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RASC Series 2006-EMX1 Trust – ‘424B5’ on 1/20/06

On:  Friday, 1/20/06, at 3:11pm ET   ·   Accession #:  950136-6-326   ·   File #:  333-122688-17

Previous ‘424B5’:  ‘424B5’ on 1/13/06   ·   Latest ‘424B5’:  This Filing

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 1/20/06  RASC Series 2006-EMX1 Trust       424B5                  1:935K                                   Capital Systems 01/FA

Prospectus   —   Rule 424(b)(5)
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 424B5       Definitive Materials                                HTML   1.17M 


Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
2Residential Funding Corporation
"Credit Enhancement
4Table of Contents
5Summary
9Transfer of Mortgage Loans
10The Trust
12Interest Distributions
13Subordination
14Advances
"Ratings
"Legal Investment
15ERISA Considerations
16Risk Factors
"Risks Associated with the Mortgage Loans
19Limited Obligations
"Liquidity Risks
20Special Yield and Prepayment Considerations
26Bankruptcy Risks
28Issuing Entity
"Sponsor and Master Servicer
36Affiliations Among Transaction Parties
37Description of the Mortgage Pool
"General
38Compliance with Local, State and Federal Laws
39Balloon Mortgage Loans
"Mortgage Rate Adjustment of Adjustable-Rate Loans
41Mortgage Loan Characteristics
43Static Pool Information
44Standard Hazard Insurance and Primary Mortgage Insurance
"Underwriting Standards
49The AlterNet Program
50Billing and Payment Procedures
"Origination and Servicing
52Percentage Change from Prior Year
53Additional Information
"The Yield Maintenance Agreement Provider
"Description of the Certificates
55Book-Entry Registration of the Offered Certificates
56Glossary of Terms
70Distributions on the Offered Certificates
72Determination of One-Month LIBOR
73Principal Distributions
75Excess Cash Flow and Overcollateralization
76Allocation of Losses
79Residual Interests
"Reports to Certificateholders
"Limited Mortgage Loan Purchase Right
80The Yield Maintenance Agreement
81Yield and Prepayment Considerations
"Prepayment Considerations
84Allocation of Principal Distributions
85Realized Losses and Interest Shortfalls
86Pass-Through Rates
87Purchase Price
"Final Scheduled Distribution Dates
"Weighted Average Life
102Class M-9 Certificates Yield Considerations
105Pooling and Servicing Agreement
"Custodial Arrangements
"The Master Servicer and Subservicer
"Master Servicer
106Subservicer
"Servicing and Other Compensation and Payment of Expenses
107Voting Rights
"Termination
109The Trustee
110Legal Proceedings
111Material Federal Income Tax Consequences
114Use of Proceeds
"Method of Distribution
115Legal Opinions
120ANNEX I Global Clearance, Settlement and Tax Documentation Procedures
"Initial Settlement
121Secondary Market Trading
123Certain U.S. Federal Income Tax Documentation Requirements
126ANNEX II Mortgage Loan Statistical Information
138ANNEX III Mortgage Loan Characteristics
146Introduction
"The Trusts
150The Mortgage Loans
152Interest Only Loans
156Buy-Down Mortgage Loans
157The Mortgaged Properties
158Loan-to-Value Ratio
159Underwriting Policies
164Automated Underwriting
165The Contracts
166The Agency Securities
168Mortgage Collateral Sellers
"Qualifications of Sellers
"Representations With Respect to Mortgage Collateral
170Repurchases of Mortgage Collateral
172Limited Right of Substitution
176Form of Certificates
179Assignment of Mortgage Loans
181Assignment of the Contracts
182Review of Mortgage Loan or Contract Documents
"Assignment of Mortgage Securities
"Spread
183Payments on Mortgage Collateral
187Withdrawals from the Custodial Account
188Distributions
189Example of Distributions
192Prepayment Interest Shortfalls
193Funding Account
195Servicing and Administration of Mortgage Collateral
197Special Servicing
198Realization Upon Defaulted Mortgage Loans or Contracts
201Description of Credit Enhancement
203Letters of Credit
205Overcollateralization and Excess Cash Flow
206Mortgage Pool Insurance Policies and Mortgage Insurance Policies
208Special Hazard Insurance Policies
209Bankruptcy Bonds
"Reserve Funds
210Certificate Insurance Policies; Surety Bonds
"Maintenance of Credit Enhancement
211Reduction or Substitution of Credit Enhancement
212Other Financial Obligations Related to the Certificates
"Swaps and Yield Supplement Agreements
"Purchase Obligations
213Insurance Policies on Mortgage Loans or Contracts
"Primary Insurance Policies
215Standard Hazard Insurance on Mortgaged Properties
217Standard Hazard Insurance on Manufactured Homes
"The Depositor
218The Pooling and Servicing Agreement
"Servicing Compensation and Payment of Expenses
219Evidence as to Compliance
220Certain Other Matters Regarding Servicing
"Events of Default
221Rights Upon Event of Default
222Amendment
223Termination; Retirement of Certificates
225Yield Considerations
230Maturity and Prepayment Considerations
234Certain Legal Aspects of Mortgage Loans and Contracts
242Foreclosure on Shares of Cooperatives
244Anti-Deficiency Legislation and Other Limitations on Lenders
246Homeownership Act and Similar State Laws
247Enforceability of Certain Provisions
248Applicability of Usury Laws
254Environmental Legislation
255Servicemembers Civil Relief Act
256Default Interest and Limitations on Prepayments
"Forfeitures in Drug and RICO Proceedings
258Opinions
259REMICs
"Characterization of Investments in REMIC Certificates
260Taxation of Owners of REMIC Regular Certificates
"Original Issue Discount
264Market Discount
265Premium
266Taxation of Owners of REMIC Residual Certificates
268Taxable Income of the REMIC
269Basis Rules, Net Losses and Distributions
270Excess Inclusions
273Possible Pass-Through of Miscellaneous Itemized Deductions
275Sales of REMIC Certificates
276Prohibited Transactions and Other Possible REMIC Taxes
279Foreign Investors in REMIC Certificates
280State and Other Tax Consequences
281ERISA Plan Asset Regulations
282Prohibited Transaction Exemptions
288Insurance Company General Accounts
"Representations From Investing ERISA Plans
289Tax-Exempt Investors; REMIC Residual Certificates
"Consultation With Counsel
290Legal Investment Matters
292Methods of Distribution
294Legal Matters
"Incorporation of Certain Information by Reference
296Glossary

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Filed Pursuant to Rule 424(b)(5) Registration File No.: 333-122688-17 Prospectus Supplement dated January 18, 2006 (To Prospectus dated January 18, 2006) $424,600,000 RESIDENTIAL ASSET SECURITIES CORPORATION DEPOSITOR RASC SERIES 2006-EMX1 TRUST ISSUING ENTITY RESIDENTIAL FUNDING CORPORATION MASTER SERVICER AND SPONSOR HOME EQUITY MORTGAGE ASSET-BACKED PASS-THROUGH CERTIFICATES,SERIES 2006-EMX1 OFFERED CERTIFICATES The trust will consist primarily of a pool of one- to four-family fixed rate and adjustable rate, first lien and junior lien mortgage loans. The trust will issue these classes of certificates, that are offered under this prospectus supplement: o 3 classes of senior certificates designated Class A-1, Class A-2 and Class A-3 Certificates; and o 9 classes of subordinated certificates designated Class M-1, Class M-2, Class M-3, Class M-4, Class M-5, Class M-6, Class M-7, Class M-8 and Class M-9 Certificates; all as more fully described in the table on page S-6 of this prospectus supplement. CREDIT ENHANCEMENT Credit enhancement for the offered certificates consists of: o excess cash flow and overcollateralization; o yield maintenance agreement; and o subordination provided to the Class A Certificates by the Class M Certificates, and subordination provided to the Class M Certificates by each class of Class M Certificates with a lower payment priority. Distributions on the certificates will be on the 25th of each month or, if the 25th is not a business day, on the next business day, beginning February 27, 2006. -------------------------------------------------------------------------------- YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-15 IN THIS PROSPECTUS SUPPLEMENT. -------------------------------------------------------------------------------- NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE OFFERED CERTIFICATES OR DETERMINED THAT THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. THE CERTIFICATES REPRESENT INTERESTS ONLY IN THE TRUST, AS THE ISSUING ENTITY, AND DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF RESIDENTIAL ASSET SECURITIES CORPORATION, AS THE DEPOSITOR, RESIDENTIAL FUNDING CORPORATION, AS THE SPONSOR, OR ANY OF THEIR AFFILIATES. Residential Funding Securities Corporation and Citigroup Global Markets Inc., as underwriters, will severally purchase all of the offered certificates from the depositor in the amounts described in "Method of Distribution" on page S-113 of this prospectus supplement. The certificates are offered by the issuing entity through the underwriters to prospective purchasers from time to time in negotiated transactions at varying prices to be determined based on the market price at the time of sale. The net proceeds to the depositor from the sale of these underwritten certificates will be approximately 99.72% of the certificate principal balance of these underwritten certificates, before deducting expenses. GMAC RFC SECURITIES CITIGROUP (Joint Lead Managers and Book Runners)
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IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS We provide information to you about the offered certificates in two separate documents that provide progressively more detail: o the accompanying prospectus, which provides general information, some of which may not apply to your series of certificates; and o this prospectus supplement, which describes the specific terms of your series of certificates. The depositor's principal offices are located at 8400 Normandale Lake Boulevard, Suite 250, Minneapolis, Minnesota 55437 and its telephone number is (952) 857-7000. S-2
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TABLE OF CONTENTS PAGE Summary................................................................ S-4 Transfer of Mortgage Loans............................................. S-8 Risk Factors........................................................... S-15 Risks Associated with the Mortgage Loans......................... S-15 Limited Obligations.............................................. S-18 Liquidity Risks.................................................. S-18 Special Yield and Prepayment Considerations...................... S-19 Bankruptcy Risks................................................. S-25 Issuing Entity......................................................... S-27 Sponsor and Master Servicer............................................ S-27 Affiliations Among Transaction Parties................................. S-35 Description of the Mortgage Pool....................................... S-36 General.......................................................... S-36 Compliance with Local, State and Federal Laws.................... S-37 Balloon Mortgage Loans........................................... S-38 Mortgage Rate Adjustment of Adjustable-Rate Loans................ S-38 Mortgage Loan Characteristics.................................... S-40 Static Pool Information.......................................... S-42 Standard Hazard Insurance and Primary Mortgage Insurance......... S-43 Underwriting Standards........................................... S-43 The AlterNet Program............................................. S-48 Billing and Payment Procedures................................... S-49 Origination and Servicing........................................ S-49 Additional Information........................................... S-52 The Yield Maintenance Agreement Provider............................... S-52 Description of the Certificates........................................ S-52 General.......................................................... S-52 Book-Entry Registration of the Offered Certificates.............. S-54 Glossary of Terms................................................ S-55 Distributions on the Offered Certificates........................ S-69 Interest Distributions........................................... S-70 Determination of One-Month LIBOR................................. S-71 Principal Distributions.......................................... S-72 Excess Cash Flow and Overcollateralization....................... S-74 Allocation of Losses............................................. S-75 Advances........................................................ S-77 Residual Interests............................................... S-78 Reports to Certificateholders.................................... S-78 Limited Mortgage Loan Purchase Right............................. S-78 The Yield Maintenance Agreement.................................. S-79 Yield and Prepayment Considerations.................................... S-80 General.......................................................... S-80 Prepayment Considerations........................................ S-80 Allocation of Principal Distributions............................ S-83 Realized Losses and Interest Shortfalls.......................... S-84 Pass-Through Rates............................................... S-85 Purchase Price................................................... S-86 Final Scheduled Distribution Dates............................... S-86 Weighted Average Life............................................ S-86 Class M-9 Certificates Yield Considerations...................... S-101 Pooling and Servicing Agreement........................................ S-104 General.......................................................... S-104 Custodial Arrangements........................................... S-104 The Master Servicer and Subservicer.............................. S-104 Servicing and Other Compensation and Payment of Expenses......... S-105 Voting Rights.................................................... S-106 Termination...................................................... S-106 The Trustee...................................................... S-108 Legal Proceedings................................................ S-109 Material Federal Income Tax Consequences............................... S-110 Use of Proceeds........................................................ S-113 Method of Distribution................................................. S-113 Legal Opinions......................................................... S-114 Ratings................................................................ S-114 Legal Investment....................................................... S-115 ERISA Considerations................................................... S-115 ANNEX I Global Clearance, Settlement and Tax Documentation Procedures......................................... I-1 Initial Settlement............................................... I-1 Secondary Market Trading......................................... I-2 Certain U.S. Federal Income Tax Documentation Requirements....... I-4 ANNEX II Mortgage Loan Statistical Information........................ II-1 ANNEX III Mortgage Loan Characteristics................................ III-1 S-3
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SUMMARY The following summary provides a brief description of material aspects of the offering 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 prospectus. Issuing Entity.................................... RASC Series 2006-EMX1 Trust. Title of the offered certificates................. Home Equity Mortgage Asset-Backed Pass-Through Certificates, Series 2006-EMX1. Depositor......................................... Residential Asset Securities Corporation, an affiliate of Residential Funding Corporation. Master Servicer and Sponsor....................... Residential Funding Corporation. Originator and Subservicer........................ Mortgage Lenders Network USA, Inc. Trustee........................................... U.S. Bank National Association. Yield Maintenance Agreement Provider.............. Bear Stearns Bank plc. Mortgage pool..................................... The mortgage pool will consist of 2,746 fixed and adjustable-rate first lien and junior lien mortgage loans with an aggregate principal balance of approximately $440,000,794 as of the close of business on the day prior to the cut-off date. Cut-off date...................................... January 1, 2006. Closing date...................................... On or about January 20, 2006. Distribution dates................................ On the 25th of each month or, if the 25th is not a business day, on the next business day, beginning in February 2006. Form of offered certificates...................... Book-entry. SEE "DESCRIPTION OF THE CERTIFICATES--BOOK-ENTRY REGISTRATION OF THE OFFERED CERTIFICATES" IN THIS PROSPECTUS SUPPLEMENT. S-4
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Minimum denominations............................. Class A, Class M-1, Class M-2 and Class M-3 Certificates: $100,000. Class M-4, Class M-5, Class M-6, Class M-7, Class M-8 and Class M-9 Certificates: $250,000. ERISA considerations.............................. Subject to the considerations described in this prospectus supplement, the offered certificates are expected to be considered eligible for purchase by persons investing assets of employee benefit plans or individual retirement accounts. SEE "ERISA CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT AND IN THE ACCOMPANYING PROSPECTUS. Legal investment.................................. The offered 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 "LEGAL INVESTMENT MATTERS" IN THE PROSPECTUS. S-5
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OFFERED CERTIFICATES ------------------------------------------------------------------------------------------------------------------- PASS-THROUGH INITIAL CERTIFICATE INITIAL RATING FINAL SCHEDULED CLASS RATE PRINCIPAL BALANCE (S&P/MOODY'S) DESIGNATIONS DISTRIBUTION DATE ------------------------------------------------------------------------------------------------------------------- CLASS A CERTIFICATES: ------------------------------------------------------------------------------------------------------------------- A-1 Adjustable $ 160,377,000 AAA/Aaa Senior/Adjustable October 2024 Rate ------------------------------------------------------------------------------------------------------------------- A-2 Adjustable $ 163,990,000 AAA/Aaa Senior/Adjustable March 2035 Rate ------------------------------------------------------------------------------------------------------------------- A-3 Adjustable $ 17,073,000 AAA/Aaa Senior/Adjustable January 2036 Rate ------------------------------------------------------------------------------------------------------------------- Total Class A Certificates: $ 341,440,000 ------------------------------------------------------------------------------------------------------------------- CLASS M CERTIFICATES: ------------------------------------------------------------------------------------------------------------------- M-1 Adjustable $ 17,160,000 AA+/Aa1 Mezzanine/ January 2036 Adjustable Rate ------------------------------------------------------------------------------------------------------------------- M-2 Adjustable $ 15,400,000 AA+/Aa2 Mezzanine/ January 2036 Adjustable Rate ------------------------------------------------------------------------------------------------------------------- M-3 Adjustable $ 9,020,000 AA/Aa3 Mezzanine/ January 2036 Adjustable Rate ------------------------------------------------------------------------------------------------------------------- M-4 Adjustable $ 8,140,000 AA/A1 Mezzanine/ January 2036 Adjustable Rate ------------------------------------------------------------------------------------------------------------------- M-5 Adjustable $ 7,700,000 AA-/A2 Mezzanine/ January 2036 Adjustable Rate ------------------------------------------------------------------------------------------------------------------- M-6 Adjustable $ 7,260,000 A+/A3 Mezzanine/ January 2036 Adjustable Rate ------------------------------------------------------------------------------------------------------------------- M-7 Adjustable $ 6,820,000 A/Baa1 Mezzanine/ January 2036 Adjustable Rate ------------------------------------------------------------------------------------------------------------------- M-8 Adjustable $ 6,380,000 BBB+/Baa2 Mezzanine/ January 2036 Adjustable Rate ------------------------------------------------------------------------------------------------------------------- M-9 Adjustable $ 5,280,000 BBB/Baa3 Mezzanine/ January 2036 Adjustable Rate ------------------------------------------------------------------------------------------------------------------- Total Class M Certificates: $ 83,160,000 ------------------------------------------------------------------------------------------------------------------- Total Offered Certificates: $ 424,600,000 ------------------------------------------------------------------------------------------------------------------- NON-OFFERED CERTIFICATES ------------------------------------------------------------------------------------------------------------------- SB N/A $ 15,400,794 N/A Subordinate N/A ------------------------------------------------------------------------------------------------------------------- R-I N/A N/A N/A Residual N/A ------------------------------------------------------------------------------------------------------------------- R-II N/A N/A N/A Residual N/A ------------------------------------------------------------------------------------------------------------------- Total non-offered certificates: $ 15,400,794 ------------------------------------------------------------------------------------------------------------------- Total offered and non offered certificates: $ 440,000,794 ------------------------------------------------------------------------------------------------------------------- S-6
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OTHER INFORMATION: Only the offered certificates are offered for sale pursuant to the prospectus supplement and the related prospectus. The non-offered certificates will be retained by the depositor, the master servicer or one of their affiliates. The pass-through rate on each class of Class A Certificates and Class M Certificates will be the least of: o a per annum rate equal to one-month LIBOR plus the related margin; o 14.000% per annum; and o the weighted average of the net mortgage rates of the mortgage loans, adjusted to an actual over 360-day rate. RELATED MARGIN CLASS (1) (2) -------------- ------------ ----------- A-1 0.080% 0.080% A-2 0.230% 0.460% A-3 0.320% 0.640% M-1 0.410% 0.615% M-2 0.430% 0.645% M-3 0.470% 0.705% M-4 0.630% 0.945% M-5 0.650% 0.975% M-6 0.710% 1.065% M-7 1.500% 2.250% M-8 1.950% 2.925% M-9 2.250% 3.375% __________________________ (1) Initially. (2) On and after the second distribution date after the first possible optional termination date. S-7
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TRANSFER OF MORTGAGE LOANS The diagram below illustrates the sequence of transfers of the mortgage loans that are included in the mortgage pool. The originator will, on or prior to the closing date, sell the mortgage loans to Residential Funding Corporation, as sponsor. Residential Funding Corporation will, simultaneously with the closing of the transaction described herein, sell the mortgage loans to Residential Asset Securities Corporation, as the depositor. The depositor will then transfer the mortgage loans to the trustee, on behalf of the trust that is the issuing entity. The trustee will accordingly own the mortgage loans for the benefit of the holders of the certificates. See "Pooling and Servicing Agreement - The Trustee" in this prospectus supplement in the prospectus. For a description of the affiliations among various transaction parties, see "Affiliations Among Transaction Parties" in this prospectus supplement. --------------------------------------------------------------- Emax Financial Group, LLC (Seller of mortgage loans) --------------------------------------------------------------- | | sale of mortgage loans | | --------------------------------------------------------------- Residential Funding Corporation (Master Servicer and Sponsor) --------------------------------------------------------------- | | sale of mortgage loans | | --------------------------------------------------------------- Residential Asset Securities Corporation (Depositor) --------------------------------------------------------------- | | sale of mortgage loans | | --------------------------------------------------------------- U.S. Bank National Association (Trustee) (owner of mortgage loans on behalf of issuing entity for the benefit of holders of certificates) --------------------------------------------------------------- S-8
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THE TRUST The depositor will establish a trust with respect to the Series 2006-EMX1 Certificates. On the closing date, the depositor will deposit the pool of mortgage loans described in this prospectus supplement into the trust. In addition the trust will enter into a yield maintenance agreement for the benefit of the Class A Certificates and Class M Certificates. Each certificate will represent a partial ownership interest in the trust. THE MORTGAGE POOL The mortgage loans to be deposited into the trust will consist of fixed-rate and adjustable-rate first lien and junior lien mortgage loans. The mortgage loans to be deposited into the trust will have the following characteristics as of the cut-off date: ---------------------------------------------------- WEIGHTED RANGE AVERAGE Principal balance $12,755 to $160,233* $1,000,000 Mortgage rate 5.150% to 7.6133% 13.200% Remaining term to stated maturity (months) 115 to 359 340 * Principal balance is an average. ---------------------------------------------------- The following tables describe certain characteristics of the mortgage loans included in the trust as of the cut-off date: NUMBER OF PERCENT OF MORTGAGE PRINCIPAL PRINCIPAL TYPES OF INTEREST RATES LOANS BALANCE BALANCE ------------------------ --------- ------------ ---------- Fixed rate loans........... 1,096 $ 95,683,573 21.75% Adjustable-rate loans...... 1,650 $344,317,221 78.25% --------- ------------ ---------- Total................... 2,746 $440,000,794 100.00% ========= ============ ========== NUMBER OF PERCENT OF MORTGAGE PRINCIPAL PRINCIPAL LOAN PURPOSE LOANS BALANCE BALANCE ------------- --------- ------------ ---------- Purchase................... 1,014 $182,078,743 41.38% Rate/Term Refinance........ 23 $ 4,478,298 1.02% Equity Refinance........... 1,709 $253,443,753 57.60% --------- ------------ ---------- Total................... 2,746 $440,000,794 100.00% ========= ============ ========== NUMBER OF PERCENT OF MORTGAGE PRINCIPAL PRINCIPAL LOAN DOCUMENTATION LOANS BALANCE BALANCE ------------------- --------- ------------- ---------- Full Documentation......... 1,782 $284,671,795 64.70% Reduced Documentation...... 964 $155,328,999 35.30% --------- ------------ ---------- Total................... 2,746 $440,000,794 100.00% ========= ============ ========== The properties securing the mortgage loans include single-family detached properties, properties in planned unit developments, two-to-four family units, condominiums, townhouses and leaseholds. The interest rate on each adjustable rate mortgage loan will adjust on each adjustment date to equal the sum of the related index and the related note margin on the mortgage note, subject to periodic rate caps and a maximum and minimum interest rate, as described in this prospectus supplement. The mortgage loans were originated using less restrictive underwriting standards than the underwriting standards applied by some other first lien and junior lien mortgage loan purchase programs, including other programs of Residential Funding Corporation and the programs of Fannie Mae and Freddie Mac. The securities described on the table on page S-6 are the only securities backed by this mortgage pool that will be issued. SEE "RISK FACTORS--RISKS ASSOCIATED WITH THE MORTGAGE LOANS" IN THIS PROSPECTUS SUPPLEMENT. S-9
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FOR ADDITIONAL INFORMATION REGARDING THE MORTGAGE POOL, SEE "DESCRIPTION OF THE MORTGAGE POOL" IN THIS PROSPECTUS SUPPLEMENT. SERVICING Residential Funding Corporation will master service the mortgage loans, as more fully described under "POOLING AND SERVICING AGREEMENT" herein. The servicing fees for each mortgage loan are payable out of the interest payments on that mortgage loan prior to payments to certificateholders. The servicing fees relating to each mortgage loan will be 0.5500% per annum of the outstanding principal balance of that mortgage loan. The servicing fees consist of (a) servicing fees payable to the master servicer, which are payable with respect to each mortgage loan at a rate of 0.0500% per annum, and (b) subservicing fees payable to the subservicer, which are payable with respect to each mortgage loan at a rate of 0.5000% per annum, and other related compensation payable to the subservicer, including such compensation paid to the master servicer as the direct servicer of a mortgage loan for which there is no subservicer. REPURCHASES OR SUBSTITUTIONS OF MORTGAGE LOANS If Residential Funding Corporation cannot cure a breach of any representation or warranty made by it and assigned to the trustee for the benefit of the certificateholders relating to a mortgage loan within 90 days after notice from the trustee or servicer, and the breach materially and adversely affects the interests of the certificateholders in the mortgage loan, Residential Funding Corporation will be obligated to purchase the mortgage loan at a price equal to its principal balance 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 payable in respect of servicing compensation. Likewise, as described under "DESCRIPTION OF THE CERTIFICATES--REVIEW OF MORTGAGE LOAN OR CONTRACT DOCUMENTS" in the prospectus, if Residential Funding Corporation cannot cure certain documentary defects with respect to a mortgage loan, Residential Funding Corporation will be required to repurchase the related mortgage loan. In addition, Residential Funding Corporation may substitute a new mortgage loan for the repurchased mortgage loan that was removed from the trust within two years after the closing date if it delivers an opinion of counsel with respect to certain tax matters. Any substitute mortgage loan will be required to satisfy certain conditions regarding its outstanding principal balance, mortgage rate, loan-to-value ratio and remaining term to maturity, as described more fully under "THE TRUSTS--LIMITED RIGHT OF SUBSTITUTION" in the prospectus. See also "THE TRUSTS--REPURCHASES OF MORTGAGE COLLATERAL" in the prospectus. PAYMENTS ON THE OFFERED CERTIFICATES AMOUNT AVAILABLE FOR MONTHLY DISTRIBUTION. On each distribution date, the trustee will make distributions to investors. The amounts available for distribution will include: o collections of monthly payments on the mortgage loans, including prepayments and other unscheduled collections; PLUS o advances for delinquent payments on the mortgage loans; MINUS S-10
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o fees and expenses of the subservicers and the master servicer for the mortgage loans, including reimbursement for advances. SEE "DESCRIPTION OF THE CERTIFICATES--GLOSSARY OF TERMS--AVAILABLE DISTRIBUTION AMOUNT" IN THIS PROSPECTUS SUPPLEMENT. PRIORITY OF PAYMENTS. Payments to the certificateholders will be made from the available distribution amount as follows: Priority of Class A Certificates Payment interest (pro rata) Class M Certificates interest (sequentially) Class A Certificates principal (sequentially) Class M Certificates principal (in the order of priority described under "DESCRIPTION OF THE CERTIFICATES--PRINCIPAL DISTRIBUTIONS") The remaining amounts will be distributed for the following purposes in the amounts and priority set forth under "Description of the Certificates--Excess Cash Flow and Overcollateralization" in this prospectus supplement: o distribution of principal to cover some realized losses; o distribution of additional principal until the required level of overcollateralization is reached; o payment in respect of prepayment interest shortfalls for that distribution date and remaining unpaid from prior distribution dates; o payment in respect of basis risk shortfalls; o payment in respect of shortfalls due to the Servicemembers Civil Relief Act for that distribution date; o payment in respect of the principal portion of any realized losses previously allocated thereto that remain unreimbursed; and o distribution of any remaining funds to the Class SB and Class R Certificates, as described in the pooling and servicing agreement. SEE "DESCRIPTION OF THE CERTIFICATES--INTEREST DISTRIBUTIONS," "--PRINCIPAL DISTRIBUTIONS" AND "--EXCESS CASH FLOW AND OVERCOLLATERALIZATION" IN THIS PROSPECTUS SUPPLEMENT. INTEREST DISTRIBUTIONS. The amount of interest owed to each class of Class A Certificates and Class M Certificates on each distribution date will equal: o the pass-through rate for that class of certificates; MULTIPLIED BY o the certificate principal balance of that class of certificates as of the day immediately prior to the related distribution date; MULTIPLIED BY o the actual number of days in the related interest accrual period divided by 360; MINUS S-11
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o the share of some types of interest shortfalls allocated to that class, such as prepayment interest shortfalls, relief act shortfalls and the interest portion of realized losses not covered by excess cash flow or overcollateralization, as described more fully in the definition of "ACCRUED CERTIFICATE INTEREST" in "DESCRIPTION OF THE CERTIFICATES --GLOSSARY OF TERMS" in this prospectus supplement. SEE "DESCRIPTION OF THE CERTIFICATES--INTEREST DISTRIBUTIONS" IN THIS PROSPECTUS SUPPLEMENT. ALLOCATIONS OF PRINCIPAL. Principal distributions on the certificates will be made primarily from principal payments on the mortgage loans as described in this prospectus supplement. In addition, the Class A Certificates and the Class M Certificates will receive a distribution of principal to the extent of any excess cash flow from the mortgage loans available to cover losses and then, to increase the amount of overcollateralization until the required level of overcollateralization is reached, to the extent described in this prospectus supplement. SEE "DESCRIPTION OF THE CERTIFICATES--PRINCIPAL DISTRIBUTIONS" AND "--EXCESS CASH FLOW AND OVERCOLLATERALIZATION" IN THIS PROSPECTUS SUPPLEMENT. CREDIT ENHANCEMENT The credit enhancement for the benefit of the offered certificates consists of: EXCESS CASH FLOW. Because more interest with respect to the mortgage loans is payable by the mortgagors than is expected to be necessary to pay the interest on the Class A Certificates and the Class M Certificates each month and related expenses, there may be excess cash flow with respect to the mortgage loans. Some of this excess cash flow may be used to protect the offered certificates against some realized losses by making an additional payment of principal up to the amount of the realized losses. OVERCOLLATERALIZATION. On each distribution date, to the extent not used to cover realized losses, excess cash flow will be used to pay principal to the Class A Certificates and Class M Certificates as described in this prospectus supplement, reducing the aggregate certificate principal balance of those certificates below the aggregate principal balance of the mortgage loans, to the extent necessary to reach and maintain the required level of overcollateralization. The excess amount of the balance of the mortgage loans represents overcollateralization, which may absorb some losses on the mortgage loans, if not covered by excess cash flow. SUBORDINATION. So long as the Class M Certificates remain outstanding, losses on the mortgage loans which are not covered by amounts payable under excess cash flow or overcollateralization will be allocated to the Class M Certificates that remain outstanding 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 are outstanding, all such losses will be allocated to the Class A Certificates as described in this prospectus supplement. YIELD MAINTENANCE AGREEMENT. The holders of the offered certificates may benefit from a series of interest rate cap payments from Bear Stearns Bank plc pursuant to a yield maintenance agreement as described in this prospectus supplement. Amounts received by the trust under the S-12
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yield maintenance agreement will be distributed as a part of excess cash flow, as described in this prospectus supplement. The yield maintenance agreement will terminate after the distribution date in December 2010. SEE "THE YIELD MAINTENANCE AGREEMENT PROVIDER" AND "DESCRIPTION OF THE CERTIFICATES--THE YIELD MAINTENANCE AGREEMENT" IN THIS PROSPECTUS SUPPLEMENT. ADVANCES With respect to any month, if the master servicer does not receive the full scheduled payment on a mortgage loan, the master servicer will advance its own funds to cover that shortfall. However, the master servicer will make an advance only if it determines that the advance will be recoverable from future payments or collections on that mortgage loan. SEE "DESCRIPTION OF THE CERTIFICATES--ADVANCES" IN THIS PROSPECTUS SUPPLEMENT. OPTIONAL TERMINATION On any distribution date on which the aggregate stated principal balance of the mortgage loans after giving effect to distributions to be made on that distribution date is less than 10% of the aggregate principal balance of the mortgage loans as of the cut-off date, the master servicer may, but will not be required to: o purchase from the trust all of the remaining mortgage loans and cause an early retirement of the certificates; OR o purchase all of the certificates. The optional termination price paid by the master servicer will also include certain amounts owed by Residential Funding Corporation, under the terms of the agreement pursuant to which Residential Funding Corporation will sell the mortgage loans to the depositor, that remain unpaid on the date of the optional termination. An optional purchase of any class of certificates will cause the outstanding certificate principal balance of those certificates to be paid in full with 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 the ratings listed on page S-6 of this prospectus supplement. A security rating is not a recommendation to buy, sell or hold a security and may be changed or withdrawn at any time by the assigning rating agency. The ratings also do not address the rate of principal prepayments on the mortgage loans. The rate of prepayments, if different than originally anticipated, could adversely affect the yield realized by holders of the offered certificates. In addition, the ratings do not address the likelihood of the receipt of any amounts in respect of prepayment interest shortfalls, relief act shortfalls or basis risk shortfalls. SEE "RATINGS" IN THIS PROSPECTUS SUPPLEMENT. LEGAL INVESTMENT The offered certificates will NOT be "mortgage related securities" for purposes of the Secondary Mortgage Market Enhancement Act of 1984. You should S-13
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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 Subject to the considerations described in "ERISA Considerations" in this prospectus supplement, the offered certificates are expected to be considered eligible for purchase by persons investing assets of employee benefit plans or individual retirement 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, exclusive of the yield maintenance agreement, as two REMICs. The offered certificates will each represent ownership of a regular interest in a REMIC, coupled with an interest in a yield maintenance agreement. The offered certificates generally will be treated as debt instruments for federal income tax purposes. Offered certificateholders will be required to include in income all interest and original issue discount, if any, on their certificates in accordance with the accrual method of accounting regardless of the certificateholder's usual method of accounting. For federal income tax purposes, the residual certificates will represent the sole residual interest in each REMIC. FOR FURTHER INFORMATION REGARDING THE FEDERAL INCOME TAX CONSEQUENCES OF INVESTING IN THE OFFERED CERTIFICATES, SEE "MATERIAL FEDERAL INCOME TAX CONSEQUENCES" IN THIS PROSPECTUS SUPPLEMENT AND IN THE PROSPECTUS. S-14
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RISK FACTORS The offered certificates are not suitable investments for all investors. In particular, you should not purchase the offered certificates unless you understand the prepayment, credit, liquidity and market risks associated with the offered certificates. 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: RISKS ASSOCIATED WITH THE MORTGAGE LOANS THE RETURN ON YOUR CERTIFICATES MAY BE Losses on the mortgage loans may occur due to a wide variety of causes, including a AFFECTED BY LOSSES ON THE MORTGAGE LOANS, decline in real estate values and adverse changes in the borrower's financial WHICH COULD OCCUR DUE TO A VARIETY OF condition. A decline in real estate values or economic conditions nationally or in the CAUSES regions where the mortgaged properties are located may increase the risk of losses on the mortgage loans. UNDERWRITING STANDARDS MAY AFFECT THE The mortgage loans have been originated using underwriting standards that are less RISK OF LOSS ON THE MORTGAGE LOANS restrictive than the underwriting requirements used as standards for other first lien and junior lien mortgage loan purchase programs, including other programs of Residential Funding Corporation and the programs of Fannie Mae and Freddie Mac. Applying less restrictive underwriting standards creates additional risks that losses on the mortgage loans will be allocated to certificateholders. Examples include the following: o mortgage loans made to borrowers having imperfect credit histories who are more likely to cease making monthly payments if their financial condition deteriorates; o mortgage loans where the amount of the loan at origination with respect to first lien mortgage loans, or the combined amount of the loan and any other senior loan at origination with respect to junior lien mortgage loans, are more than 80% of the value of the related mortgaged properties, which constitute 43.9% of the mortgage pool by principal balance, which have an increased risk that the value of those mortgaged properties will not be sufficient to satisfy those mortgage loans upon foreclosure; o mortgage loans made to borrowers with credit scores lower than S-15
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600, which constitute 25.0% of the mortgage pool by principal balance, excluding credit scores that were not available, who are more likely to cease making monthly payments if their financial condition deteriorates; o mortgage loans made to borrowers who have debt-to-income ratios that are greater than 35.00%, which constitute 73.7% of the mortgage pool by principal balance, who are more likely to experience difficulty making mortgage payments if their financial condition deteriorates; and o mortgage loans made to borrowers whose income is not required to be disclosed or verified, which constitute 35.1% of the mortgage pool by principal balance, that have an increased risk of misstatements relating to borrower income. The foregoing characteristics of the mortgage loans may adversely affect the performance of the mortgage pool and the value of the offered certificates as compared to other mortgage pools and other series of mortgage pass-through certificates issued by the depositor and its affiliates. The mortgage loans with higher loan-to-value ratios may also present a greater risk of loss. To the best of the depositor's knowledge, none of the mortgage loans secured by first liens that have a loan-to-value ratio, or a combined loan-to-value ratio where the related mortgaged property also had a junior lien, at origination in excess of 80%, are insured by a borrower-paid, primary mortgage insurance policy. To the best of the depositor's knowledge, none of the mortgage loans secured by junior liens that have a combined loan-to-value ratio at origination in excess of 80%, are insured by a borrower-paid, primary mortgage insurance policy. Approximately 43.9% of the cut-off date principal balance of the mortgage loans have a loan-to-value ratio, or combined loan-to-value ratio with respect to mortgage loans that are secured by junior liens, at origination in excess of 80%. SOME OF THE MORTGAGE LOANS PROVIDE FOR Approximately 10.1% of the cut-off date principal balance of the mortgage loans are LARGE PAYMENTS AT MATURITY. not fully amortizing over their terms to maturity and, thus, will require substantial principal payments, sometimes called a balloon amount, at their stated maturity. Mortgage loans which require payment of a balloon amount involve a greater degree of risk because the ability of a mortgagor to pay a balloon amount typically will depend upon the mortgagor's ability either to timely refinance the loan or to sell the related mortgaged property. SEE "DESCRIPTION OF THE MORTGAGE POOL" IN THIS PROSPECTUS SUPPLEMENT. S-16
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SOME OF THE MORTGAGE LOANS ARE SECURED BY Approximately 9.5% of the cut-off date principal balance of the mortgage loans are JUNIOR LIENS junior in priority to other loans which may or may not be included in the trust. If a property is liquidated after default by a borrower, there may not be enough proceeds to pay both the first lien mortgage loan and the junior lien mortgage loan. In that case, the trust, as holder of the junior lien mortgage loan, would suffer a loss. THE RETURN OF THE OFFERED CERTIFICATES One risk associated with investing in mortgage-backed securities is created by any MAY BE PARTICULARLY SENSITIVE TO CHANGES concentration of the related properties in one or more specific geographic regions. IN REAL ESTATE MARKETS IN SPECIFIC Approximately 12.3% of the cut-off date principal balance of the mortgage loans are REGIONS. located in Florida. If the regional economy or housing market weakens in Florida or in any other region having a significant concentration of properties underlying the mortgage loans, the mortgage loans in that region may experience high rates of loss and delinquency resulting in losses to the offered 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, civil disturbances such as riots, disruptions such as ongoing power outages, or hostilities such as terrorist actions or acts of war. Several hurricanes, which struck Louisiana, Alabama, Mississippi, Texas and Florida in recent months, may have adversely affected mortgaged properties located in those states. Generally, the mortgage pool does not include mortgage loans secured by mortgaged properties located in the federal emergency management agency ("FEMA")- designated individual assistance zones. However, FEMA-designated individual assistance zones are subject to change from time to time by FEMA and, therefore, no assurance can be given that the mortgage pool is free of mortgage loans secured by mortgaged properties located in those areas. Further, mortgage loans in the mortgage pool may be secured by mortgaged properties in FEMA-designated public assistance areas, which also may include mortgaged properties in areas that were affected by the hurricanes. Residential Funding Corporation will make a representation and warranty that each mortgaged property is free of damage and in good repair as of the closing date. In the event that a mortgaged property is damaged as of the closing date and that damage materially and adversely affects the value of or the interests of the holders of the certificates in the related mortgage loan, Residential Funding Corporation will be required to repurchase the related mortgage loan from the trust. Any such repurchases may shorten the weighted average lives of the certificates. We do not know how many mortgaged properties have been or may be affected by the hurricanes and therefore whether the payment experience on any mortgage loan in the mortgage pool will be affected. S-17
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LIMITED OBLIGATIONS PAYMENTS ON THE MORTGAGE LOANS AND THE Credit enhancement includes excess cash flow, the yield maintenance agreement, OTHER ASSETS OF THE TRUST ARE THE SOLE overcollateralization and, with respect to the Class A Certificates, the subordination SOURCE OF DISTRIBUTIONS ON YOUR provided by the Class M Certificates, and with respect to the Class M Certificates, CERTIFICATES. the subordination provided by any Class M Certificates with a lower payment priority, in each case as described in this prospectus supplement. Therefore, if there is no excess cash flow and the amount of overcollateralization is reduced to zero, subsequent losses generally will be allocated to the most subordinate Class M Certificates, in each case until the certificate principal balance of such class has been reduced to zero and after the Class M Certificates have all been reduced to zero, subsequent losses will be allocated to the Class A Certificates on a pro rata basis, until the certificate principal balances thereof have been reduced to zero. None of the depositor, the master servicer or any of their affiliates will have any obligation to replace or supplement the credit enhancement, or to take any other action to maintain any rating of the offered certificates. If any losses are incurred on the mortgage loans that are not covered by the credit enhancement, the holders of the offered certificates will bear the risk of these losses. SEE "DESCRIPTION OF THE CERTIFICATES--ALLOCATION OF LOSSES" IN THIS PROSPECTUS SUPPLEMENT. LIQUIDITY RISKS YOU MAY HAVE TO HOLD YOUR CERTIFICATES TO A secondary market for your certificates may not develop. Even if a secondary market MATURITY IF THEIR MARKETABILITY IS does develop, it may not continue, or it may be illiquid. Neither the underwriters nor LIMITED. any other person will have any obligation to make a secondary market in your certificates. Illiquidity means you may not be able to find a buyer to buy your certificates readily or at prices that will enable you to realize a desired yield. Illiquidity can have an adverse effect on the market value of the 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. WITHDRAWAL OR DOWNGRADING OF INITIAL A security rating is not a recommendation to buy, sell or hold securities. Similar RATINGS WILL LIKELY REDUCE THE PRICES FOR ratings on different types of securities do not necessarily mean the same thing. We CERTIFICATES. recommend that you analyze the significance of each rating independently from any other rating. S-18
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Any rating agency may change its rating of the offered certificates after the offered certificates are issued if that rating agency believes that circumstances have changed. Any subsequent withdrawal or downgrade in rating will likely reduce the price that a subsequent purchaser will be willing to pay for the offered certificates. SPECIAL YIELD AND PREPAYMENT CONSIDERATIONS THE YIELD TO MATURITY ON YOUR The yield to maturity on your certificates will depend on a variety of factors, CERTIFICATES WILL VARY DEPENDING ON including: VARIOUS FACTORS. o the rate and timing of principal payments on the mortgage loans, including prepayments, defaults and liquidations and repurchases due to breaches of representations and warranties, o the allocation of principal distributions among the various classes of certificates, o the rate and timing of realized losses and interest shortfalls on the mortgage loans, o the pass-through rate for your certificates, o the purchase price you paid for your certificates, and o the timing of the exercise of the optional termination by the master servicer. The rates of prepayments and defaults are two of the most important and least predictable of these factors. In addition, under some circumstances the master servicer or servicer will have the option to purchase any mortgage loan that is at least three months delinquent. Such repurchases would increase the prepayment rates on the mortgage loans. In general, if you purchase a certificate at a price higher than its outstanding certificate principal balance and principal distributions occur faster than you assumed at the time of purchase, your yield will be lower than anticipated. Conversely, if you purchase a certificate at a price lower than its outstanding certificate principal balance and principal distributions occur more slowly than you assumed at the time of purchase, your yield will be lower than anticipated. S-19
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THE RATE OF PREPAYMENTS ON THE MORTGAGE Since mortgagors can generally prepay their mortgage loans at any time, the rate and LOANS WILL VARY DEPENDING ON FUTURE timing of principal distributions on the offered certificates are highly uncertain. MARKET CONDITIONS AND OTHER FACTORS. Generally, when market interest rates increase, mortgagors are less likely to prepay their mortgage loans. This could result in a slower return of principal to you at a time when you might have been able to reinvest those funds at a higher rate of interest than the applicable pass-through rate. On the other hand, when market interest rates decrease, borrowers are generally more likely to prepay their mortgage loans. This could result in a faster return of principal to you at a time when you might not be able to reinvest those funds at an interest rate as high as the applicable pass-through rate. 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 programs may be conducted by the master servicer or any of its affiliates, the subservicers or a third party. Approximately 62.4% of the cut-off date principal balance of the mortgage loans provide for payment of a prepayment charge. Prepayment charges may reduce the rate of prepayment on the mortgage loans until the end of the period during which these prepayment charges apply. Prepayment charges received on the mortgage loans may be waived and in any case will not be available for distribution on the offered certificates. SEE "DESCRIPTION OF THE MORTGAGE POOL" AND "YIELD AND PREPAYMENT CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT AND "MATURITY AND PREPAYMENT CONSIDERATIONS" IN THE PROSPECTUS. THE MORTGAGE LOANS WITH INTEREST ONLY As of the cut-off date, approximately 30.5% of the cut-off date principal balance of PAYMENTS MAY AFFECT THE YIELD ON THE the mortgage loans require the related borrowers to make monthly payments of accrued OFFERED CERTIFICATES. interest, but not principal, for generally up to the first ten years following origination. After the interest only period, the mortgage rate on these mortgage loans will be reset and the related borrower's monthly payment will be recalculated to cover both interest and principal so that the mortgage loan will be paid in full by its final payment date. As a result, if the monthly payment increases, the related borrower may not be able to pay the increased amount and may default or may refinance the loan to avoid the higher payment. In addition, because no scheduled principal payments are required to be made on these mortgage loans for a period of time, the related offered certificates will receive smaller scheduled principal distributions during that period than they would have received if the related borrowers were required to make monthly payments of S-20
