August 13, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Residential Accredit Loans, Inc. Registration Statement
on Form S-3 relating to Mortgage and
Manufactured Housing Contract Pass-Through Certificates
Ladies and Gentlemen:
On behalf of Residential Accredit Loans, Inc. (the "Company"), we have
caused to be filed with you electronically under EDGAR, the captioned
Registration Statement on Form S- 3 (the "Registration Statement").
In addition, we have been advised that payment of the filing fee in the
amount of $909,091 has been made to you by the Company.
The Company is filing the Registration Statement to provide for the
issuance of pass-through certificates backed by mortgage loans, manufactured
housing contracts, participation certificates representing interests therein and
pass-through certificates issued or guaranteed by the Federal National Mortgage
Association, Federal Home Loan Mortgage Corporation or
Government National Mortgage Association.
If you have any questions concerning the Registration
Statement, please do not hesitate to call the undersigned at (212) 506-5072,
Kathy Crost at (212) 506-5070 or Carol Childers at (212) 506-5067.
Very truly yours,
/s/ David A. Marple
David A. Marple
cc: Paula Dubberly, Esq.
Assistant Director
Division of Corporation Finance
Branch 11 (Mail Stop 7-2)
Dominic Minore, Esq.
Division of Corporation Finance
Branch 11 (Mail Stop 7-2)
<PAGE>
As filed with the Securities and Exchange Commission on August 13, 1997
Registration No.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
RESIDENTIAL ACCREDIT LOANS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
51-0368240
(I.R.S. employer identification number)
Residential Accredit Loans, Inc.
8400 Normandale Lake Boulevard
Minneapolis, Minnesota 55437
(612) 832-7000
(Address, including zip code, and telephone number, including area code, of
registrant's principle executive offices)
Christopher J. Nordeen
Residential Accredit Loans, Inc.
8400 Normandale Lake Boulevard
Minneapolis, Minnesota 55437
(612) 832-7000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
Robert L. Schwartz, Esq.
GMAC Mortgage Group, Inc.
3031 West Grand Boulevard
Detroit, Michigan 48232
Steven S. Kudenholdt, Esq.
Katharine I. Crost, Esq. Paul D. Tvetenstrand, Esq.
Orrick, Herrington & Sutcliffe LLP Thacher Proffitt & Wood
666 Fifth Avenue Two World Trade Center
New York, New York 10103 New York, New York 10048
Approximate date of commencement of proposed sale to the public: From
time to time after this Registration Statement becomes effective as determined
by market conditions.
If any of the securities being registered on this Form are to be
offered pursuant to dividend or interest reinvestment plans, please check the
following box. |_|
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act Registration Statement number of the earlier
effective Registration Statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act Registration Statement number of the earlier effective Registration
Statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. |_|
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
===================================================================================================================================
<S> <C> <C> <C> <C>
Amount to be Proposed Maximum Proposed Maximum Amount of
Title of Securities to be Registered Registered(1) Aggregate Price Per Unit Aggregate Offering Price Registration Fee
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage and Manufactured Housing
Contract Pass-Through Certificates $3,000,000,000 100%(2) $3,000,000,000(2) $909,091
(Issuable in Series)
===================================================================================================================================
</TABLE>
(1) $272,617,559 aggregate principal amount of Mortgage and Manufactured
Housing Contract Pass-Through Certificates registered by the Registrant
under Registration Statement No. 333-8733 on Form S-3 referred to below
and not previously sold are consolidated into this Registration
Statement pursuant to Rule 429. All registration fees in connection
with such unsold amount of Mortgage and Manufactured Housing Contract
Pass-Through Certificates have been previously paid by the Registrant
under the foregoing Registration Statement. Accordingly, the total
amount registered under this Registration Statement as so consolidated
as of the date of this filing is $3,272,617,559.
(2) Estimated solely for the purpose of calculating the registration fee.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
Pursuant to Rule 429 of the General Rules and Regulations under the
Securities Act of 1933, the prospectus that is part of this Registration
Statement is a combined prospectus and includes all the information currently
required in a prospectus relating to the securities covered by Registration
Statement No. 333-8733 Form S-3 previously filed by the Registrant. This
Registration Statement, which relates to $3,272,617,559 aggregate principal
amount of Mortgage and Manufactured Housing Contract Pass-Through Certificates,
constitutes Post-Effective Amendment No. 1 to Registration Statement No.
333-8733 on Form S-3.
<PAGE>
EXPLANATORY NOTE
This Registration Statement includes (i) a basic prospectus, (ii) an
illustrative form of prospectus supplement for use in an offering of Mortgage or
Manufactured Housing Contract Pass-Through Certificates representing beneficial
ownership interests in a trust fund consisting primarily of mortgage loans or
manufactured housing contracts ("Version I-A") and (iii) an illustrative form of
prospectus supplement for use in an offering of Mortgage Pass-Through
Certificates representing beneficial ownership interests in a trust fund
consisting primarily of Ginnie Mae securities ("Version I-B").
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This preliminary prospectus supplement shall not constitute an offer
to sell or the solicitation of an offer to buy nor shall there be any sale of
these securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of any
such State.
SUBJECT TO COMPLETION, DATED AUGUST __, 1997
Version I-A
Prospectus Supplement
(to Prospectus dated _______ __, 199_)
RESIDENTIAL ACCREDIT LOANS, INC.
Depositor
[Name of [Master] Servicer[s]]
[Master] Servicer
<TABLE>
<CAPTION>
[Mortgage][Manufactured Housing Contract] Pass-Through Certificates, Series [199_-_]
<S> <C> <C> <C> <C> <C> <C>
$__________ ____% Class A-1 Certificates $ 0 Variable Rate (2) Class A-5 Certificates
$__________ ____% Class A-2 Certificates $__________ ____% Class R Certificates
$__________ 0% (1) Class A-4 Certificates $__________ ____% Class M Certificates
</TABLE>
----------------
(1) The Class A-4 Certificates will be Principal Only Certificates and
will not be entitled to received distributions of interest.
(2) Based on the Notional Amount (as described herein under "Description
of the Offered Certificates--Interest Distributions"). The Class A-5
Certificates will be Stripped Interests Certificates and will not be entitled to
receive distributions of principal.
----------------------
The Series [199_-_] [Mortgage] [Manufactured Housing Contract] Pass-Through
Certificates (the "Certificates") will include (i) six classes of senior
certificates (collectively, the "Senior Certificates"): Class A-1, Class A-2,
Class A-3 (the "Accrual Certificates"), Class A-4 (the "Principal Only
Certificates"), Class A-5 (the "Stripped Interests Certificates") and Class R
(the "Residual Certificates"); and (ii) two classes of subordinate certificates:
the Class M Certificates and the Class B Certificates (collectively, the
"Subordinate Certificates"). Only the Senior Certificates (other than the
Accrual Certificates) and the Class M Certificates (collectively, the "Offered
Certificates") are being offered hereby. See "Index of Principal Definitions" in
the Prospectus for meanings of capitalized terms and acronyms not otherwise
defined herein.
(continued on following page)
----------------------
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON
THE OFFERED CERTIFICATES. THE OFFERED CERTIFICATES DO NOT REPRESENT AN INTEREST
IN OR OBLIGATION OF THE COMPANY, THE [MASTER] SERVICER[S], GMAC MORTGAGE
CORPORATION ("GMAC MORTGAGE") OR ANY OF THEIR AFFILIATES. NEITHER THE OFFERED
CERTIFICATES NOR THE UNDERLYING [MORTGAGE LOANS] [CONTRACTS] ARE INSURED OR
GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY [(EXCEPT IN THE CASE OF
FHA [LOANS] [CONTRACTS], AND VA [LOANS] [CONTRACTS])] OR BY THE COMPANY, THE
[MASTER] SERVICER[S], GMAC MORTGAGE OR ANY OF THEIR AFFILIATES.
----------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION (THE "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.
----------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
----------------------
For a discussion of significant matters affecting investments in the
Certificates, see "Risk Factors" [commencing on page S-18 herein and] in the
Prospectus commencing on page 15.
___________________________ (the "Underwriter") intends to make a secondary
market in the Offered Certificates (other than the Residual Certificates and
Class M Certificates), but has no obligation to do so. There can be no assurance
that a secondary market for the Offered Certificates will develop or, if it does
develop, that it will continue. The Offered Certificates will not be listed on
any securities exchange.
The Offered Certificates will be purchased from the Company by the Underwriter
and will be offered by the Underwriter 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 proceeds to the Company from the sale of
the Offered Certificates will be equal to ____% of the initial aggregate
principal balance of the Offered Certificates, plus accrued interest thereon
from __________ 1, 19__ (the "Cut-off Date"), net of any expenses payable by the
Company to the Underwriter and any dealer. The Offered Certificates are offered
by the Underwriter subject to prior sale, when, as and if delivered to and
accepted by the Underwriter and subject to certain other conditions. The
Underwriter reserves the right to withdraw, cancel or modify such offer and to
reject any order in whole or in part. It is expected that delivery of the
Offered Certificates will be made on or about __________, 199_ [at the office of
________________________________________] [through the facilities of The
Depository Trust Company] against payment therefor in immediately available
funds.
[The Principal Only Certificates, Stripped Interests Certificates, Residual
Certificates and Class M Certificates may be offered by the Company from time to
time to the public, either directly or through an underwriter or agent, in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale[, except that a de minimis portion of the Residual Certificate will
be held by Residential Funding and such portion is not offered hereby].
[Proceeds to the Company from the sale of the Principal Only Certificates,
Stripped Interest Certificates, Residual Certificates or Class M 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 any underwriter
or agent.]
[Name of Underwriter]
The date of this Prospectus Supplement is _________ __, 199_.
<PAGE>
(continued from previous page)
It is a condition to the issuance of the Offered Certificates that the Senior
Certificates and the Class M Certificates be rated "___" and "___",
respectively, by ____________ and "___" and "___", respectively, by
____________.
The Senior Certificates in the aggregate and the Class M Certificates will
evidence initial undivided interests of approximately ____% and ____%,
respectively, in a trust fund (the "Trust Fund") consisting primarily of a pool
of [[fixed] [adjustable] rate [conventional] [FHA-insured] [VA-guaranteed] one-
to four-family, first lien mortgage loans (the "Mortgage Loans")][manufactured
housing conditional sales contracts and installment loan agreements (the
"Contracts")] to be deposited by Residential Accredit Loans, Inc. (the
"Company") into the Trust Fund. See "Description of the Trust Fund" herein. As
described herein and in the Prospectus, the rights of the holders of the Class M
Certificates and the Class B Certificates to receive distributions with respect
to the [Mortgage Loans] [Contracts] will be subordinate to the rights of the
holders of the Senior Certificates; in addition, the rights of the holders of
the Class B Certificates to receive distributions with respect to the [Mortgage
Loans] [Contracts] will be subordinate to the rights of the holders of the Class
M Certificates. See "Description of the Offered Certificates--Allocation of
Losses; Subordination" herein.
As described herein, a "real estate mortgage investment conduit" (a "REMIC")
election will be made in connection with the Trust Fund for federal income tax
purposes. Each class of Offered Certificates (other than the Residual
Certificates) will constitute "regular interests" and the Residual Certificates
will constitute "residual interests" in the REMIC. See "Certain Federal Income
Tax Consequences" herein and in the Prospectus.
Distributions on the Offered Certificates will be made on the 25th day of each
month (or, if such day is not a business day, the next business day), commencing
on __________, 199_. As described herein under "Description of the Offered
Certificates--Interest Distributions," interest distributions on the Offered
Certificates will be based on the Certificate Principal Balance or the Notional
Amount thereof and the then-applicable Pass-Through Rate thereof, which will be
variable for the Stripped Interests Certificates and fixed for all other classes
of Certificates. Distributions in respect of principal will be allocated among
the various classes of the Offered Certificates as described herein under
"Description of the Offered Certificates--Principal Distributions on the Senior
Certificates" and "-- Principal Distributions on the Class M Certificates."
The yield to maturity on the Offered Certificates will depend on the rate of
payment of principal (including prepayments, defaults and liquidations) on the
[Mortgage Loans] [Contracts]. The yield to maturity on the Class M Certificates
will be extremely sensitive to losses due to defaults on the [Mortgage Loans]
[Contracts] (and the timing thereof), to the extent losses are not covered by
the Class B Certificates. The yield to investors on the Offered Certificates
will be adversely affected by any shortfalls in interest collected on the
[Mortgage Loans] [Contracts] due to prepayments, liquidations or otherwise.
Shortfalls in interest collected on the [Mortgage Loans] [Contracts] due to
prepayments in full will be offset by the [Master] Servicer[s] to the extent
described herein under "Description of the Offered Certificates--Interest
Distributions." The yield to investors on the Stripped Interests Certificates
will be [extremely] sensitive to the rate and timing of principal payments
(including prepayments, defaults and liquidations) on the [Mortgage Loans]
[Contracts], which rate may fluctuate significantly over time. A rapid rate of
principal payments on the [Mortgage Loans] [Contracts] could result in the
failure of investors in the Stripped Interests Certificates to recover their
initial investments. Because amounts payable with respect to the Principal Only
Certificates are derived only from principal payments on the [Mortgage Loans]
[Contracts] with Net Mortgage Rates that are lower than ____%, the yield on the
Principal Only Certificates will be adversely affected by slower than expected
payments of principal on such [Mortgage Loans] [Contracts]. See
"Summary--Special Prepayment Considerations" and "--Special Yield
Considerations," and "Certain Yield and Prepayment Considerations" herein and
"Yield Considerations" in the Prospectus.
----------------------
THE CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE PART OF A
SEPARATE SERIES OF CERTIFICATES BEING OFFERED BY THE COMPANY PURSUANT TO ITS
PROSPECTUS DATED __________ __, 199_, OF WHICH THIS PROSPECTUS SUPPLEMENT IS A
PART AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE PROSPECTUS CONTAINS
IMPORTANT INFORMATION REGARDING THIS OFFERING NOT CONTAINED HEREIN AND
PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND THIS PROSPECTUS
SUPPLEMENT IN FULL. SALES OF THE OFFERED CERTIFICATES MAY NOT BE CONSUMMATED
UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS.
----------------------
UNTIL [_____ __, 199_ (90 DAYS AFTER THE DATE OF THIS PROSPECTUS
SUPPLEMENT)], ALL DEALERS EFFECTING TRANSACTIONS IN THE OFFERED 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.
----------------------
[IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE OFFERED
CERTIFICATES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET, SUCH STABILIZATION, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.]
S-2
<PAGE>
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.
Title of Securities..................................... [Mortgage]
[Manufactured Housing Contract] Pass-Through Certificates,
Series [199_-_] (the "Certificates").
Company................................................. Residential Accredit
Loans, Inc., a corporation organized under the laws of the
State of Delaware, an affiliate of Residential Funding
Corporation ("Residential Funding"), which is an indirect
wholly-owned subsidiary of GMAC Mortgage. See "The Company"
in the Prospectus.
[Master] Servicer[s].................................... [Residential Funding
(the "Master Servicer")] [__________, a __________,
organized under the laws of __________ (the "Servicer[s]")].
See "Pooling and Servicing Agreement--The [Master]
Servicer[s]" herein [and "Residential Funding Corporation"
in the Prospectus.]
Trustee................................................. , a [national bank]
[[state bank] [trust company] ------------------ organized
under the laws of __________] (the "Trustee"). See "The
Pooling and Servicing Agreement--The Trustee" in the
Prospectus.
Cut-off Date..............................................................
____________ 1, 199_ (the "Cut-off Date").
Delivery Date............................................................. On
or about ____________, 19__ (the "Delivery Date").
Distribution Date....................................... The 25th day of each
month (or, if such day is not a business day, the next
business day), beginning on ________ __, 199_, (each, a
"Distribution Date").
The [Mortgage] [Contract] Pool.......................... The Certificates, in
the aggregate, will evidence the entire beneficial interest
in the Trust Fund which consists of a pool of [Mortgage
Loans secured by first liens on one- to four-family
residential properties] [Contracts secured by manufactured
homes] (the "Mortgaged Properties") and related property
(collectively, the "Mortgage Collateral") with an aggregate
principal balance of $__________. The Mortgage Collateral
will be conveyed to the Trust Fund by the Company pursuant
to the Pooling and Servicing Agreement (as defined herein).
The [Mortgage Loans] [Contracts] are [fixed] [adjustable]
rate [conventional] [FHA-insured] [VA-guaranteed] [fully
amortizing] [balloon] loans. [The Mortgage Loans are ARM
Loans (as described in the Prospectus under "The Trust
Fund--The Mortgage Loans") with Mortgage Rates based on
__________ (the "Index").]
......................................................The
Mortgage Properties have individual principal balances at
origination of at least $__________, but not more than
$__________, with an average principal balance at
origination of approximately $__________. The [Mortgage
Loans] [Contracts]
S-3
<PAGE>
have terms to maturity from the date of origination or
modification of not more than ____ years, and a weighted
average remaining term to maturity of approximately ____
months as of the Cut-off Date. The [Mortgage Loans]
[Contracts] will bear interest at Mortgage Rates that ranged
from ____% to ____% per annum as of the Cut-off Date, with a
weighted average Mortgage Rate of approximately ____% per
annum as of the Cut-off Date. [Approximately ____% of the
[Mortgage Loans] [Contracts] will be refinance [Mortgage
Loans] [Contracts].] The [Mortgage Loans] [Contracts] were
purchased by the Company[, through [Residential Funding]
[affiliates,]] from [____ sellers unaffiliated with the
Company] [GMAC Mortgage, an indirect parent of the Company,
and its affiliates]. [[All][____%] of the [Mortgage Loans]
were purchased by the Company indirectly through
[Residential Funding][affiliates], from [___ sellers]
[_______] ([each, a] [the] "Mortgage Collateral Seller")
under the Program (such Mortgage Loans, the "Program
Loans"). [INSERT OTHER CHARACTERISTICS AS APPROPRIATE] See
"Description of the [Mortgage] [Contract] Pool" herein and
"The Trust Funds" in the Prospectus.
The Offered Certificates................................ The Senior
Certificates in the aggregate and the Class M Certificates
will evidence initial undivided interests of approximately
____% and ____%, respectively, in the Trust Fund. The
Offered Certificates will have the following Pass-Through
Rates and Certificate Principal Balances as of the Cut-off
Date:
Class A-1 Certificates ____% $_______ Senior
Class A-2 Certificates ____% $_______ Senior
Class A-4 Certificates 0% $_______Principal Only
Class A-5 Certificates Variable Rate $ 0Stripped Interests
Class R Certificates ____% $_______ Residual
Class M Certificates ____% $_______ Mezzanine
[Certificate Registration....................................... The Senior
Certificates, (other than the [Principal Only, Stripped
Interests and Residual Certificates]) will be represented by
one or more certificates registered in the name of Cede &
Co., as nominee of The Depository Trust Company ("DTC"). No
person acquiring an interest in the Senior Certificates,
(other than the [Principal Only, Stripped Interests and
Residual Certificates]) will be entitled to receive a
Certificate of such class in fully registered, certificated
form except under the limited circumstances described in the
Prospectus under "Description of the Certificates--Form of
Certificates." The [Principal Only, Stripped Interests,
Residual and Class M Certificates] will be offered in fully
registered, certificated form. See "Description of the
Certificates--Form of Certificates" in the Prospectus.]
Pass-Through Rates on the Offered
Certificates.............................. The Pass-Through
Rates on all classes of the Offered Certificates (other than
the Principal Only Certificates, which are not entitled
S-4
<PAGE>
to distributions of interest, and the Stripped Interests
Certificates) are the fixed rates set forth above. On each
Distribution Date, the Pass-Through Rate on the Stripped
Interests Certificates will equal the weighted average of
the Pool Strip Rates on each [Mortgage Loan] [Contract] with
a Net Mortgage Rate in excess of ____% per annum. The "Pool
Strip Rate" on each [Mortgage Loan] [Contract] is equal to
the Net Mortgage Rate thereon minus ____%. The "Net Mortgage
Rate" on each [Mortgage Loan] [Contract] is equal to the
Mortgage Rate thereon minus the rate per annum at which the
related servicing fee accrues (the "Servicing Fee Rate").
The Pool Strip Rates on the [Mortgage Loans] [Contracts]
range from ____% to ____% per annum. The initial
Pass-Through Rate on the Stripped Interests Certificates is
approximately ____% per annum. The Stripped Interests
Certificates have no Certificate Principal Balance and will
accrue interest at the then-applicable Pass-Through Rate on
the Notional Amount. The "Notional Amount" of the Stripped
Interests Certificates as of any date of determination will
be equal to the aggregate Certificate Principal Balance of
the Certificates of all classes as of such date. [The
Pass-Through Rate applicable to the Offered Certificates for
any Distribution Date will equal the weighted average of the
Net Mortgage Rates on the [Mortgage Loans] [Contracts] as of
the Due Date in the month preceding the month in which such
Distribution Date occurs. The Net Mortgage Rate with respect
to each [Mortgage Loan] [Contract] as of the Cut-off Date
will be set forth in the [Mortgage Loan] [Contract] Schedule
attached to the Pooling and Servicing Agreement. As of the
Cut-off Date, the weighted average Net Mortgage Rate is
[______]% per annum. The Net Mortgage Rate on each [Mortgage
Loan] [Contract] will be adjusted on each Adjustment Date to
equal the Index (rounded to the nearest multiple of
[_____]%) plus a fixed percentage per annum for each
[Mortgage Loan] [Contract] as set forth in the [Mortgage
Loan] [Contracts] Schedule attached to the Pooling and
Servicing Agreement (the "Gross Margin"), subject to the
Periodic Rate Cap, Maximum Net Mortgage Rate and Minimum Net
Mortgage Rate (each as defined herein) for such [Mortgage
Loan] [Contract]. The Gross Margins for the [Mortgage Loans]
[Contracts] will be at least [____]% per annum but not more
than [____]% per annum as of the Cut-off Date, with an
initial weighted average Gross Margin of [______]% per
annum. The Net Mortgage Rate on each Converted [Mortgage
Loan] [Contract] remaining in the [Mortgage] [Contract] Pool
will equal the Mortgage Rate thereon less [____]% per
annum.] [The Pass-Through Rate on the Offered Certificates
on the first Distribution Date will be [______]% per annum,
and is expected to change thereafter because the weighted
average of the Net Mortgage Rates is expected to change for
succeeding Distribution Dates.]
S-5
<PAGE>
See "Description of the Offered Certificates--Interest
Distributions" herein.
The Class B Certificates......................................... The Class B
Certificates have an aggregate initial Certificate Principal
Balance of approximately $__________, evidencing an initial
undivided interest of approximately ____% in the Trust Fund,
and a Pass-Through Rate of ____% per annum. The Class B
Certificates are not being offered hereby. [The Company
expects that the Class B Certificates will be privately
placed directly or indirectly with one or more institutional
investors.]
Accrual Certificates.............................................. The Accrual
Certificates have an initial Certificate Principal Balance
of $___________ and a Pass-Through Rate equal to ____% per
annum. The Accrual Certificates are not being offered
hereby.
Interest Distributions............................................ Holders of
each class of Offered Certificates (the
"Certificateholders") (other than the holders of the
Principal Only Certificates) will be entitled to receive
distributions in an amount equal to the Accrued Certificate
Interest on such class on each Distribution Date (i) in the
case of each class of Senior Certificates, to the extent of
the Available Distribution Amount (as defined herein) for
such Distribution Date except as otherwise set forth herein
(in the aggregate, the "Senior Interest Distribution
Amount") and (ii) in the case of the Class M Certificates,
to the extent of the Available Distribution Amount for such
Distribution Date after (a) distributions of interest and
principal to the holders of the Senior Certificates and (b)
reimbursement of certain Advances (as defined herein) to the
[Master] Servicer[s]. With respect to any Distribution Date,
"Accrued Certificate Interest" will be equal to (a) in the
case of each class of Offered Certificates (other than the
Principal Only Certificates and the Stripped Interests
Certificates), one month's interest accrued on the
Certificate Principal Balance of such class, at the
Pass-Through Rate on such class, and (b) in the case of the
Stripped Interests Certificates, one month's interest
accrued on the Notional Amount thereof at the Pass-Through
Rate on such class for such Distribution Date; in each case
less any interest shortfalls not covered with respect to
such class by Subordination (as defined herein) or by the
[Master] Servicer[s] (as described below), including any
Prepayment Interest Shortfall (as defined herein), to the
extent allocated thereto for such Distribution Date. The
Principal Only Certificates are not entitled to receive any
distribution of interest. See "Description of the Offered
Certificates--Interest Distributions" herein.
Principal Distributions..................................................... On
each Distribution Date, to the extent of the portion of the
Available Distribution Amount remaining after the Senior
Interest Distribution Amount is distributed, holders of the
Principal Only
S-6
<PAGE>
Certificates will be entitled to receive a distribution
allocable to principal (the "Class A-4 Principal
Distribution Amount") that will include (i) the applicable
Discount Fraction (as defined below) of scheduled principal
payments due on or, after the Credit Support Depletion Date,
received with respect to each item of Discount Mortgage
Collateral (as defined below), (ii) the applicable Discount
Fraction of the principal portion of any unscheduled
collections (other than those received in connection with a
Final Disposition described in clause (iii) below) on each
item of Discount Mortgage Collateral, including prepayments,
repurchases, Liquidation Proceeds and Insurance Proceeds, to
the extent applied as recoveries of principal, and (iii) in
connection with the Final Disposition (as defined herein) of
an item of Mortgage Collateral that occurs prior to the
Credit Support Depletion Date and that did not result in any
Excess Special Hazard Losses, Excess Bankruptcy Losses,
Excess Fraud Losses or Extraordinary Losses (each as defined
herein), an amount equal to the applicable Discount Fraction
of the Stated Principal Balance of such item of Discount
Mortgage Collateral, subject to the limitations set forth
herein. See "Description of the Offered
Certificates--Principal Distributions on the Senior
Certificates" herein. "Discount Mortgage Collateral" is any
[Mortgage Loan][Contract] with a Net Mortgage Rate less than
[____]%. With respect to each item of Discount Mortgage
Collateral, the "Discount Fraction" thereof is equal to a
fraction the numerator of which is [____]% minus the Net
Mortgage Rate for such [Mortgage Loan][Contract] and the
denominator of which is [____]%. The [Mortgage Loans]
[Contracts] that do not constitute Discount Mortgage
Collateral are referred to herein as the "Non-Discount
Mortgage Collateral." See "Description of the Offered
Certificates--General" herein. On each Distribution Date, to
the extent of the portion of the Available Distribution
Amount remaining after the Senior Interest Distribution
Amount and Class A-4 Principal Distribution Amount are
distributed, holders of the Senior Certificates (other than
Principal Only Certificates and the Stripped Interests
Certificates) will be entitled to receive a distribution
allocable to principal in the manner and priority set forth
herein. See "Description of the Offered
Certificates--Principal Distributions on the Senior
Certificates" herein. Distributions in respect of principal
of the Senior Certificates on any Distribution Date will be
allocated to the classes then entitled to such
distributions, as described herein. See "--Special
Prepayment Considerations" and "--Special Yield
Considerations" and "Certain Yield and Prepayment
Considerations" herein. The Stripped Interests Certificates
will not receive any principal distributions. On each
Distribution Date, holders of the Class M Certificates will
be entitled to receive a distribution of principal to the
extent S-7
<PAGE>
of the portion of the Available Distribution Amount
remaining after (i) distributions in respect of interest and
principal to the holders of the Senior Certificates, (ii)
reimbursements for certain Advances to the [Master]
Servicer[s], and (iii) distributions in respect of interest
to the holders of the Class M Certificates. Such principal
distributions will be made to the Class M Certificates in
the respective amounts described herein. See "Description of
the Offered Certificates--Principal Distributions on the
Class M Certificates" herein.
Advances.......................................................... The [Master]
Servicer[s] [is] [are] required to make advances
("Advances") in respect of delinquent payments of principal
and interest on the [Mortgage Loans] [Contracts] subject to
the limitations described herein. See "Description of the
Offered Certificates--Advances" herein.]
Allocation of Losses; Subordination............................... Subject to
the limitations set forth below, Realized Losses (as defined
herein) on the [Mortgage Loans] [Contracts] will be
allocated as follows: first, to the Class B Certificates;
second, to the Class M Certificates until, in each case, the
Certificate Principal Balance of each such class has been
reduced to zero; and thereafter, if any such Realized Loss
is on Discount Mortgage Collateral, to the Principal Only
Certificates in an amount equal to the related Discount
Fraction of the principal portion of such Realized Loss, and
the remainder of such Realized Losses and the entire amount
of such Realized Losses on Non-Discount Mortgage Collateral
to the remaining classes of Senior Certificates on a pro
rata basis, as described herein under "Description of the
Offered Certificates--Allocation of Losses; Subordination."
The Subordination provided to the Senior Certificates by the
Class B Certificates and Class M Certificates and the
Subordination provided to the Class M Certificates by the
Class B Certificates will cover Realized Losses on the
[Mortgage Loans] [Contracts] that are Defaulted Mortgage
Losses, Fraud Losses, Bankruptcy Losses and Special Hazard
Losses up to the limits set forth below. The aggregate
amounts of Realized Losses which may be allocated by means
of Subordination to cover Fraud Losses, Bankruptcy Losses
and Special Hazard Losses Defaulted Mortgage Losses, are
initially limited to $[_________], $[________] and
$[_________], respectively.] [All of the foregoing amounts
are subject to periodic reduction as described herein under
"Description of the Offered Certificates--Allocation of
Losses; Subordination" and may be further reduced.] If the
Certificate Principal Balances of the Class B Certificates
and Class M Certificates are reduced to zero, all additional
losses (including, without limitation, all Defaulted
Mortgage Losses, Special Hazard Losses, Fraud Losses and
Bankruptcy Losses) will be allocated among the Senior
Certificates pro rata, as more fully described herein. See
"Description of the Offered Certificates--Allocation of
Losses; Subordination."
S-8
<PAGE>
In addition, any Special Hazard Losses, Fraud Losses and
Bankruptcy Losses in excess of the respective amounts of
coverage therefor and any Extraordinary Losses on any items
of Non-Discount Mortgage Collateral will be allocated on a
pro rata basis among the Senior Certificates (other than the
Principal Only Certificates), Class M Certificates and Class
B Certificates. The principal portion of such losses on
items of Discount Mortgage Collateral will be allocated to
the Principal Only Certificates in an amount equal to the
related Discount Fraction thereof, and the remainder of such
losses on Discount Mortgage Collateral will be allocated
among the remaining Certificates on a pro rata basis as
described above. See "Description of the Offered
Certificates--Allocation of Losses; Subordination" herein.
[Optional Termination................................................. At its
option, on any Distribution Date when the aggregate
principal balance of the [Mortgage Loans] [Contracts] is
less than ___% of the aggregate principal balance of the
[Mortgage Loans] [Contracts] as of the Cut-off Date, the
[Master] Servicer[s] or the Company may (i) purchase all
remaining Mortgage Collateral from the Trust Fund and other
assets thereof, and thereby effect early retirement of the
Certificates or (ii) purchase in whole, but not in part, the
Certificates. See "The Pooling and Servicing
Agreement--Termination" herein and "The Pooling and
Servicing Agreement--Termination; Retirement of
Certificates" in the Prospectus.]
Special Prepayment Considerations.......................................... The
rate of principal payments on the Offered Certificates,
collectively, will depend on the rate and timing of
principal payments (including prepayments, defaults and
liquidations) on the Mortgage Collateral. As is the case
with mortgage-backed securities generally, the Offered
Certificates are subject to substantial inherent cash-flow
uncertainties because any of the [Mortgage Loans]
[Contracts] may be prepaid at any time. Generally, when
prevailing mortgage interest rates are increasing,
prepayment rates on [mortgage loans] [manufactured housing
contracts] tend to decrease, resulting in a reduced return
of principal to investors at a time when reinvestment at
such higher prevailing rates would be desirable. Conversely,
when prevailing mortgage interest rates are declining,
prepayment rates on [mortgage loans] [manufactured housing
contracts] tend to increase, resulting in a greater return
of principal to investors at a time when reinvestment at
comparable yields may not be possible. See "Certain Yield
and Prepayment Considerations--General" herein.
S-9
<PAGE>
[Certain types of [Mortgage Loans] [Contracts] included in
the [Trust Fund] have characteristics that may make them
more likely to default than other [mortgage loans]
[manufactured housing contracts]. [CHARACTERISTICS OF
MORTGAGE COLLATERAL THAT MAY POSE INCREASED RISKS OF DEFAULT
TO BE INSERTED AS NECESSARY.] [Such [Mortgage Loans]
[Contracts] pose a greater risk of default and liquidation
than might otherwise be expected by investors in the
Certificates. See "Risk Factors" herein.] The multiple class
structure of the Offered Certificates results in the
allocation of prepayments among certain classes as follows
[TO BE [Sequentially paying classes: [All] classes of the
Senior Certificates are subject to various priorities for
payment of principal as described herein under "Description
of the Offered Certificates--Principal Distributions on the
Senior Certificates. Distributions on classes having an
earlier priority of payment will be immediately affected by
the rate of prepayment of the [Mortgage Loans] [Contracts]
early in the life of the [Mortgage] [Contract] Pool.
Distributions on classes with a later priority of payment
will not be directly affected by the rate of prepayment
until such time as principal is distributable on such
classes; however, the timing of commencement of principal
distributions and the weighted average lives of such classes
will be affected by the rate of prepayment experienced both
before and after the commencement of principal distributions
on such classes.] [Planned Amortization Class Certificates
("PAC Certificates"): Principal distributions on the PAC
Certificates will be payable in amounts determined based on
schedules as described herein under "Description of the
Offered Certificates--Principal Distributions on the Senior
Certificates," provided that the rate of prepayment of the
[Mortgage Loans] [Contracts] each month remains between
approximately ____% SPA (as defined herein) and ____% SPA.
However, as discussed herein, actual principal distributions
may be greater or less than the described amounts. If the
rate of prepayment of the [Mortgage Loans] [Contracts] is
consistently higher than ____% SPA, then the Companion
Certificates will be retired before all of the PAC
Certificates are retired, and the rate of principal
distributions and the weighted average lives of the
remaining PAC Certificates will become significantly more
sensitive to changes in the rate of prepayment of the
[Mortgage Loans] [Contracts] and principal distributions
thereon will be more likely to deviate from the described
amounts.] [Targeted Amortization Certificates ("TAC
Certificates"): Principal distributions on the TAC
Certificates would be payable in amounts determined based on
schedules as described herein under "Description of the
Offered Certificates--Principal Distributions on the Senior
Certificates," if the rate of prepayment of the [Mortgage
Loans] [Contracts] were to remain
S-10
<PAGE>
at a constant level of approximately ____% SPA. However, as
discussed herein, actual principal distributions are likely
to deviate from the described amounts, because it is
unlikely that the actual rate of prepayment of the [Mortgage
Loans] [Contracts] each month will remain at or near ____%
SPA. If the Companion Certificates are retired before all of
the TAC Certificates are retired, the rate of principal
distributions and the weighted average lives of the
remaining TAC Certificates will become significantly more
sensitive to changes in the rate of prepayment of the
[Mortgage Loans] [Contracts], and principal distributions
thereon will be more likely to deviate from the described
amounts.] [Companion Certificates: Because of the
application of amounts available for principal distributions
among the Senior Certificates in any given month, first to
the [PAC] [TAC] Certificates up to the described amounts and
then to the Companion Certificates, the rate of principal
distributions and the weighted average lives of the
Companion Certificates will be extremely sensitive to
changes in the rate of prepayment of the [Mortgage Loans]
[Contracts]. The weighted average lives of the Companion
Certificates will be significantly more sensitive to changes
in the rate of prepayment than that of either the [PAC]
[TAC] Certificates or a fractional undivided interest in the
[Mortgage Loans] [Contracts].] [Accrual Certificates: A high
rate of prepayments on the [Mortgage Loans] [Contracts]
could result in the reduction of the Certificate Principal
Balances of the Senior Certificates (other than the Accrual
Certificates and Principal Only Certificates) to zero (and
the occurrence of the Accretion Termination Date) earlier
than anticipated. The accrual of interest on the Accrual
Certificates may end and the reduction of the Certificate
Principal Balance of the Accrual Certificates may commence
earlier than anticipated.] [Subordination features: As
described herein under "Description of the Offered
Certificates--Principal Distributions on the Senior
Certificates" and "--Principal Distributions on the Class M
Certificates," during certain periods all or a
disproportionately large percentage of principal prepayments
on the [Mortgage Loans] [Contracts] will be allocated among
the Senior Certificates, and during certain periods no such
prepayments or, relative to the related Class M Percentage,
a disproportionately small or large percentage of such
prepayments will be distributed to the Class M Certificates.
To the extent that no such prepayments are distributed on
the Class M Certificates, the Subordination afforded to the
Senior Certificates by the Class M Certificates (together
with the Class B Certificates), in the absence of offsetting
Realized Losses allocated thereto, will be increased.] See
"Description of the Offered Certificates--Principal
Distributions on the Senior Certificates," "--Principal
S-11
<PAGE>
Distributions on the Class M 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 lives of the Offered
Certificates (other than the Stripped Interests
Certificates), see the table entitled "Percentage of Initial
Certificate Balance Outstanding at the Following Percentages
of SPA" herein.
Special Yield Considerations............................ The yield to
maturity on each respective class of the Offered
Certificates will depend on the rate and timing of principal
payments (including payments due to prepayments, defaults
and liquidations) on the [Mortgage Loans] [Contracts] and
the allocation thereof (and of any losses on the [Mortgage
Loans] [Contracts]) to reduce the Certificate Principal
Balance or Notional Amount of such class, as well as other
factors such as the Pass-Through Rate (and, in the case of
the Stripped Interests Certificates, any adjustments
thereto) and the purchase price for such Certificates. The
yield to investors on any class of Offered Certificates may
be adversely affected by any allocation thereto of
Prepayment Interest Shortfalls on the [Mortgage Loans]
[Contracts], which shortfalls are expected to result from
distribution of interest to the date of prepayment only
(rather than a full month's interest) in connection with
prepayments in full and the lack of any distribution of
interest on the amount of any partial prepayments.
Prepayment Interest Shortfalls resulting from principal
prepayments in full in a calendar month will not adversely
affect the yield to investors in the Offered Certificates to
the extent such Prepayment Interest Shortfalls do not exceed
the Servicing Fee for such month. In general, if a class of
Offered Certificates is purchased at a premium and principal
distributions thereon occur at a rate faster than
anticipated at the time of purchase, the investor's actual
yield to maturity will be lower than that assumed at the
time of purchase. Conversely, if a class of Offered
Certificates 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 originally anticipated.
The Senior Certificates were structured based on a number of
assumptions, including a prepayment assumption of ____% SPA
and weighted average lives corresponding thereto as set
forth herein under "--Special Prepayment Considerations."
The yield assumptions for the respective classes that are to
be offered hereunder will vary as determined at the time of
sale. The multiple class structure of the Offered
Certificates causes the yield of certain classes to be
particularly sensitive to changes in the rate of prepayment
of the [Mortgage Loans] [Contracts] and other factors, as
follows [TO BE INCLUDED AS APPROPRIATE]:
S-12
<PAGE>
[Principal Only Certificates: Generally, the amounts payable
with respect to the Principal Only Certificates are derived
only from principal payments on the Discount Mortgage
Collateral. As a result, the yield on the Principal Only
Certificates will be adversely affected by slower than
expected payments of principal (including prepayments,
defaults and liquidations) on the Discount Mortgage
Collateral. Because the Discount Mortgage Collateral have
lower Net Mortgage Rates than the Non-Discount Mortgage
Collateral, and because the Mortgage Collateral with lower
Net Mortgage Rates are likely to have lower Mortgage Rates,
the Discount Mortgage Collateral are generally likely to
prepay at a slower rate than the Non-Discount Mortgage
Collateral. See "Certain Yield and Prepayment
Considerations," especially "--Principal Only Certificate
and Stripped Interests Certificate Yield Considerations"
herein.] [Interest strip and inverse floater classes: The
yield to investors on the Class [_] Certificates will be
extremely sensitive to the rate and timing of principal
payments on the Mortgage Collateral (including prepayments,
defaults and liquidations), which may fluctuate
significantly over time. A rapid rate of principal payments
on the [Mortgage Loans] [Contracts] could result in the
failure of investors in the Class [_] Certificates to
recover their initial investments, and a slower than
anticipated rate of principal payments on the [Mortgage
Loans] [Contracts] could adversely affect the yield to
investors on the Class [_] Certificates.] [Stripped
Interests Certificates: In addition to the foregoing, the
yield on the Stripped Interests Certificates will be
materially adversely affected to a greater extent than the
yields on the other Senior Certificates if the [Mortgage
Loans] [Contracts] with higher Mortgage Rates prepay faster
than the [Mortgage Loans] [Contracts] with lower Mortgage
Rates, because holders of the Stripped Interests
Certificates generally have rights to relatively larger
portions of interest payments on the [Mortgage Loans]
[Contracts] with higher Mortgage Rates than on [Mortgage
Loans] [Contracts] with lower Mortgage Rates.] [Adjustable
rate (including inverse floater) classes: The yield on the
Class [_] Certificates will be sensitive, and the yield on
the Class [_] Certificates will be extremely sensitive, to
fluctuations in the level of the Index. The Pass-Through
Rate on the Class [_] Certificates will vary inversely with,
and at a multiple of, the Index.] [Inverse floater companion
classes: In addition to the foregoing, in the event of
relatively low prevailing interest rates (including the
Index) and relatively high rates of principal prepayments
over an extended period, while investors in the [identify
inverse floater companion classes] may then be experiencing
a high current yield on such Certificates, such yield may be
realized only over a relatively short period, and it is
unlikely that such investors would be able to reinvest such
S-13
<PAGE>
principal prepayments on such Certificates at a comparable
yield.]
[Accrual Certificates: Interest shortfalls allocated to the
Accrual Certificates will reduce the amount of Accrued
Certificate Interest added to the Certificate Principal
Balance thereof and, therefore, will reduce the amount of
interest that will accrue in the future on such Certificates
than would otherwise be the case absent such shortfalls.
Because Accrual Certificates are not entitled to receive any
distributions of interest until the Accretion Termination
Date, the Accrual Certificates will likely experience
greater price and yield volatility than would pass-through
certificates which are otherwise similar but which are
entitled to current distributions of interest.]
[Certificates with Subordination features: The yield to
maturity on the Class M Certificates will be extremely
sensitive to losses due to defaults on [Mortgage Loans]
[Contracts] (and the timing thereof) after the Certificate
Principal Balance of the Class B Certificates has been
reduced to zero, because the entire amount of such losses
will be allocable to the Class M Certificates, as described
herein under "Description of the Offered
Certificates--Allocation of Losses; Subordination."
Furthermore, as described herein under "Certain Yield and
Prepayment Considerations," the timing of the receipt of
principal and interest by the Class M Certificates may be
adversely affected by losses on the [Mortgage Loans]
[Contracts] even if such class does not ultimately bear such
loss.] .[Residual Certificates: Holders of the Residual
Certificates are entitled to receive distributions of
principal and interest as described herein under
"Description of the Offered Certificates--Interest
Distributions" and "--Principal Distributions on the Senior
Certificates," however, holders of such Certificates may
have tax liabilities with respect to their Certificates
during the early years of their term that substantially
exceed the principal and interest payable thereon during
such periods. In addition, such distributions will be
reduced to the extent that they are subject to United States
federal income tax withholding.] See "Certain Yield and
Prepayment Considerations" herein.
