internal Revenue Code and "real estate assets" under
Section 856(c)(4)(A), formerly Section 856(c)(5)(A), of the Internal Revenue
Code generally in the same proportion that the assets of the trust would be so
treated. In addition, interest on the offered certificates will be treated as
"interest on obligations secured by mortgages on real property" under Section
856(c)(3)(B) of the Internal Revenue Code generally to the extent that the
offered certificates are treated as "real estate assets" under Section
856(c)(4)(A) of the Internal Revenue Code. Moreover, the offered certificates
will be "qualified mortgages" within the meaning of Section 860G(a)(3) of the
Internal Revenue Code if transferred to another REMIC on its startup day in
exchange for a regular or residual interest therein. However, prospective
investors in offered certificates that will be generally treated as assets
described in Section 860G(a)(3) of the Internal Revenue Code should note that,
notwithstanding that treatment, any repurchase of certificate under the right of
the master servicer or the depositor to repurchase the offered certificates may
adversely affect any REMIC that holds the offered certificates if the repurchase
is made under circumstances giving rise to a prohibited transaction tax. See
"The Pooling and Servicing Agreement--Termination" in this prospectus supplement
and "Material Federal Income Tax Consequences--REMICs and
FASITs--Characterization of Investments in REMIC and FASIT Certificates" in the
prospectus.
Residential Funding will be designated as the "tax matters person" with
respect to REMIC I and REMIC II as defined in the REMIC provisions, and in
connection therewith will be required to hold not less than 0.01% of each of the
Class R-I Certificates and Class R-II Certificates.
New Withholding Regulations
The Treasury Department has issued new regulations which make some
modifications to the withholding, backup withholding and information reporting
rules described above. The new regulations attempt to unify certification
requirements and modify reliance standards. The new regulations will generally
be effective for payments made after December 31, 2000, subject to some
transition rules. Prospective investors are urged to consult their own tax
advisors regarding the new regulations.
For further information regarding federal income tax consequences of
investing in the offered certificates, see "Material Federal Income Tax
Consequences--REMICs and FASITs" in the prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions of an underwriting agreement, dated
________, __________ has agreed to purchase and the depositor has agreed to sell
the Class A Certificates and
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Class IO Certificates. It is expected that delivery of the certificates will be
made only in book-entry form through the Same Day Funds Settlement System of DTC
on or about _____________, against payment therefor in immediately available
funds.
In connection with the offered certificates, the underwriter has agreed,
subject to the terms and conditions of the underwriting agreement, to purchase
all of the offered certificates if any of its offered certificates are purchased
thereby.
The underwriting agreement provides that the obligations of the
underwriter to pay for and accept delivery of the offered certificates is
subject to, among other things, the receipt of legal opinions and to the
conditions, among others, that no stop order suspending the effectiveness of the
depositor's registration statement shall be in effect, and that no proceedings
for that purpose shall be pending before or threatened by the Commission.
The distribution of the offered certificates by the underwriter may be
effected from time to time in one or more negotiated transactions, or otherwise,
at varying prices to be determined at the time of sale. Proceeds to the
depositor from the sale of the offered certificates, before deducting expenses
payable by the depositor, will be approximately __% of the aggregate Certificate
Principal Balance of the offered certificates plus its accrued interest from the
cut-off date.
The underwriter may effect these transactions by selling the offered
certificates to or through dealers, and those dealers may receive compensation
in the form of underwriting discounts, concessions or commissions from the
underwriter for whom they act as agent. In connection with the sale of the
offered certificates, the underwriter may be deemed to have received
compensation from the depositor in the form of underwriting compensation. The
underwriter and any dealers that participate with the underwriter in the
distribution of the offered certificates may be deemed to be underwriters and
any profit on the resale of the offered certificates positioned by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933, as amended.
The underwriting agreement provides that the depositor will indemnify
the underwriter, and that under limited circumstances the underwriter will
indemnify the depositor, against some civil liabilities under the Securities
Act, or contribute to payments required to be made in respect thereof.