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interest and principal from origination of these mortgage loans. Absent other considerations, this slower rate of principal distributions will result in longer weighted average lives of the related offered certificates than would otherwise be the case if none of the mortgage loans had interest only periods. THE RETURN ON YOUR CERTIFICATES COULD BE The Servicemembers Civil Relief Act, as amended, or Relief Act, provides relief to REDUCED BY SHORTFALLS DUE TO THE borrowers who enter active military service and to borrowers in reserve status who are SERVICEMEMBERS CIVIL RELIEF ACT. called to active duty after the origination of their mortgage loan. Current or future military operations of the United States may increase the number of citizens who may be in active military service, including persons in reserve status who may be called to active duty. The Relief Act provides generally that a borrower who is covered by the Relief Act may not be charged interest on a mortgage loan in excess of 6% per annum during the period of the borrower's active duty. These shortfalls are not required to be paid by the borrower at any future time. The master servicer is not required to advance these shortfalls. These shortfalls will reduce the amount of interest payable on the offered certificates. Interest reductions on the mortgage loans due to the application of the Relief Act or similar legislation or regulations will not be covered by any source except that interest shortfalls arising under the Relief Act or similar legislation or regulations in an interest accrual period may be covered by excess cash flow in that interest accrual period in the manner and priority described under "Description of the Certificates-Excess Cash Flow and Overcollateralization" in this prospectus supplement. The Relief Act also limits the ability of the servicer to foreclose on a mortgage loan during the borrower's period of active duty and, in some cases, during an additional three month period thereafter. As a result, there may be delays in payment and increased losses on the mortgage loans. We do not know how many mortgage loans have been or may be affected by the application of the Relief Act or similar legislation or regulations. SEE "CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND CONTRACTS--SERVICEMEMBERS' CIVIL RELIEF ACT" IN THE PROSPECTUS. THE OFFERED CERTIFICATES ARE EACH SUBJECT The offered certificates are each subject to various priorities for payment of TO DIFFERENT PAYMENT PRIORITIES. principal as described in this prospectus supplement. Distributions of principal on the offered 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 offered certificates with a later priority of payment will be S-21
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affected by the rates of prepayment of the mortgage loans experienced both before and after the commencement of principal distributions on such classes. THE PASS-THROUGH RATES ON THE CLASS A The pass-through rates on the Class A Certificates and Class M Certificates are CERTIFICATES AND CLASS M CERTIFICATES ARE subject to a cap equal to the lesser of 14.000% per annum and the weighted average of SUBJECT TO A CAP. the net mortgage rates on the mortgage loans, adjusted to an actual over 360-day rate. Therefore, the prepayment of the mortgage loans with higher mortgage rates may result in lower pass-through rates on the Class A Certificates and Class M Certificates. To the extent the weighted average net mortgage rate of the mortgage loans is paid to any class of Class A Certificates or Class M Certificates, the difference between that weighted average net mortgage rate, adjusted to an actual over 360-day rate, and the lesser of (a) One-Month LIBOR plus the related margin and (b) 14.000% per annum, adjusted to an actual over 360-day rate, will create a shortfall that will carry forward with interest. Any resulting shortfall will be payable only from the excess cash flow, which includes amounts received by the trustee under the yield maintenance agreement, to the extent available for that purpose, as and to the extent described in this prospectus supplement. These shortfalls may remain unpaid on the optional termination date or on the final distribution date. Also, in this situation, the amount of excess cash flow from the mortgage loans may be substantially reduced. Amounts received by the trustee under the yield maintenance agreement will be distributed as excess cash flow. The yield maintenance agreement terminates after the distribution date in December 2010. THE CLASS M CERTIFICATES HAVE DIFFERENT The yields to investors in the Class M Certificates will be sensitive to the rate and YIELD AND PAYMENT CONSIDERATIONS DUE TO timing of losses on the mortgage loans, to the extent not covered by excess cash flow, THEIR PAYMENT PRIORITY. which includes amounts received under the yield maintenance agreement or overcollateralization. Losses, to the extent not covered by excess cash flow or overcollateralization, will be allocated to the most subordinate class of Class M Certificates outstanding. SEE "SUMMARY--CREDIT ENHANCEMENT" AND "DESCRIPTION OF THE CERTIFICATES--ALLOCATION OF LOSSES" IN THIS PROSPECTUS SUPPLEMENT. It is not expected that the Class M Certificates will receive any distributions of principal payments until the earlier of (i) the distribution date immediately succeeding the distribution date on which the aggregate certificate principal balance of the Class A Certificates has been reduced to zero or (ii) the later of the S-22
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distribution date in February 2009 and the first distribution date on which the sum of the overcollateralization amount and the aggregate certificate principal balance of the Class M Certificates is greater than or equal to approximately 44.80% of the aggregate principal balance of the mortgage loans after giving effect to principal payments on that distribution date, provided that certain loss and delinquency tests are satisfied. As a result, the weighted average lives of the Class M Certificates may be longer than would otherwise be the case. In addition, after the Class M Certificates commence receiving principal payments, the most subordinate class of Class M Certificates may be retired before the more senior classes of Class M Certificates. SEE "DESCRIPTION OF THE CERTIFICATES--PRINCIPAL DISTRIBUTIONS" IN THIS PROSPECTUS SUPPLEMENT. AMOUNTS AVAILABLE UNDER THE YIELD Any amounts payable to the trust by the yield maintenance agreement provider under the MAINTENANCE AGREEMENT MAY BE LIMITED. yield maintenance agreement will be included as part of excess cash flow as and to the extent described under "-Excess Cash Flow and Overcollateralization" in this prospectus supplement and will be available as described in this prospectus supplement to pay certain interest shortfalls and basis risk shortfalls, to increase the overcollateralization amount to the required overcollateralization amount and to cover the principal portion of realized losses as described under "-Excess Cash Flow and Overcollateralization" in this prospectus supplement. However, no amounts will be payable on a distribution date by the yield maintenance agreement provider unless one-month LIBOR (as determined pursuant to the yield maintenance agreement) exceeds 4.40% per annum on the determination date for that distribution date. No assurance can be made that any amounts will be received under the yield maintenance agreement, or that any such amounts that are received, together with the portion of excess cash flow on the mortgage loans available for that purpose, will be sufficient to cover interest shortfalls, basis risk shortfalls, or certain losses as described in this prospectus supplement and to increase the overcollateralization amount to the required overcollateralization amount as described in this prospectus supplement. S-23
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In addition, if the yield maintenance agreement provider defaults on its obligations under the yield maintenance agreement, then there may be insufficient funds to cover such amounts, and the amount available for distribution to the offered certificates may be reduced. To the extent that distributions on the offered certificates depend in part on payments to be received by the trust under the yield maintenance agreement, the ability of the trustee to make such distributions on such certificates will be subject to the credit risk of the yield maintenance agreement provider. Investors should note that the level of one-month LIBOR as of January 18, 2006 is approximately 4.490% per annum. MORTGAGE LOAN ORIGINATION AND SERVICING. All of the mortgage loans were originated by Mortgage Lenders Network USA, Inc., which is an entity unaffiliated with Residential Funding Corporation. The mortgage loans were acquired by Residential Funding Corporation from Emax Financial Group, LLC, which is an entity unaffiliated with Residential Funding Corporation. In addition, Mortgage Lenders Network USA, Inc. will be the primary subservicer of all of the mortgage loans. A disruption in the servicing operations at Mortgage Lenders Network USA, Inc. could have a greater effect on the delinquency and loss experience on the mortgage loans in the mortgage pool than would be the case if primary subservicing of the mortgage loans was performed by more than one subservicer. Investors should consider the risks associated with a single originator and a single primary subservicer. SEE "DESCRIPTION OF THE MORTGAGE POOL--SERVICING AND ORIGINATION" IN THIS PROSPECTUS SUPPLEMENT. S-24
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BANKRUPTCY RISKS BANKRUPTCY PROCEEDINGS COULD DELAY OR The transfer of the mortgage loans from Residential Funding Corporation to the REDUCE DISTRIBUTIONS ON THE OFFERED depositor is intended by the parties to be and has been documented as a sale; however, CERTIFICATES. Residential Funding Corporation will treat the transfer of the mortgage loans as a secured financing for accounting purposes as long as the limited mortgage loan purchase right referred to in this prospectus supplement remains in effect. If Residential Funding Corporation were to become bankrupt, a trustee in bankruptcy could attempt to recharacterize the sale of the mortgage loans as a loan secured by the mortgage loans or to consolidate the mortgage loans with the assets of Residential Funding Corporation. Any such attempt could result in a delay in or reduction of collections on the mortgage loans available to make payments on the offered certificates. The risk of such a recharacterization with respect to the mortgage loans may be increased by Residential Funding Corporation's treatment of the transfer of these mortgage loans as a secured financing for accounting purposes. SEE "DESCRIPTION OF THE CERTIFICATES--LIMITED MORTGAGE LOAN PURCHASE RIGHT" IN THIS PROSPECTUS SUPPLEMENT. THE RECORDING OF MORTGAGES IN THE NAME OF The mortgages or assignments of mortgage for some of the mortgage loans have been or MERS MAY AFFECT THE YIELD ON THE OFFERED may be recorded in the name of Mortgage Electronic Registration Systems, Inc., or CERTIFICATES. MERS, solely as nominee for the originator and its successors and assigns. As of the cut-off date, all of the mortgage loans were recorded in the name of MERS. Subsequent assignments of those mortgages are registered electronically through the MERS(R) System. However, if MERS discontinues the MERS(R) System and it becomes necessary to record an assignment of the mortgage to the trustee, then any related expenses shall be paid by the trust and will reduce the amount available to pay principal of and interest on the outstanding class or classes of certificates with the lowest payment priorities. S-25
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The recording of mortgages in the name of MERS is a relatively new practice in the mortgage lending industry. Public recording officers and others in the mortgage industry may have limited, if any, experience with lenders seeking to foreclose mortgages, assignments of which are registered with MERS. Accordingly, delays and additional costs in commencing, prosecuting and completing foreclosure proceedings and conducting foreclosure sales of the mortgaged properties could result. Those delays and additional costs could in turn delay the distribution of liquidation proceeds to certificateholders and increase the amount of losses on the mortgage loans. FOR ADDITIONAL INFORMATION REGARDING MERS AND THE MERS(R) SYSTEM, SEE "DESCRIPTION OF THE MORTGAGE POOL--GENERAL" AND "YIELD AND PREPAYMENT CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT AND "DESCRIPTION OF THE CERTIFICATES--ASSIGNMENT OF MORTGAGE LOANS" IN THE PROSPECTUS. S-26
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ISSUING ENTITY The depositor will establish a trust with respect to Series 2006-EMX1 on the closing date, under a pooling and servicing agreement, dated as of January 1, 2006, among the depositor, the master servicer and the trustee. The pooling and serving agreement is governed by the laws of the State of New York. On the closing date, the depositor will deposit into the trust a mortgage pool of mortgage loans secured by first liens and junior liens on one- to four-family residential properties. The trust will not have any additional equity. The pooling and servicing agreement authorizes the trust to engage only in selling the certificates in exchange for the mortgage loans, entering into and performing its obligations under the pooling and servicing agreement, activities necessary, suitable or convenient to such actions and other activities as may be required in connection with the conservation of the trust fund and making distributions to certificateholders. The pooling and servicing agreement provides that the depositor assigns to the trustee for the benefit of the certificateholders without recourse all the right, title and interest of the depositor in and to the mortgage loans. Furthermore, the pooling and servicing agreement states that, although it is intended that the conveyance by the depositor to the trustee of the mortgage loans be construed as a sale, the conveyance of the mortgage loans shall also be deemed to be a grant by the depositor to the trustee of a security interest in the mortgage loans and related collateral. Some capitalized terms used in this prospectus supplement have the meanings given below under "Description of the Certificates--Glossary of Terms" or in the prospectus under "Glossary." SPONSOR AND MASTER SERVICER Residential Funding Corporation, a Delaware corporation, buys residential mortgage loans under several loan purchase programs from mortgage loan originators or sellers nationwide, including affiliates, that meet its seller/servicer eligibility requirements and services mortgage loans for its own account and for others. See "The Trusts--Mortgage Collateral Sellers" and "--Qualifications of Sellers" in the prospectus for a general description of applicable seller/servicer eligibility requirements. Residential Funding Corporation's principal executive offices are located at 8400 Normandale Lake Boulevard, Suite 250, Minneapolis, Minnesota 55437. Its telephone number is (952) 857-7000. Residential Funding Corporation conducts operations from its headquarters in Minneapolis and from offices located primarily in California, Texas, Maryland, Pennsylvania and New York. Residential Funding Corporation finances its operations primarily through its securitization program. Residential Funding Corporation was founded in 1982 and began operations in 1986, acquiring, servicing and securitizing residential jumbo mortgage loans secured by first liens on one- to four-family residential properties. General Motors Acceptance Corporation purchased Residential Funding Corporation in 1990. In 1995, Residential Funding Corporation expanded its business to include "subprime" first lien mortgage loans, such as the mortgage loans described in this prospectus supplement. Residential Funding Corporation also began to acquire and service "Alt-A," closed-end and revolving loans secured by second liens in 1995. S-27
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The following tables set forth the aggregate principal amount of publicly offered securitizations of mortgage loans sponsored by Residential Funding Corporation for the past five years. Residential Funding Corporation sponsored approximately $23.9 billion and $2.4 billion in initial aggregate principal amount of mortgage-backed securities in the 2001 calendar year backed by first lien mortgage loans and junior lien mortgage loans, respectively. Residential Funding Corporation sponsored approximately $52.1 billion and $2.4 billion in initial aggregate principal amount of mortgage-backed securities in the 2005 calendar year backed by first lien mortgage loans and junior lien mortgage loans, respectively. The percentages shown under "Percentage Change from Prior Year" represent the ratio of (a) the difference between the current and prior year volume over (b) the prior year volume. S-28
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SPONSOR SECURITIZATION EXPERIENCE FIRST LIEN MORTGAGE LOANS VOLUME BY PRINCIPAL BALANCE 2001 2002 2003 2004 2005 ------------------------------- Prime Mortgages(1) $16,387,846,100 $16,177,753,813 $18,964,072,062 $11,953,278,792 $24,149,038,614 Non-Prime Mortgages(2) $ 7,566,949,253 $15,475,700,554 $27,931,235,627 $24,408,531,445 $27,928,496,334 --------------- --------------- --------------- --------------- --------------- Total $23,954,795,353 $31,653,454,367 $46,895,307,689 $36,361,810,237 $52,077,534,948 =============== =============== =============== =============== =============== Prime Mortgages(1) 68.41% 51.11% 40.44% 32.87% 46.37% Non-Prime Mortgages(2) 31.59% 48.89% 59.56% 67.13% 53.63% --------------- --------------- --------------- --------------- --------------- Total 100.00% 100.00% 100.00% 100.00% 100.00% =============== =============== =============== =============== =============== PERCENTAGE CHANGE FROM PRIOR YEAR (3) ------------------------------- Prime Mortgages(1) 98.71% (1.28)% 17.22% (36.97)% 102.03% Non-Prime Mortgages(2) 2.60% 104.52% 80.48% (12.61)% 14.42% --------------- --------------- --------------- --------------- --------------- Total Volume 53.34% 32.14% 48.15% (22.46)% 43.22% =============== =============== =============== =============== =============== JUNIOR LIEN MORTGAGE LOANS VOLUME BY PRINCIPAL BALANCE 2001 2002 2003 2004 2005 ------------------------------- Prime Mortgages(1) $ 2,438,519,235 $ 2,875,005,049 $ 3,207,008,585 $ 2,085,015,925 $ 2,409,506,573 Non-Prime Mortgages(2) -- -- -- -- -- --------------- --------------- --------------- --------------- --------------- Total $ 2,438,519,235 $ 2,875,005,049 $ 3,207,008,585 $ 2,085,015,925 $ 2,409,506,573 =============== =============== =============== =============== =============== Prime Mortgages(1) 100.00% 100.00% 100.00% 100.00% 100.00% Non-Prime Mortgages(2) 0.00% 0.00% 0.00% 0.00% 0.00% PERCENTAGE CHANGE FROM PRIOR YEAR (3) ------------------------------- Prime Mortgages(1) (12.07)% 17.90% 11.55% (34.99)% 15.56% Non-Prime Mortgages(2) -- -- -- -- -- --------------- --------------- --------------- --------------- --------------- Total Volume (12.07)% 17.90% 11.55% (34.99)% 15.56% =============== =============== =============== =============== =============== S-29
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FIRST LIEN MORTGAGE LOANS VOLUME BY NUMBER OF LOANS 2001 2002 2003 2004 2005 ------------------------------- Prime Mortgages(1) 57,758 68,077 86,166 55,773 91,631 Non-Prime Mortgages(2) 71,443 136,789 200,446 170,696 173,796 --------------- --------------- --------------- --------------- --------------- Total 129,201 204,866 286,612 226,469 265,427 =============== =============== =============== =============== =============== Prime Mortgages(1) 44.70% 33.23% 30.06% 24.63% 34.52% Non-Prime Mortgages(2) 55.30% 66.77% 69.94% 75.37% 65.48% --------------- --------------- --------------- --------------- --------------- Total 100.00% 100.00% 100.00% 100.00% 100.00% =============== =============== =============== =============== =============== PERCENTAGE CHANGE FROM PRIOR YEAR (3) ------------------------------- Prime Mortgages(1) 56.78% 17.87% 26.57% (35.27)% 64.29% Non-Prime Mortgages(2) (5.21)% 91.47% 46.54% (14.84)% 1.82% --------------- --------------- --------------- --------------- --------------- Total Volume 15.14% 58.56% 39.90% (20.98)% 17.20% =============== =============== =============== =============== =============== JUNIOR LIEN MORTGAGE LOANS VOLUME BY NUMBER OF LOANS 2001 2002 2003 2004 2005 ------------------------------- Prime Mortgages(1) 62,952 73,188 84,962 51,614 53,071 Non-Prime Mortgages(2) -- -- -- -- -- --------------- --------------- --------------- --------------- --------------- Total 62,952 73,188 84,962 51,614 53,071 =============== =============== =============== =============== =============== Prime Mortgages(1) 100.00% 100.00% 100.00% 100.00% 100.00% Non-Prime Mortgages(2) 0.00% 0.00% 0.00% 0.00% 0.00% PERCENTAGE CHANGE FROM PRIOR YEAR (3) ------------------------------- Prime Mortgages(1) (16.49)% 16.26% 16.09% (39.25)% 2.82% Non-Prime Mortgages(2) -- -- -- -- -- --------------- --------------- --------------- --------------- --------------- Total Volume (16.49)% 16.26% 16.09% (39.25)% 2.82% =============== =============== =============== =============== =============== __________________________ (1) Product originated under the Jumbo, Alt A, High Loan-to-Value First Lien programs and Closed End Home Equity Loan and Home Equity Revolving Credit Line Loan Junior Lien programs. (2) Product originated under the Subprime and Negotiated Conduit Asset programs. Subprime Mortgage Loans secured by junior liens are included under First Lien Mortgage Loans--Non-Prime Mortgages because these types of loans are securitized together in the same mortgage pools. (3) Represents year to year growth or decline as a percentage of the prior year's volume S-30
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The following tables set forth the annual average outstanding principal balance, calculated as of year end, of mortgage loans master serviced by Residential Funding Corporation for the past five years, and the annual average number of such loans for the same period. Residential Funding Corporation was the master servicer of a residential mortgage loan portfolio of approximately $67.8 billion and $3.5 billion in average outstanding principal amount during the 2001 calendar year backed by first lien mortgage loans and junior lien mortgage loans, respectively. Residential Funding Corporation was the master servicer of a residential mortgage loan portfolio of approximately $101.9 billion and $5.5 billion in average outstanding principal during the 2005 calendar year backed by first lien mortgage loans and junior lien mortgage loans, respectively. The percentages shown under "Percentage Change from Prior Year" represent the ratio of (a) the difference between the current and prior year volume over (b) the prior year volume. S-31
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MASTER SERVICER SERVICING EXPERIENCE FIRST LIEN MORTGAGE LOANS VOLUME BY AVERAGE OUTSTANDING PRINCIPAL BALANCE 2001 2002 2003 2004 2005 ------------------------------- Prime Mortgages(1) $51,374,446,489 $43,282,264,857 $33,749,084,171 $32,453,682,854 $ 47,935,800,813 Non-Prime Mortgages(2) $16,429,992,363 $24,910,565,613 $39,334,697,127 $50,509,138,736 $ 53,938,083,312 --------------- --------------- --------------- --------------- ---------------- Total $67,804,438,852 $68,192,830,470 $73,083,781,298 $82,962,821,591 $101,873,884,125 =============== =============== =============== =============== ================ Prime Mortgages(1) 75.77% 63.47% 46.18% 39.12% 47.05% Non-Prime Mortgages(2) 24.23% 36.53% 53.82% 60.88% 52.95% --------------- --------------- --------------- --------------- ---------------- Total 100.00% 100.00% 100.00% 100.00% 100.00% =============== =============== =============== =============== ================ PERCENTAGE CHANGE FROM PRIOR YEAR (3) ------------------------------- Prime Mortgages(1) (3.91)% (15.75)% (22.03)% (3.84)% 47.71% Non-Prime Mortgages(2) 27.94% 51.62% 57.90% 28.41% 6.79% --------------- --------------- --------------- --------------- ---------------- Total Based on Average Outstanding Principal Balance 2.26% 0.57% 7.17% 13.52% 22.79% =============== =============== =============== =============== ================ JUNIOR LIEN MORTGAGE LOANS VOLUME BY AVERAGE OUTSTANDING PRINCIPAL BALANCE 2001 2002 2003 2004 2005 ------------------------------- Prime Mortgages(1) $ 3,512,887,567 $ 4,102,615,571 $ 4,365,319,862 $ 5,135,640,057 $ 5,476,133,777 Non-Prime Mortgages(2) $ 0 $ 0 $ 0 $ 0 $ 0 --------------- --------------- --------------- --------------- --------------- Total $ 3,512,887,567 $ 4,102,615,571 $ 4,365,319,862 $ 5,135,640,057 $ 5,476,133,777 =============== =============== =============== =============== =============== Prime Mortgages(1) 100.00% 100.00% 100.00% 100.00% 100.00% Non-Prime Mortgages(2) 0.00% 0.00% 0.00% 0.00% 0.00% PERCENTAGE CHANGE FROM PRIOR YEAR (3) ------------------------------- Prime Mortgages(1) 13.85% 16.79% 6.40% 17.65% 6.63% Non-Prime Mortgages(2) -- -- -- -- -- --------------- --------------- --------------- --------------- --------------- Total Based on Average Outstanding Principal Balance 13.85% 16.79% 6.40% 17.65% 6.63% =============== =============== =============== =============== =============== S-32
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FIRST LIEN MORTGAGE LOANS VOLUME BY AVERAGE NUMBER OF LOANS 2001 2002 2003 2004 2005 ------------------------------- Prime Mortgages(1) 237,946 202,938 168,654 156,745 201,903 Non-Prime Mortgages(2) 168,058 242,625 341,863 414,639 411,550 --------------- --------------- --------------- --------------- --------------- Total 406,004 445,563 510,517 571,384 613,453 =============== =============== =============== =============== =============== Prime Mortgages(1) 58.61% 45.55% 33.04% 27.43% 32.91% Non-Prime Mortgages(2) 41.39% 54.45% 66.96% 72.57% 67.09% --------------- --------------- --------------- --------------- --------------- Total 100.00% 100.00% 100.00% 100.00% 100.00% =============== =============== =============== =============== =============== PERCENTAGE CHANGE FROM PRIOR YEAR (3) ------------------------------- Prime Mortgages(1) (6.59)% (14.71)% (16.89)% (7.06)% 28.81% Non-Prime Mortgages(2) 28.76% 44.37% 40.90% 21.29% (0.74)% --------------- --------------- --------------- --------------- --------------- Total Based on Average Number of Loans 5.39% 9.74% 14.58% 11.92% 7.36% =============== =============== =============== =============== =============== JUNIOR LIEN MORTGAGE LOANS VOLUME BY AVERAGE NUMBER OF LOANS 2001 2002 2003 2004 2005 ------------------------------- Prime Mortgages(1) 104,044 118,773 127,833 147,647 143,713 Non-Prime Mortgages(2) -- -- -- -- -- --------------- --------------- --------------- --------------- --------------- Total 104,044 118,773 127,833 147,647 143,713 =============== =============== =============== =============== =============== Prime Mortgages(1) 100.00% 100.00% 100.00% 100.00% 100.00% Non-Prime Mortgages(2) 0.00% 0.00% 0.00% 0.00% 0.00% PERCENTAGE CHANGE FROM PRIOR YEAR (3) ------------------------------- Prime Mortgages(1) 22.78% 14.16% 7.63% 15.50% (2.66)% Non-Prime Mortgages(2) -- -- -- -- -- --------------- --------------- --------------- --------------- --------------- Total Based on Average Number of Loans 22.78% 14.16% 7.63% 15.50% (2.66)% =============== =============== =============== =============== =============== __________________________ (1) Product originated under the Jumbo, Alt A, High Loan-to-Value First Lien programs and Closed End Home Equity Loan and Home Equity Revolving Credit Line Loan Junior Lien programs. (2) Product originated under the Subprime and Negotiated Conduit Asset programs. Subprime Mortgage Loans secured by junior liens are included under First Lien Mortgage Loans--Non-Prime Mortgages because these types of loans are securitized together in the same mortgage pools. (3) Represents year to year growth or decline as a percentage of the prior year's volume S-33
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Residential Funding Corporation's overall procedures for originating and acquiring mortgage loans are described under "Description of the Mortgage Pool - The Program" in this prospectus supplement. Residential Funding Corporation's material role and responsibilities in this transaction, including as master servicer, are described in the base prospectus under "The Trusts --Qualification of Sellers" and "The Trusts - Repurchases of Mortgage Collateral" and in this prospectus supplement under "Pooling and Servicing Agreement--The Master Servicer and Subservicers--Master Servicer." S-34
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AFFILIATIONS AMONG TRANSACTION PARTIES The diagram below illustrates the various relationships among the affiliated transaction parties. ------------------------------ General Motors Corporation ------------------------------ | | ----------------------------------------- General Motors Acceptance Corporation (GMAC) ----------------------------------------- | | ----------------------------------- Residentail Capital Corporation ----------------------------------- | | ------------------------------- | | ----------------------------------- ------------------------------- Residential Funding Corporation Residential Asset Securities (Sponsor and Master Servicer) Corporation (Depositor) ----------------------------------- ------------------------------- S-35
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DESCRIPTION OF THE MORTGAGE POOL GENERAL The mortgage pool consists of 2,746 fixed-rate and adjustable-rate, sub-prime mortgage loans with an aggregate unpaid principal balance of $440,000,794 as of the cut-off date. The mortgage loans are secured by first liens and junior liens on fee simple interests or leaseholds in one- to four-family residential properties. All percentages of the mortgage loans described in this prospectus supplement are approximate percentages by outstanding principal balance determined as of the cut-off date after deducting payments due during the month of the cut-off date, unless otherwise indicated. Approximately 0.7% of the mortgage loans have a due date other than the first of each month. The mortgage loans will consist of mortgage loans with terms to maturity of not more than 30 years, or in the case of approximately 9.4% of the mortgage loans, not more than 15 years, from the date of origination or modification. The depositor and Residential Funding Corporation will make certain limited representations and warranties regarding the mortgage loans as of the date of issuance of the certificates. In connection with the mortgage loans secured by a leasehold interest, Residential Funding Corporation shall have represented to the depositor that, among other things: the use of leasehold estates for residential properties is an accepted practice in the area where the related mortgaged property is located; residential property in such area consisting of leasehold estates is readily marketable; the lease is recorded and no party is in any way in breach of any provision of such lease; the leasehold is in full force and effect and is not subject to any prior lien or encumbrance by which the leasehold could be terminated or subject to any charge or penalty; and the remaining term of the lease does not terminate less than ten years after the maturity date of such mortgage loan. The depositor and Residential Funding Corporation 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. SEE "THE TRUSTS--REPRESENTATIONS WITH RESPECT TO MORTGAGE COLLATERAL" IN THE PROSPECTUS. The original mortgages for some of the mortgage loans have been, or in the future may be, at the sole discretion of the master servicer, recorded in the name of Mortgage Electronic Registration Systems, Inc., or MERS, solely as nominee for the originator and its successors and assigns, and subsequent assignments of those mortgages have been, or in the future may be, at the sole discretion of the master servicer, registered electronically through the MERS(R) System. In some other cases, the original mortgage was recorded in the name of the originator of the mortgage loan, record ownership was later assigned to MERS, solely as nominee for the owner of the mortgage loan, and subsequent assignments of the mortgage were, or in the future may be, at the sole discretion of the master servicer, registered electronically through the MERS(R) System. With respect to each of these mortgage loans, MERS serves as mortgagee of record on the mortgage solely as a nominee in an administrative capacity on behalf of the trustee, and does not have any interest in the mortgage loan. As of the cut-off date, all of the mortgage loans were recorded in the name of MERS. FOR ADDITIONAL INFORMATION REGARDING THE RECORDING OF S-36
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MORTGAGES IN THE NAME OF MERS SEE "YIELD AND PREPAYMENT CONSIDERATIONS--GENERAL" IN THIS PROSPECTUS SUPPLEMENT AND "DESCRIPTION OF THE CERTIFICATES--ASSIGNMENT OF MORTGAGE LOANS" IN THE PROSPECTUS. Approximately 62.4% of the cut-off date principal balance of the mortgage loans provide for payment of a prepayment charge. With respect to some of these mortgage loans, the prepayment charge provisions provide for payment of a prepayment charge for partial prepayments and full prepayments made within up to three years following the origination of that mortgage loan, in an amount not to exceed the maximum amount permitted by state law. Prepayment charges received on the mortgage loans may be waived and in any case will not be available for distribution on the offered certificates. The depositor makes no representation as to the effect that the prepayment charges, decisions by the master servicer or subservicer with respect to the waiver of prepayment charges and the recent changes to the rules and regulations under the Parity Act, may have on the prepayment performance of the mortgage loans. See "Certain Legal Aspects of Mortgage Loans and Contracts--Default Interest and Limitations on Prepayments" in the prospectus. COMPLIANCE WITH LOCAL, STATE AND FEDERAL LAWS Residential Funding Corporation will sell the mortgage loans to the depositor and will represent and warrant, as of the date of issuance of the certificates, the following: o None of the mortgage loans were subject to the Home Ownership and Equity Protection Act of 1994, referred to as the Homeownership Act. o Each mortgage loan at the time it was made complied in all material respects with applicable local, state and federal laws, including, but not limited to, all applicable anti-predatory lending laws. o None of the mortgage loans are loans that, under applicable state or local law in effect at the time of origination of the loan, are referred to as (1) "high cost" or "covered" loans or (2) any other similar designation if the law imposes greater restrictions or additional legal liability for residential mortgage loans with high interest rates, points and/or fees. o None of the proceeds for the mortgage loans were used to finance the purchase of single premium credit insurance policies. o None of the mortgage loans contain prepayment penalties that extend beyond three years after the date of origination. Residential Funding Corporation will be required to repurchase or substitute for any mortgage loan that violates any of these representations and warranties, if that violation materially and adversely affects the interests of the certificateholders in that mortgage loan. Residential Funding Corporation maintains policies and procedures that are designed to ensure that it does not purchase mortgage loans subject to the Homeownership Act. However, there can S-37
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be no assurance that these policies and procedures will assure that each and every mortgage loan complies with all applicable origination laws in all material respects. Residential Funding Corporation is opposed to predatory lending practices, as a matter of corporate policy. In addition, Residential Funding Corporation's Servicer Guide requires that each subservicer accurately and fully report its borrower credit files to credit repositories in a timely manner. SEE "CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND CONTRACTS" IN THE PROSPECTUS. BALLOON MORTGAGE LOANS Approximately 8.3% of the mortgage loans require monthly payments of principal generally based on 30 year amortization schedules and have scheduled maturity dates of approximately 15 years from the due date of the first monthly payment, and approximately 1.8% of the mortgage loans require monthly payments of principal generally based on 40 year amortization schedules and have scheduled maturity dates of approximately 30 years from the due date of the first monthly payment, leaving a substantial portion of the original principal amount due and payable on the respective scheduled maturity date. These mortgage loans are called balloon mortgage loans and the payments due at maturity are called balloon amounts. The existence of a balloon amount generally will require the related mortgagor to refinance the balloon mortgage loan or to sell the mortgaged property on or prior to the scheduled maturity date. The ability of a mortgagor to accomplish either of these goals will be affected by a number of factors, including the level of available mortgage rates at the time of sale or refinancing, the mortgagor's equity in the related mortgaged property, the financial condition of the mortgagor, tax laws and prevailing general economic conditions. None of the depositor, the master servicer or the trustee is obligated to refinance any balloon mortgage loan. MORTGAGE RATE ADJUSTMENT OF ADJUSTABLE-RATE LOANS The mortgage rate on each adjustable-rate loan will adjust on each rate adjustment date to equal the index plus the note margin, subject to the minimum mortgage rate, maximum mortgage rate and periodic rate cap for such adjustable-rate loan as set forth in the related mortgage note. The mortgage rate on a adjustable-rate loan may not exceed the maximum mortgage rate or be less than the minimum mortgage rate specified for that mortgage loan in the related mortgage note. The minimum mortgage rate for each adjustable-rate loan will be equal to the greater of the note margin or the note floor, except in some cases, during the initial reset period, the mortgage rate may be lower than the note margin and the note floor. Approximately 30.5% of the cut-off date principal balance of the mortgage loans will require the related mortgagors to pay interest only on those mortgage loans for a period generally of up to ten years, and after the expiration of that period those mortgagors will be required to pay an amount of principal and interest which will amortize the related mortgage loan over the remaining term of that mortgage loan. The index for the adjustable-rate loans will be the Six-Month LIBOR Index, will adjust semi annually, and will be based on a per annum rate equal to the average of interbank offered S-38
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rates for six month U.S. dollar denominated deposits in the London market based on quotations of major banks as published in The Wall Street Journal and as most recently available: o as of the first business day of the month immediately preceding the month in which the adjustment date occurs; or o as of the date thirty or forty-five days prior to the adjustment date. The "reference date" is the date as of which the Six-Month LIBOR Index is determined. The Six-Month LIBOR Index is referred to in this prospectus supplement as an index. In the event that the index specified in a mortgage note is no longer available, an index reasonably acceptable to the trustee that is based on comparable information will be selected by the master servicer. The initial mortgage rate in effect on an adjustable-rate loan generally will be lower, and may be significantly lower, than the mortgage rate that would have been in effect based on the related index and note margin. Therefore, unless the related index declines after origination of an adjustable-rate loan, the related mortgage rate will generally increase on the first adjustment date following origination of the adjustable-rate loan subject to the periodic rate cap. The repayment of the adjustable-rate loans will be dependent on the ability of the mortgagors to make larger monthly payments following adjustments of the mortgage rate. Adjustable-rate loans that have the same initial mortgage rate may not always bear interest at the same mortgage rate because these adjustable-rate loans may have different adjustment dates, and the mortgage rates therefore may reflect different related index values, note margins, maximum mortgage rates and minimum mortgage rates. The Net Mortgage Rate with respect to each adjustable-rate loan as of the cut-off date will be set forth in the related mortgage loan schedule attached to the pooling and servicing agreement. In addition, the initial mortgage rates on some adjustable-rate loans will be lower than the related minimum mortgage rates and therefore the related net WAC rate cap will initially be less than it would be had all of the adjustable-rate loans already adjusted to their fully-indexed rate. S-39
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MORTGAGE LOAN CHARACTERISTICS The mortgage loans will have the following characteristics as of the cut-off date, after deducting payments of principal due in the month of the cut-off date: Number of Mortgage Loans......................................... 2,746 Net Mortgage Rates: Weighted average............................................ 7.0633% Range....................................................... 4.600% to 12.650% Mortgage Rates: Weighted average............................................ 7.6133% Range....................................................... 5.150% to 13.200% Note Margins of the Adjustable Rate Mortgage Loans: Weighted average............................................ 5.3318% Range....................................................... 2.850% to 8.300% Minimum Mortgage Rates of the Adjustable Rate Mortgage Loans: Weighted average............................................ 7.2861% Range....................................................... 5.150% to 10.250% Minimum Net Mortgage Rates of the Adjustable Rate Mortgage Loans: Weighted average............................................ 6.7361% Range....................................................... 4.600% to 9.700% Maximum Mortgage Rates of the Adjustable Rate Mortgage Loans: Weighted average............................................ 13.2879% Range....................................................... 11.150% to 16.250% Maximum Net Mortgage Rates of the Adjustable Rate Mortgage Loans: Weighted average............................................ 12.7379% Range....................................................... 10.600% to 15.700% Periodic Caps of the Adjustable Rate Mortgage Loans: Weighted average............................................ 1.0000% Range....................................................... 1.000% to 1.000% Weighted average months to next interest rate adjustment date of the Adjustable Rate Mortgage Loans............ 24 S-40
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The mortgage loans will have the following additional characteristics: o The mortgage loans in the final mortgage pool are expected to have an aggregate principal balance as of the cut-off date of approximately $440,000,794. o The mortgage loans had individual principal balances at origination of at least $12,760 but not more than $1,000,000, with an average principal balance at origination of approximately $160,368. o All of the mortgage loans were originated by Mortgage Lenders Network, Inc. and purchased from Emax Financial Group, LLC, each of which is an entity unaffiliated with Residential Funding Corporation. o None of the mortgage loans will have been originated prior to October 23, 2004 or will have a maturity date later than December 1, 2035. o No mortgage loans will have a remaining term to stated maturity as of the cut-off date of less than 115 months. o The weighted average remaining term to stated maturity of the mortgage loans as of the cut-off date will be approximately 340 months. The weighted average original term to maturity of the mortgage loans as of the cut-off date will be approximately 341 months. o As of the cut-off date, none of the mortgage loans are currently 30 or more days delinquent in the 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" in this prospectus supplement. o None of the mortgage loans are Buy-Down Loans. o None of the mortgage loans are subject to the Homeownership Act. o Approximately 90.5% and 9.5% of the cut-off date principal balance of the mortgage loans are secured by first liens and junior liens, respectively, on fee simple or leasehold interests in one- to four family residential properties. o No mortgage loan provides for deferred interest or negative amortization. o No mortgage loan provides for conversion from an adjustable rate to a fixed rate. o Approximately 10.1% of the cut-off date principal balance of the mortgage loans are balloon mortgage loans. o Primary subservicing will be provided by Mortgage Lenders Network USA, Inc., which is an entity unaffiliated with Residential Funding Corporation. S-41
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o To Residential Funding Corporation's knowledge, approximately 38.9% of the cut-off date principal balance of the first lien mortgage loans are secured by mortgaged properties with respect to which second-lien mortgage loans were originated at the same time as the first-lien mortgage loan. The owners of the mortgaged properties may obtain second- or more junior-lien mortgage loans at any time without Residential Funding Corporation's knowledge. o Approximately 30.5% of the cut-off date principal balance of the mortgage loans will require the related mortgagors to pay interest only on those mortgage loans for a period generally of up to ten years. o Approximately 0.1% of the mortgage loans are secured by leasehold interests. The mortgage loans which are adjustable-rate loans are generally assumable in accordance with the terms of the related mortgage note. The mortgage loans which are fixed rate loans generally contain due-on-sale clauses. SEE "MATURITY AND PREPAYMENT CONSIDERATIONS" IN THE PROSPECTUS. Set forth in Annex II of this prospectus supplement is a description of additional characteristics of the mortgage loans described herein as of the cut-off date, except as otherwise indicated. All percentages of the mortgage loans are approximate percentages by aggregate principal balance of the mortgage loans as of the cut-off date, except as otherwise indicated. Unless otherwise specified, all principal balances of the mortgage loans are as of the cut-off date, after deducting payments of principal due in the month of the cut-off date, and are rounded to the nearest dollar. STATIC POOL INFORMATION Current static pool data with respect to mortgage loans master serviced by Residential Funding Corporation is available on the internet at www.gmacrfcstaticpool.com. Information presented under (i) "RASC" as the issuer/shelf, (ii) "EMX" as the series, and (iii) "2006-EMX1" as the deal, will include information regarding prior securitizations of mortgage loans that are similar to the mortgage loans included in this mortgage pool, based on underwriting criteria and credit quality, and that information is referred to in this prospectus supplement as Static Pool Data. Static Pool Data that relates to the periods prior to January 1, 2006, will not form part of this prospectus supplement, the accompanying prospectus, or the registration statement relating to the offered certificates. As used in the Static Pool Data, a loan is considered to be "30 to 59 days" or "30 or more days" delinquent when a payment due on any scheduled due date remains unpaid as of the close of business on the next following monthly scheduled due date; "60 to 89 days" or "60 or more days" delinquent when a payment due on any scheduled due date remains unpaid as of the close of business on the second following monthly scheduled due date; and so on. The determination as to whether a mortgage loan falls into these categories is made as of the close of business on the last business day of each month. Grace periods and partial payments do not affect these determinations. S-42
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From time to time, the master servicer or a subservicer will modify a mortgage loan, recasting monthly payments for delinquent borrowers who have experienced financial difficulties. Generally such borrowers make payments under the modified terms for a trial period, before the modifications become final. During any such trial period, delinquencies are reported based on the mortgage loan's original payment terms. The trial period is designed to evaluate both a borrower's desire to remain in the mortgaged property and, in some cases, a borrower's capacity to pay a higher monthly payment obligation. The trial period generally may extend to up to six months before a modification is finalized. Once the modifications become final delinquencies are reported based on the modified terms. Generally if a borrower fails to make payments during a trial period, the mortgage loan goes into foreclosure. Historically, the master servicer has not modified a material number of mortgage loans in any pool. Furthermore, the rating agencies rating the certificates impose certain limitations on the ability of the ability of the master servicer to modify loans. Charge-offs are taken only when the master servicer has determined that it has received all payments or cash recoveries which the master servicer reasonably and in good faith expects to be finally recoverable with respect to any mortgage loan. There can be no assurance that the delinquency and foreclosure experience set forth in the Static Pool Data will be representative of the results that may be experienced with respect to the mortgage loans included in the trust. STANDARD HAZARD INSURANCE AND PRIMARY MORTGAGE INSURANCE The mortgaged property related to each mortgage loan is required to be covered by a standard hazard insurance policy. In addition, to the best of the depositor's knowledge, none of the mortgage loans secured by first liens that have a loan-to-value ratio, or a combined loan-to-value ratio where the related mortgaged property also had a junior lien, at origination in excess of 80%, are insured by a borrower-paid, primary mortgage insurance policy. To the best of the depositor's knowledge, none of the mortgage loans secured by junior liens that have a combined loan-to-value ratio at origination in excess of 80%, are insured by a borrower-paid, primary mortgage insurance policy. Approximately 43.9% of the cut-off date principal balance of the mortgage loans have a loan-to-value ratio, or combined loan-to-value ratio with respect to mortgage loans that are secured by junior liens, at origination in excess of 80%. SEE "INSURANCE POLICIES ON MORTGAGE LOANS OR CONTRACTS--STANDARD HAZARD INSURANCE ON MORTGAGED PROPERTIES" AND "--PRIMARY INSURANCE POLICIES" IN THE PROSPECTUS. UNDERWRITING STANDARDS As used in this prospectus supplement, LTV ratio means that ratio, expressed as a percentage of (a) the principal amount of the mortgage loan at origination, over (b) the lesser of the sales price or the appraised value of the related mortgaged property at origination, or in the case of a refinanced or modified mortgage loan, either the appraised value determined at origination or, if applicable, at the time of the refinancing or modification. With respect to any junior loan, the CLTV ratio will be the ratio, expressed as a percentage, of the sum of (x) the cut-off date principal balance of the junior loan and (y) the principal balance of any related mortgage S-43
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loans that constitute liens senior to the lien of the junior loan on the related mortgaged property, at the time of the origination of that junior loan or, in some instances, at the time of an appraisal subsequent to origination, to the lesser of (A) the appraised value of the related mortgaged property determined in an appraisal used in the origination of the junior loan or, in some instances, the value determined in an appraisal obtained subsequent to origination and (B) if applicable under the corresponding program, the sales price of each mortgaged property. Prior to assignment to the depositor, Residential Funding Corporation reviewed the underwriting standards for the mortgage loans and all of the mortgage loans were in substantial conformity with the standards set forth in Residential Funding Corporation's AlterNet Program or are otherwise in conformity with the standards set forth in the description of credit grades set forth in this prospectus supplement. In addition, reference is made to "The Trusts--Underwriting Policies" in the prospectus for important information in addition to that set forth in this prospectus supplement regarding the underwriting standards for the mortgage loans, including automated underwriting. All of the mortgage loans had features that generally distinguish those loans from the more restrictive underwriting requirements used as standards for Fannie Mae and Freddie Mac. Residential Funding Corporation established credit grades by which it could aggregate acceptable loans into groupings considered to have progressively greater risk characteristics. A more detailed description of those credit grades applicable to the mortgage loans is set forth below. Residential Funding Corporation's underwriting of the mortgage loans generally consisted of analyzing the following as standards applicable to the mortgage loans: o the creditworthiness of a mortgagor, o the income sufficiency of a mortgagor's projected family income relative to the mortgage payment and to other fixed obligations, including in certain instances rental income from investment property, and o the adequacy of the mortgaged property expressed in terms of LTV ratio, to serve as the collateral for a mortgage loan. Generally, each mortgagor would 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, each mortgagor would have been required to furnish information with respect to the mortgagor's assets, liabilities, income, credit history, employment history and personal information, and furnished an authorization to apply for a credit report which summarized the borrower's credit history with local merchants and lenders and any record of bankruptcy. The information may have been supplied solely in the loan application. 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, income derived from the mortgaged property may have been considered for underwriting purposes. With respect to mortgaged property consisting of S-44
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vacation homes, generally no income derived from the property was considered for underwriting purposes. Based on the data provided in the application, certain verifications, if required by the originator of the mortgage loan, and the appraisal or other valuation of the mortgaged property, a determination was made by the original lender that the mortgagor's monthly income would be sufficient to enable the mortgagor to meet its monthly obligations on the mortgage loan and other expenses related to the property, including property taxes, utility costs, standard hazard insurance and other fixed obligations other than housing expenses. The originator's guidelines for mortgage loans generally specify that 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 have considered the amount of liquid assets available to the mortgagor after origination. Some of the mortgage loans have been originated under "stated income" programs (also referred to in this prospectus supplement as "reduced documentation" programs) that require less documentation and verification than do traditional "full documentation" programs. Under a "stated income" program, some borrowers with acceptable payment histories will not be required to provide any information regarding income and no other investigation regarding the borrower's income will be undertaken. The adequacy of a mortgaged property as security for repayment of the related mortgage loan generally has been determined by an appraisal in accordance with pre-established appraisal procedure guidelines for appraisals established by or acceptable to the originator. Appraisers were either 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 would have considered 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 LTV ratio may have been based on the appraised value as indicated on a review appraisal conducted by the mortgage collateral seller or originator. In most cases, the mortgage loans were either originated and underwritten in accordance with Residential Funding Corporation's AlterNet Program, as discussed below, or otherwise acquired from a mortgage collateral seller based on standards consistent with the following discussion on credit grades classification or substantially similar standards acceptable to Residential Funding Corporation. Exceptions to these standards are made, however, on a case by case basis if it is determined, generally based on compensating factors, that an underwriting exception is warranted. Compensating factors may include, but are not limited to, a low LTV ratio, stable employment, a relatively long period of time in the same residence, a mortgagor's cash reserves and savings and monthly residual income. S-45