Certain Federal Income Tax
Consequences.......................................................... [An
election will be made to treat the Trust Fund as a "real
estate mortgage investment conduit" (a "REMIC") for federal
income tax purposes. Upon the issuance of the Offered
Certificates, [Orrick, Herrington & Sutcliffe] [Thacher
Proffitt & Wood], New York, New York, counsel to the
Company, will deliver its opinion generally to the effect
that, assuming compliance with all provisions of the Pooling
and Servicing Agreement, the Trust Fund will qualify as a
REMIC under Sections 860A through 860G of the Internal
Revenue Code of 1986 (the "Code").]
S-14
<PAGE>
[For federal income tax purposes, the Residual Certificates
will be the sole class of "residual interests" in the Trust
Fund and the Offered Certificates (other than the Residual
Certificates) [and the __________ Certificates] will
represent ownership of "regular interests" in the Trust Fund
and will generally be treated as representing ownership of
debt instruments issued by the Trust Fund.] [Under the REMIC
Regulations (as defined herein), the Residual Certificates
will not be regarded as having "significant value" for
purposes of applying the rules relating to "excess
inclusions." In addition, the Residual Certificates may
constitute "noneconomic" residual interests for purposes of
the REMIC Regulations. Transfers of the Residual
Certificates will be restricted under the Pooling and
Servicing Agreement to United States persons (as defined in
the Prospectus under "Certain Federal Income Tax
Consequences--REMICs--Foreign Investors in REMIC
Certificates") in a manner designed to prevent a transfer of
a noneconomic residual interest from being disregarded under
the REMIC Regulations. See "Certain Federal Income Tax
Consequences--Special Tax Considerations Applicable to
Residual Certificates" herein and "Certain Federal Income
Tax Consequences--REMICs--Taxation of Owners of REMIC
Residual Certificates--Excess Inclusions" and "--Noneconomic
REMIC Residual Certificates" in the Prospectus.] [The
Residual Certificateholders may be required to report an
amount of taxable income with respect to the early years of
the REMIC's term that significantly exceeds distributions on
the Residual Certificates during such years, with
corresponding tax deductions or losses deferred until the
later years of the REMIC's term. Accordingly, on a present
value basis, the tax detriments occurring in the earlier
years may substantially exceed the sum of any tax benefits
in the later years. As a result, the Residual
Certificateholders' after-tax rate of return may be zero or
negative, even if their pre-tax rate of return is positive.]
[See "Certain Yield and Prepayment Considerations,"
especially "--Additional Yield Considerations Applicable
Solely to the Residual Certificates" and "Certain Federal
Income Tax Consequences--Special Tax Considerations
Applicable to Residual Certificates" herein.] For further
information regarding the federal income tax consequences of
investing in the Offered Certificates, see "Certain Federal
Income Tax Consequences" herein and in the Prospectus.
ERISA Considerations....................................
[ERISA CONSIDERATIONS TO BE INCLUDED AS NECESSARY] See
"ERISA Considerations" [herein and] in the Prospectus.
S-15
<PAGE>
Ratings..................................................................... It
is a condition of the issuance of the Senior Certificates
and the Class M Certificates that they be rated "___" and
"___", respectively, by ________________________ and "___"
and "___", respectively, by _________________________. 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. A security
rating does not address the frequency of prepayments of the
[Mortgage Loans] [Contracts], or the corresponding effect on
yield to investors. The rating of the Stripped Interests
Certificates does not address the possibility that the
holders thereof may fail to fully recover their initial
investment. See "Certain Yield and Prepayment
Considerations" and "Ratings" herein and "Yield
Considerations" in the Prospectus.
Legal Investment Matters................................ The [Senior]
Certificates will constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement
Act of 1984, as amended ("SMMEA"), for so long as they are
rated in one of the two highest rating categories by at
least one nationally recognized statistical rating
organization, and, as such, will be legal investments for
certain entities to the extent provided in SMMEA. [The Class
M Certificates will not constitute "mortgage related
securities" for purposes of SMMEA.] Institutions whose
investment activities are subject to legal investment laws
and regulations or to review by regulatory authorities
should consult with their legal advisors in determining
whether and to what extent the Offered Certificates
constitute legal investments under SMMEA or are subject to
restrictions on investment, capital requirements or
otherwise. See "Legal Investment Matters" herein and in the
Prospectus.
S-16
<PAGE>
[RISK FACTORS]
[Prospective Certificateholders should consider, among other things,
the items discussed under "Risk Factors" in the Prospectus and the following
factors in connection with the purchase of the Certificates:]
[APPROPRIATE RISK FACTORS REGARDING MORTGAGE COLLATERAL TO BE INSERTED AS
NECESSARY]
DESCRIPTION OF THE [MORTGAGE] [CONTRACT] POOL
General
The Offered Certificates will evidence ownership interests in the Trust
Fund created by the Company, which will consist of a pool of [fixed]
[adjustable] rate [conventional] [FHA-insured] [VA-guaranteed] [Mortgage
Loans][Contracts] and certain other property. The Mortgage Collateral will be
conveyed by the Company to the Trust Fund pursuant to a pooling and servicing
agreement, dated as of ______ __, 199_ (the "Pooling and Servicing Agreement"),
by and among the Company, the [Master] Servicer[s] and the Trustee. A copy of
the Pooling and Servicing Agreement will be filed with the Securities and
Exchange Commission as an exhibit to a Current Report on Form 8-K to be filed
within 15 days after the issuance of the Certificates (the "Form 8-K").
The Mortgage Collateral will be assigned to the Trustee pursuant to the
Pooling and Servicing Agreement together with all principal and interest due on
or with respect to the [Mortgage Loans] [Contracts] after the Cut-off Date. The
Trustee will, concurrently with such assignment, authenticate and deliver the
Certificates.
[Residential Funding] [__________] will act as [Master] Servicer[s] for
the Trust Fund (in such capacity, [each a] [the] "[Master] Servicer"). The
[Master] Servicer[s] will service the [Mortgage Loans] [Contracts] [directly]
[through one or more Sub-Servicers] [who will provide customary servicing
functions with respect to the [Mortgage Loans] [Contracts] pursuant to the terms
set forth in the [Pooling and Servicing Agreement] [respective Sub-Servicing
Agreements].
The [Mortgage Loans] [Contracts] were acquired [directly] [indirectly
through Residential Funding] by the Company [on _________ __, 199_] [from time
to time] from [NAME OF SELLER] [unaffiliated Mortgage Collateral Sellers]
[pursuant to the Program]. [See "--The Program" below.] [__]% of the Mortgage
Loans were purchased from [_____] and [____]% of the Mortgage Loans were
purchased from [________], both [affiliates of the Company] [Unaffiliated
Sellers]. Except as set forth above, no Mortgage Collateral Seller sold more
than 10.0% of the Mortgage Loans to Residential Funding.
None of the [Mortgage Loans] [Contracts] were originated prior to
_______ __, 19__ or will have a maturity date later than _______ __, ____. No
[Mortgage Loan] [Contract] will have a remaining term to maturity as of the
Cut-off Date of less than ____ months. The weighted average remaining term to
maturity of the [Mortgage Loans] [Contracts] as of the Cut-off Date will be
approximately ____ months. The weighted average original term to maturity of the
[Mortgage Loans] [Contracts] as of the Cut-off Date will be approximately ____
months. All of the [Mortgage Loans] [Contracts] have principal and interest
payable monthly [on the ______ day of each month] (the "Due Date") [on a level
debt service basis] [subject to change due to adjustment in the Mortgage Rate].
As of the Cut-off Date, no [Mortgage Loan] [Contract] will be one month or more
delinquent in payment of principal and interest.
[In connection with each Mortgage Loan that is secured by a leasehold
interest, the related Mortgage Collateral Seller will have represented to the
Company that, among other things: (i) the use of leasehold estates for
residential properties is an accepted practice in the area where the related
Mortgaged Property is located; (ii) residential property in such area consisting
of leasehold estates is readily marketable; (iii) the lease is recorded and no
party is in any way in breach of any provision of such lease; (iv) the leasehold
is in full force and effect and is not subject to any prior lien or encumbrance
by which the leasehold could be terminated or subject to any charge
S-17
<PAGE>
or penalty; and (v) the remaining term of the lease does not terminate less than
ten years after the maturity date of each such Mortgage Loans.]
[Mortgage Rate Adjustment]
[The Mortgage Rate on each Mortgage Loan will adjust semi-annually on
the Adjustment Date specified in the related Mortgage Note to a rate equal to
the sum (rounded to the nearest multiple of ___%) of the Index described below
and a fixed percentage set forth in the related Mortgage Note (the "Gross
Margin"), subject to certain limitations described herein. The amount of the
monthly payment on each Mortgage Loan will be adjusted semi-annually 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 fully amortize the outstanding principal balance of the Mortgage Loan
over its remaining term to stated maturity. As of the Cut-off Date, ___% of the
Mortgage Loans will have reached their first Adjustment Date. The Mortgage Loans
will have different Adjustment Dates, Gross Margins and limitations on the
Mortgage Rate adjustments, as described below.]
[Each Mortgage Note contains an interest rate adjustment cap (the
"Periodic Rate Cap") which limits the adjustment of the Mortgage Rate to not
more than ___% above or below the previous Mortgage Rate; provided that, with
respect to ____% of the Mortgage Loans, the Periodic Rate Cap applicable to the
first Adjustment Date is 3% per annum. The Mortgage Rate on a 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. The Minimum Mortgage Rate for each
Mortgage Loan will be equal to the Gross Margin. The Minimum Mortgage Rates will
range from ___% to ___%, with a weighted average Minimum Mortgage Rate as of the
Cut-off Date of ___%. The Maximum Mortgage Rates will range from ___% to ___%,
with a weighted average Maximum Mortgage Rate as of the Cut-off Date of ___%. No
Mortgage Loan provides for payment caps on any Adjustment Date which would
result in deferred interest or negative amortization.]
[The Index applicable to the Mortgage Loans 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 ("LIBOR") as published by Fannie Mae and as most recently available as of
the date forty-five days prior to the Adjustment Date, or, with respect to _____
Mortgage Loans, representing approximately ___% of the Mortgage Loans, the Index
shall be LIBOR as published in The Wall Street Journal and as most recently
available as of the first business day of the month immediately preceding the
month in which the Adjustment Date occurs. In the event that the Index is no
longer available, an index reasonably acceptable to the Trustee that is based on
comparable information will be selected by the Master Servicer.]
[Listed below are levels of LIBOR as published by Fannie Mae that are
or would have been applicable to mortgage loans 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 LIBOR published in The Wall Street Journal for the corresponding
periods would have been at the same levels as those set forth below. The
following does not purport to be representative of future levels of LIBOR (as
published by Fannie Mae or The Wall Street Journal). No assurance can be given
as to the level of LIBOR on any Adjustment Date or during the life of any
Mortgage Loan.]
S-18
<PAGE>
<TABLE>
LIBOR
<CAPTION>
Adjustment Date 1990 1991 1992 1993 1994
- --------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
January 1.............................. 8.438% 8.063% 5.359% 3.641% 3.500%
February 1............................. 8.313 8.375 4.938 3.891 3.516
March 1................................ 8.313 7.563 4.250 3.641 3.500
April 1................................ 8.438 7.125 4.250 3.438 3.391
May 1.................................. 8.438 6.891 4.375 3.328 4.000
June 1................................. 8.688 6.531 4.547 3.375 4.250
July 1................................. 9.000 6.313 4.266 3.313 4.625
August 1............................... 8.500 6.188 4.250 3.438 5.000
September 1............................ 8.438 6.563 4.125 3.563 5.250
October 1.............................. 8.047 6.313 3.625 3.563 5.328
November 1............................. 8.188 5.875 3.625 3.438 5.328
December 1............................. 8.422 5.688 3.313 3.375 5.688
</TABLE>
[The initial Mortgage Rate in effect on a Mortgage Loan generally will
be lower, and may be significantly lower, than the sum of the Index that would
have been applicable at origination and the Gross Margin. Therefore, unless the
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 the 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 because such Mortgage Loans may have different Adjustment Dates
(and the Mortgage Rates therefore may reflect different Index values), Gross
Margins, Maximum Mortgage Rates and Minimum Mortgage Rates. 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 sum of the Index as specified in the related Mortgage Note
(rounded to the nearest multiple of ___%) and a fixed percentage per annum for
each Mortgage Loan as set forth in the Mortgage Loan Schedule attached to the
Pooling and Servicing Agreement (the "Gross Margin"), provided that the Net
Mortgage Rate on any Mortgage Loan on any Adjustment Date may not increase or
decrease by more than the Periodic Rate Cap. The Gross Margins for the Mortgage
Loans will be at least ___% per annum but not more than ___% per annum as of the
Cutoff Date. The Net Mortgage Rate on any Mortgage Loan may not exceed the
maximum Net Mortgage Rate (the "Maximum Net Mortgage Rate") or be less than the
minimum Net Mortgage Rate (the "Minimum Net Mortgage Rate") for such Mortgage
Loan.]
S-19
<PAGE>
Mortgage Pool Characteristics
[The Mortgage Pool will have the following characteristics as of
the Cut-off Date:]
[Number of Mortgage Loans.....................................____
Initial Pass-Through Rate on the Certificates (1)............____%
Range of Net Mortgage Rates (2) .....................____% - ____%
Mortgage Rates:
Weighted Average...............................____%
Range..................................____% - ____%
Gross Margins:
Weighted Average...............................____%
Range..................................____% - ____%
Minimum Mortgage Rates:
Weighted Average.............................. ____%
Range..................................____% - ____%
Minimum Net Mortgage Rates:
Weighted Average...............................____%
Range..................................____% - ____%
Maximum Mortgage Rates:
Weighted Average.............................. ____%
Range..................................____% - ____%
Maximum Net Mortgage Rates:
Weighted Average...............................____%
Range.................................. ____ - ____%
Weighted Average Months to next Adjustment Date
after _______ __, 199_ (3) ...................... 3]
- --------------------
(1) The Pass-Through Rate on the Certificates will be equal to the
weighted average of the Net Mortgage Rates on the Mortgage Loans.
(2) The Net Mortgage Rates are calculated as described under
"Description of the Certificates--Interest Distributions" herein,
and the Net Mortgage Rate as to each Mortgage Loan on and after
its initial Adjustment Date will be generally equal to the Index
plus the Gross Margin, rounded as described herein, subject to
the Periodic Rate Cap, Maximum Net Mortgage Rate and Minimum Net
Mortgage Rate. The Net Mortgage Rates may be less than or greater
than the sum of the Index and the Gross Margin during certain
periods as a result of the Periodic Rate Caps and Maximum Net
Mortgage Rates and Minimum Net Mortgage Rates.
(3) 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 __________, 199__.
S-20
<PAGE>
[The following table sets forth the number, aggregate principal balance
and percentage of Mortgage Loans as of the Cut-off Date having their next
Adjustment Dates in the months and years set forth below.]
<TABLE>
<CAPTION>
[Month and Year of Number of Aggregate Principal Percentage of
Next Adjustment Dates Mortgage Loans Balance Mortgage Loans
<S> <C> <C> <C>
January 199_............... ___ $ __________ ______%
February 199_.............. ___ __________ _______
March 199_................. ___ __________ _______
April 199_................. ___ __________ _______
- ----------------........... --- ---------- -------
- ----------------...........
Total.... ___ $ __________ _____%]
</TABLE>
[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.]
[None of the Mortgage Loans will have been originated prior to __________,
199_ or will have a maturity date later than ___________, ____. No Mortgage Loan
will have a remaining term to stated maturity as of the Cut-off Date of less
than ___ months. The weighted average remaining term to stated maturity of the
Mortgage Loans as of the Cut-off Date will be ___ months. The weighted average
original term to maturity of the Mortgage Loans as of the Cut-off Date will be
___ months.]
[As of the Cut-off Date, no Mortgage Loan will be ___ month [s] or more
delinquent in payment of principal and interest.]
[The Mortgage Loans are generally assumable pursuant to the terms of the
related Mortgage Note. See "Maturity and Prepayment Considerations" in the
Prospectus.]
[No Mortgage Loan provides for deferred interest or negative amortization.]
[None of the Mortgage Loans will be Buydown Mortgage Loans.]
[[____]% of the [Mortgage Loans] [Contracts] were made to International
Borrowers as of the date of origination. As of the Cut-off Date, the weighted
average Loan-to-Value Ratio at origination of the [Mortgage Loans] [Contracts]
that were made to International Borrowers (defined herein) was approximately
[____]%. As of the Cut-off Date, the average unpaid principal balance of the
[Mortgage Loans] [Contracts] made to International Borrowers was approximately
$[__________].]
[[____]% of the Mortgage Loans are Mortgage Loans with Loan-to-Value
Ratios greater than 80% that did not require primary mortgage insurance. The
weighted average Loan-to-Value Ratio of such Mortgage Loans was approximately
___% as of the Cut-off Date.]
[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 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.]
[Set forth below is a description of certain additional characteristics
of the [Mortgage Loans] [Contracts] as of the Cut-off Date (expressed as a
percentage of the outstanding aggregate principal balance of the [Mortgage
S-21
<PAGE>
Loans] [Contracts] having such characteristics relative to the outstanding
aggregate principal balance of all [Mortgage Loans] [Contracts]). Unless
otherwise specified, all principal balances of the [Mortgage Loans] [Contracts]
are as of the Cut-off Date and are rounded to the nearest dollar.]
S-22
<PAGE>
Mortgage Rates
Percentage of
Mortgage Rates Number Principal Balance [Mortgage] [Contract] Pool
$ . . %
. .
Total............. $ . . %
==== ====================
As of the Cut-off Date, the weighted average Mortgage Rate of the
[Mortgage Loans] [Contracts] was approximately _________% per annum.
[Net Mortgage Rates
Percentage of
Net Mortgage Rates Number Principal Balance Mortgage] [Contract] Pool
$ . . %
. .
Total.............. $ . . %
==== ====================
As of the Cut-off Date, the weighted average Net Mortgage Rate of the
[Mortgage Loans] [Contracts] was approximately ____% per annum.]
S-23
<PAGE>
[Gross Margins
Percentage of
[Mortgage] [Contract]
Gross Margins Number Principal Balance Pool
$ . . %
. .
Total........... $ . . %
==== ====================
As of the Cut-off Date, the weighted average Gross Margin on the
[Mortgage Loans] [Contracts] was approximately ____%.]
[[Minimum] [Maximum] Mortgage Rates
[Minimum] [Maximum] Percentage of
Mortgage Rates Number Principal Balance [Mortgage] [Contract] Pool
$ . . %
. .
Total.............. $ . . %
==== ====================
As of the Cut-off Date, the weighted average [minimum] [maximum]
Mortgage Rate of the [Mortgage Loans] [Contracts] was approximately _________%
per annum.]
S-24
<PAGE>
Original [Mortgage Loan] [Contract] Principal Balances
Percentage of
Principal Balance Number Principal Balance [Mortgage] [Contract] Pool
$ . $ . . %
. .
Total............ $ . . %
==== ====================
As of the Cut-off Date, the average unpaid principal balance of the
[Mortgage Loans] [Contracts] will be approximately $_______.
S-25
<PAGE>
[Remaining Months to Maturity
Remaining Months Percentage of
to Maturity Number Principal Balance [Mortgage] [Contract] Pool
$ . . %
. .
Total........... $ . . %
==== ====================
As of the Cut-off Date, the weighted average remaining months to
maturity of the [Mortgage Loans] [Contracts] was approximately ____ months.]
[Months Since Origination
Months Percentage of
Since Origination Number Principal Balance [Mortgage] [Contract] Pool
$ . . %
. .
Total............ $ . . %
==== ====================
As of the Cut-off Date, the weighted average months since origination
of the [Mortgage Loans] [Contracts] was approximately ____ months.]
S-26
<PAGE>
Original Loan-To-Value Ratios
Percentage of
Loan-to-Value Ratio Number Principal Balance [Mortgage] [Contract] Pool
$ . . %
. .
Total................ $ . . %
==== ===
The weighted average Loan-to-Value Ratio at origination of the
[Mortgage Loans] [Contracts] will have been approximately __.__%.
Geographic Distributions of Mortgaged Properties
Percentage of
State Number Principal Balance [Mortgage] [Contract] Pool
$ . . %
. .
Total........ $ . . %
==== ===
- ---------------------------
[(1) "Other" includes states that contain less than [__]% of the [Mortgage]
[Contract] Pool.]
[No more than _____% of the [Mortgage Loans] [Contracts] will be
secured by Mortgaged Properties located in any one zip code area.]
S-27
<PAGE>
Mortgaged Property Types
Percentage of
Property Number Principal Balance Mortgage Pool
Single-family detached.......... $ . . %
Planned Unit Developments
(detached)......................
Two- to four-family units.......
Condo Low-Rise (less than 5
stories)........................
Condo Mid-Rise (5 to 8
stories)........................
Condo High-Rise (9 stories or
more............................
Townhouse.......................
Planned Unit Developments
(attached)...................... . .
-- -
Total.................. $ . . %]
==== ==
[[Mortgage Loan] [Contracts] Purposes
Percentage of [Mortgage]
Loan Purpose Number Principal Balance [Contract] Pool
- ------------ ------ ----------------- -----------------------
Purchase...................
Rate/Term Refinance........ $ . . %
Equity Refinance........... . .
--- -
Total............. $ . . %]
==== ===
[The weighted average Loan-to-Value Ratio at origination of [Mortgage
Loans] [Contracts] made to finance the purchase of the related Mortgaged
Properties will have been approximately _____%. The weighted average
Loan-to-Value Ratio at origination of equity refinance [Mortgage Loans]
[Contracts] will have been approximately _____%. The weighted average
Loan-to-Value Ratio at origination of rate and term refinance [Mortgage Loans]
[Contracts] will have been approximately _____%.]
[Mortgage Loan] Documentation
Percentage of
Type of Program Number Principal Balance [Mortgage][Contract]
Pool
Full Documentation......... $ . . %
Limited
Documentation(1)...........
No Documentation........... . .
--- -
Total............. $ . . %]
==== ==
- ---------------------------
(1) Includes self-employed Mortgagors.
S-28
<PAGE>
Occupancy Types
Percentage of
Occupancy Number Principal Balance [Mortgage][Contract]
Pool
Primary Residence.......... $ . . %
Second/Vacation............
Investment Property........
Total............. $ . . %
==== ===
[Specific information with respect to the [Mortgage Loans] [Contracts]
will be available to purchasers of the Certificates on or before the time of
issuance of such Certificates (the "Closing Date"). If not included in the
Prospectus Supplement, such information will be included in the Form 8-K.]
Representations and Warranties
[Pursuant to the terms of the Pooling and Servicing Agreement, the Company
will assign the representations and warranties made by the Mortgage Collateral
Seller[s] to the Trustee for the benefit of the Certificateholders. These
representatives and warranties include: [LIST OF SPECIFIC REPRESENTATIONS AND
WARRANTIES].
[In addition, [the Company] [Residential Funding] will make certain limited
representations and warranties regarding the [Mortgage Loans] [Contracts], as of
the date of issuance of the Certificates. [DISCLOSE DEVIATIONS FROM LIST OF
SPECIFIC REPRESENTATIONS AND WARRANTIES IN "THE TRUST FUNDS - REPRESENTATIONS
WITH RESPECT TO MORTGAGE COLLATERAL"].
[To the extent that the related Mortgage Collateral Seller[s] [does] [do]
not repurchase a [Mortgage Loan][Contract] in the event of a breach of its
representations and warranties with respect to such [Mortgage Loan][Contract],
neither the Company nor Residential Funding will be required to repurchase such
[Mortgage Loan][Contract] unless such breach also constitutes a breach of one of
the Company's or Residential Funding's representations and warranties with
respect to such [Mortgage Loan][Contract] and such breach materially and
adversely affects the interests of the Certificateholders in any such [Mortgage
Loan][Contract]. See "The Trust Funds--Repurchases of Mortgage Collateral" and
"--Limited Right of Substitution" in the Prospectus. In addition, neither the
Company nor Residential Funding will be required to repurchase any [Mortgage
Loan][Contract] in the event of a breach of its representations and warranties
with respect to such [Mortgage Loan][Contract] if the substance of any such
breach also constitutes fraud in the origination of such affected [Mortgage
Loan][Contract]. A limited amount of losses on [Mortgage Loans][Contracts] as to
which there was fraud in the origination of such [Mortgage Loans][Contracts]
will be covered by the Subordination (as defined herein) provided by the Class M
Certificates and Class B Certificates as described herein under "Description of
the Offered Certificates--Allocation of Losses; Subordination."]
[The Program
General. Residential Funding commenced an Expanded Criteria Loan
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. For example, borrowers of Program Loans may be United States
citizens employed abroad, non-permanent resident aliens employed in the United
States and persons who are citizens and residents of a country other than the
United States, including foreign corporations formed for the purpose of owning
real estate (collectively, "International Borrowers"). Program Loans include
Mortgage Loans secured by investment properties, Mortgage Loans secured by
smaller or larger parcels of land, Mortgage Loans with higher Loan-to-Value
Ratios than would be included in such other programs and Mortgage Loans with
Loan-to-Value Ratios over 80% that do not require primary mortgage insurance.
The inclusion of such Mortgage Loans may present certain risks that are not
present in such other programs. [All][____%] of the
S-29
<PAGE>
Mortgage Loans are Program Loans originated under the Program. The Program Loans
were underwritten in conformity with or in a manner generally consistent with
the standards described below. The Program is administered by Residential
Funding on behalf of the Company.
Qualifications of Program Sellers. The Mortgage Collateral Sellers that
participate in the Program (each, an "Program Seller") have been selected by
Residential Funding on the basis of criteria set forth in Residential Funding's
Seller Guide (as applicable to the Program Loans, the "Program Seller Guide").
See "The Trust Funds-Mortgage Collateral Sellers" in the Prospectus.
Program 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 investment 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. 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.
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) 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.
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 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. As used in
this section, "Loan-to-Value Ratio" shall generally mean the ratio, expressed as
a percentage, of (a) the principal amount of the Mortgage Loan at origination,
over (b) the lesser of the sales price or the appraised value of the related
Mortgaged Property at origination, or in the case of a refinanced or modified
Mortgage Loan, the lesser of the appraised value determined at origination or at
the time of the refinancing or modification.
Prior to assigning the Mortgage Loans to the Depositor, Residential
Funding reviewed the underwriting documentation for [each] Mortgage Loan[s]
[purchased from Program Sellers] and determines that [each] [the]
S-30
<PAGE>
Mortgage Loan[s] [was] [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, Program Loans may experience greater rates of delinquency, foreclosure
and loss than mortgage loans required to satisfy more stringent underwriting
standards.
[Underwriting Standards]
[DESCRIBE UNDERWRITING STANDARDS FOR [MORTGAGE LOANS] [CONTRACTS] NOT PURCHASED
THROUGH PROGRAM IF APPROPRIATE]
[Delinquency and Foreclosure Experience]
[INSERT MORTGAGE COLLATERAL SELLER'S PORTFOLIO DELINQUENCY AND LOSS EXPERIENCE
IF APPROPRIATE.]
[[Mortgage Collateral Seller], which originated __% of the Mortgage
Loans, has sold the servicing rights to substantially all of the mortgage loans
that it has originated using the underwriting standards described above to
various servicers. Accordingly, the delinquency and loss experience for those
mortgage loans is not available.]
DESCRIPTION OF THE OFFERED CERTIFICATES
General
[The Offered Certificates, together with the Accrual Certificates and
the Class B Certificates] will evidence the entire beneficial ownership interest
in the Trust Fund. The Trust Fund will consist of (1) the [Mortgage Loans]
[Contracts]; (2) such assets as from time to time are identified as deposited in
respect of the [Mortgage Loans] [Contracts] in the Custodial Account and in the
Certificate Account and belonging to the Trust Fund; (3) property acquired by
foreclosure of such [Mortgage Loans] [Contracts] [or by a deed in lieu of
foreclosure]; and (4) any applicable Primary Insurance Policies and all proceeds
thereof (collectively, the "Mortgage Collateral").
The Principal Only Certificates will be entitled to payments based on
the Discount Fraction of the Discount Mortgage Collateral. "Discount Mortgage
Collateral" is any [Mortgage Loan] [Contract] with a Net Mortgage Rate less than
[___]%. With respect to each item of Discount Mortgage Collateral, the "Discount
Fraction" is equal to a fraction, expressed as a percentage, the numerator of
which is [___]% minus the Net Mortgage Rate for such Discount Mortgage
Collateral and the denominator of which is [___]%. The Mortgage Collateral other
than the Discount Mortgage Collateral are referred to herein as the
"Non-Discount Mortgage Collateral."
Available Distribution Amount
The "Available Distribution Amount" for any Distribution Date is equal
to (i) the aggregate amount of scheduled payments on the [Mortgage
Loans][Contracts] due on the related Due Date and received on or prior to the
related Determination Date, after deduction of the related servicing fees and
any subservicing fees (collectively, the "Servicing Fees"), (ii) certain
unscheduled payments, including Mortgagor prepayments on the [Mortgage
Loans][Contracts], Insurance Proceeds, Liquidation Proceeds and proceeds from
repurchases of and substitutions for the [Mortgage Loans][Contracts] occurring
during the preceding calendar month and (iii) all Advances made for such
Distribution Date, in each case net of amounts reimbursable therefrom to the
[Master] Servicer[s] [and any Subservicer]. In addition to the foregoing
amounts, with respect to unscheduled collections, not including Mortgagor
prepayments, the [Master] Servicer[s] 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. With respect to any
Distribution Date, (a) the Due Date is the first day of the month in which such
Distribution Date occurs and (b) 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 next business day).
S-31
<PAGE>
Interest Distributions
Holders of each class of Offered Certificates (other than Principal
Only Certificates) will be entitled to receive interest distributions in an
amount equal to the Accrued Certificate Interest on such class on each
Distribution Date, to the extent of the Available Distribution Amount (as
defined below) for such Distribution Date, commencing on the first Distribution
Date in the case of all classes of Senior Certificates [other than the Accrual
Certificates and commencing on the Accretion Termination Date (as defined below)
in the case of the Accrual Certificates]. Holders of the Class M Certificates
will be entitled to receive interest distributions in an amount equal to the
Accrued Certificate Interest on each Distribution Date, to the extent of the
Available Distribution Amount for such Distribution Date after distributions of
interest and principal to the Senior Certificates [and reimbursements for
certain Advances to the [Master] Servicer[s]].
With respect to any Distribution Date, "Accrued Certificate Interest"
will be equal to (a) in the case of each class of Offered Certificates (other
than the Principal Only Certificates and the Stripped Interests Certificates),
one month's interest accrued on the Certificate Principal Balance of the
Certificates of such class at the Pass-Through Rate on such class and (b) in the
case of the Stripped Interests Certificates, one month's interest accrued on the
Notional Amount of the Certificates of such class at the then-applicable
Pass-Through Rate on such class. In each case less interest shortfalls, if any,
for such Distribution Date not covered by the Subordination, including in each
case (i) any Prepayment Interest Shortfall (as defined below) to the extent not
covered by the [Master] Servicer[s], 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 Amount ("Excess Fraud Losses"), Bankruptcy Losses in excess of the
Bankruptcy Amount ("Excess Bankruptcy Losses") and losses occasioned by war,
civil insurrection, certain governmental actions, nuclear reaction and certain
other risks ("Extraordinary Losses") not covered by the Subordination, (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 interest
shortfalls not covered by Subordination, including interest shortfalls relating
to the Relief Act or similar legislation or regulations, all allocated among all
the Certificates in proportion to the respective amounts of Accrued Certificate
Interest for such Distribution Date on each such class. In the case the Class M
Certificates, Accrued Certificate Interest will be further reduced by the
allocation of the interest portion of certain losses thereto, if any, as
described below under "--Allocation of Losses; Subordination." Accrued
Certificate Interest is calculated on the basis of a 360-day year consisting of
twelve 30-day months. The distributions of interest on any Distribution Date for
all classes of Certificates will reflect interest accrued, and receipts with
respect thereto, on the [Mortgage Loans][Contracts] for the preceding calendar
month, as may be reduced by any Prepayment Interest Shortfall and other
shortfalls in the collections of interest as described below.
[The Accretion Termination Date for the Accrual Certificates is the
earlier to occur of (i) the Distribution Date on which the Certificate Principal
Balances of the Class A-1 and Class A-2 have been reduced to zero and (ii) the
Credit Support Depletion Date (as defined herein). On each Distribution Date
preceding the Accretion Termination Date, an amount equal to the amount of
Accrued Certificate Interest on the Accrual Certificates for such date will be
added to the Certificate Principal Balance thereof, and such amount will be
distributed to the holders of the then outstanding Senior Certificates (other
than the Principal Only Certificates) in reduction of the Certificate Principal
Balances thereof, as described herein. On each Distribution Date on or after the
Accretion Termination Date, the entire amount of Accrued Certificate Interest on
the Accrual Certificates for such date will be payable to the holders of the
Accrual Certificates, to the extent not required to fully retire the remaining
Senior Certificates on the Accretion Termination Date; provided, however, that
if the Accretion Termination Date is the Credit Support Depletion Date, the
entire amount of Accrued Certificate Interest on the Accrual Certificates for
such Distribution Date will be payable to the holders of the Accrual
Certificates.]
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] [Contracts] 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 are applied to reduce the outstanding
principal balance of the related [Mortgage Loans] [Contracts] as of the Due Date
in the month of prepayment. [With respect to any Distribution
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<PAGE>
Date, any Prepayment Interest Shortfalls resulting from prepayments in full for
such Distribution Date will be offset by the [Master] Servicer[s], but only to
the extent such Prepayment Interest Shortfalls do not exceed an amount equal to
[one-twelfth of 0.___% of the Stated Principal Balance of the [Mortgage
Loans][Contracts] immediately preceding such Distribution Date]. Prepayment
Interest Shortfalls will be offset by the Master Servicer first, by a reduction
in the Servicing Fee and second, by a reduction in other servicing compensation
of the [Master] Servicer[s].
If on any Distribution Date the Available Distribution Amount is less
than Accrued Certificate Interest on the Senior Certificates for such
Distribution Date, the shortfall will be allocated among the holders of all
classes of Senior Certificates (other than the Principal Only Certificates) in
proportion to the respective amounts of Accrued Certificate Interest for such
Distribution Date on each such class. In addition, the amount of any interest
shortfalls that are covered by Subordination (specifically, interest shortfalls
not described in clauses (i) through (iv) in the third preceding paragraph) will
be unpaid Accrued Certificate Interest and will be distributable to holders of
the Certificates of such classes entitled to such amounts on subsequent
Distribution Dates, to the extent of available funds after interest
distributions as required herein. Such shortfalls could occur, for example, if
delinquencies on the [Mortgage Loans][Contracts] were exceptionally high and
were concentrated in a particular month and Advances by the [Master] Servicer[s]
did not cover the shortfall. Any such amounts so carried forward will not bear
interest.
[Prior to the Accretion Termination Date, interest shortfalls to be
allocated to the Accrual Certificates will be so allocated by reducing the
amount that is added to the Certificate Principal Balance of the Accrual
Certificates in respect of Accrued Certificate Interest on such Distribution
Date. This reduction will correspondingly reduce the amount distributed in
respect of principal on the applicable Distribution Date to the holders of the
Senior Certificates (other than the Principal Only Certificates) and will cause
the Certificate Principal Balances of the outstanding Senior Certificates (other
than the Principal Only Certificates) to be reduced to zero later than would
otherwise be the case.]
The Pass-Through Rates on each class of Offered Certificates, other
than the Principal Only Certificates (which are not entitled to distributions of
interest) and the Stripped Interests Certificates, are fixed and are set forth
on the cover hereof. The Pass-Through Rate on the Stripped Interests
Certificates on each Distribution Date will equal the weighted average, as of
the Due Date in the month preceding the month in which such Distribution Date
occurs, of the Pool Strip Rates on each [Mortgage Loan][Contract] with a Net
Mortgage Rate in excess of [___]% per annum. The "Pool Strip Rate" on each
[Mortgage Loan][Contract] is equal to the Net Mortgage Rate thereon minus
[___]%. The "Net Mortgage Rate" on each [Mortgage Loan][Contract] is equal to
the Mortgage Rate thereon minus the Servicing Fee Rate. The Pool Strip Rates on
the [Mortgage Loans][Contracts] range from [___]% to [___]% per annum. The
initial Pass-Through Rate on the Stripped Interests Certificates is
approximately [___]% per annum.
[The Pass-Through Rate on each class of the Offered Certificates for
any Distribution Date will equal the weighted average of the Net Mortgage Rates
on the outstanding [Mortgage Loans] [Contracts] for the month preceding such
Distribution Date, determined as of the close of business on the Due Date
occurring in such month (or, with respect to the first Distribution Date, as of
the Cut-off Date). The Net Mortgage Rate with respect to each [Mortgage Loan]
[Contract] as of the Cut-off Date will be set forth in the [Mortgage Loan]
[Contract] Schedule attached to the Pooling and Servicing Agreement. As of the
Cut-off Date, the weighted average Net Mortgage Rate will be [______]% per
annum. Accordingly, the initial Pass-Through Rate on the Offered Certificates
will be [______]% per annum.]
[On each Adjustment Date applicable to each [Mortgage Loan] [Contract],
the Net Mortgage Rate on such [Mortgage Loan] [Contract] will be adjusted to a
rate equal to the sum of the Index (rounded to the nearest multiple of [_____]%)
and a fixed percentage per annum for each [Mortgage Loan] [Contract] as set
forth in the [Mortgage Loan] [Contract] Schedule attached to the Pooling and
Servicing Agreement; provided that the Net Mortgage Rate on any [Mortgage Loan]
[Contract] on any Adjustment Date may not increase or decrease by more than
[____]% (the "Periodic Rate Cap"), except with respect to one [Mortgage Loan]
[Contract], constituting [___]% of the [Mortgage Loans] [Contracts], on the
first Adjustment Date thereof the Net Mortgage Rate thereon may not adjust to a
rate lower than the related Gross Margin. The Net Mortgage Rate on any [Mortgage
Loan] [Contract] may not exceed the Maximum Net Mortgage Rate or decrease below
the Minimum Net Mortgage Rate applicable to such
S-33
<PAGE>
[Mortgage Loan] [Contract] as specified in the Pooling and Servicing Agreement.
The Gross Margins for the [Mortgage Loans] [Contracts] will be at least [_____]%
per annum but not more than [_____]% per annum as of the Cut-off Date, with an
initial weighted average Gross Margin of [______]% per annum. The Net Mortgage
Rate on each Converted [Mortgage Loan] [Contract] remaining in the [Mortgage]
[Contract] Pool will be equal to the Mortgage Rate thereon less [_____]% per
annum.]
As described herein, the Accrued Certificate Interest allocable to each
class of Offered Certificates is based on the Certificate Principal Balance
thereof or, in the case of the Stripped Interests Certificates, on the Notional
Amount. The Certificate Principal Balance of any Offered 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
under "--Allocation of Losses; Subordination"; provided that, after the
Certificate Principal Balance of the Class B Certificates has been reduced to
zero, the Certificate Principal Balance of the Class M Certificates shall equal
the excess, if any, of (a) the then aggregate Stated Principal Balance (as
defined herein) of all of the [Mortgage Loans][Contracts] over (b) the then
aggregate Certificate Principal Balance of all classes of Senior Certificates
then outstanding. The "Notional Amount" of the Stripped Interests Certificates
as of any date of determination is equal to the aggregate Certificate Principal
Balance of the Certificates of all classes as of such date. Reference to the
Notional Amount of a Stripped Interests Certificate is solely for convenience in
certain calculations and does not represent the right to receive any
distributions allocable to principal.
Principal Distributions on the Senior Certificates
Except as otherwise provided below, holders of the Senior Certificates
(other than the Stripped Interests, which are not entitled to receive any
principal distributions, and the Principal Only Certificates) will be entitled
to receive on each Distribution Date, to the extent of the portion of the
Available Distribution Amount remaining after the Senior Interest Distribution
Amount is distributed to such holders and the Class A-4 Principal Distribution
Amount (as described below) is so distributed, a distribution allocable to
principal in the following amount:
(i) the product of (a) the then-applicable Senior Percentage
and (b) the aggregate of the following amounts:
(1) the principal portion of all scheduled monthly
payments on the [Mortgage Loans] [Contracts] (other than the
related Discount Fraction of the principal portion of such
payments, with respect to each item of Discount Mortgage
Collateral due on the related Due Date, whether or not received
on or prior to the related Determination Date, less the
principal portion of Debt Service Reductions (as defined below)
which, together with other Bankruptcy Losses, are in excess of
the Bankruptcy Amount;
(2) the principal portion of all proceeds of the
repurchase of a [Mortgage Loan] [Contract] (or, in the case of a
substitution, certain amounts representing a principal
adjustment) (other than the related Discount Fraction of the
principal portion of such proceeds, with respect to each item of
Discount Mortgage Collateral) as required by the Pooling and
Servicing Agreement during the preceding calendar month;
(3) the principal portion of all other unscheduled
collections received during the preceding calendar month (other
than full and partial Principal Prepayments made by the
respective Mortgagors and any amounts received in connection
with a Final Disposition (as defined below) of a [Mortgage Loan]
[Contract] described in clause (ii) below), to the extent
applied as recoveries of principal (other than the related
Discount Fraction of the principal portion of such proceeds,
with respect to each item of Discount Mortgage Collateral);
(ii) in connection with the Final Disposition of a [Mortgage
Loan] [Contract] (a) that occurred in the preceding calendar month and
(b) that did not result in any Excess Special Hazard Losses, Excess
Fraud Losses, Excess Bankruptcy Losses or Extraordinary Losses, an
amount equal to the lesser of (1) the
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<PAGE>
then-applicable Senior Percentage of the Stated Principal Balance of
such [Mortgage Loan] [Contract] (other than the related Discount
Fraction of the principal portion of such proceeds, with respect to
each item of Discount Mortgage Collateral) and (2) the then-applicable
Senior Accelerated Distribution Percentage (as defined below) of the
related collections, including Insurance Proceeds and Liquidation
Proceeds, to the extent applied as recoveries of principal (other than
the related Discount Fraction of the principal portion of such
proceeds, with respect to each item of Discount Mortgage Collateral);
(iii) the then-applicable Senior Accelerated Distribution
Percentage of the aggregate of all full and partial Principal
Prepayments made by the respective Mortgagors (other than the related
Discount Fraction of the principal portion of such proceeds, with
respect to each item of Discount Mortgage Collateral) during the
preceding calendar month;
(iv) any Excess Subordinate Principal Amount (as defined below)
for such Distribution Date;
(v) if such Distribution Date is on or prior to the Accretion
Termination Date, the Accrued Certificate Interest on the Accrual
Certificates for such Distribution Date, to the extent added to the
Certificate Principal Balance thereof; and
(vi) any amounts allocable to principal for any previous
Distribution Date (calculated pursuant to clauses (i) through (iii) and
(v) above) that remain undistributed to the extent that any such
amounts are not attributable to Realized Losses which are allocated to
the Subordinate Certificates.