There can be no assurance that a secondary market for the certificates
will develop or, if it does develop, that it will continue. The primary source
of information available to investors concerning the certificates will be the
monthly statements discussed in the prospectus under "Description of the
Securities--Reports to Securityholders,"which will include information as to the
outstanding principal balance of the certificates. There can be no assurance
that any additional information regarding the certificates will be available
through any other source. In addition, the depositor is not aware of any source
through which price information about the certificates will be generally
available on an ongoing basis. The limited nature of this type of information
regarding the
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certificates may adversely affect the liquidity of the certificates, even if a
secondary market for the certificates becomes available.
The primary source of information available to investors concerning the
offered certificates will be the monthly statements discussed in the prospectus
under "Description of the Securities--Reports to Securityholders," which will
include information as to the outstanding principal balance of the offered
certificates. There can be no assurance that any additional information
regarding the offered certificates will be available through any other source.
In addition, the depositor is not aware of any source through which price
information about the offered certificates will be available on an ongoing
basis. The limited nature of this information regarding the offered certificates
may adversely affect the liquidity of the offered certificates, even if a
secondary market for the offered certificates becomes available.
LEGAL OPINIONS
Material legal matters relating to the offered certificates will be
passed upon for the depositor by ________________ and for the underwriter by
_________________.
EXPERTS
The consolidated financial statements of ____________ and subsidiaries,
as of December 31, 1998 and 1997 and for each of the years in the three-year
period ended December 31, 1998 are incorporated by reference in this prospectus
supplement and in the registration statement in reliance upon the report of
__________, independent certified public accountants, incorporated by reference
in this prospectus supplement, and upon the authority of said firm as experts in
accounting and auditing.
RATINGS
It is a condition to the issuance of the Class A Certificates that they
be rated "AAA" by _______________. and _________________. It is a condition to
the issuance of the Fixed Strip Certificates that they be rated "AAAr" by
_____________ and "AAA" by ______________.
[The ratings assigned by _____________ to mortgage pass-through
certificates address the likelihood of the receipt by certificateholders of
payments required under the pooling and servicing agreement. ____________'s
ratings take into consideration the credit quality of the mortgage pool,
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structural and legal aspects associated with the offered certificates, and the
extent to which the payment stream in the mortgage pool is adequate to make
payments required under the offered certificates. ___________'s rating on the
offered certificates does not, however, constitute a statement regarding
frequency of prepayments on the mortgages. See "Material Yield and Prepayment
Considerations" in this prospectus supplement. The "r" of the "AAAr" rating of
the Fixed Strip Certificates by ___________ is attached to highlight derivative,
hybrid, and some other obligations that _____________ believes may experience
high volatility or high variability in expected returns due to non-credit risks.
Examples of these obligations are:
o securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and
options; and
o interest only and principal only mortgage securities.
The absence of an "r" symbol should not be taken as an indication that
an obligation will exhibit no volatility or variability in total return.]
[The ratings assigned by _____________ to mortgage pass-through
certificates address the likelihood of the receipt by certificateholders of all
distributions to which they are entitled under the transaction structure.
__________'s ratings reflect its analysis of the riskiness of the underlying
mortgage loans and the structure of the transaction described in the operative
documents. ___________'s ratings do not address the effect on the certificates'
yield attributable to prepayments or recoveries on the underlying mortgage
loans. Further, the rating on the Fixed Strip Certificates does not address
whether investors therein will recoup their initial investments.]
The depositor has not requested a rating on the offered certificates by
any rating agency other than________ and ___________. However, there can be no
assurance as to whether any other rating agency will rate the offered
certificates, or, if it does, what rating would be assigned by any other rating
agency. A rating on the offered certificates by another rating agency, if
assigned at all, may be lower than the ratings assigned to the offered
certificates by ___________ and ____________.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. The ratings of the Fixed Strip
Certificates do not address the possibility that the holders of those
certificates may fail to recover fully their initial investments. In the event
that the ratings initially assigned to the offered certificates are subsequently
lowered for any reason, no person or entity is obligated to provide any
additional support or credit enhancement with respect to the offered
certificates.
LEGAL INVESTMENT
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The offered certificates will not constitute "mortgage related
securities" for purposes of SMMEA because the mortgage pool includes mortgage
loans that are secured by subordinate liens on the related mortgaged properties.
