March 5, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Residential Accredit Loans, Inc. Amendment No. 1 to Registration
Statement on Form S-3 relating to Mortgage Asset-Backed and
Manufactured Housing Contract Pass-Through Certificates (Registration
Statement No. 333-72661)
Ladies and Gentlemen:
On behalf of the Depositor, Residential Accredit Loans, Inc., we have
caused to be filed with you electronically under EDGAR, the captioned Amendment
No. 1 to the Registration Statement on Form S-3 as filed with the Securities and
Exchange Commission on February 19, 1999 (Registration Statement No. 333-72661).
In addition, we have been advised that payment of the filing fee in the
amount of $1,668,000 has been made to you by the Depositor on March 5, 1999, and
that $278 was paid to you by the Depositor on February 19, 1999.
The Depositor is filing Amendment No. 1 to increase the proposed maximum
amount of securities to be registered from $1,000,000 to $6,001,000,000.
Amendment No. 1 has been marked to show all changes made to the Registration
Statement since it was filed.
If you have any questions concerning Amendment No. 1, please do not
hesitate to call the undersigned at (212) 506-5067 or Kathy Crost at (212)
506-5070.
Very truly yours,
/s/Carol Childers
Carol Childers
cc: Mark Green, Esq.
John White, Esq.
Division of Corporation Finance
Branch 11 (Mail Stop 3-10)
<PAGE>
As filed with the Securities and Exchange Commission on {1} March 5, 1999
Registration No. 333-{2} 72661
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)
Teresa Rae Farley
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 Mortage Katharine I. Crost, Esq
Group, Inc. 3031 West Grand Boulevard Orrick, Herrington & Sutcliffe LLP
Detroit, Michigan 48232 666 Fifth Avenue
New York, New York 10103
Steven S. Kudenholdt, Esq. Robert C. Wipperman, Esq.
Paul D. Tvetenstrand, Esq. Stroock & Stroock & Lavan LLP
Thacher Proffitt & Wood 180 Maiden Lane
Two World Trade Center New York, New York 10038
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. G
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. G
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. G
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. G
<TABLE>
CALCULATION OF REGISTRATION FEE
<CAPTION>
=========================================================================================================================
Title of Securities to be Registered Amount to be {3} Registered Proposed Maximum Proposed Maximum Amount of Registration Fee(1)
Aggregate Price Aggregate Offering
Per Unit Price
- - -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage Asset-Backed and $6,001,000,000 100% $6,001,000,000 $1,668,278
Manufactured Housing{4} Contract
Pass-Through Certificates (Issuable
in Series)
=========================================================================================================================
</TABLE>
(1) Fee of $278 paid in connection with original Registration Statement filed
on February 19, 1999.
(2) $3,387,986,418.98 aggregate principal amount of Mortgage and Manufactured
Housing Contract Pass-Through Certificates registered by the Registrant
under Registration Statement No. 333-63549 on Form S-3 referred to below
and not previously sold are consolidated into this Registration Statement
pursuant to Rule 429. A filing fee of $999,455.99 was paid with
Registration Statements No. 333-63549 and 333-48327 in connection with such
unissued Mortgage and Manufactured Housing Contract Pass-Through
Certificates. 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
$9,388,986,418.98.
(3) 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. 333-63549 Form S-3 previously filed by the Registrant. This
Registration Statement, which relates to {5} $601,000,000 aggregate principal
amount of Mortgage and Manufactured Housing Contract Pass-Through Certificates,
constitutes Post-Effective Amendment No. 1 to Registration Statement No.
333-63549 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
Asset-Backed 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").
2
<PAGE>
The information in this prospectus supplement is not complete and may be change
. We may not sell these securities until the registraion statement filed with
the Securities and Exchange Commission is effective. This prospectus supplement
is not an offer to sell these securities and it is not soliciting an offer to
buy these securities in any state where the offer or sale is not permitted.
Subject to completion
Preliminary prospectus supplement dated February __, 1999
Prospectus supplement dated [______ __, ____] (to prospectus dated [______ __,
____])
$ [ --------- ]
Residential Accredit Loans, Inc.
Depositor
[Name of [Master] Servicer[s]]
[Master] Servicer
[Mortgage Asset-Backed][Manufactured Housing Contract] Pass-Through
Certificates, Series [____-QS__]
You should consider carefully the risk factors beginning on page S-9 in this
prospectus supplement.
The certificates will represent ownership interests only in the trust created
for Series [____-QS__] and will not represent ownership interests in or
obligations of Residential Accredit Loans, Inc., [Name of [Master] Servicer[s]]
or any of their affiliates. This prospectus supplement may be used to offer and
sell the certificates offered hereby only if accompanied by the prospectus.
Offered Certificates
The trust created for the Series [____-QS__] certificates will consist primarily
of a pool of conventional one- to four-family residential first mortgage loans.
The trust will issue [fifteen] classes of certificates. [Twelve] of these
classes of certificates are offered hereby, consisting of [nine] classes of
senior certificates and three classes of Class M Certificates. You can find a
list of these classes, together with their principal balances, pass-through
rates and certain other characteristics, on page S-5 of this prospectus
supplement. The certificates will not be listed on any securities exchange.
Credit Enhancement
Credit enhancement for the offered certificates consists of:
o Three classes of Class B Certificates issued by the trust, which are not
offered by this prospectus supplement. The Class B Certificates are
subordinated to and provide credit enhancement for the offered
certificates to the extent described in this prospectus supplement.
o The Class M Certificates issued by the trust, which are subordinated to
and provide credit enhancement for the senior certificates and any Class
M Certificates with a higher payment priority to the extent described in
this prospectus supplement.
Underwriting
[Name of Underwriter] will offer to the public the Class A-1 Certificates
through Class A-[_] Certificates and 99.99% of the Class R Certificates at
varying prices to be determined at the time of sale. [Name of Underwriter]'s
commission will be the difference between the price it pays to the depositor for
such underwritten certificates and the amount it receives from the sale of such
underwritten certificates to the public. The proceeds to the depositor from the
sale of such underwritten certificates to [Name of Underwriter] will be
approximately [ ____ ]% of the principal balance of such underwritten
certificates plus accrued interest, before deducting expenses.
[[Name of Underwriter] will offer to the public the Class M Certificates at
varying prices to be determined at the time of sale. [Name of Underwriter]'s
commission will be the difference between the price it pays to the depositor for
such underwritten certificates and the amount it receives from the sale of such
underwritten certificates to the public. The proceeds to the depositor from the
sale of such underwritten certificates to [Name of Underwriter] will be
approximately [ ____ ]% of the principal balance of such underwritten
certificates plus accrued interest, before deducting expenses.]
See "Method of Distribution" in this prospectus supplement.
The depositor may offer the Class A-P and Class A-V Certificates to the public
from time to time, directly or through an underwriter or agent, in negotiated
transactions or otherwise at varying prices which will be determined at the time
of sale. The proceeds to the depositor from any sale of the Class A-P or Class
A-V Certificates will equal the difference between the price paid to the
depositor for such certificates and the sum of the depositor's related expenses
and the compensation paid to any underwriter or agent.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the offered certificates or determined
that this prospectus supplement or the prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
The Attorney General of the State of New York has not passed on or endorsed the
merits of this offering. Any representation to the contrary is unlawful.
S-2
<PAGE>
Important notice about information presented in this prospectus supplement and
the accompanying prospectus
We provide information to you about the offered certificates in two separate
documents that provide progressively more detail:
the accompanying prospectus, which provides general information, some of which
may not apply to your series of certificates; and
this prospectus supplement, which describes the specific terms of your series of
certificates.
If the description of your certificates in this prospectus supplement differs
from the related description in the accompanying prospectus, you should rely on
the information in this prospectus supplement.
You can find a listing of the pages where capitalized terms used both in the
prospectus and this prospectus supplement are defined under the caption "Index"
beginning on page [___] in the accompanying prospectus.
The depositor's principal offices are located at 8400 Normandale Lake Boulevard,
Suite 600, Minneapolis, Minnesota 55437 and its telephone number is (612)
832-7000.
Table of Contents
Page
Summary ...................................... ..............3
Risk Factors................................. ..............9
Introduction................................ ...............16
Description of the [Mortgage][Contract][Pool] ..............16
General................................. ...............16
[Mortgage Rate Adjustment] .............................17
Mortgage Pool Characteristics ..........................19
Standard Hazard Insurance and Primary
Mortgage Insurance ............................... .27
[The Program]........................... ...............28
[Underwriting Standards] ...............................29
[Delinquency and Foreclosure Experience] ...............30
Residential Funding ....................................30
Additional Information .................................30
Description of the Certificates ............................31
General................................. ...............31
Book-Entry Registration of Certain of the
Offered Certificates ...............................32
Available Distribution Amount ..........................34
Interest Distributions .................................34
Principal Distributions on the Senior Certificates .....38
Principal Distributions on the Class M
Certificates........................ ...............47
Allocation of Losses; Subordination ....................49
[Advances].............................. ...............53
Year 2000 Considerations ...................................54
Overview of the Year 2000 Issue ........................54
[Overview of [Residential Funding]'s Y2K
Project............................. ...............54
Y2K Project Status...................... ...............56
Risks related to Y2K ...................................57
Certain Yield and Prepayment Considerations ................58
General................................. ...............58
Structuring Assumptions ................................62
Principal Only Certificate and Variable Strip
Certificate Yield Considerations ...................66
Additional Yield Considerations Applicable
Solely to the Residual Certificates ................68
Pooling and Servicing Agreement ............................68
General................................. ...............68
[The [Master] Servicer[s]] .............................68
Servicing and Other Compensation and Payment
of Expenses......................... ...............70
Voting Rights........................... ...............71
[Termination]........................... ...............71
Certain Federal Income Tax Consequences ....................72
Special Tax Considerations Applicable to
Residual Certificates ..............................73
[For Trusts treated as Grantor Trusts ..................74
Characterization of Investments in Grantor Trust
Certificates........................ ...............75
Taxation of Owners of Grantor Trust Fractional
Interest Certificates ..............................76
Taxation of Owners of Grantor Trust Strip
Certificates........................ ...............82
Possible Application of Proposed Contingent
Payment Rules....................... ...............83
Sales of Grantor Trust Certificates ....................84
Grantor Trust Reporting ................................85
Backup Withholding .....................................85
Foreign Investors] .....................................85
Legal Investment Matters ...................................85
Method of Distribution .....................................86
[ERISA Considerations ......................................87
Legal Opinions.............................. ...............89
Ratings ...................................... .............89
SUMMARY
The following summary is a very general overview of the certificates offered
hereby and does not contain all of the information that you should consider in
making your investment decision. To understand the terms of the offered
certificates, you should read carefully this entire document and the
accompanying prospectus.
Titleof securities................ [Mortgage Asset-Backed][Manufactured Housing
Contract] Pass-Through Certificates, Series [____-QS__].
Depositor ......................... Residential Accredit Loans, Inc., an
affiliate of Residential Funding Corporation.
[Master] servicer[s].................. [Name of [Master] Servicer[s]].
Trustee............................ [Name of Trustee].
Mortgage pool ........................_____ [fixed-rate][adjustable rate]
mortgage loans with an aggregate principal balance of approximately $[
_________ ] as of the cut-off date, secured by first liens on one- to
four-family residential properties.
Cut-off date.......................... [ ------ --, ---- ].
Closing date.......................... On or about [ ______ __, ____ ].
Distribution dates....................Beginning in [ ______ ____ ], on the 25th
of each month or if the 25th is not a business day, on the next business
day.
Scheduled final distribution date.....[ ______ 25, 20__ ]. The actual final
distribution date could be substantially earlier.
Form of certificates..................Book-entry: Class A-1 through Class A-[_]
and Class M Certificates.Physical: Class A-P, Class A-V and Class R
Certificates.
S-3
<PAGE>
See "Description of the Certificates--Book-Entry Registration" in this
prospectus supplement.
Minimum denominations.................Class A-1 through Class A-3, Class [_-_],
Class [_-_], ... Class A-P and Class M-1 Certificates: $25,000.
Class M-2 and Class M-3 Certificates: $250,000.
Class A-V and Class R Certificates: 20% percentage interest.
Legalinvestment.....................When issued, the Class A, Class R and
Class M-1 Certificates will, and the Class M-2 and Class M-3
Certificates will not, be "mortgage related securities" for purposes
of the Secondary Mortgage Market Enhancement Act of 1984.
See "Legal Investment" in this prospectus supplement and the prospectus.
.
S-4
<PAGE>
<TABLE>
Offered Certificates
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------
Class Initial Principal Pass- Initial Rating Designation
Balance Through [_____] (1)
Rate
- - -----------------------------------------------------------------------------------------------------------------
Class A Certificates:
<S> <C> <C> <C> <C> <C>
A-1 $[ _________ ] [ ____ ]% AAA/AAA Senior/[Fixed Rate][Adjustable Rate]
A-2 $[ _________ ] [ ____ ]% AAA/AAA Senior/[Fixed Rate][Adjustable Rate]
A-3 $[ _________ ] [ ____ ]% AAA/AAA Senior/[Fixed Rate][Adjustable Rate]
[_-_] $[ _________ ] [ ____ ]% AAA/AAA Senior/[Fixed Rate][Adjustable Rate]
[_-_] $[ _________ ] [ ____ ]% AAA/AAA Senior/[Fixed Rate][Adjustable Rate]
[_-_] $[ _________ ] [ ____ ]% AAA/AAA Senior/[Fixed Rate][Adjustable Rate]
A-P $[ _________ ] 0.00% AAA/AAAr Senior/Principal Only
A-V $ 0(2) (3) ) AAA/AAAr ) Senior/Interest Only/Variable Rate
Total Class A Certificates$[ _________ ]
Class R Certificates:
R $ 100 [ ____ ]% AAA/AAA Senior/Residual/Fixed Rate
Total senior certificates:$[ _________ ]
Class M Certificates:
M-1 $[ _________ ] [ ____ ]% AA/NA Mezzanine/Fixed Rate
M-2 $[ _________ ] [ ____ ]% A/NA Mezzanine/Fixed Rate
M-3 $[ _________ ] [ ____ ]% BBB/NA Mezzanine/Fixed Rate
Total Class M Certificates$[ _________ ]
Total offered certificates$[ _________ ]
S-5
<PAGE>
Non-Offered Certificates (4)
Class B Certificates:
B-1 $[ _________ ] [ ____ ]% BB/NA Subordinate/Fixed Rate
B-2 $[ _________ ] [ ____ ]% B/NA Subordinate/Fixed Rate
B-3 $[ _________ ] [ ____ ]% NA/NA Subordinate/Fixed Rate
Total Class B Certificates$[ _________ ]
Total offered and non- $[ _________ ] offered certificates:
</TABLE>
(1) See "Ratings" in this prospectus supplement.
(2) The initial notional amount of the Class A-V Certificates will be
approximately $[ _________ ]. (3) Varies according to the weighted average of
the excess of the net mortgage rate on each mortgage loan over [ ____ ]%. (4)
The information presented for non-offered certificates is provided solely to
assist your understanding of the offered certificates.
S-6
<PAGE>
The Trust
The depositor will establish a trust with respect to the Series [____-QS__]
Certificates, pursuant to a pooling and servicing agreement dated as of [ ______
1, ____ ] among the depositor, the [master] servicer[s] and the trustee. On the
closing date, the depositor will deposit the pool of mortgage loans described
below into the trust.
Each Series [____-QS__] Certificate will represent a partial ownership interest
in the trust. Distributions of interest and/or principal on the certificates
will be made only from payments received in connection with the mortgage loans
described below.
The Mortgage Pool
The mortgage loans to be deposited into the trust have the following
characteristics as of the cut-off date:
Range Weighted
Average
Principal balance $[ _________ ] to$ [ _____ ]*
$[ --------- ]
Mortgage rate [ ____ ]% to [ ____]%
[----- ]%
Remaining term to[ ___] to [ ___ ] [ ___ ]
maturity (months)
*Indicates average principal balance.
The mortgage loans were originated using less stringent underwriting standards
than the underwriting standards applied by certain other first mortgage loan
purchase programs, such as those of Fannie Mae, Freddie Mac or the depositor's
affiliate, Residential Funding Mortgage Securities I, Inc.
For additional information regarding the mortgage pool see "Description of the
Mortgage Pool" in this prospectus supplement.
S-7
<PAGE>
Distributions on the Offered Certificates
Subservicers will collect monthly payments of principal and interest on the
mortgage loans. Each month, the subservicers will retain their subservicing fee
and forward the remainder of the collections, including unscheduled payments, to
the [master] servicer[s]. After retaining its master servicing fee and amounts
that reimburse the subservicer or [master] servicer[s] for reimbursable expenses
and advances, the [master] servicer[s] will forward all collections on the
mortgage loans, together with any advances that it makes for delinquent mortgage
payments, to the trustee.
The aggregate amount of such monthly collections and advances is described under
the heading "Description of the Certificates--Available Distribution Amount" in
this prospectus supplement.
Distributions to certificateholders will be made from available amounts as
follows:
Step 1
Distribution of interest to the Class A Certificates (other than the Class A-P
Certificates) and Class R Certificates
Step 2
Distribution of principal to the
Class A-P Certificates(1)
Step 3
Distribution of principal to the Class A Certificates (other than the Class A-P
and Class A-V Certificates) and Class
R Certificates(2)
Step 4
Payment to [master] servicer[s] in respect of certain
unreimbursed advances
Step 5
Distribution to the Class M Certificates in the following order:
Interest to the Class M-1 Certificates
Principal to the Class M-1 Certificates
Interest to the Class M-2 Certificates
Principal to the Class M-2 Certificates
Interest to the Class M-3 Certificates
Principal to the Class M-3 Certificates
Step 6
Distribution of interest and principal to the Class B
Certificates
S-8
<PAGE>
Step 7
Distribution of any remaining funds to the Class R
Certificates(3)
The Class A-P Certificates receive only a certain portion of the principal
received in respect of each mortgage loan that has a net mortgage rate of
less than [ ____ ]%, as described in "Description of the Certificates
Principal Distributions on the Senior Certificates" in this prospectus
supplement.
Not all outstanding classes of Class A Certificates will receive principal
distributions on each distribution date. It is very unlikely that any
distributions will be made to the Class R Certificates under Step 7.
The amount of interest owed to each class of certificates (other than the Class
A-P Certificates) on each distribution date will generally equal:
o the pass-through rate set forth above for that class of certificates
multiplied by
o the principal balance (or notional amount) of that class of certificates
as of the day immediately prior to the related distribution date
multiplied by
o 1/12th minus
o the pro rata share of certain interest
shortfalls allocated to that class.
See "Description of the Certificates--Interest Distributions" in this prospectus
supplement.
Principal distributions on the certificates entitled to principal distributions
will be allocated among the various classes of offered certificates as described
under "Description of the Certificates--Principal Distributions on the Senior
Certificates" and "--Principal Distributions on the Class M Certificates" in
this prospectus supplement. Until the distribution date in [_____ 20__], all
principal prepayments on the mortgage loans will be distributed to the Class A
Certificates (other than the Class A-P and Class A-V Certificates) and Class R
Certificates, unless the principal balances of such certificates (other than the
Class A-P Certificates) have been reduced to zero. Not all outstanding Class A
Certificates or Class R Certificates will receive principal on each distribution
date. The Class A-V Certificates are not entitled to receive any principal
distributions.
See "Description of the Certificates--Principal Distributions on the Senior
Certificates" in this prospectus supplement.
Credit Enhancement
Allocation of losses. Except as described below, if Class M Certificates or
Class B Certificates remain outstanding, losses on the mortgage loans will be
allocated first to the outstanding class of Class M Certificates or Class B
Certificates with the lowest payment priority, and the other classes of
certificates will not bear any portion of such losses.
If none of the Class M Certificates or Class B Certificates remain outstanding,
losses will be allocated among the Class A Certificates (other than the Class
A-P Certificates) and Class R Certificates, in proportion to their respective
remaining principal balances. A special allocation provision
S-9
<PAGE>
applies to the Class A-P Certificates.
Not all losses will be allocated in the priority set forth above. Losses due to
natural disasters such as floods and earthquakes, fraud by a mortgagor,
bankruptcy of a mortgagor or certain other extraordinary events will be
allocated as described above only up to specified amounts. Losses of these types
in excess of the specified amount will, in general, be allocated to all
outstanding classes of certificates pro rata in proportion to their remaining
principal balances or accrued interest. Therefore, the Class M Certificates and
Class B Certificates do not act as credit enhancement for the Class A
Certificates and Class R Certificates for such losses.
Losses on each mortgage loan having a net mortgage rate of less than [ ____ ]%
that are allocable to the Class A Certificates and Class R Certificates will be
allocated first to the Class A-P Certificates in an amount based on the
percentage of each such mortgage loan represented by the Class A-P Certificates.
The remainder of such losses will be allocated as described above.
See "Description of the Certificates-- Allocation of Losses; Subordination" in
this prospectus supplement.
Priority of distributions. The priority in which distributions are made to
certificateholders also provides credit enhancement for certain classes of
certificates. The priority of distribution is shown in the chart on page S-6.
This manner of distributions ensures that any shortfall (other than specified
amounts of certain types of losses described in this prospectus supplement under
"Description of the Certificates--Allocation of Losses; Subordination") in
amounts owed on the certificates is borne first by the most subordinate class of
certificates.
Allocating all or a disproportionately large portion of principal prepayments
and other unscheduled payments of principal to the Class A Certificates and
Class R Certificates in the early years provides additional credit enhancement
for the Class A Certificates and Class R Certificates by preserving a greater
portion of the principal balances of the Class M Certificates and Class B
Certificates for absorption of losses.
Advances
For any month, if the [master] servicer[s] receives no payment on a mortgage
loan or a payment that is less than the full scheduled payment, the [master]
servicer[s] will advance its own funds to cover that shortfall. However, the
[master] servicer[s] will make such advance only if it determines that such
advance will be recoverable from future payments or collections on that mortgage
loan.
See "Description of the Certificates--Advances" in this prospectus supplement.
S-10
<PAGE>
Optional Termination
On any distribution date on which the aggregate outstanding principal balance of
the mortgage loans is less than 10% of their aggregate principal balance as of
the cut-off date, the [master] servicer[s] or the depositor may, but will not be
required to:
o purchase from the trust all remaining mortgage loans and thereby
cause an early retirement of the certificates; or
o purchase all the certificates.
An optional purchase of the outstanding certificates will cause the outstanding
principal balance of the certificates to be paid in full with accrued interest.
However, there will be no reimbursement of principal reductions or related
interest that resulted from losses allocated to the certificates. An optional
purchase of the remaining mortgage loans may cause the holders of one or more
classes of certificates to receive less than their outstanding principal balance
plus accrued interest.
See "Pooling and Servicing Agreement--Termination" in this prospectus supplement
and "The Pooling and Servicing Agreement--Termination; Retirement of
Certificates" in the prospectus.
Ratings
When issued, the offered certificates will receive ratings which are not lower
than those set forth in the table on page S-5 of this prospectus supplement. The
ratings on the offered certificates address the likelihood that the holders of
the offered certificates will receive all distributions on the underlying
mortgage loans to which they are entitled. A security rating is not a
recommendation to buy, sell or hold a security and is subject to change or
withdrawal at any time by the assigning rating agency. The ratings also do not
address the rate of principal prepayments on the mortgage loans. For example,
the rate of prepayments, if different than originally anticipated, could
adversely affect the yield realized by holders of the offered certificates or
cause holders of the Class A-V Certificates to fail to recover fully their
initial investments.
See "Ratings" in this prospectus supplement.
Legal Investment
When issued, the Class A, Class R and Class M-1 Certificates will, and the Class
M-2 and Class M-3 Certificates will not, be "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984. You should
consult your legal advisors in determining whether and to what extent the
offered certificates constitute legal investments for you.
See "Legal Investment" in this prospectus supplement for important information
concerning possible restrictions on ownership of the offered certificates by
regulated institutions.
S-11
<PAGE>
ERISA Considerations
The Class A Certificates may be eligible for purchase by persons investing
assets of employee benefit plans or individual retirement accounts, subject to
important considerations. Sales of the Class M Certificates and the Class R
Certificates to most such plans or retirement accounts are prohibited, except as
may be permitted under an exemption available to insurance companies using
general accounts.
See "ERISA Considerations" in this prospectus supplement and in the
prospectus.
Tax Status
For federal income tax purposes, the depositor will elect to treat the trust as
a real estate mortgage investment conduit. The certificates, other than the
Class R Certificates, will represent ownership of regular interests in the
trust. Such certificates will generally be treated as representing ownership of
debt for federal income tax purposes. Certificateholders will be required to
include in income all interest and original issue discount, if any, on such
certificates in accordance with the accrual method of accounting regardless of
the certificateholders' usual methods of accounting. For federal income tax
purposes, the Class R Certificates will be the residual interest in the trust.
For further information regarding the federal income tax consequences of
investing in the offered certificates, including important information regarding
the tax treatment of the Class R Certificates, see "Certain Federal Income Tax
Consequences" in this prospectus supplement and in the prospectus.
S-12
<PAGE>
RISK FACTORS
The offered certificates are not suitable investments for all investors.
In particular, you should not purchase any class of offered certificates unless
you understand the prepayment, credit, liquidity and market risks associated
with that class.
The offered certificates are complex securities. You should possess,
either alone or together with an investment advisor, the expertise necessary to
evaluate the information contained in this prospectus supplement and the
accompanying prospectus in the context of your financial situation and tolerance
for risk.
You should carefully consider, among other things, the following factors
in connection with the purchase of the offered certificates:
Risk of Loss
S-13
<PAGE>
Losses may occur onthe mortgage loans due to a variety of causes.
Losses on the mortgage loans may occur due to a wide variety of
causes, including fluctuation in real estate values and in the
financial conditions of borrowers. A decline in real estate values or
economic conditions nationally or in the regions where the mortgaged
properties are located may increase the risk of losses on the mortgage
loans. Such losses may be increased if the values of the related
mortgaged properties have declined since the origination of the
related mortgage loans and the borrowers' equity in such mortgaged
properties has decreased or if the mortgagors have difficulty making
payments on the mortgage loans. [Describe any special risks for
specific loan types, such as negative amortization or escalating
payments.][Describe risks relating to manufactured housing contracts.]
Underwriting standards may affect risk of loss on the mortgage loans.
The mortgage loans have been originated using underwriting standards
that are less stringent than the underwriting standards applied by
certain other first mortgage loan purchase programs, such as Fannie
Mae, Freddie Mac or the depositor's affiliate, Residential Funding
Mortgage on the Securities I, Inc. Applying less stringent
underwriting standards creates mortgage additional risks that losses
on the mortgage loans will be allocated to loans. certificateholders.
Examples include:
o mortgage loans secured by non-owner occupied
properties;
o mortgage loans with relatively high loan-to-value
ratios (i.e., the amount of the loan at origination is
80% or more of the value of the mortgaged property);
o mortgage loans made to borrowers who are United States
citizens employed abroad or citizens and residents of a
foreign country;
o mortgage loans made to borrowers who have high
debt-to-income ratios (i.e., the amount of other debt
the borrower owes represents a large portion of his or
her income); and
o mortgage loans made to borrowers whose income is not
required to be disclosed or verified. See "The
Trusts--The Mortgage Loans--Underwriting Policies" and
"Certain Legal Aspects of Mortgage Loans and Contracts"
in the prospectus.
S-14
<PAGE>
Geographic concentratio n may affect risk of loss on the mortgage loans.
Another risk associated with investing in securities backed by a pool
of mortgage loans is created by any concentration of the related
mortgaged properties in one or more geographic regions. If the
regional economy or housing market of any state (or any other region
having a significant concentration of the properties underlying the
mortgage loans) weakens, the mortgage loans related to properties in
that region may experience high rates of loss and delinquency,
resulting in losses to certificateholders. A region's economic
condition and housing market may be adversely affected by a variety of
events, including natural disasters such as earthquakes, hurricanes,
floods and eruptions, and civil disturbances such as riots. The
economic impact of any such events may also be felt in areas beyond
the region immediately affected by the disaster or disturbance. The
properties underlying the mortgage loans may be concentrated in these
regions. Such concentration may result in greater losses to
certificateholders than those generally present for similar
mortgage-backed securities without such concentration.
See "Description of the Mortgage Pool--Mortgage Pool Characteristics"
in this prospectus supplement.
Credit enhancement is limited to the subordination provided by classes with
lower payment priorities.
The only credit enhancement for the Class A Certificates and Class R
Certificates will be the subordination provided by the Class M
Certificates and Class B Certificates. The only credit enhancement for
the Class M Certificates will be the subordination provided by the
Class B Certificates and by any class of Class M Certificates with a
lower payment priority. Therefore, if the aggregate principal balance
of the Class B Certificates is reduced to zero, subsequent losses will
be allocated to the Class M-3, Class M-2 and Class M-1 Certificates,
in that order, in each case until the principal balance of such class
has been reduced to zero. If the principal balance of the Class M
Certificates is reduced to zero, any additional losses will be
allocated among the Class A Certificates and Class R Certificates.
Furthermore, the credit enhancement provided for certain types of
losses is limited.
If the performance of the mortgage loans is substantially worse than
assumed by the rating agencies, the ratings of any class of the
certificates may be reduced in the future. Neither the depositor, the
master servicer s] nor any other entity will have any obligation to
supplement any credit enhancement, or to take any other action to
maintain any rating of the certificates. See "Summary--Credit
Enhancement" and "Description of the Certificates--Allocation of
Losses; Subordination" in this prospectus supplement.
Limited Obligations
Payments on the mortgage loans are the only source of payments on the offered
certificates.
The certificates represent interests only in the Series [____-QS__]
trust. The certificates do not represent an interest in or obligation
of the depositor, the [master] servicer[s] or any of their affiliates.
If proceeds from the assets of the Series [____-QS__] trust are not
sufficient to make all payments provided for under the pooling and
servicing agreement, investors will have no recourse to the depositor,
the [master] servicer[s] or offered any other entity, and will incur
losses.
Liquidity Risks
An investor may have to hold its offered certificates to their maturity because
of difficulty in reselling the offered certificates.
A secondary market for the offered certificates may not develop. Even if a
secondary market does develop, it may not continue or it may be illiquid.
Neither the underwriter nor any other person will have any obligation to
make a secondary market in the certificates. The certificates will not be
listed on any securities exchange. Illiquidity means an investor may not be
able to find a buyer to buy its securities readily or at prices that will
enable the investor to realize a desired yield. Illiquidity can have a
severe adverse effect on the market value of the offered certificates. Any
class of offered certificates may experience illiquidity, although
generally illiquidity is more likely for classes that are especially
sensitive to prepayment, credit or interest rate risk, or that have been
structured to meet the investment requirements of limited categories of
investors.
Special Yield and Prepayment Considerations
An investor's yield to maturity will depend on various factors.
The yield to maturity on each class of offered certificates will depend on a
variety of factors, including:
o the rate and timing of principal payments on the
mortgage loans (including prepayments, defaults and
liquidations, and repurchases due to breaches of
representations or warranties);
o the pass-through rate for that class;
o interest shortfalls due to mortgagor prepayments; and
o the purchase price of that class.
In general, if a class of certificates is purchased at a
price higher than its outstanding principal balance and
principal distributions on such class occur faster than
assumed at the time of purchase, the yield will be lower
than anticipated. Conversely, if a class of certificates
is purchased at a price lower than its outstanding
principal balance and principal distributions on that
class occur more slowly than assumed at the time of
purchase, the yield will be lower than anticipated.
The rate of prepayments on the mortgage loans will be affected by various
factors.
Since mortgagors can generally prepay their mortgage loans at any time, the
rate and timing of principal distributions on the offered certificates are
highly uncertain. Generally, when market interest rates increase, borrowers
are less likely to prepay their mortgage loans. Such reduced prepayments
could result in a slower return of principal to holders of the offered
certificates at a time when they may be able to reinvest such funds at a
higher rate of interest than the pass-through rate on their class of
certificates. Conversely, when market interest rates decrease, borrowers
are generally more likely to prepay their mortgage loans. Such increased
prepayments could result in a faster return of principal to holders of the
offered certificates at a time when they may not be able to reinvest such
funds at an interest rate as high as the pass-through rate on their class
of certificates.