With respect to any Distribution Date, "Senior Principal Distribution
Amount" is equal to the lesser of (a) the Available Distribution Amount
remaining after the Senior Interest Distribution Amount and the Class A-4
Principal Distribution Amount are distributed and (b) the sum of the amounts
described in clauses (i) through (vi) of the immediately preceding paragraph.
With respect to any Distribution Date on which the Certificate Principal Balance
of the most subordinate class or classes of Certificates then outstanding is to
be reduced to zero and on which Realized Losses are to be allocated to such
class or classes, the "Excess Subordinate Principal Amount" is equal to the
amount, if any, by which (1) the amount that would otherwise be distributable in
respect of principal on such class or classes of Certificates on such
Distribution Date is greater than (2) the excess, if any, of the aggregate of
the Certificate Principal Balance of such class or classes of Certificates
immediately prior to such Distribution Date over the aggregate amount of
Realized Losses to be allocated to such class or classes of Certificates on such
Distribution Date.
Holders of the Principal Only Certificates will be entitled to receive
on each Distribution Date, to the extent of the portion of the Available
Distribution Amount remaining after the Senior Interest Distribution Amount is
distributed, a distribution allocable to principal equal to the Class A-4
Principal Distribution Amount. The Class A-4 Principal Distribution Amount is
equal to the aggregate of:
(i) the related Discount Fraction of the principal portion of the
scheduled monthly payment on each item of Discount Mortgage Collateral
due on the related Due Date, whether or not received on or prior to the
related Determination Date, less the Discount Fraction of the principal
portion of any related Debt Service Reductions (as defined below) which
together with other Bankruptcy Losses are in excess of the Bankruptcy
Amount;
(ii) the related Discount Fraction of the principal portion of all
unscheduled collections on each item of Discount Mortgage Collateral
received during the preceding calendar month (other than amounts
received in connection with a Final Disposition of an item of Discount
Mortgage Collateral described in clause (iii) below), including full
and partial Principal Prepayments, repurchases of Discount Mortgage
Collateral (or, in the case of a substitution, certain amounts
representing a principal adjustment) as required by the Pooling and
Servicing Agreement, Liquidation Proceeds and Insurance Proceeds, to
the extent applied as recoveries of principal;
(iii) in connection with the Final Disposition of an item of
Discount Mortgage Collateral that did not result in any Excess Special
Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses or
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<PAGE>
Extraordinary Losses, an amount equal to the applicable Discount
Fraction of the Stated Principal Balance of such Discount Mortgage
Collateral immediately prior to such Distribution Date net of the
principal portion of any related Realized Loss allocated to the
Principal Only Certificates on such Distribution Date; and
(iv) any amounts, allocable to principal for any previous
Distribution Date (calculated pursuant to clauses (i) through (iii)
above), that remain undistributed.
A "Final Disposition" of a defaulted [Mortgage Loan] [Contract] is
deemed to have occurred upon a determination by the [Master] Servicer[s] that it
has received all Insurance Proceeds, Liquidation Proceeds and other payments or
cash recoveries which the [Master] Servicer[s] reasonably and in good faith
expects to be finally recoverable with respect to such [Mortgage Loan]
[Contract].
The "Stated Principal Balance" of a [Mortgage Loan] [Contract] 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 or not received, reduced by all amounts
allocable to principal that have been distributed to Certificateholders with
respect to such [Mortgage Loan] [Contract] on or before such date, and as
further reduced to the extent that any Realized Loss thereon has been allocated
to one or more classes of Certificates on or before the date of determination.
The "Senior Percentage," which initially will equal approximately
[____]% and will in no event exceed 100%, will be adjusted for each Distribution
Date to be the percentage equal to the aggregate Certificate Principal Balance
of the Senior Certificates (other than the Principal Only Certificates)
immediately prior to such Distribution Date divided by the aggregate Stated
Principal Balance of the aggregate amount of all the [Mortgage Loans]
[Contracts] (other than the Discount Fraction of the Discount Mortgage
Collateral) immediately prior to such Distribution Date. The "Subordinate
Percentage" as of any date of determination is equal to 100% minus the Senior
Percentage as of such date. The initial Senior Percentage is less than the
initial percentage interest in the Trust Fund evidenced by the Senior
Certificates (including the Principal Only Certificates) in the aggregate,
because the Senior Percentage is calculated without regard to either the
Certificate Principal Balance of the Principal Only Certificates or the Discount
Fraction of the Stated Principal Balance of each item of Discount Mortgage
Collateral.
The Senior Accelerated Distribution Percentage for any Distribution
Date occurring prior to [__________ __, ____] Distribution Date will equal 100%.
Thereafter, the Senior Accelerated Distribution Percentage will be subject to
gradual reduction as described in the following paragraph. This disproportionate
allocation of certain unscheduled payments in respect of principal will have the
effect of accelerating the amortization of the Senior Certificates while, in the
absence of Realized Losses allocated to the Subordinate Certificates, increasing
the proportionate interest in the Trust Fund evidenced by the Subordinate
Certificates. Increasing the proportionate interest of the Subordinate
Certificates relative to that of the Senior Certificates is intended to preserve
the availability of the Subordination provided by the Subordinate Certificates.
The "Senior Accelerated Distribution Percentage" for any Distribution
Date occurring after the [__________ __, ____] Distribution Date will be as
follows: for any Distribution Date falling in the [__________] year after the
Delivery Date, the Senior Percentage for such Distribution Date plus [__]% of
the Subordinate Percentage (as defined below) for such Distribution Date; for
any Distribution Date falling in the [__________] year after the Delivery Date,
the Senior Percentage for such Distribution Date plus __% of the Subordinate
Percentage for such Distribution Date; for any Distribution Date falling in the
[__________] year after the Delivery Date, the Senior Percentage for such
Distribution Date plus __% of the Subordinate Percentage for such Distribution
Date; for any Distribution Date falling in the [__________] year after the
Delivery Date, the Senior Percentage for such Distribution Date plus __% of the
Subordinate Percentage for such Distribution Date; and for any Distribution Date
after the [__________] year after the Delivery Date, the Senior Percentage for
such Distribution Date (unless on any such Distribution Date the Senior
Percentage exceeds the initial Senior Percentage, in which case the Senior
Accelerated Distribution Percentage for such Distribution Date will once again
equal 100%). Any scheduled reduction to the Senior Accelerated Distribution
Percentage described above shall not be made as of any Distribution Date unless
either (a)(i) the outstanding principal balance of [Mortgage Loans][Contracts]
delinquent [____] days or more averaged over the last [____] months, as a
percentage of the aggregate outstanding principal balance of all
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<PAGE>
[Mortgage Loans][Contracts] averaged over the last [____] months, does not
exceed [____]% and (ii) Realized Losses on the [Mortgage Loans][Contracts] to
date for such Distribution Date if occurring during the [____], [____], [____],
[____] or [____] year (or any year thereafter) after the Delivery Date are less
than [___]%, [___]%, [___]%, [___]% or [___]%, respectively, of the sum of the
initial Certificate Principal Balances of the Subordinate Certificates or (b)(i)
the outstanding principal balance of [Mortgage Loans][Contracts] delinquent
[___] days or more averaged over the last [___] months, as a percentage of the
aggregate outstanding principal balance of all [Mortgage Loans][Contracts]
averaged over the last [___] months, does not exceed [___]% and (ii) Realized
Losses on the [Mortgage Loans][Contracts] to date are less than [___]% of the
sum of the initial Certificate Principal Balances of the Subordinate
Certificates. Notwithstanding the foregoing, upon reduction of the Certificate
Principal Balances of the Senior Certificates (other than the Principal Only
Certificates) to zero, the Senior Accelerated Distribution Percentage will equal
0%.
Distributions of principal on the Senior Certificates (other than the
Stripped Interests Certificates) on each Distribution Date will be made (after
distribution of the Senior Interest Distribution Amount as described herein
under "--Interest Distributions"), as follows:
(i) Prior to the occurrence of the Credit Support Depletion
Date (as defined below):
(a) the Class A-4 Principal Distribution Amount shall
be distributed to the Principal Only Certificates, in
reduction of the Certificate Principal Balance thereof, until
such Certificate Principal Balance is reduced to zero;
(b) the Senior Principal Distribution Amount shall be
distributed to the Residual Certificates, in reduction of the
Certificate Principal Balance thereof, until such Certificate
Principal Balance is reduced to zero; and
(c) the balance of the Senior Principal Distribution
Amount remaining after the distributions described in clauses
(i) and (ii) above shall be distributed in reduction of the
Certificate Principal Balances of the classes set forth below
as follows:
(1) first, [____.___]% and [___.______]% of
such amount, concurrently, to the Class A-1
Certificates and Class A-2 Certificates,
respectively, until the Certificate Principal
Balances thereof are reduced to zero; and
(2) second, to the Class A-3 Certificates
until the Certificate Principal Balance thereof is
reduced to zero.
(ii) On or after the occurrence of the Credit Support
Depletion Date, all priorities relating to distributions as described
above in respect of principal among the various classes of Senior
Certificates (other than the Principal Only Certificates) will be
disregarded, an amount equal to the Discount Fraction of the principal
portion of scheduled payments and unscheduled collections received or
advanced in respect of Discount Mortgage Collateral will be distributed
to the Principal Only Certificates, and the Senior Principal
Distribution Amount will be distributed to all classes of Senior
Certificates (other than the Principal Only Certificates) pro rata in
accordance with their respective outstanding Certificate Principal
Balances and the Senior Interest Distribution Amount will be
distributed as described under "--Interest Distributions."
(iii) If the Certificate Principal Balances of the Senior
Certificates (other than the Principal Only Certificates) have been
reduced to zero prior to the occurrence of the Credit Support Depletion
Date, the Senior Certificates (other than the Principal Only
Certificates) will be entitled to no further distributions of principal
thereon and the Available Distribution Amount will be paid solely to
the holders of the Principal Only Certificates, the Stripped Interests
Certificates and the Subordinate Certificates, in each case as
described herein.
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<PAGE>
The "Credit Support Depletion Date" is the first Distribution Date on
which the Senior Percentage equals 100%.
[The following table sets forth for each Distribution Date the
applicable Planned Principal Balances and Targeted Principal Balances for each
class of PAC and TAC Certificates and for the PAC and TAC Principal Components.
There is no assurance that sufficient funds will be available on any
Distribution Date to reduce the Certificate Principal Balances of the PAC and
TAC Certificates and the amounts of the PAC and TAC Principal Components to
their corresponding Planned Principal Balances or Targeted Principal Balances,
as applicable, for such Distribution Date, or that distributions on such PAC and
TAC Certificates and PAC and TAC Principal Components will not be made in excess
of such amounts for such Distribution Date.
S-38
<PAGE>
Planned Principal Balances and Targeted Principal Balances
Planned Principal Balances Targeted Principal Balances
----------------------------- -----------------------
---------------------------- ----------------------
Class [__] Class [___]
PAC Principal TAC Principal
Distribution Date Class [__] Component Component Class [ ]
Initial Balance...
[___ 25, 199_]....
[___ 25, 199_]....
[___ 25, 199_]....
[___ 25, 199_]....
[___ 25, 199_]....
[___ 25, 199_]....
[___ 25, 199_]....
[___ 25, 199_]....
[___ 25, 199_]....
[___ 25, 199_]....
[___ 25, 199_]....
[___ 25, 199_]....
[___ 25, 199_]....
[___ 25, 199_]....
[___ 25, 199_]....
[___ 25, 199_]....
[___ 25, 199_]....
[___ 25, 199_]....
[___ 25, 199_]....
[___ 25, 199_]....
[___ 25, 199_]....
[___ 25, 199_]....
[___ 25, 199_]....
[___ 25, 199_]....
[___ 25, 199_]....
[___ 25, 199_]....
[___ 25, 199_]....
[___ 25, 199_]....
[___ 25, 199_]....
[___ 25, 199_]....
[___ 25, 199_]....
[___ 25, 199_]....
[___ 25, 199_]....
[___ 25, 199_]....
[___ 25, 199_]....
[___ 25, 199_]....
[___ 25, 199_]....
[___ 25, 199_]....
[___ 25, 199_]....
(Table continued on next page.)
S-39
<PAGE>
[___ 25, 199_]...
[___ 25, 199_]...
[___ 25, 199_]...
[___ 25, 199_]...
[___ 25, 199_]...
[___ 25, 199_]...
[___ 25, 199_]...
[___ 25, 199_]...
[___ 25, 199_]...
[___ 25, 199_]...
[___ 25, 199_]...
[___ 25, 199_]...
[___ 25, 199_]...
[___ 25, 199_]...
[___ 25, 20__]...
[___ 25, 20__]...
[___ 25, 20__]...
[___ 25, 20__]...
[___ 25, 20__]...
[___ 25, 20__]...
[___ 25, 20__]...
[___ 25, 20__]...
[___ 25, 20__]...
[___ 25, 20__]...
[___ 25, 20__]...
[___ 25, 20__]...
[___ 25, 20__]...
[___ 25, 20__]...
[___ 25, 20__]...
[___ 25, 20__]...
[___ 25, 20__]...
[___ 25, 20__]...
[___ 25, 20__]...
[___ 25, 20__]...
[___ 25, 20__]...
[___ 25, 20__]...
[___ 25, 20__]...
S-40
<PAGE>
[___ 25, 20__]...
[___ 25, 20__]...
[___ 25, 20__]...
[___ 25, 20__]...
[___ 25, 20__]...
[___ 25, 20__
and thereafter]..
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<PAGE>
The Planned Principal Balances and Targeted Principal Balances for each
Distribution Date set forth in the table above were calculated based on certain
assumptions, including the assumption that prepayments on the [Mortgage Loans]
[Contracts] occur each month at a constant level between approximately [__]% SPA
and approximately [___]% SPA, in the case of the Planned Principal Balances and
that prepayments on the [Mortgage Loans] [Contracts] occur at a constant level
of approximately [___]% SPA in the case of the Targeted Principal Balances. The
actual characteristics and performance of the [Mortgage Loans] [Contracts] will
differ from the assumptions used in determining the Planned Principal Balances
and Targeted Principal Balances. The Planned Principal Balances and Targeted
Principal Balances set forth in the table above are final and binding regardless
of any error or alleged error in making such calculations.
There can be no assurance that funds available for distributions of principal
on the PAC and TAC Certificates and the PAC and TAC Principal Components will be
sufficient to cover, or will not be in excess of, the related PAC Principal
Amount and TAC Principal Amount for any Distribution Date. Distributions in
reduction of the Certificate Principal Balance of any class of PAC or TAC
Certificates or in reduction of the amount of the PAC or TAC Principal
Components may commence significantly earlier (other than as to any class or
Component for which the above table reflects a distribution on the first
Distribution Date) or later than the first Distribution Date for such class or
Component shown in the above table. Distributions on any of the PAC and TAC
Certificates and the PAC and TAC Principal Components may end significantly
earlier or later than the last Distribution Date for such class or Component
shown in the above table. See "Prepayment and Yield Considerations" herein for a
further discussion of the assumptions used to produce the above table and the
effect of prepayments on the [Mortgage Loans] [Contracts] on the rate of
payments of principal and on the weighted average lives of such Certificates.]
The [Master] Servicer[s] may elect to treat Insurance Proceeds, Liquidation
Proceeds and other unscheduled collections (not including prepayments by the
Mortgagors) received in any calendar month as included in the Available
Distribution Amount and the Senior Principal Distribution Amount for the
Distribution Date in the month of receipt, but is not obligated to do so. If the
[Master] Servicer[s] so elects, such amounts will be deemed to have been
received (and any related Realized Loss shall be deemed to have occurred) on the
last day of the month prior to the receipt thereof.
Principal Distributions on the Class M Certificates
Holders of each class of the Class M Certificates will be entitled to receive
on each Distribution Date, to the extent of the portion of the Available
Distribution Amount remaining after (A) the sum of the Senior Interest
Distribution Amount and the Senior Principal Distribution Amount is distributed
to holders of the Senior Certificates, (B) reimbursement is made to the [Master]
Servicer[s] for certain Advances remaining unreimbursed following the final
liquidation of the related [Mortgage Loan] [Contract] to the extent described
below under "--Advances," (C) the aggregate amount of Accrued Certificate
Interest and principal required to be distributed to holders of Class M
Certificates and (D) the aggregate amount of Accrued Certificate Interest
required to be distributed on such class of Class M Certificates on such
Distribution Date is distributed to such Class M Certificates, a distribution
allocable to principal in the following amounts:
(i) the product of (a) the then-applicable Class M Percentage
and (b) the aggregate of the following amounts:
(1) the principal portion of all scheduled monthly payments
on the [Mortgage Loans] [Contracts] due on the related Due
Date, whether or not received on or prior to the related
Determination Date, less the principal portion of Debt Service
Reductions together with other Excess Bankruptcy Losses;
(2) the principal portion of all proceeds of the repurchase
of a [Mortgage Loan] [Contract] (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; and
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(3) the principal portion of all other unscheduled
collections received during the preceding calendar month
(other than full and partial Principal Prepayments made by the
respective Mortgagors and any amounts received in connection
with a Final Disposition of a [Mortgage Loan] [Contract]
described in clause (ii) below), to the extent applied as
recoveries of principal;
(ii) such Class M Certificate's pro rata share, based on the
Certificate Principal Balance of the Class M Certificate relative to
the aggregate Certificate Principal Balance of the Class M and Class B
Certificates then outstanding, of all amounts received in connection
with the Final Disposition of a [Mortgage Loan][Contracts] (other than
the related Discount Fraction of such amounts with respect to any item
of Discount Mortgage Collateral) (1) that occurred during the preceding
calendar month and (2) that did not result in any Excess Special Hazard
Losses, Excess Fraud Losses, Excess Bankruptcy Losses or Extraordinary
Losses, to the extent applied as recoveries of principal and to the
extent not otherwise payable to the Senior Certificates;
(iii) the portion of full and partial Principal Prepayments
(other than the Discount Fraction of such Principal Prepayments with
respect to any item of Discount Mortgage Collateral) made by the
respective Mortgagors during the preceding calendar month allocable to
the Class M Certificates, as described below;
(iv) an amount equal to the Excess Subordinate Principal
Amount; and
(v) any amounts allocable to principal for any previous
Distribution Date (calculated pursuant to clauses (i), (ii) and (iii)
above) that remain undistributed to the extent that any such amounts
are not attributable to Realized Losses which were allocated to the
Class B Certificates.
As to the Class M Certificates, on any Distribution Date, any Accrued
Certificate Interest thereon remaining unpaid from any previous Distribution
Date will be distributable to the extent of available funds. Notwithstanding the
foregoing, if the Certificate Principal Balances of the Class B Certificates
have been reduced to zero, on any Distribution Date, with respect to the Class M
Certificates outstanding on such Distribution Date, Accrued Certificate Interest
thereon remaining unpaid from any previous Distribution Date (except in the
limited circumstances provided in the Pooling and Servicing Agreement) will not
be distributable.
As to the Class M Certificates, on any Distribution Date, any Accrued
Certificate Interest thereon remaining unpaid from any previous Distribution
Date will be distributable to the extent of available funds. Notwithstanding the
foregoing, if the Certificate Principal Balances of the Class B Certificates
have been reduced to zero, on any Distribution Date, with respect to the Class M
Certificates outstanding on such Distribution Date, Accrued Certificate Interest
thereon remaining unpaid from any previous Distribution Date (except as in the
limited circumstances provided in the Pooling and Servicing Agreement) will not
be distributable.
From the Distribution Date occurring in [__________ ____] (or if the
Certificate Principal Balances of the Senior Certificates (other than the
Principal Only Certificates) have been reduced to zero prior to such
Distribution Date, the Distribution Date on which such reduction occurred) to,
but not including the later to occur of the Distribution Date occurring in
[__________ ____] and the Distribution Date on which the Class B Percentage
first equals or exceeds [____]% (approximately twice the sum of the initial
Class B Percentages) before giving effect to distributions on such Distribution
Date, the Class M Certificates (if outstanding) will be entitled to receive 100%
of any Principal Prepayments not otherwise distributable to the Senior
Certificates. Thereafter, all Principal Prepayments not otherwise distributable
to the Senior Certificates will be allocated to the Class M Certificates and
Class B Certificates for which certain loss levels established for such
Subordinate Certificates in the Pooling and Servicing Agreement have not been
exceeded. The related loss level on any Distribution Date would be satisfied as
to the Class B Certificates, only if the sum of the current percentage interests
in the Trust Fund evidenced by such class and each class, if any, subordinate
thereto were at least equal to the sum of the initial percentage interests
evidenced by such class and each class, if any, subordinate thereto.
As stated above under "--Principal Distributions on the Senior
Certificates," the Senior Accelerated Distribution Percentage will be 100%
during the first [___] years after the Delivery Date (unless the Certificate
Principal Balances of the Senior Certificates (other than the Principal Only
Certificates) are reduced to zero before
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the end of such period), and will thereafter equal 100% whenever the Senior
Percentage exceeds the initial Senior Percentage. Furthermore, as set forth
herein, the Senior Accelerated Distribution Percentage will exceed the Senior
Percentage during the [___] through [___] years following the Delivery Date, and
scheduled reductions to the Senior Accelerated Distribution Percentage are
subject to postponement based on the loss and delinquency experience of the
[Mortgage Loans] [Contracts]. Accordingly, the Class M Certificates will not be
entitled to any prepayments for at least the first [___] years after the
Delivery Date (unless the Certificate Principal Balances of the Senior
Certificates (other than the Principal Only Certificates) are reduced to zero
before the end of such period), and may receive no prepayments or a
disproportionately large or small portion of prepayments (relative to the Class
M Percentage) during certain periods thereafter. See "--Principal Distributions
on the Senior Certificates" herein.
Allocation of Losses; Subordination
The Subordination provided to the Senior Certificates by the Class B
Certificates and Class M Certificates and the Subordination provided to the
Class M Certificates by the Class B Certificates will cover Realized Losses on
the [Mortgage Loans] [Contracts] that are Defaulted [Mortgage] [Contract]
Losses, Fraud Losses, Bankruptcy Losses (each as defined in the Prospectus) and
Special Hazard Losses (as defined herein), to the extent described herein. Any
Realized Losses which do not constitute Excess Special Hazard Losses, Excess
Fraud Losses, Excess Bankruptcy Losses or Extraordinary Losses will be allocated
first, to the Class B Certificates; second, to the Class M Certificates, in each
case until the Certificate Principal Balance of the Class M Certificates have
been reduced to zero; and third, if any such Realized Losses are on any item of
Discount Mortgage Collateral, to the Principal Only Certificates in an amount
equal to the related Discount Fraction of the principal portion of such Realized
Losses, and the remainder of such Realized Losses and the entire amount of such
Realized Losses on Non-Discount Mortgage Collateral will be allocated to the
remaining classes of Senior Certificates on a pro rata basis. Any allocation of
a Realized Loss (other than a Debt Service Reduction) to a Certificate will be
made by reducing the Certificate Principal Balance thereof, in the case of the
principal portion of such Realized Loss, and the Accrued Certificate Interest
thereon, in the case of the interest portion of such Realized Loss, by the
amount so allocated as of the Distribution Date occurring in the month following
the calendar month in which such Realized Loss was incurred. In addition, any
such allocation of a Realized Loss to a Class M Certificate may also be made by
operation of the payment priority to the Senior Certificates set forth under
"--Principal Distributions on the Senior Certificates" and the Class M
Certificates. As used herein, "Debt Service Reduction" means a reduction in the
amount of the monthly payment due to certain bankruptcy proceedings, but does
not include any permanent forgiveness of principal. 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.
Allocations of the principal portion of Debt Service Reductions to the
Class M Certificates and the Class B Certificates will result from the priority
of distributions of the Available Distribution Amount as described herein under
"--Principal Distributions on the Senior Certificates" and "--Principal
Distributions on the Class M Certificates," which distributions shall be made
first to the Senior Certificates and then to the Class M Certificates. An
allocation of the interest portion of a Realized Loss as well as the principal
portion of Debt Service Reductions will not reduce the level of Subordination,
as such term is defined herein, until an amount in respect thereof has been
actually disbursed to the Senior Certificateholders or the Class M
Certificateholders, as applicable. The holders of the Offered Certificates will
not be entitled to any additional payments with respect to Realized Losses from
amounts otherwise distributable on any classes of Certificates subordinate
thereto (except in limited circumstances in respect of any Excess Subordinate
Principal Amount and, in the case of the Principal Only Certificates, because an
amount equal to the Discount Fraction of the Stated Principal Balance of an item
of Discount Mortgage Collateral will be paid to the Principal Only Certificates
as described in clause (3) of the definition of "Class A-4 Principal
Distribution Amount"). Accordingly, the Subordination provided to the Senior
Certificates (other than the Principal Only Certificates) and to the Class M
Certificates by the Class B Certificates with respect to Realized Losses
allocated on any Distribution Date will be effected primarily by increasing the
Senior Percentage or the Class M Percentage of future distributions of principal
of the remaining [Mortgage Loans] [Contracts]. Because the Discount Fraction of
the Discount Mortgage Collateral will not change over time, the protection from
losses provided to the Principal Only Certificates by the Subordinate
Certificates is limited to the prior right of the Principal Only Certificates to
receive distributions in respect of principal as described herein under
"--Principal Distributions on the Senior Certificates". Furthermore, principal
losses on the [Mortgage Loans]
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<PAGE>
[Contracts] that are not covered by Subordination will be allocated to the
Principal Only Certificates only to the extent they occur on any item of
Discount Mortgage Collateral and only to the extent of the related Discount
Fraction of such losses. Such allocation of principal losses on the Discount
Mortgage Collateral may result in such losses being allocated in an amount that
is greater or less than would have been the case had such losses been allocated
in proportion to the Certificate Principal Balance of the Principal Only
Certificates. Thus, the Senior Certificates (other than the Principal Only
Certificates) will bear the entire amount of losses that are not covered by
Subordination other than the amount allocable to the Principal Only
Certificates, which losses will be allocated among all classes of Senior
Certificates other than the Principal Only Certificates on a pro rata basis in
proportion to their respective Certificate Principal Balances.
Any Excess Special Hazard Losses, Excess Fraud Losses, Excess
Bankruptcy Losses, Extraordinary Losses or other losses of a type not covered by
the Subordination on Non-Discount Mortgage Collateral will be allocated on a pro
rata basis among the Senior Certificates (other than the Principal Only
Certificates), Class M Certificates and Class B Certificates (any such Realized
Losses so allocated to the Senior Certificates (other than the Principal Only
Certificates) or Class M Certificates will be allocated without priority among
the various classes of Senior Certificates (other than the Principal Only
Certificates) or Class M Certificates). The principal portion of such losses on
Discount Mortgage Collateral will be allocated to the Principal Only
Certificates in an amount equal to the related Discount Fraction thereof, and
the remainder of such losses on Discount Mortgage Collateral will be allocated
among the remaining Certificates on a pro rata basis. 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] [Contract] 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]
[Contract] was finally liquidated, after application of all amounts recovered
(net of amounts reimbursable to the [Master] Servicer[s] [or the Subservicer]
for Advances and expenses, including attorneys' fees) towards interest and
principal owing on the [Mortgage Loan] [Contract]. Such amount of loss realized
and any Special Hazard Losses, Fraud Losses and Bankruptcy Losses are referred
to herein as "Realized Losses."
In order to maximize the likelihood of distribution in full of the
Senior Interest Distribution Amount, the Class A-4 Principal Distribution Amount
and the Senior Principal Distribution Amount, on each Distribution Date, holders
of Senior Certificates have a right to distributions of the Available
Distribution Amount that is prior to the rights of the holders of the
Subordinate Certificates, to the extent necessary to satisfy the Senior Interest
Distribution Amount, the Class A-4 Principal Amount and the Senior Principal
Distribution Amount. Similarly, holders of the Class M Certificates have a right
to distributions of the Available Distribution Amount prior to the rights of
holders of the Class B Certificates.
The application of the Senior Accelerated Distribution Percentage (when
it exceeds the Senior Percentage) to determine the Senior Principal Distribution
Amount will accelerate the amortization of the Senior Certificates (other than
the Principal Only Certificates) relative to the actual amortization of the
[Mortgage Loans] [Contracts]. The Principal Only Certificates will not receive
more than the Discount Fraction of any unscheduled payment relating to any item
of Discount Mortgage Collateral. To the extent that the Senior Certificates
(other than the Principal Only Certificates) are amortized faster than the
[Mortgage Loans] [Contracts], in the absence of offsetting Realized Losses
allocated to the Certificates, the percentage interest evidenced by the Senior
Certificates (other than the Principal Only Certificates) in the Trust Fund will
be decreased (with a corresponding increase in the interest in the Trust Fund
evidenced by the Subordinate Certificates), thereby increasing, relative to
their respective Certificate Principal Balances, the Subordination afforded to
the Senior Certificates by the Subordinate Certificates collectively.
The aggregate amount of Realized Losses which may be allocated in
connection with Special Hazard Losses (the "Special Hazard Amount") through
Subordination shall initially be equal to $[__________]. As of any date
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of determination following the Cut-off Date, the Special Hazard Amount shall
equal $[__________] less the sum of (i) any amounts allocated through
Subordination in respect of Special Hazard Losses and (ii) 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 the
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 in
connection with Fraud Losses (the "Fraud Loss Amount") through Subordination
shall initially be equal to $[__________]. As of any date of determination after
the Cut-off Date, the Fraud Loss Amount shall equal (i) prior to the first
anniversary of the Cutoff Date an amount equal to [____]% of the aggregate
principal balance of all of the [Mortgage Loans] [Contracts] as of the Cut-off
Date minus the aggregate amounts allocated through Subordination with respect to
Fraud Losses up to such date of determination and (ii) from the [__________] to
the [__________] anniversary of the Cut-off Date, an amount equal to (a) the
lesser of (1) the Fraud Loss Amount as of the most recent anniversary of the
Cutoff Date and (2) [____]% of the aggregate principal balance of all of the
[Mortgage Loans] [Contracts] as of the most recent anniversary of the Cut-off
Date minus (b) the aggregate amounts 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 [__________] 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 in
connection with Bankruptcy Losses (the "Bankruptcy Amount") through
Subordination will initially be equal to $[__________]. As of any date of
determination on or after the [__________] anniversary of the Cut-off Date, the
Bankruptcy Amount will equal the excess, if any, of (i) the lesser of (a) the
Bankruptcy Amount as of the business day next preceding the most recent
anniversary of the Cut-off Date (the "Relevant Anniversary") and (b) an amount
calculated pursuant to the terms of the Pooling and Servicing Agreement, which
amount as calculated will provide for a reduction in the Bankruptcy Amount, over
(ii) the aggregate amount of Bankruptcy Losses allocated solely to the
Subordinate Certificates through Subordination since the Relevant Anniversary.
Notwithstanding the foregoing, the provisions relating to Subordination
will not be applicable in connection with a Bankruptcy Loss so long as the
[Master] Servicer[s] [has] [have] notified the Trustee in writing that the
[Master] Servicer[s] [is] [are] diligently pursuing any remedies that may exist
in connection with the representations and warranties made regarding the related
[Mortgage Loan] [Contract] and either (i) the related [Mortgage Loan] [Contract]
is not in default with regard to payments due thereunder or (ii) delinquent
payments of principal and interest under the related [Mortgage Loan] [Contract]
and any premiums on any applicable Primary Hazard Insurance Policy and any
related escrow payments in respect of such [Mortgage Loan] [Contract] are being
advanced on a current basis by the [Master] Servicer[s] or a Subservicer.
[The Special Hazard Amount, Fraud Amount and Bankruptcy Amount are
subject to further reduction with consent of the Rating Agencies.]
[Advances]
[Prior to each Distribution Date, the [Master] Servicer[s] [is] [are]
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] [Contracts] 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[s] to be recoverable from related late
collections, Insurance Proceeds, Liquidation Proceeds or amounts otherwise
payable to the holders of the Subordinate Certificates. 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[s] will
not be required to make any Advances with respect to reductions in the amount of
the monthly
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<PAGE>
payments on the [Mortgage Loans] [Contracts] due to Debt Service Reductions or
the application of the Relief Act or similar legislation or regulation. Any
failure by the [Master] Servicer[s] 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[s], 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[s] on a
first priority basis from either (a) late collections, Insurance Proceeds and
Liquidation Proceeds from the [Mortgage Loans] [Contracts] as to which such
unreimbursed Advance was made or (b) as to any Advance that remains unreimbursed
following the final liquidation of the related item of [Mortgage Loans]
[Contracts], from amounts otherwise distributable on the Subordinate
Certificates; provided, however, that only the Subordinate Percentage of such
Advances are reimbursable from amounts otherwise distributable on the
Subordinate Certificates in the event that such Advances were made with respect
to delinquencies which ultimately were determined to be Excess Special Hazard
Losses, Excess Fraud Losses, Excess Bankruptcy Losses or Extraordinary Losses
and the Senior Percentage of such Advances which may not be so reimbursed from
amounts otherwise distributable on the Subordinate Certificates may be
reimbursed to the [Master] Servicer[s] out of any funds in the Custodial Account
or Certificate Account prior to distributions on the Senior Certificates. In the
latter event, the aggregate amount otherwise distributable on the Senior
Certificates will be reduced by an amount equal to the Senior Percentage of such
Advances. In addition, if the Certificate Principal Balance of the Subordinate
Certificates has been reduced to zero, any Advances previously made which are
deemed by the [Master] Servicer[s] to be nonrecoverable from related late
collections, Insurance Proceeds and Liquidation Proceeds may be reimbursed to
the [Master] Servicer[s] out of any funds in the Custodial Account or
Certificate Account prior to distributions on the Senior Certificates.]
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
General
The yields to maturity and the aggregate amount of distributions on the
Offered Certificates will be affected by the rate and timing of principal
payments on the [Mortgage Loans] [Contracts] and the amount and timing of
Mortgagor defaults resulting in Realized Losses. Such yields may be adversely
affected by a higher or lower than anticipated rate of principal payments on the
[Mortgage Loans] [Contracts] in the Trust Fund. The rate of principal payments
on such [Mortgage Loans] [Contracts] will in turn be affected by the
amortization schedules of the [Mortgage Loans] [Contracts], the rate and timing
of principal prepayments thereon by the Mortgagors, liquidations of defaulted
[Mortgage Loans] [Contracts] and repurchases of [Mortgage Loans] [Contracts] due
to certain breaches of representations. The timing of changes in the rate of
prepayments, liquidations and repurchases of the [Mortgage Loans] [Contracts]
may, and the timing of Realized Losses will, significantly affect the yield to
an investor, even if the average rate of principal payments experienced over
time is consistent with an investor's expectation. Since the rate and timing of
principal payments on the [Mortgage Loans] [Contracts] 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 Offered Certificates.
The [Mortgage Loans] [Contracts] may be prepaid by the Mortgagors at
any time without payment of any prepayment fee or penalty. The [Mortgage Loans]
[Contracts] contain due-on-sale clauses. As described under "Description of the
Certificates--Principal Distributions on the Senior Certificates" and
"--Principal Distributions on the Class M Certificates" herein, during certain
periods all or a disproportionately large percentage of principal prepayments on
the [Mortgage Loans] [Contracts] will be allocated among the Senior Certificates
(other than the Principal Only Certificates) and, during certain periods, no
principal prepayments or a disproportionately small or large portion of
principal prepayments on the [Mortgage Loans] [Contracts] relative to the Class
M Percentage will be distributed on the Class M Certificates. Prepayments,
liquidations and purchases of the [Mortgage Loans] [Contracts] will result in
distributions to holders of the Offered Certificates of principal amounts that
would otherwise be distributed over the remaining terms of the [Mortgage Loans]
[Contracts]. Factors affecting prepayment (including defaults and liquidations)
of [mortgage loans] [manufactured housing contracts] include changes in
borrowers' housing needs, job transfers, unemployment, borrowers' net equity in
the mortgaged properties, changes
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in the value of the mortgaged properties, mortgage market interest rates,
solicitations and servicing decisions. In addition, if prevailing mortgage
interest rates fell significantly below the Mortgage Rates on the [Mortgage
Loans] [Contracts], the rate of prepayments (including refinancings) would be
expected to increase. Conversely, if prevailing mortgage interest rates rose
significantly above the Mortgage Rates on the [Mortgage Loans] [Contracts], the
rate of prepayments on the [Mortgage Loans] [Contracts] would be expected to
decrease.
The rate of defaults on the [Mortgage Loans] [Contracts] will also
affect the rate and timing of principal payments on the [Mortgage Loans]
[Contracts]. In general, defaults on [mortgage loans] [manufactured housing
contracts] are expected to occur with greater frequency in their early years.
The rate of default on [Mortgage Loans] [Contracts] which are refinance, limited
documentation or no documentation mortgage loans, and on [Mortgage Loans]
[Contracts] with higher Loan-to-Value Ratios or Loan-to-Value Ratios in excess
of 80% where no primary mortgage insurance is required, may be higher than on
other [Mortgage Loans] [Contracts]. Likewise, the rate of default on [Mortgage
Loans] [Contracts] that are secured by investment properties or are made to
International Borrowers may be higher than on other [Mortgage Loans]
[Contracts]. Furthermore, the rate and timing of prepayments, defaults and
liquidations on the [Mortgage Loans] [Contracts] 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.
After the Certificate Principal Balances of the Class B Certificates
have been reduced to zero, the yield to maturity on the class of Class M
Certificates will be extremely sensitive to losses on the [Mortgage Loans]
[Contracts] (and the timing thereof) because the entire amount of losses that
are covered by Subordination will be allocated to such Class M Certificates.
Furthermore, because principal distributions are paid to certain classes of
Senior Certificates before other classes, holders of classes having a later
priority of payment bear a greater risk of losses than holders of classes having
earlier priorities for distribution of principal.
Because the Mortgage Rates on the [Mortgage Loans] [Contracts] and the
Pass-Through Rates on the Offered Certificates (other than the Stripped
Interests Certificates) are fixed, such rates will not change in response to
changes in market interest rates. The Pass-Through Rate on the Stripped
Interests Certificates is based on the weighted average of the Pool Strip Rates
on the [Mortgage Loans] [Contracts] and such Pool Strip Rates will not change in
response to changes in market interest rates. Accordingly, if market interest
rates or market yields for securities similar to the Offered Certificates were
to rise, the market value of the Offered Certificates may decline.
[Although the Mortgage Rates on the [Mortgage Loans] [Contracts] will
adjust [semi-]annually, such increases and decreases will be limited by the
Periodic Rate Cap, the Maximum Mortgage Rate and the Minimum Mortgage Rate, if
applicable, on each [Mortgage Loan] [Contract], and will be based on the Index
(which may not rise and fall consistently with prevailing mortgage rates) plus
the related Gross Margin (which may be different from the prevailing margins on
other mortgage loans). As a result, the Mortgage Rates on the [Mortgage Loans]
[Contracts] at any time may not equal the prevailing rates for other
adjustable-rate loans and accordingly, the rate of prepayment may be lower or
higher than would otherwise be anticipated. In addition, because all of the
[Mortgage Loans] [Contracts] have Maximum Mortgage Rates, if prevailing mortgage
rates were to increase above the Maximum Mortgage Rates, the rate of prepayment
on the [Mortgage Loans] [Contracts] may be expected to decrease, and the yield
to investors may be less than prevailing mortgage rates. In general, if
prevailing mortgage rates fall significantly below the Mortgage Rates on the
[Mortgage Loans] [Contracts], the rate of prepayments (including refinancings)
will be expected to increase. Conversely, if prevailing mortgage rates rise
significantly above the Mortgage Rates on the [Mortgage Loans] [Contracts], the
rate of prepayment on the [Mortgage Loans] [Contracts] will be expected to
decrease. The rate of defaults on adjustable rate Mortgage Loans may be higher
when Mortgage Rates increase because the Mortgagor may have difficulty making
higher monthly payments on its Mortgage Loans, particularly in the case of
Mortgage Loans with a Periodic Rate Cap of 3% per annum for the first Adjustment
Date.]
As described above under "Description of the Offered
Certificates--Allocation of Losses; Subordination" and "--Advances," amounts
otherwise distributable to the Class M Certificates may be made available to
protect the holders of the Senior Certificates against interruptions in
distributions due to certain Mortgagor delinquencies,
S-48
<PAGE>
to the extent not covered by Advances. Such delinquencies may affect the yields
to investors in the Class M Certificates, and, even if subsequently cured, may
affect the timing of the receipt of distributions by the holders of the Class M
Certificates. Furthermore, the Principal Only Certificates will share in the
principal portion of Realized Losses on the [Mortgage Loans] [Contracts] only to
the extent that they are incurred with respect to Discount Mortgage Collateral
and only to the extent of the related Discount Fraction; thus, after the Class B
Certificates and the Class M Certificates are retired or in the case of Excess
Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses and
Extraordinary Losses, the Senior Certificates (other than the Principal Only
Certificates) may be affected to a greater extent by losses on Non-Discount
Mortgage Collateral than losses on Discount Mortgage Collateral. In addition, a
higher than expected rate of delinquencies or losses will also affect the rate
of principal payments on the Class M Certificates if such delinquencies or
losses cause the scheduled reduction of the Senior Accelerated Distribution
Percentage to be delayed.
The amount of interest otherwise payable to holders of the Offered
Certificates will be reduced by any interest shortfalls to the extent not
covered by Subordination or by the [Master] Servicer[s] as described below,
including Prepayment Interest Shortfalls and, in the case of each class of the
Class M Certificates, the interest portions of Realized Losses allocated solely
to such class of Certificates. See "Yield Considerations" in the Prospectus and
"Description of the Offered Certificates--Interest Distributions" herein for a
discussion of the effect of principal prepayments on the [Mortgage Loans]
[Contracts] on the yields to maturity of the Offered Certificates and certain
possible shortfalls in the collection of interest. [Prior to the Accretion
Termination Date, interest shortfalls allocated to the Accrual Certificates will
reduce the amount added to the Certificate Principal Balance thereof in respect
of Accrued Certificate Interest and will result in a corresponding reduction of
the amount available for distributions in respect of principal on the Senior
Certificates. Furthermore, because such interest shortfalls will result in the
Certificate Principal Balance of the Accrual Certificates being less than it
would be in the absence of such interest shortfalls, the amount of interest that
will accrue in the future on the Accrual Certificates and be available for
distributions in respect of principal on the Senior Certificates will be
reduced. Accordingly, the weighted average lives and assumed final Distribution
Dates of the Senior Certificates will be extended.]
With respect to any Distribution Date, Prepayment Interest Shortfalls
resulting from prepayments in full for such Distribution Date will be offset by
the [Master] Servicer[s] to the extent such Prepayment Interest Shortfalls do
not exceed [one-twelfth of _____% of the Stated Principal Balance of the
[Mortgage Loans] [Contracts] immediately preceding such Distribution Date].
Thus, the yield to investors in the Offered Certificates generally will not be
affected by Prepayment Interest Shortfalls allocable thereto resulting from
prepayments in full in the month preceding any Distribution Date to the extent
that such shortfalls do not exceed the amount offset by the [Master]
Servicer[s].
