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Prospectus Supplement
(To Prospectus dated August 22, 1996)
RESIDENTIAL ACCREDIT LOANS, INC.
COMPANY
RESIDENTIAL FUNDING CORPORATION
MASTER SERVICER
MORTGAGE ASSET-BACKED PASS-THROUGH CERTIFICATES, SERIES 1996-QS6
$138,145,180 ADJUSTABLE RATE(1) CLASS A CERTIFICATES
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(1) The Class A Certificates will accrue interest during each Interest Accrual
Period at a per annum rate equal to One-Month LIBOR (as defined herein) plus
0.36% (or One-Month LIBOR plus 0.72% during certain periods as described
herein), not to exceed the Maximum Class A Rate, as described herein.
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The Series 1996-QS6 Mortgage Asset-Backed Pass-Through Certificates (the
'CERTIFICATES') will include one class of senior Certificates (the 'CLASS A
CERTIFICATES') and one class of subordinate Certificates (the 'CLASS R
CERTIFICATES' or the 'RESIDUAL CERTIFICATES'). Only the Class A Certificates are
offered hereby. See the 'Index of Principal Definitions' in the Prospectus for
the meanings of capitalized terms and acronyms not otherwise defined herein.
It is a condition of the issuance of the Class A Certificates that they be rated
'AAAr' by Standard & Poor's Ratings Services ('STANDARD & POOR'S') and 'Aaa' by
Moody's Investors Service, Inc. ('MOODY'S').
On or before the date of issuance of the Certificates, the Company will obtain
from AMBAC Indemnity Corporation (the 'INSURER') a certificate guaranty
insurance policy (the 'POLICY'), which will, subject to its terms, protect the
holders of the Class A Certificates against any interest shortfalls (except as
described herein) allocated to the Class A Certificates and the principal
portion of any Realized Losses allocated to the Class A Certificates. See
'Description of the Certificates -- Certificate Guaranty Insurance Policy'
herein.
(Continued on following page)
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PROCEEDS OF THE ASSETS IN THE TRUST FUND AND PROCEEDS FROM THE POLICY (AS
DESCRIBED HEREIN) ARE THE SOLE SOURCE OF PAYMENTS ON THE CLASS A CERTIFICATES.
THE CLASS A CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
COMPANY, THE MASTER SERVICER, GMAC MORTGAGE OR ANY OF THEIR AFFILIATES. NEITHER
THE CLASS A CERTIFICATES NOR THE MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY
GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE COMPANY, THE MASTER SERVICER,
GMAC MORTGAGE OR ANY OF THEIR AFFILIATES.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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FOR A DISCUSSION OF SIGNIFICANT MATTERS AFFECTING INVESTMENTS IN THE CLASS A
CERTIFICATES, SEE 'RISK FACTORS' COMMENCING ON PAGE S-11 HEREIN AND 'RISK
FACTORS' IN THE PROSPECTUS COMMENCING ON PAGE 10.
There is currently no secondary market for the Class A Certificates. Neither the
Company, Residential Funding Securities Corporation (the 'UNDERWRITER') nor any
other person or entity intends to create a secondary market in the Class A
Certificates. There can be no assurance that a secondary market for the Class A
Certificates will develop or, if it does develop, that it will continue. The
Class A Certificates will not be listed on any securities exchange.
The Class A Certificates will be offered by the Underwriter, an affiliate of the
Company, on a best efforts basis, from time to time to the public, directly or
through dealers, in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. The termination date of the offering is the
earlier to occur of August 29, 1997 or the date on which all of the Class A
Certificates have been sold. Proceeds of the offering will not be placed in any
escrow, trust or similar arrangement. The proceeds to the Company from any sale
of the Class A Certificates will be equal to the purchase price paid by the
purchaser thereof, net of any expenses payable by the Company and any
compensation payable to the Underwriter and any dealer. The Class A Certificates
are offered subject to receipt and acceptance by the Underwriter, to prior sale
and to the Underwriter's right to reject any order in whole or in part and to
withdraw, cancel or modify the offer without notice. It is expected that
delivery of the Class A Certificates will be made only in book-entry form
through the facilities of DTC, CEDEL or Euroclear as discussed herein, on or
after August 29, 1996 against payment therefor in immediately available funds.
RESIDENTIAL FUNDING SECURITIES CORPORATION
The date of this Prospectus Supplement is August 22, 1996.
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The Certificates in the aggregate will evidence the entire beneficial
ownership interest in a trust fund (the 'TRUST FUND') consisting primarily of a
pool of conventional, adjustable-rate, one- to four-family first mortgage loans
with terms to maturity of not more than 30 years (the 'MORTGAGE LOANS') to be
deposited by the Company into the Trust Fund for the benefit of the
Certificateholders. The Mortgage Loans have been originated using program
criteria and underwriting standards that are different from the program criteria
and underwriting standards of other mortgage loan purchase programs. See 'Risk
Factors -- Risks Associated with the Mortgage Loans' herein. The characteristics
of the Mortgage Loans are described herein under 'Description of the Mortgage
Pool.'
The Class A Certificates initially will be represented by certificates
registered in the name of Cede & Co., as nominee of DTC, as further described
herein. Investors in the Class A Certificates may elect to hold their Class A
Certificates through DTC (in the United States) or CEDEL or Euroclear (in
Europe). Definitive certificates will be available for the DTC Registered
Certificates only under the limited circumstances described herein. See
'Description of the Certificates -- Book-Entry Registration' herein.
As described herein, a REMIC election will be made in connection with the
Trust Fund for federal income tax purposes. The Class A Certificates will
represent ownership of 'regular interests' in the REMIC and the Residual
Certificates will constitute the sole class of 'residual interests' in the
REMIC. See 'Certain Federal Income Tax Consequences' herein and in the
Prospectus.
Distributions on the Class A Certificates will be made on the 25th day of
each month or, if such day is not a business day, then on the next business day,
commencing in September 1996 (each, a 'DISTRIBUTION DATE'). As described herein,
interest distributions on the Class A Certificates will be based on the
Certificate Principal Balance thereof and the then-applicable Pass-Through Rate.
Distributions in respect of principal of the Class A Certificates will be made
as described herein under 'Description of the Certificates -- Principal
Distributions on the Class A Certificates.' The rights of the holders of the
Class R Certificates to receive distributions with respect to the Mortgage Loans
will be subordinate to the rights of the holders of the Class A Certificates to
the extent described herein and in the Prospectus.
THE YIELD TO MATURITY ON THE CLASS A CERTIFICATES WILL DEPEND ON THE RATE
AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS, DEFAULTS AND
LIQUIDATIONS) ON THE MORTGAGE LOANS. THE MORTGAGE LOANS GENERALLY MAY BE PREPAID
IN FULL OR IN PART AT ANY TIME WITHOUT PENALTY. THE YIELD TO INVESTORS ON THE
CLASS A CERTIFICATES MAY BE ADVERSELY AFFECTED BY ANY SHORTFALLS IN INTEREST
COLLECTED ON THE MORTGAGE LOANS DUE TO PREPAYMENTS, LIQUIDATIONS OR OTHERWISE.
THE YIELD TO INVESTORS ON THE CLASS A CERTIFICATES MAY ALSO BE ADVERSELY
AFFECTED BY THE UNCERTAINTY OF THE AVAILABILITY OF EXCESS CASH FLOW TO COVER ANY
UNPAID INTEREST SHORTFALLS AND SUCH UNPAID INTEREST SHORTFALLS MAY REMAIN UNPAID
ON THE FINAL DISTRIBUTION DATE OR EARLIER TERMINATION OF THE TRUST FUND. SEE
'SUMMARY -- SPECIAL PREPAYMENT CONSIDERATIONS,' ' -- SPECIAL YIELD
CONSIDERATIONS' AND 'CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS' HEREIN AND
'YIELD CONSIDERATIONS' IN THE PROSPECTUS.
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THE CLASS A CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE
PART OF A SEPARATE SERIES OF CERTIFICATES ISSUED BY THE COMPANY AND ARE BEING
OFFERED PURSUANT TO ITS PROSPECTUS DATED AUGUST 22, 1996, OF WHICH THIS
PROSPECTUS SUPPLEMENT IS A PART AND WHICH ACCOMPANIES THIS PROSPECTUS
SUPPLEMENT. THE PROSPECTUS CONTAINS IMPORTANT INFORMATION REGARDING THIS
OFFERING WHICH IS NOT CONTAINED HEREIN, AND PROSPECTIVE INVESTORS ARE URGED TO
READ THE PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT IN FULL. SALES OF THE CLASS A
CERTIFICATES MAY NOT BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
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UNTIL NOVEMBER 20, 1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE CLASS A
CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS SUPPLEMENT AND THE PROSPECTUS TO WHICH IT RELATES. THIS
DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used herein and not otherwise defined herein have the meanings
assigned in the Prospectus. See 'Index of Principal Definitions' in the
Prospectus.
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Title of Securities................. Mortgage Asset-Backed Pass-Through Certificates, Series 1996-QS6.
Company............................. Residential Accredit Loans, Inc., an affiliate of Residential Funding. See
'The Company' in the Prospectus.
Master Servicer..................... Residential Funding Corporation. See 'Pooling and Servicing
Agreement -- The Master Servicer' herein and 'Residential Funding
Corporation' in the Prospectus.
Trustee............................. The First National Bank of Chicago, a national banking association.
Cut-off Date........................ August 1, 1996.
Delivery Date....................... On or about August 29, 1996.
The Mortgage Pool................... The Mortgage Pool will consist of a pool of conventional, adjustable-rate,
fully-amortizing mortgage loans (the 'MORTGAGE LOANS'), with an aggregate
principal balance as of the Cut-off Date of $139,119,013. The Mortgage
Loans are secured by first liens on fee simple interests in one-to
four-family residential real properties (each, a 'MORTGAGED PROPERTY'). At
origination, the Mortgage Loans had individual principal balances of at
least $23,449 but not more than $942,500 with an average principal balance
of approximately $120,312. The Mortgage Loans have terms to maturity from
the date of origination or modification of not more than 30 years, and a
weighted average remaining term to stated maturity of approximately 307
months as of the Cut-off Date. Approximately 47.6% and 46.5% of the
Mortgage Loans (by aggregate principal balance as of the Cut-off Date) are
being or will be subserviced by GMAC Mortgage Corporation of PA and
HomeSide, Inc., respectively.
The FHFB Index Mortgage Loans (as defined herein) will adjust semi-annually
on the Adjustment Date (as defined herein) specified in the related
Mortgage Note to a rate equal to One-Month FHFB (as defined herein) plus
(or minus, with respect to 35.0% of the FHFB Index Mortgage Loans) the Note
Margin set forth in the related Mortgage Note, subject to the limitations
described herein, except with respect to 48.4% of the FHFB Mortgage Loans,
which do not have a Note Margin and have a Mortgage Rate equal to One-Month
FHFB; subject to the limitations described herein.
The Treasury Index Mortgage Loans (as defined herein) will adjust annually,
commencing approximately one year after origination, on the Adjustment Date
specified in the related Mortgage Note to a rate equal to the sum of
One-Year U.S. Treasury (as defined herein) and the Note Margin set forth in
the related Mortgage Note, subject to the limitations described herein.
The Six Month LIBOR Mortgage Loans, Two Year Fixed Period LIBOR Mortgage
Loans and Three Year Fixed Period LIBOR Mortgage Loans (each as defined
herein) will adjust semi-annually commencing approximately (i) six months
after origination (with respect to the Six Month LIBOR Mortgage Loans),
(ii) two years after origination (with respect to the Two Year Fixed Period
LIBOR Mortgage Loans), or (iii) three years after origination (with respect
to the Three Year Fixed Period
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LIBOR Mortgage Loans), in each case on the Adjustment Date specified in the
related Mortgage Note to a rate equal to the sum of Six-Month LIBOR (as
defined herein) and the Note Margin set forth in the related Mortgage Note,
subject to the limitations described herein.
The amount of the monthly payment on each Mortgage Loan will be adjusted
semi-annually or annually, as applicable, on the first day of the month
following the month in which the Adjustment Date occurs to the amount
necessary to pay interest at the then applicable Mortgage Rate and to fully
amortize the outstanding principal balance of the Mortgage Loan over its
remaining term to stated maturity. As of the Cut-off Date, the Mortgage
Loans will bear interest at Mortgage Rates of at least 4.625% per annum but
not more than 12.750% per annum, with a weighted average Mortgage Rate of
approximately 7.6698% per annum as of the Cut-off Date. The Mortgage Loans
will have different Adjustment Dates, Note Margins and limitations on the
Mortgage Rate adjustments, as described herein.
For a further description of the Mortgage Loans, see 'Description of the
Mortgage Pool' herein. The Mortgage Loans have been originated using
program criteria and, in certain respects, underwriting standards, that are
less stringent than the program criteria and underwriting standards applied
by other first mortgage loan purchase programs such as those administered
by Fannie Mae, Freddie Mac or the Company's affiliate, Residential Funding,
for the purpose of collateralizing securities issued by Residential Funding
Mortgage Securities I, Inc. See 'Risk Factors -- Risks Associated with the
Mortgage Loans' herein.
The Index Applicable to the Mortgage
Loans............................. With respect to the FHFB Index Mortgage Loans, the Index (as defined
herein) will be One-Month FHFB, as most recently available as of the date
forty-five days prior to the related Adjustment Date. With respect to the
Treasury Index Mortgage Loans, the Index will be One-Year U.S. Treasury, as
most recently available as of forty-five days prior to the related
Adjustment Date. With respect to the Six Month LIBOR Loans, Two Year Fixed
Period LIBOR Loans and the Three Year Fixed Period LIBOR Loans, the Index
will be Six-Month LIBOR, as most recently available (i) as of the first
business day of the month immediately preceding the month in which the
Adjustment Date occurs, or (ii) as of the date forty-five days prior to the
Adjustment Date. With respect to one Six Month LIBOR Mortgage Loan,
representing approximately 0.4% of such Mortgage Loans, the Index will be
Six-Month LIBOR as published by Fannie Mae and as most recently available
as of the date forty-five days prior to the Adjustment Date. See
'Description of the Mortgage Pool -- Mortgage Rate Adjustment,'
' -- One-Month FHFB,' ' -- One-Year Treasury' and ' -- Six-Month LIBOR'
herein.
Conversion of Mortgage Loans........ Approximately 2.9% of the Mortgage Loans (by aggregate principal balance as
of the Cut-off Date) (the 'CONVERTIBLE LOANS') provide that, at the option
of the related Mortgagors, the adjustable interest rate thereon may be
converted to a fixed interest rate, provided that certain conditions have
been satisfied. Upon notification from a Mortgagor of such Mortgagor's
intent to convert from an adjustable interest rate to a fixed interest
rate, and prior to the conversion of any such Mortgage Loan, the related
Subservicer will be obligated to purchase the Converting
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Mortgage Loan (as defined herein) at the Conversion Price (as defined
herein). In the event of a failure by a Subservicer to purchase a
Converting Mortgage Loan, the Master Servicer is required to use its best
efforts to purchase such Converted Mortgage Loan (as defined herein) from
the Mortgage Pool at the Conversion Price during the one-month period
following the date of conversion. In the event that neither the related
Subservicer nor the Master Servicer purchases a Converting or Converted
Mortgage Loan, the Mortgage Pool will thereafter include both fixed-rate
and adjustable-rate Mortgage Loans. See 'Certain Yield and Prepayment
Considerations' herein.
The Class A Certificates............ The Class A Certificates will be issued pursuant to a Pooling and Servicing
Agreement, to be dated as of the Cut-off Date, among the Company, the
Master Servicer and the Trustee.
For a description of the allocation of interest and principal distributions
to the Class A Certificates see 'Summary -- Interest Distributions,' and
' -- Principal Distributions,' 'Description of the Certificates -- Interest
Distributions,' and ' -- Principal Distributions on the Class A
Certificates' herein.
Certificate Registration............ The Class A Certificates will be represented by one or more certificates
registered in the name of Cede & Co., as nominee of DTC. No Beneficial
Owner will be entitled to receive a Certificate of such class in fully
registered, certificated form (a 'DEFINITIVE CERTIFICATE'), except under
the limited circumstances described herein. Investors in the Class A
Certificates may elect to hold their Class A Certificates through DTC (in
the United States) or CEDEL or Euroclear (in Europe). See 'Description of
the Class A Certificates -- Book-Entry Registration' herein.
Interest Distributions.............. The Pass-Through Rate on the Class A Certificates with respect to each
Interest Accrual Period will be the per annum rate equal to the lesser of
(i) One-Month LIBOR plus 0.36%, or, on any Distribution Date when the
aggregate Stated Principal Balance of the Mortgage Loans is less than 10%
of the aggregate principal balance of the Mortgage Loans as of the Cut-off
Date, One-Month LIBOR plus 0.72% and (ii) the Maximum Class A Rate (as
defined herein under 'Description of the Certificates -- Interest
Distributions'). The Pass-Through Rate on the Class A Certificates with
respect to the initial Interest Accrual Period will be 5.79% per annum. On
each Distribution Date, holders of the Class A Certificates will be
entitled to receive an interest distribution in an amount equal to the
Accrued Certificate Interest (as defined below) thereon for such
Distribution Date to the extent of the Available Distribution Amount (as
defined herein) for such Distribution Date; provided that on any
Distribution Date on which the Accrued Certificate Interest exceeds an
amount equal to (i)(a) one-twelfth of the aggregate Stated Principal
Balance of the Mortgage Loans multiplied by (b) the weighted average of the
Net Mortgage Rates on the Mortgage Loans as of the first day of the
calendar month in which the Interest Accrual Period begins, minus (ii) the
amount of the premium payable to the Insurer with respect to the Policy for
such Distribution Date, the amount of such difference (any such amount, an
'UNPAID INTEREST SHORTFALL') will not be included in the Interest
Distribution Amount for such Distribution Date and will accrue interest at
the Pass-Through Rate on the Class A Certificates (as adjusted from time to
time) and will be paid on future Distribution Dates only to the extent of
Excess
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Cash Flow (as defined herein) available therefor. The rating assigned to
the Class A Certificates does not address the likelihood of the receipt of
any amounts in respect of any Unpaid Interest Shortfalls. Any Unpaid
Interest Shortfalls will not be covered by the Policy and may remain unpaid
on the final Distribution Date or earlier termination of the Trust Fund.
With respect to any Distribution Date, Accrued Certificate Interest will be
equal to one month's interest accrued during the related Interest Accrual
Period on the Certificate Principal Balance of the Class A Certificates at
the Pass-Through Rate for such Distribution Date, subject to reduction only
for Prepayment Interest Shortfalls to the extent not offset by the Master
Servicer from master servicing compensation and shortfalls caused by the
Relief Act. With respect to the Distribution Date in September 1996, the
Interest Accrual Period shall be the period commencing on the Delivery Date
and ending on the day preceding the Distribution Date in September 1996.
With respect to any Distribution Date after the Distribution Date in
September 1996, the Interest Accrual Period shall be the period commencing
on the Distribution Date in the month immediately preceding the month in
which such Distribution Date occurs and ending on the day preceding such
Distribution Date. Interest will be calculated on the basis of the actual
number of days in the related Interest Accrual Period and a 360-day year.
See 'Description of the Certificates -- Interest Distributions' herein.
Principal Distributions............. Holders of the Class A Certificates will be entitled to receive on each
Distribution Date, in the manner set forth herein, to the extent of the
portion of the related Available Distribution Amount remaining after the
Accrued Certificate Interest (other than any Unpaid Interest Shortfall) has
been distributed on the Class A Certificates, a principal distribution in
an amount equal to the Principal Distribution Amount. The Principal
Distribution Amount will include, to the extent of available funds and
except as otherwise described herein, the principal portion of all
scheduled monthly payments received or advanced with respect to the related
Due Date, all unscheduled amounts received during the preceding calendar
month and that are allocable to principal (including proceeds of
repurchases, prepayments and liquidations) and certain other amounts
described herein allocable to Realized Losses. The Principal Distribution
Amount may also be adjusted as a result of the required level of
subordination, as described herein. See 'Description of the Certificates --
Principal Distributions on the Class A Certificates' herein.
The subordination and cash flow provisions of the Class R Certificates will
result in a limited acceleration of the principal payments to the holders
of the Class A Certificates; such subordination provisions are described
under 'Description of the Certificates -- Overcollateralization Provisions'
herein. Such subordination provisions have the effect of shortening the
weighted average life of the Class A Certificates by increasing the rate at
which principal is distributed to the Class A Certificateholders. See
'Certain Yield and Prepayment Considerations' herein and 'Yield
Considerations' and 'Maturity and Prepayment Considerations' in the
Prospectus.
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Credit Enhancement.................. The credit enhancement provided for the benefit of the Class A
Certificateholders consists of the overcollateralization and the Policy,
each as described below.
Overcollateralization: The subordination and cash flow provisions of the
Class R Certificates result in a limited acceleration of the Class A
Certificates relative to the amortization of the Mortgage Loans. This
acceleration feature creates overcollateralization which results from the
excess of the aggregate principal balance of the Mortgage Loans over the
aggregate Certificate Principal Balance of the Class A Certificates. Once
the required level of overcollateralization is reached, the acceleration
feature will cease, unless necessary to maintain the required level of
overcollateralization.
Pursuant to the Pooling and Servicing Agreement, the actual level of
overcollateralization may increase or decrease over time as described
herein. An increase would result in a temporary period of accelerated
amortization of the Class A Certificates to increase the actual level of
overcollateralization to its required level; a decrease would result in a
temporary period of decelerated amortization to reduce the actual level of
overcollateralization to its required level. See 'Description of the
Certificates -- Overcollateralization Provisions' herein.
The Certificate Guaranty Insurance Policy: The Class A Certificates will be
entitled to the benefit of the Policy to be issued by the Insurer, which,
subject to its terms, will protect the holders of the Class A Certificates
against any interest shortfalls (except for shortfalls in respect of the
Relief Act, Prepayment Interest Shortfalls and Unpaid Interest Shortfalls)
allocated to the Class A Certificates, and against the principal portion of
any Realized Losses allocated to the Class A Certificates. See 'Description
of the Certificates -- Certificate Guaranty Insurance Policy.'
Certificate Guaranty Insurance
Policy............................ The Insurer will issue the Policy as a means of providing additional credit
enhancement to the Class A Certificates. Under the Policy, the Insurer
will, subject to the terms of the Policy, pay the Trustee, for the benefit
of the holders of the Class A Certificates, on each Distribution Date, as
further described herein, an amount that will cover any interest shortfalls
(except for shortfalls in respect of the Relief Act, Prepayment Interest
Shortfalls and Unpaid Interest Shortfalls) allocated to the Class A
Certificates, the principal portion of any Realized Losses allocated to the
Class A Certificates and the Certificate Principal Balance of the Class A
Certificates to the extent unpaid on the final Distribution Date. Any
payment required to be made by the Insurer under the Policy is referred to
herein as an 'INSURED AMOUNT.' See 'Description of the
Certificates -- Certificate Guaranty Insurance Policy' and 'The Insurer'
herein.
Advances............................ The Master Servicer is required to make Advances in respect of delinquent
payments of principal and interest on the Mortgage Loans, subject to the
limitations described herein. See 'Description of the
Certificates -- Advances' herein and in the Prospectus.
Allocation of Losses;
Subordination..................... Except as otherwise described herein, Realized Losses on the Mortgage Loans
will be allocated first to the Excess Cash Flow (as defined herein); second
to the Class R Certificates up to an amount equal to the Certificate
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Principal Balance thereof (in each case subject to the limitations with
respect to Special Hazard Losses, Fraud Losses, Bankruptcy Losses and
Extraordinary Losses as described herein); and third to the Class A
Certificates as described in 'Description of the Certificates -- Allocation
of Losses; Subordination' herein. Subject to the terms of the Policy, all
Realized Losses allocated to the Class A Certificates will be covered by
the Policy. See 'Description of the Certificates -- Certificate Guaranty
Insurance Policy' herein.
Neither the Class A Certificates nor the Mortgage Loans are insured or
guaranteed by any governmental agency or instrumentality or by the Company,
the Master Servicer, the Trustee, GMAC Mortgage or any affiliate thereof.
Class R Certificates................ As of the Cut-off Date, the Class R Certificates have an initial
Certificate Principal Balance of $973,833. The Class R Certificates will
have no Pass-Through Rate. The Class R Certificates are not being offered
hereby.
Optional Termination................ At its option, on any Distribution Date when the aggregate Stated Principal
Balance of the Mortgage Loans is less than 10% of the aggregate principal
balance of the Mortgage Loans as of the Cut-off Date, the Master Servicer
or the Company may (i) purchase from the Trust Fund all remaining Mortgage
Loans and other assets thereof, and thereby effect early retirement of the
Certificates or (ii) purchase in whole, but not in part, the Certificates.
See 'Pooling and Servicing Agreement -- Termination' herein and 'The
Pooling and Servicing Agreement -- Termination; Retirement of Certificates'
in the Prospectus.
Special Prepayment
Considerations.................... The rate and timing of principal payments on the Class A Certificates will
depend on, among other things, the rate and timing of principal payments
(including prepayments, defaults, liquidations and purchases of Mortgage
Loans due to a breach of a representation and warranty) on the Mortgage
Loans. As is the case with mortgage-backed securities generally, the Class
A Certificates are subject to substantial inherent cash flow uncertainties
because the Mortgage Loans may be prepaid at any time. Generally, when
prevailing interest rates increase, prepayment rates on mortgage loans tend
to decrease, resulting in a slower return of principal to investors at a
time when reinvestment at such higher prevailing rates would be desirable.
Conversely, when prevailing interest rates decline, prepayment rates on
mortgage loans tend to increase, resulting in a faster return of principal
to investors at a time when reinvestment at comparable yields may not be
possible.
See 'Description of the Certificates -- Principal Distributions on the
Class A Certificates' and 'Certain Yield and Prepayment Considerations'
herein and 'Maturity and Prepayment Considerations' in the Prospectus. For
further information regarding the effect of principal prepayments on the
weighted average life of the Class A Certificates, see the table entitled
'Percent of Initial Certificate Principal Balance Outstanding at the
Following Percentages of CPR' herein.
Special Yield Considerations........ The yield to maturity on the Class A Certificates will depend on, among
other things, the rate and timing of principal payments (including
prepayments, defaults, liquidations and purchases of Mortgage Loans due to
a breach of a representation and warranty) on the Mortgage Loans and the
allocation thereof to reduce the Certificate Principal Balance of such
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class. In addition, to the extent the Subservicers and the Master Servicer
fail to purchase Converting or Converted Mortgage Loans, the yield to
investors on the Class A Certificates may be affected by the inclusion of
fixed-rate Mortgage Loans in the Mortgage Pool. Prepayment Interest
Shortfalls resulting from principal prepayments in full in any calendar
month will not adversely affect the yield to investors in the Class A
Certificates to the extent such Prepayment Interest Shortfalls are offset
by the Master Servicer from master servicing compensation. See 'Description
of the Certificates -- Interest Distributions' herein.
In general, if the Class A Certificates are purchased at a premium and
principal distributions to such class 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 the
Class A Certificates are purchased at a discount and principal
distributions thereon 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. The yield to investors on the
Class A Certificates will be sensitive to fluctuations in the level of
One-Month LIBOR and may be adversely affected by the application of the
Maximum Class A Rate. The prepayment of Mortgage Loans with higher Mortgage
Rates and, to the extent not repurchased, the presence of Converted Loans
among the Mortgage Loans, may result in a lower Maximum Class A Rate. The
yield to investors on the Class A Certificates may also be adversely
affected by the uncertainty of the availability of Excess Cash Flow to
cover any Unpaid Interest Shortfalls and such Unpaid Interest Shortfalls
may remain unpaid on the final Distribution Date or earlier termination of
the Trust Fund.
Certain Federal Income Tax
Consequences...................... An election will be made to treat the Trust Fund as a REMIC for federal
income tax purposes. Upon the issuance of the Class A Certificates, Orrick,
Herrington & Sutcliffe, counsel to the Company, will deliver its opinion
generally to the effect that, assuming compliance with all provisions of
the Pooling and Servicing Agreement, for federal income tax purposes, the
Trust Fund will qualify as a REMIC under Sections 860A through 860G of the
Code.
For federal income tax purposes, the Residual Certificates will be the sole
class of 'residual interests' in the REMIC and the Class A Certificates
will represent ownership of 'regular interests' in the REMIC and will
generally be treated as representing ownership of debt instruments of the
REMIC.
For further information regarding the federal income tax consequences of
investing in the Class A Certificates, see 'Certain Federal Income Tax
Consequences' herein and in the Prospectus.
Legal Investment.................... The Class A Certificates will constitute 'mortgage related securities' for
purposes of SMMEA for so long as they are rated in at least the second
highest rating category by one or more nationally recognized statistical
rating agencies. Institutions whose investment activities are subject to
legal investment laws and regulations, regulatory capital requirements or
review by regulatory authorities may be subject to restrictions on
investment in the Class A Certificates and should consult with their legal
</TABLE>
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<TABLE>
<S> <C>
advisors. See 'Legal Investment' herein and 'Legal Investment Matters' in
the Prospectus.
Ratings............................. It is a condition to the issuance of the Class A Certificates that they be
rated 'AAAr' by Standard & Poor's and 'Aaa' by Moody's. 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.
STANDARD & POOR'S RATINGS (AS EVIDENCED BY THE SYMBOL 'r') AND MOODY'S
RATINGS OF THE CLASS A CERTIFICATES WILL NOT REPRESENT ANY ASSESSMENT OF
THE RELATED SUBSERVICER'S OR THE MASTER SERVICER'S ABILITY TO PURCHASE
CONVERTING OR CONVERTED MORTGAGE LOANS. In the event that neither the
related Subservicer nor the Master Servicer purchases a Converting or
Converted Mortgage Loan, investors in the Class A Certificates might suffer
a lower than anticipated yield. A security rating does not address the
frequency of prepayments of Mortgage Loans or the likelihood of the receipt
of any amounts in respect of Unpaid Interest Shortfalls, or the
corresponding effect on yield to investors. See 'Certain Yield and
Prepayment Considerations' and 'Ratings' herein and 'Yield Considerations'
in the Prospectus.
</TABLE>
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<PAGE>
RISK FACTORS
In addition to the matters described elsewhere in this Prospectus
Supplement and the Prospectus, prospective investors should carefully consider,
among other things, the following factors in connection with the purchase of the
Offered Certificates:
RISKS ASSOCIATED WITH THE MORTGAGE LOANS
The Mortgage Loans have been originated using program criteria and, in
certain respects, underwriting standards, that are less stringent than the
program criteria and underwriting standards applied by other first mortgage loan
purchase programs such as those run by Fannie Mae or by Freddie Mac or by the
Company's affiliate, Residential Funding, for the purpose of collateralizing
securities issued by Residential Funding Mortgage Securities I, Inc.
Approximately 10.0% (by aggregate principal balance as of the Cut-off Date) of
the Mortgage Loans are secured by non-owner occupied properties. Such Mortgage
Loans may present a greater risk of loss when a borrower experiences financial
difficulties because a mortgage loan secured by non-owner occupied property may
be more likely to default than a mortgage loan secured by a primary residence.
In addition, mortgage loans with higher Loan-to-Value Ratios and mortgage loans
made to International Borrowers, mortgagors whose debt-to-income ratios are
higher than are permitted pursuant to such other programs or whose income is not
required to be provided or verified may also present a greater risk of default.
See 'The Trust Funds -- The Mortgage Loans -- Underwriting Policies' and
'Certain Legal Aspects of Mortgage Loans and Contracts' in the Prospectus.
In addition to the foregoing, from time to time certain geographic regions
will experience weaker regional economic conditions and housing markets and,
consequently, may experience higher rates of loss and delinquency than will be
experienced on mortgage loans generally. For example, a region's economic
condition and housing market may be directly, or indirectly, adversely affected
by natural disasters or civil disturbances such as earthquakes, hurricanes,
floods, eruptions or riots. The economic impact of any of these types of events
may also be felt in areas beyond the region immediately affected by the disaster
or disturbance. The Mortgage Loans in the Trust Fund may be concentrated in
these regions, and such concentration may present risks in addition to those
generally present for similar mortgage-backed securities without such
concentration.
LIMITED OBLIGATIONS
The Certificates will not represent an interest in or obligation of the
Company, the Master Servicer, the Mortgage Collateral Sellers, GMAC Mortgage or
any of their affiliates. The only obligations of the foregoing entities with
respect to the Certificates or any Mortgage Loan will be the obligations (if
any) of the Company, the Mortgage Collateral Sellers and the Master Servicer
pursuant to certain limited representations and warranties made with respect to
the Mortgage Loans and the Master Servicer's servicing obligations under the
Pooling and Servicing Agreement (including the Master Servicer's limited
obligation to make certain Advances). Neither the Certificates nor the
underlying Mortgage Loans will be guaranteed or insured by any governmental
agency or instrumentality, or by the Company, the Master Servicer, the Mortgage
Collateral Sellers, GMAC Mortgage or any of their affiliates. Proceeds of the
assets included in the Trust Fund (including the Mortgage Loans and the Policy)
will be the sole source of payments on the Certificates, and there will be no
recourse to the Company, the Master Servicer, the Mortgage Collateral Sellers,
GMAC Mortgage or any other entity in the event that such proceeds are
insufficient or otherwise unavailable to make all payments provided for under
the Certificates.
LIMITATIONS AND SUBSTITUTION OF CREDIT ENHANCEMENT
Credit enhancement will be provided for the Class A Certificates in the
form of the overcollateralization provisions and the Policy, each as described
herein. Such overcollateralization provides limited coverage as to Special
Hazard Losses, Fraud Losses and Bankruptcy Losses and provides no coverage as to
Extraordinary Losses. None of the Company, the Master Servicer, the Mortgage
Collateral Sellers, GMAC Mortgage nor any of their affiliates will have any
obligation to replace or supplement such credit enhancement, or to take any
other action to maintain any rating of the Class A Certificates.
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<PAGE>
PASS-THROUGH RATE RISK
The Mortgage Rate on each Mortgage Loan will adjust either semi-annually or
annually (such adjustment to commence as described herein), based upon One-Month
FHFB, One-Year U.S. Treasury or Six-Month LIBOR, as applicable, and the
Pass-Through Rate on the Class A Certificates will adjust monthly based upon
One-Month LIBOR as described under 'Description of the Certificates --
Calculation of One-Month LIBOR' herein, subject to the Maximum Class A Rate.
Consequently, the interest that becomes due on the Mortgage Loans on the related
Due Date may not be equal to the amount of interest that would accrue on the
Class A Certificates at One-Month LIBOR plus the margin during the related
Interest Accrual Period. In particular, because the Pass-Through Rate on the
Class A Certificates adjusts monthly, while the interest rates on the Mortgage
Loans adjust semi-annually or annually (and in some cases, only after the
expiration of the related fixed rate period), subject to any applicable Periodic
Cap, Maximum Mortgage Rate and Minimum Mortgage Rate, in a rising interest rate
environment, the Accrued Certificate Interest on the Class A Certificates may be
greater than the difference between (i) the amount of interest accrued on the
Mortgage Loans and (ii) the sum of the amount of the premium payable to the
Insurer with respect to the Policy and the Servicing Fee (as defined herein),
resulting in Unpaid Interest Shortfalls. Unpaid Interest Shortfalls are not
covered by the Policy, are payable only to the extent of Excess Cash Flow
available therefor and may remain unpaid on the final Distribution Date or
earlier termination of the Trust Fund. In addition, the related Index and
One-Month LIBOR may respond to different economic and market forces, and there
is not necessarily a correlation between them. Thus, it is possible, for
example, that One-Month LIBOR may rise during periods in which the related Index
is stable or is falling or that, even if both One-Month LIBOR and the related
Index rise during the same period, One-Month LIBOR may rise more rapidly than
the related Index. Finally, the Pass-Through Rate is subject to the Maximum
Class A Rate, which is based on the weighted average of the Maximum Net Mortgage
Rates on the Mortgage Loans.
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Mortgage Pool will consist of Mortgage Loans with an aggregate
principal balance outstanding as of the Cut-off Date, after deducting payments
of principal due on such date, of $139,119,013. The Mortgage Pool will consist
of conventional, adjustable-rate, fully-amortizing, first Mortgage Loans with
terms to maturity of not more than 30 years from the date of origination or
modification. With respect to Mortgage Loans which have been modified,
references herein to the date of origination shall be deemed to be the date of
the most recent modification. All percentages of the Mortgage Loans described
herein are approximate percentages (except as otherwise indicated) by aggregate
principal balance as of the Cut-off Date.
All of the Mortgage Loans were purchased by the Company through its
affiliate Residential Funding from Unaffiliated Sellers as described herein and
in the Prospectus, except in the case of 25.5% of the Mortgage Loans which were
purchased by the Company through its affiliate Residential Funding from GMAC
Mortgage Corporation of PA (an affiliate of the Company). 46.5% of the Mortgage
Loans will have been purchased from The First National Bank of Boston, an
Unaffiliated Seller, and are being subserviced by HomeSide, Inc. Except as
described in the preceding sentence, no Unaffiliated Seller sold more than 2.0%
of the Mortgage Loans to Residential Funding. 47.6% of the Mortgage Loans are
being subserviced by GMAC Mortgage Corporation of PA. See ' -- The Servicers'
herein.
All of the Mortgage Loans were generally underwritten in conformity with or
in a manner generally consistent with the Program. See ' -- The Expanded
Criteria Mortgage Program' below.
The Company and Residential Funding will make certain limited
representations and warranties regarding the Mortgage Loans as of the date of
issuance of the Certificates. The Company 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 such Mortgage Loan occurs
if such breach materially and adversely affects the interests of the
Certificateholders or the Insurer in any such Mortgage Loan and such Mortgage
Loan is not otherwise repurchased by the related Mortgage Collateral Seller. The
Company, as assignee of Residential Funding, will also assign to the Trustee for
the benefit of the Certificateholders certain of its rights, title and interest
in any agreement relating to the transfer and assignment of the Mortgage Loans
to the Company by Residential Funding, including certain representations and
warranties made by the Mortgage Collateral Sellers.
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<PAGE>
Insofar as any such agreement relates to the representations and warranties made
by the related Mortgage Collateral Seller in respect of such Mortgage Loan and
any remedies provided thereunder for any breach of such representations and
warranties, such right, title and interest may be enforced by the Master
Servicer on behalf of the Trustee and the Certificateholders. However, neither
the Company nor Residential Funding will be required to repurchase or substitute
for any Mortgage Loan in the event of a breach of its representations and
warranties with respect to such Mortgage Loan if the substance of any such
breach also constitutes fraud in the origination of such affected Mortgage Loan.
MORTGAGE RATE ADJUSTMENT
The Mortgage Rate on 851 Mortgage Loans, representing approximately 46.5%
of the Mortgage Loans (the 'FHFB INDEX MORTGAGE LOANS'), will adjust
semi-annually on the date (the 'ADJUSTMENT DATE') specified in the related
Mortgage Note to a rate equal to One-Month FHFB plus (or minus, with respect to
35.0% of the FHFB Index Mortgage Loans) a fixed percentage set forth in the
related Mortgage Note (the 'NOTE MARGIN'), subject to the limitations described
herein, except with respect to 48.4% of the FHFB Index Mortgage Loans, which do
not have a Note Margin and have a Mortgage Rate equal to One-Month FHFB, subject
to the limitations described herein. The Mortgage Rate on 251 Mortgage Loans,
representing approximately 33.7% of the Mortgage Loans (the 'TREASURY INDEX
MORTGAGE LOANS'), will adjust annually commencing approximately one year after
origination on the Adjustment Date specified in the related Mortgage Note to a
rate equal to the sum of One-Year U.S. Treasury and the Note Margin set forth in
the related Mortgage Note, subject to the limitations described herein. The
Mortgage Rate on 147 Mortgage Loans, representing approximately 19.8% of the
Mortgage Loans, will adjust semi-annually commencing approximately (i) six
months after origination (with respect to 44 Mortgage Loans, representing
approximately 5.9% of the Mortgage Loans (the 'SIX MONTH LIBOR MORTGAGE
LOANS')), (ii) two years after origination (with respect to nine Mortgage Loans,
representing approximately 0.7% of the Mortgage Loans (the 'TWO YEAR FIXED
PERIOD LIBOR MORTGAGE LOANS')), or (iii) three years after origination (with
respect to 94 Mortgage Loans, representing approximately 13.2% of the Mortgage
Loans (the 'THREE YEAR FIXED PERIOD LIBOR MORTGAGE LOANS')), in each case on the
Adjustment Date specified in the related Mortgage Note to a rate equal to the
sum of Six-Month LIBOR and the Note Margin set forth in the related Mortgage
Note, subject to the limitations described herein.
The amount of the monthly payment on each Mortgage Loan will be adjusted
semi-annually or annually, as applicable, on the first day of the month
following the month in which the Adjustment Date occurs to equal the amount
necessary to pay interest at the then-applicable Mortgage Rate and to fully
amortize the outstanding principal balance of the Mortgage Loan over its
remaining term to stated maturity. As of the Cut-off Date, 51.1% of the Mortgage
Loans will have reached their first Adjustment Date. The Mortgage Loans will
have different Adjustment Dates, Note Margins and limitations on the Mortgage
Rate adjustments, as described below.
The Mortgage Rate on each Mortgage Loan, other than 26 of the FHFB Index
Mortgage Loans (representing approximately 1.6% of such Mortgage Loans), may not
increase or decrease on any Adjustment Date by more than a specified percentage
(the 'PERIODIC RATE CAP'). With respect to the FHFB Index Mortgage Loans subject
to a Periodic Rate Cap, the Periodic Rate Cap is not more than (a) 1.00% with
respect to 97.7% of the FHFB Index Mortgage Loans and (b) 0.25% annually with
respect to 0.7% of the FHFB Index Mortgage Loans. With respect to the Treasury
Index Mortgage Loans, the Periodic Rate Cap is not more than 2.00%; provided,
however, that certain of the Treasury Index Mortgage Loans may adjust from
0.000% up to 2.875% on the initial Adjustment Date. With respect to the Six
Month LIBOR Mortgage Loans, the Periodic Rate Cap is not more than 1.00%;
provided, however, that certain of the Six Month LIBOR Mortgage Loans may adjust
from 0.000% up to 1.000% on the initial Adjustment Date. With respect to the Two
Year Fixed Period LIBOR Mortgage Loans, the Periodic Rate Cap is not more than
1.00%; provided, however, that certain of the Two Year Fixed Period LIBOR
Mortgage Loans may adjust from 0.000% up to 6.500% on the initial Adjustment
Date. With respect to the Three Year Fixed Period LIBOR Mortgage Loans, the
Periodic Rate Cap is not more than 1.00%; provided, however, that certain of
Three Year Fixed Period LIBOR Mortgage Loans may adjust from 0.000% up to 6.500%
on the initial Adjustment Date.
The Mortgage Rate on any Mortgage Loan may not exceed the maximum Mortgage
Rate (the 'MAXIMUM MORTGAGE RATE') or be less than the minimum Mortgage Rate
(the 'MINIMUM MORTGAGE RATE') specified for such Mortgage Loan in the related
Mortgage Note; except with respect to 310 of the FHFB Index Mortgage
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Loans (representing approximately 30.3% of such Mortgage Loans), which do not
have Maximum Mortgage Rates specified in their related Mortgage Notes. The
Maximum Mortgage Rates on such 310 FHFB Index Mortgage Loans, each of which
(except for one Mortgage Loan) is secured by Mortgaged Property located in the
State of Massachusetts, will be equal to the maximum rate of interest
permissible under the laws of the State of Massachusetts. As of the Cut-off
Date, the maximum rate of interest permissible under the laws of the State of
Massachusetts is 20% per annum. The remaining FHFB Index Mortgage Loan is
secured by a Mortgaged Property located in the State of New Hampshire, a state
that does not currently provide a statutory maximum rate of interest for
mortgage loans. Such Mortgage Loan will be assumed to have a Maximum Mortgage
Rate of 20% per annum for the purposes of (i) determining the Maximum Class A
Rate, (ii) determining the Maximum Net Mortgage Rate of such Mortgage Loan and
(iii) the tables set forth herein under 'Description of the Mortgage
Pool -- Mortgage Pool Characteristics.' The Minimum Mortgage Rates of the
Mortgage Loans will range from 0.000% to 12.750%, with a weighted average
Minimum Mortgage Rate as of the Cut-off Date of 1.9066%. The Maximum Mortgage
Rates of the Mortgage Loans will range from 11.500% to 20.000%, with a weighted
average Maximum Mortgage Rate as of the Cut-off Date of 14.9158%. No Mortgage
Loan provides for payment caps on any Adjustment Date which would result in
deferred interest or negative amortization.
With respect to the FHFB Index Mortgage Loans, the Index will be a per
annum rate equal to the 'National Average Contract Mortgage Rate for the
Purchase of Previously Occupied Homes by Combined Lenders' (the 'ONE-MONTH
FHFB') as published by the Federal Housing Finance Board (the 'FHFB') in its
monthly adjustable rate mortgage index release and as most recently available as
of the date forty-five days prior to the Adjustment Date. With respect to the
Treasury Index Mortgage Loans, the Index will be a per annum rate equal to the
weekly average yield on U.S. Treasury securities adjusted to a constant maturity
of one year as reported by the Federal Reserve Board in statistical Release No.
H.15(519) (the 'RELEASE') as most recently available as of the date forty-five
days prior to the Adjustment Date ('ONE-YEAR U.S. TREASURY'). Such average
yields reflect the yields for the week prior to that week. With respect to the
Six Month LIBOR Loans, Two Year Fixed Period LIBOR Loans and the Three Year
Fixed Period LIBOR Loans, the Index will be a per annum rate equal to the
average of interbank offered rates for six-month U.S. dollar-denominated
deposits in the London market based on quotations of major banks ('SIX-MONTH
LIBOR') as published in The Wall Street Journal and as most recently available
(i) as of the first business day of the month immediately preceding the month in
which the Adjustment Date occurs or (ii) as of the date forty-five days prior to
the Adjustment Date (each such date as of which Six-Month LIBOR is determined, a
'REFERENCE DATE'). With respect to one Six Month LIBOR Mortgage Loan,
representing approximately 0.4% of such Mortgage Loans, the Index will be
Six-Month LIBOR, as published by Fannie Mae and as most recently available as of
the date forty-five days prior to the Adjustment Date. One-Month FHFB, One-Year
U.S. Treasury and Six-Month LIBOR are each referred to herein as an 'INDEX.' In
the event that the related Index specified in a Mortgage Note is no longer
available, an index reasonably acceptable to the Trustee that is based on
comparable information will be selected by the Master Servicer.
ONE-MONTH FHFB
Listed below are levels of One-Month FHFB as published by the FHFB in its
monthly adjustable rate mortgage index release on the date that would have been
applicable to mortgage loans whose index was most recently available as of the
date forty-five days prior to the adjustment date and having the following
adjustment dates for the indicated years. Such average yields may fluctuate
significantly from month to month as well as over longer periods and may not
increase or decrease in a constant pattern from period to period. The following
does not purport to be representative of future levels of One-Month FHFB (as
published by the FHFB). No assurance can be given as to the level of One-Month
FHFB on any Adjustment Date or during the life of any Mortgage Loan based on
One-Month FHFB.
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ONE-MONTH FHFB
<TABLE>
<CAPTION>
ADJUSTMENT DATE 1992 1993 1994 1995 1996
- ------------------------------------------------------------------------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
January 1..................................................................... 8.93% 7.44% 6.75% 7.57% 7.61%
February 1.................................................................... 8.78 7.40 6.59 7.60 7.53
March 1....................................................................... 8.43 7.49 6.60 7.56 7.48
April 1....................................................................... 8.25 7.53 6.65 7.75 7.22
May 1......................................................................... 8.02 7.49 6.73 7.77 7.18
June 1........................................................................ 8.15 7.28 6.68 8.00 7.13
July 1........................................................................ 8.14 7.17 6.84 8.09 7.29
August 1...................................................................... 8.26 7.06 7.04 7.99 7.55
September 1................................................................... 8.20 7.08 7.33 7.87
October 1..................................................................... 8.04 7.02 7.36 7.62
November 1.................................................................... 7.78 6.95 7.49 7.56
December 1.................................................................... 7.58 6.87 7.59 7.60
</TABLE>
ONE-YEAR U.S. TREASURY
One-Year U.S. Treasury is currently calculated based on information
reported in the Release. Listed below are the weekly average yields on actively
traded U.S. Treasury securities adjusted to a constant maturity of one year as
reported in the Release on the date that would have been applicable to mortgage
loans whose index was most recently available as of the date forty-five days
prior to the adjustment date and having the following adjustment dates for the
indicated years. Such average yields may fluctuate significantly from week to
week as well as over longer periods and may not increase or decrease in a
constant pattern from period to period. The following does not purport to be
representative of future average yields. No assurance can be given as to the
average yields on such U.S. Treasury securities on any Adjustment Date or during
the life of any Treasury Index Mortgage Loan.
ONE-YEAR U.S. TREASURY
<TABLE>
<CAPTION>
ADJUSTMENT DATE 1992 1993 1994 1995 1996
- ------------------------------------------------------------------------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
January 1..................................................................... 5.00% 3.64% 3.55% 6.42% 5.45%
February 1.................................................................... 4.44 3.72 3.60 7.10 5.35
March 1....................................................................... 4.06 3.60 3.63 7.24 5.17
April 1....................................................................... 4.19 3.41 3.85 6.79 4.85
May 1......................................................................... 4.73 3.39 4.28 6.54 5.15
June 1........................................................................ 4.25 3.31 4.71 6.28 5.62
July 1........................................................................ 4.25 3.27 5.49 6.00 5.67
August 1...................................................................... 4.18 3.61 5.16 5.69 5.86
September 1................................................................... 3.64 3.42 5.49 5.47 5.90
October 1..................................................................... 3.43 3.48 5.60 5.71 5.60
November 1.................................................................... 3.17 3.32 5.62 5.63
December 1.................................................................... 3.09 3.35 6.04 5.60
</TABLE>
SIX-MONTH LIBOR
Listed below are levels of Six-Month LIBOR as published by The Wall Street
Journal that are or would have been applicable to mortgage loans with a
Reference Date of the first business day of the preceding month, and having the
following adjustment dates for the indicated years. Such average yields may
fluctuate significantly from month to month as well as over longer periods and
may not increase or decrease in a constant pattern from period to period. There
can be no assurance that levels of Six-Month LIBOR published by Fannie Mae, or
published in The Wall Street Journal on a different Reference Date would have
been at the same levels as those set forth below. The following does not purport
to be representative of future levels of Six-Month LIBOR (as published by Fannie
Mae or The Wall Street Journal). No assurance can be given as to the level of
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Six-Month LIBOR on any Adjustment Date or during the life of any Mortgage Loan
based on Six-Month LIBOR.
SIX-MONTH LIBOR
<TABLE>
<CAPTION>
ADJUSTMENT DATE 1992 1993 1994 1995 1996
- ---------------------------------------------------------------------- ------ ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
January 1............................................................. 4.9375% 4.000% 3.500% 6.562% 5.718%
February 1............................................................ 4.1875 3.625 3.500 7.000 5.531
March 1............................................................... 4.250 3.375 3.375 6.687 5.281
April 1............................................................... 4.375 3.312 4.000 6.437 5.312
May 1................................................................. 4.500 3.375 4.250 6.500 5.531
June 1................................................................ 4.250 3.312 4.688 6.375 5.562
July 1................................................................ 4.1875 3.500 5.000 6.000 5.656
August 1.............................................................. 4.0625 3.500 5.250 6.000 5.812
September 1........................................................... 3.625 3.500 5.313 5.875 5.906
October 1............................................................. 3.625 3.437 5.313 5.906
November 1............................................................ 3.250 3.375 5.750 5.968
December 1............................................................ 3.625 3.437 5.937 5.875
</TABLE>
The initial Mortgage Rate in effect on a Mortgage Loan generally will be
lower, and may be significantly lower, than the Mortgage Rate that would have
been in effect based on the related Index and the Note Margin. Therefore, unless
the related Index declines after origination of a Mortgage Loan, the related
Mortgage Rate will generally increase on the first Adjustment Date following
origination of such Mortgage Loan subject to any applicable Periodic Rate Cap.
The repayment of the Mortgage Loans will be dependent on the ability of the
Mortgagors to make larger monthly payments following adjustments of the Mortgage
Rate. Mortgage Loans that have the same initial Mortgage Rate may not always
bear interest at the same Mortgage Rate thereafter because such Mortgage Loans
may have different Adjustment Dates (and the Mortgage Rates therefore may
reflect different related Index values), Note Margins, Periodic Rate Caps,
Maximum Mortgage Rates and Minimum Mortgage Rates. The Mortgage Rate on each
Mortgage Loan will be adjusted on each Adjustment Date to equal the related
Index plus (or minus, with respect to 35.0% of the FHFB Index Mortgage Loans)
the related Note Margin (except with respect to 48.4% of the FHFB Mortgage Loans
that do not have a Note Margin), rounded as specified in the related Mortgage
Note, subject to any applicable Maximum Mortgage Rate, Minimum Mortgage Rate and
Periodic Rate Cap for such Mortgage Loan. The Net Mortgage Rate with respect to
each Mortgage Loan as of the Cut-off Date will be set forth in the Mortgage Loan
Schedule attached to the Pooling and Servicing Agreement. The 'NET MORTGAGE
RATE' on each Mortgage Loan will be adjusted on each Adjustment Date to equal
the Mortgage Rate minus the rate per annum at which the related master servicing
and subservicing fees accrue thereon (the 'SERVICING FEE RATE'), subject to any
Periodic Rate Cap, but may not exceed the Maximum Mortgage Rate minus the
Servicing Fee Rate (the 'MAXIMUM NET MORTGAGE RATE') or be less than the Minimum
Mortgage Rate minus the Servicing Fee Rate (the 'MINIMUM NET MORTGAGE RATE') for
each Mortgage Loan. See 'Description of the Mortgage Pool -- Mortgage Pool
Characteristics' herein.
CONVERTIBLE MORTGAGE LOANS
Approximately 2.9% of the Mortgage Loans (the 'CONVERTIBLE MORTGAGE LOANS')
provide that, at the option of the related Mortgagors, the adjustable interest
rate on such Mortgage Loans may be converted to a fixed interest rate. The first
month in which any of the Convertible Mortgage Loans may have converted was
March 1996, and the last month in which any of the Convertible Mortgage Loans
may convert is July 2001. Upon conversion, the Mortgage Rate will be converted
to a fixed interest rate determined in accordance with the formula set forth in
the related Mortgage Note which formula is intended to result in a Mortgage Rate
which is not less than the then current market interest rate (subject to
applicable usury laws). After such conversion, the monthly payments of principal
and interest will be adjusted to provide for full amortization over the
remaining term to scheduled maturity. Upon notification from a Mortgagor of such
Mortgagor's intent to convert from an adjustable interest rate to a fixed
interest rate and prior to the conversion of any such Mortgage Loan (a
'CONVERTING MORTGAGE LOAN'), the related Subservicer will be obligated to
purchase the Converting Mortgage Loan at a price equal to the outstanding
principal balance thereof plus accrued interest thereon net of any
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<PAGE>
subservicing fees (the 'CONVERSION PRICE'). In the event of a failure by a
Subservicer to purchase a Converting Mortgage Loan, the Master Servicer is
required to use its best efforts to purchase such Mortgage Loan following its
conversion (a 'CONVERTED MORTGAGE LOAN') during the one-month period following
the date of conversion at the Conversion Price.
If the related Subservicer fails to purchase a Converting Mortgage Loan and
the Master Servicer does not purchase a Converted Mortgage Loan, neither the
Company, GMAC Mortgage, the Insurer, the Trustee (either in its capacity as
trustee or as successor master servicer) or any of their affiliates nor any
other entity is obligated to purchase or arrange for the purchase of any
Converted Mortgage Loan. Any such Converted Mortgage Loan will remain in the
Mortgage Pool as a fixed-rate Mortgage Loan (with a Maximum Mortgage Rate equal
to the fixed Mortgage Rate) and will result in the Mortgage Pool having both
fixed-rate and adjustable-rate Mortgage Loans. See 'Certain Yield and Prepayment
Considerations' herein.
Following the purchase of any Converted Mortgage Loan as described above,
the purchaser will be entitled to receive an assignment from the Trustee of such
Mortgage Loan and the purchaser will thereafter own such Mortgage Loan free of
any further obligation to the Trustee or the Certificateholders with respect
thereto.
MORTGAGE POOL CHARACTERISTICS
The Mortgage Loans will have the following characteristics as of the
Cut-off Date:
None of the Mortgage Loans will have been originated prior to February
1, 1982 or will have a maturity date later than August 1, 2026. No Mortgage
Loan will have a remaining term to stated maturity as of the Cut-off Date
of less than 33 months. The weighted average remaining term to stated
maturity of the Mortgage Loans as of the Cut-off Date will be approximately
307 months. The weighted average original term to maturity of the Mortgage
Loans as of the Cut-off Date will be approximately 348 months.
As of the Cut-off Date, no Mortgage Loan will be one month or more
delinquent in payment of principal and interest.
No Mortgage Loan provides for deferred interest or negative
amortization.
No more than 0.8% of the Mortgage Loans will have been made to
International Borrowers.
Set forth below is a description of certain additional characteristics
of the Mortgage Loans as of the Cut-off Date (except as otherwise
indicated). All percentages of the Mortgage Loans are approximate
percentages by aggregate principal balance of the Mortgage Loans as of the
Cut-off Date (except as otherwise indicated). Unless otherwise specified,
all principal balances of the Mortgage Loans are as of the Cut-off Date and
are rounded to the nearest dollar.
S-17
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
FHFB INDEX LIBOR INDEX TREASURY INDEX AGGREGATE FOR ALL
MORTGAGE LOANS MORTGAGE LOANS(1) MORTGAGE LOANS MORTGAGE LOANS
----------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Number of Mortgage Loans............... 851 147 251 1249
Range of Net Mortgage Rates............ 4.170 - 9.170% 6.170 - 12.420% 5.295 - 9.420% 4.170 - 12.420%
Mortgage Rates:
Weighted Average.................. 7.2686% 8.4384% 7.7724% 7.6698%
Range............................. 4.625 - 9.625% 6.500 - 12.750% 5.625 - 9.875% 4.625 - 12.750%
Note Margins:
Weighted Average.................. 0.0025% 3.4792% 3.1447% 1.7492%
Range............................. (1.125) - 2.500% 2.750 - 6.460% 2.750 - 3.750% (1.125) - 6.4600%
Minimum Mortgage Rates:
Weighted Average.................. 0.1385% 3.8027% 3.2338% 1.9066%
Range............................. 0.000 - 2.500% 2.750 - 12.750% 2.750 - 9.000% 0.000 - 12.750%
Minimum Net Mortgage Rates:
Weighted Average.................. 0.0690% 3.3582% 2.7970% 1.6391%
Range............................. 0.000 - 2.045% 2.420 - 12.420% 2.295 - 8.545% 0.000 - 12.420%
Maximum Mortgage Rates:
Weighted Average.................. 16.0555% 14.2250% 13.7482% 14.9158%
Range............................. 13.000 - 20.000% 11.500 - 19.250% 11.625 - 15.875% 11.500 - 20.000%
Maximum Net Mortgage Rates:
Weighted Average.................. 15.6005% 13.7804% 13.3114% 14.4690%
Range............................. 12.545 - 19.545% 11.170 - 18.920% 11.295 - 15.420% 11.170 - 19.545%
Weighted Average Months to next
Adjustment Date after August 1,
1996(2).............................. 3 22 9 9
</TABLE>
- ------------
(1) This column contains aggregate information with respect to the Six Month
LIBOR Mortgage Loans, Two Year Fixed Period LIBOR Mortgage Loans and Three
Year Fixed Period LIBOR Mortgage Loans.
(2) The Weighted Average Months to next Adjustment Date will be equal to the
weighted average of the number of months until the Adjustment Date next
following August 1, 1996.
S-18
<PAGE>
<PAGE>
MORTGAGE RATES
<TABLE>
<CAPTION>
PERCENT PERCENT
NUMBER OF PERCENT OF WTD AVG. PERCENT PERCENT PRIMARY SINGLE
MORTGAGE RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL LTV PURCHASE FULL DOC RESIDENCE FAMILY
- -------------------- -------------- ----------------- ------------- -------- -------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
4.625 - 4.749..... 1 $ 34,290 0.02% 64.00% 100.00% 100.00% 100.00% 100.00%
5.625 - 5.749..... 2 821,729 0.59 85.17 34.45 100.00 100.00 65.55
5.750 - 5.874..... 3 527,448 0.38 76.29 0.00 85.92 100.00 100.00
5.875 - 5.999..... 2 611,148 0.44 83.04 100.00 100.00 100.00 53.56
6.000 - 6.124..... 2 452,610 0.33 81.73 87.66 100.00 100.00 87.66
6.125 - 6.249..... 1 78,295 0.06 79.00 0.00 100.00 100.00 100.00
6.250 - 6.374..... 1 396,436 0.28 80.00 100.00 100.00 100.00 100.00
6.375 - 6.499..... 1 214,300 0.15 90.00 100.00 100.00 100.00 0.00
6.500 - 6.624..... 9 2,745,993 1.97 71.53 55.70 55.78 79.22 83.70
6.625 - 6.749..... 65 4,363,176 3.14 64.31 51.34 95.88 95.01 85.40
6.750 - 6.874..... 89 7,544,698 5.42 67.39 43.70 93.04 96.43 86.17
6.875 - 6.999..... 53 5,386,636 3.87 74.91 64.59 82.53 98.72 64.82
7.000 - 7.124..... 116 8,970,703 6.45 73.67 65.11 96.16 97.39 69.50
7.125 - 7.249..... 123 10,972,076 7.89 75.97 60.11 97.07 97.66 74.29
7.250 - 7.374..... 170 15,982,182 11.49 77.40 63.04 83.57 95.01 71.46
7.375 - 7.499..... 14 1,344,106 0.97 73.71 83.36 87.94 82.11 40.83
7.500 - 7.624..... 141 15,258,374 10.97 76.25 61.00 80.32 92.08 67.29
7.625 - 7.749..... 22 2,385,725 1.71 74.55 46.25 61.67 80.75 45.94
7.750 - 7.874..... 42 6,023,878 4.33 70.66 47.09 44.48 91.68 69.75
7.875 - 7.999..... 45 7,781,139 5.59 69.77 38.62 34.61 85.57 69.85
8.000 - 8.124..... 27 4,034,916 2.90 74.40 68.97 58.03 89.91 76.06
8.125 - 8.249..... 43 5,204,012 3.74 80.08 69.01 63.47 78.77 41.51
8.250 - 8.374..... 33 4,154,668 2.99 73.48 68.19 40.38 71.47 84.19
8.375 - 8.499..... 29 7,260,150 5.22 79.16 55.92 49.33 75.95 71.61
8.500 - 8.624..... 61 8,373,130 6.02 75.67 65.39 57.17 77.35 64.44
8.625 - 8.749..... 40 6,507,067 4.68 72.24 45.21 36.13 80.66 69.35
8.750 - 8.874..... 21 2,243,513 1.61 76.54 52.10 70.03 51.34 65.77
8.875 - 8.999..... 15 1,656,350 1.19 77.63 69.98 50.55 75.80 39.34
9.000 - 9.124..... 16 1,620,142 1.16 76.28 62.26 81.05 51.41 51.20
9.125 - 9.249..... 1 33,484 0.02 90.00 100.00 100.00 0.00 100.00
9.250 - 9.374..... 9 619,066 0.44 83.63 63.50 63.50 32.27 54.86
9.375 - 9.499..... 6 642,875 0.46 78.40 43.29 82.22 46.45 69.95
9.500 - 9.624..... 7 936,735 0.67 81.96 38.97 95.97 65.07 75.49
9.625 - 9.749..... 13 1,448,201 1.04 79.97 95.78 55.14 57.56 66.65
9.750 - 9.874..... 8 578,890 0.42 83.88 46.92 87.22 40.36 46.42
9.875 - 9.999..... 4 587,711 0.42 79.11 50.48 100.00 49.52 62.86
10.000 - 10.124..... 1 62,679 0.05 90.00 100.00 100.00 0.00 100.00
10.250 - 10.374..... 1 83,235 0.06 70.00 0.00 100.00 100.00 100.00
10.375 - 10.499..... 2 295,964 0.21 92.06 100.00 100.00 100.00 19.57
10.500 - 10.624..... 2 260,231 0.19 87.57 83.82 100.00 100.00 100.00
10.625 - 10.749..... 5 285,319 0.21 79.62 18.78 100.00 18.78 0.00
11.250 - 11.374..... 1 137,836 0.10 75.00 0.00 0.00 100.00 100.00
11.375 - 11.499..... 1 100,863 0.07 75.00 0.00 0.00 100.00 100.00
12.750 - 12.874..... 1 97,035 0.07 70.00 0.00 0.00 100.00 100.00
----- ----------------- ------ -------- -------- -------- --------- -------
Total or
Weighted
Average....... 1,249 $ 139,119,013 100.00% 74.85% 58.25% 71.63% 86.70% 69.29 %
----- ----------------- ------
----- ----------------- ------
</TABLE>
As of the Cut-Off Date, the weighted average Mortgage Rate of the Mortgage
Loans will be approximately 7.6698% per annum.
S-19
<PAGE>
<PAGE>
ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES
<TABLE>
<CAPTION>
PERCENT PERCENT
ORIGINAL MORTGAGE NUMBER OF PERCENT OF WTD AVG. PERCENT PERCENT PRIMARY SINGLE
LOAN BALANCE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL LTV PURCHASE FULL DOC RESIDENCE FAMILY
- -------------------- -------------- ----------------- ------------- -------- -------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 25,000... 5 $ 108,555 0.08% 39.39% 78.86% 100.00% 80.22% 79.80%
25,001 - 50,000... 178 6,030,812 4.34 65.14 64.32 93.71 74.45 65.54
50,001 - 75,000... 271 14,907,671 10.72 73.31 69.72 90.04 80.85 51.77
75,001 - 100,000... 276 21,700,486 15.60 76.13 66.38 89.09 86.20 65.10
100,001 - 125,000... 172 17,693,590 12.72 77.61 68.27 81.25 86.58 69.72
125,001 - 150,000... 102 12,786,951 9.19 76.92 57.39 70.18 89.40 70.82
150,001 - 175,000... 52 7,711,531 5.54 75.42 61.53 53.71 87.42 70.82
175,001 - 200,000... 38 6,352,311 4.57 73.13 72.69 70.75 85.56 81.57
200,001 - 250,000... 49 10,554,177 7.59 77.38 58.35 60.52 78.49 68.23
250,001 - 300,000... 35 9,572,218 6.88 76.93 53.63 56.40 94.27 65.27
300,001 - 400,000... 36 12,508,319 8.99 73.61 47.51 58.84 89.16 61.12
400,001 - 500,000... 18 7,966,426 5.73 75.39 45.42 62.09 83.71 89.12
500,001 - 600,000... 7 4,090,025 2.94 75.35 29.11 56.39 100.00 100.00
600,001 - 700,000... 7 4,472,736 3.22 69.21 14.53 43.56 100.00 100.00
800,001 - 900,000... 1 804,052 0.58 75.00 100.00 100.00 100.00 100.00
900,001 - 1,000,000... 2 1,859,156 1.34 62.04 0.00 0.00 100.00 49.39
----- ----------------- ------ -------- -------- -------- --------- -------
Total or
Weighted
Average....... 1,249 $ 139,119,013 100.00% 74.85% 58.25% 71.63% 86.70% 69.29 %
----- ----------------- ------
----- ----------------- ------
</TABLE>
As of the Cut-Off Date, the average unpaid principal balance of the
Mortgage Loans will be approximately $111,384.
ORIGINAL LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
ORIGINAL PERCENT PERCENT
LOAN-TO-VALUE RATIO NUMBER OF PERCENT OF PERCENT PERCENT PRIMARY SINGLE
(%) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL PURCHASE FULL DOC RESIDENCE FAMILY
- -------------------- -------------- ----------------- ------------- -------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
0.01 - 50.00..... 126 $ 8,973,161 6.45% 32.95% 66.77% 96.14% 89.18%
50.01 - 55.00..... 53 4,894,789 3.52 23.73 60.16 87.79 89.61
55.01 - 60.00..... 62 8,408,148 6.04 11.28 42.48 87.53 79.43
60.01 - 65.00..... 67 7,555,240 5.43 40.39 59.66 75.39 63.03
65.01 - 70.00..... 117 12,108,600 8.70 47.42 68.64 87.65 76.62
70.01 - 75.00..... 117 16,951,404 12.18 56.37 51.54 78.15 66.65
75.01 - 80.00..... 382 48,275,922 34.70 61.83 70.09 90.91 69.22
80.01 - 85.00..... 30 2,845,921 2.05 64.29 100.00 86.44 78.86
85.01 - 90.00..... 227 21,460,844 15.43 93.89 99.46 80.01 59.16
90.01 - 95.00..... 59 6,759,212 4.86 81.82 98.76 97.72 45.45
95.01 - 100.00..... 9 885,773 0.64 29.91 100.00 74.16 63.70
----- ----------------- ------ -------- -------- --------- -------
Total or
Weighted
Average....... 1,249 $ 139,119,013 100.00% 58.25% 71.63% 86.70% 69.29%
----- ----------------- ------
----- ----------------- ------
</TABLE>
The weighted average Loan-to-Value Ratio at origination of the Mortgage
Loans will be approximately 74.85%.
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
PERCENT PERCENT PERCENT
NUMBER OF PERCENT OF WTD. AVG. PERCENT FULL PRIMARY SINGLE
STATE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL LTV PURCHASE DOC RESIDENCE FAMILY
- -------------------- -------------- ----------------- ------------- ------------- -------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Massachusetts....... 844 $ 64,972,720 46.70% 74.85% 64.69% 96.87% 94.09% 69.37%
California.......... 123 29,799,021 21.42 75.00 44.07 47.58 84.04 71.70
Florida............. 47 6,375,756 4.58 76.55 71.74 32.30 77.92 27.13
Virginia............ 12 4,578,779 3.29 72.66 44.66 76.84 94.64 86.50
Other (1)........... 223 33,392,737 24.00 74.69 57.68 50.80 75.30 72.68
----- ----------------- ------ ----- -------- -------- --------- -------
Total or
Weighted
Average....... 1,249 $ 139,119,013 100.00% 74.85% 58.25% 71.63% 86.70% 69.29%
----- ----------------- ------
----- ----------------- ------
</TABLE>
- ------------
(1) Other includes states and the District of Columbia with under 3%
concentrations individually.
No more than 0.8% of the Mortgage Loans will be secured by Mortgaged
Properties located in any one zip code area in California and no more than 3.6%
of the Mortgage Loans will be secured by Mortgaged Properties located in any one
zip code area outside California.
S-20
<PAGE>
<PAGE>
MORTGAGE LOAN PURPOSE
<TABLE>
<CAPTION>
WTD. PERCENT PERCENT
NUMBER OF PERCENT OF AVG. PERCENT PRIMARY SINGLE
LOAN PURPOSE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL LTV FULL DOC RESIDENCE FAMILY
- -------------------- -------------- ----------------- ------------- -------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Purchase............ 801 $ 81,041,755 58.25% 79.20% 77.41% 85.29% 62.75%
Rate/Term
Refinance......... 122 19,722,150 14.18 72.65 60.44 87.83 71.45
Equity Refinance.... 326 38,355,108 27.57 66.79 65.18 89.10 82.00
----- ----------------- ------ -------- -------- --------- -------
Total or
Weighted
Average....... 1,249 $ 139,119,013 100.00% 74.85% 71.63% 86.70% 69.29%
----- ----------------- ------
----- ----------------- ------
</TABLE>
MORTGAGE LOAN DOCUMENTATION TYPES
<TABLE>
<CAPTION>
WTD PERCENT PERCENT
NUMBER OF PERCENT OF AVG. PERCENT PRIMARY SINGLE
DOCUMENTATION TYPE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL LTV PURCHASE RESIDENCE FAMILY
- -------------------- -------------- ----------------- ------------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Full
Documentation..... 1,034 $ 99,653,889 71.63% 76.82% 62.95% 85.07% 66.62%
No Income Stated
Prg............... 106 19,185,180 13.79 66.09 38.14 92.52 70.32
Reduced
Documentation..... 109 20,279,944 14.58 73.43 54.20 89.21 81.46
----- ----------------- ------ ------- -------- --------- -------
Total or
Weighted
Average....... 1,249 $ 139,119,013 100.00% 74.85% 58.25% 86.70% 69.29%
----- ----------------- ------
----- ----------------- ------
</TABLE>
No more than 39.6% of limited loan documentation Mortgage Loans and no
stated income program Mortgage Loans will be secured by Mortgaged Properties
located in California.