Refinancing programs, which may involve soliciting all or some of the
mortgagors to refinance their mortgage loans, may increase the rate of
prepayments on the mortgage loans. These refinancing programs may be
offered by the master servicer or any subservicer, and may include
streamlined documentation programs as well as programs under which a
mortgage loan is modified to reduce the interest rate.
See "Maturity and Prepayment Considerations" in the prospectus.
S-15
<PAGE>
Each class of offered certificates has different prepayment and yield
considerations.
The offered certificates have different yield considerations and different
sensitivities to the rate and timing of principal distributions. The
following is a general discussion of certain yield considerations and
prepayment sensitivities of certain classes.
See "Certain Yield and Prepayment Considerations" in this prospectus
supplement.
Class A Certificates
The Class A Certificates are subject to various priorities for payment of
principal as described herein. Distributions of principal on the Class A
Certificates having an earlier priority of payment will be affected by the
rates of prepayment of the mortgage loans early in the life of the mortgage
pool. Those classes of Class A Certificates with a later priority of
payment will be affected by the rates of prepayment of the mortgage loans
experienced both before and after the commencement of principal
distributions on such classes.
See "Description of the Certificates--Principal Distributions on the Senior
Certificates" in this prospectus supplement.
Class A-P Certificates
The Class A-P Certificates will receive a portion of the principal payments
only from mortgage loans that have net mortgage rates lower than [ ____ ]%.
Therefore, the yield on the Class A-P Certificate will be extremely
sensitive to the rate and timing of principal prepayments and defaults on
mortgage loans that have net mortgage rates lower than [ ___ ]%.
Investors in the Class A-P Certificates should be aware that mortgage loans
with lower mortgage rates are less likely to be prepaid than mortgage loans
with higher net mortgage rates. If prepayments of principal on the mortgage
loans that have net mortgage rates lower than [ ____ ]% occur at a rate
slower than an investor assumed at the time of purchase, the investor's
yield will be lower than anticipated.
Class A-V Certificates
The Class A-V Certificates will receive a portion of the interest payments
only from mortgage loans that have net mortgage rates higher than [___]%.
Therefore, the yield on the Class A-V Certificates will be extremely
sensitive to the rate and timing of principal prepayments and defaults on
mortgage loans that have net mortgage rates higher than [ ____ ]%.
S-16
<PAGE>
Investors in the Class A-V Certificates should be aware that mortgage
loans with higher mortgage rates are more likely to be prepaid than
mortgage loans with lower mortgage rates. If prepayments on the
mortgage loans that have net mortgage rates higher than [ ____ ]%
occur at a rate faster than an investor assumed at the time of
purchase, the investor's yield will be lower than anticipated.
Investors in the Class A-V Certificates should fully consider the risk
that a rapid rate of prepayments on the mortgage loans that have net
mortgage rates higher than [ ____ ]% could result in their failure to
recover fully their investments.
Class M Certificates
Losses on the mortgage loans will be allocated among the certificates
in the manner described herein. The yield to investors in the Class M
Certificates will be sensitive to the rate and timing of losses on the
mortgage loans. Losses (other than specified amounts of certain types
of losses described herein) will be allocated to the most subordinate
class of Class M Certificates and Class B Certificates outstanding.
See "Summary--Credit Enhancement--Allocation of Losses" and
"Description of the Certificates--Allocation of Losses; Subordination"
in this prospectus supplement.
It is not expected that the Class M Certificates will receive any
distributions of principal prepayments until the distribution date in
[_______ ____]. After that date, all or a disproportionately large
portion of principal prepayments on the mortgage loans may be
allocated to the Class A Certificates and Class R Certificates, and
none or a disproportionately small portion of principal prepayments
may be paid to the holders of the Class M Certificates and Class B
Certificates. As a result, the weighted average lives of the Class M
Certificates may be longer than would otherwise be the case.
S-17
<PAGE>
INTRODUCTION
Residential Accredit Loans, Inc. (the "Depositor") will establish a
trust (the "Trust") with respect to Series [____-QS__] on or about [ ______ __,
____ ] (the "Closing Date"), pursuant to a pooling and servicing agreement (the
"Pooling and Servicing Agreement") among the Depositor, [Name of [Master]
Servicer[s]] (the "[Master] Servicer[s]") and [Name of Trustee], a [________]
(the "Trustee"), dated as of [ ______ __, ____ ] (the "Cut-off Date"). On the
Closing Date, the Depositor will deposit into the Trust [a pool of mortgage
loans (the "Mortgage Pool")] (a pool of manufactured housing contracts (the
"Contract Pool") secured by one- to four-family residential properties with
terms to maturity of not more than [__] years.
DESCRIPTION OF THE
[MORTGAGE][CONTRACT][POOL]
General
The Mortgage Pool will consist of approximately [____] [mortgage loans
(the "Mortgage Loans")] [contracts (the "Contracts") having an aggregate
principal balance outstanding as of the Cut-off Date, after deducting payments
of principal due on such date, of approximately $[____]. The Mortgage Loans are
secured by first liens on fee simple interests in one- to four-family
residential real properties (each, a "Mortgaged Property"). The Mortgage Pool
will consist of conventional, [fixed-rate][adjustable rate], fully-amortizing,
level monthly payment Mortgage Loans with original terms to maturity of not more
than [____] years. With respect to Mortgage Loans that have been modified,
references herein to the date of origination shall be deemed to be to the date
of the most recent modification. All percentages of the Mortgage Loans described
herein are approximate percentages (except as otherwise indicated) by aggregate
principal balance as of the Cut-off Date.
All of the Mortgage Loans were purchased by the Depositor
through its affiliate Residential Funding Corporation ("Residential
Funding") from Unaffiliated Sellers as described herein and in the
Prospectus, except in the case of [___]% of the Mortgage Loans,
which were purchased by the Depositor from [___________]
("[____]"), which is an affiliate of the Depositor. No Unaffiliated
S-18
<PAGE>
Seller sold more than [____]% of the Mortgage Loans to Residential Funding.
[____] % of the Mortgage Loans are being subserviced by ___________
("[_________]"), an affiliate of the Depositor and its affiliates. All of the
Mortgage Loans were generally underwritten in conformity with or in a manner
generally consistent with the Program. See "--The Program" below.
The Depositor and Residential Funding will make certain limited
representations and warranties regarding the Mortgage Loans as of the date of
issuance of the Certificates. The Depositor and Residential Funding will be
required to repurchase or substitute for any Mortgage Loan as to which a breach
of its representations and warranties with respect to such Mortgage Loan occurs
if such breach materially and adversely affects the interests of the
Certificateholders in any such Mortgage Loan and such Mortgage Loan is not
otherwise repurchased by the related Mortgage Collateral Seller. The Depositor,
as assignee of Residential Funding, will also assign to the Trustee for the
benefit of the Certificateholders certain of its rights, title and interest in
any agreement relating to the transfer and assignment of the Mortgage Loans to
the Depositor by Residential Funding, including certain representations and
warranties made by the Mortgage Collateral Sellers. Insofar as any such
agreement relates to the representations and warranties made by the related
Mortgage Collateral Seller in respect of such Mortgage Loan and any remedies
provided thereunder for any breach of such representations and warranties, such
right, title and interest may be enforced by the Master Servicer on behalf of
the Trustee and the Certificateholders. However, neither the Depositor nor
Residential Funding will be required to repurchase or substitute for any
Mortgage Loan in the event of a breach of its representations and warranties
with respect to such Mortgage Loan if the substance of any such breach also
constitutes fraud in the origination of such affected Mortgage Loan.
S-19
<PAGE>
[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 "Note
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, Note 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 [ ]% 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 Note 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 [ ]
S-20
<PAGE>
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[s].]
[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.]
LIBOR
S-21
<PAGE>
<TABLE>
<CAPTION>
Adjustment Date [Year] [Year] [Year] [Year]
<S> <C> <C> <C> <C>
January 1............................. % % % %
February 1............................
March 1...............................
April 1...............................
May 1.................................
June 1................................
July 1................................
August 1..............................
September 1...........................
October 1.............................
November 1............................
December 1............................
</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 Note 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), Note
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 "Note 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 Note Margins for the Mortgage
Loans will be at least [ ]% per annum but not more than [ ]% per annum as of the
Cut-off Date. The Net Mortgage Rate on any Mortgage Loan may not exceed the
S-22
<PAGE>
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.]
Mortgage Pool Characteristics
None of the [Mortgage Loans][Contracts] will have been originated prior
to [__ __, ____] or will have a maturity date later than [_____ __, ____]. No
[Mortgage Loans][Contracts] 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] will be approximately [_____] months. As used
herein, "remaining term to maturity" means, as of any date of determination and
with respect to any Mortgage Loan, the number of months equaling the number of
scheduled monthly payments necessary to reduce the then-current Stated Principal
Balance of such [Mortgage Loans][Contracts] to zero, assuming the related
Mortgagor will make all scheduled monthly payments, but no prepayments, on such
[Mortgage Loans][Contracts] thereafter.
As of the Cut-off Date, none of the [[Mortgage Loans ][Contracts] will
be 30 or more days delinquent in payment of principal and interest. For a
description of the methodology used to categorize mortgage loans as delinquent,
see "Pooling and Servicing Agreement--The Master Servicer" herein.
[_____]% of the Mortgage Loans will be Buydown
[Mortgage Loans ][Contracts].
[No Mortgage Loan provides for deferred interest or
negative amortization.]
[No more than [_____]% of the [Mortgage Loans][Contracts] will have been
made to International Borrowers. [__]% of the Mortgage Loans will be Additional
Collateral Loans. [__]% of the Mortgage Loans will be Pledged Asset Mortgage
Loans. See "The Trusts--The Mortgage Loans" in the Prospectus. The Additional
Collateral with respect to the Additional Collateral Loans and the Pledged
Amount with respect to the Pledged Asset Mortgage Loans is not included in the
determination of the Loan-to-Value Ratios of such Mortgage Loans as shown in the
tables set
S-23
<PAGE>
forth below.]
[The Mortgage Loans are generally assumable pursuant to
the terms of the related Mortgage Note. See "Maturity and
Prepayment Considerations" in the Prospectus.]
[Set forth below is a description of certain additional characteristics
of the Mortgages and [Mortgage Loans][Contracts] as of the Cut-off Date
(expressed as a percentage of the outstanding aggregate principal balance of the
[Mortgage 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-24
<PAGE>
<TABLE>
Credit Score Distribution1
<CAPTION>
Credit Score Number of Principal Balance Percent of
Ranges Mortgage Loans Mortgage Pool
<S> <C> <C>
$ . . %
2 . .
Total......... $ . . %
Mortgage Rates
Mortgage Rates Number Principal Balance Percentage of
[Mortgage][Contrac
t] Pool
$ . . %
. .
Total......... $ . . %
</TABLE>
As of the Cut-off Date, the weighted average Mortgage
Rate of the [Mortgage Loans][Contracts] was approximately [ ]% per annum.
- - --------
1 Each Credit Score shown here may have been obtained at the time the Mortgagor
applied for the related Mortgage Loan, or after the origination of the related
Mortgage Loan. 2 Mortgage Loans indicated as having a Credit Score that is "not
available" include certain Mortgage Loans where the Credit Score was not
provided by the related Seller and Mortgage Loans where no credit history can be
obtained from the related mortgagor.
S-25
<PAGE>
<TABLE>
[Net Mortgage Rates
<CAPTION>
Net Mortgage Number Principal Balance Percentage of
Rates [Mortgage]
[Contract] Pool
<S> <C> <C>
$ . . %
. .
Total........... $ . . %
As of the Cut-off Date, the weighted average Net Mortgage Rate of the
[Mortgage Loans][Contracts] was approximately [ ]% per annum].
[Note Margins
Note Margins Number Principal Balance Percentage of
[Mortgage]
[Contract] Pool
$ . . %
. .
Total.......... $ . . %
</TABLE>
As of the Cut-off Date, the weighted average Note Margin on the
[Mortgage Loans][Contracts] was approximately [ ]%].
S-26
<PAGE>
<TABLE>
[[Minimum] [Maximum] Mortgage Rates
<CAPTION>
[Minimum] Number Principal Balance Percentage of
[Maximum] [Mortgage]
Mortgage Rates [Contract] Pool
<S> <C> <C>
$ . . %
. .
Total......... $ . . %
As of the Cut-off Date, the weighted average [minimum] [maximum]
Mortgage Rate of the [Mortgage Loans][Contracts] was approximately [ ]% per
annum].
Original [Mortgage Loan][Contract] Principal
Balances
Principal Balance Number Principal Balance Percentage of
[Mortgage]
[Contract] Pool
$ . $ . . %
. .
Total........... $ . . %
</TABLE>
As of the Cut-off Date, the average unpaid principal balance of the
[Mortgage Loans][Contracts] will be approximately $[ ].
S-27
<PAGE>
<TABLE>
[Remaining Months to Maturity
<CAPTION>
Remaining Months Number Principal Balance Percentage of
to Maturity [Mortgage]
[Contract] Pool
<S> <C> <C>
$ . . %
. .
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 Number Principal Balance Percentage of
Since Origination [Mortgage]
[Contract] Pool
$ . . %
. .
Total $ . . %
</TABLE>
As of the Cut-off Date, the weighted average months since
origination of the [Mortgage Loans][Contracts] was approximately
months.]
S-28
<PAGE>
<TABLE>
Original Loan-To-Value Ratios
<CAPTION>
Loan-to-Value Number Principal Balance Percentage of
Ratio [Mortgage]
[Contract] Pool
<S> <C> <C>
$ . . %
. .
Total........ $ . . %
The weighted average Loan-to-Value Ratio at origination of the [Mortgage
Loans][Contracts] will have been approximately [ . ]%.
Geographic Distributions of Mortgaged Properties
State Number Principal Balance Percentage of
[Mortgage]
[Contract] Pool
$ . . %
. .
Total......... $ . . %
</TABLE>
1. [(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
S-29
<PAGE>
in any one zip code area.]
S-30
<PAGE>
<TABLE>
Mortgaged Property Types
<CAPTION>
Property Number Principal Balance Percentage of
Mortgage Pool
<S> <C> <C>
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........
[Leasehold]............
Townhouse..............
Planned Unit . .
Developments
(attached).............
Total.............. $ . . %]
[[Mortgage Loan][Contract] Purpose
Loan Purpose Number Principal Balance Percentage of
[Mortgage][Contract]
Pool
Purchase................
Rate/Term Refinance..... $ . . %
Equity Refinance........ . .
---------------- ---------------- -- ----------------
Total................ $ . . %]
</TABLE>
[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 [ ]%.]
S-31
<PAGE>
<TABLE>
[Mortgage Loan][Contract] Documentation Types
<CAPTION>
Type of Program Number Principal Percentage of
Balance [Mortgage][Contract]
Pool
<S> <C> <C>
Full Documentation....... $ . . %
Limited Documentation(1)
No Documentation......... . .
---------------- ---------------- -- --------------
Total................. $ . . %]
</TABLE>
2. (1)Includes self-employed Mortgagors.
The weighted average Loan-to-Value Ratio at origination of the [Mortgage
Loans][Contracts] which were underwritten under a reduced loan documentation
program will be [____]%. No more than [____]% of such reduced loan documentation
[Mortgage Loans] [Contracts] will be secured by Mortgaged Properties located in
California.
[____]% of the [Mortgage Loans][Contracts] were underwritten pursuant to
a streamlined documentation refinancing program, which permits certain mortgage
loans to be refinanced with only limited verification or updating of
underwriting information obtained at the time that the original mortgage loan
was originated. See "The Trusts--The Mortgage Loans--Underwriting Policies" in
the Prospectus.
<TABLE>
Occupancy Types
<CAPTION>
Occupancy Number Principal Balance Percentage of
[Mortgage][Contract]
Pool
<S> <C> <C>
Primary Residence....... $ . . %
Second/Vacation.........
Investment Property.....
Total................ $ . . %
</TABLE>
S-32
<PAGE>
Net Mortgage Rates of Discount Mortgage Loans
Net Mortgage Rate(%) Number of Principal Percent of
Mortgage Loans Balance [Mortgage]
[Contract]
Pool
$
%
Total $
%
[In connection with each Mortgage Loan that is secured by a leasehold
interest, the related Mortgage Collateral Seller will have represented to the
Depositor 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 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.]
As of the Cut-off Date, the weighted average of the Discount Fractions of the
Discount Mortgage Loans was approximately [______]%.
S-33
<PAGE>
Standard Hazard Insurance and Primary Mortgage Insurance
Each Mortgage Loan is required to be covered by a standard hazard
insurance policy. In addition, to the best of the Depositor's knowledge, except
with respect to [______] Mortgage Loans representing approximately [__]% of the
Mortgage Loans, each Mortgage Loan with a Loan-to-Value Ratio at origination in
excess of 80% will be insured by a primary mortgage insurance policy (a "Primary
Insurance Policy") covering the amount of such Mortgage Loan generally in excess
of 75% of the value of the related Mortgaged Property used in determining such
Loan-to-Value Ratio (the "Appraised Value"). Substantially all of such Primary
Insurance Policies were issued by [_________], [_________] and [_____________]
(collectively, the "Primary Insurers"). Each Primary Insurer has a claims paying
ability currently acceptable to the Rating Agencies that have been requested to
rate the Certificates; however, there is no assurance as to the actual ability
of any Primary Insurer to pay claims. See "Insurance Policies on Mortgage Loans
or Contracts--Standard Hazard Insurance on Mortgaged Properties" and "--Primary
Mortgage Insurance Policies" in the Prospectus.
S-34
<PAGE>
[The Program]
General. Residential Funding commenced its 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 Depositor's affiliate, Residential Funding
Mortgage Securities I, Inc. Examples include mortgage loans secured by non-owner
occupied properties, mortgage loans made to borrowers whose income is not
required to be provided or verified, and mortgage loans made to borrowers whose
ratios of debt service on the mortgage loan to income and total debt service on
borrowings to income are higher than for such other programs. Borrowers may be
International Borrowers. The Mortgage Loans also include mortgage loans secured
by smaller or larger parcels of land, mortgage loans with higher Loan-to-Value
Ratios than in such other programs and mortgage loans with Loan-to-Value Ratios
over 80% that do not require primary mortgage insurance. See "--Program
Underwriting Standards," below. The inclusion of such Mortgage Loans may present
certain risks that are not present in such other programs. The Program is
administered by Residential Funding on behalf of the Depositor.
Qualifications of Program Sellers. Each Program Seller has been selected
by Residential Funding on the basis of criteria set forth in Residential
Funding's Program Seller Guide (as applicable to the Program, the "Program
Seller Guide"). See "The Trusts--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 non-owner occupied properties,
S-35
<PAGE>
income derived from the mortgaged property may be considered for underwriting
purposes. With respect to mortgaged property consisting of a vacation or second
home, generally no income derived from the property is considered for
underwriting purposes.
Based on the data provided in the application and certain verifications
(if required), a determination is made by the original lender that the
mortgagor's monthly income (if required to be stated) will be sufficient to
enable the mortgagor to meet its monthly obligations on the mortgage loan and
other expenses related to the property (such as property taxes, utility costs,
standard hazard insurance and other fixed obligations other than housing
expenses). Generally, scheduled payments on a mortgage loan during the first
year of its term plus taxes and insurance and all scheduled payments on
obligations that extend beyond ten months (including those mentioned above and
other fixed obligations) equal no more than specified percentages of the
prospective mortgagor's gross income. The originator may also consider the
amount of liquid assets available to the mortgagor after origination.
Certain of the Mortgage Loans have been originated under "reduced
documentation" or "no stated income" programs which require less documentation
and verification than do traditional "full documentation" programs. Generally,
under a "reduced documentation" program, no verification of a mortgagor's stated
income is undertaken by the originator. Under a "no stated income" program,
certain borrowers with acceptable payment histories will not be required to
provide any information regarding income and no other investigation regarding
the borrower's income will be undertaken. Under a "no income/no asset" program,
no verification of a Mortgagor's income or assets is undertaken by the
originator. 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
S-36
<PAGE>
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.
Prior to assigning the Mortgage Loans to the Depositor, Residential
Funding reviewed the underwriting documentation for substantially all of the
Mortgage Loans and, in such cases, determined that the Mortgage Loans were
originated generally in accordance with or in a manner generally consistent with
the underwriting standards set forth in the Program Seller Guide.
Because of the program criteria and underwriting standards described
above, the Mortgage Loans may experience greater rates of delinquency,
foreclosure and loss than mortgage loans required to satisfy more stringent
underwriting standards.
[Underwriting Standards]
[Describe underwriting standards for [Mortgage Loans][Contracts]
not purchased through the 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.]
S-37
<PAGE>
Residential Funding
Residential Funding will be responsible for master servicing the
Mortgage Loans. Such responsibilities will include the receipt of funds from
Subservicers, the reconciliation of servicing activity with respect to the
Mortgage Loans, investor reporting, remittances to the Trustee to accommodate
distributions to Certificateholders, follow up with Subservicers with respect to
Mortgage Loans that are delinquent or for which servicing decisions may need to
be made, management and liquidation of mortgaged properties acquired by
foreclosure or deed in lieu of foreclosure, notices and other responsibilities
as detailed in the Pooling and Servicing Agreement.
Residential Funding and its affiliates are active purchasers of
non-conforming mortgage loans and have sold a substantial amount of mortgage
loans that do not present certain of the special risk factors presented by the
Mortgage Loans as described herein. Residential Funding serves as the master
servicer for transactions backed by most of such mortgage loans. As a result of
the program criteria and underwriting standards of the Mortgage Loans, however,
the Mortgage Loans may experience rates of delinquency, foreclosure and loss
that are higher than those experienced by other pools of mortgage loans for
which Residential Funding acts as master servicer.
Additional Information
The description in this Prospectus Supplement of the Mortgage Pool and
the Mortgaged Properties is based upon the Mortgage Pool as constituted at the
close of business on the Cut-off Date, as adjusted for the scheduled principal
payments due on or before such date. Prior to the issuance of the Offered
Certificates (as defined below), Mortgage Loans may be removed from the Mortgage
Pool as a result of incomplete documentation or otherwise, if the Depositor
deems such removal necessary or appropriate. A limited number of other mortgage
loans may be added to the Mortgage Pool prior to the issuance of the Offered
Certificates. The Depositor believes that the information set forth herein will
be substantially representative of the characteristics of the Mortgage Pool as
it will be constituted at the time the Offered Certificates are issued, although
the range of Mortgage Rates and maturities and certain other characteristics of
the Mortgage Loans in the Mortgage Pool may vary.
S-38
<PAGE>
A Current Report on Form 8-K, together with the Pooling and Servicing
Agreement, will be filed with the Securities and Exchange Commission within
fifteen days after the initial issuance of the Offered Certificates. In the
event Mortgage Loans are removed from or added to the Mortgage Pool as set forth
in the preceding paragraph, such removal or addition will be noted in the
Current Report on Form 8-K.
DESCRIPTION OF THE CERTIFICATES
General
The Series [____-QS-__] [Mortgage Asset-
Backed][Manufactured Housing Contract] Pass-Through
Certificates will include the following [nine] classes (the "Senior
Certificates"): (i) Class A-1 Certificates, Class A-2 Certificates, Class [_-_]
Certificates, Class [_-_] Certificates and Class [_-_] Certificates; (ii) Class
A-P Certificates (the "Principal Only Certificates"); (iii) Class A-V
Certificates (the "Variable Strip Certificates"); and (iv) Class R Certificates
(the "Residual Certificates"). In addition to the Senior Certificates, the
Series [____-QS-__] [Mortgage Asset-Backed][Manufactured Housing Contract]
Pass-Through Certificates will also include six classes of subordinate
certificates which are designated as the Class M-1 Certificates, Class M-2
Certificates and Class M-3 Certificates (collectively, the "Class M
Certificates") and the Class B-1 Certificates, Class B-2 Certificates and Class
B-3 Certificates (collectively, the "Class B Certificates" and, together with
the Class M Certificates and Senior Certificates, the "Certificates"). Only the
Senior Certificates and Class M Certificates (together, the "Offered
Certificates") are offered hereby.
[The Certificates will evidence the entire beneficial ownership interest
in the Trust. The Trust 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; (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 Senior Certificates will evidence in the aggregate an
S-39
<PAGE>
initial beneficial ownership interest of approximately [_____]% in the Trust.
The Class M, Class B-1, Class B-2 and Class B-3 Certificates will evidence in
the aggregate an initial beneficial ownership interest of approximately
[_____]%,[_____]%, [_____]% and [_____]%, respectively, in the Trust.
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.".
The Senior Certificates (other than the Principal Only, Variable Strip
and Residual Certificates) and the Class M Certificates (together, the "DTC
Registered Certificates") will be available only in book-entry form through the
facilities of The Depository Trust Company ("DTC"). The DTC Registered
Certificates will be issued, maintained and transferred on the book-entry
records of DTC and its Participants. The Principal Only, Variable Strip and
Residual Certificates will be issued in registered, certificated form. The DTC
Registered Certificates will be issued in minimum denominations (by principal
balance) of $25,000 (or $250,000, in the case of the Class M-2 Certificates and
Class M-3 Certificates) and integral multiples of $1 in excess thereof. The
Principal Only Certificates will be issued in minimum denominations of $25,000
and integral multiples of $1,000 in excess thereof, except for one Principal
Only Certificate evidencing the sum of an authorized denomination thereof and
the remainder of the aggregate initial Certificate Principal Balance of such
class of Certificates. The Variable Strip Certificates and Residual Certificates
will be issued in minimum denominations of a 20% Percentage Interest, except, in
the case of one Residual Certificate, as otherwise set forth herein under
"Certain Federal Income Tax Consequences" and, in the case of the Variable Strip
Certificates, as otherwise set forth herein under "--Interest Distributions."
The DTC Registered Certificates will be represented by one or more
certificates registered in the name of the nominee of DTC.
S-40
<PAGE>
The Depositor has been informed by DTC that DTC's nominee will be Cede & Co.
("Cede"). No Beneficial Owner will be entitled to receive a certificate of such
class in fully registered, certificated form (a "Definitive Certificate"),
except as set forth in the Prospectus under "Description of the
Certificates--Form of Certificates." Unless and until Definitive Certificates
are issued for the DTC Registered Certificates under the limited circumstances
described herein, all references to actions by Certificateholders with respect
to the DTC Registered Certificates shall refer to actions taken by DTC upon
instructions from its Participants, and all references herein to distributions,
notices, reports and statements to Certificateholders with respect to the DTC
Registered Certificates shall refer to distributions, notices, reports and
statements to DTC or Cede, as the registered holder of the DTC Registered
Certificates, for distribution to Beneficial Owners by DTC in accordance with
DTC procedures.
Book-Entry Registration of Certain of the Offered
Certificates
General. Beneficial Owners that are not Participants or Indirect
Participants but desire to purchase, sell or otherwise transfer ownership of, or
other interests in, the related DTC Registered Certificates may do so only
through Participants and Indirect Participants. In addition, Beneficial Owners
will receive all distributions of principal of and interest on the related DTC
Registered Certificates from the Paying Agent through DTC and Participants.
Accordingly, Beneficial Owners may experience delays in their receipt of
payments. Unless and until Definitive Certificates are issued for the related
DTC Registered Certificates, it is anticipated that the only registered
Certificateholder of such DTC Registered Certificates will be Cede, as nominee
of DTC. Beneficial Owners will not be recognized by the Trustee or the Master
Servicer as Certificateholders, as such term is used in the Pooling and
Servicing Agreement, and Beneficial Owners will be permitted to receive
information furnished to Certificateholders and to exercise the rights of
Certificateholders only indirectly through DTC, its Participants and Indirect
Participants.
Under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
of DTC Registered Certificates among Participants and to receive and transmit
distributions of
S-41
<PAGE>
principal of, and interest on, such DTC Registered Certificates. Participants
and Indirect Participants with which Beneficial Owners have accounts with
respect to such DTC Registered Certificates similarly are required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Beneficial Owners. Accordingly, although Beneficial Owners will
not possess physical certificates evidencing their interests in the DTC
Registered Certificates, the Rules provide a mechanism by which Beneficial
Owners, through their Participants and Indirect Participants, will receive
distributions and will be able to transfer their interests in the DTC Registered
Certificates.
None of the Depositor, the Master Servicer or the Trustee will have any
liability for any actions taken by DTC or its nominee, including, without
limitation, actions for any aspect of the records relating to or payments made
on account of beneficial ownership interests in the DTC Registered Certificates
held by Cede, as nominee for DTC, or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests.
Definitive Certificates. Definitive Certificates will be issued to
Beneficial Owners or their nominees, respectively, rather than to DTC or its
nominee, only under the limited conditions set forth in the Prospectus under
"Description of the Certificates Form of Certificates."
Upon the occurrence of an event described in the Prospectus in the
fourth paragraph under "Description of the Certificates--Form of Certificates,"
the Trustee is required to notify, through DTC, Participants who have ownership
of DTC Registered Certificates as indicated on the records of DTC of the
availability of Definitive Certificates for their DTC Registered Certificates.
Upon surrender by DTC of the definitive certificates representing the DTC
Registered Certificates and upon receipt of instructions from DTC for
re-registration, the Trustee will reissue the DTC Registered Certificates as
Definitive Certificates issued in the respective principal amounts owned by
individual Beneficial Owners, and thereafter the Trustee and the Master Servicer
will recognize the holders of such Definitive Certificates as Certificateholders
under the Pooling and Servicing Agreement.
Year 2000. DTC has advised the Depositor that
management of DTC is aware that some computer applications,
S-42
<PAGE>
systems, and the like for processing data ("Systems") that are dependent upon
calendar dates, including dates before, on, and after January 1, 2000, may
encounter "Year 2000 problems." DTC has informed its Participants and other
members of the financial community (the "Industry") that it has developed and is
implementing a program so that its Systems, as the same relate to the timely
payment of distributions (including principal and income payments) to
securityholders, book-entry deliveries, and settlement of trades within DTC,
continue to function appropriately. This program includes a technical assessment
and a remediation plan, each of which is complete. Additionally, DTC's plan
includes a testing phase, which, DTC has advised the Industry, is expected to be
completed within appropriate time frames.
However, DTC's ability to perform properly its services is also
dependent upon other parties, including, but not limited to, issuers and their
agents, as well as DTC's Participants and Indirect Participants and third party
vendors from whom DTC licenses software and hardware, and third party vendors on
whom DTC relies for information or the provision of services, including
telecommunication and electrical utility service providers, among others. DTC
has informed the Industry that it is contacting (and will continue to contact)
third party vendors from whom DTC acquires services to: (i) impress upon them
the importance of such services being "Year 2000" compliant; and (ii) determine
the extent of their efforts for "Year 2000" remediation (and, as appropriate,
testing) of their services. In addition, DTC is in the process of developing
such contingency plans as it deems appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided to the Industry for informational purposes only and is not intended to
serve as a representation, warranty, or contract modification of any kind.
For additional information regarding DTC and the DTC
Registered Certificates, see "Description of the Certificates--Form
of Certificates" in the Prospectus.
S-43
<PAGE>
Available Distribution Amount
The "Available Distribution Amount" for any Distribution Date is equal
to the sum of (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 master 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, proceeds from the
liquidation of Additional Collateral, Pledged Assets or from the Surety Bond 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. As
described herein under "--Principal Distributions on the Senior Certificates,"
any such amount with respect to which such election is so made shall be treated
as having been received on the last day of the preceding calendar month for the
purposes of calculating the amount of principal and interest distributions to
any class of Certificates. Distributions will be made on the 25th day of each
month (or if such 25th day is not a business day, on the next succeeding
business day), commencing in February 1999 (each, a "Distribution Date"). With
respect to any Distribution Date, (i) the "Due Date" is the first day of the
month in which such Distribution Date occurs and (ii) the "Determination Date"
is the 20th day of the month in which such Distribution Date occurs or, if such
day is not a business day, the immediately succeeding business day.