The yield to maturity on each class of the Offered Certificates will
depend on the prices paid by the holders of the Offered Certificates and the
related Pass-Through Rate. The extent to which the yield to maturity of an
Offered Certificate is sensitive to prepayments will depend, in part, upon the
degree to which it is purchased at a discount or premium. In general, if a class
of Offered Certificates is purchased at a premium and principal distributions
thereon occur at a rate faster than anticipated at the time of purchase, the
investor's actual yield to maturity will be lower than that assumed at the time
of purchase. Conversely, if a class of Offered Certificates 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 assumed 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.
[A number of factors affect the performance of the Index and may cause
the Index to move in a manner different from other indices. To the extent that
the Index may reflect changes in the general level of interest rates less
quickly than other indices, in a period of rising interest rates, increases in
the yield to Offered Certificateholders due to such rising interest rates may
occur later than that which would be produced by other indices, and in a period
of declining rates, the Index may remain higher than other market interest rates
which may result in a higher level of prepayments of the [Mortgage Loans]
[Contracts], which adjust in accordance with the Index, than of [mortgage loans]
[contracts] which adjust in accordance with other indices.]
S-49
<PAGE>
The assumed final Distribution Date with respect to each class of the
Offered Certificates is [_____ __, ____] which is the Distribution Date
[immediately] [___ months] following the latest scheduled maturity date for any
[Mortgage Loan] [Contract]. No event of default, change in the priorities for
distribution among the various classes or other provisions under the Pooling and
Servicing Agreement will arise or become applicable solely by reason of the
failure to retire the entire Certificate Principal Balance of any class of
Certificates on or before its assumed final Distribution Date.
"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 Offered
Certificates will be influenced by, among other things, the rate at which
principal of the [Mortgage Loans] [Contracts] is paid, which may be in the form
of scheduled amortization, prepayments or liquidations.
[Prepayments on [mortgage loans] [manufactured housing contracts] are
commonly measured relative to a prepayment standard or model. The model used in
this Prospectus Supplement, the standard prepayment assumption ("SPA"),
represents an assumed rate of prepayment each month relative to the then
outstanding principal balance of a pool of new [mortgage loans] [manufactured
housing contracts]. A prepayment assumption of 100% SPA assumes constant
prepayment rates of [___]% per annum of the then outstanding principal balance
of such mortgage loans in the first month of the life of the mortgage loans and
an additional [___]% per annum in each month thereafter until the thirtieth
month. Beginning in the thirtieth month and in each month thereafter during the
life of the [mortgage loans] [manufactured housing contracts], 100% SPA assumes
a constant prepayment rate of [___]% per annum each month. As used in the table
below, "0% SPA" assumes prepayment rates equal to 0% of SPA (no prepayments).
Correspondingly, "[___]% SPA" assumes prepayment rates equal to [___]% of SPA,
and so forth. SPA does not purport to be a historical description of prepayment
experience or a prediction of the anticipated rate of prepayment of any pool of
[mortgage loans] [manufactured housing contracts], including the [Mortgage
Loans] [Contracts].]
Modeling Assumptions
The table set forth below has been prepared on the basis of certain
assumptions (the "Modeling Assumptions") as described below regarding the
weighted average characteristics of the [Mortgage Loans] [Contracts] that are
expected to be included in the Trust Fund as described under "Description of the
[Mortgage] [Contract] Pool" herein and the performance thereof. The table
assumes, among other things, that: (i) as of the date of issuance of the Offered
Certificates, the aggregate principal balance of the Discount Mortgage
Collateral is $[__________] and each item of Discount Mortgage Collateral has a
Mortgage Rate of [___]% per annum, an original term to maturity of [___] months,
a remaining term to maturity of [___] months and a related Servicing Fee Rate of
approximately [___]% per annum, and the aggregate principal balance of the
Non-Discount Mortgage Collateral is $[___________] and each item of Non-Discount
Mortgage Collateral has a Mortgage Rate of [___]% per annum, an original term to
maturity of [___] months, a remaining term to maturity of [___] months and a
related Servicing Fee Rate of approximately [___]% per annum; (ii) the scheduled
monthly payment for each [Mortgage Loan] [Contract] has been based on its
outstanding balance, interest rate and remaining term to maturity, such that the
[Mortgage Loan] [Contract] will amortize in amounts sufficient for repayment
thereof over its remaining term to maturity; (iii) none of the Mortgage
Collateral Sellers, the [Master] Servicer[s] or the Company will repurchase any
[Mortgage Loan] [Contract] and neither the [Master] Servicer[s] nor the Company
exercises any option to purchase the [Mortgage Loans] [Contracts] and thereby
cause a termination of the Trust Fund; (iv) there are no delinquencies or
Realized Losses on the [Mortgage Loans] [Contracts], and principal payments on
the [Mortgage Loans] [Contracts] will be timely received together with
prepayments, if any, at the respective constant percentages of SPA set forth in
the table; (v) there is no Prepayment Interest Shortfall or any other interest
shortfall in any month; (vi) payments on the Certificates will be received on
the 25th day of each month, commencing [________ 25, 199_]; (vii) payments on
the [Mortgage Loans] [Contracts] earn no reinvestment return; (viii) there are
no additional ongoing Trust Fund expenses payable out of the Trust Fund; and
(ix) the Certificates will be purchased on [_____ __, 199_].
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<PAGE>
SOME OF THE FOREGOING MODELING ASSUMPTIONS REGARDING THE
CHARACTERISTICS OF THE [MORTGAGE LOANS] [CONTRACTS] AND THE CERTIFICATES
DIFFER FROM ACTUAL CHARACTERISTICS THEREOF.
The actual characteristics and performance of the [Mortgage Loans]
[Contracts] will differ from the Modeling 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 unlikely that the [Mortgage Loans]
[Contracts] will prepay at a constant level of SPA until maturity or that all of
the [Mortgage Loans] [Contracts] will prepay at the same level of SPA. Moreover,
the diverse remaining terms to maturity of the [Mortgage Loans] [Contracts]
could produce slower or faster principal distributions than indicated in the
table at the various constant percentages of SPA specified, even if the weighted
average remaining term to maturity of the [Mortgage Loans] [Contracts] is as
assumed. Any difference between such Modeling Assumptions and the actual
characteristics and performance of the [Mortgage Loans] [Contracts], or actual
prepayment or loss experience, will affect the percentages of initial
Certificate Principal Balances outstanding over time and the weighted average
lives of the classes of Offered Certificates.
Subject to the foregoing discussion and assumptions, the following
table indicates the Weighted Average Life of each class of Offered Certificates
(other than the Stripped Interests Certificates [and Residual Certificates]) and
sets forth the percentages of the initial Certificate Principal Balance of each
such class of Offered Certificates that would be outstanding after each of the
dates shown at various percentages of SPA.
S-51
<PAGE>
Percent of Initial Certificate Principal Balance
Outstanding at the Following Percentages of SPA
Distribution Date Class A-1 Class A-2
- --------------------
--------------------- -------------------
0%[ ]%[ ]%[ ][ ]% 0%[ ][ ][ ]%[ ]%
--------------------- --------------------
Percentage
Distribution Date Class A-4 Class M
- -----------------
----------------- -------------------
0% [ [% ][ [% ]% 0%[ ][ ][ ][ ]%
-- --------------- -------------------
Initial Percentage
Weighted Average
Life Years**
* 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 amount of each distribution in reduction of
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 initial Certificate
Principal Balance of the Certificate.]
This table has been prepared based on the Modeling Assumptions (including the
assumptions regarding the characteristics and performance of the [Mortgage
Loans] [Contracts], which differ from the actual characteristics and performance
thereof) and should be read in conjunction therewith.
S-52
<PAGE>
Principal Only Certificate and Stripped Interests Certificate Yield
Considerations
The amounts payable with respect to the Principal Only Certificates
derive only from principal payments on the Discount Mortgage Collateral. As a
result, the yield on the Principal Only Certificates will be adversely affected
by slower than expected payments of principal (including prepayments, defaults
and liquidations) on the Discount Mortgage Collateral.
The yield to maturity on the Stripped Interests Certificates will be
extremely sensitive to both the timing of receipt of principal prepayments and
the overall rate of principal prepayments and defaults on the [Mortgage Loans]
[Contracts], which rate may fluctuate significantly over time. Investors in the
Stripped Interests Certificates should fully consider the risk that a rapid rate
of principal prepayments on the [Mortgage Loans] [Contracts] could result in the
failure of such investors to fully recover their investments.
The following tables indicate the sensitivity of the pre-tax yield to
maturity on the Principal Only Certificates and Stripped Interests Certificates
to various constant rates of prepayment on the [Mortgage Loans] [Contracts] by
projecting the monthly aggregate payments on the Principal Only Certificates and
Stripped Interests Certificates and computing the corresponding pre-tax yields
to maturity on a corporate bond equivalent basis, based on the assumptions
described in clauses (i) through (ix) of the Modeling Assumptions, including the
assumptions regarding the characteristics and performance of the [Mortgage
Loans] [Contracts], which differ from the actual characteristics and performance
thereof and assuming the aggregate purchase prices set forth below and assuming
further the Pass-Through Rate and Notional Amount of the Stripped Interests
Certificates are as set forth herein. Any differences between the Modeling
Assumptions and the actual characteristics and performance of the [Mortgage
Loans] [Contracts] and of the Certificates may result in yields being different
from those shown in such tables. Discrepancies between assumed and actual
characteristics and performance underscore the hypothetical nature of the
tables, which are provided only to give a general sense of the sensitivity of
yields in varying prepayment scenarios.
Pre-Tax Yield to Maturity of the Principal Only
Certificates at the Following Percentages of SPA
Assumed Purchase Price 0% [ ]% [ ]% [ ]% [ ]% [ ]%
- ---------------------- ----- ------- ------- ------- ------- -------
$[------------] [----]% [----]% [----]% [----]% [----]% [----]%
Pre-Tax Yield to Maturity of the Stripped Interests
Certificates at the Following Percentages of SPA
Assumed Purchase Price 0% [ ]% [ ]% [ ]% [ ]% [ ]%
- ---------------------- ----- ------- ------- ------ ------- -------
$[------------] [----]% [----]% [----]% [----]% [----]% [----]%
Each pre-tax yield to maturity set forth in the preceding tables was
calculated by determining the monthly discount rate which, when applied to the
assumed stream of cash flows to be paid on the Principal Only Certificates or
Stripped Interests Certificates, as applicable, would cause the discounted
present value of such assumed stream of cash flows to equal the assumed purchase
price listed in the related table. Accrued interest is included in the assumed
purchase price of the Stripped Interests Certificates and is used in computing
the corporate bond equivalent yields shown in the table relating to the Stripped
Interests Certificates. These yields do not take into account the different
interest rates at which investors may be able to reinvest funds received by them
as distributions on the
S-53
<PAGE>
Principal Only Certificates and Stripped Interests Certificates, and thus do not
reflect the return on any investment in such Certificates when any reinvestment
rates other than the discount rates are considered.
Notwithstanding the assumed prepayment rates reflected in the preceding
tables, it is highly unlikely that the [Mortgage Loans] [Contracts] will be
prepaid according to one particular pattern. For this reason, and because the
timing of cash flows is critical to determining yields, the pre-tax yields to
maturity on the Principal Only Certificates and Stripped Interests Certificates
are likely to differ from those shown in the tables, even if all of the
[Mortgage Loans] [Contracts] prepay at the indicated constant percentages of SPA
over any given time period or over the entire life of the Certificates. A lower
than anticipated rate of principal prepayments on the Discount Mortgage
Collateral will have a material adverse effect on the yield to maturity of the
Principal Only Certificates. The rate and timing of principal prepayments on the
Discount Mortgage Collateral may differ from the rate and timing of principal
prepayments on the [Mortgage] [Contract] Pool. In addition, because the Discount
Mortgage Collateral have Net Mortgage Rates that are lower than the Net Mortgage
Rates of the Non-Discount Mortgage Collateral, and because [Mortgage Loans]
[Contracts] with lower Net Mortgage Rates are likely to have lower Mortgage
Rates, the Discount Mortgage Collateral is generally likely to prepay under most
circumstances at a lower rate than the Non-Discount Mortgage Collateral. In
addition, holders of the Stripped Interests Certificates generally have rights
to relatively larger portions of interest payments on [Mortgage Loans]
[Contracts] with higher Mortgage Rates; thus, the yield on the Stripped
Interests Certificates will be materially adversely affected to a greater extent
than on the other Offered Certificates if the [Mortgage Loans] [Contracts] with
higher Mortgage Rates prepay faster than the [Mortgage Loans] [Contracts] with
lower Mortgage Rates. Because [Mortgage Loans] [Contracts] having higher Pool
Strip Rates generally have higher Mortgage Rates, such [Mortgage Loans]
[Contracts] are generally more likely to be prepaid under most circumstances
than are [Mortgage Loans] [Contracts] having lower Pool Strip Rates.
There can be no assurance that the [Mortgage Loans] [Contracts] will
prepay at any particular rate or that the yields on the Principal Only
Certificates and Stripped Interests Certificates will conform to the yields
described herein. Moreover, the various remaining terms to maturity of the
[Mortgage Loans] [Contracts] could produce slower or faster principal
distributions than indicated in the preceding tables at the various constant
percentages of SPA specified, even if the weighted average remaining term to
maturity of the [Mortgage Loans] [Contracts] is as assumed. Investors are urged
to make their investment decisions based on their determinations as to
anticipated rates of prepayment under a variety of scenarios. Investors in the
Stripped Interests Certificates should fully consider the risk that a rapid rate
of prepayments on the [Mortgage Loans] [Contracts] could result in the failure
of such investors to fully recover their investments.
For additional considerations relating to the yields on the
Certificates, see "Yield Considerations" and "Maturity and Prepayment
Considerations" in the Prospectus.
Additional Yield Considerations Applicable Solely to the Residual Certificates
The Residual Certificateholders' after-tax rate of return on their
Residual Certificates will reflect their pre-tax rate of return, reduced by the
taxes required to be paid with respect to the Residual Certificates. Holders of
Residual Certificates may have tax liabilities with respect to their Residual
Certificates during the early years of the REMIC's term that substantially
exceed any distributions payable thereon during any such period. In addition,
holders of Residual Certificates may have tax liabilities with respect to their
Residual Certificates the present value of which substantially exceeds the
present value of distributions payable thereon and of any tax benefits that may
arise with respect thereto. Accordingly, the after-tax rate of return on the
Residual Certificates may be negative or may otherwise be significantly
adversely affected. The timing and amount of taxable income attributable to the
Residual Certificates will depend on, among other things, the timing and amounts
of prepayments and losses experienced with respect to the [Mortgage] [Contract]
Pool.
The Residual Certificateholders should consult their tax advisors as to
the effect of taxes and the receipt of any payments made to such holders in
connection with the purchase of the Residual Certificates on after-tax rates
S-54
<PAGE>
of return on the Residual Certificates. See "Certain Federal Income Tax
Consequences" herein and in the Prospectus.
POOLING AND SERVICING AGREEMENT
General
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement. 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 Senior Certificates. [The Trustee will
appoint ______________________ to serve as Custodian in connection with the
Certificates.] The Senior 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
[__________] of Residential Accredit Loans, Inc., [____________________]. 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 Servicer[s]]
[_________] [Various Servicers approved by the Master Servicer] will
provide customary servicing functions with respect to the [Mortgage Loans]
[Contracts] pursuant to [a] [the Pooling and] Servicing Agreement[s]. [Among
other things, the Servicer[s] are obligated, under certain circumstances, to
advance delinquent payments of principal and interest with respect to [Mortgage
Loans] [Contracts].]
[Approximately _______% of the [Mortgage Loans] [Contracts] will be
serviced by _________.] [The following information was obtained from the
Servicer[s].
[The following tables set forth certain information concerning the
delinquency experience (including pending foreclosures) on one- to four-family
residential mortgage loans that were being serviced by [Servicer] on __________
__, 199_, __________ __, 199_ and __________ __, 199_.
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<PAGE>
Total Loan Portfolio Delinquency Experience
At , 199 At , 199
-------------------- --------------------
By No. By Dollar By No. By Dollar
of Amount of of Amount of
Loans Loans Loans Loans
(Dollar Amounts in Thousands)
Total Loan Portfolio............. $ $
Period of Delinquency
31 to 59 days...........
60 to 89 days...........
90 days or more (1).....
Foreclosures Pending.............
REO Property.....................
Total Delinquent Loans........... $ $
======= =========== ===== ==========
Percent of Loan Portfolio % % % %
At , 199
---------------------
By No. By Dollar
of Amount of
Loans Loans
(Dollar Amounts in Thousands)
Total Loan Portfolio............. $
Period of Delinquency
31 to 59 days...........
60 to 89 days...........
90 days or more (1).....
Foreclosures Pending.............
REO Property.....................
Total Delinquent Loans........... $
====== =
Percent of Loan Portfolio % %
(1) Does not include foreclosures pending.
The following tables set forth certain information concerning
foreclosed mortgage loans and loan loss experience of [Servicer] as of ________
__, 199_, ________ __, 199_ and ________ __, 199_ with respect to the mortgage
loans referred to above.
Total Loan Portfolio Foreclosure Experience
At or for At or for At or for
the year ended the year ended the year ended
-------- --, -------- --, -------- --,
199 199_ 199
---------------- ---------------------------------
(Dollar Amounts in Thousands)
Total Loan Portfolio......... $ $ $
Average Portfolio Balance.... $ $ $
Gross Loss(1)................ $ $ $
Net Loss(2) ................. $ $ $
- ----------------------
(1) Gross Loss is the sum of gross losses on all mortgage loans liquidated
during the period indicated.
(2) Net Loss is Gross Loss minus all proceeds received in connection with
liquidated mortgage loans from mortgage pool insurance, special hazard insurance
or other insurance and proceeds received from or losses borne by other credit
enhancement, including subordinated certificates, but not including primary
mortgage insurance, hazard insurance or other insurance with respect to specific
mortgaged properties for the period indicated.
There can be no assurance that the delinquency and foreclosure
experience set forth above will be representative of the results that may be
experienced with respect to the Mortgage Loans.]
[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
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<PAGE>
Agreement. For a general description of the Master Servicer and its
activities, see "The Pooling and Servicing Agreement" in the Prospectus.]
Servicing and Other Compensation and Payment of Expenses
The Servicing Fees for each [Mortgage Loan] [Contract] are payable out
of the interest payments on such [Mortgage Loan] [Contract]. The Servicing Fees
in respect of each [Mortgage Loan] [Contract] will be at least [____]% and not
more than [____]% per annum of the outstanding principal balance of each
[Mortgage Loan] [Contract]. The Servicing Fees consist of (a) servicing
compensation payable to the [Master] Servicer[s] 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[s] as the direct servicer of a [Mortgage Loan] [Contract] for which
there is no subservicer]. The primary compensation to be paid to the [Master]
Servicer[s] in respect of its servicing activities will be [____]% per annum
(the "Servicing Fee Rate") of the outstanding principal balance of each item of
Mortgage Collateral. As described more fully in the Prospectus, a Subservicer is
entitled to servicing compensation in a minimum amount equal to [____]% per
annum of the outstanding principal balance of each item of Mortgage Collateral
serviced by it. The [Master] Servicer[s] is obligated to pay certain ongoing
expenses associated with the Trust Fund and incurred by the [Master] Servicer[s]
in connection with its responsibilities under the Pooling and Servicing
Agreement. See "Description of the Certificates--Servicing and Administration of
Mortgage Collateral" in the Prospectus for information regarding other possible
compensation to the [Master] Servicer[s] and subservicers and for information
regarding expenses payable by the [Master] Servicer[s].
Voting Rights
Certain actions specified in the Prospectus that may be taken by the
Certificateholders 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. [__]% of all Voting Rights
will be allocated among all holders of the Certificates (other than the Stripped
Interests Certificates and Residual Certificates) in proportion to their then
outstanding Certificate Principal Balances, and [_]% and [_]% of all Voting
Rights will be allocated among holders of the Stripped Interests Certificates
and the Residual Certificates, in proportion to the percentage interests
evidenced by their respective Certificates.
[Termination]
[The circumstances under which the obligations created by the Pooling
and Servicing Agreement will terminate in respect of the Offered Certificates
are described in "Pooling and Servicing Agreement--Termination; Retirement of
Certificates" in the Prospectus. The [Master] Servicer[s] or the Company will
have the option on any Distribution Date on which the aggregate principal
balance of the [Mortgage Loans] [Contracts] is less than [__]% of the aggregate
principal balance of the [Mortgage Loans] [Contracts] as of the Cut-off Date
either (i) to purchase all remaining [Mortgage Loans] [Contracts] and other
assets in the Trust Fund, thereby effecting early retirement of the Offered
Certificates or (ii) purchase in whole, but not in part, the Certificates. Any
such purchase of [Mortgage Loans] [Contracts] 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 item of [Mortgage Loans] [Contracts] (or, the fair market value
of the related underlying Mortgaged Properties with respect to defaulted
[Mortgage Loans] [Contracts] as to which title to such underlying 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 Distribution Date on which the purchase proceeds are to be distributed
plus (b) accrued interest thereon at the Net Mortgage Rate to, but not
including, the first day of the month of repurchase. Distributions on the
Certificates in respect of any such optional termination will be paid, first, to
the Senior Certificates and the Class M Certificates, pro rata, based on their
respective Certificate Principal Balances, second, to the Class B Certificates.
The proceeds of any such distribution may not be sufficient to distribute the
full amount to each class of Certificates if the purchase price is based in part
on the fair market appraised value of any underlying Mortgaged Property and such
appraised value is less than 100% of the unpaid principal balance of the related
[Mortgage Loan] [Contract]. Any such purchase of the Certificates will be made
at a price equal to 100% of the
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Certificate Principal Balance thereof plus the sum of one month's interest
thereon at the applicable Pass-Through Rate and any previously unpaid Accrued
Certificate Interest. Upon the purchase of the Certificates or at any time
thereafter, at the option of the [Master] Servicer[s] or the Company, the
[Mortgage Loans] [Contract] 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[s] or the Company.]
Upon presentation and surrender of the Offered Certificates in
connection with the termination of the Trust Fund or a purchase of Certificates
under the circumstances described above, the holders of the Offered Certificates
will be entitled to receive, subject to the priorities set forth above, an
amount equal to the Certificate Principal Balance of such class plus one month's
interest thereon (or with respect to the Stripped Interests Certificates, one
month's interest on the Notional Amount) at the applicable Pass-Through Rate
plus any previously unpaid Accrued Certificate Interest.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Offered Certificates, ______________________,
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 be the
sole class of "residual interests" in the Trust Fund and the Offered
Certificates (other than the Residual Certificates) and Class B Certificates
will represent ownership of "regular interests" in the Trust Fund and will
generally be treated as representing ownership of debt instruments of the Trust
Fund. See "Certain Federal Income Tax Consequences--REMICs" in the Prospectus.
The ________________________ Certificates will not be treated as having
been issued with original issue discount for federal income tax reporting
purposes. The______________________________ Certificates will, be treated as
having been issued with original issue discount for federal income tax reporting
purposes. The prepayment assumption that will be used in determining the rate of
accrual of original issue discount, market discount and premium, if any, for
federal income tax purposes will be based on the assumption that subsequent to
the date of any determination the [Mortgage Loans] [Contracts] will prepay at a
rate equal to ___% SPA. No representation is made that the [Mortgage Loans]
[Contracts] 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 OID Regulations suggest that original issue discount with respect
to securities such as the Stripped Interests Certificates that represent
multiple uncertificated REMIC regular interests, in which ownership interests
will be issued simultaneously to the same buyer and which are required under the
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 discount with respect to the uncertificated regular interests
represented by the Stripped Interests Certificates 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 above, treating all such
uncertificated regular interests as a single debt instrument as set forth in the
OID Regulations.
If the method for computing original issue discount described in the
Prospectus results in a negative amount for any period with respect to a
Certificateholder (in particular, the Stripped Interests Certificateholders),
the amount of original issue discount allocable to such period would be zero and
such Certificateholder will be permitted to offset such negative amount only
against future original issue discount (if any) attributable to such
Certificates. Although the matter is not free from doubt, a Stripped Interests
Certificateholder may be permitted to deduct a loss to the extent that his or
her respective remaining basis in such Certificate exceeds the maximum amount of
future payments to which such Certificateholder is entitled, assuming no further
prepayments of the [Mortgage Loans] [Contracts]. Any such loss might be treated
as a capital loss.
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Although they are unclear on the issue, in certain circumstances the
OID Regulations appear to permit the holder of a debt instrument to recognize
original issue discount under a method that differs from that used by the
issuer. Accordingly, it is possible that the holder of a Certificate may be able
to select a method for recognizing original issue discount that differs from
that used by the [Master] Servicer[s] in preparing reports to the
Certificateholders and the IRS.
Certain classes of the Offered Certificates may be treated for federal
income tax purposes as having been issued at a premium. Whether any holder of
such a class of Certificates will be treated as holding a certificate with
amortizable bond premium will depend on such Certificateholder's purchase price
and the distributions remaining to be made on such Certificate at the time of
its acquisition by such Certificateholder. Holders of such classes of
Certificates should consult their own tax advisors regarding the possibility of
making an election to amortize such premium. See "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates" and
"--Premium" in the Prospectus.
The Offered 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 Offered 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 Offered
Certificates are treated as "real estate assets" under Section 856(c)(5)(A) of
the Code. Moreover, the Offered Certificates (other than the Residual
Certificates) will be "qualified mortgages" within the meaning of Section
860G(a)(3) of the Code. However, prospective investors in Offered 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[s] or the Company to
repurchase such Offered Certificates may adversely affect any REMIC that holds
such Offered Certificates if such repurchase is made under circumstances giving
rise to a Prohibited Transaction Tax. See "The 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 the federal income tax consequences
of investing in the Offered Certificates, see "Certain Federal Income Tax
Consequences--REMICs" in the Prospectus.
Special Tax Considerations Applicable to Residual Certificates
The IRS has issued regulations under the provisions of the Code related
to REMICs (the "REMIC Regulations") that significantly affect holders of
Residual Certificates. The REMIC Regulations impose restrictions on the transfer
or acquisition of certain residual interests, including the Residual
Certificates. In addition, the REMIC Regulations contain restrictions that apply
to: (i) thrift institutions holding residual interests lacking "significant
value" and (ii) the transfer of "noneconomic" residual interests to United
States persons. Pursuant to the Pooling and Servicing Agreement, the Residual
Certificates may not be transferred to non-United States persons.
The REMIC Regulations provide for the determination of whether a
residual interest has "significant value" for purposes of applying the rules
relating to "excess inclusions" with respect to residual interests. Based on the
REMIC Regulations, the Residual Certificates do not have significant value and,
accordingly, thrift institutions and their affiliates will be prevented from
using their unrelated losses or loss carryovers to offset any excess inclusions
with respect to the Residual Certificates, which will be in an amount equal to
all or virtually all of the taxable income includible by holders of the Residual
Certificates. See "Certain Federal Income Tax Consequences--REMICs--Taxation of
Owners of REMIC Residual Certificates--Excess Inclusions" in the Prospectus.
The REMIC Regulations also provide that a transfer to a United States
person of "noneconomic" residual interests will be disregarded for all federal
income tax purposes, and that the purported transferor of "noneconomic" residual
interests will continue to remain liable for any taxes due with respect to the
income on such residual interests, unless "no significant purpose of the
transfer was to impede the assessment or collection of tax." Based on the REMIC
Regulations, the Residual Certificates may constitute noneconomic residual
interests during some or all of their terms
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for purposes of the REMIC Regulations and, accordingly, unless no significant
purpose of a transfer is to impede the assessment or collection of tax,
transfers of the Residual Certificates may be disregarded and purported
transferors may remain liable for any taxes due with respect to the income on
the Residual Certificates. All transfers of the Residual Certificates will be
subject to certain restrictions under the terms of the Pooling and Servicing
Agreement that are intended to reduce the possibility of any such transfer being
disregarded to the extent that the Residual Certificates constitute noneconomic
residual interests. See "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Residual
Certificates--Noneconomic REMIC Residual Certificates" in the Prospectus.
The Residual Certificateholders may be required to report an amount of
taxable income with respect to the earlier accrual periods of the Trust Fund's
term that significantly exceeds the amount of cash distributions received by
such Residual Certificateholders from the Trust Fund with respect to such
periods. Furthermore, the tax on such income may exceed the cash distributions
with respect to such periods. Consequently, Residual Certificateholders should
have other sources of funds sufficient to pay any federal income taxes due in
the earlier years of the Trust Funds' term as a result of their ownership of the
Residual Certificates. In addition, the required inclusion of this amount of
taxable income during the Trust Fund's earlier accrual periods and the deferral
of corresponding tax losses or deductions until later accrual periods or until
the ultimate sale or disposition of a Residual Certificate (or possibly later
under the "wash sale" rules of Section 1091 of the Code) may cause the Residual
Certificateholders' after-tax rate of return to be zero or negative even if the
Residual Certificateholders' pre-tax rate of return is positive. That is, on a
present value basis, the Residual Certificateholders' resulting tax liabilities
could substantially exceed the sum of any tax benefits and the amount of any
cash distributions on such Residual Certificates over their life.
[[Residential Funding[] will be designated as the "tax matters person"
with respect to the Trust Fund as defined in the REMIC Provisions (as defined in
the Prospectus), and in connection therewith will be required to hold not less
than 0.01% of the Residual Certificates.]
Purchasers of the Residual Certificates are strongly advised to consult
their own tax advisors as to the economic and tax consequences of investment in
such Residual Certificates.
For further information regarding the federal income tax consequences
of investing in the Residual Certificates, see "Certain Yield and Prepayment
Considerations--Additional Yield Considerations Applicable Solely to the
Residual Certificates" herein and "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Residual Certificates" in the
Prospectus.
[FOR TRUSTS TREATED AS GRANTOR TRUSTS]
[Upon the issuance of the Offered Certificates [Orrick, Herrington &
Sutcliffe] [Thacher Proffitt & Wood], 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 be classified as a grantor trust under subpart E, part I of subchapter
J of the Code and not as a partnership or as an association taxable as a
corporation. Accordingly, each holder of a Certificate generally will be treated
as the owner of an interest in the Mortgage Collateral included in the Trust
Fund.
For purposes of the following discussion, the [Class ____ and Class
____] Certificates, a Grantor Trust, which represent an undivided equitable
ownership interest in the principal of the Mortgage Collateral, together with
interest thereon at the Applicable Pass-Through Rate, will be referred to as a
"Grantor Trust Fractional Interest Certificate." The [Class ___ and Class ___]
Certificates, which represent ownership of all or a portion of the difference
between interest paid on the Mortgage Collateral (net of Servicing Fees and any
Spread) and interest paid to the holders of Grantor Trust Fractional Interest
Certificates will be referred to as a "Grantor Trust Strip Certificate." A
Grantor Trust Strip Certificate may also evidence a nominal ownership interest
in the principal of the Mortgage Collateral.
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Characterization of Investments in Grantor Trust Certificates
Grantor Trust Fractional Interest Certificates. In the case of Grantor
Trust Fractional Interest Certificates[, subject to the discussion below with
respect to Buy-Down Loans], counsel to the Company will deliver an opinion upon
issuance of the offered certificates that, in general, Grantor Trust Fractional
Interest Certificates will represent interests in (i) "qualifying real property
loans" within the meaning of Section 593(d) of the Code [(except to the extent
representing a Contract secured by a Manufactured Home that is not permanently
fixed to real property)]; (ii) "loans . . . secured by an interest in real
property" within the meaning of Section 7701(a)(19)(C)(v) of the Code [(except
to the extent representing a Contract secured by a Manufactured Home used on a
transient basis)]; (iii) "obligation[s] (including any participation or
certificate of beneficial ownership therein) which . . . [are] principally
secured by an interest in real property" within the meaning of Section
860G(a)(3)(A) of the Code; and (iv) "real estate assets" within the meaning of
Section 856(c)(5)(A) of the Code. In addition, counsel to the Company will
deliver an opinion that interest on Grantor Trust Fractional Interest
Certificates will be considered "interest on obligations secured by mortgages on
real property or on interests in real property" within the meaning of Section
856(c)(3)(B) of the Code.
[The Mortgage Collateral includes Buy-Down Loans. The characterization
of an investment in Buy-Down Loans will depend upon the precise terms of the
related Buy-Down Agreement, but to the extent that such Buy-Down Loans are
secured by a bank account or other personal property, they may not be treated in
their entirety as assets described in the foregoing sections of the Code. No
directly applicable precedents exist with respect to the federal income tax
treatment or the characterization of investments in Buy-Down Loans. Accordingly,
holders of Grantor Trust Fractional Interest Certificates should consult their
tax advisors with respect to the characterization of investments in Grantor
Trust Fractional Interest Certificates.].
Grantor Trust Strip Certificates. Even if Grantor Trust Strip
Certificates evidence an interest in a Grantor Trust Fund consisting of
[Mortgage Loans] [Contracts] that are "loans . . . secured by an interest in
real property" within the meaning of Section 7701(a)(19)(C)(v) of the Code,
"qualifying real property loans" within the meaning of Section 593(d) of the
Code, and "real estate assets" within the meaning of Section 856(c)(5)(A) of the
Code, and the interest on which is "interest on obligations secured by mortgages
on real property" within the meaning of Section 856(c)(3)(B) of the Code, it is
unclear whether the Grantor Trust Strip Certificates, and the income therefrom,
will be so characterized. The policies underlying such sections (namely, to
encourage or require investments in mortgage loans by thrift institutions and
real estate investment trusts), however, may suggest that such characterization
is appropriate. Counsel to the Company will not deliver any opinion on these
questions. Prospective purchasers to which such characterization of an
investment in Grantor Trust Strip Certificates is material should consult their
tax advisors regarding whether the Grantor Trust Strip Certificates, and the
income therefrom, will be so characterized.
The Grantor Trust Strip Certificates will be "obligation[s] (including
any participation or certificate of beneficial ownership therein) which . . .
[are] principally secured by an interest in real property" within the meaning of
Section 860G(a)(3)(A) of the Code.
Taxation of Owners of Grantor Trust Fractional Interest Certificates
Holders of a Grantor Trust Fractional Interest Certificates generally
will be required to report on their federal income tax returns their shares of
the entire income from the Mortgage Collateral (including amounts used to pay
reasonable servicing fees and other expenses) and will be entitled to deduct
their shares of any such reasonable servicing fees and other expenses. Because
of stripped interests, market or original issue discount, or premium, the amount
includible in income on account of a Grantor Trust Fractional Interest
Certificate may differ significantly from the amount distributable thereon
representing interest on the Mortgage Collateral. Under Section 67 of the Code,
an individual, estate or trust holding a Grantor Trust Fractional Interest
Certificate directly or through certain pass-through entities will be allowed a
deduction for such reasonable servicing fees and expenses only to the extent
that the aggregate of such holder's miscellaneous itemized deductions exceeds
two percent of such holder'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
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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 holders of Grantor Trust Fractional
Interest Certificates who are subject to the limitations of either Section 67 or
Section 68 of the Code may be substantial. In addition, Certificateholders
(other than corporations) subject to the alternative minimum tax may not deduct
miscellaneous itemized deductions in determining such holder's alternative
minimum taxable income. [If multiple classes of Grantor Trust Certificates]
[Although it is not entirely clear, it appears that such fees and expenses
should be allocated among the classes of Grantor Trust Certificates using a
method that recognizes that each such class benefits from the related services.
In the absence of statutory or administrative clarification as to the method to
be used, it currently is intended to base information returns or reports to the
Internal Revenue Service (the "IRS") and Certificateholders on a method that
allocates such expenses among classes of Grantor Trust Certificates with respect
to each period based on the distributions made to each such class during that
period.]
[The IRS has ruled that an unreasonably high servicing fee retained by
a seller or servicer will be treated as a retained ownership interest in
mortgages that constitutes a stripped coupon. For purposes of determining what
constitutes reasonable servicing fees for various types of mortgages the IRS has
established certain "safe harbors." The servicing fees paid with respect to the
Mortgage Collateral are higher than the "safe harbors" and, accordingly, may not
constitute reasonable servicing compensation. [Information regarding servicing
fees paid to the Master Servicer, the Certificate Administrator, any Servicer,
any Sub-Servicer or their respective affiliates necessary to determine whether
the preceding "safe harbor" rules apply].
[If Certificates subject to the "stripped bond" rules of Section 1286
of the Code.] [Each Grantor Trust Fractional Interest Certificate will be
treated as having been issued with "original issue discount" within the meaning
of Section 1273(a) of the Code, subject, however, to the discussion below
regarding the treatment of certain stripped bonds as market discount bonds and
the discussion regarding de minimis market discount. See "Market Discount"
below. Under the stripped bond rules, the holder of a Grantor Trust Fractional
Interest Certificate (whether a cash or accrual method taxpayer) will be
required to report interest income from its Grantor Trust Fractional Interest
Certificate for each month in an amount equal to the income that accrues on such
Certificate in that month calculated under a constant yield method, in
accordance with the rules of the Code relating to original issue discount.
Application of Strip Bond Rules. The original issue discount on a
Grantor Trust Fractional Interest Certificate will be the excess of such
Certificate's stated redemption price over its issue price. The issue price of a
Grantor Trust Fractional Interest Certificate as to any purchaser will be equal
to the price paid by such purchaser for the Grantor Trust Fractional Interest
Certificate. The stated redemption price of a Grantor Trust Fractional Interest
Certificate will be the sum of all payments to be made on such Certificate, as
well as such Certificate's share of reasonable servicing fees and other
expenses[, other than payments of fixed interest payable periodically (not less
than annually)]. In general, the amount of such income that accrues in any month
would equal the product of such holder's adjusted basis in such Grantor Trust
Fractional Interest Certificate at the beginning of such month (see "Sales of
Grantor Trust Certificates") and the yield of such Grantor Trust Fractional
Interest Certificate to such holder. Such yield would be computed at the rate
(assuming compounding based on the regular interval between payment dates) that,
if used to discount the holder's share of future payments on the Mortgage
Collateral, would cause the present value of those future payments to equal the
price at which the holder purchased such Certificate. In computing yield under
the stripped bond rules, a Certificateholder's share of future payments on the
Mortgage Collateral will not include any payments made in respect of any
ownership interest in the Mortgage Collateral retained by the Company, the
Master Servicer, the Certificate Administrator, any Servicer, any Sub-Servicer
or their respective affiliates, but will include such Certificateholder's share
of any reasonable servicing fees and other expenses.
Section 1272(a)(6) of the Code requires (i) the use of a reasonable
prepayment assumption in accruing original issue discount and (ii) adjustments
in the accrual of original issue discount when prepayments do not conform to the
prepayment assumption with respect to certain categories of debt instruments,
and regulations could be adopted applying those provisions to the Grantor Trust
Fractional Interest Certificates. It is unclear whether those provisions would
be applicable to the Grantor Trust Fractional Interest Certificates or whether
use of a prepayment assumption may be required or permitted in the absence of
such regulations. It is also uncertain, if a prepayment assumption is used,
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whether the assumed prepayment rate would be determined based on conditions at
the time of the first sale of the Grantor Trust Fractional Interest Certificate
or, with respect to any subsequent holder, at the time of purchase of the
Grantor Trust Fractional Interest Certificate by that holder. Certificateholders
are advised to consult their tax advisors concerning reporting original issue
discount in general and, in particular, whether a prepayment assumption should
be used in reporting original issue discount with respect to Grantor Trust
Fractional Interest Certificates.
In the case of a Grantor Trust Fractional Interest Certificate acquired
at a price equal to the principal amount of the Mortgage Collateral allocable to
such Certificate, the use of a prepayment assumption would not ordinarily have
any significant effect on the yield used in calculating accruals of interest
income. In the case, however, of a Grantor Trust Fractional Interest Certificate
acquired at a discount or premium (that is, at a price less than or greater than
such principal amount, respectively), the use of a prepayment assumption would
increase or decrease such yield, and thus accelerate or decelerate,
respectively, the reporting of income.
If a prepayment assumption is not used, then when an item of Mortgage
Collateral prepays in full, the holder of a Grantor Trust Fractional Interest
Certificate acquired at a discount or a premium generally will recognize
ordinary income or loss equal to the difference between the portion of the
prepaid principal amount of the item of Mortgage Collateral that is allocable to
such Certificate and the portion of the adjusted basis of such Certificate that
is allocable to such Certificateholder's interest in the Mortgage Collateral. If
a prepayment assumption is used, it appears that no separate item of income or
loss should be recognized upon a prepayment. Instead, a prepayment should be
treated as a partial payment of the stated redemption price of the Grantor Trust
Fractional Interest Certificate and accounted for under a method similar to that
described for taking account of original issue discount on REMIC Regular
Certificates. See "Certain Federal Income Tax Consequences -- Taxation of Owners
of REMIC Regular Certificates--Original Issue Discount" in the Prospectus. It is
unclear what other adjustments would be required to reflect differences between
an assumed prepayment rate and the actual rate of prepayments.
In the absence of statutory or administrative clarification, it is
currently intended to base information reports or returns to the IRS and
Certificateholders in transactions subject to the stripped bond rules on a
prepayment assumption (the "Prepayment Assumption") that will be disclosed in
the related Prospectus Supplement and on a constant yield computed using a
representative initial offering price for each class of Certificates. 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 such Prepayment Assumption or any other rate and
Certificateholders should bear in mind that the use of a representative initial
offering price will mean that such information returns or reports, even if
otherwise accepted as accurate by the IRS, will in any event be accurate only as
to the initial Certificateholders of each series who bought at that price.
Under Treasury regulation Section 1.1286-1T, certain stripped bonds are
to be treated as market discount bonds and, accordingly, any purchaser of such a
bond is to account for any discount on the bond as market discount rather than
original issue discount. This treatment only applies, however, if immediately
after the most recent disposition of the bond by a person stripping one or more
coupons from the bond and disposing of the bond or coupon (i) there is no
original issue discount (or only a de minimis amount of original issue discount)
or (ii) the annual stated rate of interest payable on the original bond is no
more than one percentage point lower than the gross interest rate payable on the
original mortgage loan (before subtracting any servicing fee or any stripped
coupon). [Specify if interest payable on a Grantor Trust Fractional Interest
Certificate is more than one percentage point lower than the gross interest rate
payable on the Mortgage Collateral disclose that fact.] If the original issue
discount or market discount on a Grantor Trust Fractional Interest Certificate
determined under the stripped bond rules is less than 0.25% of the stated
redemption price multiplied by the weighted average maturity of the Mortgage
Collateral, then such original issue discount or market discount will be
considered to be de minimis. Original issue discount or market discount of only
a de minimis amount will be included in income in the same manner as de minimis
original issue and market discount described in "If Stripped Bond Rules Do Not
Apply" and "Market Discount."]
[If Stripped Bond Rules Do Not Apply. Subject to the discussion below on
original issue discount, [if the stripped bond rules do not apply to a Grantor
Trust Fractional Interest Certificate,] the Certificateholder will be required
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to report its share of the interest income on the Mortgage Collateral in
accordance with such Certificateholder's normal method of accounting. The
original issue discount rules will apply to a Grantor Trust Fractional Interest
Certificate to the extent it evidences an interest in Mortgage Collateral issued
with original issue discount.