OCCUPANCY TYPES
<TABLE>
<CAPTION>
WTD PERCENT
NUMBER OF PERCENT OF AVG. PERCENT PERCENT SINGLE
OCCUPANCY MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL LTV PURCHASE FULL DOC FAMILY
- -------------------- -------------- ----------------- ------------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Non
Owner-occupied.... 165 $ 13,846,466 9.95% 77.52% 64.15% 88.92% 41.17%
Primary Residence... 1,058 120,619,123 86.70 74.62 57.31 70.29 73.43
Second/Vacation..... 26 4,653,424 3.34 72.72 65.27 55.11 45.70
----- ----------------- ------ ------- -------- -------- -------
Total or
Weighted
Average....... 1,249 $ 139,119,013 100.00% 74.85% 58.25% 71.63% 69.29%
----- ----------------- ------
----- ----------------- ------
</TABLE>
MORTGAGED PROPERTY TYPES
<TABLE>
<CAPTION>
WTD PERCENT
NUMBER OF PERCENT OF AVG. PERCENT PERCENT PRIMARY
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL LTV PURCHASE FULL DOC RESIDENCE
- -------------------- -------------- ----------------- ------------- ------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Single-family
detached.......... 815 $ 96,397,838 69.29% 73.13% 52.75% 68.87% 91.88%
Condo Low-Rise (less
than 5 stories)... 247 18,083,346 13.00 79.90 84.64 94.15 80.08
Two- to four-family
units............. 111 11,170,004 8.03 79.76 61.64 91.51 66.68
Planned Unit
Developments
(detached)........ 40 7,838,880 5.63 76.31 67.20 39.39 77.42
Planned Unit
Developments
(attached)........ 13 1,980,045 1.42 80.77 57.35 56.46 65.82
Townhouse........... 4 1,483,595 1.07 68.46 1.82 11.22 88.78
Condo High-Rise (9
stories or
more)............. 9 742,582 0.53 72.34 79.82 40.92 76.95
Condo Mid-Rise (5 to
8 stories)........ 7 654,982 0.47 88.49 100.00 87.80 100.00
Two- to four-family
units - Townhouse... 1 448,217 0.32 65.00 0.00 100.00 0.00
Two- to four-family
units - Detatched
PUD............... 2 319,525 0.23 84.55 100.00 100.00 63.65
----- ----------------- ------ ------- -------- -------- ---------
Total or
Weighted
Average....... 1,249 $ 139,119,013 100.00% 74.85% 58.25% 71.63% 86.70%
----- ----------------- ------
----- ----------------- ------
</TABLE>
S-21
<PAGE>
<PAGE>
NOTE MARGINS
<TABLE>
<CAPTION>
NUMBER OF
MORTGAGE PRINCIPAL PERCENT OF
NOTE MARGINS (%) LOANS BALANCE MORTGAGE POOL
- --------------------------------------------------------------------- --------- ------------ -------------
<S> <C> <C> <C>
(1.1250)............................................................. 1 $ 74,127 0.05%
(1.0900)............................................................. 1 104,186 0.07
(0.5000)............................................................. 182 12,003,838 8.63
(0.2500)............................................................. 152 10,389,088 7.47
(0.1900)............................................................. 1 46,556 0.03
(0.0025)............................................................. 1 44,362 0.03
0.0000............................................................... 361 31,312,418 22.51
0.2200............................................................... 1 67,667 0.05
0.2500............................................................... 30 1,806,611 1.30
0.5000............................................................... 34 2,480,455 1.78
0.7500............................................................... 10 774,111 0.56
1.0000............................................................... 55 3,769,578 2.71
1.2500............................................................... 1 71,950 0.05
1.5000............................................................... 18 1,598,252 1.15
2.5000............................................................... 3 168,474 0.12
2.7500............................................................... 10 2,398,234 1.72
2.8750............................................................... 83 19,926,923 14.32
3.0000............................................................... 33 7,499,510 5.39
3.1250............................................................... 10 1,610,641 1.16
3.2500............................................................... 9 972,887 0.70
3.3750............................................................... 132 22,856,118 16.43
3.5000............................................................... 77 15,125,580 10.87
3.6250............................................................... 1 66,840 0.05
3.7500............................................................... 21 1,511,599 1.09
4.0000............................................................... 1 25,330 0.02
4.2500............................................................... 1 147,652 0.11
4.3750............................................................... 1 62,679 0.05
4.5000............................................................... 4 231,739 0.17
4.5500............................................................... 1 122,792 0.09
4.6000............................................................... 1 98,699 0.07
4.7500............................................................... 2 338,631 0.24
4.8000............................................................... 1 48,333 0.03
4.9500............................................................... 1 57,912 0.04
5.3600............................................................... 1 58,218 0.04
5.3750............................................................... 1 418,710 0.30
5.5500............................................................... 1 76,223 0.05
5.5600............................................................... 1 291,022 0.21
5.8600............................................................... 1 137,836 0.10
6.0600............................................................... 1 100,863 0.07
6.1100............................................................... 1 42,099 0.03
6.4000............................................................... 1 97,035 0.07
6.4600............................................................... 1 83,235 0.06
--------- ------------ -------------
Total........................................................... 1,249 $139,119,013 100.00%
--------- ------------ -------------
--------- ------------ -------------
</TABLE>
As of the Cut-Off Date, the weighted average Note Margin of the Mortgage
Loans will be approximately 1.7492% per annum.
S-22
<PAGE>
<PAGE>
MAXIMUM MORTGAGE RATES
<TABLE>
<CAPTION>
NUMBER OF
MAXIMUM MORTGAGE PRINCIPAL PERCENT OF
MORTGAGE RATES (%) LOANS BALANCE MORTGAGE POOL
- --------------------------------------------------------------------- --------- ------------ -------------
<S> <C> <C> <C>
11.5000.............................................................. 1 $ 279,864 0.20%
11.6250.............................................................. 2 821,729 0.59
11.7500.............................................................. 3 527,448 0.38
11.8750.............................................................. 2 611,148 0.44
12.0000.............................................................. 2 452,610 0.33
12.1250.............................................................. 1 78,295 0.06
12.2500.............................................................. 3 887,151 0.64
12.3750.............................................................. 1 214,300 0.15
12.5000.............................................................. 13 3,485,605 2.51
12.6250.............................................................. 2 259,470 0.19
12.7500.............................................................. 6 1,724,656 1.24
12.8750.............................................................. 4 1,779,141 1.28
13.0000.............................................................. 7 1,656,090 1.19
13.1250.............................................................. 7 1,638,625 1.18
13.2500.............................................................. 41 5,701,959 4.10
13.3750.............................................................. 24 2,851,111 2.05
13.5000.............................................................. 98 12,649,188 9.09
13.6250.............................................................. 34 4,208,856 3.03
13.7500.............................................................. 40 6,392,561 4.60
13.8750.............................................................. 35 7,158,148 5.15
14.0000.............................................................. 54 6,043,520 4.34
14.1250.............................................................. 49 6,169,527 4.43
14.2500.............................................................. 48 5,330,756 3.83
14.3750.............................................................. 35 8,048,120 5.79
14.5000.............................................................. 36 5,011,047 3.60
14.6250.............................................................. 31 4,450,832 3.20
14.7500.............................................................. 47 3,790,199 2.72
14.8750.............................................................. 93 7,762,176 5.58
15.0000.............................................................. 70 5,134,334 3.69
15.1250.............................................................. 36 3,949,772 2.84
15.2500.............................................................. 32 2,493,501 1.79
15.3500.............................................................. 1 120,498 0.09
15.3750.............................................................. 5 764,768 0.55
15.5000.............................................................. 17 1,792,699 1.29
15.6250.............................................................. 18 1,780,149 1.28
15.7500.............................................................. 14 896,083 0.64
15.8750.............................................................. 15 1,371,487 0.99
15.9900.............................................................. 1 48,333 0.03
16.1250.............................................................. 1 78,186 0.06
16.1500.............................................................. 1 122,792 0.09
16.2500.............................................................. 2 192,307 0.14
16.4900.............................................................. 1 291,022 0.21
16.7500.............................................................. 1 83,235 0.06
16.9000.............................................................. 1 57,912 0.04
17.0000.............................................................. 1 42,099 0.03
17.7500.............................................................. 1 137,836 0.10
17.9000.............................................................. 1 100,863 0.07
19.2500.............................................................. 1 97,035 0.07
20.0000.............................................................. 310 19,579,971 14.07
--------- ------------ -------------
Total........................................................... 1,249 $139,119,013 100.00%
--------- ------------ -------------
--------- ------------ -------------
</TABLE>
As of the Cut-Off Date, the weighted average Maximum Mortgage Rate of the
Mortgage Loans will be approximately 14.9158% per annum.
S-23
<PAGE>
<PAGE>
MINIMUM MORTGAGE RATES
<TABLE>
<CAPTION>
NUMBER OF
MINIMUM MORTGAGE PRINCIPAL PERCENT OF
MORTGAGE RATES (%) LOANS BALANCE MORTGAGE POOL
- --------------------------------------------------------------------- --------- ------------ -------------
<S> <C> <C> <C>
0.0000.............................................................. 699 $ 53,974,575 38.80%
0.2200.............................................................. 1 67,667 0.05
0.2500.............................................................. 30 1,806,611 1.30
0.5000.............................................................. 34 2,480,455 1.78
0.7500.............................................................. 10 774,111 0.56
1.0000.............................................................. 55 3,769,578 2.71
1.2500.............................................................. 1 71,950 0.05
1.5000.............................................................. 18 1,598,252 1.15
2.5000.............................................................. 3 168,474 0.12
2.7500.............................................................. 9 2,070,905 1.49
2.8750.............................................................. 82 19,715,081 14.17
3.0000.............................................................. 32 7,325,429 5.27
3.1250.............................................................. 10 1,610,641 1.16
3.2500.............................................................. 8 806,385 0.58
3.3750.............................................................. 129 22,414,514 16.11
3.5000.............................................................. 76 14,977,118 10.77
3.6250.............................................................. 1 66,840 0.05
3.7500.............................................................. 21 1,511,599 1.09
3.8750.............................................................. 1 327,330 0.24
4.0000.............................................................. 1 25,330 0.02
4.2500.............................................................. 1 147,652 0.11
4.3750.............................................................. 1 62,679 0.05
4.7500.............................................................. 1 218,133 0.16
5.5000.............................................................. 1 211,843 0.15
5.6250.............................................................. 4 231,739 0.17
7.3750.............................................................. 1 418,710 0.30
7.6250.............................................................. 1 166,502 0.12
8.5000.............................................................. 4 646,496 0.46
8.8500.............................................................. 1 120,498 0.09
8.8750.............................................................. 1 148,463 0.11
9.0000.............................................................. 1 67,888 0.05
9.2500.............................................................. 1 58,218 0.04
9.4900.............................................................. 1 48,333 0.03
9.6500.............................................................. 1 122,792 0.09
9.7500.............................................................. 1 76,223 0.05
9.9900.............................................................. 1 291,022 0.21
10.2500.............................................................. 1 83,235 0.06
10.4000.............................................................. 1 57,912 0.04
10.5000.............................................................. 1 42,099 0.03
11.2500.............................................................. 1 137,836 0.10
11.4000.............................................................. 1 100,863 0.07
12.7500.............................................................. 1 97,035 0.07
--------- ------------ -------------
Total........................................................... 1,249 $139,119,013 100.00%
--------- ------------ -------------
--------- ------------ -------------
</TABLE>
As of the Cut-Off Date, the weighted average Minimum Mortgage Rate of the
Mortgage Loans will be approximately 1.9066% per annum.
S-24
<PAGE>
<PAGE>
NEXT INTEREST RATE ADJUSTMENT DATES
<TABLE>
<CAPTION>
NUMBER OF
NEXT INTEREST MORTGAGE PRINCIPAL PERCENT OF
ADJUSTMENT DATE LOANS BALANCE MORTGAGE POOL
- --------------------------------------------------------------------- --------- ------------ -------------
<S> <C> <C> <C>
September 1996....................................................... 135 $ 10,467,766 7.52%
October 1996......................................................... 166 13,354,128 9.60
November 1996........................................................ 188 14,985,124 10.77
December 1996........................................................ 174 15,953,724 11.47
January 1997......................................................... 161 15,555,895 11.18
February 1997........................................................ 142 12,099,515 8.70
March 1997........................................................... 7 1,632,478 1.17
April 1997........................................................... 35 7,911,038 5.69
May 1997............................................................. 42 8,954,806 6.44
June 1997............................................................ 47 9,144,822 6.57
July 1997............................................................ 43 8,667,061 6.23
August 1997.......................................................... 15 2,061,639 1.48
September 1997....................................................... 1 42,099 0.03
October 1997......................................................... 1 48,333 0.03
January 1998......................................................... 4 231,739 0.17
February 1998........................................................ 3 288,451 0.21
May 1998............................................................. 2 154,876 0.11
June 1998............................................................ 5 1,076,003 0.77
August 1998.......................................................... 4 937,892 0.67
September 1998....................................................... 2 111,788 0.08
December 1998........................................................ 1 183,069 0.13
January 1999......................................................... 5 1,469,784 1.06
February 1999........................................................ 3 548,906 0.39
March 1999........................................................... 13 2,441,226 1.75
April 1999........................................................... 6 1,505,602 1.08
May 1999............................................................. 15 2,807,719 2.02
June 1999............................................................ 14 2,780,980 2.00
July 1999............................................................ 14 3,591,349 2.58
August 1999.......................................................... 1 111,200 0.08
--------- ------------ -------------
Total........................................................... 1,249 $139,119,013 100.00%
--------- ------------ -------------
--------- ------------ -------------
</TABLE>
As of the Cut-Off Date, the weighted average Months to Next Interest Rate
Adjustment Date will be approximately 9.
STANDARD HAZARD INSURANCE AND PRIMARY MORTGAGE INSURANCE
Each Mortgage Loan is required to be covered by a standard hazard insurance
policy. In addition, to the best of the Company's knowledge, except with respect
to 211 Mortgage Loans representing approximately 13.4% of the Mortgage Loans,
each Mortgage Loan with a Loan-to-Value Ratio at origination in excess of 80%
will be insured by a primary mortgage insurance policy (a 'PRIMARY INSURANCE
POLICY') covering at least 22% of the principal balance of the Mortgage Loan at
origination (or 20% with respect to two Mortgage Loans representing
approximately 0.1% of the Mortgage Loans) if the Loan-to-Value Ratio is between
95.00% and 90.01%, at least 17% of such balance if the Loan-to-Value Ratio is
between 90.00% and 85.01%, and at least 12% of such balance if the Loan-to-Value
Ratio is between 85.00% and 80.01%. All of such Primary Insurance Policies were
issued by General Electric Mortgage Insurance Corporation, PMI Mortgage
Insurance Company, Commonwealth Mortgage Assurance Company, Republic Mortgage
Insurance Company, Mortgage Guaranty Insurance Corporation, Amerin Guaranty
Corporation or United Guaranty Residential Insurance Company (collectively, the
'PRIMARY INSURERS'). Each Primary Insurer has a claims paying ability currently
acceptable to the Rating Agencies that have been requested to rate the
Certificates; however, there is no assurance as to the actual ability of any
Primary Insurer to pay claims. See 'Insurance Policies on Mortgage Loans or
Contracts --
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<PAGE>
<PAGE>
Standard Hazard Insurance on Mortgaged Properties' and ' -- Primary Mortgage
Insurance Policies' in the Prospectus.
THE EXPANDED CRITERIA MORTGAGE PROGRAM
General. Residential Funding commenced its Expanded Criteria Mortgage
Program (the 'PROGRAM') primarily for the purchase of mortgage loans that
generally would not qualify for other first mortgage purchase programs such as
those run by Fannie Mae or Freddie Mac or by Residential Funding in connection
with securities issued by the Company's affiliate, Residential Funding Mortgage
Securities I, Inc. Examples include mortgage loans secured by non-owner occupied
properties, mortgage loans made to borrowers whose income is not required to be
provided or verified, mortgage loans with higher Loan-to-Value Ratios or
mortgage loans made to borrowers whose ratios of debt service on the mortgage
loan to income and total debt service on borrowings to income are higher than
for such other programs. Borrowers may be International Borrowers. The Mortgage
Loans also include mortgage loans secured by smaller or larger parcels of land,
mortgage loans with higher Loan-to-Value Ratios than in such other programs and
mortgage loans with Loan-to-Value Ratios over 80% that do not require primary
mortgage insurance. See ' -- Underwriting Standards,' below. The inclusion of
such Mortgage Loans may present certain risks that are not present in such other
programs. The Program is administered by Residential Funding on behalf of the
Company.
Qualifications of Program Sellers. Each Program Seller has been selected by
Residential Funding on the basis of criteria set forth in Residential Funding's
Program Seller Guide (as applicable to the Program, the 'PROGRAM SELLER GUIDE').
See 'The Trust Funds -- Mortgage Collateral Sellers' in the Prospectus.
Underwriting Standards. In accordance with the Program Seller Guide, the
Program Seller is required to review an application designed to provide to the
original lender pertinent credit information concerning the mortgagor. As part
of the description of the mortgagor's financial condition, each mortgagor is
required to furnish information (which may have been supplied solely in such
application) with respect to its assets, liabilities, income (except as
described below), credit history and employment history, and to furnish an
authorization to apply for a credit report which summarizes the borrower's
credit history with local merchants and lenders and any record of bankruptcy.
The mortgagor may also be required to authorize verifications of deposits at
financial institutions where the mortgagor had demand or savings accounts. In
the case of non-owner occupied properties, income derived from the mortgaged
property may be considered for underwriting purposes. With respect to mortgaged
property consisting of a vacation or second home, generally no income derived
from the property is considered for underwriting purposes.
Based on the data provided in the application and certain verifications (if
required), a determination is made by the original lender that the mortgagor's
monthly income (if required to be stated) will be sufficient to enable the
mortgagor to meet its monthly obligations on the mortgage loan and other
expenses related to the property (such as property taxes, utility costs,
standard hazard insurance and other fixed obligations other than housing
expenses). Generally, scheduled payments on a mortgage loan during the first
year of its term plus taxes and insurance and all scheduled payments on
obligations that extend beyond ten months (including those mentioned above and
other fixed obligations) equal no more than specified percentages of the
prospective mortgagor's gross income. The originator may also consider the
amount of liquid assets available to the mortgagor after origination.
Certain of the Mortgage Loans have been originated under 'reduced
documentation' or 'no stated income' programs which require less documentation
and verification than do traditional 'full documentation' programs. Generally,
under a 'reduced documentation' program, no verification of a mortgagor's stated
income is undertaken by the originator. Under a 'no stated income' program,
certain borrowers with acceptable payment histories will not be required to
provide any information regarding income and no other investigation regarding
the borrower's income will be undertaken. The underwriting for such mortgage
loans may be based primarily or entirely on an appraisal of the Mortgaged
Property and the Loan-to-Value Ratio at origination.
The adequacy of the mortgaged property as security for repayment of the
related mortgage loan generally is determined by an appraisal in accordance with
appraisal procedure guidelines set forth in the Program Seller Guide. Appraisers
may be staff appraisers employed by the originator. The appraisal procedure
guidelines generally require the appraiser or an agent on its behalf to
personally inspect the property and to verify whether the property is in good
condition and that construction, if new, has been substantially completed. The
appraiser
S-26
<PAGE>
<PAGE>
is required to consider a market data analysis of recent sales of comparable
properties and, when deemed applicable, an analysis based on income generated
from the property, or replacement cost analysis based on the current cost of
constructing or purchasing a similar property. In certain instances, the
Loan-to-Value Ratio is based on the appraised value as indicated on a review
appraisal conducted by the Mortgage Collateral Seller or originator.
Prior to assigning the Mortgage Loans to the Company, Residential Funding
reviewed the underwriting documentation for substantially all of the Mortgage
Loans and, in such cases, determined that the Mortgage Loans were originated
generally in accordance with or in a manner generally consistent with the
underwriting standards set forth in the Program Seller Guide.
Because of the program criteria and underwriting standards described above,
the Mortgage Loans may experience greater rates of delinquency, foreclosure and
loss than mortgage loans required to satisfy more stringent underwriting
standards.
RESIDENTIAL FUNDING
Residential Funding will be responsible for master servicing the Mortgage
Loans. Such responsibilities will include the receipt of funds from
Subservicers, the reconciliation of servicing activity with respect to the
Mortgage Loans, investor reporting, remittances to the Trustee to accommodate
distributions to Certificateholders, follow up with Subservicers with respect to
Mortgage Loans that are delinquent or for which servicing decisions may need to
be made, management and liquidation of mortgaged properties acquired by
foreclosure or deed in lieu of foreclosure, notices and other responsibilities
as detailed in the Pooling and Servicing Agreement.
Residential Funding and its affiliates are active purchasers of
non-conforming mortgage loans and have sold a substantial amount of mortgage
loans that do not present certain of the special risk factors presented by the
Mortgage Loans as described herein. Residential Funding serves as the master
servicer for transactions backed by most of such mortgage loans. As of June 30,
1996, Residential Funding was master servicing approximately 130,000 of such
mortgage loans, totalling approximately $30.8 billion. As a result of the
program criteria and underwriting standards of the Mortgage Loans, however, the
Mortgage Loans may experience rates of delinquency, foreclosure and loss that
are higher than those experienced by other pools of mortgage loans for which
Residential Funding acts as master servicer. Residential Funding has not had
sufficient experience master servicing the types of mortgage loans comprising
the Mortgage Pool to provide meaningful disclosure of its delinquency and loss
experience with respect to such mortgage loans.
THE SERVICERS
Primary servicing will be provided by GMAC Mortgage Corporation of PA (an
affiliate of the Company) and HomeSide, Inc. ('HOMESIDE') with respect to
approximately 47.6% and 46.5%, respectively, of the Mortgage Loans.
GMAC Mortgage Corporation of PA is engaged in the mortgage banking
business, including the origination, purchase, sale and servicing of residential
loans. As of June 30, 1996, GMAC Mortgage Corporation of PA was servicing
approximately 545,917 residential mortgage loans, totalling approximately $53.9
billion. GMAC Mortgage Corporation of PA's executive offices are located at 100
Witmer Road, Horsham, Pennsylvania 19044.
HomeSide originates and services residential single family mortgage loans.
HomeSide was formed on March 15, 1996 and acquired the mortgage banking
subsidiary of Bank of Boston Corporation on March 15, 1996 and the mortgage
banking subsidiary of Barnett Banks, Inc. on May 31, 1996. As of July 31, 1996,
HomeSide was servicing approximately 1,026,000 residential mortgage loans,
totalling approximately $79.6 billion. HomeSide's executive offices are located
at 7301 Baymeadows Way, Jacksonville, Florida 32256.
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, as adjusted for the scheduled
S-27
<PAGE>
<PAGE>
principal payments due on or before such date. Prior to the issuance of the
Class A Certificates, Mortgage Loans may be removed from the Mortgage Pool as a
result of incomplete documentation or otherwise, if the Company deems such
removal necessary or appropriate. A limited number of other mortgage loans may
be added to the Mortgage Pool prior to the issuance of the Class A Certificates.
The Company believes that the information set forth herein will be substantially
representative of the characteristics of the Mortgage Pool as it will be
constituted at the time the Class A Certificates are issued although the range
of Mortgage Rates and maturities and certain 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 Class A
Certificates and will be filed, together with the Pooling and Servicing
Agreement, with the Securities and Exchange Commission within fifteen days after
the initial issuance of the Class A Certificates. In the event Mortgage Loans
are removed from or added to the Mortgage Pool as set forth in the preceding
paragraph, such removal or addition will be noted in the Current Report on Form
8-K.
S-28
<PAGE>
<PAGE>
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Series 1996-QS6 Mortgage Asset-Backed Pass-Through Certificates (the
'CERTIFICATES') will include one class of senior certificates (the 'CLASS A
CERTIFICATES') and one class of subordinate Certificates (the 'CLASS R
CERTIFICATES' or the 'RESIDUAL CERTIFICATES'). Only the Class A Certificates are
offered hereby.
The Certificates will evidence the entire beneficial ownership interest in
the Trust Fund. The Trust Fund will consist of: (i) the Mortgage Loans; (ii)
such assets as from time to time are identified as deposited in respect of the
Mortgage Loans in the Custodial Account and in the Certificate Account and
belonging to the Trust Fund; (iii) property acquired by foreclosure of such
Mortgage Loans or deed in lieu of foreclosure; (iv) any applicable Primary
Insurance Policies and standard hazard insurance policies; (v) the Policy; and
(vi) all proceeds of the foregoing.
The Class A Certificates will be issued in minimum denominations of $25,000
and integral multiples of $1 in excess thereof.
The Class A Certificates will be represented by one or more certificates
registered in the name of the nominee of DTC. The Company has been informed by
DTC that DTC's nominee will be Cede & Co. ('CEDE'). No Beneficial Owner will be
entitled to receive a Definitive Certificate, except as set forth in the
Prospectus under 'Description of the Certificates -- Form of Certificates.'
Investors in the Class A Certificates may elect to hold their Class A
Certificates through DTC (in the United States) or CEDEL or Euroclear (in
Europe). CEDEL and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in CEDEL's and Euroclear's
names on the books of their Depositaries, which in turn will hold such positions
in customers' securities accounts in the Depositaries' names on the books of
DTC. Unless and until Definitive Certificates are issued for the Class A
Certificates under the limited circumstances described herein, all references to
actions by Certificateholders with respect to the Class A Certificates shall
refer to actions taken by DTC upon instructions from its Participants, and all
references herein to distributions, notices, reports and statements to
Certificateholders with respect to the Class A Certificates shall refer to
distributions, notices, reports and statements to DTC or Cede, as the registered
holder of the Class A Certificates, for distribution to Beneficial Owners by DTC
in accordance with DTC procedures.
BOOK-ENTRY REGISTRATION
General. Beneficial Owners that are not Participants or Indirect
Participants but desire to purchase, sell or otherwise transfer ownership of, or
other interests in, the Class A Certificates may do so only through Participants
and Indirect Participants. In addition, Beneficial Owners will receive all
distributions of principal of and interest on the Class A Certificates from the
Paying Agent through DTC and Participants. Accordingly, Beneficial Owners may
experience delays in their receipt of payments. Unless and until Definitive
Certificates are issued for the Class A Certificates, it is anticipated that the
only registered Certificateholder of the Class A Certificates will be Cede, as
nominee of DTC. Beneficial Owners will not be recognized by the Trustee or the
Master Servicer as Certificateholders, as such term is used in the Pooling and
Servicing Agreement, and Beneficial Owners will be permitted to receive
information furnished to Certificateholders and to exercise the rights of
Certificateholders only indirectly through DTC, its Participants and Indirect
Participants.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the 'RULES'), DTC is required to make book-entry transfers of
Class A Certificates among Participants and to receive and transmit
distributions of principal of, and interest on, such Class A Certificates.
Participants and Indirect Participants with which Beneficial Owners have
accounts with respect to such Class A Certificates similarly are required to
make book-entry transfers and receive and transmit such distributions on behalf
of their respective Beneficial Owners. Accordingly, although Beneficial Owners
will not possess physical certificates evidencing their interests in the Class A
Certificates, the Rules provide a mechanism by which Beneficial Owners, through
their Participants and Indirect Participants, will receive distributions and
will be able to transfer their interests in the Class A Certificates.
Transfers between Participants will occur in accordance with the Rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
S-29
<PAGE>
<PAGE>
None of the Company, the Master Servicer, the Insurer or the Trustee will
have any liability for any aspect of the records relating to or payments made on
account of beneficial ownership interests in the Class A Certificates held by
Cede, as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
Definitive Certificates. Definitive Certificates will be issued to
Beneficial Owners or their nominees, respectively, rather than to DTC or its
nominee, only under the limited conditions set forth in the Prospectus under
'Description of the Certificates -- Form of Certificates.'
Upon the occurrence of an event described in the Prospectus in the fourth
paragraph under 'Description of the Certificates -- Form of Certificates,' the
Trustee is required to notify, through DTC, Participants who have ownership of
Class A Certificates as indicated on the records of DTC of the availability of
Definitive Certificates for their Class A Certificates. Upon surrender by DTC of
the definitive certificates representing the Class A Certificates and upon
receipt of instructions from DTC for re-registration, the Trustee will reissue
the Class A Certificates as Definitive Certificates issued in the respective
principal amounts owned by individual Beneficial Owners, and thereafter the
Trustee and the Master Servicer will recognize the holders of such Definitive
Certificates as Certificateholders under the Pooling and Servicing Agreement.
For additional information regarding DTC, CEDEL and Euroclear and the Class
A Certificates, see 'Description of the Certificates -- Form of Certificates' in
the Prospectus.
AVAILABLE DISTRIBUTION AMOUNT
The 'AVAILABLE DISTRIBUTION AMOUNT' for any Distribution Date will equal
the sum of (i) the aggregate amount of scheduled payments on the Mortgage Loans
due on the related Due Date and received on or prior to the related
Determination Date, after deduction of the related master servicing fees and any
related subservicing fees (collectively, the 'SERVICING FEES') and the premium
payable to the Insurer with respect to the Policy in respect of the Class A
Certificates for such Distribution Date, (ii) certain unscheduled payments,
including Mortgagor prepayments, Insurance Proceeds, Liquidation Proceeds and
proceeds from repurchases of and substitutions for such Mortgage Loans occurring
during the preceding calendar month and (iii) all Advances made for such
Distribution Date in respect of such Mortgage Loans, in each case net of amounts
reimbursable therefrom to the Master Servicer and any Subservicer. In addition
to the foregoing amounts, with respect to unscheduled collections (other than
Mortgagor prepayments), the Master Servicer may elect to treat such amounts as
included in the Available Distribution Amount for the Distribution Date in the
month of receipt, but is not obligated to do so. As described herein under
' -- Principal Distributions on the Senior Certificates,' any such amount with
respect to which such election is so made shall be treated as having been
received on the last day of the preceding calendar month for the purposes of
calculating the amount of principal and interest distributions to any class of
Certificates. With respect to any Distribution Date, (i) the 'DUE DATE' is the
first day of the month in which such Distribution Date occurs and (ii) the
'DETERMINATION DATE' is the 20th day of the month in which such Distribution
Date occurs or, if such day is not a business day, the immediately succeeding
business day.
With respect to any Distribution Date, the amount of the premium payable to
the Insurer with respect to the Policy is equal to the product of the percentage
(the 'POLICY PREMIUM RATE') specified in the Pooling and Servicing Agreement and
the aggregate Certificate Principal Balance of the Class A Certificates
immediately prior to such Distribution Date, divided by twelve.
INTEREST DISTRIBUTIONS
On each Distribution Date, holders of the Class A Certificates will be
entitled to receive interest distributions (the 'INTEREST DISTRIBUTION AMOUNT')
in an amount equal to the Accrued Certificate Interest (as defined below)
thereon for such Distribution Date to the extent of the Available Distribution
Amount for such Distribution Date; provided that on any Distribution Date on
which the Accrued Certificate Interest exceeds an amount equal to (i)(a)
one-twelfth of the aggregate Stated Principal Balance of the Mortgage Loans
multiplied by (b) the weighted average of the Net Mortgage Rates on the Mortgage
Loans as of the first day of the calendar month in which the Interest Accrual
Period begins, minus (ii) the amount of the premium payable to the Insurer with
respect to the Policy for such Distribution Date, the amount of such difference
(any such amount, an 'UNPAID INTEREST SHORTFALL') will not be included in the
Interest Distribution Amount for such Distribution
S-30
<PAGE>
<PAGE>
Date and will accrue interest at the Pass-Through Rate on the Class A
Certificates (as adjusted from time to time) and will be paid (together with
interest thereon) on future Distribution Dates only to the extent of any Excess
Cash Flow (as defined herein) available therefor on such Distribution Dates. The
rating assigned to the Class A Certificates does not address the likelihood of
the receipt of any amounts in respect of any Unpaid Interest Shortfalls. Unpaid
Interest Shortfalls will not be covered by the Policy and may remain unpaid on
the final Distribution Date or earlier termination of the Trust Fund. See
' -- Overcollateralization Provisions' and ' -- Certificate Guaranty Insurance
Policy.'
Accrued Certificate Interest on any Distribution Date will be equal to one
month's interest accrued during the Interest Accrual Period on the Certificate
Principal Balance of the Class A Certificates at the Pass-Through Rate for such
Distribution Date, less interest shortfalls, if any, allocated to such class for
such Distribution Date, to the extent not covered with respect to the Class A
Certificates by the Subordination, including in each case (i) any Prepayment
Interest Shortfall (as defined below) to the extent not covered by the Master
Servicer as described below, (ii) the interest portions of Realized Losses
including Special Hazard Losses in excess of the Special Hazard Amount ('EXCESS
SPECIAL HAZARD LOSSES'), Fraud Losses in excess of the Fraud Loss Amount
('EXCESS FRAUD LOSSES'), Bankruptcy Losses in excess of the Bankruptcy Loss
Amount ('EXCESS BANKRUPTCY LOSSES') and losses occasioned by war, civil
insurrection, certain governmental actions, nuclear reaction and certain other
risks ('EXTRAORDINARY LOSSES') not allocated solely to the Class R Certificates,
(iii) the interest portion of any Advances that were made with respect to
delinquencies that were ultimately determined to be Excess Special Hazard
Losses, Excess Fraud Losses, Excess Bankruptcy Losses or Extraordinary Losses,
and (iv) any other interest shortfalls not covered by Subordination, including
interest shortfalls relating to the Relief Act or similar legislation or
regulations, all allocated as described herein; provided, however, that in the
event that any shortfall described in (ii) or (iii) of this sentence is
allocated to the Class A Certificates, subject to the terms of the Policy, the
amount of such allocated shortfall will be drawn under the Policy and
distributed to the holders of the Class A Certificates. Notwithstanding the
foregoing, if payments are not made as required under the Policy, any interest
shortfalls may be allocated to the Class A Certificates as described below. See
'Description of the Certificates -- Certificate Guaranty Insurance Policy.'
The 'INTEREST ACCRUAL PERIOD' shall be: (i) with respect to the
Distribution Date in September 1996, the period commencing on the Delivery Date
and ending on the day preceding the Distribution Date in September 1996 and (ii)
with respect to any Distribution Date after the Distribution Date in September
1996, the period commencing on the Distribution Date of the month immediately
preceding the month in which such Distribution Date occurs and ending on the day
preceding such Distribution Date. Interest will be calculated on the basis of
the actual number of days in the related Interest Accrual Period and a 360-day
year.
The Pass-Through Rate on the Class A Certificates with respect to any
Interest Accrual Period will equal the lesser of (i) a per annum rate equal to
0.36% plus the arithmetic mean of the London interbank offered rate quotations
for one-month Eurodollar deposits, determined monthly as set forth herein
('ONE-MONTH LIBOR') or, on any Distribution Date when the aggregate Stated
Principal Balance of the Mortgage Loans is less than 10% of the aggregate
principal balance of the Mortgage Loans as of the Cut-off Date, a per annum rate
equal to 0.72% plus One-Month LIBOR and (ii) a per annum rate (the 'MAXIMUM
CLASS A RATE') equal to (x)(1) one-twelfth of the aggregate Stated Principal
Balance of the Mortgage Loans multiplied by the weighted average of the Maximum
Net Mortgage Rates on the Mortgage Loans as of the first day of the calendar
month in which the Interest Accrual Period begins, minus (2) the amount of the
premium payable to the Insurer with respect to the Policy for such Distribution
Date, divided by (y) the Certificate Principal Balance of the Class A
Certificates as of such Distribution Date multiplied by (z) 360 divided by the
actual number of days in the related Interest Accrual Period. The Pass-Through
Rate on the Class A Certificates with respect to the initial Interest Accrual
Period will be 5.79% per annum. For a description of the Net Mortgage Rates on
the Mortgage Loans, see 'Description of the Mortgage Pool -- Mortgage Pool
Characteristics' herein.
The Pass-Through Rate on the Class A Certificates for the current and
immediately preceding calendar month may be obtained by telephoning the Trustee
at 1-800-524-9274.
The Prepayment Interest Shortfall for any Distribution Date is equal to the
aggregate shortfall, if any, in collections of interest (adjusted to the related
Net Mortgage Rates) resulting from Mortgagor prepayments on the Mortgage Loans
during the preceding calendar month. Such 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 such
prepayments in part are applied to reduce the outstanding principal balance of
the
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<PAGE>
<PAGE>
related Mortgage Loans as of the Due Date in the month of prepayment. However,
with respect to any Distribution Date, any Prepayment Interest Shortfalls
resulting from prepayments in full during the preceding calendar month will be
offset by the Master Servicer, but only to the extent such Prepayment Interest
Shortfalls do not exceed an amount equal to the lesser of (a) one-twelfth of
0.125% of the Stated Principal Balance (as defined herein) of the Mortgage Loans
immediately preceding such Distribution Date and (b) the sum of the master
servicing fee payable to the Master Servicer in respect of its master servicing
activities and reinvestment income received by the Master Servicer on amounts
payable with respect to such Distribution Date. Prepayment Interest Shortfalls
resulting from partial prepayments will not be offset by the Master Servicer
from master servicing compensation or otherwise. No assurance can be given that
the master servicing compensation available to cover Prepayment Interest
Shortfalls will be sufficient therefor. See 'Pooling and Servicing
Agreement -- Servicing and Other Compensation and Payment of Expenses' herein.
The Certificate Principal Balance of any Class A Certificate as of any date
of determination is equal to the initial Certificate Principal Balance thereof,
reduced by the aggregate of (a) all amounts allocable to principal previously
distributed with respect to such Certificate and (b) any reductions in the
Certificate Principal Balance thereof deemed to have occurred in connection with
allocations of Realized Losses in the manner described herein, unless such
amounts have been paid pursuant to the Policy. The Certificate Principal Balance
of the Class R Certificates in the aggregate, as of any date of determination,
is equal to the excess, if any, of (a) the then aggregate Stated Principal
Balance (as defined herein) of the Mortgage Loans over (b) the then aggregate
Certificate Principal Balance of the Class A Certificates.
DETERMINATION OF ONE-MONTH LIBOR
The Pass-Through Rate on the Class A Certificates for any Interest Accrual
Period (other than the initial Interest Accrual Period) will be determined on
the second LIBOR Business Day immediately prior to the commencement of such
Interest Accrual Period and, in the case of the initial Interest Accrual Period,
as of the second LIBOR Business Day immediately preceding the Delivery Date
(each, a 'LIBOR RATE ADJUSTMENT DATE').
On each LIBOR Rate Adjustment Date, One-Month LIBOR shall be established by
the Trustee and, as to any Interest Accrual Period, will equal the rate for one
month United States dollar deposits that appears on the Telerate Screen Page
3750 as of 11:00 a.m., London time, on such LIBOR Rate Adjustment Date.
'TELERATE SCREEN PAGE 3750' means the display designated as page 3750 on the
Telerate Service (or such other page as may replace page 3750 on that service
for the purpose of displaying London interbank offered rates of major banks). If
such rate does not appear on such page (or such other page as may replace that
page on that service, or if such service is no longer offered, such other
service for displaying One-Month LIBOR or comparable rates as may be selected by
the Trustee after consultation with the Master Servicer), the rate will be the
Reference Bank Rate. The 'REFERENCE BANK RATE' will be determined on the basis
of the rates at which deposits in U.S. Dollars are offered by the reference
banks (which shall be three major banks that are engaged in transactions in the
London interbank market, selected by the Trustee after consultation with the
Master Servicer) as of 11:00 a.m., London time, on the LIBOR Rate Adjustment
Date to prime banks in the London interbank market for a period of one month in
amounts approximately equal to the Certificate Principal Balance of the Class A
Certificates then outstanding. The Trustee will request the principal London
office of each of the reference banks to provide a quotation of its rate. If at
least two such quotations are provided, the rate will be the arithmetic mean of
the quotations. If on such date fewer than two quotations are provided as
requested, the rate will be the arithmetic mean of the rates quoted by one or
more major banks in New York City, selected by the Trustee after consultation
with the Master Servicer, as of 11:00 a.m., New York City time, on such date for
loans in U.S. Dollars to leading European banks for a period of one month in
amounts approximately equal to the Certificate Principal Balance of the Class A
Certificates then outstanding. If no such quotations can be obtained, the rate
will be One-Month LIBOR for the prior Distribution Date. 'LIBOR BUSINESS DAY'
means any day other than (i) a Saturday or a Sunday or (ii) a day on which
banking institutions in the city of London, England are required or authorized
by law to be closed.
The establishment of One-Month LIBOR by the Trustee and the Trustee's
subsequent calculation of the Pass-Through Rate applicable to the Class A
Certificates for the relevant Interest Accrual Period, in the absence of
manifest error, will be final and binding.
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PRINCIPAL DISTRIBUTIONS ON THE CLASS A CERTIFICATES
Holders of the Class A Certificates will be entitled to receive on each
Distribution Date, to the extent of the portion of the Available Distribution
Amount remaining after the Interest Distribution Amount for such Distribution
Date is distributed, a distribution allocable to principal equal to the lesser
of:
(a) the excess of (i) the Available Distribution Amount over (ii) the
Interest Distribution Amount; and
(b) the sum of:
(i) the principal portion of all scheduled monthly payments on the
Mortgage Loans received or Advanced (as defined herein) with respect to
the related Due Date;
(ii) the principal portion of all proceeds of the repurchase of any
Mortgage Loans (or, in the case of a substitution, certain amounts
representing a principal adjustment) as required by the Pooling and
Servicing Agreement during the preceding calendar month;
(iii) the principal portion of all other unscheduled collections
received on the Mortgage Loans during the preceding calendar month (or
deemed to be received during the preceding calendar month) (including,
without limitation, full and partial Principal Prepayments made by the
respective Mortgagors), to the extent not distributed in the preceding
month;
(iv) the principal portion of any Realized Losses incurred (or
deemed to have been incurred) on any Mortgage Loans in the calendar
month preceding such Distribution Date to the extent covered by Excess
Cash Flow for such Distribution Date; and
(v) the amount of any Subordination Increase Amount (as defined
herein) for such Distribution Date;
minus
(vi) the amount of any Subordination Reduction Amount (as defined
herein) for such Distribution Date.
In no event will the Principal Distribution Amount with respect to any
Distribution Date be (x) less than zero or (y) greater than the then outstanding
Certificate Principal Balance of the Class A Certificates.
On each Distribution Date, the Insurer shall be entitled to receive, after
payment to the Class A Certificateholders of the Interest Distribution Amount
and the Principal Distribution Amount for such Certificates for such
Distribution Date (but before application of any Subordination Increase Amount),
from the Excess Cash Flow, the aggregate of any payment made with respect to the
Class A Certificates ('CUMULATIVE INSURANCE PAYMENTS') by the Insurer under the
Policy to the extent not previously reimbursed, plus interest thereon.
OVERCOLLATERALIZATION PROVISIONS
The Pooling and Servicing Agreement requires that, on each Distribution
Date, Excess Cash Flow, if any, be applied on such Distribution Date as an
accelerated payment of principal on the Class A Certificates, but only in the
manner and to the extent hereafter described. 'EXCESS CASH FLOW' for a
Distribution Date is equal to the excess of (x) the Available Distribution
Amount for such Distribution Date over (y) the sum of (i) the Interest
Distribution Amount payable to the Class A Certificateholders on such
Distribution Date and (ii) the sum of the amounts relating to the Mortgage Loans
described in clauses (b)(i)-(iii) of the definition of Principal Distribution
Amount. The Excess Cash Flow for any Distribution Date will derive primarily
from the amount of interest accrued on the Mortgage Loans in excess of the sum
of (a) the Interest Distribution Amount, (b) the premium payable on the Policy
and (c) accrued Servicing Fees, in each case in respect of such Distribution
Date. Excess Cash Flow will be applied on any Distribution Date first to pay the
principal portion of Realized Losses incurred on the Mortgage Loans for the
preceding calendar month (subject to the limitations with respect to Special
Hazard Losses, Fraud Losses, Bankruptcy Losses and Extraordinary Losses as
described herein), second to the payment of Cumulative Insurance Payments, third
to pay any Subordination Increase Amount, fourth to pay any Unpaid Interest
Shortfalls remaining from prior Distribution Dates, together with interest
thereon, and last, to pay to the holder of the Class R Certificates.
With respect to any Distribution Date, the excess, if any, of (a) the
aggregate Stated Principal Balances of the Mortgage Loans immediately following
such Distribution Date over (b) the Certificate Principal Balance of
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the Class A Certificates as of such 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 Principal Distribution Amount on such Distribution Date) is
the 'SUBORDINATED AMOUNT' as of such Distribution Date. The Pooling and
Servicing Agreement requires that the Excess Cash Flow, to the extent available
therefor as described above, will be applied as an accelerated payment of
principal on the Class A Certificates to the extent that the Required
Subordinated Amount exceeds the Subordinated Amount as of such Distribution
Date. Any amount of Excess Cash Flow actually applied as an accelerated payment
of principal on the Class A Certificates is a 'SUBORDINATION INCREASE AMOUNT.'
The required level of the Subordinated Amount with respect to a Distribution
Date is the 'REQUIRED SUBORDINATED AMOUNT' with respect to such Distribution
Date. The Required Subordinated Amount will be set at an amount equal to
approximately 2.40% of the initial Stated Principal Balance of the Mortgage
Loans as of the Cut-off Date until the later to occur of (a) the 31st month
following the Cut-off Date and (b) the first Distribution Date on which the
Stated Principal Balance of the Mortgage Loans is equal to or less than 50% of
the Stated Principal Balance of the Mortgage Loans as of the Cut-off Date.
Thereafter, the Required Subordinated Amount with respect to a Distribution Date
will be equal to the lesser of (a) the initial Required Subordinated Amount and
(b) as set forth in the Pooling and Servicing Agreement, at least 4.80% of the
Stated Principal Balance of the Mortgage Loans immediately preceding such
Distribution Date but not less than $1,043,393.
In the event that the Required Subordinated Amount 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 such Distribution Date shall not be distributed to the holders of the Class A
Certificates on such 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 Subordinated Amount. With respect to any
Distribution Date, the excess, if any, of (a) the Subordinated Amount on such
Distribution Date over (b) the Required Subordinated Amount is the 'EXCESS
SUBORDINATED AMOUNT' with respect to such Distribution Date. If, on any
Distribution Date, the Excess Subordinated Amount is, or, after taking into
account all other distributions to be made on such Distribution Date would be,
greater than zero (i.e., the Subordinated Amount is or would be greater than the
related Required Subordinated Amount), then any amounts relating to principal
which would otherwise be distributed to the holders of the Class A Certificates
on such Distribution Date shall instead be distributed to the holders of the
Class R Certificates in an amount equal to the lesser of (x) the Excess
Subordinated Amount and (y) the amount available for distribution specified in
clauses (b)(i)-(iii) of the definition of Principal Distribution Amount on such
Distribution Date; such amount being the 'SUBORDINATION REDUCTION AMOUNT' for
such Distribution Date.
CERTIFICATE GUARANTY INSURANCE POLICY
The following summary of the terms of the Policy does not purport to be
complete and is qualified in its entirety by reference to the Policy. The
following information regarding the Policy has been supplied by the Insurer for
inclusion herein.
The Insurer, in consideration of the payment of the premium and subject to
the terms of the Policy, thereby unconditionally and irrevocably guarantees to
any Holder (as defined below) that an amount equal to each full and complete
Insured Amount will be received by the Trustee, or its successor, as trustee for
the Holders. The Insurer's obligations under the Policy with respect to a
particular Insured Amount shall be discharged to the extent funds equal to the
applicable Insured Amount are received by the Trustee, whether or not such funds
are properly applied by the Trustee. Insured Amounts shall be made only at the
time set forth in the Policy, and no accelerated Insured Amounts shall be made
regardless of any acceleration of the Class A Certificates, unless such
acceleration is at the sole option of the Insurer. The Policy does not cover
Prepayment Interest Shortfalls or Unpaid Interest Shortfalls.
Notwithstanding the foregoing paragraph, the Policy does not cover
shortfalls, if any, attributable to the liability of the Trust Fund, the REMIC
or the Trustee for withholding taxes, if any (including interest and penalties
in respect of any such liability).
The Insurer will pay any amounts payable under the Policy no later than
12:00 noon, New York City time, on the later of the Distribution Date on which
the related Deficiency Amount (as defined below) is due or the Business Day
following receipt in New York, New York on a Business Day of a Notice (as
described below); provided that if such Notice is received after 12:00 noon, New
York City time, on such Business Day, it will be
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deemed to be received on the following Business Day. If any such Notice received
is not in proper form or is otherwise insufficient for the purpose of making a
claim under the Policy it shall be deemed not to have been received for purposes
of this paragraph, and the Insurer shall promptly so advise the Trustee and the
Trustee may submit an amended Notice.
Insured Amounts due under the Policy, unless otherwise stated therein, are
to be disbursed by the Insurer to the Trustee on behalf of the Holders by wire
transfer of immediately available funds in the amount of the Insured Amount.
As used in this section and in the Policy, the following terms shall have
the following meanings:
'AGREEMENT' means the Pooling and Servicing Agreement, dated as of August
1, 1996, among the Company, as company, Residential Funding, as master servicer,
and the Trustee, as trustee for the Owners, without regard to any amendment or
supplement thereto unless such amendment or supplement has been approved in
writing by the Insurer.
'BUSINESS DAY' means any day other than a Saturday, a Sunday or a day on
which banking institutions in New York City or in the city in which the
corporate trust office of the Trustee under the Agreement or the Insurer is
located are authorized or obligated by law or executive order to close.
'DEFICIENCY AMOUNT' means, with respect to the Class A Certificates as of
any Distribution Date, (i) any shortfall in amounts available in the Certificate
Account to pay one month's interest on the Certificate Principal Balance of the
Class A Certificates at the then-applicable Pass-Through Rate, net of any
interest shortfalls relating to the Relief Act, any Prepayment Interest
Shortfalls and any Unpaid Interest Shortfalls allocated to the Class A
Certificates, (ii) the principal portion of any Realized Loss allocated to the
Class A Certificates and (iii) the Certificate Principal Balance of the Class A
Certificates to the extent unpaid on the final Distribution Date or earlier
termination of the Trust Fund pursuant to the terms of the Agreement.
'HOLDER' means any person who is the registered or beneficial owner of any
Class A Certificate and who, on the applicable Distribution Date, is entitled
under the terms of the Class A Certificates to payment thereunder.
'INSURED AMOUNT' means, as of any Distribution Date, any Deficiency Amount.
'NOTICE' means the telephonic or telegraphic notice, promptly confirmed in
writing by telecopy substantially in the form of Exhibit A attached to the
Policy, the original of which is subsequently delivered by registered or
certified mail from the Trustee specifying the Insured Amount which shall be due
and owing on the applicable Distribution Date.
Capitalized terms used in the Policy and not otherwise defined in the
Policy shall have the respective meanings set forth in the Agreement as of the
date of execution of the Policy, without giving effect to any subsequent
amendment to or modification of the Agreement unless such amendment or
modification has been approved in writing by the Insurer.
The Policy is being issued under and pursuant to and shall be construed
under, the laws of the State of Illinois, without giving effect to the conflict
of laws principles thereof.
The insurance provided by the Policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
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 Class A Certificates.
ALLOCATION OF LOSSES; SUBORDINATION
Subject to the terms of the Policy, the Policy will cover all Realized
Losses allocated to the Class A Certificates. Notwithstanding the foregoing, if
payments are not made as required under the Policy, Realized Losses will be
allocable to the Class A Certificates based on the following priorities.
The Subordination provided to the Class A Certificates by the Class R
Certificates will cover Realized Losses on the Mortgage Loans that are Defaulted
Mortgage Losses, Fraud Losses, Bankruptcy Losses, Extraordinary Losses (each as
defined in the Prospectus) and Special Hazard Losses (as defined herein). Any
Realized Losses that are not Excess Special Hazard Losses, Excess Fraud Losses,
Excess Bankruptcy Losses or Extraordinary Losses will be allocated first, by
application of clause (b)(iv) of the definition of Principal
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Distribution Amount, to the Excess Cash Flow for the related Distribution Date;
second, to the Class R Certificates up to an amount equal to the Certificate
Principal Balance of the Class R Certificates; and third, to the Class A
Certificates. As used herein, 'SUBORDINATION' refers to the provisions discussed
above for the sequential allocation of Realized Losses among the various
classes, as well as all provisions effecting such allocations including the
priorities for distribution of cash flows in the amounts described herein. As
used herein, 'SPECIAL HAZARD LOSSES' has the same meaning set forth in the
Prospectus, except that Special Hazard Losses will not include Extraordinary
Losses, and Special Hazard Losses will not exceed the lesser of the cost of
repair or replacement of the related Mortgaged Properties.
Any Excess Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy
Losses, Extraordinary Losses or other losses of a type not covered by
Subordination will be allocated on a pro rata basis among the Class A
Certificates and Class R Certificates. An allocation of a Realized Loss on a
'pro rata basis' among two or more classes of Certificates means an allocation
to each such class of Certificates on the basis of its then outstanding
Certificate Principal Balance prior to giving effect to distributions to be made
on such Distribution Date (in the case of an allocation of the principal portion
of a Realized Loss) or based on the Accrued Certificate Interest thereon (in the
case of an allocation of the interest portion of a Realized Loss).
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 interest thereon through the
last day of the month in which such Mortgage Loan was finally liquidated, after
application of all amounts recovered (net of amounts reimbursable to the Master
Servicer or the Subservicer for Advances and expenses, including attorneys'
fees) towards interest and principal owing on the Mortgage Loan. Such amount of
loss realized and any Special Hazard Losses, Fraud Losses, Bankruptcy Losses
(except for Bankruptcy Losses that result from an extension of the maturity of a
Mortgage Loan) and Extraordinary Losses are referred to herein as 'REALIZED
LOSSES.'
In order to maximize the likelihood of distribution in full of amounts of
interest and principal to be distributed to holders of the Class A Certificates
on each applicable Distribution Date, holders of Class A Certificates have a
right to distributions of the Available Distribution Amount that is prior to the
rights of the holders of the Class R Certificates. In addition, the
overcollateralization described herein will also maximize the likelihood of
distribution of full amounts of interest and principal to the Class A
Certificates on each Distribution Date.
The aggregate amount of Realized Losses which may be allocated to the Class
R Certificates or covered by Excess Cash Flow otherwise distributable to the
Class R Certificateholders in connection with Special Hazard Losses (the
'SPECIAL HAZARD AMOUNT') through Subordination shall initially be equal to
$1,881,824. As of any date of determination following the Cut-off Date, the
Special Hazard Amount shall equal $1,881,824 less the sum of (A) any amounts
allocated through Subordination in respect of Special Hazard Losses and (B) the
Adjustment Amount. The Adjustment Amount will be equal to an amount calculated
pursuant to the terms of the Pooling and Servicing Agreement. As used in this
Prospectus Supplement, 'Special Hazard Losses' has the same meaning set forth in
the Prospectus, except that Special Hazard Losses will not include and
Subordination will not cover Extraordinary Losses, and Special Hazard Losses
will not exceed the lesser of the cost of repair or replacement of the related
Mortgaged Properties.
The aggregate amount of Realized Losses which may be allocated to the Class
R Certificates or covered by Excess Cash Flow otherwise distributable to the
Class R Certificateholders in connection with Fraud Losses (the 'FRAUD LOSS
AMOUNT') through Subordination shall initially be equal to $4,173,570. As of any
date of determination after the Cut-off Date, the Fraud Loss Amount shall equal
(X) prior to the first anniversary of the Cut-off Date an amount equal to 3.00%
of the aggregate principal balance of all of the Mortgage Loans as of the
Cut-off Date minus the aggregate amounts allocated through Subordination with
respect to Fraud Losses up to such date of determination; (Y) from the first to
the second anniversary of the Cut-off Date, an amount equal to (1) the lesser of
(a) the Fraud Loss Amount as of the most recent anniversary of the Cut-off Date
and (b) 2.00% of the aggregate principal balance of all of the Mortgage Loans as
of the most recent anniversary of the Cut-off Date minus (2) the aggregate
amount allocated through Subordination with respect to Fraud Losses since the
most recent anniversary of the Cut-off Date up to such date of determination;
and (Z) from the second to the fifth anniversary of the Cut-off Date, an amount
equal to (1) the lesser of (a) the Fraud Loss Amount as of the most recent
anniversary of the Cut-off Date and (b) 1.00% of the aggregate principal balance
of all of the
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Mortgage Loans as of the most recent anniversary of the Cut-off Date minus (2)
the aggregate amount allocated through Subordination with respect to Fraud
Losses since the most recent anniversary of the Cut-off Date up to such date of
determination. On and after the fifth anniversary of the Cut-off Date the Fraud
Loss Amount shall be zero and Fraud Losses shall not be allocated through
Subordination.
The aggregate amount of Realized Losses which may be allocated to the Class
R Certificates or covered by Excess Cashflow otherwise distributable to the
Class R Certificateholders in connection with Bankruptcy Losses (the 'BANKRUPTCY
AMOUNT') through Subordination will initially be equal to $100,000. As of any
date of determination, the Bankruptcy Amount shall equal $100,000 less the sum
of any amounts allocated through Subordination for such losses up to such date
of determination.
Notwithstanding the foregoing, the provisions relating to Subordination
will not be applicable in connection with a Bankruptcy Loss so long as the
Master Servicer has notified the Trustee in writing that the Master Servicer is
diligently pursuing any remedies that may exist in connection with the
representations and warranties made regarding the related Mortgage Loan and
either (A) the related Mortgage Loan is not in default with regard to payments
due thereunder or (B) delinquent payments of principal and interest under the
related Mortgage Loan and any premiums on any applicable Primary Hazard
Insurance Policy and any related escrow payments in respect of such Mortgage
Loan are being advanced on a current basis by the Master Servicer or a
Subservicer.
The Special Hazard Amount, Fraud Amount and Bankruptcy Amount are subject
to further reduction as described in the Prospectus under 'Subordination.'
ADVANCES
Prior to each Distribution Date, the Master Servicer is required to make
Advances (out of its own funds, advances made by a Subservicer, or funds held in
the Custodial Account (as described in the Prospectus) for future distribution
or withdrawal) with respect to any payments of principal and interest (net of
the related Servicing Fees) which were due on the Mortgage Loans on the
immediately preceding Due Date and delinquent on the business day next preceding
the related Determination Date.
Such Advances are required to be made only to the extent they are deemed by
the Master Servicer to be recoverable from related late collections, Insurance
Proceeds, or Liquidation Proceeds. The purpose of making such Advances is to
maintain a regular cash flow to the Certificateholders, rather than to guarantee
or insure against losses. The Master Servicer will not be required to make any
Advances with respect to reductions in the amount of the monthly payments on the
Mortgage Loans due to Debt Service Reductions or the application of the Relief
Act or similar legislation or regulations. Any failure by the Master Servicer to
make an Advance as required under the Pooling and Servicing Agreement will
constitute an Event of Default thereunder, in which case the Trustee, as
successor Master Servicer, will be obligated to make any such Advance, in
accordance with the terms of the Pooling and Servicing Agreement.
All Advances will be reimbursable to the Master Servicer on a first
priority basis from either late collections, Insurance Proceeds or Liquidation
Proceeds from the Mortgage Loan as to which such unreimbursed Advance was made.
In addition, any Advances previously made which are deemed by the Master
Servicer to be nonrecoverable from related late collections, Insurance Proceeds
and Liquidation Proceeds may be reimbursed to the Master Servicer out of any
funds in the Custodial Account prior to distributions on the Class A
Certificates.
THE INSURER
The following information has been supplied by AMBAC Indemnity Corporation
(the 'INSURER') for inclusion in this Prospectus Supplement. No representation
is made by the Company, the Underwriter or any of their affiliates as to the
accuracy or completeness of such information.
The Insurer is a Wisconsin-domiciled stock insurance corporation regulated
by the Office of the Commissioner of Insurance of the State of Wisconsin and
licensed to do business in 50 states, the District of Columbia, the Commonwealth
of Puerto Rico and Guam. The Insurer primarily insures newly issued municipal
bonds. The Insurer is a wholly owned subsidiary of AMBAC Inc., a 100% publicly
held company. Moody's, Standard & Poor's and Fitch Investors Service, L.P. have
each assigned a triple-A claims-paying ability rating to the Insurer.
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The Insurer has entered into pro rata reinsurance agreements under which a
percentage of the insurance underwritten pursuant to certain of the Insurer's
municipal bond insurance programs has been and will be assumed by a number of
foreign and domestic unaffiliated reinsurers.
The following table sets forth the Insurer's capitalization as of December
31, 1993, December 31, 1994, December 31, 1995 and June 30, 1996, respectively,
on the basis of generally accepted accounting principles.
AMBAC INDEMNITY CORPORATION
CAPITALIZATION TABLE
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30,
1993 1994 1995 1996
------------ ------------ ------------ -----------
(UNAUDITED)
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Unearned premiums....................................... $ 785 $ 840 $ 906 $ 937
Other liabilities....................................... 192 136 295 286
Stockholder's equity:
Common stock....................................... 82 82 82 82
Additional paid-in capital......................... 444 444 481 514
Unrealized gain (loss) on bonds; net of tax........ 68 (46) 87 34
Retained earnings.................................. 668 782 907 912
------------ ------------ ------------ -----------
Total stockholder's equity.............................. $1,262 $1,262 $1,557 $ 1,542
------------ ------------ ------------ -----------
Total liabilities and stockholder's equity.............. $2,239 $2,238 $2,758 $ 2,765
------------ ------------ ------------ -----------
------------ ------------ ------------ -----------
</TABLE>
For additional financial information concerning the Insurer, see the
audited financial statements of the Insurer included in Appendix A of this
Prospectus Supplement.
Effective December 31, 1993, the Insurer adopted Statement of Financial
Accounting Standards No. 115, 'Accounting for Certain Debt and Equity
Securities' ('STATEMENT 115') with all investments designated as
available-for-sale. As required under Statement 115, prior years' financial
statements have not been restated. The cumulative effect of adopting Statement
115 as of December 31, 1993 was to increase the Insurer's stockholder's equity
$63.6 million, net of tax. The adoption of Statement 115 had no effect on
earnings.
The Insurer makes no representation regarding the Certificates or the
advisability of investing in the Certificates and makes no representation
regarding, nor has it participated in the preparation of, the Prospectus
Supplement other than the information supplied by the Insurer and presented
under the heading 'THE INSURER' and 'DESCRIPTION OF THE
CERTIFICATES -- Certificate Guaranty Insurance Policy' and in the financial
statements hereto.
THE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND
SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
GENERAL
The yield to maturity and the aggregate amount of distributions on the
Class A Certificates will be affected by the rate and timing of principal
payments on the Mortgage Loans, the amount and timing of Mortgagor defaults
resulting in Realized Losses and by adjustments to the Mortgage Rates. Such
yield may be adversely affected by a higher or lower than anticipated rate of
principal payments on the Mortgage Loans in the Trust Fund. The rate of
principal payments on such Mortgage Loans will in turn be affected by the
amortization schedules of the Mortgage Loans, the rate and timing of principal
prepayments thereon by the Mortgagors, liquidations of defaulted Mortgage Loans
and purchases of Mortgage Loans due to certain breaches of representations and
warranties or the conversion of Convertible Mortgage Loans. 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
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payments on the Mortgage Loans will depend on future events and on a variety of
factors (as described more fully herein and in the Prospectus under 'Yield
Considerations' and 'Maturity and Prepayment Considerations'), no assurance can
be given as to such rate or the timing of principal payments on the Class A
Certificates. If a substantial number of Mortgagors exercise their conversion
rights with respect to Convertible Mortgage Loans, and the related subservicers
or the Master Servicer purchase the Converting and Converted Mortgage Loans, the
Mortgage Loans will experience a substantial prepayment of principal.
The Mortgage Loans generally may be prepaid by the Mortgagors at any time
without payment of any prepayment fee or penalty. The Mortgage Loans generally
contain due-on-sale clauses. 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. Conversely, 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.
The Mortgage Loans will adjust either semi-annually or annually based upon
the related Index, whereas the Pass-Through Rate on the Class A Certificates
will adjust monthly based upon One-Month LIBOR as described under 'Description
of the Certificates -- Determination of One-Month LIBOR' herein, subject to the
Maximum Class A Rate. Consequently, the interest that becomes due on the
Mortgage Loans on the related Due Date may not equal the amount of interest that
would accrue on the Class A Certificates at One-Month LIBOR plus the margin
during the related Interest Accrual Period. In particular, because the
Pass-Through Rate on the Class A Certificates will adjust monthly, while the
interest rates of the Mortgage Loans will adjust semi-annually or annually,
subject to any applicable Periodic Cap, Maximum Mortgage Rate or Minimum
Mortgage Rate, in a rising interest rate environment, the Accrued Certificate
Interest on the Class A Certificates may be greater than the difference between
(i) the amount of interest accrued on the Mortgage Loans and (ii) the sum of the
amount of the premium payable to the Insurer with respect to the Policy and the
Servicing Fees, possibly resulting in Unpaid Interest Shortfalls to holders of
the Class A Certificates. Any Unpaid Interest Shortfalls are payable only to the
extent of Excess Cash Flow available therefor and may remain unpaid on the final
Distribution Date or earlier termination of the Trust Fund. In addition, the
related Index and One-Month LIBOR may respond to different economic and market
factors, and there is not necessarily a correlation between them. Thus, it is
possible, for example, that One-Month LIBOR may rise during periods in which the
related Index is stable or is falling or that, even if both One-Month LIBOR and
the related Index rise during the same period, One-Month LIBOR may rise more
rapidly than the related Index. Finally, the Pass-Through Rate is subject to the
Maximum Class A Rate, which is based on the weighted average of the Maximum Net
Mortgage Rates on the Mortgage Loans.
The Convertible Mortgage Loans provide that the Mortgagors may, during a
specified period of time, convert the adjustable interest rate of such Mortgage
Loans to a fixed interest rate. The Company is not aware of any publicly
available statistics that set forth principal prepayment, conversion experience
or conversion forecasts of adjustable-rate mortgage loans over an extended
period of time, and its experience with respect to adjustable-rate mortgages is
insufficient to draw any conclusions with respect to the expected prepayment or
conversion rates on the Mortgage Loans. As is the case with conventional,
fixed-rate mortgage loans originated in a high interest rate environment that
may be subject to a greater rate of principal prepayments when interest rates
decrease, adjustable-rate mortgage loans may be subject to a greater rate of
principal prepayments (or purchases by the related Subservicer or the Master
Servicer) due to their refinancing or conversion to fixed interest rate loans in
a low interest rate environment. For example, if prevailing interest rates fall
significantly, adjustable-rate mortgage loans could be subject to higher
prepayment and conversion rates than if prevailing interest rates remain
constant because the availability of fixed-rate or other adjustable-rate
mortgage loans at competitive interest rates may encourage mortgagors to
refinance their adjustable-rate mortgages to 'lock in' a lower fixed interest
rate or to take advantage of the availability of such other adjustable-rate
mortgage loans, or, in the case of convertible adjustable-rate mortgage loans,
to exercise their option to convert the adjustable interest rates to fixed
interest rates. The conversion feature may also be exercised in a rising
interest rate environment as mortgagors attempt to limit their risk of higher
rates. Such a rising interest rate environment may
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also result in an increase in the rate of defaults on the Mortgage Loans. If the
related Subservicer or the Master Servicer purchases Converting or Converted
Mortgage Loans, a mortgagor's exercise of the conversion option will result in a
distribution of the principal portion thereof to the Class A Certificateholders,
as described herein. Alternatively, to the extent Subservicers fail to purchase
Converting Mortgage Loans and the Master Servicer does not purchase Converted
Mortgage Loans, the Mortgage Pool will include fixed-rate Mortgage Loans, which
will have the effect of limiting the extent to which the related Pass-Through
Rate can increase in accordance with changes in the Index and accordingly may
affect the yield to the Class A Certificateholders.
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 on adjustable-rate Mortgage Loans in a rising
interest rate environment may be higher than for fixed-rate Mortgage Loans,
because Mortgagors, who were qualified based on the initial Mortgage Rate, may
have difficulty making higher monthly payments as the Mortgage Rate increases.
Furthermore, the rate of default on Mortgage Loans that are secured by non-owner
occupied properties, Mortgage Loans made to borrowers whose income is not
required to be provided or verified, Mortgage Loans with higher Loan-to-Value
Ratios and Mortgage Loans made to borrowers with higher debt-to-income ratios,
may be higher than for other types of Mortgage Loans. As a result of the program
criteria and underwriting standards applicable to the Mortgage Loans, the
Mortgage Loans may experience rates of delinquency, foreclosure, bankruptcy and
loss that are higher than those experienced by mortgage loans that satisfy the
standards applied by Fannie Mae and Freddie Mac first mortgage loan purchase
programs, or by Residential Funding for the purpose of acquiring mortgage loans
to collateralize securities issued by Residential Funding Mortgage Securities I,
Inc. See 'Description of the Mortgage Pool -- The Expanded Criteria Mortgage
Program' herein. Additionally, 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 'Maturity and Prepayment Considerations' in the Prospectus.
In addition, the yield to maturity of the Class A Certificates will depend
on, among other things, the price paid by the holders of the Class A
Certificates and the Pass-Through Rate. The extent to which the yield to
maturity of a Class A Certificate is sensitive to prepayments will depend, in
part, upon the degree to which it is purchased at a discount or premium. In
general, if a Class A Certificate is purchased at a premium and principal
distributions thereon 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 a Class A Certificate is
purchased at a discount and principal distributions thereon 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
Considerations' and 'Maturity and Prepayment Considerations' in the Prospectus.
The assumed final Distribution Date for the Class A Certificates is August
25, 2026, which is 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 classes of Certificates 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.
Weighted average life refers to the average amount of time that will elapse
from the date of issuance of a security to the date of distribution to the
investor of each dollar distributed in reduction of principal of such security
(assuming no losses). The weighted average life of the Class A 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.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement, the
Constant Prepayment Rate ('CPR') model, assumes that the then outstanding
principal balance of a pool of mortgage loans prepays at a specified constant
annual rate. In generating monthly cash flows, this rate is converted to an
equivalent constant monthly rate. To assume an 18% CPR or any other CPR
percentage is to assume that the stated percentage of the outstanding principal
balance of the pool is prepaid over the course of a year. No representation is
made that the Mortgage Loans will prepay at that or any other rate.
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The table set forth below has been prepared on the basis of certain
assumptions as described below regarding the weighted average characteristics of
the Mortgage Loans that are expected to be included in the Trust Fund as
described under 'Description of the Mortgage Pool' herein and the performance
thereof. The table assumes, among other things, that, as of the date of issuance
of the Class A Certificates: (i) (a) with respect to each FHFB Index Mortgage
Loan, the aggregate principal balance of such Mortgage Loans is $64,711,673 and
each such Mortgage Loan has an initial Mortgage Rate of 7.2686% per annum, which
is in effect until the initial semi-annual Adjustment Date occurring in November
1996 when the Mortgage Rate adjusts to 7.7225% per annum (based on an assumed
Index of 7.7200% per annum and a Note Margin of 0.0025% per annum, and subject
to a Periodic Rate Cap of 0.9945% per annum) and continues to adjust accordingly
every six months until it reaches a fully indexed rate, an initial aggregate
Servicing Fee Rate and Policy Premium Rate of 0.5550% per annum, an original
term to maturity of 333 months and a remaining term to stated maturity of 252
months; (b) with respect to each Treasury Index Mortgage Loan, the aggregate
principal balance of such Mortgage Loans is $46,883,576 and each such Mortgage
Loan has an initial Mortgage Rate of 7.7724% per annum, which is in effect until
the initial annual Adjustment Date occurring in May 1997 when the Mortgage Rate
adjusts to 8.7747% per annum (based on an assumed Index of 5.6300% per annum and
a Note Margin of 3.1447% per annum, and subject to a Periodic Rate Cap of 2.00%
per annum) and continues to adjust accordingly every year until it reaches a
fully indexed rate, an initial aggregate Servicing Fee Rate and Policy Premium
Rate of 0.5368% per annum, an original term to maturity of 360 months and a
remaining term to stated maturity of 356 months; (c) with respect to each Six
Month LIBOR Mortgage Loan, the aggregate principal balance of such Mortgage
Loans is $8,183,285 and each such Mortgage Loan has an initial Mortgage Rate of
8.0976% per annum, which is in effect until the initial semi-annual Adjustment
Date occurring in December 1996 when the Mortgage Rate adjusts to 8.9575% per
annum (based on an assumed Index of 5.6875% per annum and a Note Margin of
3.2700% per annum, and subject to a Periodic Rate Cap of 1.00% per annum) and
continues to adjust accordingly every six months until it reaches a fully
indexed rate, an initial aggregate Servicing Fee Rate and Policy Premium Rate of
0.5239% per annum, an original term to maturity of 360 months and a remaining
term to stated maturity of 352 months; and (d) with respect to each Two Year
Fixed Period LIBOR Mortgage Loan and Three Year Fixed Period LIBOR Mortgage
Loan, the aggregate principal balance of such Mortgage Loans is $19,340,479 and
each such Mortgage Loan has an initial Mortgage Rate of 8.5826% per annum, which
is in effect until the initial semi-annual Adjustment Date occurring in February
1999 when the Mortgage Rate adjusts to 9.2552% per annum (based on an assumed
Index of 5.6875% per annum and a Note Margin of 3.5677% per annum, and subject
to a Periodic Rate Cap of 1.00% per annum) and continues to adjust accordingly
every six months until it reaches a fully indexed rate, an initial aggregate
Servicing Fee Rate and Policy Premium Rate of 0.5533% per annum, an original
term to maturity of 360 months and a remaining term to stated maturity of 354
months; (ii) the value of One-Month LIBOR for each month will be 5.43% per
annum; (iii) the scheduled monthly payment for each Mortgage Loan has been based
on its outstanding balance, interest rate and remaining term to maturity, such
that the Mortgage Loan will amortize in amounts sufficient for repayment thereof
over its remaining term to maturity; (iv) none of the Unaffiliated Sellers, the
Master Servicer or the Company will repurchase any Mortgage Loan, as described
under 'Mortgage Loan Program -- Representations by Sellers' and 'Description of
the Certificates -- Assignment of the Mortgage Loans' in the Prospectus, and
neither the Master Servicer nor the Company exercises any option to purchase the
Mortgage Loans and thereby cause a termination of the Trust Fund; (v) there are
no delinquencies or Realized Losses on the Mortgage Loans, and principal
payments on the Mortgage Loans will be timely received together with
prepayments, if any, at the respective levels of CPR set forth in the table;
(vi) there is no Prepayment Interest Shortfall or any other interest shortfall
in any month; (vii) the Required Subordinated Amount will be as set forth under
'Description of the Certificates -- Overcollateralization Provisions' herein;
(viii) payments on the Certificates will be received on the 25th day of each
month, commencing in September 1996; (ix) payments on the Mortgage Loans earn no
reinvestment return; (x) there are no additional ongoing Trust Fund expenses
payable out of the Trust Fund; and (xi) the Certificates will be purchased on
August 29, 1996.