S-44
<PAGE>
Interest Distributions
Holders of each class of Senior Certificates (other than the 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 for such
Distribution Date. The aggregate amount of the interest on the Senior
Certificates payable on any Distribution Date is referred to herein as the
"Senior Interest Distribution Amount."
Holders of each class of Class M 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 for such Distribution Date after distributions of interest
and principal to the Senior Certificates, reimbursements for certain Advances to
the [Master[ Servicer[s] and distributions of interest and principal to any
class of Class M Certificates having a higher payment priority.
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, which are not entitled to distributions of
interest, and Variable Strip Certificates), interest accrued during the related
Interest Accrual Period on the Certificate Principal Balance of the Certificates
of such class immediately prior to such Distribution Date at the per annum rate
at which interest accrues on such class (the "Pass-Through Rate") and (b) in the
case of the Variable Strip Certificates, interest accrued during the related
Interest Accrual Period on the Notional Amount thereof immediately prior to such
Distribution Date at the then-applicable Pass-Through Rate on such class for
such Distribution Date, in each case less interest shortfalls from the Mortgage
Loans, if any, allocated thereto for such Distribution Date to the extent not
covered with respect to the Senior Certificates by the Subordination provided by
the Class B Certificates and Class M Certificates and, with respect to the Class
M Certificates to the extent not covered by the Subordination provided by the
Class B Certificates and any class or classes of Class M Certificates having a
lower payment priority, including in each case:
(i) any Prepayment Interest Shortfall (as defined
below) to the extent not covered by the Master Servicer as
S-45
<PAGE>
described below;
(ii) the interest portions of Realized Losses (including Special
Hazard Losses in excess of the Special Hazard Amount ("Excess Special
Hazard Losses"), Fraud Losses in excess of the Fraud Loss Amount
("Excess Fraud Losses"), Bankruptcy Losses in excess of the Bankruptcy
Amount ("Excess Bankruptcy Losses") and losses occasioned by war, civil
insurrection, certain governmental actions, nuclear reaction and certain
other risks ("Extraordinary Losses")) not allocated through
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 other interest shortfalls not covered by Subordination,
including interest shortfalls relating to the Relief Act or similar
legislation or regulations, all allocated as described below.
Such reductions will be allocated among the holders of all classes of
Certificates in proportion to the respective amounts of Accrued Certificate
Interest that would have been payable on such Distribution Date absent such
reductions. In the case of each class of Class M Certificates, Accrued
Certificate Interest on such class 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 on each
class of Senior Certificates will be distributed on a pro rata basis. Accrued
Certificate Interest on each class of Certificates is calculated on the basis of
a 360-day year consisting of twelve 30-day months. The Principal Only
Certificates are not entitled to distributions of interest.
The "Interest Accrual Period" for all classes of Certificates is the
calendar month preceding the month in which the Distribution Date occurs.
[The "Prepayment Interest Shortfall" for any Distribution
Date is equal to the aggregate shortfall, if any, in collections of
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<PAGE>
interest (adjusted to the related Net Mortgage Rates) resulting from Mortgagor
prepayments on the Mortgage Loans during the preceding calendar month. Such
shortfalls will result because interest on prepayments in full is distributed
only to the date of prepayment, and because no interest is distributed on
prepayments in part, as such prepayments in part are applied to reduce the
outstanding principal balance of the related Mortgage Loans as of the Due Date
in the month of prepayment. However, with respect to any Distribution Date, any
Prepayment Interest Shortfalls resulting from prepayments in full during the
preceding calendar month will be offset by the Master Servicer, but only to the
extent such Prepayment Interest Shortfalls do not exceed an amount equal to the
lesser of (a) one-twelfth of 0.125% of the Stated Principal Balance (as defined
herein) of the Mortgage Loans immediately preceding such Distribution Date and
(b) the sum of the master servicing fee payable to the Master Servicer in
respect of its master servicing activities and reinvestment income received by
the Master Servicer on amounts payable with respect to such Distribution Date.
Prepayment Interest Shortfalls resulting from partial prepayments will not be
offset by the Master Servicer from master servicing compensation or otherwise.
No assurance can be given that the master servicing compensation available to
cover Prepayment Interest Shortfalls resulting from prepayments in full will be
sufficient therefor. See "Pooling and Servicing Agreement--Servicing and Other
Compensation and Payment of Expenses" herein.]
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 in proportion to the respective amounts of
Accrued Certificate Interest for such Distribution Date. In addition, the amount
of any such 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 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 were exceptionally high and were
concentrated in a particular month and Advances by the Master Servicer did not
cover the shortfall. Any such amounts so carried forward will not
S-47
<PAGE>
bear interest. Any interest shortfalls will not be offset by a reduction in the
servicing compensation of the Master Servicer or otherwise, except to the
limited extent described in the preceding paragraph with respect to Prepayment
Interest Shortfalls resulting from prepayments in full.
The Pass-Through Rates on all classes of Offered Certificates (other
than the Variable Strip Certificates) are fixed and are set forth in the table
on page S-5 hereof. The Pass-Through Rate on the Variable Strip 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 of the Mortgage Loans. The "Pool Strip Rate" on any
Mortgage Loan is equal to the Net Mortgage Rate thereon minus [_____]% (but not
less than 0.00%) per annum. The "Net Mortgage Rate" on each Mortgage Loan is
equal to the Mortgage Rate thereon minus the rate per annum at which the related
master servicing and subservicing fees accrue (the "Servicing Fee Rate"). As of
the Cut-off Date, the Pool Strip Rates on the Mortgage Loans ranged between
[_____]% and [_____]% per annum. The initial Pass-Through Rate on the Variable
Strip Certificates is [_____]% per annum.
As described herein, the Accrued Certificate Interest allocable to each
class of Certificates entitled to distributions in respect of interest is based
on the Certificate Principal Balance thereof or, in the case of the Variable
Strip Certificates, on the Notional Amount thereof. 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, provided that, after the Certificate
Principal Balances of the Class B Certificates have been reduced to zero, the
Certificate Principal Balance of any Certificate of the class of Class M
Certificates outstanding with the lowest payment priority shall equal the
percentage interest evidenced thereby multiplied by the excess, if any, of (i)
the then aggregate Stated Principal Balance of all of the Mortgage Loans over
(ii) the then aggregate Certificate Principal Balance of all other classes of
Certificates then outstanding.
S-48
<PAGE>
As of any date of determination, the "Notional Amount" for the Variable
Strip Certificates will be equal to the aggregate Stated Principal Balance of
the Mortgage Loans as of such date. At the option of the initial holder of the
Variable Strip Certificates, the Variable Strip Certificates can be exchanged by
such holder for one or more Variable Strip Certificates that represent in the
aggregate the Pool Strip Rates on each of the Mortgage Loans as of such date,
and the Pass-Through Rate and Notional Amount of each Variable Strip Certificate
so exchanged will be based on the Pool Strip Rates and Stated Principal Balances
of the Mortgage Loans corresponding to such Variable Strip Certificate.
Reference to the Notional Amount with respect to any Variable Strip Certificate
is solely for convenience in certain calculations and does not represent the
right to receive any distributions allocable to principal.
[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.]
[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
S-49
<PAGE>
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.]
[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 Note 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 [Mortgage Loan][Contract] as specified in the
Pooling and Servicing Agreement. The Note 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 Note 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.]
Principal Distributions on the Senior Certificates
Except as otherwise provided below, holders of the Senior Certificates
(other than the Variable Strip Certificates, 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 Principal Only
Distribution Amount (as described below) is so distributed, a distribution
allocable to principal in the following amount:
S-50
<PAGE>
(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
S-51
<PAGE>
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
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 Principal Only
Distribution Amount
S-52
<PAGE>
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 Principal Only
Distribution Amount. The Principal Only 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;
S-53
<PAGE>
(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
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;
(iv) any amounts, allocable to principal for any previous
Distribution Date (calculated pursuant to clauses (i) through (iii)
above), that remain undistributed; and
(v) with respect to each Final Disposition of a Discount
Mortgage Loan in connection with such Distribution Date or any prior
Distribution Date, to the extent that the amount included under clause
(iii) above for such Distribution Date was less than the amount
described in (a) under clause (iii) above (each such shortfall, a
"Principal Only Collection Shortfall"), an amount equal to the aggregate
of the Principal Only Collection Shortfalls, less any amounts paid
pursuant to this clause (v) on a prior Distribution Date, until paid in
full; provided that distributions pursuant to this clause (v) shall only
be made to the extent of Eligible Funds (as described below) on any
Distribution Date.
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].
"Eligible Funds" on any Distribution Date means the portion, if any, of
the Available Distribution Amount remaining after reduction by the sum of the
Senior Interest Distribution Amount, the Senior Principal Distribution Amount
(determined without regard to clause (iv) of the definition thereof), the
Principal Only Distribution Amount (determined without regard to clause (v)
S-54
<PAGE>
of the definition thereof) and the aggregate amount of Accrued Certificate
Interest on the Class M, Class B-1 and Class B-2 Certificates. Notwithstanding
anything herein to the contrary, any distribution in respect of any Principal
Only Collection Shortfall, to the extent not covered by any amounts otherwise
distributable to the Class B-3 Certificates, will result in a reduction of the
amount of principal distributions on such Distribution Date on (i) first, the
Class B-1 Certificates and Class B-2 Certificates and (ii) second, the Class M
Certificates, in each case in reverse order of their payment priority.
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 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
S-55
<PAGE>
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 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 [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 [ ], [ ],
-------- --------
S-56
<PAGE>
[ ], [ ] 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
Variable Strip 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 Principal Only 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
S-57
<PAGE>
Balances thereof are reduced to zero;
(2) second, to the Class A-3 Certificates until the Certificate
Principal Balance thereof is reduced to zero;
(3) third, to the Class [_-_] Certificates until the Certificate
Principal Balance thereof is reduced to zero;
(4) fourth, to the Class [_-_] Certificates until the Certificate
Principal Balance thereof is reduced to zero; and
(5) fifth, to the Class [_-_] 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 Variable Strip
Certificates and the Subordinate Certificates, in each case as described
herein.
The "Credit Support Depletion Date" is the first Distribution Date on
which the Senior Percentage equals 100%.
S-58
<PAGE>
[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-59
<PAGE>
<TABLE>
Planned Principal Balances and Targeted Principal Balances
<CAPTION>
Planned Principal Balances Targeted Principal Balances
Distribution Date Class [ ] Class [ ] Class [ ] Class [ ]
--- ---- ---- ---
PAC Principal TAC Principal
Component Component
<S> <C>
Initial Balance............
[ 25, ____ ]........
[ 25, ____ ]........
[ 25, ____ ]........
[ 25, ____ ]........
[ 25, ____ ]........
[ 25, ____ ]........
[ 25, ____ ]........
[ 25, ____ ]........
[ 25, ____ ]........
[ 25, ____ ]........
[ 25, ____ ]........
[ 25, ____ ]........
[ 25, ____ ]........
[ 25, ____ ]........
[ 25, ____ ]........
[ 25, 20 ].........
[ 25, 20 and
thereafter]................
</TABLE>
S-60
<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 [
]% PSA and approximately [ ]% PSA, in the case of the Planned Principal Balances
and that prepayments on the [Mortgage Loans][Contracts] occur at a constant
level of approximately [ ]% PSA 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
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<PAGE>
[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
(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)
S-62
<PAGE>
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.
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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 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 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
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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.
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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
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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 "Principal Only 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][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
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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."
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In order to maximize the likelihood of distribution in full of the
Senior Interest Distribution Amount, the Principal Only 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 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 will be
decreased (with a corresponding increase in the interest in the Trust 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 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
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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
Cutoff Date, the Fraud Loss Amount shall equal (i) prior to the first
anniversary of the Cut-off 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 Cutoff Date, an amount equal to (a) the lesser of (1) the
Fraud Loss Amount as of the most recent anniversary of the Cut-off 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]
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[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 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
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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.]
YEAR 2000 CONSIDERATIONS
Overview of the Year 2000 Issue
The Year 2000 ("Y2K") issue is the term generally used to describe the
potential failure of information technology components on or after January 1,
2000 because existing computer programs, applications and microprocessors
frequently use only two digits to identify a year. Since the Year 2000 is also a
leap year, there could be additional business disruptions as a result of the
inability of many computer systems to recognize February 29, 2000.
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The failure to correct or replace computer programs, applications and
microprocessors with Y2K-ready alternatives may adversely impact the operations
of [Name of [Master] Servicer[s]] on or after January 1, 2000. The
responsibilities of [Name of [Master] Servicer[s]] as the [Master] Servicer[s]
include collecting payments from the Subservicers in respect of the Mortgage
Loans, calculating the Available Distribution Amount for each Distribution Date,
remitting such amount to the Trustee prior to each Distribution Date,
calculating the amount of principal and interest payments to be made to the
Certificateholders on each Distribution Date, and preparing the monthly
statement to be sent to Certificateholders on each Distribution Date.
[Overview of [Residential Funding]'s Y2K Project
In January 1997, [Residential Funding] commenced activities to determine
the impact of Y2K on its critical computer systems. In April 1998, [Residential
Funding] established a formal Y2K project team (the "Y2K Project Team") to
address Y2K issues. The Y2K Project Team remains in place and continues to work
on solving problems related to the Year 2000. In addition, the Y2K Project Team
coordinates its efforts with the Y2K programs established by General Motors
Acceptance Corporation and General Motors Corporation.
Members of the Y2K Project Team, together with relevant personnel from
[Residential Funding]'s business units have developed and implemented a
six-phase management strategy (as discussed below), which is being applied to
information technology and non-information technology components ("Components")
throughout the organization. [Residential Funding]'s Components primarily
consist of the following:
hardware, including mainframe computers, desktop
computers and network devices;
facilities equipment, including elevators, telephone systems,
heating systems and security systems;
software applications, including vendor purchased
applications, in-house developed applications and
end-user developed applications;
business partner communication links, which primarily
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provide data transmissions to and from business
partners; and
business partners data systems, which primarily process data for
[Residential Funding].
The six phases by which the Y2K Project Team will seek to achieve Y2K
readiness throughout [Residential Funding] are as follows:
Phase Objective
Phase I--Awareness To promote Y2K awareness
throughout [Residential Funding].
Emphasis has been placed on
ensuring that Components recently
purchased (or to be purchased) by
business units are Y2K-ready prior
to the implementation of such
Components.
Phase II-- nventory To (i) create an inventory
of all Components and (ii) assess the Y2K
risks associated with such Components.
Phase III--Assessment To (i) determine which
Components are not Y2K-ready and (ii)
decide whether such Components should be
replaced, retired or repaired.
Phase IV--Renovation To execute Component
replacement, retirement or repair to
ensure Y2K readiness.
Phase V--Validation To test Components that have
been repaired to ensure Y2K
readiness and validate "mission
critical" Components that were
assessed as Y2K-ready in Phase
III.
Phase VI-- Implementation To deploy repaired and
validated Components.
In order to execute the six-phase plan, a combination of
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internal resources and external contractors have been, and will be, employed by
the Y2K Project Team.
Y2K Project Status
As of [ ______ __, ____ ], the Y2K Project Team had substantially
completed the six phases for internal "mission critical" Components. However,
several software applications used by [Residential Funding] in its role as
[Master] Servicer[s] are still in the final three phases of the six-phase
management plan described above. [Residential Funding] expects that all phases
with respect to such applications will be substantially completed by [
- - ------ --, ---- ].
The Y2K Project Team anticipates that its efforts with respect to all
internal Components will be substantially complete by [ ______ __, ____ ]. This
includes substantial completion of (i) renovation and validation of any
non-mission critical Components that the Y2K Project Team and related business
units determine to be necessary, (ii) validation of any remaining "mission
critical" Components that are either completing in-house remediation or waiting
for a vendor upgrade, and (iii) Y2K business continuity planning activities
discussed below.
The potential impact on [Residential Funding] of problems related to
Y2K, however, will not depend solely on the corrective measures undertaken by
the Y2K Project Team. The manner in which Y2K issues are addressed by business
partners, governmental agencies and other entities that provide data to, or
receive data from, [Residential Funding], or whose financial condition or
operational capability is important to [Residential Funding] and its ability to
act as [Master] Servicer[s], will have a significant impact upon [Residential
Funding]. These entities include, among others, Subservicers, the Trustee, the
Custodian and certain depositary institutions, as well as their respective
suppliers and vendors. Accordingly, [Residential Funding] is communicating with
certain of these parties to assess their Y2K readiness and evaluate any
potential impact on [Residential Funding].
Due to the various dates by which [Residential Funding]'s business partners
anticipate being Y2K-ready, it is expected that the Y2K Project Team will
continue to spend significant time assessing Y2K business partner issues
throughout 1999. Any
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business partner, including any Subservicer, the Trustee and the Custodian, that
(i) has not provided [Residential Funding] appropriate documentation supporting
its Y2K efforts, (ii) has not responded in a timely manner to [Residential
Funding]'s inquiries regarding their Y2K efforts or (iii) does not expect to be
Y2K- ready until after [ ______ __, ____ ], has been, and will be, placed in an
"at risk" category. [Residential Funding] will carefully monitor the efforts and
progress of its "at risk" business partners, and if additional steps are
necessary [Residential Funding] will reassess the risk and act accordingly.
During [ ____ ], [Residential Funding] also commenced a formal business
continuity plan that is designed to address potential Y2K problems and other
possible disruptions. [Residential Funding]'s business continuity plan has the
following four phases:
Phase Objective
Phase I--Business Impact To assess the impact upon
Assessment [Residential Funding] business
units if "mission critical" Components
were suddenly not available or
significantly impaired as a result of a
natural disaster or other type of
disruption (including as a result of
Y2K).
Phase II--Strategic Development To develop
broad, strategic plans regarding the
manner in which [Residential Funding]
will operate in the aftermath of a
natural disaster or other type of
disruption (including as a result of
Y2K).
Phase III--Business Continuity To develop detailed procedures on
Planning how [Residential Funding] and
individual business units will continue
to operate in the aftermath of a natural
disaster or other type of disruption
(including as a result of Y2K).
Phase IV--Validation To test the plans
developed in Phases II and III above.
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As of December 15, 1998, [Residential Funding] had substantially
completed Phases I and II of its business continuity plan. [Residential Funding]
anticipates that Phase III will be substantially complete by [ ______ __, ____ ]
and Phase IV will be substantially complete by [ ______ __, ____ ]. ]
Risks related to Y2K
Although [Name of [Master] Servicer[s]]'s remediation efforts are
directed at eliminating its Y2K exposure, there can be no assurance that these
efforts will fully mitigate the effect of all Y2K problems. If [Name of [Master]
Servicer[s]] fails to identify or correct any material Y2K problem, there could
be significant disruptions in its normal business operations. Such disruptions
could have a material adverse effect on [Name of [Master] Servicer[s]]'s ability
to (i) collect (and monitor any Subservicer's collection of) payments on the
Mortgage Loans, (ii) distribute such collections to the Trustee and (iii)
provide reports to Certificateholders as set forth herein. Furthermore, if any
Subservicer, the Trustee or any other business partner or any of their
respective vendors or third party service providers are not Y2K-ready, the
ability to (a) service the Mortgage Loans (in the case of any Subservicer or any
of their respective vendors or third party service providers) and (b) make
distributions to Certificateholders (in the case of the Trustee or any of its
vendors or third party service providers), may be materially and adversely
affected.
This section entitled "Year 2000 Considerations" contains
"forward-looking statements" within the meaning of Section 27A of the Securities
Act. Generally, all statements in this section that are not statements of
historical fact are forward-looking statements. Forward-looking statements made
in this Y2K discussion are subject to certain risks and uncertainties. Important
factors that could cause results to differ materially from such forward-looking
statements include, among other things, the ability of [Name of [Master]
Servicer[s]] to successfully identify Components that may pose Y2K problems, the
nature and amount of programming required to fix the affected Components, the
costs of labor and consultants related to such efforts, the continued
availability of resources (both personnel and technology) and the ability of
business partners that interface with [Name of [Master] Servicer[s]] to
successfully address their Y2K issues.
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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. 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
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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 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
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<PAGE>
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 Variable Strip
Certificates) are fixed, such rates will not change in response to changes in
market interest rates. The Pass-Through Rate on the Variable Strip 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 Note 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
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<PAGE>
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, 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
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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.
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<PAGE>
[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.]
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 ("PSA"),
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% PSA 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
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thirtieth month. Beginning in the thirtieth month and in each month thereafter
during the life of the [mortgage loans] [manufactured housing contracts], 100%
PSA assumes a constant prepayment rate of [ ]% per annum each month. As used in
the table below, "0% PSA" assumes prepayment rates equal to 0% of PSA (no
prepayments). Correspondingly, " [ ]% PSA" assumes prepayment rates equal to [
]% of PSA, and so forth. PSA 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].]
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<PAGE>
Structuring Assumptions
The table set forth below has been prepared on the basis of certain
assumptions (the "Structuring Assumptions") as described below regarding the
weighted average characteristics of the [Mortgage Loans][Contracts] that are
expected to be included in the Trust 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 Depositor will repurchase any [Mortgage Loan][Contract] and
neither the [Master] Servicer[s] nor the Depositor exercises any option to
purchase the [Mortgage Loans][Contracts] and thereby cause a termination of the
Trust; (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 PSA 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, ____ ]; (vii) payments on the [Mortgage Loans][Contracts] earn no
reinvestment return; (viii) there are no additional ongoing Trust expenses
payable out of the Trust; and (ix) the Certificates will be purchased on [ ,
____ ].
Some of the foregoing structuring assumptions regarding the
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<PAGE>
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 Structuring 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 PSA until
maturity or that all of the [Mortgage Loans][Contracts] will prepay at the same
level of PSA. 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 PSA specified,
even if the weighted average remaining term to maturity of the [Mortgage
Loans][Contracts] is as assumed. Any difference between such Structuring
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 Variable Strip 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 PSA.
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<PAGE>
Percent of Initial Certificate Principal Balance Outstanding at the Following
Percentages of PSA
<TABLE>
<CAPTION>
Distribution Class A-1 Class A-2 Class [_-_]
Date
<S> <C> <C> <C>
0% _% _% _% _% 0% _% _% _% _% 0% _% _% _% _%
Class [_-_]
0% _% _% _% _%
Initial Percentage
</TABLE>
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 Structuring 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.
Table continued on next page.
<PAGE>
Table continued from previous page.
Percent of Initial Certificate Principal Balance Outstanding at the Following
Percentages of PSA
<TABLE>
<CAPTION>
Distribution Class [_-_] Class [_-_] Classes M-1, M-2 and
Date M-3
<S> <C> <C> <C>
0% _% _% _% _% 0% _% _% _% _% 0% _% _% _% _%
Initial Percentage
</TABLE>
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 Structuring 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.
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<PAGE>
Principal Only Certificate and Variable Strip 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 Variable Strip 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 Variable Strip 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 Variable Strip Certificates to
various constant rates of prepayment on the [Mortgage Loans][Contracts] by
projecting the monthly aggregate payments on the Principal Only Certificates and
Variable Strip 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 Structuring 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 Variable Strip
Certificates are as set forth herein. Any differences between the Structuring
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.
<PAGE>
<TABLE>
<CAPTION>
Pre-Tax Yield to Maturity of the Principal Only
Certificates at the Following Percentages of PSA
<S> <C> <C> <C> <C> <C> <C>
Assumed Purchase Price 0% [ ]% [ ]% [ ]% [ ]% [ ]%
-- ---- ---- ---- ---- ----
$[ ] [ ] [ ] [ ] [ ] [ ] [ ]
% % % % % %
Pre-Tax Yield to Maturity of the Variable Strip
Certificates at the Following Percentages of PSA
Assumed Purchase Price 0% [ ]% [ ]% [ ]% [ ]% [ ]%
-- ---- ---- ---- ---- ----
$[ ] [ ] [ ] [ ] [ ] [ ] [ ]
% % % % % %
</TABLE>
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
Variable Strip 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 Variable Strip Certificates and is used in computing the
corporate bond equivalent yields shown in the table relating to the Variable
Strip 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 Principal Only Certificates and Variable Strip
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 Variable Strip 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 PSA 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
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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 Variable Strip Certificates generally have rights to
relatively larger portions of interest payments on [Mortgage Loans][Contracts]
with higher Mortgage Rates; thus, the yield on the Variable Strip 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 Variable Strip 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 PSA 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
Variable Strip 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.
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<PAGE>
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 of
return on the Residual Certificates. See "Certain Federal Income Tax
Consequences" herein and in the Prospectus.
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<PAGE>
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 Depositor will provide a prospective or actual Certificateholder
without charge, on written request, a copy (without exhibits) of the Pooling and
Servicing Agreement. Requests should be addressed to the [ ] of Residential
Accredit Loans, Inc., [ ]. In addition to the circumstances described in the
Prospectus, the Depositor may terminate the Trustee for cause under certain
circumstances. See "The Pooling and Servicing Agreement--The Trustee" in the
Prospectus.
[The [Master] Servicer[s]]
[Residential Funding], an indirect wholly owned subsidiary of [GMAC
Mortgage] and an affiliate of the Depositor, will act as master servicer for the
Certificates pursuant to the Pooling and Servicing Agreement. For a general
description of Residential Funding and its activities, see "Residential Funding
Corporation" in the Prospectus and "The Mortgage Pool-Residential Funding"
herein.]
[The following table sets forth certain information concerning the
delinquency experience (including pending foreclosures) on one-to four-family
residential mortgage loans that generally complied with Residential Funding's
Expanded Criteria Mortgage Program at the time of purchase by Residential
Funding and were being master serviced by Residential Funding on [__________ __,
____], [__________ __, ____] and [__________ __, ____]. As used herein, a loan
is considered to be "30 to 59 days" or "30 or more days" delinquent when a
payment due on
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<PAGE>
any due date remains unpaid as of the close of business on the last business day
immediately prior to the next following monthly due date. The determination as
to whether a loan falls into this category is made as of the close of business
on the last business day of each month. Delinquency information presented herein
as of the Cut-off Date is determined and prepared as of the close of business on
the last business day immediately prior to the Cut-off Date.]
<TABLE>
[Expanded Criteria Mortgage Program
Delinquency Experience(1)]
<CAPTION>
At [ , ____] At [ , ____] At [ , ____]
By No. of By Dollar By No. of By Dollar By No. of By Dollar
Loans Amount of Loans Amount of Loans Amount of
Loans Loans Loans
(Dollar Amounts in Thousands)
<S> <C> <C> <C>
Total Loan Portfolio......... $ $ $
Period of Delinquency
31 to 59 days............
60 to 89 days............
90 days or more (2)......
Foreclosures Pending.........
REO Property.................
Total Delinquent Loans....... $ $ $
Percent of Loan Portfolio % % % % % %
(1) The table relates only to the mortgage loans referred to above. (2) Does not
include foreclosures pending.
S-94
</TABLE>
<PAGE>
<TABLE>
[Expanded Criteria Mortgage Program Reduced
Documentation Delinquency Experience(1)]
At [ , ____] At [ , ____] At [ , ____]
<CAPTION>
By No. of By Dollar By No. of By Dollar By No. of By Dollar
Loans Amount of Loans Amount of Loans Amount of
Loans Loans Loans
(Dollar Amounts in Thousands)
<S> <C> <C> <C>
Total Loan Portfolio......... $ $ $
Period of Delinquency
31 to 59 days............
60 to 89 days............
90 days or more (2)......
Foreclosures Pending.........
REO Property.................
Total Delinquent Loans....... $ $ $
Percent of Loan Portfolio % % % % % %
</TABLE>
(1) The table relates only to the mortgage loans referred to above. (2) Does not
include foreclosures pending.
[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.]
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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 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].
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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 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 Variable Strip
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 Variable Strip Certificates and the Residual
Certificates, in proportion to the percentage interests evidenced by their
respective Certificates.
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[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 Depositor 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, 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 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 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 Depositor, the [Mortgage Loans] [Contract] may be sold,
thereby effecting a retirement of the Certificates and the termination of the
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Trust, or the Certificates so purchased may be held or resold by
the [Master] Servicer[s] or the Depositor.]
Upon presentation and surrender of the Offered Certificates in
connection with the termination of the Trust 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 Variable Strip 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 Depositor, 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 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 and the Offered Certificates
(other than the Residual Certificates) and Class B Certificates will represent
ownership of "regular interests" in the Trust and will generally be treated as
representing ownership of debt instruments of the Trust. 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 [ ]% PSA. No representation is made that the
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[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 Variable Strip 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 Variable Strip 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 Variable Strip 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 Variable Strip
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.
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
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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 assets described in Section
7701(a)(19)(C) of the Code and "real estate assets" under Section 856(c)(4)(A)
of the Code generally in the same proportion that the assets of the Trust would
be so treated. In addition, interest on the Offered Certificates will be treated
as "interest on obligations secured by mortgages on real property" under Section
856(c)(3)(B) of the Code generally to the extent that such Offered Certificates
are treated as "real estate assets" under Section 856(c)(4)(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 Depositor 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.
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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 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 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 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's term
that significantly exceeds the amount of cash distributions received by such
Residual Certificateholders from the Trust 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
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have other sources of funds sufficient to pay any federal income taxes due in
the earlier years of the Trusts' 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'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.
[[[Name of [Master] Servicer[s]][] will be designated as the "tax
matters person" with respect to the Trust 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.
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[For Trusts treated as Grantor Trusts]
[Upon the issuance of the Offered Certificates [Orrick, Herrington &
Sutcliffe LLP] [Thacher Proffitt & Wood] [Stroock & Stroock & Lavan], counsel to
the Depositor 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 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.
For purposes of the following discussion, the [Class and Class ]
Certificates 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 Mortgage Loans], counsel to the Depositor will deliver an
opinion upon issuance of the offered certificates that, in general, Grantor
Trust Fractional Interest Certificates will represent interests in (i) "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)]; (ii) "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 (iii) "real estate assets"
within the meaning of Section 856(c)(4)(A) of the Code. [In addition, counsel to
the Depositor 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 Mortgage Loans. The
characterization of an investment in Buy-Down Mortgage Loans will depend upon
the precise terms of the related Buy-Down Agreement, but to the extent that such
Buy-Down Mortgage 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 Mortgage 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 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)(4)(A) of the Code, and the
interest on which is "interest on obligations secured by
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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 Depositor 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.
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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 Variable Strip, 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 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.]
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[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[s], the Certificate Administrator, any
Servicer, any Subservicer 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
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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
Depositor, the [Master] Servicer[s], the Certificate Administrator, any
Servicer, any Subservicer 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 the Grantor Trust Fractional Interest
Certificates. It is uncertain 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.
When an item of Mortgage Collateral prepays in full, it appears that the
holder of a Grantor Trust Fractional Interest
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Certificate acquired at a discount or a premium generally will not recognize a
separate item of income or loss. 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 [insert applicable assumption] (the "Prepayment
Assumption") and on a constant yield computed using a representative initial
offering price for each class of Certificates. However, neither the Depositor,
the [Master] Servicer[s] 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 1.1286-1, 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 stripped 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.] If the original issue discount or market
discount on a
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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
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.