The original issue discount, if any, on the Mortgage Collateral will
equal the difference between the stated redemption price of such Mortgage
Collateral and its issue price. Under the OID Regulations, the stated redemption
price is equal to the total of all payments to be made on such Mortgage
Collateral other than "qualified stated interest." "Qualified stated interest"
includes interest that is unconditionally payable at least annually at a single
fixed rate, or 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 Mortgage Collateral. In general, the issue price of a
Mortgage Loan or Contract will be the amount received by the borrower from the
lender under the terms of the Mortgage Loan or Contract, less any "points" paid
by the borrower, and the stated redemption price of a Mortgage Loan will equal
its principal amount, unless the Mortgage Loan or Contract provides for an
initial below-market rate of interest or the acceleration or the deferral of
interest payments.
[Describe the manner in which such rules will be applied with respect
to those Mortgage Collateral by the Trustee in preparing information returns to
the Certificateholders and the IRS.]
Notwithstanding the general definition of original issue discount,
original issue discount will be considered to be de minimis if such original
issue discount is less than 0.25% of the stated redemption price multiplied by
the weighted average maturity of the Mortgage Collateral. For this purpose, the
weighted average maturity of the Mortgage Collateral will be computed as the sum
of the amounts determined, as to each payment included in the stated redemption
price of such Mortgage Collateral, 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 by (ii) a fraction, the numerator of which is the amount
of the payment and the denominator of which is the stated redemption price of
the Mortgage Collateral. 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" rate or 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 each such payment and the
denominator of which is the outstanding stated principal amount of the Mortgage
Collateral. The OID Regulations also permit a Certificateholder to elect to
accrue de minimis original issue discount into income currently based on a
constant yield method. See "Market Discount" below.
If original issue discount is in excess of a de minimis amount, all
original issue discount with respect to the Mortgage Collateral will be required
to be accrued and reported in income each month, based on a constant yield. The
OID Regulations suggest that no prepayment assumption is appropriate in
computing the yield on prepayable obligations issued with original issue
discount. In the absence of statutory or administrative clarification, it
currently is not intended to base information reports or returns to the IRS and
Certificateholders on the use of a prepayment assumption in transactions not
subject to the stripped bond rules. Section 1272(a)(6) of the Code, however, may
require that a prepayment assumption be used in computing yield with respect to
all mortgage-backed securities. Certificateholders are advised to consult their
tax advisors concerning whether a prepayment assumption should be used in
reporting original issue discount with respect to Grantor Trust Fractional
Interest Certificates. [Describe manner by which the original issue discount
rules will apply to Mortgage Collateral in such series.]
A purchaser of a Grantor Trust Fractional Interest Certificate that
purchases such Grantor Trust Fractional Interest Certificate at a cost less than
such Certificate's allocable portion of the aggregate remaining stated
redemption price of the Mortgage Collateral will also be required to include in
gross income such Certificate's daily portions of any original issue discount
with respect to such Mortgage Collateral. However, each such daily portion will
be reduced, if the cost of such Grantor Trust Fractional Interest Certificate to
such purchaser is in excess of such Certificate's allocable portion of the
aggregate "adjusted issue prices" of the Mortgage Collateral, approximately in
proportion to the ratio such
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excess bears to such Certificate's allocable portion of the aggregate original
issue discount remaining to be accrued on the Mortgage Collateral. The adjusted
issue price of an item of Mortgage Collateral 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 item of Mortgage Collateral at the beginning of the accrual
period that includes such day and (ii) the daily portions of original issue
discount for all days during such accrual period prior to such day. The adjusted
issue price of an item of Mortgage Collateral at the beginning of any accrual
period will equal the issue price of such Mortgage Collateral, increased by the
aggregate amount of original issue discount with respect to such Mortgage
Collateral that accrued in prior accrual periods, and reduced by the amount of
any payments made on such Mortgage Collateral in prior accrual periods of
amounts included in its stated redemption price.
The Master Servicer will provide to any holder of a Grantor Trust
Fractional Interest Certificate such information as such holder may reasonably
request from time to time with respect to original issue discount accruing on
Grantor Trust Fractional Interest Certificates. Such requests may be directed to
[Residential Funding] [principal executive office]. [See "Residential Funding
Corporation" in the Prospectus.] See "Grantor Trust Reporting" below.]
Market Discount. If the stripped bond rules do not apply to the Grantor
Trust Fractional Interest Certificate, a Certificateholder may be subject to the
market discount rules of Sections 1276 through 1278 of the Code to the extent an
interest in Mortgage Collateral is considered to have been purchased at a
"market discount," that is, in the case of Mortgage Collateral issued without
original issue discount, at a purchase price less than its remaining stated
redemption price (as defined above), or in the case of Mortgage Collateral
issued with original issue discount, at a purchase price less than its adjusted
issue price (as defined above). If market discount is in excess of a de minimis
amount (as described below), the holder generally will be required to include in
income in each month the amount of such discount that has accrued (under the
rules described in the next paragraph) through such month that has not
previously been included in income, but limited, in the case of the portion of
such discount that is allocable to any Mortgage Collateral, to the payment of
stated redemption price on such Mortgage Collateral that is received by (or, in
the case of accrual basis Certificateholders, due to) the Trust Fund in that
month. A Certificateholder may elect to include market discount in income
currently as it accrues (under a constant yield method based on the yield of the
Certificate to such holder) 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 during or after the first
taxable year to which such election applies. In addition, the OID Regulations
would 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 Mortgage Collateral with market discount, the Certificateholder
would be deemed to have made an election to include market discount in income
currently with respect to all other debt instruments having market discount that
such Certificateholder acquires during the taxable year of the election and
thereafter, and possibly previously acquired instruments. Similarly, a
Certificateholder that made this election for a Certificate 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 "Certain Federal Income Tax
Consequences--Taxation of Owners of REMIC Regular Certificates--Premium" in the
Prospectus. Each of these elections to accrue interest, discount and premium
with respect to a Certificate on a constant yield method or as interest is
irrevocable.
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 such time as regulations are issued by the Treasury
Department, certain rules described in the Conference Committee Report (the
"Committee Report") accompanying the Tax Reform Act of 1986 will apply. Under
those rules, in each accrual period market discount on the Mortgage Collateral
should accrue, at the Certificateholder's option: (i) on the basis of a constant
yield method, (ii) in the case of Mortgage Collateral 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 stated interest remaining to be paid on the Mortgage Collateral as of the
beginning of the accrual period, or (iii) in the case of Mortgage Collateral
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 at the
beginning of the accrual period. The prepayment assumption, if any,
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used in calculating the accrual of original issue discount is to be used in
calculating the accrual of market discount. The effect of using a prepayment
assumption could be to accelerate the reporting of such discount income. 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 Mortgage Collateral purchased at a discount in the secondary market.
Since the Mortgage Collateral will provide for periodic payments of
stated redemption price, such discount may be required to be included in income
at a rate that is not significantly slower than the rate at which such discount
would be included in income if it were original issue discount.
Market discount with respect to Mortgage Collateral generally will be
considered to be de minimis if it is not greater than or equal to 0.25% of the
stated redemption price of the Mortgage Collateral 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 used, if any. The effect of using a prepayment assumption
could be to accelerate the reporting of such discount income. If market discount
is treated as de minimis under the foregoing rule, it appears that actual
discount would be treated [in a manner similar to original issue discount of a
de minimis amount. See "If Stripped Bond Rules Do Not Apply."]
Further, under the rules described in "Certain Federal Income Tax
Consequences -- Taxation of Owners of REMIC Regular Certificates--Market
Discount" in the Prospectus, any discount that is not original issue discount
and exceeds a de minimis amount may require the deferral of interest expense
deductions attributable to accrued market discount not yet includible in income,
unless an election has been made to report market discount currently as it
accrues.
Premium. If a Certificateholder is treated as acquiring the underlying
Mortgage Collateral at a premium, that is, at a price in excess of their
remaining stated redemption price, such Certificateholder may elect under
Section 171 of the Code to amortize such premium using a constant yield method.
Amortizable premium is treated as an offset to interest income on the related
Mortgage Collateral rather than as a separate interest deduction. Premium
allocable to Mortgage Collateral for which an amortization election is not made
should be allocated among the payments on the Mortgage Collateral representing
stated redemption price and be allowed as an ordinary deduction as such payments
are made (or, for a Certificateholder using the accrual method of accounting,
when such payments are due).
It is unclear whether a prepayment assumption should be used in
computing amortization of premium allowable under Section 171 of the Code. If
premium is not subject to amortization using a prepayment assumption and an item
of Mortgage Collateral prepays in full, the holder of a Grantor Trust Fractional
Interest Certificate acquired at a premium should recognize a loss, equal to the
difference between the portion of the prepaid principal amount of the Mortgage
Collateral that is allocable to the Certificate and the portion of the adjusted
basis of the Certificate that is allocable to the Mortgage Collateral. If a
prepayment assumption is used to amortize such premium, it appears that such a
loss would be unavailable. Instead, if a prepayment assumption is used, a
prepayment should be treated as a partial payment of the stated redemption price
of the Grantor Trust Fractional Interest Certificate and accounted for under a
method similar to that described for taking account of original issue discount
on REMIC Regular Certificates. See "Certain Federal Income Tax Consequences --
Taxation of Owners of REMIC Regular Certificates--Original Issue Discount" in
the Prospectus. It is unclear what other adjustments would be required to
reflect differences between an assumed prepayment rate and the actual rate of
prepayments.
Taxation of Owners of Grantor Trust Strip Certificates
The "stripped coupon" rules of Section 1286 of the Code will apply to
the Grantor Trust Strip Certificates. Except as described above in "Taxation of
Owners of Grantor Trust Fractional Interest Certificates--If Stripped Bond Rules
Apply," no regulations or published rulings under Section 1286 of the Code have
been issued and some uncertainty exists as to how it will be applied to
securities such as the Grantor Trust Strip Certificates. Accordingly, holders of
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Grantor Trust Strip Certificates should consult their tax advisors concerning
the method to be used in reporting income or loss with respect to such
Certificates.
The OID Regulations do not apply to "stripped coupons," although they
provide general guidance as to how the original issue discount sections of the
Code will be applied. In addition, the discussion below is subject to the
discussion under "Possible Application of Proposed Contingent Payment Rules"
below, and assumes that the holder of a Grantor Trust Strip Certificate will not
own any Grantor Trust Fractional Interest Certificates.
Under the stripped coupon rules, it appears that original issue
discount will be required to be accrued in each month on the Grantor Trust Strip
Certificates based on a constant yield method. In effect, each holder of Grantor
Trust Strip Certificates would include as interest income in each month an
amount equal to the product of such holder's adjusted basis in such Grantor
Trust Strip Certificate at the beginning of such month and the yield of such
Grantor Trust Strip Certificate to such holder. Such yield would be calculated
based on the price paid for that Grantor Trust Strip Certificate by its holder
and the payments remaining to be made thereon at the time of the purchase, plus
an allocable portion of the servicing fees and expenses to be paid with respect
to the Mortgage Collateral. See "Taxation of Owners of Grantor Trust Fractional
Interest Certificates--If Stripped Bond Rules Apply" above.
As noted above, Section 1272(a)(6) of the Code requires that a
prepayment assumption be used in computing the accrual of original issue
discount with respect to certain categories of debt instruments, and that
adjustments be made in the amount and rate of accrual of such discount when
prepayments do not conform to such prepayment assumption. Regulations could be
adopted applying those provisions to the Grantor Trust Strip Certificates. It is
unclear whether those provisions would be applicable to the Grantor Trust Strip
Certificates or whether use of a prepayment assumption may be required or
permitted in the absence of such regulations. It is also uncertain, if a
prepayment assumption is used, whether the assumed prepayment rate would be
determined based on conditions at the time of the first sale of the Grantor
Trust Strip Certificate or, with respect to any subsequent holder, at the time
of purchase of the Grantor Trust Strip Certificate by that holder.
The accrual of income on the Grantor Trust Strip Certificates will be
significantly slower if a prepayment assumption is permitted to be made than if
yield is computed assuming no prepayments. In the absence of statutory or
administrative clarification, it currently is intended to base information
returns or reports to the IRS and Certificateholders on the Prepayment
Assumption disclosed in the related Prospectus Supplement and on a constant
yield computed using a representative initial offering price for each class of
Certificates. 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 and Certificateholders should bear in mind that the use of
a representative initial offering price will mean that such information returns
or reports, even if otherwise accepted as accurate by the IRS, will in any event
be accurate only as to the initial Certificateholders of each series who bought
at that price. Prospective purchasers of the Grantor Trust Strip Certificates
should consult their tax advisors regarding the use of the Prepayment
Assumption.
It is unclear under what circumstances, if any, the prepayment of an
item of Mortgage Collateral will give rise to a loss to the holder of a Grantor
Trust Strip Certificate. If a Grantor Trust Strip Certificate is treated as a
single instrument (rather than an interest in discrete mortgage loans or
contracts) and the effect of prepayments is taken into account in computing
yield with respect to such Grantor Trust Strip Certificate, it appears that no
loss may be available as a result of any particular prepayment unless
prepayments occur at a rate faster than the Prepayment Assumption. However, if a
Grantor Trust Strip Certificate is treated as an interest in discrete Mortgage
Collateral, or if the Prepayment Assumption is not used, then when an item of
Mortgage Collateral is prepaid, the holder of a Grantor Trust Strip Certificate
should be able to recognize a loss equal to the portion of the adjusted issue
price of the Grantor Trust Strip Certificate that is allocable to such Mortgage
Collateral.
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Possible Application of Proposed Contingent Payment Rules
The coupon stripping rules' general treatment of stripped coupons is to
regard them as newly issued debt instruments in the hands of each purchaser. To
the extent that payments on the Grantor Trust Strip Certificates would cease if
the Mortgage Collateral were prepaid in full, the Grantor Trust Strip
Certificates could be considered to be debt instruments providing for contingent
payments. Under the OID Regulations, debt instruments providing for contingent
payments are not subject to the same rules as debt instruments providing for
noncontingent payments, but no final regulations have been promulgated with
respect to contingent payment debt instruments. Proposed regulations were
promulgated in 1986 regarding contingent payment debt instruments, but have not
been made final and are likely to be substantially revised before being made
final. Moreover, like the OID Regulations, such proposed regulations do not
specifically address securities, such as the Grantor Trust Strip Certificates,
that are subject to the stripped bond rules of Section 1286 of the Code.
If the contingent payment rules under the regulations proposed in 1986
were to apply, the holder of a Grantor Trust Strip Certificate would be required
to include as interest income in each month a portion of the periodic payment
(the "Accrued Periodic Payment") due on the Grantor Trust Strip Certificate.
That portion (the "Periodic Income Amount") would equal the product of (i) the
adjusted issue price of the Grantor Trust Strip Certificate at the beginning of
the period and (ii) a specified yield (as further described below). The excess
of the Accrued Periodic Payment over the Periodic Income Amount first would
reduce the adjusted issue price of the Grantor Trust Strip Certificate and, to
that extent, would be treated as a return of capital and not as interest income;
after the adjusted issue price had been reduced to zero, the entire Accrued
Periodic Payment would be treated as interest income.
The specified yield referred to in clause (ii) above would equal the
"applicable federal rate" (expressed as a monthly rate) in effect at the time of
purchase of the Grantor Trust Strip Certificate by that holder, which rate is
computed monthly by the IRS. It is unclear whether a prepayment assumption
should be made in determining which Treasury securities (short-term, mid-term or
long-term) should be used to determine the "applicable federal rate" for this
purpose.
Income accrual with respect to a Grantor Trust Strip Certificate will
generally be slower if the foregoing contingent payment rules apply than if they
do not. However, as noted above, there is substantial doubt that the contingent
payment rules of the proposed regulations in their current form will be
permitted to be applied to instruments such as the Grantor Trust Strip
Certificates and revised contingent payment regulations are expected to be
proposed. Certificateholders should consult their tax advisors concerning the
possible application of the contingent payment rules to the Grantor Trust Strip
Certificates.]
Sales of Grantor Trust Certificates
Except as described below, any gain or loss recognized on the sale of a
Grantor Trust Certificate generally will be capital gain or loss, and will be
equal to the difference between the amount realized on the sale of a Grantor
Trust Certificate and its adjusted basis. The adjusted basis of a Grantor Trust
Certificate generally will equal its cost, increased by any income (including
original issue discount and market discount income) recognized by the seller and
reduced (but not below zero) by any previously reported losses, amortized
premium and distributions with respect to such Grantor Trust Certificate. The
Code currently provides for a top marginal tax rate applicable to ordinary
income of individuals of 39.6% while maintaining a maximum marginal rate for the
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 or loss from the sale of a Grantor Trust Certificate may be
partially or wholly ordinary and not capital in certain circumstances. Gain
attributable to accrued and unrecognized market discount will be treated as
ordinary income, as will gain or loss recognized by banks and other financial
institutions subject to Section 582(c) of the Code. Furthermore, a portion of
any gain that might otherwise be capital gain may be treated as ordinary income
to the extent that the Grantor Trust 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 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 that 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.
Grantor Trust Reporting
The Trustee will furnish to each holder of a Grantor Trust Certificate
with each distribution a statement setting forth the amount of such distribution
allocable to principal on the underlying [Mortgage Loans] [Contracts] and to
interest thereon at the related Pass-Through Rate. In addition, within a
reasonable time after the end of each calendar year, based on information
provided by the Master Servicer or the Certificate Administrator, as applicable,
the Trustee will furnish to each Certificateholder during such year such
customary factual information as the Trustee deems necessary or desirable to
enable holders of Grantor Trust Certificates to prepare their tax returns and
will furnish comparable information to the IRS as and when required by law to do
so. Because the rules for accruing discount and amortizing premium with respect
to the Grantor Trust Certificates are uncertain in various respects, there is no
assurance the IRS will agree with the Trustee's information reports of such
items of income and expense. Moreover, such information reports, even if
otherwise accepted as accurate by the IRS, will in any event be accurate only as
to the initial Certificateholders who bought their Certificates at the
representative initial offering price used in preparing such reports.
Backup Withholding
In general, the rules described in "Certain Federal Income Tax
Consequences -- Backup Withholding with Respect to REMIC Certificates" in the
Prospectus will also apply to Grantor Trust Certificates.
Foreign Investors
In general, the discussion with respect to REMIC Regular Certificates
in "Certain Federal Income Tax Consequences -- Foreign Investors in REMIC
Certificates" in the Prospectus applies to Grantor Trust Certificates.
To the extent that interest on a Grantor Trust Certificate would be
exempt under Sections 871(h)(1) and 881(c) of the Code from United States
withholding tax, and the Grantor Trust Certificate is not held in connection
with a Certificateholder's trade or business in the United States, such Grantor
Trust Certificate will not be subject to United States estate taxes in the
estate of a non-resident alien individual.]
[ERISA CONSIDERATIONS]
[A description of whether there will be any exemption from "plan asset"
treatment will be available with respect to the Series to be included as
appropriate.]
[A statement of whether the Series will be an Exempt or a Nonexempt
Series to be included if appropriate]
[To qualify for exemption under PTCE 83-1 (see "ERISA
Considerations--Prohibited Transaction Class Exemptions" in the Prospectus), a
Certificate of an Exempt Series must entitle its holder to pass-through payments
of both principal and interest on the Mortgage Loans. Because the Subordinate
Certificates are subordinated to the Senior Certificates, PTCE 83-1 will not
provide an exemption from the prohibited transaction rules of ERISA for Plans
that
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<PAGE>
acquire Subordinate Certificates. Any Plan fiduciary who proposes to cause a
Plan to purchase Certificates should consult with its counsel with respect to
the potential consequences under ERISA and Section 4975 of the Code of the
Plan's acquisition and ownership of Certificates. However, the other PTCEs or
the Underwriter's PTE may be applicable. See "ERISA Considerations" in the
Prospectus.]
[A Description of PTE 90-23 to be included if appropriate.]
LEGAL INVESTMENT MATTERS
The [Senior] Certificates will constitute "mortgage related securities"
for purposes of SMMEA for so long as they are rated in one of the two highest
rating categories by at least one nationally recognized statistical rating
organization, and, as such, will be legal investments for certain entities to
the extent provided in the SMMEA. [The Class M Certificates will not constitute
"mortgage related securities" for purposes of SMMEA.] Institutions whose
investment activities are subject to legal investment laws and regulations or to
review by regulatory authorities should consult with their own legal advisors in
determining whether and to what extent the Offered Certificates constitute legal
investments under SMMEA or are subject to restrictions on investment, capital
requirements or otherwise. See "Legal Investment Matters" in the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the underwriting
agreement dated [_______ __, 199_], (the "Underwriting Agreement") the
Underwriter has agreed to purchase, and the Company has agreed to sell to the
Underwriter, each class of the Offered Certificates [except that a de minimis
portion of the Residual Certificates will be retained by Residential Funding and
such portion is not offered hereby].
The Underwriting Agreement provides that the obligation of the
Underwriter to pay for and accept delivery of the Offered 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 distribution of the Offered Certificates by the Underwriter may be
effected, from time to time, in one or more negotiated transactions, or
otherwise, at varying prices to be determined at the time of sale. Proceeds to
the Company from the sale of the Offered Certificates, before deducting expenses
payable by the Company, will be [______]% of the aggregate Certificate Principal
Balance of the Offered Certificates plus accrued interest thereon from the
Cut-off Date. The Underwriter may effect such transactions by selling the
Offered Certificates to or through dealers, and such dealers may receive
compensation in the form of underwriting discounts, concessions or commissions
from the Underwriter for whom they act as agent. In connection with the sale of
the Offered Certificates, the Underwriter may be deemed to have received
compensation from the Company in the form of underwriting compensation. The
Underwriter and any dealers that participate with the Underwriter in the
distribution of the Offered Certificates may be deemed to be underwriters and
any profit on the resale of the Offered Certificates positioned by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933.
The Underwriting Agreement provides that the Company will indemnify the
Underwriter, and under limited circumstances the Underwriter will indemnify the
Company, against certain civil liabilities under the Securities Act of 1933 or
contribute to payments required to be made in respect thereof.
There can be no assurance that a secondary market for the Offered
Certificates will develop or, if it does develop, that it will continue. The
primary source of information available to investors concerning the Offered
Certificates will be the monthly statements discussed in the Prospectus under
"Description of the Certificates--Reports
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to Certificateholders," which will include information as to the outstanding
principal balance of the Offered Certificates and the status of the applicable
form of credit enhancement. There can be no assurance that any additional
information regarding the Offered Certificates will be available through any
other source. In addition, the Company is not aware of any source through which
price information about the Offered Certificates will be generally available on
an ongoing basis. The limited nature of such information regarding the Offered
Certificates may adversely affect the liquidity of the Offered Certificates,
even if a secondary market for the Offered Certificates becomes available.
LEGAL OPINIONS
Certain legal matters relating to the Offered Certificates will be
passed upon for the Company by [Orrick, Herrington & Sutcliffe] [Thacher
Proffitt & Wood], New York, New York and for the Underwriter by
[------------------------------].
RATINGS
It is a condition to the issuance of the Senior Certificates (other
than the Accrual Certificates) and the Class M Certificates that they be rated
not lower than "[___]" and "[___]", respectively by
[____________________________ ("_______")] and "[___]" and "[___]",
respectively, by [________________________ ("_______")].
[[________________] ratings on pass-through certificates address the
likelihood of the receipt by Certificateholders of payments required under the
Pooling and Servicing Agreement. [_______________] ratings take into
consideration the credit quality of the [Mortgage] [Contract] Pool, structural
and legal aspects associated with the Certificates, and the extent to which the
payment stream in the [Mortgage] [Contract] Pool is adequate to make payments
required under the Certificates. [_______________] rating on the Certificates
does not, however, constitute a statement regarding frequency of prepayments on
the [Mortgage Loans] [Contracts]. See "Certain Yield and Prepayment
Considerations" herein.] [The "r" of the "AAAr" rating of the Class [__]
Certificates by [________________] is attached to highlight derivative, hybrid,
and certain other obligations that [________________] believes may experience
high volatility or high variability in expected returns due to non-credit risks.
Examples of such obligations are: securities whose principal or interest return
is indexed to equities, commodities, or currencies; certain swaps and options;
and interest only and principal only mortgage securities. The absence of an "r"
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.]
[The ratings of [____] on pass-through certificates [also] address the
likelihood of the receipt by Certificateholders of all distributions on the
underlying [mortgage loans] [manufactured housing contracts] to which they are
entitled. The rating process addresses the structural and legal aspects
associated with the Certificates, including the nature of the underlying
[mortgage loans] [contracts]. The ratings assigned to pass-through certificates
do not represent any assessment of the likelihood or rate of principal
prepayments. The rating does not address the possibility that Certificateholders
might suffer a lower than anticipated yield.]
[The ratings of [_____] assigned to pass-through certificates [also]
address the likelihood of the receipt by Certificateholders of all distributions
to which such Certificateholders are entitled. [_____] ratings on pass-through
certificates do not represent any assessment of the likelihood that principal
prepayments will be made by the mortgagors or the degree to which such
prepayments differ from that originally anticipated. The ratings assigned to
pass-through certificates do not represent any assessment of the likelihood or
rate of principal prepayments. The rating does not address the possibility that
Certificateholders might suffer a lower than anticipated yield or that rapid
rates of principal prepayments could result in a failure of the holders of the
Stripped Interests Certificates to fully recover their initial investment.]
The Company has not requested a rating on the Offered Certificates by
any rating agency other than [__________] and [__________]. However, there can
be no assurance as to whether any other rating agency will rate
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<PAGE>
the Offered 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 Offered
Certificates by [_________] and [__________].
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. The rating of the Principal Only
Certificates, Stripped Interests Certificates or the Class M Certificates does
not address the possibility that the holders of such Certificates may fail to
fully recover their initial investment. In the event that the rating initially
assigned to the Offered Certificates is subsequently lowered for any reason, no
person or entity is obligated to provide any additional support or credit
enhancement with respect to the Offered Certificates.
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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
representations 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
Prospectus Supplement Page
Summary.............................................. S-
Description of the [Mortgage] [Contract] Pool........ S-
Description of the Offered Certificates.............. S-
Certain Yield and Prepayment Considerations.......... S-
Pooling and Servicing Agreement...................... S-
Certain Federal Income Tax Consequences.............. S-
Method of Distribution............................... S-
Legal Opinions....................................... S-
Ratings.............................................. S-
Legal Investment..................................... S-
ERISA Considerations................................. S-
Prospectus
Summary of Prospectus................................
Risk Factors.........................................
The Trust Funds......................................
Description of the Certificates......................
Subordination........................................
Description of Credit Enhancement....................
Insurance Policies on Mortgage
Loans or Contracts..............................
The Company..........................................
Residential Funding Corporation......................
The Pooling and Servicing Agreement..................
Yield Considerations.................................
Maturity and Prepayment Considerations...............
Certain Legal Aspects of Mortgage
Loans and Contracts.............................
Certain Federal Income Tax Consequences..............
State and Other Tax Consequences.....................
ERISA Considerations.................................
Legal Investment Matters.............................
Use of Proceeds......................................
Methods of Distribution..............................
Legal Matters........................................
Financial Information................................
Additional Information...............................
Index of Principal Definitions.......................
Residential Accredit Loans, Inc.
[Mortgage] [Manufactured Housing
Contract] Pass-Through Certificates,
Series [199_-___]
Class A-1 Certificates ____% $
Class A-2 Certificates ____% $
Class A-4 Certificates 0% $
Class A-5 Certificates Variable Rate $ 0
Class R Certificates ____% $
Class M Certificates ____% $
[Name of [Master] Servicer[s]]
PROSPECTUS SUPPLEMENT
________________, 199_
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This preliminary prospectus supplement shall not constitute an offer
to sell or the solicitation of an offer to buy nor shall there be any sale of
these securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of any
such State.
SUBJECT TO COMPLETION, DATED AUGUST __, 1997
Version I-B
Prospectus Supplement
(To Prospectus dated [_______ __, 199_])
$[------------]
Residential Accredit Loans, Inc.
Depositor
[Name of Certificate Administrator]
Certificate Administrator
Mortgage Pass-Through Certificates, Series [199_-_]
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
$[__________] [____]% Class A-1 Certificates $ 0 [____]%(1) Class S Certificates
$[__________] [____]% Class A-2 Certificates $[________] [____]% Class R Certificates
$[__________] [____]% Class A-3 Certificates
</TABLE>
- ------------------
(1) Based upon the related Notional Amount, (as described herein under
"Description of the Offered Certificates-Interest Distributions"). The Class
S Certificates will be Fixed Strip Certificates and will not be entitled to
receive distributions of principal.
The Series [199_-_] Mortgage Pass-Through Certificates offered hereby will
include the following five classes (the "Offered Certificates"): (i) Class A-1
Certificates, Class A-2 Certificates and Class A-3 Certificates, (ii) Class S
Certificates (the "Fixed Strip Certificates") and (iii) Class R Certificates
(the "Residual Certificates"). The Offered Certificates in the aggregate will
represent the entire beneficial ownership interest in a trust fund (the "Trust
Fund") consisting primarily of Ginnie Mae Securities (the "Underlying Agency
Securities"). Each Underlying Agency Security is a ["fully modified
pass-through" mortgage-backed certificate] [issued and serviced by a mortgage
banking company or other financial concern approved by Ginnie Mae (a "Ginnie Mae
Issuer")] based on and backed by a pool of mortgage loans (each, a "Mortgage
Pool") which may consist of FHA-insured or VA-guaranteed mortgage loans secured
by one- to four-family residential properties and eligible for inclusion in
mortgage pools underlying Ginnie Mae Securities, which may be level payment or
graduated payment first lien mortgage loans with terms to maturity of not more
than 30 years (collectively, the "Mortgage Loans"). Certain characteristics of
the Underlying Agency Securities are described herein under "Description of the
Underlying Agency Securities." See "Index of Principal Definitions" in the
Prospectus for meanings of capitalized terms and acronyms not otherwise defined
herein.
(Continued on following page)
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON THE
OFFERED CERTIFICATES. THE OFFERED CERTIFICATES DO NOT REPRESENT AN INTEREST IN
OR OBLIGATION OF THE COMPANY, THE CERTIFICATE ADMINISTRATOR, GMAC MORTGAGE
CORPORATION ("GMAC MORTGAGE") OR ANY OF THEIR AFFILIATES. ALTHOUGH PAYMENT OF
PRINCIPAL AND INTEREST ON THE UNDERLYING AGENCY SECURITIES IS GUARANTEED BY
GINNIE MAE, THE OFFERED CERTIFICATES ARE NOT INSURED OR GUARANTEED BY ANY
GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE COMPANY, 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 SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE ATTORNEY GENERAL OF
THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
For a discussion of significant matters affecting investments in the
Certificates, see "Risk Factors" [commencing on page S-11 herein and] in the
Prospectus commencing on page 15.
[Name of Underwriter] (the "Underwriter") intends to make a secondary market in
the Offered Certificates, but has no obligation to do so. There can be no
assurance that a secondary market for the Offered Certificates will develop or,
if it does develop, that it will continue.
The Offered Certificates will not be listed on any securities exchange.
The Offered Certificates will be purchased from the Company by the Underwriter,
and will be offered by the Underwriter 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 proceeds to the Company from the sale of
the Offered Certificates, before deducting expenses payable by the Company, will
be equal to approximately [____]% of the initial aggregate principal balance of
the Offered Certificates, plus accrued interest thereon from [__________ __,
199_] (the "Reference Date"). The Offered Certificates are offered by the
Underwriter subject to prior sale, when, as and if delivered to and accepted by
the Underwriter and subject to certain other conditions. The Underwriter
reserves the right to withdraw, cancel or modify such offer and to reject any
order in whole or in part. It is expected that delivery of the Offered
Certificates will be made on or about [__________ __, 199_], [at the offices of
[ ]], [through the facilities of The Depository Trust Company], against payment
therefor in immediately available funds.
[Name of Underwriter]
[__________ __, 199_]
<PAGE>
(Continued from previous page)
It is a condition to the issuance of the Offered Certificates that the Class
A-1, Class A-2, Class A-3, Fixed Strip and Residual Certificates be rated "[__]"
by [_______] and "[__]" by [________].
As described herein, a "real estate mortgage investment conduit" (a "REMIC")
election will be made in connection with the Trust Fund for federal income tax
purposes. Each class of the Offered Certificates (other than the Residual
Certificates) will represent ownership of "regular interests" in the REMIC and
the Residual Certificates will be the sole class of "residual interests" in the
REMIC. See "Certain Federal Income Tax Consequences" herein and in the
Prospectus. [Transfers of the Residual Certificates may be made only to
"qualified institutional buyers" as defined in Rule 144A under the Securities
Act of 1933, as amended, and will be prohibited to any non-United States person,
and will be subject to certain additional transfer restrictions described under
"Certain Federal Income Tax Consequences--Special Tax Considerations Applicable
to Residual Certificates" herein and in the Prospectus under "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."]
Distributions on the Offered Certificates will be made on the third business
day following each distribution date for the Underlying Agency Securities (each,
a "Distribution Date"), commencing on [__________ __, 199_] for the Offered
Certificates other than the Class A-3 Certificates, and commencing on the
Accretion Termination Date (as defined herein) for the Class A-3 Certificates.
With respect to any of the Underlying Agency Securities, the distribution date
is the [15th day of each calendar month in the case of a GNMA I Certificate]
[the 20th day of each calendar month in the case of a GNMA II Certificate] (or,
if such day is not a business day, the next business day) (each, an "Underlying
Security Distribution Date"). As described herein under "Description of the
Offered Certificates-Interest Distributions," interest distributions on the
Offered Certificates will be based on the Certificate Principal Balance thereof
(or the Notional Amount (as defined herein) in the case of the Fixed Strip
Certificates) and the applicable Pass-Through Rate thereof, which will be fixed
for all classes of Offered Certificates. Distributions in respect of principal
of the Offered Certificates will be allocated among the various classes of the
Offered Certificates (other than the Fixed Strip Certificates), as described
herein under "Description of the Offered Certificates--Principal Distributions."
The yield to maturity on the Offered Certificates will depend on the rate
and timing of principal payments on the Underlying Agency Securities, which in
turn will be affected by the rate and timing of principal payments on the
Mortgage Loans. The yield to investors on the Fixed Strip Certificates will be
extremely sensitive to the rate and timing of principal payments on the related
Underlying Agency Securities, which in turn will be affected by the rate and
timing of principal payments on the Mortgage Loans which may fluctuate
significantly over time. An extremely rapid rate of principal payments on the
Mortgage Loans could result in the failure of investors in the Fixed Strip
Certificates to recover their initial investments. See "Summary--Special
Prepayment Considerations," "--Special Yield Considerations" and "Certain Yield
and Prepayment Considerations" herein and "Yield Considerations" in the
Prospectus.
THE CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE PART OF A
SEPARATE SERIES OF CERTIFICATES BEING OFFERED BY THE COMPANY PURSUANT TO ITS
PROSPECTUS DATED [__________ __, 199_], OF WHICH THIS PROSPECTUS SUPPLEMENT IS A
PART AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE PROSPECTUS CONTAINS
IMPORTANT INFORMATION REGARDING THIS OFFERING NOT CONTAINED HEREIN AND
PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND THIS PROSPECTUS
SUPPLEMENT IN FULL. SALES OF THE OFFERED CERTIFICATES MAY NOT BE CONSUMMATED
UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS.
UNTIL [__________ __, 199_] (90 DAYS AFTER THE DATE OF THIS PROSPECTUS
SUPPLEMENT), ALL DEALERS EFFECTING TRANSACTIONS IN THE OFFERED 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.
[IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE OFFERED
CERTIFICATES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET, SUCH STABILIZATION, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.]
S-2
<PAGE>
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.
Title of Securities.............................. Mortgage
Pass-Through Certificates, Series [199_-_] (the "Certificates").
Company.......................................... Residential Accredit
Loans, Inc. (the "Company"), a corporation organized under the laws of
the State of Delaware which is an affiliate of Residential Funding
Corporation ("Residential Funding"), and an indirect wholly-owned
subsidiary of GMAC Mortgage. See "The Company" in the Prospectus.
Certificate Administrator........................ [Residential
Funding] [ ] in its capacity as certificate --------
administrator (the "Certificate Administrator"). See "Trust
Agreement--The Certificate Administrator" herein [and
"Residential Funding Corporation" in the Prospectus.]
Trustee.......................................... [Name of
Trustee], a [national bank] [[state bank] [trust company]
organized under the laws of __________] (the "Trustee"). See "The
Pooling and Servicing Agreement--The Trustee" in the Prospectus.
Reference Date................................... [__________ 1,
199_] (the "Reference Date").
Delivery Date.................................... On or about
[__________ __, 199_] (the "Delivery Date").
Distribution Date................................ The third
business day following each distribution date for the Underlying
Agency Securities commencing on [__________ __, 199_] (each, a
"Distribution Date"). With respect to any of the Underlying
Agency Securities, the distribution date is the [15th day of each
calendar month in the case of a GNMA I Certificate] [the 20th day
of each calendar month in the case of a GNMA II Certificate] (or,
if such day is not a business day, the next business day) (each,
an "Underlying Security Distribution Date").
The Trust Fund................................... The Trust Fund,
in which the Offered Certificates in the aggregate represent the
entire beneficial ownership interest, consists primarily of the
Underlying Agency Securities. The Offered Certificates will be
issued pursuant to a Trust Agreement (the "Trust Agreement"),
dated as of the Reference Date, among the Company, the
Certificate Administrator and the Trustee. See "Description of
the Offered Certificates--General" herein.
The Underlying Agency Securities. . . . .........The Underlying
Agency Securities are [GNMA] [I] [II] Certificates. Each
Underlying Agency Security is a ["fully modified pass- through"
mortgage-backed certificate] [issued and serviced by a mortgage
banking company or other financial concern approved by Ginnie Mae
(a "Ginnie Mae Issuer")] based on and backed by a pool of
FHA-insured or VA-guaranteed mortgage loans secured by one- to
four-family residential properties and eligible for inclusion
S-3
<PAGE>
in mortgage pools underlying Ginnie Mae Securities, which may be
level payment or graduated payment first lien mortgage loans with
terms to maturity of not more than 30 years (the "Mortgage
Loans"). Information relating to the Underlying Agency Securities
is provided as of the Reference Date.
The Underlying Agency Securities will have an aggregate
outstanding principal balance of approximately $[ ], pass-
------- through rates of [ ]% and a weighted average remaining
term to -- stated maturity of approximately [ ] months as of the
Reference --- Date.
The Underlying Agency Securities are guaranteed as to full and
timely payment of principal and interest by Ginnie Mae. The
guaranty of Ginnie Mae is backed by the full faith and credit of
the United States. For a further description of the underlying
Agency Securities, see "Description of the Underlying Agency
Securities" herein.
The Offered Certificates......................... The Offered
Certificates in the aggregate will represent the entire
beneficial ownership interest in the Trust Fund. The Offered
Certificates will have the following Pass-Through Rates,
Certificate Principal Balances and other features as of the
Reference Date:
Class A-1 Certificates[____]% $[_________] Fixed
Class A-2 Certificates[____]% $[_________] Fixed
Class A-3 Certificates[____]% $[_________] Fixed/Accrual
Class S Certificates [____]% $ 0 Fixed Strip
[Class R Certificates [____]% $[_________] Residual]
Residual Certificates............................ The Class R
Certificates are designated as the "Residual Certificates." [The
Residual Certificates have no Certificate Principal Balance and
no Pass-Through Rate. The Residual Certificates represent the
right to receive certain distributions, if any, of amounts which
are in excess of the amounts required to be distributed to all
other classes of Offered Certificates following the retirement of
all of the Offered Certificates.] [The Residual Certificates are
not being offered hereby.]
[Residential Funding initially will retain [a de minimis portion
of] the Residual Certificates; however, the Residual Certificates
held by Residential Funding may be sold at any time in accordance
with the terms of the Trust Agreement.]
Denominations.................................... The Class A-1,
Class A-2 and Class A-3 Certificates will be offered in
registered form, in minimum denominations of $[ ] and --------
integral multiples of $[ ] in excess thereof [, with one Class
----------- [____] Certificate evidencing the sum of an
authorized denomination thereof plus the remainder of the
aggregate initial Certificate Principal Balance of such class].
The Fixed Strip Certificates and Residual Certificates will be
offered in registered form in minimum denominations of a [____]%
Percentage Interest [, except, in the case of the Residual
Certificates, as otherwise set forth herein under "Certain
Federal Income Tax Consequences."]
S-4
<PAGE>
[Certificate Registration........................ The Offered
Certificates (other than the [Fixed Strip and Residual]
Certificates) will be represented by one or more certificates
registered in the name of Cede & Co., as nominee of The
Depository Trust Company ("DTC"). No person acquiring an interest
in the Offered Certificates (other than the [Fixed Strip and
Residual] Certificates) will be entitled to receive a Certificate
of such class in fully registered, certificated form, except
under the limited circumstances described in the Prospectus under
"Description of the Certificates--Form of Certificates." The
[Fixed Strip and Residual] Certificates will be offered in fully
registered, certificated form. See "Description of the
Certificates--Form of Certificates" in the Prospectus.]
Pass-Through Rates on the Offered
Certificates......................................... The Pass-Through Rates on
all classes of the Offered Certificates are the fixed rates set
forth above. The Fixed Strip Certificates have no Certificate
Principal Balance and will accrue interest at the applicable
Pass-Through Rate on the related Notional Amount (as defined
herein).
Interest Distributions on the Offered
Certificates........................................ Holders of each class of
Offered Certificates (the "Certificateholders") will be entitled
to receive interest distributions in an amount equal to the
Accrued Certificate Interest on such class on each Distribution
Date, (i) in the case of the Class A-1 Certificates, Class A-2
Certificates, Fixed Strip Certificates and Residual Certificates,
to the extent of the amount available for interest distributions
(as described herein under "Description of the Offered
Certificates-Interest Distributions") for such Distribution Date
and (ii) in the case of the Class A-3 Certificates, to the extent
of the Available Distribution Amount for such Distribution Date
after distributions of interest and principal to the Class A-1
Certificates, Class A-2 Certificates, Fixed Strip Certificates
and Residual Certificates, commencing on the first Distribution
Date in the case of all classes of Offered Certificates (other
than the Class A-3 Certificates) and commencing on the Accretion
Termination Date (as defined below) in the case of the Class A-3
Certificates.
With respect to any Distribution Date, "Accrued Certificate
Interest" will be equal to (a) in the case of each class of
Offered Certificates (other than the Fixed Strip Certificates),
one month's interest accrued on the related Certificate Principal
Balance of such class, at the Pass-Through Rate on such class and
(b) in the case of the Fixed Strip Certificates, one month's
interest accrued on the related Notional Amount thereof at the
Pass-Through Rate set forth below; [in each case less the class's
pro rata portion of any Prepayment Interest Shortfall (as defined
herein) allocated to any of the Underlying Agency Securities].
The "Notional Amount" of the Fixed Strip Certificates with
respect to any Distribution Date is equal to the aggregate
Certificate Principal Balance of the Underlying Agency Securities
immediately prior to the most recent Underlying Security
Distribution Date.