The actual characteristics and performance of the Mortgage Loans will
differ from the assumptions used in constructing the table set forth below,
which is hypothetical in nature and is provided only to give a general sense of
how the principal cash flows might behave under varying prepayment scenarios.
For example, it is very unlikely that the Mortgage Loans will prepay at a
constant percentage until maturity or that all of the Mortgage Loans will prepay
at the same rate of prepayment. Moreover, the diverse remaining terms to stated
maturity of the Mortgage Loans could produce slower or faster principal
distributions than indicated in the table at the
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various levels of CPR specified, even if the weighted average remaining term to
stated maturity of the Mortgage Loans is as assumed. Any difference between such
assumptions and the actual characteristics and performance of the Mortgage
Loans, or actual prepayment experience, will affect the percentages of initial
Certificate Principal Balances outstanding over time and the weighted average
life of the Class A Certificates.
Subject to the foregoing discussion and assumptions, the following table
indicates the weighted average life of the Class A Certificates, and sets forth
the percentages of the initial Certificate Principal Balance of the Class A
Certificates that would be outstanding after each of the dates shown at various
levels of CPR.
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PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING
PERCENTAGES OF CPR
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------
DISTRIBUTION DATE 0% 10% 18% 22% 30% 35%
- ------------------------------------------------------- ---- ---- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage..................................... 100 100 100 100 100 100
August 25, 1997........................................ 97 87 79 75 67 63
August 25, 1998........................................ 95 77 63 57 46 39
August 25, 1999........................................ 94 68 51 43 31 25
August 25, 2000........................................ 92 60 41 33 22 16
August 25, 2001........................................ 90 52 33 25 15 10
August 25, 2002........................................ 88 46 26 19 10 6
August 25, 2003........................................ 86 40 21 15 7 4
August 25, 2004........................................ 84 35 17 11 4 2
August 25, 2005........................................ 81 31 13 8 3 1
August 25, 2006........................................ 79 27 10 6 2 *
August 25, 2007........................................ 76 23 8 4 1 0
August 25, 2008........................................ 73 20 6 3 * 0
August 25, 2009........................................ 69 17 5 2 0 0
August 25, 2010........................................ 65 15 3 1 0 0
August 25, 2011........................................ 61 12 2 1 0 0
August 25, 2012........................................ 57 10 2 * 0 0
August 25, 2013........................................ 52 8 1 * 0 0
August 25, 2014........................................ 47 7 1 0 0 0
August 25, 2015........................................ 42 5 * 0 0 0
August 25, 2016........................................ 36 4 0 0 0 0
August 25, 2017........................................ 29 3 0 0 0 0
August 25, 2018........................................ 27 2 0 0 0 0
August 25, 2019........................................ 24 2 0 0 0 0
August 25, 2020........................................ 22 1 0 0 0 0
August 25, 2021........................................ 18 1 0 0 0 0
August 25, 2022........................................ 15 * 0 0 0 0
August 25, 2023........................................ 11 0 0 0 0 0
August 25, 2024........................................ 7 0 0 0 0 0
August 25, 2025........................................ 2 0 0 0 0 0
August 25, 2026........................................ 0 0 0 0 0 0
Weighted Average Life in Years** ...................... 16.7 7.1 4.3 3.6 2.6 2.1
</TABLE>
- ------------
(*) Indicates a number that is greater than zero but less than 0.5%.
(**) The weighted average life of a Certificate of any class is determined by
(i) multiplying the net reduction, if any, of the Certificate Principal
Balance by the number of years from the date of issuance of the Certificate
to the related Distribution Date, (ii) adding the results, and (iii)
dividing the sum by the aggregate of the net reductions of the certificate
principal balance described in (i) above.
THIS TABLE HAS BEEN PREPARED BASED ON THE ASSUMPTIONS DESCRIBED IN THE THIRD
PARAGRAPH PRECEDING THIS TABLE (INCLUDING THE ASSUMPTIONS REGARDING THE
CHARACTERISTICS AND PERFORMANCE OF THE MORTGAGE LOANS WHICH DIFFER FROM THE
ACTUAL CHARACTERISTICS AND PERFORMANCE THEREOF) AND SHOULD BE READ IN
CONJUNCTION THEREWITH.
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POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement dated as of August 1, 1996, among the Company, the Master Servicer,
and The First National Bank of Chicago, as Trustee. Reference is made to the
Prospectus for important information in addition to that set forth herein
regarding the terms and conditions of the Pooling and Servicing Agreement and
the Class A 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 Norwest Bank Minnesota, National Association to serve as
Custodian in connection with the Certificates. The Class A Certificates will be
transferable and exchangeable at the corporate trust office of the Trustee,
which will serve as Certificate Registrar and Paying Agent. The Company 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 Accredit Loans, Inc.,
8400 Normandale Lake Boulevard, Suite 700, Minneapolis, Minnesota 55437.
Pursuant to the Pooling and Servicing Agreement, transfers of Residual
Certificates are prohibited to any non-United States person. Transfers of
certain of the Certificates, including the Residual Certificates, are also
subject to additional transfer restrictions as set forth in the Pooling and
Servicing Agreement. See 'Certain Federal Income Tax Consequences' herein and
'Certain Federal Income Tax Consequences -- REMICs -- Tax and Restrictions on
Transfers of REMIC Residual Certificates to Certain Organizations' and
' -- Taxation of Owners of REMIC Residual Certificates -- Noneconomic REMIC
Residual Certificates' in the Prospectus. In addition to the circumstances
described in the Prospectus, the Company may terminate the Trustee for cause
under certain circumstances. See 'The Pooling and Servicing Agreement -- The
Trustee' in the Prospectus.
THE MASTER SERVICER
Residential Funding, an indirect wholly-owned subsidiary of GMAC Mortgage
and an affiliate of the Company, will act as master servicer for the
Certificates pursuant to the Pooling and Servicing Agreement. For a general
description of Residential Funding and its activities, see 'Residential Funding
Corporation' in the Prospectus and 'The Mortgage Pool -- Residential Funding'
herein.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Servicing Fees for each Mortgage Loan are payable out of the interest
payments on such Mortgage Loan. The Servicing Fees in respect of each Mortgage
Loan will be at least 0.33% per annum and not more than 0.83% per annum of the
outstanding principal balance of such Mortgage Loan except that, with respect to
each Convertible Mortgage Loan which becomes a Converted Mortgage Loan and
remains in the Mortgage Pool, the Servicing Fees will be fixed at 0.33% per
annum. The Servicing Fees consist of (a) servicing compensation payable to the
Master Servicer in respect of its master servicing activities, and (b)
subservicing and other related compensation payable to the Subservicer
(including such compensation paid to the Master Servicer as the direct servicer
of a Mortgage Loan for which there is no Subservicer). The primary compensation
to be paid to the Master Servicer in respect of its master servicing activities
will be 0.08% per annum of the outstanding principal balance of each Mortgage
Loan. As described in the Prospectus, a Subservicer is entitled to servicing
compensation in a minimum amount equal to 0.250% per annum of the outstanding
principal balance of each Mortgage Loan serviced by it. The Master Servicer is
obligated to pay certain ongoing expenses associated with the Trust Fund and
incurred by the Master Servicer in connection with its responsibilities under
the Pooling and Servicing Agreement. See 'Description of the
Certificates -- Spread' and ' -- Servicing and Administration of the Mortgage
Collateral -- Servicing Compensation and Payment of Expenses' 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.
VOTING RIGHTS
Certain actions specified in the Prospectus that may be taken by holders of
Certificates evidencing a specified percentage of all undivided interests in the
Trust Fund may be taken by holders of Certificates entitled in the aggregate to
such percentage of the Voting Rights. 99% of all Voting Rights will be allocated
among all
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holders of the Class A Certificates in proportion to their then outstanding
Certificate Principal Balances, and 1% of all Voting Rights will be allocated
among holders of the Residual Certificates in proportion to the Percentage
Interests (as defined in the Prospectus) evidenced by their respective
Certificates. So long as there does not exist a failure by the Insurer to make a
required payment under the Policy (such event, a 'CERTIFICATE INSURER DEFAULT'),
the Insurer shall have the right to exercise all rights of the holders of the
Class A Certificates under the Pooling and Servicing Agreement without any
consent of such holders, and such holders may exercise such rights only with the
prior written consent of the Insurer except as provided in the Pooling and
Servicing Agreement.
TERMINATION
The circumstances under which the obligations created by the Pooling and
Servicing Agreement will terminate in respect of the Class A Certificates are
described in 'The Pooling and Servicing Agreement -- Termination; Retirement of
Certificates' in the Prospectus. The Master Servicer or the Company 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 principal
balance of the Mortgage Loans as of the Cut-off Date, (i) to purchase all
remaining Mortgage Loans and other assets in the Trust Fund (except for the
Policy) thereby effecting early retirement of the Class A Certificates, or (ii)
to purchase in whole, but not in part, the Certificates. Any such purchase of
Mortgage Loans and other assets of the Trust Fund shall be made at a price equal
to the sum of (a) 100% of the unpaid principal balance of each Mortgage Loan (or
the fair market value of the related underlying Mortgaged Properties with
respect to defaulted Mortgage Loans as to which title to such Mortgaged
Properties has been acquired if such fair market value is less than such unpaid
principal balance) (net of any unreimbursed Advance attributable to principal)
as of the date of repurchase plus (b) accrued interest thereon at the Net
Mortgage Rate to, but not including, the first day of the month in which such
repurchase price is distributed and (c) any amounts due to the Insurer pursuant
to the Insurance Agreement. Distributions on the Certificates in respect of any
such optional termination will be paid, first, to the Class A Certificates, and
second, except as set forth in the Pooling and Servicing Agreement, to the Class
R Certificates. The proceeds of any such distribution may not be sufficient to
distribute the full amount to the Class A Certificates if the purchase price is
based in part on the fair market value of any underlying Mortgaged Property and
such fair market value is less than 100% of the unpaid principal balance of the
related Mortgage Loan; provided, however, with respect to the Class A
Certificates, if such amount is an Insured Amount, such amount will be paid
under the Policy, subject to the terms thereof. Any such purchase of Mortgage
Loans and termination of the Trust Fund requires the consent of the Insurer if
it would result in a draw on the Policy. Any such purchase of the Certificates,
will be made at a price equal to 100% of the Certificate Principal Balance
thereof plus the sum of one month's interest accrued thereon at the applicable
Pass-Through Rate and any previously unpaid Accrued Certificate Interest
(including Unpaid Interest Shortfalls and interest thereon). Upon the purchase
of the Certificates or at any time thereafter, at the option of the Master
Servicer or the Company, the Mortgage Loans may be sold, thereby effecting a
retirement of the Certificates and the termination of the Trust Fund, or the
Certificates so purchased may be held or resold by the Master Servicer or the
Company.
Upon presentation and surrender of the Class A Certificates in connection
with the termination of the Trust Fund or a purchase of Certificates under the
circumstances described above, the holders of the Class A Certificates will
receive an amount equal to the Certificate Principal Balance of such class plus
one month's interest accrued thereon at the related Pass-Through Rate, plus any
previously unpaid Accrued Certificate Interest (reduced, as described above, in
the case of the termination of the Trust Fund resulting from a purchase of all
the assets of the Trust Fund).
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Class A Certificates, Orrick, Herrington &
Sutcliffe, counsel to the Company, will deliver its opinion generally to the
effect that, assuming compliance with all provisions of the Pooling and
Servicing Agreement, for federal income tax purposes, the Trust Fund will
qualify as a REMIC under the Code.
For federal income tax purposes, the Residual Certificates will constitute
the sole class of 'residual interests' in the Trust Fund and the Class A
Certificates will represent ownership of 'regular interests' in the REMIC and
will generally be treated as debt instruments of the REMIC. See 'Certain Federal
Income Tax Consequences -- REMICs' in the Prospectus.
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For federal income tax reporting purposes, the Class A Certificates will
not be treated as having been issued with original issue discount. The
prepayment assumption that will be used in determining the rate of accrual of
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 18% of CPR. No representation is
made that the Mortgage Loans will prepay at that rate or at any other rate. See
'Certain Federal Income Tax Consequences -- REMICs -- Taxation of Owners of
REMIC Regular Certificates -- Original Issue Discount' in the Prospectus.
The IRS has issued the OID Regulations under sections 1271 to 1275 of the
Code generally addressing the treatment of debt instruments issued with original
issue discount. Purchasers of the Class A Certificates should be aware that
Section 1272(a)(6) of the Code and the OID Regulations do not adequately address
certain issues relevant to, or applicable to, prepayable securities bearing a
variable rate of interest such as the Class A Certificates. In the absence of
other authority, the Master Servicer intends to be guided by certain principles
of the OID Regulations applicable to variable rate debt instruments in
determining whether such Certificates should be treated as issued with original
issue discount and in adapting the provisions of Section 1272(a)(6) of the Code
to such Certificates for the purpose of preparing reports furnished to
Certificateholders and the IRS. Because of the uncertainties concerning the
application of Section 1272(a)(6) of the Code to such Certificates and because
the rules relating to debt instruments having a variable rate of interest are
limited in their application in ways that could preclude their application to
such Certificates even in the absence of Section 1272(a)(6) of the Code, the IRS
could assert that the Class A Certificates should be governed by some other
method not yet set forth in regulations. Prospective purchasers of the Class A
Certificates are advised to consult their tax advisors concerning the tax
treatment of such Certificates.
The Master Servicer believes that if the Class A Certificates were treated
as having been issued with original issue discount, a reasonable application of
the principles of the OID Regulations to the Class A Certificates generally
would be to report all income with respect to such Certificates as original
issue discount for each period, computing such original issue discount (i) by
assuming that the value of the applicable index will remain constant for
purposes of determining the original yield to maturity of each such class of
Certificates and projecting future distributions on such Certificates, thereby
treating such Certificates as fixed rate instruments to which the original issue
discount computation rules described in the Prospectus can be applied, and (ii)
by accounting for any positive or negative variation in the actual value of the
applicable index in any period from its assumed value as a current adjustment to
original issue discount with respect to such period. See 'Certain Federal Income
Tax Consequences -- REMICs -- Taxation of Owners of REMIC Regular
Certificates -- Original Issue Discount' in the Prospectus.
In certain circumstances the 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, the holder of a Class 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.
The Class A Certificates will be treated as 'qualifying real property
loans' under Section 593(d) of the Code, assets described in Section
7701(a)(19)(C) of the Code and 'real estate assets' under Section 856(c)(5)(A)
of the Code generally in the same proportion that the assets of the Trust Fund
would be so treated. In addition, interest on the Class A Certificates will be
treated as 'interest on obligations secured by mortgages on real property' under
Section 856(c)(3)(B) of the Code generally to the extent that such Class A
Certificates are treated as 'real estate assets' under Section 856(c)(5)(A) of
the Code. Moreover, the Class A Certificates will be 'qualified mortgages'
within the meaning of Section 860G(a)(3) of the Code. However, prospective
investors in Class A Certificates that will be generally treated as assets
described in Section 860G(a)(3) of the Code should note that, notwithstanding
such treatment, any repurchase of such a Certificate pursuant to the right of
the Master Servicer or the Company to repurchase such Class A Certificates may
adversely affect any REMIC that holds such Class A Certificates if such
repurchase is made under circumstances giving rise to a Prohibited Transaction
Tax. See 'Pooling and Servicing Agreement -- Termination' herein and 'Certain
Federal Income Tax Consequences -- REMICs -- Characterization of Investments in
REMIC Certificates' in the Prospectus.
For further information regarding federal income tax consequences of
investing in the Class A Certificates, see 'Certain Federal Income Tax
Consequences -- REMICs' in the Prospectus.
S-46
<PAGE>
<PAGE>
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an Underwriting Agreement
(the 'UNDERWRITING AGREEMENT'), dated August 22, 1996, Residential Funding
Securities Corporation (the 'UNDERWRITER') has agreed to offer the Class A
Certificates on a best efforts basis and the Company has agreed to sell to the
Underwriter such Class A Certificates when and if sold by the Underwriter. The
termination date of the offering of the Class A Certificates is the earlier to
occur of August 29, 1997, or the date on which all of such Class A Certificates
have been sold. Proceeds of the offering of the Class A Certificates will not be
placed in any escrow, trust or similar arrangement. It is expected that delivery
of the Class A Certificates will be made only in book-entry form through the
facilities of DTC, CEDEL or Euroclear.
The Underwriter is offering the Class A Certificates on a best efforts
basis and will only be obligated to pay for and accept delivery of any of the
Class A Certificates at such time as it sells such Class A Certificates. The
Underwriter is an indirect wholly-owned subsidiary of the parent of the Company.
In addition, the Underwriting Agreement provides that the obligation of the
Underwriter to pay for and accept delivery of its Certificates is subject to,
among other things, the receipt of certain legal opinions and to the conditions,
among others, that no stop order suspending the effectiveness of the Company's
Registration Statement shall be in effect, and that no proceedings for such
purpose shall be pending before or threatened by the Securities and Exchange
Commission.
The Class A Certificates will be offered by the Underwriter, on a best
efforts basis, from time to time to the public, directly or through dealers, in
one or more negotiated transactions, or otherwise, at varying prices to be
determined at the time of sale. The proceeds to the Company from any sale of the
Class A Certificates will be equal to the purchase price paid by the purchaser
thereof, net of any expenses payable by the Company and any compensation payable
to the Underwriter and any such dealer. The Underwriter may effect such
transactions by selling its Class A Certificates to or through dealers, and such
dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from the Underwriter. In connection with the sale of
the Class A Certificates, the Underwriter may be deemed to have received
compensation from the Company in the form of underwriting compensation. The
Underwriter and any dealers that participate with the Underwriter in the
distribution of Class A Certificates may be deemed to be underwriters and any
profit on the resale of the Class A Certificates positioned by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933.
The Underwriting Agreement provides that the Company will indemnify the
Underwriter, and that under limited circumstances the Underwriter will indemnify
the Company, against certain civil liabilities under the Securities Act of 1933,
as amended, or contribute to payments required to be made in respect thereof.
There is currently no secondary market for the Class A Certificates.
Neither the Company, the Underwriter nor any other person or entity intends to
create a secondary market in the Class A Certificates. There can be no assurance
that a secondary market for the Class A Certificates will develop or, if it does
develop, that it will provide liquidity or that it will continue. The primary
source of information available to investors concerning the Class A Certificates
will be the monthly statements discussed in the Prospectus under 'Description of
the Certificates -- Reports to Certificateholders,' which will include
information as to the outstanding principal balance of the Class A Certificates
and the status of the applicable form of credit enhancement. There can be no
assurance that any additional information regarding the Class A Certificates
will be available through any other source. In addition, the Company is not
aware of any source through which price information about the Class A
Certificates will be generally available on an ongoing basis. The limited nature
of such information regarding the Class A Certificates may adversely affect the
liquidity of the Class A Certificates, even if a secondary market for the Class
A Certificates becomes available.
LEGAL OPINIONS
Certain legal matters relating to the Certificates will be passed upon for
the Company and the Underwriter by Orrick, Herrington & Sutcliffe, New York, New
York.
S-47
<PAGE>
<PAGE>
EXPERTS
The consolidated balance sheets of the Insurer, AMBAC Indemnity
Corporation, at December 31, 1995 and 1994 and the consolidated statements of
operations, stockholder's equity and cash flows of AMBAC Indemnity Corporation
for each of the years in the three year period ended December 31, 1995 appearing
in Appendix A of this Prospectus Supplement have been included herein in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein and upon the authority of said firm as
experts in accounting and auditing.
The report of KPMG Peat Marwick LLP covering the consolidated financial
statements referred to above of AMBAC Indemnity Corporation refers to the
adoption of the Financial Accounting Standards Board's Statements of Financial
Accounting Standards No. 109, 'Accounting for Income Taxes,' No. 115,
'Accounting for Certain Investments in Debt and Equity Securities,' No. 106,
'Employers' Accounting for Postretirement Benefits Other Than Pensions,' and No.
112, 'Employers' Accounting for Postemployment Benefits' in 1993.
RATINGS
It is a condition to the issuance of the Class A Certificates that they be
rated 'AAAr' by Standard & Poor's and 'Aaa' by Moody's.
Standard & Poor's ratings on mortgage pass-through certificates address the
likelihood of the receipt by Certificateholders of payments required under the
Pooling and Servicing Agreement. Standard & Poor's ratings take into
consideration the credit quality of the mortgage pool, structural and legal
aspects associated with the Certificates, and the extent to which the payment
stream in the mortgage pool is adequate to make payments required under the
Certificates. Standard & Poor's rating on the Class A Certificates is based on
the claims-paying ability of the Insurer. Standard & Poor's rating on the Class
A Certificates does not, however, constitute a statement regarding frequency of
prepayments on the mortgages. In addition, Standard & Poor's ratings do not
address the likelihood of the receipt of any amounts in respect of Unpaid
Interest Shortfalls. See 'Certain Yield and Prepayment Considerations' herein.
Standard & Poor's ratings (as evidenced by the symbol 'r') and Moody's
ratings on mortgage pass-through certificates do not represent any assessment of
the related Subservicer's ability to purchase Converting Mortgage Loans or the
Master Servicer's ability to purchase Converted Mortgage Loans. In the event
that neither the related Subservicer nor the Master Servicer purchases a
Converting or Converted Mortgage Loan, investors in the Offered Certificates
might suffer a lower than anticipated yield. See 'Certain Yield and Prepayment
Considerations' herein.
The rating assigned by Moody's to the Class A Certificates is based on the
claims-paying ability of the Insurer. Ratings by Moody's address the structural,
legal and issuer-related aspects associated with the Certificates, including the
nature and quality of the underlying mortgage loans. Such ratings do not
represent any assessment of the likelihood of principal prepayments by
mortgagors or of the degree by which such prepayments might differ from those
originally anticipated. In addition, such ratings do not address the likelihood
of the receipt of any amounts in respect of Unpaid Interest Shortfalls.
The Company has not requested a rating on the Class A Certificates by any
rating agency other than Standard & Poor's and Moody's. However, there can be no
assurance as to whether any other rating agency will rate the Class A
Certificates, or, if it does, what rating would be assigned by any such other
rating agency. A rating on the Certificates by another rating agency, if
assigned at all, may be lower than the ratings assigned to the Class A
Certificates by Standard & Poor's and Moody's.
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. In the event that the ratings initially assigned to the
Class A 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 Class A Certificates.
S-48
<PAGE>
<PAGE>
LEGAL INVESTMENT
The Class A Certificates will constitute 'mortgage related securities' for
purposes of SMMEA so long as they are rated in at least the second highest
rating category by one of the Rating Agencies, and, as such, are legal
investments for certain entities to the extent provided in SMMEA. SMMEA,
however, provides that states could override its provisions on legal investment
and restrict or condition investment in mortgage related securities by taking
statutory action on or prior to October 3, 1991. Certain states have enacted
legislation which overrides the preemption provisions of SMMEA.
The Company makes no representations as to the proper characterization of
the Class A Certificates for legal investment or other purposes, or as to the
ability of particular investors to purchase the Class A Certificates under
applicable legal investment restrictions. These uncertainties may adversely
affect the liquidity of the Class A 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 own legal advisors in determining whether and to what
extent an investment in the Class A Certificates constitutes a legal investment
or is subject to investment, capital or other restrictions.
See 'Legal Investment Matters' in the Prospectus.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or other plan or arrangement
subject to ERISA, or Section 4975 of the Code (a 'PLAN') or any insurance
company (whether through its general or separate accounts) or other person
investing 'plan assets' of any Plan should carefully review with its legal
advisors whether the purchase or holding of Class A Certificates could give rise
to a transaction prohibited or not otherwise permissible under ERISA or Section
4975 of the Code. The purchase or holding of the Class A Certificates by, on
behalf of or with 'plan assets' of a Plan may qualify for exemptive relief under
the Exemption; however, the Exemption contains a number of conditions including
the requirement that any such Plan must be an 'accredited investor' as defined
in Rule 501(a)(1) of Regulation D of the Securities and Exchange Commission
under the Securities Act of 1933, as amended. See 'ERISA Considerations' in the
Prospectus.
S-49
<PAGE>
<PAGE>
APPENDIX A
AMBAC INDEMNITY CORPORATION AND SUBSIDIARIES
(a wholly owned subsidiary of AMBAC Inc.)
Consolidated Financial Statements
December 31, 1995 and 1994
(With Independent Auditors' Report Thereon)
<PAGE>
<PAGE>
Independent Auditors' Report
The Board of Directors
AMBAC Indemnity Corporation:
We have audited the accompanying consolidated balance sheets of AMBAC
Indemnity Corporation and subsidiaries (a wholly owned subsidiary of AMBAC Inc.)
as of December 31, 1995 and 1994, and the related consolidated statements of
operations, stockholder's equity and cash flows for each of the years in the
three-year period ended December 31, 1995. These consolidated financial
statements are the responsibility of AMBAC Indemnity Corporation's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of AMBAC
Indemnity Corporation and subsidiaries as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995 in conformity with generally accepted
accounting principles.
As discussed in Note 2 to the consolidated financial statements, AMBAC
Indemnity Corporation has adopted the provisions of the Financial Accounting
Standards Board's Statements of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions" and No. 112, "Employers' Accounting for
Postemployment Benefits," in 1993.
KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
New York, New York
January 31, 1996
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Consolidated Balance Sheets
(Dollars In Thousands Except Share Data)
<TABLE>
<CAPTION>
December 31,
-------------------------
1995 1994
---------- ----------
<S> <C> <C>
Assets
Investments:
Bonds held in available-for-sale account, at fair value
(amortized cost of $2,090,101 in 1995 and $1,865,350
in 1994).............................................. $2,224,528 $1,795,958
Short-term investments, at cost (approximates fair
value)................................................ 163,953 85,202
---------- ----------
Total investments..................................... 2,388,481 1,881,160
Cash....................................................... 6,912 2,117
Securities purchased under agreements to resell............ 4,120 8,011
Receivable for securities.................................. 8,136 21,508
Investment income due and accrued.......................... 38,319 34,902
Investment in affiliate.................................... 25,827 24,976
Deferred acquisition costs................................. 82,620 71,774
Deferred income taxes...................................... -- 1,778
Current income taxes....................................... 2,171 10,544
Prepaid reinsurance........................................ 153,372 139,855
Other assets............................................... 48,472 41,677
---------- ----------
Total assets.......................................... $2,758,430 $2,238,302
========== ==========
Liabilities and Stockholder's Equity
Liabilities:
Unearned premiums........................................ $ 906,136 $ 839,775
Losses and loss adjustment expenses...................... 65,996 65,662
Ceded reinsurance balances payable....................... 14,654 908
Deferred income taxes.................................... 85,008 --
Accounts payable and other liabilities................... 43,625 43,519
Payable for securities................................... 86,304 26,696
---------- ----------
Total liabilities..................................... 1,201,723 976,560
---------- ----------
Stockholder's equity:
Preferred stock, par value $1,000.00 per share.
Authorized shares -- 285,000; issued and outstanding
shares -- none........................................ -- --
Common stock, par value $2.50 per share. Authorized
shares -- 40,000,000; issued and outstanding
shares -- 32,800,000 at December 31, 1995 and 1994.... 82,000 82,000
Additional paid-in capital............................... 481,059 444,258
Unrealized gains (losses) on investments, net of tax..... 87,112 (46,087)
Retained earnings........................................ 906,536 781,571
---------- ----------
Total stockholder's equity............................ 1,556,707 1,261,742
---------- ----------
Total liabilities and stockholder's equity............ $2,758,430 $2,238,302
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
1
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Consolidated Statements of Operations
(Dollars In Thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Gross premiums written........................... $195,033 $192,598 $321,490
Ceded premiums written........................... (28,606) 2,815 (35,810)
-------- -------- --------
Net premiums written.......................... 166,427 195,413 285,680
Increase in unearned premiums, net............... (52,844) (76,077) (132,862)
-------- -------- --------
Net premiums earned........................... 113,583 119,336 152,818
Net investment income............................ 131,496 119,737 104,609
Net realized gains (losses)...................... 177 (13,386) 30,145
Other income..................................... 6,777 6,887 1,516
-------- -------- --------
Total revenues................................ 252,033 232,574 289,088
-------- -------- --------
Expenses:
Losses and loss adjustment expenses.............. 3,377 2,593 (1,849)
Underwriting and operating expenses.............. 38,722 35,946 34,746
Interest expense................................. 1,590 1,428 163
-------- -------- --------
Total expenses................................ 43,689 39,967 33,060
-------- -------- --------
Income before income taxes.................... 208,344 192,607 256,028
-------- -------- --------
Income tax expense:
Current taxes.................................... 29,085 26,286 66,386
Deferred taxes................................... 14,461 16,277 4,090
-------- -------- --------
Total income taxes............................ 43,546 42,563 70,476
-------- -------- --------
Income before cumulative effect of changes in
accounting principles......................... 164,798 150,044 185,552
Cumulative effect of changes in accounting
principles.................................... -- -- (98)
-------- -------- --------
Net income.................................... $164,798 $150,044 $185,454
========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
2
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Consolidated Statements of Stockholder's Equity
(Dollars In Thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1995 1994 1993
--------- --------- --------
<S> <C> <C> <C>
Preferred Stock:
Balance at January 1 and December 31........... $ -- $ -- $ --
========== ========== =========
Common Stock:
Balance at January 1 and December 31........... $ 82,000 $ 82,000 $ 82,000
========== ========== =========
Additional Paid-in Capital:
Balance at January 1........................... $ 444,258 $ 444,143 $397,570
Capital contributions.......................... 35,000 -- 40,000
Cumulative effect of changes in accounting
principles.................................. -- -- 4,708
Other paid-in capital.......................... 1,801 115 1,865
--------- --------- --------
Balance at December 31......................... $ 481,059 $ 444,258 $444,143
========== ========== =========
Unrealized Gains (Losses) on Investments, Net of
Tax:
Balance at January 1........................... $ (46,087) $ 68,091 $ 5,285
Unrealized gain from change in accounting
principle................................... -- -- 63,568
Change in unrealized gain (loss)............... 133,199 (114,178) (762)
--------- --------- --------
Balance at December 31......................... $ 87,112 ($ 46,087) $ 68,091
========== ========== =========
Retained Earnings:
Balance at January 1........................... $ 781,571 $ 667,527 $515,073
Net income..................................... 164,798 150,044 185,454
Dividends declared-common stock................ (40,000) (36,000) (33,000)
Other.......................................... 167 -- --
--------- --------- --------
Balance at December 31......................... $ 906,536 $ 781,571 $667,527
========== ========== =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars In Thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................... $ 164,798 $ 150,044 $ 185,454
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization............ 1,605 1,106 1,080
Amortization of bond premium and
discount.............................. (831) (1,097) (507)
Current income taxes payable............. 8,373 (6,069) (20,844)
Deferred income taxes payable............ 14,462 16,277 (2,463)
Deferred acquisition costs............... (10,846) (20,757) (7,059)
Unearned premiums........................ 52,844 76,077 132,862
Losses and loss adjustment expenses...... 334 1,625 (718)
Ceded reinsurance balances payable....... 13,746 (2,963) (5,147)
(Gain) loss on sales of investments...... (177) 13,386 (30,145)
Proceeds from sales of bonds in trading
account............................... -- -- 2,091,143
Proceeds from maturities of bonds in
trading account....................... -- -- 34,409
Purchases of bonds for trading account... -- -- (2,181,198)
Accounts payable and other liabilities... 106 20,497 9,591
Other, net............................... (11,273) 7,179 (1,622)
----------- ----------- -----------
Net cash provided by operating
activities......................... 233,141 255,305 204,836
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sales of bonds at amortized
cost.................................. 1,882,485 1,305,011 18,912
Proceeds from maturities of bonds at
amortized cost........................ 163,031 39,126 60,131
Purchases of bonds at amortized cost..... (2,192,824) (1,559,982) (258,832)
Investment in preferred stock of
affiliate............................. -- -- (3,000)
Change in short-term investments......... (78,751) 9,005 (25,252)
Securities purchased under agreements to
resell................................ 3,891 (8,011) --
Other, net............................... (1,178) (3,786) (2,370)
----------- ----------- -----------
Net cash used in investing
activities......................... (223,346) (218,637) (210,411)
----------- ----------- -----------
Cash flows from financing activities:
Dividends paid........................... (40,000) (36,000) (33,000)
Capital contribution..................... 35,000 -- 40,000
----------- ----------- -----------
Net cash (used in) provided by
financing activities............... (5,000) (36,000) 7,000
----------- ----------- -----------
Net cash flow......................... 4,795 668 1,425
Cash at beginning of year.................. 2,117 1,449 24
----------- ----------- -----------
Cash at December 31........................ $ 6,912 $ 2,117 $ 1,449
=========== =========== ===========
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Income taxes.......................... $ 19,500 $ 32,153 $ 86,781
=========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands)
1 BACKGROUND
AMBAC Indemnity Corporation ("AMBAC Indemnity") is a leading insurer of
municipal and structured finance obligations. Financial guarantee insurance
underwritten by AMBAC Indemnity guarantees payment when due of the principal of
and interest on the obligation insured. In the case of a default on the insured
bond, payments under the insurance policy may not be accelerated by the
policyholder without AMBAC Indemnity's consent. As of December 31, 1995, AMBAC
Indemnity's net insurance in force (principal and interest) was $199,078,000.
AMBAC Indemnity is a wholly owned subsidiary of AMBAC Inc. (NYSE: ABK), a
holding company that provides financial guarantee insurance and financial
services to both public and private clients through its subsidiaries.
As of December 31, 1995, AMBAC Indemnity owned approximately 26.5% of the
outstanding common stock of an affiliate, HCIA Inc. (NASDAQ: HCIA) ("HCIA"), a
leading health care information content company. AMBAC Inc. owns approximately
19.9% of the outstanding common stock of HCIA. Prior to 1995, AMBAC Inc. and
AMBAC Indemnity combined owned approximately 96% of HCIA. During 1995, HCIA
offered approximately 3.5 million shares of its common stock for sale in two
separate public offerings. In addition, in conjunction with the second public
offering by HCIA, AMBAC Inc. sold approximately 1.1 million shares of HCIA
common stock. As a result of these public offerings, as of December 31, 1995,
AMBAC Indemnity and AMBAC Inc. combined owned 46.4% of the common stock of HCIA.
AMBAC Indemnity, as the sole limited partner, owns a limited partnership
interest representing 90% of the total partnership interests of AMBAC Financial
Services, Limited Partnership ("AFS"), a limited partnership which provides
interest rate swaps primarily to states, municipalities and municipal
authorities. The sole general partner of AFS, AMBAC Financial Services Holdings,
Inc., a wholly owned subsidiary of AMBAC Inc., owns a general partnership
interest representing 10% of the total partnership interest in AFS.
AMBAC Indemnity has one wholly owned subsidiary, American Municipal Bond
Holding Company ("AMBH"), which is a holding company for certain real estate
interests.
2 SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements have been prepared on
the basis of generally accepted accounting principles ("GAAP"). The preparation
of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported revenues and expenses during the
reporting period. Actual results could differ from those estimates. The
significant accounting policies of AMBAC Indemnity and its subsidiaries are as
described below:
CONSOLIDATION:
The consolidated financial statements include the accounts of AMBAC
Indemnity, AFS and AMBH (sometimes collectively referred to as "AMBAC
Indemnity"). All significant intercompany balances have been eliminated.
5
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
INVESTMENTS:
AMBAC Indemnity's investment portfolio is accounted for on a trade-date
basis and consists entirely of investments in debt securities which are
considered available-for-sale and are carried at fair value. Fair value is based
on quotes obtained by AMBAC Indemnity from independent market sources.
Short-term investments are carried at cost, which approximates their fair value.
Unrealized gains and losses, net of deferred income taxes, are included as a
separate component of stockholder's equity and are computed using amortized cost
as the basis. For purposes of computing amortized cost, premiums and discounts
are accounted for using the interest method. For bonds purchased at a price
below par value, discounts are accreted over the remaining term of the
securities. For bonds purchased at a price above par value which have call
features, premiums are amortized to the most likely call dates as determined by
management. For premium bonds which do not have call features, such premiums are
amortized over the remaining term of the securities. Premiums and discounts on
mortgage-backed securities are adjusted for the effects of actual and
anticipated prepayments. Realized gains and losses on the sale of investments
are determined on the basis of specific identification.
Effective December 31, 1993, AMBAC Indemnity adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("Statement 115"). Pursuant to Statement 115, AMBAC Indemnity
has designated all investments as "available-for-sale" and reports them at fair
value. Unrealized gains and losses are excluded from earnings and reported as a
separate component of stockholder's equity, net of tax. The cumulative effect of
adopting Statement 115 as of December 31, 1993 was to increase AMBAC Indemnity's
stockholder's equity by $63,568, net of tax. The adoption of Statement 115 had
no effect on earnings.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL:
Securities purchased under agreements to resell are collateralized
financing transactions, and are recorded at their contracted resale amounts,
plus accrued interest. AMBAC Indemnity takes possession of the collateral
underlying those agreements and monitors its market value on a daily basis and,
when necessary, requires prompt transfer of additional collateral to reflect
current market value.
PREMIUM REVENUE RECOGNITION:
Premiums for municipal new issue and secondary market policies are: (i)
generally computed as a percentage of principal and interest insured; (ii)
typically collected in a single payment at policy inception date; and (iii) are
earned pro rata over the period of risk. Premiums for structured finance
policies can be computed as a percentage of either principal or principal and
interest insured. The timing of the collection of structured finance premiums
varies among individual transactions. For policies where premiums are collected
in a single payment at policy inception date, premiums are earned pro rata over
the period of risk. For policies with premiums that are collected periodically
(i.e., monthly, quarterly or annually), premiums are reflected in income pro
rata over the period covered by the premium payment.
When an AMBAC Indemnity-insured new or secondary market issue has been
refunded or called, the remaining unearned premium is generally earned at that
time, as the risk to AMBAC Indemnity is considered to have been eliminated.
6
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
LOSSES AND LOSS ADJUSTMENT EXPENSES:
The liability for losses and loss adjustment expenses consists of the
Active Credit Reserve ("ACR") and case basis loss reserves. The development of
the ACR is based upon estimates of the ultimate aggregate losses inherent in the
obligations insured and reflects the net result of contributions related to the
portion of earnings required to cover those losses, less reductions of ACR no
longer deemed necessary by management. When losses occur (actual monetary
defaults or defaults which are imminent on insured obligations), case basis loss
reserves are established in an amount that is sufficient to cover the present
value of the anticipated defaulted debt service payments over the expected
period of default and estimated expenses associated with settling the claims,
less estimated recoveries under salvage or subrogation rights. All or part of
case basis loss reserves are allocated from any ACR available for such insured
obligation.
AMBAC Indemnity's management believes that the reserves for losses and loss
adjustment expenses are adequate to cover the ultimate net cost of claims, but
the reserves are necessarily based on estimates and there can be no assurance
that the ultimate liability will not exceed such estimates.
DEFERRED ACQUISITION COSTS:
Certain costs incurred which vary with, and are primarily related to, the
production of business have been deferred. These costs include direct and
indirect expenses related to underwriting, marketing and policy issuance, rating
agency fees and premium taxes, net of reinsurance ceding commissions. The
deferred acquisition costs are being amortized over the periods in which the
related premiums are earned, and such amortization amounted to $10,183, $9,348
and $12,120 for 1995, 1994 and 1993, respectively. Deferred acquisition costs,
net of such amortization, amounted to $10,845, $20,757 and $7,059 for 1995, 1994
and 1993, respectively.
DEPRECIATION AND AMORTIZATION:
Depreciation of furniture and fixtures and electronic data processing
equipment is provided over the estimated useful lives of the respective assets
using the straight-line method. Amortization of leasehold improvements and
intangibles, including certain computer software licenses, is provided over the
estimated useful lives of the respective assets using the straight-line method.
INTEREST RATE CONTRACTS:
Interest Rate Contracts Held for Purposes Other Than Trading:
AMBAC Indemnity uses interest rate contracts for hedging purposes as part
of its overall interest rate risk management. Gains and losses on interest rate
futures and options contracts that qualify as accounting hedges of existing
assets or liabilities are included in the carrying amounts and amortized over
the remaining lives of the assets and liabilities as an adjustment to interest
income. When the hedged asset is sold, the unamortized gain or loss on the
related hedge is recognized in income. Gains and losses on interest rate
contracts that do not qualify as accounting hedges are recognized in current
period income.
AMBAC Indemnity accounts for its interest rate futures contracts in
accordance with the provisions of Statement of Financial Accounting Standards
No. 80, "Accounting For Futures Contracts" ("Statement 80"). Statement 80
permits hedge accounting for interest rate futures contracts when the item to be
hedged exposes the Company to price or interest rate risk, and the futures
contract effectively reduces that exposure and is designated as a hedge.
Interest rate futures contracts held for purposes other than trading are used
primarily to hedge interest sensitive assets, and are designated at inception as
a hedge to specific assets.
7
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
Interest rate swaps that are linked with existing liabilities are accounted
for like a hedge of those liabilities, using the accrual method as an adjustment
to interest expense. Interest rate swaps that are linked with existing assets
classified as available-for-sale are accounted for like hedges of those assets,
using the accrual method as an adjustment to interest income, with unrealized
gains and losses included in stockholder's equity, net of tax.
Interest Rate Contracts Held for Trading Purposes:
AMBAC Indemnity, in connection with its market making activities as a
provider of interest rate swaps, primarily to states, municipalities, municipal
authorities and other entities in connection with their financings, uses
interest rate contracts which are classified as held for trading purposes.
Interest rate contracts are recorded on trade date at fair value. Changes in
fair value are recorded as a component of other income. The fair value of
interest rate swaps is determined through the use of valuation models. The
portion of the interest rate swap's initial fair value that reflects credit
considerations, on-going servicing and transaction hedging costs is recognized
over the life of the interest rate swap, as an adjustment to other income.
Interest rate swaps are recorded on a gross basis; assets and liabilities are
netted by customer only when a legal right of set-off exists.
INCOME TAXES:
AMBAC Inc., as common parent, files a consolidated Federal income tax
return with its subsidiaries. Effective January 1, 1993, AMBAC Indemnity adopted
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("Statement 109"). Under Statement 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the period that includes the enactment
date.
The cumulative effect of this change in accounting for income taxes
resulted in an increase to net income for 1993 of $1,162 and an increase to
additional paid-in capital of $4,708. The adjustment to additional paid-in
capital reflects Statement 109 adjustments for prior business combinations.
The Internal Revenue Code permits municipal bond insurance companies to
deduct from taxable income, subject to certain limitations, the amounts added to
the statutory mandatory contingency reserve during the year. The deduction taken
is allowed only to the extent that U.S. Treasury noninterest-bearing tax and
loss bonds are purchased at their par value prior to the original due date of
AMBAC Inc.'s consolidated Federal tax return and held in an amount equal to the
tax benefit attributable to such deductions. The amounts deducted must be
included in taxable income when the contingency reserve is released, at which
time AMBAC Indemnity may redeem the tax and loss bonds to satisfy the additional
tax liability. The purchases of tax and loss bonds are recorded as payments of
Federal income taxes and are not reflected in AMBAC Indemnity's current tax
provision.
POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS:
AMBAC Inc., through its subsidiaries, provides various postretirement and
postemployment benefits, including pension, and health and life benefits
covering substantially all employees who meet certain age and service
requirements. AMBAC Indemnity accounts for these benefits under the accrual
method of accounting. Amounts related to the defined benefit pension plan and
postretirement health benefits are charged based on actuarial determinations.
8
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
Effective January 1, 1993, AMBAC Indemnity adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions" ("Statement 106"). Statement 106 requires that the expected
cost of postretirement benefits, other than pensions, be charged to expense
during the period that the employee renders service. AMBAC Indemnity elected to
recognize the transition obligation immediately and recorded a charge of $465,
after reduction of $240 for income tax benefits, as a cumulative effect of a
change in accounting principle as of the date of adoption.
Effective January 1, 1993, AMBAC Indemnity adopted Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits" ("Statement 112"), which, similar to Statement 106, requires accrual
of a liability representing the cost of certain benefits earned by employees
over their employment period. Statement 112 applies to vested benefits provided
to former or inactive employees, their beneficiaries and covered dependents,
after employment but before retirement. In adopting Statement 112, AMBAC
Indemnity recorded a charge of $801, after reduction for income tax benefits of
$429, as a cumulative effect of a change in accounting principle as of the date
of adoption.
STOCK COMPENSATION PLANS:
In 1991, AMBAC Inc. adopted the AMBAC Inc. 1991 Stock Incentive Plan. Under
this plan awards are granted to eligible employees of AMBAC Indemnity in the
form of incentive stock options or other stock-based awards. In October 1995,
the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("Statement 123") which must be adopted no later than 1996. Statement 123
applies to all stock-based employee compensation plans (except employee stock
ownership plans) in which an employer grants shares of its stock or other equity
instruments to employees. Statement 123 permits a company to choose either the
fair value based method of accounting as defined in the statement or the
intrinsic value based method of accounting as prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") for its stock-based
compensation plans. Companies electing the accounting requirements under APB 25
must also make pro forma disclosures of net income and earnings per share as if
the fair value based method of accounting had been applied. AMBAC Indemnity
currently accounts for its plans under APB 25 and intends to continue to do so
after adopting Statement 123 in 1996. The adoption of Statement 123 is expected
to have no effect on AMBAC Indemnity's results of operations.
RECLASSIFICATIONS:
Certain reclassifications have been made to prior years' amounts to conform
to the current year's presentation.
9
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
3 INVESTMENTS
The amortized cost and estimated fair value of investments in debt
securities at December 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1995
Municipal obligations........................ $1,558,754 $ 98,090 $ 2,428 $1,654,416
Corporate securities......................... 261,492 30,785 3,263 289,014
U.S. Government obligations.................. 214,224 8,796 621 222,399
Mortgage-backed securities (including
GNMA)...................................... 55,631 3,362 294 58,699
Other........................................ 163,953 -- -- 163,953
---------- ---------- ---------- ----------
$2,254,054 $ 141,033 $ 6,606 $2,388,481
========= ======== ======== =========
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1994
Municipal obligations........................ $1,505,501 $ 23,009 $ 80,935 $1,447,575
Corporate securities......................... 228,992 2,336 11,501 219,827
U.S. Government obligations.................. 61,906 311 1,797 60,420
Mortgage-backed securities (including
GNMA)...................................... 70,251 1,325 2,140 69,436
Other........................................ 83,902 -- -- 83,902
---------- ---------- ---------- ----------
$1,950,552 $ 26,981 $ 96,373 $1,881,160
========= ======== ======== =========
</TABLE>
The amortized cost and estimated fair value of debt securities at December
31, 1995, by contractual maturity, were as follows:
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
---------- ----------
<S> <C> <C>
1995
Due in one year or less..................................... $ 223,069 $ 223,949
Due after one year through five years....................... 168,417 181,772
Due after five years through ten years...................... 302,601 315,385
Due after ten years......................................... 1,504,336 1,608,676
---------- ----------
2,198,423 2,329,782
Mortgage-backed securities.................................. 55,631 58,699
---------- ----------
$2,254,054 $2,388,481
========= =========
</TABLE>
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
10
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
Net investment income comprised the following:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Bonds.............................................. $127,865 $118,685 $102,020
Short-term investments............................. 6,116 3,512 4,278
-------- -------- --------
Total investment income.......................... 133,981 122,197 106,298
Investment expense................................. (2,485) (2,460) (1,689)
-------- -------- --------
Net investment income............................ $131,496 $119,737 $104,609
======== ======== ========
</TABLE>
Gross realized gains were $27,786, $26,514 and $42,217 for 1995, 1994 and
1993, respectively, and gross realized losses were $27,609, $39,900 and $12,072
for 1995, 1994 and 1993, respectively.
As of December 31, 1995, AMBAC Indemnity did not have any investment
concentrated in any single repayment source (excluding obligations of the U.S.
Government and its agencies) with a fair value greater than 2.0% of its
stockholder's equity.
As of December 31, 1995 and 1994, AMBAC Indemnity held securities subject
to agreements to resell for $4,120 and $8,011, respectively. Such securities
were held as collateral by AMBAC Indemnity. The agreements had terms of less
than 30 days.
As of December 31, 1995 and 1994, investment securities with a fair value
of $4,583 and $3,948, respectively, were pledged to futures brokers for required
margin.
4 REINSURANCE
In the ordinary course of business, AMBAC Indemnity cedes exposures under
various reinsurance contracts primarily designed to minimize losses from large
risks and to protect capital and surplus. The effect of reinsurance on premiums
written and earned was as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1995 1994 1993
--------------------- --------------------- ---------------------
Written Earned Written Earned Written Earned
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Direct................... $192,277 $127,322 $188,057 $136,632 $321,179 $181,320
Assumed.................. 2,756 1,349 4,541 1,325 311 311
Ceded.................... (28,606) (15,088) 2,815 (18,621) (35,810) (28,813)
-------- -------- -------- -------- -------- --------
Net premiums............. $166,427 $113,583 $195,413 $119,336 $285,680 $152,818
======== ======== ======== ======== ======== ========
</TABLE>
The reinsurance of risk does not relieve the ceding insurer of its original
liability to its policyholders. In the event that all or any of the reinsurers
are unable to meet their obligations to AMBAC Indemnity under the existing
reinsurance agreements, AMBAC Indemnity would be liable for such defaulted
amounts. To minimize its exposure to significant losses from reinsurer
insolvencies, AMBAC Indemnity evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk. There were no reinsurance
receivables as of December 31, 1995 and 1994. As of December 31, 1995, prepaid
reinsurance of approximately $48,120 was associated with a single reinsurer. As
of December 31, 1995, AMBAC Indemnity held letters of credit and collateral
amounting to approximately $90,643 from its reinsurers to cover liabilities
ceded under the aforementioned reinsurance contracts.
AMBAC Indemnity terminated reinsurance contracts, resulting in return
premiums to AMBAC Indemnity of $18,141, $30,482 and $36,461 of which $15,700,
$25,891 and $31,010 were recorded as an
11
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
increase to the unearned premium reserve in 1995, 1994 and 1993, respectively,
with the remainder recognized as revenue.
5 LOSSES AND LOSS ADJUSTMENT EXPENSES
AMBAC Indemnity's liability for losses and loss adjustment expenses
includes case basis loss reserves and the ACR. Following is a summary of the
activity in the case basis loss and active credit reserve accounts and the
components of the liability for losses and loss adjustment expenses:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- --------
<S> <C> <C> <C>
Case basis loss reserves:
Balance at January 1......................... $38,892 $35,155 $ 28,321
------- ------- --------
Incurred related to:
Current year............................... 750 8,073 6,630
Prior years................................ 2,650 (3,368) (926)
------- ------- --------
Total incurred.......................... 3,400 4,705 5,704
------- ------- --------
Paid related to:
Current year............................... 150 275 315
Prior years................................ 2,893 693 (1,445)
------- ------- --------
Total paid.............................. 3,043 968 (1,130)
------- ------- --------
Balance at December 31....................... 39,249 38,892 35,155
------- ------- --------
Active credit reserve:
Balance at January 1......................... 26,770 28,882 36,434
Net provision for losses..................... 4,097 4,422 6,709
ACR transfers to case reserves............... (4,120) (6,534) (14,261)
------- ------- --------
Balance at December 31....................... 26,747 26,770 28,882
------- ------- --------
Total................................... $65,996 $65,662 $ 64,037
======= ======= =========
</TABLE>
The terms "current year" and "prior years" in the foregoing table refer to
the year in which case basis loss reserves were established.
12
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
6 COMMITMENTS AND CONTINGENCIES
AMBAC Indemnity is responsible for leases on the rental of office space,
principally in New York City. The lease agreements which expire periodically
through September 2014, contain provisions for scheduled periodic rent increases
and are accounted for as operating leases. An estimate of future net minimum
lease payments in each of the next five years ending December 31, and the
periods thereafter, is as follows:
<TABLE>
<CAPTION>
Year Amount
- --------------- --------
<S> <C>
1996........................................................... $ 3,042
1997........................................................... 3,073
1998........................................................... 3,359
1999........................................................... 3,650
2000........................................................... 3,650
All later years................................................ 53,880
-------
$70,654
=======
</TABLE>
Rent expense for the aforementioned leases amounted to $2,924, $2,719 and
$2,778 for the years ended December 31, 1995, 1994 and 1993, respectively.
7 INSURANCE REGULATORY RESTRICTIONS
AMBAC Indemnity is subject to insurance regulatory requirements of the
States of Wisconsin, New York and the other jurisdictions in which it is
licensed to conduct business.
AMBAC Indemnity's ability to pay dividends is generally restricted by law
and subject to approval by the Office of the Commissioner of Insurance of the
State of Wisconsin (the "Wisconsin Commissioner"). Wisconsin insurance law
restricts the payment of dividends in any 12-month period without regulatory
approval to the lesser of (a) 10% of policyholders' surplus as of the preceding
December 31 and (b) the greater of (i) statutory net income for the calendar
year preceding the date of dividend, minus realized capital gains for that
calendar year and (ii) the aggregate of statutory net income for three calendar
years preceding the date of the dividend, minus realized capital gains for those
calendar years and minus dividends paid or credited within the first two of the
three preceding calendar years. AMBAC Indemnity paid dividends of $40,000,
$36,000 and $33,000 on its common stock in 1995, 1994 and 1993, respectively.
Based upon these restrictions, at December 31, 1995, the maximum amount that
will be available during 1996 for payment of dividends by AMBAC Indemnity
without prior approval is approximately $86,000.
However, as discussed in Note 15, AMBAC Indemnity, upon consummation of the
proposed PRIDES offering will deliver to AMBAC Inc. (in the form of an
extraordinary dividend) its 2,378,672 shares of HCIA common stock, at fair
value. The Wisconsin Commissioner has approved such dividend. The fair value of
such dividend will be determined based on the price per share of HCIA common
stock used to price the PRIDES. As a result, any dividends paid by AMBAC
Indemnity to AMBAC Inc. for the twelve months following the extraordinary
dividend will require pre-approval from the Wisconsin Commissioner. The
Wisconsin Commissioner has stated to AMBAC Indemnity management that it does not
foresee any reason such pre-approval would not be given.
The New York Financial Guarantee Insurance Law establishes single risk
limits applicable to all obligations issued by a single entity and backed by a
single revenue source. Under the limit applicable to
13
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
municipal bonds, the insured average annual debt service for a single risk, net
of reinsurance and collateral, may not exceed 10% of the sum of the insurer's
policyholders' surplus and contingency reserves. In addition, insured principal
of municipal bonds attributable to any single risk, net of reinsurance and
collateral, is limited to 75% of the insurer's policyholders' surplus and
contingency reserves. Additional single risk limits, which generally are more
restrictive than the municipal bond single risk limit, are also specified for
several other categories of insured obligations.
Statutory capital and surplus was $862,976 and $781,772 at December 31,
1995 and 1994, respectively. Qualified statutory capital (statutory surplus plus
contingency reserve) was $1,358,769 and $1,218,204 at December 31, 1995 and
1994, respectively. Statutory net income was $142,541, $116,238 and $166,157 for
1995, 1994 and 1993, respectively. Statutory capital and surplus differs from
stockholder's equity determined under GAAP principally due to statutory
accounting rules that treat loss reserves, premiums earned, policy acquisition
costs and deferred income taxes differently.
8 INCOME TAXES
The total effect of income taxes on income and stockholder's equity for the
years ended December 31, 1995 and 1994 was as follows:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Total income taxes charged to income.................. $ 43,546 $ 42,563
-------- --------
Income taxes charged (credited) to stockholder's equity:
Unrealized gain (loss) on bonds..................... 71,722 (61,480)
Unrealized gain on investment in affiliate.......... 602 --
Other............................................... (682) (116)
-------- --------
Total charged (credited) to stockholder's
equity................................... 71,642 (61,596)
-------- --------
Total effect of income taxes.......................... $115,188 $(19,033)
======== ========
</TABLE>
The tax provisions in the accompanying consolidated statements of
operations reflect effective tax rates differing from prevailing Federal
corporate income tax rates. The following is a reconciliation of these
differences:
<TABLE>
<CAPTION>
1995 % 1994 % 1993 %
-------- ----- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Computed expected tax at
statutory rate................ $ 72,920 35.0% $ 67,412 35.0% $ 89,610 35.0%
Increases (reductions) in expected tax resulting from:
Tax-exempt interest........ (28,274) (13.6) (26,336) (13.7) (21,043) (8.2)
Adjustment to deferred tax
assets and liabilities
for enacted changes in
tax laws and rates...... -- -- -- -- 754 0.3
Other, net................. (1,100) (0.5) 1,487 0.8 1,155 0.4
------- ----- ------- ---- ------- ----
Income tax expense on income from
continuing operations.......... $ 43,546 20.9% $ 42,563 22.1% $ 70,476 27.5%
======= ===== ======= ==== ======= ====
</TABLE>
14
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax liabilities and deferred tax assets at December 31,
1995 and 1994 are presented below:
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
Deferred tax liabilities:
Unrealized gains on bonds............................ $ 46,906 $ --
Deferred acquisition costs........................... 28,917 25,121
Unearned premiums.................................... 22,079 14,522
Unrealized gain on investment in affiliate........... 602 --
Investments.......................................... 2,911 796
Other................................................ 1,996 1,613
------- -------
Total deferred tax liabilities.............. 103,411 42,052
------- -------
Deferred tax assets:
Unrealized loss on bonds............................. -- 24,816
Loss reserves........................................ 9,631 9,733
Insurance in force................................... 2,870 3,205
Compensation......................................... 2,418 2,812
Other................................................ 3,484 3,264
------- -------
Sub-total deferred tax assets............... 18,403 43,830
Valuation allowance.................................. -- --
------- -------
Total deferred tax assets................... 18,403 43,830
------- -------
Net deferred tax (liabilities) assets....... $(85,008) $ 1,778
======= =======
</TABLE>
AMBAC Indemnity believes that no valuation allowance is necessary in
connection with the deferred tax assets.
9 EMPLOYEE BENEFITS
Pensions:
AMBAC Inc. has a defined benefit pension plan covering substantially all
employees of AMBAC Indemnity and AFS. The benefits are based on years of service
and the employee's compensation during the last five years of employment. AMBAC
Indemnity's funding policy is to contribute annually the maximum amount that can
be deducted for Federal income tax purposes. Contributions are intended to
provide not only for benefits attributed to service-to-date but also for those
expected to be earned in the future.
The actuarial present value of the benefit obligations shown in the table
below sets forth the plan's funded status and amounts recognized by AMBAC Inc.
as of December 31, 1995 and 1994.
15
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
Actuarial present value of the benefit obligations:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Accumulated benefit obligation, including vested benefits of
$6,049 and $4,300, respectively................................ $(6,788) $(5,000)
======= =======
Projected benefit obligation for service rendered to date........ (7,800) (5,500)
Plan assets at fair value, primarily listed stocks, commingled
funds and fixed income securities.............................. 7,054 4,898
------- -------
Unfunded projected benefit....................................... (746) (602)
Unrecognized prior service cost.................................. (1,784) (1,950)
Unrecognized net loss............................................ 1,906 1,412
Unrecognized net transition asset................................ (12) (15)
------- -------
Pension liability -- entire plan................................. $ (636) $(1,155)
======= =======
</TABLE>
Net pension costs for 1995, 1994 and 1993 included the following
components:
<TABLE>
<CAPTION>
1995 1994 1993
------- ----- -----
<S> <C> <C> <C>
Service cost............................................. $ 541 $ 558 $ 447
Interest cost on expected benefit obligation............. 456 386 297
Actual return on plan assets............................. (1,333) 30 (390)
Net amortization and deferral............................ 760 (547) (149)
------- ----- -----
Net periodic pension cost................................ $ 424 $ 427 $ 205
======= ===== =====
</TABLE>
The weighted-average discount rate used in the determination of the
actuarial present value for the projected benefit obligation was 7.25% and 8.0%
for 1995 and 1994, respectively. The expected long-term rate of return on assets
was 9.25% for both 1995 and 1994. The rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation was 5.0% in both 1995 and 1994.
Substantially all employees of AMBAC Indemnity and AFS are covered by a
defined contribution plan (the "Savings Incentive Plan") for which contributions
and costs are determined as 6% of each covered employee's base salary, plus a
matching company contribution of 50% on contributions up to 6% of base salary
made by eligible employees to the plan. The total cost of the Savings Incentive
Plan to AMBAC Indemnity was $1,435, $1,292 and $1,243 in 1995, 1994 and 1993,
respectively.
Annual Incentive Plan:
AMBAC Indemnity has an annual incentive plan which provides for awards to
key officers and employees based upon predetermined criteria. The cost of the
plan to AMBAC Indemnity for the years ended December 31, 1995, 1994 and 1993 was
$7,669, $8,531 and $6,165, respectively.
Postretirement Health Care and Other Benefits:
AMBAC Indemnity provides certain medical and life insurance benefits for
retired employees and eligible dependents. All plans are contributory. None of
the plans is currently funded.
16
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
Postretirement benefits expense was $168, $176 and $500 in 1995, 1994 and
1993, respectively. The unfunded accumulated postretirement benefit obligation
was $1,309 and the accrued postretirement liability was $1,368 as of December
31, 1995.
The assumed weighted average health care cost trend rates range from 13.5%
in 1995, decreasing ratably to 5.5% in 2001, and remaining at that level
thereafter. Increasing the assumed health care cost trend rate by one percentage
point in each future year would increase the accumulated postretirement benefit
obligation at December 31, 1995 by $174 and the 1995 benefit expense by $28. The
weighted average discount rate used to measure the accumulated postretirement
benefit obligation and 1995 expense was 7.25%.
10 INSURANCE IN FORCE
The par amount of bonds insured by AMBAC Indemnity, net of reinsurance, was
$110,997,000 and $93,305,000 at December 31, 1995 and 1994, respectively. As of
December 31, 1995, AMBAC Indemnity's insured portfolio was diversified by type
of insured bond as shown in the following table:
<TABLE>
<CAPTION>
Net Par Amount
Outstanding
--------------------
(Dollars in Millions) As of December 31 1995 1994
-------- -------
<S> <C> <C>
Municipal finance:
General obligation........................... $ 30,546 $26,674
Utility revenue.............................. 21,053 19,597
Tax-backed revenue........................... 18,780 16,279
Health care revenue.......................... 12,553 10,922
Transportation revenue....................... 6,293 5,397
Investor Owned Utilities..................... 4,497 3,500
Higher education............................. 3,973 3,447
Student loan................................. 3,769 2,709
Housing revenue.............................. 3,577 2,567
Other........................................ 483 403
-------- -------
Total Municipal finance................... 105,524 91,495
-------- -------
Structured finance:
Domestic..................................... 3,238 902
International................................ 2,235 908
-------- -------
Total Structured finance.................. 5,473 1,810
-------- -------
$110,997 $93,305
========= =======
</TABLE>
As of December 31, 1995, California was the state with the highest
aggregate net par amount inforce, accounting for 14.3% of the total, and the
highest single insured risk represented 0.6% of aggregate net par amount
insured. AMBAC Indemnity's direct insurance in force (principal and interest)
was $235,118,000 and $205,810,000, at December 31, 1995 and 1994, respectively.
Net insurance in force (after giving effect to reinsurance) was $199,078,000 and
$171,678,000 as of December 31, 1995 and 1994, respectively.
17
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
11 FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING
Financial instruments with off-balance-sheet risk:
In the normal course of business, AMBAC Indemnity becomes a party to
various financial transactions to reduce its exposure to fluctuations in
interest rates. These financial instruments include an interest rate swap
agreement and exchange traded interest rate futures contracts. The notional
amounts of AMBAC Indemnity's off-balance-sheet financial instruments which are
held for purposes other than trading were as follows:
<TABLE>
<CAPTION>
As of December 31,
--------------------
1995 1994
------- --------
<S> <C> <C>
Interest rate futures contracts................ $44,500 $164,200
Interest rate swap............................. 20,000 20,000
</TABLE>
Notional principal amounts are often used to express the volume of these
transactions and do not reflect the extent to which positions may offset one
another. These amounts do not represent the much smaller amounts potentially
subject to risk.
Interest rate futures contracts are sold to hedge interest rate risk
inherent in fixed rate investment securities. At December 31, 1995, interest
rate futures contracts with an outstanding notional amount of $44,500 were
designated as hedges of fixed rate investment securities.
The interest rate swap held for purposes other than trading is used to
manage interest rate risk by synthetically changing the nature of certain
floating rate investments.
Fair values of financial instruments held for purposes other than trading:
The following fair value amounts were determined by AMBAC Indemnity using
independent market information when available, and appropriate valuation
methodologies when market quotes were not available. In cases where specific
market quotes are unavailable, interpreting market data and estimating market
values necessarily require considerable judgment by management. Accordingly, the
estimates presented are not necessarily indicative of the amount AMBAC Indemnity
could realize in a current market exchange.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Investments: The fair values of bonds are based on quoted market prices or
dealer quotes.
Short-term investments and cash: The fair values of short-term investments
and cash are assumed to equal amortized cost.
Securities purchased under agreements to resell: The fair value of
securities purchased under agreements to resell is assumed to approximate
carrying value.
Investment in affiliate: As of December 31, 1995, the fair value of AMBAC
Indemnity's investment in HCIA is based on the quoted market price of HCIA
common stock. As of December 31, 1994, the fair value of AMBAC Indemnity's
investment in HCIA was assumed to equal carrying value.
Interest rate contracts: Fair values of off-balance-sheet interest rate
contracts (futures and swap) are based on quoted market and dealer prices,
current settlement values, or pricing models.
18
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
Liability for net financial guarantees written: The fair value of the
liability for those financial guarantees written related to new issue and
secondary market exposures is based on the estimated cost to reinsure those
exposures at current market rates, which amount consists of the current unearned
premium reserve, less an estimated ceding commission thereon.
Certain other financial guarantee insurance policies have been written on
an installment basis, where the future premiums to be received by AMBAC
Indemnity are determined based on the outstanding exposure at the time the
premiums are due. The fair value of AMBAC Indemnity's liability under its
installment premium policies is measured using the present value of estimated
future installment premiums, less an assumed ceding commission. The estimate of
the amounts and timing of the future installment premiums is based on
contractual premium rates, debt service schedules and expected run-off
scenarios. This measure is used as an estimate of the cost to reinsure AMBAC
Indemnity's liability under these policies. The carrying amount and estimated
fair value of these financial instruments are presented below:
<TABLE>
<CAPTION>
As of December 31,
---------------------------------------------------
1995 1994
----------------------- -----------------------
Carrying Estimated Carrying Estimated
(Dollars in Millions) Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Investments........................ $2,225 $2,225 $1,796 $1,796
Short-term investments............. 164 164 85 85
Securities purchased under
agreements to resell............. 4 4 8 8
Investment in affiliate............ 26 111 25 25
Cash............................... 7 7 2 2
Unrecognized financial instruments:
Interest rate swap................. -- -- -- (1)
Interest rate futures contracts.... -- -- -- --
Liability for net financial
guarantees
Direct........................... -- 655 -- 609
Net of reinsurance............... -- 543 -- 507
Net installment premiums......... -- 80 -- 51
</TABLE>
12 FINANCIAL INSTRUMENTS HELD FOR TRADING PURPOSES
AMBAC Indemnity, through its affiliate AFS, is a provider of interest rate
swaps to states, municipalities, municipal authorities and other entities,
including its affiliate, AMBAC Capital Management, Inc. ("ACMI"), in connection
with their financings. AMBAC Indemnity manages its interest rate swap business
with the goal of being market neutral to changes in overall interest rates,
while retaining "basis risk", the relationship between changes in floating rate
tax-exempt and floating rate taxable interest rates. If actual or projected
floating rate tax-exempt interest rates rise in relation to floating rate
taxable rates, AMBAC Indemnity will experience an unrealized mark-to-market
loss. Conversely, if actual or projected floating rate tax-exempt interest rates
decline in relation to floating rate taxable interest rates, AMBAC Indemnity
will experience an unrealized mark-to-market gain.
19
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
In the ordinary course of business, AMBAC Indemnity manages a variety of
risks -- principally credit, market, liquidity, operational and legal. These
risks are identified, measured and monitored through a variety of control
mechanisms, which are in place at different levels throughout the organization.
Credit risk relates to the ability of counterparties to perform according
to the terms of their contractual commitments. Various procedures and controls
are in place to monitor the credit risk of interest rate swaps. These include
the initial credit approval process, the establishment of credit limits,
management approvals and a process that ensures the continuous monitoring of
credit exposure.
Market risk relates to the impact of price changes on future earnings. This
risk is a consequence of AMBAC Indemnity's market-making activities in the
municipal interest rate swap market. The principal market risk is basis risk,
the relationship between changes in floating rate tax-exempt and floating rate
taxable interest rates. Since the third quarter of 1995, all municipal interest
rate swaps transacted contain provisions which are designed to protect AMBAC
Indemnity against certain forms of tax reform, thus mitigating its basis risk.
An independent risk management group monitors trading risk limits and, together
with senior management, is involved in the application of risk measurement
methodologies.
The estimation of potential losses arising from adverse changes in market
relationships, known as "value at risk," is a key element in managing market
risk. AMBAC Indemnity has developed a value at risk methodology to estimate
potential losses over a specified holding period and based on certain
probabilistic assessments. AMBAC Indemnity estimates value at risk utilizing
historical short and long term interest rate volatilities and the relationship
between changes in tax-exempt and taxable interest rates calculated on a
consistent daily basis. For the year ended December 31, 1995, AMBAC Indemnity's
value at risk averaged approximately $1,358, calculated at a ninety-nine percent
confidence level. Since no single measure can capture all dimensions of market
risk, AMBAC Indemnity bolsters its value at risk methodology by performing daily
analyses of parallel and nonparallel shifts in yield curves and stress test
scenarios which measure the potential impact of market conditions, however
improbable, which might cause abnormal volatility swings or disruptions of
market relationships.
Liquidity risk relates to the possible inability to satisfy contractual
obligations when due. This risk is present in interest rate swap agreements and
in futures contracts used to hedge those agreements. AMBAC Indemnity manages
liquidity risk by maintaining cash and cash equivalents, closely matching the
dates swap payments are made and received and limiting the amount of risk hedged
by futures contracts.
Operational risk relates to the potential for loss caused by a breakdown in
information, communication and settlement systems. AMBAC Indemnity mitigates
operational risk by maintaining a comprehensive system of internal controls.
This includes the establishment of systems and procedures to monitor
transactions and positions, documentation and confirmation of transactions,
ensuring compliance with regulations and periodic reviews by auditors.
Legal risk relates to the uncertainty of the enforceability, through legal
or judicial processes, of the obligations of AMBAC Indemnity's counterparties,
including contractual provisions intended to reduce credit exposure by providing
for the offsetting or netting of mutual obligations. AMBAC Indemnity seeks to
remove or minimize such uncertainties through continuous consultation with
internal and external legal advisers to analyze and understand the nature of
legal risk, to improve documentation and to strengthen transaction structure.
20
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
The following table summarizes information about AMBAC Indemnity's
financial instruments held for trading purposes as of December 31, 1995 and
1994:
<TABLE>
<CAPTION>
Net Net Average Net Fair Value
Carrying Estimated ----------------------- Notional
Amount Fair Value Assets Liabilities Amount
-------- ---------- ------- ----------- ----------
<S> <C> <C> <C> <C> <C>
1995:
Interest rate
swaps............ $5,207 $5,207 $17,714 $16,667 $2,152,400
Interest rate
futures
contracts........ -- -- -- -- 569,800
1994:
Interest rate
swaps............ $1,681 $1,681 $ 4,441 $ 3,560 $ 771,900
Interest rate
futures
contracts........ -- -- -- -- 443,000
</TABLE>
The aggregate amount of net trading income recognized from interest rate
financial instruments held for trading purposes was $2,602 and $3,051 for 1995
and 1994, respectively. Average net fair values were calculated based on average
daily net fair values. For 1994, average net fair values began from the
commencement of operations in September 1994.