Recently enacted amendments to Section 1272(a)(6) of the Code require
the use of a prepayment assumption in determining the existence and accrual of
original issue discount associated with pools of debt instruments whose yield
may be affected by prepayments. No regulations have been issued interpreting the
application of this provision to securities such as the Grantor Trust Fractional
Interest Certificates nor do the committee reports prepared by those
Congressional committees that examined such provision in the course of its
enactment provide guidance as to its intended application to such securities. In
the absence of such guidance, various interpretations are possible. For example,
the provision could be interpreted as requiring the pool of mortgage loans
underlying the Grantor Trust Fractional Interest Certificates to be segregated
into two subpools consisting respectively of those mortgage loans that had
original issue discount upon their origination (the "OID Pool") and those
mortgage loans that did not have original issue discount upon their origination
(the "Non-OID Pool"). A holder of a Grantor Trust Fractional Interest
Certificate would be required to report its share of the interest income on the
Mortgage Loans in the Non-OID Pool in accordance with such holder's normal
method of accounting and, to the extent that the portion of its purchase price
for such Certificates properly allocable to its interest in the Non-OID Pool
were less than its share of the
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aggregate principal amount of the Mortgage Loans in the Non-OID Pool, would be
subject to the Market Discount rules described in the Prospectus under "Market
Discount" or "REMICs--Taxation of Owners of REMIC Regular Certificates--Market
Discount." Such holder would be required to treat the portion of its Certificate
representing an interest in the OID Pool as a single debt instrument issued on
the Closing Date with original issue discount equal to its pro-rata share of the
aggregate of the unaccrued original issue discount on the Mortgage Loans in the
OID Pool as of such date and subject to the rules for reporting original issue
discount described under "REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount." To the extent that the portion of such
holder's purchase price for its Certificate properly allocable to the OID Pool
represented a discount greater than such holder's pro-rata share of the
aggregate original issue discount on the Mortgage Loans in the OID Pool, such
holder would be subject to the Market Discount Rules described in the Prospectus
under "REMICs--Taxation of Owners of REMIC Regular Certificates--Market
Discount."
Alternatively, a Grantor Trust Fractional Interest Certificate could be
treated as a single debt instrument issued on the Closing Date and subject to
the rules described in the Prospectus under "REMICs--Taxation of Owners of REMIC
Regular Certificates--Original Issue Discount" and "--Market Discount." Other
interpretations of the application of the original issue discount rules to
Grantor Trust Fractional Interest Certificates are possible. Investors are urged
to consult their tax advisors concerning the application and effect of such
rules on their investment in such Certificates.
The [Master] Servicer[s] 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
[[Name of [Master] Servicer[s]]] [principal executive office]. [See "[Name of
[Master] Servicer[s]]" 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. The amendment
to
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Section 1272(a)(6) of the Code described under "-- If Stripped Bond Rules Do Not
Apply," above, could be interpreted as requiring the use of a prepayment
assumption in connection with the determination, accrual and inclusion in income
of market discount. If such a requirement were applicable, a Grantor Trust
Fractional Interest Certificate would probably be treated as a single aggregate
debt instrument to which the rules described in the prospectus under
"REMICs--Taxation of Owners of REMIC Regular Certificates--Market Discount"
would apply. Alternatively, if the requirement of a prepayment assumption were
not applicable, the rules described in the succeeding paragraphs of this section
would be applicable either on a Mortgage-Loan-by-Mortgage-Loan basis or on such
a basis with respect to the Non-OID Pool and on an aggregate basis with respect
to the OID Pool. Other interpretations of the effect of the amendment to Section
1272(a)(6) on the determination and accrual of market discount are possible.
Investors are advised to consult their tax advisors concerning the application
of the market discount rules to Grantor Trust Fractional Interest Certificates.
If a prepayment assumption generally is not required in the application
of the market discount rules to pools of debt instruments, a Grantor Trust
Fractional Interest Certificate may be subject to the market discount rules 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 [define or reference prospectus], or in the
case of Mortgage Collateral issued with original issue discount, at a purchase
price less than its adjusted issue price [define or reference prospectus]. 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 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
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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, used in
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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
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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.
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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
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.
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 the
Grantor Trust Strip Certificates and that adjustments be made in the amount and
rate of accrual of such discount when prepayments do not conform to such
prepayment assumption. It is uncertain 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
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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 Depositor, the [Master] Servicer[s] 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. As in the case of the OID Regulations generally, the
regulations addressing contingent payment debt instruments 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 OID Regulations were to apply,
the holder of a Grantor Trust Strip Certificate would be required to apply a
"noncontingent bond method." Under that method, the issuer of a Grantor Trust
Strip Certificate would determine a projected payment schedule with respect to
such Grantor Trust Strip Certificate. Holders of Grantor Trust Strip
Certificates would be bound by issuer's projected payment schedule, which would
consist of all noncontingent payments and a projected amount for each contingent
payment based on the projected yield (as described below) of the Grantor Trust
Strip Certificate. The projected amount of each payment would be determined so
that the projected payment schedule reflected the projected yield reasonably
expected to be received by the holder of a Grantor Trust Strip Certificate. The
projected yield referred to above would be a reasonable rate, not less than the
"applicable Federal rate" that, as of the issue date, reflected general market
conditions, the credit quality of the issuer, and the terms and conditions of
the Mortgage Collateral. The holder of a Grantor Trust Strip Certificate would
be required to include as interest income in each month the adjusted issue price
of the Grantor Trust Strip Certificate at the beginning of the period multiplied
by the projected yield, and would add to, or subtract from, such income any
variation between the payment actually received in such month and the payment
originally projected to be made in such month.
Certificateholders should consult their tax advisors concerning the
possible application of the contingent payment rules to the Grantor Trust Strip
Certificates.
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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.
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 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.
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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[s] 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
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not be subject to United States estate taxes in the estate of a non- resident
alien individual.]
LEGAL INVESTMENT MATTERS
The [Senior] Certificates [and Class M-1 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.
The Depositor makes no representations as to the proper characterization
of any class of the Offered Certificates for legal investment or other purposes,
or as to the ability of particular investors to purchase any class of the
Offered Certificates under applicable legal investment restrictions. These
uncertainties may adversely affect the liquidity of any class of Offered
Certificates. Accordingly, all institutions whose investment activities are
subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their legal
advisors in determining whether and to what extent any class of the Offered
Certificates constitutes a legal investment or is subject to investment, capital
or other restrictions.
See "Legal Investment Matters" in the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an Underwriting
Agreement, dated [ , ____] (the "Underwriting Agreement"), [_____________] (the
"Underwriter") has agreed to purchase and the Depositor has agreed to sell to
sell to the each class of the Offered Certificates [other than a de minimis
portion of the Residual Certificates that will be retained by [Name of [Master]
Servicer[s]] Certificates (the "Underwritten Certificates").
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It is expected that delivery of the Underwritten Certificates (other
than the Residual Certificates) will be made only in book-entry form through the
Same Day Funds Settlement System of DTC, and that the delivery of the Residual
Certificates will be made at the offices of the Underwriter, New York, New York,
on or about [_______ __, ____] 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
Depositor'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 Depositor from the sale of the Offered Certificates, before deducting
expenses payable by the Depositor, 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 Depositor in the form of underwriting compensation. The
Underwriter and any dealers that participate with the Underwriter in the
distribution of the Offered Certificates may be deemed to be underwriters and
any profit on the resale of the Offered Certificates positioned by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933.
The Underwriting Agreement provides that the Depositor will indemnify
the Underwriter, and under limited circumstances the Underwriter will indemnify
the Depositor, against certain civil liabilities under the Securities Act of
1933 or contribute to payments required to be made in respect thereof.
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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 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
Depositor 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 Depositor by [Orrick, Herrington & Sutcliffe LLP][Thacher
Proffitt & Wood][Stroock & Stroock & Lavan], New York, New York and for the
Underwriter by [ ].
RATINGS
It is a condition to the issuance of the Senior Certificates (other than
the Class [__] Certificates) and the Class M Certificates that they be rated not
lower than "[ ]" and "[ ]", respectively by [ (" ")] and "[ ]" and "[ ]",
respectively, by [ (" ")].It is a condition to the issuance of the Class [__]
Certificates that they be rated not lower than "[ ]" and "[ ]", respectively by
[ (" ")]" and [ (" ")].
[[ ] 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,
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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
Variable Strip Certificates to fully recover
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their initial investment.]
The Depositor has not requested a rating on the Offered Certificates by
any rating agency other than [ ] and [ ]. However, there can be no assurance as
to whether any other rating agency will rate the Offered Certificates, or, if it
does, what rating would be assigned by any 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 [ ].
ERISA CONSIDERATIONS
Any Plan, any insurance company (whether through its general or separate
accounts) or any other person investing "Plan Assets" of any Plan, as defined
under "ERISA Considerations--Plan Asset Regulations" in the Prospectus, should
carefully review with its legal advisors whether the purchase or holding of
Offered Certificates could give rise to a transaction prohibited or not
otherwise permissible under ERISA or Section 4975 of the Code. The purchase or
holding of the Offered Certificates (other than the Class M Certificates or
Residual Certificates) by or on behalf of, or with "Plan Assets" of, a Plan may
qualify for exemptive relief under the Exemption, as described under "ERISA
Considerations--Prohibited Transaction Exemptions" in the Prospectus. However,
the Exemption contains a number of conditions which must be met for the
Exemption to apply, including the requirement that any such Plan must be an
"accredited investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933, as amended.
Insurance companies contemplating the investment of general account
assets in the Offered Certificates should consult with their legal advisors with
respect to the applicability of Section 401(c) of ERISA, as described under
"ERISA Considerations--Insurance Company General Accounts" in the Prospectus.
The DOL issued proposed regulations under Section 401(c) on December 22, 1997,
but the required final regulations have not been issued as of the date hereof.
Because the exemptive relief afforded by the Exemption (or any similar
exemption that might be available) will not likely apply
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<PAGE>
to the purchase, sale or holding of the Class M Certificates, no Class M
Certificate (or any interest therein) may be acquired or held by any Plan, any
trustee or other person acting on behalf of any Plan, or any other person using
"Plan Assets" to effect such acquisition or holding (each, a "Plan Investor")
unless (i) such acquirer or holder is an insurance company, (ii) the source of
funds used to acquire or hold such Certificate (or interest therein) is an
"insurance company general account" (as defined in U.S. Department of Labor
Prohibited Transaction Class Exemption ("PTCE") 95-60), and (iii) the conditions
set forth in Sections I and III of PTCE 95-60 have been satisfied. Each
Beneficial Owner of a Class M Certificate (or any interest therein) shall be
deemed to have represented, by virtue of its acquisition or holding of such
Certificate (or interest therein), that either (i) it is not a Plan Investor or
(ii) (1) it is an insurance company, (2) the source of funds used to acquire or
hold such Certificate (or interest therein) is an "insurance company general
account" (as such term is defined in PTCE 95-60), and (3) the conditions set
forth in Sections I and III of PTCE 95-60 have been satisfied.
If any Class M Certificate (or any interest therein) is acquired or held
in violation of the provisions of the preceding paragraph, the next preceding
permitted Beneficial Owner will be treated as the Beneficial Owner of such Class
M Certificate, retroactive to the date of transfer to the purported Beneficial
Owner. Any purported Beneficial Owner whose acquisition or holding of any such
Certificate (or interest therein) was effected in violation of the provisions of
the preceding paragraph shall indemnify and hold harmless the Depositor, the
Trustee, the Master Servicer, any Sub-Servicer and the Trust from and against
any and all liabilities, claims, costs or expenses incurred by such parties as a
result of such acquisition or holding.
Investors in the Class M Certificates are urged to obtain from a
transferee of any such Certificate a certification of such transferee's
eligibility to purchase such Certificates in the form of the representation
letter attached hereto as Annex I.
Because the exemptive relief afforded by the Exemption (or any similar
exemption that might be available) also will not likely apply to the purchase,
sale or holding of the Residual Certificates, transfers of such Certificates to
any Plan Investor will not be registered by the Trustee unless the transferee
provides the Depositor, the Trustee and the Master Servicer with an opinion of
S-127
<PAGE>
counsel satisfactory to the Depositor, the Trustee and the Master Servicer,
which opinion will not be at the expense of the Depositor, the Trustee or the
Master Servicer, that the purchase of such Certificates by or on behalf of such
Plan Investor is permissible under applicable law, will not constitute or result
in a non-exempt prohibited transaction under ERISA or Section 4975 of the Code
and will not subject the Depositor, the Trustee or the Master Servicer to any
obligation in addition to those undertaken in the Pooling and Servicing
Agreement.
Any fiduciary or other investor of Plan Assets that proposes to acquire
or hold the Offered Certificates on behalf of or with Plan Assets of any Plan
should consult with its counsel with respect to: (i) whether the specific and
general conditions and the other requirements in the Exemption would be
satisfied, or whether any other prohibited transaction exemption would apply,
and (ii) the potential applicability of the general fiduciary responsibility
provisions of ERISA and the prohibited transaction provisions of ERISA and
Section 4975 of the Code to the proposed investment.
See "ERISA Considerations" in the Prospectus.
The sale of any of the Offered Certificates to a Plan is in no respect a
representation by the Depositor or the Underwriter that such an investment meets
all relevant legal requirements with respect to investments by Plans generally
or any particular Plan, or that such an investment is appropriate for Plans
generally or any particular Plan.
S-128
<PAGE>
[ANNEX I]
[ERISA Representation Letter]
[date]
[Residential Funding Corporation
8400 Normandale Lake Boulevard, Suite 600
Minneapolis, Minnesota 55437]
[Residential Accredit Loans, Inc.
8400 Normandale Lake Boulevard, Suite 600
Minneapolis, Minnesota 55437]
[Trustee]
Re: Residential Accredit Loans, Inc.
Mortgage Pass-Through Certificates, Series [___-QS__], Class M-__
Dear Ladies and Gentlemen:
[_________________________] (the "Purchaser") intends to purchase from
[______________________] (the "Seller") $[__________________] initial
Certificate Principal Balance of the above-referenced certificates (the
"Certificates"), issued pursuant to the Pooling and Servicing Agreement (the
"Pooling and Servicing Agreement"), dated as of _______ __, ____, among
Residential Accredit Loans, Inc., as seller (the "Company"), [Master
Servicer[s]], as master servicer (the "Master Servicer") and [Trustee], as
trustee (the "Trustee"). All terms used herein and not otherwise defined shall
have the meanings set forth in the Pooling and Servicing Agreement.
The Purchaser hereby certifies, represents and warrants to, and
covenants with the Depositor, the Trustee and the Master Servicer that, either:
(a) The Purchaser is not an employee benefit or other plan
subject to the prohibited transaction provisions of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or Section
4975 of the Internal Revenue Code of 1986, as amended (a "Plan"), or any
other person (including an investment manager, a named fiduciary or a
trustee of any Plan) acting, directly or indirectly, on behalf of or
purchasing any Certificate with "plan assets" of any Plan within the
meaning of the U.S. Department of Labor ("DOL") regulation at 29
C.F.R.ss.2510.3-101; or
b) The Purchaser is an insurance company, the source of funds to
be used by which to purchase the Certificates is an "insurance company
general account" (as such term is defined in DOL Prohibited Transaction
Class Exemption ("PTCE") 95-60), and the conditions set forth in
Sections I and III of PTCE 95-60 have been satisfied.
In addition, the Purchaser hereby certifies, represents and warrants to,
and covenants with, the Depositor, the Trustee and the Master Servicer that the
Purchaser will not transfer the Certificates to any Plan or person unless such
Plan or person meets the requirements set forth in either (a) or (b) above.
Very truly yours,
<PAGE>
By:
Name:
Title:
-2-
<PAGE>
Residential Accredit Loans, Inc.
$[--------]
[Mortgage Asset-Backed][Manufactured Housing Contract]
Pass-Through Certificates
Series [____-QS__]
Prospectus Supplement
Underwriter[s]
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus.
We have not authorized anyone to provide you with different information.
We are not offering the certificates in any state where the offer is not
permitted.
We represent the accuracy of the information in this prospectus
supplement and the accompanying prospectus only as of the dates on their
respective covers.
Dealers will be required to deliver a prospectus supplement and
prospectus when acting as underwriters of the certificates offered
hereby and with respect to their unsold allotments or subscriptions. In
addition, all dealers selling the offered certificates, whether or not
participating in this offering, may be required to deliver a
<PAGE>
prospectus supplement and prospectus until [_____ __, ____].
<PAGE>
<PAGE>
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective . This
prospectus supplement is not an offer to sell these securities and it is not
soliciting an offer to buy these securities in any state where the offer or sale
is not permitted.
<PAGE>
Subject to completion
Preliminary prospectus supplement dated February __, 1999
Prospectus supplement dated [______ __, ____] (to prospectus dated [______ __,
____])
$ [ --------- ]
Residential Accredit Loans, Inc.
Depositor
[Name of Certificate Administrator]
Certificate Administrator
Mortgage Pass-Through Certificates, Series [____-QS__]
You should consider carefully the risk factors beginning on page S-7 in this
prospectus supplement. The certificates will represent ownership interests only
in the trust created for Series [____-QS__] and will not represent ownership
interests in or obligations of Residential Accredit Loans, Inc., [Name of
Certificate Administrator] or any of their affiliates. This prospectus
supplement may be used to offer and sell the certificates offered hereby only if
accompanied by the prospectus.
Offered Certificates
The trust created for the Series [____-QS__] certificates will consist primarily
of a pool of fully modified pass- through mortgage-backed certificates issued
and serviced by a mortgage banking company or other financial concern approved
by Ginnie Mae, and backed by a pool of mortgage loans with terms to maturity of
not more than 30 years. Ginnie Mae will guarantee full and timely payment of
principal and interest on each such certificate. GinnieMae's obligation is
backed by the full faith and credit of the United States. The trust will issue
[three] classes of certificates. You can find a list of these classes, together
with their principal balances, pass-through rates and certain other
characteristics, on page S-4 of this prospectus supplement. The certificates
will not be listed on any securities exchange.
Underwriting
[Name of Underwriter] will offer to the public the Class A-1 Certificates and
99.99% of the Class R Certificates at varying prices to be determined at the
time of sale. [Name of Underwriter]'s commission will be the difference between
the price it pays to the depositor for such underwritten certificates and the
amount it receives from the sale of such underwritten certificates to the
public. The proceeds to the depositor from the sale of such underwritten
certificates to [Name of Underwriter] will be approximately [ ____ ]% of the
principal balance of such underwritten certificates plus accrued interest,
before deducting expenses.
See "Method of Distribution" in this prospectus supplement.
The depositor may offer the Class A-V Certificates to the public from time to
time, directly or through an underwriter or agent, in negotiated transactions or
otherwise at varying prices which will be determined at the time of sale. The
proceeds to the depositor from any sale of the Class A-V Certificates will equal
the difference between the price paid to the depositor for such certificates and
the sum of the depositor's related expenses and the compensation paid to any
underwriter or agent.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the offered certificates or determined
that this prospectus supplement or the prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
The Attorney General of the State of New York has not passed on or endorsed the
merits of this offering. Any representation to the contrary is unlawful.
S-2
<PAGE>
Important notice about information presented in this prospectus supplement and
the accompanying prospectus We provide information to you about the offered
certificates in two separate documents that provide progressively more detail:
the accompanying prospectus, which provides general information, some of
which may not apply to your series of certificates; and
this prospectus supplement, which describes the specific terms of your
series of certificates.
If the description of your certificates in this prospectus
supplement differs from the related description in the accompanying prospectus,
you should rely on the information in this prospectus supplement.
You can find a listing of the pages where capitalized terms used
both in the prospectus and this prospectus supplement are defined under the
caption "Index" beginning on page [___] in the accompanying prospectus.
The depositor's principal offices are located at 8400 Normandale
Lake Boulevard, Suite 600, Minneapolis, Minnesota 55437 and its telephone number
is (612) 832-7000.
Table of Contents
Page
Summary......................................................................3
Risk Factors.................................................................8
Introduction................................................................11
Description of the Offered Certificates.....................................11
General.................................................................11
Available Distribution Amount...........................................11
Interest Distributions..................................................13
Principal Distributions.................................................13
Description of the Underlying Agency Securities.............................13
Year 2000 Considerations....................................................16
Overview of the Year 2000 Issue.........................................16
[Overview of [Residential Funding]'s Y2K Project........................16
Y2K Project Status......................................................17
Risks related to Y2K....................................................19
Certain Yield and Prepayment Considerations.................................20
General.................................................................20
Structuring Assumptions.................................................22
Variable Strip Certificate Yield Considerations.........................26
Additional Yield Considerations Applicable Solely to the Residual
Certificates ..........................................................27
Trust Agreement.............................................................28
General.................................................................28
[The Certificate Administrator].........................................29
Compensation of Certificate Administrator...............................28
Actions in Respect of the Underlying Agency Securities..................29
Voting Rights...........................................................29
[Termination]...........................................................29
Certain Federal Income Tax Consequences.....................................30
Method of Distribution......................................................30
Legal Opinions..............................................................30
Ratings.....................................................................30
Legal Investment Matters....................................................31
ERISA Considerations........................................................33
<PAGE>
SUMMARY
The following summary is a very general overview of the certificates offered
hereby and does not contain all of the information that you should consider in
making your investment decision. To understand the terms of the offered
certificates, you should read carefully this entire document and the
accompanying prospectus.
Titleof securities................ Mortgage Pass-Through Certificates,
Series [____-QS__].
Depositor ......................... Residential Accredit Loans, Inc., an
affiliate of Residential Funding Corporation.
Certificate administrator............. [Residential Funding] [ ] in its
capacity as certificate administrator. See "Trust Agreement--The
Certificate Administrator" herein [and "Residential Funding
Corporation" in the Prospectus.] -------
Trustee............................ [Name of trustee].
Reference date........................ [ ______ 1, ____ ].
Closing date.......................... On or about [ ______ __, ____ ].
Distribution dates....................The third business day following each
distribution date for the underlying agency securities commencing on [
, 199 ]. 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). -------------------- ---- --
The trust.............................The trust, 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, dated as of the reference date, among the depositor,
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 which 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.
Scheduled final distribution date..... [ ______ 25, 20__ ]. The actual final
distribution date could be substantially earlier.
Form of certificates..................Book-entry: Class A-1 Certificates.
Physical: Class A-V and Class R Certificates.
Minimum denominations.................Class A-1 Certificates: $25,000.
Class A-V and Class R Certificates: 20% percentage interest.
Legalinvestment......................When issued, the Class A-1 and Class R
Certificates will be "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984.
See "Legal Investment" in this prospectus supplement and the prospectus.
S-2
<PAGE>
<TABLE>
Offered Certificates
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------
Class Initial Principal Pass-Through Initial Rating Designation
Balance Rate [_____] (1)
- - -----------------------------------------------------------------------------------------------------------------
Class A Certificates:
<S> <C> <C> <C> <C> <C>
A-1 $[ _________ ] [ ____ ]% AAA/AAA Senior/[Fixed Rate][Adjustable Rate]
A-V $ 0(2) (3) ) AAA/AAAr ) Senior/Interest Only/Variable Rate
Total Class A Certificates$[ _________ ]
Class R Certificates:
R $ 100 [ ____ ]% AAA/AAA Senior/Residual/Fixed Rate
Total offered certificates$[ _________ ]
</TABLE>
(1) See "Ratings" in this prospectus supplement.
(2) The initial notional amount of the Class A-V Certificates will be
approximately $[ _________ ].
(3) Varies according to the weighted average of the excess of the net mortgage
rate on each item of mortgage collateral over [ ____ ]%.
S-3
<PAGE>
The Trust
The depositor will establish a trust with respect to the Series [____-QS__]
Certificates, pursuant to a trust agreement dated as of [ ______ 1, ____ ] among
the depositor, the certificate administrator and the trustee. On the closing
date, the depositor will deposit the pool of mortgage collateral described below
into the trust.
Each Series [____-QS__] Certificate will represent a partial ownership interest
in the trust. Distributions of interest and/or principal on the certificates
will be made only from payments received in connection with the mortgage loans
described below.
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 depositor or other
financial concern approved by Ginnie Mae], and backed by a pool of FHA-insured
or VA-guaranteed mortgage loans secured by one- to four-family residential
properties. The mortgage loans may be level payment or graduated payment first
lien mortgage loans with terms to maturity of not more than 30 years.
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 additional information regarding the underlying agency securities, see
"Description of the Underlying Agency Securities" in this prospectus supplement.
Distributions on the Offered Certificates
Distributions to certificateholders will be made from available amounts as
follows:
Step 1
Distribution of interest to the Class A-1, Class A-V and Class R Certificates
Step 2 Distribution of principal to the Class A-1 Certificates and Class R
Certificates(1)
Step 3
Distribution of any remaining funds to the Class R Certificates(2)
Not all outstanding classes of Class A Certificates will receive principal
distributions on each distribution date. It is very unlikely that any
distributions will be made to the Class R Certificates under Step 3.
The amount of interest owed to each class of certificates on each distribution
date will generally equal:
o the pass-through rate set forth above for that class of certificates
multiplied by
o the principal balance (or notional amount) of that class of
certificates as of the day immediately prior to the related
distribution date multiplied by
o 1/12th minus
o the pro rata share of certain interest shortfalls allocated to that
class.
See "Description of the Certificates--Interest Distributions" in this prospectus
supplement.
Principal distributions on the certificates entitled to principal distributions
will be allocated among the various classes of offered certificates as described
under "Description of the Certificates--Principal Distributions on the Senior
Certificates" in this prospectus supplement. Not all outstanding Class A
Certificates or Class R Certificates will receive principal on each distribution
date. The Class A-V Certificates are not entitled to receive any principal
distributions.
See "Description of the Certificates--Principal Distributions on the Senior
Certificates" in this prospectus supplement.
Optional Termination
On any distribution date on which the aggregate outstanding principal balance of
the mortgage collateral is less than [__]% of its aggregate principal balance as
of the cut-off date, the certificate administrator or the depositor may, but
will not be required to:
o purchase from the trust all remaining mortgage collateral and thereby
cause an early retirement of the certificates; or
o purchase all the certificates.
An optional purchase of the outstanding certificates will cause the outstanding
principal balance of the certificates to be paid in full with accrued interest.
However, there will be no reimbursement of principal reductions or related
interest that resulted from losses allocated to the certificates. An optional
purchase of the remaining mortgage loans may cause the holders of one or more
classes of certificates to receive less than their outstanding principal balance
plus accrued interest.
See "Trust Agreement--Termination" in this prospectus supplement and "Trust
Agreement--Termination" in the prospectus.
Ratings
When issued, the offered certificates will receive ratings which are not lower
than those set forth in the table on page S-4 of this prospectus supplement. The
ratings on the offered certificates address the likelihood that the holders of
the offered certificates will receive all distributions on the underlying
mortgage loans to which they are entitled. A security rating is not a
recommendation to buy, sell or hold a security and is subject to change or
withdrawal at any time by the assigning rating agency. The ratings also do not
address the rate of principal prepayments on the mortgage loans. For example,
the rate of prepayments, if different than originally anticipated, could
adversely affect the yield realized by holders of the offered certificates or
cause holders of the Class A-V Certificates to fail to recover fully their
initial investments.
See "Ratings" in this prospectus supplement.
Legal Investment
When issued, the Class A and Class R Certificates will be "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984. You should consult your legal advisors in determining whether and to what
extent the offered certificates constitute legal investments for you.
See "Legal Investment" in this prospectus supplement for important information
concerning possible restrictions on ownership of the offered certificates by
regulated institutions.
ERISA Considerations
The Class A Certificates may be eligible for purchase by persons investing
assets of employee benefit plans or individual retirement accounts, subject to
important considerations. Sales of the Class R Certificates to most such plans
or retirement accounts are prohibited, except as may be permitted under an
exemption available to insurance companies using general accounts.
See "ERISA Considerations" in this prospectus supplement and in the prospectus.
Tax Status
For federal income tax purposes, the depositor will elect to treat the trust as
a real estate mortgage investment conduit. The certificates, other than the
Class R Certificates, will represent ownership of regular interests in the
trust. Such certificates will generally be treated as representing ownership of
debt for federal income tax purposes. Certificateholders will be required to
include in income all interest and original issue discount, if any, on such
certificates in accordance with the accrual method of accounting regardless of
the certificateholders' usual methods of accounting. For federal income tax
purposes, the Class R Certificates will be the residual interest in the trust.
For further information regarding the federal income tax consequences of
investing in the offered certificates, including important information regarding
the tax treatment of the Class R Certificates, see "Certain Federal Income Tax
Consequences" in this prospectus supplement and in the prospectus.
RISK FACTORS
The offered certificates are not suitable investments for all investors.
In particular, you should not purchase any class of offered certificates unless
you understand the prepayment, credit, liquidity and market risks associated
with that class.
The offered certificates are complex securities. You should possess,
either alone or together with an investment advisor, the expertise necessary to
evaluate the information contained in this prospectus supplement and the
accompanying prospectus in the context of your financial situation and tolerance
for risk.
You should carefully consider, among other things, the following factors
in connection with the purchase of the offered certificates:
Liquidity Risks
An investor may have to hold its offered certificates to their maturity because
of difficulty in reselling the offered certificates.
A secondary market for the offered certificatest may not develop,it may not
continue or it may be illiquid. Neither the underwriter nor any other
person will have any obligation to make a secondary market in the
certificates. The certificates will not be listed on any securities
exchange. Illiquidity means an investor may not be able to find a buyer to
buy its securities readily or at prices that will enable the investor to
realize a desir can have a severe adverse effect on the market value of the
offered certificates. Any class of offered certificates may experience
illiquidity, although generally illiquidity is more likely for classes that
are especially sensitive to prepayment, credit or interest rate risk, or
that have been structured to meet the investment requirements of limited
categories of investors.
Special Yield and Prepayment Considerations
An investor's yield to maturity will depend on various factors.
The yield to maturity on each class of offered certificates will depend on
a variety of factors, including:
o the rate and timing of principal payments on the mortgage
collateral (including prepayments, liquidations, and
repurchases due to breaches of representations or
warranties);
o the pass-through rate for that class;
o interest shortfalls due to mortgagor prepayments; and
o the purchase price of that class.
In general, if a class of certificates is purchased at a price higher than
its outstanding principal balance and principal distributions on such class
occur faster than assumed at the time of purchase, the yield will be lower
than anticipated. Conversely, if a class of certificates is purchased at a
price lower than its outstanding principal balance and principal
distributions on that class occur more slowly than assumed at the time of
purchase, the yield will be lower than anticipated.
The rate of prepayments on the mortgaeg collateral will be affected by various
factors.
Since mortgagors can generally prepay their mortgage loans at any time, the
rate and timing of principal distributions on the offered certificates are
highly uncertain. Generally, when market interest rates increase, borrowers
are less likely to prepay their mortgage loans. Such reduced prepayments
could result in a slower return of principal to holders of the offered
certificates at a time when they may be able to reinvest such funds at a
higher rate of interest than the pass-thro class of certificates.
Conversely, when market interest rates decrease, borrowers are generally
more likely to prepay their mortgage loans. Such increased prepayments
could result in a faster return of principal to holders of the offered
certificates at a time when they may not be able to reinvest such funds at
an interest rate as high as the pass-through rate on their class of
certificates.
Refinancing programs, which may involve soliciting all or some of the
mortgagors to refinance their mortgage loans, may increase the rate of
prepayments on the mortgage collateral. These refinancing programs may be
offered by any servicer or subservicer, and may include streamlined
documentation programs as well as programs under which a mortgage loan is
modified to reduce the interest rate.
See "Maturity and Prepayment Considerations" in the prospectus.
Each class of offered certificates has different prepayment and yield
considerations.
The offered certificates have different yield considerations and different
sensitivities to the rate and timing of principal distributions. The
following is a general discussion of certain yield considerations and
prepayment sensitivities of certain classes.
See "Certain Yield and Prepayment Considerations" in this prospectus
supplement.
Class A-V Certificates
The Class A-V Certificates will receive a portion of the interest payments
only from mortgage collateral that has a net mortgage rate higher than
[___]%. Therefore, the yield on the Class A-V Certificates will be
extremely sensitive to the rate and timing of principal prepayments on
mortgage collateral that has a net mortgage rate higher than [ ____ ]%.
Investors in the Class A-V Certificates should be aware that mortgage
collateral with a higher mortgage rate is more likely to be prepaid than
mortgage collateral with a lower mortgage rate. If prepayments on the
mortgage collateral that has a net mortgage rate higher than [ ____ ]%
occur at a rate faster than an investor assumed at the time of purchase,
the investor's yield will be lower than anticipated. Investors in the Class
A-V Certificates should fully consider the risk tha prepayments on the
mortgage collateral that has a net mortgage rate higher than [ ____ ]%
could result in their failure to recover fully their investments.
[Other appropriate risk factors regarding mortgage collateral to be
inserted as necessary.]