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The credit grade categories determined by Residential Funding Corporation as applicable to all of the mortgage loans are expressed in this prospectus supplement as Credit Grade Categories A4, Ax, Am, B, C and Cm. The following is a general description of the Credit Grades: CREDIT GRADE CATEGORY A4: Under Credit Grade Category A4, the prospective mortgagor may have minor repayment delinquencies related to installment or revolving debt. No 30-day, 60-day or 90-day late payments are acceptable within the last 12 months on an existing mortgage loan. The credit score generally will be 600 or greater. The mortgaged property must be in average to good condition. A maximum LTV ratio of 95% is permitted for a mortgage loan on a single family owner-occupied property or 90% for a mortgage loan originated under a stated income documentation program. A maximum LTV ratio of 85% is permitted for a mortgage loan on a non-owner-occupied property or 75% for mortgage loans originated under a stated income documentation program. The mortgagor's debt service-to income ratio is 50% or less which, in the case of adjustable-rate mortgage loans, will be based on the initial rate on the mortgage loan plus 2% per annum unless the initial rate would not be subject to change for an extended period. With respect to each mortgagor in this Credit Grade Category, no foreclosure proceedings are permitted in the past 3 years. CREDIT GRADE CATEGORY AX: Under Credit Grade Category Ax, the prospective mortgagor may have minor repayment delinquencies related to installment or revolving debt. A maximum of one 30-day late payment, and no 60-day or 90-day late payments, within the last 12 months is acceptable on an existing mortgage loan. The credit score on the primary borrower generally will be 600 or greater. With respect to each mortgagor in this Credit Grade Category, no foreclosure proceedings are permitted in the past 3 years. The mortgaged property must be in average to good condition. A maximum LTV ratio of 90% is permitted for a mortgage loan on a single family owner-occupied property or 85% for a mortgage loan originated under a stated income documentation program. A maximum LTV ratio of 80% is permitted for a mortgage loan on a non-owner-occupied property or 80% under the stated income documentation program. The mortgagor's debt service-to-income ratio is 50% or less which, in the case of adjustable rate mortgage loans, will be based on the initial rate on the mortgage loan plus 2% per annum unless the initial rate would not be subject to change for an extended period. CREDIT GRADE CATEGORY AM: Under Credit Grade Category Am, the prospective mortgagor is required to have generally repaid all previous or existing installment or revolving debt according to its terms. With respect to non-mortgage credit, some prior defaults may have occurred, provided, that open collections and charge-offs in excess of $1,000 must be paid down to zero at closing unless they are 2 years or older and not reflected in the title report or relate to medical expenses. The credit score on the primary borrower generally will be between 580 and 599. With respect to each mortgagor in this credit grade category, no foreclosure proceedings are permitted in the past 3 years. The mortgaged property must be in average to good condition. A maximum LTV ratio of 90% is permitted for a mortgage loan on an owner-occupied property or 80% for mortgage loans originated under a stated income documentation program. A maximum LTV ratio of 80% is permitted for a mortgage loan on a non-owner-occupied property or 70% for mortgage loans originated under a stated income documentation program. The debt service-to-income ratio is 50% or less which, in the case of adjustable-rate mortgage loans, will S-46
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be based on an initial rate on the mortgage loan plus 2% per annum unless the initial rate would not be subject to change for an extended period. CREDIT GRADE CATEGORY B: Under Credit Grade Category B, the prospective mortgagor may not have paid all previous or existing installment or revolving debt according to its terms, and may have some charge offs. With respect to non-mortgage credit, some prior defaults may have occurred, provided, that open collections and charge-offs must be paid down to an amount not in excess of $2,500 at closing unless they are 2 years or older and not reflected in the title report or relate to medical expenses. The credit score on the primary borrower generally will be between 560 and 579. With respect to each mortgagor in this credit grade category, no foreclosure proceedings are permitted in the past 2 years. The mortgaged property must be in average to good condition. A maximum LTV ratio of 85% is permitted for a mortgage loan on an owner-occupied property or 70% under a stated income documentation program. A maximum LTV ratio of 75% is permitted for a mortgage loan on a non-owner-occupied property or 65% for mortgage loans originated under a stated income documentation program. The debt service-to-income ratio is 50% or less which, in the case of adjustable rate mortgage loans, will be based on the initial rate on the mortgage loan plus 2% per annum unless the initial rate would not be subject to change for an extended period. CREDIT GRADE CATEGORY C: Under Credit Grade Category C, the prospective mortgagor may have experienced significant credit problems in the past. With respect to mortgage credit, the mortgagor may have had a history of being generally 30 to 60 days delinquent. A maximum of one 90-day late payment(s) within the last 12 months is acceptable on an existing mortgage loan. With respect to non mortgage credit, significant prior defaults may have occurred, provided, that open collections and charge-offs must be paid down to an amount not in excess of $5,000 at closing unless they are 2 years or older and not reflected in the title report or relate to medical expenses. The credit score on the primary borrower generally will be between 540 and 559. With respect to each mortgagor in this credit grade category, no foreclosure proceedings in the past 2 years. The mortgaged property must be in average to good condition. A maximum LTV ratio of 75% is permitted for mortgage loans on an owner-occupied property or 65% for mortgage loans originated under a stated income documentation program. A maximum LTV ratio of 65% is permitted for mortgage loans originated under a full documentation program or a maximum LTV rate of 55% for mortgage loans originated under a stated income documentation program on a non-owner-occupied property. The debt service-to-income ratio is 50% or less which, in the case of adjustable-rate mortgage loans, will be based on the initial rate on the mortgage loan plus 2% per annum unless the initial rate would not be subject to change for an extended period. CREDIT GRADE CATEGORY CM: Under Credit Grade Category Cm, the prospective mortgagor may have experienced substantial credit problems in the past. With respect to mortgage credit, the mortgagor may have had a history of being generally 30 to 60 days delinquent, and a maximum of one 90-day late payment(s) within the last 12 months is acceptable on an existing mortgage loan. The prospective mortgagor's credit history is poor and a notice of default may have been filed. The credit score on the primary borrower generally will be between 520 and 539. With respect to each mortgagor in this credit grade category, no foreclosure proceedings are permitted in the past year. The mortgaged property must be in average to good condition. A maximum LTV ratio of 70% is permitted for mortgage loans on an S-47
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owner-occupied property or 60% for mortgage loans originated under a stated documentation program. A maximum LTV ratio of 60% is permitted for mortgage loans originated under a full documentation program on a non-owner-occupied property. The debt service-to-income ratio is required to be 50% or less which, in the case of adjustable rate mortgage loans, will be based on the initial rate on the mortgage loan plus 2% per annum unless the initial rate would not be subject to change for an extended period. For all credit grade categories, non-mortgage credit may include prior defaults, and different levels of major adverse credit. Major adverse credit is defined as collection accounts, charge-off accounts, judgments, liens, delinquent property taxes, repossessions, garnishments and accounts currently 90 days or more delinquent. In most cases, Chapter 7 bankruptcies were discharged in the past 12 months; and Chapter 13 bankruptcies must be paid as agreed for the past 12 months and paid off prior to or at closing. Any adverse account affecting title must also be paid down to zero at closing. Some adverse accounts may remain open after closing, provided the borrower has adequate compensating factors. As described above, the indicated underwriting standards applicable to the mortgage loans include the foregoing categories and characteristics as guidelines only. The underwriting process may determine that the prospective mortgagor warrants a credit grade category upgrade based on compensating factors. Examples of compensating factors include strong residual income, strong prior mortgage history, 6 months or more of liquid reserves, LTV ratios below 65%, or a credit score above 600. The foregoing credit grade classifications are based on factors that are exclusive of the additional protection against loss that borrower-paid primary mortgage insurance customarily provides on loans which have LTV ratios in excess of 80%. In applying the standards described above to junior loans, the CLTV ratio is used in lieu of the LTV ratio for all junior loans that have CLTV ratios of up to 100%. CLTV ratios in excess of 95% are allowed in the A4, Ax and Am credit grade categories. Based on the indicated underwriting standards applicable for mortgage loans with risk features originated thereunder, and in particular mortgage loans in Credit Grade Categories C as described above, those mortgage loans are likely to experience greater rates of delinquency, foreclosure and loss, and may experience substantially greater rates of delinquency, foreclosure and loss than mortgage loans underwritten under more stringent underwriting standards. THE ALTERNET PROGRAM Residential Funding Corporation has established the AlterNet program primarily for the purchase of mortgage loans that are made to borrowers that may have imperfect credit histories, higher debt to income ratios or mortgage loans that present certain other risks to investors. The mortgage collateral sellers that participate in this program have been selected by Residential Funding Corporation on the basis of criteria set forth in Residential Funding Corporation's Client Guide, referred to as the Guide. For those mortgage loans that Residential Funding Corporation purchased from sellers in this program, each mortgage loan determined by Residential Funding Corporation to be acceptable for purchase would have been originated in accordance with or would have been determined to be generally consistent with the provisions of the Guide. S-48
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If a mortgage collateral seller in this program becomes the subject of a receivership, conservatorship or other insolvency or bankruptcy proceeding or if the net worth, financial performance or delinquency and foreclosure rates of a mortgage collateral seller in this program are adversely impacted, that institution may continue to be treated as a mortgage collateral seller in this program. BILLING AND PAYMENT PROCEDURES All of the mortgage loans require monthly payments to be made no later than either the 1st or 15th day of each month, with a grace period of either 10 or 15 days. The subservicer sends monthly invoices to borrowers. Moreover, borrowers are provided with coupon books annually, and no invoices are sent separately. Borrowers may elect for monthly payments to be deducted automatically from deposit accounts and may make payments by various means, including online transfers, phone payment and Western Union quick check, although an additional fee may be charged for these payment methods. Borrowers may also elect to pay one half of each monthly payment amount every other week, in order to accelerate the amortization of their loans. Further, borrowers are afforded the opportunity to use electronic methods to both access and manage their respective accounts, including use of the subservicer's internet website. ORIGINATION AND SERVICING Mortgage Lenders Network USA, Inc. is a Delaware corporation. Mortgage Lenders Network USA, Inc., also referred to in this prospectus supplement as the subservicer, originated all of the mortgage loans. The subservicer originates conforming and non-conforming mortgage loans through a nationwide network of retail production branches, independent mortgage brokers approved by Mortgage Lenders Network USA, Inc. and also through its correspondent lending division. The subservicer is licensed to originate in 49 States and its executive offices are located in Middletown, Connecticut. The mortgage loans were originated in accordance with the underwriting standards of Residential Funding Corporation, as described under "--Underwriting Standards" above. Residential Funding Corporation acquired all of the mortgage loans from Emax Financial Group, LLC. Emax Financial Group, LLC, is a mortgage banking company engaged in the mortgage banking business, which consists of acquisition and sale of residential mortgage loans secured primarily by one- to four-unit family residences, and the purchase and sale of mortgage servicing rights. The subservicer will subservice all of the mortgage loans. The subservicer is an approved Fannie Mae and Freddie Mac servicer. The subservicer will subservice the mortgage loans pursuant to the terms of a subservicing agreement with the master servicer. The subservicing agreement provides that the subservicer will provide all of the services described in "The Pooling and Servicing Agreement--The Master Servicer and the Subservicer--Subservicer" in this prospectus supplement. The subservicer has been servicing mortgage loans secured by first liens on one-to four-family residential properties since 1997. The subservicer is a wholly-owned subsidiary of Emax Financial Group, LLC. As of December 31, 2005 the subservicer's servicing portfolio included approximately 73,000 mortgage loans with an aggregate principal balance of $8.9 billion. The subservicer also services an additional 29,000 S-49
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mortgage loans, with an aggregate principal balance of $1.7 billion, that are 5 to 89 days delinquent. 91% and 51% of the subservicer's servicing portfolio, based on the outstanding principal balance of the loans in the subservicer's servicing portfolio, are first lien loans and fixed-rate loans, respectively. 73% and 70% of the subservicer's servicing portfolio, based on the number of loans in the subservicer's portfolio, are first lien loans and fixed-rate loans, respectively. 13.45% and 9.35% of the subservicer's servicing portfolio, based on the outstanding principal balance of the loans in the subservicer's servicing portfolio and the number of loans, respectively, are conforming loans. During each of the periods described in the table on the following page, approximately 80% to 85% of the subservicer's servicing portfolio, based on the outstanding principal balance of the loans in the subservicer's servicing portfolio, were subprime mortgage loans. The following table summarizes the subservicer's servicing experience, on the dates indicated: S-50
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MORTGAGE LENDERS NETWORK USA, INC. AND ITS AFFILIATE, EMAX FINANCIAL GROUP, LLC. SERVICING EXPERIENCE 2001 2002 2003 2004 2005 --------------- --------------- --------------- --------------- ----------------- VOLUME BY UNPAID PRINCIPAL BALANCE AT YEAR END First Mortgages (Conforming and Subprime) $2,215,153,454 $2,855,986,058 $4,740,358,535 $6,858,407,950 $ 9,713,242,698 Second Mortgages (Conforming and Subprime) 335,173,041 626,667,040 762,971,751 1,813,883,267 962,242,320 --------------- --------------- --------------- --------------- ----------------- Total Unpaid Principal Balance $2,550,326,495 $3,482,653,098 $5,503,330,286 $8,672,291,217 $10,675,485,018 PERCENTAGE CHANGE FROM PRIOR YEAR First Mortgages (Conforming and Subprime) 8% 29% 66% 45% 42% Second Mortgages (Conforming and Subprime) 94% 87% 22% 138% -47% --------------- --------------- --------------- --------------- ----------------- Total Unpaid Principal Balance 14% 37% 58% 58% 23% VOLUME BY NUMBER OF LOANS First Mortgages (Conforming and Subprime) 30,386 33,080 41,628 51,890 80,596 Second Mortgages (Conforming and Subprime) 8,878 16,929 21,405 44,712 22,446 --------------- --------------- --------------- --------------- ----------------- Total Number of Loans 39,264 50,009 63,033 96,602 103,042 PERCENTAGE CHANGE FROM PRIOR YEAR First Mortgages (Conforming and Subprime) 7% 9% 26% 25% 55% Second Mortgages (Conforming and Subprime) 77% 91% 26% 109% (50)% --------------- --------------- --------------- --------------- ----------------- Total Number of Loans 17% 27% 26% 53% 7% S-51
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ADDITIONAL INFORMATION The description in this prospectus supplement of the mortgage pool and the mortgaged properties is based upon the mortgage pool as of the cut-off date after deducting payments due during the month of the cut-off date, except as otherwise noted. Prior to the issuance of the certificates, mortgage loans may be removed from the mortgage pool as a result of incomplete documentation or otherwise, if the depositor deems that removal is necessary or appropriate. A limited number of other mortgage loans may be added to the mortgage pool prior to the issuance of the certificates. The depositor believes that the information in this prospectus supplement will be substantially representative of the characteristics of the mortgage pool as it will be constituted at the time the certificates are issued although the range of mortgage rates and maturities and some other characteristics of the mortgage loans in the mortgage pool may vary. A Current Report on Form 8-K will be available to purchasers of the certificates and will be filed, together with the pooling and servicing agreement, with the Securities and Exchange Commission within fifteen days after the initial issuance of the offered certificates. In the event mortgage loans are removed from or added to the mortgage pool as described in the preceding paragraph, that removal or addition will be noted in the Current Report on Form 8-K. THE YIELD MAINTENANCE AGREEMENT PROVIDER The yield maintenance agreement provider will be Bear Stearns Bank plc, or BSB. BSB is a bank regulated in Ireland by the Financial Regulator and is a wholly owned subsidiary of The Bear Stearns Companies, Inc., or BSC. BSB's main activities are the provision of banking and financial services and to act as broker and dealer in financial instruments. BSB is a fully authorized banking institution as prescribed by the Central Bank of Ireland and the Irish Financial Services Regulatory Authority. BSB has a ratings classification of "A" from Standard & Poor's and "A1" from Moody's Investors Service. BSB will provide upon request, without charge, to each person to whom this prospectus supplement is delivered, a copy of (i) the ratings analysis from each of Standard & Poor's and Moody's Investors Service evidencing those respective ratings or (ii) the most recent audited annual financial statements of BSC. The payment of any amount due and payable by BSB under the yield maintenance agreement will be guaranteed by BSC. Requests for information should be directed to the Joint Chief Executive Officers of BSB at 353-1-402-6000 or in writing at Block 8, Harcourt Centre, Charlotte Way, Dublin 2, Ireland. DESCRIPTION OF THE CERTIFICATES GENERAL The certificates will be issued pursuant to the pooling and servicing agreement. The following summaries describe provisions of the pooling and servicing agreement. The summaries do not purport to be complete and are subject to, and qualified in their entirety by reference to, the provisions of the pooling and servicing agreement. The Series 2006-EMX1 Home Equity Mortgage Asset-Backed Pass-Through Certificates will consist of the following fifteen classes: S-52
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o Class A-1, Class A-2 and Class A-3 Certificates, which collectively are sometimes referred to as the Class A Certificates; o Class M-1, Class M-2, Class M-3, Class M-4, Class M-5, Class M-6, Class M-7, Class M-8 and Class M-9 Certificates, which collectively are sometimes referred to as the Class M Certificates; o Class SB Certificates; and o Class R-I Certificates and Class R-II Certificates, which together are sometimes referred to as the Class R Certificates. Only the Class A Certificates and Class M Certificates are offered by this prospectus supplement. See "--Glossary of Terms" in this prospectus supplement for the meanings of capitalized terms and acronyms not otherwise defined in this prospectus supplement. The certificates in the aggregate will evidence the entire beneficial ownership interest in the trust. The trust will consist of: o the mortgage loans, excluding scheduled payments due in the month of the cut-off date; o the assets as from time to time are identified as deposited in respect of the mortgage loans in the custodial account and in the certificate account and belonging to the trust; o property acquired by foreclosure of the mortgage loans or deed in lieu of foreclosure; o any applicable primary insurance policies and standard hazard insurance policies; o the yield maintenance agreement; and o all proceeds of the foregoing. The offered certificates will be issued, maintained and transferred on the book-entry records of DTC and its participants. The Class A, Class M-1, Class M-2 and Class M-3 Certificates will be issued in minimum denominations of $100,000 and integral multiples of $1 in excess of $100,000. The Class M-4, Class M-5, Class M-6, Class M-7, Class M-8 and Class M-9 Certificates will be issued in minimum denominations of $250,000 and integral multiples of $1 in excess of $250,000. The offered certificates will be represented by one or more certificates registered in the name of the nominee of DTC. The depositor has been informed by DTC that DTC's nominee will be Cede & Co. No beneficial owner will be entitled to receive a definitive certificate, except as set forth in the prospectus under "Description of the Certificates--Form of Certificates." Investors in the offered certificates may elect to hold their offered certificates through DTC in S-53
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the United States or Clearstream, Luxembourg, formerly known as Cedelbank SA, or Euroclear in Europe. Clearstream, Luxembourg and Euroclear will hold omnibus positions on behalf of their participants through customers' securities accounts in Clearstream, Luxembourg's and Euroclear's names on the books of their depositaries, which in turn will hold those positions in customers' securities accounts in the depositaries' names on the books of DTC. Unless and until definitive certificates are issued for the offered certificates under the limited circumstances described in this prospectus supplement, o all references to actions by certificateholders with respect to the offered certificates shall refer to actions taken by DTC upon instructions from its participants, and o all references in this prospectus supplement to distributions, notices, reports and statements to certificateholders with respect to the offered certificates shall refer to distributions, notices, reports and statements to DTC or Cede & Co., as the registered holder of the offered certificates, for distribution to beneficial owners by DTC in accordance with DTC procedures. BOOK-ENTRY REGISTRATION 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 offered 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 offered 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 offered certificates, it is anticipated that the only registered certificateholder of the offered certificates will be Cede & Co., 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, DTC is required to make book-entry transfers of offered certificates among participants and to receive and transmit distributions of principal of, and interest on, the offered certificates. Participants and indirect participants with which beneficial owners have accounts with respect to the offered certificates similarly are required to make book-entry transfers and receive and transmit distributions on behalf of their respective beneficial owners. Accordingly, although beneficial owners will not possess physical certificates evidencing their interests in the offered certificates, DTC's 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 offered certificates. Transfers between participants will occur in accordance with DTC's rules. Transfers between Clearstream, Luxembourg participants and Euroclear participants will occur in accordance with their respective rules and operating procedures. 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 S-54
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records relating to or payments made on account of beneficial ownership interests in the offered certificates held by Cede & Co., 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 certificateholders or their nominees, rather than to DTC, if: o the depositor advises the trustee in writing that DTC is no longer willing or able to properly discharge its responsibilities as a depository with respect to book-entry certificates and the depositor is unable to locate a qualified successor; or o the depositor notifies DTC of its intent to terminate the book-entry system and, upon receipt from DTC of the depositor's intent to terminate the book-entry system, the participants holding beneficial interest in the book-entry certificates agree to initiate a termination. Upon surrender by DTC of the definitive certificates representing the offered certificates and upon receipt of instructions from DTC for re-registration, the trustee will reissue the offered 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 the definitive certificates as certificateholders under the pooling and servicing agreement. For additional information regarding DTC, Clearstream, Luxembourg and Euroclear and the offered certificates, see "Description of the Certificates--Form of Certificates" in the prospectus. GLOSSARY OF TERMS The following terms are given the meanings shown below to help describe the cash flows on the certificates: ACCRUED CERTIFICATE INTEREST--With respect to any class of Class A Certificates and Class M Certificates and any distribution date, an amount equal to interest accrued during the related Interest Accrual Period on its Certificate Principal Balance immediately prior to that distribution date at the related Pass-Through Rate for that distribution date. Accrued Certificate Interest will be reduced by Prepayment Interest Shortfalls to the extent not covered by Eligible Master Servicer Compensation, and by Relief Act Shortfalls, each as described in "--Interest Distributions" below. These reductions will be allocated to the related certificates on a pro rata basis, based upon the amount of Accrued Certificate Interest that would have accrued on these certificates absent these reductions. In addition to the foregoing, Accrued Certificate Interest on any class of Class A Certificates and Class M Certificates may be reduced by the interest portion of Realized Losses that are not covered by Excess Cash Flow or overcollateralization and are allocated to that class of certificates as described in "--Allocation of Losses" below. S-55
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Accrued Certificate Interest will be calculated on the basis of the actual number of days in the related Interest Accrual Period and a 360-day year. AVAILABLE DISTRIBUTION AMOUNT--For any distribution date, an amount equal to the sum of the following amounts, net of amounts reimbursable to the master servicer and any subservicer: o the aggregate amount of scheduled payments on the mortgage loans due during the related due period and received on or prior to the related determination date, after deduction of the master servicing fees and any subservicing fees in respect of the mortgage loans for that distribution date; o unscheduled payments, including mortgagor prepayments on the mortgage loans, Insurance Proceeds, Liquidation Proceeds and Subsequent Recoveries from the mortgage loans, and proceeds from repurchases of and substitutions for the mortgage loans occurring during the preceding calendar month; and o all Advances made for that distribution date in respect of the mortgage loans. In addition to the foregoing amounts, with respect to unscheduled collections on the mortgage loans, not including mortgagor prepayments, the master servicer may elect to treat these 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 in this prospectus supplement under "--Principal Distributions," any amount with respect to which this election is 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. BASIS RISK SHORTFALL--With respect to any class of Class A Certificates and Class M Certificates and any distribution date on which the Net WAC Cap Rate is used to determine the Pass-Through Rate of that class of certificates, an amount equal to the excess of (x) Accrued Certificate Interest for that class of certificates calculated at a rate (not to exceed 14.000% per annum) equal to One-Month LIBOR plus the related Margin over (y) Accrued Certificate Interest for that class of certificates calculated using the Net WAC Cap Rate; plus any unpaid Basis Risk Shortfall from prior distribution dates, plus interest thereon to the extent previously unreimbursed by Excess Cash Flow, at a rate equal to the related Pass-Through Rate. CAPITALIZATION REIMBURSEMENT AMOUNT--With respect to any distribution date, the amount of Advances or Servicing Advances that were added to the outstanding principal balance of the related mortgage loans during the preceding calendar month and reimbursed to the master servicer or subservicer on or prior to that distribution date. CERTIFICATE PRINCIPAL BALANCE--With respect to any class of Class A Certificates and Class M Certificates and any date of determination, an amount equal to its initial certificate principal balance, reduced by the aggregate of (a) all amounts allocable to principal previously distributed with respect to that class of certificates and (b) any reductions in its Certificate Principal Balance in connection with the allocation of Realized Losses in the manner described in this prospectus supplement; provided, that with respect to any distribution date, the Certificate S-56
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Principal Balances of the Class A Certificates and Class M Certificates to which a Realized Loss was previously allocated and remains unreimbursed will be increased, sequentially, as follows: first to the Class A Certificates, pro rata, and then to the Class M-1, Class M-2, Class M-3, Class M-4, Class M-5, Class M-6, Class M-7, Class M-8 and Class M-9 Certificates, in that order, to the extent of Realized Losses previously allocated thereto and remaining unreimbursed, but only to the extent of Subsequent Recoveries received during the previous calendar month. The initial Certificate Principal Balance of the Class SB Certificates is equal to the excess, if any, of (a) the initial aggregate Stated Principal Balance of the mortgage loans over (b) the initial aggregate Certificate Principal Balance of the Class A Certificates and Class M Certificates. CLASS A PRINCIPAL DISTRIBUTION AMOUNT--With respect to any distribution date (i) prior to the Stepdown Date or on or after the Stepdown Date if a Trigger Event is in effect for that distribution date, the Principal Distribution Amount for that distribution date or (ii) on or after the Stepdown Date if a Trigger Event is not in effect for that distribution date, the lesser of: o the Principal Distribution Amount for that distribution date; and o the excess, if any, of (A) the aggregate Certificate Principal Balance of the Class A Certificates immediately prior to that distribution date over (B) the lesser of (x) the product of (1) the applicable Subordination Percentage and (2) the aggregate Stated Principal Balance of the mortgage loans after giving effect to distributions to be made on that distribution date and (y) the excess, if any, of the aggregate Stated Principal Balance of the mortgage loans after giving effect to distributions to be made on that distribution date, over the Overcollateralization Floor. CLASS M-1 PRINCIPAL DISTRIBUTION AMOUNT--With respect to any distribution date (i) prior to the Stepdown Date or on or after the Stepdown Date if a Trigger Event is in effect for that distribution date, the remaining Principal Distribution Amount for that distribution date after distribution of the Class A Principal Distribution Amount or (ii) on or after the Stepdown Date if a Trigger Event is not in effect for that distribution date, the lesser of: o the remaining Principal Distribution Amount for that distribution date after distribution of the Class A Principal Distribution Amount; and o the excess, if any, of (A) the sum of (1) the aggregate Certificate Principal Balance of the Class A Certificates (after taking into account the payment of the Class A Principal Distribution Amount for that distribution date) and (2) the Certificate Principal Balance of the Class M-1 Certificates immediately prior to that distribution date over (B) the lesser of (x) the product of (1) the applicable Subordination Percentage and (2) the aggregate Stated Principal Balance of the mortgage loans after giving effect to distributions to be made on that distribution date and (y) the excess, if any, of the aggregate Stated Principal Balance of the mortgage loans after giving effect to distributions to be made on that distribution date, over the Overcollateralization Floor. CLASS M-2 PRINCIPAL DISTRIBUTION AMOUNT--With respect to any distribution date (i) prior to the Stepdown Date or on or after the Stepdown Date if a Trigger Event is in effect for S-57
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that distribution date, the remaining Principal Distribution Amount for that distribution date after distribution of the Class A Principal Distribution Amount and the Class M-1 Principal Distribution Amount or (ii) on or after the Stepdown Date if a Trigger Event is not in effect for that distribution date, the lesser of: o the remaining Principal Distribution Amount for that distribution date after distribution of the Class A Principal Distribution Amount and Class M-1 Principal Distribution Amount; and o the excess, if any, of (A) the sum of (1) the aggregate Certificate Principal Balance of the Class A Certificates and Class M-1 Certificates (after taking into account the payment of the Class A Principal Distribution Amount and Class M-1 Principal Distribution Amount for that distribution date) and (2) the Certificate Principal Balance of the Class M-2 Certificates immediately prior to that distribution date over (B) the lesser of (x) the product of (1) the applicable Subordination Percentage and (2) the aggregate Stated Principal Balance of the mortgage loans after giving effect to distributions to be made on that distribution date and (y) the excess, if any, of the aggregate Stated Principal Balance of the mortgage loans after giving effect to distributions to be made on that distribution date, over the Overcollateralization Floor. CLASS M-3 PRINCIPAL DISTRIBUTION AMOUNT--With respect to any distribution date (i) prior to the Stepdown Date or on or after the Stepdown Date if a Trigger Event is in effect for that distribution date, the remaining Principal Distribution Amount for that distribution date after distribution of the Class A Principal Distribution Amount, the Class M-1 Principal Distribution Amount and the Class M-2 Principal Distribution Amount or (ii) on or after the Stepdown Date if a Trigger Event is not in effect for that distribution date, the lesser of: o the remaining Principal Distribution Amount for that distribution date after distribution of the Class A Principal Distribution Amount, Class M-1 Principal Distribution Amount and Class M-2 Principal Distribution Amount; and o the excess, if any, of (A) the sum of (1) the aggregate Certificate Principal Balance of the Class A, Class M-1 and Class M-2 Certificates (after taking into account the payment of the Class A Principal Distribution Amount, Class M-1 Principal Distribution Amount and Class M-2 Principal Distribution Amount for that distribution date) and (2) the Certificate Principal Balance of the Class M-3 Certificates immediately prior to that distribution date over (B) the lesser of (x) the product of (1) the applicable Subordination Percentage and (2) the aggregate Stated Principal Balance of the mortgage loans after giving effect to distributions to be made on that distribution date and (y) the excess, if any, of the aggregate Stated Principal Balance of the mortgage loans after giving effect to distributions to be made on that distribution date, over the Overcollateralization Floor. CLASS M-4 PRINCIPAL DISTRIBUTION AMOUNT--With respect to any distribution date (i) prior to the Stepdown Date or on or after the Stepdown Date if a Trigger Event is in effect for that distribution date, the remaining Principal Distribution Amount for that distribution date after S-58
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distribution of the Class A Principal Distribution Amount, the Class M-1 Principal Distribution Amount, the Class M-2 Principal Distribution Amount and the Class M-3 Principal Distribution Amount or (ii) on or after the Stepdown Date if a Trigger Event is not in effect for that distribution date, the lesser of: o the remaining Principal Distribution Amount for that distribution date after distribution of the Class A Principal Distribution Amount, Class M-1 Principal Distribution Amount, Class M-2 Principal Distribution Amount and Class M-3 Principal Distribution Amount; and o the excess, if any, of (A) the sum of (1) the aggregate Certificate Principal Balance of the Class A, Class M-1, Class M-2 and Class M-3 Certificates (after taking into account the payment of the Class A Principal Distribution Amount, Class M-1 Principal Distribution Amount, Class M-2 Principal Distribution Amount and Class M-3 Principal Distribution Amount for that distribution date) and (2) the Certificate Principal Balance of the Class M-4 Certificates immediately prior to that distribution date over (B) the lesser of (x) the product of (1) the applicable Subordination Percentage and (2) the aggregate Stated Principal Balance of the mortgage loans after giving effect to distributions to be made on that distribution date and (y) the excess, if any, of the aggregate Stated Principal Balance of the mortgage loans after giving effect to distributions to be made on that distribution date, over the Overcollateralization Floor. CLASS M-5 PRINCIPAL DISTRIBUTION AMOUNT--With respect to any distribution date (i) prior to the Stepdown Date or on or after the Stepdown Date if a Trigger Event is in effect for that distribution date, the remaining Principal Distribution Amount for that distribution date after distribution of the Class A Principal Distribution Amount, the Class M-1 Principal Distribution Amount, the Class M-2 Principal Distribution Amount, the Class M-3 Principal Distribution Amount and the Class M-4 Principal Distribution Amount or (ii) on or after the Stepdown Date if a Trigger Event is not in effect for that distribution date, the lesser of: o the remaining Principal Distribution Amount for that distribution date after distribution of the Class A Principal Distribution Amount, Class M-1 Principal Distribution Amount, Class M-2 Principal Distribution Amount, Class M-3 Principal Distribution Amount and Class M-4 Principal Distribution Amount; and o the excess, if any, of (A) the sum of (1) the aggregate Certificate Principal Balance of the Class A, Class M-1, Class M-2, Class M-3 and Class M-4 Certificates (after taking into account the payment of the Class A Principal Distribution Amount, Class M-1 Principal Distribution Amount, Class M-2 Principal Distribution Amount, Class M-3 Principal Distribution Amount and Class M-4 Principal Distribution Amount for that distribution date) and (2) the Certificate Principal Balance of the Class M-5 Certificates immediately prior to that distribution date over (B) the lesser of (x) the product of (1) the applicable Subordination Percentage and (2) the aggregate Stated Principal Balance of the mortgage loans after giving effect to distributions to be made on that distribution date and (y) the excess, if any, of the aggregate Stated Principal Balance of the S-59
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mortgage loans after giving effect to distributions to be made on that distribution date, over the Overcollateralization Floor. CLASS M-6 PRINCIPAL DISTRIBUTION AMOUNT--With respect to any distribution date (i) prior to the Stepdown Date or on or after the Stepdown Date if a Trigger Event is in effect for that distribution date, the remaining Principal Distribution Amount for that distribution date after distribution of the Class A Principal Distribution Amount, the Class M-1 Principal Distribution Amount, the Class M-2 Principal Distribution Amount, the Class M-3 Principal Distribution Amount, the Class M-4 Principal Distribution Amount and the Class M-5 Principal Distribution Amount or (ii) on or after the Stepdown Date if a Trigger Event is not in effect for that distribution date, the lesser of: o the remaining Principal Distribution Amount for that distribution date after distribution of the Class A Principal Distribution Amount, Class M-1 Principal Distribution Amount, Class M-2 Principal Distribution Amount, Class M-3 Principal Distribution Amount, Class M-4 Principal Distribution Amount and Class M-5 Principal Distribution Amount; and o the excess, if any, of (A) the sum of (1) the aggregate Certificate Principal Balance of the Class A, Class M-1, Class M-2, Class M-3, Class M-4 and Class M-5 Certificates (after taking into account the payment of the Class A Principal Distribution Amount, Class M-1 Principal Distribution Amount, Class M-2 Principal Distribution Amount, Class M-3 Principal Distribution Amount, Class M-4 Principal Distribution Amount and Class M-5 Principal Distribution Amount for that distribution date) and (2) the Certificate Principal Balance of the Class M-6 Certificates immediately prior to that distribution date over (B) the lesser of (x) the product of (1) the applicable Subordination Percentage and (2) the aggregate Stated Principal Balance of the mortgage loans after giving effect to distributions to be made on that distribution date and (y) the excess, if any, of the aggregate Stated Principal Balance of the mortgage loans after giving effect to distributions to be made on that distribution date, over the Overcollateralization Floor. CLASS M-7 PRINCIPAL DISTRIBUTION AMOUNT--With respect to any distribution date (i) prior to the Stepdown Date or on or after the Stepdown Date if a Trigger Event is in effect for that distribution date, the remaining Principal Distribution Amount for that distribution date after distribution of the Class A Principal Distribution Amount, the Class M-1 Principal Distribution Amount, the Class M-2 Principal Distribution Amount, the Class M-3 Principal Distribution Amount, the Class M-4 Principal Distribution Amount, the Class M-5 Principal Distribution Amount and the Class M-6 Principal Distribution Amount or (ii) on or after the Stepdown Date if a Trigger Event is not in effect for that distribution date, the lesser of: o the remaining Principal Distribution Amount for that distribution date after distribution of the Class A Principal Distribution Amount, Class M-1 Principal Distribution Amount, Class M-2 Principal Distribution Amount, Class M-3 Principal Distribution Amount, S-60
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Class M-4 Principal Distribution Amount, Class M-5 Principal Distribution Amount and Class M-6 Principal Distribution Amount; and o the excess, if any, of (A) the sum of (1) the aggregate Certificate Principal Balance of the Class A, Class M-1, Class M-2, Class M-3, Class M-4, Class M-5 and Class M-6 Certificates (after taking into account the payment of the Class A Principal Distribution Amount, Class M-1 Principal Distribution Amount, Class M-2 Principal Distribution Amount, Class M-3 Principal Distribution Amount, Class M-4 Principal Distribution Amount, Class M-5 Principal Distribution Amount and Class M-6 Principal Distribution Amount for that distribution date) and (2) the Certificate Principal Balance of the Class M-7 Certificates immediately prior to that distribution date over (B) the lesser of (x) the product of (1) the applicable Subordination Percentage and (2) the aggregate Stated Principal Balance of the mortgage loans after giving effect to distributions to be made on that distribution date and (y) the excess, if any, of the aggregate Stated Principal Balance of the mortgage loans after giving effect to distributions to be made on that distribution date, over the Overcollateralization Floor. CLASS M-8 PRINCIPAL DISTRIBUTION AMOUNT--With respect to any distribution date (i) prior to the Stepdown Date or on or after the Stepdown Date if a Trigger Event is in effect for that distribution date, the remaining Principal Distribution Amount for that distribution date after distribution of the Class A Principal Distribution Amount, the Class M-1 Principal Distribution Amount, the Class M-2 Principal Distribution Amount, the Class M-3 Principal Distribution Amount, the Class M-4 Principal Distribution Amount, the Class M-5 Principal Distribution Amount, the Class M-6 Principal Distribution Amount and the Class M-7 Principal Distribution Amount or (ii) on or after the Stepdown Date if a Trigger Event is not in effect for that distribution date, the lesser of: o the remaining Principal Distribution Amount for that distribution date after distribution of the Class A Principal Distribution Amount, Class M-1 Principal Distribution Amount, Class M-2 Principal Distribution Amount, Class M-3 Principal Distribution Amount, Class M-4 Principal Distribution Amount, Class M-5 Principal Distribution Amount, Class M-6 Principal Distribution Amount and Class M-7 Principal Distribution Amount; and o the excess, if any, of (A) the sum of (1) the aggregate Certificate Principal Balance of the Class A, Class M-1, Class M-2, Class M-3, Class M-4, Class M-5, Class M-6 and Class M-7 Certificates (after taking into account the payment of the Class A Principal Distribution Amount, Class M-1 Principal Distribution Amount, Class M-2 Principal Distribution Amount, Class M-3 Principal Distribution Amount, Class M-4 Principal Distribution Amount, Class M-5 Principal Distribution Amount, Class M-6 Principal Distribution Amount and Class M-7 Principal Distribution Amount for that distribution date) and (2) the Certificate Principal Balance of the Class M-8 Certificates immediately prior to that distribution date over (B) the lesser of (x) the product of (1) the applicable Subordination Percentage and (2) the aggregate Stated Principal Balance of the mortgage loans after giving effect to distributions to be made on that distribution S-61
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date and (y) the excess, if any, of the aggregate Stated Principal Balance of the mortgage loans after giving effect to distributions to be made on that distribution date, over the Overcollateralization Floor. CLASS M-9 PRINCIPAL DISTRIBUTION AMOUNT--With respect to any distribution date (i) prior to the Stepdown Date or on or after the Stepdown Date if a Trigger Event is in effect for that distribution date, the remaining Principal Distribution Amount for that distribution date after distribution of the Class A Principal Distribution Amount, the Class M-1 Principal Distribution Amount, the Class M-2 Principal Distribution Amount, the Class M-3 Principal Distribution Amount, the Class M-4 Principal Distribution Amount, the Class M-5 Principal Distribution Amount, the Class M-6 Principal Distribution Amount, the Class M-7 Principal Distribution Amount and the Class M-8 Principal Distribution Amount or (ii) on or after the Stepdown Date if a Trigger Event is not in effect for that distribution date, the lesser of: o the remaining Principal Distribution Amount for that distribution date after distribution of the Class A Principal Distribution Amount, Class M-1 Principal Distribution Amount, Class M-2 Principal Distribution Amount, Class M-3 Principal Distribution Amount, Class M-4 Principal Distribution Amount, Class M-5 Principal Distribution Amount, Class M-6 Principal Distribution Amount, Class M-7 Principal Distribution Amount and Class M-8 Principal Distribution Amount; and o the excess, if any, of (A) the sum of (1) the aggregate Certificate Principal Balance of the Class A, Class M-1, Class M-2, Class M-3, Class M-4, Class M-5, Class M-6, Class M-7 and Class M-8 Certificates (after taking into account the payment of the Class A Principal Distribution Amount, Class M-1 Principal Distribution Amount, Class M-2 Principal Distribution Amount, Class M-3 Principal Distribution Amount, Class M-4 Principal Distribution Amount, Class M-5 Principal Distribution Amount, Class M-6 Principal Distribution Amount, Class M-7 Principal Distribution Amount and Class M-8 Principal Distribution Amount for that distribution date) and (2) the Certificate Principal Balance of the Class M-9 Certificates immediately prior to that distribution date over (B) the lesser of (x) the product of (1) the applicable Subordination Percentage and (2) the aggregate Stated Principal Balance of the mortgage loans after giving effect to distributions to be made on that distribution date and (y) the excess, if any, of the aggregate Stated Principal Balance of the mortgage loans after giving effect to distributions to be made on that distribution date, over the Overcollateralization Floor. ELIGIBLE MASTER SERVICING COMPENSATION--For any distribution date, an amount equal to the lesser of (a) one-twelfth of 0.125% of the Stated Principal Balance of the mortgage loans immediately preceding that 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 that distribution date. EXCESS CASH FLOW--With respect to any distribution date, an amount equal to the sum of (x) the excess of (i) the Available Distribution Amount for that distribution date over (ii) the sum S-62
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of (a) the Interest Distribution Amount for that distribution date and (b) the Principal Remittance Amount for that distribution date, (y) the Overcollateralization Reduction Amount, if any, for that distribution date and (z) any amounts received by the trust under the yield maintenance agreement for that distribution date. EXCESS OVERCOLLATERALIZATION AMOUNT--With respect to any distribution date, the excess, if any, of the Overcollateralization Amount on that distribution date over the Required Overcollateralization Amount on that distribution date. EXPENSE FEE RATE--With respect to any mortgage loan, the sum of the rates at which the master servicing and subservicing fees are paid. FITCH--Fitch Ratings. INTEREST ACCRUAL PERIOD--With respect to any distribution date and the Class A Certificates and Class M Certificates, (i) with respect to the distribution date in February 2006, the period commencing on the closing date and ending on the day preceding the distribution date in February 2006, and (ii) with respect to any distribution date after the distribution date in February 2006, the period commencing on the distribution date in the month immediately preceding the month in which that distribution date occurs and ending on the day preceding that distribution date. INTEREST DISTRIBUTION AMOUNT--With respect to any distribution date, the aggregate amount of Accrued Certificate Interest on the Class A Certificates and Class M Certificates for that distribution date and any Accrued Certificate Interest remaining unpaid for any previous distribution date. MARGIN--With respect to each class of Class A Certificates and Class M Certificates, the related margin set forth in the table below: RELATED MARGINS CLASS (1) (2) ---------------------- -------------------- ---------------------- A-1 0.080% 0.080% A-2 0.230% 0.460% A-3 0.320% 0.640% M-1 0.410% 0.615% M-2 0.430% 0.645% M-3 0.470% 0.705% M-4 0.630% 0.945% M-5 0.650% 0.975% M-6 0.710% 1.065% M-7 1.500% 2.250% M-8 1.950% 2.925% M-9 2.250% 3.375% (1) Initially. (2) On and after the second distribution date after the first possible optional termination date. MOODY'S-- Moody's Investors Service, Inc. S-63
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NET MORTGAGE RATE--With respect to any mortgage loan, the mortgage rate thereon minus the Expense Fee Rate. NET WAC CAP RATE--With respect to any distribution date, a per annum rate equal to the product of (a) the weighted average of the Net Mortgage Rates of the mortgage loans using the Net Mortgage Rates in effect for the scheduled payments due on such mortgage loans during the related due period, and (b) a fraction expressed as a percentage the numerator of which is 30 and the denominator of which is the actual number of days in the related Interest Accrual Period. ONE-MONTH LIBOR--The London interbank offered rate for one-month United States Dollar deposits determined as described in this prospectus supplement. OPTIONAL TERMINATION DATE--The first distribution date on which the master servicer can exercise its right to purchase the mortgage loans and other remaining assets from the trust as described in "Pooling and Servicing Agreement--Termination" in this prospectus supplement. OVERCOLLATERALIZATION AMOUNT--With respect to any distribution date, the excess, if any, of (a) the aggregate Stated Principal Balance of the mortgage loans before giving effect to distributions of principal to be made on that distribution date, over (b) the aggregate Certificate Principal Balance of the Class A Certificates and Class M Certificates before taking into account distributions of principal to be made on that distribution date. OVERCOLLATERALIZATION FLOOR--An amount equal to 0.50% of the aggregate Stated Principal Balance of the mortgage loans as of the cut-off date. OVERCOLLATERALIZATION INCREASE AMOUNT--With respect to any distribution date, an amount equal to the lesser of (i) the Excess Cash Flow for that distribution date (to the extent not used to cover the amounts described in clauses (iv) and (v) of the definition of Principal Distribution Amount as of such distribution date) and (ii) the excess, if any, of (x) the Required Overcollateralization Amount for that distribution date over (y) the Overcollateralization Amount for that distribution date. OVERCOLLATERALIZATION REDUCTION AMOUNT--With respect to any distribution date on which the Excess Overcollateralization Amount is, or would be, after taking into account all other distributions to be made that distribution date, greater than zero, an amount equal to the lesser of (i) the Excess Overcollateralization Amount for that distribution date and (ii) the Principal Remittance Amount for that distribution date. PASS-THROUGH RATE--With respect to each class of Class A Certificates and Class M Certificates and any distribution date, the least of (i) One Month LIBOR plus the related Margin, (ii) 14.000% per annum and (iii) the Net WAC Cap Rate. PREPAYMENT INTEREST SHORTFALLS--With respect to any distribution date, the aggregate shortfall, if any, in collections of interest resulting from mortgagor prepayments on the mortgage loans during the preceding calendar month. These shortfalls will result because interest on prepayments in full is distributed only to the date of prepayment, and because no interest is distributed on prepayments in part, as these prepayments in part are applied to reduce the outstanding principal balance of the mortgage loans as of the due date immediately preceding the S-64