Notional principal amounts are often used to express the volume of these
transactions and do not reflect the extent to which positions may offset one
another. These amounts do not represent the much smaller amounts potentially
subject to risk.
13 LINES OF CREDIT
AMBAC Inc. and AMBAC Indemnity maintain a three-year revolving credit
facility with two major international banks, as co-agents, for $100,000. As of
December 31, 1995, no amounts were outstanding under this credit facility, which
expires in July 1998. This facility amended a one-year revolving credit facility
for $75,000. As of December 31, 1994, no amounts were outstanding under this
credit facility.
AMBAC Indemnity has an agreement with another major international bank, as
agent, for a $300,000 credit facility, expiring in 2002. This facility is a
seven-year stand-by irrevocable limited recourse line of credit, which was
increased from $225,000 to $300,000 and extended for an additional year in
December 1995. The line will provide liquidity to AMBAC Indemnity in the event
claims from municipal obligations exceed specified levels. Repayment of any
amounts drawn under the line will be limited primarily to the amount of any
recoveries of losses related to policy obligations. As of December 31, 1995 and
1994, no amounts were outstanding under this line.
14 RELATED PARTY TRANSACTIONS
During 1995 and 1994, AMBAC Indemnity guaranteed the timely payment of
principal and interest on obligations under municipal investment contracts and
municipal investment repurchase agreements issued by its affiliate, ACMI. As of
December 31, 1995 and 1994, the aggregate amount of municipal investment
contracts and municipal investment repurchase contracts insured was $2,240,959
and $2,042,230, respectively, including accrued interest. These insurance
policies are collateralized by ACMI's investment securities, accrued interest,
securities purchased under agreements to resell and cash and cash equivalents,
which as of December 31, 1995 and 1994 had a fair value of $2,299,687 and
$1,964,830, respectively, in the aggregate.
21
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
During 1995 and 1994, AMBAC Indemnity recorded gross premiums written of $1,707
and $2,692, and net premiums earned of $1,764 and $1,872, respectively, related
to these contracts.
During 1995 and 1994, several interest rate swap transactions were executed
between AFS and ACMI. As of December 31, 1995 and 1994, these contracts had an
outstanding notional amount of approximately $359,000 and $478,000,
respectively. As of December 31, 1995 and 1994, AFS recorded a positive fair
value of $6,539 and a negative fair value of $5,492, respectively, related to
these transactions.
15 SUBSEQUENT EVENTS
On January 19, 1996, AMBAC Inc. filed with the Securities and Exchange
Commission a registration statement related to a proposed offering of 3,781,369
PRIDES'sm' (Provisionally Redeemable Income Debt Exchangeable for Stock). The
PRIDES, which constitute senior debt of AMBAC Inc., will mature in 2001 and will
be mandatorily exchanged at maturity into shares of HCIA common stock (or, at
AMBAC Inc.'s option, cash with an equal value) determined in accordance with an
exchange rate formula. AMBAC Inc. may redeem the PRIDES, in whole or in part,
after three years. AMBAC Inc. has also granted the underwriters an option to
purchase up to 378,136 PRIDES to cover any over-allotments.
AMBAC Indemnity, upon consummation of the PRIDES offering, will deliver to
AMBAC Inc. (in the form of an extraordinary dividend) its 2,378,672 shares of
HCIA common stock, at fair value. The fair value of such dividend will be
determined based on the price per share of HCIA common stock used to price the
PRIDES.
22
<PAGE>
Mortgage and Manufactured Housing Contract Pass-Through
Certificates
Residential Accredit Loans, Inc.
Depositor
The Mortgage and Manufactured Housing Contract Pass-Through Certificates (the
"Certificates") offered hereby may be sold from time to time in series, as
described in the related Prospectus Supplement. Each series of Certificates will
represent in the aggregate the entire beneficial ownership interest, excluding
any interest retained by Residential Accredit Loans, Inc. (the "Company") or any
other entity specified in the related Prospectus Supplement, in a trust fund
consisting primarily of a segregated pool of one- to four-family, residential
first mortgage loans (the "Mortgage Loans"), manufactured housing conditional
sales contracts and installment loan agreements (the "Contracts") or interests
therein (which may include Agency Securities, as defined herein) (collectively
with the Mortgage Loans and Contracts, the "Mortgage Collateral"), acquired by
the Company from one or more affiliated or unaffiliated institutions. See "The
Trust Funds." See "Index of Principal Definitions" for the meanings of
capitalized terms and acronyms.
The Mortgage Collateral and certain other assets described herein under "The
Trust Funds" and in the related Prospectus Supplement will be held in trust
(collectively, a "Trust Fund") for the benefit of the holders of the related
series of Certificates and the Excess Spread, if any, pursuant to a pooling and
servicing agreement (each, a "Pooling and Servicing Agreement") or a trust
agreement (each, a "Trust Agreement") as described herein under "The Trust
Funds" and in the related Prospectus Supplement. Each Trust Fund will consist of
one or more types of the various types of Mortgage Collateral described under
"The Trust Funds." Information regarding each class of Certificates of a series,
and the general characteristics of the Mortgage Collateral to be evidenced by
such Certificates, will be set forth in the related Prospectus Supplement.
Each series of Certificates will include one or more classes. Each class of
Certificates of any series will represent the right, which right may be senior
or subordinate to the rights of one or more of the other classes of the
Certificates, to receive a specified portion of payments of principal or
interest (or both) on the Mortgage Collateral in the related Trust Fund in the
manner described herein and in the related Prospectus Supplement. See
"Description of the Certificates--Distributions." A series may include one or
more classes of Certificates entitled to principal distributions, with
disproportionate, nominal or no interest distributions, or to interest
distributions, with disproportionate, nominal or no principal distributions. A
series may include two or more classes of Certificates which differ as to
NY1-147950.4
6863-1-DM2-07/19/96
<PAGE>
the timing, sequential order, priority of payment, pass-through rate or amount
of distributions of principal or interest or both.
The Company's only obligations with respect to a series of Certificates will be
pursuant to certain limited representations and warranties made by the Company
or as otherwise described in the related Prospectus Supplement. The related
Prospectus Supplement may identify one or more entities as servicers (each, a
"Servicer") for a series of Certificates secured by Mortgage Loans and/or
Contracts or, if specified in the related Prospectus Supplement, an entity may
act as master servicer with respect to the Certificates (the "Master Servicer").
If specified in the related Prospectus Supplement, a series of Certificates may
have a certificate administrator (the "Certificate Administrator") in addition
to, or in lieu of, a Servicer or a Master Servicer. The principal obligations of
a Servicer or the Master Servicer, if any, will be its contractual servicing
obligations (which may include its limited obligation to make certain advances
in the event of delinquencies in payments on the Mortgage Loans or Contracts).
The principal obligations of the Certificate Administrator, if any, will be to
perform certain obligations with respect to the Certificates under the terms of
the Pooling and Servicing Agreement or Trust Agreement, as applicable. See
"Description of the Certificates."
If so specified in the related Prospectus Supplement, the Trust Fund for a
series of Certificates may include any one or any combination of a mortgage pool
insurance policy, letter of credit, bankruptcy bond, special hazard insurance
policy, reserve fund, certificate insurance policy, surety bond or other form of
credit support. In addition to or in lieu of the foregoing, credit enhancement
may be provided by means of subordination. See "Description of Credit
Enhancement."
The rate of payment of principal of each class of Certificates entitled to a
portion of principal payments on the Mortgage Collateral will depend on the
priority of payment of such class and the rate and timing of principal payments
(including prepayments, defaults, liquidations and repurchases) on the Mortgage
Collateral. A rate of principal payment lower or higher than that anticipated
may affect the yield on each class of Certificates in the manner described
herein and in the related Prospectus Supplement. See "Yield Considerations." For
a discussion of significant matters affecting investments in the Certificates,
see "Risk Factors" commencing herein on page 11.
One or more separate elections may be made to treat a Trust Fund as a "real
estate mortgage investment conduit" (a "REMIC") for federal income tax purposes.
The Prospectus Supplement for a series of Certificates will specify which class
or classes of the related series of Certificates will be considered to be
regular interests in the related REMIC and which class of Certificates or other
interests will be designated as the residual interest in the related REMIC, if
applicable. See "Certain Federal Income Tax Consequences."
NY1-147950.4
2
<PAGE>
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON THE
CERTIFICATES. THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF
THE COMPANY, THE MASTER SERVICER, THE CERTIFICATE ADMINISTRATOR, GMAC MORTGAGE
CORPORATION ("GMAC MORTGAGE") OR ANY OF THEIR AFFILIATES. NEITHER THE
CERTIFICATES NOR THE MORTGAGE COLLATERAL WILL BE GUARANTEED OR INSURED BY ANY
GOVERNMENTAL AGENCY OR INSTRUMENTALITY (EXCEPT IN THE CASE OF FHA LOANS, FHA
CONTRACTS, VA LOANS, VA CONTRACTS AND GINNIE MAE SECURITIES) OR BY THE COMPANY,
THE MASTER SERVICER, THE CERTIFICATE ADMINISTRATOR, GMAC MORTGAGE OR ANY OF
THEIR AFFILIATES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Offers of the Certificates may be made through one or more different methods,
including offerings through underwriters, as described under "Methods of
Distribution" and in the related Prospectus Supplement. There will be no
secondary market for any series of Certificates prior to the offering thereof.
There can be no assurance that a secondary market for any of the Certificates
will develop or, if it does develop, that it will continue. The Certificates
will not be listed on any securities exchange.
Retain this Prospectus for future reference. This Prospectus may not be used to
consummate sales of securities offered hereby unless accompanied by a Prospectus
Supplement.
The date of this Prospectus is July __, 1996.
NY1-147950.4 6863-1-DM2-07/19/96
3
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement under
the Securities Act of 1933, as amended, with respect to the Certificates (the
"Registration Statement"). The Company is also subject to certain of the
information requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and, accordingly, will file reports thereunder with the
Commission. The Registration Statement and the exhibits thereto, and reports and
other information filed by the Company pursuant to the Exchange Act can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at certain of
its Regional Offices located as follows: Midwest Regional Office, Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and
Northeast Regional Office, 7 World Trade Center, Suite 1300, New York, New York
10048. Copies of such material can also be obtained from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates.
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 such 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 Company 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 therein.
REPORTS TO CERTIFICATEHOLDERS
Monthly reports which contain information concerning the Trust
Fund for a series of Certificates will be sent by the Master
Servicer or Certificate Administrator, as applicable, to each holder
of record of the Certificates of the related series. See
NY1-147950.4 6863-1-DM2-07/19/96
2
<PAGE>
"Description of the Certificates--Reports to Certificateholders." The Company
will file with the Commission such periodic reports with respect to the Trust
Fund for a series of Certificates as are required under the Exchange Act, and
the rules and regulations of the Commission thereunder.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
With respect to each series of Certificates offered hereby, there are
incorporated herein and in the related Prospectus Supplement by reference all
documents and reports filed or caused to be filed by the Company pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the termination
of the offering of the related series of Certificates, that relate specifically
to such related series of Certificates. The Company will provide or cause to be
provided without charge to each person to whom this Prospectus and related
Prospectus Supplement is delivered in connection with the offering of one or
more classes of such series of Certificates, upon written or oral request of
such person, a copy of any or all such reports incorporated herein by reference,
in each case to the extent such reports relate to one or more of such classes of
such series of Certificates, other than the exhibits to such documents, unless
such exhibits are specifically incorporated by reference in such documents.
Requests should be directed in writing to Residential Accredit Loans, Inc., 8400
Normandale Lake Boulevard, Suite 700, Minnesota 55437, or by telephone at (612)
832-7000.
NY1-147950.4 6863-1-DM2-07/19/96
3
<PAGE>
No dealer, salesman, or any other person has been authorized to give any
information, or to make any representations, other than those contained in this
Prospectus or the related Prospectus Supplement and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company or any dealer, salesman, or any other person. Neither the
delivery of this Prospectus or the related Prospectus Supplement nor any sale
made hereunder or thereunder shall under any circumstances create an implication
that there has been no change in the information herein or therein since the
date hereof. This Prospectus and the related Prospectus Supplement are not an
offer to sell or a solicitation of an offer to buy any security in any
jurisdiction in which it is unlawful to make such offer or solicitation.
TABLE OF CONTENTS
Caption
Page
ADDITIONAL INFORMATION..........................2
REPORTS TO CERTIFICATEHOLDERS...................2
INCORPORATION OF CERTAIN INFORMATION
BY REFERENCE....................................2
SUMMARY OF PROSPECTUS...........................4
RISK FACTORS...................................11
Special Features of the Mortgage Collateral....11
Yield and Prepayment Considerations............12
Limited Representations and Warranties.........12
Limited Liquidity..............................12
Limited Obligations............................13
Limitations, Reduction and Substitution of
Credit
Enhancement....................................13
THE TRUST FUNDS................................14
General........................................14
The Mortgage Loans.............................15
The Contracts..................................20
The Agency Securities..........................21
Mortgage Collateral Sellers....................22
Representations with Respect to Mortgage
Collateral.....................................23
Repurchases of Mortgage Collateral.............24
Limited Right of Substitution..................25
DESCRIPTION OF THE CERTIFICATES................26
General........................................26
Form of Certificates...........................27
Assignment of Mortgage Loans...................29
Assignment of Contracts........................30
Review of Mortgage Loan or Contract Documents..30
Assignment of Agency Securities................31
Spread.........................................31
Payments on Mortgage Collateral................31
Withdrawals from the Custodial Account.........33
Distributions..................................34
Advances.......................................37
Prepayment Interest Shortfalls.................38
Reports to Certificateholders..................38
Servicing and Administration of Mortgage
Collateral.......................................
Realization Upon Defaulted Property............43
SUBORDINATION..................................45
DESCRIPTION OF CREDIT ENHANCEMENT..............46
General........................................46
Letters of Credit..............................47
Mortgage Pool Insurance Policies...............47
Special Hazard Insurance Policies..............49
Bankruptcy Bonds...............................50
Reserve Funds..................................50
Certificate Insurance Policies.................51
Caption
Page
Surety Bonds.................................51
Maintenance of Credit Enhancement............51
Reduction or Substitution of Credit
Enhancement..................................52
INSURANCE POLICIES ON MORTGAGE LOANS
OR CONTRACTS.................................53
Primary Mortgage Insurance Policies..........53
Standard Hazard Insurance on Mortgaged
Properties...................................54
Standard Hazard Insurance on Manufactured
Homes........................................55
FHA Mortgage Insurance.......................55
VA Mortgage Guaranty.........................55
THE COMPANY..................................56
RESIDENTIAL FUNDING CORPORATION..............56
THE POOLING AND SERVICING AGREEMENT..........56
Servicing and Administration.................57
Events of Default............................57
Rights Upon Event of Default.................57
Amendment....................................58
Termination; Retirement of Certificates......59
The Trustee..................................60
YIELD CONSIDERATIONS.........................60
MATURITY AND PREPAYMENT
CONSIDERATIONS...............................63
CERTAIN LEGAL ASPECTS OF MORTGAGE
LOANS AND CONTRACTS..........................65
The Mortgage Loans...........................66
The Contracts................................73
Environmental Legislation....................75
Soldiers' and Sailors' Civil Relief Act of
1940.........................................76
Default Interest and Limitations on
Prepayments..................................76
Forfeitures in Drug and RICO Proceedings.....76
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES.................................77
General......................................77
REMICs.......................................78
STATE AND OTHER TAX CONSEQUENCES.............93
ERISA CONSIDERATIONS.........................94
Plan Asset Regulations.......................94
Prohibited Transaction Exemption.............95
Tax-Exempt Investors.........................97
Consultation with Counsel....................97
LEGAL INVESTMENT MATTERS.....................97
USE OF PROCEEDS..............................98
METHODS OF DISTRIBUTION......................99
LEGAL MATTERS...............................100
FINANCIAL INFORMATION.......................100
INDEX OF PRINCIPAL DEFINITIONS..............101
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to each series of Certificates contained in the
Prospectus Supplement to be prepared and delivered in connection with the
offering of such series. Capitalized terms used in this summary that are not
otherwise defined shall have the meanings ascribed thereto in this Prospectus.
An index indicating where certain terms used herein are defined appears at the
end of this Prospectus.
Securities Offered............................... Mortgage and Manufactured
Housing Contract Pass-Through Certificates.
Company.......................................... Residential Accredit
Loans, Inc. See "The Company."
.................................................
Servicer or Master Servicer..................... The related Prospectus
Supplement may identify one or more entities as Servicers for a series of
Certificates evidencing interests in Mortgage Loans or Contracts and/or an
entity may act as Master Servicer. The Master Servicer may be Residential
Funding Corporation, an affiliate of the Company ("Residential Funding"). See
"Residential Funding Corporation" and "Description of the
Certificates--Servicing and Administration of Mortgage Collateral."
.................................................
Certificate Administrator........................ An entity may be named as
the Certificate Administrator in the related Prospectus Supplement, if required
in addition to or in lieu of the Master Servicer or Servicer for a series of
Certificates. The Certificate Administrator may be Residential Funding. See
"Residential Funding Corporation" and "Description of the
Certificates--Servicing and Administration of Mortgage Collateral."
.................................................
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Trustee.......................................... The Trustee for each
series of Certificates will be specified in the related Prospectus Supplement.
.................................................
Certificates..................................... Each series of
Certificates will represent in the aggregate the entire beneficial ownership
interest, excluding any interest retained by the Company or any other entity
specified in the related Prospectus Supplement, in a Trust Fund consisting
primarily of the Mortgage Collateral acquired by the Company from one or more
affiliated or unaffiliated institutions. Each series of Certificates will be
issued pursuant to a Pooling and Servicing Agreement or a Trust Agreement among
the Company, the Trustee and one or more of any Servicer, the Master Servicer
and the Certificate Administrator.
.................................................
................................................. As specified in the
related Prospectus Supplement, each series of Certificates, or class of
Certificates in the case of a series consisting of two or more classes, may have
a stated principal balance, no stated principal balance or a notional amount and
may be entitled to distributions of interest based on a specified interest rate
or rates (each, a "Pass-Through Rate"). Each series or class of Certificates may
have a different Pass- Through Rate, which may be a fixed, variable or
adjustable Pass-Through Rate, or any combination of two or more of such
Pass-Through Rates. The related Prospectus Supplement will specify the
Pass-Through Rate or Rates for each series or class of Certificates, or the
initial Pass-Through Rate
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or Rates and the method for determining subsequent changes to the
Pass-Through Rate or Rates.
.................................................
................................................. A series may include one
or more classes of Certificates (each, a "Strip Certificate") entitled to (i)
principal distributions, with disproportionate, nominal or no interest
distributions, or (ii) interest distributions, with disproportionate, nominal or
no principal distributions. In addition, a series may include classes of
Certificates which differ as to timing, sequential order, priority of payment,
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, or on the basis of collections from designated portions of the Trust
Fund. In addition, a series may include one or more classes of Certificates
("Accrual Certificates"), as to which certain accrued interest will not be
distributed but rather will be added to the principal balance thereof in the
manner described in the related Prospectus Supplement. One or more classes of
Certificates in a series may be entitled to receive principal payments pursuant
to an amortization schedule under the circumstances described in the related
Prospectus Supplement.
.................................................
................................................. If so specified in the
related Prospectus Supplement, a series of Certificates may include one or more
classes of Certificates
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(collectively, the "Senior Certificates") which are senior to one or more
classes of Certificates (collectively, the "Subordinate Certificates") in
respect of certain distributions of principal and interest and allocations of
losses on the Mortgage Collateral. See "Subordination." If so specified in the
related Prospectus Supplement, a series of Certificates may include one or more
classes of Certificates (collectively, the "Mezzanine Certificates") which are
Subordinate Certificates but which are senior to other classes of Subordinate
Certificates in respect of such distributions or losses. In addition, certain
classes of Senior Certificates may be senior to other classes of Senior
Certificates in respect of such distributions or losses. The Certificates will
be issued in fully-registered certificated or book-entry form in the authorized
denominations specified in the related Prospectus Supplement. See "Description
of the Certificates."
.................................................
................................................. Neither the Certificates
nor the underlying Mortgage Collateral will be guaranteed or insured by any
governmental agency or instrumentality (except in the case of FHA Loans, FHA
Contracts, VA Loans, VA Contracts and Ginnie Mae Securities) or by the Company,
the Master Servicer, any Servicer, the Mortgage Collateral Seller, the
Certificate Administrator, GMAC Mortgage or any of their affiliates. See "Risk
Factors--Limited Obligations."
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Interest Distributions........................... Except as otherwise
specified herein or in the related Prospectus Supplement, interest on each class
of Certificates of each series, other than Strip Certificates or Accrual
Certificates (prior to the time when accrued interest becomes payable thereon),
will be remitted at the applicable Pass-Through Rate on the outstanding
principal balance of such class, on the 25th day (or, if such day is not a
business day, the next business day) of each month, commencing with the month
following the month in which the Cut-off Date (as defined in the applicable
Prospectus Supplement) occurs (each, a "Distribution Date"). If the Prospectus
Supplement so specifies, interest distributions on any class of Certificates may
be reduced on account of negative amortization on the Mortgage Collateral, with
the Deferred Interest (as defined herein) allocable to such class added to the
principal balance thereof, which Deferred Interest will thereafter bear interest
at the applicable Pass-Through Rate. Distributions, if any, with respect to
interest on Strip Certificates will be made on each Distribution Date as
described herein and in the related Prospectus Supplement. See "Description of
the Certificates--Distributions." Strip Certificates that are entitled to
distributions of principal only will not receive distributions in respect of
interest. Interest that has accrued but is not yet payable on any Accrual
Certificates will be added to the principal balance of such class on the
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<PAGE>
related Distribution Date, and will thereafter bear interest at the
applicable Pass-Through Rate. Unless otherwise specified in the related
Prospectus Supplement, distributions of interest with respect to any series of
Certificates (or accruals thereof in the case of Accrual Certificates), or with
respect to one or more classes included therein, may be reduced to the extent of
interest shortfalls not covered by advances or the applicable form of credit
support, including any Prepayment Interest Shortfalls. See "Description of the
Certificates" and "Maturity and Prepayment Considerations."
.................................................
Principal Distributions.......................... Except as otherwise
specified in the related Prospectus Supplement, principal distributions on the
Certificates of each series will be payable on each Distribution Date,
commencing with the Distribution Date in the month following the month in which
the Cut-off Date occurs, to the holders of the Certificates of such series, or
of the class or classes of Certificates then entitled thereto, on a pro rata
basis among all such Certificates or among the Certificates of any such class,
in proportion to their respective outstanding principal balances or the
percentage interests represented by such class, in the priority and manner
specified in the related Prospectus Supplement. Strip Certificates with no
principal balance will not receive distributions in respect of principal.
Distributions of principal with respect to any
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<PAGE>
class of Certificates may be reduced to the extent of certain delinquencies
not covered by advances or losses not covered by the applicable form of credit
enhancement. See "The Trust Funds," "Maturity and Prepayment Considerations" and
"Description of the Certificates."
.................................................
Trust Fund....................................... The Trust Fund for a
series of Certificates will consist primarily of Mortgage Loans, Contracts,
whole or partial participations in Mortgage Loans or Contracts and/or Agency
Securities, together with certain accounts, reserve funds, insurance policies
and related agreements specified in the related Prospectus Supplement. The Trust
Fund for a series of Certificates will also include the Certificate Account and
a Collection Account, if applicable, and may include various forms of credit
enhancement, all as specified in the related Prospectus Supplement. See "The
Trust Funds" and "Description of Credit Enhancement."
.................................................
................................................. The Mortgage Collateral
will be purchased by the Company directly or indirectly (through Residential
Funding or other affiliates) from affiliates, including GMAC Mortgage
Corporation of PA and Homecomings Financial Network, Inc., or directly or
indirectly from sellers unaffiliated with the Company (each, a "Mortgage
Collateral Seller"). See "The Trust Funds--Mortgage Collateral Sellers."
.................................................
Mortgage Loans................................... The Trust Fund for a
series of Certificates may include a pool
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<PAGE>
of Mortgage Loans, or whole or partial participations in Mortgage Loans (a
"Mortgage Pool"), secured by first liens on one- to four-family residential
properties (each, a "Mortgaged Property"). Such Mortgage Loans may, as specified
in the related Prospectus Supplement, include conventional loans, FHA Loans, VA
Loans, Balloon Loans, GPM Loans, Buy-Down Loans, BiWeekly Loans or Mortgage
Loans having other special payment features, as described herein and in the
related Prospectus Supplement. See "The Trust Funds--The Mortgage Loans." The
Mortgage Loans may have fixed or adjustable interest rates. A Mortgage Pool may
include Mortgage Loans that have been modified prior to their inclusion in a
Trust Fund. The Mortgage Loans may include either (i) Mortgage Loans secured by
mortgages, deeds of trust or other security instruments creating a first lien on
the Mortgaged Properties or (ii) loans secured by an assignment by the borrower
of a security interest in shares issued by a private cooperative housing
corporation and the related proprietary lease or occupancy agreement on a
cooperative dwelling ("Cooperative Loans"). The Mortgaged Properties may be
owner occupied or non-owner occupied and may include vacation and second homes
and investment properties. The borrowers of the Mortgage Loans (the
"Mortgagors") may include United States citizens employed abroad, non-permanent
resident aliens employed in the United States and persons who are citizens and
residents of a
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<PAGE>
country other than the United States, including foreign corporations formed
for the purpose of owning real estate (collectively, "International Borrowers").
See "The Trust Funds--The Mortgage Loans."
.................................................
Contracts........................................ The Trust Fund for a
series of Certificates may include a pool of Contracts, or whole or partial
participations in Contracts (a "Contract Pool") originated by one or more
manufactured housing dealers, or such other entity or entities described in the
related Prospectus Supplement. The Contracts may be conventional manufactured
housing contracts or contracts insured by the FHA or partially guaranteed by the
VA. Each Contract will be secured by a manufactured home (each, a "Manufactured
Home," which shall also be included in the term "Mortgaged Property").
Generally, the Contracts will be fully-amortizing and will bear interest at a
fixed rate unless otherwise specified in the related Prospectus Supplement. See
"The Trust Funds--The Contracts."
.................................................
Agency Securities................................ The Trust Fund for a
series of Certificates may include a pool of Freddie Mac Securities, Fannie Mae
Securities or Ginnie Mae Securities (collectively, the "Agency Securities"), or
a combination of Agency Securities. Such Agency Securities may represent whole
or partial interests in pools of (i) Mortgage Loans or Contracts or (ii) Agency
Securities. Unless otherwise set forth in the related Prospectus Supplement, all
Ginnie Mae Securities will be
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<PAGE>
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
Mortgage Loans or Contracts specified in the related Prospectus Supplement. See
"The Trust Funds--The Agency Securities."
.................................................
Yield and Prepayment Considerations.............. The Mortgage Collateral
supporting a series of Certificates will have unique characterist ics that will
affect the yield to maturity and the rate of payment of principal on such
Certificates . See "Yield Consideratio ns" and "Maturity and Prepayment
Consideratio ns" herein and in the related Prospectus Supplement.
.................................................
Credit Enhancement............................... If so specified in the
related Prospectus Supplement, the Trust Fund with respect to any series of
Certificates may include any one or any
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<PAGE>
combination of a letter of credit, mortgage pool insurance policy, special
hazard insurance policy, bankruptcy bond, reserve fund, certificate insurance
policy, surety bond or other type of credit support to provide partial coverage
for certain defaults and losses relating to the Mortgage Loans. Credit support
also may be provided in the form of subordination of one or more classes of
Certificates in a series under which losses are first allocated to any
Subordinate Certificates up to a specified limit or in the form of
Overcollateralization. Any form of credit enhancement typically will have
certain limitations and exclusions from coverage thereunder, which will be
described in the related Prospectus Supplement. Losses not covered by any form
of credit enhancement will be borne by the holders of the related Certificates
(or certain classes thereof). To the extent not set forth herein, the amount and
types of coverage, the identification of any entity providing the coverage, the
terms of any subordination and related information will be set forth in the
Prospectus Supplement relating to a series of Certificates. See "Description of
Credit Enhancement" and "Subordination."
Advances......................................... Unless otherwise
specified in the related Prospectus Supplement, the Master Servicer (or, if
there is no Master Servicer for such series, the related Servicer) will be
obligated to make certain advances with respect to delinquent scheduled payments
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<PAGE>
on the Mortgage Loans or Contracts, but only to the extent that the Master
Servicer or Servicer believes that such amounts will be recoverable by it. Any
advance made by the Master Servicer or a Servicer with respect to a Mortgage
Loan or a Contract is recoverable by it as provided herein under "Description of
the Certificates--Advances" either from recoveries on the specific Mortgage Loan
or Contract or, with respect to any advance subsequently determined to be
nonrecoverable, out of funds otherwise distributable to the holders of the
related series of Certificates.
.................................................
Optional Termination............................. The Master Servicer, the
Certificate Administrator, the Company, a Servicer or, if specified in the
related Prospectus Supplement, the holder of the residual interest in a REMIC
may at its option either (i) effect early retirement of a series of Certificates
through the purchase of the assets in the related Trust Fund or (ii) purchase,
in whole but not in part, the Certificates specified in the related Prospectus
Supplement; in each case under the circumstances and in the manner set forth
herein under "The Pooling and Servicing Agreement--Termination; Retirement of
Certificates" and in the related Prospectus Supplement.
.................................................
Rating........................................... At the date of issuance,
as to each series, each class of Certificates offered hereby will be rated, at
the request of the Company, in one of the four highest rating categories
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by one or more nationally recognized statistical rating agencies (each, a
"Rating Agency"). See "Ratings" in the related Prospectus Supplement.
.................................................
Legal Investment................................. Unless otherwise
specified in the related Prospectus Supplement, each class of Certificates
offered hereby and by the related Prospectus Supplement that is rated in one of
the two highest rating categories by at least one Rating Agency will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984, as amended ("SMMEA"), for so long as it sustains such a
rating. See "Legal Investment Matters."
.................................................
ERISA Considerations............................. A fiduciary of an
employee benefit plan and certain other plans and arrangements, including
individual retirement accounts and annuities, Keogh plans, and collective
investment funds, insurance company general or separate accounts and certain
other entities in which such plans, accounts, annuities or arrangements are
invested, which is subject to the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or Section 4975 of the Internal Revenue Code of 1986
(the "Code"), and any other person contemplating purchasing a Certificate with
Plan Assets (as defined herein), should carefully review with its legal counsel
whether the purchase or holding of Certificates could give rise to a transaction
that is prohibited or is not otherwise permissible either under ERISA or Section
4975 of the Code.
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See "ERISA Considerations" herein and in the related Prospectus Supplement.
.................................................
Certain Federal Income Tax Consequences.......... Certificates of each
series offered hereby will constitute "regular interests" or "residual
interests" in a Trust Fund, or a portion thereof, treated as a REMIC under
Sections 860A through 860G of the Code, unless otherwise specified in the
related Prospectus
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<PAGE>
Supplement. See "Certain Federal Income Tax Consequences " herein and in the
related Prospectus Supplement.
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RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Certificates:
Special Features of the Mortgage Collateral
The primary assets underlying a series of Certificates will be the Mortgage
Loans or Contracts (or interests therein) in the related Trust Fund or the
Mortgage Loans or Contracts that underlie the Agency Securities in a Trust Fund.
Defaults on mortgage loans and contracts may occur because of changes in the
economic status of the related borrower or because of increases in the monthly
payment for such mortgage loan or contract or decreases in the related
borrower's equity in the related Mortgaged Property. Losses upon the foreclosure
of a mortgage loan or contract may occur because the value of the related
Mortgaged Property is insufficient to recover the outstanding principal balance
of the mortgage loan or contract. Factors which may affect the value of the
related Mortgaged Property include declines in real estate values and adverse
economic conditions either generally or in the particular geographic area in
which the related Mortgaged Property is located. See "Yield Considerations."
Losses may also result from fraud in the origination of a mortgage loan or
contract.
Mortgage Loans or Contracts may have been originated using underwriting
standards that are less stringent than the underwriting standards applied by
other first mortgage loan purchase programs such as those run by Fannie Mae or
Freddie Mac or by the Company's affiliate, Residential Funding, for the purpose
of collateralizing securities issued by Residential Funding Mortgage Securities
I, Inc. For example, Mortgage Loans or Contracts in a Trust Fund may present a
greater risk of loss than such other lending programs due to the inclusion of
Mortgage Loans with higher Loan-to-Value Ratios and Mortgage Loans with
Loan-to-Value Ratios over 80% that do not require primary mortgage insurance.
Mortgage Loans secured by investment properties may present a greater risk of
loss because a borrower experiencing financial difficulties may be more likely
to default on an investment property than a primary residence. Mortgage Loans
made to Mortgagors who reside outside of the United States or are non-United
States citizens may present a greater risk of loss because of the difficulty of
verifying income, assets and employment and, in the case of a foreclosure,
locating and serving the borrowers. Mortgage Loans that are secured by mortgaged
properties, a higher percentage of the value of which is represented by land,
may present a greater risk of loss because of delays in liquidation due to the
narrower market for such properties, difficulties in disposing of such
properties and wider fluctuations in the market value for such properties. See
"The Trust Funds--The Mortgage Loans--Underwriting Policies" and "Certain Legal
Aspects of the Mortgage Loans and Contracts."
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Mortgage Loans or Contracts may have been originated one or more years
prior to the Closing Date for the related Certificates. Such seasoned Mortgage
Collateral may have higher current loan-to-value ratios than at origination if
the value of the related Mortgaged Property has declined. No assurance can be
given that values of the Mortgaged Properties have remained or will remain at
the levels existing on the dates of origination of the related Mortgage Loans or
Contracts. If a residential real estate market should experience an overall
decline in property values, or if the Mortgagors on such seasoned Mortgage
Collateral have lower incomes or poorer credit histories than at the time of
origination of the related Mortgage Loan or Contract, the actual rates of
delinquencies, foreclosures and losses could be higher than the rates otherwise
expected by an investor in the Certificates.
In addition, in the case of Mortgage Loans or Contracts that are subject to
negative amortization due to the addition to the related principal balance of
Deferred Interest, the principal balances of such Mortgage Loans or Contracts
could be increased to an amount equal to or in excess of the value of the
underlying Mortgaged Properties, thereby increasing the likelihood of default by
the Mortgagors which may result in losses on such Mortgage Loans or Contracts.
Certain other Mortgage Loans or Contracts may provide for escalating or variable
payments by the Mortgagor, as to which the Mortgagor is generally qualified on
the basis of the initial payment amount. Some of the Mortgage Loans or Contracts
may be Balloon Loans and the ability of a Mortgagor to pay the related Balloon
Amount may depend on the Mortgagor's ability to refinance the Mortgage Loan or
Contract. In some instances, the Mortgagors may not be able to make their loan
payments as such payments increase and thus the likelihood of default will
increase.
In addition to the foregoing, from time to time certain geographic regions
will experience weaker regional economic conditions and housing markets and,
consequently, may experience higher rates of loss and delinquency than will be
experienced on mortgage loans or contracts generally. For example, a region's
economic condition and housing market may be directly, or indirectly, adversely
affected by natural disasters or civil disturbances such as earthquakes,
hurricanes, floods, eruptions or riots. The economic impact of any of these
types of events may also be felt in areas beyond the region immediately affected
by the disaster or disturbance. The Mortgage Loans or Contracts in the Trust
Fund for a series of Certificates may be concentrated in these regions, and such
concentration may present risks in addition to those generally present for
similar mortgage-backed securities without such concentration.
To the extent that losses on any item of Mortgage Collateral are not
covered by any credit enhancement, the related Certificateholders (or specific
classes thereof) will bear all risk of loss resulting from default by the
Mortgagors, and will have to
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look primarily to the value of the Mortgaged Properties for recovery of the
outstanding principal and unpaid interest on the defaulted Mortgage Loans or
Contracts. Specific risks, if any, associated with the Mortgage Collateral
underlying a particular series of Certificates will be discussed in the related
Prospectus Supplement. See "Risk Factors," if any, in the related Prospectus
Supplement.
Yield and Prepayment Considerations
The yield to maturity of the Certificates of each series will depend on the
rate and timing of principal payments (including prepayments, liquidations due
to defaults, and repurchases due to conversion of ARM Loans to fixed interest
rate loans or breaches of representations and warranties) on the Mortgage Loans
or Contracts and the price paid by Certificateholders. Such yield may be
adversely affected by a higher or lower than anticipated rate of prepayments on
the related Mortgage Collateral. The yield to maturity on Strip Certificates
will be extremely sensitive to the rate of prepayments on the related Mortgage
Collateral. In addition, the yield to maturity on certain other types of classes
of Certificates, including Accrual Certificates, Certificates with a
Pass-Through Rate that fluctuates inversely with an index or certain other
classes, may be relatively more sensitive to the rate of prepayment on the
related Mortgage Collateral than other classes of Certificates. Prepayments are
influenced by a number of factors, including prevailing mortgage market interest
rates, local and regional economic conditions and homeowner mobility. See "Yield
Considerations" and "Maturity and Prepayment Considerations."
Limited Representations and Warranties
Certain Mortgage Collateral Sellers may make more limited representations
and warranties with respect to the Mortgage Loans or Contracts that have been
acquired by the Company than would be required by Fannie Mae or Freddie Mac in
connection with their first mortgage loan purchase programs. In addition, any
item of Mortgage Collateral for which a breach of a representation or warranty
exists will remain in the related Trust Fund in the event that a Mortgage
Collateral Seller is unable, or disputes its obligation, to repurchase such
Mortgage Collateral and such a breach does not also constitute a breach of a
representation made by Residential Funding, the Company or the Master Servicer.
In either event, any resulting losses will be borne by the related form of
credit enhancement, to the extent available, and otherwise by the holders of one
or more classes of Certificates. See "The Trust Funds--Representations with
Respect to Mortgage Collateral."
Limited Liquidity
There can be no assurance that a secondary market for the Certificates of
any series will develop or, if it does develop, that it will provide
Certificateholders with liquidity of investment or
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that it will continue for the life of the Certificates of any series. The
Prospectus Supplement for any series of Certificates may indicate that an
underwriter specified therein intends to establish a secondary market in such
Certificates, however no underwriter will be obligated to do so. The
Certificates will not be listed on any securities exchange.
Limited Obligations
The Certificates will not represent an interest in or obligation of the
Company, the Master Servicer, any Servicer, the Mortgage Collateral Seller, the
Certificate Administrator, GMAC Mortgage or any of their affiliates. The only
obligations of the foregoing entities with respect to the Certificates or any
Mortgage Collateral will be the obligations (if any) of the Company, the related
Servicer, if applicable, the Mortgage Collateral Seller, and the Master Servicer
pursuant to certain limited representations and warranties made with respect to
the Mortgage Collateral, the Master Servicer's or the applicable Servicer's
servicing obligations under the related Pooling and Servicing Agreement
(including such entity's limited obligation to make certain Advances) and
pursuant to the terms of any Agency Securities, the Certificate Administrator's
(if any) administrative obligations under the Pooling and Servicing Agreement or
the Trust Agreement, and, if and to the extent expressly described in the
related Prospectus Supplement, certain limited obligations of the Master
Servicer or the related Servicer in connection with an agreement to purchase a
Convertible Mortgage Loan upon conversion to a fixed rate. Neither the
Certificates nor the underlying Mortgage Collateral will be guaranteed or
insured by any governmental agency or instrumentality (except in the case of FHA
Loans, FHA Contracts, VA Loans, VA Contracts or Ginnie Mae Securities), or by
the Company, the Master Servicer, any Servicer, the Mortgage Collateral Seller,
the Certificate Administrator, GMAC Mortgage or any of their affiliates.
Proceeds of the assets included in the related Trust Fund (including the
Mortgage Collateral and any form of credit enhancement) will be the sole source
of payments on the Certificates, and there will be no recourse to the Company,
the Master Servicer, any Servicer, the Mortgage Collateral Seller, the
Certificate Administrator, GMAC Mortgage or any other entity in the event that
such proceeds are insufficient or otherwise unavailable to make all payments
provided for under the Certificates.
Limitations, Reduction and Substitution of Credit Enhancement
With respect to each series of Certificates, credit enhancement may be
provided in limited amounts to cover certain types of losses on the underlying
Mortgage Collateral. Credit enhancement will be provided in one or more of the
forms referred to herein, including, but not limited to: subordination of other
classes of Certificates of the same series; a Letter of Credit; a Mortgage Pool
Insurance Policy; a Special Hazard Insurance Policy; a Bankruptcy Bond; a
Reserve Fund; a Certificate Insurance Policy; a Surety Bond;
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Overcollateralization; or any combination thereof. See "Subordination" and
"Description of Credit Enhancement" herein. Regardless of the form of credit
enhancement provided, the amount of coverage will be limited in amount and in
most cases will be subject to periodic reduction in accordance with a schedule
or formula. Furthermore, such credit enhancement may provide only very limited
coverage as to certain types of losses or risks, and may provide no coverage as
to certain other types of losses or risks. In the event losses exceed the amount
of coverage provided by any credit enhancement or losses of a type not covered
by any credit enhancement occur, such losses will be borne by the holders of the
related Certificates (or certain classes thereof). The Master Servicer or the
Certificate Administrator, as applicable, will generally be permitted to reduce,
terminate or substitute all or a portion of the credit enhancement for any
series of Certificates, if each Rating Agency maintaining a rating on such
Certificates indicates that the then-current rating thereof will not be
adversely affected. The rating of any series of Certificates by any Rating
Agency may be lowered following the initial issuance thereof as a result of the
downgrading of the obligations of any applicable credit support provider, or as
a result of losses on the related Mortgage Collateral in excess of the levels
contemplated by such Rating Agency at the time of its initial rating analysis.
None of the Company, the Master Servicer, any Servicer, the Mortgage Collateral
Seller, the Certificate Administrator, GMAC Mortgage or any of their affiliates
will have any obligation to replace or supplement any credit enhancement, or to
take any other action to maintain any rating of any series of Certificates. See
"Description of Credit Enhancement--Reduction or Substitution of Credit
Enhancement."
THE TRUST FUNDS
General
A Trust Fund for a series of Certificates may include Mortgage Collateral
that consists of one or more of the following: (1) Mortgage Loans, or whole or
partial participations in Mortgage Loans, which are one- to four-family
residential mortgage loans, including loans secured by shares of cooperative
housing corporations and proprietary leases for cooperative apartment units, (2)
Contracts, or whole or partial participations in Contracts; (3) Agency
Securities which are mortgage pass-through certificates (including those
representing whole or partial interests in pools of Mortgage Loans, Contracts or
Agency Securities (a) guaranteed and/or issued by the Government National
Mortgage Association ("Ginnie Mae" and such securities, "Ginnie Mae
Securities"), (b) issued by the Federal Home Loan Mortgage Corporation ("Freddie
Mac" and such securities, "Freddie Mac Securities") or (c) issued by the Federal
National Mortgage Association ("Fannie Mae" and such securities, "Fannie Mae
Securities"); and (4) certain other related property conveyed by the Company.
Each Trust Fund may also include (i) the
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amounts required to be held from time to time in a trust account (the
"Certificate Account"), into which payments in respect of the Mortgage
Collateral may be deposited, maintained by the Master Servicer, a Servicer, the
Trustee or the Certificate Administrator, as the case may be, pursuant to the
Pooling and Servicing Agreement or Trust Agreement, (ii) if so specified in the
related Prospectus Supplement, a trust account (the "Custodial Account") into
which amounts to be deposited in the Certificate Account may be deposited on a
periodic basis prior to deposit in the Certificate Account, (iii) any Mortgaged
Property which initially secured a Mortgage Loan or Contract and that is
acquired by foreclosure or deed in lieu of foreclosure and (iv) if so specified
in the related Prospectus Supplement, one or more other cash accounts, insurance
policies or other forms of credit enhancement with respect to the Certificates,
the Mortgage Collateral or all or any part of the Trust Fund, required to be
maintained pursuant to the related Pooling and Servicing Agreement or Trust
Agreement. See "Description of Credit Enhancement."
Each Certificate will evidence the interest specified in the related
Prospectus Supplement in a Trust Fund, containing a Mortgage Pool, a Contract
Pool or a pool of Agency Securities (an "Agency Securities Pool") having the
aggregate principal balance as of the date (the "Cut-off Date") specified in the
related Prospectus Supplement. Certificateholders of a series will have
interests only in such Mortgage Pool, Contract Pool or Agency Securities Pool
and will have no interest in the Mortgage Pool, Contract Pool or Agency
Securities Pool created with respect to any other series of Certificates.
The related Prospectus Supplement may identify one or more entities as
Servicers for a series of Certificates evidencing interests in Mortgage Loans or
Contracts or, if so provided in the related Prospectus Supplement, an entity may
act as Master Servicer with respect to a series of Certificates. The Master
Servicer or any Servicer, as applicable, may service the Mortgage Loans or
Contracts through one or more Sub-Servicers. See "Description of the
Certificates-Servicing and Administration of Mortgage Collateral." In addition
to or in lieu of the Master Servicer or Servicer for a series of Certificates,
the related Prospectus Supplement may identify a Certificate Administrator for
the Trust Fund. The related Prospectus Supplement will identify an entity that
will serve as trustee (the "Trustee") for a series of Certificates. The Trustee
will be authorized to appoint a custodian (a "Custodian") pursuant to a
custodial agreement to maintain possession of and review documents relating to
the Mortgage Collateral as the agent of the Trustee. The identity of such
Custodian, if any, will be set forth in the related Prospectus Supplement.
The following is a brief description of the Mortgage Collateral expected to
be included in the Trust Funds. If specific information respecting the Mortgage
Collateral is not known to the Company at
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the time Certificates are initially offered, more general information of the
nature described below will be provided in the Prospectus Supplement, and
specific information will be set forth in a Current Report on Form 8-K (a "Form
8-K") to be filed with the Securities and Exchange Commission (the "Commission")
within fifteen days after the initial issuance of such Certificates. A copy of
the Pooling and Servicing Agreement or Trust Agreement, as applicable, with
respect to each series will be an exhibit to the Form 8-K. A schedule of
Mortgage Collateral will be an exhibit to the related Pooling and Servicing
Agreement or Trust Agreement.
The Mortgage Loans
Unless otherwise stated in the related Prospectus Supplement, the Mortgage
Loans included in a Trust Fund for a series will have been originated by or on
behalf of either (i) savings and loan associations, savings banks, commercial
banks, credit unions, insurance companies or similar institutions which are
supervised and/or examined by a federal or state authority, or (ii) HUD-approved
mortgagees. Each Mortgage Loan will be selected by the Company for inclusion in
a Mortgage Pool from those purchased by the Company from Affiliated Sellers or,
either directly or through its affiliates, including Homecomings Financial
Network, Inc., GMAC Mortgage and Residential Funding, from Unaffiliated Sellers,
all as described in the related Prospectus Supplement. If a Mortgage Pool is
composed of Mortgage Loans acquired by the Company directly from Unaffiliated
Sellers, the related Prospectus Supplement will specify the extent of Mortgage
Loans so acquired. The characteristics of the Mortgage Loans will be as
described in the related Prospectus Supplement. The Mortgage Loans purchased by
the Company from a Mortgage Collateral Seller will be selected by the Company.
Other mortgage loans available for purchase by the Company may have had
characteristics that would have made them eligible for inclusion in a Mortgage
Pool, but were not selected by the Company for inclusion in such Mortgage Pool.
If so stated in the related Prospectus Supplement, all or a portion of the
Mortgage Loans that underlie a series of Certificates may have been purchased by
the Company, either directly, or indirectly through Residential Funding or other
affiliates, from Mortgage Collateral Sellers under Residential Funding's
Expanded Criteria Loan Program (the "Program") as described below (such Mortgage
Loans, the "Program Loans").
The Mortgage Loans may include mortgage loans insured by the Federal
Housing Administration (the "FHA" and such loans, "FHA Loans"), a division of
the United States Department of Housing and Urban Development ("HUD"), mortgage
loans partially guaranteed by the Veterans Administration (the "VA" and such
loans, "VA Loans") and mortgage loans not insured or guaranteed by the FHA or VA
("Conventional Loans"). The Mortgage Loans may have fixed interest rates or
adjustable interest rates ("Mortgage Rates") and may
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provide for fixed level payments or may be Mortgage Loans pursuant to which the
monthly payments by the Mortgagor during the early years of the related Mortgage
are less than the amount of interest that would otherwise be payable thereon,
with the interest not so paid added to the outstanding principal balance of such
Mortgage Loan ("GPM Loans"), Mortgage Loans subject to temporary buy-down plans
("Buy-Down Loans"), pursuant to which the monthly payments made by the Mortgagor
during the early years of the Mortgage Loan will be less than the scheduled
monthly payments on the Mortgage Loan, Mortgage Loans that provide for payment
every other week during the term thereof ("Bi-Weekly Loans"), Mortgage Loans
that experience negative amortization, Mortgage Loans that require a larger
payment of principal upon maturity (a "Balloon Amount") that may be all or a
portion of the principal thereof ("Balloon Loans"), or Mortgage Loans with other
payment characteristics as described below or in the related Prospectus
Supplement. The Mortgage Loans may be secured by mortgages, deeds of trust,
deeds to secure debt or other similar security instruments (collectively,
"Mortgages") creating a first lien on the related Mortgaged Properties. The
Mortgage Loans may also include Cooperative Loans evidenced by promissory notes
secured by a lien on shares issued by private, non-profit, cooperative housing
corporations ("Cooperatives") and on the related proprietary leases or occupancy
agreements granting exclusive rights to occupy specific units within the
apartment building owned by a Cooperative ("Cooperative Dwellings").
If specified in the related Prospectus Supplement, a Mortgage Pool will
contain Mortgage Loans that, in addition to being secured by the related
Mortgaged Properties, are secured by other collateral owned by the related
Mortgagors or are supported by third-party guarantees secured by collateral
owned by the related guarantors. Such Mortgage Loans are collectively referred
to herein as "Additional Collateral Loans," and such collateral is collectively
referred to herein as "Additional Collateral." Additional Collateral may consist
of marketable securities, insurance policies, annuities, certificates of
deposit, cash, accounts or other personal property and, in the case of
Additional Collateral owned by any guarantor, may consist of real estate. Unless
otherwise specified in the related Prospectus Supplement, the security
agreements and other similar security instruments related to the Additional
Collateral for a Mortgage Pool will, in the case of Additional Collateral
consisting of personal property, create first liens thereon, and, in the case of
Additional Collateral consisting of real estate, create first or second liens
thereon. Additional Collateral, or the liens thereon in favor of the related
Additional Collateral Loans, may be greater or less in value than the principal
balances of such Additional Collateral Loans, the Appraised Values of the
underlying Mortgaged Properties or the differences, if any, between such
principal balances and such Appraised Values, and the requirements that
Additional Collateral be maintained may be terminated upon the reduction of the
Loan-to-Value Ratios or principal balances of the related Additional Collateral
Loans to
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certain pre-determined amounts. Additional Collateral (including any related
third-party guarantees) may be provided either in addition to or in lieu of
Primary Insurance Policies for the Additional Collateral Loans in a Mortgage
Pool, as specified in the related Prospectus Supplement. Guarantees supporting
Additional Collateral Loans may be guarantees of payment or guarantees of
collectability and may be full guarantees or limited guarantees. If a Mortgage
Pool includes Additional Collateral Loans, the related Prospectus Supplement
will specify the nature and extent of such Additional Collateral Loans and of
the related Additional Collateral. If specified in such Prospectus Supplement,
the Trustee, on behalf of the related Certificateholders, will have only the
right to receive certain proceeds from the disposition of any such Additional
Collateral consisting of personal property and the liens thereon will not be
assigned to the Trustee. No assurance can be given that values of the Additional
Collateral have remained or will remain at their levels on the Cut-off Date or
as to the timing of collections thereunder from the disposition of such
Additional Collateral. No assurance can be given as to the amount of proceeds,
if any, that might be realized from the disposition of the Additional Collateral
for any of the Additional Collateral Loans. See "Certain Legal Aspects of the
Mortgage Loans and Related Matters--Anti-Deficiency Legislation and Other
Limitations on Lenders" herein.
If so specified in the related Prospectus Supplement, a Mortgage Pool may
include Mortgage Loans that have been modified (each, a "Modified Mortgage
Loan"). Such modifications may include conversions from an adjustable to a fixed
Mortgage Rate (discussed below) or other changes in the related mortgage note.
If a Mortgage Loan is a Modified Mortgage Loan, references to origination
generally shall be deemed to be references to the date of modification.
The Mortgaged Properties may consist of detached individual dwellings,
individual condominiums, townhouses, duplexes, row houses, modular
pre-cut/panelized housing, individual units or two-to four- unit dwellings in
planned unit developments, two- to four-family dwellings and other attached
dwelling units. Each Mortgaged Property will be located on land owned in fee
simple by the Mortgagor or, if specified in the related Prospectus Supplement,
land leased by the Mortgagor. Attached dwellings may include structures where
each Mortgagor owns the land upon which the unit is built with the remaining
adjacent land owned in common, or 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
generally subordinate 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 is subject to
termination and the cooperative shares are subject to cancellation by the
Cooperative if the tenant-stockholder
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fails to pay maintenance or other obligations or charges owed by
such tenant-stockholder. See "Certain Legal Aspects of Mortgage
Loans and Contracts."
The percentage of Mortgage Loans that are owner-occupied will be disclosed
in the related Prospectus Supplement. The basis for any statement that a given
percentage of the Mortgage Loans are secured by Mortgaged Properties that are
owner-occupied will be one or more of the following: (i) the making of a
representation by the Mortgagor at origination of a Mortgage Loan that the
Mortgagor intends to use the Mortgaged Property as a primary residence, (ii) a
representation by the originator of the Mortgage Loan (which representation may
be based solely on (i) above) or (iii) the fact that the mailing address for the
Mortgagor is the same as the address of the Mortgaged Property, and any
representation and warranty in the related Pooling and Servicing Agreement to
such effect may be qualified similarly. To the extent specified in the related
Prospectus Supplement, the Mortgaged Properties may include vacation homes,
second homes and non-owner-occupied investment properties. Mortgage 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 Mortgage Loans. The percentage of Mortgage Loans
made to International Borrowers will also be disclosed in the related Prospectus
Supplement.
Certain information, including information regarding loan-to-value ratios
(each, a "Loan-to-Value Ratio") at origination (unless otherwise specified in
the related Prospectus Supplement) of the Mortgage Loans underlying each series
of Certificates, will be supplied in the related Prospectus Supplement. In the
case of purchase money Mortgage Loans, the Loan-to-Value Ratio is defined
generally as the ratio, expressed as a percentage, of the principal amount of
the Mortgage Loan at origination to the lesser of (1) the appraised value
determined in an appraisal obtained at origination of such Mortgage Loan and (2)
the sales price for the related Mortgaged Property, except that in the case of
certain employee or preferred customer loans, the denominator of such ratio may
be the sales price. In the case of certain non-purchase money Mortgage Loans
including refinance, modified or converted Mortgage Loans, the Loan-to-Value
Ratio at origination is defined generally as the ratio, expressed as a
percentage, of the principal amount of such Mortgage Loan to either the
appraised value determined in an appraisal obtained at the time of refinancing,
modification or conversion or, if no such appraisal has been obtained, the value
of the related Mortgaged Property which value generally will be supported by
either (i) a representation by the related Mortgage Collateral Seller (as
described below) as to such value, (ii) a broker's price opinion, automated
appraisal, drive-by appraisal or other certification of value, (iii) an
appraisal obtained within twelve months prior to such refinancing, modification
or conversion or (iv) the sales price, if the Mortgaged Property was purchased
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within the previous twelve months. The denominator of the ratio described in the
preceding sentence or the second preceding sentence, as the case may be, is
hereinafter referred to as the "Appraised Value." Certain Mortgage Loans that
are subject to negative amortization will have Loan-to-Value Ratios that will
increase after origination as a result of such negative amortization. In the
case of seasoned Mortgage Loans, the appraisals upon which Loan-to-Value Ratios
have been calculated may no longer be accurate valuations of the Mortgaged
Properties. Certain Mortgaged Properties may be located in regions where
property values have declined significantly since the time of origination. In
addition, a Loan-to-Value calculation does not take into account any secondary
financing. Under the Company's underwriting standards, a Mortgage Collateral
Seller is generally permitted to provide secondary financing to a Mortgagor
contemporaneously with the origination of a Mortgage Loan, provided that the
combined Loan-to-Value Ratio is not greater than 100%. Secondary financing is
readily available and may be obtained by a Mortgagor from a lender including the
Mortgage Collateral Seller at any time (including at origination).
The Mortgage Loans may be "equity refinance" Mortgage Loans, as to which a
portion of the proceeds are used to refinance an existing mortgage loan, and the
remaining proceeds may be retained by the Mortgagor or used for purposes
unrelated to the Mortgaged Property. Alternatively, the Mortgage Loans may be
"rate and term refinance" Mortgage Loans, as to which substantially all of the
proceeds (net of related costs incurred by the Mortgagor) are used to refinance
an existing mortgage loan or loans (which may include a junior lien) primarily
in order to change the interest rate or other terms thereof. The Mortgage Loans
may be mortgage loans that have been consolidated and/or have had various terms
changed, mortgage loans that have been converted from adjustable rate mortgage
loans to fixed rate mortgage loans, or construction loans which have been
converted to permanent mortgage loans. In addition, a Mortgaged Property may be
subject to secondary financing at the time of origination of the Mortgage Loan
or thereafter.
Mortgage Loans that have adjustable Mortgage Rates ("ARM Loans") generally
will provide for a fixed initial Mortgage Rate until the first date on which
such Mortgage Rate is to be adjusted. Thereafter, the Mortgage Rate is subject
to periodic adjustment as described in the related Prospectus Supplement,
subject to the applicable limitations, based on changes in the relevant index
(the "Index") described in the applicable Prospectus Supplement, to a rate equal
to the Index plus a fixed percentage spread over the Index established
contractually for each ARM Loan at the time of its origination (the "Gross
Margin"). The initial Mortgage Rate on an ARM Loan may be lower than the sum of
the then-applicable Index and the Gross Margin for such ARM Loan.
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ARM Loans have features that provide different investment considerations
than fixed-rate mortgage loans. In particular, adjustable mortgage rates can
cause payment increases that may exceed some Mortgagors' capacity to cover such
payments. However, to the extent specified in the related Prospectus Supplement,
an ARM Loan may provide that its Mortgage Rate may not be adjusted to a rate
above the applicable maximum Mortgage Rate (the "Maximum Mortgage Rate") or
below the applicable minimum Mortgage Rate (the "Minimum Mortgage Rate"), if
any, for such ARM Loan. In addition, to the extent specified in the related
Prospectus Supplement, certain of the ARM Loans may provide for limitations on
the maximum amount by which their mortgage rates may adjust for any single
adjustment period (the "Periodic Cap"). Some ARM Loans provide for limitations
on the amount of scheduled payments of principal and interest.
Certain ARM Loans may be subject to negative amortization from time to time
prior to their maturity (such ARM Loans, "Neg-Am ARM Loans"). Such negative
amortization may result from either the adjustment of the Mortgage Rate on a
more frequent basis than the adjustment of the scheduled payment or the
application of a cap on the size of the scheduled payment. In the first case,
negative amortization results if an increase in the Mortgage Rate occurs prior
to an adjustment of the scheduled payment on the related Mortgage Loan and such
increase causes accrued monthly interest on the Mortgage Loan to exceed the
scheduled payment. In the second case, negative amortization results if an
increase in the Mortgage Rate causes accrued monthly interest on a Mortgage Loan
to exceed the limit on the size of the scheduled payment on such Mortgage Loan.
In the event that the scheduled payment is not sufficient to pay the accrued
monthly interest on a Neg-Am ARM Loan, the amount of accrued monthly interest
that exceeds the scheduled payment on such Mortgage Loans (the "Deferred
Interest") is added to the principal balance of such ARM Loan and is to be
repaid from future scheduled payments. Neg-Am ARM Loans do not provide for the
extension of their original stated maturity to accommodate changes in their
Mortgage Rate. The related Prospectus Supplement will specify whether the ARM
Loans underlying a series are Neg-Am ARM Loans.
A Mortgage Pool may contain ARM Loans which allow the Mortgagors to convert
the adjustable rates on such Mortgage Loans to a fixed rate at one or more
specified periods during the life of such Mortgage Loans (each, a "Convertible
Mortgage Loan"), generally not later than ten years subsequent to the date of
origination. If specified in the related Prospectus Supplement, upon any
conversion, the Company will repurchase or Residential Funding, the applicable
Servicer or Sub-Servicer or a third party will purchase the converted Mortgage
Loan as and to the extent set forth in the related Prospectus Supplement.
Alternatively, if specified in the related Prospectus Supplement, the Company or
Residential Funding (or another party specified therein) may agree to act as
remarketing agent with respect to such converted Mortgage Loans and, in such
capacity, to use its best efforts to arrange for the sale of
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converted Mortgage Loans under specified conditions. Upon the failure of any
party so obligated to purchase any such converted Mortgage Loan, the inability
of any remarketing agent to arrange for the sale of the converted Mortgage Loan
and the unwillingness of such remarketing agent to exercise any election to
purchase the converted Mortgage Loan for its own account, the related Mortgage
Pool will thereafter include both fixed rate and adjustable rate Mortgage Loans.
If specified in the related Prospectus Supplement, certain of the Mortgage
Loans may be Buy-Down Loans pursuant to which the monthly payments made by the
Mortgagor during the early years of the Mortgage Loan (the "Buy-Down Period")
will be less than the scheduled monthly payments on the Mortgage Loan, the
resulting difference to be made up from (i) an amount (such amount, exclusive of
investment earnings thereon, being hereinafter referred to as "Buy-Down Funds")
contributed by the seller of the Mortgaged Property or another source and placed
in an escrow account, (ii) if the Buy-Down Funds are contributed on a present
value basis, investment earnings on such Buy-Down Funds or (iii) additional
buydown funds to be contributed over time by the Mortgagor's employer or another
source.
The related Prospectus Supplement will provide material information
concerning the types and characteristics of the Mortgage Loans included in a
Trust Fund as of the related Cut-off Date. In the event that Mortgage Loans are
added to or deleted from the Trust Fund after the date of the related Prospectus
Supplement and prior to the Closing Date for the related series of Certificates,
the final characteristics of the Mortgage Pool will be noted in the Form 8-K.
Under the Pooling and Servicing Agreement for each series of Certificates,
the Company will cause the Mortgage Loans constituting each Mortgage Pool to be
assigned to the Trustee for such series of Certificates, for the benefit of the
holders of all such Certificates. Such assignment of the Mortgage Loans to the
Trustee will be without recourse. See "Description of the
Certificates--Assignment of Mortgage Loans."
Underwriting Policies
The Company generally expects that the originator of each of the Mortgage
Loans will have applied, consistent with applicable federal and state laws and
regulations, underwriting procedures intended to evaluate the borrower's credit
standing and repayment ability and/or the value and adequacy of the related
property as collateral. If so specified in the related Prospectus Supplement,
all or a portion of the Mortgage Loans constituting the Mortgage Pool for a
series of Certificates may have been acquired either directly or indirectly by
the Company through the Program. Any FHA Loans or VA Loans will have been
originated in compliance with the underwriting policies of the
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FHA or VA, respectively. The underwriting criteria applied by the originators of
the Mortgage Loans included in a Mortgage Pool may vary significantly among
Mortgage Collateral Sellers. The related Prospectus Supplement will describe
generally certain underwriting criteria, to the extent known by the Company,
that were applied by the originators of such Mortgage Loans. The Company
generally will have less detailed information concerning the origination of
seasoned Mortgage Loans than it will have concerning newly-originated Mortgage
Loans.
General Standards. Generally, each Mortgagor will have been required to
complete an application designed to provide to the original lender pertinent
credit information concerning the Mortgagor. As part of the description of the
Mortgagor's financial condition, such Mortgagor will have furnished information
(which may be supplied solely in such application) with respect to its assets,
liabilities, income (except as described below), credit history, employment
history and personal information, and furnished an authorization to apply for a
credit report which summarizes the borrower's credit history with local
merchants and lenders and any record of bankruptcy. The Mortgagor may also have
been required to authorize verifications of deposits at financial institutions
where the Mortgagor had demand or savings accounts. In the case of investment
properties and two- to four- unit dwellings, income derived from the Mortgaged
Property may have been considered for underwriting purposes, in addition to the
income of the Mortgagor from other sources. With respect to Mortgaged Property
consisting of vacation or second homes, no income derived from the property
generally will have been considered for underwriting purposes. In the case of
certain borrowers with acceptable payment histories, no income will be required
to be stated (or verified) in connection with the loan application.
As described in the related Prospectus Supplement, certain Mortgage Loans
may have been originated under "limited documentation" or "no documentation"
programs which require less documentation and verification than do traditional
"full documentation" programs. Generally, under such a program, minimal
investigation into the Mortgagor's credit history and income profile is
undertaken by the originator and such underwriting may be based primarily or
entirely on an appraisal of the Mortgaged Property and the Loan-to-Value Ratio
at origination.
The adequacy of the Mortgaged Property as security for repayment of the
related Mortgage Loan will generally have been determined by an appraisal in
accordance with pre-established appraisal procedure guidelines for appraisals
established by or acceptable to the originator. Appraisers may be staff
appraisers employed by the originator or independent appraisers selected in
accordance with pre-established guidelines established by the originator. The
appraisal procedure guidelines generally will have required the appraiser or an
agent on its behalf to personally inspect the
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property and to verify whether the property was in good condition and that
construction, if new, had been substantially completed. The appraisal generally
will have been based upon a market data analysis of recent sales of comparable
properties and, when deemed applicable, an analysis based on income generated
from the property or a replacement cost analysis based on the current cost of
constructing or purchasing a similar property.
The underwriting standards applied by an originator generally require that
the underwriting officers be satisfied that the value of the property being
financed, as indicated by an appraisal or other acceptable valuation method,
currently supports and is anticipated to support in the future the outstanding
loan balance. In fact, certain states where the Mortgaged Properties may be
located have "anti-deficiency" laws requiring, in general, that lenders
providing credit on single family property look solely to the property for
repayment in the event of foreclosure. See "Certain Legal Aspects of Mortgage
Loans and Contracts." Any of these factors could change nationwide or merely
could affect a locality or region in which all or some of the Mortgaged
Properties are located. However, declining values of real estate, as experienced
recently in certain regions, or increases in the principal balances of certain
Mortgage Loans, such as GPM Loans and Neg-Am ARM Loans, could cause the
principal balance of some or all of the Mortgage Loans to exceed the value of
the Mortgaged Properties.
Based on the data provided in the application, certain verifications (if
required) and the appraisal or other valuation of the Mortgaged Property, a
determination will have been made by the original lender that the Mortgagor's
monthly income (if required to be stated) would be sufficient to enable the
Mortgagor to meet its monthly obligations on the Mortgage Loan and other
expenses related to the property (such as property taxes, utility costs,
standard hazard and primary mortgage insurance and, if applicable, maintenance
fees and other levies assessed by a Cooperative) and other fixed obligations
other than housing expenses. The originator's guidelines for Mortgage Loans
generally will specify that scheduled payments on a Mortgage Loan during the
first year of its term plus taxes and insurance (including primary mortgage
insurance) and all scheduled payments on obligations that extend beyond one year
(including those mentioned above and other fixed obligations) would generally
equal no more than specified percentages of the prospective Mortgagor's gross
income. The originator may also consider the amount of liquid assets available
to the Mortgagor after origination.
The level of review by Residential Funding, if any, will vary depending on
a number of factors. Residential Funding, on behalf of the Company, generally
will review a portion of the Mortgage Loans constituting the Mortgage Pool for a
series of Certificates for conformity with the applicable underwriting standards
and to assess the likelihood of repayment of the Mortgage Loan from the various
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sources for such repayment, including the Mortgagor, the Mortgaged Property, and
primary mortgage insurance, if any. In reviewing seasoned Mortgage Loans (those
which have been outstanding for more than 12 months), Residential Funding may
also take into consideration the Mortgagor's actual payment history in assessing
a Mortgagor's current ability to make payments on the Mortgage Loan. In
addition, Residential Funding may conduct additional procedures to assess the
current value of the Mortgaged Properties. Such procedures may consist of drive
by appraisals or real estate broker's price opinions. The Company may also
consider a specific area's housing value trends. These alternative valuation
methods are not generally as reliable as the type of mortgagor financial
information or appraisals that are generally obtained at origination.
Residential Funding may also consider the applicable credit score of the related
Mortgagor used in connection with the origination of the Mortgage Loan (as
determined based on a credit scoring model acceptable to the Company.)
Generally, such credit scoring models provide a means for evaluating the
information about a prospective borrower that is available from a credit
reporting agency. The underwriting criteria applicable to any program under
which the Mortgage Loans may be originated and reviewed may provide that
qualification for the loan, or the availability of certain loan features (such
as maximum loan amount, maximum Loan-to-Value Ratio, property type and use, and
documentation level) may depend on the borrower's credit score.
With respect to the Company's underwriting standards, as well as any other
underwriting standards that may be applicable to any Mortgage Loans, such
underwriting standards generally include a set of specific criteria pursuant to
which the underwriting evaluation is made. However, the application of such
underwriting standards does not imply that each specific criterion was satisfied
individually. Rather, a Mortgage Loan will be considered to be originated in
accordance with a given set of underwriting standards if, based on an overall
qualitative evaluation, the loan is in substantial compliance with such
underwriting standards. For example, a Mortgage Loan may be considered to comply
with a set of underwriting standards, even if one or more specific criteria
included in such underwriting standards were not satisfied, if other factors
compensated for the criteria that were not satisfied or if the Mortgage Loan is
considered to be in substantial compliance with the underwriting standards.
The Program. The underwriting standards with respect to Program Loans will
generally conform to those published in Residential Funding's Seller Guide (as
applicable to the Program Loans, the "Program Seller Guide"), as modified from
time to time. The Program Seller Guide will set forth general underwriting
standards relating to mortgage loans, which are generally less stringent than
underwriting standards applicable to mortgage loans originated under other first
mortgage loan purchase programs such as those run by Fannie Mae or Freddie Mac
or by the Company's affiliate, Residential
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Funding, for the purpose of collateralizing securities issued by Residential
Funding Mortgage Securities I, Inc. For example, Program Loans may include
mortgage loans with higher Loan-to-Value Ratios, larger principal balances,
mortgage loans secured by smaller or larger parcels of land or by investment
properties, mortgage loans with Loan-to-Value Ratios in excess of 80% that do
not require primary mortgage insurance, mortgage loans made to International
Borrowers, and mortgage loans made to borrowers that are self-employed or are
not required to state their income. The underwriting standards set forth in the
Program Seller Guide are revised based on changing conditions in the residential
mortgage market and the market for the Company's mortgage pass-through
certificates and may also be waived by Residential Funding from time to time.
The Prospectus Supplement for each series of Certificates secured by Program
Loans will set forth the general underwriting criteria applicable to such
Mortgage Loans.
A portion of Program Loans generally will be reviewed by Residential
Funding or by a designated third party for compliance with applicable
underwriting criteria. Certain of the Program Loans may be purchased in
negotiated transactions (which may be governed by agreements relating to ongoing
purchases of Program Loans by Residential Funding) ("Master Commitments"), from
Program Sellers who will represent that Program Loans have been originated in
accordance with underwriting standards agreed to by Residential Funding. Certain
other Program Loans will be purchased from Program Sellers who will represent
that Program Loans were originated pursuant to underwriting standards determined
by a mortgage insurance company or third party origination system acceptable to
Residential Funding. Residential Funding may accept a certification from such
insurance company as to a Program Loan's insurability in a mortgage pool as of
the date of certification as evidence of a Program Loan conforming to applicable
underwriting standards. Such certifications will likely have been issued before
the purchase of the Program Loan by Residential Funding or the Company.
FHA and VA Programs. With respect to FHA Loans and VA Loans, traditional
underwriting guidelines used by the FHA and the VA, as the case may be, which
were in effect at the time of origination of each such Mortgage Loan will have
generally been applied.
The Contracts
General
The Trust Fund for a series may include a Contract Pool evidencing
interests in Contracts originated by one or more manufactured housing dealers,
or such other entity or entities described in the related Prospectus Supplement.
The Contracts may be conventional Contracts or Contracts insured by the FHA
("FHA Contracts") or partially guaranteed by the VA ("VA Contracts"). Each
Contract will be secured by a Manufactured Home. Unless otherwise
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specified in the related Prospectus Supplement, the Contracts will
be fully amortizing.
The Manufactured Homes securing the 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 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 81/2 feet and 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 therein.