S-4
<PAGE>
INTRODUCTION
Residential Accredit Loans, Inc. (the "Depositor") will establish a
trust (the "Trust") with respect to Series [____-QS__] on or about [ ______ __,
____ ] (the "Closing Date"), pursuant to a trust agreement (the "Trust
Agreement") among the Depositor, [Name of Certificate Administrator] (the
"Certificate Administrator") and [Name of Trustee], a [________] (the
"Trustee"), dated as of [ ______ __, ____ ] (the "Cut-off Date"). On the Closing
Date, the Depositor will deposit into the Trust a pool 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").
S-5
<PAGE>
DESCRIPTION OF THE OFFERED CERTIFICATES
General
The Series [199 -QS ] Mortgage Pass-Through Certificates will include the
following three classes (the "Offered Certificates"): (i) Class A-1
Certificates, (ii) the Class A-V Certificates (the "Variable 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. The Trust will consist of: (i) the
Underlying Agency Securities, including all distributions thereon payable after
the Closing 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.
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 (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, in the
case of the Class A-1 Certificates and Residual Certificates, to the extent of
the Available Distribution Amount for such Distribution Date. 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 Variable 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 Variable 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 Variable 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 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 Pass-Through Rates on all classes of Offered Certificates (other
than the Variable Strip Certificates) are fixed and are set forth in the table
on page S-4 hereof. The Pass-Through Rate on the Variable Strip 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 item of Mortgage Collateral. The "Pool Strip Rate" on
any item of Mortgage Collateral is equal to the Net Mortgage Rate thereon minus
[_____]% (but not less than 0.00%) per annum. The "Net Mortgage Rate" on each
item of Mortgage Collateral is equal to the Mortgage Rate thereon minus the rate
per annum at which the related master servicing and subservicing fees accrue
(the "Servicing Fee Rate"). As of the Cut-off Date, the Pool Strip Rates on the
Mortgage Collateral ranged between [_____]% and [_____]% per annum. The initial
Pass-Through Rate on the Variable Strip Certificates is [_____]% per annum.
As described herein, the Accrued Certificate Interest allocable to each
class of Certificates entitled to distributions in respect of interest is based
on the Certificate Principal Balance thereof or, in the case of the Variable
Strip Certificates, on the Notional Amount thereof. 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.
As of any date of determination, the "Notional Amount" for the Variable
Strip Certificates will be equal to the aggregate Stated Principal Balance of
the Mortgage Collateral as of such date. At the option of the initial holder of
the Variable Strip Certificates, the Variable Strip Certificates can be
exchanged by such holder for one or more Variable Strip Certificates that
represent in the aggregate the Pool Strip Rates on each item of Mortgage
Collateral as of such date, and the Pass-Through Rate and Notional Amount of
each Variable Strip Certificate so exchanged will be based on the Pool Strip
Rates and Stated Principal Balances of the Mortgage Collateral corresponding to
such Variable Strip Certificate. Reference to the Notional Amount with respect
to any Variable Strip Certificate is solely for convenience in certain
calculations and does not represent the right to receive any distributions
allocable to principal.
Principal Distributions
Holders of the Offered Certificates (other than the Variable 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, Variable Strip Certificates and Residual Certificates 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:
first, to the holders of the Residual Certificates, until the Certificate
Principal Balance thereof is reduced to zero; and
second, to the holders of the Class A-1 Certificates, until the
Certificate Principal Balance thereof is reduced to zero.
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 -QS
] 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 -QS ] 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.
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.
YEAR 2000 CONSIDERATIONS
Overview of the Year 2000 Issue
The Year 2000 ("Y2K") issue is the term generally used to describe the
potential failure of information technology components on or after January 1,
2000 because existing computer programs, applications and microprocessors
frequently use only two digits to identify a year. Since the Year 2000 is also a
leap year, there could be additional business disruptions as a result of the
inability of many computer systems to recognize February 29, 2000.
The failure to correct or replace computer programs, applications and
microprocessors with Y2K-ready alternatives may adversely impact the operations
of [Name of Certificate Administrator] on or after January 1, 2000. The
responsibilities of [Name of Certificate Administrator] as the Certificate
Administrator include calculating the Available Distribution Amount for each
Distribution Date, remitting such amount to the Trustee prior to each
Distribution Date, calculating the amount of principal and interest payments to
be made to the Certificateholders on each Distribution Date, and preparing the
monthly statement to be sent to Certificateholders on each Distribution Date.
[Overview of [Residential Funding]'s Y2K Project
In January 1997, [Residential Funding] commenced activities to determine
the impact of Y2K on its critical computer systems. In April 1998, [Residential
Funding] established a formal Y2K project team (the "Y2K Project Team") to
address Y2K issues. The Y2K Project Team remains in place and continues to work
on solving problems related to the Year 2000. In addition, the Y2K Project Team
coordinates its efforts with the Y2K programs established by General Motors
Acceptance Corporation and General Motors Corporation.
Members of the Y2K Project Team, together with relevant personnel from
[Residential Funding]'s business units have developed and implemented a
six-phase management strategy (as discussed below), which is being applied to
information technology and non-information technology components ("Components")
throughout the organization. [Residential Funding]'s Components primarily
consist of the following:
hardware, including mainframe computers, desktop computers and network
devices; facilities equipment, including elevators, telephone systems,
heating systems and security systems;
software applications, including vendor purchased applications, in-house
developed applications and end-user developed applications; business
partner communication links, which primarily provide data transmissions
to and from business partners; and business partners data systems, which
primarily process data for [Residential Funding]. The six phases by
which the Y2K Project Team will seek to achieve Y2K readiness throughout
[Residential Funding] are as follows:
Phase Objective
Phase I--Awareness
To promote Y2K awareness throughout [Residential Funding]. Emphasis has
been placed on ensuring that Components recently purchased (or to be
purchased) by business units are Y2K-ready prior to the implementation of
such Components.
Phase II--Inventory
To (i) create an inventory of all Components and (ii) assess the Y2K risks
associated with such Components.
Phase III--Assessment
To (i) determine which Components are not Y2K-ready and (ii) decide whether
such Components should be replaced, retired or repaired.
Phase IV--Renovation
To execute Component replacement, retirement or repair to ensure Y2K
readiness.
Phase V--Validation
To test Components that have been repaired to ensure Y2K readiness and
validate "mission critical" Components that were assessed as Y2K-ready in
Phase III.
Phase VI--Implementation
To deploy repaired and validated Components.
In order to execute the six-phase plan, a combination of internal
resources and external contractors have been, and will be, employed by the Y2K
Project Team.
Y2K Project Status
As of [ ______ __, ____ ], the Y2K Project Team had substantially completed
the six phases for internal "mission critical" Components. However, several
software applications used by [Residential Funding] in its role as Certificate
Administrator are still in the final three phases of the six-phase management
plan described above. [Residential Funding] expects that all phases with respect
to such applications will be substantially completed by [ ______ __, ____ ].
The Y2K Project Team anticipates that its efforts with respect to all
internal Components will be substantially complete by [ ______ __, ____ ]. This
includes substantial completion of (i) renovation and validation of any
non-mission critical Components that the Y2K Project Team and related business
units determine to be necessary, (ii) validation of any remaining "mission
critical" Components that are either completing in-house remediation or waiting
for a vendor upgrade, and (iii) Y2K business continuity planning activities
discussed below.
The potential impact on [Residential Funding] of problems related to
Y2K, however, will not depend solely on the corrective measures undertaken by
the Y2K Project Team. The manner in which Y2K issues are addressed by business
partners, governmental agencies and other entities that provide data to, or
receive data from, [Residential Funding], or whose financial condition or
operational capability is important to [Residential Funding] and its ability to
act as Certificate Administrator, will have a significant impact upon
[Residential Funding]. These entities include, among others, the Trustee, the
Custodian and certain depositary institutions, as well as their respective
suppliers and vendors. Accordingly, [Residential Funding] is communicating with
certain of these parties to assess their Y2K readiness and evaluate any
potential impact on [Residential Funding].
Due to the various dates by which [Residential Funding]'s business
partners anticipate being Y2K-ready, it is expected that the Y2K Project Team
will continue to spend significant time assessing Y2K business partner issues
throughout 1999. Any business partner, including the Trustee and the Custodian,
that (i) has not provided [Residential Funding] appropriate documentation
supporting its Y2K efforts, (ii) has not responded in a timely manner to
[Residential Funding]'s inquiries regarding their Y2K efforts or (iii) does not
expect to be Y2K-ready until after [ ______ __, ____ ], has been, and will be,
placed in an "at risk" category. [Residential Funding] will carefully monitor
the efforts and progress of its "at risk" business partners, and if additional
steps are necessary [Residential Funding] will reassess the risk and act
accordingly.
During [ ____ ], [Residential Funding] also commenced a formal business
continuity plan that is designed to address potential Y2K problems and other
possible disruptions. [Residential Funding]'s business continuity plan has the
following four phases:
Phase Objective
Phase I--Business Impact Assessment
To assess the impact upon [Residential Funding] business units if "mission
critical" Components were suddenly not available or significantly impaired
as a result of a natural disaster or other type of disruption (including as
a result of Y2K).
Phase II--Strategic Development
To develop broad, strategic plans regarding the manner in which
[Residential Funding] will operate in the aftermath of a natural disaster
or other type of disruption (including as a result of Y2K).
Phase III--Business Continuity Planning
To develop detailed procedures on how [Residential Funding] and individual
business units will continue to operate in the aftermath of a natural
disaster or other type of disruption (including as a result of Y2K).
Phase IV--Validation
To test the plans developed in Phases II and III above.
As of December 15, 1998, [Residential Funding] had substantially
completed Phases I and II of its business continuity plan. [Residential Funding]
anticipates that Phase III will be substantially complete by [ ______ __, ____ ]
and Phase IV will be substantially complete by [ ______ __, ____ ]. ]
Risks related to Y2K
Although [Name of Certificate Administrator]'s remediation efforts are
directed at eliminating its Y2K exposure, there can be no assurance that these
efforts will fully mitigate the effect of all Y2K problems. If [Name of
Certificate Administrator] fails to identify or correct any material Y2K
problem, there could be significant disruptions in its normal business
operations. Such disruptions could have a material adverse effect on [Name of
Certificate Administrator]'s ability to (i) distribute collections on the Agency
Securities to the Trustee and (ii) provide reports to Certificateholders as set
forth herein. Furthermore, if the Trustee or any other business partner or any
of their respective vendors are not Y2K-ready, the ability to make distributions
to Certificateholders (in the case of the Trustee or any of its vendors or third
party service providers), may be materially and adversely affected.
This section entitled "Year 2000 Considerations" contains
"forward-looking statements" within the meaning of Section 27A of the Securities
Act. Generally, all statements in this section that are not statements of
historical fact are forward-looking statements. Forward-looking statements made
in this Y2K discussion are subject to certain risks and uncertainties. Important
factors that could cause results to differ materially from such forward-looking
statements include, among other things, the ability of [Name of Certificate
Administrator] to successfully identify Components that may pose Y2K problems,
the nature and amount of programming required to fix the affected Components,
the costs of labor and consultants related to such efforts, the continued
availability of resources (both personnel and technology) and the ability of
business partners that interface with [Name of Certificate Administrator] to
successfully address their Y2K issues.
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 higher or lower than anticipated rate of principal
payments on the Mortgage Loans in the Trust. 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 Variable 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 Variable 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 Collateral 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 "Maturit 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 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 ("PSA"), 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% PSA 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% PSA assumes a constant prepayment rate of 6% per annum
each month. As used in the table below, "0% PSA" assumes prepayment rates equal
to 0% of PSA (i.e., no prepayments). Correspondingly, " [ ]% PSA" assumes
prepayment rates equal to [ ]% of PSA, and so forth. PSA 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 [ ]% PSA. The original prepayment assumption for each series of
the Underlying Security is indicated in the corresponding Term Sheet.
Structuring Assumptions
The table set forth below entitled "Percent of Initial Certificate
Principal Balance Outstanding at the Following Percentage of PSA" has been
prepared on the basis of certain assumptions as described below (the
"Structuring Assumptions") regarding the weighted average characteristics of the
Mortgage Loans that are included in the Mortgage Pools and the performance
thereof. Structuring 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:
<TABLE>
<CAPTION>
Series Aggregate Outstanding Weighted Average Weighted Average Weighted Average Weighted Average Pass-Through
Principal Balance of Mortgage Rate Servicing Fee Original Term to Term to Scheduled Rate on the
the Mortgage Loans Maturity (1) Maturity(1) Underlying
Agency
Securities
<S> <C> <C> <C> <C> <C> <C>
$ % % - - -
Aggregate $
</TABLE>
(1) In months.
In addition, the Structuring 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 Depositor will exercise any option to purchase the
Underlying Agency Securities and thereby cause a termination of the Trust; (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 PSA 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 expenses payable out of the Trust; and (x) the
Offered Certificates will be purchased on [ , 19 ].
The actual characteristics and performance of the Mortgage Loans differ
from the Structuring 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 PSA until maturity or that all of the Mortgage Loans will
prepay at the same level of PSA. 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
PSA specified, even if the weighted average remaining term to maturity of the
Mortgage Loans is as assumed. Any difference between the Structuring 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 Structuring Assumptions, the
following table indicates the weighted average life of the Class A-1
Certificates, and sets forth the percentages of the initial Certificate
Principal Balance of each such Class A-1 Certificate that would be outstanding
after each of the dates shown at various percentages of PSA.
S-6
<PAGE>
Percent of Initial Certificate Principal Balance
Outstanding at the Following Percentages of PSA
Class A-1
Distribution Date 0% % % % %
- - -----------------
Initial Percentage
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 Structuring 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.
<PAGE>
Variable Strip Certificate Yield Considerations
The yield to maturity on each class of the Variable 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 Variable Strip Certificates to various constant rates of
prepayment by projecting the monthly aggregate payments of interest on the
Variable Strip Certificates and computing the corresponding pre-tax yields to
maturity on a corporate bond equivalent basis, based on the Structuring
Assumptions including the assumptions regarding the characteristics and
performance of the Mortgage Loans 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 Variable
Strip Certificates are as set forth herein. Any differences between the
Structuring 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 Variable Strip
Certificates at the Following
Percentages of PSA
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 Variable 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 Variable
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 Variable
Strip Certificates, and thus do not reflect the return on any investment in the
Variable 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 Variable 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
PSA 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 Variable 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 PSA 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 Variable Strip Certificates should fully consider
the risk that a rapid rate of prepayments on the Mortgage Collateral could
result in the failure of such investors to fully recover their investments.
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'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 Depositor, 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
Depositor 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 Corporation ("Residential Funding"), an indirect
wholly-owned subsidiary of GMAC Mortgage and an affiliate of the Depositor], [ ]
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 Closing Date, the Depositor 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, 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.
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 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 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 Certificates in
proportion to their then-outstanding Certificate Principal Balances and [ ]% of
all voting rights will be allocated among holders of the Residual Certificates,
in proportion to the Percentage Interests (as defined in the Prospectus)
evidenced by their respective Certificates. 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 Depositor may, at its option,
repurchase from the Trust all of the Underlying Agency Securities remaining in
such Trust 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 LLP] [Thacher Proffitt & Wood] [Stroock & Stroock & Lavan LLP],
counsel to the Depositor, will deliver its opinion generally to the effect that,
assuming compliance with all provisions of the Trust Agreement, the Trust will
qualify as a "real estate mortgage investment conduit" ("REMIC") under Sections
860A through 860G of the Internal Revenue Code of 1986, as amended (the "Code").
For federal income tax purposes, the Residual Certificates will be the
sole class of "residual interests" in the Trust and the Offered Certificates
(other than the Residual Certificates) will represent ownership of "regular
interests" in the Trust and will be generally treated as debt instruments of the
Trust. See "Certain Federal Income Tax Consequences" in the Prospectus.
[ADDITIONAL TAX CONSIDERATIONS 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" 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 Depositor 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
Depositor'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 Depositor from the sale of the Offered Certificates, before deducting
expenses payable by the Depositor, will be approximately [ ]% of the aggregate
Certificate Principal Balance of the Offered Certificates plus 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 Depositor in the form of underwriting compensation. The
Underwriter and any dealers that participate with the Underwriter in the
distribution of the Offered Certificates may be deemed to be underwriters and
any profit on the resale of the Offered Certificates positioned by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933, as amended.
The Underwriting Agreement provides that the Depositor will indemnify
the Underwriter, and under limited circumstances the Underwriter will indemnify
the Depositor, 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 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 Depositor 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 Depositor by Orrick, Herrington & Sutcliffe LLP] [Thacher
Proffitt & Wood] [Stroock & Stroock & Lavan LLP], New York, New York and for the
Underwriter by [ ], [ ].
RATINGS
It is a condition to the issuance of the Offered Certificates that the
Class A-1 and Class R Certificates be rated "[ ]" by [ ] and "[ ]" by [ ]. It is
a condition to the issuance of the Offered Certificates that the Variable Strip
Certificates be rated "AAAr" and "[ ]" by [ ] and [ ], respectively.
[[ ] 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-credi 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 ass-through certificates do not represent any assessment of the
likelihood or rate of principal prepayments.]
The Depositor has not requested a rating on the Offered Certificates by any
rating agency other than [ ] and [ ]. However, there can be no assurance as to
whether any other rating agency will rate the Offered Certificates, or, if it
does, what rating would be assigned by any 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.
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 Depositor makes no representations as to the proper characterization of
any class of the Offered Certificates for legal investment or other purposes, or
as to the ability of particular investors to purchase any class of the Offered
Certificates under applicable legal investment restrictions. These uncertainties
may adversely affect the liquidity of any class of Offered Certificates.
Accordingly, all institutions whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult with their 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.
[ERISA CONSIDERATIONS]
[Any Plan, any insurance company (whether through its general or
separate accounts) or any other person investing "Plan Assets" of any Plan, as
defined under "ERISA Considerations--Plan Asset Regulations" in the Prospectus,
should carefully review with its legal advisors whether the purchase or holding
of Offered Certificates could give rise to a transaction prohibited or not
otherwise permissible under ERISA or Section 4975 of the Code. The purchase or
holding of the Offered Certificates (other than the Residual Certificates) by or
on behalf of, or with "Plan Assets" of, a Plan may qualify for exemptive relief
under the Exemption, as described under "ERISA Considerations--Prohibited
Transaction Exemptions" in the Prospectus. However, the Exemption contains a
number of conditions which must be met for the Exemption to apply, including the
requirement that any such Plan must be an "accredited investor" as defined in
Rule 501(a)(1) of Regulation D of the Securities and Exchange Commission under
the Securities Act of 1933, as amended.]
[Insurance companies contemplating the investment of general account
assets in the Offered Certificates should consult with their legal advisors with
respect to the applicability of Section 401(c) of ERISA, as described under
"ERISA Considerations--Insurance Company General Accounts" in the Prospectus.
The DOL issued proposed regulations under Section 401(c) on December 22, 1997,
but the required final regulations have not been issued as of the date hereof.]
[Because the exemptive relief afforded by the Exemption (or any similar
exemption that might be available) also will not likely apply to the purchase,
sale or holding of the Residual Certificates, transfers of such Certificates to
any Plan Investor will not be registered by the Trustee unless the transferee
provides the Depositor, the Trustee and the Certificate Administrator with an
opinion of counsel satisfactory to the Depositor, the Trustee and the
Certificate Administrator, which opinion will not be at the expense of the
Depositor, the Trustee or the Certificate Administrator, that the purchase of
such Certificates by or on behalf of such Plan Investor is permissible under
applicable law, will not constitute or result in a non-exempt prohibited
transaction under ERISA or Section 4975 of the Code and will not subject the
Depositor, the Trustee or the Certificate Administrator to any obligation in
addition to those undertaken in the Trust Agreement.]
[Any fiduciary or other investor of Plan Assets that proposes to acquire or
hold the Offered Certificates on behalf of or with Plan Assets of any Plan
should consult with its counsel with respect to: (i) whether the specific and
general conditions and the other requirements in the Exemption would be
satisfied, or whether any other prohibited transaction exemption would apply,
and (ii) the potential applicability of the general fiduciary responsibility
provisions of ERISA and the prohibited transaction provisions of ERISA and
Section 4975 of the Code to the proposed investment. See "ERISA Considerations"
in the Prospectus.]
[The sale of any of the Offered Certificates to a Plan is in no respect
a representation by the Depositor or the Underwriter that such an investment
meets all relevant legal requirements with respect to investments by Plans
generally or any particular Plan, or that such an investment is appropriate for
Plans generally or any particular Plan.]
<PAGE>
Residential Accredit Loans, Inc.
$[--------]
Mortgage Pass-Through Certificates
Series [____-QS__]
Prospectus Supplement
Underwriter[s]
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the certificates in any state where the offer is not
permitted.
We represent the accuracy of the information in this prospectus
supplement and the accompanying prospectus only as of the dates on their
respective covers.
Dealers will be required to deliver a prospectus supplement and
prospectus when acting as underwriters of the certificates offered hereby and
with respect to their unsold allotments or subscriptions. In addition, all
dealers selling the offered certificates, whether or not participating in this
offering, may be required to deliver a prospectus supplement and prospectus
until [_____ __, ____].
<PAGE>
The information in this prospectus is not complete and may be changed. We will
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective . This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Preliminary prospectus subject to completion dated February __, 1999
Prospectus
Mortgage Asset-Backed and Manufactured Housing Contract Pass-Through
Certificates
Residential Accredit Loans, Inc.
Depositor
You should carefully consider the risk factors discussed in the accompanying
prospectus supplement under the heading "Risk Factors." The certificates of any
series offered by this prospectus and the accompanying prospectus supplement
will represent ownership interests only in the trust created for such series and
will not represent ownership interests in or obligations of Residential Accredit
Loans, Inc., Residential Funding Corporation or any of their affiliates.
This prospectus may be used to offer and sell the certificates only if
accompanied by the related prospectus supplement.
The depositor may periodically establish trusts to issue certificates
representing interests in such trusts that consist primarily of certain mortgage
collateral as described in this prospectus and in the prospectus supplement. The
certificates will be issued in series and each series of certificates will
represent interests in a different trust established by the depositor.
Offered Certificates
The certificates in a series will represent interests in a trust and will be
paid only from the assets of that trust. The certificates may consist of
multiple classes of certificates, and, if so, each class may:
receive a specified fixed or variable rate of interest;
have a higher or lower priority relative to other classes in the series
with respect to distributions of principal and/or interest from the trust
and/or allocations of any losses; receive distributions of principal only
or interest only; and have a specified form of credit enhancement.
You can find specific information regarding each class of offered certificates
in the related prospectus supplement.
Mortgage Collateral
Each trust will consist primarily of one or more of the following types of
mortgage collateral grouped into one or more mortgage pools that are described
in detail in the prospectus supplement and include: mortgage loans or other
similar security interests secured by first liens on one- to four-family
residential properties; manufactured housing conditional sale contracts and
installment sale contracts secured by manufactured homes;
whole or partial participations in, or mortgage pass-through
certificates representing interests in, mortgage loans or contracts; and
mortgage securities issued or guaranteed by Ginnie Mae, Fannie Mae or
Freddie Mac as described herein.
Credit Enhancement
If so specified in the related prospectus supplement, credit enhancement for a
series of securities may include any one or any combination of a financial
guaranty insurance policy, mortgage pool insurance policy, letter of credit,
bankruptcy bond, special hazard insurance policy, reserve fund or one or more
classes of subordinate certificates. In addition to or in lieu of the foregoing,
credit enhancement may be provided by means of overcollateralization of the
certificates, to the extent the principal balance of the mortgage loans is
greater than the principal balance of the certificates.
Underwriting
The certificates may be offered to the public through different methods as
described in "Methods of Distribution" in this Prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these certificates or determined that
this prospectus is accurate or complete. Any representation to the contrary is a
criminal offense. ______ __, 1999
<PAGE>
Important notice about information presented in this
prospectus and the related prospectus supplement
We provide information to you about the certificates in two separate documents
that provide progressively more detail:
this prospectus, which provides general information, some of which may not apply
to your series of certificates; and
the accompanying prospectus supplement, which describes the specific terms of
your series of certificates.
If the description of your certificates in this prospectus differs from the
related description in the related prospectus supplement, you should rely on the
information in the related prospectus supplement.
You should rely only on the information provided in this prospectus and the
related prospectus supplement, including the information incorporated by
reference. See "Additional Information", "Reports to Certificateholders" and
"Incorporation of Certain Information by Reference" in this Prospectus. You can
request information incorporated by reference from Residential Accredit Loans,
Inc. by calling us at (612) 832-7000 or writing to us at 8400 Normandale Lake
Boulevard, Suite 600, Minneapolis, Minnesota 55437. We have not authorized
anyone to provide you with different information. We are not offering the
Certificates in any state where the offer is not permitted. We do not claim the
accuracy of the information in this prospectus or the related prospectus
supplement as of any date other than the dates stated on their respective
covers.
You can find a listing of the pages where capitalized terms used in this
prospectus are defined under the caption "Index of Principal Definitions"
beginning on page __.
-----------------------
2
<PAGE>
Table of Contents
Page Page
Introduction....................... .......................................1
The Trusts......................... .......................................1
General......................... .......................................1
The Mortgage Loans.............. .......................................3
The Contracts.................. ........................................13
The Agency Securities.......... ........................................14
Mortgage Collateral Sellers.... ........................................16
Representations with Respect to Mortgage Collateral.....................17
Repurchases of Mortgage Collateral......................................18
Limited Right of Substitution...........................................20
Description of the
Certificates................... ........................................22
General........................ ........................................22
Form of Certificates........... ........................................23
Assignment of Mortgage Loans............................................25
Assignment of Contracts........ ........................................27
Review of Mortgage Loan or Contract Documents...........................27
Assignment of Agency Securities.........................................28
Spread......................... ...................................... .28
Payments on Mortgage Collateral.........................................29
Withdrawals from the Custodial Account..................................32
Distributions.................. ........................................33
Advances....................... ........................................37
Prepayment Interest Shortfalls..........................................38
Reports to Certificateholders...........................................38
Servicing and Administration of Mortgage Collateral.....................40
Realization Upon Defaulted Property.....................................46
Subordination..................... ........................................48
General........................ ........................................48
Overcollateralization.......... ........................................50
Description of Credit Enhancement..........................................50
General........................ ........................................50
Letters of Credit.............. ........................................51
Mortgage Pool Insurance Policies........................................52
Special Hazard Insurance Policies.......................................54
Bankruptcy Bonds............... ........................................55
Reserve Funds.................. ........................................55
Certificate Insurance Policies; Surety Bonds............................56
Maintenance of Credit Enhancement.......................................56
Reduction or Substitution of Credit Enhancement.........................58
Other Financial Obligations Related to the
Certificates................... ........................................58
Swaps and Yield Supplement Agreements...................................58
Purchase Obligations........... ........................................59
Insurance Policies on Mortgage Loans or Contracts.......................59
Primary Mortgage Insurance
Policies.................... ........................................60
Standard Hazard Insurance on Mortgaged Properties.......................61
Standard Hazard Insurance on Manufactured Homes.........................62
FHA Mortgage Insurance......... ........................................63
VA Mortgage Guaranty........... ........................................63
The Depositor..................... ........................................64
Residential Funding Corporation............................................64
The Pooling and Servicing Agreement........................................65
Servicing and Administration............................................65
Events of Default.............. ........................................66
Rights Upon Event of Default............................................66
Amendment...................... ........................................67
Termination; Retirement of Certificates.................................68
The Trustee.................... ........................................69
Yield Considerations.............. ........................................69
Maturity And Prepayment Considerations.....................................75
Certain Legal Aspects of Mortgage Loans and Contracts......................79
The Mortgage Loans............. ........................................80
The Contracts.................. ........................................90
Environmental Legislation...... ........................................93
Soldiers' and Sailors' Civil Relief Act of 1940.........................94
Default Interest and Limitations on Prepayments.........................95
Forfeitures in Drug and RICO Proceedings................................95
Negative Amortization Loans.... ........................................96
Certain Federal Income Tax
Consequences................... ........................................96
General........................ ........................................96
REMICs............................ ........................................97
State and Other Tax Consequences...........................................117
ERISA Considerations............. .........................................118
Plan Asset Regulations........ .........................................118
Prohibited Transaction Exemption........................................119
Insurance Company General
Accounts................... .........................................122
Representation from Investing Plans.....................................123
Tax-Exempt Investors.......... .........................................123
Consultation with Counsel..... .........................................124
Legal Investment Matters......... .........................................124
Use of Proceeds.................. .........................................126
Methods of Distribution.......... .........................................126
Legal Matters.................... .........................................128
Financial Information............ .........................................128
Additional Information........... .........................................128
Reports to Certificate-
Holders....................... .........................................128
Incorporation of Certain Information By
Reference..................... .........................................128
INTRODUCTION
The Mortgage Asset-Backed 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 supplement to the Prospectus (each, a
"Prospectus Supplement"). Each series of Certificates will represent in the
aggregate the entire beneficial ownership interest, excluding any interest
retained by Residential Accredit Loans, Inc. (the "Depositor") or any other
entity specified in the related Prospectus Supplement, in a trust consisting
primarily of a segregated pool of one- to four-family, 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) (collectively with the Mortgage Loans and
Contracts, the "Mortgage Collateral") acquired by the Depositor from one or more
affiliated or unaffiliated institutions. Each series of Certificates will be
issued pursuant to a pooling and servicing agreement (a "Pooling and Servicing
Agreement") or a trust agreement (each, a "Trust Agreement") among the
Depositor, the trustee (the "Trustee") and master servicer, if any (the "Master
Servicer") or certificate administrator (the "Certificate Administrator"), if
any, specified in the related Prospectus Supplement.
THE TRUSTS
General
The Mortgage Collateral and other assets described below and in the
related Prospectus Supplement will be held in trust (each, a "Trust") 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 or a Trust
Agreement as described herein and in the related Prospectus Supplement. A Trust
for a series of Certificates may include Mortgage Collateral that consists of
one or more of the following: (1) 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, including shares of cooperative
housing corporations and proprietary leases for cooperative apartment units
(together with Manufactured Homes, "Mortgaged Properties"); (2) a pool of
Contracts, or whole or partial participations in Contracts (a "Contract Pool")
secured by manufactured homes (each, a "Manufactured Home"); (3) a pool of
mortgage pass through certificates, including Agency Securities, representing
whole or partial interests in pools of Mortgage Loans, Contracts or Agency
Securities (a "Securities Pool"); and (4) certain other related property
conveyed by the Depositor. "Agency Securities" will include any mortgage
pass-through 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"). The Mortgaged Properties may be located in any of the 50
States, the District of Columbia or the Commonwealth of Puerto Rico (the "Puerto
Rico Mortgage Loans"). The Mortgage Collateral will be purchased by the
Depositor directly or indirectly from sellers (the "Mortgage Collateral
Sellers"), which may include (i) affiliates of the Depositor including
Residential Funding Corporation ("Residential Funding") and GMAC Mortgage
Corporation, or (ii) sellers unaffiliated with the Depositor. See "The
Trusts--Mortgage Collateral Sellers."
Each Trust 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, which account will be
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 certain proceeds from the
disposition of any related Additional Collateral or Pledged Assets, or from the
Surety Bond, if any, (iv) hazard insurance policies and Primary Insurance
Policies, if any, and certain proceeds thereof; and (v) 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, required to be
maintained pursuant to the related Pooling and Servicing Agreement or Trust
Agreement. See "Description of Credit Enhancement." To the extent that any Trust
includes certificates of interest or participations in Mortgage Loans, the
related Prospectus Supplement will describe the material terms and conditions of
such certificates or participations.
Each Certificate will evidence the interest specified in the related
Prospectus Supplement in a Trust, containing a Mortgage Pool, Contract Pool,
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 Securities Pool or combination thereof and will
have no interest in the Mortgage Pool, Contract Pool or Securities Pool created
with respect to any other series of Certificates.
The related Prospectus Supplement may identify one or more entities as
servicers (each, a "Servicer") 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 Subservicers. 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. The Certificate Administrator may be
the Master Servicer, or an affiliate of the Master Servicer or the Depositor.