Institutions whose investment activities are subject to legal investment laws
and regulations or to review by regulatory authorities should consult with their
own legal advisors in determining whether and to what extent the offered
certificates are subject to restrictions on investment, capital requirements or
otherwise. See "Legal Investment Matters" in the prospectus.
One or more classes of the offered certificates may be viewed as
'complex securities" under TB 13a, which applies to thrift institutions
regulated by the OTS.
The depositor makes no representations as to the proper characterization
of any class of the offered certificates for legal investment or other purposes,
or as to the ability of particular investors to purchase any class of the
offered certificates under applicable legal investment restrictions. These
uncertainties may adversely affect the liquidity of any class of offered
certificates. Accordingly, all institutions whose investment activities are
subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their legal
advisors in determining whether and to what extent any class of the offered
certificates constitutes a legal investment or is subject to investment, capital
or other restrictions.
See "Legal Investment Matters" in the prospectus.
ERISA CONSIDERATIONS
A fiduciary of any ERISA plan or any insurance company, whether through
its general or separate accounts, or any other person investing ERISA plan
assets of any ERISA plan, as defined under "ERISA Considerations--Plan Asset
Regulations" in the prospectus, should carefully review with its legal advisors
whether the purchase or holding of offered certificates could give rise to a
transaction prohibited or not otherwise permissible under ERISA or Section 4975
of the Internal Revenue Code. The purchase or holding of the offered
certificates by, on behalf of or with ERISA plan assets of an ERISA plan may
qualify for exemptive relief under the Exemption, as described under "ERISA
Considerations--Considerations for ERISA Plans Regarding the Purchase of
Certificates--Prohibited Transaction Exemptions" in the prospectus. However, the
Exemption contains a number of conditions which must be met for the Exemption to
apply, including the requirement that any ERISA plan must be an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Commission under
the Securities Act. See "ERISA Considerations" in the prospectus.
Insurance companies contemplating the investment of general account
assets in the offered certificates should consult with their legal advisors with
respect to the applicability of Section 401(c)
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of ERISA, as described under "ERISA Considerations--Considerations for ERISA
Plans Regarding the Purchase of Certificates--Insurance Company General
Accounts" in the prospectus. The DOL issued final regulations under Section
401(c) on January 5, 2000, but these final regulations are generally not
applicable until July 5, 2001.
Any fiduciary or other investor of ERISA plan assets that proposes to
acquire or hold the offered certificates on behalf of or with ERISA plan assets
of any ERISA plan should consult with its counsel with respect to:
o whether the specific and general conditions and the other
requirements in the Exemption would be satisfied, or whether any
other prohibited transaction exemption would apply, and
o the potential applicability of the general fiduciary
responsibility provisions of ERISA and the prohibited transaction
provisions of ERISA and Section 4975 of the Internal Revenue Code
to the proposed investment.
The sale of any of the offered certificates to an ERISA plan is in no
respect a representation by the depositor or the underwriter that such an
investment meets all relevant legal requirements relating to investments by
ERISA plans generally or any particular ERISA plan, or that such an investment
is appropriate for ERISA plans generally or any particular ERISA plan.
S-74
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION
PROCEDURES
Except in certain limited circumstances, the globally offered
Residential Funding Mortgage Securities II, Inc., Home Equity Loan Pass-Through
Certificates, Series ________, 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
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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.
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
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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:
o 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;
o borrowing interests in global securities in the United
States from a DTC participant no later than one day prior
to settlement, which would give
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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
o staggering the value dates for the buy and sell sides of
the trade so that the value date for the purchase from the
DTC participant is at least one day prior to the value
date for the sale to the 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
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:
o each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of
its trade or business in the chain of intermediaries between
the beneficial owner and the U.S. entity required to
withhold tax complies with applicable certification
requirements; and
o the beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate:
o 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
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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.
o 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.
o 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.
o 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:
o a citizen or resident of the United States;
o a corporation, partnership or other entity treated as a
corporation or a partnership for United States federal
income tax purposes, organized in or
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under the laws of the United States or any state thereof,
including for this purpose the District of Columbia, unless,
in the case of a partnership, future Treasury regulations
provide otherwise;
o an estate that is subject to U.S. federal income tax regardless
of the source of its income; or
o a trust if a court within the United States is able to exercise
primary supervision of the administration of the trust and one or
more United States persons have the authority to control all
substantial decisions of the trust.