The related Prospectus Supplement will provide information concerning the
types or characteristics of the Contracts included in a Trust Fund as of the
related Cut-off Date. In the event that Contracts are added to or deleted from
the Trust Fund after the date of the related Prospectus Supplement, the final
characteristics of the Contract Pool will be noted in the Form 8-K.
Underwriting Policies
Conventional Contracts will comply with the underwriting policies of the
applicable originator or Mortgage Collateral Seller, which will be described in
the related Prospectus Supplement. With respect to FHA Contracts and VA
Contracts, traditional underwriting guidelines used by the FHA and the VA, as
the case may be, which were in effect at the time of origination of each such
Contract will generally have been applied.
With respect to a Contract made in connection with the Mortgagor's purchase
of a Manufactured Home, the "Appraised Value" is generally the sales price of
the Manufactured Home or the amount determined by a professional appraiser. The
appraiser must personally inspect the Manufactured Home and prepare a report
which includes market data based on recent sales of comparable Manufactured
Homes and, when deemed applicable, a replacement cost analysis based on the
current cost of a similar Manufactured Home. The Loan-to-Value Ratio for a
Contract generally will be equal to the original principal amount of the
Contract divided by the lesser of the Appraised Value or the sales price for the
Manufactured Home; however, unless otherwise specified in the related Prospectus
Supplement, an appraisal of the Manufactured Home will not be required.
The Agency Securities
Government National Mortgage Association
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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 (the "Housing Act"), authorizes Ginnie Mae to guarantee the timely
payment of the principal of and interest on certificates representing interests
in a pool of mortgages (i) insured by the FHA, under the Housing Act or under
Title V of the Housing Act of 1949, or
(ii) 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 any such 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.
Ginnie Mae Securities
Unless otherwise specified in the related Prospectus Supplement, 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 with respect to 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 Fund for a
series of Certificates will be set forth in the related Prospectus Supplement.
Federal Home Loan Mortgage Corporation
Freddie Mac is a corporate instrumentality of the United States created
pursuant to Title III of the Emergency Home Finance Act of 1970, as amended (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 mortgage loans or participation interests
in such mortgage loans and reselling the mortgage loans so purchased in the form
of guaranteed mortgage securities, primarily Freddie Mac Securities. In 1981,
Freddie Mac initiated its Home Mortgage Guaranty Program under which it
purchases mortgage loans from sellers with Freddie Mac Securities representing
interests in the mortgage loans so purchased. All mortgage loans purchased by
Freddie Mac must meet certain standards set forth in the Freddie Mac Act.
Freddie Mac is confined to
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purchasing, so far as practicable, mortgage loans that it deems to be of such
quality and type as to meet generally 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
Unless otherwise specified in the related Prospectus Supplement, each
Freddie Mac Security relating to a series will represent an undivided interest
in a pool of mortgage loans that typically consists of conventional loans (but
may include FHA Loans and VA Loans) purchased by Freddie Mac, except with
respect to any stripped mortgage backed securities issued by Freddie Mac. Each
such pool will consist of mortgage loans
(i) substantially all of which are secured by one- to four-family residential
properties or (ii) if specified in the related Prospectus Supplement, secured by
five or more family residential properties. The characteristics of any Freddie
Mac Securities included in the Trust Fund for a series of Certificates will be
set forth in the related 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 mortgage 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
Unless otherwise specified in the related Prospectus Supplement, each
Fannie Mae Security relating to a series will represent a fractional undivided
interest in a pool of mortgage loans formed by Fannie Mae, except with respect
to any stripped mortgage backed securities issued by Fannie Mae. Mortgage loans
underlying Fannie Mae Securities will consist of (i) fixed, variable or
adjustable
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rate conventional mortgage loans or (ii) fixed-rate FHA Loans or VA Loans. Such
mortgage 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 Fund for a series of Certificates will be set forth in the
related Prospectus Supplement.
Mortgage Collateral Sellers
The Mortgage Collateral to be included in a Trust Fund will be purchased by
the Company directly or indirectly (through Residential Funding or other
affiliates) from Mortgage Collateral Sellers that may be (a) banks, savings and
loan associations, mortgage bankers, investment banking firms, insurance
companies, the Federal Deposit Insurance Corporation (the "FDIC") and other
mortgage loan originators or sellers not affiliated with the Company (each, an
"Unaffiliated Seller") or (b) Homecomings Financial Network, Inc. and GMAC
Mortgage Corporation of PA, each affiliates of the Company, and their affiliates
(each, an "Affiliated Seller"). Such purchases may occur by one or more of the
following methods: (i) one or more direct or indirect purchases from
Unaffiliated Sellers, which may occur simultaneously with the issuance of the
Certificates or which may occur over an extended period of time; (ii) multiple
direct or indirect purchases through the Program; or (iii) one or more purchases
from Affiliated Sellers. The Prospectus Supplement for a series of Certificates
will disclose the method or methods used to acquire the Mortgage Collateral for
such series. The Company may issue one or more classes of Certificates to a
Mortgage Collateral Seller as consideration for the purchase of the Mortgage
Collateral securing such series of Certificates, if so described in the related
Prospectus Supplement.
The Mortgage Collateral Sellers that participate in the Program (each, a
"Program Seller") will have been selected by Residential Funding on the basis of
criteria set forth in the Program Seller Guide. A Program Seller may be an
affiliate of the Company and the Company presently anticipates that GMAC
Mortgage Corporation of PA, an affiliate of the Company, will be a Program
Seller. Except in the case of the FDIC and investment banking firms, each
Program Seller will have been approved by Residential Funding for participation
in Residential Funding's loan purchase programs. In determining whether to
approve a seller for participation in the loan purchase program, Residential
Funding generally will consider, among other things, the financial status
(including the net worth) of the seller, the previous experience of the seller
in originating mortgage loans, the prior delinquency and loss experience of the
seller, the underwriting standards employed by the seller and the quality
control and, if applicable, the servicing operations established by the seller.
There can be no assurance that any Program Seller presently meets any
qualifications or will continue to meet any qualifications at the time of
inclusion of mortgage loans sold by it in the Trust Fund for a series of
Certificates, or thereafter. If a
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Program Seller becomes subject to the direct or indirect control of the FDIC or
if a Program Seller's net worth, financial performance or delinquency and
foreclosure rates are adversely impacted, such institution may continue to be
treated as a Program Seller. Any such event may adversely affect the ability of
any such Program Seller to repurchase Mortgage Collateral in the event of a
breach of a representation or warranty which has not been cured. See
"--Repurchases of Mortgage Collateral" below.
Representations with Respect to Mortgage Collateral
Mortgage Collateral Sellers generally will make certain limited
representations and warranties with respect to the Mortgage Collateral that they
sell. The Company will assign to the Trustee for the benefit of the related
Certificateholders all of its right, title and interest in each agreement
pursuant to which it purchased any item of Mortgage Collateral from a Mortgage
Collateral Seller, to the extent such agreement relates to (i) the
representations and warranties made by a Mortgage Collateral Seller or
Residential Funding, as the case may be, in respect of such item of Mortgage
Collateral and (ii) any remedies provided for any breach of such representations
and warranties.
With respect to any Mortgage Loan (including Program Loans) or Contract
constituting a part of the Trust Fund, unless otherwise disclosed in the related
Prospectus Supplement, Residential Funding generally will represent and warrant
that: (i) as of the Cut-off Date, the information set forth in a listing of the
related Mortgage Loan or Contract was true and correct in all material respects;
(ii) except in the case of Cooperative Loans, a policy of title insurance was
effective or attorney's certificate was received at origination, and each policy
remained in full force and effect on the date of sale of the related Mortgage
Loan or Contract to the Company; (iii) to the best of Residential Funding's
knowledge, if required by applicable underwriting standards, the Mortgage Loan
or Contract is the subject of a Primary Insurance Policy; (iv) Residential
Funding had good title to the Mortgage Loan or Contract and the Mortgage Loan or
Contract is not subject to offsets, defenses or counterclaims except as may be
provided under the Relief Act and except with respect to any buydown agreement
for a Buy-Down Loan; (v) each Mortgaged Property is free of material damage and
in good repair; (vi) the Mortgage Loan or Contract was not one month or more
delinquent in payment of principal and interest as of the related Cut-off Date
and was not so delinquent more than once during the twelve-month period prior to
the Cut-off Date; and (vii) there is no delinquent tax or assessment lien
against the related Mortgaged Property.
In the event of a breach of a representation or warranty made by
Residential Funding that materially adversely affects the interests of the
Certificateholders in the Mortgage Loan or Contract, Residential Funding will be
obligated to repurchase any such
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Mortgage Loan or Contract or substitute for such Mortgage Loan or Contract as
described below. In addition, unless otherwise specified in the related
Prospectus Supplement, Residential Funding will be obligated to repurchase or
substitute for any Mortgage Loan as to which it is discovered that the related
Mortgage does not create a valid first lien on, or in the case of a Contract a
perfected security interest in, the related Mortgaged Property, subject only to
(a) liens of real property taxes and assessments not yet due and payable, (b)
covenants, conditions and restrictions, rights of way, easements and other
matters of public record as of the date of recording of such Mortgage and
certain other permissible title exceptions and (c) other encumbrances to which
like properties are commonly subject which do not materially adversely affect
the value, use, enjoyment or marketability of the Mortgaged Property. In
addition, unless otherwise specified in the related Prospectus Supplement, with
respect to any Mortgage Loan or Contract as to which the Company delivers to the
Trustee an affidavit certifying that the original Mortgage Note or Contract has
been lost or destroyed, if such Mortgage Loan or Contract subsequently is in
default and the enforcement thereof or of the related Mortgage or Contract is
materially adversely affected by the absence of the original Mortgage Note or
Contract, Residential Funding will be obligated to repurchase or substitute for
such Mortgage Loan or Contract in the manner described below. However, unless
otherwise set forth in the related Prospectus Supplement, Residential Funding
will not be required to repurchase or substitute for any Mortgage Loan or
Contract if the circumstances giving rise to such requirement also constitute
fraud in the origination of the related Mortgage Loan or Contract. Furthermore,
because the listing of the related Mortgage Collateral generally contains
information with respect to the Mortgage Collateral as of the Cut-off Date,
prepayments and, in certain limited circumstances, modifications to the interest
rate and principal and interest payments may have been made with respect to one
or more of the related items of Mortgage Collateral between the Cut-off Date and
the Closing Date. Neither Residential Funding nor any Seller will be required to
repurchase or substitute for any item of Mortgage Collateral as a result of any
such prepayment or modification.
All of the representations and warranties of a Mortgage Collateral Seller
in respect of an item of Mortgage Collateral will have been made as of the date
on which such Mortgage Collateral Seller sold the Mortgage Collateral to the
Company or Residential Funding or one of their affiliates. The date as of which
such representations and warranties were made generally will be a date prior to
the date of issuance of the related series of Certificates. A substantial period
of time may elapse between the date as of which the representations and
warranties were made and the date of issuance of the related series of
Certificates. The Mortgage Collateral Seller's repurchase obligation (or, if
specified in the related Prospectus Supplement, limited substitution option)
will not arise if, after the sale of the related Mortgage Collateral, an
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event occurs that would have given rise to such an obligation had the event
occurred prior to such period.
Repurchases of Mortgage Collateral
If a Mortgage Collateral Seller or Residential Funding, as the case may be,
cannot cure a breach of any representation or warranty made by it in respect of
an item of Mortgage Collateral within 90 days after notice from the Master
Servicer, the Servicer, the Certificate Administrator or the Trustee, and such
breach materially and adversely affects the interests of the Certificateholders
in such item of Mortgage Collateral, such Mortgage Collateral Seller or
Residential Funding, as the case may be, will be obligated to purchase such item
of Mortgage Collateral at a price set forth in the related Pooling and Servicing
Agreement or Trust Agreement. Likewise, as described under "Description of the
Certificates--Review of Mortgage Loan or Contract Documents," if the Company or
the Mortgage Collateral Seller, as applicable, cannot cure certain documentary
defects with respect to a Mortgage Loan or Contract, the Company or the Mortgage
Collateral Seller, as applicable, will be required to repurchase such item of
Mortgage Collateral. Unless otherwise specified in the related Prospectus
Supplement, the "Purchase Price" for any such item of Mortgage Collateral will
be equal to the principal balance thereof as of the date of purchase plus
accrued and unpaid interest to the first day of the month following the month of
repurchase (less the amount, expressed as a percentage per annum, payable in
respect of servicing or administrative compensation and the Excluded Spread, if
any). In certain limited cases, a substitution may be made in lieu of such
repurchase obligation. See "--Limited Right of Substitution" below.
The Master Servicer, the Servicer or the Certificate Administrator, as
applicable, will be required under the applicable Pooling and Servicing
Agreement or Trust Agreement to enforce this repurchase obligation, or the
substitution right described below, for the benefit of the Trustee and the
Certificateholders, using practices it would employ in its good faith business
judgment and which are normal and usual in its general mortgage servicing
activities; provided, however, that this purchase or substitution obligation
will not become an obligation of the Master Servicer in the event the Seller or
Residential Funding, as the case may be, fails to honor such obligation. The
Master Servicer will be entitled to reimbursement for any costs and expenses
incurred in pursuing such a purchase or substitution obligation, including but
not limited to any costs or expenses associated with litigation. If, as a result
of a breach of representation or warranty, a Mortgage Collateral Seller is
required, but fails, to repurchase the related Mortgage Collateral, the Company
or Residential Funding will only be required to repurchase such Mortgage
Collateral if the Company or Residential Funding has assumed such
representations and warranties. Consequently, such Mortgage Collateral will
remain in the related Trust Fund and any related losses not borne by any
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applicable credit enhancement will be borne by Certificateholders. If the
Mortgage Collateral Seller fails to honor its repurchase or substitution
obligation, such obligation will not become an obligation of Residential
Funding, the Master Servicer or Servicer (although Residential Funding, the
Master Servicer or Servicer may have an independent obligation to repurchase or
substitute for such Mortgage Collateral). In instances where a Mortgage
Collateral Seller is unable or disputes its obligation to repurchase affected
Mortgage Collateral, the Master Servicer or Servicer, using practices it would
employ in its good faith business judgment and which are normal and usual in its
general mortgage servicing activities, may negotiate and enter into settlement
agreements with such Mortgage Collateral Seller that could provide for, among
other things, the repurchase of only a portion of the affected Mortgage
Collateral. Any such settlement could lead to losses on the Mortgage Collateral
which would be borne by the related Certificateholders. In accordance with the
above described practices, the Master Servicer or Servicer will not be required
to enforce any purchase obligation of a Mortgage Collateral Seller arising from
any misrepresentation by the Mortgage Collateral Seller, if the Master Servicer
or Servicer determines in the reasonable exercise of its business judgment that
the matters related to such misrepresentation did not directly cause or are not
likely to directly cause a loss on the related Mortgage Collateral. Unless
otherwise specified in the related Prospectus Supplement, the foregoing
repurchase obligations and the limited right of substitution (described below)
will constitute the sole remedies available to Certificateholders or the Trustee
for a breach of any representation by a Mortgage Collateral Seller in its
capacity as a seller of Mortgage Collateral, or for any other event giving rise
to such obligations as described above.
The Company and Residential Funding generally monitor which Mortgage
Collateral Sellers are under the control of the FDIC, or are insolvent,
otherwise in receivership or conservatorship or financially distressed. Such
Mortgage Collateral Sellers may not be able or permitted to repurchase Mortgage
Collateral for which there has been a breach of representation or warranty.
Moreover, any such Mortgage Collateral Seller may make no representations or
warranties with respect to Mortgage Collateral sold by it. The FDIC (either in
its corporate capacity or as receiver for a depository institution), may also be
a Mortgage Collateral Seller, in which event neither the FDIC nor the related
depository institution may make representations or warranties with respect to
the Mortgage Collateral sold, or only limited representations or warranties may
be made (for example, that the related legal documents are enforceable). The
FDIC may have no obligation to repurchase any Mortgage Collateral for a breach
of a representation or warranty.
Limited Right of Substitution
In the case of a Mortgage Loan or Contract required to be repurchased from
the Trust Fund (a "Repurchased Mortgage Loan" or a
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"Repurchased Contract," respectively) the related Mortgage Collateral Seller or
Residential Funding, as applicable, may substitute a new Mortgage Loan or
Contract (a "Qualified Substitute Mortgage Loan" or a "Qualified Substitute
Contract," respectively) for the Repurchased Mortgage Loan or Contract that was
removed from the Trust Fund, during the limited time period described below. Any
such substitution must be effected within 120 days of the date of the issuance
of the Certificates with respect to a Trust Fund for which no REMIC election is
to be made. With respect to a Trust Fund for which a REMIC election is to be
made, except as otherwise provided in the related Prospectus Supplement, such
substitution must be effected within two years of the date of the issuance of
the Certificates, and may not be made if such substitution would cause the Trust
Fund to fail to qualify as a REMIC or result in a prohibited transaction tax
under the Code.
Except as otherwise provided in the related Prospectus Supplement, any
Qualified Substitute Mortgage Loan or Qualified Substitute Contract generally
will, on the date of substitution: (i) 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
Repurchased Mortgage Loan or Repurchased Contract; (ii) have a Mortgage Rate and
a Net Mortgage Rate not less than (and not more than one percentage point
greater than) the Mortgage Rate and Net Mortgage Rate, respectively, of the
Repurchased Mortgage Loan or Repurchased Contract as of the date of
substitution; (iii) have a Loan-to-Value Ratio at the time of substitution no
higher than that of the Repurchased Mortgage Loan or Repurchased Contract; (iv)
have a remaining term to maturity not greater than (and not more than one year
less than) that of the Repurchased Mortgage Loan or Repurchased Contract; and
(v) comply with all of the representations and warranties set forth in the
related Pooling and Servicing Agreement as of the date of substitution. In the
event the outstanding principal balance of a Qualified Substitute Mortgage Loan
or Qualified Substitute Contract is less than the outstanding principal balance
of the related Repurchased Mortgage Loan or Repurchased Contract, the amount of
such shortfall shall be deposited into the Custodial Account in the month of
substitution for distribution to the related Certificateholders. The related
Pooling and Servicing Agreement may include additional requirements relating to
ARM Loans or other specific types of Mortgage Loans or Contracts, or additional
provisions relating to meeting the foregoing requirements on an aggregate basis
where a number of substitutions occur contemporaneously. Unless otherwise
specified in the related Prospectus Supplement, a Mortgage Collateral Seller
will have no option to substitute for a Mortgage Loan or Contract that it is
obligated to repurchase in connection with a breach of a representation and
warranty.
DESCRIPTION OF THE CERTIFICATES
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General
The Certificates will be issued in series. Each series of Certificates (or,
in certain instances, two or more series of Certificates) will be issued
pursuant to a Pooling and Servicing Agreement or, in the case of Certificates
backed by Agency Securities, a Trust Agreement, similar to one of the forms
filed as an exhibit to the Registration Statement of which this Prospectus is a
part. Each Pooling and Servicing Agreement or Trust Agreement will be filed with
the Commission as an exhibit to a Form 8-K. The following summaries (together
with additional summaries under "The Pooling and Servicing Agreement" below)
describe certain provisions relating to the Certificates common to each Pooling
and Servicing Agreement or Trust Agreement. All references herein to a "Pooling
and Servicing Agreement" and any discussion of the provisions thereof will also
apply to Trust Agreements. 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 the Pooling and Servicing Agreement for each Trust Fund and the
related Prospectus Supplement.
Each series of Certificates may consist of any one or a combination of the
following: (i) a single class of Certificates; (ii) two or more classes of
Certificates, one or more classes of which may be Senior Certificates that are
senior in right of payment to any class or classes of Mezzanine Certificates and
to any other class or classes of Subordinate Certificates, and as to which
certain classes of Senior (or Subordinate) Certificates may be senior to other
classes of Senior (or Subordinate) Certificates, as described in the respective
Prospectus Supplement (any such series, a "Senior/Subordinate Series"); (iii)
one or more classes of Strip Certificates which will be entitled to (a)
principal distributions, with disproportionate, nominal or no interest
distributions or (b) interest distributions, with disproportionate, nominal or
no principal distributions; (iv) two or more classes of Certificates which
differ as to the timing, sequential order, rate, pass-through rate or amount of
distributions of principal or interest or both, or as to which distributions of
principal or interest or both on any class may be made upon the occurrence of
specified events, in accordance with a schedule or formula (including "planned
amortization classes" and "targeted amortization classes"), or on the basis of
collections from designated portions of the Mortgage Pool or Contract Pool,
which series may include one or more classes of Accrual Certificates with
respect to which certain accrued interest will not be distributed but rather
will be added to the principal balance thereof on each Distribution Date for the
period described in the related Prospectus Supplement; or (v) other types of
classes of Certificates, as described in the related Prospectus Supplement.
Credit support for each series of Certificates will be provided by a Mortgage
Pool Insurance Policy, Special Hazard Insurance Policy, Bankruptcy Bond, Letter
of Credit, Reserve Fund, Certificate Insurance Policy, Overcollateralization, or
other credit
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enhancement as described under "Description of Credit Enhancement," or by the
subordination of one or more classes of Certificates as described under
"Subordination" or by any combination of the foregoing.
Form of Certificates
As specified in the related Prospectus Supplement, the Certificates of each
series will be issued either as physical certificates or in book-entry form. If
issued as physical certificates, the Certificates will be in fully registered
form only in the denominations specified in the related Prospectus Supplement,
and will be transferable and exchangeable at the corporate trust office of the
person appointed under the related Pooling and Servicing Agreement to register
the Certificates (the "Certificate Registrar"). No service charge will be made
for any registration of exchange or transfer of Certificates, but the Trustee
may require payment of a sum sufficient to cover any tax or other governmental
charge. The term "Certificateholder" as used herein refers to the entity whose
name appears on the records of the Certificate Registrar (or, if applicable, a
transfer agent) as the registered holder thereof, except as otherwise indicated
in the related Prospectus Supplement.
If issued in book-entry form, certain classes of a series of Certificates
will be initially issued through the book-entry facilities of The Depository
Trust Company ("DTC"), or Cedel Bank, SA ("CEDEL") or the Euroclear System
("Euroclear") (in Europe) if they are participants of such systems, or
indirectly through organizations which are participants in such systems, or
through such other depository or facility as may be specified in the related
Prospectus Supplement. As to any such class of Certificates so issued
("Book-Entry Certificates"), the record holder of such Certificates will be
DTC's nominee. CEDEL and Euroclear will hold omnibus positions on behalf of
their participants through customers' securities accounts in CEDEL's and
Euroclear's names on the books of their respective depositaries (the
"Depositaries"), which in turn will hold such positions in customers' securities
accounts in the depositaries' names on the books of DTC.
DTC is a limited-purpose trust company organized under the laws of the
State of New York, which holds securities for its participating organizations
("DTC Participants," and together with the CEDEL and Euroclear participating
organizations, "Participants") and facilitates the clearance and settlement of
securities transactions between Participants through electronic book-entry
changes in the accounts of Participants. Participants include securities brokers
and dealers, banks, trust companies and clearing corporations and may include
certain other organizations. Other institutions that are not Participants but
clear through or maintain a custodial relationship with Participants (such
institutions,
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"Indirect Participants") have indirect access to DTC's clearance
system.
Unless otherwise specified in the related Prospectus Supplement, no person
acquiring an interest in any Book-Entry Certificate (each such person, a
"Beneficial Owner") will be entitled to receive a Certificate representing such
interest in registered, certificated form, unless either (i) DTC ceases to act
as depository in respect thereof and a successor depository is not obtained, or
(ii) the Company elects in its sole discretion to discontinue the registration
of such Certificates through DTC. Prior to any such event, Beneficial Owners
will not be recognized by the Trustee or the Master Servicer as holders of the
related Certificates for purposes of the Pooling and Servicing Agreement, and
Beneficial Owners will be able to exercise their rights as owners of such
Certificates only indirectly through DTC, Participants and Indirect
Participants. Any Beneficial Owner that desires to purchase, sell or otherwise
transfer any interest in Book-Entry Certificates may do so only through DTC,
either directly if such Beneficial Owner is a Participant or indirectly through
Participants and, if applicable, Indirect Participants. Pursuant to the
procedures of DTC, transfers of the beneficial ownership of any Book-Entry
Certificates will be required to be made in minimum denominations specified in
the related Prospectus Supplement. The ability of a Beneficial Owner to pledge
Book-Entry Certificates to persons or entities that are not Participants in the
DTC system, or to otherwise act with respect to such Certificates, may be
limited because of the lack of physical certificates evidencing such
Certificates and because DTC may act only on behalf of Participants.
Because of time zone differences, the securities account of a CEDEL or
Euroclear participant as a result of a transaction with a DTC Participant (other
than a depositary holding on behalf of CEDEL or Euroclear) will be credited
during a subsequent securities settlement processing day (which must be a
business day for CEDEL or Euroclear, as the case may be) immediately following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear
Participant or CEDEL Participants on such business day. Cash received in CEDEL
or Euroclear as a result of sales of securities by or through a CEDEL
Participant or Euroclear Participant to a DTC Participant (other than the
depositary for CEDEL or Euroclear) will be received with value on the DTC
settlement date, but will be available in the relevant CEDEL or Euroclear cash
account only as of the business day following settlement in DTC.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
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Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the relevant Depositaries; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to its
Depositary to take action to effect final settlement on its behalf by delivering
or receiving securities in DTC, and making or receiving payment in accordance
with normal procedures for same day funds settlement applicable to DTC. CEDEL
Participants and Euroclear Participants may not deliver instructions directly to
the Depositaries.
CEDEL, a professional depository, holds securities for its participating
organizations ("CEDEL Participants") and facilitates the clearance and
settlement of securities transactions between CEDEL Participants through
electronic book-entry changes in accounts of CEDEL Participants, thereby
eliminating the need for physical movement of certificates. As a professional
depository, CEDEL is subject to regulation by the Luxembourg Monetary Institute.
Euroclear was created to hold securities for participants of Euroclear
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Euroclear is operated by the Brussels, Belgium office of Morgan Guaranty
Trust Company of New York (the "Euroclear Operator"), under contract with
Euroclear Clearance Systems S.C., a Belgian co-operative corporation (the
"Clearance Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Clearance
Cooperative. The Clearance Cooperative establishes policy for Euroclear on
behalf of Euroclear Participants.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission. Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of
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securities and cash within Euroclear, withdrawals of securities and cash from
Euroclear, and receipts of payments with respect to securities in Euroclear. All
securities in Euroclear are held on a fungible basis without attribution of
specific certificates to specific securities clearance accounts.
Distributions in respect of the Book-Entry Certificates will be forwarded
by the Trustee to DTC, and DTC will be responsible for forwarding such payments
to Participants, each of which will be responsible for disbursing such payments
to the Beneficial Owners it represents or, if applicable, to Indirect
Participants. Accordingly, Beneficial Owners may experience delays in the
receipt of payments in respect of their Certificates. Under DTC's procedures,
DTC will take actions permitted to be taken by holders of any class of
Book-Entry Certificates under the Pooling and Servicing Agreement only at the
direction of one or more Participants to whose account the Book-Entry
Certificates are credited and whose aggregate holdings represent no less than
any minimum amount of Percentage Interests or voting rights required therefor.
DTC may take conflicting actions with respect to any action of
Certificateholders of any Class to the extent that Participants authorize such
actions. None of the Master Servicer, the Company, the Trustee or any of their
respective affiliates will have any liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests in the
Book-Entry Certificates, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
Assignment of Mortgage Loans
At the time of issuance of a series of Certificates, the Company will cause
the Mortgage Loans being included in the related Trust Fund to be assigned to
the Trustee or its nominee (which may be the Custodian) together with all
principal and interest received on or with respect to such Mortgage Loans after
the Cut-off Date (other than principal and interest due on or before the Cut-off
Date and any Excluded Spread). The Trustee will, concurrently with such
assignment, deliver a series of Certificates to the Company in exchange for the
Mortgage Loans. Each Mortgage Loan will be identified in a schedule appearing as
an exhibit to the related Pooling and Servicing Agreement. Such schedule will
include, among other things, information as to the principal balance of each
Mortgage Loan as of the Cut-off Date, as well as information respecting the
Mortgage Rate, the currently scheduled monthly payment of principal and
interest, the maturity of the Mortgage Note and the Loan-to-Value Ratio at
origination or modification (without regard to any secondary financing).
In addition, the Company will, as to each Mortgage Loan other than a
Mortgage Loan underlying any Agency Securities, deliver to the Trustee (or to
the Custodian) the legal documents relating to such Mortgage Loan that are in
possession of the Company, which may
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include: (i) the note evidencing such Mortgage Loan (the "Mortgage Note") (and
any modification or amendment thereto) endorsed without recourse either in blank
or to the order of the Trustee (or its nominee); (ii) the Mortgage (except for
any Mortgage not returned from the public recording office) with evidence of
recording indicated thereon or, in the case of a Cooperative Loan, the
respective security agreements and any applicable UCC financing statements;
(iii) an assignment in recordable form of the Mortgage (or, with respect to a
Cooperative Loan, an assignment of the respective security agreements, any
applicable UCC financing statements, recognition agreements, relevant stock
certificates, related blank stock powers and the related proprietary leases or
occupancy agreements); and (iv) if applicable, any riders or modifications to
such Mortgage Note and Mortgage, together with certain other documents at such
times as set forth in the related Pooling and Servicing Agreement. Such
assignments may be blanket assignments covering Mortgages secured by Mortgaged
Properties located in the same county, if permitted by law. If so provided in
the related Prospectus Supplement, the Company may not be required to deliver
one or more of such documents if such documents are missing from the files of
the party from whom such Mortgage Loans were purchased. Notwithstanding the
foregoing, a Trust Fund may include Mortgage Loans where the original Mortgage
Note is not delivered to the Trustee if the Company delivers to the Trustee or
the Custodian a copy or a duplicate original of the Mortgage Note, together with
an affidavit certifying that the original thereof has been lost or destroyed.
With respect to such Mortgage Loans, the Trustee (or its nominee) may not be
able to enforce the Mortgage Note against the related borrower. Residential
Funding will agree to repurchase or substitute for such a Mortgage Loan in
certain circumstances (see "The Trust Funds--Representations with Respect to
Mortgage Collateral").
In the event that, with respect to any Mortgage Loan, the Company cannot
deliver the Mortgage or any assignment with evidence of recording thereon
concurrently with the execution and delivery of the related Pooling and
Servicing Agreement because of a delay caused by the public recording office,
the Company will deliver or cause to be delivered to the Trustee or the
Custodian a true and correct photocopy of such Mortgage or assignment. The
Company will deliver or cause to be delivered to the Trustee or the Custodian
such Mortgage or assignment with evidence of recording indicated thereon after
receipt thereof from the public recording office or from the related Servicer or
Sub-Servicer.
Assignments of the Mortgage Loans to the Trustee will be recorded in the
appropriate public recording office, except in states where, in the opinion of
counsel acceptable to the Trustee, such recording is not required to protect the
Trustee's interests in the Mortgage Loan against the claim of any subsequent
transferee or any successor to or creditor of the Company or the originator of
such Mortgage
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Loan, or except as otherwise specified in the related Prospectus Supplement.
Assignment of Contracts
The Company will cause the Contracts constituting the Contract Pool to be
assigned to the Trustee or its nominee (which may be the Custodian), together
with principal and interest due on or with respect to the Contracts after the
Cut-off Date, but not including principal and interest due on or before the
Cut-off Date or any Excluded Spread. Each Contract will be identified in a
schedule appearing as an exhibit to the Pooling and Servicing Agreement. Such
schedule will specify, with respect to each Contract, among other things: the
original principal amount and the adjusted principal balance as of the close of
business on the Cut-off Date; the Mortgage Rate; the current scheduled monthly
level payment of principal and interest; and the maturity date of the Contract.
In addition, the Company, the Servicer or the Master Servicer, as to each
Contract, will deliver or cause to be delivered to the Trustee, or, as specified
in the related Prospectus Supplement, the Custodian, the original Contract and
copies of documents and instruments related to each Contract and the security
interest in the Manufactured Home securing each Contract. The Company, the
Master Servicer or the Servicer will cause a UCC-1 financing statement to be
executed by the Company identifying the Trustee as the secured party and
identifying all Contracts as collateral. However, unless otherwise specified in
the related Prospectus Supplement, the Contracts will not be stamped or
otherwise marked to reflect their assignment from the Company to the Trust Fund
and no recordings or filings will be made in the jurisdictions in which the
Manufactured Homes are located. See "Certain Legal Aspects of Mortgage Loans and
Contracts--The Contracts."
Review of Mortgage Loan or Contract Documents
The Trustee or the Custodian will hold such documents in trust for the
benefit of the Certificateholders and, generally within 45 days after receipt
thereof, will review such documents. Unless otherwise provided in the related
Prospectus Supplement, if any such document is found to be defective in any
material respect, the Trustee or such Custodian shall immediately notify the
Master Servicer or the Servicer, if any, and the Company, and if so specified in
the related Prospectus Supplement, the Master Servicer, the Servicer or the
Trustee shall immediately notify the Mortgage Collateral Seller. If the Mortgage
Collateral Seller (or, if so specified in the related Prospectus Supplement, the
Company) cannot cure such defect within 60 days (or within such other period
specified in the related Prospectus Supplement) after notice of the defect is
given to the Mortgage Collateral Seller (or, if applicable, the Company), the
Mortgage Collateral Seller (or, if applicable, the Company) will, not later than
90 days after such
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notice (or within such other period specified in the related Prospectus
Supplement), either repurchase the related Mortgage Loan or Contract or any
property acquired in respect thereof from the Trustee or substitute for such
Mortgage Loan or Contract, a new Mortgage Loan or Contract in accordance with
the standards set forth herein. See "The Trust Funds--Repurchases of Mortgage
Collateral." Unless otherwise specified in the related Prospectus Supplement,
the obligation to repurchase or substitute for a Mortgage Loan or Contract
constitutes the sole remedy available to the Certificateholders or the Trustee
for a material defect in a constituent document.
Assignment of Agency Securities
The Company will transfer, convey and assign to the Trustee or its nominee
(which may be the Custodian) all right, title and interest of the Company in the
Agency Securities and other property to be included in the Trust Fund for a
series. Such assignment will include all principal and interest due on or with
respect to the Agency Securities after the Cut-off Date specified in the related
Prospectus Supplement (except for any Excluded Spread). The Company will cause
the Agency Securities to be registered in the name of the Trustee or its
nominee, and the Trustee will concurrently authenticate and deliver the
Certificates. Unless otherwise specified in the related Prospectus Supplement,
the Trustee will not be in possession of or be assignee of record of any
underlying assets for any Agency Security. Each Agency Security will be
identified in a schedule appearing as an exhibit to the related Pooling and
Servicing Agreement, which will specify as to each Agency Security the original
principal amount and outstanding principal balance as of the Cut-off Date; the
annual pass-through rate or interest rate for each Agency Security conveyed to
the Trustee.
Spread
The Company, the Master Servicer or any of their affiliates, or such other
entity as may be specified in the related Prospectus Supplement may retain or be
paid a portion of interest due with respect to the related Mortgage Collateral.
The payment of any such portion of interest will be disclosed in the related
Prospectus Supplement. This payment may be in addition to any other payment
(such as the Servicing Fee) that any such entity is otherwise entitled to
receive with respect to the Mortgage Collateral. Any such payment in respect of
the Mortgage Collateral will represent a specified portion of the interest
payable thereon and, as specified in the related Prospectus Supplement, will
either be part of the assets transferred to the related Trust Fund (the "Excess
Spread") or will be excluded from the assets transferred to the related Trust
Fund (the "Excluded Spread"). The interest portion of a Realized Loss and any
partial recovery of interest in respect of the Mortgage Collateral will be
allocated between the owners of any Excess Spread
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or Excluded Spread and the Certificateholders entitled to payments of interest
as provided in the applicable Pooling and Servicing Agreement.
Payments on Mortgage Collateral
The Trustee or the Master Servicer, if any, will, as to each series of
Certificates, establish and maintain in trust the Certificate Account which will
be a separate account that may be interest bearing or non-interest bearing in
the name of the Trustee, maintained with a depository institution and in a
manner acceptable to each Rating Agency. If permitted by each such Rating
Agency, a Certificate Account may contain funds relating to one or more series
of Certificates.
The Trustee, the Servicer or the Master Servicer, if any, will establish a
Custodial Account which will be a separate trust account, into which payments on
the Mortgage Collateral for such series may be transferred on a periodic basis
and from which funds may be transferred to the Certificate Account in order to
make payments to Certificateholders. The Custodial Account may contain funds
relating to more than one series of Certificates as well as payments received on
other mortgage loans serviced or master serviced by the Master Servicer or the
Servicer, as applicable. Amounts held in the Certificate Account or a Custodial
Account may be invested in Permitted Investments. See "--Collection of Payments
on Mortgage Loans and Contracts" below. In addition, if so stated in such
Prospectus Supplement, one or more other trust accounts, including any Reserve
Funds, will be established into which cash, certificates of deposit or letters
of credit, or a combination thereof, will be deposited by the Company, if such
assets are required to make timely distributions with respect to the
Certificates of a series, are required as a condition to the rating of such
Certificates or are required in order to provide for certain contingencies as
described in the related Prospectus Supplement.
Collection of Payments on Mortgage Loans and Contracts
Each Servicer or the Master Servicer, if any, will be required to deposit
into the Custodial Account (unless otherwise specified in the related Prospectus
Supplement) all amounts enumerated in the following paragraph in respect of the
Mortgage Loans or Contracts serviced by it, less the Servicing Fee and Excluded
Spread, if any.
The Servicer or Master Servicer, as applicable, will deposit or will cause
to be deposited into the Custodial Account certain payments and collections
received by it subsequent to the Cut-off Date (other than payments due on or
before the Cut-off Date), as specifically set forth in the related Pooling and
Servicing Agreement, which (except as otherwise provided therein) generally will
include the following:
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(i) all payments on account of principal of the Mortgage Loans or
Contracts comprising a Trust Fund;
(ii) all payments on account of interest on the Mortgage Loans comprising
such Trust Fund, net of the portion of each payment thereof retained by the
Servicer or Sub-Servicer, if any, as Excluded Spread, its servicing or
other compensation;
(iii) all amounts (net of unreimbursed liquidation expenses and insured
expenses incurred, and unreimbursed Servicing Advances made, by the related
Servicer or Sub-Servicer) received and retained in connection with the
liquidation of any defaulted Mortgage Loan or Contract, by foreclosure or
otherwise ("Liquidation Proceeds"), including all proceeds of any Special
Hazard Insurance Policy, Bankruptcy Bond, Mortgage Pool Insurance Policy,
Contract Pool Insurance Policy, Primary Insurance Policy and any title,
hazard or other insurance policy covering any Mortgage Loan or Contract in
such Trust Fund (together with any payments under any Letter of Credit,
"Insurance Proceeds") or proceeds from any alternative arrangements
established in lieu of any such insurance and described in the applicable
Prospectus Supplement, other than proceeds to be applied to the restoration
of the related property or released to the Mortgagor in accordance with the
Master Servicer's or Servicer's normal servicing procedures;
(iv)
any Buy-Down Funds (and, if applicable, investment earnings
thereon) required to be paid to Certificateholders, as described
below;
(v) all proceeds of any Mortgage Loan or Contract in such Trust Fund
purchased (or, in the case of a substitution, certain amounts representing a
principal adjustment) by the Master Servicer, the Company, Residential Funding,
any Sub-Servicer or Mortgage Collateral Seller or any other person pursuant to
the terms of the
Pooling and Servicing Agreement. See "The Trust
Funds--Representations with Respect to Mortgage Collateral" and
"--Repurchases of Defective Mortgage Collateral" herein;
(vi) any amount required to be deposited by the Master Servicer in
connection with losses realized on investments of funds held in the Custodial
Account, as described below; and
(vii) any amounts required to be transferred from the Certificate
Account to the Custodial Account.
Both the Custodial Account and the Certificate Account must be either (i)
maintained with a depository institution whose debt obligations at the time of
any deposit therein are rated by any Rating Agency that rated any Certificates
of the related series not less than a specified level comparable to the rating
category of
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such Certificates, (ii) an account or accounts the deposits in which are fully
insured to the limits established by the FDIC, provided that any deposits not so
insured shall be otherwise maintained such that, as evidenced by an opinion of
counsel, the Certificateholders have a claim with respect to the funds in such
accounts or a perfected first priority security interest in any collateral
securing such funds that is superior to the claims of any other depositors or
creditors of the depository institution with which such accounts are maintained,
(iii) in the case of the Custodial Account, a trust account or accounts
maintained in either the corporate trust department or the corporate asset
services department of a financial institution which has debt obligations that
meet certain rating criteria, (iv) in the case of the Certificate Account, a
trust account or accounts maintained with the Trustee or (v) such other account
or accounts acceptable to any applicable Rating Agency (an "Eligible Account").
The collateral that is eligible to secure amounts in an Eligible Account is
limited to certain permitted investments, which are generally limited to United
States government securities and other investments that are rated, at the time
of acquisition, in one of the categories permitted by the related Pooling and
Servicing Agreement ("Permitted Investments").
Unless otherwise set forth in the related Prospectus Supplement, not later
than the business day preceding each Distribution Date, the Master Servicer or
Servicer, as applicable, will withdraw from the Custodial Account and deposit
into the applicable Certificate Account, in immediately available funds, the
amount to be distributed therefrom to Certificateholders on such Distribution
Date. The Master Servicer, the Servicer or the Trustee, as applicable, will also
deposit or cause to be deposited into the Certificate Account: (i) the amount of
any advances made by the Master Servicer or the Servicer as described herein
under "--Advances," (ii) any payments under any Letter of Credit, and any
amounts required to be transferred to the Certificate Account from a Reserve
Fund, as described under "Description of Credit Enhancement" below, (iii) any
amounts required to be paid by the Master Servicer or Servicer out of its own
funds due to the operation of a deductible clause in any blanket policy
maintained by the Master Servicer or Servicer to cover hazard losses on the
Mortgage Loans as described under "Insurance Policies on Mortgage Loans or
Contracts" below, (iv) any distributions received on any Agency Securities
included in the Trust Fund and (v) any other amounts as set forth in the related
Pooling and Servicing Agreement.
The portion of any payment received by the Master Servicer or the Servicer
in respect of a Mortgage Loan that is allocable to Excess Spread or Excluded
Spread, as applicable, will generally be deposited into the Custodial Account,
but any Excluded Spread will not be deposited in the Certificate Account for the
related series of Certificates and will be distributed as provided in the
related Pooling and Servicing Agreement.
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Funds on deposit in the Custodial Account may be invested in Permitted
Investments maturing in general not later than the business day preceding the
next Distribution Date and funds on deposit in the related Certificate Account
may be invested in Permitted Investments maturing, in general, no later than the
Distribution Date. Unless otherwise specified in the related Prospectus
Supplement, all income and gain realized from any such investment will be for
the account of the Servicer or the Master Servicer as additional servicing
compensation. The amount of any loss incurred in connection with any such
investment must be deposited in the Custodial Account or in the Certificate
Account, as the case may be, by the Servicer or the Master Servicer out of its
own funds upon realization of such loss.
Collection of Payments on Agency Securities
The Trustee or the Certificate Administrator, as specified in the related
Prospectus Supplement, will deposit in the Certificate Account all payments on
the Agency Securities as they are received after the Cut-off Date. If the
Trustee has not received a distribution with respect to any Agency 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 to make such payment as promptly as possible and legally
permitted. The Trustee may take such legal action against such issuer or
guarantor as the Trustee deems 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 such
legal action will be reimbursable to the Trustee out of the proceeds of any such
action and will be retained by the Trustee prior to the deposit of any remaining
proceeds in the Certificate Account pending distribution thereof to the
Certificateholders of the affected series. In the event that the Trustee has
reason to believe that the proceeds of any such legal action may be insufficient
to cover its projected legal fees and expenses, the Trustee will notify such
Certificateholders that it is not obligated to pursue any such available
remedies unless adequate indemnity for its legal fees and expenses is provided
by such Certificateholders.
Withdrawals from the Custodial Account
The Servicer or the Master Servicer, as applicable, may, from time to time,
make withdrawals from the Custodial Account for certain purposes, as
specifically set forth in the related Pooling and Servicing Agreement, which
(except as otherwise provided therein) generally will include the following:
(i) to make deposits to the Certificate Account in the amounts and in the
manner provided in the Pooling and Servicing Agreement and described above under
"--Payments on Mortgage Collateral";
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(ii) to reimburse itself or any Sub-Servicer for Advances, or for amounts
advanced in respect of taxes, insurance premiums or similar expenses or similar
expenses incurred in connection with acquiring by foreclosure or deed in lieu of
foreclosure a Mortgaged Property, including, if the Master Servicer and any
affiliate of the Master Servicer provides services such as appraisals and
brokerage services that are customarily provided by persons other than servicers
of mortgage loans, reasonable compensation for such services ("Servicing
Advances") as to any Mortgaged Property, out of late payments, Insurance
Proceeds, Liquidation Proceeds, any proceeds in respect of any REO Mortgage Loan
or collections on the Mortgage Loan or Contract with respect to which such
Advances or Servicing Advances were made;
(iii) to pay to itself or any Sub-Servicer unpaid Servicing Fees and
subservicing fees, out of payments or collections of interest on each Mortgage
Loan or Contract;
(iv) to pay to itself as additional servicing compensation any investment
income on funds deposited in the Custodial Account, any amounts remitted by
Sub-Servicers as interest in respect of partial prepayments on the Mortgage
Loans or Contracts, and, if so provided in the Pooling and Servicing Agreement,
any profits realized upon disposition of a Mortgaged Property acquired by deed
in lieu of foreclosure or repossession or otherwise allowed under the Pooling
and Servicing Agreement;
(v) to pay to itself, a Sub-Servicer, Residential Funding, the Company or
the Mortgage Collateral Seller all amounts received with respect to each
Mortgage Loan or Contract purchased, repurchased or removed pursuant to the
terms of the Pooling and Servicing Agreement and not required to be distributed
as of the date on which the related Purchase Price is determined;
(vi) to pay the Company or its assignee, or any other party named in the
related Prospectus Supplement, all amounts allocable to the Excluded Spread, if
any, out of collections or payments which represent interest on each Mortgage
Loan or Contract (including any Mortgage Loan or Contract as to which title to
the underlying Mortgaged Property was acquired);
(vii) to reimburse itself or any Sub-Servicer for any Advance previously
made which the Master Servicer has determined to not be ultimately recoverable
from Liquidation Proceeds, Insurance Proceeds or otherwise (a "Nonrecoverable
Advance"), subject to any limitations set forth in the Pooling and Servicing
Agreement as described in the related Prospectus Supplement;
(viii) to reimburse itself or the Company for certain other expenses
incurred for which it or the Company is entitled to reimbursement (including
reimbursement in connection with enforcing any repurchase, substitution or
indemnification obligation of any
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Seller) or against which it or the Company is indemnified pursuant
to the Pooling and Servicing Agreement; and
(ix) to clear the Custodial Account of amounts relating to the
corresponding Mortgage Loans or Contracts in connection with the termination of
the Trust Fund pursuant to the Pooling and Servicing Agreement, as described in
"The Pooling and Servicing Agreement--Termination; Retirement of Certificates."
Distributions
Distributions of principal and interest (or, where applicable, of principal
only or interest only) on each class of Certificates entitled thereto will be
made on each Distribution Date either by the Trustee, the Master Servicer or the
Certificate Administrator acting on behalf of the Trustee or a paying agent
appointed by the Trustee (the "Paying Agent"). Such distributions will be made
to the persons who are registered as the holders of such Certificates at the
close of business on the last business day of the preceding month (the "Record
Date"). Distributions will be made in immediately available funds (by wire
transfer or otherwise) to the account of a Certificateholder at a bank or other
entity having appropriate facilities therefor, if such Certificateholder has so
notified the Trustee, the Master Servicer, the Certificate Administrator or the
Paying Agent, as the case may be, and the applicable Pooling and Servicing
Agreement provides for such form of payment, or by check mailed to the address
of the person entitled thereto as it appears on the Certificate Register. The
final distribution in retirement of the Certificates will be made only upon
presentation and surrender of the Certificates at the office or agency of the
Trustee specified in the notice to Certificateholders. Distributions will be
made to each Certificateholder in accordance with such holder's Percentage
Interest in a particular class. The "Percentage Interest" represented by a
Certificate of a particular class will be equal to the percentage obtained by
dividing the initial principal balance or notional amount of such Certificate by
the aggregate initial amount or notional balance of all the Certificates of such
class.
Principal and Interest on the Certificates
The method of determining, and the amount of, distributions of principal
and interest (or, where applicable, of principal only or interest only) on a
particular series of Certificates will be described in the related Prospectus
Supplement. Distributions of interest on each class of Certificates will be made
prior to distributions of principal thereon. Each class of Certificates (other
than certain classes of Strip Certificates) may have a different Pass-Through
Rate, which may be a fixed, variable or adjustable Pass-Through Rate, or any
combination of two or more such Pass-Through Rates. The related Prospectus
Supplement will specify the Pass-Through Rate or Rates for each class, or the
initial Pass-Through Rate or Rates and the method for determining the Pass-
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Through Rate or Rates. Unless otherwise specified in the related Prospectus
Supplement, interest on the Certificates will be calculated on the basis of a
360-day year consisting of twelve 30- day months.
On each Distribution Date for a series of Certificates, the Trustee or the
Master Servicer or the Certificate Administrator on behalf of the Trustee will
distribute or cause the Paying Agent to distribute, as the case may be, to each
holder of record on the Record Date of a class of Certificates, an amount equal
to the Percentage Interest represented by the Certificate held by such holder
multiplied by such class's Distribution Amount. The "Distribution Amount" for a
class of Certificates for any Distribution Date will be the portion, if any, of
the Principal Distribution Amount (as defined in the related Prospectus
Supplement) allocable to such class for such Distribution Date, plus, if such
class is entitled to payments of interest on such Distribution Date, one month's
interest at the applicable Pass-Through Rate on the principal balance or
notional amount of such class specified in the applicable Prospectus Supplement,
less certain interest shortfalls, which generally will include (i) any Deferred
Interest added to the principal balance of the Mortgage Loans and/or the
outstanding balance of one or more classes of Certificates on the related Due
Date, (ii) any other interest shortfalls (including, without limitation,
shortfalls resulting from application of the Relief Act or similar legislation
or regulations as in effect from time to time) allocable to Certificateholders
which are not covered by advances or the applicable credit enhancement and (iii)
unless otherwise specified in the related Prospectus Supplement, Prepayment
Interest Shortfalls, in each case in such amount that is allocated to such class
on the basis set forth in the Prospectus Supplement.
In the case of a series of Certificates which includes two or more classes
of Certificates, the timing, sequential order, priority of payment or amount of
distributions in respect of principal, and any schedule or formula or other
provisions applicable to the determination thereof (including distributions
among multiple classes of Senior Certificates or Subordinate Certificates) shall
be set forth in the related Prospectus Supplement. Distributions in respect of
principal of any class of Certificates will be made on a pro rata basis among
all of the Certificates of such class unless otherwise set forth in the related
Prospectus Supplement.
Except as otherwise provided in the related Pooling and Servicing
Agreement, on or prior to the 20th day (or, if such day is not a business day,
the next business day) of the month of distribution (the "Determination Date"),
the Master Servicer or the Certificate Administrator, as applicable, will
determine the amounts of principal and interest which will be passed through to
Certificateholders on the succeeding Distribution Date. Prior to the close of
business on the business day succeeding each Determination
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Date, the Master Servicer or the Certificate Administrator, as applicable, will
furnish a statement to the Trustee (the information in such statement to be made
available to Certificateholders by the Master Servicer or the Certificate
Administrator, as applicable, on request) setting forth, among other things, the
amount to be distributed on the next succeeding Distribution Date.
Example of Distributions
The following chart sets forth an example of the flow of funds as it would
relate to a hypothetical series of Certificates issued, and with a Cut-off Date
occurring, in July 1996:
Date Note Description
July 1. (A) Cut-off Date.
July 2-31 (B) The Servicers or the Sub-Servicers, as
. applicable, receive Principal Prepayments.
July 31 . (C) Record Date.
August 1. (D) The due date for a Mortgage Loan or
Contract (the "Due
Date").
August 16 (E) The Master Servicer or the Servicer, as
. applicable, receives scheduled payments of
principal and interest due on August 1 and
received or advanced by Servicers or
Subservicers.
August 20 (F) Determination Date.
.
August 26 (G) Distribution Date.
.
Succeeding months follow the pattern of (B) through (G), except that for
succeeding months (B) will also include the first day of such month. Certain
series of Certificates may have different prepayment periods, Cut-off Dates,
Record Dates, Due Dates, remittance dates, Determination Dates and/or
Distribution Dates than those set forth above.
(A) The initial principal balance of the Mortgage Pool or Contract Pool will be
the aggregate principal balance of the Mortgage Loans or Contracts at the
close of business on July 1, 1996, after deducting principal payments due
on or before such date. Those principal payments due on or before July 1,
and the accompanying interest payments, and any Principal Prepayments
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received as of the close of business on July 1, 1996 are not part of the
Mortgage Pool or Contract Pool and will not be passed through to
Certificateholders.
(B) Any principal payments received in advance of the scheduled
Due Date and not accompanied by a payment of interest for any
period following the date of payment ("Principal Prepayments")
may be received at any time during this period and will be
remitted to the Master Servicer or Servicer as described in (E)
below for distribution to Certificateholders as described in (F)
below. When a Mortgage Loan or Contract is prepaid in full,
interest on the amount prepaid is collected from the Mortgagor
only to the date of payment. Partial Principal Prepayments are
applied so as to reduce the principal balances of the related
Mortgage Loans or Contracts as of the first day of the month in
which the payments are made; no interest will be paid to
Certificateholders in respect of such prepaid amounts for the
month in which such partial Principal Prepayments were received.
(C) Distributions on August 26 (because August 25, 1996 is not a business day)
will be made to Certificateholders of record at the close of business on
July 31.
(D) Scheduled principal and interest payments are due from Mortgagors.
(E) Payments due on August 1 from Mortgagors will be deposited by
the Sub-Servicers in subservicing accounts or Servicers in
collection accounts (or will be otherwise managed in a manner
acceptable to the Rating Agencies) as received and will include
the scheduled principal payments plus interest on the July
balances (with the exception of interest from the date of
prepayment of any Mortgage Loan or Contract prepaid in full
during July and interest on the amount of partial Principal
Prepayments in July). Funds required to be remitted from the
collection accounts or the subservicing accounts to the Master
Servicer or the Servicer, as applicable, will be so remitted on
August 16 (because August 18, 1996 is not a business day)
together with any required Advances by the Servicer or the Sub-
Servicers (except that Principal Prepayments in full and certain
Principal Prepayments in part received by Sub-Servicers during
the month of July will have been remitted to the Master Servicer
or the Servicer, as applicable, within five business days of
receipt).
(F) On August 20, the Master Servicer or the Certificate Administrator, if any,
will determine the amounts of principal and interest which will be passed
through on August 26 to the holders of each class of Certificates. The
Master Servicer or the Certificate Administrator, if any, will be obligated
to distribute those payments due August 1 which have been received from
Servicers or Sub-Servicers prior to and including August 16,
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as well as all Principal Prepayments received on Mortgage Loans in July
(with interest adjusted to the Pass-Through Rates applicable to the
respective classes of Certificates and reduced on account of Principal
Prepayments as described above). Distributions to the holders of Senior
Certificates, if any, on August 26 may include certain amounts otherwise
distributable to the holders of the related Subordinate Certificates,
amounts withdrawn from any Reserve Fund and amounts advanced by the Master
Servicer or the Servicer under the circumstances described in
"Subordination" and "--Advances."
(G) On August 26 (because August 25 is not a business day, the next succeeding
business day), the amounts determined on August 20 will be distributed to
Certificateholders.
If provided in the related Prospectus Supplement, the Distribution Date
with respect to any series of Certificates as to which the Trust Fund includes
Agency Securities may be a specified date or dates other than the 25th day of
each month in order to allow for the receipt of distributions on such Agency
Securities.
Advances
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer or the applicable Servicer will agree to advance (either out of its own
funds, funds advanced to it by Servicers or Sub-Servicers, as applicable, or
funds being held in the Custodial Account for future distribution), for the
benefit of the related Certificateholders, on or before each Distribution Date,
an amount equal to the aggregate of all scheduled payments of principal (other
than any Balloon Amount in the case of a Balloon Loan) and interest at the
applicable Pass-Through Rate or Net Mortgage Rate, as the case may be (an
"Advance"), which were delinquent as of the close of business on the business
day preceding the related Determination Date on the related Mortgage Loans or
Contracts, but only to the extent that such Advances would, in the judgment of
the Master Servicer or the Servicer, be recoverable out of late payments by the
Mortgagors, Liquidation Proceeds, Insurance Proceeds or otherwise. If a Trust
Fund includes Agency Securities, any advancing obligations with respect to
underlying Mortgage Loans or Contracts will be pursuant to the terms of such
Agency Securities and may differ from the provisions relating to Advances
described herein.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to related Certificateholders. Such Advances do not represent
an obligation of the Master Servicer or the Servicer to guarantee or insure
against losses. If Advances have been made by the Master Servicer or Servicer
from cash being held for future distribution to Certificateholders, such funds
will be required to be replaced on or before any future Distribution Date to the
extent that funds in the Certificate Account on such Distribution Date would be
less than payments required to be made to
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Certificateholders. Any Advances will be reimbursable to the Master Servicer or
Servicer out of recoveries on the related Mortgage Loans or Contracts for which
such amounts were advanced (e.g., late payments made by the related Mortgagor,
any related Liquidation Proceeds and Insurance Proceeds, proceeds of any
applicable form of credit enhancement or proceeds of any Mortgage Collateral
purchased by the Company, Residential Funding, a Sub-Servicer or a Mortgage
Collateral Seller under the circumstances described above). Such Advances will
also be reimbursable from cash otherwise distributable to Certificateholders to
the extent that the Master Servicer or Servicer shall determine that any such
Advances previously made are not ultimately recoverable as described above. With
respect to any Senior/Subordinate Series, so long as the related Subordinate
Certificates remain outstanding and subject to certain limitations with respect
to Special Hazard Losses, Fraud Losses, Bankruptcy Losses and Extraordinary
Losses, such Advances may also be reimbursable out of amounts otherwise
distributable to holders of the Subordinate Certificates, if any. The Master
Servicer or the Servicer will also be obligated to make Servicing Advances, to
the extent recoverable out of Liquidation Proceeds or otherwise, in respect of
certain taxes and insurance premiums not paid by Mortgagors on a timely basis.
Funds so advanced will be reimbursable to the Master Servicer or Servicer to the
extent permitted by the Pooling and Servicing Agreement. The Master Servicer's
or Servicer's obligation to make Advances may be supported by another entity, a
letter of credit or other method as may be described in the related Pooling and
Servicing Agreement. In the event that the short-term or long-term obligations
of the provider of such support are downgraded by a Rating Agency rating the
related Certificates or if any collateral supporting such obligation is not
performing or is removed pursuant to the terms of any agreement described in the
related Prospectus Supplement, the Certificates may also be downgraded.
Prepayment Interest Shortfalls
When a Mortgagor prepays a Mortgage Loan or Contract in full between
scheduled Due Dates for such Mortgage Loan or Contract, the Mortgagor pays
interest on the amount prepaid only to but not including the date on which such
Principal Prepayment is made. Similarly, Liquidation Proceeds from a Mortgaged
Property will not include interest for any period after the date on which the
liquidation took place. The shortfall between a full month's interest due with
respect to a Mortgage Loan or Contract and the amount of interest paid or
recovered with respect thereto in the event of a prepayment or liquidation is
referred to as a "Prepayment Interest Shortfall." If so specified in the related
Prospectus Supplement, to the extent funds are available from the Servicing Fee,
the Servicer or Master Servicer may make an additional payment to
Certificateholders with respect to any Mortgage Loan or Contract that prepaid in
full during the related prepayment period equal to the amount, if any, necessary
to assure that, on the related
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Distribution Date, the Available Distribution Amount would include with respect
to each such Mortgage Loan or Contract an amount equal to interest at the
Mortgage Rate (less the Servicing Fee and Excluded Spread, if any) for such
Mortgage Loan or Contract from the date of such prepayment to the related Due
Date (such amount, "Compensating Interest"). Compensating Interest may be
limited to the aggregate amount (or any portion thereof) of the Servicing Fee
received by the Servicer or Master Servicer in that month in relation to the
Mortgage Loans or Contracts, or in any other manner, and, if so limited, may not
be sufficient to cover the Prepayment Interest Shortfall. If so disclosed in the
related Prospectus Supplement, Prepayment Interest Shortfalls may be applied to
reduce interest otherwise payable with respect to one or more classes of
Certificates of a series. See "Yield Considerations."
Reports to Certificateholders
On each Distribution Date, the Master Servicer or the Certificate
Administrator, as applicable, will forward or cause to be forwarded to each
Certificateholder of record a statement or statements with respect to the
related Trust Fund setting forth the information described in the related
Pooling and Servicing Agreement. Except as otherwise provided in the related
Pooling and Servicing Agreement, such information generally will include the
following (as applicable):
(i) the amount, if any, of such distribution allocable to
principal;
(ii) the amount, if any, of such distribution allocable to
interest and the amount, if any, of any shortfall in the amount of
interest and principal;
(iii) the aggregate unpaid principal balance of the Mortgage Collateral
after giving effect to the distribution of principal on such Distribution Date;
(iv) the outstanding principal balance or notional amount of each class of
Certificates after giving effect to the distribution of principal on such
Distribution Date;
(v) based on the most recent reports furnished by Servicers or
Sub-Servicers, the number and aggregate principal balances of any items of
Mortgage Collateral in the related Trust Fund that are delinquent (a) one month,
(b) two months and (c) three months, and that are in foreclosure;
(vi) the book value of any property acquired by such Trust Fund through
foreclosure or grant of a deed in lieu of foreclosure;
(vii) the balance of the Reserve Fund, if any, at the close of
business on such Distribution Date;
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(viii) the Senior Percentage, if applicable, after giving effect
to the distributions on such Distribution Date;
(ix) the amount of coverage under any Letter of Credit, Mortgage Pool
Insurance Policy or other form of credit enhancement covering default risk as of
the close of business on the applicable Determination Date and a description of
any credit enhancement substituted therefor;
(x) 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 such amounts;
(xi) in the case of Certificates benefiting from alternative credit
enhancement arrangements described in a Prospectus Supplement, the amount of
coverage under such alternative arrangements as of the close of business on the
applicable Determination Date; and
(xii) with respect to any series of Certificates as to which the Trust Fund
includes Agency Securities, certain additional information as required under the
related Pooling and Servicing
Agreement.
Each amount set forth pursuant to clause (i) or (ii) above will be
expressed as a dollar amount per Single Certificate. As to a particular class of
Certificates, a "Single Certificate" generally will evidence a Percentage
Interest obtained by dividing $1,000 by the initial principal balance or
notional balance of all the Certificates of such class, except as otherwise
provided in the related Pooling and Servicing Agreement. In addition to the
information described above, reports to Certificateholders will contain such
other information as is set forth in the applicable Pooling and Servicing
Agreement, which may include, without limitation, information as to Advances,
reimbursements to Sub-Servicers, Servicers and the Master Servicer and losses
borne by the related Trust Fund.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or the Certificate Administrator, as
applicable, will furnish a report to each person that was a holder of record of
any class of Certificates at any time during such calendar year. Such report
will include information as to the aggregate of amounts reported pursuant to
clauses (i) and (ii) above for such calendar year or, in the event such person
was a holder of record of a class of Certificates during a portion of such
calendar year, for the applicable portion of such year.
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Servicing and Administration of Mortgage Collateral
General
The Master Servicer, the Certificate Administrator or any Servicer, as
applicable, that is a party to a Pooling and Servicing Agreement, will be
required to perform the services and duties specified in the related Pooling and
Servicing Agreement. The duties to be performed by the Master Servicer or each
Servicer, subject to the general supervision by the Master Servicer or the
Certificate Administrator, if any, will include the customary functions of a
servicer, including collection of payments from Mortgagors; maintenance of any
primary mortgage insurance, hazard insurance and other types of insurance;
processing of assumptions or substitutions; attempting to cure delinquencies;
supervising foreclosures; inspection and management of Mortgaged Properties
under certain circumstances; and maintaining accounting records relating to the
Mortgage Collateral. Each Servicer or the Master Servicer, if any, may be
obligated, under certain circumstances, to make Advances in respect of
delinquent installments of principal of and interest on Mortgage Loans or
Contracts and in respect of certain taxes and insurance premiums not paid on a
timely basis by Mortgagors, as described under "--Advances" above. With respect
to any series of Certificates for which the Trust Fund includes Agency
Securities, the Master Servicer's or Certificate Administrator's servicing and
administration obligations will be set forth in the related Prospectus
Supplement.
Pursuant to each Pooling and Servicing Agreement, each Servicer or the
Master Servicer, if there are no Servicers for the related series, may enter
into sub-servicing agreements (each, a "Sub-Servicing Agreement") with one or
more sub-servicers (each, a "Sub-Servicer") who will agree to perform certain
functions for the Servicer or Master Servicer relating to the servicing and
administration of the Mortgage Loans or Contracts included in the Trust Fund
relating to such Sub-Servicing Agreement. Under any Sub-Servicing Agreement,
each Sub-Servicer, will agree, among other things, to perform some or all of the
Servicer's or the Master Servicer's servicing obligations, including but not
limited to, making Advances to the related Certificateholders. The Servicer or
the Master Servicer, as applicable, will remain liable for its servicing
obligations that are delegated to a Sub-Servicer as if such Servicer or the
Master Servicer alone were servicing such Mortgage Loans or Contracts.
Collection and Other Servicing Procedures
Each Servicer or the Master Servicer, as applicable, will make reasonable
efforts to collect all payments called for under the Mortgage Loans or Contracts
and will, consistent with the related Pooling and Servicing Agreement and any
applicable insurance policy or other credit enhancement, follow such collection
procedures as it
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follows with respect to mortgage loans or contracts serviced by it that are
comparable to the Mortgage Loans or Contracts. The Servicer or the Master
Servicer may, in its discretion, waive any prepayment charge in connection with
the prepayment of a Mortgage Loan or extend the due dates for payments due on a
Mortgage Note or Contract, provided that the insurance coverage for such
Mortgage Loan or Contract or any coverage provided by any alternative credit
enhancement will not be adversely affected.
In connection with any significant partial prepayment of a Mortgage Loan,
the Master Servicer, to the extent not inconsistent with the terms of the
Mortgage Note and local law and practice, may permit the Mortgage Loan to be
re-amortized such that the monthly payment is recalculated as an amount that
will fully amortize the remaining principal amount thereof by the original
maturity date based on the original Mortgage Rate, provided that such
re-amortization shall not be permitted if it would constitute a modification of
the Mortgage Loan for federal income tax purposes.
The Master Servicer, any Servicer or one or more Sub-Servicers with respect
to a given Trust Fund may establish and maintain an escrow account (the "Escrow
Account") in which Mortgagors will be required to deposit amounts sufficient to
pay taxes, assessments, certain mortgage and hazard insurance premiums and other
comparable items. Withdrawals from any such Escrow Account may be made to effect
timely payment of taxes, assessments, mortgage and hazard insurance, to refund
to Mortgagors amounts determined to be owed, to pay interest on balances in any
such Escrow Account, if required, to repair or otherwise protect the Mortgaged
Properties and to clear and terminate such account. The Master Servicer or any
Servicer or Sub-Servicer, as the case may be, will be responsible for the
administration of each such Escrow Account and will be obligated to make
advances to such accounts when a deficiency exists therein. The Master Servicer,
Servicer or Sub-Servicer will be entitled to reimbursement for any such advances
from the Collection Account.
Other duties and responsibilities of each Servicer, the Master Servicer and
the Certificate Administrator are described above under "--Payments on Mortgage
Collateral."
Servicing Compensation and Payment of Expenses
Each Servicer, the Master Servicer or the Certificate Administrator, as
applicable, will be paid compensation for the performance of its servicing
obligations, which compensation will be part of the servicing fee (the
"Servicing Fee") specified in the related Prospectus Supplement. Any
Sub-Servicer will be entitled to receive a portion of the Servicing Fee. Except
as otherwise provided in the related Prospectus Supplement, the Servicer or the
Master Servicer, if any, will deduct the Servicing Fee with respect to the
Mortgage Loans or Contracts underlying the Certificates of a Series in an amount
to be specified in the related Prospectus Supplement.
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The Servicing Fee may be fixed or variable. In addition to the Servicing Fee,
unless otherwise specified in the related Prospectus Supplement, the Master
Servicer, any Servicer or the relevant Sub-Servicers, if any, will be entitled
to servicing compensation in the form of assumption fees, late payments charges
or excess proceeds following disposition of property in connection with
defaulted Mortgage Loans or Contracts and any earnings on investments held in
the Certificate Account or any Custodial Account. Any Excluded Spread retained
by a Mortgage Collateral Seller, the Master Servicer, or any Servicer or
Sub-Servicer will not constitute part of the Servicing Fee. Notwithstanding the
foregoing, with respect to a series of Certificates as to which the Trust Fund
includes Agency Securities, the compensation payable to the Master Servicer or
Certificate Administrator for servicing and administering such Agency Securities
on behalf of the holders of such Certificates may be based on a percentage per
annum described in the related Prospectus Supplement of the outstanding balance
of such Agency Securities and may be retained from distributions of interest
thereon, if so specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer, the Master Servicer or the Certificate Administrator will pay from the
Servicing Fee (i) the fees of any Sub-Servicers, (ii) certain expenses incurred
in connection with the servicing of the Mortgage Loans or Contracts, including,
without limitation, payment of certain of the insurance policy premiums, fees or
other amounts payable for any alternative credit enhancement, reimbursement of
expenses incurred in connection with a foreclosure or deed in lieu of
foreclosure upon a Mortgaged Property, payment of the fees and disbursements of
the Trustee (and any Custodian selected by the Trustee), the Certificate
Registrar, any Paying Agent, independent accountants and payment of expenses
incurred in enforcing the obligations of Sub-Servicers, Servicers and Mortgage
Collateral Sellers and (iii) expenses related to the preparation of reports to
Certificateholders. Certain of these expenses may be reimbursable from
Liquidation Proceeds or insurance policies and, in the case of enforcement of
the obligations of Sub-Servicers, from any recoveries in excess of amounts due
with respect to the related Mortgage Loans or Contracts or from specific
recoveries of costs. The related Pooling and Servicing Agreement may provide
that the Certificate Administrator, the Master Servicer, and any Servicer and
Sub-Servicer may obtain their respective fees by deducting them from amounts
otherwise required to be deposited into the Collection Account.
The related Trust Fund will suffer no loss by reason of the expenses of the
Servicer or Master Servicer described above to the extent claims are fully paid
from amounts in any Reserve Fund, any related insurance policies, the
Liquidation Proceeds, any proceeds in respect of an REO Mortgage Loan (with
respect to expenses incurred in connection with a foreclosure or deed in lieu of
foreclosure) or any applicable alternative credit enhancement
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described in the related Prospectus Supplement. In the event, however, that
claims are either not made or are not fully paid from such sources, the related
Trust Fund will suffer a loss to the extent that Liquidation Proceeds, after
reimbursement of the expenses of the Master Servicer or any Servicer or
Sub-Servicer, are less than the principal balance of and accrued interest on the
related Mortgage Loan or Contract. In addition, the Master Servicer or any
Servicer or Sub-Servicer, as applicable, will be entitled to reimbursement of
expenditures incurred by it in connection with the restoration of Mortgaged
Property, such right of reimbursement being prior to the rights of the
Certificateholders to receive any payments from any Reserve Fund or from any
related Insurance Proceeds, Liquidation Proceeds or any proceeds of alternative
credit enhancement.
Evidence as to Compliance
Each Servicer, the Master Servicer or the Certificate Administrator, as
appropriate, will, with respect to each series of Certificates, deliver to the
Trustee, on or before the date in each year specified in the related Pooling and
Servicing Agreement, an officer's certificate stating that (i) a review of the
activities of the Certificate Administrator, each Servicer or the Master
Servicer and each Sub-Servicer, as applicable, during the preceding calendar
year and of performance under such Pooling and Servicing Agreement and the
applicable Sub-Servicing Agreement, if any, has been made under the supervision
of such officer, and (ii) to the best of such officer's knowledge, based on such
review, the Certificate Administrator, each Servicer or the Master Servicer and
each Sub-Servicer, as applicable, has fulfilled all its obligations under such
Pooling and Servicing Agreement throughout such year, or, if there has been a
default in the fulfillment of any such obligation, specifying each such default
known to such officer and the nature and status thereof. If set forth in the
Prospectus Supplement, such officer's certificate shall be accompanied by a
statement of a firm of independent public accountants to the effect that, on the
basis of an examination of certain documents and records relating to servicing
of the Mortgage Loans or Contracts, including similar reports delivered by each
Servicer or Sub-Servicer (upon which such firm is entitled to rely), conducted
in accordance with the Uniform Single Attestation Program for Mortgage Bankers
or similar standards acceptable to the Servicer, the Master Servicer or the
Certificate Administrator, as applicable, the servicing of the Mortgage Loans or
Contracts was conducted in compliance with the provisions of the related Pooling
and Servicing Agreement and the applicable Sub-Servicing Agreement, if any,
except for (a) such exceptions as such firm believes to be immaterial and (b)
such other exceptions as are set forth in such statement.