The related Prospectus Supplement will identify an entity that will serve as
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 Trusts. If specific information respecting the Mortgage
Collateral is not known to the Depositor 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 Securities and
Exchange Commission (the "Commission ) within fifteen days after the initial
issuance of such Certificates. A copy of the Pooling and Servicing Agreement or
Trust Agreement, as applicable, with respect to each series will be an exhibit
to the Form 8-K. A schedule of Mortgage Collateral will be an exhibit to the
related Pooling and Servicing Agreement or Trust Agreement.
The Mortgage Loans
Unless otherwise stated in the related Prospectus Supplement, the Mortgage
Loans included in a Trust 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 Depositor for inclusion in
a Mortgage Pool from those purchased by the Depositor 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 Depositor 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 Depositor from a Mortgage Collateral Seller will be selected by
the Depositor. Other mortgage loans available for purchase by the Depositor may
have had characteristics that would have made them eligible for inclusion in a
Mortgage Pool, but were not selected by the Depositor 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 Depositor, 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" ). The Mortgage Loans may include
(i) Mortgage Loans with fixed level payments; (ii) 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"); (iii) Mortgage Loans
subject to temporary buy-down plans ("Buy-Down Mortgage 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; (iv) Mortgage Loans that provide for the reduction of the interest rate
based on the payment performance of the Mortgage Loans; (v) Mortgage Loans that
provide for payment every other week during the term thereof ("Bi-Weekly
Loans"); (vi) Mortgage Loans that experience negative amortization; (vii)
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 (viii) Mortgage Loans with other payment characteristics
as described below or in the related Prospectus Supplement.
The Mortgage Loans may include either (i) Mortgage Loans secured by
mortgages, deeds of trust, deeds to secure debt or other similar security
instruments (collectively, "Mortgages") creating first liens on the related
Mortgaged Properties or (ii) Mortgage Loans ("Cooperative Loans"), each of which
is secured by an assignment by the borrower of a security interest in shares
issued by a private, non-profit, cooperative housing corporation (any such
corporation, a "Cooperative") and the related proprietary lease or occupancy
agreement granting exclusive rights to occupy specific units within the
apartment building owned by a Cooperative ("Cooperative Dwellings").
The borrowers under the Mortgage Loans (the "Mortgagors") may be United
States citizens living in the United States or one of the following types of
borrowers (collectively, "International Borrowers"): (i) United States citizens
employed abroad; (ii) non-permanent resident aliens employed in the United
States; or (iii) 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.
If so specified in the related Prospectus Supplement, a Mortgage Pool will
contain Mortgage Loans (the "Additional Collateral Loans") purchased from
Unaffiliated Sellers (each, an "Additional Collateral Loan Seller"), that have
Loan-to-Value Ratios at origination in excess of 80% but not greater than 100%
and are secured, in addition to the related Mortgaged Property and in lieu of
any primary mortgage insurance, by additional collateral which will consist of
(i) a security interest in financial assets owned by the Mortgagor (which will
consist of securities, insurance policies, annuities, certificates of deposit,
cash, accounts or similar assets) and/or (ii) a third party guarantee (usually
by a relative of the Mortgagor), which in turn is secured by a security interest
in financial assets (as described in above) or residential property owned by the
guarantor. The collateral referred to in clauses (i) and (ii) above is herein
referred to as "Additional Collateral". The amount of Additional Collateral for
any Mortgage Loan generally will not exceed 30% of the principal amount of such
Mortgage Loan (the "Additional Collateral Requirement"), and the requirement to
maintain Additional Collateral will generally terminate when the Loan-to-Value
Ratio of the Mortgage Loan is reduced to a predetermined level (which generally
shall not be more than 75%) as a result of a reduction in the loan amount caused
by principal payments by the Mortgagor or an increase in the appraised value of
the related Mortgaged Property. The Additional Collateral Loan Seller or the
related Subservicer, as applicable, will be required, in accordance with the
Master Servicer's servicing guidelines or its normal servicing procedures,
respectively, to attempt to realize on any such Additional Collateral if the
related Additional Collateral Loan is liquidated upon default. The right to
receive proceeds from the realization of Additional Collateral upon any such
liquidation will be assigned to the related Trustee. No assurance can be given
as to the amount of proceeds, if any, that might be realized by the Additional
Collateral Loan Seller from such Additional Collateral and thereafter remitted
to the Trustee. Unless otherwise specified in the related Prospectus Supplement,
Ambac Assurance Corporation or another insurance company (whose claims-paying
ability is rated in the highest long-term rating category by each Rating Agency
rating the applicable series of Certificates) will have issued a limited purpose
surety bond insuring any deficiency in the amounts realized by the Additional
Collateral Loan Seller from the liquidation of Additional Collateral, up to the
amount of the Additional Collateral Requirement. For additional considerations
concerning the Additional Collateral Loans, see "Certain Legal Aspects of
Mortgage Loans and Contracts--The Mortgage Loans--Anti-Deficiency Legislation
and Other Limitations on Lenders" herein.
If so specified in the related Prospectus Supplement, a Mortgage Pool may
include Mortgage Loans (the "Pledged Asset Mortgage Loans") that have
Loan-to-Value Ratios at origination of up to 100% and are secured, in addition
to the related Mortgaged Property, by funds (the "Pledged Assets") pledged by a
limited liability company. The limited liability company is a special purpose
entity formed for the purpose of holding and pledging to the owner of each
Pledged Asset Mortgage Loan the Pledged Assets, which funds will have been
remitted to the limited liability company at the direction of or for the benefit
of the Mortgagor. The amount of the Pledged Assets (the "Pledged Amount") will
be determined by the Mortgage Collateral Seller in accordance with its
underwriting standards, but generally will not be more than an amount that, if
applied to reduce the original principal balance of the Mortgage Loan, would
reduce such principal balance to less than 70% of the Appraised Value of the
Mortgaged Property. If, following a default by the Mortgagor and the liquidation
of the related Mortgaged Property, there remains a loss on the related Mortgage
Loan, the limited liability company will be required to pay the amount of such
loss, up to the Pledged Amount for such Mortgage Loan. If the Mortgagor becomes
a debtor in a bankruptcy proceeding, there is a significant risk that the
Pledged Assets will not be available to be paid to the Certificateholders. At
the Mortgagor's request, and subject to certain conditions, the Pledged Assets
may be applied as a partial prepayment of the Mortgage Loan. The Pledged Assets
will be released, and will no longer be available to cover a loss on a Mortgage
Loan, if the outstanding principal balance of the Mortgage Loan has been reduced
by the amount of the Pledged Amount.
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 Mortgaged Properties may be owner occupied or non-owner occupied and
may include vacation homes, second homes and investment properties. 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
regarding owner-occupancy may be based solely on such information. 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.
Additional 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 also 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, under the streamlined refinancing
program described herein, an appraisal obtained within 24 months prior to such
refinancing, (iv) the sales price, if the Mortgaged Property was purchased
within the previous twelve months, or (v) with respect to a Contract made in
connection with the Mortgagor's purchase of a Manufactured Home, generally the
sales price of the Manufactured Home or the amount determined by a professional
appraiser. 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
Depositor's underwriting standards, a Mortgage Collateral Seller is generally
permitted to provide secondary financing to a Mortgagor contemporaneously with
the origination of a Mortgage Loan, provided that the combined Loan-to-Value
Ratio is not greater than 100%. Secondary financing is readily available and may
be obtained by a Mortgagor from a lender including the Mortgage Collateral
Seller at any time (including at origination).
The Mortgage Loans may be "equity refinance" Mortgage Loans, as to which a
portion of the proceeds are used to refinance an existing mortgage loan, and the
remaining proceeds may be retained by the Mortgagor or used for purposes
unrelated to the Mortgaged Property. Alternatively, the Mortgage Loans may be
"rate and term refinance" Mortgage Loans, as to which substantially all of the
proceeds (net of related costs incurred by the Mortgagor) are used to refinance
an existing mortgage loan or loans (which may include a junior lien) primarily
in order to change the interest rate or other terms thereof. The Mortgage Loans
may be mortgage loans that have been consolidated and/or have had various terms
changed, mortgage loans that have been converted from adjustable rate mortgage
loans to fixed rate mortgage loans, or construction loans which have been
converted to permanent mortgage loans. In addition, a Mortgaged Property may be
subject to secondary financing at the time of origination of the Mortgage Loan
or thereafter.
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.
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 an 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 "Note Margin"). The initial Mortgage
Rate on an ARM Loan may be lower than the sum of the then-applicable Index and
the Note Margin for such ARM Loan.
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 Depositor will repurchase or Residential Funding, the
applicable Servicer or Subservicer 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 Depositor 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 Mortgage 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 as of the related Cut-off Date. In the event that Mortgage Loans are added
to or deleted from the Trust after the date of the related Prospectus Supplement
and prior to the Closing Date for the related series of Certificates, the final
characteristics of the Mortgage Pool will be noted in the Form 8-K.
Under the Pooling and Servicing Agreement for each series of Certificates,
the Depositor 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 Depositor 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 Depositor 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
Depositor, that were applied by the originators of such Mortgage Loans. The
Depositor 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.
Certain information, including the "Credit Scores" for certain of the
Mortgagors, may be set forth in the related Prospectus Supplement. Credit Scores
are obtained by many mortgage lenders in connection with their assessment of
mortgage loan applications. Credit Scores assist in determining the
credit-worthiness of the borrower. In addition, Credit Scores may be obtained by
Residential Funding after the origination of a Mortgage Loan if the Seller does
not provide to Residential Funding a Credit Score. Credit Scores are obtained
from credit reports provided by various credit reporting organizations, each of
which may employ differing computer models and methodologies. The Credit Score
is designed to assess a borrower's credit history at a single point in time,
using objective information currently on file for the borrower at a particular
credit reporting organization. Information used to create a Credit Score may
include, among other things, payment history, delinquencies on accounts, levels
of outstanding indebtedness, length of credit history, types of credit, and
bankruptcy experience. Credit Scores generally range from 350 to 840, with
higher scores indicating an individual with a more favorable credit history
compared to an individual with a lower score. However, a Credit Score purports
only to be a measurement of the relative degree of risk a borrower represents to
a lender at a single point in time, i.e., a borrower with a higher score is
statistically expected to be less likely to default in payment than a borrower
with a lower score. In addition, it should be noted that Credit Scores were
developed to indicate a level of default probability over a two-year period,
which does not correspond to the life of a mortgage loan. Mortgage loans
generally amortize over a 15 to 30 year period. Furthermore, Credit Scores were
not developed specifically for use in connection with mortgage loans, but for
consumer loans in general, and assess only the borrower's past credit history.
Therefore, a Credit Score does not take into consideration the differences
between mortgage loans and consumer loans generally, or the specific
characteristics of the related mortgage loan (for example, the Loan-to-Value
Ratio, the collateral for the mortgage loan, or the debt to income ratio of the
related borrower). There can be no assurance that the Credit Scores of the
Mortgagors will be an accurate predictor of the likelihood of repayment of the
related Mortgage Loans or that any Mortgagor's Credit Score would not be lower
if obtained as of the date of the related Prospectus Supplement.
If so specified in the related Prospectus Supplement, a Mortgage Pool may
include Mortgage Loans that have been underwritten pursuant to a streamlined
documentation refinancing program, as set forth in the Program Seller Guide.
Such program permits certain mortgage loans to be refinanced with only limited
verification or updating of the underwriting information that was obtained at
the time that the original mortgage loan was originated. For example, a new
appraisal of a Mortgaged Property may not be required if the related original
mortgage loan was originated up to 24 months prior to the refinancing. In
addition, a Mortgagor's income may not be verified, although continued
employment is required to be verified. In certain circumstances, a Mortgagor may
be permitted to borrow up to 105% of the outstanding principal amount of the
original mortgage loan. Each Mortgage Loan underwritten pursuant to this program
will be treated as having been underwritten pursuant to the same underwriting
documentation program as the mortgage loan that it refinanced, including for
purposes of the disclosure in the related Prospectus Supplement.
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
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 Depositor, 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 Depositor 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. 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 Depositor'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 Depositor'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-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 Depositor'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 Depositor.
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 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 (each, a "Manufactured Home"), but generally not
the property on which such home is situated. 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 "real estate
mortgage investment conduit" ("REMIC") provisions of the Internal Revenue Code
of 1986, as amended (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 as of the related
Cut-off Date. In the event that Contracts are added to or deleted from the Trust
after the date of the related Prospectus Supplement, the final characteristics
of the Contract Pool will be noted in the Form 8-K.
Underwriting Policies
Conventional Contracts will comply with the underwriting policies of the
applicable originator or Mortgage Collateral Seller, which will be described in
the related Prospectus Supplement. With respect to FHA Contracts and VA
Contracts, traditional underwriting guidelines used by the FHA and the VA, as
the case may be, which were in effect at the time of origination of each such
Contract will generally have been applied.
With respect to a Contract made in connection with the Mortgagor's
purchase of a Manufactured Home, the Appraised Value is generally the sales
price of the Manufactured Home or the amount determined by a professional
appraiser. The appraiser must personally inspect the Manufactured Home and
prepare a report which includes market data based on recent sales of comparable
Manufactured Homes and, when deemed applicable, a replacement cost analysis
based on the current cost of a similar Manufactured Home. The Loan-to-Value
Ratio for a Contract generally will be equal to the original principal amount of
the Contract divided by the lesser of the Appraised Value or the sales price for
the Manufactured Home; however, unless otherwise specified in the related
Prospectus Supplement, an appraisal of the Manufactured Home will not be
required.
The Agency Securities
Government National Mortgage Association
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 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 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 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 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 will be purchased by the
Depositor 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 Depositor (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 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 Depositor may issue one or more
classes of Certificates to a Mortgage Collateral Seller as consideration for the
purchase of the Mortgage Collateral securing such series of Certificates, if so
described in the related Prospectus Supplement.
The Mortgage Collateral Sellers that participate in the Program (each, a
"Program Seller") will have been selected by Residential Funding on the basis of
criteria set forth in the Program Seller Guide. A Program Seller may be an
affiliate of the Depositor and the Depositor presently anticipates that GMAC
Mortgage Corporation and HomeComings Financial Network, Inc., each an affiliate
of the Depositor, 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 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 directly or indirectly to the Depositor. The Depositor 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, 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 Depositor; (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 Mortgage Loan; (v) each Mortgaged Property is free of material
damage and in good repair; (vi) each Mortgage Loan complied in all material
respects with all applicable local, state and federal laws at the time of
origination; (vii) the Mortgage Loan or Contract was not 30 or more days
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 (viii) 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 Depositor delivers to the Trustee an affidavit
certifying that the original Mortgage Note or Contract has been lost or
destroyed, if such Mortgage Loan or Contract subsequently is in default and the
enforcement thereof or of the related Mortgage or Contract is materially
adversely affected by the absence of the original Mortgage Note or Contract,
Residential Funding will be obligated to repurchase or substitute for such
Mortgage Loan or Contract in the manner described below. However, unless
otherwise set forth in the related Prospectus Supplement, Residential Funding
will not be required to repurchase or substitute for any Mortgage Loan or
Contract if the circumstances giving rise to such requirement also constitute
fraud in the origination of the related Mortgage Loan or Contract. Furthermore,
because the listing of the related Mortgage Collateral generally contains
information with respect to the Mortgage Collateral as of the Cut-off Date,
prepayments and, in certain limited circumstances, modifications to the interest
rate and principal and interest payments may have been made with respect to one
or more of the related items of Mortgage Collateral between the Cut-off Date and
the Closing Date. Neither Residential Funding nor any Seller will be required to
repurchase or substitute for any item of Mortgage Collateral as a result of any
such prepayment or modification.
All of the representations and warranties of a Mortgage Collateral Seller
in respect of an item of Mortgage Collateral will have been made as of the date
on which such Mortgage Collateral Seller sold the Mortgage Collateral to the
Depositor 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 Depositor
or the Mortgage Collateral Seller, as applicable, cannot cure certain
documentary defects with respect to a Mortgage Loan or Contract, the Depositor
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
Depositor or Residential Funding will only be required to repurchase such
Mortgage Collateral if the Depositor or Residential Funding has assumed such
representations and warranties. Consequently, such Mortgage Collateral will
remain in the related Trust 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, 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 Depositor 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 (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,
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 for which no REMIC election is to be made. With respect to a
Trust 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 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 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.
- - --------
* The index (the "Index") for a particular Mortgage Pool will be specified
in the related Prospectus Supplement and may include one of the following
indexes: (i) the weekly average yield on U.S. Treasury securities adjusted to a
constant maturity of either three months, six months or one year, (ii) the
weekly auction average investment yield of U.S. Treasury bills of six months,
(iii) the daily Bank Prime Loan rate made available by the Federal Reserve
Board, (iv) the cost of funds of member institutions for the Federal Home Loan
Bank of San Francisco, or (v) the interbank offered rates for U.S. dollar
deposits in the London market, each calculated as of a date prior to each
scheduled interest rate adjustment date which will be specified in the related
Prospectus Supplement.
<PAGE>
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 under the Securities Act of
1933, as amended, with respect to the Certificates (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 and the related Prospectus
Supplement.
If so specified in the related Prospectus Supplement, a 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, of which
one or more classes of Certificates (collectively, the "Senior Certificates")
are senior in right of payment to one or more other classes of Certificates
(collectively, the "Subordinate Certificates"), and among which certain classes
of Senior Certificates may be senior to other classes of Senior Certificates, or
certain classes of Subordinate Certificates (collectively, the "Mezzanine
Certificates") may be senior to other classes of Subordinate Certificates, in
each case as described in the related Prospectus Supplement (any such series, a
"Senior/Subordinate Series"); (iii) one or more classes of Certificates (each, a
"Strip Certificate") that 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 that 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 Certificates ("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 "Certificat Registrar"). No service charge
will be made for any registration of exchange or transfer of Certificates, but
the Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge. The term "Certificateholder" as used herein refers to the
entity whose name appears on the records of the Certificate Registrar (or, if
applicable, a transfer agent) as the registered holder thereof, except as
otherwise indicated in the related Prospectus Supplement.
If issued in book-entry form, certain classes of a series of Certificates
will be initially issued through the book-entry facilities of The Depository
Trust Company ("DTC"), or Cedelbank ("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 Depositor 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 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 Depositor, the Trustee or any of their
respective affiliates will have any liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests in the
Book-Entry Certificates, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
Assignment of Mortgage Loans
At the time of issuance of a series of Certificates, the Depositor will
cause the Mortgage Loans being included in the related Trust 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 Depositor in exchange for
the Mortgage Loans. Each Mortgage Loan will be identified in a schedule
appearing as an exhibit to the related Pooling and Servicing Agreement. Such
schedule will include, among other things, information as to the principal
balance of each Mortgage Loan as of the Cut-off Date, as well as information
respecting the Mortgage Rate, the currently scheduled monthly payment of
principal and interest, the maturity of the Mortgage Note and the Loan-to-Value
Ratio at origination or modification (without regard to any secondary
financing).
In addition, the Depositor 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 Depositor, 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 evidence that the Mortgage is held for the Trustee through the
MERS(R) System (or, with respect to a Cooperative Loan, an assignment of the
respective security agreements, any applicable UCC financing statements,
recognition agreements, relevant stock certificates, related blank stock powers
and the related proprietary leases or occupancy agreements); and (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
Depositor 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 may include Mortgage
Loans where the original Mortgage Note is not delivered to the Trustee if the
Depositor 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
Trusts--Representations with Respect to Mortgage Collateral".
In the event that, with respect to any Mortgage Loan, the Depositor cannot
deliver the Mortgage or any assignment with evidence of recording thereon
concurrently with the execution and delivery of the related Pooling and
Servicing Agreement because of a delay caused by the public recording office,
the Depositor will deliver or cause to be delivered to the Trustee or the
Custodian a true and correct photocopy of such Mortgage or assignment. The
Depositor 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
Subservicer.
If so specified in the related Prospectus Supplement, and subject to the
rules of membership of Merscorp, Inc. and/or Mortgage Electronic Registration
Systems, Inc. (together, "MERS"), assignments of the mortgages for the Mortgage
Loans in the related Trust will be registered electronically through Mortgage
Electronic Registration Systems, Inc. (the "MERS(R) System"). With respect to
Mortgage Loans registered through the MERS(R) System, MERS shall serve as
mortgagee of record solely as a nominee in
an administrative capacity on behalf of the Trustee and shall not have any
interest in any such Mortgage Loans.
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 for mortgages held under the MERS(R)
System or 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 Depositor or the originator of such Mortgage Loan, or except
as otherwise specified in the related Prospectus Supplement.
Assignment of Contracts
The Depositor will cause the Contracts constituting the Contract Pool to
be assigned to the Trustee or its nominee (which may be the Custodian), together
with principal and interest due on or with respect to the Contracts after the
Cut-off Date, but not including principal and interest due on or before the
Cut-off Date or any Excluded Spread. Each Contract will be identified in a
schedule appearing as an exhibit to the Pooling and Servicing Agreement. Such
schedule will specify, with respect to each Contract, among other things: the
original principal amount and the adjusted principal balance as of the close of
business on the Cut-off Date; the Mortgage Rate; the current scheduled monthly
level payment of principal and interest; and the maturity date of the Contract.
In addition, the Depositor, 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
Depositor, the Master Servicer or the Servicer will cause a UCC-1 financing
statement to be executed by the Depositor identifying the Trustee as the secured
party and identifying all Contracts as collateral. However, unless otherwise
specified in the related Prospectus Supplement, the Contracts will not be
stamped or otherwise marked to reflect their assignment from the Depositor to
the Trust and no recordings or filings will be made in the jurisdictions in
which the Manufactured Homes are located. See "Certain Legal Aspects of 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 Depositor, 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
Depositor) 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 Depositor), the
Mortgage Collateral Seller (or, if applicable, the Depositor) 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 Trusts--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 Depositor will transfer, convey and assign to the Trustee or its
nominee (which may be the Custodian) all right, title and interest of the
Depositor in the Agency Securities and other property to be included in the
Trust 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 (as defined
in the related Prospectus Supplement) (except for any Excluded Spread). The
Depositor 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 Depositor, 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 (the "Excess
Spread") or will be excluded from the assets transferred to the related Trust
(the "Excluded Spread"). The interest portion of a Realized Loss and any partial
recovery of interest in respect of the Mortgage Collateral will be allocated
between the owners of any Excess Spread 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 the nationally recognized statistical rating agency or
agencies (each, a "Rating Agency") maintaining a rating on the Certificates of
such series. 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 Depositor, 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;
(ii) all payments on account of interest on the Mortgage Loans comprising
such Trust, net of the portion of each payment thereof retained by the Servicer
or Subservicer, 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 Subservicer) 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 (together
with any payments under any Letter of Credit, "Insurance Proceeds") or proceeds
from any alternative arrangements established in lieu of any such insurance and
described in the applicable Prospectus Supplement, other than proceeds to be
applied to the restoration of the related property or released to the Mortgagor
in accordance with the Master Servicer's or Servicer's normal servicing
procedures;
(iv) any Buy-Down Funds (and, if applicable, investment earnings thereon)
required to be paid to Certificateholders, as described below;
(v) all proceeds of any Mortgage Loan or Contract in such Trust purchased
(or, in the case of a substitution, certain amounts representing a principal
adjustment) by the Master Servicer, the Depositor, Residential Funding, any
Subservicer or Mortgage Collateral Seller or any other person pursuant to the
terms of the Pooling and Servicing Agreement. See "The Trusts--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 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.
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 Subservicer 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 Subservicer 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
Subservicers 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 Subservicer, Residential Funding, the Depositor 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 Depositor or its assignee, or any other party named in the
related Prospectus Supplement, all amounts allocable to the Excluded Spread, if
any, out of collections or payments which represent interest on each Mortgage
Loan 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 Subservicer for any Advance previously
made which the Master Servicer has determined to not be ultimately recoverable
from Liquidation Proceeds, Insurance Proceeds or otherwise (a "Nonrecoverable
Advance"), subject to any limitations set forth in the Pooling and Servicing
Agreement as described in the related Prospectus Supplement;
(viii) to reimburse itself or the Depositor for certain other expenses
incurred for which it or the Depositor is entitled to reimbursement (including
reimbursement in connection with enforcing any repurchase, substitution or
indemnification obligation of any Seller) or against which it or the Depositor
is indemnified pursuant to the Pooling and Servicing Agreement;
(ix) to withdraw any amount deposited in the Custodial Account that was
not required to be deposited therein; and
(x) to clear the Custodial Account of amounts relating to the
corresponding Mortgage Loans or Contracts in connection with the termination of
the Trust pursuant to the Pooling and Servicing Agreement, as described in "The
Pooling and Servicing Agreement--Termination; Retirement of Certificates".
Distributions
Distributions of principal and interest (or, where applicable, of
principal only or interest only) on each class of Certificates entitled thereto
will be made on the 25th day (or, if such day is not a business day, the next
business day) of each month, commencing in the month following the month in
which the Cut-off Date occurs or such other date as may be specified in the
related Prospectus Supplement (each, a "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 or Trust 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 be entitled to different
distributions of interest based on a specified interest rate or rates (each, a
"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 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 March 1999:
Date Note Description
March 1 (A) Cut-off Date.
March 2-31 (B) The Servicers or the Subservicers, as applicable,
receive any Principal Prepayments.
March 31 (C) Record Date.
March 2 - April 1 (D) The due dates on which scheduled payments and
Mortgage Loans or Contracts are due (each, a "Due
Date" and collectively, the "Due Period").
April 16 (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.
April 20 (F) Determination Date.
April 26 (G) Distribution Date.
Succeeding months follow the pattern of (B) through (G), except that for
succeeding months (B) will also include the first day of such month. Certain
series of Certificates may have different prepayment periods, Cut-off Dates,
Record Dates, Due 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 March 1, after deducting principal payments due on or
before such date. Those principal payments due on or before March 1, and
the accompanying interest payments, and any Principal Prepayments received
as of the close of business on March 1 are not part of the Mortgage Pool or
Contract Pool and will not be passed through to Certificateholders.
(B) Any principal payments received in advance of the scheduled Due Date 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 April 26 (because April 25, 1999 is not a business day)
will be made to Certificateholders of record at the close of business on
March 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 Subservicers 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 April 16 (because April
18, 1999 is not a business day) together with any required Advances by the
Servicer or the Subservicers (except that Principal Prepayments in full
and certain Principal Prepayments in part received by Subservicers during
the month of March will have been remitted to the Master Servicer or the
Servicer, as applicable, within five business days of receipt).
(F) On April 20, the Master Servicer or the Certificate Administrator, if any,
will determine the amounts of principal and interest which will be passed
through on April 26 to the holders of each class of Certificates. The
Master Servicer or the Certificate Administrator, if any, will be
obligated to distribute those payments due during the related Due Period
which have been received from Servicers or Subservicers prior to and
including April 16, as well as all Principal Prepayments received on
Mortgage Loans in March (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 April 26 may include certain
amounts otherwise distributable to the holders of the related Subordinate
Certificates, amounts withdrawn from any Reserve Fund and amounts advanced
by the Master Servicer or the Servicer under the circumstances described
in "Subordination" and "--Advances."
(G) On April 26, the amounts determined on April 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 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 Subservicers, 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
includes Agency Securities, any advancing obligations with respect to underlying
Mortgage Loans or Contracts will be pursuant to the terms of such Agency
Securities and may differ from the provisions relating to Advances described
herein.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to related Certificateholders. Such Advances do not represent
an obligation of the Master Servicer or the Servicer to guarantee or insure
against losses. If Advances have been made by the Master Servicer or Servicer
from cash being held for future distribution to Certificateholders, such funds
will be required to be replaced on or before any future Distribution Date to the
extent that funds in the Certificate Account on such Distribution Date would be
less than payments required to be made to 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 Depositor, Residential
Funding, a Subservicer 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 setting forth the information described in the related Pooling and
Servicing Agreement. Except as otherwise provided in the related Pooling and
Servicing Agreement, such information generally will include the following (as
applicable):
(i) the amount, if any, of such distribution allocable to principal;
(ii) the amount, if any, of such distribution allocable to interest and
the amount, if any, of any shortfall in the amount of interest and principal;
(iii) the aggregate unpaid principal balance of the Mortgage Collateral
after giving effect to the distribution of principal on such Distribution Date;
(iv) the outstanding principal balance or notional amount of each class of
Certificates after giving effect to the distribution of principal on such
Distribution Date;
(v) based on the most recent reports furnished by Servicers or
Subservicers, the number and aggregate principal balances of any items of
Mortgage Collateral in the related Trust 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 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
includes mortgage pass-through certificates representing whole or partial
interests in pools of Mortgage Loans, Contracts or 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 Subservicers, Servicers and the Master Servicer and losses
borne by the related Trust.
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
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 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 Subservicing agreements (each, a "Subservicing Agreement") with one or more
Subservicers (each, a "Subservicer") 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 relating to such
Subservicing Agreement. Under any Subservicing Agreement, each Subservicer, 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 Subservicer 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 Subservicers with respect
to a given Trust 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 Subservicer, 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 Subservicer will be entitled to reimbursement for any such advances
from the related collection account.
Other duties and responsibilities of each Servicer, the Master Servicer
and the Certificate Administrator are described above under "--Payments on
Mortgage Collateral."
Servicing Compensation and Payment of Expenses
Each Servicer, the Master Servicer or the Certificate Administrator, as
applicable, will be paid compensation for the performance of its servicing
obligations, which compensation will be part of the servicing fee (the
"Servicing Fee") specified in the related Prospectus Supplement. Any Subservicer
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
Subservicers, 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 Subservicer will not constitute part of the
Servicing Fee. Notwithstanding the foregoing, with respect to a series of
Certificates as to which the Trust 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 Subservicers, (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 Subservicers, 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 Subservicers, 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
Subservicer may obtain their respective fees by deducting them from amounts
otherwise required to be deposited into the related collection account.
The related Trust 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 will suffer a
loss to the extent that Liquidation Proceeds, after reimbursement of the
expenses of the Master Servicer or any Servicer or Subservicer, 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 Subservicer, 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 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
Subservicer 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 Subservicing
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 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 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, adversely affect such REMIC status. The Master Servicer or Servicer may
also waive or modify any term of a 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 Depositor, any Mortgage Collateral Seller
or their affiliates.
Special Servicing and Special Servicing Agreements
The Pooling and Servicing Agreement for a series of Certificates may name
a special servicer (a "Special Servicer"), which will be responsible for the
servicing of certain delinquent Mortgage Loans or Contracts. The Special
Servicer may have discretion to extend relief to certain Mortgagors whose
payments become delinquent. The Special Servicer may be permitted to grant a
period of temporary indulgence to a Mortgagor or may enter into a repayment plan
providing for repayment of arrearages by such Mortgagor, in each case without
the prior approval of the Master Servicer or the Servicer. Other types of
forbearance may require the approval of the Master Servicer or Servicer, as
applicable.
In addition, the Master Servicer may enter into various agreements with
holders of one or more classes of Subordinate Certificates or of a class of
securities representing interests in one or more classes of Subordinate
Certificates. Pursuant to the terms of such agreements, such holder may, with
respect to certain delinquent Mortgage Loans:
instruct the Master Servicer to commence or delay foreclosure proceedings,
provided that the holder deposits a specified amount of cash with the Master
Servicer which will be available for distribution to Certificateholders in the
event that liquidation proceeds are less than they otherwise may have been had
the Master Servicer acted pursuant to its normal servicing procedures;
instruct the Master Servicer to purchase such Mortgage Loans from the
Trust prior to the commencement of foreclosure proceedings at the Purchase Price
and to resell such Mortgage Loans to such holder, in which case any subsequent
loss with respect to such Mortgage Loans will not be allocated to the
Certificateholders;
become, or designate a third party to become, a Subservicer with respect
to such Mortgage Loans so long as (i) the Master Servicer has the right to
transfer the subservicing rights and obligations of such Mortgage Loans to
another Subservicer at any time or (ii) such holder (or its servicing designee)
is required to service the Mortgage Loans according to the Master Servicer's
servicing guidelines; or
other types of special servicing arrangements that are described in the
related Prospectus Supplement.