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>
Residential Funding Mortgage Securities II, Inc.
$_______________
Home Equity Loan Pass-Through Certificates,
Series _______
Prospectus Supplement
_______________________
[Underwriter]
You should rely only on the information contained or incorporated by reference
in this prospectus supplement and the accompanying prospectus. We have not
authorized anyone to provide you with different information.
We are not offering the certificates offered in this prospectus supplement in
any state where the offer is not permitted.
Dealers will be required to deliver a prospectus supplement and prospectus when
acting as underwriters of the certificates offered hereby and with respect to
their unsold allotments or subscriptions. In addition, all dealers selling the
certificates, whether or not participating in this offering, may be required to
deliver a prospectus supplement and prospectus until _____________.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Other Expenses of Issuance and Distribution (Item 14 of Form S-3).
The expenses expected to be incurred in connection with the issuance and
distribution of the Securities being registered, other than underwriting
compensation, are as set forth below. All such expenses, except for the filing
fee, are estimated.
Filing Fee for Registration Statement.................... $ 1,319,736
Legal Fees and Expenses.................................. 1,000,000
Accounting Fees and Expenses............................. 800,000
Trustee's Fees and Expenses
(including counsel fees)........................... 150,000
Blue Sky Fees............................................ 30,000
Printing and Engraving Fees.............................. 420,000
Rating Agency Fees....................................... 3,000,000
Miscellaneous.......................................... 50,000
____________
Total ...................................................$ 6,769,736
============
Indemnification of Directors and Officers (Item 15 of Form S-3).
Any underwriters who execute one of the Underwriting Agreements in the
form filed as Exhibit 1.1 or Exhibit 1.2 to this Registration Statement will
agree to indemnify the Registrant's directors and its officers who signed this
Registration Statement against certain liabilities which might arise under the
Securities Act of 1933 from certain information furnished to the Registrant by
or on behalf of such indemnifying party.
Subsection (a) of Section 145 of the General Corporation Law of Delaware
empowers a corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, employee or agent of the corporation or is or
was serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
cause to believe his conduct was unlawful.
<PAGE>
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Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation and except that no indemnification may be made
in respect to any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine that despite the adjudication of liability such person is fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper.
Section 145 further provides that to the extent a director, officer,
employee or agent of a corporation has been successful in the defense of any
action, suit or proceeding referred to in subsections (a) and (b) or in the
defense of any claim, issue or matter therein, he shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection therewith; that indemnification or advancement of expenses provided
for by Section 145 shall not be deemed exclusive of any other rights to which
the indemnified party may be entitled; and empowers the corporation to purchase
and maintain insurance on behalf of a director, officer, employee or agent of
the corporation against any liability asserted against him or incurred by him in
any such capacity or arising out of his status as such whether or not the
corporation would have the power to indemnify him against such liabilities under
Section 145.
The By-Laws of the Registrant provide, in effect, that to the extent and
under the circumstances permitted by subsections (a) and (b) of Section 145 of
the General Corporation Law of the State of Delaware, the Registrant (i) shall
indemnify and hold harmless each person who was or is a party or is threatened
to be made a party to any action, suit or proceeding described in subsections
(a) and (b) by reason of the fact that he is or was a director or officer, or
his testator or intestate is or was a director or officer of the Registrant,
against expenses, judgments, fines and amounts paid in settlement, and (ii)
shall indemnify and hold harmless each person who was or is a party or is
threatened to be made a party to any such action, suit or proceeding if such
person is or was serving at the request of the Registrant as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise.
In addition, the Pooling and Servicing Agreements and the Indentures and
Trust Agreements, as the case may be, will provide that no director, officer,
employee or agent of the Registrant is liable to the Trust Fund or the
Securityholders, except for such person's own willful misfeasance, bad faith,
gross negligence in the performance of duties or reckless disregard of
obligations and duties. The Pooling and Servicing Agreements and the Indentures,
as the case may be, will further provide that, with the exceptions stated above,
a director, officer, employee or agent of the Registrant is entitled to be
indemnified against any loss, liability or expense incurred in connection with
legal action relating to such Pooling and Servicing Agreements and Indentures
and related Securities other than such expenses related to particular Mortgage
Loans.