Certain Other Matters Regarding Servicing
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Each Servicer, the Master Servicer or the Certificate Administrator, as
applicable, may not resign from its obligations and duties under the related
Pooling and Servicing Agreement except with the consent of all
Certificateholders or upon a determination that its duties thereunder are no
longer permissible under applicable law. No such resignation will become
effective until the Trustee or a successor servicer or administrator has assumed
the Servicer's, the Master Servicer's or the Certificate Administrator's
obligations and duties under such Pooling and Servicing Agreement. A Servicer,
the Master Servicer or the Certificate Administrator, as applicable, may be
removed upon the occurrence of certain Events of Default described below under
"The Pooling and Servicing Agreement--Events of Default" and "--Rights Upon
Event of Default."
Each Pooling and Servicing Agreement will also provide that neither the
Servicer, the Master Servicer or the Certificate Administrator, nor any
director, officer, employee or agent thereof, will be under any liability to the
Trust Fund or the Certificateholders for any action taken or for restraining
from taking any action in good faith pursuant to the Pooling and Servicing
Agreement, or for errors in judgment. However, neither the Servicer, the Master
Servicer or the Certificate Administrator nor any such person will be protected
against any liability which would otherwise be imposed by reason of the failure
to perform its obligations in compliance with any standard of care set forth in
the Pooling and Servicing Agreement. The Servicer, the Master Servicer or the
Certificate Administrator, as applicable, may, in its discretion, undertake any
such action that it may deem necessary or desirable with respect to the Pooling
and Servicing Agreement and the rights and duties of the parties thereto and the
interest of the Certificateholders thereunder. In such event, the legal expenses
and costs of such action and any liability resulting therefrom will be expenses,
costs and liabilities of the Trust Fund and the Servicer, the Master Servicer or
the Certificate Administrator will be entitled to be reimbursed therefor out of
funds otherwise distributable to Certificateholders.
The Master Servicer or Servicer may in its discretion (i) waive any late
payment charge or any prepayment charge or penalty interest in connection with
the prepayment of a Mortgage Loan or Contract and (ii) extend the Due Date for
payments due on a Mortgage Loan or Contract, if the Master Servicer or Servicer
has determined that any such waiver or extension will not impair the coverage of
any related insurance policy, materially adversely affect the lien of the
related Mortgage or, if a REMIC election has been made with respect to the Trust
Fund, adversely affect such REMIC status.
The Master Servicer will be required to maintain a fidelity bond and errors
and omissions policy with respect to its officers and employees and other
persons acting on behalf of the Master Servicer in connection with its
activities under the Pooling and Servicing Agreement.
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A Servicer, the Master Servicer or the Certificate Administrator may have
other business relationships with the Company, any Mortgage Collateral Seller or
their affiliates.
Special Servicing
If provided for in the related Prospectus Supplement, the Pooling and
Servicing Agreement for a series of Certificates may name a special servicer (a
"Special Servicer"). The Special Servicer will be responsible for the servicing
of certain delinquent Mortgage Loans or Contracts as described in the Prospectus
Supplement. The Special Servicer may have certain discretion to extend relief to
Mortgagors whose payments become delinquent. The Special Servicer may be
permitted to grant a period of temporary indulgence to a Mortgagor or may enter
into a liquidating plan providing for repayment by the Mortgagor, in each case
without the prior approval of the Master Servicer or the Servicer, as
applicable. Other types of forbearance generally will require the approval of
the Master Servicer or Servicer, as applicable.
Enforcement of "Due-on-Sale" Clauses
Unless otherwise specified in the related Prospectus Supplement, when any
Mortgaged Property relating to a Mortgage Loan or Contract (other than an ARM
Loan described below) is about to be conveyed by the Mortgagor, the Master
Servicer or the Servicer, as applicable, directly or through a Sub-Servicer, to
the extent it has knowledge of such proposed conveyance, generally will be
obligated to exercise the Trustee's rights to accelerate the maturity of such
Mortgage Loan or Contract under any due-on-sale clause applicable thereto. A
due-on-sale clause will be enforced only if the exercise of such rights is
permitted by applicable law and only to the extent it would not adversely affect
or jeopardize coverage under any Primary Insurance Policy or applicable credit
enhancement arrangements. See "Certain Legal Aspects of Mortgage Loans and
Contracts--The Mortgage Loans--Enforceability of Certain Provisions" and "--The
Contracts--'Due-on-Sale' Clauses." If the Master Servicer, Servicer or
Sub-Servicer is prevented from enforcing a due-on-sale clause under applicable
law or if the Master Servicer, Servicer or Sub-Servicer determines that it is
reasonably likely that a legal action would be instituted by the related
Mortgagor to avoid enforcement of such due-on-sale clause, the Master Servicer,
Servicer or Sub-Servicer will enter into an assumption and modification
agreement with the person to whom such property has been or is about to be
conveyed, pursuant to which such person becomes liable under the Mortgage Note
or Contract subject to certain specified conditions. The original Mortgagor may
be released from liability on a Mortgage Loan or Contract if the Master
Servicer, Servicer or Sub-Servicer shall have determined in good faith that such
release will not adversely affect the collectability of the Mortgage Loan or
Contract. In the event of the sale of a Mortgaged Property subject to an ARM
Loan, such ARM Loan may be assumed if it is by its terms
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assumable and if, in the reasonable judgment of the Master Servicer, Servicer or
Sub-Servicer, the proposed transferee of the related Mortgaged Property
establishes its ability to repay the loan and the security for such ARM Loan
would not be impaired by the assumption. If a Mortgagor transfers the Mortgaged
Property subject to an ARM Loan without consent, such ARM Loan may be declared
due and payable. In connection with any such assumption, the Mortgage Rate borne
by the related Mortgage Note or Contract may not be altered. Mortgagors may,
from time to time, request partial releases of the Mortgaged Properties,
easements, consents to alteration or demolition and other similar matters. The
Master Servicer, Servicer or Sub-Servicer may approve such a request if it has
determined, exercising its good faith business judgment, that such approval will
not adversely affect the security for, and the timely and full collectability
of, the related Mortgage Loan or Contract. Any fee collected by the Master
Servicer, Servicer or Sub-Servicer for entering into an assumption or
substitution of liability agreement or for processing a request for partial
release of the Mortgaged Property generally will be retained by the Master
Servicer, Servicer or Sub-Servicer as additional servicing compensation.
Realization Upon Defaulted Property
In the event that title to any Mortgaged Property is acquired in
foreclosure or by deed in lieu of foreclosure (or, in the case of Contracts in
certain states, by repossession of the related Manufactured Home), the deed or
certificate of sale will be issued to the Trustee or to its nominee on behalf of
Certificateholders. Notwithstanding any such acquisition of title and
cancellation of the related Mortgage Loan or Contract, such Mortgage Loan (an
"REO Mortgage Loan") or Contract (an "REO Contract") will be considered for most
purposes to be an outstanding Mortgage Loan or Contract held in the Trust Fund
until such time as the Mortgaged Property is sold and all recoverable
Liquidation Proceeds and Insurance Proceeds have been received with respect to
such defaulted Mortgage Loan (a "Liquidated Mortgage Loan") or Contract (a
"Liquidated Contract"). For purposes of calculations of amounts distributable to
Certificateholders in respect of an REO Mortgage Loan or an REO Contract, the
amortization schedule in effect at the time of any such acquisition of title
(before any adjustment thereto by reason of any bankruptcy or any similar
proceeding or any moratorium or similar waiver or grace period) will be deemed
to have continued in effect (and, in the case of an ARM Loan, such amortization
schedule will be deemed to have adjusted in accordance with any interest rate
changes occurring on any adjustment date therefor) so long as such REO Mortgage
Loan or REO Contract is considered to remain in the Trust Fund. If a REMIC
election has been made, any Mortgaged Property so acquired by the Trust Fund
must be disposed of in accordance with applicable federal income tax regulations
and consistent with the status of the Trust Fund as a REMIC. To the extent
provided in the related Pooling and Servicing Agreement, any income (net of
expenses and other than gains described below)
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received by the Sub-Servicer, Servicer or Master Servicer on such Mortgaged
Property prior to its disposition will be deposited in the Custodial Account
upon receipt and will be available at such time for making payments to
Certificateholders.
With respect to a Mortgage Loan or Contract in default, the Master Servicer
or Servicer may pursue foreclosure (or similar remedies) concurrently with
pursuing any remedy for a breach of a representation and warranty. However, the
Master Servicer or Servicer is not required to continue to pursue both such
remedies if it determines that one such remedy is more likely to result in a
greater recovery. If such Mortgage Loan is an Additional Collateral Loan, the
Master Servicer (or the related Subservicer) may proceed against the related
Mortgaged Property or the related Additional Collateral first or may proceed
against both concurrently (as permitted by applicable law and the terms under
which such Additional Collateral is held, including any third-party guarantee).
Upon the first to occur of final liquidation and a repurchase or substitution
pursuant to a breach of a representation and warranty, such Mortgage Loan or
Contract will be removed from the related Trust Fund. The Master Servicer or
Servicer may elect to treat a defaulted Mortgage Loan or Contract as having been
finally liquidated if substantially all amounts expected to be received in
connection therewith have been received. Any additional liquidation expenses
relating to such Mortgage Loan or Contract thereafter incurred will be
reimbursable to the Master Servicer or Servicer (or any Sub-Servicer) from any
amounts otherwise distributable to the related Certificateholders, or may be
offset by any subsequent recovery related to such Mortgage Loan or Contract.
Alternatively, for purposes of determining the amount of related Liquidation
Proceeds to be distributed to Certificateholders, the amount of any Realized
Loss or the amount required to be drawn under any applicable form of credit
enhancement, the Master Servicer or Servicer may take into account minimal
amounts of additional receipts expected to be received, as well as estimated
additional liquidation expenses expected to be incurred in connection with such
defaulted Mortgage Loan or Contract.
With respect to certain series of Certificates, if so provided in the
related Prospectus Supplement, the applicable form of credit enhancement may
provide, to the extent of coverage thereunder, that a defaulted Mortgage Loan or
Contract or REO Mortgage Loan or REO Contract will be removed from the Trust
Fund prior to the final liquidation thereof. In addition, the Master Servicer or
Servicer may have the option to purchase from the Trust Fund any defaulted
Mortgage Loan or Contract after a specified period of delinquency. In the case
of a Senior/Subordinate Series, unless otherwise specified in the related
Prospectus Supplement, if a final liquidation of a Mortgage Loan or Contract
resulted in a Realized Loss and within two years thereafter the Master Servicer
or Servicer receives a subsequent recovery specifically related to such Mortgage
Loan or Contract (in connection with a related breach of a
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representation or warranty or otherwise), such subsequent recovery shall be
distributed to the then-current Certificateholders of any outstanding class to
which such 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 Certificates of any such class in excess of the total amounts of principal
and interest that would have been distributable thereon if such Mortgage Loan or
Contract had been liquidated with no Realized Loss. In the case of a series of
Certificates other than a Senior/Subordinate Series, if so provided in the
related Prospectus Supplement, the applicable form of credit enhancement may
provide for reinstatement subject to certain conditions in the event that,
following the final liquidation of a Mortgage Loan or Contract and a draw under
such credit enhancement, subsequent recoveries are received. If a defaulted
Mortgage Loan or Contract or REO Mortgage Loan or REO Contract is not so removed
from the Trust Fund, then, upon the final liquidation thereof, if a loss is
realized which is not covered by any applicable form of credit enhancement or
other insurance, the Certificateholders will bear such loss. However, if a gain
results from the final liquidation of an REO Mortgage Loan or REO Contract which
is not required by law to be remitted to the related Mortgagor, the Master
Servicer or the Servicer will be entitled to retain such gain as additional
servicing compensation unless the related Prospectus Supplement provides
otherwise. For a description of the Certificate Administrator's, the Master
Servicer's or the Servicer's obligations to maintain and make claims under
applicable forms of credit enhancement and insurance relating to the Mortgage
Loans or Contracts, see "Description of Credit Enhancement" and "Insurance
Policies on Mortgage Loans or Contracts."
For a discussion of legal rights and limitations associated with the
foreclosure of a Mortgage Loan or Contract, see "Certain Legal Aspects of
Mortgage Loans and Contracts."
The Master Servicer or the Certificate Administrator, as applicable, will
deal with any defaulted Agency Securities in the manner set forth in the related
Prospectus Supplement.
SUBORDINATION
A Senior/Subordinate Series of Certificates will consist of one or more
classes of Senior Certificates and one or more classes of Subordinate
Certificates, as set forth in the related Prospectus Supplement. Subordination
of the Subordinate Certificates of any Senior/Subordinate Series will be
effected by the following method, unless an alternative method is specified in
the related Prospectus Supplement. In addition, certain classes of Senior (or
Subordinate) Certificates may be senior to other classes of Senior (or
Subordinate) Certificates, as specified in the related Prospectus
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Supplement. With respect to any Senior/Subordinate Series, the total amount
available for distribution on each Distribution Date, as well as the method for
allocating such amount among the various classes of Certificates included in
such series, will be described in the related Prospectus Supplement. Generally,
with respect to any such series, the amount available for distribution will be
allocated first to interest on the Senior Certificates and then to principal of
the Senior Certificates up to the amounts described in the related Prospectus
Supplement, prior to allocation of any amounts to the Subordinate Certificates.
With respect to any defaulted Mortgage Loan or Contract that is finally
liquidated, the amount of loss realized, if any (as described in the related
Pooling and Servicing Agreement, a "Realized Loss"), will equal the portion of
the Stated Principal Balance remaining after application of all amounts
recovered (net of amounts reimbursable to the Master Servicer or Servicer for
related Advances and expenses) towards interest and principal owing on the
Mortgage Loan. With respect to a Mortgage Loan or Contract, the principal
balance of which has been reduced in connection with bankruptcy proceedings, the
amount of such reduction will be treated as a Realized Loss. If so provided in
the Pooling and Servicing Agreement, the Master Servicer may be permitted, under
certain circumstances, to purchase any Mortgage Loan that is three or more
months delinquent in payments of principal and interest, at the Purchase Price.
Any Realized Loss incurred in connection with any such Mortgage Loan will be
passed through to the then outstanding Certificateholders of the related series
in the same manner as Realized Losses on Mortgage Loans that have not been so
purchased.
In the event of any Realized Losses not in excess of the limitations
described below (other than Extraordinary Losses), the rights of the Subordinate
Certificateholders to receive distributions will be subordinate to the rights of
the Senior Certificateholders.
Except as noted below, Realized Losses will be allocated to the Subordinate
Certificates of the related series until the outstanding principal balance
thereof has been reduced to zero. Additional Realized Losses, if any, will be
allocated to the Senior Certificates. If such series includes more than one
class of Senior Certificates, such additional Realized Losses will be allocated
either on a pro rata basis among all of the Senior Certificates in proportion to
their respective outstanding principal balances or as otherwise provided in the
related Prospectus Supplement.
With respect to certain Realized Losses resulting from physical
damage to Mortgaged Properties which are generally of the same type
as are covered under a Special Hazard Insurance Policy, the amount
thereof that may be allocated to the Subordinate Certificates of the
related series may be limited to an amount (the "Special Hazard
Amount") specified in the related Prospectus Supplement. See
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"Description of Credit Enhancement-Special Hazard Insurance Policies." If so,
any Special Hazard Losses in excess of the Special Hazard Amount will be
allocated among all outstanding classes of Certificates of the related series,
either on a pro rata basis in proportion to their outstanding principal
balances, or as otherwise provided in the related Prospectus Supplement. The
respective amounts of other specified types of losses (including Fraud Losses
and Bankruptcy Losses) that may be borne solely by the Subordinate Certificates
may be similarly limited to an amount (with respect to Fraud Losses, the "Fraud
Loss Amount" and with respect to Bankruptcy Losses, the "Bankruptcy Amount"),
and the Subordinate Certificates may provide no coverage with respect to certain
other specified types of losses, as described in the related Prospectus
Supplement, in which case such losses would be allocated on a pro rata basis
among all outstanding classes of Certificates. 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 Certificateholders, upon the written confirmation from each
applicable Rating Agency that the then-current rating of the related series of
Certificates will not be adversely affected thereby.
Generally, any allocation of a Realized Loss (including a Special Hazard
Loss) to a Certificate will be made by reducing the outstanding principal
balance thereof as of the Distribution Date following the calendar month in
which such Realized Loss was incurred. At any given time, the percentage of the
outstanding principal balances of all of the Certificates evidenced by the
Senior Certificates is the "Senior Percentage," determined in the manner set
forth in the related Prospectus Supplement. The "Stated Principal Balance" of
any item of Mortgage Collateral as of any date of determination is equal to the
principal balance thereof as of the Cut-off Date, after application of all
scheduled principal payments due on or before the Cut-off Date, whether received
or not, reduced by all amounts allocable to principal that are distributed to
Certificateholders on or before the date of determination, and as further
reduced to the extent that any Realized Loss thereon has been allocated to any
Certificates on or before such date.
As set forth above, the rights of holders of the various classes of
Certificates of any series to receive distributions of principal and interest is
determined by the aggregate outstanding principal balance of each such class
(or, if applicable, the related notional amount). The outstanding principal
balance of any Certificate will be reduced by all amounts previously distributed
on such Certificate in respect of principal and by any Realized Losses allocated
thereto. If there are no Realized Losses or Principal Prepayments on any item of
Mortgage Collateral, the respective rights of the holders of Certificates of any
series to future distributions generally would not change. However, to the
extent set forth in the related Prospectus Supplement, holders of Senior
Certificates may be entitled to receive a disproportionately larger amount of
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prepayments received during certain specified periods, which will have the
effect (absent offsetting losses) of accelerating the amortization of the Senior
Certificates and increasing the respective percentage ownership interest
evidenced by the Subordinate Certificates in the related Trust Fund (with a
corresponding decrease in the Senior Percentage), thereby preserving the
availability of the subordination provided by the Subordinate Certificates. In
addition, as set forth above, certain Realized Losses generally will be
allocated first to Subordinate Certificates by reduction of the outstanding
principal balance thereof, which will have the effect of increasing the
respective ownership interest evidenced by the Senior Certificates in the
related Trust Fund.
If so provided in the related Prospectus Supplement, certain amounts
otherwise payable on any Distribution Date to holders of Subordinate
Certificates may be deposited into a Reserve Fund. Amounts held in any Reserve
Fund may be applied as described under "Description of Credit
Enhancement-Reserve Funds" and in the related Prospectus Supplement.
With respect to any Senior/Subordinate Series, the terms and provisions of
the subordination may vary from those described above. Any such variation and
any additional credit enhancement will be described in the related Prospectus
Supplement.
Overcollateralization
If so specified in the related Prospectus Supplement, interest collections
on the Mortgage Collateral may exceed interest payments on the Certificates for
the related Distribution Date. To the extent such excess interest is applied as
principal payments on the Certificates, the effect will be to reduce the
principal balance of the Certificates relative to the outstanding balance of the
Mortgage Loans, thereby creating "Overcollateralization" and additional
protection to the Certificateholders, as specified in the related Prospectus
Supplement.
DESCRIPTION OF CREDIT ENHANCEMENT
General
Credit support with respect to each series of Certificates may be comprised
of one or more of the following components. Each component will have a dollar
limit and will provide coverage with respect to Realized Losses that are (i)
attributable to the Mortgagor's failure to make any payment of principal or
interest as required under the Mortgage Note or Contract, but not including
Special Hazard Losses, Extraordinary Losses or other losses resulting from
damage to a Mortgaged Property, Bankruptcy Losses or Fraud Losses (any such
losses, "Defaulted Mortgage Losses"); (ii) of a type generally covered by a
Special Hazard Insurance Policy (any such losses, "Special Hazard Losses");
(iii) attributable to certain
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actions which may be taken by a bankruptcy court in connection with a Mortgage
Loan, including a reduction by a bankruptcy court of the principal balance of or
the Mortgage Rate on a Mortgage Loan or Contract or an extension of its maturity
(any such losses, "Bankruptcy Losses"); and (iv) incurred on defaulted Mortgage
Loans or Contracts as to which there was fraud in the origination of such
Mortgage Loans or Contracts (any such losses, "Fraud Losses").
Unless otherwise specified in the related Prospectus Supplement, credit
support will not provide protection against all risks of loss and will not
guarantee repayment of the entire outstanding principal balance of the
Certificates and interest thereon. If losses occur which exceed the amount
covered by credit support or which are not covered by the credit support,
Certificateholders will bear their allocable share of deficiencies. In
particular, Defaulted Mortgage Losses, Special Hazard Losses, Bankruptcy Losses
and Fraud Losses in excess of the amount of coverage provided therefor and
losses occasioned by war, civil insurrection, certain governmental actions,
nuclear reaction and certain other risks ("Extraordinary Losses") will not be
covered. To the extent that the credit enhancement for any series of
Certificates is exhausted, the Certificateholders will bear all further risks of
loss not otherwise insured against.
As set forth below and in the related Prospectus Supplement, (i) coverage
with respect to Defaulted Mortgage Losses may be provided by a Mortgage Pool
Insurance Policy or Contract Pool Insurance Policy, (ii) coverage with respect
to Special Hazard Losses may be provided by a Special Hazard Insurance Policy,
(iii) coverage with respect to Bankruptcy Losses may be provided by a Bankruptcy
Bond and (iv) coverage with respect to Fraud Losses may be provided by a
Mortgage Pool Insurance Policy or mortgage repurchase bond. In addition, if so
specified in the applicable Prospectus Supplement, in lieu of or in addition to
any or all of the foregoing arrangements, credit enhancement may be in the form
of a Reserve Fund to cover such losses, in the form of subordination of one or
more classes of Certificates or Overcollateralization, each as described under
"Subordination," or in the form of a Certificate Insurance Policy, a Letter of
Credit, surety bonds or other types of insurance policies, certain other secured
or unsecured corporate guarantees or in such other form as may be described in
the related Prospectus Supplement, or in the form of a combination of two or
more of the foregoing. The credit support may be provided by an assignment of
the right to receive certain cash amounts, a deposit of cash into a Reserve Fund
or other pledged assets, or by banks, insurance companies, guarantees or any
combination thereof identified in the related Prospectus Supplement. Credit
support may also be provided in the form of an insurance policy covering the
risk of collection and adequacy of any Additional Collateral provided in
connection with any Additional Collateral Loan, subject to the limitations set
forth in any such insurance policy. As set forth in the Pooling and Servicing
Agreement, credit support may
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apply to all of the Mortgage Loans or to certain Mortgage Loans
contained in a Mortgage Pool.
Each Prospectus Supplement will include a description of (a) the amount
payable under the credit enhancement arrangement, if any, provided with respect
to a series, (b) any conditions to payment thereunder not otherwise described
herein, (c) the conditions under which the amount payable under such credit
support may be reduced and under which such credit support may be terminated or
replaced and (d) the material provisions of any agreement relating to such
credit support. Additionally, each such Prospectus Supplement will set forth
certain information with respect to the issuer of any third-party credit
enhancement.
The descriptions of any insurance policies, bonds or other instruments
described in this Prospectus or any Prospectus Supplement and the coverage
thereunder do not purport to be complete and are qualified in their entirety by
reference to the actual forms of such policies, copies of which will be exhibits
to the Current Report on Form 8-K to be filed with the Securities and Exchange
Commission in connection with the issuance of the related series of
Certificates.
Letters of Credit
If any component of credit enhancement as to any series of Certificates is
to be provided by a letter of credit (the "Letter of Credit"), a bank (the
"Letter of Credit Bank") will deliver to the Trustee an irrevocable Letter of
Credit. The Letter of Credit may provide direct coverage with respect to the
Mortgage Collateral. The Letter of Credit Bank, the amount available under the
Letter of Credit with respect to each component of credit enhancement, the
expiration date of the Letter of Credit, and a more detailed description of the
Letter of Credit will be specified in the related Prospectus Supplement. On or
before each Distribution Date, the Letter of Credit Bank will be required to
make certain payments after notification from the Trustee, to be deposited in
the related Certificate Account with respect to the coverage provided thereby.
The Letter of Credit may also provide for the payment of Advances.
Mortgage Pool Insurance Policies
Any pool-wide insurance policy covering losses on Mortgage Loans (each, a
"Mortgage Pool Insurance Policy") obtained by the Company for a Trust Fund will
be issued by the insurer named in the related Prospectus Supplement (the "Pool
Insurer"). Each Mortgage Pool Insurance Policy, subject to the limitations
described below and in the Prospectus Supplement, if any, will cover Defaulted
Mortgage Losses in an amount specified in the applicable Prospectus Supplement.
As set forth under "--Maintenance of Credit Enhancement" below, the Master
Servicer, Servicer or Certificate Administrator, as applicable, will use its
best reasonable efforts to maintain the
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Mortgage Pool Insurance Policy and to present claims thereunder to the Pool
Insurer on behalf of itself, the Trustee and the Certificateholders. The
Mortgage Pool Insurance Policies, however, are not blanket policies against
loss, since claims thereunder may only be made respecting particular defaulted
Mortgage Loans and only upon satisfaction of certain conditions precedent
described below. Unless specified in the related 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 thereunder unless, among other things, (i) any required
Primary Insurance Policy is in effect for the defaulted Mortgage Loan and a
claim thereunder has been submitted and settled, (ii) hazard insurance on the
property securing such Mortgage Loan has been kept in force and real estate
taxes and other protection and preservation expenses have been paid by the
Master Servicer, Servicer or Sub-Servicer, (iii) 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 (iv) the insured has
acquired good and merchantable title to the Mortgaged Property free and clear of
liens except certain permitted encumbrances. Upon satisfaction of these
conditions, the Pool Insurer will have the option either (a) to purchase the
property securing the defaulted Mortgage Loan at a price equal to the
outstanding principal balance thereof plus accrued and unpaid interest at the
applicable Mortgage Rate to the date of purchase and certain expenses incurred
by the Master Servicer, Servicer or Sub-Servicer on behalf of the Trustee and
Certificateholders, or (b) to pay the amount by which the sum of the outstanding
principal balance of the defaulted Mortgage Loan plus accrued and unpaid
interest at the Mortgage 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 certain amounts paid or assumed to
have been paid under any related Primary Insurance Policy. Certificateholders
will experience a shortfall in the amount of interest payable on the related
Certificates 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 such claim is paid. In addition, the Certificateholders will also
experience losses with respect to the related Certificates in connection with
payments made under a Mortgage Pool Insurance Policy to the extent that the
Master Servicer, Servicer or Sub-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 such policy and will be reimbursable to the Master
Servicer, Servicer or Sub-Servicer from funds otherwise payable to the
Certificateholders. If any Mortgaged Property securing a defaulted Mortgage Loan
is
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damaged and proceeds, if any (see "--Special Hazard Insurance Policies" below
for risks which are not covered by such policies), from the related hazard
insurance policy or applicable Special Hazard Instrument are insufficient to
restore the damaged property to a condition sufficient to permit recovery under
the Mortgage Pool Insurance Policy, the Master Servicer, Servicer or
Sub-Servicer is not required to expend its own funds to restore the damaged
property unless it determines that (a) such restoration will increase the
proceeds to Certificateholders on liquidation of the Mortgage Loan after
reimbursement of the Master Servicer, Servicer or Sub-Servicer for its expenses
and (b) such expenses will be recoverable by it through Liquidation Proceeds or
Insurance Proceeds.
Unless otherwise specified in the related Prospectus Supplement, a Mortgage
Pool Insurance Policy (and certain Primary Insurance Policies) will likely not
insure against loss sustained by reason of a default arising from, among other
things, (i) fraud or negligence in the origination or servicing of a Mortgage
Loan, including misrepresentation by the Mortgagor, the Mortgage Collateral
Seller or other persons involved in the origination thereof, or (ii) failure to
construct a Mortgaged Property in accordance with plans and specifications.
Depending upon the nature of the event, a breach of representation made by a
Mortgage Collateral Seller may also have occurred. Such a breach, unless
otherwise specified in the related Prospectus Supplement, would not give rise to
a repurchase obligation on the part of the Company or Residential Funding.
The original amount of coverage under each Mortgage Pool Insurance Policy
will be reduced over the life of the related series of Certificates by the
aggregate amount of claims paid less the aggregate of the net amounts realized
by the Pool Insurer upon disposition of all foreclosed properties. The amount of
claims paid includes certain expenses incurred by the Master Servicer, Servicer
or Sub-Servicer as well as accrued interest on delinquent Mortgage Loans to the
date of payment of the claim. See "Certain Legal Aspects of Mortgage Loans and
Contracts--Foreclosure." 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 the related Certificateholders. In addition, unless the Master
Servicer or Servicer determines that an Advance in respect of a delinquent
Mortgage Loan would be recoverable to it from the proceeds of the liquidation of
such Mortgage Loan or otherwise, the Master Servicer or Servicer would not be
obligated to make an Advance respecting any such 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
Certificates--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, such
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policy will not provide coverage against hazard losses. As set forth under
"Insurance Policies on Mortgage Loans or Contracts-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 such losses. Additionally, no coverage in
respect of 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" below. As a result, certain hazard risks will not be
insured against and may be borne by Certificateholders.
Contract Pools may be covered by pool insurance policies (each, a "Contract
Pool Insurance Policy") that are similar to the Mortgage Pool Insurance Policies
described above.
Special Hazard Insurance Policies
Any insurance policy covering Special Hazard Losses (a "Special Hazard
Insurance Policy") obtained for a Trust Fund will be issued by the insurer named
in the related Prospectus Supplement (the "Special Hazard Insurer"). Each
Special Hazard Insurance Policy, subject to limitations described below and in
the related Prospectus Supplement, if any, will protect the related
Certificateholders from Special Hazard Losses which are (i) losses due to direct
physical damage to a Mortgaged Property other than any loss of a type covered by
a hazard insurance policy or a flood insurance policy, if applicable, and (ii)
losses from partial damage caused by reason of the application of the
co-insurance clauses contained in hazard insurance policies. See "Insurance
Policies on Mortgage Loans or Contracts." A Special Hazard Insurance Policy will
not cover losses occasioned by war, civil insurrection, certain governmental
actions, errors in design, faulty workmanship or materials (except under certain
circumstances), nuclear reaction, chemical contamination or waste by the
Mortgagor. Aggregate claims under a Special Hazard Insurance Policy will be
limited to the amount set forth in the related Pooling and Servicing Agreement
and will be subject to reduction as set forth in such related Pooling and
Servicing Agreement. A Special Hazard Insurance Policy will provide that no
claim may be paid unless hazard and, if applicable, flood insurance on the
property securing the Mortgage Loan or Contract has been kept in force and other
protection and preservation expenses have been paid by the Master Servicer or
Servicer.
Subject to the foregoing limitations, a Special Hazard Insurance Policy
will provide that, where there has been damage to property securing a foreclosed
Mortgage Loan (title to which has been acquired by the insured) and to the
extent such damage is not covered by the hazard insurance policy or flood
insurance policy, if any, maintained by the Mortgagor or the Master Servicer,
Servicer or Sub-Servicer, the insurer will pay the lesser of (i) the cost of
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repair or replacement of such property or (ii) upon transfer of the property to
the insurer, the unpaid principal balance of such Mortgage Loan or Contract at
the time of acquisition of such property by foreclosure or deed in lieu of
foreclosure, plus accrued interest at the Mortgage Rate to the date of claim
settlement and certain expenses incurred by the Master Servicer, Servicer or
Sub-Servicer with respect to such property. If the property is transferred to a
third party in a sale approved by the Special Hazard Insurer, the amount that
the Special Hazard Insurer will pay will be the amount under (ii) above reduced
by the net proceeds of the sale of the property. If the unpaid principal balance
plus accrued interest and certain expenses is paid by the Special Hazard
Insurer, the amount of further coverage under the related Special Hazard
Insurance Policy will be reduced by such amount less any net proceeds from the
sale of the property. Any amount paid as the cost of repair of the property will
further reduce coverage by such amount. Restoration of the property with the
proceeds described under (i) above will satisfy the condition under each
Mortgage Pool Insurance Policy or Contract Pool Insurance Policy that the
property be restored before a claim under such policy may be validly presented
with respect to the defaulted Mortgage Loan or Contract secured by such
property. The payment described under (ii) above will render presentation of a
claim in respect of such Mortgage Loan or Contract under the related Mortgage
Pool Insurance Policy or Contract Pool Insurance Policy unnecessary. Therefore,
so long as a Mortgage Pool Insurance Policy or Contract Pool Insurance Policy
remains in effect, the payment by the insurer under a Special Hazard Insurance
Policy of the cost of repair or of the unpaid principal balance of the related
Mortgage Loan or Contract plus accrued interest and certain expenses will not
affect the total Insurance Proceeds paid to Certificateholders, but will affect
the relative amounts of coverage remaining under the related Special Hazard
Insurance Policy and Mortgage Pool Insurance Policy or Contract Pool Insurance
Policy.
To the extent set forth in the related Prospectus Supplement, coverage in
respect of Special Hazard Losses for a series of Certificates may be provided,
in whole or in part, by a type of special hazard coverage other than a Special
Hazard Insurance Policy or by means of a representation of the Company or
Residential Funding.
Bankruptcy Bonds
In the event of a personal bankruptcy of a Mortgagor, a bankruptcy court
may establish the value of the Mortgaged Property of such Mortgagor (and, if
specified in the related Prospectus Supplement, any related Additional
Collateral) at an amount less than the then outstanding principal balance of the
Mortgage Loan or Contract secured by such Mortgaged Property (such difference, a
"Deficient Valuation"). The amount of the secured debt could then be reduced to
such value and, thus, the holder of such Mortgage Loan or
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Contract would become an unsecured creditor to the extent the outstanding
principal balance of such Mortgage Loan or Contract exceeds the value assigned
to the Mortgaged Property (and any related Additional Collateral) by the
bankruptcy court. In addition, certain other modifications of the terms of a
Mortgage Loan or Contract can result from a bankruptcy proceeding, including a
reduction in the amount of the Monthly Payment on the related Mortgage Loan (a
"Debt Service Reduction"). See "Certain Legal Aspects of Mortgage Loans and
Contracts--Mortgage Loans--Anti-Deficiency Legislation and Other Limitations on
Lenders." Any Bankruptcy Bond to provide coverage for Bankruptcy Losses
resulting from proceedings under the federal Bankruptcy Code obtained for a
Trust Fund will be issued by an insurer named in the related Prospectus
Supplement. The level of coverage under each Bankruptcy Bond will be set forth
in the related Prospectus Supplement.
Reserve Funds
If so specified in the related Prospectus Supplement, the Company will
deposit or cause to be deposited in an account (a "Reserve Fund") any
combination of cash or Permitted Investments in specified amounts, or any other
instrument satisfactory to the Rating Agency or Agencies, which will be applied
and maintained in the manner and under the conditions specified in such
Prospectus Supplement. In the alternative or in addition to such deposit, to the
extent described in the related Prospectus Supplement, a Reserve Fund may be
funded through application of all or a portion of amounts otherwise payable on
any related Subordinate Certificates, from the Excess Spread, Excluded Spread or
otherwise. To the extent that the funding of the Reserve Fund is dependent on
amounts otherwise payable on related Subordinate Certificates, Excess Spread,
Excluded Spread or other cash flows attributable to the related Mortgage Loans
or on reinvestment income, the Reserve Fund may provide less coverage than
initially expected if the cash flows or reinvestment income on which such
funding is dependent are lower than anticipated. With respect to any series of
Certificates as to which credit enhancement includes a Letter of Credit, if so
specified in the related Prospectus Supplement, under certain circumstances the
remaining amount of the Letter of Credit may be drawn by the Trustee and
deposited in a Reserve Fund. Amounts in a Reserve Fund may be distributed to
Certificateholders, or applied to reimburse the Master Servicer or Servicer for
outstanding Advances, or may be used for other purposes, in the manner and to
the extent specified in the related Prospectus Supplement. Unless otherwise
specified in the related Prospectus Supplement, any such Reserve Fund will not
be deemed to be part of the related Trust Fund. A Reserve Fund may provide
coverage to more than one series of Certificates, if set forth in the related
Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
Trustee will have a perfected security interest for the benefit of the
Certificateholders in the assets in the Reserve Fund.
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However, to the extent that the Company, any affiliate thereof or any other
entity has an interest in any Reserve Fund, in the event of the bankruptcy,
receivership or insolvency of such entity, there could be delays in withdrawals
from the Reserve Fund and the corresponding payments to the Certificateholders.
Such delays could adversely affect the yield to investors on the related
Certificates.
Amounts deposited in any Reserve Fund for a series will be invested in
Permitted Investments by, or at the direction of, and for the benefit of a
Servicer, the Master Servicer, the Certificate Administrator or any other person
named in the related Prospectus Supplement.
Certificate Insurance Policies
If so specified in the related Prospectus Supplement, the Company may
obtain one or more certificate insurance policies (each, a "Certificate
Insurance Policy"), issued by insurers acceptable to the Rating Agency or
Agencies rating the Certificates offered pursuant to such Prospectus Supplement,
insuring the holders of one or more classes of Certificates the payment of
amounts due in accordance with the terms of such class or classes of
Certificates. Any Certificate Insurance Policy will have the characteristics
described in and will be subject to such limitations and exceptions as set forth
in the related Prospectus Supplement.
Surety Bonds
If so specified in the related Prospectus Supplement, the Company may
obtain one or more surety bonds (each, a "Surety Bond"), issued by insurers
acceptable to the Rating Agency or Agencies rating the Certificates offered
pursuant to such Prospectus Supplement, insuring the holders of one or more
classes of Certificates the payment of amounts due in accordance with the terms
of such class or classes of Certificates. Any surety bond will have the
characteristics described in and will be subject to such limitations and
exceptions as set forth in the related Prospectus Supplement.
Maintenance of Credit Enhancement
If credit enhancement has been obtained for a series of Certificates, the
Master Servicer, the Servicer or the Certificate Administrator will be obligated
to exercise its best reasonable efforts to keep or cause to be kept such credit
enhancement in full force and effect throughout the term of the applicable
Pooling and Servicing Agreement or Trust Agreement, unless coverage thereunder
has been exhausted through payment of claims or otherwise, or substitution
therefor is made as described below under "--Reduction or Substitution of Credit
Enhancement." The Master Servicer, the Servicer or the Certificate
Administrator, as applicable, on behalf of itself, the Trustee and
Certificateholders, will be required to
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provide information required for the Trustee to draw under any
applicable credit enhancement.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer, the Servicer or the Certificate Administrator will agree to pay the
premiums for each Mortgage Pool Insurance Policy, Contract Pool Insurance
Policy, Special Hazard Insurance Policy, Bankruptcy Bond, Certificate Insurance
Policy or Surety Bond, as applicable, on a timely basis. In the event the
related insurer ceases to be a "Qualified Insurer" because it ceases to be
qualified under applicable law to transact such insurance business or coverage
is terminated for any reason other than exhaustion of such coverage, the Master
Servicer, the Servicer or the Certificate Administrator will use its best
reasonable efforts to obtain from another Qualified Insurer a comparable
replacement insurance policy or bond with a total coverage equal to the then
outstanding coverage of such policy or bond. If the cost of the replacement
policy is greater than the cost of such policy or bond, the coverage of the
replacement policy or bond will, unless otherwise agreed to by the Company, be
reduced to a level such that its premium rate does not exceed the premium rate
on the original insurance policy. In the event that the Pool Insurer ceases to
be a Qualified Insurer because it ceases to be approved as an insurer by Freddie
Mac, Fannie Mae or any successor entity, the Master Servicer, the Servicer or
the Certificate Administrator, as applicable, 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 or
Contract Pool Insurance Policy are jeopardized for reasons related to the
financial condition of the Pool Insurer. If the Master Servicer, the Servicer or
the Certificate Administrator 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, subject to the same
cost limit. Any losses in market value of the Certificates associated with any
reduction or withdrawal in rating by an applicable Rating Agency shall be borne
by the Certificateholders.
If any property securing a defaulted Mortgage Loan or Contract is damaged
and proceeds, if any, from the related hazard insurance policy or any applicable
Special Hazard Insurance Policy are insufficient to restore the damaged property
to a condition sufficient to permit recovery under any Letter of Credit,
Mortgage Pool Insurance Policy, Contract Pool Insurance Policy or any related
Primary Insurance Policy, the Master Servicer or the Servicer, as applicable, is
not required to expend its own funds to restore the damaged property unless it
determines (i) that such restoration will increase the proceeds to one or more
classes of Certificateholders on liquidation of the Mortgage Loan after
reimbursement of the Master Servicer or the Servicer, as applicable, for its
expenses and (ii) that such expenses will be recoverable by it through
Liquidation Proceeds or Insurance Proceeds. If recovery under any
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Letter of Credit, Mortgage Pool Insurance Policy, Contract Pool Insurance
Policy, other credit enhancement or any related Primary Insurance Policy is not
available because the Master Servicer or the Servicer, as applicable, has been
unable to make the above determinations, has made such determinations
incorrectly or recovery is not available for any other reason, the Master
Servicer or the Servicer, as applicable, is nevertheless obligated to follow
such normal practices and procedures (subject to the preceding sentence) as it
deems necessary or advisable to realize upon the defaulted Mortgage Loan and in
the event such determination has been incorrectly made, is entitled to
reimbursement of its expenses in connection with such restoration.
Reduction or Substitution of Credit Enhancement
Unless otherwise specified in the Prospectus Supplement, the amount of
credit support provided with respect to any series of Certificates may be
reduced under certain specified circumstances. In most cases, the amount
available as credit support will be subject to periodic reduction on a
non-discretionary basis in accordance with a schedule or formula set forth in
the related Pooling and Servicing Agreement or Trust Agreement. Additionally, in
most cases, such credit support may be replaced, reduced or terminated, and the
formula used in calculating the amount of coverage with respect to Bankruptcy
Losses, Special Hazard Losses or Fraud Losses may be changed, without the
consent of the Certificateholders, upon the written assurance from each
applicable Rating Agency that the then-current rating of the related series of
Certificates will not be adversely affected thereby. Furthermore, in the event
that the credit rating of any obligor under any applicable credit enhancement is
downgraded, the credit rating of each class of the related Certificates may be
downgraded to a corresponding level, and, unless otherwise specified in the
related Prospectus Supplement, the Master Servicer, the Servicer or the
Certificate Administrator, as applicable, will not be obligated to obtain
replacement credit support in order to restore the rating of the Certificates.
The Master Servicer, the Servicer or the Certificate Administrator, as
applicable, will also be permitted to replace such credit support with other
credit enhancement instruments issued by obligors whose credit ratings are
equivalent to such downgraded level and in lower amounts which would satisfy
such downgraded level, provided that the then-current rating of each class of
the related series of Certificates is maintained. Where the credit support is in
the form of a Reserve Fund, a permitted reduction in the amount of credit
enhancement will result in a release of all or a portion of the assets in the
Reserve Fund to the Company, the Master Servicer or such other person that is
entitled thereto. Any assets so released will not be available for distributions
in future periods.
INSURANCE POLICIES ON MORTGAGE LOANS OR CONTRACTS
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Each Mortgage Loan or Contract will be required to be covered by a hazard
insurance policy (as described below) and, in certain cases, a Primary Insurance
Policy. In addition, FHA Loans and VA Loans will be covered by the government
mortgage insurance programs described below. The descriptions of any insurance
policies set forth in this Prospectus or any Prospectus Supplement and the
coverage thereunder do not purport to be complete and are qualified in their
entirety by reference to such forms of policies.
Primary Mortgage Insurance Policies
Unless otherwise specified in the related Prospectus Supplement, (i) each
Mortgage Loan having a Loan-to-Value Ratio at origination of over 80% (except in
the case of certain borrowers with acceptable credit histories) will be covered
by a primary mortgage guaranty insurance policy (a "Primary Insurance Policy")
insuring against default on such Mortgage Loan as to at least the principal
amount thereof exceeding 75% of the Appraised Value of the Mortgaged Property at
origination of the Mortgage Loan, unless and until the principal balance of the
Mortgage Loan is reduced to a level that would produce a Loan-to-Value Ratio
equal to or less than 80%, and (ii) the Company or the related Mortgage
Collateral Seller will represent and warrant that, to the best of such entity's
knowledge, such Mortgage Loans are so covered. Unless otherwise specified in the
Prospectus Supplement, the Company will have the ability to cancel any Primary
Insurance Policy if the Loan-to-Value Ratio of the Mortgage Loan is reduced
below 80% (or a lesser specified percentage) based on an appraisal of the
Mortgaged Property after the related Closing Date or as a result of principal
payments that reduce the principal balance of the Mortgage Loan after such
Closing Date. Mortgage Loans which are subject to negative amortization will
only be covered by a Primary Insurance Policy if such coverage was so required
upon their origination, notwithstanding that subsequent negative amortization
may cause such Mortgage Loan's Loan-to-Value Ratio (based on the then-current
balance) to subsequently exceed the limits which would have required such
coverage upon their origination.
While the terms and conditions of the Primary Insurance Policies issued by
one primary mortgage guaranty insurer (a "Primary Insurer") will differ from
those in Primary Insurance Policies issued by other Primary Insurers, each
Primary Insurance Policy generally will pay either: (i) the insured percentage
of the loss on the related Mortgaged Property; (ii) the entire amount of such
loss, after receipt by the Primary Insurer of good and merchantable title to,
and possession of, the Mortgaged Property; or (iii) at the option of the Primary
Insurer under certain Primary Insurance Policies, the sum of the delinquent
monthly payments plus any advances made by the insured, both to the date of the
claim payment and, thereafter, monthly payments in the amount that would have
become due under the Mortgage Loan if it had not been discharged plus any
advances made by the insured until the earlier of (a) the
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date the Mortgage Loan would have been discharged in full if the default had not
occurred or (b) an approved sale. The amount of the loss as calculated under a
Primary Insurance Policy covering a Mortgage Loan will generally consist of the
unpaid principal amount of such Mortgage Loan and accrued and unpaid interest
thereon and reimbursement of certain expenses, less (i) rents or other payments
received by the insured (other than the proceeds of hazard insurance) that are
derived from the related Mortgaged Property, (ii) hazard insurance proceeds
received by the insured in excess of the amount required to restore such
Mortgaged Property and which have not been applied to the payment of the
Mortgage Loan, (iii) amounts expended but not approved by the Primary Insurer,
(iv) claim payments previously made on such Mortgage Loan and (v) unpaid
premiums and certain other amounts.
As conditions precedent to the filing or payment of a claim under a Primary
Insurance Policy, in the event of default by the Mortgagor, the insured will
typically be required, among other things, to: (i) advance or discharge (a)
hazard insurance premiums and (b) as necessary and approved in advance by the
Primary Insurer, real estate taxes, protection and preservation expenses and
foreclosure and related costs; (ii) in the event of any physical loss or damage
to the Mortgaged Property, have the Mortgaged Property restored to at least its
condition at the effective date of the Primary Insurance Policy (ordinary wear
and tear excepted); and (iii) tender to the Primary Insurer good and
merchantable title to, and possession of, the Mortgaged Property.
The Pooling and Servicing Agreement for a series generally will require
that the Master Servicer or Servicer maintain, or cause to be maintained,
coverage under a Primary Insurance Policy to the extent such coverage was in
place on the Cut-off Date. In the event that the Company gains knowledge that,
as of the Closing Date, a Mortgage Loan had a Loan-to-Value Ratio at origination
in excess of 80% and was not the subject of a Primary Insurance Policy (and was
not included in any exception to such standard disclosed in the related
Prospectus Supplement) and that such Mortgage Loan has a then current
Loan-to-Value Ratio in excess of 80%, then the Master Servicer or the Servicer
is required to use its reasonable efforts to obtain and maintain a Primary
Insurance Policy to the extent that such a policy is obtainable at a reasonable
price.
Any primary mortgage insurance or primary credit insurance policies
relating to Contracts will be described in the related Prospectus Supplement.
Standard Hazard Insurance on Mortgaged Properties
The terms of the Mortgage Loans (other than Cooperative Loans) require each
Mortgagor to maintain a hazard insurance policy covering the related Mortgaged
Property and providing for coverage at least equal to that of the standard form
of fire insurance policy
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with extended coverage customary in the state in which the property
is located.
Such coverage generally will be in an amount equal to the lesser of the
principal balance of such Mortgage Loan or 100% of the insurable value of the
improvements securing the Mortgage Loan. The Pooling and Servicing Agreement
will provide that the Master Servicer or Servicer shall cause such hazard
policies to be maintained or shall obtain a blanket policy insuring against
losses on the Mortgage Loans. The ability of the Master Servicer or 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
and under any flood insurance policy referred to below, or upon the extent to
which information in this regard is furnished to the Master Servicer or the
Servicer by Mortgagors or Sub-Servicers.
In general, 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,
subject to 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
thereof are dictated by respective state laws. Such 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 certain cases,
vandalism. The foregoing list is merely indicative of certain kinds of uninsured
risks and is not intended to be all-inclusive. Where the improvements securing a
Mortgage Loan are located in a federally designated flood area at the time of
origination of such Mortgage Loan, the Pooling and Servicing Agreement generally
requires the Master Servicer or Servicer to cause to be maintained for each such
Mortgage Loan serviced, flood insurance (to the extent available) in an amount
equal in general to the lesser of the amount 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 Mortgagors are required to
maintain on the improvements securing the Mortgage Loans may decline as the
principal balances owing thereon decrease, and since residential properties have
historically appreciated in value over time, hazard insurance proceeds could be
insufficient to restore fully the damaged property in the event of a partial
loss. See "Subordination" above for a description of when subordination is
provided, the protection (limited to the Special Hazard Amount as described in
the related Prospectus Supplement) afforded by such
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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.
Standard Hazard Insurance on Manufactured Homes
The terms of the Pooling and Servicing Agreement will require the Servicer
or the Master Servicer, as applicable, to cause to be maintained with respect to
each Contract one or more Standard Hazard Insurance Policies which provide, at a
minimum, the same coverage as a standard form fire and extended coverage
insurance policy that is customary for manufactured housing, issued by a company
authorized to issue such policies in the state in which the Manufactured Home is
located, and in an amount which is not less than the maximum insurable value of
such Manufactured Home or the principal balance due from the Mortgagor on the
related Contract, whichever is less. Such coverage may be provided by one or
more blanket insurance policies covering losses on the Contracts resulting from
the absence or insufficiency of individual Standard Hazard Insurance Policies.
If a Manufactured Home's location was, at the time of origination of the related
Contract, within a federally designated flood area, the Servicer or the Master
Servicer also will be required to maintain flood insurance.
If the Servicer or the Master Servicer repossesses a Manufactured Home on
behalf of the Trustee, the Servicer or the Master Servicer will either (i)
maintain at its expense hazard insurance with respect to such Manufactured Home
or (ii) indemnify the Trustee against any damage to such Manufactured Home prior
to resale or other disposition.
FHA Mortgage Insurance
The Housing Act authorizes various FHA mortgage insurance programs. Some of
the Mortgage Loans may be insured under either Section 203(b), Section 234 or
Section 235 of the Housing Act. Under Section 203(b), FHA insures mortgage loans
of up to 30 years' duration for the purchase of one- to four-family dwelling
units. Mortgage Loans for the purchase of condominium units are insured by FHA
under Section 234. Loans insured under these programs must bear interest at a
rate not exceeding the maximum rate in effect at the time the loan is made, as
established by HUD, and may not exceed specified percentages of the lesser of
the appraised value of the property and the sales price, less seller paid
closing costs for the property, up to certain specified maximums. In addition,
FHA imposes initial investment minimums and other requirements on mortgage loans
insured under the Section 203(b) and Section 234 programs.
Under Section 235, assistance payments are paid by HUD to the mortgagee on
behalf of eligible mortgagors for as long as the mortgagors continue to be
eligible for the payments. To be eligible,
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a mortgagor must be part of a family, have income within the limits prescribed
by HUD at the time of initial occupancy, occupy the property and meet
requirements for recertification at least annually.
The regulations governing these programs provide that insurance benefits
are payable either (i) upon foreclosure (or other acquisition of possession) and
conveyance of the mortgaged premises to HUD or (ii) upon assignment of the
defaulted mortgage loan to HUD. The FHA insurance that may be provided under
these programs upon the conveyance of the home to HUD is equal to 100% of the
outstanding principal balance of the mortgage loan, plus accrued interest, as
described below, and certain additional costs and expenses. When entitlement to
insurance benefits results from assignment of the mortgage loan to HUD, the
insurance payment is computed as of the date of the assignment and includes the
unpaid principal amount of the mortgage loan plus mortgage interest accrued and
unpaid to the assignment date.
When entitlement to insurance benefits results from foreclosure (or other
acquisition of possession) and conveyance, the insurance payment is equal to the
unpaid principal amount of the mortgage loan, adjusted to reimburse the
mortgagee for certain tax, insurance and similar payments made by it and to
deduct certain amounts received or retained by the mortgagee after default, plus
reimbursement not to exceed two-thirds of the mortgagee's foreclosure costs. Any
FHA insurance relating to Contracts underlying a series of Certificates will be
described in the related Prospectus Supplement.
VA Mortgage Guaranty
The Servicemen's Readjustment Act of 1944, as amended, permits a veteran
(or, in certain instances, his or her spouse) to obtain a mortgage loan guaranty
by the VA covering mortgage financing of the purchase of a one- to four-family
dwelling unit to be occupied as the veteran's home at an interest rate not
exceeding the maximum rate in effect at the time the loan is made, as
established by HUD. The program has no limit on the amount of a mortgage loan,
requires no down payment from the purchaser and permits the guaranty of mortgage
loans with terms, limited by the estimated economic life of the property, up to
30 years. The maximum guaranty that may be issued by the VA under this program
is 50% of the original principal amount of the mortgage loan up to a certain
dollar limit established by the VA. The liability on the guaranty is reduced or
increased pro rata with any reduction or increase in the amount of indebtedness,
but in no event will the amount payable on the guaranty exceed the amount of the
original guaranty. Notwithstanding the dollar and percentage limitations of the
guaranty, a mortgagee will ordinarily suffer a monetary loss only when the
difference between the unsatisfied indebtedness and the proceeds of a
foreclosure sale of mortgaged premises is greater than the original guaranty as
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adjusted. The VA may, at its option, and without regard to the guaranty, make
full payment to a mortgagee of the unsatisfied indebtedness on a mortgage upon
its assignment to the VA.
Since there is no limit imposed by the VA on the principal amount of a
VA-guaranteed mortgage loan but there is a limit on the amount of the VA
guaranty, additional coverage under a Primary Mortgage Insurance Policy may be
required by the Company for VA loans in excess of certain amounts. The amount of
any such additional coverage will be set forth in the related Prospectus
Supplement. Any VA guaranty relating to Contracts underlying a series of
Certificates will be described in the related Prospectus Supplement.
THE COMPANY
The Company is an indirect wholly-owned subsidiary of GMAC Mortgage which
is a wholly-owned subsidiary of General Motors Acceptance Corporation. The
Company was incorporated in the State of Delaware in August 1995. The Company
was organized for the purpose of acquiring mortgage loans and contracts and
issuing securities backed by such mortgage loans or contracts. The Company
anticipates that it will in many cases have acquired Mortgage Loans indirectly
through Residential Funding, which is also an indirect wholly-owned subsidiary
of GMAC Mortgage. The Company does not have, nor is it expected in the future to
have, any significant assets.
The Certificates do not represent an interest in or an obligation of the
Company. The Company's only obligations with respect to a series of Certificates
will be pursuant to certain limited representations and warranties made by the
Company or as otherwise provided in the related Prospectus Supplement.
The Company maintains its principal office at 8400 Normandale
Lake Boulevard, Suite 700, Minneapolis, Minnesota 55437. Its
telephone number is (612) 832-7000.
RESIDENTIAL FUNDING CORPORATION
Unless otherwise specified in the related Prospectus Supplement,
Residential Funding, an affiliate of the Company, will act as the Master
Servicer or Certificate Administrator for each series of Certificates.
Residential Funding buys conventional mortgage loans under several loan
purchase programs from mortgage loan originators or sellers nationwide that meet
its seller/servicer eligibility requirements and services mortgage loans for its
own account and for others. Residential Funding's principal executive offices
are located at 8400 Normandale Lake Boulevard, Suite 700, Minneapolis, Minnesota
55437. Its telephone number is (612) 832-7000. Residential
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Funding conducts operations from its headquarters in Minneapolis and from
offices located in California, Colorado, Connecticut, New York, Florida,
Georgia, Maryland, North Carolina, Rhode Island and Texas. At March 31, 1996,
Residential Funding was master servicing a mortgage loan portfolio of
approximately $28.9 billion.
THE POOLING AND SERVICING AGREEMENT
As described above under "Description of the Certificates-General," each
series of Certificates will be issued pursuant to a Pooling and Servicing
Agreement or, if the Trust Fund for a series of Certificates contains Agency
Securities, a Trust Agreement. The discussion below covers Pooling and Servicing
Agreements, but its terms are also generally applicable to Trust Agreements. The
following summaries describe certain additional provisions common to each
Pooling and Servicing Agreement and are qualified entirely by reference to the
actual terms of the Pooling and Servicing Agreement for a series of
Certificates.
Servicing and Administration
The Pooling and Servicing Agreement for a series of Certificates will set
forth the party responsible for performing servicing functions for such series
which may be the Master Servicer or one or more Servicers. If there is more than
one Servicer and there is no Master Servicer, a Certificate Administrator may be
party to the Pooling and Servicing Agreement. The Certificate Administrator will
not be responsible for servicing Mortgage Loans or Contracts and instead will
perform certain specified administrative and reporting functions with regard to
the Trust Fund. In addition, if the Trust Fund for a series of Certificates
contains Agency Securities, generally the Certificate Administrator will perform
collection, administrative and reporting functions pursuant to a Trust Agreement
and no Master Servicer or Servicer will be appointed for such series.
The Master Servicer or any Servicer for a series of Certificates generally
will perform the functions set forth under "Description of the
Certificates-Servicing and Administration of Mortgage
Collateral" above.
Events of Default
Events of Default under the Pooling and Servicing Agreement in respect of a
series of Certificates, unless otherwise specified in the Prospectus Supplement,
will include: (i) in the case of a Trust Fund including Mortgage Loans or
Contracts, any failure by the Certificate Administrator, the Master Servicer or
a Servicer (if such Servicer is a party to the Pooling and Servicing Agreement)
to make a required deposit to the Certificate Account or, if the Certificate
Administrator or the Master Servicer is the Paying
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Agent, to distribute to the holders of any class of Certificates of such series
any required payment which continues unremedied for five days after the giving
of written notice of such failure to the Master Servicer or the Certificate
Administrator, as applicable, by the Trustee or the Company, or to the Master
Servicer, the Certificate Administrator, the Company and the Trustee by the
holders of Certificates of such class evidencing not less than 25% of the
aggregate Percentage Interests constituting such class; (ii) any failure by the
Master Servicer or the Certificate Administrator, as applicable, duly to observe
or perform in any material respect any other of its covenants or agreements in
the Pooling and Servicing Agreement with respect to such series of Certificates
which continues unremedied for 30 days (15 days in the case of a failure to pay
the premium for any insurance policy which is required to be maintained under
the Pooling and Servicing Agreement) after the giving of written notice of such
failure to the Master Servicer or the Certificate Administrator, as applicable,
by the Trustee or the Company, or to the Master Servicer, the Certificate
Administrator, the Company and the Trustee by the holders of any class of
Certificates of such series evidencing not less than 25% (33% in the case of a
Trust Fund including Agency Securities) of the aggregate Percentage Interests
constituting such class; and (iii) certain events of insolvency, readjustment of
debt, marshalling of assets and liabilities or similar proceedings regarding the
Master Servicer or the Certificate Administrator, as applicable, and certain
actions by the Master Servicer or the Certificate Administrator indicating its
insolvency or inability to pay its obligations. A default pursuant to the terms
of any Agency Securities included in any Trust Fund will not constitute an Event
of Default under the related Pooling and Servicing Agreement.
Rights Upon Event of Default
So long as an Event of Default remains unremedied, either the Company or
the Trustee may, and, at the direction of the holders of Certificates evidencing
not less than 51% of the aggregate voting rights in the related Trust Fund, the
Trustee shall, by written notification to the Master Servicer or the Certificate
Administrator, as applicable, and to the Company or the Trustee, terminate all
of the rights and obligations of the Master Servicer or the Certificate
Administrator under the Pooling and Servicing Agreement (other than any rights
of the Master Servicer or the Certificate Administrator as Certificateholder)
covering such Trust Fund and in and to the Mortgage Collateral and the proceeds
thereof, whereupon the Trustee or, upon notice to the Company and with the
Company's consent, its designee will succeed to all responsibilities, duties and
liabilities of the Master Servicer or the Certificate Administrator under such
Pooling and Servicing Agreement (other than the obligation to purchase Mortgage
Collateral under certain circumstances) and will be entitled to similar
compensation arrangements. In the event that the Trustee would be obligated to
succeed the Master Servicer but is unwilling so to act,
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it may appoint (or if it is unable so to act, it shall appoint) or petition a
court of competent jurisdiction for the appointment of, a Fannie Mae or Freddie
Mac approved mortgage servicing institution with a net worth of at least
$10,000,000 to act as successor to the Master Servicer under the Pooling and
Servicing Agreement (unless otherwise set forth in the Pooling and Servicing
Agreement). Pending such appointment, the Trustee is obligated to act in such
capacity. The Trustee and such successor may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
to the initial Master Servicer or the Certificate Administrator under the
Pooling and Servicing Agreement.
No Certificateholder will have any right under a Pooling and Servicing
Agreement to institute any proceeding with respect to such Pooling and Servicing
Agreement unless such holder previously has given to the Trustee written notice
of default and the continuance thereof and unless the holders of Certificates of
any class evidencing not less than 25% of the aggregate Percentage Interests
constituting such class have made written request upon the Trustee to institute
such proceeding in its own name as Trustee thereunder and have offered to the
Trustee reasonable indemnity and the Trustee for 60 days after receipt of such
request and indemnity has neglected or refused to institute any such proceeding.
However, the Trustee will be under no obligation to exercise any of the trusts
or powers vested in it by the Pooling and Servicing Agreement or to institute,
conduct or defend any litigation thereunder or in relation thereto at the
request, order or direction of any of the holders of Certificates covered by
such Pooling and Servicing Agreement, unless such Certificateholders have
offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which may be incurred therein or thereby.
Amendment
Each Pooling and Servicing Agreement may be amended by the Company, the
Master Servicer, the Certificate Administrator or any Servicer, as applicable,
and the Trustee, without the consent of the related Certificateholders: (i) to
cure any ambiguity; (ii) to correct or supplement any provision therein which
may be inconsistent with any other provision therein or to correct any error;
(iii) to change the timing and/or nature of deposits in the Custodial Account or
the Certificate Account or to change the name in which the Custodial Account is
maintained (except that (a) deposits to the Certificate Account may not occur
later than the related Distribution Date, (b) such change may not adversely
affect in any material respect the interests of any Certificateholder, as
evidenced by an opinion of counsel, and (c) such change may not adversely affect
the then-current rating of any rated classes of Certificates, as evidenced by a
letter from each applicable Rating Agency); (iv) if a REMIC election has been
made with respect to the related Trust Fund, to modify, eliminate or add to any
of its provisions (a) to the extent necessary to maintain the qualification
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of the Trust Fund as a REMIC or to avoid or minimize the risk of imposition of
any tax on the related Trust Fund, provided that the Trustee has received an
opinion of counsel to the effect that (1) such action is necessary or desirable
to maintain such qualification or to avoid or minimize such risk and (2) such
action will not adversely affect in any material respect the interests of any
related Certificateholder or (b) to restrict the transfer of the REMIC Residual
Certificates, provided that the Company has determined that such change would
not adversely affect the applicable ratings of any classes of the Certificates,
as evidenced by a letter from each applicable Rating Agency, and that any such
amendment will not give rise to any tax with respect to the transfer of the
REMIC Residual Certificates to a non-permitted transferee; or (v) to make any
other provisions with respect to matters or questions arising under such Pooling
and Servicing Agreement which are not materially inconsistent with the
provisions thereof, so long as such action will not adversely affect in any
material respect the interests of any Certificateholder.
The Pooling and Servicing Agreement may also be amended by the Company, the
Master Servicer, the Certificate Administrator or any Servicer, as applicable,
and the Trustee with the consent of the holders of Certificates of each class
affected thereby evidencing, in each case, not less than 66% of the aggregate
Percentage Interests constituting such class for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
such Pooling and Servicing Agreement or of modifying in any manner the rights of
the related Certificateholders, except that no such amendment may (i) reduce in
any manner the amount of, or delay the timing of, payments received on Mortgage
Collateral which are required to be distributed on a Certificate of any class
without the consent of the holder of such Certificate or (ii) reduce the
percentage of Certificates of any class the holders of which are required to
consent to any such amendment unless the holders of all Certificates of such
class have consented to the change in such percentage.
Notwithstanding the foregoing, if a REMIC election has been made with
respect to the related Trust Fund, the Trustee will not be entitled to consent
to any amendment to a Pooling and Servicing Agreement without having first
received an opinion of counsel to the effect that such amendment or the exercise
of any power granted to the Master Servicer, the Certificate Administrator, any
Servicer, the Company or the Trustee in accordance with such amendment will not
result in the imposition of a tax on the related Trust Fund or cause such Trust
Fund to fail to qualify as a REMIC.
Termination; Retirement of Certificates
The obligations created by the Pooling and Servicing Agreement for each
series of Certificates (other than certain limited payment and notice
obligations of the Trustee and the Company, respectively)
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will terminate upon the payment to the related Certificateholders of all amounts
held in the Certificate Account or by the Master Servicer or any Servicer and
required to be paid to Certificateholders following the earlier of (i) the final
payment or other liquidation or disposition (or any advance with respect
thereto) of the last item of Mortgage Collateral subject thereto and all
property acquired upon foreclosure or deed in lieu of foreclosure of any
Mortgage Loan or Contract and (ii) the purchase by the Master Servicer, the
Certificate Administrator, a Servicer or the Company or, if specified in the
related Prospectus Supplement, by the holder of the REMIC Residual Certificates
(see "Certain Federal Income Tax Consequences" below) from the Trust Fund for
such series of all remaining Mortgage Collateral and all property acquired in
respect of such Mortgage Collateral. In addition to the foregoing, the Master
Servicer, the Certificate Administrator or the Company may have the option to
purchase, in whole but not in part, the Certificates specified in the related
Prospectus Supplement in the manner set forth in the related Prospectus
Supplement. Upon the purchase of such Certificates or at any time thereafter, at
the option of the Master Servicer, the Certificate Administrator or the Company,
the Mortgage Collateral may be sold, thereby effecting a retirement of the
Certificates and the termination of the Trust Fund, or the Certificates so
purchased may be held or resold by the Master Servicer, the Certificate
Administrator or the Company. Written notice of termination of the Pooling and
Servicing Agreement will be given to each Certificateholder, and the final
distribution will be made only upon surrender and cancellation of the
Certificates at an office or agency appointed by the Trustee which will be
specified in the notice of termination. If the Certificateholders are permitted
to terminate the trust under the applicable Pooling and Servicing Agreement, a
penalty may be imposed upon the Certificateholders based upon the fee that would
be foregone by the Master Servicer, the Certificate Administrator or a Servicer,
as applicable, because of such termination.
Any such purchase of Mortgage Collateral and property acquired in respect
of Mortgage Collateral evidenced by a series of Certificates shall be made at
the option of the Master Servicer, the Certificate Administrator, a Servicer,
the Company or, if applicable, the holder of the REMIC Residual Certificates at
the price specified in the related Prospectus Supplement. The exercise of such
right will effect early retirement of the Certificates of that series, but the
right of any such entity to purchase the Mortgage Collateral and related
property will be subject to the criteria, and will be at the price, set forth in
the related Prospectus Supplement. Such early termination may adversely affect
the yield to holders of certain classes of such Certificates. If a REMIC
election has been made, the termination of the related Trust Fund will be
effected in a manner consistent with applicable federal income tax regulations
and its status as a REMIC.
The Trustee
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The Trustee under each Pooling and Servicing Agreement will be named in the
related Prospectus Supplement. The commercial bank or trust company serving as
Trustee may have normal banking relationships with the Company and/or its
affiliates, including Residential Funding.
The Trustee may resign at any time, in which event the Company will be
obligated to appoint a successor trustee. The Company may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Pooling and Servicing Agreement or if the Trustee becomes insolvent. Upon
becoming aware of such circumstances, the Company will be obligated to appoint a
successor Trustee. The Trustee may also be removed at any time by the holders of
Certificates evidencing not less than 51% of the aggregate voting rights in the
related Trust Fund. Any resignation or removal of the Trustee and appointment of
a successor Trustee will not become effective until acceptance of the
appointment by the successor Trustee.
YIELD CONSIDERATIONS
The yield to maturity of a Certificate will depend on the price paid by the
holder for such Certificate, the Pass-Through Rate on any such Certificate
entitled to payments of interest (which Pass-Through Rate may vary if so
specified in the related Prospectus Supplement) and the rate and timing of
principal payments (including prepayments, defaults, liquidations and
repurchases) on the Mortgage Collateral and the allocation thereof to reduce the
principal balance of such Certificate (or notional amount thereof, if
applicable).
The rate of defaults on the Mortgage Loans or Contracts will affect the
rate and timing of principal prepayments on such Mortgage Collateral and, thus,
the yield on the Certificates. Defaults on the Mortgage Loans or Contracts may
lead to Realized Losses upon foreclosure and liquidation. To the extent Realized
Losses are not covered by any credit enhancement, they will be allocated to
Certificates as described in the related Prospectus Supplement and, accordingly,
will affect the yield on such Certificates. In general, defaults on mortgage
loans or manufactured housing contracts are expected to occur with greater
frequency in their early years. The rate of default on refinance, limited
documentation or no documentation mortgage loans, and on mortgage loans or
manufactured housing contracts with higher Loan-to-Value Ratios, borrowers whose
income is not required to be stated in the loan application, and mortgage loans
with Loan-to-Value Ratios over 80% that do not require primary mortgage
insurance, may be higher than on other mortgage loans or manufactured housing
contracts. Likewise, the rate of default on mortgage loans or manufactured
housing contracts that are secured by investment properties or mortgaged
properties with smaller or larger parcels of land or mortgage loans that are
made to
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International Borrowers may be higher than on other mortgage loans or
manufactured housing contracts. See "Risk Factors--Special Features of the
Mortgage Collateral." In addition, the rate and timing of prepayments, defaults
and liquidations on the Mortgage Loans or Contracts 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. In addition, Manufactured
Homes may decline in value even in areas where real estate values generally have
not declined. Each Prospectus Supplement will highlight any material
characteristics of the Mortgage Collateral in the related Trust Fund that may
make such Mortgage Collateral more susceptible to default.
The amount of interest payments with respect to each item of Mortgage
Collateral distributed (or accrued in the case of Deferred Interest or Accrual
Certificates) monthly to holders of a class of Certificates entitled to payments
of interest will be calculated on the basis of such class's specified percentage
of each such payment of interest (or accrual in the case of Accrual
Certificates) and will be expressed as a fixed, adjustable or variable
Pass-Through Rate payable on the outstanding principal balance or notional
amount of such Certificate, or any combination of such Pass-Through Rates,
calculated as described herein and in the related Prospectus Supplement. See
"Description of the Certificates--Distributions." Holders of Strip Certificates
or a class of Certificates having a Pass-Through Rate that varies based on the
weighted average interest rate of the underlying Mortgage Collateral will be
affected by disproportionate prepayments and repurchases of Mortgage Collateral
having higher net interest rates or higher rates applicable to the Strip
Certificates, as applicable.
The effective yield to maturity to each holder of Certificates entitled to
payments of interest will be below that otherwise produced by the applicable
Pass-Through Rate and purchase price of such Certificate because, while interest
will accrue on each Mortgage Loan or Contract from the first day of each month,
the distribution of such interest will be made on the 25th day (or, if such day
is not a business day, the next succeeding business day) of the month following
the month of accrual or, in the case of a Trust Fund including Agency
Certificates, such other day that is specified in the related Prospectus
Supplement.
A class of Certificates may be entitled to payments of interest at a fixed,
variable or adjustable Pass-Through Rate, or any combination of such
Pass-Through Rates, as specified in the related Prospectus Supplement. A
variable Pass-Through Rate may be calculated based on the weighted average of
the Mortgage Rates (net of Servicing Fees and any Certificate Administrator fee,
Excess Spread or Excluded Spread (each, a "Net Mortgage Rate")) of the
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related Mortgage Collateral for the month preceding the Distribution Date, by
reference to an index or otherwise. The aggregate payments of interest on a
class of Certificates, and the yield to maturity thereon, will be affected by
the rate of payment of principal on the Certificates (or the rate of reduction
in the notional amount of Certificates entitled to payments of interest only)
and, in the case of Certificates evidencing interests in ARM Loans, by changes
in the Net Mortgage Rates on the ARM Loans. See "Maturity and Prepayment
Considerations" below. The yield on the Certificates will also be affected by
liquidations of Mortgage Loans or Contracts following Mortgagor defaults and by
purchases of Mortgage Collateral in the event of breaches of representations
made in respect of such Mortgage Collateral by the Company, the Master Servicer
and others, or conversions of ARM Loans to a fixed interest rate. See "The Trust
Funds--Representations with Respect to Mortgage Collateral."