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 Subservicer, 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
Subservicer is prevented from enforcing a due-on-sale clause under applicable
law or if the Master Servicer, Servicer or Subservicer 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 Subservicer 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 Subservicer 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 Subservicer, 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 Subservicer 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 Subservicer 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 Subservicer as additional servicing compensation.
Realization Upon Defaulted Property
In the event that title to any Mortgaged Property is acquired in
foreclosure or by deed in lieu of foreclosure (or, in the case of Contracts in
certain states, by repossession of the related Manufactured Home), the deed or
certificate of sale will be issued to the Trustee or to its nominee on behalf of
Certificateholders. Notwithstanding any such acquisition of title and
cancellation of the related Mortgage Loan or Contract, such Mortgage Loan (an
"REO Mortgage Loan") or Contract (an "REO Contract") will be considered for most
purposes to be an outstanding Mortgage Loan or Contract held in the Trust 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. If a REMIC election
has been made, any Mortgaged Property so acquired by the Trust must be disposed
of in accordance with applicable federal income tax regulations and consistent
with the status of the Trust as a REMIC. To the extent provided in the related
Pooling and Servicing Agreement, any income (net of expenses and other than
gains described below) received by the Subservicer, 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. 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 Subservicer) 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
prior to the final liquidation thereof. In addition, the Master Servicer or
Servicer may have the option to purchase from the Trust 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 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, 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
General
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
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 (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.
If so provided in the related Prospectus Supplement, certain amounts
otherwise payable on any Distribution Date to holders of Subordinate
Certificates may be deposited into a Reserve Fund. Amounts held in any Reserve
Fund may be applied as described under "Description of Credit
Enhancement--Reserve Funds" and in the related Prospectus Supplement.
With respect to any Senior/Subordinate Series, the terms and provisions of
the subordination may vary from those described above. Any such variation and
any additional credit enhancement will be described in the related Prospectus
Supplement.
Overcollateralization
If so specified in the related Prospectus Supplement, interest collections
on the Mortgage Collateral may exceed interest payments on the Certificates for
the related Distribution Date. To the extent such excess interest is applied as
principal payments on the Certificates, the effect will be to reduce the
principal balance of the Certificates relative to the outstanding balance of the
Mortgage Loans, thereby creating "Overcollateralization" and additional
protection to the Certificateholders, as specified in the related Prospectus
Supplement.
DESCRIPTION OF CREDIT ENHANCEMENT
General
Credit support with respect to each series of Certificates may be
comprised of one or more of the following components. Each component will have a
dollar limit and will provide coverage with respect to Realized Losses that are
(i) attributable to the Mortgagor's failure to make any payment of principal or
interest as required under the Mortgage Note or Contract, but not including
Special Hazard Losses, Extraordinary Losses or other losses resulting from
damage to a Mortgaged Property, Bankruptcy Losses or Fraud Losses (any such
losses, "Defaulted Mortgage Losses"); (ii) of a type generally covered by a
Special Hazard Insurance Policy (any such losses, "Special Hazard Losses");
(iii) attributable to certain 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 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 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 Depositor for a Trust 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 Subservicer, (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 Subservicer on behalf of the Trustee and
Certificateholders, or (b) to pay the amount by which the sum of the outstanding
principal balance of the defaulted Mortgage Loan plus accrued and unpaid
interest at the Mortgage Rate to the date of payment of the claim and the
aforementioned expenses exceeds the proceeds received from an approved sale of
the Mortgaged Property, in either case net of certain amounts paid or assumed to
have been paid under any related Primary Insurance Policy. Certificateholders
will experience a shortfall in the amount of interest payable on the related
Certificates in connection with the payment of claims under a Mortgage Pool
Insurance Policy because the Pool Insurer is only required to remit unpaid
interest through the date a claim is paid rather than through the end of the
month in which such claim is paid. In addition, the Certificateholders will also
experience losses with respect to the related Certificates in connection with
payments made under a Mortgage Pool Insurance Policy to the extent that the
Master Servicer, Servicer or Subservicer 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 Subservicer 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 Subservicer
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 Subservicer 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 Depositor 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 Subservicer 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 will be issued by the insurer named in
the related Prospectus Supplement (the "Special Hazard Insurer"). Each Special
Hazard Insurance Policy, subject to limitations described below and in the
related Prospectus Supplement, if any, will protect the related
Certificateholders from Special Hazard Losses which are (i) losses due to direct
physical damage to a Mortgaged Property other than any loss of a type covered by
a hazard insurance policy or a flood insurance policy, if applicable, and (ii)
losses from partial damage caused by reason of the application of the
co-insurance clauses contained in hazard insurance policies. See "Insurance
Policies on Mortgage Loans or Contracts." A Special Hazard Insurance Policy will
not cover losses occasioned by war, civil insurrection, certain governmental
actions, errors in design, faulty workmanship or materials (except under certain
circumstances), nuclear reaction, chemical contamination or waste by the
Mortgagor. Aggregate claims under a Special Hazard Insurance Policy will be
limited to the amount set forth in the related Pooling and Servicing Agreement
and will be subject to reduction as set forth in such related Pooling and
Servicing Agreement. A Special Hazard Insurance Policy will provide that no
claim may be paid unless hazard and, if applicable, flood insurance on the
property securing the Mortgage Loan or Contract has been kept in force and other
protection and preservation expenses have been paid by the Master Servicer or
Servicer.
Subject to the foregoing limitations, a Special Hazard Insurance Policy
will provide that, where there has been damage to property securing a foreclosed
Mortgage Loan (title to which has been acquired by the insured) and to the
extent such damage is not covered by the hazard insurance policy or flood
insurance policy, if any, maintained by the Mortgagor or the Master Servicer,
Servicer or Subservicer, 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
Subservicer 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 Depositor 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, but not any permanent forgiveness
of principal (a "Debt Service Reduction"). See "Certain Legal Aspects of
Mortgage Loans and Contracts--Mortgage Loans--Anti-Deficiency Legislation and
Other Limitations on Lenders." Any Bankruptcy Bond to provide coverage for
Bankruptcy Losses resulting from proceedings under the federal Bankruptcy Code
obtained for a Trust 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 Depositor 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. 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 Depositor, any affiliate thereof or any other entity has an interest in
any Reserve Fund, in the event of the bankruptcy, receivership or insolvency of
such entity, there could be delays in withdrawals from the Reserve Fund and the
corresponding payments to the Certificateholders. 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; Surety Bonds
If so specified in the related Prospectus Supplement, the Depositor may
obtain one or more certificate insurance policies (each, a "Certificate
Insurance Policy"), one or more surety bonds (each, a "Surety Bond"), or one or
more guarantees, issued by insurers or other parties acceptable to the Rating
Agency or Agencies rating the Certificates offered, as specified in the related
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, Surety Bond
or guaranty will have the characteristics described in, and will be subject to
such limitations and exceptions set forth in, the related Prospectus Supplement.
Maintenance of Credit Enhancement
If credit enhancement has been obtained for a series of Certificates, the
Master Servicer, the Servicer or the Certificate Administrator will be obligated
to exercise its best reasonable efforts to keep or cause to be kept such credit
enhancement in full force and effect throughout the term of the applicable
Pooling and Servicing Agreement or Trust Agreement, unless coverage thereunder
has been exhausted through payment of claims or otherwise, or substitution
therefor is made as described below under "--Reduction or Substitution of Credit
Enhancement." The Master Servicer, the Servicer or the Certificate
Administrator, as applicable, on behalf of itself, the Trustee and
Certificateholders, will be required to 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 Depositor, 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 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 Depositor, 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 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 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 Depositor 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 Depositor 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.
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 Depositor 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 Subservicers.
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.
The hazard insurance policies covering the Mortgaged Properties typically
contain a co-insurance clause that in effect requires the related Mortgagor at
all times to carry insurance of a specified percentage (generally 80% to 90%) of
the full replacement value of the improvements on the property in order to
recover the full amount of any partial loss. If the related Mortgagor's coverage
falls below this specified percentage, such clause generally provides that the
insurer's liability in the event of partial loss does not exceed the greater of
(i) the replacement cost of the improvements damaged or destroyed less physical
depreciation or (ii) such proportion of the loss as the amount of insurance
carried bears to the specified percentage of the full replacement cost of such
improvements.
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 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 Depositor 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 DEPOSITOR
The Depositor is an indirect wholly-owned subsidiary of GMAC Mortgage
Group, Inc. ("GMAC Mortgage"), which is a wholly-owned subsidiary of General
Motors Acceptance Corporation. The Depositor was incorporated in the State of
Delaware in August 1995. The Depositor was organized for the purpose of
acquiring mortgage loans and contracts and issuing securities backed by such
mortgage loans or contracts. The Depositor anticipates that it will in many
cases have acquired Mortgage Loans indirectly through Residential Funding, which
is also an indirect wholly-owned subsidiary of GMAC Mortgage. The Depositor does
not have, nor is it expected in the future to have, any significant assets.
The Certificates do not represent an interest in or an obligation of the
Depositor. The Depositor's only obligations with respect to a series of
Certificates will be pursuant to certain limited representations and warranties
made by the Depositor or as otherwise provided in the related Prospectus
Supplement.
The Depositor maintains its principal office at 8400 Normandale Lake
Boulevard, Suite 600, Minneapolis, Minnesota 55437. Its telephone number is
(612) 832-7000.
RESIDENTIAL FUNDING CORPORATION
Unless otherwise specified in the related Prospectus Supplement,
Residential Funding, an affiliate of the Depositor, 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. Residential Funding conducts
operations from its headquarters in Minneapolis and from offices located in
California, Florida, Georgia, Maryland and New York. At December 31, 1998,
Residential Funding was master servicing a first lien loan portfolio of
approximately $54.8 billion and a second lien loan portfolio of approximately
$3.0 billion.
Residential Funding's delinquency, foreclosure and loan loss experience as
of the end of the most calendar quarter for which such information is available
on the portfolio of loans for which it acts as master servicer and that were
originated generally in accordance with the Program will be summarized in each
Prospectus Supplement relating to a Mortgage Pool for which Residential Funding
will act as master servicer. There can be no assurance that such experience will
be representative of the results that may be experienced with respect to any
particular series of Certificates.
THE POOLING AND SERVICING AGREEMENT
As described above under "Description of the Certificates--General," each
series of Certificates will be issued pursuant to a Pooling and Servicing
Agreement or, if the Trust 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 In addition, if the Trust 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 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 Depositor, or to the Master Servicer, the Certificate
Administrator, the Depositor 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 Depositor, or to the Master Servicer, the Certificate Administrator, the
Depositor 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 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 will not constitute an Event of Default under the related
Pooling and Servicing Agreement.
Rights Upon Event of Default
So long as an Event of Default remains unremedied, either the Depositor or
the Trustee may, and, at the direction of the holders of Certificates evidencing
not less than 51% of the aggregate voting rights in the related Trust, the
Trustee shall, by written notification to the Master Servicer or the Certificate
Administrator, as applicable, and to the Depositor 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 and in and to the Mortgage Collateral and the proceeds
thereof, whereupon the Trustee or, upon notice to the Depositor and with the
Depositor'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 Depositor, 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, to modify, eliminate or add to any of
its provisions (a) to the extent necessary to maintain the qualification of the
Trust as a REMIC or to avoid or minimize the risk of imposition of any tax on
the related Trust, provided that the Trustee has received an opinion of counsel
to the effect that (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 Depositor 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; (v) to make any other provisions with respect to matters or
questions arising under such Pooling and Servicing Agreement which are not
materially inconsistent with the provisions thereof, so long as such action will
not adversely affect in any material respect the interests of any
Certificateholder; or (vi) to amend any provision that is not material to
holders of any class of related Certificates.
The Pooling and Servicing Agreement may also be amended by the Depositor,
the Master Servicer, 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, 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 Depositor or the Trustee in accordance with such amendment will
not result in the imposition of a material tax on the related Trust or cause
such Trust 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 Depositor, 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 Depositor 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 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 Depositor 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 Depositor, the Mortgage Collateral may be
sold, thereby effecting a retirement of the Certificates and the termination of
the Trust, or the Certificates so purchased may be held or resold by the Master
Servicer, the Certificate Administrator or the Depositor. 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 Depositor 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 will be effected in
a manner consistent with applicable federal income tax regulations and its
status as a REMIC.
In addition to the optional repurchase of the property in the related
Trust described above, if so specified in the related Prospectus Supplement, a
holder of a class of Certificates of the related series (the "Call Class") will
have the right, solely at its discretion, to terminate the related Trust and
thereby effect early retirement of the Certificates of such series, on any
Distribution Date after the 12th Distribution Date following the date of initial
issuance of the related series of Certificates and until such date as the
optional termination rights of the Master Servicer and the Depositor become
exercisable. The Call Class will not be offered under the Prospectus Supplement.
Any such call will be of the entire Trust at one time; multiple calls with
respect to any series of Certificates will not be permitted. In such case, the
holders of the Certificates will be paid a price equal to 100% of the principal
balance of such Certificates as of the day of such purchase plus accrued
interest thereon at the applicable Pass-Though Rate (the "Call Price"). To
exercise such call, the Call Class holder must remit to the related Trustee for
distribution to the Certificateholders funds equal to the Call Price. If such
funds are not deposited with the related Trustee, the Certificates of such
series will remain outstanding. In addition, in the case of a Trust for which a
REMIC election or elections have been made, such termination will be effected in
a manner consistent with applicable Federal income tax regulations and its
status as a REMIC. In connection with a call by the Call Class, the final
payment to the Certificateholders will be made upon surrender of the related
Certificates to the Trustee. Once the Certificates have been surrendered and
paid in full, there will not be any further liability to Certificateholders.
The Trustee
The Trustee under each Pooling and Servicing Agreement will be named in
the related Prospectus Supplement. The commercial bank or trust company serving
as Trustee may have normal banking relationships with the Depositor and/or its
affiliates, including Residential Funding.
The Trustee may resign at any time, in which event the Depositor will be
obligated to appoint a successor trustee. The Depositor may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Pooling and Servicing Agreement or if the Trustee becomes insolvent. Upon
becoming aware of such circumstances, the Depositor will be obligated to appoint
a successor Trustee. The Trustee may also be removed at any time by the holders
of Certificates evidencing not less than 51% of the aggregate voting rights in
the related Trust. Any resignation or removal of the Trustee and appointment of
a successor Trustee will not become effective until acceptance of the
appointment by the successor Trustee.
YIELD 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 amount of interest payments with respect to each item of Mortgage
Collateral distributed (or accrued in the case of Deferred Interest or Accrual
Certificates) monthly to holders of a class of Certificates entitled to payments
of interest will be calculated on the basis of such class's specified percentage
of each such payment of interest (or accrual in the case of Accrual
Certificates) and will be expressed as a fixed, adjustable or variable
Pass-Through Rate payable on the outstanding principal balance or notional
amount of such Certificate, or any combination of such Pass-Through Rates,
calculated as described herein and in the related Prospectus Supplement. See
"Description of the Certificates--Distributions." Holders of Strip Certificates
or a class of Certificates having a Pass-Through Rate that varies based on the
weighted average net interest rate of the underlying Mortgage Collateral will be
affected by disproportionate prepayments and repurchases of Mortgage Collateral
having higher amounts payable to the Strip Certificates or higher interest
rates, 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 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 Depositor, the Master
Servicer and others, or conversions of ARM Loans to a fixed interest rate. See
"The Trusts--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 will be affected by
any losses on the Mortgage Collateral because of the effect 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.
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.
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 yield on any class of Certificates and the timing
of principal payments thereon may also be affected by certain modifications or
actions that may be approved by the Master Servicer or a Special Servicer as
described herein under "Description of the Certificates--Servicing and
Administration of Mortgage Collateral--Collection and Other Servicing
Procedures" and "--Special Servicing and Special Servicing Agreements" in
connection with a Mortgage Loan that is in default (or if a default is
reasonably foreseeable).
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. 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. In addition, Manufactured Homes may decline in
value even in areas where real estate values generally have not declined. The
risk of loss on Puerto Rico Mortgage Loans may be greater than Mortgage Loans
that are secured by properties located in the United States. See "Certain Legal
Aspects of Mortgage Loans and Contracts."
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.
When a full prepayment is made on a Mortgage Loan or Contract, the
Mortgagor is charged interest on the principal amount of the Mortgage Loan or
Contract so prepaid for the number of days in the month actually elapsed up to
the date of the prepayment, at a daily rate determined by dividing the Mortgage
Rate by 365. 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
Note 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 Note 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 Mortgage 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 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 may contain
GPM Loans or Buy-Down Mortgage 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 may contain
Balloon Loans which require a single payment of a Balloon Amount. The payment of
Balloon Amounts may result in a lower yield on Certificates than would be the
case if all such Mortgage Collateral was fully-amortizing because the maturity
of a Balloon Loan occurs earlier than that for a fully-amortizing Mortgage Loan
due to the payment of a Balloon Amount. Balloon Loans also pose a greater risk
of default than fully-amortizing Mortgage Loans because Mortgagors are required
to pay the Balloon Amount upon maturity. A Mortgagor's ability to pay a Balloon
Amount may depend on its ability to refinance the related Mortgaged Property.
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.
For each Mortgage Pool, if all necessary Advances are made and if there is
no unrecoverable loss on any Mortgage Loan, the net effect of each distribution
respecting interest will be to pass-through to each holder of a class of
Certificates entitled to payments of interest an amount which is equal to one
month's interest at the applicable Pass-Through Rate on such class's principal
balance or notional balance, as adjusted downward to reflect any decrease in
interest caused by any principal prepayments and the addition of any Deferred
Interest to the principal balance of any Mortgage Loan. See "Description of the
Certificates--Distributions--Principal and Interest on the Certificates."
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 Trusts," the original terms to maturity of
the Mortgage Collateral in a given Trust will vary depending upon the type of
Mortgage Collateral included in such Trust. 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. 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, the availability of mortgage funds, and the
obtaining of secondary financing by the Mortgagor, 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 Depositor 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
Mortgage Loans (other than ARM Loans) will contain due-on-sale provisions
permitting the mortgagee to accelerate the maturity of the Mortgage Loan upon
sale or certain transfers by the Mortgagor of the underlying Mortgaged Property.
Unless the related Prospectus Supplement indicates otherwise, the Master
Servicer will generally enforce any due-on-sale clause to the extent it has
knowledge of the conveyance or proposed conveyance of the underlying Mortgaged
Property and it is entitled to do so under applicable law, provided, however,
that the Master Servicer will not take any action in relation to the enforcement
of any due-on-sale provision which would adversely affect or jeopardize coverage
under any applicable insurance policy. An ARM Loan is 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 Subservicer, the security for the
ARM Loan would not be impaired by the assumption. The extent to which ARM Loans
are assumed by purchasers of the Mortgaged Properties rather than prepaid by the
related Mortgagors in connection with the sales of the Mortgaged Properties 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."
Unless otherwise specified in the related Prospectus Supplement, all of
the Mortgage Loans or Contracts may be prepaid without penalty in full or in
part at any time. The terms of the related Pooling and Servicing Agreement
generally will require the Servicer or Master Servicer, as the case may be, to
enforce any due-on-sale clause to the extent it has knowledge of the conveyance
or the proposed conveyance of the underlying Mortgaged Property and to the
extent permitted by applicable law, except that any enforcement action that
would impair or threaten to impair any recovery under any related insurance
policy will not be required or permitted. See "Description of the
Certificates--Servicing and Administration of Mortgage Collateral--Enforcement
of 'Due-on-Sale' Clauses" and "Certain Legal Aspects of Mortgage Loans and
Contracts--The Mortgage Loans-- Enforceability of Certain Provisions" and "--The
Contracts" for a description of certain provisions of each Pooling and Servicing
Agreement and certain legal aspects that may affect the prepayment rate of
Mortgage Loans or Contracts.
Certain types of Mortgage Collateral included in a Trust may have
characteristics that make it more likely to default than collateral provided for
mortgage pass-through certificates from other mortgage purchase programs. The
Depositor 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."
In addition, certain Mortgage Securities included in a Mortgage Pool may
be backed by underlying Mortgage Loans having differing interest rates.
Accordingly, the rate at which principal payments are received on the related
Certificates will, to a certain extent, depend on the interest rates on such
underlying Mortgage Loans.
A Subservicer may allow the refinancing of a Mortgage Loan in any Trust by
accepting prepayments thereon and permitting a new loan to the same borrower
secured by a mortgage on the same property, which may be originated by the
Subservicer or the Master Servicer or any of their respective affiliates or by
an unrelated entity. In the event of such a refinancing, the new loan would not
be included in the related Trust and, therefore, such refinancing would have the
same effect as a prepayment in full of the related Mortgage Loan. A Subservicer
or the Master Servicer may, from time to time, implement programs designed to
encourage refinancing. Such programs may include, without limitation,
modifications of existing loans, general or targeted solicitations, the offering
of pre-approved applications, reduced origination fees or closing costs, or
other financial incentives. Targeted solicitations may be based on a variety of
factors, including the credit of the borrower or the location of the Mortgaged
Property. In addition, Subservicers or the Master Servicer may encourage
assumptions of Mortgage Loans, including defaulted Mortgage Loans, under which
creditworthy borrowers assume the outstanding indebtedness of such Mortgage
Loans, which may be removed from the related Mortgage Pool. As a result of such
programs, with respect to the Mortgage Pool underlying any Trust (i) the rate of
principal prepayments of the Mortgage Loans in such Mortgage Pool may be higher
than would otherwise be the case, and (ii) in some cases, the average credit or
collateral quality of the Mortgage Loans remaining in the Mortgage Pool may
decline.
All statistics known to the Depositor that have been compiled with respect
to prepayment experience on mortgage loans indicate that while some mortgage
loans may remain outstanding until their stated maturities, a substantial number
will be paid prior to their respective stated maturities.
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 Trusts--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
Subservicer, 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 Note 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 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.
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 Depositor, the Master Servicer, a Servicer, a Subservicer, 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.
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 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
Depositor 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. See "The Pooling and Servicing Agreement--Termination;
Retirement of Certificates." Any such repurchase will shorten the weighted
average lives of the related Certificates.
CERTAIN LEGAL ASPECTS OF
MORTGAGE LOANS AND CONTRACTS
The following discussion contains summaries of certain legal aspects of
mortgage loans and manufactured housing contracts that are general in nature.
Because such legal aspects are governed in part by state law (which laws may
differ substantially from state to state), the summaries do not purport to be
complete, to reflect the laws of any particular state or to encompass the laws
of all states in which the Mortgaged Properties may be situated. The summaries
are qualified in their entirety by reference to the applicable federal and state
laws governing the Mortgage Loans or Contracts.
The Mortgage Loans
General
The Mortgage Loans (other than Cooperative Loans) will be secured by deeds
of trust, mortgages or deeds to secure debt depending upon the prevailing
practice in the state in which the related Mortgaged Property is located. In
some states, a mortgage, deed of trust or deed to secure debt creates a lien
upon the related real property. 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). Such instruments are not prior to the lien for real estate taxes and
assessments and other charges imposed under governmental police powers. Priority
with respect to 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, deed of trust or deed to secure debt
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 certain states, three parties may be involved
in a mortgage financing when title to the property is held by a land trustee who
is the land trustee under a land trust agreement of which the borrower is the
beneficiary. At origination of such a mortgage loan, the land trustee, as fee
owner of the property, executes the mortgage and the borrower executes (1) a
separate undertaking to make payments on the mortgage note and (2) an assignment
of leases and rents. Although a deed of trust is similar to a mortgage, a deed
of trust has three parties: the trustor, who is the borrower/homeowner; the
beneficiary, who is the lender; and a third-party grantee called the trustee.
Under a deed of trust, the borrower grants the property, irrevocably until the
debt is paid, in trust, the grantee's authority under a deed to secure debt
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 Cooperative
Note evidencing a Cooperative Loan will be secured by a security interest in
shares issued by the related Cooperative that owns the related apartment
building, which is a corporation entitled to be treated as a housing cooperative
under federal tax law, and in the related proprietary lease or occupancy
agreement granting exclusive rights to occupy a specific dwelling unit in the
Cooperative's building. The security agreement will create a lien upon, or grant
a security interest in, the Cooperative shares and proprietary leases or
occupancy agreements, the priority of which will depend on, among other things,
the terms of the particular security agreement as well as the order of
recordation 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 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 or grantee's, as applicable,
sale under a specific provision in the deed of trust or deed to secure debt
which authorizes the trustee or grantee, as applicable, to sell the property
upon any default by the borrower under the terms of the note or deed of trust or
deed to secure debt. In addition to any notice requirements contained in a deed
of trust or deed to secure debt, in some states, the trustee or grantee, as
applicable, must record a notice of default and send a copy to the
borrower/trustor and to any person who has recorded a request for a copy of
notice of default and notice of sale. In addition, in some states, the trustee
or grantee, as applicable, must provide notice to any other individual having an
interest of record in the real property, including any junior lienholders. If
the deed of trust or deed to secure debt is not reinstated within a specified
period, a notice of sale must be posted in a public place and, in most states,
published for a specific period of time in one or more newspapers. In 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 or grantee, as applicable, 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 grantee, as applicable,
or referee for a credit bid less than or equal to the unpaid principal amount of
the mortgage or deed of trust or deed to secure debt, 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.
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 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, or a deed to
secure debt or foreclosure of a mortgage, the borrower and foreclosed junior
lienors or other parties are given a statutory period (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, a mortgagee under a mortgage or
a grantee under a deed to secure debt. In some states (including California),
statutes limit the right of the beneficiary, mortgagee or grantee to obtain a
deficiency judgment against the borrower following foreclosure. A deficiency
judgment is a personal judgment against the former borrower equal in most cases
to the difference between the net amount realized upon the public sale of the
real property and the amount due to the lender. In the case of a Mortgage Loan
secured by a property owned by a trust where the Mortgage Note is executed on
behalf of the trust, a deficiency judgment against the trust following
foreclosure or sale under a deed of trust or deed to secure debt, even if
obtainable under applicable law, may be of little value to the beneficiary,
grantee or mortgagee if there are no trust assets against which 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, grantee or mortgagee to exhaust the security afforded under a deed
of trust, deed to secure debt or mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the borrower. In
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, grantee or mortgagee from
obtaining a large deficiency judgment against the borrower as a result of low or
no bids at the judicial sale.
Generally, Article 9 of the UCC governs foreclosure on Cooperative Shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted Article 9 to prohibit or limit a deficiency award in certain
circumstances, including circumstances where the disposition of the collateral
(which, in the case of a Cooperative Loan, would be the shares of the
Cooperative and the related proprietary lease or occupancy agreement) was not
conducted in a commercially reasonable manner.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other federal and state statutory provisions, including the federal bankruptcy
laws and state laws affording relief to debtors, may interfere with or affect
the ability of the secured mortgage lender to realize upon its collateral and/or
enforce a deficiency judgment. For example, under the federal bankruptcy law,
all actions against the debtor, the debtor's property and any co-debtor are
automatically stayed upon the filing of a bankruptcy petition. Moreover, a court
having federal bankruptcy jurisdiction may permit a debtor through its Chapter
11 or Chapter 13 rehabilitative plan to cure a monetary default in respect of a
mortgage loan on such debtor's residence by paying arrearages within a
reasonable time period and reinstating the original mortgage loan payment
schedule, even though the lender accelerated the mortgage loan and final
judgment of foreclosure had been entered in state court (provided no sale of the
residence had yet occurred) prior to the filing of the debtor's petition. Some
courts with federal bankruptcy jurisdiction have approved plans, based on the
particular facts of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property which is not the principal
residence of the debtor may be modified. These courts have allowed modifications
that include reducing the amount of each monthly payment, changing the rate of
interest, altering the repayment schedule, forgiving all or a portion of the
debt and reducing the lender's security interest to the value of the residence,
thus leaving the lender a general unsecured creditor for the difference between
the value of the residence and the outstanding balance of the loan. Generally,
however, the terms of a 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, 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 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 mortgagee having a power of sale, does not
involve sufficient state action to afford constitutional protections to the
borrower.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980 ("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 (the "OTS") is authorized to issue rules and regulations
and to publish interpretations governing implementation of Title V. The statute
authorized any state to impose interest rate limits by adopting, before April 1,
1983, a law or constitutional provision which expressly rejects application of
the federal law. In addition, even where Title V is not so rejected, any state
is authorized by the law to adopt a provision limiting discount points or other
charges on mortgage loans covered by Title V. Certain states have taken action
to reimpose interest rate limits or to limit discount points or other charges.
Unless otherwise set forth in the related Prospectus Supplement, each
Mortgage Collateral Seller, or another specified party, will have represented
that each Mortgage Loan was originated in compliance with then applicable state
laws, including usury laws, in all material respects. However, the Mortgage
Rates on the Mortgage Loans will be subject to applicable usury laws as in
effect from time to time.
Alternative Mortgage Instruments
Alternative mortgage instruments, including adjustable rate mortgage loans
and early ownership mortgage loans, originated by non-federally chartered
lenders, have historically been subjected to a variety of restrictions. Such
restrictions differed from state to state, resulting in difficulties in
determining whether a particular alternative mortgage instrument originated by a
state-chartered lender was in compliance with applicable law. These difficulties
were alleviated substantially as a result of the enactment of Title VIII of the
Garn-St Germain Act ("Title VIII"). Title VIII provides that, notwithstanding
any state law to the contrary, (i) state-chartered banks may originate
alternative mortgage instruments in accordance with regulations promulgated by
the Comptroller of the Currency with respect to the origination of alternative
mortgage instruments by national banks, (ii) state-chartered credit unions may
originate alternative mortgage instruments in accordance with regulations
promulgated by the National Credit Union Administration with respect to
origination of alternative mortgage instruments by federal credit unions and
(iii) all other non-federally chartered housing creditors, including
state-chartered savings and loan associations, state-chartered savings banks and
mutual savings banks and mortgage banking companies, may originate alternative
mortgage instruments in accordance with the regulations promulgated by the
Federal Home Loan Bank Board, predecessor to the OTS, with respect to
origination of alternative mortgage instruments by federal savings and loan
associations. Title VIII also provides that any state may reject applicability
of the provisions of Title VIII by adopting, prior to October 15, 1985, a law or
constitutional provision expressly rejecting the applicability of 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 Depositor. 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 Depositor 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 Depositor nor
the Trustee will amend the certificates of title to identify the Trustee as the
new secured party. Accordingly, the Depositor 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 Depositor, 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 Depositor 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.
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 Depositor, the Master Servicer or
the Servicer and permit the acceleration of the maturity of the Contracts by the
Depositor, 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 Depositor, 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 Depositor
desires to accelerate the maturity of the related Contract, the Depositor'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 Depositor 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 environmental hazard.
Such clean-up costs may be substantial. It is possible that such costs could
become a liability of the related Trust 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.
Traditionally, many residential mortgage lenders have not taken steps to
evaluate whether contaminants are present with respect to any mortgaged property
prior to origination of the mortgage loan or prior to foreclosure or accepting a
deed-in-lieu of foreclosure. Neither the Depositor nor any Master Servicer will
be required by any agreement to undertake any such evaluations prior to
foreclosure or accepting a deed-in-lieu of foreclosure. The Depositor does not
make any representations or warranties or assume any liability with respect to
the absence or effect of contaminants on any Mortgaged Property or any casualty
resulting from the presence or effect of contaminants. However, the Master
Servicer will not be obligated to foreclose on any Mortgaged Property or accept
a deed-in-lieu of foreclosure if it knows or reasonably believes that there are
material contaminated conditions on such property. A failure so to foreclosure
may reduce the amounts available to Certificateholders of the related series.