<PAGE>
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Certain controlling persons of the Registrant may also be entitled to
indemnification from General Motors Acceptance Corporation, an indirect parent
of the Registrant. Under sections 7015 and 7018-7023 of the New York Banking
Law, General Motors Acceptance Corporation may or shall, subject to various
exceptions and limitation, indemnify its directors or officers and may purchase
and maintain insurance as follows:
(a) If the director is made or threatened to be made a party to an
action by or in the right of General Motors Acceptance Corporation to
procure a judgment in its favor, by reason of the fact that such person
is or was a director or officer of General Motors Acceptance Corporation
or is or was servicing at the request of General Motors Acceptance
Corporation as a director or officer of some other enterprise, General
Motors Acceptance Corporation may indemnify such person against amounts
paid in settlement of such action or an appeal therein, if such director
or officer acted, in good faith, for a purpose which such person
reasonably believed to be in (or, in the case of service for any other
enterprise, not opposed to) the best interests of General Motors
Acceptance Corporation, except that no indemnification is available
under such statutory provisions in respect of a threatened action or a
pending action which is settled or otherwise disposed of, or any claim
or issue or matter as to which such person is found liable to General
Motors Acceptance Corporation, unless in each such case a court
determined that such person is fairly and reasonably entitled to
indemnity for such amount as the court deems proper.
(b) With respect to any action or proceeding other than one by or
in the right of General Motors Acceptance Corporation to procure a
judgment in its favor, if a director or officer is made or threatened to
be made a party by reason of the fact that such person was a director or
officer of General Motors Acceptance Corporation, or served some other
enterprise at the request of General Motors Acceptance Corporation,
General Motors Acceptance Corporation may indemnify such person against
judgments, fines, amounts paid in settlement and reasonable expenses,
including attorneys' fees, incurred as a result of such action or
proceeding or an appeal therein, if such person acted in good faith for
a purpose which such person reasonably believed to be in (or, in the
case of service for any other enterprise, not opposed to) the best
interests of General Motors Acceptance Corporation and, in criminal
actions or proceedings, in addition, had no reasonable cause to believe
that such person's conduct was unlawful.
(c) A director or officer who has been wholly successful, on the
merits or otherwise, in the defense of a civil or criminal action or
proceeding of the character described in paragraphs (a) or (b) above,
shall be entitled to indemnification as authorized in such paragraphs.
(d) General Motors Acceptance Corporation may purchase and
maintain insurance to indemnify directors and officers in instances in
which they may not otherwise be indemnified by General Motors Acceptance
Corporation under the provisions of the New York Banking Law, provided
hat the contract of insurance provides for a retention amount and for
<PAGE>
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co- insurance, except that no such insurance may provide for any
payment, other than cost of defense, to or on behalf of any director or
officer if a judgment or other final adjudication adverse to such
director or officer establishes that such person's acts of active and
deliberate dishonesty were material to the cause of action so
adjudicated or that such person personally gained in fact a financial
profit or other advantage to which such person was not legally entitled.
The foregoing statement is subject to the detailed provisions of
sections 7015 and 7018-7023 of the New York Banking Law.
As a subsidiary of General Motors Corporation, General Motors Acceptance
Corporation is insured against liabilities which it may incur by reason of the
foregoing provisions of the New York Banking Law and directors and officers of
General Motors Acceptance Corporation are insured against some liabilities which
might arise out of their employment and not be subject to indemnification under
said Banking Law.
Pursuant to resolutions adopted by the Board of Directors of General
Motors Corporation, that company to the fullest extent permissible under law
will indemnify, and has purchased insurance on behalf of, directors or officers
of the company, or any of them, who incur or are threatened with personal
liability, including expenses, under Employee Retirement Income Security Act of
1974 or any amendatory or comparable legislation or regulation thereunder.
<PAGE>
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Exhibits (Item 16 of Form S-3).