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date of prepayment. No assurance can be given that the amounts available to cover Prepayment Interest Shortfalls will be sufficient therefor. See "--Interest Distributions," "--Excess Cash Flow and Overcollateralization," and "Pooling and Servicing Agreement--Servicing and Other Compensation and Payment of Expenses" in this prospectus supplement. PRINCIPAL DISTRIBUTION AMOUNT-- On any distribution date, the lesser of (a) the excess of (i) the sum of (x) Available Distribution Amount for that distribution date, plus (y) for inclusion in Excess Cash Flow for purposes of clauses (b)(v) and (b)(vi) below, the Yield Maintenance Agreement Principal Distributable Amount for that distribution date, over (ii) the Interest Distribution Amount and (b) the aggregate amount described below: (i) the principal portion of all scheduled monthly payments on the mortgage loans received or advanced with respect to the related due period; (ii) the principal portion of all proceeds of the repurchase of mortgage loans, or, in the case of a substitution, amounts representing a principal adjustment, as required by the pooling and servicing agreement during the preceding calendar month; (iii) the principal portion of all other unscheduled collections other than Subsequent Recoveries, received on the mortgage loans during the preceding calendar month, or deemed to be received during the preceding calendar month, including, without limitation, full and partial Principal Prepayments made by the respective mortgagors, to the extent not distributed in the preceding month; (iv) the lesser of (a) Subsequent Recoveries for that distribution date and (b) the principal portion of any Realized Losses allocated to any class of offered certificates on a prior distribution date and remaining unpaid; (v) the lesser of (a) the Excess Cash Flow for that distribution date, to the extent not used in clause (iv) above on such distribution date, and (b) the principal portion of any Realized Losses incurred, or deemed to have been incurred, on any mortgage loans in the calendar month preceding that distribution date to the extent covered by Excess Cash Flow for that distribution date as described under "--Excess Cash Flow and Overcollateralization" below; and (vi) the lesser of (a) the Excess Cash Flow for that distribution date, to the extent not used pursuant to clauses (iv) and (v) above on such distribution date, and (b) the amount of any Overcollateralization Increase Amount for that distribution date; MINUS (vii) the amount of any Overcollateralization Reduction Amount for that distribution date; and (viii) any Capitalization Reimbursement Amount. In no event will the Principal Distribution Amount on any distribution date be less than zero or greater than the outstanding aggregate Certificate Principal Balance of the Class A Certificates and Class M Certificates. S-65
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PRINCIPAL REMITTANCE AMOUNT--With respect to any distribution date, the sum of the amounts described in clauses (b)(i), (b)(ii) and (b)(iii) of the definition of Principal Distribution Amount for that distribution date. REALIZED LOSS--As to any defaulted mortgage loan that is finally liquidated the portion of the Stated Principal Balance plus accrued and unpaid interest remaining after application of all amounts recovered, net of amounts reimbursable to the master servicer for related Advances, Servicing Advances and other expenses, towards interest and principal owing on the mortgage loan. For a mortgage loan the principal balance of which has been reduced in connection with bankruptcy proceedings, the amount of the reduction. As to any mortgage loan that has been the subject of a Debt Service Reduction, the amount of the reduction. For a mortgage loan that has been modified, following a default or if a default was reasonably foreseeable, the amount of principal that has been forgiven, the amount by which a monthly payment has been reduced due to a reduction of the interest rate, and any Servicing Advances that are forgiven and reimbursable to the master servicer or servicer. To the extent the master servicer receives Subsequent Recoveries with respect to any mortgage loan, the amount of the Realized Loss with respect to that mortgage loan will be reduced to the extent such recoveries are received. RECORD DATE--With respect to the offered certificates and any distribution date, the close of business on the day prior to that distribution date. RELIEF ACT SHORTFALLS-- Interest shortfalls resulting from the application of the Servicemembers Civil Relief Act, as amended, or any similar legislation or regulations. REQUIRED OVERCOLLATERALIZATION AMOUNT--With respect to any distribution date, (a) prior to the Stepdown Date, an amount equal to 3.50% of the aggregate Stated Principal Balance of the mortgage loans as of the cut-off date, and (b) on or after the Stepdown Date, the greater of (i) an amount equal to 7.00% of the aggregate outstanding Stated Principal Balance of the mortgage loans after giving effect to distributions made on that distribution date and (ii) the Overcollateralization Floor; provided, however, that if a Trigger Event is in effect, the Required Overcollateralization Amount will be an amount equal to the Required Overcollateralization Amount from the immediately preceding distribution date; provided, further, that the Required Overcollateralization Amount may be reduced so long as written confirmation is obtained from each rating agency that the reduction will not reduce the rating assigned to any class of certificates by that rating agency below the lower of the then current rating assigned to those certificates by that rating agency or the rating assigned to those certificates as of the closing date by that rating agency. SENIOR ENHANCEMENT PERCENTAGE--On any distribution date, the Senior Enhancement Percentage will be equal to a fraction, the numerator of which is the sum of (x) the aggregate Certificate Principal Balance of the Class M Certificates immediately prior to that distribution date and (y) the Overcollateralization Amount, in each case prior to the distribution of the Principal Distribution Amount on such distribution date, and the denominator of which is the aggregate Stated Principal Balance of the mortgage loans after giving effect to distributions to be made on that distribution date. S-66
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SIXTY-PLUS DELINQUENCY PERCENTAGE--With respect to any distribution date, the arithmetic average, for each of the three distribution dates ending with such distribution date, of the fraction, expressed as a percentage, equal to (x) the aggregate Stated Principal Balance of the mortgage loans that are 60 or more days delinquent in payment of principal and interest for that distribution date, including mortgage loans in foreclosure and REO, over (y) the aggregate Stated Principal Balance of all of the mortgage loans immediately preceding that distribution date. STANDARD & POOR'S--Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. STATED PRINCIPAL BALANCE--With respect to any mortgage loan and as of any date of determination, (a) the sum of (i) the principal balance thereof as of the cut-off date after payment of all scheduled principal payments due during the month of the cut-off date and (ii) any amount by which the outstanding principal balance thereof has been increased pursuant to a servicing modification, minus (b) the sum of (i) the aggregate of the principal portion of the scheduled monthly payments due with respect to that mortgage loan during each due period commencing on the first due period after the cut-off date and ending with the due period related to the previous distribution date which were received or with respect to which an advance was made, (ii) all principal prepayments with respect to such mortgage loan and all Liquidation Proceeds and Insurance Proceeds, to the extent applied by the master servicer as recoveries of principal, in each case which were distributed on any previous distribution date, and (iii) any Realized Loss allocated to the trust with respect to that mortgage loan for any previous distribution date. STEPDOWN DATE--The earlier to occur of (i) the distribution date immediately succeeding the distribution date on which the aggregate certificate principal balance of the Class A Certificates has been reduced to zero or (ii) the later to occur of (x) the distribution date in February 2009 and (y) the first distribution date on which the Senior Enhancement Percentage is greater than or equal to 44.80%. SUBORDINATION PERCENTAGE--With respect to any class of Class A Certificates or Class M Certificates, the respective approximate percentage set forth below. CLASS PERCENTAGE CLASS PERCENTAGE ---------------- -------------------- ---------------- ------------------- A 55.20% M-5 81.30% M-1 63.00% M-6 84.60% M-2 70.00% M-7 87.70% M-3 74.10% M-8 90.60% M-4 77.80% M-9 93.00% TRIGGER EVENT--A Trigger Event is in effect with respect to any distribution date on or after the Stepdown Date if either (a) the Sixty-Plus Delinquency Percentage, as determined on that distribution date, equals or exceeds 36.75% of the Senior Enhancement Percentage for that distribution date or (b) on or after the distribution date in February 2008, the aggregate amount of Realized Losses on the mortgage loans as a percentage of the initial aggregate Stated Principal Balance as of the cut-off date exceeds the applicable amount set forth below: S-67
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February 2008 to January 2009: 1.65% with respect to February 2008, plus an additional 1/12th of 2.00% for each month thereafter. February 2009 to January 2010: 3.65% with respect to February 2009, plus an additional 1/12th of 2.10% for each month thereafter. February 2010 to January 2011: 5.75% with respect to February 2010, plus an additional 1/12th of 1.65% for each month thereafter. February 2011 to January 2012: 7.40% with respect to February 2011, plus an additional 1/12th of 0.85% for each month thereafter. February 2012 and thereafter: 8.25%. S-68
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YIELD MAINTENANCE AGREEMENT NOTIONAL BALANCE-- With respect to any distribution date beginning on the distribution date in February 2006 and ending on the distribution date in December 2010, the lesser of (1) the aggregate Certificate Principal Balance of the Class A Certificates and Class M Certificates immediately prior to that distribution date and (2) the approximate amount specified below for that distribution date: DISTRIBUTION DATE NOTIONAL BALANCE DISTRIBUTION DATE NOTIONAL BALANCE ----------------- ---------------- ----------------- ---------------- February 2006 $424,600,000.00 August 2008 $123,820,743.85 March 2006 $418,705,592.87 September 2008 $117,900,933.43 April 2006 $414,678,355.24 October 2008 $112,236,977.40 May 2006 $409,429,393.68 November 2008 $106,817,495.74 June 2006 $402,958,917.03 December 2008 $101,631,624.73 July 2006 $395,276,711.91 January 2009 $ 96,668,993.22 August 2006 $386,402,530.32 February 2009 $ 91,922,492.57 September 2006 $376,366,377.17 March 2009 $ 91,922,492.57 October 2006 $365,208,685.04 April 2009 $ 91,922,492.57 November 2006 $353,110,845.46 May 2009 $ 89,171,823.89 December 2006 $340,265,352.05 June 2009 $ 85,522,101.41 January 2007 $327,104,772.77 July 2009 $ 82,028,070.60 February 2007 $314,432,013.47 August 2009 $ 78,682,873.34 March 2007 $302,228,831.35 September 2009 $ 75,479,959.12 April 2007 $290,477,670.78 October 2009 $ 72,413,073.26 May 2007 $279,161,637.19 November 2009 $ 69,476,242.51 June 2007 $268,264,472.09 December 2009 $ 66,663,762.28 July 2007 $257,770,528.99 January 2010 $ 63,970,184.34 August 2007 $247,664,750.18 February 2010 $ 61,390,305.08 September 2007 $237,932,644.51 March 2010 $ 58,919,154.40 October 2007 $228,560,265.89 April 2010 $ 56,551,984.98 November 2007 $217,092,613.89 May 2010 $ 54,284,262.20 December 2007 $201,308,429.74 June 2010 $ 52,111,654.39 January 2008 $186,688,361.82 July 2010 $ 50,030,023.61 February 2008 $173,170,051.76 August 2010 $ 48,035,416.82 March 2008 $160,640,333.94 September 2010 $ 46,124,057.49 April 2008 $150,305,628.37 October 2010 $ 44,292,337.51 May 2008 $143,237,377.32 November 2010 $ 42,536,809.62 June 2008 $136,476,179.97 December 2010 $ 40,854,180.03 July 2008 $130,008,329.86 January 2011 and thereafter N/A YIELD MAINTENANCE AGREEMENT PRINCIPAL DISTRIBUTABLE AMOUNT--With respect to any distribution date, the amount received by the trust under the yield maintenance agreement for that distribution date and paid as part of the Principal Distribution Amount for that distribution date to the extent set forth in clauses second and third under "--Excess Cash Flow and Overcollateralization" below. DISTRIBUTIONS ON THE OFFERED CERTIFICATES Distributions on the offered certificates will be made by the trustee beginning in February 2006 on the 25th day of each month or the following business day if the 25th is not a business day. Each of these dates is referred to as a distribution date. Payments on the certificates will be made to the persons in the names of which such certificates are registered at the close of business on the related Record Date. Payments will be made by check or money order mailed to the S-69
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address of the person which appears on the certificate register, or upon the request of a holder owning certificates having denominations aggregating at least $1,000,000, by wire transfer or otherwise. In the case of book-entry certificates, payments will be made by wire transfer to DTC or its nominee in amounts calculated on the determination date as described in this prospectus supplement. However, the final payment relating to the certificates will be made only upon presentation and surrender of the certificates at the office or the agency of the trustee specified in the notice to holders of the final payment. A business day is any day other than a Saturday or Sunday or a day on which banking institutions in the States of California, Minnesota, Texas, New York or Illinois are required or authorized by law to be closed. With respect to any distribution date, the due period is the calendar month in which the distribution date occurs and the determination date is the 20th day of the month in which the distribution date occurs or, if the 20th day is not a business day, the immediately succeeding business day. The due date with respect to each mortgage loan is the date on which the scheduled monthly payment is due. INTEREST DISTRIBUTIONS On each distribution date, holders of the Class A Certificates will be entitled to receive interest distributions in an amount equal to the related Accrued Certificate Interest thereon for that distribution date plus any Accrued Certificate Interest remaining unpaid from any prior distribution date, to the extent of the Available Distribution Amount for that distribution date. On each distribution date, holders of each class of the Class M Certificates will be entitled to receive interest distributions in an amount equal to the Accrued Certificate Interest on such class plus any Accrued Certificate Interest remaining unpaid from any prior distribution date, to the extent of the Available Distribution Amount remaining after distributions of interest to the Class A Certificates and distributions of interest to any class of Class M Certificates with a higher payment priority. With respect to any distribution date, any Prepayment Interest Shortfalls during the preceding calendar month will be offset by the master servicer, but only to the extent these Prepayment Interest Shortfalls do not exceed Eligible Master Servicing Compensation. On any distribution date, Eligible Master Servicing Compensation will be applied to cover Prepayment Interest Shortfalls in accordance with the amount of Prepayment Interest Shortfalls. Prepayment Interest Shortfalls which are not covered as described above and Relief Act Shortfalls will be allocated to the offered certificates on a pro rata basis, in accordance with the amount of Accrued Certificate Interest that would have accrued absent these shortfalls, in each case in reduction of Accrued Certificate Interest thereon. Any Prepayment Interest Shortfalls not covered by Eligible Master Servicing Compensation or Excess Cash Flow and allocated to a class of certificates will accrue interest at the then-applicable Pass-Through Rate on that class of certificates, and will be paid, together with interest thereon, on future distribution dates only to the extent of any Excess Cash Flow available therefor on that distribution date, as described under "--Excess Cash Flow and Overcollateralization" below. Relief Act Shortfalls will not be covered by any source, except S-70
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that Relief Act Shortfalls arising in an Interest Accrual Period may be covered by Excess Cash Flow in that Interest Accrual Period in the manner described under "--Excess Cash Flow and Overcollateralization." If the Pass-Through Rate on any class of Class A Certificates or Class M Certificates is limited by the Net WAC Cap Rate, Basis Risk Shortfalls will occur and will be reimbursed from Excess Cash Flow, to the extent described in this prospectus supplement. See "--Excess Cash Flow and Overcollateralization" below. The ratings assigned to any class of offered certificates do not address the likelihood of the receipt of any amounts in respect of any Prepayment Interest Shortfalls, Basis Risk Shortfalls or Relief Act Shortfalls. DETERMINATION OF ONE-MONTH LIBOR With respect to each Interest Accrual Period, One-Month LIBOR will equal the rate for one month United States Dollar deposits that appears on the Dow Jones Telerate Screen Page 3750 as of 11:00 a.m., London time, on the second LIBOR business day immediately prior to the commencement of such Interest Accrual Period. That date of determination is referred to in this prospectus supplement as the LIBOR rate adjustment date. Dow Jones Telerate Screen Page 3750 means the display designated as page 3750 on the Bridge Telerate Service, or such other page as may replace page 3750 on that service for the purpose of displaying London interbank offered rates of major banks. If the rate for One Month LIBOR does not appear on Dow Jones Telerate Screen Page 3750, or any other page as may replace that page on that service, or if the service is no longer offered, on any other service for displaying One-Month LIBOR or comparable rates as may be selected by the trustee after consultation with the master servicer, the rate will be the reference bank rate as described below. The reference bank rate will be determined on the basis of the rates at which deposits in U.S. Dollars are offered by the reference banks, which shall be three major banks that are engaged in transactions in the London interbank market, selected by the trustee after consultation with the master servicer, as of 11:00 a.m., London time, on the LIBOR rate adjustment date, to prime banks in the London interbank market for a period of one month in amounts approximately equal to the aggregate Certificate Principal Balance of the Class A Certificates and Class M Certificates. The trustee will request the principal London office of each of the reference banks to provide a quotation of its rate. If at least two such quotations are provided, the rate will be the arithmetic mean of the quotations. If on such date fewer than two quotations are provided as requested, the rate will be the arithmetic mean of the rates quoted by one or more major banks in New York City, selected by the trustee after consultation with the master servicer, as of 11:00 a.m., New York City time, on such date, for loans in U.S. Dollars to leading European banks for a period of one month in an amount approximately equal to the aggregate Certificate Principal Balance of the Class A Certificates and Class M Certificates. If no such quotations can be obtained, the rate will be One-Month LIBOR for the prior distribution date; provided, however, if, under the priorities described above, One-Month LIBOR for a distribution date would be based on One-Month LIBOR for the previous distribution date for the third consecutive distribution date, the trustee shall select an alternative comparable index over which the trustee has no control, used for determining one-month Eurodollar lending rates that is S-71
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calculated and published or otherwise made available by an independent party. LIBOR business day means any day other than a Saturday or a Sunday or a day on which banking institutions in the city of London, England are required or authorized by law to be closed. For any Interest Accrual Period, the trustee will determine One-Month LIBOR for that Interest Accrual Period on the related LIBOR rate adjustment date (or if the LIBOR rate adjustment date is not a business day, then on the next succeeding business day). The establishment of One-Month LIBOR by the trustee and the trustee's subsequent calculation of the Pass-Through Rates applicable to the Class A Certificates and Class M Certificates for the relevant Interest Accrual Period, in the absence of manifest error, will be final and binding. PRINCIPAL DISTRIBUTIONS Holders of each class of Class A Certificates will be entitled to receive on each distribution date, to the extent of the Principal Distribution Amount, the Class A Principal Distribution Amount sequentially to the Class A-1, Class A-2 and Class A-3 Certificates, in that order, in reduction of the Certificate Principal Balance of each such class, until the Certificate Principal Balance of each such class has been reduced to zero. Holders of the Class M-1 Certificates will be entitled to receive on each distribution date, to the extent of the Principal Distribution Amount remaining after the Class A Principal Distribution Amount has been distributed, the Class M-1 Principal Distribution Amount, in reduction of the Certificate Principal Balance thereof, until the Certificate Principal Balance of the Class M-1 Certificates has been reduced to zero. Holders of the Class M-2 Certificates will be entitled to receive on each distribution date, to the extent of the Principal Distribution Amount remaining after the Class A Principal Distribution Amount and the Class M-1 Principal Distribution Amount have been distributed, the Class M-2 Principal Distribution Amount, in reduction of the Certificate Principal Balance thereof, until the Certificate Principal Balance of the Class M-2 Certificates has been reduced to zero. Holders of the Class M-3 Certificates will be entitled to receive on each distribution date, to the extent of the Principal Distribution Amount remaining after the Class A Principal Distribution Amount, the Class M-1 Principal Distribution Amount and the Class M-2 Principal Distribution Amount have been distributed, the Class M-3 Principal Distribution Amount, in reduction of the Certificate Principal Balance thereof, until the Certificate Principal Balance of the Class M-3 Certificates has been reduced to zero. Holders of the Class M-4 Certificates will be entitled to receive on each distribution date, to the extent of the Principal Distribution Amount remaining after the Class A Principal Distribution Amount, the Class M-1 Principal Distribution Amount, the Class M-2 Principal Distribution Amount and the Class M-3 Principal Distribution Amount have been distributed, the Class M-4 Principal Distribution Amount, in reduction of the Certificate Principal Balance thereof, until the Certificate Principal Balance of the Class M-4 Certificates has been reduced to zero. S-72
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Holders of the Class M-5 Certificates will be entitled to receive on each distribution date, to the extent of the Principal Distribution Amount remaining after the Class A Principal Distribution Amount, the Class M-1 Principal Distribution Amount, the Class M-2 Principal Distribution Amount, the Class M-3 Principal Distribution Amount and the Class M-4 Principal Distribution Amount have been distributed, the Class M-5 Principal Distribution Amount, in reduction of the Certificate Principal Balance thereof, until the Certificate Principal Balance of the Class M-5 Certificates has been reduced to zero. Holders of the Class M-6 Certificates will be entitled to receive on each distribution date, to the extent of the Principal Distribution Amount remaining after the Class A Principal Distribution Amount, the Class M-1 Principal Distribution Amount, the Class M-2 Principal Distribution Amount, the Class M-3 Principal Distribution Amount, the Class M-4 Principal Distribution Amount and the Class M-5 Principal Distribution Amount have been distributed, the Class M-6 Principal Distribution Amount, in reduction of the Certificate Principal Balance thereof, until the Certificate Principal Balance of the Class M-6 Certificates has been reduced to zero. Holders of the Class M-7 Certificates will be entitled to receive on each distribution date, to the extent of the Principal Distribution Amount remaining after the Class A Principal Distribution Amount, the Class M-1 Principal Distribution Amount, the Class M-2 Principal Distribution Amount, the Class M-3 Principal Distribution Amount, the Class M-4 Principal Distribution Amount, the Class M-5 Principal Distribution Amount and the Class M-6 Principal Distribution Amount have been distributed, the Class M-7 Principal Distribution Amount, in reduction of the Certificate Principal Balance thereof, until the Certificate Principal Balance of the Class M-7 Certificates has been reduced to zero. Holders of the Class M-8 Certificates will be entitled to receive on each distribution date, to the extent of the Principal Distribution Amount remaining after the Class A Principal Distribution Amount, the Class M-1 Principal Distribution Amount, the Class M-2 Principal Distribution Amount, the Class M-3 Principal Distribution Amount, the Class M-4 Principal Distribution Amount, the Class M-5 Principal Distribution Amount, the Class M-6 Principal Distribution Amount and the Class M-7 Principal Distribution Amount have been distributed, the Class M-8 Principal Distribution Amount, in reduction of the Certificate Principal Balance thereof, until the Certificate Principal Balance of the Class M-8 Certificates has been reduced to zero. Holders of the Class M-9 Certificates will be entitled to receive on each distribution date, to the extent of the Principal Distribution Amount remaining after the Class A Principal Distribution Amount, the Class M-1 Principal Distribution Amount, the Class M-2 Principal Distribution Amount, the Class M-3 Principal Distribution Amount, the Class M-4 Principal Distribution Amount, the Class M-5 Principal Distribution Amount, the Class M-6 Principal Distribution Amount, the Class M-7 Principal Distribution Amount and the Class M-8 Principal Distribution Amount have been distributed, the Class M-9 Principal Distribution Amount, in reduction of the Certificate Principal Balance thereof, until the Certificate Principal Balance of the Class M-9 Certificates has been reduced to zero. S-73
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EXCESS CASH FLOW AND OVERCOLLATERALIZATION Excess Cash Flow will be applied on any distribution date as follows: o FIRST, as part of the Principal Distribution Amount, to pay to the holders of the Class A Certificates and Class M Certificates in reduction of their Certificate Principal Balances, the principal portion of Realized Losses previously allocated to reduce the Certificate Principal Balance of any class of Class A Certificates or Class M Certificates and remaining unreimbursed, but only to the extent of Subsequent Recoveries for that distribution date; o SECOND, as part of the Principal Distribution Amount, to pay to the holders of the Class A Certificates and Class M Certificates in reduction of their Certificate Principal Balances, the principal portion of Realized Losses incurred on the mortgage loans for the preceding calendar month; o THIRD, to pay the holders of the Class A Certificates and Class M Certificates as part of the Principal Distribution Amount, any Overcollateralization Increase Amount; o FOURTH, to pay the holders of Class A Certificates and Class M Certificates, the amount of any Prepayment Interest Shortfalls allocated thereto for that distribution date, on a pro rata basis based on Prepayment Interest Shortfalls allocated thereto, to the extent not covered by the Eligible Master Servicing Compensation on that distribution date; o FIFTH, to pay to the holders of the Class A Certificates and Class M Certificates, any Prepayment Interest Shortfalls remaining unpaid from prior distribution dates together with interest thereon, on a pro rata basis based on unpaid Prepayment Interest Shortfalls previously allocated thereto; o SIXTH, to pay to the holders of the Class A Certificates, pro rata, and then the Class M Certificates, in order of priority, the amount of any Basis Risk Shortfall remaining unpaid as of that distribution date; o SEVENTH, to pay to the holders of the Class A Certificates and Class M Certificates, the amount of any Relief Act Shortfalls allocated thereto, on a pro rata basis based on Relief Act Shortfalls allocated thereto for that distribution date; o EIGHTH, to pay to the holders of the Class A Certificates, pro rata, and then to the Class M Certificates, in order of priority, the principal portion of any Realized Losses previously allocated thereto that remain unreimbursed; and o NINTH, to pay to the holders of the Class SB and Class R Certificates any balance remaining, in accordance with the terms of the pooling and servicing agreement. S-74
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On any distribution date, any amounts payable pursuant to clauses first, second and third above shall be included in the Principal Distribution Amount and shall be paid as described in "Principal Distributions" above. Any amounts payable pursuant to clause eighth above shall not accrue interest or reduce the Certificate Principal Balance of the Class A Certificates and Class M Certificates. In addition, notwithstanding the foregoing, on any distribution date after the distribution date on which the Certificate Principal Balance of a class of certificates has been reduced to zero, that class of certificates will be retired and will no longer be entitled to distributions, including distributions in respect of Prepayment Interest Shortfalls and any Basis Risk Shortfall, or reimbursement of the principal portion of any Realized Losses previously allocated thereto that remain unreimbursed. The pooling and servicing agreement requires that the Excess Cash Flow, to the extent available as described above, will be applied as an accelerated payment of principal on the Class A Certificates and Class M Certificates, to the extent that the Required Overcollateralization Amount exceeds the Overcollateralization Amount as of that distribution date and in the order of priority set forth in this prospectus supplement. The application of Excess Cash Flow to the payment of principal on the Class A Certificates and Class M Certificates has the effect of accelerating the amortization of those certificates relative to the amortization of the related mortgage loans. In the event that the Required Overcollateralization Amount is permitted to decrease or "step down" on a distribution date, a portion of the principal which would otherwise be distributed to the holders of the Class A Certificates and Class M Certificates on that distribution date shall not be distributed to the holders of those certificates. This has the effect of decelerating the amortization of the Class A Certificates and Class M Certificates relative to the amortization of the related mortgage loans, and of reducing the Overcollateralization Amount. ALLOCATION OF LOSSES Realized Losses on the mortgage loans will be allocated or covered as follows: first, to remaining Excess Cash Flow for that distribution date; second, by a reduction in the Overcollateralization Amount until reduced to zero; third, to the Class M-9 Certificates; fourth, to the Class M-8 Certificates; fifth, to the Class M-7 Certificates; sixth, to the Class M-6 Certificates; seventh, to the Class M-5 Certificates; eighth, to the Class M-4 Certificates; ninth, to the Class M-3 Certificates; tenth, to the Class M-2 Certificates; eleventh, to the Class M-1 Certificates; and twelfth, to all of the Class A Certificates on a pro rata basis, in each case until the Certificate Principal Balance thereof has been reduced to zero. An allocation of a Realized Loss on a "pro rata basis" among two or more classes of certificates means an allocation to each of those classes of certificates on the basis of its then outstanding Certificate Principal Balance prior to giving effect to distributions to be made on that 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 respect of that distribution date in the case of an allocation of the interest portion of a Realized Loss. S-75
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With respect to any defaulted mortgage loan that is finally liquidated, through foreclosure sale, disposition of the related mortgaged property if acquired on behalf of the certificateholders by deed in lieu of foreclosure, or otherwise, the amount of loss realized, if any, will equal the portion of the Stated Principal Balance remaining, if any, plus interest thereon through the date of liquidation, after application of all amounts recovered, net of amounts reimbursable to the master servicer or the subservicer for Advances and expenses, including attorneys' fees, towards interest and principal owing on the mortgage loan. This amount of loss realized is referred to in this prospectus supplement as Realized Losses. The principal portion of any Realized Loss, other than a Debt Service Reduction, allocated to any class of Class A Certificates or Class M Certificates will be allocated in reduction of its Certificate Principal Balance, until the Certificate Principal Balance of that certificate has been reduced to zero. The interest portion of any Realized Loss, other than a Debt Service Reduction, allocated to any class of Class A Certificates or Class M Certificates will be allocated in reduction of its Accrued Certificate Interest for the related distribution date. In addition, any allocation of Realized Losses may be made by operation of the payment priority for the certificates set forth in this prospectus supplement. In order to maximize the likelihood of distribution in full of amounts of interest and principal to be distributed to holders of the Class A Certificates, on each distribution date, holders of each class of Class A Certificates have a right to distributions of interest before distributions of interest to other classes of certificates and distributions of principal before distributions of principal to other classes of certificates. In addition, overcollateralization and the application of Excess Cash Flow will also increase the likelihood of distribution in full of amounts of interest and principal to the Class A Certificates on each distribution date. The priority of distributions among the Class M Certificates, as described in this prospectus supplement, also has the effect during certain periods, in the absence of losses, of decreasing the percentage interest evidenced by any class of Class M Certificates with a higher payment priority, thereby increasing, relative to its Certificate Principal Balance, the subordination afforded to such class of the Class M Certificates by overcollateralization and any class of Class M Certificates with a lower payment priority. In addition, in instances in which a mortgage loan is in default or if default is reasonably foreseeable, and if determined by the master servicer to be in the best interest of the certificateholders, the master servicer or subservicer may permit servicing modifications of the mortgage loan rather than proceeding with foreclosure, as described under "Description of the Certificates--Servicing and Administration of Mortgage Collateral" in the prospectus. However the master servicer's and subservicer's ability to perform servicing modifications will be subject to some limitations, including but not limited to the following. Advances and other amounts may be added to the outstanding principal balance of a mortgage loan only once during the life of a mortgage loan. Any amounts added to the principal balance of the mortgage loan, or capitalized amounts added to the mortgage loan, will be required to be fully amortized over the term of the mortgage loan. All capitalizations are to be implemented in accordance with Residential Funding Corporation's program guide and may be implemented only by subservicers that have been approved by the master servicer for that purpose. The final maturity of any mortgage loan shall not be extended beyond the assumed final distribution date. No servicing S-76
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modification with respect to a mortgage loan will have the effect of reducing the mortgage rate below the lesser of (i) one-half of the mortgage rate as in effect on the cut-off date and (ii) the Expense Fee Rate. Further, the aggregate current principal balance of all mortgage loans subject to modifications can be no more than five percent (5%) of the aggregate principal balance of the mortgage loans as of the cut-off date, but this limit may increase from time to time, so long as written confirmation is obtained from each rating agency that the increase will not reduce the ratings assigned to any class of offered certificates by that rating agency below the lower of the then-current ratings assigned to those certificates by that rating agency or the ratings assigned to those certificates as of the closing date by that rating agency. ADVANCES Prior to each distribution date, the master servicer is required to make Advances out of its own funds, advances made by a subservicer, or funds held in the Custodial Account, with respect to any distributions of principal and interest, net of the related servicing fees, that were due on the mortgage loans during the related due period and not received on the business day next preceding the related determination date. Advances are required to be made only to the extent they are deemed by the master servicer to be recoverable from related late collections, Insurance Proceeds, or Liquidation Proceeds. Recoverability is determined in the context of existing outstanding arrearages, the current LTV ratio and an assessment of the fair market value of the related mortgaged property. The purpose of making Advances is to maintain a regular cash flow to the certificateholders, rather than to guarantee or insure against losses. The master servicer will not be required to make any Advances with respect to reductions in the amount of the scheduled monthly payments on the mortgage loans due to Debt Service Reductions or the application of the Relief Act or similar legislation or regulations. In connection with the failure by the related mortgagor to make a balloon payment, to the extent deemed recoverable, the master servicer will Advance an amount equal to the monthly payment for such balloon loan due prior to the balloon payment. Any failure by the master servicer to make an Advance as required under the pooling and servicing agreement will constitute an event of default under the pooling and servicing agreement, in which case the trustee, as successor master servicer, will be obligated to make any such Advance, in accordance with the terms of the pooling and servicing agreement. All Advances will be reimbursable to the master servicer on a first priority basis from late collections, Insurance Proceeds and Liquidation Proceeds from the mortgage loan as to which the unreimbursed Advance was made. In addition, any Advances previously made which are deemed by the master servicer to be nonrecoverable from related late collections, Insurance Proceeds and Liquidation Proceeds may be reimbursed to the master servicer out of any funds in the Custodial Account prior to distributions on the offered certificates. The pooling and servicing agreement provides that the master servicer may enter into a facility with any person which provides that such person, or the advancing person, may directly or indirectly fund Advances and/or Servicing Advances, although no such facility will reduce or otherwise affect the master servicer's obligation to fund these Advances and/or Servicing Advances. No facility will require the consent of the certificateholders or the trustee. Any Advances and/or Servicing Advances made by an advancing person would be reimbursed to the S-77
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advancing person under the same provisions pursuant to which reimbursements would be made to the master servicer if those advances were funded by the master servicer, but on a priority basis in favor of the advancing person as opposed to the master servicer or any successor master servicer, and without being subject to any right of offset that the trustee or the trust might have against the master servicer or any successor master servicer. In addition, see "Description of the Certificates--Withdrawals from the Custodial Account" and "--Advances" in the prospectus. RESIDUAL INTERESTS Holders of the Class R Certificates will be entitled to receive any residual cash flow from the mortgage pool, which is not expected to be significant. The Class R Certificates will not be entitled to any payments other than their nominal principal amount and accrued interest on that amount unless the aggregate amount received by the issuing entity with respect to the mortgage loans exceeds the aggregate amount payable to the other certificateholders, which is highly unlikely. A holder of a Class R Certificate will not have a right to alter the structure of this transaction. The Class R Certificates may be retained by the depositor or transferred to any of its affiliates, subsidiaries of the sponsor or any other party. REPORTS TO CERTIFICATEHOLDERS The trustee will make the reports referred to in the prospectus under "Description of the Certificates--Reports to Certificateholders" (and, at its option, any additional files containing the same information in an alternative format) available each month to the certificateholders and other parties referred to in the pooling and servicing agreement via the trustee's internet website at http://www.usbank.com/mbs, presented under "RESIDENTIAL ASSET SECURITIES CORPORATION (RASC)" as the product and "RESIDENTIAL ASSET SECURITIES CORP 2006-EMX1" as the deal. Certificateholders with questions may direct them to the trustee's bondholder services group at (800) 934-6802. For purposes of any electronic version of this prospectus supplement, the preceding uniform resource locator, or URL, is an inactive textual reference only. The depositor has taken steps to ensure that this URL reference was inactive at the time the electronic version of this prospectus supplement was created. In addition, for so long as the issuing entity is required to file reports with the Commission under the Securities Exchange Act of 1934, the issuing entity's annual report on Form 10-K, distribution reports on Form 10-D, current reports on Form 8-K and amendments to those reports will be made available on such website as soon as reasonably practicable after such materials are electronically filed with, or furnished to, the Commission. See also "Pooling and Servicing Agreement-Reports to Certificateholders" in the prospectus for a more detailed description of certificateholder reports. LIMITED MORTGAGE LOAN PURCHASE RIGHT The pooling and servicing agreement will provide that Residential Funding Corporation, through an affiliate, will have the option at any time to purchase any of the mortgage loans from the trust at a purchase price equal to the greater of par plus accrued interest or the fair market value of each mortgage loan so purchased, up to a maximum of five mortgage loans. In the S-78
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event that this option is exercised as to any five mortgage loans in the aggregate, this option will thereupon terminate. THE YIELD MAINTENANCE AGREEMENT The holders of the Class A Certificates and Class M Certificates may benefit from a series of interest rate cap payments from the yield maintenance agreement provider pursuant to a yield maintenance agreement. Until the distribution date in December 2010, the yield maintenance agreement is intended to be used to cover certain interest shortfalls, basis risk shortfalls and losses on the mortgage loans as described in this prospectus supplement. On each distribution date, payments under the yield maintenance agreement will be made based on (a) an amount equal to the Yield Maintenance Agreement Notional Balance for that distribution date and (b) the positive excess of (i) One-Month LIBOR, over (ii) 4.40%, calculated on an actual/360-day basis. Amounts received by the trustee under the yield maintenance agreement will be distributed as a part of Excess Cash Flow, as described under "--Excess Cash Flow and Overcollateralization" above. The yield maintenance agreement provider will have the right to assign its obligations under the yield maintenance agreement if the rating agencies confirm that the assignment will not cause the offered certificates to be downgraded below their then-current ratings. Additionally, if the ratings of The Bear Stearns Companies Inc. are downgraded below the thresholds set forth in the yield maintenance agreement, the yield maintenance agreement provider will be required to (i) pledge collateral to support its obligations, (ii) obtain a guaranty of its obligations that is approved by the rating agencies, or (iii) assign its obligations to an entity that the rating agencies confirm will not cause the offered certificates to be downgraded below their then-current ratings. The significance percentage of the yield maintenance agreement is less than 10%. S-79
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YIELD AND PREPAYMENT CONSIDERATIONS GENERAL The yield to maturity on each class of offered certificates will be primarily affected by the following factors: o The rate and timing of principal payments on the mortgage loans, including prepayments, defaults and liquidations, and repurchases due to breaches of representations and warranties; o The allocation of principal distributions among the various classes of certificates; o The rate and timing of Realized Losses and interest shortfalls on the mortgage loans; o The pass-through rate on that class of offered certificates; o The purchase price paid for that class of offered certificates; and o The timing of the exercise of the optional termination by the master servicer. For additional considerations relating to the yields on the offered certificates, see "Yield Considerations" and "Maturity and Prepayment Considerations" in the prospectus. As of the cut-off date, approximately 30.5% of the mortgage loans, by cut-off date principal balance, require the related borrowers to make monthly payments of accrued interest, but not principal, generally for up to ten years following origination. After the interest-only period, the related borrower's monthly payment will be recalculated to cover both interest and principal so that the mortgage loan will be paid in full by its final payment date. As a result, if the monthly payment increases, the related borrower may not be able to pay the increased amount and may default or may refinance the loan to avoid the higher payment. In addition, because no scheduled principal payments are required to be made on these mortgage loans for a period of time, the related offered certificates will receive smaller scheduled principal distributions during that period than they would have received if the related borrowers were required to make monthly payments of interest and principal from origination of these mortgage loans. PREPAYMENT CONSIDERATIONS The yield to maturity and the aggregate amount of distributions on each class of offered certificates will be affected by the rate and timing of principal payments on the related mortgage loans and the amount and timing of mortgagor defaults resulting in Realized Losses on the related mortgage loans. These yields may be adversely affected by a higher or lower than anticipated rate of principal payments on the mortgage loans. The rate of principal payments on the mortgage loans will in turn be affected by the amortization schedules of the mortgage loans, the rate and timing of principal prepayments thereon by the mortgagors, liquidations or modifications of defaulted mortgage loans and purchases of mortgage loans due to breaches of representations and warranties. The timing of changes in the rate of prepayments, liquidations S-80
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and purchases of the mortgage loans may, and the timing of Realized Losses on the mortgage loans will, significantly affect the yield to an investor in the offered certificates, 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 in this prospectus supplement, no assurance can be given as to the rate or the timing of principal payments on the offered certificates entitled to distributions in respect of principal. The mortgage loans may be prepaid by the mortgagors at any time in full or in part, although approximately 62.4% of the cut-off date principal balance of the mortgage loans provide for payment of a prepayment charge. Prepayment charges may reduce the rate of prepayment on the mortgage loans until the end of the period during which these prepayment charges apply. See "Description of the Mortgage Pool" in this prospectus supplement Some state laws restrict the imposition of prepayment charges even when the mortgage loans expressly provide for the collection of those charges. As a result, it is possible that prepayment charges may not be collected even on mortgage loans that provide for the payment of these charges. In any case, these amounts will not be available for distribution on the offered certificates. See "Certain Legal Aspects of Mortgage Loans and Contracts--Default Interest and Limitations on Prepayments" in the prospectus. The Class SB Certificateholders shall receive the amount of any payments or collections in the nature of prepayment charges on the mortgage loans received by the master servicer in respect of the related due period. Investors in the offered certificates should be aware that some of the mortgage loans will be junior loans, which are secured by junior liens on the related mortgaged properties. Generally, junior mortgage loans are not viewed by mortgagors as permanent financing. Accordingly, junior loans may experience a higher rate of prepayment than first lien mortgage loans. The fixed-rate loans typically contain due-on-sale clauses. The terms of the pooling and servicing agreement generally require the master servicer or any subservicer, 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. The adjustable-rate loans typically are assumable under some circumstances if, in the sole judgment of the master servicer or subservicer, the prospective purchaser of a mortgaged property is creditworthy and the security for the mortgage loan is not impaired by the assumption. Prepayments, liquidations and purchases of the mortgage loans will result in distributions to holders of the related offered certificates of principal amounts which would otherwise be distributed over the remaining terms of those mortgage loans. Factors affecting prepayment, including defaults and liquidations, of mortgage loans include changes in mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity in the mortgaged properties, changes in the value of the mortgaged properties, mortgage market interest rates, solicitations and servicing decisions. In addition, if prevailing mortgage rates fell significantly below the mortgage rates on the mortgage loans, the rate of prepayments, including refinancings, would be expected to increase. Conversely, if prevailing mortgage rates rose significantly above the S-81
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mortgage rates on the mortgage loans, the rate of prepayments on the mortgage loans would be expected to decrease. The rate of defaults on the mortgage loans will also affect the rate and timing of principal distributions on the related offered certificates. In general, defaults on mortgage loans are expected to occur with greater frequency in their early years. Furthermore, the rate and timing of prepayments, defaults and liquidations on the mortgage loans will be affected by the general economic condition of the region of the country in which the related mortgaged properties are located. The risk of delinquencies and loss is greater and prepayments are less likely in regions where a weak or deteriorating economy exists, as may be evidenced by, among other factors, increasing unemployment or falling property values. In addition, the rate of default of mortgage loans secured by junior liens is likely to be greater than that of mortgage loans secured by first liens on comparable properties. Also, because borrowers of balloon loans are required to make a relatively large single payment upon maturity, it is possible that the default risk associated with balloon loans is greater than that associated with fully-amortizing mortgage loans. See "Risk Factors" in this prospectus supplement. A subservicer may allow the refinancing of a mortgage loan by accepting prepayments thereon and permitting a new loan secured by a mortgage on the same property. In the event of such a refinancing, the new loan would not be included in the trust fund and, therefore, the refinancing would have the same effect as a prepayment in full of the related mortgage loan. A subservicer or the master servicer may, from time to time, implement programs designed to encourage refinancing. These programs may include, without limitation, modifications of existing loans, 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. The rate of default on mortgage loans that are refinances by the borrower, were originated with limited documentation, or are mortgage loans with high LTV ratios, may be higher than for other types of mortgage loans. As a result of the underwriting standards applicable to the mortgage loans, the mortgage loans are likely to experience rates of delinquency, foreclosure, bankruptcy and loss that are higher, and that may be substantially higher, than those experienced by mortgage loans underwritten in accordance with the standards applied by Fannie Mae and Freddie Mac first lien and junior lien mortgage loan purchase programs. See "Description of the Mortgage Pool--Underwriting Standards." In addition, because of these underwriting criteria and their likely effect on the delinquency, foreclosure, bankruptcy and loss experience of the mortgage loans, the mortgage loans will generally be serviced in a manner intended to result in a faster exercise of remedies, which may include foreclosure, in the event mortgage loan delinquencies and defaults occur, than would be the case if the mortgage loans were serviced in accordance with those other programs. Furthermore, the rate and timing of prepayments, defaults and liquidations on the mortgage loans will be affected by the general economic condition of the region of the country in which the related mortgaged properties are located. The risk of delinquencies and loss is greater, and prepayments are less likely, in regions where a weak or deteriorating economy exists, as may be evidenced by, among other factors, increasing unemployment or falling property values. The master servicer has a limited right, but not an obligation, to repurchase some defaulted mortgage loans at a price equal S-82
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to the unpaid principal balance thereof plus accrued and unpaid interest, resulting in a payment of principal on the related offered certificates earlier than might have been the case if foreclosure proceedings had been commenced. See "Maturity and Prepayment Considerations" in the prospectus. ALLOCATION OF PRINCIPAL DISTRIBUTIONS The yields to maturity of the offered certificates will be affected by the allocation of principal distributions among the offered certificates and the extent of any Overcollateralization Reduction Amount. The offered certificates are subject to priorities for payment of principal as described in this prospectus supplement. Distributions of principal and the weighted average lives of classes having an earlier priority of payment will be affected by the rates of prepayment of the related mortgage loans early in the life of those mortgage loans. The timing of commencement of principal distributions and the weighted average lives of the offered certificates with a later priority of payment will be affected by the rates of prepayment of the related mortgage loans both before and after the commencement of principal distributions on those classes. In addition, the rate and timing of principal distributions on and the weighted average lives of the offered certificates will be affected primarily by the rate and timing of principal payments, including prepayments, defaults, losses, liquidations and purchases, on the mortgage loans. As described in this prospectus supplement, during certain periods all or a disproportionately large percentage of principal payments on the mortgage loans will be allocated among the Class A Certificates and, during certain periods, no principal distributions will be distributed to each class of Class M Certificates. Unless the Certificate Principal Balances of the Class A Certificates have been reduced to zero, the Class M Certificates will not be entitled to receive distributions of principal until the Stepdown Date. Furthermore, if a Trigger Event is in effect, the Class M Certificates will not be entitled to receive distributions in respect of principal until the aggregate Certificate Principal Balance of the Class A Certificates has been reduced to zero. To the extent that no principal distributions are distributed on the Class M Certificates, the subordination afforded the Class A Certificates by the Class M Certificates, together with overcollateralization, in the absence of offsetting Realized Losses allocated thereto, will be increased, and the weighted average lives of the Class M Certificates will be extended. As described under "Description of the Certificates--Allocation of Losses" and "--Advances," amounts otherwise distributable to holders of one or more classes of the Class M Certificates may be made available to protect the holders of the Class A Certificates and holders of any Class M Certificates with a higher payment priority against interruptions in distributions due to certain mortgagor delinquencies, to the extent not covered by Advances. Such delinquencies may affect the yields to investors on such classes of the Class M Certificates, and, even if subsequently cured, may affect the timing of the receipt of distributions by the holders of such classes of Class M Certificates. In addition, a higher than expected rate of delinquencies or losses will also affect the rate of principal distributions on one or more classes of the Class M Certificates if delinquencies or losses cause a Trigger Event. S-83