In general, if a Certificate is purchased at a premium over its face amount
and payments of principal on the related Mortgage Collateral occur at a rate
faster than anticipated at the time of purchase, the purchaser's actual yield to
maturity will be lower than that assumed at the time of purchase. Conversely, if
a class of Certificates is purchased at a discount from its face amount and
payments of principal on the related Mortgage Collateral occur at a rate slower
than that assumed at the time of purchase, the purchaser's actual yield to
maturity will be lower than that originally anticipated. If Strip Certificates
are issued evidencing a right to payments of interest only or disproportionate
payments of interest, a faster than expected rate of principal prepayments on
the Mortgage Collateral will negatively affect the total return to investors in
any such Certificates. If Strip Certificates are issued evidencing a right to
payments of principal only or disproportionate payments of principal, a slower
than expected rate of principal payments on the Mortgage Collateral could
negatively affect the anticipated yield on such Strip Certificates. If
Certificates with either of the foregoing characteristics are issued, the total
return to investors of such Certificates will be extremely sensitive to such
prepayments. In addition, the total return to investors of Certificates
evidencing a right to distributions of interest at a rate that is based on the
weighted average Net Mortgage Rate of the Mortgage Collateral from time to time
will be adversely affected by principal prepayments on Mortgage Collateral with
Mortgage Rates higher than the weighted average Mortgage Rate on the Mortgage
Collateral. In general, mortgage loans or manufactured housing contracts with
higher Mortgage Rates prepay at a faster rate than mortgage loans or
manufactured housing contracts with lower Mortgage Rates. The yield on a class
of Strip Certificates that is entitled to receive a portion of principal or
interest from each item of Mortgage Collateral in a Trust Fund will be affected
by any losses on the Mortgage Collateral because of the affect on timing and
amount of payments. In certain circumstances, rapid prepayments may result in
the failure of such holders to recoup their original investment. In addition,
the yield to maturity on certain other
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types of classes of Certificates, including Accrual Certificates, Certificates
with a Pass-Through Rate that fluctuates inversely with or at a multiple of an
index or certain other classes in a series including more than one class of
Certificates, may be relatively more sensitive to the rate of prepayment on the
related Mortgage Collateral than other classes of Certificates.
The timing of changes in the rate of principal payments on or repurchases
of the Mortgage Collateral may significantly affect an investor's actual yield
to maturity, even if the average rate of principal payments experienced over
time is consistent with an investor's expectation. In general, the earlier a
prepayment of principal on the Mortgage Collateral or a repurchase thereof, 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 and repurchases occurring at
a rate higher (or lower) than the rate anticipated by the investor during the
period immediately following the issuance of a series of Certificates would not
be fully offset by a subsequent like reduction (or increase) in the rate of
principal payments.
Unless otherwise specified in the related Prospectus Supplement,
prepayments in full or final liquidations will reduce the amount of interest
distributed in the following month to holders of Certificates entitled to
distributions of interest because the resulting Prepayment Interest Shortfall
will not be covered by Compensating Interest. See "Description of the
Certificates--Prepayment Interest Shortfalls." Unless otherwise specified in the
related Prospectus Supplement, a partial prepayment of principal is applied so
as to reduce the outstanding principal balance of the related Mortgage Loan or
Contract as of the first day of the month in which such partial prepayment is
received. As a result, unless otherwise specified in the related Prospectus
Supplement, the effect of a partial prepayment on a Mortgage Loan or Contract
will be to reduce the amount of interest distributed to holders of Certificates
in the month following the receipt of such partial prepayment by an amount equal
to one month's interest at the applicable Pass-Through Rate or Net Mortgage
Rate, as the case may be, on the prepaid amount. See "Description of the
Certificates--Prepayment Interest Shortfalls." Neither full or partial principal
prepayments nor Liquidation Proceeds will be distributed until the Distribution
Date in the month following receipt. See "Maturity and Prepayment
Considerations."
With respect to certain ARM Loans, the Mortgage Rate at origination may be
below the rate that would result from the sum of the then-applicable Index and
Gross Margin. Under the applicable underwriting standards, the Mortgagor under
each Mortgage Loan or Contract generally will be qualified on the basis of the
Mortgage Rate in effect at origination and not the higher rate that would be
produced by the sum of the Index and Gross Margin. The repayment of any such
Mortgage Loan or Contract may thus be dependent on the
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ability of the Mortgagor to make larger level monthly payments following the
adjustment of the Mortgage Rate. In addition, the periodic increase in the
amount paid by the Mortgagor of a Buy-Down Loan during or at the end of the
applicable Buy-Down Period may create a greater financial burden for the
Mortgagor, who might not have otherwise qualified for a mortgage under the
applicable underwriting guidelines, and may accordingly increase the risk of
default with respect to the related Mortgage Loan.
If so specified in the related Prospectus Supplement, a Trust Fund may
contain Neg-Am ARM Loans with fluctuating Mortgage Rates that adjust more
frequently than the monthly payment with respect to such Mortgage Loans or
Contracts. During a period of rising interest rates as well as immediately after
origination, the amount of interest accruing on the principal balance of such
Mortgage Loans may exceed the amount of the minimum scheduled monthly payment
thereon. As a result, a portion of the accrued interest on Neg-Am ARM Loans may
become Deferred Interest which will be added to the principal balance thereof
and will bear interest at the applicable Mortgage Rate. The addition of any such
Deferred Interest to the principal balance of any related class of Certificates
will lengthen the weighted average life thereof and may adversely affect yield
to holders thereof. In addition, with respect to certain Neg-Am ARM Loans,
during a period of declining interest rates, it might be expected that each
minimum scheduled monthly payment on such a Mortgage Loan would exceed the
amount of scheduled principal and accrued interest on the principal balance
thereof, and since such excess will be applied to reduce the principal balance
of the related class or classes of Certificates, the weighted average life of
such Certificates will be reduced and may adversely affect yield to holders
thereof.
If so specified in the related Prospectus Supplement, a Trust Fund may
contain GPM Loans or Buy-Down Loans which have monthly payments that increase
during the first few years following origination. Mortgagors generally will be
qualified for such loans on the basis of the initial monthly payment. To the
extent that the related Mortgagor's income does not increase at the same rate as
the monthly payment, such a loan may be more likely to default than a mortgage
loan with level monthly payments.
If so specified in the related Prospectus Supplement, a Trust Fund may
contain Balloon Loans which require a single payment of a Balloon Amount. The
payment of Balloon Amounts may result in a lower yield on Certificates than
would be the case if all such Mortgage Collateral was fully-amortizing because
the maturity of a Balloon Loan occurs earlier than that for a fully-amortizing
Mortgage Loan due to the payment of a Balloon Amount. Balloon Loans also pose a
greater risk of default than fully-amortizing Mortgage Loans because Mortgagors
are required to pay the Balloon Amount upon maturity. A Mortgagor's ability to
pay a Balloon Amount may depend on its ability to refinance the related
Mortgaged Property.
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If credit enhancement for a series of Certificates is provided by a Letter
of Credit, insurance policy or bond that is issued or guaranteed by an entity
that suffers financial difficulty, such credit enhancement may not provide the
level of support that was anticipated at the time an investor purchased its
Certificate. In the event of a default under the terms of such a Letter of
Credit, insurance policy or bond, any Realized Losses on the Mortgage Collateral
not covered by such credit enhancement will be applied to a series of
Certificates in the manner described in the related Prospectus Supplement and
may reduce an investor's anticipated yield to maturity.
The related Prospectus Supplement may set forth other factors concerning
the Mortgage Collateral securing a series of Certificates or the structure of
such series that will affect the yield on such Certificates.
MATURITY AND PREPAYMENT CONSIDERATIONS
As indicated above under "The Trust Funds," the original terms to maturity
of the Mortgage Collateral in a given Trust Fund will vary depending upon the
type of Mortgage Collateral included in such Trust Fund. The Prospectus
Supplement for a series of Certificates will contain information with respect to
the types and maturities of the Mortgage Collateral in the related Trust Fund.
The prepayment experience, the timing and rate of repurchases and the timing and
amount of liquidations with respect to the related Mortgage Loans or Contracts
will affect the life and yield of the related series of Certificates.
Prepayments on mortgage loans and manufactured housing contracts are
commonly measured relative to a prepayment standard or model. The Prospectus
Supplement for each series of Certificates may describe one or more such
prepayment standards or models and may contain tables setting forth the
projected yields to maturity on each class of Certificates or the weighted
average life of each class of Certificates and the percentage of the original
principal amount of each class of Certificates of such series that would be
outstanding on specified payment dates for such series based on the assumptions
stated in such Prospectus Supplement, including assumptions that prepayments on
the Mortgage Collateral are made at rates corresponding to various percentages
of the prepayment standard or model specified in the related Prospectus
Supplement.
There is no assurance that prepayment of the Mortgage Collateral underlying
a series of Certificates will conform to any level of the prepayment standard or
model specified in the related Prospectus Supplement. A number of factors,
including homeowner mobility, economic conditions, changes in mortgagors'
housing needs, job transfers, unemployment, mortgagors' net equity in the
properties securing the mortgages, servicing decisions, enforceability of due-
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on-sale clauses, mortgage market interest rates, mortgage recording taxes,
solicitations and the availability of mortgage funds, may affect prepayment
experience. The rate of prepayment with respect to conventional fixed-rate
mortgage loans and contracts has fluctuated significantly in recent years. In
general, however, if prevailing interest rates fall significantly below the
Mortgage Rates on the Mortgage Loans or Contracts underlying a series of
Certificates, the prepayment rate of such Mortgage Loans or Contracts is likely
to be higher than if prevailing rates remain at or above the rates borne by such
Mortgage Loans or Contracts. It should be noted that Certificates of a certain
series may evidence an interest in Mortgage Loans or Contracts with different
Mortgage Rates. Accordingly, the prepayment experience of these Certificates
will to some extent be a function of the range of interest rates of such
Mortgage Loans or Contracts.
Unless otherwise specified in the related Prospectus Supplement, all of the
Mortgage Loans or Contracts may be prepaid without penalty in full or in part at
any time. The terms of the related Pooling and Servicing Agreement generally
will require the Servicer or Master Servicer, as the case may be, to enforce any
due-on-sale clause to the extent it has knowledge of the conveyance or the
proposed conveyance of the underlying Mortgaged Property and to the extent
permitted by applicable law, except that any enforcement action that would
impair or threaten to impair any recovery under any related insurance policy
will not be required or permitted. See "Description of the
Certificates--Servicing and Administration of Mortgage Collateral--Enforcement
of 'Due-on-Sale' Clauses" and "Certain Legal Aspects of Mortgage Loans and
Contracts--The Mortgage Loans-- Enforceability of Certain Provisions" and "--The
Contracts" for a description of certain provisions of each Pooling and Servicing
Agreement and certain legal aspects that may affect the prepayment rate of
Mortgage Loans or Contracts.
Certain types of Mortgage Collateral included in a Trust Fund may have
characteristics that make it more likely to default than collateral provided for
mortgage pass-through certificates from other mortgage purchase programs. The
Company anticipates including "limited documentation" and "no documentation"
Mortgage Loans and Contracts, as well as Mortgage Loans and Contracts that were
made to International Borrowers, secured by investment properties and have other
characteristics not present in such other programs. Such Mortgage Collateral may
be susceptible to a greater risk of default and liquidation than might otherwise
be expected by investors in the related Certificates. See "Yield
Considerations."
The Master Servicer, a Servicer, a Sub-Servicer or a Mortgage Collateral
Seller may refinance a Mortgage Loan or Contract in a Trust Fund by accepting
full prepayment thereof and making a new loan secured by a mortgage on the same
property. A Mortgagor may be legally entitled to require the Master Servicer,
Servicer, Sub-Servicer or Mortgage Collateral Seller, as applicable, to allow
such
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refinancing. Any such refinancing will have the same effect on the
Certificateholders as a prepayment in full of the refinanced Mortgage Loan or
Contract, thereby affecting the yield to Certificateholders.
There are no uniform statistics compiled for prepayments of contracts
relating to Manufactured Homes. Prepayments on manufactured housing contracts
may be influenced by a variety of economic, geographic, social and other facts,
including repossessions, aging, seasonality and interest rate fluctuations.
Other factors affecting prepayment of manufactured housing contracts include
changes in housing needs, job transfers, unemployment and servicing decisions.
An investment in Certificates evidencing interests in Contracts may be affected
by, among other things, a downturn in regional or local economic conditions.
These regional or local economic conditions are often volatile, and historically
have affected the delinquency, loan loss and repossession experience of the
Contracts. To the extent that losses on the Contracts are not covered by any
credit enhancement, holders of the Certificates of a series evidencing interests
in such Contracts will bear all risk of loss resulting from default by
Mortgagors and will have to look primarily to the value of the Manufactured
Homes, which generally depreciate in value, for recovery of the outstanding
principal and unpaid interest of the defaulted Contracts. See "The Trust
Funds--The Contracts."
While most manufactured housing contracts will contain "due-on-sale"
provisions permitting the holder of the contract to accelerate the maturity of
the contract upon conveyance by the Mortgagor, the Master Servicer, Servicer or
Sub-Servicer, as applicable, may permit proposed assumptions of contracts where
the proposed buyer of the Manufactured Home meets the underwriting standards
described above. Such assumption would have the effect of extending the average
life of the contract. FHA Loans, FHA Contracts, VA Loans and VA Contracts are
not permitted to contain "due-on-sale" clauses, and are freely assumable.
Although the Mortgage Rates on ARM Loans will be subject to periodic
adjustments, such adjustments generally will (i) not increase or decrease such
Mortgage Rates by more than a fixed percentage amount on each adjustment date,
(ii) not increase such Mortgage Rates over a fixed percentage amount during the
life of any ARM Loan and (iii) be based on an index (which may not rise and fall
consistently with mortgage interest rates) plus the related Gross Margin (which
may be different from margins being used at the time for newly-originated
adjustable rate mortgage loans). As a result, the Mortgage Rates on the ARM
Loans in a Trust Fund at any time may not equal the prevailing rates for
similar, newly originated adjustable rate mortgage loans. In certain rate
environments, the prevailing rates on fixed-rate mortgage loans may be
sufficiently low in relation to the then-current Mortgage Rates on ARM Loans
that the rate of prepayment may increase as a result of refinancings.
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There can be no certainty as to the rate of prepayments on the Mortgage
Collateral during any period or over the life of any series of Certificates.
With respect to Balloon Loans, payment of the Balloon Amount (which, based
on the amortization schedule of such Mortgage Loans, is expected to be a
substantial amount) will generally depend on the Mortgagor's ability to obtain
refinancing of such a 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 Mortgagor's financial
situation, prevailing mortgage loan interest rates, the Mortgagor's equity in
the related Mortgaged Property, tax laws and prevailing general economic
conditions. Unless otherwise specified in the related Prospectus Supplement,
none of the Company, the Master Servicer, a Servicer, a Sub-Servicer, a Mortgage
Collateral Seller nor any of their affiliates will be obligated to refinance or
repurchase any Mortgage Loan or to sell the Mortgaged Property.
An ARM Loan is assumable under certain conditions if the proposed
transferee of the related Mortgaged Property establishes its ability to repay
the Mortgage Loan and, in the reasonable judgment of the Master Servicer or the
related Sub-Servicer, the security for the ARM Loan would not be impaired by the
assumption. The extent to which ARM Loans are assumed by purchasers of the
Mortgaged Properties rather than prepaid by the related Mortgagors in connection
with the sales of the Mortgaged Properties will affect the weighted average life
of the related series of Certificates. See "Description of the Certificates" and
"Certain Legal Aspects of Mortgage Loans and Contracts."
No assurance can be given that the value of the Mortgaged Property securing
a Mortgage Loan or Contract 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
Mortgage Loans or Contracts and any secondary financing on the Mortgaged
Properties in a particular Mortgage Pool or Contract 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. In addition, the value of property
securing Cooperative Loans and the delinquency rates with respect to 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 Mortgage Loans and Contracts."
To the extent that losses resulting from delinquencies, losses and
foreclosures or repossession of Mortgaged Property with respect to Mortgage
Loans or Contracts included in a Trust Fund for a series
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of Certificates are not covered by the methods of credit enhancement described
herein under "Description of Credit Enhancement" or in the related Prospectus
Supplement, such losses will be borne by holders of the Certificates of such
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 Mortgage
Collateral, thus reducing average weighted life and affecting yield to maturity.
See "Yield Considerations."
Under certain circumstances, the Master Servicer, a Servicer, the Company
or, if specified in the related Prospectus Supplement, the holders of the REMIC
Residual Certificates may have the option to purchase the Mortgage Loans in a
Trust Fund. See "The Pooling and Servicing Agreement--Termination; Retirement of
Certificates." Any such repurchase will shorten the weighted average lives of
the related Certificates.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND CONTRACTS
The following discussion contains summaries of certain legal aspects of
mortgage loans and manufactured housing contracts that are general in nature.
Because such legal aspects are governed in part by state law (which laws may
differ substantially from state to state), the summaries do not purport to be
complete, to reflect the laws of any particular state or to encompass the laws
of all states in which the Mortgaged Properties may be situated. The summaries
are qualified in their entirety by reference to the applicable federal and state
laws governing the Mortgage Loans or Contracts.
The Mortgage Loans
General
The Mortgage Loans (other than Cooperative Loans) will be secured by deeds
of trust, mortgages or deeds to secure debt depending upon the prevailing
practice in the state in which the related Mortgaged Property is located. In
some states, a mortgage, deed of trust or deed to secure debt creates a lien
upon the real property encumbered by the mortgage. In other states, the
mortgage, deed of trust or deed to secure debt conveys legal title to the
property to the mortgagee subject to a condition subsequent (i.e., the payment
of the indebtedness secured thereby). It is not prior to the lien for real
estate taxes and assessments and other charges imposed under governmental police
powers. Priority with respect to such instruments depends on their terms and in
some cases on the terms of separate subordination or inter-creditor agreements,
and generally on the order of recordation of the mortgage in the appropriate
recording office. There are two parties to a mortgage, the mortgagor, who is the
borrower and homeowner, and the mortgagee, who is the lender. Under the mortgage
instrument, the mortgagor delivers
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to the mortgagee a note or bond and the mortgage. In the case of a land trust,
there are three parties because title to the property is held by a land trustee
under a land trust agreement of which the borrower is the beneficiary; at
origination of a mortgage loan, the borrower executes a separate undertaking to
make payments on the mortgage note. Although a deed of trust is similar to a
mortgage, a deed of trust has three parties: the trustor, who is the
borrower/homeowner; the beneficiary, who is the lender; and a third-party
grantee called the trustee. Under a deed of trust, the borrower grants the
property, irrevocably until the debt is paid, in trust, generally with a power
of sale, to the trustee to secure payment of the obligation. A deed to secure
debt typically has two parties, pursuant to which the borrower, or grantor,
conveys title to the real property to the grantee, or lender, generally with a
power of sale, until such time as the debt is repaid. The trustee's authority
under a deed of trust and the mortgagee's authority under a mortgage are
governed by the law of the state in which the real property is located, the
express provisions of the deed of trust, mortgage or deed to secure debt and, in
certain deed of trust, transactions, the directions of the beneficiary.
Cooperative Loans
If specified in the Prospectus Supplement relating to a series of
Certificates, the Mortgage Loans may include Cooperative Loans. Each debt
instrument (a "Cooperative Note") evidencing a Cooperative Loan will be secured
by a security interest in shares issued by the related corporation (a
"Cooperative") that owns the related apartment building, which is a corporation
entitled to be treated as a housing cooperative under federal tax law, and in
the related proprietary lease or occupancy agreement granting exclusive rights
to occupy a specific dwelling unit in the Cooperative's building. The security
agreement will create a lien upon, or grant a security interest in, the
Cooperative shares and proprietary leases or occupancy agreements, the priority
of which will depend on the terms of the particular security agreement as well
as the order of recordation of the agreement (or the filing of the financing
statements related thereto) in the appropriate recording office or the taking of
possession of the Cooperative shares, depending on the law of the state in which
the Cooperative is located. Such a lien or security interest is not, in general,
prior to liens in favor of the cooperative corporation for unpaid assessments or
common charges.
Unless otherwise specified in the related Prospectus Supplement, all
Cooperative buildings relating to the Cooperative Loans are located in the State
of New York. Generally, each Cooperative owns in fee or has a leasehold interest
in all the real property and owns in fee or leases the building and all separate
dwelling units therein. The Cooperative is directly responsible for property
management and, in most cases, payment of real estate taxes, other governmental
impositions and hazard and liability insurance. If there is an underlying
mortgage (or mortgages) on the Cooperative's
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building or underlying land, as is generally the case, or an underlying lease of
the land, as is the case in some instances, the Cooperative, as mortgagor or
lessee, as the case may be, is also responsible for fulfilling such mortgage or
rental obligations. An underlying mortgage loan is ordinarily obtained by the
Cooperative in connection with either the construction or purchase of the
Cooperative's building or the obtaining of capital by the Cooperative. The
interest of the occupant under proprietary leases or occupancy agreements as to
which that Cooperative is the landlord is generally subordinate to the interest
of the holder of an underlying mortgage and to the interest of the holder of a
land lease. If the Cooperative is unable to meet the payment obligations (i)
arising under an underlying mortgage, the mortgagee holding an underlying
mortgage could foreclose on that mortgage and terminate all subordinate
proprietary leases and occupancy agreements or (ii) arising under its land
lease, the holder of the landlord's interest under the land lease could
terminate it and all subordinate proprietary leases and occupancy agreements. In
addition, an underlying mortgage on a Cooperative may provide financing in the
form of a mortgage that does not fully amortize, with a significant portion of
principal being due in one final payment at maturity. The inability of the
Cooperative to refinance a mortgage and its consequent inability to make such
final payment could lead to foreclosure by the mortgagee. Similarly, a land
lease has an expiration date and the inability of the Cooperative to extend its
term or, in the alternative, to purchase the land, could lead to termination of
the Cooperative's interest in the property and termination of all proprietary
leases and occupancy agreements. In either event, a foreclosure by the holder of
an underlying mortgage or the termination of the underlying lease could
eliminate or significantly diminish the value of any collateral held by the
lender who financed the purchase by an individual tenant-stockholder of shares
of the Cooperative or, in the case of the Mortgage Loans, the collateral
securing the Cooperative Loans.
Each Cooperative is owned by shareholders (referred to as
tenant-stockholders) who, through ownership of stock or shares in the
Cooperative, receive proprietary leases or occupancy agreements which confer
exclusive rights to occupy specific dwellings. Generally, a tenant-stockholder
of a Cooperative must make a monthly rental payment to the Cooperative pursuant
to the proprietary lease, which rental payment represents such
tenant-stockholder's pro rata share of the Cooperative's payments for its
underlying mortgage, real property taxes, maintenance expenses and other capital
or ordinary expenses. An ownership interest in a Cooperative and accompanying
occupancy rights may be financed through a Cooperative Loan evidenced by a
Cooperative Note and secured by an assignment of and a security interest in the
occupancy agreement or proprietary lease and a security interest in the related
shares of the related Cooperative. The lender generally takes possession of the
share certificate and a counterpart of the proprietary lease or occupancy
agreement and a financing statement covering the proprietary lease
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or occupancy agreement and the Cooperative shares is filed in the appropriate
state and local offices to perfect the lender's interest in its collateral.
Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the Cooperative Note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in the
security agreement covering the assignment of the proprietary lease or occupancy
agreement and the pledge of Cooperative shares. See "--Foreclosure on Shares of
Cooperatives" below.
Tax Aspects of Cooperative Ownership
In general, a "tenant-stockholder" (as defined in Section 216(b)(2) of the
Internal Revenue Code (the "Code") of a corporation that qualifies as a
"cooperative housing corporation" within the meaning of Section 216(b)(1) of the
Code is allowed a deduction for amounts paid or accrued within his or her
taxable year to the corporation representing his or her proportionate share of
certain interest expenses and certain real estate taxes allowable as a deduction
under Section 216(a) of the Code to the corporation under Sections 163 and 164
of the Code. In order for a corporation to qualify under Section 216(b)(1) of
the Code for its taxable year in which such items are allowable as a deduction
to the corporation, such section requires, among other things, that at least 80%
of the gross income of the corporation be derived from its tenant-stockholders.
By virtue of this requirement, the status of a corporation for purposes of
Section 216(b)(1) of the Code must be determined on a year-to-year basis.
Consequently, there can be no assurance that Cooperatives relating to the
Cooperative Loans will qualify under such section for any particular year. In
the event that such a Cooperative fails to qualify for one or more years, the
value of the collateral securing any related Cooperative Loans could be
significantly impaired because no deduction would be allowable to
tenant-stockholders under Section 216(a) of the Code with respect to those
years. In view of the significance of the tax benefits accorded
tenant-stockholders of a corporation that qualifies under Section 216(b)(1) of
the Code, the likelihood that such a failure would be permitted to continue over
a period of years appears remote.
Foreclosure on Mortgage Loans
Although a deed of trust or a deed to secure debt may also be foreclosed by
judicial action, foreclosure of a deed of trust or a deed to secure debt is
generally accomplished by a non-judicial trustee's sale under a specific
provision in the deed of trust which authorizes the trustee or lender, as
applicable, to sell the property upon any default by the borrower under the
terms of the note or deed of trust. In addition to any notice requirements
contained in a deed of trust, in some states, the trustee must record a notice
of default and send a copy to the borrower/trustor and to any person who has
recorded a request for a copy of notice of
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default and notice of sale. In addition, in some states, the trustee or lender,
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 is not reinstated within a specified period, a notice of sale must be
posted in a public place and, in most states, published for a specific period of
time in one or more newspapers. In 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.
Foreclosure of a mortgage generally is accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure may result from difficulties in locating and serving
necessary parties, including borrowers located outside the jurisdiction in which
the mortgaged property is located. Difficulties in foreclosing on mortgaged
properties owned by International Borrowers may also result in increased
foreclosure costs, which may reduce the amount of proceeds from the liquidation
of the related mortgage loan available to be distributed to the
Certificateholders of the related series. If the mortgagee's right to foreclose
is contested, the legal proceedings necessary to resolve the issue may be
time-consuming.
In some states, the borrower-trustor has the right to reinstate the loan at
any time following default until shortly before the trustee's sale. In general,
in such states, the borrower, or any other person having a junior encumbrance on
the real estate, may, during a reinstatement period, cure the default by paying
the entire amount in arrears plus the costs and expenses incurred in enforcing
the obligation.
In the case of foreclosure under a mortgage, a deed of trust or deed to
secure debt, the sale by the referee or other designated officer or by the
trustee is a public sale. However, because of the difficulty a potential buyer
at the sale would have in determining the exact status of title and because the
physical condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale. Rather, it is common for the lender to purchase the property
from the trustee or referee for a credit bid less than or equal to the unpaid
principal amount of the mortgage or deed of trust, accrued and unpaid interest
and the expense of foreclosure. Generally, state law controls the amount of
foreclosure costs and expenses, including attorneys' fees, which may be
recovered by a lender. Thereafter, subject to the right of the borrower in some
states to remain in possession during the redemption period, the lender will
assume the burdens of ownership, including obtaining hazard insurance and making
such repairs at its own expense as are necessary to render the property suitable
for sale. Generally, the lender will obtain the services of a real estate broker
and pay the
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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. See "--Anti-Deficiency Legislation and Other
Limitations on Lenders" below. In some cases, a deficiency judgment
may be pursued in lieu of foreclosure. Any loss may be reduced by
the receipt of any mortgage insurance proceeds or other forms of
credit enhancement for a series of Certificates. See "Description of
Credit Enhancement."
Foreclosure on Shares of Cooperatives
The Cooperative shares owned by the tenant-stockholder, together with the
rights of the tenant-stockholder under the proprietary lease or occupancy
agreement, are pledged to the lender and are, in almost all cases, subject to
restrictions on transfer as set forth in the Cooperative's certificate of
incorporation and by-laws, as well as in the proprietary lease or occupancy
agreement. The proprietary lease or occupancy agreement, even while pledged, may
be cancelled by the Cooperative for failure by the tenant-stockholder to pay
rent or other obligations or charges owed by such tenant-stockholder, including
mechanics' liens against the Cooperative's building incurred by such
tenant-stockholder. Generally, rent and other obligations and charges arising
under a proprietary lease or occupancy agreement which are owed to the
Cooperative are made liens upon the shares to which the proprietary lease or
occupancy agreement relates. In addition, the proprietary lease or occupancy
agreement generally permits the Cooperative to terminate such lease or agreement
in the event the borrower defaults in the performance of covenants thereunder.
Typically, the lender and the Cooperative enter into a recognition agreement
which, together with any lender protection provisions contained in the
proprietary lease or occupancy agreement, establishes the rights and obligations
of both parties in the event of a default by the tenant-stockholder on its
obligations under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with notice of and an opportunity
to cure the default. The recognition agreement typically provides that if the
proprietary lease or occupancy agreement is terminated, the Cooperative will
recognize the lender's lien against proceeds from a sale of the shares and the
proprietary lease or occupancy agreement allocated to the dwelling, subject,
however, to the Cooperative's right to sums due under such proprietary lease or
occupancy agreement or which have become liens on the shares relating to the
proprietary lease or
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occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the amount realized upon a sale of the collateral below
the outstanding principal balance of the Cooperative Loan and accrued and unpaid
interest thereon.
Recognition agreements also generally provide that in the event the lender
succeeds to the tenant-shareholder's shares and proprietary lease or occupancy
agreement as the result of realizing upon its collateral for a Cooperative Loan,
the lender must obtain the approval or consent of the board of directors of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares and assigning the proprietary lease. Such approval or consent
is usually based on the prospective purchaser's income and net worth, among
other factors, and may significantly reduce the number of potential purchasers,
which could limit the ability of the lender to sell and realize upon the value
of the collateral. Generally, the lender is not limited in any rights it may
have to dispossess the tenant-stockholder.
Because of the nature of Cooperative Loans, lenders do not require the
tenant-stockholder (i.e., the borrower) to obtain title insurance of any type.
Consequently, the existence of any prior liens or other imperfections of title
affecting the Cooperative's building or real estate also may adversely affect
the marketability of the shares allocated to the dwelling unit in the event of
foreclosure.
A foreclosure on the Cooperative shares is accomplished by public sale in
accordance with the provisions of Article 9 of the Uniform Commercial Code (the
"UCC") and the security agreement relating to those shares. Article 9 of the UCC
requires that a sale be conducted in a "commercially reasonable" manner. Whether
a sale has been conducted in a "commercially reasonable" manner will depend on
the facts in each case. In determining commercial reasonableness, a court will
look to the notice given the debtor and the method, manner, time, place and
terms of the sale and the sale price. Generally, a sale conducted according to
the usual practice of creditors selling similar collateral in the same area will
be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperative corporation to receive sums due under
the proprietary lease or occupancy agreement. If there are proceeds remaining,
the lender must account to the tenant-stockholder for the surplus. Conversely,
if a portion of the indebtedness remains unpaid, the tenant-stockholder is
generally responsible for the
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deficiency. See "--Anti-Deficiency Legislation and Other Limitations
on Lenders" below.
Rights of Redemption
In some states, after sale pursuant to a deed of trust, a deed to secure
debt or foreclosure of a mortgage, the borrower and foreclosed junior lienors or
other parties are given a statutory period (generally ranging from six months to
two years) in which to redeem the property from the foreclosure sale. In some
states, redemption may occur only upon payment of the entire principal balance
of the loan, accrued interest and expenses of foreclosure. In other states,
redemption may be authorized if the former borrower pays only a portion of the
sums due. The effect of a statutory right of redemption is to diminish the
ability of the lender to sell the foreclosed property. The rights of redemption
would defeat the title of any purchaser subsequent to foreclosure or sale under
a deed of trust or a deed to secure debt. Consequently, the practical effect of
the redemption right is to force the lender to maintain the property and pay the
expenses of ownership until the redemption period has expired.
Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory prohibitions which limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage or a deed
to secure debt. In some states (including California), statutes limit the right
of the beneficiary or mortgagee to obtain a deficiency judgment against the
borrower following foreclosure. A deficiency judgment is a personal judgment
against the former borrower equal in most cases to the difference between the
net amount realized upon the public sale of the real property and the amount due
to the lender. In the case of a Mortgage Loan secured by a property owned by a
trust where the Mortgage Note is executed on behalf of the trust, a deficiency
judgment against the trust following foreclosure or sale under a deed of trust,
even if obtainable under applicable law, may be of little value to the mortgagee
or beneficiary if there are no trust assets against which such deficiency
judgment may be executed. In addition, a deficiency judgment against a borrower
who resides outside of the jurisdiction in which the property is located may be
difficult to obtain because, unless a court orders otherwise, service of process
must be effected by personal delivery. Some state statutes require the
beneficiary 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 certain other
states, the lender has the option of bringing a personal action against the
borrower on the debt without first exhausting such security; however, in some of
these states, the lender, following judgment on such personal action, may be
deemed to have elected a remedy and may be precluded from exercising remedies
with respect to the security. Consequently, the practical
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effect of the election requirement, in those states permitting such election, is
that lenders will usually proceed against the security first rather than
bringing a personal action against the borrower.
Finally, in certain other states, statutory provisions limit any deficiency
judgment against the borrower following a foreclosure to the excess of the
outstanding debt over the fair value of the property at the time of the public
sale. The purpose of these statutes is generally to prevent a beneficiary or
mortgagee from obtaining a large deficiency judgment against the borrower as a
result of low or no bids at the judicial sale.
Generally, Article 9 of the UCC governs foreclosure on Cooperative Shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted Article 9 to prohibit or limit a deficiency award in certain
circumstances, including circumstances where the disposition of the collateral
(which, in the case of a Cooperative Loan, would be the shares of the
Cooperative and the related proprietary lease or occupancy agreement) was not
conducted in a commercially reasonable manner.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other federal and state statutory provisions, including the federal bankruptcy
laws and state laws affording relief to debtors, may interfere with or affect
the ability of the secured mortgage lender to realize upon its collateral and/or
enforce a deficiency judgment. For example, under the federal bankruptcy law,
all actions against the debtor, the debtor's property and any co-debtor are
automatically stayed upon the filing of a bankruptcy petition. Moreover, a court
having federal bankruptcy jurisdiction may permit a debtor through its Chapter
11 or Chapter 13 rehabilitative plan to cure a monetary default in respect of a
mortgage loan on such debtor's residence by paying arrearages within a
reasonable time period and reinstating the original mortgage loan payment
schedule, even though the lender accelerated the mortgage loan and final
judgment of foreclosure had been entered in state court (provided no sale of the
residence had yet occurred) prior to the filing of the debtor's petition. Some
courts with federal bankruptcy jurisdiction have approved plans, based on the
particular facts of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property which is not the principal
residence of the debtor may be modified. These courts have allowed modifications
that include reducing the amount of each monthly payment, changing the rate of
interest, altering the repayment schedule, forgiving all or a portion of the
debt and reducing the lender's security interest to the value of the residence,
thus leaving the lender a general unsecured creditor for the difference between
the value of the residence and the outstanding balance of the loan. Generally,
however, the terms of a
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mortgage loan secured only by a mortgage on real property that is the debtor's
principal residence may not be modified pursuant to a plan confirmed pursuant to
Chapter 13 except with respect to mortgage payment arrearages, which may be
cured within a reasonable time period. Courts with federal bankruptcy
jurisdiction similarly may be able to modify the terms of a Cooperative Loan.
Certain tax liens arising under the Code may, in certain circumstances,
have priority over the lien of a mortgage, deed to secure debt or deed of trust.
This may have the effect of delaying or interfering with the enforcement of
rights with respect to a defaulted Mortgage Loan.
In addition, substantive requirements are imposed upon mortgage lenders in
connection with the origination and the servicing of mortgage loans by numerous
federal and some state consumer protection laws. These laws include the federal
Truth-in-Lending Act, Real Estate Settlement Procedures Act, Equal Credit
Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act and related
statutes. These federal laws impose specific statutory liabilities upon lenders
who originate mortgage loans and who fail to comply with the provisions of the
law. In some cases, this liability may affect assignees of the mortgage loans.
Certain of the Mortgage Loans may be subject to special rules, disclosure
requirements and other provisions that were added to the federal
Truth-in-Lending Act by the Homeownership and Equity Protection Act of 1994
(such Mortgage Loans, "High Cost Loans"), if such Mortgage Loans were originated
on or after October 1, 1995, are not mortgage loans made to finance the purchase
of the mortgaged property and have interest rates or origination costs in excess
of certain prescribed levels. Purchasers or assignees of any High Cost Loan,
including any Trust Fund, could be liable for all claims and subject to all
defenses arising under such provisions that the borrower could assert against
the originator thereof. Remedies available to the borrower include monetary
penalties, as well as recission rights if the appropriate disclosures were not
given as required.
Enforceability of Certain Provisions
Unless the Prospectus Supplement indicates otherwise, the Mortgage Loans
generally 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. The enforceability of these clauses has been the subject of
legislation or litigation in many states, and in some cases the enforceability
of these clauses has been limited or denied. However, the Garn-St Germain
Depository Institutions Act of 1982 (the "Garn-St Germain Act"), preempts state
constitutional, statutory and case law that prohibit the enforcement of
due-on-sale clauses and permits lenders to enforce these clauses in accordance
with their terms, subject to
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certain limited exceptions. The Garn-St Germain Act does "encourage" lenders to
permit assumption of loans at the original rate of interest or at some other
rate less than the average of the original rate and the market rate.
The Garn-St Germain Act also sets forth nine specific instances in which a
mortgage lender covered by the Garn-St Germain Act may not exercise a
due-on-sale clause, notwithstanding the fact that a transfer of the property may
have occurred. These include intra-family transfers, certain transfers by
operation of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St Germain Act also prohibit
the imposition of a prepayment penalty upon the acceleration of a loan pursuant
to a due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a mortgage loan
bearing an interest rate below the current market rate being assumed by a new
home buyer rather than being paid off, which may have an impact upon the average
life of the Mortgage Loans and the number of Mortgage Loans which may be
outstanding until maturity.
Upon foreclosure, courts have imposed general equitable principles. These
equitable principles are generally designed to relieve the borrower from the
legal effect of its defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have required that lenders reinstate
loans or recast payment schedules in order to accommodate borrowers who are
suffering from temporary financial disability. In other cases, courts have
limited the right of the lender to foreclose if the default under the mortgage
instrument is not monetary, such as the borrower failing to adequately maintain
the property. 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 under a deed to secure a debt or a mortgage having a power of sale, does not
involve sufficient state action to afford constitutional protections to the
borrower.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980 ("Title V"), provides that state usury limitations shall not apply
to certain types of residential first mortgage loans originated by certain
lenders after March 31, 1980.
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A similar federal statute was in effect with respect to mortgage loans made
during the first three months of 1980. The Office of Thrift Supervision is
authorized to issue rules and regulations and to publish interpretations
governing implementation of Title V. The statute authorized any state to impose
interest rate limits by adopting, before April 1, 1983, a law or constitutional
provision which expressly rejects application of the federal law. In addition,
even where Title V is not so rejected, any state is authorized by the law to
adopt a provision limiting discount points or other charges on mortgage loans
covered by Title V. Certain states have taken action to reimpose interest rate
limits or to limit discount points or other charges.
Unless otherwise set forth in the related Prospectus Supplement, each
Mortgage Collateral Seller, or another specified party, will have represented
that each Mortgage Loan was originated in compliance with then applicable state
laws, including usury laws, in all material respects. However, the Mortgage
Rates on the Mortgage Loans will be subject to applicable usury laws as in
effect from time to time.
Alternative Mortgage Instruments
Alternative mortgage instruments, including adjustable rate mortgage loans
and early ownership mortgage loans, originated by non-federally chartered
lenders, have historically been subjected to a variety of restrictions. Such
restrictions differed from state to state, resulting in difficulties in
determining whether a particular alternative mortgage instrument originated by a
state-chartered lender was in compliance with applicable law. These difficulties
were alleviated substantially as a result of the enactment of Title VIII of the
Garn-St Germain Act ("Title VIII"). Title VIII provides that, notwithstanding
any state law to the contrary, (i) state-chartered banks may originate
alternative mortgage instruments in accordance with regulations promulgated by
the Comptroller of the Currency with respect to the origination of alternative
mortgage instruments by national banks, (ii) state-chartered credit unions may
originate alternative mortgage instruments in accordance with regulations
promulgated by the National Credit Union Administration with respect to
origination of alternative mortgage instruments by federal credit unions and
(iii) all other non-federally chartered housing creditors, including
state-chartered savings and loan associations, state-chartered savings banks and
mutual savings banks and mortgage banking companies, may originate alternative
mortgage instruments in accordance with the regulations promulgated by the
Federal Home Loan Bank Board, predecessor to the Office of Thrift Supervision,
with respect to origination of alternative mortgage instruments by federal
savings and loan associations. Title VIII also provides that any state may
reject applicability of the provisions of Title VIII by adopting, prior to
October 15, 1985, a law or constitutional provision expressly rejecting the
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applicability of such provisions. Certain states have taken such
action.
The Contracts
General
A Contract evidences both (a) the obligation of the Mortgagor to repay the
loan evidenced thereby and (b) the grant of a security interest in the
Manufactured Home to secure repayment of such loan. Certain aspects of both
features of the Contracts are described below.
Security Interests in Manufactured Homes
The law governing perfection of a security interest in a Manufactured Home
varies from state to state. Security interests in manufactured homes may be
perfected either by notation of the secured party's lien on the certificate of
title or by delivery of the required documents and payments of a fee to the
state motor vehicle authority, depending on state law. In some non-title states,
perfection pursuant to the provisions of the UCC is required. The lender, the
Servicer or the Master Servicer may effect such notation or delivery of the
required documents and fees, and obtain possession of the certificate of title,
as appropriate under the laws of the state in which any Manufactured Home
securing a Contract is registered. In the event the Master Servicer, the
Servicer or the lender fails to effect such notation or delivery, or files the
security interest under the wrong law (for example, under a motor vehicle title
statute rather than under the UCC, in a few states), the Certificateholders may
not have a first priority security interest in the Manufactured Home securing a
Contract. As manufactured homes have become larger and often have been attached
to their sites without any apparent intention to move them, courts in many
states have held that manufactured homes, under certain circumstances, may
become subject to real estate title and recording laws. As a result, a security
interest in a manufactured home could be rendered subordinate to the interests
of other parties claiming an interest in the 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 record a mortgage,
deed of trust or deed to secure debt, as applicable, under the real estate laws
of the state where the manufactured home is located. These filings must be made
in the real estate records office of the county where the manufactured home is
located. Unless otherwise provided in the related Prospectus Supplement,
substantially all of the Contracts will contain provisions prohibiting the
Mortgagor from permanently attaching the Manufactured Home to its site. So long
as the Mortgagor does not violate this agreement and a court does not hold that
the Manufactured Home is real property, a security interest in the Manufactured
Home will be governed by the certificate of title laws
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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 seller's security interest in the Manufactured Home. If,
however, a Manufactured Home is permanently attached to its site or if a court
determines that a Manufactured Home is real property, other parties could obtain
an interest in the Manufactured Home which is prior to the security interest
originally retained by the Mortgage Collateral Seller and transferred to the
Company. In certain cases, the Master Servicer or the Servicer, as applicable,
may be required to perfect a security interest in the Manufactured Home under
applicable real estate laws. If such real estate recordings are not required and
if any of the foregoing events were to occur, the only recourse of the
Certificateholders would be against the Mortgage Collateral Seller pursuant to
its repurchase obligation for breach of representations or warranties.
The Company will assign its security interests in the Manufactured Homes to
the Trustee on behalf of the Certificateholders. See "Description of the
Certificates-Assignment of Contracts." Unless otherwise specified in the related
Prospectus Supplement, if a Manufactured Home is governed by the applicable
motor vehicle laws of the relevant state neither the Company nor the Trustee
will amend the certificates of title to identify the Trustee as the new secured
party. Accordingly, the Company or such other entity as may be specified in the
Prospectus Supplement will continue to be named as the secured party on the
certificates of title relating to the Manufactured Homes. However, there exists
a risk that, in the absence of an amendment to the certificate of title, such
assignment of the security interest may not be held effective against subsequent
purchasers of a Manufactured Home or subsequent lenders who take a security
interest in the Manufactured Home or creditors of the assignor.
If the owner of a Manufactured Home moves it to a state other than the
state in which such Manufactured Home initially is registered and if steps are
not taken to re-perfect the Trustee's security interest in such state, the
security interest in the Manufactured Home will cease to be perfected. While in
many circumstances the Trustee would have the opportunity to re-perfect its
security interest in the Manufactured Home in the state of relocation, there can
be no assurance that the Trustee will be able to do so.
When a Mortgagor under a Contract sells a Manufactured Home, the Trustee,
or the Servicer or the Master Servicer on behalf of the Trustee, must surrender
possession of the certificate of title or will receive notice as a result of its
lien noted thereon and accordingly will have an opportunity to require
satisfaction of the related lien before release of the lien.
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Under the laws of most states, liens for repairs performed on a
Manufactured Home take priority over a perfected security interest. The
applicable Mortgage Collateral Seller generally will represent that it has no
knowledge of any such liens with respect to any Manufactured Home securing
payment on any Contract. However, such liens could arise at any time during the
term of a Contract. No notice will be given to the Trustee or Certificateholders
in the event such a lien arises and such lien would not give rise to a
repurchase obligation on the part of the party specified in the Pooling and
Servicing Agreement.
To the extent that Manufactured Homes are not treated as real property
under applicable state law, contracts generally are "chattel paper" as defined
in the UCC in effect in the states in which the Manufactured Homes initially
were registered. Pursuant to the UCC, the sale of chattel paper is treated in a
manner similar to perfection of a security interest in chattel paper. Under the
Pooling and Servicing Agreement, the Master Servicer or the Company, as the case
may be, will transfer physical possession of the Contracts to the Trustee or its
Custodian. In addition, the Master Servicer 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 otherwise specified in the related
Prospectus Supplement, the Contracts will not be stamped or marked otherwise to
reflect their assignment from the Company to the Trustee. Therefore, if a
subsequent purchaser were able to take physical possession of the Contracts
without notice of such assignment, the Trustee's interest in the Contracts could
be defeated. To the extent that Manufactured Homes are treated as real property
under applicable state law, Contracts will be treated in a manner similar to
that described above with regard to Mortgage Loans. See "--The Mortgage Loans"
above.
Enforcement of Security Interests in Manufactured Homes
The Servicer or the Master Servicer on behalf of the Trustee, to the extent
required by the related Pooling and Servicing Agreement, may take action to
enforce the Trustee's security interest with respect to Contracts in default by
repossession and sale of the Manufactured Homes securing such defaulted
Contracts. So long as the Manufactured Home has not become subject to real
estate law, a creditor generally can repossess a Manufactured Home securing a
Contract by voluntary surrender, by "self-help" repossession that is "peaceful"
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The UCC and consumer protection laws
in most states place restrictions on repossession sales, including requiring
prior notice to the debtor and commercial reasonableness in effecting such a
sale. The debtor may also have a right to redeem the Manufactured Home at or
before resale.
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Certain statutory provisions, including federal and state bankruptcy and
insolvency laws and general equitable principles, may limit or delay the ability
of a lender to repossess and resell collateral or enforce a deficiency judgment.
For a discussion of deficiency judgments, see "--The Mortgage
Loans-Anti-Deficiency Legislation and Other Limitations on Lenders" above.
Consumer Protection Laws
If the transferor of a consumer credit contract is also the seller of goods
that give rise to the transaction (and, in certain cases, related lenders and
assignees), the "Holder-in-Due-Course" rule of the Federal Trade Commission is
intended to defeat the ability of such transferor to transfer such contract free
of notice of claims by the debtor thereunder. The effect of this rule is to
subject the assignee of such a contract to all claims and defenses that the
debtor could assert against the seller of goods. Liability under this rule is
limited to amounts paid under a Contract; however, the Mortgagor also may be
able to assert the rule to set off remaining amounts due as a defense against a
claim brought against such Mortgagor. Numerous other federal and state consumer
protection laws impose requirements applicable to the origination and lending
pursuant to the Contracts, including the Truth in Lending Act, the Federal Trade
Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the
Equal Credit Opportunity Act, the Fair Debt Collection Practices Act and the
Uniform Consumer Credit Code. In the case of some of these laws, the failure to
comply with their provisions may affect the enforceability of the related
Contract.
"Due-on-Sale" Clauses
The Contracts, in general, prohibit the sale or transfer of the related
Manufactured Homes without the consent of the Company, the Master Servicer or
the Servicer and permit the acceleration of the maturity of the Contracts by the
Company, the Master Servicer or the Servicer upon any such sale or transfer that
is not consented to. Unless otherwise specified in the related Prospectus
Supplement, the Company, the Master Servicer or the Servicer generally will
permit most transfers of Manufactured Homes and not accelerate the maturity of
the related Contracts. In certain cases, the transfer may be made by a
delinquent Mortgagor in order to avoid a repossession proceeding with respect to
a Manufactured Home.
In the case of a transfer of a Manufactured Home after which the Company
desires to accelerate the maturity of the related Contract, the Company's
ability to do so will depend on the enforceability under state law of the
"due-on-sale" clause. The Garn-St Germain Act preempts, subject to certain
exceptions and conditions, state laws prohibiting enforcement of "due-on-sale"
clauses applicable to the Manufactured Homes. In some states the Company or the
Master
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Servicer may be prohibited from enforcing a "due-on-sale" clause in respect of
certain Manufactured Homes.
Applicability of Usury Laws
Title V provides that, subject to certain conditions, state usury
limitations shall not apply to any loan that is secured by a first lien on
certain kinds of manufactured housing. For a discussion of Title V, see "-The
Mortgage Loans-Applicability of Usury Laws" above. Unless otherwise specified in
the related Pooling and Servicing Agreement, each Mortgage Collateral Seller, or
another specified party, will represent that all of the Contracts comply with
applicable usury laws.
Environmental Legislation
Real property pledged as security to a lender may be subject to unforeseen
environmental risks. Most environmental statutes create obligations for any
party that can be classified as the "owner" or "operator" of a "facility"
(referring to both operating facilities and to real property). Under the laws of
some states and under the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980, a lender may be liable, as an "owner" or
"operator," for costs arising out of releases or threatened releases of
hazardous substances that require remedy at a mortgaged property, if agents or
employees of the lender have become sufficiently involved in the operations of
the borrower or, subsequent to a foreclosure, in the management of the property.
Such liability may arise regardless of whether the environmental damage or
threat was caused by a prior owner.
Under federal and certain state laws, contamination of a property may give
rise to a lien on the property to assure the payment of costs of clean-up. Under
federal law and in several states, such a lien has priority over the lien of an
existing mortgage against such property. If a lender is or becomes directly
liable following a foreclosure, it may be precluded from bringing an action for
contribution against the owner or operator who created the environmental hazard.
Such clean-up costs may be substantial. It is possible that such costs could
become a liability of the related Trust Fund and occasion a loss to
Certificateholders in certain circumstances described above if such remedial
costs were incurred.
Except as otherwise specified in the applicable Prospectus Supplement, at
the time the Mortgage Loans or Contracts were originated, no environmental
assessment or a very limited environment assessment of the Mortgaged Properties
will have been conducted.
Soldiers' and Sailors' Civil Relief Act of 1940
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Under the terms of the Relief Act, a borrower who enters military service
after the origination of such borrower's mortgage loan or contract (including a
borrower who was in reserve status and is called to active duty after
origination of the mortgage loan or contract), may not be charged interest
(including fees and charges) above an annual rate of 6% during the period of
such borrower's active duty status, unless a court 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 or 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 mortgage loan or contract, no information can be provided as to the
number of Mortgage Loans or Contracts that may be affected by the Relief Act.
With respect to Mortgage Loans or Contracts included in a Trust Fund,
application of the Relief Act would adversely affect, for an indeterminate
period of time, the ability of the Servicer or the Master Servicer, as
applicable, to collect full amounts of interest on such Mortgage Collateral. Any
shortfall in interest collections resulting from the application of the Relief
Act or similar legislation or regulations, which would not be recoverable from
the related Mortgage Loans or Contracts, would result in a reduction of the
amounts distributable to the holders of the related Certificates, and would not
be covered by Advances or any form of credit enhancement provided in connection
with the related series of Certificates. In addition, the Relief Act imposes
limitations that would impair the ability of the Servicer or the Master
Servicer, as applicable, to foreclose on an affected Mortgage Loan or Contract
during the Mortgagor's period of active duty status, and, under certain
circumstances, during an additional three month period thereafter. Thus, in the
event that the Relief Act or similar legislation or regulations applies to any
Mortgage Loan or Contract which goes into default, there may be delays in
payment and losses on the related Certificates in connection therewith. Any
other interest shortfalls, deferrals or forgiveness of payments on the Mortgage
Loans or Contracts resulting from similar legislation or regulations may result
in delays in payments or losses to Certificateholders of the related series.
Default Interest and Limitations on Prepayments
Notes and mortgages may contain provisions that obligate the borrower to
pay a late charge or additional interest if payments are not timely made, and in
some circumstances, may prohibit prepayments for a specified period and/or
condition prepayments upon the borrower's payment of prepayment fees or yield
maintenance penalties. In certain states, there are or may be specific
limitations upon the late charges which a lender may collect from a borrower for
delinquent payments. Certain states also limit the amounts that a lender may
collect from a borrower as an additional charge if the loan is prepaid. In
addition, the enforceability of
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provisions that provide for prepayment fees or penalties upon an involuntary
prepayment is unclear under the laws of many states. Most conventional
single-family mortgage loans may be prepaid in full or in part without penalty.
The regulations of the Federal Home Loan Bank Board, as succeeded by the OTS,
prohibit the imposition of a prepayment penalty or equivalent fee for or in
connection with the acceleration of a loan by exercise of a due-on-sale clause.
A mortgagee to whom a prepayment in full has been tendered may be compelled to
give either a release of the mortgage or an instrument assigning the existing
mortgage. The absence of a restraint on prepayment, particularly with respect to
Mortgage Loans having higher mortgage rates, may increase the likelihood of
refinancing or other early retirements of the Mortgage Loans.
Forfeitures in Drug and RICO Proceedings
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the "Crime
Control Act"), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties "known to have an alleged interest in the property," including
the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
The following is a general discussion of certain anticipated material
federal income tax consequences of the purchase, ownership and disposition of
the Certificates offered hereunder. This discussion has been prepared with the
advice of Orrick, Herrington & Sutcliffe and Thacher Proffitt & Wood, counsel to
the Company. This discussion is directed solely to Certificateholders that hold
the Certificates as capital assets within the meaning of Section 1221 of the
Code and does not purport to discuss all federal income tax consequences that
may be applicable to particular categories of investors, some of which (such as
banks, insurance companies and foreign investors) may be subject to special
rules. In addition, the authorities on which this discussion, and the opinion
referred to below, are based are subject to change or differing interpretations,
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which could apply retroactively. Taxpayers and preparers of tax returns
(including those filed by any REMIC or other issuer) should be aware that under
applicable Treasury regulations a provider of advice on specific issues of law
is not considered an income tax return preparer unless the advice (i) is given
with respect to events that have occurred at the time the advice is rendered and
is not given with respect to the consequences of contemplated actions, and (ii)
is directly relevant to the determination of an entry on a tax return.
Accordingly, taxpayers should consult their tax advisors and tax return
preparers regarding the preparation of any item on a tax return, even where the
anticipated tax treatment has been discussed herein or in a Prospectus
Supplement. In addition to the federal income tax consequences described herein,
potential investors should consider the state and local tax consequences, if
any, of the purchase, ownership and disposition of the Certificates. See "State
and Other Tax Consequences." Certificateholders are advised to consult their tax
advisors concerning the federal, state, local or other tax consequences to them
of the purchase, ownership and disposition of the Certificates offered
hereunder.
The following discussion addresses certificates (the "REMIC Certificates")
representing interests in a Trust Fund, or a portion thereof, which the Master
Servicer or Certificate Administrator, as applicable, will covenant to elect to
have treated as a REMIC under Sections 860A through 860G (the "REMIC
Provisions") of the Code. The Prospectus Supplement for each series of
Certificates will indicate whether a REMIC election (or elections) will be made
for the related Trust Fund and, if such an election is to be made, will identify
all "regular interests" and "residual interests" in the REMIC. If a REMIC
election will not be made for a Trust Fund, the federal income consequences of
the purchase, ownership and disposition of the related Certificates will be set
forth in the related Prospectus Supplement. For purposes of this tax discussion,
references to a "Certificateholder" or a "holder" are to the beneficial owner of
a Certificate.
The following discussion is based in part upon the rules governing original
issue discount that are set forth in Sections 1271 through 1273 and Section 1275
of the Code and in the Treasury regulations issued thereunder (the "OID
Regulations"), and in part upon the REMIC Provisions and the Treasury
regulations issued thereunder (the "REMIC Regulations"). The OID Regulations,
which are effective with respect to debt instruments issued on or after April 4,
1994, do not adequately address certain issues relevant to, and in some
instances provide that they are not applicable to, securities such as the
Certificates.
REMICs
Classification of REMICs
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Upon the issuance of each series of REMIC Certificates, Orrick, Herrington
& Sutcliffe or Thacher Proffitt & Wood, counsel to the Company, will deliver
their opinion generally to the effect that, assuming compliance with all
provisions of the related Pooling and Servicing Agreement or Trust Agreement,
the related Trust Fund (or each applicable portion thereof) will qualify as a
REMIC and the REMIC Certificates offered with respect thereto will be considered
to evidence ownership of "regular interests" ("REMIC Regular Certificates") or
"residual interests" ("REMIC Residual Certificates") in that REMIC within the
meaning of the REMIC Provisions.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for such status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for such
year and thereafter. In that event, such entity may be taxable as a separate
corporation under Treasury regulations, and the related REMIC Certificates may
not be accorded the status or given the tax treatment described below. Although
the Code authorizes the Treasury Department to issue regulations providing
relief in the event of an inadvertent termination of REMIC status, no such
regulations have been issued. Any such relief, moreover, may be accompanied by
sanctions, such as the imposition of a corporate tax on all or a portion of the
Trust Fund's income for the period in which the requirements for such status are
not satisfied. The Pooling and Servicing Agreement or Trust Agreement, with
respect to each REMIC will include provisions designed to maintain the Trust
Fund's status as a REMIC under the REMIC Provisions. It is not anticipated that
the status of any Trust Fund as a REMIC will be terminated.
Characterization of Investments in REMIC Certificates
In general, the REMIC Certificates will be "qualifying real property loans"
within the meaning of Section 593(d) of the Code, "real estate assets" within
the meaning of Section 856(c)(5)(A) of the Code and assets described in Section
7701(a)(19)(C) of the Code in the same proportion that the assets of the REMIC
underlying such Certificates would be so treated. Moreover, if 95% or more of
the assets of the REMIC qualify for any of the foregoing treatments at all times
during a calendar year, the REMIC Certificates will qualify for the
corresponding status in their entirety for that calendar year. Interest
(including original issue discount) on the REMIC Regular Certificates and income
allocated to the class of REMIC Residual Certificates will be interest described
in Section 856(c)(3)(B) of the Code to the extent that such Certificates are
treated as "real estate assets" within the meaning of Section 856(c)(5)(A) of
the Code. In addition, the REMIC Regular Certificates will be "qualified
mortgages" within the meaning of Section 860G(a)(3)(C) of the Code if
transferred to another REMIC on its startup day in exchange for regular or
residual interests therein. The determination as to the percentage of the
REMIC's
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assets that constitute assets described in the foregoing sections of the Code
will be made with respect to each calendar quarter based on the average adjusted
basis of each category of the assets held by the REMIC during such calendar
quarter. The Master Servicer or the Certificate Administrator, as applicable,
will report those determinations to Certificateholders in the manner and at the
times required by applicable Treasury regulations.
The assets of the REMIC will include, in addition to Mortgage Collateral,
payments on Mortgage Collateral held pending distribution on the REMIC
Certificates and property acquired by foreclosure held pending sale, and may
include amounts in reserve accounts. It is unclear whether property acquired by
foreclosure held pending sale and amounts in reserve accounts would be
considered to be part of the Mortgage Collateral, or whether such assets (to the
extent not invested in assets described in the foregoing sections) otherwise
would receive the same treatment as the Mortgage Collateral for purposes of all
of the foregoing sections. In addition, in some instances Mortgage Collateral
(including Additional Collateral Loans) may not be treated entirely as assets
described in the foregoing sections. If the assets of a REMIC include Additional
Collateral Loans, the non-real property collateral, while itself not an asset of
the REMIC, could cause the Mortgage Collateral not to qualify for one or more of
such characterizations. If so, the related Prospectus Supplement will describe
the Mortgage Collateral (including Additional Collateral Loans) that may not be
so treated. The REMIC Regulations do provide, however, that payments on Mortgage
Collateral held pending distribution are considered part of the Mortgage
Collateral for purposes of Sections 593(d) and 856(c)(5)(A) of the Code.
Tiered REMIC Structures
For certain series of REMIC Certificates, two or more separate elections
may be made to treat designated portions of the related Trust Fund as REMICs
("Tiered REMICs") for federal income tax purposes. Upon the issuance of any such
series of REMIC Certificates, Orrick, Herrington & Sutcliffe or Thacher Proffitt
& Wood, counsel to the Company, will deliver their opinion generally to the
effect that, assuming compliance with all provisions of the related Pooling and
Servicing Agreement or Trust Agreement, the Tiered REMICs will each qualify as a
REMIC and the REMIC Certificates issued by the Tiered REMICs, respectively, will
be considered to evidence ownership of REMIC Regular Certificates or REMIC
Residual Certificates in the related REMIC within the meaning of the REMIC
Provisions.
Solely for purposes of determining whether the REMIC Certificates will be
"qualifying real property loans" under Section 593(d) of the Code, "real estate
assets" within the meaning of Section 856(c)(5)(A) of the Code, and "loans
secured by an interest in real property" under Section 7701(a)(19)(C) of the
Code, and whether the
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income on such Certificates is interest described in Section 856(c)(3)(B) of the
Code, the Tiered REMICs will be treated as one REMIC.
Taxation of Owners of REMIC Regular Certificates
General. Except as otherwise stated in this discussion, REMIC Regular
Certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Moreover, holders of REMIC Regular Certificates that otherwise report income
under a cash method of accounting will be required to report income with respect
to REMIC Regular Certificates under an accrual method.
Original Issue Discount. Certain REMIC Regular Certificates may be issued
with "original issue discount" within the meaning of Section 1273(a) of the
Code. Any holders of REMIC Regular Certificates issued with original issue
discount generally will be required to include original issue discount in income
as it accrues, in accordance with the method described below, in advance of the
receipt of the cash attributable to such income. In addition, Section 1272(a)(6)
of the Code provides special rules applicable to REMIC Regular Certificates and
certain other debt instruments issued with original issue discount. Regulations
have not been issued under that section.
The Code requires that a prepayment assumption be used with respect to
Mortgage Collateral held by a REMIC in computing the accrual of original issue
discount on REMIC Regular Certificates issued by that REMIC, and that
adjustments be made in the amount and rate of accrual of such discount to
reflect differences between the actual prepayment rate and the prepayment
assumption. The prepayment assumption is to be determined in a manner prescribed
in Treasury regulations; as noted above, those regulations have not been issued.
The Conference Committee Report (the "Committee Report") accompanying the Tax
Reform Act of 1986 indicates that the regulations will provide that the
prepayment assumption used with respect to a REMIC Regular Certificate must be
the same as that used in pricing the initial offering of such REMIC Regular
Certificate. The Prepayment Assumption used by the Master Servicer or the
Certificate Administrator, as applicable, in reporting original issue discount
for each series of REMIC Regular Certificates will be consistent with this
standard and will be disclosed in the related Prospectus Supplement. However,
neither the Company, the Master Servicer nor the Certificate Administrator will
make any representation that the Mortgage Collateral will in fact prepay at a
rate conforming to the Prepayment Assumption or at any other rate.
The original issue discount, if any, on a REMIC Regular Certificate will be
the excess of its stated redemption price at maturity over its issue price. The
issue price of a particular class of REMIC Regular Certificates will be the
first cash price at which
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a substantial amount of REMIC Regular Certificates of that class is sold
(excluding sales to bond houses, brokers and underwriters).
If less than a substantial amount of a particular class of REMIC Regular
Certificates is sold for cash on or prior to the date of their initial issuance
(the "Closing Date"), the issue price for such class will be treated as the fair
market value of such class on the Closing Date. Under the OID Regulations, the
stated redemption price of a REMIC Regular Certificate is equal to the total of
all payments to be made on such Certificate other than "qualified stated
interest." "Qualified stated interest" includes interest that is unconditionally
payable at least annually at a single fixed rate, or in the case of a variable
rate debt instrument, at a "qualified floating rate," an "objective rate," a
combination of a single fixed rate and one or more "qualified floating rates" or
one "qualified inverse floating rate," or a combination of "qualified floating
rates" that generally does not operate in a manner that accelerates or defers
interest payments on such REMIC Regular Certificate.
In the case of REMIC Regular Certificates bearing adjustable interest
rates, the determination of the total amount of original issue discount and the
timing of the inclusion thereof will vary according to the characteristics of
such REMIC Regular Certificates. If the original issue discount rules apply to
such Certificates, the related Prospectus Supplement will describe the manner in
which such rules will be applied by the Master Servicer or the Certificate
Administrator, as applicable, with respect to those Certificates in preparing
information returns to the Certificateholders and the Internal Revenue Service
("IRS").
Certain classes of the REMIC Regular Certificates may provide for the first
interest payment with respect to such Certificates to be made more than one
month after the date of issuance, a period which is longer than the subsequent
monthly intervals between interest payments. Assuming the "accrual period" (as
defined herein) for original issue discount is each monthly period that ends on
a Distribution Date, in some cases, as a consequence of this "long first accrual
period," some or all interest payments may be required to be included in the
stated redemption price of the REMIC Regular Certificate and accounted for as
original issue discount. Because interest on REMIC Regular Certificates must in
any event be accounted for under an accrual method, applying this analysis would
result in only a slight difference in the timing of the inclusion in income of
the yield on the REMIC Regular Certificates.
In addition, if the accrued interest to be paid on the first Distribution
Date is computed with respect to a period that begins prior to the Closing Date,
a portion of the purchase price paid for a REMIC Regular Certificate will
reflect such accrued interest. In such cases, information returns to the
Certificateholders and the IRS will be based on the position that the portion of
the purchase price paid for the interest accrued with respect to periods prior
to
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the Closing Date is treated as part of the overall cost of such REMIC Regular
Certificate (and not as a separate asset the cost of which is recovered entirely
out of interest received on the next Distribution Date) and that portion of the
interest paid on the first Distribution Date in excess of interest accrued for a
number of days corresponding to the number of days from the Closing Date to the
first Distribution Date should be included in the stated redemption price of
such REMIC Regular Certificate. However, the OID Regulations state that all or
some portion of such accrued interest may be treated as a separate asset the
cost of which is recovered entirely out of interest paid on the first
Distribution Date. It is unclear how an election to do so would be made under
the OID Regulations and whether such an election could be made unilaterally by a
Certificateholder.
Notwithstanding the general definition of original issue discount, original
issue discount on a REMIC Regular Certificate will be considered to be de
minimis if it is less than 0.25% of the stated redemption price of the REMIC
Regular Certificate multiplied by its weighted average maturity. For this
purpose, the weighted average maturity of the REMIC Regular Certificate is
computed as the sum of the amounts determined, as to each payment included in
the stated redemption price of such REMIC Regular Certificate, by multiplying
(i) the number of complete years (rounding down for partial years) from the
issue date until such payment is expected to be made (presumably taking into
account the Prepayment Assumption) by (ii) a fraction, the numerator of which is
the amount of the payment, and the denominator of which is the stated redemption
price at maturity of such REMIC Regular Certificate. Under the OID Regulations,
original issue discount of only a de minimis amount (other than de minimis
original issue discount attributable to a so-called "teaser" interest rate or an
initial interest holiday) will be included in income as each payment of stated
principal is made, based on the product of the total amount of such de minimis
original issue discount and a fraction, the numerator of which is the amount of
such principal payment and the denominator of which is the outstanding stated
principal amount of the REMIC Regular Certificate. The OID Regulations also
would permit a Certificateholder to elect to accrue de minimis original issue
discount into income currently based on a constant yield method. See "--Market
Discount" for a description of such election under the OID Regulations.
If original issue discount on a REMIC Regular Certificate is in excess of a
de minimis amount, the holder of such Certificate must include in ordinary gross
income the sum of the "daily portions" of original issue discount for each day
during its taxable year on which it held such REMIC Regular Certificate,
including the purchase date but excluding the disposition date. In the case of
an original holder of a REMIC Regular Certificate, the daily portions of
original issue discount will be determined as follows.
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As to each "accrual period," that is, unless otherwise stated in the
related Prospectus Supplement, each period that ends on a date that corresponds
to a Distribution Date and begins on the first day following the immediately
preceding accrual period (or in the case of the first such period, begins on the
Closing Date), a calculation will be made of the portion of the original issue
discount that accrued during such accrual period. The portion of original issue
discount that accrues in any accrual period will equal the excess, if any, of
(i) the sum of (A) the present value, as of the end of the accrual period, of
all of the distributions remaining to be made on the REMIC Regular Certificate,
if any, in future periods and (B) the distributions made on such REMIC Regular
Certificate during the accrual period of amounts included in the stated
redemption price, over (ii) the adjusted issue price of such REMIC Regular
Certificate at the beginning of the accrual period. The present value of the
remaining distributions referred to in the preceding sentence will be calculated
(1) assuming that distributions on the REMIC Regular Certificate will be
received in future periods based on the Mortgage Collateral being prepaid at a
rate equal to the Prepayment Assumption and (2) using a discount rate equal to
the original yield to maturity of the Certificate. For these purposes, the
original yield to maturity of the Certificate will be calculated based on its
issue price and assuming that distributions on the Certificate will be made in
all accrual periods based on the Mortgage Collateral being prepaid at a rate
equal to the Prepayment Assumption. The adjusted issue price of a REMIC Regular
Certificate at the beginning of any accrual period will equal the issue price of
such Certificate, increased by the aggregate amount of original issue discount
that accrued with respect to such Certificate in prior accrual periods, and
reduced by the amount of any distributions made on such REMIC Regular
Certificate in prior accrual periods of amounts included in its stated
redemption price. The original issue discount accruing during any accrual
period, computed as described above, will be allocated ratably to each day
during the accrual period to determine the daily portion of original issue
discount for such day.
The OID Regulations suggest that original issue discount with respect to
securities that represent multiple uncertificated REMIC regular interests, in
which ownership interests will be issued simultaneously to the same buyer and
which may be required under the related Pooling and Servicing Agreement to be
transferred together, should be computed on an aggregate method. In the absence
of further guidance from the IRS, original issue of multiple uncertificated
REMIC regular interests will be reported to the IRS and the Certificateholders
on an aggregate method based on a single overall constant yield and the
prepayment assumption stated in the related Prospectus Supplement, treating all
such uncertificated regular interests as a single debt instrument as set forth
in the OID Regulations, so long as the Pooling and Servicing Agreement requires
that such uncertificated regular interests be transferred together.
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A subsequent purchaser of a REMIC Regular Certificate that purchases such
Certificate at a cost (excluding any portion of such cost attributable to
accrued qualified stated interest) less than its remaining stated redemption
price will also be required to include in gross income the daily portions of any
original issue discount with respect to such Certificate. However, each such
daily portion will be reduced, if such cost is in excess of its "adjusted issue
price," in proportion to the ratio such excess bears to the aggregate original
issue discount remaining to be accrued on such REMIC Regular Certificate. The
adjusted issue price of a REMIC Regular Certificate on any given day equals the
sum of (i) the adjusted issue price (or, in the case of the first accrual
period, the issue price) of such Certificate at the beginning of the accrual
period which includes such day and (ii) the daily portions of original issue
discount for all days during such accrual period prior to such day.
Market Discount. A Certificateholder that purchases a REMIC Regular
Certificate at a market discount, that is, in the case of a REMIC Regular
Certificate issued without original issue discount, at a purchase price less
than its remaining stated principal amount, or in the case of a REMIC Regular
Certificate issued with original issue discount, at a purchase price less than
its adjusted issue price will recognize income upon receipt of each distribution
representing stated redemption price. In particular, under Section 1276 of the
Code such a Certificateholder generally will be required to allocate the portion
of each such distribution representing stated redemption price first to accrued
market discount not previously included in income, and to recognize ordinary
income to that extent. A Certificateholder may elect to include market discount
in income currently as it accrues rather than including it on a deferred basis
in accordance with the foregoing. If made, such election will apply to all
market discount bonds acquired by such Certificateholder on or after the first
day of the first taxable year to which such election applies. In addition, the
OID Regulations permit a Certificateholder to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium in
income as interest, based on a constant yield method. If such an election were
made with respect to a REMIC Regular Certificate with market discount, the
Certificateholder would be deemed to have made an election to include currently
market discount in income with respect to all other debt instruments having
market discount that such Certificateholder acquires during the taxable year of
the election or thereafter, and possibly previously acquired instruments.