Exhibits--
1.1* Form of Underwriting Agreement for the Home Equity Loan Pass-Through
Certificates
1.2* Form of Underwriting Agreement for the Asset-Backed Notes
3.1* Certificate of Incorporation of Residential Funding Mortgage
Securities II, Inc. ("RFMSII")
3.2* By-Laws of RFMSII
4.1* Form of Pooling and Servicing Agreement for Closed-End Loans 4.2*
Form of Pooling and Servicing Agreement for Revolving Credit Loans
4.3* Form of Servicing Agreement 4.4* Form of Trust Agreement 4.5*
Form of Indenture 5.1** -- Opinion of Thacher Proffitt & Wood with
respect to legality relating to the Home Equity Loan Pass-Through
Certificates
5.2**-- Opinion of Thacher Proffitt & Wood with respect to legality relating to
the Asset-Backed Notes
5.3**-- Opinion of Orrick, Herrington & Sutcliffe with respect to legality
relating to the Home Equity Loan Pass-Through Certificates and
Asset-Backed Notes
5.4**-- Opinion of Stroock & Stroock & Lavan with respect to legality relating
to the Home Equity Loan Pass-Through Certificates and Asset-Backed Notes
8.1**-- Opinion of Thacher Proffitt & Wood with respect to certain tax matters
relating to the Home Equity Loan Pass-Through Certificates
(included as part of Exhibit 5.1).
8.2**-- Opinion of Thacher Proffitt & Wood with respect to certain tax matters
relating to the Asset-Backed Notes (included as part of Exhibit 5.2).
8.3**-- Opinion of Orrick, Herrington & Sutcliffe with respect to certain tax
matters relating to the Home Equity Loan Pass-Through
Certificates and Asset- Backed Notes
8.4**-- Opinion of Stroock & Stroock & Lavan with respect to certain tax
matters relating to the Home Equity Loan Pass-Through Certificates
and Asset- Backed Notes (included as part of Exhibit 5.4).
10.1* -Form of Mortgage Loan Purchase Agreement
23.1** -- Consent of Thacher Proffitt & Wood relating to the Home Equity Loan
Pass-Through Certificates (included as part of Exhibit 5.1).
23.2** -- Consent of Thacher Proffitt & Wood relating to the Asset-Backed Notes
(included as part of Exhibit 5.2).
23.3** -- Consent of Orrick, Herrington & Sutcliffe relating to the Home Equity
Loan Pass-Through Certificates and Asset-Backed Notes (included as part of
Exhibit 5.3).
<PAGE>
-6-
23.4** -- Consent of Stroock & Stroock & Lavan relating to the Home Equity Loan
Pass-Through Certificates and Asset-Backed Notes (included as part of
Exhibit 5.4).
24.1** -- Power of Attorney
_______________________
* Incorporated by reference from the Registration Statement on Form S-3 (File
No. 33-80419).
** Incorporated by reference from the Registration Statement on Form S-3 (File
No. 333-36244).
Undertakings (Item 17 of Form S-3).
A. Undertakings Pursuant to Rule 415.
The Registrant hereby undertakes:
(a)(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement;
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement; and
(iii) to include any material information with respect to the
plan of distribution not previously disclosed in this Registration
Statement or any material change to such information in this
Registration Statement;
provided however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the Registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in this
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
<PAGE>
-7-
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.
(b) The Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the Registrant's
annual report pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in this Registration Statement shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
B. Undertaking in respect of indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933, as amended, and will be governed by the final
adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Residential Funding
Mortgage Securities II, Inc. certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-3, reasonably
believes that the security rating requirement contained in Transaction
Requirement B.5 of Form S-3 will be met by the time of the sale of the
securities registered hereunder, and has duly caused this Amendment No. 1 to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Minneapolis, State of Minnesota, as of the 10th
day of May, 2000.
RESIDENTIAL FUNDING MORTGAGE
SECURITIES II, INC.