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The yields to maturity of the offered certificates may also be affected to the extent any Excess Cash Flow is used to accelerate distributions of principal on the offered certificates and to the extent any Overcollateralization Reduction Amount is used to decelerate principal on the offered certificates. In addition, the amount of the Overcollateralization Increase Amount paid to the offered certificates on any payment date will be affected by, among other things, the level of delinquencies and losses on the mortgage loans, and the level of One-Month LIBOR and Six Month LIBOR. See "Description of the Certificates--Excess Cash Flow and Overcollateralization" in this prospectus supplement. REALIZED LOSSES AND INTEREST SHORTFALLS The yield to maturity and the aggregate amount of distributions on each class of offered certificates will be affected by the timing of borrower defaults resulting in Realized Losses on the mortgage loans, to the extent such losses are not covered by credit support in the form of the Excess Cash Flow, overcollateralization or subordination provided by any Class M Certificates with a lower payment priority. Furthermore, as described in this prospectus supplement, the timing of receipt of principal and interest by the offered certificates may be adversely affected by losses or delinquencies on the related mortgage loans if those losses or delinquencies result in a change in the Required Overcollateralization Amount. The amount of interest otherwise payable to holders of each class of offered certificates will be reduced by any interest shortfalls, including Prepayment Interest Shortfalls, on the mortgage loans to the extent not covered by the Excess Cash Flow or by the master servicer in each case as described in this prospectus supplement. These shortfalls will not be offset by a reduction in the servicing fees payable to the master servicer or otherwise, except as described in this prospectus supplement with respect to Prepayment Interest Shortfalls. Prepayment Interest Shortfalls, Relief Act Shortfalls and Basis Risk Shortfalls will only be covered by Excess Cash Flow, in each case as and to the extent described in this prospectus supplement. Relief Act Shortfalls arising in an Interest Accrual Period will only be covered to the extent of funds available therefor and such interest shortfalls will not carry forward or be paid on any subsequent distribution date. See "Description of the Certificates--Interest Distributions" in this prospectus supplement for a discussion of possible shortfalls in the collection of interest. The recording of mortgages in the name of MERS is a relatively new practice in the mortgage lending industry. While the depositor expects that the master servicer or applicable subservicer will be able to commence foreclosure proceedings on the mortgaged properties, when necessary and appropriate, public recording officers and others in the mortgage industry, however, may have limited, if any, experience with lenders seeking to foreclose mortgages, assignments of which are registered with MERS. Accordingly, delays and additional costs in commencing, prosecuting and completing foreclosure proceedings, defending litigation commenced by third parties and conducting foreclosure sales of the mortgaged properties could result. Those delays and additional costs could in turn delay the distribution of liquidation proceeds to the related certificateholders and increase the amount of Realized Losses on the mortgage loans. In addition, if, as a result of MERS discontinuing or becoming unable to continue operations in connection with the MERS(R) System, it becomes necessary to remove any mortgage loan from registration on the MERS(R) System and to arrange for the assignment of the related mortgages to the trustee, then any related expenses shall be reimbursable by the trust to S-85
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the master servicer, which will reduce the amount available to pay principal of and interest on the outstanding class or classes of related certificates with the lowest payment priorities. For additional information regarding the recording of mortgages in the name of MERS see "Description of the Mortgage Pool--General" in this prospectus supplement and "Description of the Certificates--Assignment of Mortgage Loans" in the prospectus. PASS-THROUGH RATES The yields to maturity on the offered certificates will be affected by their Pass-Through Rates. The Class A Certificates and Class M Certificates may not always receive interest at a rate equal to One-Month LIBOR plus the related Margin. If the Net WAC Cap Rate is less than the lesser of One- Month LIBOR plus the related Margin and 14.000% per annum, the Pass-Through Rate on the Class A Certificates or Class M Certificates, as applicable, will be limited to the Net WAC Cap Rate. Thus, the yields to investors in the Class A Certificates and Class M Certificates will be sensitive to fluctuations in the level of One-Month LIBOR and will be adversely affected by the application of the Net WAC Cap Rate. Therefore, the prepayment of the related mortgage loans with higher mortgage rates may result in lower Pass-Through Rates on the Class A Certificates and Class M Certificates. In addition, if prepayments on the mortgage loans occur at a rate slower than anticipated, the yield maintenance agreement may not provide sufficient funds to cover such shortfalls with respect to the Class A Certificates and Class M Certificates because the notional balance may be lower than the outstanding principal balance of the mortgage loans. If on any distribution date the application of the Net WAC Cap Rate results in an interest payment lower than the lesser of One-Month LIBOR plus the related Margin and 14.000% per annum on the Class A Certificates or Class M Certificates on any distribution date, the value of the Class A Certificates or Class M Certificates may be temporarily or permanently reduced. Investors in the Class A Certificates and Class M Certificates should be aware that some of the mortgage loans have adjustable interest rates. Consequently, the interest that becomes due on these mortgage loans during the related due period will be sensitive to changes in the related indices and may be less than interest that would accrue on the Class A Certificates and Class M Certificates at the rate of the lesser of One-Month LIBOR plus the related Margin and 14.000% per annum. In a rising interest rate environment, the Class A Certificates and Class M Certificates may receive interest at the Net WAC Cap Rate or at 14.000% per annum for a protracted period of time. In addition, because the initial mortgage rates on the adjustable rate loans may be lower than the related minimum mortgage rates, the Net WAC Cap Rate will initially be less than it will be once the adjustable-rate loans have all adjusted to their fully indexed rate. Therefore, prior to the month in which all of the adjustable-rate loans have adjusted to their fully-indexed rate, there is a greater risk that the Pass-Through Rate on any class of offered certificates may be limited by the Net WAC Cap Rate. To the extent the Net WAC Cap Rate is paid on any class of Class A Certificates or Class M Certificates, the difference between the Net WAC Cap Rate and the lesser of One-Month S-85
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LIBOR plus the related Margin and 14.000% per annum will create a shortfall that will carry forward with interest thereon. This shortfall will only be payable from amounts in respect of Excess Cash Flow. These shortfalls may remain unpaid on the Optional Termination Date and final distribution date. PURCHASE PRICE The yield to maturity on a class of offered certificates will depend on the price paid by the holders of those certificates. 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 an offered certificate is purchased at a premium and principal distributions thereon occur at a rate faster than assumed at the time of purchase, the investor's actual yield to maturity will be lower than that anticipated at the time of purchase. Conversely, if an offered certificate is purchased at a discount and principal distributions thereon occur at a rate slower than assumed at the time of purchase, the investor's actual yield to maturity will be lower than that anticipated at the time of purchase. FINAL SCHEDULED DISTRIBUTION DATES The final scheduled distribution date with respect to the Class A-1 Certificates and Class A-2 Certificates will be the distribution dates in October 2024 and March 2035, respectively, assuming (i) the fixed-rate mortgage loans prepay at a constant rate of 0% HEP, (ii) the adjustable-rate mortgage loans prepay at a constant rate of 0% CPR, and (iii) the structuring assumptions described under "--Weighted Average Life" below. The final scheduled distribution date with respect to the Class A-3 Certificates and Class M Certificates will be the distribution date in January 2036, which is the distribution date occurring in the month following the last scheduled monthly payment on any mortgage loan. Due to losses and prepayments on the mortgage loans, the actual final distribution date on any class of offered certificates may be substantially earlier. In addition, the actual final distribution date on any class of offered certificates may be later than the final scheduled distribution date therefor. No event of default 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 offered certificates on or before its final scheduled distribution date. WEIGHTED AVERAGE LIFE Weighted average life refers to the average amount of time that will elapse from the date of issuance of a security to the date of distribution of net reduction of principal balance of the security. The weighted average life of each class of offered certificates will be influenced by, among other things, the rate at which principal of the related mortgage loans is paid, which may be in the form of scheduled amortization, prepayments or liquidations. The prepayment model used in this prospectus supplement with respect to the fixed-rate mortgage loans included in the mortgage pool is the Home Equity Prepayment assumption, or HEP, which assumes a rate of prepayment each month relative to the then outstanding principal balance of a pool of mortgage loans. The offered certificates were structured on the basis of, among other things, a HEP of 23% for the fixed-rate mortgage loans, which is the related S-86
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Prepayment Assumption for the fixed-rate mortgage loans. 23% HEP assumes a constant prepayment rate or CPR, of one-tenth of 23% per annum of the then outstanding principal balance of those mortgage loans in the first month of the life of the mortgage loans and an additional one-tenth of 23% per annum in each month thereafter until the tenth month. Beginning in the tenth month and in each month thereafter during the life of the mortgage loans, a 23% HEP assumes a CPR of 23% per annum each month. HEP 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 fixed-rate mortgage loans. No representation is made that the fixed-rate mortgage loans will prepay at that or any other rate. The prepayment model used in this prospectus supplement with respect to the adjustable-rate mortgage loans included in the mortgage pool, referred to in this prospectus supplement as PPC, represents an assumed rate of prepayment each month relative to the then outstanding principal balance of a pool of mortgage loans. The offered certificates were structured on the basis of, among other things, a PPC of 100% for the adjustable-rate mortgage loans. 100% PPC prepayment assumption assumes (i) a per annum prepayment rate of 2% of the then outstanding principal balance of the adjustable-rate mortgage loans in the first month of the life of the mortgage loans, (ii) an additional 28/11% per annum in each month thereafter through the eleventh month, (iii) a constant prepayment rate of 30% per annum beginning in the twelfth month through the twenty-second month, (iv) a constant prepayment rate of 50% per annum beginning in the twenty-third month through the twenty-seventh month and (v) a constant prepayment rate of 35% per annum beginning in the twenty-eighth month and thereafter during the life of the adjustable-rate mortgage loans. No representation is made that the adjustable-rate mortgage loans will prepay at that or any other rate. The tables set forth below have been prepared on the basis of assumptions as described below. The tables assume, among other things, the following structuring assumptions: o as of the date of issuance of the offered certificates, the mortgage loans have the characteristics set forth in Annex III to this prospectus supplement; o the scheduled monthly payment for each mortgage loan has been based on its outstanding balance, interest rate and remaining term to maturity so that the mortgage loan will amortize in amounts sufficient for repayment thereof over its remaining term to maturity, except for the mortgage loans which are balloon mortgage loans or interest only mortgage loans; o the mortgage rate on each adjustable-rate loan will be adjusted on each adjustment date to a rate equal to the related index plus the applicable note margin, subject to a lifetime maximum mortgage rate, lifetime minimum mortgage rate and periodic rate caps, as applicable, with the scheduled monthly payment adjusted accordingly to fully amortize the mortgage loan after the interest-only term, if applicable; o none of Residential Funding Corporation, the master servicer or the depositor will repurchase any mortgage loan and neither Residential Funding Corporation nor its designee exercises its option to purchase the mortgage loans on the optional termination date, except where indicated; S-87
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o all delinquencies of payments due on or prior to the cut-off date are brought current, and thereafter there are no delinquencies or Realized Losses on the mortgage loans, and principal payments on the mortgage loans will be timely received together with prepayments, if any, at the constant percentages of HEP and PPC set forth in the tables; o there is no Prepayment Interest Shortfall, Relief Act Shortfall, Basis Risk Shortfall or any other interest shortfall in any month; o distributions on the Certificates will be received on the 25th day of each month, commencing in February 2006; o payments on the mortgage loans earn no reinvestment return; o the expenses described under "Description of the Certificates--Interest Distributions" will be paid from trust assets, and there are no additional ongoing trust expenses payable out of the trust; o One-Month LIBOR and Six-Month LIBOR remain constant at 4.490% per annum and 4.720% per annum, respectively; o the interest rate on the performance mortgage loans is not reduced; and o the certificates will be purchased on January 20, 2006. The actual characteristics and performance of the mortgage loans will differ from the assumptions used in constructing the tables set forth below, which are hypothetical in nature and are provided only to give a sense of how the principal cash flows might behave under varying prepayment scenarios. For example, it is very unlikely that the mortgage loans will prepay at a constant percentage of HEP and PPC until maturity or that all of the mortgage loans will prepay at the same rate of prepayment. Moreover, the diverse remaining terms to stated maturity and mortgage rates of the mortgage loans could produce slower or faster principal distributions than indicated in the tables at the various constant percentages of HEP and PPC specified. Any difference between the assumptions and the actual characteristics and performance of the mortgage loans, or actual prepayment experience, will affect the percentages of initial Certificate Principal Balance of the certificates outstanding over time and the weighted average lives of the offered certificates. Subject to the foregoing discussion and assumptions, the following tables indicate the weighted average lives of the offered certificates and set forth the percentages of the initial Certificate Principal Balance of those offered certificates that would be outstanding after each of the distribution dates shown at various constant percentages of HEP and PPC. S-88
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PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING PERCENTAGES OF HEP AND PPC CLASS A-1 CERTIFICATES ------------------------------------------------------------- PREPAYMENT ASSUMPTION FOR FIXED-RATE LOANS (HEP) 0% 11.50% 17.25% 23.00% 28.75% 34.50% ------------------------------------------------ ---- ------ ------ ------ ------ ------ PREPAYMENT ASSUMPTION FOR ADJUSTABLE-RATE LOANS (PPC) 0% 50% 75% 100% 125% 150% ----------------------------------------------------- ---- ------ ------ ------ ------ ------ DISTRIBUTION DATE ----------------- Initial Percentage......................................... 100% 100% 100% 100% 100% 100% January 2007............................................... 98 73 60 46 33 19 January 2008............................................... 96 30 * 0 0 0 January 2009............................................... 95 0 0 0 0 0 January 2010............................................... 93 0 0 0 0 0 January 2011............................................... 91 0 0 0 0 0 January 2012............................................... 88 0 0 0 0 0 January 2013............................................... 85 0 0 0 0 0 January 2014............................................... 82 0 0 0 0 0 January 2015............................................... 78 0 0 0 0 0 January 2016............................................... 74 0 0 0 0 0 January 2017............................................... 69 0 0 0 0 0 January 2018............................................... 64 0 0 0 0 0 January 2019............................................... 59 0 0 0 0 0 January 2020............................................... 53 0 0 0 0 0 January 2021............................................... 28 0 0 0 0 0 January 2022............................................... 21 0 0 0 0 0 January 2023............................................... 14 0 0 0 0 0 January 2024............................................... 6 0 0 0 0 0 January 2025............................................... 0 0 0 0 0 0 January 2026............................................... 0 0 0 0 0 0 January 2027............................................... 0 0 0 0 0 0 January 2028............................................... 0 0 0 0 0 0 January 2029............................................... 0 0 0 0 0 0 January 2030............................................... 0 0 0 0 0 0 January 2031............................................... 0 0 0 0 0 0 January 2032............................................... 0 0 0 0 0 0 January 2033............................................... 0 0 0 0 0 0 January 2034............................................... 0 0 0 0 0 0 January 2035............................................... 0 0 0 0 0 0 January 2036............................................... 0 0 0 0 0 0 WEIGHTED AVERAGE LIFE (TO CALL)(1)......................... 12.57 1.59 1.21 1.00 0.86 0.76 WEIGHTED AVERAGE LIFE (TO MATURITY)(1)(2).................. 12.57 1.59 1.21 1.00 0.86 0.76 ______________________ (1) The weighted average life of an offered certificate is determined by (i) multiplying the net reduction, if any, of the Certificate Principal Balance by the number of years from the date of issuance of the offered certificate to the related distribution date, (ii) adding the results, and (iii) dividing the sum by the aggregate of the net reductions of the Certificate Principal Balance described in (i) above. (2) The weighted average life to maturity assumes that the optional termination is not exercised. * Indicates a number that is greater than zero but less than 0.5% 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. S-89
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PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING PERCENTAGES OF HEP AND PPC CLASS A-2 CERTIFICATES ------------------------------------------------------------- PREPAYMENT ASSUMPTION FOR FIXED-RATE LOANS (HEP) 0% 11.50% 17.25% 23.00% 28.75% 34.50% ------------------------------------------------ ---- ------ ------ ------ ------ ------ PREPAYMENT ASSUMPTION FOR ADJUSTABLE-RATE LOANS (PPC) 0% 50% 75% 100% 125% 150% ----------------------------------------------------- ---- ------ ------ ------ ------ ------ DISTRIBUTION DATE ----------------- Initial Percentage......................................... 100% 100% 100% 100% 100% 100% January 2007............................................... 100 100 100 100 100 100 January 2008............................................... 100 100 100 72 46 22 January 2009............................................... 100 95 56 24 0 0 January 2010............................................... 100 67 42 24 0 0 January 2011............................................... 100 53 30 14 0 0 January 2012............................................... 100 42 20 6 0 0 January 2013............................................... 100 33 13 1 0 0 January 2014............................................... 100 26 7 0 0 0 January 2015............................................... 100 20 3 0 0 0 January 2016............................................... 100 15 0 0 0 0 January 2017............................................... 100 10 0 0 0 0 January 2018............................................... 100 7 0 0 0 0 January 2019............................................... 100 4 0 0 0 0 January 2020............................................... 100 1 0 0 0 0 January 2021............................................... 100 0 0 0 0 0 January 2022............................................... 100 0 0 0 0 0 January 2023............................................... 100 0 0 0 0 0 January 2024............................................... 100 0 0 0 0 0 January 2025............................................... 98 0 0 0 0 0 January 2026............................................... 89 0 0 0 0 0 January 2027............................................... 79 0 0 0 0 0 January 2028............................................... 67 0 0 0 0 0 January 2029............................................... 59 0 0 0 0 0 January 2030............................................... 52 0 0 0 0 0 January 2031............................................... 44 0 0 0 0 0 January 2032............................................... 35 0 0 0 0 0 January 2033............................................... 25 0 0 0 0 0 January 2034............................................... 14 0 0 0 0 0 January 2035............................................... 2 0 0 0 0 0 January 2036............................................... 0 0 0 0 0 0 WEIGHTED AVERAGE LIFE (TO CALL)(1)......................... 24.17 6.26 4.21 3.00 2.08 1.79 WEIGHTED AVERAGE LIFE (TO MATURITY)(1)(2).................. 24.18 6.30 4.24 3.02 2.08 1.79 ______________________ (1) The weighted average life of an offered certificate is determined by (i) multiplying the net reduction, if any, of the Certificate Principal Balance by the number of years from the date of issuance of the offered certificate to the related distribution date, (ii) adding the results, and (iii) dividing the sum by the aggregate of the net reductions of the Certificate Principal Balance described in (i) above. (2) The weighted average life to maturity assumes that the optional termination is not exercised. 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. S-90
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PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING PERCENTAGES OF HEP AND PPC CLASS A-3 CERTIFICATES ------------------------------------------------------------- PREPAYMENT ASSUMPTION FOR FIXED-RATE LOANS (HEP) 0% 11.50% 17.25% 23.00% 28.75% 34.50% ------------------------------------------------ ---- ------ ------ ------ ------ ------ PREPAYMENT ASSUMPTION FOR ADJUSTABLE-RATE LOANS (PPC) 0% 50% 75% 100% 125% 150% ----------------------------------------------------- ---- ------ ------ ------ ------ ------ DISTRIBUTION DATE ----------------- Initial Percentage......................................... 100% 100% 100% 100% 100% 100% January 2007............................................... 100 100 100 100 100 100 January 2008............................................... 100 100 100 100 100 100 January 2009............................................... 100 100 100 100 71 0 January 2010............................................... 100 100 100 100 71 0 January 2011............................................... 100 100 100 100 71 0 January 2012............................................... 100 100 100 100 71 0 January 2013............................................... 100 100 100 100 52 0 January 2014............................................... 100 100 100 76 33 0 January 2015............................................... 100 100 100 53 21 0 January 2016............................................... 100 100 97 37 12 0 January 2017............................................... 100 100 74 26 4 0 January 2018............................................... 100 100 56 18 0 0 January 2019............................................... 100 100 43 11 0 0 January 2020............................................... 100 100 32 4 0 0 January 2021............................................... 100 77 19 0 0 0 January 2022............................................... 100 62 13 0 0 0 January 2023............................................... 100 51 6 0 0 0 January 2024............................................... 100 41 1 0 0 0 January 2025............................................... 100 33 0 0 0 0 January 2026............................................... 100 26 0 0 0 0 January 2027............................................... 100 21 0 0 0 0 January 2028............................................... 100 16 0 0 0 0 January 2029............................................... 100 10 0 0 0 0 January 2030............................................... 100 4 0 0 0 0 January 2031............................................... 100 0 0 0 0 0 January 2032............................................... 100 0 0 0 0 0 January 2033............................................... 100 0 0 0 0 0 January 2034............................................... 100 0 0 0 0 0 January 2035............................................... 100 0 0 0 0 0 January 2036............................................... 0 0 0 0 0 0 WEIGHTED AVERAGE LIFE (TO CALL)(1)......................... 28.85 12.85 8.68 6.35 4.37 2.50 WEIGHTED AVERAGE LIFE (TO MATURITY)(1)(2).................. 29.62 18.02 12.97 9.81 6.75 2.50 ______________________ (1) The weighted average life of an offered certificate is determined by (i) multiplying the net reduction, if any, of the Certificate Principal Balance by the number of years from the date of issuance of the offered certificate to the related distribution date, (ii) adding the results, and (iii) dividing the sum by the aggregate of the net reductions of the Certificate Principal Balance described in (i) above. (2) The weighted average life to maturity assumes that the optional termination is not exercised. 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. S-91
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PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING PERCENTAGES OF HEP AND PPC CLASS M-1 CERTIFICATES ------------------------------------------------------------- PREPAYMENT ASSUMPTION FOR FIXED-RATE LOANS (HEP) 0% 11.50% 17.25% 23.00% 28.75% 34.50% ------------------------------------------------ ---- ------ ------ ------ ------ ------ PREPAYMENT ASSUMPTION FOR ADJUSTABLE-RATE LOANS (PPC) 0% 50% 75% 100% 125% 150% ----------------------------------------------------- ---- ------ ------ ------ ------ ------ DISTRIBUTION DATE ----------------- Initial Percentage......................................... 100% 100% 100% 100% 100% 100% January 2007............................................... 100 100 100 100 100 100 January 2008............................................... 100 100 100 100 100 100 January 2009............................................... 100 100 100 100 100 95 January 2010............................................... 100 100 71 60 100 95 January 2011............................................... 100 86 54 33 82 83 January 2012............................................... 100 71 41 22 24 47 January 2013............................................... 100 59 31 15 7 27 January 2014............................................... 100 49 24 11 5 13 January 2015............................................... 100 41 18 7 3 2 January 2016............................................... 100 34 14 5 0 0 January 2017............................................... 100 28 10 4 0 0 January 2018............................................... 100 23 8 2 0 0 January 2019............................................... 100 19 6 0 0 0 January 2020............................................... 100 16 5 0 0 0 January 2021............................................... 100 11 2 0 0 0 January 2022............................................... 100 9 0 0 0 0 January 2023............................................... 100 7 0 0 0 0 January 2024............................................... 100 6 0 0 0 0 January 2025............................................... 100 5 0 0 0 0 January 2026............................................... 100 4 0 0 0 0 January 2027............................................... 100 3 0 0 0 0 January 2028............................................... 100 * 0 0 0 0 January 2029............................................... 94 0 0 0 0 0 January 2030............................................... 84 0 0 0 0 0 January 2031............................................... 73 0 0 0 0 0 January 2032............................................... 61 0 0 0 0 0 January 2033............................................... 48 0 0 0 0 0 January 2034............................................... 33 0 0 0 0 0 January 2035............................................... 17 0 0 0 0 0 January 2036............................................... 0 0 0 0 0 0 WEIGHTED AVERAGE LIFE (TO CALL)(1)......................... 26.53 8.53 5.75 4.74 4.93 3.87 WEIGHTED AVERAGE LIFE (TO MATURITY)(1)(2).................. 26.65 9.27 6.35 5.23 5.76 6.19 ______________________ (1) The weighted average life of an offered certificate is determined by (i) multiplying the net reduction, if any, of the Certificate Principal Balance by the number of years from the date of issuance of the offered certificate to the related distribution date, (ii) adding the results, and (iii) dividing the sum by the aggregate of the net reductions of the Certificate Principal Balance described in (i) above. (2) The weighted average life to maturity assumes that the optional termination is not exercised. * Indicates a number that is greater than zero but less than 0.5% 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. S-92
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PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING PERCENTAGES OF HEP AND PPC CLASS M-2 CERTIFICATES ------------------------------------------------------------- PREPAYMENT ASSUMPTION FOR FIXED-RATE LOANS (HEP) 0% 11.50% 17.25% 23.00% 28.75% 34.50% ------------------------------------------------ ---- ------ ------ ------ ------ ------ PREPAYMENT ASSUMPTION FOR ADJUSTABLE-RATE LOANS (PPC) 0% 50% 75% 100% 125% 150% ----------------------------------------------------- ---- ------ ------ ------ ------ ------ DISTRIBUTION DATE ----------------- Initial Percentage......................................... 100% 100% 100% 100% 100% 100% January 2007............................................... 100 100 100 100 100 100 January 2008............................................... 100 100 100 100 100 100 January 2009............................................... 100 100 100 100 100 100 January 2010............................................... 100 100 71 48 100 79 January 2011............................................... 100 86 54 33 19 10 January 2012............................................... 100 71 41 22 12 6 January 2013............................................... 100 59 31 15 7 3 January 2014............................................... 100 49 24 11 5 0 January 2015............................................... 100 41 18 7 2 0 January 2016............................................... 100 34 14 5 0 0 January 2017............................................... 100 28 10 4 0 0 January 2018............................................... 100 23 8 0 0 0 January 2019............................................... 100 19 6 0 0 0 January 2020............................................... 100 16 5 0 0 0 January 2021............................................... 100 11 0 0 0 0 January 2022............................................... 100 9 0 0 0 0 January 2023............................................... 100 7 0 0 0 0 January 2024............................................... 100 6 0 0 0 0 January 2025............................................... 100 5 0 0 0 0 January 2026............................................... 100 4 0 0 0 0 January 2027............................................... 100 1 0 0 0 0 January 2028............................................... 100 0 0 0 0 0 January 2029............................................... 94 0 0 0 0 0 January 2030............................................... 84 0 0 0 0 0 January 2031............................................... 73 0 0 0 0 0 January 2032............................................... 61 0 0 0 0 0 January 2033............................................... 48 0 0 0 0 0 January 2034............................................... 33 0 0 0 0 0 January 2035............................................... 17 0 0 0 0 0 January 2036............................................... 0 0 0 0 0 0 WEIGHTED AVERAGE LIFE (TO CALL)(1)......................... 26.53 8.53 5.75 4.60 4.57 3.93 WEIGHTED AVERAGE LIFE (TO MATURITY)(1)(2).................. 26.65 9.25 6.34 5.07 4.93 4.51 ______________________ (1) The weighted average life of an offered certificate is determined by (i) multiplying the net reduction, if any, of the Certificate Principal Balance by the number of years from the date of issuance of the offered certificate to the related distribution date, (ii) adding the results, and (iii) dividing the sum by the aggregate of the net reductions of the Certificate Principal Balance described in (i) above. (2) The weighted average life to maturity assumes that the optional termination is not exercised. 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. S-93
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PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING PERCENTAGES OF HEP AND PPC CLASS M-3 CERTIFICATES ------------------------------------------------------------- PREPAYMENT ASSUMPTION FOR FIXED-RATE LOANS (HEP) 0% 11.50% 17.25% 23.00% 28.75% 34.50% ------------------------------------------------ ---- ------ ------ ------ ------ ------ PREPAYMENT ASSUMPTION FOR ADJUSTABLE-RATE LOANS (PPC) 0% 50% 75% 100% 125% 150% ----------------------------------------------------- ---- ------ ------ ------ ------ ------ DISTRIBUTION DATE ----------------- Initial Percentage......................................... 100% 100% 100% 100% 100% 100% January 2007............................................... 100 100 100 100 100 100 January 2008............................................... 100 100 100 100 100 100 January 2009............................................... 100 100 100 100 100 100 January 2010............................................... 100 100 71 48 58 18 January 2011............................................... 100 86 54 33 19 10 January 2012............................................... 100 71 41 22 12 6 January 2013............................................... 100 59 31 15 7 * January 2014............................................... 100 49 24 11 5 0 January 2015............................................... 100 41 18 7 0 0 January 2016............................................... 100 34 14 5 0 0 January 2017............................................... 100 28 10 2 0 0 January 2018............................................... 100 23 8 0 0 0 January 2019............................................... 100 19 6 0 0 0 January 2020............................................... 100 16 5 0 0 0 January 2021............................................... 100 11 0 0 0 0 January 2022............................................... 100 9 0 0 0 0 January 2023............................................... 100 7 0 0 0 0 January 2024............................................... 100 6 0 0 0 0 January 2025............................................... 100 5 0 0 0 0 January 2026............................................... 100 2 0 0 0 0 January 2027............................................... 100 0 0 0 0 0 January 2028............................................... 100 0 0 0 0 0 January 2029............................................... 94 0 0 0 0 0 January 2030............................................... 84 0 0 0 0 0 January 2031............................................... 73 0 0 0 0 0 January 2032............................................... 61 0 0 0 0 0 January 2033............................................... 48 0 0 0 0 0 January 2034............................................... 33 0 0 0 0 0 January 2035............................................... 17 0 0 0 0 0 January 2036............................................... 0 0 0 0 0 0 WEIGHTED AVERAGE LIFE (TO CALL)(1)......................... 26.53 8.53 5.74 4.54 4.26 3.76 WEIGHTED AVERAGE LIFE (TO MATURITY)(1)(2).................. 26.65 9.22 6.33 4.99 4.61 4.04 ______________________ (1) The weighted average life of an offered certificate is determined by (i) multiplying the net reduction, if any, of the Certificate Principal Balance by the number of years from the date of issuance of the offered certificate to the related distribution date, (ii) adding the results, and (iii) dividing the sum by the aggregate of the net reductions of the Certificate Principal Balance described in (i) above. (2) The weighted average life to maturity assumes that the optional termination is not exercised. * Indicates a number that is greater than zero but less than 0.5% 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. S-94
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PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING PERCENTAGES OF HEP AND PPC CLASS M-4 CERTIFICATES ------------------------------------------------------------- PREPAYMENT ASSUMPTION FOR FIXED-RATE LOANS (HEP) 0% 11.50% 17.25% 23.00% 28.75% 34.50% ------------------------------------------------ ---- ------ ------ ------ ------ ------ PREPAYMENT ASSUMPTION FOR ADJUSTABLE-RATE LOANS (PPC) 0% 50% 75% 100% 125% 150% ----------------------------------------------------- ---- ------ ------ ------ ------ ------ DISTRIBUTION DATE ----------------- Initial Percentage......................................... 100% 100% 100% 100% 100% 100% January 2007............................................... 100 100 100 100 100 100 January 2008............................................... 100 100 100 100 100 100 January 2009............................................... 100 100 100 100 100 100 January 2010............................................... 100 100 71 48 31 18 January 2011............................................... 100 86 54 33 19 10 January 2012............................................... 100 71 41 22 12 6 January 2013............................................... 100 59 31 15 7 0 January 2014............................................... 100 49 24 11 5 0 January 2015............................................... 100 41 18 7 0 0 January 2016............................................... 100 34 14 5 0 0 January 2017............................................... 100 28 10 0 0 0 January 2018............................................... 100 23 8 0 0 0 January 2019............................................... 100 19 6 0 0 0 January 2020............................................... 100 16 5 0 0 0 January 2021............................................... 100 11 0 0 0 0 January 2022............................................... 100 9 0 0 0 0 January 2023............................................... 100 7 0 0 0 0 January 2024............................................... 100 6 0 0 0 0 January 2025............................................... 100 5 0 0 0 0 January 2026............................................... 100 0 0 0 0 0 January 2027............................................... 100 0 0 0 0 0 January 2028............................................... 100 0 0 0 0 0 January 2029............................................... 94 0 0 0 0 0 January 2030............................................... 84 0 0 0 0 0 January 2031............................................... 73 0 0 0 0 0 January 2032............................................... 61 0 0 0 0 0 January 2033............................................... 48 0 0 0 0 0 January 2034............................................... 33 0 0 0 0 0 January 2035............................................... 17 0 0 0 0 0 January 2036............................................... 0 0 0 0 0 0 WEIGHTED AVERAGE LIFE (TO CALL)(1)......................... 26.53 8.53 5.74 4.50 4.11 3.56 WEIGHTED AVERAGE LIFE (TO MATURITY)(1)(2).................. 26.65 9.20 6.31 4.94 4.45 3.83 ______________________ (1) The weighted average life of an offered certificate is determined by (i) multiplying the net reduction, if any, of the Certificate Principal Balance by the number of years from the date of issuance of the offered certificate to the related distribution date, (ii) adding the results, and (iii) dividing the sum by the aggregate of the net reductions of the Certificate Principal Balance described in (i) above. (2) The weighted average life to maturity assumes that the optional termination is not exercised. 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. S-95
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PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING PERCENTAGES OF HEP AND PPC CLASS M-5 CERTIFICATES ------------------------------------------------------------- PREPAYMENT ASSUMPTION FOR FIXED-RATE LOANS (HEP) 0% 11.50% 17.25% 23.00% 28.75% 34.50% ------------------------------------------------ ---- ------ ------ ------ ------ ------ PREPAYMENT ASSUMPTION FOR ADJUSTABLE-RATE LOANS (PPC) 0% 50% 75% 100% 125% 150% ----------------------------------------------------- ---- ------ ------ ------ ------ ------ DISTRIBUTION DATE ----------------- Initial Percentage......................................... 100% 100% 100% 100% 100% 100% January 2007............................................... 100 100 100 100 100 100 January 2008............................................... 100 100 100 100 100 100 January 2009............................................... 100 100 100 100 100 100 January 2010............................................... 100 100 71 48 31 18 January 2011............................................... 100 86 54 33 19 10 January 2012............................................... 100 71 41 22 12 6 January 2013............................................... 100 59 31 15 7 0 January 2014............................................... 100 49 24 11 1 0 January 2015............................................... 100 41 18 7 0 0 January 2016............................................... 100 34 14 4 0 0 January 2017............................................... 100 28 10 0 0 0 January 2018............................................... 100 23 8 0 0 0 January 2019............................................... 100 19 6 0 0 0 January 2020............................................... 100 16 * 0 0 0 January 2021............................................... 100 11 0 0 0 0 January 2022............................................... 100 9 0 0 0 0 January 2023............................................... 100 7 0 0 0 0 January 2024............................................... 100 6 0 0 0 0 January 2025............................................... 100 1 0 0 0 0 January 2026............................................... 100 0 0 0 0 0 January 2027............................................... 100 0 0 0 0 0 January 2028............................................... 100 0 0 0 0 0 January 2029............................................... 94 0 0 0 0 0 January 2030............................................... 84 0 0 0 0 0 January 2031............................................... 73 0 0 0 0 0 January 2032............................................... 61 0 0 0 0 0 January 2033............................................... 48 0 0 0 0 0 January 2034............................................... 33 0 0 0 0 0 January 2035............................................... 17 0 0 0 0 0 January 2036............................................... 0 0 0 0 0 0 WEIGHTED AVERAGE LIFE (TO CALL)(1)......................... 26.53 8.53 5.74 4.47 4.00 3.42 WEIGHTED AVERAGE LIFE (TO MATURITY)(1)(2).................. 26.65 9.16 6.29 4.88 4.32 3.68 ______________________ (1) The weighted average life of an offered certificate is determined by (i) multiplying the net reduction, if any, of the Certificate Principal Balance by the number of years from the date of issuance of the offered certificate to the related distribution date, (ii) adding the results, and (iii) dividing the sum by the aggregate of the net reductions of the Certificate Principal Balance described in (i) above. (2) The weighted average life to maturity assumes that the optional termination is not exercised. * Indicates a number that is greater than zero but less than 0.5% 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. S-96
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PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING PERCENTAGES OF HEP AND PPC CLASS M-6 CERTIFICATES ------------------------------------------------------------- PREPAYMENT ASSUMPTION FOR FIXED-RATE LOANS (HEP) 0% 11.50% 17.25% 23.00% 28.75% 34.50% ------------------------------------------------ ---- ------ ------ ------ ------ ------ PREPAYMENT ASSUMPTION FOR ADJUSTABLE-RATE LOANS (PPC) 0% 50% 75% 100% 125% 150% ----------------------------------------------------- ---- ------ ------ ------ ------ ------ DISTRIBUTION DATE ----------------- Initial Percentage......................................... 100% 100% 100% 100% 100% 100% January 2007............................................... 100 100 100 100 100 100 January 2008............................................... 100 100 100 100 100 100 January 2009............................................... 100 100 100 100 100 96 January 2010............................................... 100 100 71 48 31 18 January 2011............................................... 100 86 54 33 19 10 January 2012............................................... 100 71 41 22 12 3 January 2013............................................... 100 59 31 15 7 0 January 2014............................................... 100 49 24 11 0 0 January 2015............................................... 100 41 18 7 0 0 January 2016............................................... 100 34 14 0 0 0 January 2017............................................... 100 28 10 0 0 0 January 2018............................................... 100 23 8 0 0 0 January 2019............................................... 100 19 4 0 0 0 January 2020............................................... 100 16 0 0 0 0 January 2021............................................... 100 11 0 0 0 0 January 2022............................................... 100 9 0 0 0 0 January 2023............................................... 100 7 0 0 0 0 January 2024............................................... 100 2 0 0 0 0 January 2025............................................... 100 0 0 0 0 0 January 2026............................................... 100 0 0 0 0 0 January 2027............................................... 100 0 0 0 0 0 January 2028............................................... 100 0 0 0 0 0 January 2029............................................... 94 0 0 0 0 0 January 2030............................................... 84 0 0 0 0 0 January 2031............................................... 73 0 0 0 0 0 January 2032............................................... 61 0 0 0 0 0 January 2033............................................... 48 0 0 0 0 0 January 2034............................................... 33 0 0 0 0 0 January 2035............................................... 17 0 0 0 0 0 January 2036............................................... 0 0 0 0 0 0 WEIGHTED AVERAGE LIFE (TO CALL)(1)......................... 26.53 8.53 5.74 4.45 3.92 3.33 WEIGHTED AVERAGE LIFE (TO MATURITY)(1)(2).................. 26.65 9.12 6.25 4.83 4.22 3.57 ______________________ (1) The weighted average life of an offered certificate is determined by (i) multiplying the net reduction, if any, of the Certificate Principal Balance by the number of years from the date of issuance of the offered certificate to the related distribution date, (ii) adding the results, and (iii) dividing the sum by the aggregate of the net reductions of the Certificate Principal Balance described in (i) above. (2) The weighted average life to maturity assumes that the optional termination is not exercised. 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. S-97
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PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING PERCENTAGES OF HEP AND PPC CLASS M-7 CERTIFICATES ------------------------------------------------------------- PREPAYMENT ASSUMPTION FOR FIXED-RATE LOANS (HEP) 0% 11.50% 17.25% 23.00% 28.75% 34.50% ------------------------------------------------ ---- ------ ------ ------ ------ ------ PREPAYMENT ASSUMPTION FOR ADJUSTABLE-RATE LOANS (PPC) 0% 50% 75% 100% 125% 150% ----------------------------------------------------- ---- ------ ------ ------ ------ ------ DISTRIBUTION DATE ----------------- Initial Percentage......................................... 100% 100% 100% 100% 100% 100% January 2007............................................... 100 100 100 100 100 100 January 2008............................................... 100 100 100 100 100 100 January 2009............................................... 100 100 100 100 100 34 January 2010............................................... 100 100 71 48 31 18 January 2011............................................... 100 86 54 33 19 10 January 2012............................................... 100 71 41 22 12 0 January 2013............................................... 100 59 31 15 4 0 January 2014............................................... 100 49 24 11 0 0 January 2015............................................... 100 41 18 5 0 0 January 2016............................................... 100 34 14 0 0 0 January 2017............................................... 100 28 10 0 0 0 January 2018............................................... 100 23 7 0 0 0 January 2019............................................... 100 19 0 0 0 0 January 2020............................................... 100 16 0 0 0 0 January 2021............................................... 100 11 0 0 0 0 January 2022............................................... 100 9 0 0 0 0 January 2023............................................... 100 3 0 0 0 0 January 2024............................................... 100 0 0 0 0 0 January 2025............................................... 100 0 0 0 0 0 January 2026............................................... 100 0 0 0 0 0 January 2027............................................... 100 0 0 0 0 0 January 2028............................................... 100 0 0 0 0 0 January 2029............................................... 94 0 0 0 0 0 January 2030............................................... 84 0 0 0 0 0 January 2031............................................... 73 0 0 0 0 0 January 2032............................................... 61 0 0 0 0 0 January 2033............................................... 48 0 0 0 0 0 January 2034............................................... 33 0 0 0 0 0 January 2035............................................... 17 0 0 0 0 0 January 2036............................................... 0 0 0 0 0 0 WEIGHTED AVERAGE LIFE (TO CALL)(1)......................... 26.53 8.53 5.74 4.43 3.85 3.24 WEIGHTED AVERAGE LIFE (TO MATURITY)(1)(2).................. 26.64 9.05 6.20 4.78 4.12 3.46 ______________________ (1) The weighted average life of an offered certificate is determined by (i) multiplying the net reduction, if any, of the Certificate Principal Balance by the number of years from the date of issuance of the offered certificate to the related distribution date, (ii) adding the results, and (iii) dividing the sum by the aggregate of the net reductions of the Certificate Principal Balance described in (i) above. (2) The weighted average life to maturity assumes that the optional termination is not exercised. 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. S-98
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PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING PERCENTAGES OF HEP AND PPC CLASS M-8 CERTIFICATES ------------------------------------------------------------- PREPAYMENT ASSUMPTION FOR FIXED-RATE LOANS (HEP) 0% 11.50% 17.25% 23.00% 28.75% 34.50% ------------------------------------------------ ---- ------ ------ ------ ------ ------ PREPAYMENT ASSUMPTION FOR ADJUSTABLE-RATE LOANS (PPC) 0% 50% 75% 100% 125% 150% ----------------------------------------------------- ---- ------ ------ ------ ------ ------ DISTRIBUTION DATE ----------------- Initial Percentage......................................... 100% 100% 100% 100% 100% 100% January 2007............................................... 100 100 100 100 100 100 January 2008............................................... 100 100 100 100 100 100 January 2009............................................... 100 100 100 100 100 34 January 2010............................................... 100 100 71 48 31 18 January 2011............................................... 100 86 54 33 19 9 January 2012............................................... 100 71 41 22 12 0 January 2013............................................... 100 59 31 15 0 0 January 2014............................................... 100 49 24 11 0 0 January 2015............................................... 100 41 18 0 0 0 January 2016............................................... 100 34 14 0 0 0 January 2017............................................... 100 28 9 0 0 0 January 2018............................................... 100 23 0 0 0 0 January 2019............................................... 100 19 0 0 0 0 January 2020............................................... 100 16 0 0 0 0 January 2021............................................... 100 11 0 0 0 0 January 2022............................................... 100 3 0 0 0 0 January 2023............................................... 100 0 0 0 0 0 January 2024............................................... 100 0 0 0 0 0 January 2025............................................... 100 0 0 0 0 0 January 2026............................................... 100 0 0 0 0 0 January 2027............................................... 100 0 0 0 0 0 January 2028............................................... 100 0 0 0 0 0 January 2029............................................... 94 0 0 0 0 0 January 2030............................................... 84 0 0 0 0 0 January 2031............................................... 73 0 0 0 0 0 January 2032............................................... 61 0 0 0 0 0 January 2033............................................... 48 0 0 0 0 0 January 2034............................................... 33 0 0 0 0 0 January 2035............................................... 17 0 0 0 0 0 January 2036............................................... 0 0 0 0 0 0 WEIGHTED AVERAGE LIFE (TO CALL)(1)......................... 26.53 8.53 5.74 4.41 3.80 3.19 WEIGHTED AVERAGE LIFE (TO MATURITY)(1)(2).................. 26.63 8.96 6.13 4.70 4.03 3.37 ______________________ (1) The weighted average life of an offered certificate is determined by (i) multiplying the net reduction, if any, of the Certificate Principal Balance by the number of years from the date of issuance of the offered certificate to the related distribution date, (ii) adding the results, and (iii) dividing the sum by the aggregate of the net reductions of the Certificate Principal Balance described in (i) above. (2) The weighted average life to maturity assumes that the optional termination is not exercised. 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. S-99