Similarly, a Certificateholder that made this election for a Certificate that is
acquired at a premium would be deemed to have made an election to amortize bond
premium with respect to all debt instruments having amortizable bond premium
that such Certificateholder owns or acquires. See "--Premium." Each of these
elections to accrue interest, discount and premium with respect to a Certificate
on a constant yield method or as interest would be irrevocable.
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However, market discount with respect to a REMIC Regular Certificate will
be considered to be de minimis for purposes of Section 1276 of the Code if such
market discount is less than 0.25% of the remaining stated redemption price of
such REMIC Regular Certificate multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect to
market discount, presumably taking into account the Prepayment Assumption. If
market discount is treated as de minimis under this rule, it appears that the
actual discount would be treated in a manner similar to original issue discount
of a de minimis amount. See "--Original Issue Discount." Such 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.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until regulations are issued by the Treasury Department, certain
rules described in the Committee Report apply. The Committee Report indicates
that in each accrual period market discount on REMIC Regular Certificates should
accrue, at the Certificateholder's option: (i) on the basis of a constant yield
method, (ii) in the case of a REMIC Regular Certificate issued without original
issue discount, in an amount that bears the same ratio to the total remaining
market discount as the stated interest paid in the accrual period bears to the
total amount of stated interest remaining to be paid on the REMIC Regular
Certificate as of the beginning of the accrual period, or (iii) in the case of a
REMIC Regular Certificate issued with original issue discount, in an amount that
bears the same ratio to the total remaining market discount as the original
issue discount accrued in the accrual period bears to the total original issue
discount remaining on the REMIC Regular Certificate at the beginning of the
accrual period. Moreover, the Prepayment Assumption used in calculating the
accrual of original issue discount is to be used in calculating the accrual of
market discount. Because the regulations referred to in this paragraph have not
been issued, it is not possible to predict what effect such regulations might
have on the tax treatment of a REMIC Regular Certificate purchased at a discount
in the secondary market.
To the extent that REMIC Regular Certificates provide for monthly or other
periodic distributions throughout their term, the effect of these rules may be
to require market discount to be includible in income at a rate that is not
significantly slower than the rate at which such discount would accrue if it
were original issue discount. Moreover, in any event a holder of a REMIC Regular
Certificate generally will be required to treat a portion of any gain on the
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sale or exchange of such Certificate as ordinary income to the extent of the
market discount accrued to the date of disposition under one of the foregoing
methods, less any accrued market discount previously reported as ordinary
income.
In addition, under Section 1277 of the Code, a holder of a REMIC Regular
Certificate may be required to defer a portion of its interest deductions for
the taxable year attributable to any indebtedness incurred or continued to
purchase or carry a REMIC Regular Certificate purchased with market discount.
For these purposes, the de minimis rule referred to above applies. Any such
deferred interest expense would not exceed the market discount that accrues
during such taxable year and is, in general, allowed as a deduction not later
than the year in which such market discount is includible in income. If such
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by such holder in that taxable year or
thereafter, the interest deferral rule described above will not apply.
Premium. A REMIC Regular Certificate purchased at a cost (excluding any
portion of such 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 such a REMIC Regular Certificate may elect under
Section 171 of the Code to amortize such premium under the constant yield method
over the life of the Certificate. If made, such an election will apply to all
debt instruments having amortizable bond premium that the holder owns or
subsequently acquires. Amortizable premium will be treated as an offset to
interest income on the related REMIC Regular Certificate, rather than as a
separate interest deduction. The OID Regulations also permit Certificateholders
to elect to include all interest, discount and premium in income based on a
constant yield method, further treating the Certificateholder as having made the
election to amortize premium generally. See "--Market Discount." The Committee
Report states that the same rules that apply to accrual of market discount
(which rules will require use of a Prepayment Assumption in accruing market
discount with respect to REMIC Regular Certificates without regard to whether
such Certificates have original issue discount) will also apply in amortizing
bond premium under Section 171 of the Code.
Realized Losses. Under Section 166 of the Code, both corporate holders of
the REMIC Regular Certificates and noncorporate holders of the REMIC Regular
Certificates that acquire such Certificates in connection with a trade or
business should be allowed to deduct, as ordinary losses, any losses sustained
during a taxable year in which their Certificates become wholly or partially
worthless as the result of one or more Realized Losses on the Mortgage
Collateral. However, it appears that a noncorporate holder that does not acquire
a REMIC Regular Certificate in connection with a trade or business
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will not be entitled to deduct a loss under Section 166 of the Code until such
holder's Certificate becomes wholly worthless (i.e., until its outstanding
principal balance has been reduced to zero) and that the loss will be
characterized as a short-term capital loss.
Each holder of a REMIC Regular Certificate will be required to accrue
interest and original issue discount with respect to such Certificate, without
giving effect to any reductions in distributions attributable to defaults or
delinquencies on the Mortgage Collateral or the Agency Certificates until it can
be established that any such reduction ultimately will not be recoverable. As a
result, the amount of taxable income reported in any period by the holder of a
REMIC Regular Certificate could exceed the amount of economic income actually
realized by the holder in such period. Although the holder of a REMIC Regular
Certificate eventually will recognize a loss or reduction in income attributable
to previously accrued and included income that, as the result of a realized
loss, ultimately will not be realized, the law is unclear with respect to the
timing and character of such loss or reduction in income.
Taxation of Owners of REMIC Residual Certificates
General. As residual interests, the REMIC Residual Certificates will be
subject to tax rules that differ significantly from those that would apply if
the REMIC Residual Certificates were treated for federal income tax purposes as
direct ownership interests in the Mortgage Collateral or as debt instruments
issued by the REMIC.
A holder of a REMIC Residual Certificate generally 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 such holder owned such REMIC Residual Certificate. For
this purpose, the taxable income or net loss of the REMIC will be allocated to
each day in the calendar quarter ratably using a "30 days per month/90 days per
quarter/360 days per year" convention unless otherwise disclosed in the related
Prospectus Supplement. The daily amounts will then be allocated among the REMIC
Residual Certificateholders in proportion to their respective ownership
interests on such day. Any amount included in the gross income or allowed as a
loss of any REMIC Residual Certificateholder by virtue of this allocation will
be treated as ordinary income or loss. The taxable income of the REMIC will be
determined under the rules described below in
"--Taxable Income of the REMIC" and will be taxable to the REMIC Residual
Certificateholders without regard to the timing or amount of cash distributions
by the REMIC. Ordinary income derived from REMIC Residual Certificates will be
"portfolio income" for purposes of the taxation of taxpayers subject to
limitations under Section 469 of the Code on the deductibility of "passive
losses."
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A holder of a REMIC Residual Certificate that purchased such Certificate
from a prior holder of such Certificate also will be required to report on its
federal income tax return amounts representing its daily portion of the taxable
income (or net loss) of the REMIC for each day that it holds such REMIC Residual
Certificate. These daily portions generally will equal the amounts of taxable
income or net loss determined as described above. The Committee Report indicates
that certain modifications of the general rules may be made, by regulations,
legislation or otherwise, to reduce (or increase) the income or loss of a holder
of a REMIC Residual Certificateholder that purchased such REMIC Residual
Certificate from a prior holder of such Certificate at a price greater than (or
less than) the adjusted basis (as defined herein) such REMIC Residual
Certificate would have had in the hands of an original holder of such
Certificate. The REMIC Regulations, however, do not provide for any such
modifications.
Any payments received by a holder of a REMIC Residual Certificate in
connection with the acquisition of such REMIC Residual Certificate will be taken
into account in determining the income of such holder for federal income tax
purposes. Although it appears likely that any such payment would be includible
in income immediately upon its receipt, the IRS might assert that such 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 such payments, holders of REMIC Residual Certificates should
consult their tax advisors concerning the treatment of such payments for income
tax purposes.
The amount of income REMIC Residual Certificateholders will be required to
report (or the tax liability associated with such income) may exceed the amount
of cash distributions received from the REMIC for the corresponding period.
Consequently, REMIC Residual Certificateholders should have other sources of
funds sufficient to pay any federal income taxes due as a result of their
ownership of REMIC Residual Certificates or unrelated deductions against which
income may be offset, subject to the rules relating to "excess inclusions,"
residual interests without "significant value" and "noneconomic" residual
interests discussed below. The fact that the tax liability associated with the
income allocated to REMIC Residual Certificateholders may exceed the cash
distributions received by such REMIC Residual Certificateholders for the
corresponding period may significantly adversely affect such REMIC Residual
Certificateholders' after-tax rate of return.
Taxable Income of the REMIC. The taxable income of the REMIC will equal the
income from the Mortgage Collateral and other assets of the REMIC plus any
cancellation of indebtedness income due to the allocation of realized losses to
REMIC Regular Certificates, less the deductions allowed to the REMIC for
interest (including original issue discount and reduced by the amortization of
any premium received on issuance) on the REMIC Regular Certificates (and any
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other class of REMIC Certificates constituting "regular interests" in the REMIC
not offered hereby), amortization of any premium on the Mortgage Collateral, bad
debt deductions with respect to the Mortgage Collateral 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 or the Certificate Administrator, as applicable, intends to treat the
fair market value of the Mortgage Collateral as being equal to the aggregate
issue prices of the REMIC Regular Certificates and REMIC Residual Certificates.
Such aggregate basis will be allocated among the Mortgage Collateral
collectively and the other assets of the REMIC in proportion to their respective
fair market values. The issue price of any REMIC Certificates offered hereby
will be determined in the manner described above under "--Taxation of Owners of
REMIC Regular Certificates-Original Issue Discount." Accordingly, if one or more
classes of REMIC Certificates are retained initially rather than sold, the
Master Servicer or the Certificate Administrator, as applicable, may be required
to estimate the fair market value of such interests in order to determine the
basis of the REMIC in the Mortgage Collateral and other property held by the
REMIC.
Subject to the possible application of the de minimis rules, the method of
accrual by the REMIC of original issue discount income and market discount
income with respect to Mortgage Collateral that it holds will be equivalent to
the method of accruing original issue discount income for REMIC Regular
Certificateholders (that is, under the constant yield method taking into account
the Prepayment Assumption). However, a REMIC that acquires Mortgage Collateral
at a market discount must include such discount in income currently, as it
accrues, on a constant interest basis. See "--Taxation of Owners of REMIC
Regular Certificates" above, which describes a method of accruing discount
income that is analogous to that required to be used by a REMIC as to Mortgage
Collateral with market discount that it holds.
An item of Mortgage Collateral will be deemed to have been acquired with
discount (or premium) to the extent that the REMIC's basis therein, determined
as described in the preceding paragraph, is less than (or greater than) its
stated redemption price. Any such discount will be includible in the income of
the REMIC as it accrues, in advance of receipt of the cash attributable to such
income, under a method similar to the method described above for accruing
original issue discount on the REMIC Regular Certificates. It is anticipated
that each REMIC will elect under Section 171 of the Code to amortize any premium
on the Mortgage Collateral. Premium on any item of Mortgage Collateral to which
such election applies may be amortized under a constant yield method, presumably
taking into account a Prepayment Assumption.
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The REMIC will be allowed deductions for interest (including original issue
discount) on the REMIC Regular Certificates (including any other class of REMIC
Certificates constituting "regular interests" in the REMIC not offered hereby)
equal to the deductions that would be allowed if the REMIC Regular Certificates
(including any other class of REMIC Certificates constituting "regular
interests" in the REMIC not offered hereby) were indebtedness of the REMIC.
Original issue discount will be considered to accrue for this purpose as
described above under "--Taxation of Owners of REMIC Regular
Certificates-Original Issue Discount," except that the de minimis rule and the
adjustments for subsequent holders of REMIC Regular Certificates (including any
other class of Certificates constituting "regular interests" in the REMIC not
offered hereby) described therein will not apply.
If a class of REMIC Regular Certificates is issued at a price in excess of
the stated redemption price of such class (such excess, "Issue Premium"), the
net amount of interest deductions that are allowed the REMIC in each taxable
year with respect to the REMIC Regular Certificates of such class will be
reduced by an amount equal to the portion of the Issue Premium that is
considered to be amortized or repaid in that year. Although the matter is not
entirely certain, it is likely that Issue Premium would be amortized under a
constant yield method in a manner analogous to the method of accruing original
issue discount described above under "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount."
As a general rule, the taxable income of the REMIC will be determined in
the same manner as if the REMIC were an individual having the calendar year as
its taxable year and using the accrual method of accounting. However, no item of
income, gain, loss or deduction allocable to a prohibited transaction will be
taken into account. See "--Prohibited Transactions and Other Possible REMIC
Taxes" below. Further, the limitation on miscellaneous itemized deductions
imposed on individuals by Section 67 of the Code (which allows such 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 such expenses will be allocated
as a separate item to the holders of REMIC Certificates, subject to the
limitation of Section 67 of the Code. See "--Possible Pass-Through of
Miscellaneous Itemized Deductions" below. If the deductions allowed to the REMIC
exceed its gross income for a calendar quarter, such excess will be the net loss
for the REMIC for that calendar quarter.
Basis Rules, Net Losses and Distributions. The adjusted basis of a REMIC
Residual Certificate will be equal to the amount paid for such REMIC Residual
Certificate, increased by amounts included in the income of the related
Certificateholder and decreased (but not
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below zero) by distributions made, and by net losses allocated, to
such Certificateholder.
A REMIC Residual Certificateholder is not allowed to take into account any
net loss for any calendar quarter to the extent such net loss exceeds such REMIC
Residual Certificateholder's adjusted basis in its REMIC Residual Certificate as
of the close of such calendar quarter (determined without regard to such net
loss). Any loss that is not currently deductible by reason of this limitation
may be carried forward indefinitely to future calendar quarters and, subject to
the same limitation, may be used only to offset income from the REMIC Residual
Certificate. The ability of holders of REMIC Residual Certificates to deduct net
losses may be subject to additional limitations under the Code, as to which such
Certificateholders should consult their tax advisors.
Any distribution on a REMIC Residual Certificate will be treated as a
non-taxable return of capital to the extent it does not exceed the holder's
adjusted basis in such REMIC Residual Certificate. To the extent a distribution
on a REMIC Residual Certificate exceeds such adjusted basis, it will be treated
as gain from the sale of such REMIC Residual Certificate. Holders of certain
REMIC Residual Certificates may be entitled to distributions early in the term
of the related REMIC under circumstances in which their bases in such REMIC
Residual Certificates will not be sufficiently large that such distributions
will be treated as nontaxable returns of capital. Their bases in such REMIC
Residual Certificates will initially equal the amount paid for such REMIC
Residual Certificates and will be increased by their allocable shares of taxable
income of the Trust Fund. However, such basis increases may not occur until the
end of the calendar quarter, or perhaps the end of the calendar year, with
respect to which such REMIC taxable income is allocated to the holders of REMIC
Residual Certificates. To the extent such Certificateholders' initial bases are
less than the distributions to such REMIC Residual Certificateholders, and
increases in such initial bases either occur after such distributions or
(together with their initial bases) are less than the amount of such
distributions, gain will be recognized to such Certificateholders on such
distributions and will be treated as gain from the sale of their REMIC Residual
Certificates.
The effect of these rules is that a Certificateholder may not amortize its
basis in a REMIC Residual Certificate, but may only recover its basis through
distributions, through the deduction of its share of any net losses of the REMIC
or upon the sale of its REMIC Residual Certificate. See "--Sales of REMIC
Certificates" below. For a discussion of possible modifications of these rules
that may require adjustments to income of a holder of a REMIC Residual
Certificate other than an original holder in order to reflect any difference
between the cost of such REMIC Residual Certificate to such holder and the
adjusted basis such REMIC
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Residual Certificate would have had in the hands of the original holder, see
"--General" above.
Excess Inclusions. Any "excess inclusions" with respect to a REMIC Residual
Certificate will, with an exception discussed below for certain REMIC Residual
Certificates held by thrift institutions, be subject to federal income tax in
all events.
In general, the "excess inclusions" with respect to a REMIC Residual
Certificate for any calendar quarter will be the excess, if any, of (i) the sum
of the daily portions of REMIC taxable income allocable to such REMIC Residual
Certificate over (ii) the sum of the "daily accruals" (as defined herein) for
each day during such quarter that such REMIC Residual Certificate was held by
such REMIC Residual Certificateholder. The daily accruals of a REMIC Residual
Certificateholder will be determined by allocating to each day during a calendar
quarter its ratable portion of the product of the "adjusted issue price" of the
REMIC Residual Certificate at the beginning of the calendar quarter and 120% of
the "long-term federal rate" in effect on the Closing Date. For this purpose,
the adjusted issue price of a REMIC Residual Certificate as of the beginning of
any calendar quarter will be equal to the issue price of the REMIC Residual
Certificate, increased by the sum of the daily accruals for all prior quarters
and decreased (but not below zero) by any distributions made with respect to
such REMIC Residual Certificate before the beginning of such quarter. The issue
price of a REMIC Residual Certificate is the initial offering price to the
public (excluding bond houses and brokers) at which a substantial amount of the
REMIC Residual Certificates were sold. 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.
For REMIC Residual Certificateholders, an excess inclusion (i) will not be
permitted to be offset by deductions, losses or loss carryovers from other
activities, (ii) will be treated as "unrelated business taxable income" to an
otherwise tax-exempt organization and (iii) will not be eligible for any rate
reduction or exemption under any applicable tax treaty with respect to the 30%
United States withholding tax imposed on distributions to REMIC Residual
Certificateholders that are foreign investors. See, however, "--Foreign
Investors in REMIC Certificates" below.
As an exception to the general rules described above, thrift institutions
are allowed to offset their excess inclusions with unrelated deductions, losses
or loss carryovers, but only if the REMIC Residual Certificates are considered
to have "significant value." The REMIC Regulations provide that in order to be
treated as having significant value, the REMIC Residual Certificates must have
an aggregate issue price at least equal to two percent of the aggregate issue
prices of all of the related REMIC's Regular and Residual Certificates. In
addition, based on the Prepayment
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Assumption, the anticipated weighted average life of the REMIC Residual
Certificates must equal or exceed 20% of the anticipated weighted average life
of the REMIC and on any required or permitted clean up calls or required
qualified liquidation provided for in the REMIC's organizational documents.
Although it has not done so, the Treasury also has authority to issue
regulations that would treat the entire amount of income accruing on a REMIC
Residual Certificate as an excess inclusion if the REMIC Residual Certificates
are considered not to have "significant value." The related Prospectus
Supplement will disclose whether offered REMIC Residual Certificates may be
considered to have "significant value" under the REMIC Regulations; except that
any disclosure that a REMIC Residual Certificate will have "significant value"
will be based upon certain assumptions, and the Company will make no
representation that a REMIC Residual Certificate will have "significant value"
for purposes of the above-described rules. The above-described exception for
thrift institutions applies only to those residual interests held directly by,
and deductions, losses and loss carryovers incurred by, such institutions (and
not by other members of an affiliated group of corporations filing a
consolidated income tax return) or by certain wholly-owned direct subsidiaries
of such institutions formed or operated exclusively in connection with the
organization and operation of one or more REMICs.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Section 857(b)(2) of the
Code, excluding any net capital gain), will be allocated among the shareholders
of such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Certificate as if held directly by such
shareholder. Treasury regulations yet to be issued could apply a similar rule to
regulated investment companies, common trust funds and certain cooperatives; the
REMIC Regulations currently do not address this subject.
Noneconomic REMIC Residual Certificates. Under the REMIC Regulations,
transfers of "noneconomic" REMIC Residual Certificates will be disregarded for
all federal income tax purposes if "a significant purpose of the transfer was to
enable the transferor to impede the assessment or collection of tax." If such
transfer is disregarded, the purported transferor will continue to remain liable
for any taxes due with respect to the income on such "noneconomic" REMIC
Residual Certificate. The REMIC Regulations provide that a REMIC Residual
Certificate is noneconomic unless, based on the Prepayment Assumption and on any
required or permitted clean up calls, or required qualified liquidation provided
for in the REMIC's organizational documents, (1) the present value of the
expected future distributions (discounted using the "applicable federal rate"
for obligations whose term ends on the close of the last quarter in
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which excess inclusions are expected to accrue with respect to the REMIC
Residual Certificate, which rate is computed and published monthly by the IRS)
on the REMIC Residual Certificate equals at least the present value of the
expected tax on the anticipated excess inclusions, and (2) the transferor
reasonably expects that the transferee will receive distributions with respect
to the REMIC Residual Certificate at or after the time the taxes accrue on the
anticipated excess inclusions in an amount sufficient to satisfy the accrued
taxes. Accordingly, all transfers of REMIC Residual Certificates that may
constitute noneconomic residual interests will be subject to certain
restrictions under the terms of the related Pooling and Servicing Agreement or
Trust Agreement that are intended to reduce the possibility of any such transfer
being disregarded. Such restrictions will require each party to a transfer to
provide an affidavit that no purpose of such transfer is to impede the
assessment or collection of tax, including certain 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 such
transferee's historic payment of its debts and ability to continue to pay its
debts as they come due in the future. Prior to purchasing a REMIC Residual
Certificate, prospective purchasers should consider the possibility that a
purported transfer of such REMIC Residual Certificate by such 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
such purchaser.
The related Prospectus Supplement will disclose whether offered REMIC
Residual Certificates may be considered "noneconomic" residual interests under
the REMIC Regulations. Any such disclosure that a REMIC Residual Certificate
will not be considered "noneconomic" will be based upon certain assumptions, and
the Company will make no representation that a REMIC Residual Certificate will
not be considered "noneconomic" for purposes of the above-described rules. See
"--Foreign Investors in REMIC Certificates" below for additional restrictions
applicable to transfers of certain REMIC Residual Certificates to foreign
persons.
Mark-to-Market Rules. On December 28, 1993, the IRS released temporary
regulations (the "Mark-to-Market Regulations") relating to the requirement that
a securities dealer mark to market securities held for sale to customers. This
mark-to-market requirement applies to all securities owned by a dealer, except
to the extent that the dealer has specifically identified a security as held for
investment. The Mark-to-Market Regulations provide that for purposes of this
mark-to-market requirement, a "negative value" REMIC Residual Certificate is not
treated as a security and thus generally may not be marked to market. This
exclusion from the mark-to-market requirement is expanded to include all REMIC
Residual Certificates under proposed Treasury regulations published January 4,
1995 which provide that any REMIC Residual Certificate issued after January 4,
1995 will not be treated as a security and therefore generally may
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not be marked to market. Prospective purchasers of a REMIC Residual Certificate
should consult their tax advisors regarding the possible application of the
mark-to-market requirement to REMIC Residual Certificates.
Possible Pass-Through of Miscellaneous Itemized Deductions. Fees and
expenses of a REMIC generally will be allocated to the holders of the related
REMIC Residual Certificates. The applicable Treasury regulations indicate,
however, that in the case of a REMIC that is similar to a single class grantor
trust, all or a portion of such fees and expenses should be allocated to the
holders of the related REMIC Regular Certificates. Unless otherwise stated in
the related Prospectus Supplement, such fees and expenses will be allocated to
holders of the related REMIC Residual Certificates in their entirety and not to
the holders of the related REMIC Regular Certificates.
With respect to REMIC Residual Certificates or REMIC Regular Certificates
the holders of which receive an allocation of fees and expenses in accordance
with the preceding discussion, if any holder thereof is an individual, estate or
trust, or a "pass-through entity" beneficially owned by one or more individuals,
estates or trusts, (i) an amount equal to such individual's, estate's or trust's
share of such fees and expenses will be added to the gross income of such holder
and (ii) such individual's, estate's or trust's share of such fees and expenses
will be treated as a miscellaneous itemized deduction allowable subject to the
limitation of Section 67 of the Code, which permits such deductions only to the
extent they exceed in the aggregate two percent of a taxpayer's adjusted gross
income. In addition, Section 68 of the Code provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a specified amount will be reduced by the lesser of (i) 3% of the excess
of the individual's adjusted gross income over such amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for the taxable year. The
amount of additional taxable income reportable by REMIC Certificateholders that
are subject to the limitations of either Section 67 or Section 68 of the Code
may be substantial. Furthermore, in determining the alternative minimum taxable
income of such a holder of a REMIC Certificate that is an individual, estate or
trust, or a "pass-through entity" beneficially owned by one or more individuals,
estates or trusts, no deduction will be allowed for such holder's allocable
portion of servicing fees and other miscellaneous itemized deductions of the
REMIC, even though an amount equal to the amount of such fees and other
deductions will be included in such holder's gross income. Accordingly, such
REMIC Certificates may not be appropriate investments for individuals, estates,
or trusts, or pass-through entities beneficially owned by one or more
individuals, estates or trusts. Such prospective investors should consult with
their tax advisors prior to making an investment in such Certificates.
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Sales of REMIC Certificates
If a REMIC Certificate is sold, the selling Certificateholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and its adjusted basis in the REMIC Certificate. The adjusted basis of
a REMIC Regular Certificate generally will equal the cost of such REMIC Regular
Certificate to such Certificateholder, increased by income reported by such
Certificateholder with respect to such REMIC Regular Certificate (including
original issue discount and market discount income) and reduced (but not below
zero) by distributions on such REMIC Regular Certificate received by such
Certificateholder and by any amortized premium. The adjusted basis of a REMIC
Residual Certificate will be determined as described under "--Taxation of Owners
of REMIC Residual Certificates--Basis Rules, Net Losses and Distributions"
above. Except as described below, any such gain or loss generally will be
capital gain or loss. The Code as of the date of this Prospectus provides for a
top marginal tax rate of 39.6% for individuals and a maximum marginal rate for
long-term capital gains of individuals of 28%. No such rate differential exists
for corporations. In addition, the distinction between a capital gain or loss
and ordinary income or loss remains relevant for other purposes.
Gain from the sale of a REMIC Regular Certificate that might otherwise be
capital gain will be treated as ordinary income to the extent such gain does not
exceed the excess, if any, of (i) the amount that would have been includible in
the seller's income with respect to such REMIC Regular Certificate had income
accrued thereon at a rate equal to 110% of the "applicable federal rate"
(generally, a rate based on an average of current yields on Treasury securities
having a maturity comparable to that of the Certificate, which rate is computed
and published monthly by the IRS), determined as of the date of purchase of such
REMIC Regular Certificate, over (ii) the amount of ordinary income actually
includible in the seller's income prior to such sale. In addition, gain
recognized on the sale of a REMIC Regular Certificate by a seller who purchased
such REMIC Regular Certificate at a market discount will be taxable as ordinary
income to the extent of any accrued and previously unrecognized market discount
that accrued during the period the Certificate was held. See "--Taxation of
Owners of REMIC Regular Certificates--Market Discount" above.
REMIC Certificates will be "evidences of indebtedness" within the meaning
of Section 582(c)(1) of the Code, so that gain or loss recognized from the sale
of a REMIC Certificate by a bank or thrift institution to which such section
applies will be ordinary income or loss.
A portion of any gain from the sale of a REMIC Regular Certificate that
might otherwise be capital gain may be treated as ordinary income to the extent
that such Certificate is held as part of a "conversion transaction" within the
meaning of Section 1258 of
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the Code. A conversion transaction generally is one in which the taxpayer has
taken two or more positions in Certificates or similar property that reduce or
eliminate market risk, if substantially all of the taxpayer's return is
attributable to the time value of the taxpayer's net investment in such
transaction. The amount of gain so realized in a conversion transaction that is
recharacterized as ordinary income generally will not exceed the amount of
interest that would have accrued on the taxpayer's net investment at 120% of the
appropriate "applicable federal rate" (which rate is computed and published
monthly by the IRS) at the time the taxpayer enters into the conversion
transaction, subject to appropriate reduction for prior inclusion of interest
and other ordinary income items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include such 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.
Except as may be provided in Treasury regulations yet to be issued, if the
seller of a REMIC Residual Certificate reacquires the Certificate, any other
residual interest in a REMIC or any similar interest in a "taxable mortgage
pool" (as defined in Section 7701(i) of the Code) within six months of the date
of such sale, the sale will be subject to the "wash sale" rules of Section 1091
of the Code. In that event, any loss realized by the REMIC Residual
Certificateholder on the sale will not be deductible, but instead will be added
to such REMIC Residual Certificateholder's adjusted basis in the newly-acquired
asset.
Prohibited Transactions and Other Possible REMIC Taxes
The Code imposes a tax on REMICs equal to 100% of the net income derived
from "prohibited transactions" (the "Prohibited Transactions Tax"). In general,
subject to certain specified exceptions a prohibited transaction means the
disposition of an item of Mortgage Collateral, the receipt of income from a
source other than an item of Mortgage Collateral or certain other permitted
investments, the receipt of compensation for services, or gain from the
disposition of an asset purchased with the payments on the Mortgage Collateral
for temporary investment pending distribution on the REMIC Certificates. It is
not anticipated that any REMIC will engage in any prohibited transactions in
which it would recognize a material amount of net income.
In addition, certain 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 (the
"Contributions Tax"). Each Pooling and Servicing Agreement or Trust Agreement
will include provisions
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designed to prevent the acceptance of any contributions that would
be subject to such tax.
REMICs also are subject to federal income tax at the highest corporate rate
on "net income from foreclosure property," determined by reference to the rules
applicable to real estate investment trusts. "Net income from foreclosure
property" generally means gain from the sale of a foreclosure property that is
inventory property and gross income from foreclosure property other than
qualifying rents and other qualifying income for a real estate investment trust.
Unless otherwise disclosed in the related Prospectus Supplement, it is not
anticipated that any REMIC will recognize "net income from foreclosure property"
subject to federal income tax.
Unless otherwise disclosed in the related Prospectus Supplement, it is not
anticipated that any material state or local income or franchise tax will be
imposed on any REMIC.
Unless otherwise stated in the related Prospectus Supplement, and to the
extent permitted by then applicable laws, any Prohibited Transactions Tax,
Contributions Tax, tax on "net income from foreclosure property" or state or
local income or franchise tax that may be imposed on the REMIC will be borne by
the related Master Servicer, the Certificate Administrator or the Trustee in
either case out of its own funds, provided that the Master Servicer, the
Certificate Administrator or the Trustee, as the case may be, has sufficient
assets to do so, and provided further that such tax arises out of a breach of
the Master Servicer's, the Certificate Administrator's or the Trustee's
obligations, as the case may be, under the related Pooling and Servicing
Agreement or Trust Agreement and in respect of compliance with applicable laws
and regulations. Any such tax not borne by the Master Servicer, the Certificate
Administrator or the Trustee will be payable out of the related Trust Fund
resulting in a reduction in amounts payable to holders of the related REMIC
Certificates.
Tax and Restrictions on Transfers of REMIC Residual Certificates
to Certain Organizations
If a REMIC Residual Certificate is transferred to a "disqualified
organization" (as defined below), a tax would be imposed in an amount
(determined under the REMIC Regulations) equal to the product of (i) the present
value (discounted using the "applicable federal rate" for obligations whose term
ends on the close of the last quarter in which excess inclusions are expected to
accrue with respect to the Certificate, which rate is computed and published
monthly by the IRS) of the total anticipated excess inclusions with respect to
such REMIC Residual Certificate for periods after the transfer and (ii) the
highest marginal federal income tax rate applicable to corporations. The
anticipated excess inclusions must be determined as of the date that the REMIC
Residual Certificate is transferred and must be based on events that have
occurred up to the
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time of such transfer, the Prepayment Assumption and any required or permitted
clean up calls or required liquidation provided for in the REMIC's
organizational documents. Such a tax generally would be imposed on the
transferor of the REMIC Residual Certificate, except that where such transfer is
through an agent for a disqualified organization, the tax would instead be
imposed on such agent. However, a transferor of a REMIC Residual Certificate
would in no event be liable for such 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 such affidavit is false. Moreover, an entity
will not qualify as a REMIC unless there are reasonable arrangements designed to
ensure that (i) residual interests in such entity are not held by disqualified
organizations and (ii) information necessary for the application of the tax
described herein will be made available. Restrictions on the transfer of REMIC
Residual Certificates and certain other provisions that are intended to meet
this requirement will be included in the Pooling and Servicing Agreement or
Trust Agreement, including provisions (a) requiring any transferee of a REMIC
Residual Certificate to provide an affidavit representing that it is not a
"disqualified organization" and is not acquiring the REMIC Residual Certificate
on behalf of a "disqualified organization," undertaking to maintain such status
and agreeing to obtain a similar affidavit from any person to whom it shall
transfer the REMIC Residual Certificate, (b) providing that any transfer of a
REMIC Residual Certificate to a "disqualified person" shall be null and void and
(c) granting to the Master Servicer or the Certificate Administrator, as
applicable, the right, without notice to the holder or any prior holder, to sell
to a purchaser of its choice any REMIC Residual Certificate that shall become
owned by a "disqualified organization" despite (a) and (b) above.
In addition, if a "pass-through entity" (as defined below) includes in
income excess inclusions with respect to a REMIC Residual Certificate, and a
disqualified organization is the record holder of an interest in such entity,
then a tax will be imposed on such entity equal to the product of (i) the amount
of excess inclusions on the REMIC Residual Certificate that are allocable to the
interest in the pass-through entity held by such disqualified organization and
(ii) the highest marginal federal income tax rate imposed on corporations. A
pass-through entity will not be subject to this tax for any period, however, if
each record holder of an interest in such pass-through entity furnishes to such
pass-through entity (i) such holder's social security number and a statement
under penalties of perjury that such social security number is that of the
record holder or (ii) a statement under penalties of perjury that such record
holder is not a disqualified organization.
For these purposes, a "disqualified organization" means (i) the United
States, any State or political subdivision thereof, any foreign government, any
international organization, or any agency or
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instrumentality of the foregoing (but would not include instrumentalities
described in Section 168(h)(2)(D) of the Code or Freddie Mac), (ii) any
organization (other than a cooperative described in Section 521 of the Code)
that is exempt from federal income tax, unless it is subject to the tax imposed
by Section 511 of the Code or (iii) any organization described in Section
1381(a)(2)(C) of the Code. For these purposes, a "pass-through entity" means any
regulated investment company, real estate investment trust, trust, partnership
or certain other entities described in Section 860E(e)(6) of the Code. In
addition, a person holding an interest in a pass-through entity as a nominee for
another person will, with respect to such 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 in respect of the Mortgage Collateral
or upon a sale of the REMIC's assets following the adoption by the REMIC of a
plan of complete liquidation. The last distribution on a REMIC Regular
Certificate will be treated as a payment in retirement of a debt instrument. In
the case of a REMIC Residual Certificate, if the last distribution on such REMIC
Residual Certificate is less than the Certificateholder's adjusted basis in such
Certificate, such Certificateholder should be treated as realizing a loss equal
to the amount of such difference, and such loss may be treated as a capital
loss.
Reporting and Other Administrative Matters
Solely for purposes of the administrative provisions of the Code, the REMIC
will be treated as a partnership and holders of REMIC Residual Certificates will
be treated as partners. Unless otherwise stated in the related Prospectus
Supplement, the Master Servicer or the Certificate Administrator, as applicable,
will file REMIC federal income tax returns on behalf of the related REMIC and
will be designated as and will act as the "tax matters person" for the REMIC in
all respects, and may hold a nominal amount of REMIC Residual Certificates.
As the tax matters person, the Master Servicer or the Certificate
Administrator, as applicable, subject to certain notice requirements and various
restrictions and limitations, generally will have the authority to act on behalf
of the REMIC and the holders of REMIC Residual Certificates 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. Holders of REMIC
Residual Certificates generally will be required to report such 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 or the Certificate
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Administrator, as applicable, as tax matters person, and the IRS concerning any
such REMIC item. Adjustments made to the REMIC tax return may require a holder
of a REMIC Residual Certificate to make corresponding adjustments on its return,
and an audit of the REMIC's tax return, or the adjustments resulting from such
an audit, could result in an audit of such Certificateholder's return. No REMIC
will be registered as a tax shelter pursuant to Section 6111 of the Code because
it is not anticipated that any REMIC will have a net loss for any of the first
five taxable years of its existence. Any person that holds a REMIC Residual
Certificate as a nominee for another person may be required to furnish to the
related REMIC, in a manner to be provided in Treasury regulations, the name and
address of such person and other information.
Reporting of interest income, including any original issue discount, with
respect to REMIC Regular Certificates is required annually, and may be required
more frequently under Treasury regulations. These information reports generally
are required to be sent to individual holders of REMIC Regular Interests and the
IRS; holders of REMIC Regular Certificates that are corporations, trusts,
securities dealers and certain other non-individuals will be provided interest
and original issue discount income information and the information set forth in
the following paragraph upon request in accordance with the requirements of the
applicable regulations. The information must be provided by the later of 30 days
after the end of the quarter for which the information was requested, or two
weeks after the receipt of the request. The REMIC must also comply with rules
requiring a REMIC Regular Certificate issued with original issue discount to
disclose on its face certain information including the amount of original issue
discount and the issue date, and requiring such information to be reported to
the IRS. Reporting with respect to the REMIC Residual Certificates, including
income, excess inclusions, investment expenses and relevant information
regarding qualification of the REMIC's assets will be made as required under the
Treasury regulations, generally on a quarterly basis.
As applicable, the REMIC Regular Certificate information reports will
include a statement of the adjusted issue price of the REMIC Regular Certificate
at the beginning of each accrual period. In addition, the reports will include
information required by regulations with respect to computing the accrual of any
market discount. Because exact computation of the accrual of market discount on
a constant yield method requires information relating to the holder's purchase
price that the Master Servicer or the Certificate Administrator will not have,
such regulations only require that information pertaining to the appropriate
proportionate method of accruing market discount be provided. See "--Taxation of
Owners of REMIC Regular Certificates--Market Discount."
The responsibility for complying with the foregoing reporting rules will be
borne by the Master Servicer or the Certificate Administrator.
Certificateholders may request any information with
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respect to the returns described in Section 1.6049-7(e)(2) of the Treasury
regulations. Such request should be directed to the Master Servicer or the
Certificate Administrator, as applicable, at Residential Funding Corporation,
8400 Normandale Lake Boulevard, Suite 600, Minneapolis, Minnesota 55437.
Backup Withholding with Respect to REMIC Certificates
Payments of interest and principal, as well as payments of proceeds from
the sale of REMIC Certificates, may be subject to the "backup withholding tax"
under Section 3406 of the Code at a rate of 31% if recipients of such payments
fail to furnish to the payor certain information, including their taxpayer
identification numbers, or otherwise fail to establish an exemption from such
tax. Any amounts deducted and withheld from a distribution to a recipient would
be allowed as a credit against such recipient's federal income tax. Furthermore,
certain penalties may be imposed by the IRS on a recipient of payments that is
required to supply information but that does not do so in the proper manner.
Foreign Investors in REMIC Certificates
A REMIC Regular Certificateholder that is not a "United States person" and
is not subject to federal income tax as a result of any direct or indirect
connection to the United States in addition to its ownership of a REMIC Regular
Certificate will not be subject to United States federal income or withholding
tax in respect of a distribution on a REMIC Regular Certificate, provided that
the holder complies to the extent necessary with certain identification
requirements (including delivery of a statement, signed by the Certificateholder
under penalties of perjury, certifying that such Certificateholder is not a
United States person and providing the name and address of such
Certificateholder). For these purposes, "United States person" means a citizen
or resident of the United States, a corporation, partnership or other entity
created or organized in, or under the laws of, the United States or any
political subdivision thereof, or an estate or trust whose income from sources
without the United States is includible in gross income for United States
federal income tax purposes regardless of its connection with the conduct of a
trade or business within the United States. It is possible that the IRS may
assert that the foregoing tax exemption should not apply with respect to a REMIC
Regular Certificate held by a Certificateholder that owns directly or indirectly
a 10% or greater interest in the REMIC Residual Certificates. If the holder does
not qualify for exemption, distributions of interest, including distributions in
respect of accrued original issue discount, to such 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
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taxation on such United States shareholder's allocable portion of the interest
income received by such controlled foreign corporation.
Further, it appears that a REMIC Regular Certificate would not be included
in the estate of a non-resident alien individual and would not be subject to
United States estate taxes. However, Certificateholders who are
non-resident alien individuals should consult their tax advisors concerning
this question.
Unless otherwise stated in the related Prospectus Supplement, transfers of
REMIC Residual Certificates to investors that are not United States persons will
be prohibited under the related Pooling and Servicing Agreement or Trust
Agreement.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences," potential investors should consider the state
and local tax consequences of the acquisition, ownership, and disposition of the
Certificates offered. State tax law may differ substantially from the
corresponding federal tax law, and the discussion above does not purport to
describe any aspect of the tax laws of any state or other jurisdiction.
Therefore, prospective investors should consult their tax advisors with respect
to the various tax consequences of investments in the Certificates offered
hereby.
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ERISA CONSIDERATIONS
ERISA imposes certain fiduciary and prohibited transaction restrictions on
employee pension and welfare benefit plans subject to ERISA ("ERISA Plans").
Section 4975 of the Code imposes similar prohibited transaction restrictions on
tax-qualified retirement plans described in Section 401(a) of the Code
("Qualified Retirement Plans") and on individual retirement accounts and
annuities ("IRAs") described in Section 408 of the Code (collectively,
"Tax-Favored Plans").
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA), are not subject to the ERISA requirements discussed
herein. Accordingly, assets of such plans may be invested in Certificates
without regard to the ERISA considerations described below, subject to the
provisions of applicable federal and state law. Any such plan that is a
Qualified Retirement Plan and exempt from taxation under Sections 401(a) and
501(a) of the Code, however, is subject to the prohibited transaction rules set
forth in Section 503 of the Code.
In addition to imposing general fiduciary requirements, including those of
investment prudence and diversification and the requirement that a Plan's
investment be made in accordance with the documents governing the Plan, Section
406 of ERISA and Section 4975 of the Code prohibit a broad range of transactions
involving "plan assets" of ERISA Plans and Tax-Favored Plans (collectively,
"Plans") and persons ("Parties in Interest" under ERISA or "Disqualified
Persons" under the Code) who have certain specified relationships to the Plans,
unless a statutory or administrative exemption is available. Certain Parties in
Interest (or Disqualified Persons) that participate in a prohibited transaction
may be subject to a penalty (or an excise tax) imposed pursuant to Section
502(i) of ERISA or Section 4975 of the Code, unless a statutory or
administrative exemption is available.
Plan Asset Regulations
An investment of Plan Assets in Certificates may cause the underlying
Mortgage Loans, Contracts or Agency Securities included in a Trust Fund to be
deemed "plan assets" of such Plan. The U.S. Department of Labor (the "DOL") has
promulgated regulations at 29 C.F.R. ss. 2510.3-101 (the "DOL Regulations")
concerning whether or not a Plan's assets would be deemed to include an interest
in the underlying assets of an entity (such as a Trust Fund), for purposes of
applying the general fiduciary responsibility provisions of ERISA and the
prohibited transaction provisions of ERISA and Section 4975 the Code, when a
Plan acquires an "equity interest" (such as a Certificate) in such entity.
Because of the factual nature of certain of the rules set forth in the DOL
Regulations, Plan Assets either may be deemed to include an interest in the
assets of an entity (such as a Trust Fund) or may be deemed merely to include a
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Plan's interest in the instrument evidencing such equity interest (such as a
Certificate). Therefore, neither Plans nor such entities should acquire or hold
Certificates in reliance upon the availability of any exception under the DOL
Regulations. For purposes of this section, the term "plan assets" ("Plan
Assets") or "assets of a Plan" has the meaning specified in the DOL Regulations
and includes an undivided interest in the underlying assets of certain entities
in which a Plan invests.
The prohibited transaction provisions of Section 406 of ERISA and Section
4975 of the Code may apply to a Trust Fund and cause the Company, the Master
Servicer, the Certificate Administrator, any Servicer, any Sub-Servicer, the
Trustee, the obligor under any credit enhancement mechanism or certain
affiliates thereof to be considered or become Parties in Interest (or
Disqualified Persons) with respect to an investing Plan (or of a Plan holding an
interest in such an entity). If so, the acquisition or holding of Certificates
by or on behalf of the investing Plan could also give rise to a prohibited
transaction under ERISA and/or Section 4975 of the Code, unless some statutory
or administrative exemption is available. Certificates acquired by a Plan would
be assets of that Plan. Under the DOL Regulations, the Trust Fund, including the
Mortgage Loans, Contracts or Agency Securities and the other assets held in the
Trust Fund, may also be deemed to be assets of each Plan that acquires
Certificates. Special caution should be exercised before Plan Assets are used to
acquire a Certificate in such circumstances, especially if, with respect to such
Plan Assets, the Company, the Master Servicer, the Certificate Administrator,
any Servicer, any Sub-Servicer, the Trustee, the obligor under any credit
enhancement mechanism or an affiliate thereof either (i) has investment
discretion with respect to the investment of Plan Assets; or (ii) has authority
or responsibility to give (or regularly gives) investment advice with respect to
Plan Assets for a fee pursuant to an agreement or understanding that such advice
will serve as a primary basis for investment decisions with respect to such Plan
Assets.
Any person who has discretionary authority or control respecting the
management or disposition of Plan Assets, and any person who provides investment
advice with respect to such Plan Assets for a fee (in the manner described
above), is a fiduciary of the investing Plan. If the Mortgage Loans, Contracts
or Agency Securities were to constitute Plan Assets, then any party exercising
management or discretionary control regarding those Plan Assets may be deemed to
be a Plan "fiduciary," and thus subject to the fiduciary requirements of ERISA
and the prohibited transaction provisions of ERISA and Section 4975 of the Code
with respect to any investing Plan. In addition, if the Mortgage Loans,
Contracts or Agency Securities were to constitute Plan Assets, then the
acquisition or holding of Certificates by, on behalf of or with Plan Assets, as
well as the operation of the Trust Fund, may constitute or result in a
prohibited transaction under ERISA and the Code.
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Prohibited Transaction Exemption
On March 29, 1994, the DOL issued (with an effective date of June 9, 1992)
an individual exemption (the "Exemption") to Residential Funding and certain of
its affiliates, which generally exempts from the application of the prohibited
transaction provisions of Section 406 of ERISA, and the excise taxes imposed on
such prohibited transactions pursuant to Section 4975(a) and (b) of the Code,
certain transactions, among others, relating to the servicing and operation of
pools of certain secured obligations such as Mortgage Loans, Contracts or Agency
Securities which are held in a trust and the purchase, sale and holding of
pass-through certificates issued by such a trust as to which (i) the Company or
any of its affiliates is the sponsor if any entity which has received from the
DOL an individual prohibited transaction exemption which is similar to the
Exemption is the sole underwriter, or manager or co-manager of the underwriting
syndicate or a seller or placement agent, or (ii) the Company or an affiliate is
the underwriter or placement agent, provided that certain conditions set forth
in the Exemption are satisfied. For purposes of this section, the term
"Underwriter" shall include (a) the Company and certain of its affiliates, (b)
any person directly or indirectly, through one or more intermediaries,
controlling, controlled by or under common control with the Company and certain
of its affiliates, (c) any member of the underwriting syndicate or selling group
of which a person described in (a) or (b) is a manager or co-manager with
respect to a class of Certificates, or (d) any entity which has received an
exemption from the DOL relating to Certificates which is similar to the
Exemption.
The Exemption sets forth six general conditions which must be satisfied for
a transaction involving the purchase, sale and holding of Certificates to be
eligible for exemptive relief thereunder. First, the acquisition of Certificates
by a Plan or with Plan Assets must be on terms that are at least as favorable to
the Plan as they would be in an arm's-length transaction with an unrelated
party. Second, the Exemption only applies to Certificates evidencing rights and
interests that are not subordinated to the rights and interests evidenced by the
other Certificates of the same trust. Third, the Certificates at the time of
acquisition by a Plan or with Plan Assets must be rated in one of the three
highest generic rating categories by Standard & Poor's Ratings Services, Moody's
Investors Service, Inc., Duff & Phelps, Inc. or Fitch Investors Service, L.P.
Fourth, the Trustee cannot be an affiliate of any other member of the
"Restricted Group" which consists of any Underwriter, the Company, the Master
Servicer, the Certificate Administrator, any Servicer, any Sub-Servicer, the
Trustee and any mortgagor with respect to assets of a Trust Fund constituting
more than 5% of the aggregate unamortized principal balance of the assets in the
related Trust Fund as of the date of initial issuance of the Certificates.
Fifth, the sum of all payments made to and retained by the Underwriters must
represent not more than reasonable compensation for underwriting the
Certificates; the sum of all payments made to
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and retained by the Company pursuant to the assignment of the assets to the
related Trust Fund must represent not more than the fair market value of such
obligations; and the sum of all payments made to and retained by the Master
Servicer, the Certificate Administrator, any Servicer or any Sub-Servicer must
represent not more than reasonable compensation for such person's services under
the related Pooling and Servicing Agreement or Trust Agreement and reimbursement
of such person's reasonable expenses in connection therewith. Sixth, the
Exemption states that the investing Plan or Plan Asset investor must be an
accredited investor as defined in Rule 501(a)(1) of Regulation D of the
Commission under the Securities Act of 1933, as amended.
A fiduciary of or other investor of Plan Assets contemplating purchasing a
Certificate must make its own determination that the general conditions set
forth above will be satisfied with respect to such 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 of
ERISA, and the excise taxes imposed by Sections 4975(a) and (b) of the Code by
reason of Sections 4975(c)(1)(A) through (D) of the Code, in connection with the
direct or indirect sale, exchange, transfer, holding or the direct or indirect
acquisition or disposition in the secondary market of Certificates by a Plan or
with Plan Assets. However, no exemption is provided from the restrictions of
Sections 406(a)(1)(E) and 406(a)(2) of ERISA for the acquisition or holding of a
Certificate by a Plan or with Plan Assets of an Excluded Plan by any person who
has discretionary authority or renders investment advice with respect to Plan
Assets of such Excluded Plan. For purposes of the Certificates, an "Excluded
Plan" is a Plan sponsored by any member of the Restricted Group.
If certain 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, and the excise taxes imposed by Section
4975(c)(1)(E) of the Code, in connection with (1) the direct or indirect sale,
exchange or transfer of Certificates in the initial issuance of Certificates
between the Company or an Underwriter and a Plan when the person who has
discretionary authority or renders investment advice with respect to the
investment of the relevant Plan Assets in the Certificates is (a) a mortgagor
with respect to 5% or less of the fair market value of the assets of a Trust
Fund or (b) an affiliate of such a person, (2) the direct or indirect
acquisition or disposition in the secondary market of Certificates by a Plan or
with Plan Assets and (3) the holding of Certificates by a Plan or with Plan
Assets.
Additionally, if certain specific conditions of the Exemption are
satisfied, the Exemption may provide an exemption from the
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restrictions imposed by Sections 406(a), 406(b) and 407 of ERISA, and the excise
taxes imposed by Sections 4975(a) and (b) of the Code by reason of Section
4975(c) of the Code, for transactions in connection with the servicing,
management and operation of the Mortgage Pools and Contract Pools. The Company
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, and the excise taxes imposed by Sections 4975(a) and (b) of the Code by
reason of Section 4975(c) of the Code, for transactions in connection with the
servicing, management and operation of the Mortgage Pools and Contract 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, and the excise taxes imposed by Section
4975(a) and (b) of the Code by reason of Sections 4975(c)(1)(A) through (D) of
the Code, if such restrictions are deemed to otherwise apply merely because a
person is deemed to be a Party in Interest (or a Disqualified Person) with
respect to an investing Plan (or Plans holding interests in the investing entity
holding Plan Assets) by virtue of providing services to the Plan or such Plan
Assets (or by virtue of having certain specified relationships to such a person)
solely as a result of the ownership of Certificates by a Plan or such Plan Asset
investor.
Before purchasing a Certificate, a fiduciary or other investor of Plan
Assets should itself confirm that (a) the Certificates constitute "certificates"
for purposes of the Exemption and (b) the specific and general conditions set
forth in the Exemption and the other requirements set forth 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 investor of Plan Assets should consider its general fiduciary obligations
under ERISA in determining whether to purchase any Certificates with Plan
Assets.
Any fiduciary or other investor of Plan Assets that proposes to purchase
Certificates on behalf of or with Plan Assets should consult with its counsel
with respect to the potential applicability of ERISA and the Code to such
investment and the availability of the Exemption or any other prohibited
transaction exemption in connection therewith. In particular, in connection with
a contemplated purchase of Certificates representing a beneficial ownership
interest in a pool of single-family residential first Mortgage Loans or Agency
Certificates, such fiduciary or other Plan investor should consider the
availability of the Exemption or Prohibited Transaction Class Exemption ("PTCE")
83-1 ("PTCE 83-1") for certain transactions involving mortgage pool investment
trusts. However, PTCE 83-1 does not provide exemptive relief with respect to
Certificates evidencing interests in Trust Funds that include Cooperative Loans.
In addition, such fiduciary or other Plan Asset
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investor should consider the availability of PTCE 95-60, regarding investments
by insurance company general accounts, PTCE 90-1, regarding investments by
insurance company pooled separate accounts, PTCE 96-23, regarding transactions
effected by "in-house asset managers," PTCE 91-38, regarding investments by bank
collective investment funds, and PTCE 84-14, regarding transactions effected by
"qualified professional asset managers." The Prospectus Supplement with respect
to a series of Certificates may contain additional information regarding the
application of the Exemption, PTCE 83-1 or any other exemption with respect to
the Certificates offered thereby. There can be no assurance that any of these
exemptions will apply with respect to any particular Plan's or other Plan Asset
investor's investment in the Certificates or, even if an exemption were deemed
to apply, that any exemption would apply to all prohibited transactions that may
occur in connection with such an investment.
Tax-Exempt Investors
A Plan that is exempt from federal income taxation pursuant to Section 501
of the Code (a "Tax-Exempt Investor") nonetheless will be subject to federal
income taxation to the extent that its income is "unrelated business taxable
income" ("UBTI") within the meaning of Section 512 of the Code. 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 "Certain Federal Income Tax Consequences--Taxation of Owners of
REMIC Residual Certificates--Excess Inclusions."
Consultation with Counsel
Any fiduciary or other investor of Plan Assets that proposes to acquire or
hold Certificates on behalf of or with Plan Assets of any Plan should consult
with its counsel with respect to the potential applicability of the fiduciary
responsibility provisions of ERISA and the prohibited transaction provisions of
ERISA and the Code to the proposed investment and the Exemption, the
availability of PTCE 83-1 or any other prohibited transaction exemption.
LEGAL INVESTMENT MATTERS
Each class of Certificates offered hereby and by the related Prospectus
Supplement will be rated at the date of issuance in one of the four highest
rating categories by at least one Rating Agency. Unless otherwise specified in
the related Prospectus Supplement, each such class that is, and continues to be,
rated in one of the two highest rating categories by at least one nationally
recognized statistical rating organization will constitute "mortgage related
securities" for purposes of SMMEA, and, as such, will be legal investments for
persons, trusts, corporations, partnerships, associations, business trusts and
business entities (including
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depository institutions, life insurance companies and pension funds) created
pursuant to or existing under the laws of the United States or of any State
whose authorized investments are subject to state regulation to the same extent
that, under applicable law, obligations issued by or guaranteed as to principal
and interest by the United States or any agency or instrumentality thereof
constitute legal investments for such entities. Under SMMEA, if a State enacted
legislation on or prior to October 3, 1991 specifically limiting the legal
investment authority of any such entities with respect to "mortgage related
securities," such securities will constitute legal investments for entities
subject to such legislation only to the extent provided therein. Certain States
enacted legislation which overrides the preemption provisions of SMMEA. SMMEA
provides, however, that in no event will the enactment of any such legislation
affect the validity of any contractual commitment to purchase, hold or invest in
"mortgage related securities," or require the sale or other disposition of such
securities, so long as such contractual commitment was made or such securities
acquired prior to the enactment of such legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with "mortgage
related securities" without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in such securities, and
national banks may purchase such securities for their own account without regard
to the limitations generally applicable to investment securities set forth in 12
U.S.C. ss. 24 (Seventh), subject in each case to such regulations as the
applicable federal regulatory authority may prescribe.
The Federal Financial Institutions Examination Council has issued a
supervisory policy statement (the "Policy Statement") applicable to all
depository institutions, setting forth guidelines for and significant
restrictions on investments in "high-risk mortgage securities." The Policy
Statement has been adopted by the Federal Reserve Board, the Office of the
Comptroller of the Currency, the FDIC and the Office of Thrift Supervision (the
"OTS") with an effective date of February 10, 1992. The Policy Statement
generally indicates that a mortgage derivative product will be deemed to be high
risk if it exhibits greater price volatility than a standard fixed-rate
thirty-year mortgage security. According to the Policy Statement, prior to
purchase, a depository institution will be required to determine whether a
mortgage derivative product that it is considering acquiring is high-risk and,
if so, that the proposed acquisition would reduce the institution's overall
interest rate risk. Reliance on analysis and documentation obtained from a
securities dealer or other outside party without internal analysis by the
institution would be unacceptable. There can be no assurance as to which classes
of Certificates will be treated as high-risk under the Policy Statement.
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The predecessor to the OTS issued a bulletin, entitled "Mortgage Derivative
Products and Mortgage Swaps," which is applicable to thrift institutions
regulated by the OTS. The bulletin established guidelines for the investment by
savings institutions in certain "high-risk" mortgage derivative securities and
limitations on the use of such securities by insolvent, undercapitalized or
otherwise "troubled" institutions. According to the bulletin, such "high-risk"
mortgage derivative securities include securities having certain specified
characteristics, which may include certain classes of Certificates. In addition,
the National Credit Union Administration has issued regulations governing
federal credit union investments which prohibit investment in certain specified
types of securities, which may include certain classes of Certificates. Similar
policy statements have been issued by regulators having jurisdiction over other
types of depository institutions.
Certain classes of Certificates offered hereby, including any class that is
not rated in one of the two highest rating categories by at least one nationally
recognized statistical rating organization, will not constitute "mortgage
related securities" for purposes of SMMEA. Any such class of Certificates will
be identified in the related Prospectus Supplement. Prospective investors in
such classes of Certificates, in particular, should consider the matters
discussed in the following paragraph.
There may be other restrictions on the ability of certain investors either
to purchase certain classes of Certificates or to purchase any class of
Certificates representing more than a specified percentage of the investors'
assets. The Company will make no representations as to the proper
characterization of any class of Certificates for legal investment or other
purposes, or as to the ability of particular investors to purchase any class of
Certificates under applicable legal investment restrictions. These uncertainties
may adversely affect the liquidity of any class of Certificates. Accordingly,
all investors whose investment activities are subject to legal investment laws
and regulations, regulatory capital requirements or review by regulatory
authorities should consult with their own legal advisors in determining whether
and to what extent the Certificates of any class constitute legal investments or
are subject to investment, capital or other restrictions, and, if applicable,
whether SMMEA has been overridden in any jurisdiction relevant to such investor.
USE OF PROCEEDS
Unless otherwise specified in the related Prospectus Supplement,
substantially all of the net proceeds to be received from the sale
of Certificates will be applied by the Company to finance the
purchase of, or to repay short-term loans incurred to finance the
purchase of, the Mortgage Collateral underlying the Certificates or
will be used by the Company for general corporate purposes. The
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Company expects that it will make additional sales of securities similar to the
Certificates from time to time, but the timing and amount of any such additional
offerings will be dependent upon a number of factors, including the volume of
mortgage loans, contracts or mortgage securities purchased by the Company,
prevailing interest rates, availability of funds and general market conditions.
METHODS OF DISTRIBUTION
The Certificates offered hereby and by the related Prospectus Supplements
will be offered in series through one or more of the methods described below.
The Prospectus Supplement prepared for each series will describe the method of
offering being utilized for that series and will state the net proceeds to the
Company from such sale.
The Company intends that Certificates will be offered through the following
methods from time to time and that offerings may be made concurrently through
more than one of these methods or that an offering of a particular series of
Certificates may be made through a combination of two or more of these methods.
Such methods are as follows:
1. by negotiated firm commitment or best efforts underwriting and
public re-offering by underwriters;
2. by placements by the Company with institutional investors
through dealers; and
3. by direct placements by the Company with institutional
investors.
In addition, if specified in the related Prospectus Supplement, a series of
Certificates may be offered in whole or in part to the Seller of the related
Mortgage Collateral that would comprise the Trust Fund for such Certificates.
If underwriters are used in a sale of any Certificates (other than in
connection with an underwriting on a best efforts basis), such Certificates will
be acquired by the underwriters for their own account and may be resold from
time to time in one or more transactions, including negotiated transactions, at
fixed public offering prices or at varying prices to be determined at the time
of sale or at the time of commitment therefor. Such underwriters may be
broker-dealers affiliated with the Company whose identities and relationships to
the Company will be as set forth in the related Prospectus Supplement. The
managing underwriter or underwriters with respect to the offer and sale of a
particular series of Certificates will be set forth on the cover of the
Prospectus Supplement relating to such series and the members of the
underwriting syndicate, if any, will be named in such Prospectus Supplement.
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In connection with the sale of the Certificates, underwriters may receive
compensation from the Company or from purchasers of the Certificates in the form
of discounts, concessions or commissions. Underwriters and dealers participating
in the distribution of the Certificates may be deemed to be underwriters in
connection with such Certificates, and any discounts or commissions received by
them from the Company and any profit on the resale of Certificates by them may
be deemed to be underwriting discounts and commissions under the Securities Act
of 1933, as amended.
It is anticipated that the underwriting agreement pertaining to the sale of
any series of Certificates will provide that the obligations of the underwriters
will be subject to certain conditions precedent, that the underwriters will be
obligated to purchase all such Certificates if any are purchased (other than in
connection with an underwriting on a best efforts basis) and that, in limited
circumstances, the Company will indemnify the several underwriters and the
underwriters will indemnify the Company against certain civil liabilities,
including liabilities under the Securities Act of 1933, as amended, or will
contribute to payments required to be made in respect thereof.
The Prospectus Supplement with respect to any series offered by placements
through dealers will contain information regarding the nature of such offering
and any agreements to be entered into between the Company and purchasers of
Certificates of such series.
The Company anticipates that the Certificates offered hereby will be sold
primarily to institutional investors or sophisticated noninstitutional
investors. Purchasers of Certificates, including dealers, may, depending on the
facts and circumstances of such purchases, be deemed to be "underwriters" within
the meaning of the Securities Act of 1933, as amended, in connection with
reoffers and sales by them of Certificates. Holders of Certificates should
consult with their legal advisors in this regard prior to any such reoffer or
sale.
LEGAL MATTERS
Certain legal matters, including certain federal income tax matters, will
be passed upon for the Company by Orrick, Herrington & Sutcliffe, New York, New
York, or by Thacher Proffitt & Wood, New York, New York, as specified in the
Prospectus Supplement.
FINANCIAL INFORMATION
The Company has determined that its financial statements are not material
to the offering made hereby. The Certificates do not represent an interest in or
an obligation of the Company. The Company's only obligations with respect to a
series of Certificates
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<PAGE>
will be to repurchase certain items of Mortgage Collateral upon any breach of
certain limited representations and warranties made by the Company, or as
otherwise provided in the applicable Prospectus Supplement.
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<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
Page
Accrual Certificates.........................................5
Additional Collateral.......................................15
Additional Collateral Loans.................................15
Advance.....................................................37
Affiliated Seller...........................................23
Agency Securities............................................8
Agency Securities Pool......................................14
Appraised Value.............................................16
ARM Loans...................................................17
Balloon Amount..............................................15
Balloon Loans...............................................15
Bankruptcy Amount...........................................45
Bankruptcy Losses...........................................46
Beneficial Owner............................................27
Bi-Weekly Loans.............................................15
Book-Entry Certificates.....................................27
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Page
Buy-Down Funds..............................................18
Buy-Down Loans..............................................15
Buy-Down Period.............................................18
CEDEL.......................................................27
CEDEL Participants..........................................28
Certificate Account.........................................14
Certificate Administrator....................................1
Certificate Insurance Policy................................51
Certificate Registrar.......................................27
Certificateholders..........................................27
Certificates.................................................1
Clearance Cooperative.......................................29
Closing Date................................................79
Code.........................................................9
Commission..................................................14
Committee Report............................................79
Company......................................................1
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Page
Compensating Interest.......................................38
Contract Pool................................................7
Contract Pool Insurance Policy..............................49
Contracts....................................................1
Contributions Tax...........................................90
Conventional Loans..........................................15
Convertible Mortgage Loan...................................17
Cooperative.................................................66
Cooperative Dwellings.......................................15
Cooperative Loans............................................7
Cooperative Note............................................66
Cooperatives................................................15
Crime Control Act...........................................76
Custodial Account...........................................14
Custodian...................................................14
Cut-off Date................................................14
Debt Service Reduction......................................50
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Page
Defaulted Mortgage Losses...................................46
Deferred Interest...........................................17
Deficient Valuation.........................................50
Depositaries................................................27
Determination Date..........................................35
Disqualified Organization...................................91
Disqualified Persons........................................94
Distribution Amount.........................................35
Distribution Date............................................6
DOL.........................................................94
DOL Regulations.............................................94
DTC.........................................................27
DTC Participants............................................27
Due Date....................................................36
Eligible Account............................................32
ERISA.......................................................10
ERISA Plans.................................................94
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Page
Escrow Account..............................................40
Euroclear...................................................27
Euroclear Operator...........................................8
Euroclear Participants......................................28
Excess Spread...............................................31
Exchange Act.................................................2
Excluded Plan...............................................96
Excluded Spread.............................................31
Exemption...................................................95
Extraordinary Losses........................................47
Fannie Mae..................................................14
Fannie Mae Securities.......................................14
FDIC........................................................23
FHA.........................................................15
FHA Contracts...............................................20
FHA Loans...................................................15
Form 8-K....................................................14
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Page
Fraud Losses................................................46
Fraud Loss Amount...........................................45
Freddie Mac.................................................14
Freddie Mac Act.............................................22
Freddie Mac Securities......................................14
Garn-St Germain Act.........................................71
Ginnie Mae..................................................14
Ginnie Mae Securities.......................................14
GMAC MORTGAGE................................................1
GPM Loans...................................................15
Gross Margin................................................17
High Cost Loans.............................................71
Housing Act.................................................21
HUD.........................................................15
Index.......................................................17
Indirect Participants.......................................27
Insurance Proceeds..........................................32
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Page
International Borrowers.......................................7
IRAs.........................................................94
IRS..........................................................80
Issue Premium................................................85
Letter of Credit.............................................47
Letter of Credit Bank........................................47
Liquidated Contract..........................................43
Liquidated Mortgage Loan.....................................43
Liquidation Proceeds.........................................32
Loan-to-Value Ratio..........................................16
Manufactured Home.............................................8
Mark-to-Market Regulations...................................88
Master Commitments...........................................20
Master Servicer...............................................1
Maximum Mortgage Rate........................................17
Mezzanine Certificates........................................5
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Page
Minimum Mortgage Rate.......................................17
Modified Mortgage Loan......................................15
Mortgage Collateral..........................................1
Mortgage Collateral Seller...................................7
Mortgage Loans...............................................1
Mortgage Note...............................................29
Mortgage Pool................................................7
Mortgage Pool Insurance Policy..............................47
Mortgage Rates..............................................15
Mortgaged Property...........................................7
Mortgages...................................................15
Mortgagors...................................................7
Neg-Am ARM Loans............................................17
Net Mortgage Rate...........................................61
Nonrecoverable Advance......................................34
OID Regulations.............................................77
OTS.........................................................98
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Page
Overcollateralization.......................................47
Participants................................................27
Parties in Interest.........................................94
Pass-Through Rate............................................4
Paying Agent................................................34
Percentage Interest.........................................34
Periodic Cap................................................17
Permitted Investments.......................................32
Plan Assets.................................................94
Plans.......................................................94
Policy Statement............................................98
Pool Insurer................................................47
Pooling and Servicing Agreement..............................1
Prepayment Interest Shortfall...............................38
Primary Insurance Policy....................................53
Primary Insurer.............................................53
Principal Prepayments.......................................36
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Page
Program Loans...............................................15
Program.....................................................15
Program Seller..............................................23
Program Seller Guide........................................20
Prohibited Transactions Tax.................................90
PTCE........................................................97
PTCE 83-1...................................................97
Purchase Price..............................................24
Qualified Insurer...........................................51
Qualified Retirement Plans..................................94
Qualified Substitute Contract...............................25
Qualified Substitute Mortgage Loan..........................25
Rating Agency................................................9
Realized Loss...............................................45
Record Date.................................................34
Registration Statement.......................................2
REMIC........................................................1
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Page
REMIC Certificates..........................................77
REMIC Provisions............................................77
REMIC Regular Certificates..................................78
REMIC Regulations...........................................77
REMIC Residual Certificates.................................78
REO Contract................................................43
REO Mortgage Loan...........................................43
Repurchased Contract........................................25
Repurchased Mortgage Loan...................................25
Reserve Fund................................................50
Residential Funding..........................................4
Restricted Group............................................95
RICO........................................................76
Senior Certificates..........................................5
Senior Percentage...........................................46
Senior/Subordinate Series...................................26
Servicer.....................................................1
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Page
Servicing Advances.........................................34
Servicing Fee..............................................40
Single Certificate.........................................39
SMMEA.......................................................9
Special Hazard Amount......................................45
Special Hazard Insurance Policy............................49
Special Hazard Insurer.....................................49
Special Hazard Losses......................................46
Special Servicer...........................................42
Stated Principal Balance...................................46
Strip Certificate...........................................5
Sub-Servicer...............................................39
Sub-Servicing Agreement....................................39
Subordinate Certificates....................................5
Surety Bond................................................51
Tax-Exempt Investor........................................97
Tax-Favored Plans..........................................94
Terms and Conditions.......................................29
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Page
Tiered REMICs.............................................79
Title V...................................................72
Title VIII................................................72
Trust Agreement............................................1
Trust Fund.................................................1
Trustee...................................................14
UBTI......................................................97
UCC.......................................................69
Unaffiliated Seller.......................................23
United States Person......................................93
VA........................................................15
VA Contracts..............................................20
VA Loans..................................................15
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<PAGE>
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND
THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY THE
UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE SECURITIES OFFERED
HEREBY TO ANYONE IN ANY JURISDICTION IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE ANY SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT INFORMATION HEREIN OR THEREIN IS
CORRECT AS OF ANY TIME SINCE THE DATE OF THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
----
PROSPECTUS SUPPLEMENT
Summary........................................................................................................... S-3
Risk Factors...................................................................................................... S-11
Description of the Mortgage Pool.................................................................................. S-12
Description of the Certificates................................................................................... S-29
The Insurer....................................................................................................... S-37
Certain Yield and Prepayment Considerations....................................................................... S-38
Pooling and Servicing Agreement................................................................................... S-44
Certain Federal Income Tax Consequences........................................................................... S-45
Method of Distribution............................................................................................ S-47
Legal Opinions.................................................................................................... S-47
Experts........................................................................................................... S-48
Ratings........................................................................................................... S-48
Legal Investment.................................................................................................. S-49
ERISA Considerations.............................................................................................. S-49
Appendix A........................................................................................................ A-1
PROSPECTUS
Additional Information............................................................................................ 3
Reports to Certificateholders..................................................................................... 3
Incorporation of Certain Information by Reference................................................................. 3
Summary of Prospectus............................................................................................. 4
Risk Factors...................................................................................................... 10
The Trust Funds................................................................................................... 12
Description of the Certificates................................................................................... 26
Subordination..................................................................................................... 43
Description of Credit Enhancement................................................................................. 45
Insurance Policies on Mortgage Loans or Contracts................................................................. 51
The Company....................................................................................................... 54
Residential Funding Corporation................................................................................... 54
The Pooling and Servicing Agreement............................................................................... 55
Yield Considerations.............................................................................................. 58
Maturity and Prepayment Considerations............................................................................ 60
Certain Legal Aspects of Mortgage Loans and Contracts............................................................. 63
Certain Federal Income Tax Consequences........................................................................... 74
State and Other Tax Consequences.................................................................................. 89
ERISA Considerations.............................................................................................. 89
Legal Investment Matters.......................................................................................... 93
Use of Proceeds................................................................................................... 94
Methods of Distribution........................................................................................... 94
Legal Matters..................................................................................................... 95
Financial Information............................................................................................. 95
Index of Principal Definitions.................................................................................... 96
</TABLE>
RESIDENTIAL ACCREDIT LOANS, INC.
MORTGAGE ASSET-BACKED
PASS-THROUGH CERTIFICATES
SERIES 1996-QS6
$138,145,180
ADJUSTABLE RATE CLASS A CERTIFICATES
RESIDENTIAL FUNDING
SECURITIES CORPORATION
PROSPECTUS SUPPLEMENT
AUGUST 22, 1996
STATEMENT OF DIFFERENCES
________________________
The service mark symbol shall be expressed as ...................'sm'