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 Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (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, application of the Relief Act would adversely
affect, for an indeterminate period of time, the ability of the Servicer or the
Master Servicer, as applicable, to collect full amounts of interest on such
Mortgage Collateral. Any shortfall in interest collections resulting from the
application of the Relief Act or similar legislation or regulations, which would
not be recoverable from the related Mortgage Loans or Contracts, would result in
a reduction of the amounts distributable to the holders of the related
Certificates, and would not be covered by Advances or any form of credit
enhancement provided in connection with the related series of Certificates. In
addition, the Relief Act imposes limitations that would impair the ability of
the Servicer or the Master Servicer, as applicable, to foreclose on an affected
Mortgage Loan or Contract during the Mortgagor's period of active duty status,
and, under certain circumstances, during an additional three month period
thereafter. Thus, in the event that the Relief Act or similar legislation or
regulations applies to any Mortgage Loan or Contract which goes into default,
there may be delays in payment and losses on the related Certificates in
connection therewith. Any other interest shortfalls, deferrals or forgiveness of
payments on the Mortgage Loans or Contracts resulting from similar legislation
or regulations may result in delays in payments or losses to Certificateholders
of the related series.
Default Interest and Limitations on Prepayments
Notes and mortgages may contain provisions that obligate the borrower to
pay a late charge or additional interest if payments are not timely made, and in
some circumstances, may prohibit prepayments for a specified period and/or
condition prepayments upon the borrower's payment of prepayment fees or yield
maintenance penalties. In certain states, there are or may be specific
limitations upon the late charges which a lender may collect from a borrower for
delinquent payments. Certain states also limit the amounts that a lender may
collect from a borrower as an additional charge if the loan is prepaid. In
addition, the enforceability of 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, Thacher Proffitt & Wood and
Stroock & Stroock & Lavan LLP, counsel to the Depositor. This discussion is
directed solely to Certificateholders that hold the Certificates as capital
assets within the meaning of Section 1221 of the 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 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, 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 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, 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, Thacher Proffitt & Wood or Stroock & Stroock & Lavan LLP,
counsel to the Depositor, 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 (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'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's status as
a REMIC under the REMIC Provisions. It is not anticipated that the status of any
Trust as a REMIC will be terminated.
Characterization of Investments in REMIC Certificates
In general, the REMIC Certificates will be "real estate assets" within the
meaning of Section 856(c)(4)(A) of the Code and assets described in Section
7701(a)(19)(C) of the Code in the same proportion that the assets of the REMIC
underlying such Certificates would be so treated. Moreover, if 95% or more of
the assets of the REMIC qualify for any of the foregoing treatments at all times
during a calendar year, the REMIC Certificates will qualify for the
corresponding status in their entirety for that calendar year. Interest
(including original issue discount) on the REMIC Regular Certificates and income
allocated to the class of REMIC Residual Certificates will be interest described
in Section 856(c)(3)(B) of the Code to the extent that such Certificates are
treated as "real estate assets" within the meaning of Section 856(c)(4)(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)(4)(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 as REMICs ("Tiered
REMICs") for federal income tax purposes. Upon the issuance of any such series
of REMIC Certificates, Orrick, Herrington & Sutcliffe LLP, Thacher Proffitt &
Wood or Stroock & Stroock & Lavan LLP, counsel to the Depositor, 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)(4)(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.
Taxation of Owners of REMIC Regular Certificates
General. Except as otherwise stated in this discussion, REMIC Regular
Certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Moreover, holders of REMIC Regular Certificates that otherwise report income
under a cash method of accounting will be required to report income with respect
to REMIC Regular Certificates under an accrual method.
Original Issue Discount. Certain REMIC Regular Certificates may be issued
with "original issue discount" within the meaning of Section 1273(a) of the
Code. Any holders of REMIC Regular Certificates issued with original issue
discount generally will be required to include original issue discount in income
as it accrues, in accordance with the method described below, in advance of the
receipt of the cash attributable to such income. In addition, Section 1272(a)(6)
of the Code provides special rules applicable to REMIC Regular Certificates and
certain other debt instruments issued with original issue discount. Regulations
have not been issued under that section.
The Code requires that a prepayment assumption be used with respect to
Mortgage Collateral held by a REMIC in computing the accrual of original issue
discount on REMIC Regular Certificates issued by that REMIC, and that
adjustments be made in the amount and rate of accrual of such discount to
reflect differences between the actual prepayment rate and the prepayment
assumption. The prepayment assumption is to be determined in a manner prescribed
in Treasury regulations; as noted above, those regulations have not been issued.
The Conference Committee Report (the "Committee Report") accompanying the Tax
Reform Act of 1986 indicates that the regulations will provide that the
prepayment assumption used with respect to a REMIC Regular Certificate must be
the same as that used in pricing the initial offering of such REMIC Regular
Certificate. The Prepayment Assumption used by the Master Servicer or the
Certificate Administrator, as applicable, in reporting original issue discount
for each series of REMIC Regular Certificates will be consistent with this
standard and will be disclosed in the related Prospectus Supplement. However,
neither the Depositor, 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 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
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 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 (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 plus (ii) the daily portions of original issue discount for all days
during such accrual period prior to such day minus (iii) any payments other than
qualified stated interest payments made during such accrual period prior to such
day with respect to such Certificate.
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 may not be revoked without the consent
of the IRS.
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 may
result in discount being included in income at a slower rate than discount would
be required to be included in income using the method described above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until regulations are issued by the Treasury Department, certain
rules described in the Committee Report apply. The Committee Report indicates
that in each accrual period market discount on REMIC Regular Certificates should
accrue, at the Certificateholder's option: (i) on the basis of a constant yield
method, (ii) in the case of a REMIC Regular Certificate issued without original
issue discount, in an amount that bears the same ratio to the total remaining
market discount as the stated interest paid in the accrual period bears to the
total amount of stated interest remaining to be paid on the REMIC Regular
Certificate as of the beginning of the accrual period, or (iii) in the case of a
REMIC Regular Certificate issued with original issue discount, in an amount that
bears the same ratio to the total remaining market discount as the original
issue discount accrued in the accrual period bears to the total original issue
discount remaining on the REMIC Regular Certificate at the beginning of the
accrual period. Moreover, the Prepayment Assumption used in calculating the
accrual of original issue discount is to be used in calculating the accrual of
market discount. Because the regulations referred to in this paragraph have not
been issued, it is not possible to predict what effect such regulations might
have on the tax treatment of a REMIC Regular Certificate purchased at a discount
in the secondary market.
To the extent that REMIC Regular Certificates provide for monthly or other
periodic distributions throughout their term, the effect of these rules may be
to require market discount to be includible in income at a rate that is not
significantly slower than the rate at which such discount would accrue if it
were original issue discount. Moreover, in any event a holder of a REMIC Regular
Certificate generally will be required to treat a portion of any gain on the
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.
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" 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.
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 yield 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 generally to the holders 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. 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 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 abov 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 Depositor will make no representation that a REMIC Residual Certificate will
not be considered "noneconomic" for purposes of the above-described rules. See
"--Foreign Investors in REMIC Certificates" 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.
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.
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 (and possibly a "financial asset securitization
investment trust" within the meaning of Section 860L of the Code. (a "FASIT"))
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.
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 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 resulting
in a reduction in amounts payable to holders of the 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 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 taxable years beginning after
December 31, 1997, notwithstanding the preceding two sentences, in the case of a
REMIC Residual Certificate held by an "electing large partnership," all
interests in such partnership shall be treated as held by disqualified
organizations (without regard to whether the record holders of the partnership
furnish statements described in the preceding sentence) and the amount that is
subject to tax under the second preceding sentence is excluded from the gross
income of the partnership allocated to the partners (in lieu of allocating to
the partners a deduction for such tax paid by the partners).
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 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
treated as a corporation or partnership) created or organized in, or under the
laws of, the United States, any state thereof or the District of Columbia
(except, in the case of a partnership, to the extent provided in regulations),
or an estate whose income is subject to United States federal income tax
regardless of its source, or a trust if a court within the United States is able
to exercise primary supervision over the administration of the trust and one or
more United States persons has the authority to control all substantial
decisions of the trust. To the extent prescribed in regulations by the Secretary
of the Treasury, which regulations have not yet been finalized, a trust which
was in existence on August 20, 1996 (other than a trust treated as owned by the
grantor under subpart E of part I of subchapter J of chapter 1 of the Code), and
which was treated as a United States person on August 19, 1996, may elect to
continue to be treated as a United States person notwithstanding the previous
sentence. It is possible that the IRS may assert that the foregoing tax
exemption should not apply with respect to a REMIC Regular Certificate held by a
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.
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.
New Withholding Regulations
The Treasury Department has issued new regulations (the "New Regulations")
which make certain modifications to the withholding, backup withholding and
information reporting rules described above. The New Regulations attempt to
unify certification requirements and modify reliance standards. The New
Regulations will generally be effective for payments made after December 31,
1999, subject to certain transition rules. Prospective investors are urged to
consult their tax advisors regarding the New Regulations.
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 the Employee Retirement Income Security Act, as
amended ("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-qualifie 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 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), for
purposes of applying the general fiduciary responsibility provisions of ERISA
and the prohibited transaction provisions of ERISA and Section 4975 the Code,
when a Plan acquires an "equity interest" (such as a Certificate) in such
entity. Because of the factual nature of certain of the rules set forth in the
DOL Regulations, Plan Assets either may be deemed to include an interest in the
assets of an entity (such as a Trust) 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 and cause the Depositor, the Master
Servicer, the Certificate Administrator, any Servicer, any Subservicer, 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, including the Mortgage Loans, Contracts, Agency
Securities or any other assets held in such Trust, may also be deemed to be
assets of each Plan that acquires Certificates. Special caution should be
exercised before Plan Assets are used to acquire a Certificate in such
circumstances, especially if, with respect to such Plan Assets, the Depositor,
the Master Servicer, the Certificate Administrator, any Servicer, any
Subservicer, the Trustee, the obligor under any credit enhancement mechanism or
an affiliate thereof either (i) has investment discretion with respect to the
investment of such 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 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 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, 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. 14674 (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 Depositor 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 Depositor
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 Depositor 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
Depositor and certain of its affiliates, (c) any member of the underwriting
syndicate or selling group of which a person described in (a) or (b) is a
manager or co-manager with respect to a class of Certificates, or (d) any entity
which has received an exemption from the DOL relating to Certificates which is
similar to the Exemption.
The Exemption sets forth six general conditions which must be satisfied
for a transaction involving the purchase, sale and holding of Certificates to be
eligible for exemptive relief thereunder. First, the acquisition of Certificates
by a Plan or with Plan Assets must be on terms that are at least as favorable to
the Plan as they would be in an arm's-length transaction with an unrelated
party. Second, the Exemption only applies to Certificates evidencing rights and
interests that are not subordinated to the rights and interests evidenced by the
other Certificates of the same trust. Third, at the time of acquisition by a
Plan or with Plan Assets, the Certificates must be rated in one of the three
highest generic rating categories by Standard & Poor's, a division of The
McGraw-Hill Companies, Inc., Moody's Investors Service, Inc., Duff & Phelps
Credit Rating Co. or Fitch IBCA, Inc. (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 Depositor, the
Master Servicer, the Certificate Administrator, any Servicer, any Subservicer,
the Trustee and any mortgagor with respect to assets of a Trust constituting
more than 5% of the aggregate unamortized principal balance of the assets in the
related Trust as of the date of initial issuance of the Certificates. 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 Depositor pursuant to the assignment of
the assets to the related Trust 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
Subservicer 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 related Prospectus Supplement,
the exemptive relief afforded by the Exemption may not apply to any Certificates
where the related Trust contains a Swap.
The Exemption also requires that each Trust meet the following
requirements: (i) the Trust 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 Depositor or an
Underwriter and a Plan when the person who has discretionary authority or
renders investment advice with respect to the investment of the relevant Plan
Assets in the Certificates is (a) a mortgagor with respect to 5% or less of the
fair market value of the assets of a Trust 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 connection with the servicing, management and operation of
the Mortgage Pools and Contract Pools. The Depositor expects that the specific
conditions of the Exemption required for this purpose will be satisfied with
respect to the Certificates so that the Exemption would provide an exemption
from the restrictions imposed by Sections 406(a) and (b) of ERISA, as well as
the excise taxes imposed by Sections 4975(a) and (b) of the 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
a Plan holding interests in the investing entity holding Plan Assets) by virtue
of providing services to the Plan or such Plan Assets (or by virtue of having
certain specified relationships to such a person) solely as a result of the
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 a Plan or with Plan Assets should consult with its
counsel with respect to the potential applicability of ERISA and the Code to
such investment and the availability of the Exemption or any other prohibited
transaction exemption in connection therewith. In particular, in connection with
a contemplated purchase of Certificates representing a beneficial ownership
interest in a pool of single-family residential first Mortgage Loans or Agency
Certificates, such fiduciary or other Plan Asset 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 Trusts that include Cooperative Loans or
certain types of mortgage securities, or which contain a Swap. 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 related
Prospectus Supplement may contain additional information regarding the
application of the Exemption, PTCE 8 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
issued proposed regulations on December 22, 1997, but final regulations (the
"401(c) Regulations") have not been issued as of the date hereof. The 401(c)
Regulations are to provide guidance for the purpose of determining, in cases
where insurance policies or annuity contracts supported by an insurer's general
account are issued to or for the benefit of 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 state criminal law. Any assets of an
insurance company general account which support insurance policies or annuity
contracts issued to a Plan after December 31, 1998 or issued to Plans on or
before December 31, 1998 for which the insurance company does not comply with
the 401(c) Regulations may be treated as Plan Assets. In addition, because
Section 401(c) does not relate to insurance company separate accounts, separate
account assets are still treated as Plan Assets of any Plan invested in 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 or REMIC
Residual Certificates. To the extent Certificates are Subordinate Certificates
or the related Trust contains a Swap, except as otherwise specified in the
related 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 Depositor, the Trustee and the Master
Servicer with an opinion of counsel satisfactory to the Depositor, the Trustee
and the Master Servicer, which opinion will not be at the expense of the
Depositor, the Trustee or the Master Servicer that the purchase of such
Certificates by or on behalf of such Plan or with Plan Assets 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
Depositor, the Trustee or 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 related 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 or with Plan
Assets 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 Depositor, the Trustee or the Master Servicer 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 all transactions involving a Trust. 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
availability of exemptive relief under the Exemption, PTCE 83-1, Sections I and
III of PTCE 95-60 or any other DOL class exemption.
LEGAL INVESTMENT MATTERS -
Each class of Certificates offered hereby and by the related Prospectus
Supplement will be rated at the date of issuance in one of the four highest
rating categories by at least one Rating Agency. 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 the Secondary Mortgage Market Enhancement Act of 1984, as
amended ("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.
On April 23, 1998, the Federal Financial Institutions Examination Council
issued a revised supervisory policy statement (the "1998 Policy Statement")
applicable to all depository institutions, setting forth guidelines for and
significant restrictions on investments in "high-risk mortgage securities." The
1998 Policy Statement has been adopted by the Federal Reserve Board, the Office
of the Comptroller of the Currency, the FDIC and the OTS with an effective date
of May 26, 1998. The 1998 Policy Statement rescinded a 1992 policy statement
that had required, prior to purchase, a depository institution to determine
whether a mortgage derivative product that it was considering acquiring was
high-risk and, if so, required that its acquisition would reduce the
institution's overall interest rate risk. The 1998 Policy Statement eliminated
constraints on investing in certain "high-risk" mortgage derivative products and
substituted broader guidelines for evaluating and monitoring investment risk.
The OTS has issued Thrift Bulletin 13a, entitled "Management of Interest
Rate Risk, Investment Securities, and Derivatives Activities" ("TB 13a"), which
is effective as of December 1, 1998 and applies to thrift institutions regulated
by the OTS. One of the primary purposes of TB 13a is to require thrift
institutions, prior to taking any investment position, to conduct (i) a
pre-purchase portfolio sensitivity analysis for any "significant transaction"
involving securities or financial derivatives, and (ii) a pre-purchase price
sensitivity analysis of any "complex security" or financial derivative. For the
purposes of TB 13a, "complex security" includes, among other things, any
collateralized mortgage obligation or REMIC security, other than any "plain
vanilla" mortgage pass-through security (that is, securities that are part of a
single class of securities in the related pool that are non-callable and do not
have any special features). One or more classes of Certificates offered hereby
and by the related Prospectus Supplement may be viewed as "complex securities".
The OTS recommends that while a thrift institution should conduct its own
in-house pre-acquisition analysis, it may rely on an analysis conducted by an
independent third-party as long as management understands the analysis and its
key assumptions. Further, TB 13a recommends that the use of "complex securities
with high price sensitivity" be limited to transactions and strategies that
lower a thrift institutions portfolio interest rate risk. TB 13a warns that
investment in complex securities by thrift institutions that do not have
adequate risk measurement, monitoring and control systems may be viewed by OTS
examiners as an unsafe and unsound practice.
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 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.
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.
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 Depositor will make no representations as to the proper
characterization of any class of Certificates for legal investment or other
purposes, or as to the ability of particular investors to purchase any class of
Certificates under applicable legal investment restrictions. These uncertainties
may adversely affect the liquidity of any class of Certificates. Accordingly,
all investors whose investment activities are subject to legal investment laws
and 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 Depositor 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 Depositor for
general corporate purposes. The Depositor expects that it will make additional
sales of securities similar to the Certificates from time to time, but the
timing and amount of any such additional offerings will be dependent upon a
number of factors, including the volume of mortgage loans, contracts or mortgage
securities purchased by the Depositor, prevailing interest rates, availability
of funds and general market conditions.
METHODS OF DISTRIBUTION -
The Certificates offered hereby and by the related Prospectus Supplements
will be offered in series through one or more of the methods described below.
The Prospectus Supplement prepared for each series will describe the method of
offering being utilized for that series and will state the net proceeds to the
Depositor from such sale.
The Depositor intends that Certificates will be offered through the
following methods from time to time and that offerings may be made concurrently
through more than one of these methods or that an offering of a particular
series of Certificates may be made through a combination of two or more of 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 Depositor with institutional investors through
dealers; and
3. by direct placements by the Depositor with institutional investors.
In addition, if specified in the related Prospectus Supplement, a series
of Certificates may be offered in whole or in part to the Seller of the related
Mortgage Collateral that would comprise the Trust 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 Depositor whose identities and relationships
to the Depositor 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 Depositor or from purchasers of the Certificates in the
form of discounts, concessions or commissions. Underwriters and dealers
participating in the distribution of the Certificates may be deemed to be
underwriters in connection with such Certificates, and any discounts or
commissions received by them from the Depositor and any profit on the resale of
Certificates by them may be deemed to be underwriting discounts and commissions
under the Securities Act 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 Depositor will indemnify the
several underwriters and the underwriters will indemnify the Depositor 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 Depositor and purchasers of
Certificates of such series.
The Depositor anticipates that the Certificates offered hereby will be
sold primarily to institutional investors or sophisticated non-institutional
investors. Purchasers of Certificates, including dealers, may, depending on the
facts and circumstances of 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 Depositor by Orrick, Herrington & Sutcliffe LLP, New
York, New York, Thacher Proffitt & Wood, New York, New York or Stroock & Stroock
& Lavan LLP, New York, New York, as specified in the Prospectus Supplement.
FINANCIAL INFORMATION
The Depositor has determined that its financial statements are not
material to the offering made hereby. The Certificates do not represent an
interest in or an obligation of the Depositor. The Depositor's only obligations
with respect to a series of Certificates will be to repurchase certain items of
Mortgage Collateral upon any breach of certain limited representations and
warranties made by the Depositor, or as otherwise provided in the applicable
Prospectus Supplement.
ADDITIONAL INFORMATION
The Depositor has filed the Registration Statement with respect to the
Certificates with the Commission. The Depositor 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 Depositor 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).
REPORTS TO CERTIFICATEHOLDERS
Monthly reports which contain information concerning the Trust Fund for a
series of Certificates will be sent by or on behalf of the Master Servicer or
the Trustee to each holder of record of the Certificates of the related series.
See "Description of the Certificates--Reports to Certificateholders." Reports
forwarded to holders will contain financial information that has not been
examined or reported upon by an independent certified public accountant. The
Depositor will file with the Commission such periodic reports with respect to
the trust for a series of certificates as are required under the Exchange Act.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
With respect to each series of Certificates offered 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 series of Certificates. The Depositor will provide or cause to be
provided without charge to each person to whom this Prospectus and related
Prospectus Supplement is 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.
2
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
1998 Policy Statement............124
401(c) Regulations...............122
Accrual Certificates..............22
Additional Collateral..............5
Additional Collateral Loan Seller..4
Additional Collateral Loans........4
Additional Collateral Requirement..5
Advance...........................37
Affiliated Seller.................17
Agency Securities..................1
Appraised Value....................7
ARM Loans..........................8
Balloon Amount.....................4
Balloon Loans......................4
Bankruptcy Amount.................49
Bankruptcy Losses.................51
Beneficial Owner..................23
Bi-Weekly Loans....................4
Book-Entry Certificates...........23
Buy-Down Funds.....................9
Buy-Down Mortgage Loans............4
Buy-Down Period....................9
Call Price........................70
Cedel.............................23
Cedel Participants................24
CERCLA............................92
Certificate Account................2
Certificate Administrator..........1
Certificate Insurance Policy......57
Certificate Registrar.............23
Certificateholder.................23
Certificates.......................1
Clearance Cooperative.............25
Closing Date......................99
Code..............................14
Commission.........................3
Committee Report..................99
Compensating Interest.............38
Conservation Act..................93
Contract Pool......................1
Contract Pool Insurance Policy....54
Contracts..........................1
Contributions Tax................112
Conventional Loans.................4
Convertible Mortgage Loan..........9
Cooperative........................4
Cooperative Dwellings..............4
Cooperative Loans..................4
Cooperative Note..................80
Counterparties....................59
Credit Scores.....................10
Crime Control Act.................95
Custodial Account..................2
Custodian..........................3
Cut-off Date.......................2
Debt Service Reduction............56
Defaulted Mortgage Losses.........50
Deferred Interest..................9
Deficient Valuation...............55
Depositaries......................23
Depositor..........................1
Determination Date................35
DIDMC.............................95
Direct Puerto Rico Mortgage.......27
Distribution Amount...............34
Distribution Date.................33
DOL..............................118
DOL Regulations..................118
DTC...............................23
DTC Participants..................23
Due Date..........................35
Due Period........................35
Eligible Account..................31
Endorsable Puerto Rico Mortgage...27
ERISA............................117
ERISA Plans......................117
Escrow Account....................41
Euroclear.........................23
Euroclear Operator................25
Euroclear Participants............25
Excess Spread.....................29
Exchange Act.....................128
Excluded Plan....................121
Excluded Spread...................29
Exemption........................119
Exemption Rating Agencies........120
Extraordinary Losses..............51
Fannie Mae.........................1
Fannie Mae Securities..............2
FDIC..............................17
FHA................................3
FHA Contracts.....................14
FHA Loans..........................3
Form 8-K...........................3
Fraud Loss Amount.................49
Fraud Losses......................51
Freddie Mac........................1
Freddie Mac Act...................15
Freddie Mac Securities.............1
Garn-St Germain Act...............87
Ginnie Mae.........................1
Ginnie Mae I Certificate..........15
Ginnie Mae II Certificate.........15
Ginnie Mae Securities..............1
GMAC Mortgage.....................64
GPM Loans..........................4
High Cost Loans...................87
Holder-in-Due-Course..............91
Housing Act.......................15
HUD................................3
Index..............................8
Indirect Participants.............23
Insurance Proceeds................30
International Borrowers............4
IRS...............................99
Issue Premium....................106
Letter of Credit..................52
Letter of Credit Bank.............52
LIBOR.............................59
Liquidated Contract...............46
Liquidated Mortgage Loan..........46
Liquidation Proceeds..............30
Loan-to-Value Ratio................6
Manufactured Home..................1
Manufactured Home.................14
Mark-to-Market Regulations.......110
Master Commitments................13
Master Servicer....................1
Maximum Mortgage Rate..............8
MERS..............................26
MERS(R) System....................27
Mezzanine Certificates............22
Minimum Mortgage Rate..............8
Modified Mortgage Loan.............6
Mortgage Collateral................1
Mortgage Collateral Seller.........2
Mortgage Loans.....................1
Mortgage Note.....................26
Mortgage Pool......................1
Mortgage Pool Insurance Policy....52
Mortgage Rates.....................4
Mortgages..........................4
Mortgagors.........................4
Neg-Am ARM Loans...................8
Net Mortgage Rate.................71
New Regulations..................117
Nonrecoverable Advance............33
Note Margin........................8
OID Regulations...................96
OTS...............................88
Overcollateralization.............50
Participants......................23
Parties in Interest..............118
Pass-Through Rate.................34
Paying Agent......................33
Percentage Interest...............34
Periodic Cap.......................8
Permitted Investments.............31
Plan Assets......................118
Plans............................118
Pledged Amount.....................5
Pledged Asset Mortgage Loans.......5
Policy Statement.................125
Pool Insurer......................52
Pooling and Servicing Agreement....1
Prepayment Interest Shortfall.....38
Primary Insurance Policy..........60
Primary Insurer...................60
Principal Prepayments.............36
Program............................3
Program Loans......................3
Program Seller....................17
Program Seller Guide..............13
Prohibited Transactions Tax......112
Prospectus Supplement..............1
PTCE 83-1........................122
PTE..............................119
Puerto Rico Mortgage Loans.........2
Purchase Obligations..............60
Purchase Price....................19
Qualified Insurer.................57
Qualified Substitute Contract.....21
Qualified Substitute Mortgage Loan21
Rating Agency.....................29
Realized Loss.....................48
Record Date.......................33
Registration Statement............22
Relief Act........................94
REMIC.............................14
REMIC Certificates................96
REMIC Provisions..................96
REMIC Regular Certificates........97
REMIC Regulations.................96
REMIC Residual Certificates.......97
REO Contract......................46
REO Mortgage Loan.................46
Repurchased Contract..............21
Repurchased Mortgage Loan.........21
Reserve Fund......................56
Residential Funding................2
Restricted Group.................120
RICO..............................95
Securities Pool....................1
Senior Certificates...............22
Senior Percentage.................49
Senior/Subordinate Series.........22
Servicer...........................2
Servicing Advances................32
Servicing Fee.....................41
Single Certificate................39
Special Hazard Amount.............49
Special Hazard Insurance Policy...54
Special Hazard Insurer............54
Special Hazard Losses.............50
Special Servicer..................44
Stated Principal Balance..........49
Strip Certificates................34
Subordinate Certificates..........22
Subservicer.......................40
Subservicing Agreement............40
Swaps.............................59
Tax-Exempt Investor..............123
Tax-Favored Plans................117
TB 13a...........................125
Terms and Conditions..............25
Tiered REMICs.....................98
Title V...........................88
Title VIII........................89
Trust..............................1
Trust Agreement....................1
Trustee............................1
UBTI.............................123
UCC...............................85
Unaffiliated Seller...............17
Underwriter......................119
United States person.............116
VA ................................3
VA Contracts......................14
VA Loans...........................4
Yield Supplement Agreements.......59
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Other Expenses of Issuance and Distribution (Item 14 of Form S-3).
The expenses expected to be incurred in connection with the issuance and
distribution of the 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 {1} $1,668,278
==========
Legal Fees and Expenses {2} $1,300,000
==========
Accounting Fees and Expenses $ {3} 960,000
=======
Trustee's Fees and Expenses $ {4} 180,000
=======
(including counsel fees)
Blue Sky Fees and Expenses $ {5} 36,000
======
Printing and Engraving Expenses $ {6} 500,000
=======
Rating Agency Fees {7}$ 3,000,000
=============
Miscellaneous $ {8} 30,000
======
Total {9} $7,674,278
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,
<PAGE>
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceeding, had no
cause to believe his conduct was unlawful.
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
<PAGE>
Section 145, 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) The Certificate of Incorporation, as amended, of General Motors
Acceptance Corporation provides that no director shall be personally
liable to General Motors Acceptance Corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to
General Motors Acceptance Corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) under Section 174, or any successor
provision thereto, of the Delaware Corporation Law, or (iv) for any
transaction from which the director derived an improper personal
benefit.
(b) Under Article VI of its By-Laws, General Motors Acceptance
Corporation shall indemnify and advance expenses to every director and
officer (and to such person's heirs, executors, administrators or other
legal representatives) in the manner and to the full extent permitted by
applicable law as it presently exists, or may hereafter be amended,
against any and all amounts (including judgments, fines, payments in
settlement, attorneys' fees and other expenses) reasonably incurred by
or on behalf of such person in connection with any threatened, pending
or completed action, suit or proceeding, whether civil, criminal
administrative or investigative (a "proceeding"), in which such director
or officer was or is made or is threatened to be made a party or is
otherwise involved 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 Acceptance Corporation, as
a director, officer, employee, fiduciary or member of any other
corporation, partnership, joint venture, trust, organization or other
enterprise. General Motors Acceptance Corporation shall not be required
to indemnify a person in connection with a proceeding initiated by such
person if the proceeding was not authorized by the Board of Directors of
General Motors Acceptance Corporation. General Motors Acceptance
Corporation shall pay the expenses of directors and officers incurred in
defending any proceeding in advance of its final disposition
("advancement of expenses"); provided, however, that the payment of
expenses incurred by a director or officer in advance of the final
disposition of the proceeding shall be made only upon receipt of an
undertaking by the director or officer to repay all amounts advanced if
it should be ultimately determined that the director or officer is not
entitled to be indemnified under Article VI of the By-Laws or otherwise.
If a claim for indemnification or advancement of expenses by an officer
or director under Article VI of the By-Laws is not paid in full within
ninety days after a written claim therefor has been received by General
Motors Acceptance Corporation, the claimant may file suit to recover the
unpaid amount of such claim, and if successful in whole or in part,
shall be entitled to the requested indemnification or advancement of
expenses under applicable law. The rights conferred on any person by
Article VI of the By-Laws shall not be exclusive of any other rights
which such person may have or hereafter acquire under any statute,
provision of the Certificate of Incorporation, By-Laws, agreement, vote
of
<PAGE>
stockholders or disinterested directors of General Motors Acceptance
Corporation or otherwise. The obligation, if any, of General Motors
Acceptance Corporation to indemnify any person who was or is serving at
its request as a director, officer or employee of another corporation,
partnership, joint venture, trust, organization or other enterprise
shall be reduced by any amount such person may collect as
indemnification from such other corporation, partnership, joint venture,
trust, organization or other enterprise.
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 Delaware General Corporation Law and directors and
officers of General Motors Acceptance Corporation are insured against some
liabilities which might arise out of their employment and not be subject to
indemnification under said General Corporation 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.
**5.3 Opinion of Stroock & Stroock & Lavan LLP 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).
**8.3 Opinion of Stroock & Stroock & Lavan LLP with respect to certain
tax matters (included as part of Exhibit 5.3).
**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).
<PAGE>
**23.3 Consent of Stroock & Stroock & Lavan LLP (included as part of
Exhibit 5.3).
**24.1 Power of Attorney.
**24.2 Certified Copy of the Resolutions of the Board of Directors of the
Registrant.
* Not filed herewith.
**As previously filed.
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;
(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
<PAGE>
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.
<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 Amendment No. 1 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Minneapolis, State of Minnesota, on {10} March 5, 1999.
RESIDENTIAL ACCREDIT LOANS, INC.
By: {11}*
Christopher J. Nordeen
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Amendment No. 1 to the Registration Statement has been signed by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C> <C>
{12}* President and Chief {13} March 4, 1999
- - ---------------------------=----
Christopher J. Nordeen Executive Officer
(Principal Executive Officer)
{14}* Director and Chief Financial {15} March 4, 1999
Davee L. Olson Officer (Principal Financial
Officer)
{16}* Director {17} March 4, 1999
Bruce J. Paradis
{18}* {19} Director {20} March 4, 1999
Dennis W. Sheehan, Jr.
{21}* Controller (Principal Accounting {22} March 4, 1999
Jack R. Katzmark Officer)
</TABLE>
*By: /s/Teresa Rae Farley
Teresa Rae Farley
Attorney-in-Fact pursuant
to a power of attorney filed
with the Registration Statement
<PAGE>