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PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING PERCENTAGES OF HEP AND PPC CLASS M-9 CERTIFICATES ------------------------------------------------------------- PREPAYMENT ASSUMPTION FOR FIXED-RATE LOANS (HEP) 0% 11.50% 17.25% 23.00% 28.75% 34.50% ------------------------------------------------ ---- ------ ------ ------ ------ ------ PREPAYMENT ASSUMPTION FOR ADJUSTABLE-RATE LOANS (PPC) 0% 50% 75% 100% 125% 150% ----------------------------------------------------- ---- ------ ------ ------ ------ ------ DISTRIBUTION DATE ----------------- Initial Percentage......................................... 100% 100% 100% 100% 100% 100% January 2007............................................... 100 100 100 100 100 100 January 2008............................................... 100 100 100 100 100 100 January 2009............................................... 100 100 100 100 100 34 January 2010............................................... 100 100 71 48 31 18 January 2011............................................... 100 86 54 33 19 0 January 2012............................................... 100 71 41 22 4 0 January 2013............................................... 100 59 31 15 0 0 January 2014............................................... 100 49 24 * 0 0 January 2015............................................... 100 41 18 0 0 0 January 2016............................................... 100 34 12 0 0 0 January 2017............................................... 100 28 0 0 0 0 January 2018............................................... 100 23 0 0 0 0 January 2019............................................... 100 19 0 0 0 0 January 2020............................................... 100 16 0 0 0 0 January 2021............................................... 100 1 0 0 0 0 January 2022............................................... 100 0 0 0 0 0 January 2023............................................... 100 0 0 0 0 0 January 2024............................................... 100 0 0 0 0 0 January 2025............................................... 100 0 0 0 0 0 January 2026............................................... 100 0 0 0 0 0 January 2027............................................... 100 0 0 0 0 0 January 2028............................................... 100 0 0 0 0 0 January 2029............................................... 94 0 0 0 0 0 January 2030............................................... 84 0 0 0 0 0 January 2031............................................... 73 0 0 0 0 0 January 2032............................................... 61 0 0 0 0 0 January 2033............................................... 48 0 0 0 0 0 January 2034............................................... 33 0 0 0 0 0 January 2035............................................... 17 0 0 0 0 0 January 2036............................................... 0 0 0 0 0 0 WEIGHTED AVERAGE LIFE (TO CALL)(1)......................... 26.53 8.53 5.74 4.41 3.77 3.15 WEIGHTED AVERAGE LIFE (TO MATURITY)(1)(2).................. 26.61 8.86 6.02 4.62 3.93 3.27 ______________________ (1) The weighted average life of an offered certificate is determined by (i) multiplying the net reduction, if any, of the Certificate Principal Balance by the number of years from the date of issuance of the offered certificate to the related distribution date, (ii) adding the results, and (iii) dividing the sum by the aggregate of the net reductions of the Certificate Principal Balance described in (i) above. (2) The weighted average life to maturity assumes that the optional termination is not exercised. * Indicates a number that is greater than zero but less than 0.5% 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. S-100
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CLASS M-9 CERTIFICATES YIELD CONSIDERATIONS The yield to maturity on the Class M-9 Certificates will be extremely sensitive to losses on the mortgage loans (and the timing thereof) because the entire amount of such losses that are not covered by Excess Cash Flow or overcollateralization will be allocated first to the Class M-9 Certificates. The initial Certificate Principal Balance of the Class M-9 Certificates is equal to approximately 1.20% of the aggregate Stated Principal Balance of the mortgage loans as of the Cut-off Date. Defaults on mortgage loans may be measured relative to a default standard or model. The model used herein, the Constant Default Rate ("CDR"), represents an assumed rate of default each month relative to the then outstanding performing principal balance of a pool of mortgage loans. A default assumption of 1.00% CDR assumes a constant default rate of 1.00% per annum of the then outstanding principal balance of such mortgage loans. As used in the tables below, "0% CDR" assumes default rates equal to 0% of CDR (no defaults). Correspondingly, "1.00% CDR" assumes default rates equal to 1.00% of CDR, and so forth. CDR does not purport to be a historical description of default experience or a prediction of the anticipated rate of default of any pool of mortgage loans, including the mortgage loans. The following table indicates the sensitivity of the yield to maturity on the Class M-9 Certificates to various rates of the prepayment assumption described in this prospectus supplement and varying levels of aggregate Realized Losses by projecting the monthly aggregate cash flows on the Class M-9 Certificates and computing the corresponding pre-tax yield to maturity on a corporate bond equivalent basis. The table is based on (i) the assumption that the purchase price of the Class M-9 Certificates will be 97.25% of the Certificate Principal Balance of the Class M-9 Certificates, (ii) the assumption that the Class M-9 Certificates were purchased on January 20, 2006, (iii) defaults on the mortgage loans occur on the last day of each month at the respective CDR percentages set forth in the table beginning in the first collection period, (iv) each liquidation results in an immediate Realized Loss allocable to principal equal to the percentage indicated ("Loss Severity Percentage") times the principal balances of the mortgage loans assumed to be liquidated, (v) principal payments on the mortgage loans (other than those defaulted mortgage loans or mortgage loans assumed to be liquidated) will be timely received together with prepayments, if any, on the last day of the month and at the respective constant percentages of the related prepayment assumption set forth in the table below after giving effect to defaults in such periods, (vi) the master servicer will advance principal and interest on any defaulted mortgage loan, (vii) the assumption that no optional termination will occur and (viii) the assumption that the structuring assumptions described in the bullet points on pages S-82 and S-83 of this prospectus supplement are applicable (other than bullet point number 5 with respect to Realized Losses). Investors should also consider the possibility that aggregate losses incurred may not in fact be materially reduced by higher prepayment speeds because mortgage loans that would otherwise ultimately default and be liquidated may be less likely to be prepaid. Any differences between such assumptions and the actual characteristics and performance of the mortgage loans and the certificates, may result in yields different from those shown in such table. Discrepancies between assumed and actual characteristics and performance underscore the hypothetical nature S-101
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of the table, which is provided only to give a general sense of the sensitivity of yields in varying Realized Loss and prepayment scenarios. SENSITIVITY OF PRE-TAX YIELD TO MATURITY OF THE CLASS M-9 CERTIFICATES TO PREPAYMENTS AND REALIZED LOSSES PERCENTAGE OF THE PREPAYMENT ASSUMPTION PREPAYMENT ASSUMPTION FOR FIXED-RATE LOANS (HEP) 0% 11.50% 17.25% 23.00% 28.75% 34.50% ---------------------------------------- ---- ------ ------ ------ ------ ------ PREPAYMENT ASSUMPTION FOR ADJUSTABLE-RATE LOANS (PPC) 0% 50% 75% 100% 125% 150% ---------------------------------------- ---- ------ ------ ------ ------ ------ PERCENTAGE OF LOSS SEVERITY CDR PERCENTAGE 5% 40% 7.11% 7.45% 7.52% 7.63% 7.73% 7.80% 6% 40% 7.12% 7.37% 7.48% 7.58% 7.65% 7.74% 7% 40% 7.14% 7.38% 7.46% 7.51% 7.61% 7.77% 8% 40% 7.16% 7.39% 7.49% 7.53% 7.66% 7.80% 9% 40% 7.18% 7.44% 7.54% 7.64% 7.70% 7.83% The 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 Class M-9 Certificates, would cause the discounted present value of such assumed stream of cash flows to equal the assumed purchase price referred to above, and converting such rate to a corporate bond equivalent yield. 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 Class M-9 Certificates, and thus do not reflect the return on any investment in the Class M-9 Certificates when any reinvestment rates other than the discount rates are considered. Notwithstanding the assumed percentages of CDR, loss severity percentages and prepayment rates reflected in the preceding table, it is highly unlikely that the mortgage loans will be prepaid or that Realized Losses will be incurred according to one particular pattern. For this reason, and because the timing of cash flows is critical to determining yields, the pre-tax yield to maturity on the Class M-9 Certificates is likely to differ from those shown in the table set forth above. There can be no assurance that the mortgage loans will prepay at any particular rate or that Realized Losses will be incurred at any particular level or that the yield on the Class M-9 Certificates will conform to the yields described herein. Moreover, the various remaining terms to maturity of the mortgage loans could produce slower or faster principal distributions than indicated in the preceding table at the various constant percentages of the prepayment assumption specified, even if the weighted average remaining term to maturity and weighted average mortgage rate of the mortgage loans are as assumed. S-102
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Investors are urged to make their investment decisions based on their determinations as to anticipated rates of prepayment and Realized Losses under a variety of scenarios. Investors in the Class M-9 Certificates should fully consider the risk that Realized Losses on the mortgage loans could result in the failure of such investors to fully recover their investments. For additional considerations relating to the yield on the Certificates, see "Yield and Prepayment Considerations" in this prospectus supplement and "Yield Considerations" and "Maturity and Prepayment Considerations" in the accompanying prospectus. S-103
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POOLING AND SERVICING AGREEMENT GENERAL The certificates will be issued pursuant to the pooling and servicing agreement dated as of January 1, 2006, among the depositor, the master servicer and the trustee. Reference is made to the prospectus for important information in addition to that set forth in this prospectus supplement regarding the terms and conditions of the pooling and servicing agreement and the offered certificates. The trustee, or any of its affiliates, in its individual or any other capacity, may become the owner or pledgee of certificates with the same rights as it would have if it were not trustee. The offered certificates will be transferable and exchangeable at the corporate trust office of the trustee. The depositor will provide a prospective or actual certificateholder, without charge, on written request, a copy, without exhibits, of the pooling and servicing agreement. Requests should be addressed to the President, Residential Asset Securities Corporation, 8400 Normandale Lake Boulevard, Suite 250, Minneapolis, Minnesota 55437. In addition to the circumstances described in the prospectus, the depositor may terminate the trustee for cause under some circumstances. See "The Pooling and Servicing Agreement--The Trustee" in the prospectus. CUSTODIAL ARRANGEMENTS The trustee will be directed to appoint Wells Fargo Bank, N.A., to serve as custodian of the mortgage loans. The custodian is not an affiliate of the depositor, the master servicer or the sponsor. No servicer will have custodial responsibility for the mortgage loans. The custodian will maintain mortgage loan files that contain originals of the notes, mortgages, assignments and allonges in vaults located at the sponsor's premises in Minnesota. Only the custodian has access to these vaults. A shelving and filing system segregates the files relating to the mortgage loans from other assets serviced by the master servicer. THE MASTER SERVICER AND SUBSERVICER Residential Funding Corporation, an indirect wholly-owned subsidiary of GMAC Mortgage Group, Inc. and an affiliate of the depositor, will act as master servicer for the certificates under the pooling and servicing agreement. For a general description of Residential Funding Corporation and its activities, see "Residential Funding Corporation" in the prospectus. MASTER SERVICER. The master servicer, an affiliate of the depositor, will be responsible for master servicing the mortgage loans. Master servicing responsibilities include: o receiving funds from subservicers; o reconciling servicing activity with respect to the mortgage loans; o calculating remittance amounts to certificateholders; o sending remittances to the trustee for distributions to certificateholders; o investor and tax reporting; o coordinating loan repurchases; o oversight of all servicing activity, including subservicers; S-104
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o following up with subservicers with respect to mortgage loans that are delinquent or for which servicing decisions may need to be made; o approval of loss mitigation strategies; o management and liquidation of mortgaged properties acquired by foreclosure or deed in lieu of foreclosure; and o providing certain notices and other responsibilities as detailed in the pooling and servicing agreement. The master servicer may, from time to time, outsource certain of its servicing functions, such as foreclosure management, although any such outsourcing will not relieve the master servicer of any of its responsibilities or liabilities under the pooling and servicing agreement. For a general description of the master servicer and its activities, see "Sponsor and Master Servicer" in this prospectus supplement. For a general description of material terms relating to the master servicer's removal or replacement, see "The Pooling and Servicing Agreement"--Rights Upon Event of Default" in the prospectus. SUBSERVICER. Mortgage Lenders Network USA, Inc. will subservice all of the mortgage loans pursuant to the terms of a subservicing agreement with the master servicer. The subservicer is generally responsible for the following duties: o communicating with borrowers; o sending monthly remittance statements to borrowers; o collecting payments from borrowers; o recommending a loss mitigation strategy for borrowers who have defaulted on their loans (i.e. repayment plan, modification, foreclosure, etc.); o accurate and timely accounting, reporting and remittance of the principal and interest portions of monthly installment payments to the master servicer, together with any other sums paid by borrowers that are required to be remitted; o accurate and timely accounting and administration of escrow and impound accounts, if applicable; o accurate and timely reporting of negative amortization amounts, if any; o paying escrows for borrowers, if applicable; o calculating and reporting payoffs and liquidations; o maintaining an individual file for each loan; o maintaining primary mortgage insurance commitments or certificates if required; and o filing any primary mortgage insurance claims. For more information about the subservicer see "Description of the Mortgage Pool--Origination and Servicing" in this prospectus supplement. SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES The servicing fee consists of (a) servicing compensation payable to the master servicer for its master servicing activities, and (b) subservicing and other related compensation payable to the subservicer, including compensation paid to the master servicer as the direct servicer of a S-105
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mortgage loan for which there is no subservicer. The servicing fee rate in respect of each mortgage loan will be 0.5500% per annum of the outstanding principal balance of that mortgage loan. The primary compensation to be paid to the master servicer for its master servicing activities, which is included in the rate described in the preceding sentence, will be 0.0500% per annum of the outstanding principal balance of each mortgage loan. The master servicer is obligated to pay specified ongoing expenses associated with the trust and incurred by the master servicer in connection with its responsibilities under the pooling and servicing agreement. See "Description of the Certificates--Spread" and "--Withdrawals from the Custodial Account" in the prospectus for information regarding other possible compensation to the master servicer and the subservicer and for information regarding expenses payable by the master servicer. The following table sets forth the fees and expenses that are payable out of payments on the mortgage loans, prior to payments of interest and principal to the certificateholders: DESCRIPTION AMOUNT RECEIVING PARTY --------------------- ----------------------------------- ----------------- Master Servicer Fee 0.0500% per annum of the principal Master Servicer balance of each mortgage loan Subservicer Fee 0.5000% per annum of the principal Subservicer balance of each mortgage loan serviced by a subservicer In addition, the master servicer or the subservicer may recover from payments on the mortgage loans or withdraw from the Custodial Account the amount of any Advances and Servicing Advances previously made, interest and investment income, foreclosure profits, indemnification payments payable under the pooling and servicing agreement, and certain other servicing expenses, including foreclosure expenses. VOTING RIGHTS Some actions specified in the prospectus that may be taken by holders of certificates evidencing a specified percentage of all undivided interests in the trust may be taken by holders of certificates entitled in the aggregate to such percentage of the voting rights. 98% of all voting rights will be allocated among all holders of the Class A Certificates and Class M Certificates in proportion to their then outstanding Certificate Principal Balances, 1% of all voting rights will be allocated to the holders of the Class SB Certificates and 1% of all voting rights will be allocated to holders of the Class R Certificates. The percentage interest of an offered certificate is equal to the percentage obtained by dividing the initial Certificate Principal Balance of that certificate by the aggregate initial Certificate Principal Balance of all of the certificates of that class. TERMINATION The circumstances under which the obligations created by the pooling and servicing agreement will terminate in respect of the certificates are described in "The Pooling and Servicing Agreement--Termination; Retirement of Certificates" in the prospectus. The master servicer will have the option on any distribution date when the aggregate Stated Principal S-106
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Balance of the mortgage loans after giving effect to distributions to be made on that distribution date is less than 10% of the initial aggregate principal balance of the mortgage loans as of the cut-off date, (i) to purchase all remaining mortgage loans and other assets in the trust related thereto, thereby effecting early retirement of the certificates, or (ii) to purchase in whole, but not in part, the certificates. Any such purchase of the mortgage loans and other assets of the trust related thereto, shall be made at a price equal to the sum of (a) 100% of the unpaid principal balance of each mortgage loan or, if less than such unpaid principal balance, the fair market value of the related underlying mortgaged properties with respect to the mortgage loans, as to which title to such underlying mortgaged properties has been acquired, net of any unreimbursed Advance attributable to principal, as of the date of repurchase and (b) accrued interest thereon at the Net Mortgage Rate, to, but not including, the first day of the month in which the repurchase price is distributed. The optional termination price paid by the master servicer will also include certain amounts owed by Residential Funding Corporation, under the terms of the agreement pursuant to which Residential Funding Corporation will sell the mortgage loans to the depositor, that remain unpaid on the date of the optional termination. Distributions on the certificates in respect of any optional termination related to the mortgage loans will be paid, first, to the Class A Certificates on a pro rata basis, the outstanding Certificate Principal Balance thereof, plus Accrued Certificate Interest thereon for the related Interest Accrual Period and any previously unpaid Accrued Certificate Interest, second, to the Class M Certificates in their order of payment priority, the outstanding Certificate Principal Balance thereof, plus Accrued Certificate Interest thereon for the related Interest Accrual Period and any previously unpaid Accrued Certificate Interest, third, to the Class A Certificates and Class M Certificates, the amount of any Prepayment Interest Shortfalls allocated thereto for such distribution date or remaining unpaid from prior distribution dates and accrued interest thereon at the applicable Pass-Through Rate, on a pro rata basis based on Prepayment Interest Shortfalls allocated thereto for such distribution date or remaining unpaid from prior distribution dates and fourth, to the Class SB Certificates and Class R Certificates. The proceeds of any such distribution may not be sufficient to distribute the full amount to the certificates if the purchase price is based in part on the fair market value of any underlying mortgaged property and such fair market value is less than 100% of the unpaid principal balance of the related mortgage loan. Any such purchase of the certificates as discussed above will be made at a price equal to 100% of the Certificate Principal Balance of each class of certificates plus one month's interest accrued thereon at the applicable Pass-Through Rate, including any unpaid Prepayment Interest Shortfalls and accrued interest thereon, and any previously accrued and unpaid interest, but not including any current Relief Act Shortfalls or Basis Risk Shortfalls or reimbursement of the principal portion of any Realized Losses previously allocated thereto that remain unreimbursed. Promptly upon the purchase of the certificates, the master servicer, will retire the REMICs in accordance with the terms of the pooling and servicing agreement. Upon presentation and surrender of the certificates in connection with their purchase, the holders of the offered certificates will receive an amount equal to the Certificate Principal Balance of their class plus one month's interest at the related Pass-Through Rate accrued thereon plus any Prepayment Interest Shortfalls and previously accrued and unpaid interest, but not including any current S-107
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Relief Act Shortfalls or Basis Risk Shortfalls or reimbursement of the principal portion of any Realized Losses previously allocated thereto that remain unreimbursed. THE TRUSTEE U.S. Bank National Association, or U.S. Bank, will act as trustee, registrar and paying agent under the pooling and servicing agreement. U.S. Bank is a national banking association and a wholly-owned subsidiary of U.S. Bancorp, which is currently ranked as the sixth largest bank holding company in the United States with total assets exceeding $207 billion as of September 30, 2005. As of September 30, 2005, U.S. Bancorp served approximately 13.3 million customers, operated 2,396 branch offices in 24 states and had over 51,000 employees. A network of specialized U.S. Bancorp offices across the nation, inside and outside its 24-state footprint, provides a comprehensive line of banking, brokerage, insurance, investment, mortgage, trust and payment services products to consumers, businesses, governments and institutions. U.S. Bank's corporate trust business has offices in 31 U.S. cities. The pooling and servicing agreement will be administered from U.S. Bank's corporate trust office located at 60 Livingston Avenue, St. Paul, Minnesota 55107. U.S. Bank has provided corporate trust services since 1924. As of September 30, 2005, U.S. Bank was acting as trustee with respect to approximately 49,500 issuances of securities with an aggregate outstanding principal balance of over $1.58 trillion. This portfolio includes corporate and municipal bonds, mortgage-backed and asset-backed securities and collateralized debt obligations. On December 30, 2005, U.S. Bank purchased the corporate trust and structured finance trust services businesses of Wachovia Corporation. Following the closing of the transaction, the Wachovia affiliate named as fiduciary or agent, as applicable, under each client agreement will continue in that role until U.S. Bank succeeds to that role in accordance with the terms of the governing instrument or agreement and applicable law. As of December 31, 2005, U.S. Bank (and its affiliate U.S. Bank Trust National Association) was acting as trustee on approximately 258 issuances of sub-prime mortgage-backed securities with an outstanding aggregate principal balance of approximately $51,822,983,031.98. Unless an event of default has occurred and is continuing under the pooling and servicing agreement, the trustee will perform only such duties as are specifically set forth in the pooling and servicing agreement. If an event of default occurs and is continuing under the pooling and servicing agreement, the trustee is required to exercise such of the rights and powers vested in it by the pooling and servicing agreement, such as either acting as the master servicer or appointing a successor master servicer, and use the same degree of care and skill in their exercise as a prudent investor would exercise or use under the circumstances in the conduct of such investor's own affairs. Subject to certain qualifications and exceptions specified in the pooling and servicing agreement, the trustee will be liable for its own negligent action, its own negligent failure to act and its own willful misconduct for actions. S-108
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The trustee's duties and responsibilities under the pooling and servicing agreement include collecting funds from the master servicer to distribute to certificateholders at the direction of the master servicer, providing certificateholders and applicable rating agencies with monthly distribution statements and notices of the occurrence of a default under the pooling and servicing agreement, removing the master servicer as a result of any such default at the direction of the holders of certificates evidencing not less than 51% of the aggregate voting rights of the issuing entity, appointing a successor master servicer, and effecting any optional termination of the trust. The initial master servicer will pay to the trustee reasonable compensation for its services and reimburse the trustee for all reasonable expenses incurred or made by the trustee in accordance with any of the provisions of the pooling and servicing agreement, except any such expense as may arise from the trustee's negligence or bad faith. The master servicer has also agreed to indemnify the trustee for any losses and expenses incurred without negligence or willful misconduct on the trustee's part arising out of the acceptance and administration of the trust. The trustee may resign at any time, in which event the depositor will be obligated to appoint a successor trustee. The depositor may also remove the trustee if the trustee ceases to be eligible to continue as trustee under the pooling and servicing agreement or if the trustee becomes insolvent. Upon becoming aware of those circumstances, the depositor will be obligated to appoint a successor trustee. The trustee may also be removed at any time by the holders of 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. Any costs associated with removing and replacing a trustee will be paid by the master servicer. LEGAL PROCEEDINGS There are no material pending legal or other proceedings involving the mortgage loans or Residential Funding Corporation, as sponsor and master servicer, Residential Asset Securities Corporation as depositor, RASC Series 2006-EMX1 Trust as the issuing entity, Mortgage Lenders Network USA, Inc., as subservicer, or other parties described in Item 1117 of Regulation AB that, individually or in the aggregate, would have a material adverse impact on investors in these certificates. Residential Funding Corporation is currently party to various legal proceedings arising from time to time in the ordinary course of its business, some of which purport to be class actions. Based on information currently available, it is the opinion of Residential Funding Corporation that the eventual outcome of any currently pending legal proceeding, individually or in the aggregate, will not have a material adverse effect on their ability to perform their obligations in relation to the mortgage loans. No assurance, however, can be given that the final outcome of these legal proceedings, if unfavorable, either individually or in the aggregate, would not have a material adverse impact on Residential Funding Corporation. Any such unfavorable outcome could adversely affect the ability of Residential Funding Corporation to perform its S-109
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master servicing duties with respect to the mortgage loans and potentially lead to the replacement of Residential Funding Corporation with a successor master servicer. Mortgage Lenders Network USA, Inc. is currently involved in a legal proceeding with Wachovia Bank, National Association concerning fees for a prior warehouse lending facility. MATERIAL FEDERAL INCOME TAX CONSEQUENCES The following is a general discussion of anticipated material federal income tax consequences of the purchase, ownership and disposition of the certificates offered under this prospectus supplement. Upon issuance of the certificates, Orrick, Herrington & Sutcliffe LLP, 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, exclusive of the yield maintenance agreement, will qualify as two REMICs under the Internal Revenue Code, which shall be referred to in this prospectus supplement as REMIC I and REMIC II. For federal income tax purposes: o the Class R-I Certificates will constitute the sole class of "residual interests" in REMIC I; o the Class R-II Certificates will constitute the sole class of "residual interests" in REMIC II; and o each class of Class A Certificates, Class M Certificates and Class SB Certificates will represent ownership of "regular interests" in REMIC II and will generally be treated as debt instruments of REMIC II and, in addition, an ownership interest in the yield maintenance agreement (which is an interest rate cap agreement). See "Material Federal Income Tax Consequences--REMICs" in the prospectus. For federal income tax reporting purposes, the offered certificates may be treated as having been issued with original issue discount. The prepayment assumption that will be used in determining the rate of accrual of market discount and premium, if any, for federal income tax purposes will be based on the assumption that subsequent to the date of any determination the fixed-rate mortgage loans will prepay at a rate equal to 23% HEP and the adjustable-rate mortgage loans will prepay at a rate equal to 100% PPC. No representation is made that the mortgage loans will prepay at those rates or at any other rate. See "Material Federal Income Tax Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates--Original Issue Discount" in the prospectus. The holders of the offered certificates will be required to include in income interest on their certificates in accordance with the accrual method of accounting. S-110
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The IRS has issued the OID Regulations under sections 1271 to 1275 of the Code generally addressing the treatment of debt instruments issued with original issue discount. Purchasers of the offered certificates should be aware that Section 1272(a)(6) of the Code and the OID Regulations do not adequately address some issues relevant to, or applicable to, prepayable securities bearing an adjustable rate of interest such as the offered certificates. In the absence of other authority, the master servicer intends to be guided by certain principles of the OID Regulations applicable to adjustable rate debt instruments in determining whether such certificates should be treated as issued with original issue discount and in adapting the provisions of Section 1272(a)(6) of the Code to such certificates for the purpose of preparing reports furnished to certificateholders and the IRS. Because of the uncertainties concerning the application of Section 1272(a)(6) of the Code to such certificates and because the rules relating to debt instruments having an adjustable rate of interest are limited in their application in ways that could preclude their application to such certificates even in the absence of Section 1272(a)(6) of the Code, the IRS could assert that the offered certificates should be governed by some other method not yet set forth in regulations or should be treated as having been issued with original issue discount. Prospective purchasers of the offered certificates are advised to consult their tax advisors concerning the tax treatment of such certificates. Each holder of an offered certificate is deemed to own an undivided beneficial ownership interest in two assets, a REMIC regular interest and an interest in the yield maintenance agreement. The treatment of amounts received by an offered certificateholder under such certificateholder's right to receive payments under a yield maintenance agreement will depend on the portion, if any, of such offered certificateholder's purchase price allocable thereto. Under the REMIC regulations, each holder of an offered certificate must allocate its purchase price for that certificate between its undivided interest in the REMIC regular interest and its undivided interest in the right to receive payments under the yield maintenance agreement in accordance with the relative fair market values of each property right. The trustee intends to treat distributions made to the holders of the offered certificates with respect to the payments under the yield maintenance agreement as includible in income based on the tax regulations relating to notional principal contracts. The OID regulations provide that the trust's allocation of the issue price is binding on all holders unless the holder explicitly discloses on its tax return that its allocation is different from the trust's allocation. Under the REMIC regulations, the master servicer is required to account for the REMIC regular interest and the right to receive payments under the yield maintenance agreement as discrete property rights. It is possible that the right to receive payments under the yield maintenance agreement could be treated as a partnership among the holders of the offered certificates and Class SB Certificates, in which case holders of the offered certificates would be subject to potentially different timing of income and foreign holders of the offered certificates could be subject to withholding in respect of any payments under the yield maintenance agreement. Holders of the offered certificates are advised to consult their own tax advisors regarding the allocation of issue price, timing, character and source of income and deductions resulting from the ownership of their certificates. Treasury regulations have been promulgated under Section 1275 of the Internal Revenue Code generally providing for the integration of a "qualifying debt instrument" with a hedge if the combined cash flows of the components are substantially equivalent to the cash flows on a variable rate debt instrument. However, such regulations specifically disallow integration of debt instruments subject to Section 1272(a)(6) of the Internal Revenue Code. Therefore, holders of the offered certificates will be unable to use the integration method provided for under such regulations with respect to S-111
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such certificates. If the trustee's treatment of payments under the yield maintenance agreement is respected, ownership of the right to the payments under the yield maintenance agreement will nevertheless entitle the owner to amortize the separate price paid for the right to the payments under the yield maintenance agreement under the notional principal contract regulations. In the event that the right to receive the payments under the yield maintenance agreement is characterized as a "notional principal contract" for federal income tax purposes, upon the sale of an offered certificate, the amount of the sale allocated to the selling certificateholder's right to receive payments under the yield maintenance agreement would be considered a "termination payment" under the notional principal contract regulations allocable to the related certificate. An offered certificateholder would have gain or loss from such a termination of the right to receive distributions in respect of the payments under the yield maintenance agreement equal to (i) any termination payment it received or is deemed to have received minus (ii) the unamortized portion of any amount paid, or deemed paid, by the certificateholder upon entering into or acquiring its interest in the right to receive payments under the yield maintenance agreement. Gain or loss realized upon the termination of the right to receive payments under the yield maintenance agreement will generally be treated as capital gain or loss. Moreover, in the case of a bank or thrift institution, Internal Revenue Code Section 582(c) would likely not apply to treat such gain or loss as ordinary. This paragraph applies to the portion of each offered certificate exclusive of any rights in respect to payments under the yield maintenance agreement. That portion of the offered certificates will be treated as assets described in Section 7701(a)(19)(C) of the Internal Revenue Code and "real estate assets" under Section 856(c)(4)(A) of the Internal Revenue Code generally in the same proportion that the assets of the trust would be so treated. In addition, interest on the offered certificates, exclusive of any interest received from the yield maintenance agreement, will be treated as "interest on obligations secured by mortgages on real property" under Section 856(c)(3)(B) of the Internal Revenue Code generally to the extent that such offered certificates are treated as "real estate assets" under Section 856(c)(4)(A) of the Internal Revenue Code. Moreover, the specified portion of the offered certificates will be "qualified mortgages" within the meaning of Section 860G(a)(3) of the Internal Revenue Code. However, prospective investors in offered certificates that will be generally treated as assets described in Section 860G(a)(3) of the Internal Revenue Code should note that, notwithstanding such treatment, any repurchase of such a certificate pursuant to the right of the master servicer 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 "Pooling and Servicing Agreement--Termination" in this prospectus supplement and "Material Federal Income Tax Consequences--REMICs--Characterization of Investments in REMIC Certificates" in the prospectus. The holders of the offered certificates will be required to include in income interest on their certificates in accordance with the accrual method of accounting. As noted above, each holder of an offered certificate will be required to allocate a portion of the purchase price paid for its certificates to the right to receive payments in respect of the yield maintenance agreement. The value of the right to receive any such payments under the yield maintenance agreement is a question of fact which could be subject to differing interpretations. Because the rights to receive S-112
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payments under the yield maintenance agreement is treated as a separate right of the offered certificates not payable by any REMIC, such right will not be treated as a qualifying asset for any such certificateholder that is a mutual savings bank, domestic building and loan association, real estate investment trust, or real estate mortgage investment conduit and any amounts received in respect thereof will not be qualifying real estate income for real estate investment trusts. If penalties were asserted against purchasers of the offered certificates in respect of their treatment of the offered certificates for tax purposes, the summary of tax considerations contained, and the opinions stated, herein and in the prospectus may not meet the conditions necessary for purchasers' reliance on that summary and those opinions to exculpate them from the asserted penalties. For further information regarding federal income tax consequences of investing in the offered certificates, see "Material Federal Income Tax Consequences" in the prospectus. USE OF PROCEEDS The net proceeds from the sale of the offered certificates will be paid to the depositor. The depositor will use the proceeds to purchase the mortgage loans or for general corporate purposes. See "Method of Distribution" in this prospectus supplement. METHOD OF DISTRIBUTION Subject to the terms and conditions set forth in an underwriting agreement dated January 10, 2006, Residential Funding Securities Corporation and Citigroup Global Markets Inc. have severally each agreed to purchase, and the depositor has agreed to sell, 50% of each class of the offered certificates. It is expected that delivery of the offered certificates will be made only in book-entry form through the Same Day Funds Settlement System of DTC, Clearstream and Euroclear on or about January 20, 2006, against payment therefor in immediately available funds. The underwriting agreement provides that the obligation of the underwriters to pay for and accept delivery of the offered certificates is subject to, among other things, the receipt of legal opinions and to the conditions, among others, that no stop order suspending the effectiveness of the depositor's registration statement shall be in effect, and that no proceedings for such purpose shall be pending before or threatened by the Securities and Exchange Commission. The distribution of the offered certificates by the underwriters may be effected from time to time in one or more negotiated transactions, or otherwise, at varying prices to be determined at the time of sale. Proceeds to the depositor from the sale of the offered certificates, before deducting expenses payable by the depositor, will be approximately 99.72% of the aggregate Certificate Principal Balance of the offered certificates. The underwriters may effect these transactions by selling the offered certificates to or through dealers, and these dealers may receive compensation in the form of underwriting discounts, concessions or commissions from the underwriters for whom they act as agent. In connection with the sale of the offered certificates, the underwriters may be deemed to have received compensation from the depositor S-113
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in the form of underwriting compensation. The underwriters and any dealers that participate with the underwriters in the distribution of the offered certificates are also underwriters under the Securities Act of 1933. Under the Securities Act of 1933 any profit on the resale of the offered certificates positioned by an underwriter would be underwriting compensation in the form of underwriting discounts and commissions under the Securities Act of 1933, as amended. The underwriting agreement provides that the depositor will indemnify the underwriters, and that under limited circumstances the underwriters will indemnify the depositor, against some civil liabilities under the Securities Act of 1933, or contribute to payments required to be made in respect thereof. There can be no assurance that a secondary market for any class of offered certificates will develop or, if it does develop, that it will continue. The offered certificates will not be listed on any securities exchange. The 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 each class of 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 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. Residential Funding Securities Corporation is an affiliate of the master servicer and the depositor. Residential Funding Securities Corporation is also known as GMAC RFC Securities. LEGAL OPINIONS Legal matters concerning the offered certificates will be passed upon for the depositor and Residential Funding Securities Corporation by Orrick, Herrington & Sutcliffe LLP, New York, New York and for Citigroup Global Markets Inc. by Thacher Proffitt & Wood LLP, New York, New York. RATINGS It is a condition of the issuance of the offered certificates that they be rated as indicated on page S-6 of this prospectus supplement by Standard & Poor's and Moody's. The ratings do not address the possibility that certificateholders might suffer a lower than anticipated yield due to non-credit events. A securities rating addresses the likelihood of the receipt by the holders of the offered certificates of distributions on the mortgage loans. The rating takes into consideration the structural, legal and tax aspects associated with the offered certificates. The ratings on the offered certificates do not constitute statements regarding the possibility that the holders of the offered certificates might realize a lower than anticipated yield. In addition, the ratings do not address the likelihood of the receipt of any amounts in respect of Prepayment Interest Shortfalls, Relief Act Shortfalls or Basis Risk Shortfalls. A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or S-114
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withdrawal at any time by the assigning rating organization. Each security rating should be evaluated independently of any other security rating. In the event that the ratings initially assigned to the offered certificates are subsequently lowered for any reason, no person or entity is obligated to provide any additional support or credit enhancement with respect to the offered certificates. The depositor has not requested a rating on the offered certificates by any rating agency other than Standard & Poor's and Moody's. However, there can be no assurance as to whether any other rating agency will rate any class of offered certificates, or, if it does, what rating would be assigned by any such other rating agency. A rating on any class of offered certificates by another rating agency, if assigned at all, may be lower than the ratings assigned to that class of offered certificates by Standard & Poor's and Moody's. The fees paid by the depositor to the rating agencies at closing include a fee for ongoing surveillance by the rating agencies for so long as any certificates are outstanding. However, the rating agencies are under no obligation to the depositor to continue to monitor or provide a rating on the certificates. LEGAL INVESTMENT The offered certificates will NOT constitute "mortgage related securities" for purposes 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 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. One or more classes of the offered certificates may be viewed as "complex securities" under TB13a and TB73a, which applies to thrift institutions regulated by the OTS. See "Legal Investment Matters" in the prospectus. ERISA CONSIDERATIONS A fiduciary of any ERISA plan, any insurance company, whether through its general or separate accounts, or any other person investing ERISA plan assets of any ERISA plan, as defined under "ERISA Considerations--ERISA Plan Asset Regulations" in the prospectus, should carefully review with its legal advisors whether the purchase or holding of offered certificates could give rise to a transaction prohibited or not otherwise permissible under ERISA or Section 4975 of the Internal Revenue Code. The purchase or holding of the Class A Certificates, as well as the Class M Certificates, by or on behalf of, or with ERISA plan assets of, an ERISA plan may qualify for exemptive relief under the RFC exemption, as described under "ERISA Considerations--Prohibited Transaction Exemptions" in the prospectus provided those certificates are rated at least "BBB-" (or its equivalent) by Standard & Poor's, Moody's or Fitch S-115
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at the time of purchase. The RFC exemption contains a number of other conditions which must be met for the RFC exemption to apply, including the requirement that any ERISA plan must be an "accredited investor" as defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange Commission under the Securities Act. The depositor expects that the specific conditions of the RFC exemption should be satisfied with respect to the offered certificates so that the RFC exemption should provide an exemption from the application of the prohibited transaction provisions of Sections 406(a) and (b) of ERISA and Section 4975(c) of the Internal Revenue 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 RFC exemption are satisfied. The Department of Labor issued Prohibited Transaction Exemption, or PTE, 2002-41, 67 Fed. Reg. 54487 (August 22, 2002), which amended the RFC exemption and similar exemptions issued to other underwriters. This allows the trustee to be affiliated with an underwriter despite the restriction in PTE 2000-58 to the contrary. Each beneficial owner of Class M Certificates or any interest therein shall be deemed to have represented, by virtue of its acquisition or holding of that certificate or interest therein, that either (i) it is not an ERISA plan investor, (ii) it has acquired and is holding such Class M Certificates in reliance on the RFC exemption, and that it understands that there are certain conditions to the availability of the RFC exemption, including that the Class M Certificates must be rated, at the time of purchase, not lower than "BBB-" (or its equivalent) by Standard & Poor's, Moody's or Fitch or (iii) (1) it is an insurance company, (2) the source of funds used to acquire or hold the certificate or interest therein is an "insurance company general account," as such term is defined in Prohibited Transaction Class Exemption, or PTCE, 95-60, and (3) the conditions 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 conditions described in the preceding paragraph, the next preceding permitted beneficial owner will be treated as the beneficial owner of that 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 conditions described in the preceding paragraph shall indemnify and hold harmless the depositor, the trustee, the master servicer, any subservicer, the underwriters, and the trust from and against any and all liabilities, claims, costs or expenses incurred by those parties as a result of that acquisition or holding. Any fiduciary or other investor of ERISA plan assets that proposes to acquire or hold the offered certificates on behalf of or with ERISA plan assets of any ERISA plan should consult with its counsel with respect to: (i) whether the specific and general conditions and the other requirements in the RFC 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 Internal Revenue Code to the proposed investment. See "ERISA Considerations" in the prospectus. S-116
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The sale of any of the offered certificates to an ERISA plan is in no respect a representation by the depositor or the underwriters that such an investment meets all relevant legal requirements relating to investments by ERISA plans generally or any particular ERISA plan, or that such an investment is appropriate for ERISA plans generally or any particular ERISA plan. S-117
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ANNEX I GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES Except in certain limited circumstances, the globally offered Residential Asset Securities Corporation, Home Equity Mortgage Asset-Backed Pass-Through Certificates, Series 2006-EMX1, which are referred to as the global securities, will be available only in book-entry form. Investors in the global securities may hold interests in these global securities through any of DTC, Clearstream or Euroclear. Initial settlement and all secondary trades will settle in same-day funds. Secondary market trading between investors holding interests in global securities through Clearstream and Euroclear will be conducted in accordance with their normal rules and operating procedures and in accordance with conventional eurobond practice. Secondary market trading between investors holding interests in global securities through DTC will be conducted according to the rules and procedures applicable to U.S. corporate debt obligations. Secondary cross-market trading between investors holding interests in global securities through Clearstream or Euroclear and investors holding interests in global securities through DTC participants will be effected on a delivery against-payment basis through the respective depositories of Clearstream and Euroclear, in such capacity, and other DTC participants. Although DTC, Euroclear and Clearstream are expected to follow the procedures described below in order to facilitate transfers of interests in the global securities among participants of DTC, Euroclear and Clearstream, they are under no obligation to perform or continue to perform those procedures, and those procedures may be discontinued at any time. Neither the depositor, the master servicer nor the trustee will have any responsibility for the performance by DTC, Euroclear and Clearstream or their respective participants or indirect participants of their respective obligations under the rules and procedures governing their obligations. Non-U.S. holders of global securities will be subject to U.S. withholding taxes unless those holders meet certain requirements and deliver appropriate U.S. tax documents to the securities clearing organizations or their participants. INITIAL SETTLEMENT The global securities will be registered in the name of Cede & Co. as nominee of DTC. Investors' interests in the global securities will be represented through financial institutions acting on their behalf as direct and indirect participants in DTC. Clearstream and Euroclear will hold positions on behalf of their participants through their respective depositories, which in turn will hold such positions in accounts as DTC participants. Investors electing to hold interests in global securities through DTC participants, rather than through Clearstream or Euroclear accounts, will be subject to the settlement practices applicable to similar issues of pass-through certificates. Investors' securities custody accounts will be credited with their holdings against payment in same-day funds on the settlement date. I-1