By:/s/Christopher J. Nordeen
Christopher J. Nordeen
President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
___________________________________* President and Chief Executive May 10, 2000
Christopher J. Nordeen Officer (Principal Executive
Officer)
___________________________________* Director and Chief Financial May 10, 2000
Davee L. Olson Officer (Principal Financial
Officer)
___________________________________* Director May 10, 2000
Bruce J. Paradis
___________________________________* Controller (Principal May 10, 2000
Jack R. Katzmark Accounting Officer)
__________________________________* Director May 10, 2000
David C. Walker
</TABLE>
*By: /s/Lisa R. Lundsten
Lisa R. Lundsten
Attorney-in-fact
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Number Description Location of Exhibit
in Sequential
Numbering System
<S> <C>
1.1* Form of Underwriting Agreement for the Home Equity Loan Pass-
Through Certificates
1.2* Form of Underwriting Agreement for the Asset-Backed Notes
3.1* Certificate of Incorporation of Residential Funding Mortgage
Securities II, Inc. ("RFMSII")
3.2* By-Laws of RFMSII
4.1* Form of Pooling and Servicing Agreement for Closed-End Loans
4.2* Form of Pooling and Servicing Agreement for Revolving Credit Loans
4.3* Form of Servicing Agreement
4.4* Form of Trust Agreement
4.5* Form of Indenture
5.1** Opinion of Thacher Proffitt & Wood with respect to legality relating to
the Home Equity Loan Pass-Through Certificates
5.2** Opinion of Thacher Proffitt & Wood with respect to legality relating to
the Asset-Backed Notes
5.3** Opinion of Orrick, Herrington & Sutcliffe with respect to legality
relating to the Home Equity Loan Pass-Through Certificates and
Asset- Backed Notes
5.4** Opinion of Stroock & Stroock & Lavan with respect to legality relating
to the Home Equity Loan Pass-Through Certificates and Asset-Backed
Notes
8.1** Opinion of Thacher Proffitt & Wood with respect to certain tax
matters relating to the Home Equity Loan Pass-Through Certificates
(included as part of Exhibit 5.1)
8.2** Opinion of Thacher Proffitt & Wood with respect to certain tax matters
relating to the Asset-Backed Notes (included as part of Exhibit 5.2)
8.3** Opinion of Orrick, Herrington & Sutcliffe with respect to certain
tax matters relating to the Home Equity Loan Pass-Through
Certificates and Asset-Backed Notes
8.4** Opinion of Stroock & Stroock & Lavan with respect to certain tax
matters relating to the Home Equity Loan Pass-Through Certificates
and Asset-Backed Notes (included as part of Exhibit 5.4)
</TABLE>
<PAGE>
10.1* Form of Mortgage Loan Purchase Agreement
23.1** Consent of Thacher Proffitt & Wood relating to the Home Equity Loan
Pass-Through Certificates (included as part of Exhibit 5.1)
23.2** Consent of Thacher Proffitt & Wood relating to the Asset-Backed
Notes (included as part of Exhibit 5.2)
23.3** Consent of Orrick, Herrington & Sutcliffe relating to the Home
Equity Loan Pass-Through Certificates and Asset-Backed Notes
(included as part of Exhibit 5.3)
23.4** Consent of Stroock & Stroock & Lavan relating to the Home Equity
Loan Pass-Through Certificates and Asset-Backed Notes (included as
part of Exhibit 5.4)
24.1** Power of Attorney
* Incorporated by reference from the Registration Statement on Form S-3 (File
No. 33-80419).
** Incorporated by reference from the Registration Statement on Form S-3 (File
No. 333-36244).
<PAGE>
May 10, 2000
Securities and Exchange Commission
Division of Corporation Finance
450 Fifth Street, N.W.
Judiciary Plaza
Washington, D.C. 20549
Re: Residential Funding Mortgage Securities II, Inc.
Registration Statement on Form S-3/A
Registration No. 333-36244
Dear Sirs:
Pursuant to Rule 461 of the Rules and Regulations under the Securities
Act of 1933, as amended, we hereby request acceleration of the effective date of
the above-referenced Registration Statement so that it may become effective by
9:00 a.m., Eastern Standard Time, on May 12, 2000 or as soon as practicable
thereafter.
Very truly yours,
RESIDENTIAL FUNDING MORTGAGE
SECURITIES II, INC.
By:____________________________*
Name: Christopher J. Nordeen
Title:President
*By:/A/Lisa R. Lundsten
Lisa R. Lundsten
Attorney-in-fact
<PAGE>