S-5
<PAGE>
The Accretion Termination Date is the first Distribution Date to
occur on which the Certificate Principal Balance of the Residual,
Class A-1 and Class A-2 Certificates have been reduced to zero.
On each Distribution Date preceding the Accretion Termination
Date, an amount equal to the Accrued Certificate Interest on the
Class A-3 Certificates will be added to the Certificate Principal
Balance thereof (the "Accretion Amount") and will thereafter
accrue interest at the applicable Pass-Through Rate. On each
Distribution Date on or after the Accretion Termination Date,
Accrued Certificate Interest will generally be payable to the
holders of the Class A-3 Certificates, as described herein. See
"Description of the Offered Certificates--Interest Distributions"
herein.
Principal Distributions on the Offered
Certificates....................................... Holders of the Offered
Certificates (other than the Fixed Strip Certificates) will be
entitled to receive, in the aggregate, on each Distribution Date,
to the extent of the portion of the Available Distribution Amount
(as defined herein) remaining after the aggregate amount of
Accrued Certificate Interest to be distributed to the holders of
the Offered Certificates is distributed, a distribution allocable
to principal which will be equal to the sum of (i) the aggregate
amount distributed in respect of principal on all of the
Underlying Agency Securities on the immediately preceding
Underlying Security Distribution Date and (ii) the Accretion
Amount. Distributions of principal on the Offered Certificates
will be made first to the Residual Certificates, second to Class
A-1 Certificates, third to the Class A-2 Certificates and fourth
to the Class A-3 Certificates, in each case until the Certificate
Principal Balance thereof is reduced to zero. The Fixed Strip
Certificates have no Certificate Principal Balance and,
accordingly, will not be entitled to any principal distributions.
See "Description of the Offered Certificates-Principal
Distributions herein.
As to each of the Underlying Agency Securities, principal
distributions will be made thereon on each Underlying Security
Distribution Date in the respective amounts described herein
under "Description of the Underlying Agency Securities."
Optional Termination............................................ At its option,
the Certificate Administrator or the Company may repurchase from
the Trust Fund all of the Underlying Agency Securities remaining
in the Trust Fund, and thereby effect early retirement of the
Offered Certificates, at such time as the aggregate Certificate
Principal Balance of the Underlying Agency Securities is less
than [____]% of the aggregate Certificate Principal Balance
thereof as of the Delivery Date, as described herein. See "Trust
Agreement--Termination" herein and "The Pooling and Servicing
Agreement-Termination; Retirement of Certificates" in the
Prospectus.
S-6
<PAGE>
Special Prepayment Considerations................................
The rate and timing of principal payments on the Offered
Certificates will depend, among other things, on the rate and
timing of principal payments on the Underlying Agency Securities,
which in turn will be affected by the rate and timing of
principal payments on the Mortgage Loans. As is the case with
mortgage-backed securities generally, the Underlying Agency
Securities and, as a result, the Offered 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.
The allocation of prepayments among certain classes of the
Offered Certificates will be affected by certain other factors,
as follows: Distributions of principal to the Offered
Certificates will be made first to the Residual Certificates,
second, to the Class A-1 Certificates, third, to the Class A-2
Certificates and fourth, to the Class A-3 Certificates, in each
case until the Certificate Principal Balance thereof is reduced
to zero. The timing of commencement of principal distributions
and the weighted average lives of the Class A-2 Certificates and
Class A-3 Certificates will be affected by the rates of
prepayment experienced both before and after the commencement of
principal distributions on such classes. See "Description of the
Offered Certificates--Principal Distributions," "Description of
the Underlying Agency Securities" 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 lives of the Offered Certificates (other than the Fixed
Strip Certificates and Residual Certificates), see the table
entitled "Percent of Initial Certificate Principal Balance
Outstanding at the Following Percentages of SPA" herein.
Special Yield Considerations................................... The yield to
maturity on each class of the Offered Certificates will depend,
among other things, on the rate and timing of principal payments
on the Underlying Agency Securities, which in turn will be
affected by the rate and timing of principal payments on the
Mortgage Loans and the allocation thereof to reduce the
Certificate Principal Balance or Notional Amount of such class.
The yield to maturity on each class of Offered Certificates will
also depend on the Pass-Through Rate and the purchase price for
such class. [The yield to investors on any class of Offered
Certificates will be adversely affected by any allocation thereto
of Prepayment Interest Shortfalls on the Mortgage Loans, which
are expected to result from the distribution of interest only to
the date of prepayment (rather than a full month's interest) in
connection with prepayments in full,
S-7
<PAGE>
and the lack of any distribution of interest on the amount of any
partial prepayments.] In general, if a class of Offered
Certificates is purchased at a premium and principal
distributions thereon occur at a rate faster than anticipated at
the time of purchase, the investor's actual yield to maturity
will be lower than that assumed at the time of purchase.
Conversely, if a class of Offered Certificates 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 assumed at the
time of purchase. The Offered Certificates were structured
assuming, among other things, a prepayment assumption of [____]%
SPA (as defined herein) and corresponding weighted average lives
as described herein under "Description of the Underlying Agency
Securities." The prepayment, yield and other assumptions to be
used for pricing purposes for the respective classes that are to
be offered hereunder may vary as determined at the time of sale.
The yield of certain classes of the Offered Certificates will be
particularly sensitive to changes in the rates of prepayment of
the Mortgage Loans and other factors, as follows: The yield to
investors on the Fixed Strip Certificates will be extremely
sensitive to the rate and timing of principal payments on the
Underlying Agency Securities, which in turn will be affected by
the rate and timing of principal payments on the Mortgage Loans
included in the related Mortgage Pools, which rate may fluctuate
significantly over time. [In addition, Prepayment Interest
Shortfalls allocated to the Underlying Agency Securities, will be
allocated to the Fixed Strip Certificates and each other class of
Offered Certificates on a pro rata basis based on the aggregate
Accrued Certificate Interest thereon, regardless, in the case of
the Fixed Strip Certificates, of whether such Prepayment Interest
Shortfalls are attributable to those Underlying Agency Securities
used for purposes of determining the related Notional Amount.] An
extremely rapid rate of principal payments on the Underlying
Agency Securities could result in the failure of investors in the
Fixed Strip Certificates to recover their initial investments.
Because the Class A-3 Certificates do not receive any
distribution of interest until the Accretion Termination Date,
the Class A-3 Certificates will likely experience greater price
and yield volatility than would mortgage pass-through
certificates which are otherwise similar but that are entitled to
current distributions of interest. Investors should consider
whether such volatility is in accordance with their investment
needs. Holders of the Residual Certificates are entitled to
receive distributions of principal and interest as described
herein under "Description of the Offered Certificates-Interest
Distributions" and "-Principal Distributions"; however, holders
of such Certificates may have tax liabilities with respect to
their Certificates during the
S-8
<PAGE>
early years of the term of the Trust Fund that substantially
exceed the principal and interest payable thereon during such
periods.
See "Certain Yield and Prepayment Considerations," especially
"--Fixed Strip Certificate Yield Considerations" and
"--Additional Yield Considerations Applicable Solely to the
Residual Certificates" herein, "Certain Federal Income Tax
Consequences" herein and in the Prospectus and "Yield
Considerations" in the Prospectus.
Certain Federal Income Tax
Consequences................................................ A "real estate
mortgage investment conduit" (a "REMIC") election will be made
with respect to the Trust Fund for federal income tax purposes.
Upon the issuance of the Offered Certificates, [Orrick,
Herrington & Sutcliffe] [Thacher Proffitt & Wood], New York, New
York, tax counsel to the Company, will deliver its opinion
generally to the effect that, assuming compliance with all
provisions of the Trust Agreement, the Trust Fund will qualify as
a REMIC under Sections 860A through 860G of the Internal Revenue
Code of 1986 (the "Code").
[ADDITIONAL TAX CONSEQUENCES TO BE INCLUDED AS APPROPRIATE.] For
further information regarding the federal income tax consequences
of investing in the Offered Certificates, see "Certain Federal
Income Tax Consequences" herein and in the Prospectus.
ERISA Considerations........................................... [ERISA
CONSIDERATIONS TO BE INCLUDED AS NECESSARY.] See "ERISA
Considerations" [herein and] in the Prospectus.
Ratings.......................................... It is a
condition to the issuance of the Offered Certificates that the
Class A-1, Class A-2, Class A-3, Fixed Strip and Class R
Certificates be rated "[__]" by [__________] and "[__]" by
[________]. 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. A
security rating does not address the frequency of prepayments of
Mortgage Loans, or the corresponding effect on yield to
investors. The rating of the Fixed Strip Certificates does not
address the possibility that the holders of such Certificates may
fail to fully recover their initial investments. See "Certain
Yield and Prepayment Considerations" and "Ratings" herein and
"Yield Considerations" in the Prospectus.
Legal Investment Matters......................... The Offered
Certificates will constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of
1984, as amended ("SMMEA"), for so long as they are rated in one
of the two highest rating categories by at least one nationally
recognized statistical rating organization, and, as such, will be
legal investments for certain entities to the extent provided in
SMMEA. Institutions whose investment activities are subject to
legal investment laws and regulations or review by regulatory
authorities should consult with their legal advisors in
determining whether and
S-9
<PAGE>
to what extent the Offered Certificates constitute legal
investments under SMMEA or are subject to restriction on
investment, capital requirements or otherwise. See "Legal
Investment Matters" herein and in the Prospectus.
S-10
<PAGE>
[RISK FACTORS]
[Prospective Certificateholders should consider, among other things,
the items discussed under "Risk Factors" in the Prospectus and the following
factors in connection with the purchase of the Certificates:]
[APPROPRIATE RISK FACTORS REGARDING MORTGAGE COLLATERAL TO BE INSERTED AS
NECESSARY]
DESCRIPTION OF THE OFFERED CERTIFICATES
General
The Series [199_-_] Mortgage Pass-Through Certificates will include the
following five classes (the "Offered Certificates"): (i) Class A-1 Certificates,
Class A-2 Certificates and Class A-3 Certificates, (ii) the Class S Certificates
(the "Fixed Strip Certificates") and (iii) the Class R Certificates (the
"Residual Certificates").
The Offered Certificates in the aggregate will represent the entire
beneficial ownership interest in the Trust Fund. The Trust Fund will consist of:
(i) the Underlying Agency Securities, including all distributions thereon
payable after the Delivery Date; and (ii) such assets as from time to time are
identified as deposited in respect of the Underlying Agency Securities in the
Certificate Account and belonging to the Trust Fund.
Available Distribution Amount
The "Available Distribution Amount" with respect to the Offered
Certificates for any Distribution Date will be equal to the aggregate amount of
distributions on the Underlying Agency Securities on the immediately preceding
Underlying Security Distribution Date, after deduction of the related Servicing
Fee (as described herein under "Trust Agreement--Compensation of Certificate
Administrator").
Interest Distributions
Holders of each class of Offered Certificates will be entitled to
receive interest distributions in an amount equal to the Accrued Certificate
Interest on such class on each Distribution Date, (i) in the case of the Class
A-1 Certificates, Class A-2 Certificates, Fixed Strip Certificates and Residual
Certificates, to the extent of the Available Distribution Amount for such
Distribution Date and (ii) in the case of the Class A-3 Certificates to the
extent of the Available Distribution Amount for such Distribution Date after
distributions of interest and principal on the Class A-1 Certificates, Class A-2
Certificates, Fixed Strip Certificates and Residual Certificates, commencing on
the first Distribution Date in the case of all classes of Offered Certificates
(other than the Class A-3 Certificates) and commencing on the Accretion
Termination Date in the case of the Class A-3 Certificates. Notwithstanding the
foregoing sentence, the amount available for interest distributions on the
Offered Certificates on any Distribution Date shall not exceed the aggregate
amounts distributed on the Underlying Agency Securities on the preceding
Underlying Security Distribution Date in respect of interest, reduced by the
Servicing Fee (as defined herein), which is calculated at a rate of [____]% per
annum.
With respect to any Distribution Date, "Accrued Certificate Interest"
will be equal to (a) in the case of each class of Offered Certificates (other
than the Fixed Strip Certificates) one month's interest accrued on the
Certificate Principal Balance of such class at the Pass-Through Rate set forth
on the cover hereof and (b) in the case of the Fixed Strip Certificates, one
month's interest accrued on the Notional Amount at the applicable Pass-Through
Rate[; in each case minus the aggregate amount of Prepayment Interest Shortfalls
for such Distribution Date as described in the following sentence, which shall
be allocated among the Offered Certificates (including the Fixed Strip
Certificates and, in the case of such Certificates, without regard to the source
of such Prepayment Interest Shortfalls in proportion to the total amount of
Accrued Certificate Interest that would have been paid thereon absent such
reductions]. [For purposes of the foregoing, the aggregate amount of Prepayment
Interest Shortfalls for any Distribution Date will be equal to the aggregate
amount of Prepayment Interest Shortfalls, if any, allocated to each of the
Underlying Agency Securities for the immediately preceding Underlying Security
Distribution Date.] [Any
S-11
<PAGE>
Prepayment Interest Shortfalls will not be offset by a reduction of the
servicing compensation of the Certificate Administrator or otherwise.] Accrued
Certificate Interest is calculated on the basis of a 360-day year consisting of
twelve 30-day months.
The "Accretion Termination Date" for the Class A-3 Certificates is the
first Distribution Date on or after the Certificate Principal Balances of the
Residual Certificates, Class A-1 Certificates and Class A-2 Certificates have
been reduced to zero. On each Distribution Date preceding the Accretion
Termination Date, an amount equal to the amount of Accrued Certificate Interest
on the Class A-3 Certificates for such date will be added to the Certificate
Principal Balance thereof (the "Accretion Amount"), and such amount will be
distributed to the holders of the Offered Certificates, other than the Class A-3
Certificates, as described herein, in reduction of the Certificate Principal
Balances thereof, as described herein. On each Distribution Date on or after the
Accretion Termination Date, the entire amount of Accrued Certificate Interest on
the Class A-3 Certificates for such Distribution Date will be payable to the
holders of the Class A-3 Certificates, to the extent not required to fully
retire the remaining Offered Certificates (other than the Class A-3
Certificates) on the Accretion Termination Date.
The Pass-Through Rates on all classes of Offered Certificates are the
fixed rates set forth on the cover hereof. The Fixed Strip Certificates have no
Certificate Principal Balance and will accrue interest at the applicable
Pass-Through Rate on the Notional Amount.
As described herein, the Accrued Certificate Interest allocable to each
class of Offered Certificates is based on the Certificate Principal Balance
thereof or, in the case of the Fixed Strip Certificates, on the Notional Amount.
The "Certificate Principal Balance" of any Offered Certificate as of any date of
determination is equal to the initial Certificate Principal Balance thereof,
reduced by the aggregate of all amounts allocable to principal previously
distributed with respect to such Offered Certificate and, in the case of the
Class A-3 Certificates, increased by the amount of any Accrued Certificate
Interest added to the Certificate Principal Balance of such class. The "Notional
Amount" of the Fixed Strip Certificates is initially $[__________] and with
respect to any Distribution Date is equal to the aggregate Certificate Principal
Balance of the Underlying Agency Securities immediately prior to the most recent
Underlying Security Distribution Date.
Principal Distributions
Holders of the Offered Certificates (other than the Fixed Strip
Certificates, which are not entitled to receive any principal distributions)
will be entitled to receive, in the aggregate on each Distribution Date, to the
extent of the portion of the Available Distribution Amount remaining after
Accrued Certificate Interest has been distributed to the holders of the Class
A-1 Certificates, Class A-2 Certificates, Fixed Strip Certificates and Residual
Certificates for such Distribution Date (and, in the case of any payments of
principal to the Class A-3 Certificates, after Accrued Certificate Interest has
been distributed to the holders thereof for such Distribution Date), a
distribution allocable to principal which will be equal to the sum of (i) the
aggregate amount distributed in respect of principal on all of the Underlying
Agency Securities on the immediately preceding Underlying Security Distribution
Date and (ii) the Accretion Amount (together, the "Principal Distribution
Amount").
On each Distribution Date, the Principal Distribution Amount shall be
distributed as follows:
(i) first, to the holders of the Residual Certificates, until the
Certificate Principal Balance thereof is reduced to zero;
(ii) second, to the holders of the Class A-1 Certificates, until the
Certificate Principal Balance thereof is reduced to zero;
(iii) third, to the holders of the Class A-2 Certificates, until the
Certificate Principal Balance thereof is reduced to zero; and
(iv) fourth, to the holders of the Class A-3 Certificates, until the
Certificate Principal Balance thereof is reduced to zero.
S-12
<PAGE>
DESCRIPTION OF THE UNDERLYING AGENCY SECURITIES
[Each Underlying Agency Security (which may be a GNMA I Certificate or
a GNMA II Certificate as referred to by Ginnie Mae) underlying the Series
[199_-_] Certificates will be a "fully-modified pass-through" mortgage-backed
certificate issued and serviced by a mortgage banking company or other financial
concern (a "Ginnie Mae Issuer") approved by Ginnie Mae as a seller-servicer of
FHA Loans and VA Loans.
The mortgage loans underlying Ginnie Mae Securities may consist of FHA
Loans or VA Loans secured by one- to four-family residential properties and
eligible for inclusion in mortgage pools underlying Ginnie Mae Securities, which
may be level payment first lien mortgage loans (including "buy-down" mortgage
loans) or graduated payment first lien mortgage loans.
Ginnie Mae has approved the issuance of each Underlying Agency Security
in accordance with a guarantee agreement (a "Guarantee Agreement") between
Ginnie Mae and the Ginnie Mae Issuer. Pursuant to its Guarantee Agreement, a
Ginnie Mae Issuer will be required to advance its own funds in order to make
timely payments of all amounts due on each Underlying Agency Security, even if
the payments received by the Ginnie Mae Issuer on the Mortgage Loans relating to
each Underlying Agency Security are less than the amounts due on each such
Underlying Agency Security.
The full and timely payment of principal and interest on each
Underlying Agency Security will be guaranteed by Ginnie Mae, which obligation is
backed by the full faith and credit of the United States. See "The Agency
Securities--Government National Mortgage Association" and "--Ginnie Mae
Securities" in the Prospectus. Each Underlying Agency Security will have an
original maturity of not more than 30 years. Each Underlying Agency Security
will be based on and backed by a Mortgage Pool and will provide for the payment
by or on behalf of the Ginnie Mae Issuer to the registered holder of such
Underlying Agency Security of fixed monthly payments of principal and interest
equal to the aggregate amount of the scheduled monthly principal and interest
payments on the Mortgage Loans relating to such Underlying Agency Security, less
a servicing and guarantee fee of 0.5% and up to 1.5% per annum of the
outstanding principal balance for such GNMA I Certificates and GNMA II
Certificates, respectively. In addition, each payment will include any
prepayments of principal of the Mortgage Loans relating to such Underlying
Agency Security and liquidation proceeds in the event of a foreclosure or other
disposition of any such Mortgage Loans.
Mortgage loans underlying a particular GNMA I Certificate must have the
same annual interest rate (except for pools of mortgage loans secured by mobile
homes). The annual pass-through rate on each GNMA I Certificate is the annual
interest rate on the mortgage loans included in the pool of mortgages backing
such GNMA I Certificate less 0.5% per annum of the unpaid principal balance of
such loans. This amount consists of 0.44% to be paid to the Ginnie Mae Issuer of
the GNMA I Certificate (or its agent) as a fee for servicing the loans and the
GNMA I Certificates and a guaranty fee of 0.06%, which must be paid out to
Ginnie Mae by the Ginnie Mae Issuer. Mortgage loans underlying a particular GNMA
II Certificate may have annual interest rates that vary from each other by up to
1%. The annual pass-through rate on each GNMA II Certificate will be between
0.5% and 1.5% per annum less than the highest annual interest rate on the
mortgage loans included in the pool of mortgages backing such GNMA II
Certificate. The difference between the GNMA II Certificate rate and rates on
the underlying mortgages consists of a guaranty fee of 0.06% which must be paid
to Ginnie Mae by the Ginnie Mae Issuer and a servicing fee of between 0.44% and
1.44% to be paid to the Ginnie Mae Issuer (or its agent).
All Ginnie Mae Securities underlying the Series [199_-_] Certificates
will have original maturities of not more than 30 years (but may have original
maturities of substantially less than 30 years). In general, Ginnie Mae requires
that at least 90% of the original principal amount of the mortgage pool
underlying a Ginnie Mae Security must be mortgages with maturities of 20 years
or more. However, in certain circumstances, Ginnie Mae Securities may be backed
by pools of mortgage loans at least 90% of the original principal amount of
which have original maturities of at least 15 years. Each mortgage loan
underlying a Ginnie Mae Security, at the time Ginnie Mae issues its guarantee
commitment, must be originated no more than 12 months prior to such commitment
date.
S-13
<PAGE>
No Ginnie Mae Issuer will insure or guarantee the Offered Certificates
or the Underlying Agency Securities. Each Ginnie Mae Issuer will be obligated
under its Guarantee Agreement with Ginnie Mae to service the pooled Mortgage
Loans in accordance with FHA and VA requirements and with generally accepted
practices in the mortgage lending industry. Each Ginnie Mae Issuer's
responsibilities with respect to the pooled Mortgage Loans will include
collection of all principal and interest payments and payments made by borrowers
toward escrows established for taxes and insurance premiums; maintenance of
necessary hazard insurance policies; institution of all actions necessary to
foreclose on, or take other appropriate action with respect to, loans in
default; and collection of FHA insurance and VA guarantee benefits.
If a Ginnie Mae Issuer is unable to make the payments on an Underlying
Agency Security as it becomes due, it must promptly notify Ginnie Mae and
request Ginnie Mae to make such payment. Upon notification and request, Ginnie
Mae will make such payments directly to the registered holder of such Underlying
Agency Security. In the event no payment is made by a Ginnie Mae Issuer and the
Ginnie Mae Issuer fails to notify and request Ginnie Mae to make such payment,
the holder of such Underlying Agency Security will have recourse only against
Ginnie Mae to obtain such payment. The Trustee or its nominee, as registered
holder of the Underlying Agency Security, will have the right to proceed
directly against Ginnie Mae under the terms of the Guaranty Agreement relating
to such Underlying Agency Security for any amounts that are not paid when due.
Regular monthly installment payments on each Underlying Agency Security
will be comprised of interest due as specified on such Underlying Agency
Security plus the scheduled principal payments on the related Mortgage Loans due
on the first day of the month in which the scheduled monthly installment on such
Underlying Agency Security is due. Such regular monthly installments on each
such Underlying Agency Security will be paid to the Trustee as registered holder
by the 15th day of each month in the case of a GNMA I Certificate and will be
mailed to the Trustee by the 20th day of each month in the case of a GNMA II
Certificate (each, an "Underlying Security Distribution Date"). Any principal
prepayments on any Mortgage Loans underlying an Underlying Agency Security or
any other early recovery of principal of such loans will be passed through to
the Trustee as the registered holder of the Underlying Agency Security.
Pools of non-graduated payment mortgages evidenced by certain of the
Ginnie Mae Securities may consist of level payment mortgages for which funds
have been provided (and deposited in escrow accounts) by one or more Ginnie Mae
Issuers, their affiliates or other persons to reduce the borrowers' monthly
payments during the early years of such mortgage loans. Payments due the
registered holders of such "buy down" Ginnie Mae Securities, however, will be
computed in the same manner as payments derived from level payment non-buy down
Ginnie Mae Securities and will include amounts to be collected from both the
borrowers and the escrow accounts under the control of the Ginnie Mae Issuer.
The obligations of Ginnie Mae and the Ginnie Mae Issuer with respect to such buy
down Ginnie Mae Security will be the same as with respect to non-buy down Ginnie
Mae Securities.]
The Underlying Agency Securities had an aggregate outstanding principal
balance of approximately $[___________], pass-through rates of [___]% and a
weighted average remaining term to stated maturity of approximately [_____]
months as of the Reference Date.
[INSERT ADDITIONAL DESCRIPTION OF UNDERLYING AGENCY SECURITIES AS APPROPRIATE]
A Current Report on Form 8-K will be available to purchasers of the
Offered Certificates and will be filed, together with the Trust Agreement, with
the Securities and Exchange Commission within fifteen days after the initial
issuance of the Offered Certificates.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
General
The yield to maturity and the aggregate amount of distributions on the
Offered Certificates will be affected by the rate and timing of principal
payments on the Underlying Agency Securities, which in turn will be affected by
the rate and timing of principal payments on the Mortgage Loans. Such yield may
be adversely affected by a
S-14
<PAGE>
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 and
liquidations of defaulted Mortgage Loans. The timing of changes in the rate of
prepayments and liquidations of the Mortgage Loans may affect the yield to an
investor, even if the average rate of principal payments experienced over time
is consistent with an investor's expectation. Since the rate and timing of
principal payments on the Mortgage Loans will depend on future events and on a
variety of factors (as described more fully herein under "Yield Considerations"
and "Maturity and Prepayment Considerations" in the Prospectus), no assurance
can be given as to such rate or the timing of principal payments on the Offered
Certificates.
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 (to the extent of
distributions thereof on the related Underlying Agency Securities) and
liquidations of the Mortgage Loans will result in distributions to holders of
the Offered Certificates of principal amounts which would otherwise be
distributed over the remaining terms of the Mortgage Loans. Factors affecting
prepayment 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 fall 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 rise significantly above the
Mortgage Rates on the Mortgage Loans, the rate of prepayment on the Mortgage
Loans would be expected to decrease.
[The aggregate amount of interest otherwise payable to holders of the
Offered Certificates will be reduced by any Prepayment Interest Shortfalls with
respect to the Underlying Agency Securities.] [In addition, Prepayment Interest
Shortfalls allocated to the Underlying Agency Securities, will be allocated to
the Fixed Strip Certificates and each other class of Offered Certificates on a
pro rata basis based on the aggregate Accrued Certificate Interest thereon,
regardless, in the case of the Fixed Strip Certificates, of whether such
Prepayment Interest Shortfalls are attributable to those Underlying Agency
Securities used for purposes of determining the notional amount.] Such
Prepayment Interest Shortfalls will not be offset by a reduction in the
Servicing Fee payable to the Certificate Administrator or otherwise. See "Yield
Considerations" in the Prospectus and "Description of the Offered
Certificates--Interest Distributions" and "Description of the Underlying Agency
Securities" herein for a discussion of the effect of principal prepayments on
the Mortgage Loans on the yield to maturity of the Offered Certificates.
The yield to maturity of the Offered Certificates will depend on the
price paid by the holders of the Offered Certificates and the related
Pass-Through Rate. The extent to which the yield to maturity of an Offered
Certificate is sensitive to prepayments will depend, in part, upon the degree to
which it is purchased at a discount or premium. In general, if a class of
Offered Certificates is purchased at a premium and principal distributions
thereon occur at a rate faster than anticipated at the time of purchase, the
investor's actual yield to maturity will be lower than that assumed at the time
of purchase. Conversely, if a class of Offered Certificates 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 assumed at the time of purchase. For additional considerations
relating to the yield on the Offered Certificates, see "Yield Considerations"
and "Maturity and Prepayment Considerations" in the Prospectus.
The yield to maturity on the Offered Certificates will be less that the
yield that would otherwise be produced by the applicable Pass-Through Rate and
the applicable purchase price because, while interest on the Mortgage Loans will
accrue monthly and will be payable of the first day of each month, distributions
on the Underlying Agency Certificates will be made on the [15th][20th] day of
each month (or, if such day is not a business day, the next business day) and
distributions on the Offered Certificates will not be made until the third
business day following such 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 Offered
Certificates will be influenced by, among
S-15
<PAGE>
other things, the rate at which principal of the Mortgage Loans is paid, which
may be in the form of scheduled amortization, prepayments or liquidations.
The assumed final Distribution Date with respect to each class of the
Offered Certificates is [__________ __, 20__] which is the Distribution Date
[immediately] [____ months] following the latest scheduled maturity date for any
Mortgage Loan. No event of default, change in the priorities for distribution
among the various classes or other provisions under the Trust Agreement will
arise or become applicable solely by reason of the failure to retire the entire
Certificate Principal Balance of any class of Offered Certificates on or before
its assumed final Distribution Date.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement, the
standard prepayment assumption ("SPA"), represents an assumed rate of prepayment
each month relative to the then outstanding principal balance of a pool of new
mortgage loans. A prepayment assumption of 100% SPA assumes constant prepayment
rates of 0.2% per annum of the then outstanding principal balance of such
mortgage loans in the first month of the life of the mortgage loans and an
additional 0.2% per annum in each month thereafter until the thirtieth month.
Beginning in the thirtieth month and in each month thereafter during the life of
the mortgage loans, 100% SPA assumes a constant prepayment rate of 6% per annum
each month. As used in the table below, "0% SPA" assumes prepayment rates equal
to 0% of SPA (i.e., no prepayments). Correspondingly, "[___]% SPA" assumes
prepayment rates equal to [___]% of SPA, and so forth. SPA does not purport to
be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
Mortgage Loans.
As described herein under "Certain Federal Income Tax Consequences,"
the prepayment assumption with respect to the Underlying Agency Securities that
will be used in determining the rate of accrued original issue discount, market
discount and premium, if any, on the Offered Certificates for federal income tax
purposes will be [____]% SPA. The original prepayment assumption for each series
of the Underlying Security is indicated in the corresponding Term Sheet.
Modeling Assumptions
The table set forth below entitled "Percent of Initial Certificate
Principal Balance Outstanding at the Following Percentage of SPA" has been
prepared on the basis of certain assumptions as described below (the "Modeling
Assumptions") regarding the weighted average characteristics of the Mortgage
Loans that are included in the Mortgage Pools and the performance thereof.
Modeling Assumptions include among other things, that as of the Reference Date,
the characteristics of the Mortgage Loans in each respective Mortgage Pool and
the Pass- Through Rate for the related Underlying Agency Securities are as set
forth in the following table:
S-16
<PAGE>
<TABLE>
<CAPTION>
Pass-Through
Aggregate Weighted Weighted Rate on the
Outstanding Weighted Average Average Term Underlying
Principal Balance of Weighted Average Average Original Term to Scheduled Agency
Series the Mortgage Loans Mortgage Rate Servicing Fee to Maturity(1) Maturity(1) Securities
<S> <C> <C> <C>
$ % %
</TABLE>
Aggregate.... $__________
- ------------------
(1) In months.
In addition, the Modeling Assumptions, among other things, assume that: (i) the
Underlying Agency Security Principal Balance is $[_______________]; (ii) the
scheduled monthly payment for a Mortgage Loan in each respective Mortgage Pool
has been based on its outstanding balance, interest rate and term to scheduled
maturity, such that the Mortgage Loan will amortize in amounts sufficient for
repayment thereof over its remaining term to maturity; (iii) the [Ginnie Mae
Issuer] will not repurchase any Mortgage Loan or exercise any option to purchase
the remaining Mortgage Loans in any Mortgage Pool, and neither the Certificate
Administrator nor the Company will exercise any option to purchase the
Underlying Agency Securities and thereby cause a termination of the Trust Fund;
(iv) there are no delinquencies on the Mortgage Loans, and principal payments on
the Mortgage Loans will be timely received together with prepayments, if any, at
the respective constant percentages of SPA set forth in the table; (v) there is
no Prepayment Interest Shortfall or any other interest shortfall in any month;
(vi) as of the date of issuance of the Offered Certificates, the Underlying
Agency Securities are as described herein under "Description of the Underlying
Agency Securities" and in the corresponding Term Sheet; (vii) payments on the
Offered Certificates will be received on the 28th day of each month, commencing
[__________ __, 199_]; (viii) payments on the Mortgage Loans earn no
reinvestment return; (ix) there are no additional ongoing Trust Fund expenses
payable out of the Trust Fund; and (x) the Offered Certificates will be
purchased on [__________ __, 19__].
The actual characteristics and performance of the Mortgage Loans differ
from the Modeling 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 level of SPA until maturity or that all of the Mortgage Loans will
prepay at the same level of SPA. Moreover, the diverse remaining terms to
maturity of the Mortgage Loans could produce slower or faster principal
distributions than indicated in the table at the various constant percentages of
SPA specified, even if the weighted average remaining term to maturity of the
Mortgage Loans is as assumed. Any difference between the Modeling Assumptions
and the actual characteristics and performance of the Mortgage Loans, or actual
prepayment or loss experience, will affect the percentages of initial
Certificate Principal Balances outstanding over time and the weighted average
lives of the classes of Offered Certificates.
Subject to the foregoing discussion and the Modeling Assumptions, the
following table indicates the weighted average lives of the Class A-1, Class A-2
and Class A-3 Certificates, and sets forth the percentages of the initial
Certificate Principal Balance of each such Class A-1, Class A-2 and Class A-3
Certificate that would be outstanding after each of the dates shown at various
percentages of SPA.
S-17
<PAGE>
Percent of Initial Certificate Principal Balance
Outstanding at the Following Percentages of SPA
Class A-1
----------------------------------------------------
Distribution Date 0% % % % %
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Initial Percentage...
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Weighted Average Life
in Years**
Percent of Initial Certificate Principal Balance
Outstanding at the Following Percentages of SPA (CONTINUED)
Class A-2
----------------------------------------------------
Distribution Date
- ----------------- 0% % % % %
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Initial Percentage...
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Weighted Average Life
in Years**
Percent of Initial Certificate Principal Balance
Outstanding at the Following Percentages of SPA (CONTINUED)
Class A-3
--------------------------------------------------------
Distribution Date 0% % % % %
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Initial Percentage...
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Weighted Average Life
in Years**
* 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 amount of each net distribution in reduction of
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 distributions described in clause (i) above.
This table has been prepared based on the Modeling Assumptions (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.
S-18
<PAGE>
Fixed Strip Certificate Yield Considerations
The yield to maturity on each class of the Fixed Strip Certificates
will be extremely sensitive to the rate and timing of receipt of principal
payments on the Underlying Agency Securities, which in turn will be affected by
the rate and timing of principal payments (including prepayments, defaults and
liquidations) on the Mortgage Loans included in the corresponding Mortgage
Pools, which rate may fluctuate significantly over time.
The following table indicates the sensitivity of the yield to maturity
on each class of the Fixed Strip Certificates to various constant rates of
prepayment by projecting the monthly aggregate payments of interest on the Fixed
Strip Certificates and computing the corresponding pre-tax yields to maturity on
a corporate bond equivalent basis, based on the Modeling Assumptions including
the assumptions regarding the characteristics and performance of the Mortgage
Loans included in the corresponding Mortgage Pools which differ from the actual
characteristics and performance thereof, and assuming further that the
Pass-Through Rate and Notional Amount on the Fixed Strip Certificates are as set
forth herein. Any differences between the Modeling Assumptions and the actual
characteristics and performance of the corresponding Mortgage Loans may result
in yields being different from those shown in such table. Discrepancies between
assumed and actual characteristics and performance underscore the hypothetical
nature of the table, which is provided only to give a general sense of the
sensitivity of yields in varying prepayment scenarios.
Pre-Tax Yield to Maturity of the Fixed Strip
Certificates at the Following
Percentages of SPA
Assumed
Purchase
Price 0% [___]% [___]% [___]% [___]%
- --------- ----- ------ ------ ------ ------
$[----------] [----]% [----]% [----]% [----]% [----]%
Each pre-tax yield to maturity set forth in the preceding table was
calculated by determining the monthly discount rate which, when applied to the
assumed stream of cash flows to be paid on the Fixed Strip Certificates, would
cause the discounted present value of such assumed stream of cash flows to equal
the assumed purchase price listed in the table for such class of Fixed Strip
Certificates. Accrued interest is included in the purchase prices shown and is
used in computing the corporate bond equivalent yields shown. These yields do
not take into account the different interest rates at which investors may be
able to reinvest funds received by them as distributions on the Fixed Strip
Certificates, and thus do not reflect the return on any investment in the Fixed
Strip Certificates when any reinvestment rates other than the discount rates are
considered.
Notwithstanding the assumed prepayment rates reflected in the preceding
table, it is highly unlikely that the Mortgage Loans included in the
corresponding Mortgage Pools will be prepaid according to one particular
pattern. For this reason, and because the timing of cash flows is critical to
determining yields, the pre-tax yields to maturity on the Fixed Strip
Certificates are likely to differ from those shown in the table, even if all of
the corresponding Mortgage Loans prepay at the indicated constant percentages of
SPA over any given time period or over the entire life of the Offered
Certificates.
There can be no assurance that the corresponding Mortgage Loans will
prepay at any particular rate or that the yield on the Fixed Strip Certificates
will conform to the yields described herein. Moreover, the various remaining
terms to maturity of the corresponding Mortgage Loans could produce slower or
faster principal distributions than indicated in the preceding table at the
various constant percentages of SPA specified, even if the weighted average
remaining term to maturity of the corresponding Mortgage Loans is as assumed.
Investors are urged to make their investment decisions based on their
determinations as to anticipated rates of prepayment under a variety of
scenarios. Investors in the Fixed Strip Certificates should fully consider the
risk that a rapid rate of prepayments on the Mortgage Loans could result in the
failure of such investors to fully recover their investments.
S-19
<PAGE>
For additional considerations relating to the yield on the Offered
Certificates, see "Yield Considerations" and "Maturity and Prepayment
Considerations" in the Prospectus.
Additional Yield Considerations Applicable Solely to the Residual Certificates
The Residual Certificateholders' after-tax rate of return on their
Residual Certificates will reflect their pre-tax rate of return, reduced by the
taxes required to be paid with respect to the Residual Certificates. Holders of
Residual Certificates may have tax liabilities with respect to their Residual
Certificates during the early years of the Trust Fund's term that substantially
exceed any distributions payable thereon during any such period. In addition,
holders of Residual Certificates may have tax liabilities with respect to their
Residual Certificates the present value of which substantially exceeds the
present value of distributions payable thereon and of any tax benefits that may
arise with respect thereto. Accordingly, the after-tax rate of return on the
Residual Certificates may be negative or may otherwise be significantly
adversely affected. The timing and amount of taxable income attributable to the
Residual Certificates will depend on, among other things, the timing and amounts
of prepayments and losses experienced with respect to the Mortgage Loans
underlying the Underlying Agency Securities.
The Residual Certificateholders should consult their tax advisors as to
the effect of taxes and the receipt of any payments made to such holders in
connection with the purchase of the Residual Certificates on after-tax rates of
return on the Residual Certificates. See "Certain Federal Income Tax
Consequences" herein and in the Prospectus.
TRUST AGREEMENT
General
The Certificates will be issued pursuant to a Trust Agreement (the
"Trust Agreement"), dated as of [__________ __, 199_], among the Company, the
Certificate Administrator, and [ ], 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 Trust Agreement and the Offered
Certificates. The Offered 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 of the Trust
Agreement (without exhibits) . Requests should be addressed to the [__________],
Residential Accredit Loans, Inc.,
[_________________________________________________].
The Certificate Administrator
[Residential Funding, an indirect wholly-owned subsidiary of GMAC
Mortgage and an affiliate of the Company], [__________] will act as certificate
administrator with respect to the Offered Certificates pursuant to the Trust
Agreement. [For a general description of Residential Funding and its activities,
see "Residential Funding Corporation" in the Prospectus.]
Assignment of the Underlying Agency Securities
On the Delivery Date, the Company will deliver to the Trustee, with
respect to each class of Underlying Agency Securities, the Certificate for such
class registered in the name of the Trustee, evidencing the entire interest in
such class. The Trustee will be entitled to receive distributions in respect of
each Underlying Agency Security beginning with the distributions thereon in
[__________, 199_]. A Certificate Account will be established as part of the
Trust Fund, which shall be an Eligible Account as described in the Prospectus
under "Description of the Certificates--Payments on Mortgage Collateral," into
which the Trustee shall deposit all amounts received as distributions on the
Underlying Agency Securities (net of the Servicing Fee described below), pending
distributions on the Offered Certificates on each Distribution Date.
S-20
<PAGE>
Compensation of Certificate Administrator
The primary compensation to be paid to the Certificate Administrator in
respect of its certificate administration activities in respect of the Offered
Certificates pursuant to the Trust Agreement will be [____]% per annum of the
aggregate outstanding Certificate Principal Balance of the Underlying Agency
Securities (the "Servicing Fee"), payable monthly out of the interest
distributions on such Underlying Agency Securities. The Certificate
Administrator is obligated to pay certain ongoing expenses associated with the
Trust Fund and incurred by the Certificate Administrator in connection with its
responsibilities under the Trust Agreement. See "Description of the
Certificates--Servicing and Administration of Mortgage Collateral" in the
Prospectus for information regarding other possible compensation to the
Certificate Administrator and for information regarding expenses payable by the
Certificate Administrator.
Actions in Respect of the Underlying Agency Securities
If at any time the Trustee, in its capacity as the registered holder of
the Underlying Agency Securities, is requested to take any action or to give any
consent, approval or waiver, the Trust Agreement provides that the Trustee, in
its capacity as holder of the Underlying Agency Securities, may take action in
connection with the enforcement of any rights and remedies available to it in
such capacity with respect thereto, will promptly notify all of the holders of
the Offered Certificates and will act only in accordance with the written
directions of holders of the Offered Certificates evidencing at least 51% of the
voting rights.
Voting Rights
Certain actions specified in the Prospectus that may be taken by
holders of Offered Certificates evidencing a specified percentage of all
undivided interests in the Trust Fund may be taken by holders of Offered
Certificates entitled in the aggregate to such percentage of the voting rights.
[____]% of all voting rights will be allocated among all holders of the Class
A-1, Class A-2 and Class A-3 Certificates in proportion to their
then-outstanding Certificate Principal Balances and [____]% and [____]% of all
voting rights will be allocated among holders of the Class S Certificates and
Residual Certificates, respectively, in proportion to the Percentage Interests
(as defined in the Prospectus) evidenced by their respective Certificates. The
Trust Agreement will be subject to amendment without the consent of the holders
of the Residual Certificates in certain circumstances.
Termination
Either the Certificate Administrator or the Company may, at its option,
repurchase from the Trust Fund all of the Underlying Agency Securities remaining
in such Trust Fund and other assets thereof, and thereby effect early retirement
of the Offered Certificates at such time as the aggregate of the Certificate
Principal Balances of such Underlying Agency Securities is less than [____]% of
the aggregate of the Certificate Principal Balances of the Underlying Agency
Securities as of the Closing Date. In the event such option is exercised, the
purchase price distributed with respect to each of the Offered Certificates will
be 100% of its then outstanding Certificate Principal Balance plus interest
thereon at the Pass-Through Rate.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Offered Certificates, [Orrick, Herrington &
Sutcliffe] [Thacher Proffitt & Wood], counsel to the Company, will deliver its
opinion generally to the effect that, assuming compliance with all provisions of
the Trust Agreement, 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 Trust Fund and the Offered
Certificates (other than the Residual Certificates) will represent ownership of
"regular interests" in the Trust Fund and will be generally treated as debt
instruments of the Trust Fund. See "Certain Federal Income Tax Consequences" in
the Prospectus.
[ADDITIONAL TAX CONSIDERATIONS TO BE INCLUDED AS APPROPRIATE]
S-21
<PAGE>
For further information regarding the federal income tax consequences
of investing in the Offered Certificates, see "Certain Federal Income Tax
Consequences" in the Prospectus.