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Investors electing to hold interests in global securities through Clearstream or Euroclear accounts will follow the settlement procedures applicable to conventional eurobonds, except that there will be no temporary global security and no "lock-up" or restricted period. Interests in global securities will be credited to the securities custody accounts on the settlement date against payment in same-day funds. SECONDARY MARKET TRADING Since the purchaser determines the place of delivery, it is important to establish at the time of the trade where both the purchaser's and seller's accounts are located to ensure that settlement can be made on the desired value date. TRANSFERS BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC participants will be settled using the DTC procedures applicable to similar issues of pass-through certificates in same-day funds. TRANSFERS BETWEEN CLEARSTREAM AND/OR EUROCLEAR PARTICIPANTS. Secondary market trading between Clearstream participants or Euroclear participants and/or investors holding interests in global securities through them will be settled using the procedures applicable to conventional eurobonds in same-day funds. TRANSFERS BETWEEN DTC SELLER AND CLEARSTREAM OR EUROCLEAR PURCHASER. When interests in global securities are to be transferred on behalf of a seller from the account of a DTC participant to the account of a Clearstream participant or a Euroclear participant for a purchaser, the purchaser will send instructions to Clearstream or Euroclear through a Clearstream participant or Euroclear participant at least one business day prior to settlement. Clearstream or the Euroclear operator will instruct its respective depository to receive an interest in the global securities against payment. Payment will include interest accrued on the global securities from and including the last distribution date to but excluding the settlement date. Payment will then be made by the respective depository to the DTC participant's account against delivery of an interest in the global securities. After this settlement has been completed, the interest will be credited to the respective clearing system, and by the clearing system, in accordance with its usual procedures, to the Clearstream participant's or Euroclear participant's account. The credit of this interest will appear on the next business day and the cash debit will be back-valued to, and the interest on the global securities will accrue from, the value date, which would be the preceding day when settlement occurred in New York. If settlement is not completed through DTC on the intended value date, i.e., the trade fails, the Clearstream or Euroclear cash debit will be valued instead as of the actual settlement date. Clearstream participants and Euroclear participants will need to make available to the respective clearing system the funds necessary to process same-day funds settlement. The most direct means of doing so is to pre-position funds for settlement from cash on hand, in which case the Clearstream participants or Euroclear participants will take on credit exposure to Clearstream or the Euroclear operator until interests in the global securities are credited to their accounts one day later. I-2
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As an alternative, if Clearstream or the Euroclear operator has extended a line of credit to them, Clearstream participants or Euroclear participants can elect not to pre-position funds and allow that credit line to be drawn upon. Under this procedure, Clearstream participants or Euroclear participants receiving interests in global securities for purchasers would incur overdraft charges for one day, to the extent they cleared the overdraft when interests in the global securities were credited to their accounts. However, interest on the global securities would accrue from the value date. Therefore, the investment income on the interest in the global securities earned during that one-day period would tend to offset the amount of these overdraft charges, although this result will depend on each Clearstream participant's or Euroclear participant's particular cost of funds. Since the settlement through DTC will take place during New York business hours, DTC participants are subject to DTC procedures for transferring interests in global securities to the respective depository of Clearstream or Euroclear for the benefit of Clearstream participants or Euroclear participants. The sale proceeds will be available to the DTC seller on the settlement date. Thus, to the seller settling the sale through a DTC participant, a cross-market transaction will settle no differently than a sale to a purchaser settling through a DTC participant. Finally, intra-day traders that use Clearstream participants or Euroclear participants to purchase interests in global securities from DTC participants or sellers settling through them for delivery to Clearstream participants or Euroclear participants should note that these trades will automatically fail on the sale side unless affirmative action is taken. At least three techniques should be available to eliminate this potential condition: o borrowing interests in global securities through Clearstream or Euroclear for one day, until the purchase side of the infra-day trade is reflected in the relevant Clearstream or Euroclear accounts, in accordance with the clearing system's customary procedures; o borrowing interests in global securities in the United States from a DTC participant no later than one day prior to settlement, which would give sufficient time for such interests to be reflected in the relevant Clearstream or Euroclear accounts in order to settle the sale side of the trade; or o staggering the value dates for the buy and sell sides of the trade so that the value date for the purchase from the DTC participant is at least one day prior to the value date for the sale to the Clearstream participant or Euroclear participant. TRANSFERS BETWEEN CLEARSTREAM OR EUROCLEAR SELLER AND DTC PURCHASER. Due to time zone differences in their favor, Clearstream participants and Euroclear participants may employ their customary procedures for transactions in which interests in global securities are to be transferred by the respective clearing system, through the respective depository, to a DTC participant. The seller will send instructions to Clearstream or the Euroclear operator through a Clearstream participant or Euroclear participant at least one business day prior to settlement. Clearstream or Euroclear will instruct its respective depository, to credit an interest in the global securities to the DTC participant's account against payment. Payment will include interest accrued on the global securities from and including the last distribution date to but excluding the settlement date. The payment will then be reflected in the account of the Clearstream participant I-3
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or Euroclear participant the following business day, and receipt of the cash proceeds in the Clearstream participant's or Euroclear participant's account would be back-valued to the value date, which would be the preceding day, when settlement occurred through DTC in New York. If settlement is not completed on the intended value date, i.e., the trade fails, receipt of the cash proceeds in the Clearstream participant's or Euroclear participant's account would instead be valued as of the actual settlement date. CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS A beneficial owner who is an individual or corporation holding the global security on its own behalf of global securities holding securities through Clearstream or Euroclear, or through DTC if the holder has an address outside the U.S., will be subject to the 30% U.S. withholding tax that typically applies to payments of interest, including original issue discount, on registered debt issued by U.S. persons, unless: o each clearing system, bank or other institution that holds customers' securities in the ordinary course of its trade or business in the chain of intermediaries between the beneficial owner or a foreign corporation or foreign trust and the U.S. entity required to withhold tax complies with applicable certification requirements; and o the beneficial owner takes one of the following steps to obtain an exemption or reduced tax rate: o Exemption for Non-U.S. Persons-Form W-8BEN. Beneficial holders of global securities that are Non-U.S. persons generally can obtain a complete exemption from the withholding tax by filing a signed Form W-8BEN, or Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding. If the information shown on Form W-8BEN changes, a new Form W-8BEN must be filed within 30 days of the change. o Exemption for Non-U.S. persons with effectively connected income--Form W-8ECI. A Non-U.S. person, including a non-U.S. corporation or bank with a U.S. branch, for which the interest income is effectively connected with its conduct of a trade or business in the United States, can obtain an exemption from the withholding tax by filing Form W-8ECI, or Certificate of Foreign Person's Claim for Exemption from Withholding on Income Effectively Connected with the Conduct of a Trade or Business in the United States. o Exemption or reduced rate for Non-U.S. persons resident in treaty countries--Form W 8BEN. Non-U.S. persons residing in a country that has a tax treaty with the United States can obtain an exemption or reduced tax rate, depending on the treaty terms, by filing Form W-8BEN. Form W-8BEN may be filed by Bond Holders or their agent. o Exemption for U.S. Persons--Form W-9. U.S. persons can obtain a complete exemption from the withholding tax by filing Form W-9, or Payer's Request for Taxpayer Identification Number and Certification. I-4
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U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The holder of a global security or, in the case of a Form W8BEN or Form W-8ECI filer, his agent, files by submitting the appropriate form to the person through whom it holds the security-the clearing agency, in the case of persons holding directly on the books of the clearing agency. Form W8BEN and Form W-8ECI generally are effective until the third succeeding calendar year from the date the form is signed. However, the W-8BEN and W-8ECI with a taxpayer identification number will remain effective until a change in circumstances makes any information on the form incorrect, provided that the withholding agent reports at least annually to the beneficial owner on Form 1042-S. The term "U.S. person" means: o a citizen or resident of the United States; o a corporation, partnership or other entity treated as a corporation or a partnership for United States federal income tax purposes, organized in or under the laws of the United States or any state thereof, including for this purpose the District of Columbia, unless, in the case of a partnership, future Treasury regulations provide otherwise; o an estate that is subject to U.S. federal income tax regardless of the source of its income; or o a trust if a court within the United States is able to exercise primary supervision of the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust. Certain trusts not described in the final bullet of the preceding sentence in existence on August 20, 1996 that elect to be treated as a United States Person will also be a U.S. person. The term "Non-U.S. person" means any person who is not a U.S. person. This summary does not deal with all aspects of U.S. federal income tax withholding that may be relevant to foreign holders of the global securities. Investors are advised to consult their own tax advisors for specific tax advice concerning their holding and disposing of the global securities. I-5
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ANNEX II MORTGAGE LOAN STATISTICAL INFORMATION CREDIT SCORE DISTRIBUTION OF THE MORTGAGE LOANS NUMBER OF PERCENTAGE OF AVERAGE WEIGHTED AVERAGE MORTGAGE PRINCIPAL MORTGAGE PRINCIPAL LOAN-TO-VALUE CREDIT SCORE RANGE LOANS BALANCE LOANS BALANCE RATIO -------------------------------------- --------- ------------ ------------- --------- ---------------- 500 - 519 ............................ 126 $ 19,061,709 4.33% $151,283 80.41% 520 - 539 ............................ 130 21,894,812 4.98 168,422 80.46 540 - 559 ............................ 111 16,807,392 3.82 151,418 80.75 560 - 579 ............................ 89 14,433,506 3.28 162,174 79.02 580 - 599 ............................ 231 37,737,230 8.58 163,365 83.19 600 - 619 ............................ 417 64,529,897 14.67 154,748 83.84 620 - 639 ............................ 519 77,833,560 17.69 149,968 84.35 640 - 659 ............................ 374 60,551,801 13.76 161,903 84.20 660 - 679 ............................ 279 48,732,512 11.08 174,669 85.15 680 - 699 ............................ 177 30,430,548 6.92 171,924 85.15 700 - 719 ............................ 125 20,115,331 4.57 160,923 86.03 720 - 739 ............................ 76 13,849,887 3.15 182,235 87.04 740 - 759 ............................ 37 6,404,017 1.46 173,082 87.06 760 or greater ....................... 55 7,618,591 1.73 138,520 85.39 --------- ------------ ------------- --------- ---------------- TOTAL ..................... 2,746 $440,000,794 100.00% $160,233 83.84% o With respect to the junior lien mortgage loans, this table was calculated using the combined loan-to-value ratio for such mortgage loans. o As of the cut-off date, the weighted average Credit Score of the mortgage loans will be approximately 630. ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES OF THE MORTGAGE LOANS WEIGHTED NUMBER OF PERCENTAGE OF AVERAGE WEIGHTED AVERAGE ORIGINAL MORTGAGE MORTGAGE PRINCIPAL MORTGAGE PRINCIPAL AVERAGE LOAN-TO- LOAN BALANCE ($) LOANS BALANCE LOANS BALANCE CREDIT SCORE VALUE RATIO -------------------------------------- --------- ------------ ------------- ---------- ------------ ----------- 100,000 or less ...................... 1,035 $ 58,405,196 13.27% $ 56,430 632 89.86% 100,001 to 200,000 ................... 928 134,823,755 30.64 145,284 618 82.44 200,001 to 300,000 ................... 446 109,190,450 24.82 244,822 629 82.53 300,001 to 400,000 ................... 210 72,854,442 16.56 346,926 637 82.75 400,001 to 500,000 ................... 68 29,950,333 6.81 440,446 650 84.02 500,001 to 600,000 ................... 42 23,040,050 5.24 548,573 636 85.84 600,001 to 700,000 ................... 11 6,990,452 1.59 635,496 674 84.98 700,001 to 800,000 ................... 5 3,746,116 0.85 749,223 640 85.28 900,001 to 1,000,000 ................. 1 1,000,000 0.23 1,000,000 647 79.00 --------- ------------ ------------- ---------- ------------ ----------- TOTAL ..................... 2,746 $440,000,794 100.00% $ 160,233 630 83.84% o With respect to the junior lien mortgage loans, this table was calculated using the combined loan-to-value ratio for such mortgage loans. o As of the cutoff date, the average unpaid principal balance of the mortgage loans will be approximately $160,233. II-1
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NET MORTGAGE RATES OF THE MORTGAGE LOANS WEIGHTED NUMBER OF PERCENTAGE OF AVERAGE WEIGHTED AVERAGE NET MORTGAGE RATES MORTGAGE PRINCIPAL MORTGAGE PRINCIPAL AVERAGE LOAN-TO- (%) LOANS BALANCE LOANS BALANCE CREDIT SCORE VALUE RATIO -------------------------------------- --------- ------------ ------------- ---------- ------------ ----------- 4.5000 - 4.9999 ...................... 4 $ 718,802 0.16% $ 179,700 639 76.20% 5.0000 - 5.4999 ...................... 47 12,854,764 2.92 273,506 670 79.52 5.5000 - 5.9999 ...................... 178 44,331,285 10.08 249,052 663 79.72 6.0000 - 6.4999 ...................... 491 109,039,045 24.78 222,075 647 80.56 6.5000 - 6.9999 ...................... 427 89,202,991 20.27 208,906 626 81.60 7.0000 - 7.4999 ...................... 378 68,735,104 15.62 181,839 612 83.31 7.5000 - 7.9999 ...................... 200 34,605,257 7.86 173,026 590 86.80 8.0000 - 8.4999 ...................... 206 28,002,701 6.36 135,935 587 88.44 8.5000 - 8.9999 ...................... 139 14,834,422 3.37 106,722 613 91.51 9.0000 - 9.4999 ...................... 139 9,216,183 2.09 66,303 665 94.63 9.5000 - 9.9999 ...................... 218 11,567,891 2.63 53,064 651 97.98 10.0000 - 10.4999 .................... 142 7,273,993 1.65 51,225 633 97.38 10.5000 - 10.9999 .................... 119 6,404,467 1.46 53,819 628 98.09 11.0000 - 11.4999 .................... 46 2,544,591 0.58 55,317 627 97.26 11.5000 - 11.9999 .................... 7 369,774 0.08 52,825 627 98.83 12.0000 - 12.4999 .................... 2 131,447 0.03 65,724 591 77.61 12.5000 - 12.9999 .................... 3 168,075 0.04 56,025 589 94.19 --------- ------------ ------------- ---------- ------------ ----------- TOTAL ..................... 2,746 $440,000,794 100.00% $ 160,233 630 83.84% o With respect to the junior lien mortgage loans, this table was calculated using the combined loan-to-value ratio for such mortgage loans. o As of the cut-off date, the weighted average Net Mortgage Rate of the mortgage loans will be approximately 7.0633% per annum. II-2
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MORTGAGE RATES OF THE MORTGAGE LOANS WEIGHTED NUMBER OF PERCENTAGE OF AVERAGE WEIGHTED AVERAGE MORTGAGE PRINCIPAL MORTGAGE PRINCIPAL AVERAGE LOAN-TO- MORTGAGE RATES (%) LOANS BALANCE LOANS BALANCE CREDIT SCORE VALUE RATIO -------------------------------------- --------- ------------ ------------- ---------- ------------ ----------- 5.0000 - 5.4999 ...................... 2 $ 362,360 0.08% $ 181,180 644 80.00% 5.5000 - 5.9999 ...................... 43 11,732,091 2.67 272,839 669 79.38 6.0000 - 6.4999 ...................... 154 39,316,444 8.94 255,302 663 79.75 6.5000 - 6.9999 ...................... 482 108,860,452 24.74 225,852 648 80.43 7.0000 - 7.4999 ...................... 434 90,042,273 20.46 207,471 630 81.65 7.5000 - 7.9999 ...................... 395 72,077,371 16.38 182,474 611 83.18 8.0000 - 8.4999 ...................... 191 32,795,501 7.45 171,704 591 86.15 8.5000 - 8.9999 ...................... 216 30,936,986 7.03 143,227 589 88.47 9.0000 - 9.4999 ...................... 139 15,243,471 3.46 109,665 612 91.13 9.5000 - 9.9999 ...................... 142 9,588,460 2.18 67,524 660 94.12 10.0000 - 10.4999 .................... 197 10,692,758 2.43 54,278 651 98.11 10.5000 - 10.9999 .................... 154 7,786,985 1.77 50,565 635 97.24 11.0000 - 11.4999 .................... 120 6,356,326 1.44 52,969 629 97.90 11.5000 - 11.9999 .................... 62 3,397,114 0.77 54,792 629 98.79 12.0000 - 12.4999 .................... 10 512,681 0.12 51,268 625 93.54 12.5000 - 12.9999 .................... 1 91,953 0.02 91,953 571 68.00 13.0000 - 13.4999 .................... 4 207,569 0.05 51,892 599 95.29 --------- ------------ ------------- ---------- ------------ ----------- TOTAL ..................... 2,746 $440,000,794 100.00% $ 160,233 630 83.84% o With respect to the junior lien mortgage loans, this table was calculated using the combined loan-to-value ratio for such mortgage loans. o As of the cut-off date, the weighted average mortgage rate of the mortgage loans will be approximately 7.6133% per annum. ORIGINAL LOAN-TO-VALUE RATIOS OF THE MORTGAGE LOANS NUMBER OF PERCENTAGE OF AVERAGE WEIGHTED ORIGINAL LOAN-TO-VALUE MORTGAGE PRINCIPAL MORTGAGE PRINCIPAL AVERAGE RATIO (%) LOANS BALANCE LOANS BALANCE CREDIT SCORE -------------------------------------- --------- ------------ ------------- ---------- ------------ 00.01 - 50.00 ........................ 49 $ 5,364,537 1.22% $ 109,480 592 50.01 - 55.00 ........................ 21 2,338,457 0.53 111,355 565 55.01 - 60.00 ........................ 29 4,651,003 1.06 160,379 593 60.01 - 65.00 ........................ 45 6,622,865 1.51 147,175 576 65.01 - 70.00 ........................ 76 12,621,275 2.87 166,069 595 70.01 - 75.00 ........................ 78 14,012,086 3.18 179,642 595 75.01 - 80.00 ........................ 988 201,350,691 45.76 203,796 642 80.01 - 85.00 ........................ 164 34,009,821 7.73 207,377 610 85.01 - 90.00 ........................ 390 79,774,764 18.13 204,551 611 90.01 - 95.00 ........................ 109 18,461,300 4.20 169,370 644 95.01 - 100.00 ....................... 797 60,793,995 13.82 76,279 652 --------- ------------ ------------- ---------- ------------ TOTAL ..................... 2,746 $440,000,794 100.00% $ 160,233 630 o With respect to the junior lien mortgage loans, this table was calculated using the combined loan-to-value ratio for such mortgage loans. o The weighted average loan-to-value ratio at origination of the mortgage loans will be approximately 83.84%. II-3
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PRODUCT TYPE OF THE MORTGAGE LOANS WEIGHTED NUMBER OF PERCENTAGE OF AVERAGE WEIGHTED AVERAGE MORTGAGE PRINCIPAL MORTGAGE PRINCIPAL AVERAGE LOAN-TO- PRODUCT TYPE LOANS BALANCE LOANS BALANCE CREDIT SCORE VALUE RATIO -------------------------------------- --------- ------------ ------------- ---------- ------------ ----------- Fixed Rate Loans (30/15 Balloon) ...................... 686 $ 36,623,565 8.32% $ 53,387 653 98.24% Fixed Rate Loans (40/30 Balloon) ...................... 30 7,789,264 1.77 259,642 638 80.85 Fixed Rate Loans ..................... 380 51,270,744 11.65 134,923 627 81.79 2 Year Hybrid ........................ 959 178,014,185 40.46 185,625 613 82.72 2 Year Hybrid (Interest Only) ...................... 455 121,279,666 27.56 266,549 649 82.49 3 Year Hybrid ........................ 184 32,120,338 7.30 174,567 620 82.62 3 Year Hybrid (Interest Only) ...................... 52 12,903,032 2.93 248,135 645 84.12 --------- ------------ ------------- ---------- ------------ ----------- TOTAL ..................... 2,746 $440,000,794 100.00% $ 160,233 630 83.84% o With respect to the junior lien mortgage loans, this table was calculated using the combined loan-to-value ratio for such mortgage loans. II-4
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GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES OF THE MORTGAGE LOANS WEIGHTED NUMBER OF PERCENTAGE OF AVERAGE WEIGHTED AVERAGE MORTGAGE PRINCIPAL MORTGAGE PRINCIPAL AVERAGE LOAN-TO- STATE LOANS BALANCE LOANS BALANCE CREDIT SCORE VALUE RATIO -------------------------------------- --------- ------------ ------------- ---------- ------------ ----------- Alabama .............................. 62 $ 6,595,269 1.50% $ 106,375 602 84.91% Arkansas ............................. 24 1,887,334 0.43 78,639 594 82.93 Arizona .............................. 112 18,263,953 4.15 163,071 630 84.03 California ........................... 112 29,562,317 6.72 263,949 641 83.33 Colorado ............................. 55 6,903,955 1.57 125,526 638 85.05 Connecticut .......................... 147 20,994,381 4.77 142,819 637 81.57 District of Columbia ................. 4 752,420 0.17 188,105 607 73.88 Delaware ............................. 14 2,264,845 0.51 161,775 585 85.92 Florida .............................. 343 54,225,350 12.32 158,091 635 83.00 Georgia .............................. 162 18,770,380 4.27 115,867 630 86.04 Iowa ................................. 4 289,994 0.07 72,499 603 92.74 Idaho ................................ 1 85,774 0.02 85,774 677 80.00 Illinois ............................. 116 18,696,112 4.25 161,173 617 84.31 Indiana .............................. 31 3,310,761 0.75 106,799 596 87.15 Kansas ............................... 9 828,579 0.19 92,064 624 87.25 Kentucky ............................. 33 2,910,027 0.66 88,183 618 85.41 Louisiana ............................ 29 3,256,457 0.74 112,292 605 89.37 Massachusetts ........................ 191 41,797,191 9.50 218,833 641 84.09 Maryland ............................. 169 32,706,936 7.43 193,532 631 82.36 Maine ................................ 10 785,593 0.18 78,559 637 85.13 Michigan ............................. 44 5,038,119 1.15 114,503 617 87.36 Minnesota ............................ 35 4,887,331 1.11 139,638 633 86.77 Missouri ............................. 19 2,470,836 0.56 130,044 642 89.41 Mississippi .......................... 12 1,170,650 0.27 97,554 618 82.92 Montana .............................. 4 334,396 0.08 83,599 623 87.31 North Carolina ....................... 91 10,758,390 2.45 118,224 615 84.64 Nebraska ............................. 4 496,420 0.11 124,105 615 89.51 New Hampshire ........................ 35 5,266,359 1.20 150,467 621 82.94 New Jersey ........................... 135 28,872,456 6.56 213,870 637 84.11 New Mexico ........................... 11 1,136,421 0.26 103,311 651 85.26 Nevada ............................... 36 6,376,933 1.45 177,137 653 82.61 New York ............................. 95 20,608,588 4.68 216,933 640 83.11 Ohio ................................. 59 7,081,330 1.61 120,023 602 86.09 Oklahoma ............................. 47 3,929,511 0.89 83,607 638 86.40 Oregon ............................... 3 280,732 0.06 93,577 560 88.04 Pennsylvania ......................... 127 18,410,157 4.18 144,962 605 84.21 Rhode Island ......................... 47 8,773,041 1.99 186,660 645 82.36 South Carolina ....................... 34 4,481,795 1.02 131,818 594 85.33 South Dakota ......................... 3 229,743 0.05 76,581 613 82.61 Tennessee ............................ 27 3,384,618 0.77 125,356 617 82.23 Texas ................................ 23 2,526,210 0.57 109,835 666 87.95 Utah ................................. 5 661,489 0.15 132,298 645 84.15 Virginia ............................. 147 27,063,729 6.15 184,107 628 82.58 Vermont .............................. 6 1,399,275 0.32 233,212 573 77.88 Washington ........................... 32 4,447,222 1.01 138,976 642 85.97 Wisconsin ............................ 32 4,341,891 0.99 135,684 626 85.88 West Virginia ........................ 5 685,523 0.16 137,105 589 76.62 --------- ------------ ------------- ---------- ------------ ----------- TOTAL ..................... 2,746 $440,000,794 100.00% $ 160,233 630 83.84% o With respect to the junior lien mortgage loans, this table was calculated using the combined loan-to-value ratio for such mortgage loans. o No more than 0.5% of the mortgage loans will be secured by mortgaged properties located in any one zip code area in Virginia and no more than 0.4% of the mortgage loans will be secured by mortgaged properties located in any one zip code area outside Virginia. II-5
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MORTGAGE LOAN PURPOSE OF THE MORTGAGE LOANS WEIGHTED NUMBER OF PERCENTAGE OF AVERAGE WEIGHTED AVERAGE MORTGAGE PRINCIPAL MORTGAGE PRINCIPAL AVERAGE LOAN-TO- LOAN PURPOSE LOANS BALANCE LOANS BALANCE CREDIT SCORE VALUE RATIO -------------------------------------- --------- ------------ ------------- ---------- ------------ ----------- Purchase ............................. 1,014 $182,078,743 41.38% $ 179,565 651 83.47% Rate/Term Refinance .................. 23 4,478,298 1.02 194,709 622 82.73 Equity Refinance ..................... 1,709 253,443,753 57.60 148,299 615 84.13 --------- ------------ ------------- ---------- ------------ ----------- TOTAL ..................... 2,746 $440,000,794 100.00% $ 160,233 630 83.84% o With respect to the junior lien mortgage loans, this table was calculated using the combined loan-to-value ratio for such mortgage loans. MORTGAGE LOAN DOCUMENTATION TYPES OF THE MORTGAGE LOANS WEIGHTED NUMBER OF PERCENTAGE OF AVERAGE WEIGHTED AVERAGE MORTGAGE PRINCIPAL MORTGAGE PRINCIPAL AVERAGE LOAN-TO- DOCUMENTATION TYPE LOANS BALANCE LOANS BALANCE CREDIT SCORE VALUE RATIO -------------------------------------- --------- ------------ ------------- ---------- ------------ ----------- Full Documentation ................... 1,782 $284,671,795 64.70% $ 159,748 616 83.79% Reduced Documentation ................ 964 155,328,999 35.30 161,130 655 83.93 --------- ------------ ------------- ---------- ------------ ----------- TOTAL ..................... 2,746 $440,000,794 100.00% $ 160,233 630 83.84% o With respect to the junior lien mortgage loans, this table was calculated using the combined loan-to-value ratio for such mortgage loans. o No more than 9.2% of such reduced loan documentation mortgage loans will be secured by mortgaged properties located in California. OCCUPANCY TYPES OF THE MORTGAGE LOANS WEIGHTED NUMBER OF PERCENTAGE OF AVERAGE WEIGHTED AVERAGE MORTGAGE PRINCIPAL MORTGAGE PRINCIPAL AVERAGE LOAN-TO- OCCUPANCY LOANS BALANCE LOANS BALANCE CREDIT SCORE VALUE RATIO -------------------------------------- --------- ------------ ------------- ---------- ------------ ----------- Primary Residence .................... 2,620 $420,058,240 95.47% $ 160,328 628 83.80% Second/Vacation ...................... 75 11,772,740 2.68 156,970 682 84.37 Non-Owner Occupied ................... 51 8,169,815 1.86 160,192 662 85.35 --------- ------------ ------------- ---------- ------------ ----------- TOTAL ..................... 2,746 $440,000,794 100.00% $ 160,233 630 83.84% o With respect to the junior lien mortgage loans, this table was calculated using the combined loan-to-value ratio for such mortgage loans. II-6
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MORTGAGED PROPERTY TYPES OF THE MORTGAGE LOANS WEIGHTED NUMBER OF PERCENTAGE OF AVERAGE WEIGHTED AVERAGE MORTGAGE PRINCIPAL MORTGAGE PRINCIPAL AVERAGE LOAN-TO- PROPERTY TYPE LOANS BALANCE LOANS BALANCE CREDIT SCORE VALUE RATIO -------------------------------------- --------- ------------ ------------- ---------- ------------ ----------- Single-family detached ............... 1,846 $281,472,171 63.97% $ 152,477 623 83.94% Planned Unit Developments (detached)* ...................... 384 74,030,915 16.83 192,789 635 83.63 Two-to-four family units ............. 158 32,710,719 7.43 207,030 656 83.53 Condo Low-Rise (less than 5 stories) ......................... 202 30,142,096 6.85 149,218 644 84.29 Planned Unit Developments (attached)* ...................... 111 15,515,109 3.53 139,776 645 83.40 Townhouse ............................ 34 3,820,641 0.87 112,372 624 81.48 Condo Mid-Rise (5 to 8 stories) ...... 8 1,416,278 0.32 177,035 663 85.45 Condo High-Rise (9 stories or more) ............................ 2 703,921 0.16 351,961 654 79.15 Leasehold ............................ 1 188,945 0.04 188,945 686 93.00 --------- ------------ ------------- ---------- ------------ ----------- TOTAL ..................... 2,746 $440,000,794 100.00% $ 160,233 630 83.84% o With respect to the junior lien mortgage loans, this table was calculated using the combined loan-to-value ratio for such mortgage loans. * A Planned Unit Development is a development that has all the following characteristics: (i) the individual unit owners own a parcel of land improved with a dwelling and this ownership is not in common with other unit owners; (ii) the development is administered by a homeowner's association that owns and is obligated to maintain property improvements within the development for the common use and benefit of the unit owners; and (iii) the unit owners have an automatic, non-severable interest in the homeowner's association and pay mandatory assessments. CREDIT GRADES OF THE MORTGAGE LOANS WEIGHTED NUMBER OF PERCENTAGE OF AVERAGE WEIGHTED AVERAGE MORTGAGE PRINCIPAL MORTGAGE PRINCIPAL AVERAGE LOAN-TO- CREDIT GRADE LOANS BALANCE LOANS BALANCE CREDIT SCORE VALUE RATIO -------------------------------------- --------- ------------ ------------- ---------- ------------ ----------- A4 ................................... 1,637 $265,263,730 60.29% $ 162,043 665 84.84% AX ................................... 780 121,861,405 27.70 156,233 580 82.68 AM ................................... 293 47,712,747 10.84 162,842 572 82.61 B .................................... 36 5,162,913 1.17 143,414 540 71.19 --------- ------------ ------------- ---------- ------------ ----------- TOTAL ..................... 2,746 $440,000,794 100.00% $ 160,233 630 83.84% o With respect to the junior lien mortgage loans, this table was calculated using the combined loan-to-value ratio for such mortgage loans. II-7
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PREPAYMENT PENALTY TERMS OF THE MORTGAGE LOANS WEIGHTED NUMBER OF PERCENTAGE OF AVERAGE WEIGHTED AVERAGE MORTGAGE PRINCIPAL MORTGAGE PRINCIPAL AVERAGE LOAN-TO- PREPAYMENT PENALTY TERM LOANS BALANCE LOANS BALANCE CREDIT SCORE VALUE RATIO -------------------------------------- --------- ------------ ------------- ---------- ------------ ----------- None ................................. 1,041 $165,473,984 37.61% $ 158,957 634 84.92% 12 Months ............................ 218 40,755,332 9.26 186,951 642 83.46 24 Months ............................ 1,062 178,849,722 40.65 168,408 625 83.17 36 Months ............................ 422 54,639,439 12.42 129,477 626 83.02 Other ................................ 3 282,317 0.06 94,106 621 93.53 --------- ------------ ------------- ---------- ------------ ----------- TOTAL ..................... 2,746 $440,000,794 100.00% $ 160,233 630 83.84% o With respect to the junior lien mortgage loans, this table was calculated using the combined loan-to-value ratio for such mortgage loans. o Other means not 0, 12, 24 or 36 months and not more than 36 months. INTEREST ONLY TERMS OF THE MORTGAGE LOANS WEIGHTED NUMBER OF PERCENTAGE OF AVERAGE WEIGHTED AVERAGE MORTGAGE PRINCIPAL MORTGAGE PRINCIPAL AVERAGE LOAN-TO- INTEREST ONLY TERM LOANS BALANCE LOANS BALANCE CREDIT SCORE VALUE RATIO -------------------------------------- --------- ------------ ------------- ---------- ------------ ----------- None ................................. 2,239 $305,818,096 69.50% $ 136,587 622 84.36% 60 Months ............................ 506 133,743,498 30.40 264,315 649 82.63 120 Months ........................... 1 439,200 0.10 439,200 663 90.00 --------- ------------ ------------- ---------- ------------ ----------- TOTAL ..................... 2,746 $440,000,794 100.00% $ 160,233 630 83.84% o With respect to the junior lien mortgage loans, this table was calculated using the combined loan-to-value ratio for such mortgage loans. II-8
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NOTE MARGINS OF THE MORTGAGE LOANS WEIGHTED NUMBER OF PERCENTAGE OF AVERAGE WEIGHTED AVERAGE MORTGAGE PRINCIPAL MORTGAGE PRINCIPAL AVERAGE LOAN-TO- NOTE MARGINS (%) LOANS BALANCE LOANS BALANCE CREDIT SCORE VALUE RATIO -------------------------------------- --------- ------------ ------------- ---------- ------------ ----------- N/A (Fixed) .......................... 1,096 $ 95,683,573 21.75% $ 87,303 638 88.01% 2.5000 - 2.9999 ...................... 1 83,442 0.02 83,442 696 80.00 3.0000 - 3.4999 ...................... 5 691,113 0.16 138,223 661 80.00 3.5000 - 3.9999 ...................... 32 8,758,423 1.99 273,701 668 78.73 4.0000 - 4.4999 ...................... 134 33,725,902 7.66 251,686 667 80.63 4.5000 - 4.9999 ...................... 367 83,910,155 19.07 228,638 650 80.66 5.0000 - 5.4999 ...................... 390 84,642,802 19.24 217,033 630 81.41 5.5000 - 5.9999 ...................... 339 65,847,356 14.97 194,240 612 83.30 6.0000 - 6.4999 ...................... 167 29,132,820 6.62 174,448 588 85.36 6.5000 - 6.9999 ...................... 135 23,542,644 5.35 174,390 585 89.27 7.0000 - 7.4999 ...................... 60 10,707,663 2.43 178,461 583 90.32 7.5000 - 7.9999 ...................... 16 2,621,041 0.60 163,815 602 90.69 8.0000 - 8.4999 ...................... 4 653,860 0.15 163,465 571 92.83 --------- ------------ ------------- ---------- ------------ ----------- TOTAL ..................... 2,746 $440,000,794 100.00% $ 160,233 630 83.84% o With respect to the junior lien mortgage loans, this table was calculated using the combined loan-to-value ratio for such mortgage loans. o As of the cut-off date, the weighted average note margin of the adjustable rate mortgage loans will be approximately 5.3318% per annum. MAXIMUM MORTGAGE RATES OF THE MORTGAGE LOANS WEIGHTED NUMBER OF PERCENTAGE OF AVERAGE WEIGHTED AVERAGE MAXIMUM MORTGAGE MORTGAGE PRINCIPAL MORTGAGE PRINCIPAL AVERAGE LOAN-TO- RATES (%) LOANS BALANCE LOANS BALANCE CREDIT SCORE VALUE RATIO -------------------------------------- --------- ------------ ------------- ---------- ------------ ----------- N/A (Fixed) .......................... 1,096 $ 95,683,573 21.75% $ 87,303 638 88.01% 11.0000 - 11.9999 .................... 44 11,977,888 2.72 272,225 668 79.54 12.0000 - 12.9999 .................... 571 132,702,882 30.16 232,404 652 80.62 13.0000 - 13.9999 .................... 680 137,603,110 31.27 202,358 620 82.38 14.0000 - 14.9999 .................... 292 50,867,824 11.56 174,205 584 87.79 15.0000 - 15.9999 .................... 61 10,899,979 2.48 178,688 590 91.20 16.0000 - 16.9999 .................... 2 265,539 0.06 132,769 547 87.17 --------- ------------ ------------- ---------- ------------ ----------- TOTAL ..................... 2,746 $440,000,794 100.00% $ 160,233 630 83.84% o With respect to the junior lien mortgage loans, this table was calculated using the combined loan-to-value ratio for such mortgage loans. o As of the cut-off date, the weighted average Maximum Mortgage Rate of the adjustable rate mortgage loans will be approximately 13.2879% per annum. II-9
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MINIMUM MORTGAGE RATES OF THE MORTGAGE LOANS WEIGHTED NUMBER OF PERCENTAGE OF AVERAGE WEIGHTED AVERAGE MINIMUM MORTGAGE MORTGAGE PRINCIPAL MORTGAGE PRINCIPAL AVERAGE LOAN-TO- RATES (%) LOANS BALANCE LOANS BALANCE CREDIT SCORE VALUE RATIO -------------------------------------- --------- ------------ ------------- ---------- ------------ ----------- N/A (Fixed) .......................... 1,096 $ 95,683,573 21.75% $ 87,303 638 88.01% 5.0000 - 5.9999 ...................... 45 12,238,745 2.78 271,972 667 79.87 6.0000 - 6.9999 ...................... 571 132,702,882 30.16 232,404 652 80.62 7.0000 - 7.9999 ...................... 680 137,467,666 31.24 202,158 620 82.35 8.0000 - 8.9999 ...................... 291 50,742,411 11.53 174,373 584 87.80 9.0000 - 9.9999 ...................... 61 10,899,979 2.48 178,688 590 91.20 10.0000 - 10.9999 .................... 2 265,539 0.06 132,769 547 87.17 --------- ------------ ------------- ---------- ------------ ----------- TOTAL ..................... 2,746 $440,000,794 100.00% $ 160,233 630 83.84% o With respect to the junior lien mortgage loans, this table was calculated using the combined loan-to-value ratio for such mortgage loans. o As of the cut-off date, the weighted average Minimum Mortgage Rate of the adjustable rate mortgage loans will be approximately 7.2861% per annum. NEXT INTEREST RATE ADJUSTMENT DATES OF THE MORTGAGE LOANS WEIGHTED NUMBER OF PERCENTAGE OF AVERAGE WEIGHTED AVERAGE NEXT INTEREST MORTGAGE PRINCIPAL MORTGAGE PRINCIPAL AVERAGE LOAN-TO- ADJUSTMENT DATE LOANS BALANCE LOANS BALANCE CREDIT SCORE VALUE RATIO -------------------------------------- --------- ------------ ------------- ---------- ------------ ----------- N/A (Fixed) .......................... 1,096 $ 95,683,573 21.75% $ 87,303 638 88.01% November 2006 ........................ 1 66,680 0.02 66,680 526 84.00 June 2007 ............................ 7 889,532 0.20 127,076 620 89.77 July 2007 ............................ 7 839,426 0.19 119,918 627 83.56 August 2007 .......................... 5 540,409 0.12 108,082 619 85.73 September 2007 ....................... 4 845,496 0.19 211,374 581 91.70 October 2007 ......................... 18 2,994,077 0.68 166,338 595 87.50 November 2007 ........................ 571 119,919,111 27.25 210,016 630 82.55 December 2007 ........................ 801 173,199,121 39.36 216,229 628 82.50 October 2008 ......................... 3 322,196 0.07 107,399 577 94.70 November 2008 ........................ 102 18,784,564 4.27 184,162 629 83.48 December 2008 ........................ 131 25,916,611 5.89 197,837 627 82.60 --------- ------------ ------------- ---------- ------------ ----------- TOTAL ..................... 2,746 $440,000,794 100.00% $ 160,233 630 83.84% o With respect to the junior lien mortgage loans, this table was calculated using the combined loan-to-value ratio for such mortgage loans. o As of the cut-off date, the weighted average months to the next interest rate adjustment date of the adjustable rate mortgage loans will be approximately 24 months. II-10
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DEBT-TO-INCOME RATIOS OF THE MORTGAGE LOANS WEIGHTED NUMBER OF PERCENTAGE OF AVERAGE WEIGHTED AVERAGE DEBT-TO-INCOME MORTGAGE PRINCIPAL MORTGAGE PRINCIPAL AVERAGE LOAN-TO- RATIO (%) LOANS BALANCE LOANS BALANCE CREDIT SCORE VALUE RATIO -------------------------------------- --------- ------------ ------------- ---------- ------------ ----------- 20.00 or less ........................ 161 $ 31,556,847 7.17% $ 196,005 639 82.10% 20.01 - 25.00 ........................ 120 16,146,412 3.67 134,553 623 82.30 25.01 - 30.00 ........................ 174 25,860,554 5.88 148,624 634 82.62 30.01 - 35.00 ........................ 279 42,293,593 9.61 151,590 630 82.99 35.01 - 40.00 ........................ 451 70,194,557 15.95 155,642 632 83.72 40.01 - 45.00 ........................ 698 110,340,336 25.08 158,081 637 84.04 45.01 - 50.00 ........................ 675 106,371,223 24.18 157,587 624 84.20 50.01 - 55.00 ........................ 188 37,237,272 8.46 198,071 616 86.43 --------- ------------ ------------- ---------- ------------ ----------- TOTAL ..................... 2,746 $440,000,794 100.00% $ 160,233 630 83.84% o With respect to the junior lien mortgage loans, this table was calculated using the combined loan-to-value ratio for such mortgage loans. o As of the cutoff date, the average debt-to-income ratio of the mortgage loans will be approximately 39.69%. II-11
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ANNEX III MORTGAGE LOAN CHARACTERISTICS EXPENSE ORIGINAL REMAINING REMAINING MONTHS TO MONTHS AGGREGATE FEE TERM TO TERM TO AMORTIZATION NEXT RATE BETWEEN GROSS LOAN PRINCIPAL MORTGAGE RATE MATURITY MATURITY TERM ADJUSTMENT RATE MARGIN NUMBER BALANCE ($) RATE (%) (%) (MONTHS) (MONTHS) (MONTHS) DATE ADJUSTMENT (%) --------- ------------- --------- -------- --------- --------- ------------ ---------- ---------- ------ 1 64,366,968.00 7.536 0.550 360 359 359 23 6 5.579 2 18,013,320.07 7.299 0.550 360 359 359 23 6 5.338 3 439,200.00 6.950 0.550 360 359 359 23 6 5.000 4 93,429,686.59 7.367 0.550 360 358 358 22 6 5.399 5 2,094,090.37 7.510 0.550 360 358 358 22 6 5.563 6 46,713,368.99 7.311 0.550 360 359 359 23 6 5.364 7 9,473,801.73 6.926 0.550 360 358 358 22 6 4.988 8 64,246,895.44 6.942 0.550 360 359 359 23 6 4.994 9 406,400.00 6.881 0.550 360 358 358 22 6 4.931 10 110,120.01 8.650 0.550 360 358 358 22 6 6.700 11 13,712,559.36 7.534 0.550 360 359 359 35 6 5.585 12 2,254,147.05 7.622 0.550 360 359 359 35 6 5.672 13 3,282,068.42 7.060 0.550 360 359 359 35 6 5.132 14 12,871,563.50 7.269 0.550 360 358 358 34 6 5.298 15 4,776,890.00 7.409 0.550 360 358 358 34 6 5.467 16 1,878,760.00 6.764 0.550 360 359 359 35 6 4.814 17 1,580,153.00 6.787 0.550 360 358 358 34 6 4.874 18 4,667,228.80 6.996 0.550 360 359 359 35 6 5.065 19 3,506,126.41 10.476 0.550 180 178 358 N/A N/A N/A 20 17,145,836.14 10.543 0.550 180 179 359 N/A N/A N/A 21 10,160,742.35 10.340 0.550 180 178 358 N/A N/A N/A 22 172,680.94 8.048 0.550 180 179 359 N/A N/A N/A 23 5,638,178.78 10.388 0.550 180 178 358 N/A N/A N/A 24 3,100,697.06 7.649 0.550 360 358 478 N/A N/A N/A 25 1,306,722.88 6.876 0.550 360 358 478 N/A N/A N/A 26 709,174.34 7.952 0.550 360 359 479 N/A N/A N/A 27 2,672,669.78 6.948 0.550 360 359 479 N/A N/A N/A 28 1,023,412.45 7.561 0.550 166 164 164 N/A N/A N/A 29 259,201.06 8.114 0.550 149 147 147 N/A N/A N/A 30 290,442.44 9.917 0.550 162 160 160 N/A N/A N/A 31 370,609.80 10.339 0.550 155 154 154 N/A N/A N/A 32 452,527.66 7.771 0.550 151 149 149 N/A N/A N/A 33 62,540.37 8.231 0.550 161 159 159 N/A N/A N/A 34 2,290,771.33 7.786 0.550 173 172 172 N/A N/A N/A 35 50,614.10 9.571 0.550 180 176 176 N/A N/A N/A 36 11,211,348.96 7.733 0.550 356 355 355 N/A N/A N/A 37 3,348,386.94 7.555 0.550 354 353 353 N/A N/A N/A 38 424,423.87 9.916 0.550 240 238 238 N/A N/A N/A 39 2,613,092.97 9.171 0.550 284 282 282 N/A N/A N/A 40 4,633,299.64 7.724 0.550 350 349 349 N/A N/A N/A 41 292,633.86 10.159 0.550 240 238 238 N/A N/A N/A 42 22,582,714.22 7.540 0.550 355 353 353 N/A N/A N/A 43 1,192,527.63 9.932 0.550 240 238 238 N/A N/A N/A 44 172,196.69 7.237 0.550 325 324 324 N/A N/A N/A INITIAL ORIGINAL PERIODIC PERIODIC INTEREST ORIGINAL RATE RATE MINIMUM MAXIMUM ONLY PREPAY LOAN CAP CAP MORTGAGE MORTGAGE TERM PENALTY NUMBER (%) (%) RATE (%) RATE (%) (MONTHS) TERM --------- -------- -------- -------- -------- -------- -------- 1 3.000 1.000 7.536 13.536 0 0 2 3.000 1.000 7.299 13.299 0 12 3 3.000 1.000 6.950 12.950 120 0 4 3.000 1.000 7.367 13.367 0 24 5 2.940 1.000 7.510 13.569 0 36 6 2.998 1.000 7.311 13.311 60 0 7 3.000 1.000 6.926 12.926 60 12 8 2.998 1.000 6.942 12.942 60 24 9 3.000 1.000 6.881 12.881 60 36 10 3.000 1.000 8.650 14.650 0 6 11 3.000 1.000 7.534 13.534 0 0 12 3.000 1.000 7.622 13.622 0 12 13 3.000 1.000 7.060 13.060 0 24 14 3.000 1.000 7.229 13.269 0 36 15 3.000 1.000 7.409 13.409 60 0 16 3.000 1.000 6.764 12.764 60 12 17 3.000 1.000 6.787 12.787 60 24 18 3.000 1.000 6.996 12.996 60 36 19 N/A N/A N/A N/A 0 12 20 N/A N/A N/A N/A 0 0 21 N/A N/A N/A N/A 0 24 22 N/A N/A N/A N/A 0 36 23 N/A N/A N/A N/A 0 36 24 N/A N/A N/A N/A 0 0 25 N/A N/A N/A N/A 0 12 26 N/A N/A N/A N/A 0 24 27 N/A N/A N/A N/A 0 36 28 N/A N/A N/A N/A 0 0 29 N/A N/A N/A N/A 0 12 30 N/A N/A N/A N/A 0 12 31 N/A N/A N/A N/A 0 0 32 N/A N/A N/A N/A 0 24 33 N/A N/A N/A N/A 0 24 34 N/A N/A N/A N/A 0 36 35 N/A N/A N/A N/A 0 36 36 N/A N/A N/A N/A 0 0 37 N/A N/A N/A N/A 0 12 38 N/A N/A N/A N/A 0 12 39 N/A N/A N/A N/A 0 0 40 N/A N/A N/A N/A 0 24 41 N/A N/A N/A N/A 0 24 42 N/A N/A N/A N/A 0 36 43 N/A N/A N/A N/A 0 36 44 N/A N/A N/A N/A 0 6 The hypothetical Loan Numbers 1 through 18 represent the adjustable-rate mortgage loans. The hypothetical Loan Numbers 19 through 44 represent the fixed-rate mortgage loans. III-1
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PROSPECTUS MORTGAGE ASSET-BACKED AND MANUFACTURED HOUSING CONTRACT PASS-THROUGH CERTIFICATES RESIDENTIAL ASSET SECURITIES CORPORATION Depositor RESIDENTIAL FUNDING CORPORATION Sponsor The depositor may periodically form separate trusts to issue certificates in series, secured by assets of that trust. 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 will not represent interests in or obligations of Residential Asset Securities Corporation, Residential Funding Corporation or any of their affiliates. Each series may include multiple classes of certificates with differing payment terms and priorities. Credit enhancement will be provided for all offered certificates. MORTGAGE COLLATERAL Each trust will consist primarily of: o mortgage loans or manufactured housing conditional sales contracts or installment loan agreements secured by first or junior liens on one- to four-family residential properties; o mortgage loans secured by first or junior liens on mixed-use properties; or o mortgage securities and whole or partial participations in mortgage loans. 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. January 18, 2006
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IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT We provide information to you about the certificates in two separate documents that provide progressively more detail: o this prospectus, which provides general information, some of which may not apply to your series of certificates; and o the accompanying prospectus supplement, which describes the specific terms of your series of certificates. You should rely only on the information provided in this prospectus and the accompanying prospectus supplement, including the information incorporated by reference. See "Additional Information," "Reports to Certificateholders" and "Incorporation of Certain Information by Reference" in the Prospectus. You can request information incorporated by reference from Residential Asset Securities Corporation by calling us at (952) 857-7000 or writing to us at 8400 Normandale Lake Boulevard, Suite 250, 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. Some capitalized terms used in this prospectus are defined in the Glossary attached to this prospectus.
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TABLE OF CONTENTS PAGE INTRODUCTION............................................................. 1 THE TRUSTS............................................................... 1 General............................................................. 1 The Mortgage Loans.................................................. 5 The Mortgaged Properties............................................ 12 Loan-to-Value Ratio................................................. 13 Underwriting Policies............................................... 14 The Contracts....................................................... 20 The Agency Securities............................................... 21 Mortgage Collateral Sellers......................................... 23 Qualifications of Sellers........................................... 23 Representations With Respect to Mortgage Collateral................. 23 Repurchases of Mortgage Collateral.................................. 25 Limited Right of Substitution....................................... 27 DESCRIPTION OF THE CERTIFICATES.......................................... 28 General............................................................. 28 Form of Certificates................................................ 31 Assignment of Mortgage Loans........................................ 34 Assignment of the Contracts......................................... 36 Review of Mortgage Loan or Contract Documents....................... 37 Assignment of Mortgage Securities................................... 37 Spread.............................................................. 37 Payments on Mortgage Collateral..................................... 38 Withdrawals From the Custodial Account.............................. 42 Distributions....................................................... 43 Example of Distributions............................................ 44 Advances............................................................ 46 Prepayment Interest Shortfalls...................................... 47 Funding Account..................................................... 48 Reports to Certificateholders....................................... 48 Servicing and Administration of Mortgage Collateral................. 50 Realization Upon Defaulted Mortgage Loans or Contracts.............. 53 DESCRIPTION OF CREDIT ENHANCEMENT........................................ 56 General............................................................. 56 Letters of Credit................................................... 58 Subordination....................................................... 58 Overcollateralization and Excess Cash Flow.......................... 60 Mortgage Pool Insurance Policies and Mortgage Insurance Policies.... 61 Special Hazard Insurance Policies................................... 63 Bankruptcy Bonds.................................................... 64 Reserve Funds....................................................... 64 Certificate Insurance Policies; Surety Bonds........................ 65 Maintenance of Credit Enhancement................................... 65 Reduction or Substitution of Credit Enhancement..................... 66 OTHER FINANCIAL OBLIGATIONS RELATED TO THE CERTIFICATES.................. 67 Swaps and Yield Supplement Agreements............................... 67 Purchase Obligations................................................ 67 INSURANCE POLICIES ON MORTGAGE LOANS OR CONTRACTS........................ 68 Primary Insurance Policies.......................................... 68 Standard Hazard Insurance on Mortgaged Properties................... 70 Standard Hazard Insurance on Manufactured Homes..................... 72 THE DEPOSITOR............................................................ 72 RESIDENTIAL FUNDING CORPORATION.......................................... 73 THE POOLING AND SERVICING AGREEMENT...................................... 73 Servicing Compensation and Payment of Expenses...................... 73 Evidence as to Compliance........................................... 74 Certain Other Matters Regarding Servicing........................... 75 Events of Default................................................... 75 Rights Upon Event of Default........................................ 76 Amendment........................................................... 77 Termination; Retirement of Certificates............................. 78 The Trustee......................................................... 80 YIELD CONSIDERATIONS..................................................... 80 MATURITY AND PREPAYMENT CONSIDERATIONS................................... 85 CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND CONTRACTS.................... 89 The Mortgage Loans.................................................. 90 The Contracts....................................................... 105 Environmental Legislation........................................... 109 Servicemembers Civil Relief Act..................................... 110 Default Interest and Limitations on Prepayments..................... 111 Forfeitures in Drug and RICO Proceedings............................ 111 MATERIAL FEDERAL INCOME TAX CONSEQUENCES................................. 112 General............................................................. 112 Opinions............................................................ 113 REMICs.............................................................. 114 STATE AND OTHER TAX CONSEQUENCES......................................... 135 ERISA CONSIDERATIONS..................................................... 135 ERISA Plan Asset Regulations........................................ 136 Prohibited Transaction Exemptions................................... 137 Insurance Company General Accounts.................................. 143 Representations From Investing ERISA Plans.......................... 143 Tax-Exempt Investors; REMIC Residual Certificates................... 144 Consultation With Counsel........................................... 144 LEGAL INVESTMENT MATTERS................................................. 145 USE OF PROCEEDS.......................................................... 147 METHODS OF DISTRIBUTION.................................................. 147 LEGAL MATTERS............................................................ 149 ADDITIONAL INFORMATION................................................... 149 INCORPORATION OF CERTAIN INFORMATION BY REFERENCE........................ 149 GLOSSARY................................................................. 151 -i-
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INTRODUCTION The pass-through certificates offered may be sold from time to time in series. Each series of certificates will represent in the aggregate the entire beneficial ownership interest, excluding any interest retained by the depositor or any other entity specified in the accompanying prospectus supplement, in a trust consisting primarily of a segregated pool of mortgage loans or manufactured housing conditional sales contracts and installment loan agreements, acquired by the depositor from one or more affiliated or unaffiliated institutions. Each series of certificates will be issued under a pooling and servicing agreement among the depositor, the trustee and master servicer or servicer as specified in the accompanying prospectus supplement, or a trust agreement between the depositor and trustee as specified in the accompanying prospectus supplement. THE TRUSTS GENERAL The mortgage loans, contracts and other assets described in this prospectus under "The Trusts--The Mortgage Loans" and "--The Contracts" and in the accompanying prospectus supplement will be held in a trust for the benefit of the holders of the related series of certificates and any uncertificated interest, if any, as described in this section and in the accompanying prospectus supplement. These assets will be evidenced by promissory notes, or mortgage notes, that are secured by the following: o mortgages; o deeds of trust; o manufactured housing conditional sales contracts and installment loan agreements; o other similar security instruments creating a first or junior lien on one- to four-family residential properties and Mixed-Use Properties; or o whole or partial participations in the mortgage loans or contracts, which may include mortgage pass-through certificates, known as mortgage securities, including Agency Securities, evidencing interests in mortgage loans or contracts. As used in this prospectus, contracts may include: o manufactured housing conditional sales contracts; and o installment loan agreements. Mortgage collateral may include: o mortgage loans; and o contracts.