ERISA CONSIDERATIONS
[A description of whether there will be any exemption from "plan asset"
treatment will be available with respect to the Series to be included as
appropriate.]
[A statement of whether the Series will be an Exempt or a Nonexempt
Series to be included if appropriate]
[To qualify for exemption under PTCE 83-1 (see "ERISA
Considerations--Prohibited Transaction Exemption" in the Prospectus), a
Certificate of an Exempt Series must entitle its holder to pass-through payments
of both principal and interest on the Mortgage Loans. Any Plan fiduciary who
proposes to cause a Plan to purchase Offered Certificates should consult with
its counsel with respect to the potential consequences under ERISA and Section
4975 of the Code of the Plan's acquisition and ownership of Offered
Certificates. See "ERISA Considerations" in the Prospectus.]
[A Description of PTE 90-23 to be included if appropriate.]
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement dated [__________ __, 199_] (the "Underwriting Agreement"), the
Underwriter has agreed to purchase and the Company has agreed to sell to the
Underwriter the Offered Certificates. It is expected that delivery of the
Offered Certificates will be [made at the offices of [___________________]]
[through the book-entry facilities of The Depository Trust Company] on or about
[____________ __, 199_], against payment therefor in immediately available
funds.
The Underwriting Agreement provides that the obligation of the
Underwriter to pay for and accept delivery of the Offered 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 distribution of the Offered Certificates by the Underwriter may be
effected, from time to time, in one or more negotiated transactions, or
otherwise, at varying prices to be determined at the time of sale. Proceeds to
the Company from the sale of the Offered Certificates, before deducting expenses
payable by the Company, will be approximately [ ]% of the aggregate Certificate
Principal Balance of the Offered Certificates plus accrued interest thereon from
the Reference Date. The Underwriter may effect such transactions by selling its
Certificates to or through dealers, and such dealers may receive compensation in
the form of underwriting discounts, concessions or commissions from the
Underwriter for whom they act as agent. In connection with the sale of the
Offered Certificates, the Underwriter may be deemed to have received
compensation from the Company in the form of underwriting compensation. The
Underwriter and any dealers that participate with the Underwriter in the
distribution of the Offered Certificates may be deemed to be underwriters and
any profit on the resale of the Offered Certificates positioned by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933, as amended.
The Underwriting Agreement provides that the Company will indemnify the
Underwriter, and 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 can be no assurance that a secondary market for the Offered
Certificates will develop or, if it does develop, that it will continue. The
primary source of information available to investors concerning the Offered
Certificates will be the monthly statements provided to the Certificateholders
as of each Distribution Date, which
S-22
<PAGE>
will include information as to the Certificate Principal Balance or Notional
Amount, as applicable, of the Offered Certificates. There can be no assurance
that any additional information regarding the Offered Certificates will be
available through any other source. In addition, the Company is not aware of any
source through which price information about the Offered Certificates will be
generally available on an ongoing basis. The limited nature of such information
regarding the Offered Certificates may adversely affect the liquidity of the
Offered Certificates, even if a secondary market for the Offered Certificates
becomes available.
LEGAL OPINIONS
Certain legal matters relating to the Offered Certificates will be
passed upon for the Company by Orrick, Herrington & Sutcliffe] [Thacher Proffitt
& Wood], New York, New York and for the Underwriter by
[--------------------], [--------------------].
RATING
It is a condition to the issuance of the Offered Certificates that the
Class A-1, Class A-2, Class A-3, Fixed Strip and Class R Certificates be rated
"[__]" by [____________] and "[__]" by [________].
[[_________________] ratings on mortgage pass-through certificates
address the likelihood of the receipt by Certificateholders of payments required
under the Trust Agreement. [________________] 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.
[________________] rating on the Certificates does not, however, constitute a
statement regarding frequency of prepayments on the Mortgage Loans. See "Certain
Yield and Prepayment Considerations" herein.] [The "r" of the "AAAr" rating of
the Class [__] Certificates by [_________________] is attached to highlight
derivative, hybrid, and certain other obligations that [_________________]
believes may experience high volatility or high variability in expected returns
due to non-credit risks. Examples of such obligations are: securities whose
principal or interest return is indexed to equities, commodities, or currencies;
certain swaps and options; and interest only and principal only mortgage
securities. The absence of an "r" symbol should not be taken as an indication
that an obligation will exhibit no volatility or variability in total return.]
[The ratings of [______] on mortgage pass-through certificates [also]
address the likelihood of the receipt by Certificateholders of all distributions
on the Mortgage Loans to which they are entitled. The rating process addresses
the structural and legal aspects associated with the Certificates, including the
nature of the Mortgage Loans. The ratings assigned to mortgage pass-through
certificates do not represent any assessment of the likelihood or rate of
principal prepayments. The rating does not address the possibility that
Certificateholders might suffer a lower than anticipated yield.]
[The ratings of [________] assigned to mortgage pass-through
certificates [also] address the likelihood of the receipt by Certificateholders
of all distributions to which such Certificateholders are entitled. [________]
ratings on mortgage pass-through certificates do not represent any assessment of
the likelihood that principal prepayments will be made by the mortgagors or the
degree to which such prepayments differ from that originally anticipated. The
ratings assigned to mortgage pass-through certificates do not represent any
assessment of the likelihood or rate of principal prepayments. The rating does
not address the possibility that Certificateholders might suffer a lower than
anticipated yield or that rapid rates of principal prepayments could result in a
failure of the holders of the Fixed Strip Certificates to fully recover their
initial investment.]
The Company has not requested a rating on the Offered Certificates by
any rating agency other than [__________] and [__________]. However, there can
be no assurance as to whether any other rating agency will rate the Offered
Certificates, or, if it does, what rating would be assigned by any 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 Offered
Certificates by [_________] and [__________].
S-23
<PAGE>
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. The rating of the Fixed Strip
Certificates does not address the possibility that the holders of such
Certificates may fail to fully recover their initial investment. In the event
that the rating initially assigned to the Offered Certificates is subsequently
lowered for any reason, no person or entity is obligated to provide any
additional support or credit enhancement with respect to the Offered
Certificates.
LEGAL INVESTMENT MATTERS
The Offered Certificates will constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984, as
amended ("SMMEA"), for so long as they are rated in one of the two highest
rating categories by at least one nationally recognized statistical rating
organization, and, as such, will be legal investments for certain entities to
the extent provided in SMMEA. SMMEA provides, however, 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 any class of the Offered Certificates for legal investment or other purposes,
or as to the ability of particular investors to purchase any class of the
Offered Certificates under applicable legal investment restrictions. These
uncertainties may adversely affect the liquidity of any class of Offered
Certificates. Accordingly, all institutions whose investment activities are
subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their own
legal advisors in determining whether and to what extent any class of the
Offered Certificates constitutes a legal investment or is subject to investment,
capital or other restrictions.
See "Legal Investment Matters" in the Prospectus.
S-24
<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
representations 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
Page
Prospectus Supplement
Summary.............................................. S-
Description of the Offered Certificates.............. S-
Description of the Underlying Agency Securities...... S-
Certain Yield and Prepayment Considerations.......... S-
Trust Agreement...................................... S-
Certain Federal Income Tax Consequences.............. S-
ERISA Considerations................................. S-
Method of Distribution............................... S-
Legal Opinions....................................... S-
Rating............................................... S-
Legal Investment Matters............................. S-
Prospectus
Summary of Prospectus................................
Risk Factors.........................................
The Trust Funds......................................
Description of the Certificates......................
Subordination........................................
Description of Credit Enhancement....................
Insurance Policies on Mortgage Loans or Contracts....
The Company..........................................
Residential Funding Corporation......................
The Pooling and Servicing Agreement..................
Yield Considerations.................................
Maturity and Prepayment Considerations...............
Certain Legal Aspects of Mortgage
Loans and Contracts.............................
Certain Federal Income Tax Consequences..............
State Tax Consequences...............................
ERISA Considerations.................................
Legal Investment Matters.............................
Use of Proceeds......................................
Methods of Distribution..............................
Legal Matters........................................
Financial Information................................
Additional Information...............................
Index of Principal Definitions.......................
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This preliminary prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws or any
such State.
PROSPECTUS (Subject to Completion Dated August , 1997)
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 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.
<PAGE>
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."
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
GROUP, INC. ("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 August , 1997.
2
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the 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: Chicago Regional Office, Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661- 2511; and Northeast Regional Office, 7
World Trade Center, Suite 1300, New York, New York 10048 and electronically
through the Commission's Electronic Data Gathering, Analysis and Retrieval
System at the Commission's Web Site (http://www.sec.gov).
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 "Description of the Certificates--Reports to
Certificateholders." Any reports forwarded to holders will contain financial
information that has not been examined or reported upon by an independent
certified public accountant. The Company will file with the Commission such
periodic reports with respect to the Trust Fund for a series of 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 600, Minneapolis, Minnesota 55437, or by
telephone at (612) 832-7000.
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No dealer, salesman, or any other person has been authorized to give any
information, or to make any representations, other than those contained in this
Prospectus or the related Prospectus Supplement and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company or any dealer, salesman, or any other person. Neither the
delivery of this Prospectus or the related Prospectus Supplement nor any sale
made hereunder or thereunder shall under any circumstances create an implication
that there has been no change in the information herein or therein since the
date hereof. This Prospectus and the related Prospectus Supplement are not an
offer to sell or a solicitation of an offer to buy any security in any
jurisdiction in which it is unlawful to make such offer or solicitation.
TABLE OF CONTENTS
ADDITIONAL INFORMATION............................................. 3
REPORTS TO CERTIFICATEHOLDERS...................................... 3
INCORPORATION OF CERTAIN INFORMATION BY
REFERENCE................................................. 3
SUMMARY OF PROSPECTUS.............................................. 5
RISK FACTORS....................................................... 12
Special Features of the Mortgage Collateral............... 12
Yield and Prepayment Considerations....................... 13
Limited Representations and Warranties.................... 13
Limited Liquidity......................................... 13
Limited Obligations....................................... 14
Limitations, Reduction and Substitution of Credit
Enhancement...................................... 14
THE TRUST FUNDS.................................................... 15
General ................................................. 15
The Mortgage Loans........................................ 16
The Contracts............................................. 22
The Agency Securities..................................... 23
Mortgage Collateral Sellers............................... 24
Representations with Respect to Mortgage Collateral....... 25
Repurchases of Mortgage Collateral........................ 26
Limited Right of Substitution............................. 27
DESCRIPTION OF THE CERTIFICATES.................................... 28
General ................................................. 28
Form of Certificates...................................... 28
Assignment of Mortgage Loans.............................. 30
Assignment of Contracts................................... 31
Review of Mortgage Loan or Contract Documents............. 32
Assignment of Agency Securities........................... 32
Spread ................................................. 32
Payments on Mortgage Collateral........................... 33
Withdrawals from the Custodial Account.................... 35
Distributions............................................. 36
Advances ................................................. 38
Prepayment Interest Shortfalls............................ 39
Reports to Certificateholders............................. 39
Servicing and Administration of Mortgage Collateral....... 40
Realization Upon Defaulted Property....................... 45
SUBORDINATION...................................................... 46
Overcollateralization..................................... 48
DESCRIPTION OF CREDIT ENHANCEMENT.................................. 48
General ................................................. 48
Letters of Credit......................................... 49
Mortgage Pool Insurance Policies.......................... 49
Special Hazard Insurance Policies......................... 50
Bankruptcy Bonds.......................................... 51
Reserve Funds............................................. 52
Certificate Insurance Policies............................ 52
Surety Bonds.............................................. 52
Maintenance of Credit Enhancement......................... 53
Reduction or Substitution of Credit Enhancement........... 53
OTHER FINANCIAL OBLIGATIONS RELATED TO THE
CERTIFICATES.............................................. 54
Swaps and Yield Supplement Agreements..................... 54
Purchase Obligations............................................... 54
INSURANCE POLICIES ON MORTGAGE LOANS OR
CONTRACTS................................................. 55
Primary Mortgage Insurance Policies....................... 55
Standard Hazard Insurance on Mortgaged Properties......... 56
Standard Hazard Insurance on Manufactured Homes........... 57
FHA Mortgage Insurance.................................... 57
VA Mortgage Guaranty...................................... 58
THE COMPANY........................................................ 58
RESIDENTIAL FUNDING CORPORATION.................................... 58
THE POOLING AND SERVICING AGREEMENT................................ 59
Servicing and Administration.............................. 59
Events of Default......................................... 59
Rights Upon Event of Default.............................. 60
Amendment................................................. 60
Termination; Retirement of Certificates................... 61
The Trustee............................................... 62
YIELD CONSIDERATIONS............................................... 62
MATURITY AND PREPAYMENT CONSIDERATIONS............................. 65
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND
CONTRACTS................................................. 67
The Mortgage Loans........................................ 68
The Contracts............................................. 75
Environmental Legislation................................. 77
Soldiers' and Sailors' Civil Relief Act of 1940........... 78
Default Interest and Limitations on Prepayments........... 78
Forfeitures in Drug and RICO Proceedings.................. 79
Negative Amortization Loans............................... 79
CERTAIN FEDERAL INCOME TAX CONSEQUENCES............................ 79
General ................................................. 79
REMICs ................................................. 80
STATE AND OTHER TAX CONSEQUENCES................................... 95
ERISA CONSIDERATIONS............................................... 95
Plan Asset Regulations.................................... 95
Prohibited Transaction Exemption.......................... 96
Insurance Company General Accounts........................ 98
Representation from Investing Plans....................... 99
Tax-Exempt Investors...................................... 99
Consultation with Counsel................................. 99
LEGAL INVESTMENT MATTERS...........................................100
USE OF PROCEEDS....................................................101
METHODS OF DISTRIBUTION............................................101
LEGAL MATTERS......................................................102
FINANCIAL INFORMATION..............................................102
INDEX OF PRINCIPAL DEFINITIONS.....................................103
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 mor e 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."
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
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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 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
(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 certain 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
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Administrator, GMAC Mortgage or any of their affiliates.
See "Risk Factors--Limited Obligations."
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 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
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Supplement. Strip Certificates with no principal balance will not
receive distributions in respect of principal. Distributions of
principal with respect to any 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 HomeComings Financial Network, Inc.
and GMAC Mortgage Corporation, 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 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"). The
Mortgaged Properties may be located in any of the 50 States, the
District of Columbia or the Commonwealth of Puerto Rico. 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, Bi-Weekly 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
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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 country other than the United States,
including foreign corporations formed for the purpose of owning
real estate (collectively, "International Borrowers"). Mortgage
Loans secured by Mortgaged Properties located in Puerto Rico are
sometimes referred to herein as "Puerto Rico Mortgage Loans." 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 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
characteristics that will affect the yield to maturity and the
rate of payment of principal on such Certificates. See "Yield
Considerations" and "Maturity and Prepayment Considerations"
herein and in the related Prospectus Supplement.
Credit Enhancement..................................................... If so
specified in the related Prospectus Supplement, the Trust
Fund with respect to any series of Certificates may include
any one or any combination of a letter of credit, mortgage
pool insurance policy, special hazard insurance policy,
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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 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 by
one or more nationally recognized statistical rating
agencies (each, a "Rating Agency"). See "Ratings" in the
related Prospectus Supplement.
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Legal Investment..................................................... If so
specified in the related Prospectus Supplement, certain
classes of Certificates offered hereby and by the related
Prospectus Supplement that are 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 such classes sustain 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, bank collective
investment funds, insurance company general and 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, 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. 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 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."
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. A portion of the proceeds of certain Mortgage Loans may be held in
escrow by the originator and used to reimburse the Mortgagor for certain costs
of construction of or improvements to the
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related Mortgaged Property. The failure to complete such construction could
adversely affect the value of the related Mortgaged Property and the actual
loan-to-value ratio of the related Mortgage Loan.
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 Certificateholders of the related series
(or specific classes thereof) will bear all risk of loss resulting from default
by the Mortgagors, and will have to 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 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.
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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;
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."
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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.
The Mortgaged Properties may be located in any of the 50 States, the District of
Columbia or the Commonwealth of Puerto Rico. Each Trust Fund may also include
(i) the 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") or any
combination thereof, 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 or combination thereof 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 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 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.
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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. If so specified in the related Prospectus Supplement, the Mortgage
Collateral Sellers may include state or local government housing finance
agencies. 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 Corporation 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 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 the reduction of
the interest rate based on the payment performance of the Mortgage Loans,
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
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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 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,
cooperative 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 (other than a Cooperative
Dwelling) 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 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.
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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
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).
If so specified in the related Prospectus Supplement, a portion of the
proceeds of a Mortgage Loan may be held by the originator and used to reimburse
the Mortgagor for certain costs of construction of or improvements to the
related Mortgaged Property. The Appraised Value of any such Mortgaged Property
will be based on the assumption that such construction has been completed. If
the construction is not completed, the actual value of the related Mortgaged
Property could be adversely affected and, even if the escrowed proceeds are
applied to reduce the principal balance of the Mortgage Loan, the actual
loan-to-value ratio of the Mortgage Loan could be higher than that assumed at
the time of origination of the Mortgage Loan. In addition, the application of
any unused proceeds could cause the rate of payment of principal on such
Mortgage Loan to be faster than that assumed.
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 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.
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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 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 aspects of the 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 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
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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
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 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-
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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 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.
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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
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 purchasing, so far as practicable, mortgage loans
that it deems
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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 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 and its 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) one or more direct or indirect purchases through
the Program; or (iii) one or more purchases from Affiliated Sellers. Certain of
the Mortgage Loans may be purchased pursuant to agreements relating to ongoing
purchases of Mortgage Loans by Residential Funding ("Master Commitments"). 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.
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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 and HomeComings Financial Network, Inc., each an affiliate
of the Company, will be Program Sellers. 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 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 or more months
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 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 (or, with respect to a Cooperative Loan, the related shares
of stock and proprietary lease), 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
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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 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
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,
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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 "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; (v) be
secured by Mortgaged Property located in the United States, unless the
Repurchased Mortgage Loan was a Puerto Rico Mortgage Loan, in which case the
Qualified Substitute Mortgage Loan may be a Puerto Rico Mortgage Loan; and (vi)
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
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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
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 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
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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, "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.
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
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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 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
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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 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.
With respect to any Puerto Rico Mortgage Loans, the Mortgages with respect
to such Mortgage Loans either (i) secure a specific obligation for the benefit
of a specified person (a "Direct Puerto Rico Mortgage") or (ii) secure an
instrument transferable by endorsement (an "Endorsable Puerto Rico Mortgage").
Endorsable Puerto Rico Mortgages do not require an assignment to transfer the
related lien. Rather, transfer of such mortgages follows an effective
endorsement of the related Mortgage Note and, therefore, delivery of the
assignment referred to in clause (iii) of the second preceding paragraph would
be inapplicable. Direct Puerto Rico Mortgages, however, require an assignment to
be recorded with respect to any transfer of the related lien and such assignment
would be delivered to the Trustee (or the Custodian).
Assignments of the Mortgage Loans to the Trustee will be recorded in the
appropriate public recording office, except 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 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
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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 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
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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 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:
(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;
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(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 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.
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.
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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";
(ii) to reimburse itself or any Sub-Servicer for Advances, or for amounts
advanced in respect of taxes, insurance premiums or similar expenses incurred in
connection with acquiring by foreclosure or deed in lieu of foreclosure property
securing a Mortgage Loan, 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 such
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 property securing a Mortgage Loan
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
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"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 Seller) or against which it or the Company is
indemnified pursuant to the Pooling and Servicing Agreement;
(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";
and
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-Through Rate or Rates. Unless otherwise specified in the related Prospectus
Supplement, interest on the Certificates will accrue during each calendar month
and will be payable on the Distribution Date in the following calendar month.
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 amount to be distributed to such class for such Distribution Date in respect
of principal, plus, if such class is entitled to payments of interest on such
Distribution Date, interest accrued during the related interest accrual period
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
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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 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 1997:
Date Note Description
July 1........ (A) Cut-off Date.
July 2-31..... (B) The Servicers or the Sub-Servicers, as applicable, receive
any Principal Prepayments.
July 31 ...... (C) Record Date.
July 2 - (D) The due dates on which scheduled payments and Mortgage
August 1...... Loans or Contracts are due (each, a "Due Date" and
collectively, the "Due Period").
August 18..... (E) The Master Servicer or the Servicer, as applicable,
receives scheduled payments of principal and interest due
during the related Due Period and received or advanced by
Servicers or Subservicers.
August 20..... (F) Determination Date.
August 25..... (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 Periods, 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, 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 received as of the close of business on July 1
are not part of the Mortgage Pool or Contract Pool and will
not be passed through to Certificateholders.
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(B) Any principal payments received in advance of the scheduled
Due Date for a Mortgage Loan 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 25 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 from Mortgagors during the related Due
Period 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 principal balances immediately prior to such
payments. 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 18 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 25 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 during the related Due Period which have been
received from Servicers or Sub-Servicers prior to and
including August 18, 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 25 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 25, 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.
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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 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 was
prepaid in full during the related prepayment period equal to the amount, if
any, necessary to assure that, on the related 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;
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(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;
(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.
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
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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 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."
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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. 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 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 Pooling and Servicing Agreement will provide that the Master Servicer
or 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 Master Servicer
(or the Certificate Administrator) during the preceding calendar year relating
to its servicing of mortgage loans and its performance under pooling and
servicing agreements, including such
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Pooling and Servicing Agreement has been made under the supervision of such
officer, (ii) to the best of such officer's knowledge, based on such review, the
Master Servicer (or the Certificate Administrator) has complied in all material
respects with the minimum servicing standards set forth in the Uniform Single
Attestation Program for Mortgage Bankers and has fulfilled all its obligations
under such Pooling and Servicing Agreement throughout such year, or, if there
has been material noncompliance with such servicing standards or a material
default in the fulfillment of any such obligation, such statement shall include
a description of such noncompliance or specify each such default known to such
officer and the nature and status thereof and (iii) to the best of such
officer's knowledge, each Sub-Servicer has complied in all material respects
with the minimum servicing standards set forth in the Uniform Single Attestation
Program for Mortgage Bankers and has fulfilled all of its material obligations
under its Sub-Servicing Agreement in all material respects throughout such year,
or, if there has been material noncompliance with such servicing standards or a
material default in the fulfillment of such obligations, such statement shall
include a description of such noncompliance or specify each such default, as the
case may be, known to such officer and the nature and status thereof. In
addition, each Pooling and Servicing Agreement will provide that the Master
Servicer or the Certificate Administrator, as the case may be, will cause a firm
of independent public accountants which is a member of the American Institute of
Certified Public Accountants to furnish a report stating its opinion that, on
the basis of an examination conducted by such firm substantially in accordance
with standards established by the American Institute of Certified Public
Accountants, the assertions made regarding compliance with the minimum servicing
standards set forth in the Uniform Single Attestation Program for Mortgage
Bankers during the preceding calendar year are fairly stated in all material
respects, subject to such exceptions and other qualifications that, in the
opinion of such firm, such accounting standards require it to report. In
rendering such statement, such firm may rely, as to matters relating to the
direct servicing of mortgage loans by Subservicers, on comparable statements
prepared in connection with examinations conducted in similar manners.
Certain Other Matters Regarding Servicing
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 unless each Rating Agency has confirmed in
writing that the resignation will not qualify, reduce or cause to be withdrawn
the then current ratings on the Certificates 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 or Servicer may
also waive or modify any term of a
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Mortgage Loan so long as the Master Servicer or Servicer has determined that
such waiver or modification is not materially adverse to any Certificateholders,
taking into account any estimated loss that may result absent such action.
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.
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 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.
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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) 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. 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 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
amount of the Realized Loss that was
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allocated to such class. 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 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.
If so specified in the related Prospectus Supplement, 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
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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
"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
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.
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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 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 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
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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 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
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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 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 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
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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
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 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
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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. 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.
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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 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 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
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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.
OTHER FINANCIAL OBLIGATIONS RELATED TO THE CERTIFICATES
Swaps and Yield Supplement Agreements
The Trustee on behalf of the Trust may enter into interest rate swaps and
related caps, floors and collars to minimize the risk of Certificateholders from
adverse changes in interest rates (collectively, "Swaps"), and other yield
supplement agreements or similar yield maintenance arrangements that do not
involve swap agreements or other notional principal contracts (collectively,
"Yield Supplement Agreements").
An interest rate Swap is an agreement between two parties
("Counterparties") to exchange a stream of interest payments on an agreed
hypothetical or "notional" principal amount. No principal amount is exchanged
between the Counterparties to an interest rate Swap. In the typical Swap, one
party agrees to pay a fixed rate on a notional principal amount, while the
Counterparty pays a floating rate based on one or more reference interest rates
such as the London Interbank Offered Rate ("LIBOR"), a specified bank's prime
rate or U.S. Treasury Bill rates. Interest rate Swaps also permit Counterparties
to exchange a floating rate obligation based upon one reference interest rate
(such as LIBOR) for a floating rate obligation based upon another referenced
interest rate (such as U.S.
Treasury Bill rates).
The Swap market has grown substantially in recent years with a significant
number of banks and financial service firms acting both as principals and as
agents utilizing standardized Swap documentation. Caps, floors and collars are
more recent innovations, and they are less liquid than other Swaps.
Yield Supplement Agreements may be entered into to supplement the interest
rate or rates on one or more classes of the Certificates of any series.
There can be no assurance that the Trust will be able to enter into or
offset Swaps or enter into Yield Supplement Agreements at any specific time or
at prices or on other terms that are advantageous. In addition, although the
terms of the Swaps and Yield Supplement Agreements may provide for termination
under certain circumstances, there can be no assurance that the Trust will be
able to terminate a Swap or Yield Supplement Agreement when it would be
economically advantageous to the Trust Fund to do so.
Purchase Obligations
Certain types of Mortgage Collateral and certain classes of Certificates of
any series, as specified in the related Prospectus Supplement, may be subject to
a purchase obligation (a "Purchase Obligation") that would become applicable on
one or more specified dates, or upon the occurrence of one or more specified
events, or on demand made by or on behalf of the applicable Certificateholders.
A Purchase Obligation may be in the form of a conditional or unconditional
purchase commitment, liquidity facility, maturity guaranty, put option or demand
feature. The terms and conditions of each Purchase Obligation, including the
purchase price, timing and payment
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procedure, will be described in the related Prospectus Supplement. A Purchase
Obligation with respect to Mortgage Collateral may apply to that Mortgage
Collateral or to the related Certificates. Each Purchase Obligation may be a
secured or unsecured obligation of the provider thereof, which may include a
bank or other financial institution or an insurance company. Each Purchase
Obligation will be evidenced by an instrument delivered to the Trustee for the
benefit of the applicable Certificateholders of the related series. Each
Purchase Obligation with respect to Mortgage Collateral will be payable solely
to the Trustee for the benefit of the Certificateholders of the related series.
Other Purchase Obligations may be payable to the Trustee or directly to the
holders of the Certificates to which such obligations relate.
INSURANCE POLICIES ON MORTGAGE LOANS OR CONTRACTS
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. Primary Insurance Policies may be
required to be obtained and paid for by the Mortgagor, or may be paid for by the
Servicer.
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 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.
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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, to the extent that coverage is available and for so long as a Primary
Insurance Policy is required to be maintained, the Master Servicer or Servicer
shall 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 and the
Master Servicer had knowledge of such Primary Insurance Policy. 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 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.
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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 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, 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
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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
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 600, 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 600, Minneapolis, Minnesota
55437. Its telephone number is (612) 832-7000.
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Residential Funding conducts operations from its headquarters in Minneapolis and
from offices located in California, Florida, Georgia, Maryland and New York. At
March 31, 1997, Residential Funding was master servicing a first lien loan
portfolio of approximately $34.8 billion and a second lien loan portfolio of
approximately $1.8 billion.
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 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.
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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, 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 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 modify the provisions regarding the
transferability 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
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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) 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.
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The Trustee
The Trustee under each Pooling and Servicing Agreement will be named in the
related Prospectus Supplement. The commercial bank or trust company serving as
Trustee may have normal banking relationships with the 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 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. The risk of loss may also be
greater on mortgage loans or contracts with Loan-to-Value Ratios or Combined
Loan-to-Value Ratios greater than 80% and no Primary Insurance Policies. 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
and loss.
The risk of loss on Mortgage Loans made to International Borrowers and on
Puerto Rico Mortgage Loans may be greater than Mortgage Loans that are made to
Mortgagors who are United States residents and citizens or that are secured by
properties located in the United States. See "Certain Legal Aspects of Mortgage
Loans and Contracts."
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
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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 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 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.
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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 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
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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.
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-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. The Company is not aware of any historical
prepayment experience with respect to mortgage loans secured by properties
located in Puerto Rico and, accordingly, prepayments on such loans may not occur
at the same rate or be affected by the same factors as other mortgage loans.
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
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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, Puerto Rico Mortgage Loans and 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 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. 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.
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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 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.
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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 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 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
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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 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
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
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borrower/trustor and to any person who has recorded a request for a copy of
notice of default and notice of sale. In addition, in some states, 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, such as International Borrowers, located
outside the jurisdiction in which the mortgaged property is located.
Difficulties in foreclosing on mortgaged properties owned by International
Borrowers may 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 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 Mortgaged Properties Located in the Commonwealth of Puerto Rico
Under the laws of the Commonwealth of Puerto Rico the foreclosure of a real
estate mortgage usually follows an ordinary "civil action" filed in the Superior
Court for the District where the mortgaged property is located. If the defendant
does not contest the action filed, a default judgment is rendered for the
plaintiff and the mortgaged property is sold at public auction, after
publication of the sale for two weeks, by posting written notice in three public
places in the municipality where the auction will be held, in the tax collection
office and in the public school of the municipality where the mortgagor resides,
if known. If the residence of the mortgagor is not known, publication in one of
the newspapers of general circulation in the Commonwealth must be made at least
once a week for two weeks. There may be as many as three public sales of the
mortgaged property. If the defendant contests the foreclosure, the case may be
tried and judgment rendered based on the merits of the case.
There are no redemption rights after the public sale of a foreclosed
property under the laws of the Commonwealth. Commonwealth law provides for a
summary proceeding for the foreclosure of a mortgage, but it is very seldom used
because of concerns regarding the validity of such actions. The process may be
expedited if the mortgagee can obtain the consent of the defendant to the
execution of a deed in lieu of foreclosure.
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Under Commonwealth law, in the case of the public sale upon foreclosure of
a mortgaged property that (a) is subject to a mortgage loan that was obtained
for a purpose other than the financing or refinancing of the acquisition,
construction or improvement of such property and (b) is occupied by the
mortgagor as his principal residence, the mortgagor of such property has a right
to be paid the first $1,500 from the proceeds obtained on the public sale of
such property. The mortgagor can claim this sum of money from the mortgagee at
any time prior to the public sale or up to one year after such sale. Such
payment would reduce the amount of sales proceeds available to satisfy the
Mortgage Loan and may increase the amount of the loss.
Foreclosure on Shares of Cooperatives
The Cooperative shares owned by the tenant-stockholder, together with the
rights of the tenant-stockholder under the proprietary lease or occupancy
agreement, are pledged to the lender and are, in almost all cases, subject to
restrictions on transfer as 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 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
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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 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 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
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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 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 rescission 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
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accordance with their terms, subject to 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. 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
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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
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 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
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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.
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.
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.
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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 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 ("CERCLA"), 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
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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.
The Asset Conservation, Lender Liability and Deposit Insurance Act of 1996
(the "Conservation Act") amended, among other things, the provisions of CERCLA
with respect to lender liability and the secured creditor exemption. The
Conservation Act offers substantial protection to lenders by defining the
activities in which a lender can engage and still have the benefit of the
secured creditor exemption. In order for a lender to be deemed to have
participated in the management of a mortgaged property, the lender must actually
participate in the operational affairs of the mortgaged property. The
Conservation Act provides that "merely having the capacity to influence, or
unexercised right to control" operations does not constitute participation in
management. A lender will lose the protection of the secured creditor exemption
only if it exercises decision-making control over the mortgagor's environmental
compliance and hazardous substance handling and disposal practices, or assumes
day-to-day management of substantially all of the operational functions of the
mortgaged property. The Conservation Act also provides that a lender will
continue to have the benefit of the secured creditor exemption even if it
forecloses on a mortgaged property, purchases it at a foreclosure sale or
accepts a deed-in-lieu of foreclosure provided that the lender seeks to sell the
mortgaged property at the earliest practicable commercially reasonable time on
commercially reasonable terms.
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
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
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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 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.
Negative Amortization Loans
A recent case held that state restrictions on the compounding of interest
are not preempted by the provisions of the Depository Institutions Deregulation
and Monetary Control Act of 1980 ("DIDMC") and as a result, a mortgage loan that
provided for negative amortization violated New Hampshire's requirement that
first mortgage loans provide for computation of interest on a simple interest
basis. The court did not address the applicability of the Alternative Mortgage
Transaction Parity Act of 1982, which authorizes a lender to make residential
mortgage loans that provide for negative amortization. As a result, the
enforceability of compound interest on mortgage loans that provide for negative
amortization is unclear. The case, which was decided by the First Circuit Court
of Appeals, is binding authority only on Federal District Courts in Maine, New
Hampshire, Massachusetts, Rhode Island and Puerto Rico.
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 LLP 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, 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
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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
Upon the issuance of each series of REMIC Certificates, Orrick, Herrington
& Sutcliffe LLP 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 "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
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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 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 Section 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 LLP 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
"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 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. The Small Business Job Protection Act of 1996 repealed the application of
Section 593(d) of the Code to any taxable year after December, 1995.
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.
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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 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 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
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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.
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
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long as the Pooling and Servicing Agreement requires that such uncertificated
regular interests be transferred together.
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.
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
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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
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 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.
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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."
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
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.
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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.
A REMIC will be allowed deductions for interest (including original issue
discount) on the REMIC Regular Certificates (including any other class of REMIC
Certificates constituting "regular interests" in the REMIC not offered 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
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of REMIC Residual 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 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 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 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, brokers and underwriters) at which a substantial
amount of the REMIC
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Residual Certificates were sold. If less than a substantial amount of a
particular class of REMIC Residual Certificates is sold for cash on or prior to
the Closing Date, the issue price of such class will be treated as the fair
market value of such class on the Closing Date. 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. Furthermore, for purposes of the
alternative minimum tax, (i) excess inclusions will not be permitted to be
offset by the alternative tax net operating loss deduction and (ii) alternative
minimum taxable income may not be less than the taxpayer's excess inclusions;
provided, however, that for purposes of (ii), alternative minimum taxable income
is determined without regard to the special rule that taxable income cannot be
less than excess inclusions. The latter rule has the effect of preventing
nonrefundable tax credits from reducing the taxpayer's income tax to an amount
lower than the alternative minimum tax on excess inclusions.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to 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 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
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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 24, 1996, the IRS released final
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 REMIC Residual Certificate acquired on or after
January 4, 1995 is not treated as a security and thus may not be marked to
market. Prospective purchasers of a REMIC Residual Certificate should consult
their tax advisors regarding the possible application of the mark-to-market
requirement to REMIC Residual Certificates.
Possible Pass-Through of Miscellaneous Itemized Deductions. Fees and
expenses of a REMIC 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.
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.
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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 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 designed to prevent the acceptance of any contributions
that would be subject to such tax.
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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 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
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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 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 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
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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 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 whose income is subject to United
States federal income tax regardless of its source, or a trust if a court within
the United States is able to exercise primary supervision over the
administration of the trust and one or more United States fiduciaries has the
authority to control all substantial decisions of the trust. 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 taxation on such United
States shareholder's allocable portion of the interest income received by such
controlled foreign corporation.
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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.
ERISA CONSIDERATIONS
Sections 404 and 406 of ERISA impose certain fiduciary and prohibited
transaction restrictions on employee pension and welfare benefit plans subject
to ERISA ("ERISA Plans") and on certain other retirement plans and arrangements,
including individual retirement accounts and annuities, Keogh plans, bank
collective investment funds and insurance company general and separate accounts
in which such ERISA Plans are invested. Section 4975 of the Code imposes
essentially the same prohibited transaction restrictions on tax-qualified
retirement plans described in Section 401(a) of the Code and on individual
retirement accounts described in Section 408 of the Code (collectively,
"Tax-Favored Plans").
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA) and, if no election has been made under Section 410(d)
of the Code, church plans (as defined in Section 3(33) of ERISA), are not
subject to the ERISA requirements discussed herein. Accordingly, assets of such
plans may be invested in 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 tax-qualified 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, collectively, "Parties in Interest") who have certain
specified relationships to the Plans, unless a statutory or administrative
exemption is available. Certain Parties in Interest that participate in a
prohibited transaction may be subject to a penalty (or an excise tax) imposed
pursuant to Section 502(i) of ERISA or Section 4975 of the Code, unless a
statutory or administrative exemption is available with respect to any such
transaction.
Plan Asset Regulations
An investment of Plan Assets in Certificates may cause the underlying
Mortgage Loans, Contracts, Agency Securities or any other assets 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. Section 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
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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 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 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, a Trust Fund, including the Mortgage Loans, Contracts,
Agency Securities or any other assets held in such 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,
Agency Securities or any other assets in a Trust Fund were to constitute Plan
Assets, then any party exercising management or discretionary control with
respect to those Plan Assets may be deemed to be a Plan "fiduciary," and thus
subject to the fiduciary 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, Agency Securities or any
other assets in a Trust Fund were to constitute Plan Assets, then the
acquisition or holding of Certificates by, or on behalf of a Plan or with Plan
Assets, as well as the operation of such Trust Fund, may constitute or result in
a prohibited transaction under ERISA and the Code.
Prohibited Transaction Exemption
The DOL issued an individual exemption, Prohibited Transaction Exemption
("PTE") 94-29 (59 Fed. Reg. 14,674, March 29, 1994), as amended by PTE 97-34, 62
Fed. Reg. 39021 (July 21, 1997) (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
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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 Credit Rating Co. or
Fitch Investors Service, L.P. (collectively, the "Exemption Rating Agencies").
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 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. In addition, except as otherwise specified in the
respective Prospectus Supplement, the exemptive relief afforded by the Exemption
may not apply to any Certificates where the related Trust Fund contains a Swap.
The Exemption also requires that each Trust Fund meet the following
requirements: (i) the Trust Fund must consist solely of assets of the type that
have been included in other investment pools; (ii) certificates evidencing
interests in such other investment pools must have been rated in one of the
three highest categories of one of the Exemption Rating Agencies for at least
one year prior to the acquisition of Certificates by or on behalf of a Plan or
with Plan Assets; and (iii) certificates in such other investment pools must
have been purchased by investors other than Plans for at least one year prior to
any acquisition of Certificates by or on behalf of a Plan or with Plan Assets.
A fiduciary 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(a)
of ERISA, as well as 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, as well as the taxes imposed by Sections 4975(a)
and (b) of the Code by reason of 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 restrictions imposed
by Sections 406(a), 406(b) and 407(a) of ERISA, as well as the taxes imposed by
Sections 4975(a) and (b) of the Code by reason of Section 4975(c) of the Code,
for transactions in
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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, as well as 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, as well as the 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 with respect to an investing Plan (or
the investing entity holding Plan Assets) by virtue of providing services to the
Plan (or by virtue of having certain specified relationships to such a person)
solely as a result of the Plan's ownership of Certificates.
Before purchasing a Certificate, a fiduciary or other investor of Plan
Assets should itself confirm that (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, Contracts
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 investor
should consider the availability of other class exemptions granted by the DOL,
which provide relief from certain of the prohibited transaction provisions of
ERISA and the related excise tax provisions of Section 4975 of the Code,
including Sections I and III of PTCE 95-60, regarding transactions by insurance
company general accounts. The respective Prospectus Supplement may contain
additional information regarding the application of the Exemption, PTCE 83-1,
PTCE 95-60 or other DOL class exemptions 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.
Insurance Company General Accounts
In addition to any exemptive relief that may be available under PTCE 95-60
for the purchase and holding of the Certificates by an insurance company general
account, the Small Business Job Protection Act of 1996 added a new Section
401(c) to ERISA, which provides certain exemptive relief from the provisions of
Part 4 of Title I of ERISA and Section 4975 of the Code, including the
prohibited transaction restrictions imposed by ERISA and the related excise
taxes imposed by Section 4975 of the Code, for transactions involving an
insurance company general account. Pursuant to Section 401(c) of ERISA, the DOL
is required to issue final regulations (the "401(c) Regulations") no later than
December 31, 1997 which are to provide guidance for the purpose of determining,
in cases where insurance policies supported by an insurer's general account are
issued to or for the benefit of a Plan on or before December 31, 1998, which
general account assets constitute Plan Assets. Section 401(c) of ERISA generally
provides that, until the date which is 18 months after the 401(c) Regulations
become final, no person shall be subject to liability under Part 4 of Title I of
ERISA and Section 4975 of the Code on the basis of a claim that the assets of an
insurance company general account constitute Plan Assets, unless (i) as
otherwise provided by the Secretary of Labor in the 401(c) Regulations to
prevent avoidance of the regulations or (ii) an action is brought by the
Secretary of Labor for certain breaches of fiduciary duty which would also
constitute a violation of federal or
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state criminal law. Any assets of an insurance company general account which
support insurance policies issued to a Plan after December 31, 1998 or issued to
Plans on or before December 31, 1998 for which the insurance company does not
comply with the 401(c) Regulations may be treated as Plan Assets. In addition,
because Section 401(c) does not relate to insurance company separate accounts,
separate account assets are still treated as Plan Assets of any Plan invested in
such separate account. Insurance companies contemplating the investment of
general account assets in the Certificates should consult with their legal
counsel with respect to the applicability of Sections I and III of PTCE 95-60
and Section 401(c) of ERISA, including the general account's ability to continue
to hold the Certificates after the date which is 18 months after the date the
401(c) Regulations become final.
Representation from Investing Plans
The exemptive relief afforded by the Exemption will not apply to the
purchase, sale or holding of any class of Subordinate Certificates. To the
extent Certificates are Subordinate Certificates or the related Trust Fund
contains a Swap, except as otherwise specified in the respective Prospectus
Supplement, transfers of such Certificates to a Plan, to a trustee or other
person acting on behalf of any Plan, or to any other person using Plan Assets to
effect such acquisition will not be registered by the Trustee unless the
transferee provides the Company, the Trustee and the Master Servicer with an
opinion of counsel satisfactory to the Company, the Trustee and the Master
Servicer, which opinion will not be at the expense of the Company, the Trustee
or the Master Servicer that the purchase of such Certificates by or on behalf of
such Plan is permissible under applicable law, will not constitute or result in
any non-exempt prohibited transaction under ERISA or Section 4975 of the Code
and will not subject the Company, the Trustee and the Master Servicer to any
obligation in addition to those undertaken in the Pooling and Servicing
Agreement. In lieu of such opinion of counsel, except as otherwise specified in
the respective Prospectus Supplement, the transferee may provide a certification
of facts substantially to the effect that the purchase of such Certificates by
or on behalf of such Plan is permissible under applicable law, will not
constitute or result in a non-exempt prohibited transaction under ERISA or
Section 4975 of the Code, will not subject the Company, the Trustee or the
Master to any obligation in addition to those undertaken in the Pooling and
Servicing Agreement, and the following conditions are met: (a) the source of
funds used to purchase such Certificates is an "insurance company general
account" (as such term is defined in PTCE 95-60), and (b) the conditions set
forth in Sections I and III of PTCE 95-60 have been satisfied as of the date of
the acquisition of such Certificates.
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
There can be no assurance that the Exemption or any other DOL exemption
will apply with respect to any particular Plan that acquires the Certificates
or, even if all of the conditions specified therein were satisfied, that the
exemption would apply to transactions involving a Trust Fund. Prospective Plan
investors should consult with their legal counsel concerning the impact of ERISA
and the Code and the potential consequences to their specific circumstances
prior to making an investment in the Certificates.
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 Section 4975 of the Code to the proposed investment and the Exemption,
the availability of exemptive relief under PTCE 83-1, Sections I and III of PTCE
95-60 or any other DOL class exemption.
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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. If so specified in the related
Prospectus Supplement, certain classes that are, and continue 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 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.
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.
Prospective investors in the Certificates, including in particular the
classes of Certificates that do not constitute "mortgage related securities" for
purposes of SMMEA, should consider the matters discussed in the following
paragraph.
99
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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 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.
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
100
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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 non-institutional
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 LLP, 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 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.
101
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INDEX OF PRINCIPAL DEFINITIONS
401(c) Regulations..................................................98
Accrual Certificates.................................................6
Additional Collateral...............................................16
Additional Collateral Loans.........................................16
Advance ..................................................38
Affiliated Seller ..................................................24
Agency Securities ...................................................9
Agency Securities Pool..............................................15
Appraised Value ..................................................18
ARM Loans ..................................................18
Balloon Amount ..................................................16
Balloon Loans ..................................................16
Bankruptcy Amount ..................................................47
Bankruptcy Losses ..................................................48
Beneficial Owner ..................................................29
Bi-Weekly Loans ..................................................16
Book-Entry Certificates.............................................29
Buy-Down Funds ..................................................19
Buy-Down Loans ..................................................16
Buy-Down Period ..................................................19
CEDEL ..................................................29
CEDEL Participants..................................................30
CERCLA ..................................................77
Certificate Account.................................................15
Certificate Administrator............................................1
Certificate Insurance Policy........................................52
Certificate Registrar...............................................28
Certificateholder ..................................................28
Certificates ...................................................1
Clearance Cooperative...............................................30
Closing Date ..................................................82
Code ..............................................11, 69
Committee Report ..................................................82
Company ...................................................1
Compensating Interest...............................................39
Conservation Act ..................................................78
Contract Pool ...................................................9
Contract Pool Insurance Policy......................................50
Contracts ...................................................1
Contributions Tax ..................................................91
Conventional Loans..................................................16
Convertible Mortgage Loan...........................................19
Cooperative ..................................................68
Cooperative Dwellings...............................................16
Cooperative Loans ...................................................8
Cooperative Note ..................................................68
Cooperatives ..................................................16
Counterparties ..................................................54
Crime Control Act ..................................................79
Custodial Account ..................................................15
Custodian ..................................................15
Cut-off Date ..................................................15
Debt Service Reduction..............................................51
Defaulted Mortgage Losses...........................................48
Deferred Interest ..................................................19
Deficient Valuation.................................................51
Depositaries ..................................................29
Determination Date..................................................37
DIDMC ..................................................79
Direct Puerto Rico Mortgage.........................................31
Distribution Amount.................................................36
Distribution Date ...................................................7
DOL ..................................................95
DOL Regulations ..................................................95
DTC ..................................................29
DTC Participants ..................................................29
Due Date ..................................................37
Due Period ..................................................37
Eligible Account ..................................................34
Endorsable Puerto Rico Mortgage.....................................31
ERISA ..................................................11
ERISA Plans ..................................................95
Escrow Account ..................................................41
Euroclear ..................................................29
Euroclear Operator..................................................30
Euroclear Participants..............................................30
Excess Spread ..................................................32
Exchange Act ...................................................3
Excluded Plan ..................................................97
Excluded Spread ..................................................32
Exemption ..................................................96
Exemption Rating Agencies...........................................97
Extraordinary Losses................................................48
Fannie Mae ..................................................15
Fannie Mae Securities...............................................15
FDIC ..................................................24
FHA ..................................................16
FHA Contracts ..................................................22
FHA Loans ..................................................16
Form 8-K ..................................................15
Fraud Loss Amount ..................................................47
Fraud Losses ..................................................48
Freddie Mac ..................................................15
Freddie Mac Act ..................................................23
Freddie Mac Securities..............................................15
Garn-St Germain Act.................................................73
Ginnie Mae ..................................................15
Ginnie Mae Securities...............................................15
GMAC Mortgage ...................................................2
GPM Loans ..................................................16
Gross Margin ..................................................18
High Cost Loans ..................................................73
Holder-in-Due-Course................................................77
Housing Act ..................................................23
HUD ..................................................16
Index ..................................................18
Indirect Participants...............................................29
Insurance Proceeds..................................................33
International Borrowers..............................................9
IRS ..................................................82
Issue Premium ..................................................87
Letter of Credit ..................................................49
Letter of Credit Bank...............................................49
LIBOR ..................................................54
Liquidated Contract.................................................45
Liquidated Mortgage Loan............................................45
Liquidation Proceeds................................................33
Loan-to-Value Ratio.................................................18
Manufactured Home ...................................................9
Mark-to-Market Regulations..........................................90
Master Commitments..................................................22
Maximum Mortgage Rate...............................................19
Mezzanine Certificates...............................................6
Minimum Mortgage Rate...............................................19
Modified Mortgage Loan..............................................17
Mortgage Collateral..................................................1
Mortgage Collateral Seller...........................................8
Mortgage Loans ...................................................1
Mortgage Note ..................................................31
Mortgage Pool ...................................................8
Mortgage Pool Insurance Policy......................................49
Mortgage Rates ..................................................16
Mortgaged Property...................................................8
Mortgages ..................................................16
Mortgagors ...................................................9
Neg-Am ARM Loans ..................................................19
Net Mortgage Rate ..................................................63
Nonrecoverable Advance..............................................36
OID Regulations ..................................................80
OTS .................................................100
Overcollateralization...............................................48
Participants ..................................................29
Parties in Interest.................................................95
Pass-Through Rate ...................................................5
Paying Agent ..................................................36
Percentage Interest.................................................36
Periodic Cap ..................................................19
Permitted Investments...............................................34
Plan Assets ..................................................96
Plans ..................................................95
Policy Statement .................................................100
Pool Insurer ..................................................49
Pooling and Servicing Agreement......................................1
Prepayment Interest Shortfall.......................................39
Primary Insurance Policy............................................55
Primary Insurer ..................................................55
Principal Prepayments...............................................38
Program ..................................................16
Program Loans ..................................................16
Program Seller ..................................................25
Program Seller Guide................................................21
Prohibited Transactions Tax.........................................91
PTCE ..................................................98
PTCE 83-1 ..................................................98
Puerto Rico Mortgage Loans...........................................9
Purchase Obligation.................................................54
Purchase Price ..................................................26
Qualified Substitute Contract.......................................27
Qualified Substitute Mortgage Loan..................................27
Rating Agency ..................................................10
Realized Loss ..................................................46
Record Date ..................................................36
Registration Statement...............................................3
REMIC ...................................................2
REMIC Certificates..................................................80
REMIC Provisions ..................................................80
REMIC Regular Certificates..........................................80
REMIC Regulations ..................................................80
REMIC Residual Certificates.........................................80
REO Contract ..................................................45
REO Mortgage Loan ..................................................45
Repurchased Contract................................................27
Repurchased Mortgage Loan...........................................27
Reserve Fund ..................................................52
Residential Funding..................................................5
Restricted Group ..................................................97
RICO ..................................................79
Senior Certificates..................................................6
Senior Percentage ..................................................47
Senior/Subordinate Series...........................................28
Servicing Advances..................................................35
Servicing Fee ..................................................42
Single Certificate..................................................40
SMMEA ..................................................11
Special Hazard Amount...............................................47
Special Hazard Insurance Policy.....................................50
Special Hazard Insurer..............................................50
Special Hazard Losses...............................................48
Special Servicer ..................................................44
Stated Principal Balance............................................47
Strip Certificate ...................................................6
Sub-Servicer ..................................................41
Sub-Servicing Agreement.............................................41
Subordinate Certificates.............................................6
Surety Bond ..................................................52
Swaps ..................................................54
Tax-Exempt Investor.................................................99
Tax-Favored Plans ..................................................95
Terms and Conditions................................................30
Tiered REMICs ..................................................81
Title V ..................................................74
Title VIII ..................................................74
Trust Agreement ...................................................1
Trust Fund ...................................................1
Trustee ..................................................15
UBTI ..................................................99
UCC ..................................................71
Unaffiliated Seller.................................................24
Underwriter ..................................................96
United States person................................................94
VA ..................................................16
VA Contracts ..................................................22
VA Loans ..................................................16
Yield Supplement Agreements.........................................54
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Other Expenses of Issuance and Distribution (Item 14 of Form S-3).
The expenses expected to be incurred in connection with the issuance
and distribution of the Certificates being registered, other than underwriting
compensation, are as set forth below. All such expenses, except for the filing
fee, are estimated.
Filing Fee for Registration Statement................ $ 909,091
Legal Fees and Expenses.............................. 540,000
Accounting Fees and Expenses......................... 480,000
Trustee's Fees and Expenses
(including counsel fees).......................... 60,000
Blue Sky Fees and Expenses........................... 20,000
Printing and Engraving Expenses...................... 240,000
Rating Agency Fees................................... 1,500,000
Miscellaneous ....................................... 50,000
-----------------
Total................................................ $ 3,799,091
----------
Indemnification of Directors and Officers (Item 15 of Form S-3).
The Pooling and Servicing Agreements or the Trust Agreements, as
applicable, will provide that no director, officer, employee or agent of the
Registrant is liable to the Trust Fund or the Certificateholders, except for
such person's own willful misfeasance, bad faith, gross negligence in the
performance of duties or reckless disregard of obligations and duties. The
Pooling and Servicing Agreements or the Trust Agreements, as applicable, will
further provide that, with the exceptions stated above, a director, officer,
employee or agent of the Registrant is entitled to be indemnified against any
loss, liability or expense incurred in connection with legal action relating to
such Pooling and Servicing Agreements or the Trust Agreements, as applicable,
and related Certificates other than such expenses related to particular Mortgage
Loans or Contracts.
Any underwriters who execute an Underwriting Agreement in the form
filed as Exhibit 1.1 to this Registration Statement will agree to indemnify the
Registrant's directors and its officers who signed this Registration Statement
against certain liabilities which might arise under the Securities Act of 1933
from certain information furnished to the Registrant by or on behalf of such
indemnifying party.
Subsection (a) of Section 145 of the General Corporation Law of
Delaware empowers a corporation to indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, employee or agent of the corporation or is or
was serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not
<PAGE>
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation and except that no indemnification may be made
in respect to any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine that despite the adjudication of liability such person is fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper.
Section 145 further provides that to the extent a director, officer,
employee or agent of a corporation has been successful in the defense of any
action, suit or proceeding referred to in subsections (a) and (b) or in the
defense of any claim, issue or matter therein, he shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection therewith; that indemnification or advancement of expenses provided
for by Section 145 shall not be deemed exclusive of any other rights to which
the indemnified party may be entitled; and empowers the corporation to purchase
and maintain insurance on behalf of a director, officer, employee or agent of
the corporation against any liability asserted against him or incurred by him in
any such capacity or arising out of his status as such whether or not the
corporation would have the power to indemnify him against such liabilities under
Section 145.
The By-Laws of the Registrant provide, in effect, that to the extent
and under the circumstances permitted by subsections (a) and (b) of Section 145
of the General Corporation Law of the State of Delaware, the Registrant (i)
shall indemnify and hold harmless each person who was or is a party or is
threatened to be made a party to any action, suit or proceeding described in
subsections (a) and (b) by reason of the fact that he is or was a director or
officer, or his testator or intestate is or was a director or officer of the
Registrant, against expenses, judgments, fines and amounts paid in settlement,
and (ii) shall indemnify and hold harmless each person who was or is a party or
is threatened to be made a party to any such action, suit or proceeding if such
person is or was serving at the request of the Registrant as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise.
Certain controlling persons of the Registrant may also be entitled to
indemnification from General Motors Acceptance Corporation, an indirect parent
of the Registrant. Under sections 7015 and 7018-7023 of the New York Banking
Law, General Motors Acceptance Corporation may or shall, subject to various
exceptions and limitations, indemnify its directors or officers and may purchase
and maintain insurance as follows:
(a) If the director is made or threatened to be made a party
to an action by or in the right of General Motors Acceptance
Corporation to procure a judgment in its favor, by reason of the fact
that such person is or was a director or officer of General Motors
Acceptance Corporation or is or was serving at the request of General
Motors
2
<PAGE>
Acceptance Corporation as a director or officer of some other
enterprise, General Motors Acceptance Corporation may indemnify such
person against amounts paid in settlement of such action or an appeal
therein, if such director or officer acted, in good faith, for a
purpose which such person reasonably believed to be in (or, in the case
of service for any other enterprise, not opposed to) the best interests
of General Motors Acceptance Corporation, except that no
indemnification is available under such statutory provisions in respect
of a threatened action or a pending action which is settled or
otherwise disposed of, or any claim or issue or matter as to which such
person is found liable to General Motors Acceptance Corporation, unless
in each such case a court determined that such person is fairly and
reasonably entitled to indemnity for such amount as the court deems
proper.
(b) With respect to any action or proceeding other than one by
or in the right of General Motors Acceptance Corporation to procure a
judgment in its favor, if a director or officer is made or threatened
to be made a party by reason of the fact that such person was a
director or officer of General Motors Acceptance Corporation, or served
some other enterprise at the request of General Motors Acceptance
Corporation, General Motors Acceptance Corporation may indemnify such
person against judgments, fines, amounts paid in settlement and
reasonable expenses, including attorneys' fees, incurred as a result of
such action or proceeding or an appeal therein, if such person acted in
good faith for a purpose which such person reasonably believed to be in
(or, in the case of service for any other enterprise, not opposed to)
the best interests of General Motors Acceptance Corporation and, in
criminal actions or proceedings, in addition, had no reasonable cause
to believe that such person's conduct was unlawful.
(c) A director or officer who has been wholly successful, on
the merits or otherwise, in the defense of a civil or criminal action
or proceeding of the character described in paragraphs (a) or (b)
above, shall be entitled to indemnification as authorized in such
paragraphs.
(d) General Motors Acceptance Corporation may purchase and
maintain insurance to indemnify directors and officers in instances in
which they may not otherwise be indemnified by General Motors
Acceptance Corporation under the provisions of the New York Banking
Law, provided that the contract of insurance provides for a retention
amount and for co-insurance, except that no such insurance may provide
for any payment, other than cost of defense, to or on behalf of any
director or officer if a judgment or other final adjudication adverse
to such director or officer establishes that such person's acts of
active and deliberate dishonesty were material to the cause of action
so adjudicated or that such person personally gained in fact a
financial profit or other advantage to which such person was not
legally entitled.
The foregoing statement is subject to the detailed provisions of
sections 7015 and 7018-7023 of the New York Banking Law.
As a subsidiary of General Motors Corporation, General Motors
Acceptance Corporation is insured against liabilities which it may incur by
reason of the foregoing provisions of the New York Banking Law and directors and
officers of General Motors
3
<PAGE>
Acceptance Corporation are insured against some liabilities which might arise
out of their employment and not be subject to indemnification under said Banking
Law.
Pursuant to resolutions adopted by the Board of Directors of General
Motors Corporation, that company to the fullest extent permissible under law
will indemnify, and has purchased insurance on behalf of, directors or officers
of the company, or any of them, who incur or are threatened with personal
liability, including expenses, under Employee Retirement Income Security Act of
1974 or any amendatory or comparable legislation or regulation thereunder.
Exhibits (Item 16 of Form S-3).
*1.1 Form of Underwriting Agreement (Incorporated by reference to Exhibit
1 to Registration Statement No. 33-95932).
*3.1 Certificate of Incorporation (Incorporated by reference to Exhibit 3.1 to
Registration Statement No. 33-95932).
*3.2 By-Laws (Incorporated by reference to Exhibit 3.2 to Registration
Statement No. 33-95932).
*4.1 Form of Pooling and Servicing Agreement (Incorporated by reference
to Exhibit 4.1 to Registration Statement No. 33-95932).
*4.2 Form of Trust Agreement (Incorporated by reference to Exhibit 4.2 to
Registration Statement No. 33-95932).
5.1 Opinion of Orrick, Herrington & Sutcliffe LLP with respect to legality.
5.2 Opinion of Thacher Proffitt & Wood with respect to legality.
8.1 Opinion of Orrick, Herrington & Sutcliffe LLP with respect to certain
tax matters.
8.2 Opinion of Thacher Proffitt & Wood with respect to certain tax matters
(included as part of Exhibit 5.2).
23.1 Consent of Orrick, Herrington & Sutcliffe LLP (included as part of
Exhibit 5.1 and Exhibit 8.1).
23.2 Consent of Thacher Proffitt & Wood (included as part of Exhibit 5.2
and Exhibit 8.2).
24.1 Power of Attorney.
24.2 Certified Copy of the Resolutions of the Board of Directors of the
Registrant.
---------------
* Not filed herewith.
Undertakings (Item 17 of Form S-3).
The Registrant hereby undertakes:
(a)(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement;
(i) to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
4
<PAGE>
(ii) to reflect in the prospectus any facts or events
arising after the effective date of this Registration
Statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in this
Registration Statement. Notwithstanding the foregoing, any
increase or decrease in the volume of securities offered (if
the total dollar value of securities offered would not exceed
that which was registered) and any deviation from the low or
high and of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement; and
(iii) to include any material information with
respect to the plan of distribution not previously disclosed
in this Registration Statement or any material change to such
information in this Registration Statement;
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof; and
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(b) The Registrant hereby undertakes that, for purposes of determining
any liability under the Securities Act of 1933, each filing of the Registrant's
annual report pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in this Registration Statement shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form S-3, reasonably believes
that the security rating requirement referred to in Transaction Requirement B.2
or B.5 of Form S-3 will be met by the time of sale of the securities registered
hereby, and has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Minneapolis, State of Minnesota, on August 11, 1997.
RESIDENTIAL ACCREDIT LOANS, INC.
By: /s/ Christopher J. Nordeen
Christopher J. Nordeen
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
Signature Title Date
/s/ Christopher J. Nordeen President and Chief August 11, 1997
- ---------------------------
Christopher J. Nordeen Executive Officer
(Principal Executive
Officer)
/s/ Davee L. Olson Director and Chief August 11, 1997
- ------------------------------------
Davee L. Olson Financial Officer
(Principal Financial Officer)
/s/ Bruce J. Paradis Director August 11, 1997
- ------------------------------------
Bruce J. Paradis
/s/ Dennis W. Sheehan, Jr. Director August 11, 1997
Dennis W. Sheehan, Jr.
/s/ Jack R. Katzmark Controller (Principal August 11, 1997
- ---------------------------
Jack R. Katzmark Accounting Officer)
6
<PAGE>
Exhibit 5.1
August 13, 1997
Residential Accredit Loans, Inc.
8400 Normandale Lake Boulevard
Minneapolis, Minnesota 55437
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form
S-3, to be filed by Residential Accredit Loans, Inc., a Delaware corporation
(the "Registrant"), with the Securities and Exchange Commission on August 13,
1997 (the "Registration Statement"), in connection with the registration under
the Securities Act of 1933, as amended (the "Act") of Mortgage and Manufactured
Housing Contract Pass-Through Certificates (the "Certificates"). The
Certificates are issuable in series (each, a "Series") under either a separate
Pooling and Servicing Agreement (each such agreement, a "Pooling and Servicing
Agreement") by and among the Registrant, the Master Servicer or Servicer named
therein and the Trustee named therein or a Trust Agreement (each such agreement,
a "Trust Agreement") by and among the Registrant, the Trustee named therein and
the Certificate Administrator named therein. The Certificates of each Series are
to be sold as set forth in the Registration Statement, any amendment thereto,
and the prospectus and prospectus supplement relating to such Series.
We have examined such instruments, documents and records as we deemed
relevant and necessary as a basis of our opinion hereinafter expressed. In such
examination, we have assumed the following: (a) the authenticity of original
documents and the genuineness of all signatures; (b) the conformity to the
originals of all documents submitted to us as copies; and (c) the truth,
accuracy and completeness of the information, representations and warranties
contained in the records, documents, instruments and certificates we have
reviewed.
Based on such examination, we are of the opinion that when the issuance
of each Series of Certificates has been duly authorized by appropriate corporate
action and the Certificates of such Series have been duly executed,
authenticated and delivered in accordance with the Pooling and Servicing
Agreement or the Trust Agreement relating to such Series and sold, the
Certificates will be legally issued, fully paid, binding obligations of the
trust created by the Pooling and Servicing Agreement or the Trust Agreement, and
the holders of the Certificates will be entitled to the benefits of the Pooling
and Servicing Agreement or the Trust Agreement, except as enforcement thereof
may be limited by applicable bankruptcy, insolvency, reorganization,
arrangement, fraudulent conveyance, moratorium, or other laws relating to or
affecting the rights of creditors generally and general principles of equity,
including without limitation, concepts of materiality, reasonableness, good
faith and fair dealing, and the possible unavailability of specific performance
or injunctive relief, regardless of whether such enforceability is considered in
a proceeding in equity or at law.
<PAGE>
Residential Accredit Loans, Inc.
August 13, 1997
Page 2
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name wherever appearing in the
Registration Statement and the prospectus contained therein. In giving such
consent, we do not consider that we are "experts," within the meaning of the
term as used in the Act or the rules and regulations of the Commission issued
thereunder, with respect to any part of the Registration Statement, including
this opinion as an exhibit or otherwise.
Very truly yours,
/s/ ORRICK, HERRINGTON & SUTCLIFFE LLP
ORRICK, HERRINGTON & SUTCLIFFE LLP
<PAGE>
Exhibit 5.2
August 13, 1997
Residential Accredit Loans, Inc.
8400 Normandale Lake Boulevard
Minneapolis, Minnesota 55437
Residential Accredit Loans, Inc.
Mortgage and Manufactured Housing Contract
Pass-Through Certificates
Registration Statement on Form S-3
Ladies and Gentlemen:
We are counsel to Residential Accredit Loans, Inc., a Delaware
corporation (the "Registrant"), in connection with the registration under the
Securities Act of 1933, as amended (the "Act"), of Mortgage and Manufactured
Housing Contract Pass-Through Certificates (the "Certificates"), and the related
preparation and filing of a Registration Statement on Form S-3 (the
"Registration Statement"). The Certificates are issuable in series under
separate pooling and servicing agreements (each such agreement, a "Pooling and
Servicing Agreement") or trust agreements (each such agreement, a "Trust
Agreement"), among the Registrant, a master servicer, servicer or certificate
administrator to be identified in the prospectus supplement for such series of
Certificates and a trustee to be identified in the prospectus supplement for
such series of Certificates. Each Pooling and Servicing Agreement or Trust
Agreement will be substantially in the respective form filed as an Exhibit to
the Registration Statement.
In connection with rendering this opinion letter, we have
examined the forms of the Pooling and Servicing Agreement and Trust Agreement
contained as Exhibits in the Registration Statement, the Registration Statement
and such other documents as we have deemed necessary. As to matters of fact, we
have examined and relied upon representations or certifications of officers of
the Registrant or public officials. In rendering this opinion letter, except for
the matters that are specifically addressed in the opinions expressed below, we
have assumed (i) the authenticity of all documents submitted to us as originals
and the conformity to the originals of all documents submitted to us as copies,
(ii) the necessary entity formation and continuing existence in the jurisdiction
of formation, and the necessary licensing and qualification in all
jurisdictions, of all parties to all documents, (iii) the necessary
authorization, execution, delivery and enforceability of such documents, and the
necessary entity power with respect thereto, and (iv) that there is not and will
not be any other agreement that modifies or supplements the agreements expressed
in the documents to which this opinion letter relates and that renders any of
the opinions expressed herein inconsistent with such documents as so modified or
supplemented.
Our opinions set forth below are subject to the qualification
that enforceability of each of the respective obligations of the parties under
any agreement is subject to (i) general
<PAGE>
Residential Accredit Loans, Inc. Page 2
August 13, 1997
principles of equity, regardless of whether such enforceability is considered in
a proceeding in equity or at law, (ii) the effect of certain laws, regulations
and judicial or other decisions upon the availability and enforceability of
certain provisions, covenants or remedies, including the remedies of specific
performance and self-help and provisions imposing penalties and forfeitures,
(iii) bankruptcy, insolvency, liquidation, receivership, moratorium,
reorganization or other similar laws affecting the rights of creditors and (iv)
public policy considerations underlying the securities laws, to the extent that
such public policy considerations limit the enforceability of the provisions of
any agreement, which purport or are construed to provide indemnification with
respect to securities law violations. However, the non-enforceability of any
such remedies will not, taken as a whole, materially interfere with the
practical realization of the benefits of the rights and remedies included in any
such agreement, except for the consequences of any judicial, administrative,
procedural or other delay which may be imposed by, relate to or arise from
applicable laws, equitable principles and interpretations thereof.
In rendering this opinion letter, we to not express any
opinion concerning any law other than the law of the State of New York and the
corporate law of the State of Delaware. We do not express any opinion with
respect to the securities laws of any jurisdiction or any other matter not
specifically addressed below.
Based upon and subject to the foregoing, it is our opinion
that:
1. Upon the authorization, execution and delivery thereof by
the parties thereto, each Pooling and Servicing Agreement or Trust Agreement
will be the legal and valid obligation of the Registrant, enforceable against
the Registrant in accordance with its terms.
2. Upon the authorization, execution and delivery of a Pooling
and Servicing Agreement or Trust Agreement for a series of Certificates by the
parties thereto, the execution and authentication of the Certificates of such
series in accordance with the provisions of that Pooling and Servicing Agreement
or Trust Agreement and the sale and delivery of such Certificates as
contemplated in the Registration Statement and the prospectus and prospectus
supplement delivered in connection therewith, such Certificates will be legally
and validly issued and outstanding, fully paid and non-assessable and entitled
to the benefits of that Pooling and Servicing Agreement or Trust Agreement.
3. The description of federal income tax consequences
appearing under the heading "Certain Federal Income Tax Consequences" in the
prospectus contained in the Registration Statement, while not purporting to
discuss all possible federal income tax consequences of an investment in the
Certificates, is accurate with respect to those tax consequences which are
discussed.
We hereby consent to the filing of this opinion letter as an
Exhibit to the Registration Statement, and to the use of our name in the
prospectus and prospectus supplement
<PAGE>
Residential Accredit Loans, Inc. Page 3
August 13, 1997
included in the Registration Statement under the heading "Legal Matters", and in
the prospectus included in the Registration Statement under the heading "Certain
Federal Income Tax Consequences", without admitting that we are "experts" within
the meaning of the Act and the rules and regulations thereunder with respect to
any part of the Registration Statement, including this Exhibit.
Very truly yours,
THACHER PROFFITT & WOOD
By
<PAGE>
Residential Accredit Loans, Inc. Page 1
August 13, 1997
Exhibit 8.1
August 13, 1997
Residential Accredit Loans, Inc.
8400 Normandale Lake Boulevard
Minneapolis, Minnesota 55437
Ladies and Gentlemen:
We have advised Residential Accredit Loans, Inc. (the "Registrant")
with respect to certain federal income tax aspects of the issuance by the
Registrant of its Mortgage and Manufactured Housing Contract Pass-Through
Certificates, issuable in series (the "Certificates"). Such advice conforms to
the description of selected federal income tax consequences to holders of the
Certificates that appears under the heading "Certain Federal Income Tax
Consequences" in the prospectus (the "Prospectus") forming a part of the
Registration Statement on Form S-3 as prepared for filing by the Registrant with
the Securities and Exchange Commission under the Securities Act of 1933, as
amended (the "Act") on August 13, 1997 (the "Registration Statement"). Such
description does not purport to discuss all possible income tax ramifications of
the proposed issuance, but with respect to those tax consequences which are
discussed, in our opinion the description is accurate in all material respects.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name wherever appearing in the
Registration Statement and the Prospectus contained therein. In giving such
consent, we do not consider that we are "experts," within the meaning of the
term as used in the Act or the rules and regulations of the Commission issued
thereunder, with respect to any part of the Registration Statement, including
this opinion as an exhibit or otherwise.
Very truly yours,
/s/ ORRICK, HERRINGTON & SUTCLIFFE LLP
ORRICK, HERRINGTON & SUTCLIFFE LLP
<PAGE>
EXHIBIT 24.1
RESIDENTIAL ACCREDIT LOANS, INC.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Christopher J. Nordeen, Jack R.
Katzmark and Teresa R. Farley as his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities (including his capacity as
director and/or officer of Residential Accredit Loans, Inc. (the "Registrant"))
to sign any or all amendments (including post-effective amendments) to the
Registration Statement on Form S-3 to be filed on or about August 11, 1997, and
other documents in connection therewith, and to file the same, with all exhibits
thereto, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully and to all intents and purposes as might or could be done in
person, hereby ratifying and confirming that said attorneys-in-fact and agents,
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Signature Title Date
/s/ Christopher J. Nordeen President and Chief August 11, 1997
- ----------------------------
Christopher J. Nordeen Executive Officer
(Principal Executive
Officer)
/s/ Davee L. Olson Director and Chief August 11, 1997
- ----------------------------
Davee L. Olson Financial Officer
(Principal Financial
Officer)
/s/ Bruce J. Paradis Director August 11, 1997
- ----------------------------
Bruce J. Paradis
/s/ Dennis W. Sheehan, Jr. Director August 11, 1997
Dennis W. Sheehan, Jr.
/s/ Jack R. Katzmark Controller (Principal August 11, 1997
- ----------------------------
Jack R. Katzmark Accounting Officer)
1
<PAGE>
RESIDENTIAL ACCREDIT LOANS, INC.
UNANIMOUS WRITTEN CONSENT OF DIRECTORS
IN LIEU OF MEETING OF BOARD OF DIRECTORS
August 8, 1997
The undersigned, being all the Directors of Residential Accredit Loans,
Inc., a Delaware corporation (the "Corporation"), do hereby consent in writing
that the following resolutions shall have the same force and effect as if
adopted at a Meeting of the Board of Directors of the Corporation:
RESOLVED, that the President, the Treasurer, the Chief
Financial Officer, the Directors and other officers
specifically authorized by the Board of Directors in
writing in their capacities as such be, and they hereby
are, authorized to sign on behalf of the Corporation, a
Registration Statement constituting a filing on Form
S-3 with respect to the registration of an additional
$3,000,000,000 of Mortgage and Manufactured Housing
Contract Pass-Through Certificates (the "Certificates")
(such registration statement, in the form in which it
was executed and to be filed on or about August 11,
1997, including any and all exhibits thereto and
together with the amount outstanding on the Form S-3
registration statement that was filed with the
Securities and Exchange Commission on or about August
16, 1995, is hereby called the "Registration
Statement"); and the President, Chief Financial
Officer, Treasurer, Controller, any Executive Vice
President, any Senior Vice President, any Vice
President and any other officer specifically authorized
by the Board of Directors in writing (the "Authorized
Officers") or the Secretary is hereby authorized to
cause the same to be filed with the Securities and
Exchange Commission in accordance with the provisions
of the Securities Act of 1933, as amended, and the
Securities and Exchange Commission's rules and
regulations thereunder;
RESOLVED, that the Authorized Officers be, and they hereby
are, also authorized to sign on behalf of the
Corporation and cause to be filed such amendments and
supplements to the Registration Statement, including,
without limitation, the financial statements and
schedules, exhibits and forms of Prospectus and
Prospectus Supplements (the "Prospectus" and
"Prospectus Supplements," respectively) required as a
part thereof, which such Authorized Officers in their
sole discretion find necessary or desirable in order to
effect the registration and takedown therefrom;
RESOLVED, that the President, the Chief Financial Officer or
the Controller be, and each of them, with full
authority to act without the others, hereby is,
authorized to sign the Registration Statement and any
amendments to the Registration Statement on behalf of
the Corporation as the principal executive officer, the
principal financial officer and the principal
accounting officer of the Corporation;
<PAGE>
RESOLVED, that the Authorized Officers of the Corporation
and its counsel be, and each of them, with full
authorization to act without the others, hereby is,
authorized to appear on behalf of the Corporation
before the Securities and Exchange Commission in
connection with any matter relating to the Registration
Statement and to any amendment thereto;
RESOLVED, that the Authorized Officers and the Directors be,
and each of them, with full authority to act without
the others, hereby is, authorized to execute, in the
name and on behalf of the Corporation, one or more
Powers of Attorney, constituting and appointing
Christopher J. Nordeen, Jack R. Katzmark and Teresa R.
Farley, the attorneys-in-fact and agents of the
Corporation, with full power to act without the others,
to sign the Registration Statement and any and all
amendments thereto, with power appropriate to affix the
corporate seal of the Corporation and to attest said
seal, to file the Registration Statement and each
amendment so signed with all exhibits thereto with the
Securities and Exchange Commission;
RESOLVED, that Christopher J. Nordeen, President and Chief
Executive Officer of the Corporation, is hereby
designated to act on behalf of the Corporation as the
agent for service of process in connection with the
Registration Statement and authorized to receive
notices and communications from the Securities and
Exchange Commission in connection with the Registration
Statement and any amendments thereto;
RESOLVED, that the Authorized Officers, the Secretary or any
Assistant Secretary of the Corporation be, and each of
them with full authority to act without the others,
hereby is, authorized and directed in the name and on
behalf of the Corporation to take any and all action
that he or she may deem necessary or advisable in order
to obtain a permit, register or qualify the
Certificates for issuance and sale or to request an
exemption from registration of the Certificates, to
register or obtain a license for the Corporation as a
dealer or broker under the securities laws of such of
the states of the United States of America or other
jurisdictions, including Canada, as such officer may
deem advisable, and in connection with such
registration, permits, licenses, qualifications and
exemptions to execute, acknowledge, verify, file and
publish all such applications, reports, issuer's
covenants, resolutions, irrevocable consents to service
of process, powers of attorney and other papers,
agreements, documents and instruments as may be deemed
by such officer to be useful or advisable to be filed,
and that the Board of Directors hereby adopts the form
of any and all resolutions required by any such state
authority in connection with any such applications,
reports, issuer's covenants, irrevocable consents to
service of process, powers of attorney and other
papers, agreements, documents and instruments if (i) in
the opinion of the officer of the Corporation so acting
the adoption of such resolutions is necessary or
advisable and (ii) the Secretary of the Corporation
evidences such adoption by filing with this Unanimous
Written Consent copies of such resolutions, which shall
thereupon be deemed to be adopted by the Board of
Directors and incorporated in this Unanimous Written
Consent as part of this resolution with the same force
and effect as if included herein, and that the
Authorized Officers, the
2
<PAGE>
Secretary or any Assistant Secretary of the
Corporation take any and all further action that they
may deem necessary or advisable in order to maintain
such registration in effect for as long as they may
deem to be in the best interests of the Corporation;
RESOLVED, that it is in the best interests of the
Corporation that the Certificates be qualified or
registered for sale in various states, that the
Authorized Officers, the Secretary or any Assistant
Secretary of the Corporation and its counsel are
authorized to determine the states in which appropriate
action shall be taken to qualify or register for sale
all or such part of the Certificates as said Authorized
Officers, the Secretary or any Assistant Secretary may
deem advisable, that said Authorized Officers,
Secretary or any Assistant Secretary are hereby
authorized to perform on behalf of the Corporation any
and all such acts as they may deem necessary or
advisable in order to comply with the applicable laws
of any such states, and in connection therewith to
execute and file all requisite papers and documents,
including, but not limited to, applications, reports,
surety bonds, irrevocable consents and appointments of
attorneys for service of process, and the execution by
such Authorized Officers, Secretary or any Assistant
Secretary of any such paper or document or the
performance by them of any act in connection with the
foregoing matters shall conclusively establish their
authority therefor from the Corporation and the
approval and ratification by the Corporation of the
papers and documents to be executed and the action so
taken;
RESOLVED, that (i) the establishment of the trust fund for
any series (a "Series") of Certificates (the "Trust
Fund"), (ii) the issuance and sale of the Certificates
of such Series, with such designations, original
principal amounts, pass-through rates and such other
terms, all substantially as set forth in the
Registration Statement, the Prospectus and Prospectus
Supplement and any Private Placement Memorandum (a
"Private Placement Memorandum") relating to such Series
and (iii) the conveyance to the Trust Fund of mortgage
loans having approximate aggregate principal amounts
equal to the aggregate principal amounts of the
Certificates that constitute such Series, in return for
such Certificates, are hereby approved by the
Corporation;
RESOLVED, that (i) the proposed form and terms of the
Pooling and Servicing Agreement or Trust Agreement,
Custodial Agreement or any other related agreement,
document or instrument for any Series of Certificates
(together, the "Offering Documents") with respect to
the Certificates of any Series (as described in the
Registration Statement, the Prospectus and Prospectus
Supplement and any Private Placement Memorandum
relating to such Series) are hereby approved by the
Corporation and (ii) the Authorized Officers be, and
each of them hereby is, authorized to execute and
deliver the Offering Documents, generally in the form
previously executed by the Corporation, with such
changes as any of the Authorized Officers may deem
necessary or advisable;
RESOLVED, that the preparation of a Prospectus Supplement
and any Private Placement Memorandum relating to the
Certificates of a Series and the use of such
3
<PAGE>
Prospectus Supplement and Prospectus and any Private
Placement Memorandum in connection with the sale of the
Certificates offered thereby is hereby approved;
RESOLVED, that the proposed form and terms of any Assignment
and Assumption Agreement relating to the sale of
mortgage loans by Residential Funding Corporation
("RFC") to the Corporation, and as described in the
Registration Statement, the Prospectus and Prospectus
Supplement and any Private Placement Memorandum for any
Series (each, an "Assignment and Assumption
Agreement"), are hereby approved by the Corporation,
and each of the Authorized Officers is and shall be
authorized to execute and deliver on behalf of the
Corporation any such Assignment and Assumption
Agreement, generally in a form previously executed by
the Corporation between RFC and the Corporation, with
such changes as any of the Authorized Officers may deem
necessary or advisable;
RESOLVED, that, upon such request, the execution of the
Certificates for such Series by the Trustee under the
Pooling and Servicing Agreement or Trust Agreement and
their authentication by the Trustee or the Certificate
Registrar is authorized by the Corporation, and each
Authorized Officer is authorized to, upon receipt of
the purchase price for the Certificates stated in any
Underwriting Agreement and/or Purchase Agreement (each
an "Underwriting Agreement" and "Purchase Agreement,"
respectively) to be paid to the Corporation, deliver,
or cause to be delivered, the related Certificates in
accordance with the terms of such Underwriting
Agreement and any Purchase Agreement;
RESOLVED, that any class or classes of Certificates of any
Series created and issued under any Pooling and
Servicing Agreement or Trust Agreement are hereby
authorized to be sold pursuant to any Underwriting
Agreement or Purchase Agreement, or any similar
agreement, generally in a form previously executed by
the Corporation, with such changes as any of the
Authorized Officers may deem necessary or advisable,
either at the time of issuance or thereafter, including
for the purpose of creating a new Series of
Certificates;
RESOLVED, that if any class or classes of Certificates of
any (i) Series are subject to a letter of credit,
corporate guaranty or any other similar credit
enhancement provided or supported by either the
Corporation or General Motors Acceptance Corporation,
or any of their respective affiliates, or, in respect
of any such class or classes of Certificates the
Corporation or General Motors Acceptance Corporation,
or any of their respective affiliates, makes any
representation, covenant or assurance regarding the
future performance of the mortgage loans, recoveries in
the event of foreclosure, prepayment performance or
other similar financial guarantees, or (ii) derive
their payments from a Mortgage Pool that contains
Mortgage Loans secured by properties located in the
Commonwealth of Puerto Rico, then, in each case, the
matters contained herein with respect to such Series
must also be approved by the execution of a Certificate
of Approval in substantially the form of Exhibit A
attached hereto;
4
<PAGE>
RESOLVED, that execution of any agreement, instrument or
document by an Authorized Officer of the Corporation
pursuant to these resolutions shall constitute
conclusive evidence of the approval of, and of that
Authorized Officer's authority to execute, such
agreement, instrument or document;
RESOLVED, that the Authorized Officers, the Secretary or any
Assistant Secretary of the Corporation be, and each of
them hereby is, authorized to take any other action and
execute and deliver any other agreements, documents and
instruments, including powers of attorney, as any of
the Authorized Officers, the Secretary or any Assistant
Secretary deem necessary or advisable to carry out the
purpose and intent of the foregoing resolutions or of a
Certificate of Approval;
RESOLVED, that the Authorized Officers, the Secretary, any
Assistant Secretary of the Corporation or any
attorney-in-fact of the Corporation be, and each of
them hereby is, authorized to attest and affix the
corporate seal of the Corporation to any agreement,
instrument or document executed pursuant to any of the
foregoing resolutions or pursuant to a Certificate of
Approval by impressing or affixing such seal thereon or
by imprinting or otherwise reproducing thereon a
facsimile thereof; and
RESOLVED, that any actions of the Board of Directors, the
Authorized Officers, the Secretary or any Assistant
Secretary of the Corporation in furtherance of the
purposes of the foregoing resolutions or of a
Certificate of Approval, whether taken before or after
the adoption or effectiveness of these resolutions or
the execution of a Certificate of Approval,
respectively, are hereby approved, confirmed, ratified
and adopted (if in furtherance of the purposes of these
resolutions), and shall be approved, confirmed,
ratified and adopted upon execution of such Certificate
of Approval (if in furtherance of the purposes of such
Certificate of Approval).
IN WITNESS WHEREOF, the undersigned Directors have executed this
Unanimous Written Consent this 8th day of August, 1997.
/s/ Dennis W. Sheehan, Jr. /s/ Bruce J. Paradis
Dennis W. Sheehan, Jr. Bruce J. Paradis
/s/ Davee L. Olson
Davee L. Olson
5
<PAGE>
EXHIBIT A
CERTIFICATE OF APPROVAL
RESIDENTIAL ACCREDIT LOANS, INC.
Residential Accredit Loans, Inc. (the "Corporation") is authorized to
execute the agreements and to take such other action as described in the
resolutions adopted by Unanimous Written Consent of Directors in Lieu of Meeting
of Board of Directors of the Corporation dated ____________ __, 1997 with
respect to the Certificates of the Series described below upon the execution of
this Certificate of Approval by the undersigned members of the Board of
Directors:
Series ______, Classes
__________________________________________, to be issued on
______________________, pursuant to a Pooling and Servicing
Agreement or Trust Agreement dated as of _________________
among the Corporation, _________________ and ______________,
as Trustee.
Date:______________ RESIDENTIAL ACCREDIT LOANS, INC.*
By:________________________________
Director
By:________________________________
Director
By:________________________________
Director
* At least two of the three designated members of the Board of Directors must
sign.
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