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As specified in the accompanying prospectus supplement, the mortgaged properties will primarily include any combination of the following: o attached or detached one-family dwelling units; o two- to four-family dwelling units; o condominiums; o townhouses and row houses; o individual units in planned-unit developments; o modular pre-cut/panelized housing; o Cooperatives; o manufactured homes; o Mixed-Use Properties; and o the fee, leasehold or other interests in the underlying real property. The mortgaged properties may be located in any of the fifty states, the District of Columbia or the Commonwealth of Puerto Rico and may include vacation, second and non-owner-occupied homes. In addition, if specified in the accompanying prospectus supplement, a mortgage pool may contain Mexico Mortgage Loans, which are secured by interests in trusts that own residential properties located in Mexico. The Mexico Mortgage Loans will not exceed ten percent (10%) by aggregate principal balance of the mortgage loans in any mortgage pool as of the cut-off date specified in the accompanying prospectus supplement. The prospectus supplement with respect to a series will describe the specific manner in which certificates of that series issued under a particular pooling and servicing agreement or trust agreement will evidence specified beneficial ownership interests in a separate trust created under that pooling and servicing agreement or trust agreement. A trust will consist of, to the extent provided in the related pooling and servicing agreement or trust agreement: o mortgage loans or contracts and the related mortgage documents or interests in them, including any mortgage securities, underlying a particular series of certificates as from time to time are subject to the pooling and servicing agreement or trust agreement, exclusive of, if specified in the accompanying prospectus supplement, any interest retained by the depositor or any of its affiliates with respect to each mortgage loan; o assets including all payments and collections derived from the mortgage loans, contracts or mortgage securities due after the related cut-off date, as from time to time are identified as deposited in the Custodial Account and in the related Certificate Account; 2
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o property acquired by foreclosure of the mortgage loans or contracts or deed in lieu of foreclosure; o hazard insurance policies and primary insurance policies, if any, and portions of the related proceeds; and o any combination, as and to the extent specified in the accompanying prospectus supplement, of a letter of credit, purchase obligation, mortgage pool insurance policy, mortgage insurance policy, special hazard insurance policy, reserve fund, bankruptcy bond, certificate insurance policy, surety bond or other similar types of credit enhancement as described under "Description of Credit Enhancement." The accompanying prospectus supplement will describe the material terms and conditions of certificates of interest or participations in mortgage loans to the extent they are included in the related trust. Each mortgage loan or contract will be selected by the depositor for inclusion in a mortgage pool from among those purchased by the depositor from any of the following sources: o either directly or through its affiliates, including Residential Funding Corporation; o sellers who are affiliates of the depositor including Homecomings Financial Network, Inc. and GMAC Mortgage Corporation; or o savings banks, savings and loan associations, commercial banks, credit unions, insurance companies or similar institutions that are supervised and/or examined by a federal or state authority, lenders approved by the United States Department of Housing and Urban Development, known as HUD, mortgage bankers, investment banking firms, the Federal Deposit Insurance Corporation, known as the FDIC, and other mortgage loan originators or sellers not affiliated with the depositor, all as described in the accompanying prospectus supplement. The mortgage collateral sellers may include state or local government housing finance agencies. If a mortgage pool is composed of mortgage loans or contracts acquired by the depositor directly from sellers other than Residential Funding Corporation, the accompanying prospectus supplement will specify the extent of mortgage loans or contracts so acquired. The characteristics of the mortgage loans or contracts are as described in the accompanying prospectus supplement. The mortgage loans or contracts may also be delivered to the depositor in a Designated Seller Transaction. A "Designated Seller Transaction" is a transaction in which the mortgage loans are provided to the depositor by an unaffiliated seller, as more fully described in the prospectus supplement. Certificates issued in Designated Seller Transactions may be sold in whole or in part to any seller identified in the accompanying prospectus supplement in exchange for the related mortgage loans, or may be offered under any of the other methods described in this prospectus under "Methods of Distribution." The accompanying prospectus supplement for a Designated Seller Transaction will include information, provided by the related seller, about the seller, the mortgage loans and the underwriting standards applicable to the mortgage loans. All 3
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representations and warranties with respect to the mortgage loans sold in a Designated Seller Transaction will be made only by the applicable unaffiliated seller, referred to herein as the Designated Seller. The depositor will take reasonable steps to ensure that the mortgage loans in a Designated Seller Transaction satisfy the eligibility criteria for securitization transactions registered on Form S-3 with the Securities and Exchange Commission. The depositor will limit Designated Seller Transactions to creditworthy unaffiliated sellers. In addition, the depositor will obtain from Designated Sellers representations and warranties regarding specific characteristics of the mortgage loans, together with an obligation to repurchase any mortgage loans that do not satisfy such representations and warranties. Furthermore, the depositor will obtain from the Designated Sellers the obligation to indemnify the depositor against any liabilities resulting from a breach of such representations and warranties. If specified in the accompanying prospectus supplement, the trust underlying a series of certificates may include mortgage securities, including Agency Securities. The mortgage securities may have been issued previously by the depositor or an affiliate thereof, a financial institution or other entity engaged in the business of mortgage lending or a limited purpose corporation organized for the purpose of, among other things, acquiring and depositing mortgage loans into trusts, and selling beneficial interests in such trusts. As specified in the accompanying prospectus supplement, the mortgage securities will primarily be similar to certificates offered hereunder in their collateral and their cash flows. The primary collateral for both the mortgage securities and the related certificates will be the same pool of mortgage loans. Payments on the mortgage securities will be passed through to holders of the related certificates. The Agency Securities may have been guaranteed and/or issued by the Governmental National Mortgage Association, known as Ginnie Mae, or issued by the Federal Home Loan Mortgage Corporation, known as Freddie Mac, or the Federal National Mortgage Association, known as Fannie Mae. As to any series of certificates, the accompanying prospectus supplement will include a description of the mortgage securities and any related credit enhancement, and the mortgage loans underlying those mortgage securities will be described together with any other mortgage loans included in the mortgage pool relating to that series. As to any series of certificates, as used in this prospectus a mortgage pool includes the related mortgage loans underlying any mortgage securities. For any series of certificates backed by mortgage securities, the entity that administers the mortgage securities may be referred to as the administrator, if stated in the accompanying prospectus supplement. References in this prospectus to Advances to be made and other actions to be taken by the master servicer in connection with the mortgage loans may include Advances made and other actions taken under the terms of the mortgage securities. Each certificate will evidence an interest in only the related mortgage pool and corresponding trust, and not in any other mortgage pool or trust. The accompanying prospectus supplement will provide material information concerning the types and characteristics of the mortgage loans and contracts included in the related trust as of the cut-off date. A Current Report on Form 8-K will be available on request to holders of the related series of certificates and will be filed, together with the related pooling and servicing agreement, with the Securities and Exchange Commission within fifteen days after the initial issuance of the certificates. If mortgage loans or contracts are added to or deleted from the trust after the date of the accompanying prospectus supplement, that addition or deletion will be noted in the Form 8-K. Additions or deletions of this type, if any, will be made prior to the closing date. 4
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THE MORTGAGE LOANS GENERAL If stated in the accompanying prospectus supplement, all or a portion of the mortgage loans that underlie a series of certificates may have been purchased by the depositor under the AlterNet Mortgage Program or the Credit Gap Program. The depositor does not expect to purchase Mexico Mortgage Loans through the AlterNet Mortgage Program or the Credit Gap Program. The mortgage loans may be secured by mortgages or deeds of trust, deeds to secure debt or other similar security instruments creating a first or junior lien on or other interests in the related mortgaged properties. The mortgage loans may be loans that have been consolidated and/or have had various terms changed, 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 at any time thereafter. The depositor will cause the mortgage loans constituting each mortgage pool, or mortgage securities evidencing interests therein, to be assigned to the trustee named in the accompanying prospectus supplement, for the benefit of the holders of all of the certificates of a series. The assignment of the mortgage loans to the trustee will be without recourse. See "Description of the Certificates--Assignment of Mortgage Loans." INTEREST RATE CHARACTERISTICS The accompanying prospectus supplement will describe the type of interest rates of the mortgage loans, which will include adjustable-rate mortgage loans, or ARM loans, fixed-rate mortgage loans and Convertible Mortgage Loans. ARM LOANS. ARM loans will provide for a fixed initial mortgage rate until the first date on which the mortgage rate is to be adjusted. After this date, the mortgage rate may adjust periodically, subject to any applicable limitations, based on changes in the relevant index, to a rate equal to the index plus the Gross Margin. The initial mortgage rate on an ARM loan may be lower than the sum of the then-applicable index and the Gross Margin for the ARM loan. The index or indices for a particular pool will be specified in the accompanying prospectus supplement and may include one of the following indexes: o the weekly average yield on U.S. Treasury securities adjusted to a constant maturity of six months, one year or other terms to maturity; o the weekly auction average investment yield of U.S. Treasury bills of various maturities; o the daily bank prime loan rate as quoted by financial industry news sources; o the cost of funds of member institutions of any of the regional Federal Home Loan Banks; 5
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o 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 that will be specified in the accompanying prospectus supplement; or o the weekly average of secondary market interest rates on six-month negotiable certificates of deposit. ARM loans have features that provide different investment considerations than fixed-rate mortgage loans. Adjustable mortgage rates can cause payment increases that may exceed some mortgagors' capacity to cover such payments. An ARM loan may provide that its mortgage rate may not be adjusted to a rate above the applicable maximum mortgage rate or below the applicable minimum mortgage rate, if any, for the ARM loan. In addition, some of the ARM loans may provide for limitations on the maximum amount by which their mortgage rates may adjust for any single adjustment period. Some ARM loans provide for limitations on the amount of scheduled payments of principal and interest. Other ARM loans may permit the borrower to select from various payment options on each payment date. Those options may include a payment of accrued interest only, a minimum payment based on an amortization schedule that may not be sufficient to cover accrued interest on the ARM loan thus producing negative amortization, a monthly payment that would fully amortize the ARM loan over its remaining term to maturity at the current interest rate, and a monthly payment that would fully amortize the ARM loan over a shorter period at the current interest rate. CONVERTIBLE MORTGAGE LOANS. On any conversion of a Convertible Mortgage Loan, either the depositor will be obligated to repurchase or Residential Funding Corporation, the applicable subservicer or a third party will be obligated to purchase the converted mortgage loan. Alternatively, if specified in the accompanying prospectus supplement, the depositor, Residential Funding Corporation or another party may agree to act as remarketing agent with respect to the converted mortgage loans and, in such capacity, to use its best efforts to arrange for the sale of converted mortgage loans under specified conditions. If any party obligated to purchase any converted mortgage loan fails to do so, or if any remarketing agent fails either to arrange for the sale of the converted mortgage loan or 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. ACTUARIAL LOANS Monthly payments made by or on behalf of the borrower for each loan, in most cases, will be one-twelfth of the applicable loan rate times the unpaid principal balance, with any remainder of the payment applied to principal. This is known as an actuarial loan. AMORTIZATION PROVISIONS The accompanying prospectus supplement will also describe the applicable amortization provisions of the mortgage loans. The mortgage loans may include: o loans with equal monthly payments; 6
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o GPM Loans, which have monthly payments that increase in amount over time, until they are fully amortizing; o Interest Only Loans; o simple interest loans; o mortgage loans that experience negative amortization; o bi-weekly or semi-monthly payment loans; and o Balloon Loans. INTEREST ONLY LOANS. Interest Only Loans generally require that a borrower make monthly payments of accrued interest, but not principal, for a predetermined period following origination (commonly referred to as an "interest-only period"). After the interest-only period, the borrower's monthly payment generally will be recalculated to cover both interest and principal so that the Interest Only Loan will be paid in full by its final payment date. As a result, when the monthly payment increases, the borrower may not be able to pay the increased amount and may default or refinance the Interest Only Loan to avoid the higher payment. Because no scheduled principal payments are required to be made during the interest-only period, the related offered certificates will receive smaller scheduled principal distributions during that period than they would have received if the borrower were required to make monthly payments of interest and principal from origination. In addition, because a borrower is not required to make scheduled principal payments during the interest-only period, the principal balance of an Interest Only Loan may be higher than the principal balance of a similar mortgage loan that requires payment of principal and interest throughout the entire term of the mortgage loan, and a higher principal balance may result in a greater loss upon the liquidation of an Interest Only Loan due to a default. MEXICO MORTGAGE LOANS Each Mexico Mortgage Loan will be secured by the beneficial ownership interest in a separate trust, the sole asset of which is a residential property located in Mexico. The residential property may be a second home, vacation home or the primary residence of the mortgagor. The mortgagor of a Mexico Mortgage Loan may be a U.S. borrower or an international borrower. Because of the uncertainty and delays in foreclosing on real property interests in Mexico and because non-Mexican citizens are prohibited from owning real property located in certain areas of Mexico, the nature of the security interest and the manner in which the Mexico Mortgage Loans are secured differ from that of mortgage loans typically made in the United States. Record ownership and title to the Mexican property will be held in the name of a Mexican financial institution acting as Mexican trustee for a Mexican trust under the terms of a trust agreement. The trust agreement will be governed by Mexican law and will be filed (in Spanish) in the real property records in the jurisdiction in which the property is located. The original term of the Mexican trust will be 50 years and will be renewable at the option of the mortgagor. To secure the repayment of the Mexico Mortgage Loan, the lender is named as a beneficiary of the Mexican trust. The lender's beneficial interest in the Mexican trust grants to the lender the right to direct the Mexican trustee to transfer 7
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the mortgagor's beneficial interest in the Mexican trust or to terminate the Mexican trust and sell the Mexican property. The mortgagor's beneficial interest in the Mexican trust grants to the mortgagor the right to use, occupy and enjoy the Mexican property so long as it is not in default of its obligations relating to the Mexico Mortgage Loan. As security for repayment of the Mexico Mortgage Loan, under the loan agreement, the mortgagor grants to the lender a security interest in the mortgagor's beneficial interest in the Mexican trust. If the mortgagor is domiciled in the United States, the mortgagor's beneficial interest in the Mexican trust should be considered under applicable state law to be an interest in personal property, not real property, and, accordingly, the lender will file financing statements in the appropriate state to perfect the lender's security interest. Because the lender's security interest in the mortgagor's beneficial interest in the Mexican trust is not, for purposes of foreclosing on such collateral, an interest in real property, the depositor either will rely on its remedies that are available in the United States under the applicable Uniform Commercial Code, or UCC, and under the trust agreement and foreclose on the collateral securing a Mexico Mortgage Loan under the UCC, or direct the Mexican trustee to conduct an auction to sell the mortgagor's beneficial interest or the Mexican property under the trust agreement. If a mortgagor is not a resident of the United States, the lender's security interest in the mortgagor's beneficial interest in the Mexican trust may be unperfected under the UCC. If the lender conducts its principal lending activities in the United States, the loan agreement will provide that rights and obligations of such a mortgagor and the lender under the loan agreement will be governed under applicable United States state law. See "Certain Legal Aspects of Mortgage Loans and Contracts -- The Mortgage Loans." In connection with the assignment of a Mexico Mortgage Loan into a trust created under a pooling and servicing agreement, the depositor will transfer to the trustee, on behalf of the certificateholders, all of its right, title and interest in the mortgage note, the lender's beneficial interest in the Mexican trust, the lender's security interest in the mortgagor's beneficial interest in the Mexican trust, and its interest in any policies of insurance on the Mexico Mortgage Loan or the Mexican property. The percentage of mortgage loans, if any, that are Mexico Mortgage Loans will be specified in the accompanying prospectus supplement. SIMPLE INTEREST MORTGAGE LOANS If specified in the accompanying prospectus supplement, a portion of the mortgage loans underlying a series of certificates may be simple interest mortgage loans. A simple interest mortgage loan provides the amortization of the amount financed under the mortgage loan over a series of equal monthly payments, except, in the case of a Balloon Loan, the final payment. Each monthly payment consists of an installment of interest which is calculated on the basis of the outstanding principal balance of the mortgage loan multiplied by the stated mortgage loan rate and further multiplied by a fraction, with the numerator equal to the number of days in the period elapsed since the preceding payment of interest was made and the denominator equal to the number of days in the annual period for which interest accrues on the mortgage loan. As payments are received under a simple interest mortgage loan, the amount received is applied first to interest accrued to the date of payment and then the remaining amount is applied to pay any unpaid fees and then to reduce the unpaid principal balance. Accordingly, if a mortgagor pays a fixed monthly installment on a simple interest mortgage loan before its scheduled due date, the portion of the payment allocable to interest for the period since the preceding payment was made will be less than 8
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it would have been had the payment been made as scheduled, and the portion of the payment applied to reduce the unpaid principal balance will be correspondingly greater. On the other hand, if a mortgagor pays a fixed monthly installment after its scheduled due date, the portion of the payment allocable to interest for the period since the preceding payment was made will be greater than it would have been had the payment been made as scheduled, and the remaining portion, if any, of the payment applied to reduce the unpaid principal balance will be correspondingly less. If each scheduled payment under a simple interest mortgage loan is made on or prior to its scheduled due date, the principal balance of the mortgage loan will amortize more quickly than scheduled. However, if the mortgagor consistently makes scheduled payments after the scheduled due date, the mortgage loan will amortize more slowly than scheduled. If a simple interest mortgage loan is prepaid, the mortgagor is required to pay interest only to the date of prepayment. The variable allocations among principal and interest of a simple interest mortgage loan may affect the distributions of principal and interest on the certificates, as described in the accompanying prospectus supplement. DELINQUENT LOANS Some mortgage pools may include mortgage loans that are one or more months delinquent with regard to payment of principal or interest at the time of their deposit into a trust. The accompanying prospectus supplement will set forth the percentage of mortgage loans that are so delinquent. Delinquent mortgage loans are more likely to result in losses than mortgage loans that have a current payment status. PERFORMANCE MORTGAGE LOANS Some mortgage pools may include mortgage loans that provide that the mortgagor may qualify for one or more permanent reductions in the note margin on the mortgagor's mortgage note. If applicable, the accompanying prospectus supplement will set forth the requirements the mortgagor must satisfy to qualify to obtain a performance mortgage loan. NEGATIVELY AMORTIZING ARM LOANS. Certain ARM loans may be subject to negative amortization from time to time prior to their maturity. 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 the mortgage loan. In addition, ARM loans with payment options described above may produce negative amortization if the borrower chooses an option that does not cover the accrued interest on the ARM loan. If the scheduled payment is not sufficient to pay the accrued monthly interest on a negative amortization ARM loan, the amount of accrued monthly interest that exceeds the scheduled payment on the mortgage loans is added to the principal balance of the ARM loan and is to be repaid from future scheduled payments. Negatively amortizing ARM loans do not provide for the extension of their original stated maturity to accommodate changes in their mortgage rate. The accompanying prospectus 9
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supplement will specify whether the ARM loans underlying a series allow for negative amortization. BI-WEEKLY OR SEMI-MONTHLY MORTGAGE LOANS. Certain mortgage loans may provide for payments by the borrowers every other week or twice each month during the term of the mortgage loan, rather than monthly payments. BALLOON LOANS. Balloon Loans generally require a monthly payment of a pre-determined amount that will not fully amortize the loan until the maturity date, at which time the Balloon Amount will be due and payable. For Balloon Loans, payment of the Balloon Amount, which, based on the amortization schedule of those mortgage loans, is expected to be a substantial amount, will typically depend on the mortgagor's ability to obtain refinancing of the 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, the level of available mortgage loan interest rates, the mortgagor's equity in the related mortgaged property, tax laws, prevailing general economic conditions and the terms of any related first lien mortgage loan. Neither the depositor, the master servicer nor any of their affiliates will be obligated to refinance or repurchase any mortgage loan or to sell the mortgaged property. COLLATERAL CHARACTERISTICS The accompanying prospectus supplement will also describe the type of collateral securing the mortgage loans. In addition to mortgage loans secured only by fee simple or leasehold interests on residential properties, each trust may include: o Pledged Asset Mortgage Loans; and o Additional Collateral Loans. PLEDGED ASSET MORTGAGE LOANS. Each Pledged Asset will be held by a custodian for the benefit of the trustee for the trust in which the related Pledged Asset Mortgage Loan is held, and will be invested in investment obligations permitted by the rating agencies rating the related series of certificates. The amount of the Pledged Assets will be determined by the 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 that 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 custodian will be instructed to pay to the master servicer or the subservicer on behalf of the trustee the amount of that loss, up to the pledged amount for the 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, since the bankruptcy court may prevent the custodian from making these payments. At the mortgagor's request, and in accordance with some conditions, the Pledged Assets may be applied as a partial prepayment of the mortgage loan. The Pledged Assets will be released 10
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from the pledge if the outstanding principal balance of the mortgage loan has been reduced by the amount of the Pledged Assets. OTHER ATTRIBUTES Each trust may also include mortgage loans with the attributes described below, which will be described further in the accompanying prospectus supplement as applicable. COOPERATIVE LOANS. Cooperative Loans are evidenced by promissory notes secured by a first lien on the shares issued by Cooperatives and on the related proprietary leases or occupancy agreements granting exclusive rights to occupy specific units within a Cooperative. As used in this prospectus, mortgage loans may include Cooperative Loans; mortgaged properties may include shares in the related Cooperative and the related proprietary leases or occupancy agreements securing Cooperative Notes; mortgage notes may include Cooperative Notes; and mortgages may include security agreements with respect to Cooperative Notes. PREPAYMENT CHARGES ON THE MORTGAGE LOANS. In some cases, mortgage loans may be prepaid by the mortgagors at any time without payment of any prepayment fee or penalty. The prospectus supplement will disclose whether a material portion of the mortgage loans provide for payment of a prepayment charge if the mortgagor prepays within a specified time period. This charge may affect the rate of prepayment. The master servicer or another entity identified in the accompanying prospectus supplement will generally be entitled to all prepayment charges and late payment charges received on the mortgage loans and those amounts will not be available for payment on the certificates unless the prospectus supplement discloses that those charges will be available for payment. However, some states' laws restrict the imposition of prepayment charges even when the mortgage loans expressly provide for the collection of those charges. See "Certain Legal Aspects of Mortgage Loans and Contracts--Default Interest and Limitations on Prepayments." "EQUITY REFINANCE" AND "RATE AND TERM REFINANCE" MORTGAGE LOANS. Some of 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, primarily in order to change the interest rate or other terms of the existing mortgage loan. All of these types of loans are nevertheless secured by mortgaged properties. BUY-DOWN MORTGAGE LOANS. In the case of Buy-Down Mortgage Loans, the monthly payments made by the mortgagor during the Buy-Down Period will be less than the scheduled monthly payments on the mortgage loan, the resulting difference to be made up from: o Buy-Down Funds contributed by the seller of the mortgaged property or another source and placed in the Buy-Down Account; o if the Buy-Down Funds are contributed on a present value basis, investment earnings on the Buy-Down Funds; or 11
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o additional Buy-Down Funds to be contributed over time by the mortgagor's employer or another source. All Buy-Down Funds will be available to fund scheduled principal and interest payments on the related mortgage loans. See "Description of the Certificates--Payments on Mortgage Collateral--Buy-Down Mortgage Loans." THE MORTGAGED PROPERTIES The mortgaged properties may consist of attached or detached individual dwellings, Cooperative dwellings, individual or adjacent condominiums, townhouses, duplexes, row houses, modular pre-cut/panelized housing, manufactured homes, individual units or two-to four-unit dwellings in planned unit developments, two- to four-family dwellings, Mixed-Use Properties and other attached dwelling units. Each mortgaged property, other than a Cooperative dwelling or Mexican property, will be located on land owned in fee simple by the mortgagor or, if specified in the accompanying prospectus supplement, land leased by the mortgagor. The ownership of the Mexican properties will be held by the Mexican trust. Attached dwellings may include structures where each mortgagor owns the land on 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 subordinate, in most cases, to any blanket mortgage on the related cooperative apartment building or on the underlying land. Additionally, in the case of a Cooperative Loan, the proprietary lease or occupancy agreement may be terminated and the cooperative shares may be cancelled by the Cooperative if the tenant-stockholder fails to pay maintenance or other obligations or charges owed by the tenant-stockholder. See "Certain Legal Aspects of Mortgage Loans and Contracts." Mortgage loans secured by Mixed-Use Property, or mixed-use mortgage loans, will consist of mortgage loans secured by first or junior mortgages, deeds of trust or similar security instruments on fee simple or leasehold interests in Mixed-Use Property. The mixed-use mortgage loans may also be secured by one or more assignments of leases and rents, management agreements or operating agreements relating to the mortgaged property and in some cases by certain letters of credit, personal guarantees or both. Under an assignment of leases and rents, the related mortgagor assigns its right, title and interest as landlord under each related lease and the income derived from the lease to the related lender, while retaining a right to collect the rents for so long as there is no default. If the mortgagor defaults, the right of the mortgagor terminates and the related lender is entitled to collect the rents from tenants to be applied to the payment obligations of the mortgagor. State law may limit or restrict the enforcement of the assignment of leases and rents by a lender until the lender takes possession of the related mortgaged property and a receiver is appointed. Mixed-use real estate lending is generally viewed as exposing the lender to a greater risk of loss than one- to four-family residential lending. Mixed-use real estate lending typically involves larger loans to single mortgagors or groups of related mortgagors than residential one- to four-family mortgage loans. Furthermore, the repayment of loans secured by income-producing properties is typically dependent on the successful operation of the related real estate project. If the cash flow from the project is reduced, for example, if leases are not obtained or renewed, the borrower's ability to repay the loan may be impaired. Mixed-use real estate can be affected 12
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significantly by supply and demand in the market for the type of property securing the loan and, therefore, may be subject to adverse economic conditions. Market values may vary as a result of economic events or governmental regulations outside the control of the borrower or lender, such as rent control laws, which impact the future cash flow of the property. Mortgage loans secured by Mixed-Use Properties will not exceed ten percent (10%) by aggregate principal balance of the mortgage loans in any mortgage pool as of the cut-off date specified in the accompanying prospectus supplement. 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 accompanying prospectus supplement. The basis for any statement that a given percentage of the mortgage loans are secured by mortgage properties that are owner-occupied will be one or more of the following: o 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; o a representation by the originator of the mortgage loan, which may be based solely on the above clause; or o the fact that the mailing address for the mortgagor is the same as the address of the mortgaged property. Any representation and warranty in the related pooling and servicing agreement regarding owner-occupancy may be based solely on that information. 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. LOAN-TO-VALUE RATIO In the case of most mortgage loans made to finance the purchase of the mortgaged property, the Loan-to-Value Ratio, or LTV ratio, is 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 the mortgage loan and (2) the sales price for the related mortgaged property. In the case of some mortgage loans made to refinance non-purchase mortgage loans or converted mortgage loans, the LTV ratio at origination is defined in most cases as the ratio, expressed as a percentage, of the principal amount of the mortgage loan to either the appraised value determined in an appraisal obtained at the time of refinancing or conversion or, if no appraisal has been obtained, to the lesser of (1) the appraised value or other valuation of the related mortgaged property determined at origination of the loan to be refinanced or converted and (2) the sale price of the related mortgaged property. In some cases, in lieu of an appraisal, a valuation of the mortgaged property will be obtained from a service that provides an automated valuation. An automated valuation evaluates, through the use of computer models, various types of publicly-available information, such as recent sales prices for similar homes within the same geographic area and within the same price range. In the case of some mortgage loans seasoned for over twelve 13
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months, the LTV ratio may be determined at the time of purchase from the related seller based on the ratio of the current loan amount to the current value of the mortgaged property. Appraised values may be determined by either: o a statistical analysis; o a broker's price opinion; or o an automated valuation, drive-by appraisal or other certification of value. Some of the mortgage loans which are subject to negative amortization will have LTV ratios that will increase after origination as a result of their negative amortization. In the case of some seasoned mortgage loans, the values used in calculating LTV ratios may no longer be accurate valuations of the mortgaged properties. Some mortgaged properties may be located in regions where property values have declined significantly since the time of origination. With respect to any junior mortgage loan, the combined LTV ratio, or CLTV ratio, usually will be the ratio, expressed as a percentage, of the sum of the cut-off date principal balance of the junior mortgage loan and the principal balance of any related mortgage loans that constitute liens senior or subordinate to the lien of the junior mortgage loan on the related mortgaged property, at the time of the origination of the junior mortgage loan, or, in some cases, at the time of an appraisal subsequent to origination, to the lesser of (1) the appraised value of the related mortgaged property determined in the appraisal used in the origination of the junior mortgage loan, or the value determined in an appraisal obtained subsequent to origination, and (2) in some cases, the sales price of the mortgaged property. With respect to each junior mortgage loan, the junior mortgage ratio in most cases will be the ratio, expressed as a percentage, of the cut-off date principal balance of the junior mortgage loan to the sum of the cut-off date principal balance of the junior mortgage loan and the principal balance of any mortgage loans senior or subordinate to the junior mortgage loan at the time of the origination of the junior mortgage loan. UNDERWRITING POLICIES The depositor 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. 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 AlterNet Mortgage Program or the Credit Gap Program from affiliated or unaffiliated sellers. The mortgage loans in any mortgage pool may be underwritten by Residential Funding Corporation, a seller or a designated third party through the use of an automated underwriting system. In the case of a Designated Seller Transaction, the mortgage loans may be underwritten by the designated seller or a designated third party through the use of an automated underwriting system. For additional information regarding automated underwriting systems that are used by Residential Funding Corporation to review some of the mortgage loans that it purchases and that may be included in any mortgage pool, see "--Automated Underwriting," below. 14
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GENERAL STANDARDS In most cases, under a traditional "full documentation" program, 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, the mortgagor will have furnished information, which may be supplied solely in the application, with respect to its assets, liabilities, income, credit history and employment history, and furnished an authorization to apply for a credit report that 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, only income derived from the mortgaged property may have been considered for underwriting purposes, rather than 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 will have been considered for underwriting purposes. If specified in the accompanying prospectus supplement, some mortgage loans may have been originated under "limited documentation," "stated documentation" or "no documentation" programs that require less documentation and verification than do traditional "full documentation" programs. Under a limited documentation, stated documentation or no documentation program, minimal investigation into the mortgagor's credit history and income profile is undertaken by the originator and the underwriting may be based primarily or entirely on an appraisal of the mortgaged property and the LTV ratio at origination. The adequacy of a mortgaged property as security for repayment of the related mortgage loan will typically have been determined by an appraisal or an automated valuation, as described above under "--Loan-to-Value Ratio." Appraisers may be either staff appraisers employed by the originator or independent appraisers selected in accordance with pre-established guidelines established by or acceptable to the originator. The appraisal procedure guidelines in most cases 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 will have considered 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 LTV ratio or CLTV ratio may have been based on the appraised value as indicated on a review appraisal conducted by the mortgage collateral seller or originator. The underwriting standards applied by an originator typically require that the underwriting officers of the originator be satisfied that the value of the property being financed, as indicated by an appraisal or other acceptable valuation method as described below, currently supports and is anticipated to support in the future the outstanding loan balance. In fact, some 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 periodically in certain regions, or increases in the principal balances of some mortgage loans, such 15
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as GPM Loans and negative amortization ARM loans, could cause the principal balance of some or all of these mortgage loans to exceed the value of the mortgaged properties. Based on the data provided in the application and 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 would be sufficient to enable the mortgagor to meet its monthly obligations on the mortgage loan and other expenses related to the property. Examples of other expenses include property taxes, utility costs, standard hazard and primary mortgage insurance, maintenance fees and other levies assessed by a Cooperative, if applicable, and other fixed obligations other than housing expenses including, in the case of junior mortgage loans, payments required to be made on any senior mortgage. The originator's guidelines for mortgage loans will, in most cases, 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 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 Corporation, if any, will vary depending on several factors. Residential Funding Corporation, on behalf of the depositor, typically will review a sample of the mortgage loans purchased by Residential Funding Corporation 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. Such underwriting reviews will generally not be conducted with respect to any individual mortgage pool related to a series of certificates. In reviewing seasoned mortgage loans, or mortgage loans that have been outstanding for more than 12 months, Residential Funding Corporation 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 Corporation may conduct additional procedures to assess the current value of the mortgaged properties. Those procedures may consist of drive-by appraisals, automated valuations or real estate broker's price opinions. The depositor may also consider a specific area's housing value trends. These alternative valuation methods may not be as reliable as the type of mortgagor financial information or appraisals that are typically obtained at origination. In its underwriting analysis, Residential Funding Corporation may also consider the applicable Credit Score of the related mortgagor used in connection with the origination of the mortgage loan, as determined based on a credit scoring model acceptable to the depositor. The depositor anticipates that mortgage loans, other than the Mexico Mortgage Loans and some Puerto Rico mortgage loans, included in mortgage pools for certain series of certificates will have been originated based on underwriting standards that are less restrictive than for other mortgage loan lending programs. In such cases, borrowers may have credit histories that contain delinquencies on mortgage and/or consumer debts. Some borrowers may have initiated bankruptcy proceedings within a few years of the time of origination of the related mortgage loan. In addition, some mortgage loans with LTV ratios over 80% will not be required to have the benefit of primary mortgage insurance. Likewise, mortgage loans included in a trust may have been originated in connection with a governmental program under which underwriting standards were significantly less stringent and designed to promote home ownership or the availability of affordable residential 16
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rental property regardless of higher risks of default and losses. As discussed above, in evaluating seasoned mortgage loans, the depositor may place greater weight on payment history or market and other economic trends and less weight on underwriting factors usually applied to newly originated mortgage loans. 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 typically include a set of specific criteria by which the underwriting evaluation is made. However, the application of the underwriting standards does not imply that each specific criterion was satisfied individually. Rather, a 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 the 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 the 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. In the case of a Designated Seller Transaction, the applicable underwriting standards will be those of the seller or of the originator of the mortgage loans, and will be described in the accompanying prospectus supplement. Credit Scores are obtained by some mortgage lenders in connection with mortgage loan applications to help assess a borrower's creditworthiness. In addition, Credit Scores may be obtained by Residential Funding Corporation or the designated seller after the origination of a mortgage loan if the seller does not provide to Residential Funding Corporation or the designated seller 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 range from approximately 350 to approximately 840, with higher scores indicating an individual with a more favorable credit history compared to an individual with a lower score. However, a Credit Score purports only to be a measurement of the relative degree of risk a borrower represents to a lender, i.e., a borrower with a higher score is statistically expected to be less likely to default in payment than a borrower with a lower score. In addition, it should be noted that Credit Scores were developed to indicate a level of default probability over a two-year period, which does not correspond to the life of a mortgage loan. Furthermore, Credit Scores were not developed specifically for use in connection with mortgage loans, but for consumer loans in general, and assess only the borrower's past credit history. Therefore, in most cases, a Credit Score does not take into consideration the differences between mortgage loans and consumer loans, or the specific characteristics of the related mortgage loan, including the LTV ratio, the collateral for the mortgage loan, or the debt to income ratio. There can be no assurance that the Credit Scores of the mortgagors will be an accurate predictor of the likelihood of repayment of the related mortgage loans or that any mortgagor's Credit Score would not be lower if obtained as of the date of the accompanying prospectus supplement. 17
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Once all applicable employment, credit and property information is received, a determination is made as to whether the prospective borrower has sufficient monthly income available to meet the borrower's monthly obligations on the proposed mortgage loan and other expenses related to the home, including property taxes and hazard insurance, and other financial obligations and monthly living expenses. ARM loans, Buy-Down Mortgage Loans, graduated payment mortgage loans and any other mortgage loans will generally be underwritten on the basis of the borrower's ability to make monthly payments as determined by reference to the mortgage rates in effect at origination or the reduced initial monthly payments, as the case may be, and on the basis of an assumption that the borrowers will likely be able to pay the higher monthly payments that may result from later increases in the mortgage rates or from later increases in the monthly payments, as the case may be, at the time of the increase even though the borrowers may not be able to make the higher payments at the time of origination. The mortgage rate in effect from the origination date of an ARM loan or other types of loans to the first adjustment date are likely to be lower, and may be significantly lower, than the sum of the then applicable index and Note Margin. Similarly, the amount of the monthly payment on Buy-Down Mortgage Loans and graduated payment mortgage loans will increase periodically. If the borrowers' incomes do not increase in an amount commensurate with the increases in monthly payments, the likelihood of default will increase. In addition, in the case of either ARM loans or graduated payment mortgage loans that are subject to negative amortization, due to the addition of deferred interest the principal balances of those mortgage loans are more likely to equal or exceed the value of the underlying mortgaged properties, thereby increasing the likelihood of defaults and losses. With respect to Balloon Loans, payment of the Balloon Amount will depend on the borrower's ability to obtain refinancing or to sell the mortgaged property prior to the maturity of the Balloon Loan, and there can be no assurance that refinancing will be available to the borrower or that a sale will be possible. THE ALTERNET MORTGAGE PROGRAM AND THE CREDIT GAP PROGRAM The specific underwriting standards with respect to AlterNet loans and Credit Gap loans will in most cases conform to those published in Residential Funding Corporation's Client Guide, referred to as the Guide, as modified from time to time, including the provisions of the Guide applicable to the depositor's AlterNet Mortgage Program and the Credit Gap Program. AlterNet loans and Credit Gap Loans are made to borrowers having a range of imperfect credit histories, ranging from minor delinquencies to borrower bankruptcies. The applicable underwriting standards 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 Corporation from time to time. The prospectus supplement for each series of certificates secured by AlterNet loans or Credit Gap loans will describe the general underwriting criteria applicable to such mortgage loans, as well as any material changes to the general standard described above. A portion of AlterNet loans and Credit Gap Loans typically will be reviewed by Residential Funding Corporation or by a designated third party for compliance with applicable underwriting criteria. Residential Funding Corporation may conduct this review using an automated underwriting system. See "--Automated Underwriting," below. Some AlterNet loans will be purchased from AlterNet Program Sellers who will represent to Residential Funding Corporation that AlterNet loans were originated under underwriting standards determined by a mortgage insurance company acceptable to Residential Funding Corporation. Residential Funding Corporation may accept a certification from an insurance company as to an AlterNet loan's insurability in a mortgage pool as 18
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of the date of certification as evidence of an AlterNet loan conforming to applicable underwriting standards. The certifications will likely have been issued before the purchase of the AlterNet loan by Residential Funding Corporation or the depositor. Similarly, some Credit Gap loans will be purchased from Credit Gap Program Sellers who will represent to Residential Funding Corporation that Credit Gap loans were originated under underwriting standards determined by a mortgage insurance company acceptable to Residential Funding Corporation. Residential Funding Corporation may accept a certification from an insurance company as to a Credit Gap loan's insurability in a mortgage pool as of the date of certification as evidence of a Credit Gap loan conforming to applicable underwriting standards. The certifications will likely have been issued before the purchase of the Credit Gap loan by Residential Funding Corporation or the depositor. A portion of the mortgage loans will be purchased in negotiated transactions, which may be governed by master commitment agreements relating to ongoing purchases of mortgage loans by Residential Funding Corporation or the designated seller. In some of those cases, the price paid by Residential Funding Corporation or the designated seller to the seller may be adjusted to reflect losses or gains on the mortgage loans sold by that seller to Residential Funding Corporation. The sellers who sell to Residential Funding Corporation or the designated seller pursuant to master commitment agreements will represent to Residential Funding Corporation or the designated seller that the mortgage loans have been originated in accordance with underwriting standards agreed to by Residential Funding Corporation or the designated seller, as applicable. Residential Funding Corporation or the designated seller, as the case may be, on behalf of the depositor, will review only a limited portion of the mortgage loans in any delivery from the related seller for conformity with the applicable underwriting standards. AUTOMATED UNDERWRITING In recent years, the use of automated underwriting systems has become commonplace in the residential mortgage market. Residential Funding Corporation evaluates many of the mortgage loans that it purchases through the use of one or more automated underwriting systems. In general, these systems are programmed to review most of the information that is set forth in Residential Funding Corporation's Guide as the underwriting criteria that is necessary to satisfy each underwriting program. In the case of the AlterNet Mortgage Program and the Credit Gap Program, the system may make adjustments for some compensating factors, which could result in a mortgage loan being approved even if all of the specified underwriting criteria for that underwriting program are not satisfied. In some cases, Residential Funding Corporation enters the information into the automated underwriting system using the documentation delivered to Residential Funding Corporation by the mortgage collateral seller. In other cases, the mortgage collateral seller enters the information directly into the automated underwriting system. If a mortgage collateral seller enters the information, Residential Funding Corporation will, in many cases, verify that the information relating to the underwriting criteria that it considers most important accurately reflects the information contained in the underwriting documentation. However, for some mortgage collateral sellers, it will only verify the information with respect to a sample of those mortgage loans. Each automated review will either generate an approval, a rejection or a recommendation for further review. In the case of a recommendation of further review, underwriting personnel will 19
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perform a manual review of the mortgage loan documentation before Residential Funding Corporation will purchase the mortgage loan. However, in the case of some mortgage collateral sellers, underwriting personnel will conduct only a limited review of the mortgage loan documentation. If that limited review does not detect any material deviations from the applicable underwriting criteria, Residential Funding Corporation will approve that mortgage loan for purchase. Because an automated underwriting system will only consider the information that it is programmed to review, which may be more limited than the information that could be considered in the course of a manual review, some mortgage loans may be approved by an automated system that would have been rejected through a manual review. In addition, there could be programming inconsistencies between an automated underwriting system and the underwriting criteria set forth in Residential Funding Corporation's Guide, which could, in turn, be applied to numerous mortgage loans that the system reviews. We cannot assure you that an automated underwriting review will in all cases result in the same determination as a manual review with respect to whether a mortgage loan satisfies Residential Funding Corporation's underwriting criteria. 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 accompanying prospectus supplement. Each contract will be secured by a manufactured home. The contracts will be fully amortizing or, if specified in the accompanying prospectus supplement, Balloon Loans. The manufactured homes securing the contracts will consist of "manufactured homes" within the meaning of 42 U.S.C. ss. 5402(6), which are treated as "single family residences" for the purposes of the REMIC provisions of the Internal Revenue Code of 1986, or Internal Revenue Code. Accordingly, a manufactured home will be a structure built on a permanent chassis, which is transportable in one or more sections and customarily used at a fixed location, has a minimum of 400 square feet of living space and minimum width in excess of 8 1/2 feet, is designed to be used as a dwelling with or without a permanent foundation when connected to the required utilities, and includes the plumbing, heating, air conditioning, and electrical systems contained therein. Some contract pools may include contracts that are one or more months delinquent with regard to payment of principal or interest at the time of their deposit into a trust. The accompanying prospectus supplement will describe the percentage of contracts that are delinquent and whether such contracts have been so delinquent more than once during the preceding twelve months. Contract pools that contain delinquent contracts are more likely to sustain losses than are contract pools that contain contracts that have a current payment status. UNDERWRITING POLICIES Conventional contracts will comply with the underwriting policies of the applicable originator or mortgage collateral seller, which will be described in the accompanying prospectus supplement. 20
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With respect to a contract made in connection with the mortgagor's purchase of a manufactured home, the appraised value is usually 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 that 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 LTV ratio for a contract in most cases 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, an appraisal of the manufactured home generally 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, referred to in this prospectus as 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 insured by the FHA, under the Housing Act or under Title V of the Housing Act of 1949, or partially guaranteed by the VA under the Servicemen's Readjustment Act of 1944, as amended, or under Chapter 37 of Title 38, United States Code. Section 306(g) of the Housing Act provides that "the full faith and credit of the United States is pledged to the payment of all amounts which may be required to be paid under any guarantee under this subsection." In order to meet its obligations under 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 In most cases, each Ginnie Mae security relating to a series, which may be a Ginnie Mae I Certificate or a Ginnie Mae II Certificate as referred to by Ginnie Mae, will be a "fully modified pass-through" mortgage-backed certificate issued and serviced by a mortgage banking company or other financial concern approved by Ginnie Mae, except 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 described in the accompanying prospectus supplement. FEDERAL HOME LOAN MORTGAGE CORPORATION Freddie Mac is a corporate instrumentality of the United States created under Title III of the Emergency Home Finance Act of 1970, as amended, or the Freddie Mac Act. Freddie Mac was established primarily for the purpose of increasing the availability of mortgage credit for the financing of needed housing. The principal activity of Freddie Mac currently consists of purchasing first-lien, conventional, residential mortgage loans or participation interests in such mortgage loans and reselling the mortgage loans so purchased in the form of guaranteed mortgage securities, 21
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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 described 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 that generally meets the purchase standards imposed by private institutional mortgage investors. See "Additional Information" for the availability of further information regarding Freddie Mac and Freddie Mac securities. Neither the United States nor any agency thereof is obligated to finance Freddie Mac's operations or to assist Freddie Mac in any other manner. FREDDIE MAC SECURITIES In most cases, each Freddie Mac security relating to a series will represent an undivided interest in a pool of 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, substantially all of which are secured by one- to four-family residential properties or, if specified in the accompanying prospectus supplement, are secured by multi-family residential properties. The characteristics of any Freddie Mac securities included in the trust for a series of certificates will be described in the accompanying prospectus supplement. FEDERAL NATIONAL MORTGAGE ASSOCIATION Fannie Mae is a federally chartered and privately owned corporation organized and existing under the Federal National Mortgage Association Charter Act (12 U.S.C. ss. 1716 et seq.). It is the nation's largest supplier of residential mortgage funds. Fannie Mae was originally established in 1938 as a United States government agency to provide supplemental liquidity to the mortgage market and was transformed into a stockholder-owned and privately managed corporation by legislation enacted in 1968. Fannie Mae provides funds to the mortgage market primarily by purchasing home 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 In most cases, 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 fixed, variable or adjustable-rate conventional mortgage loans or 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 described in the accompanying prospectus supplement. 22
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MORTGAGE COLLATERAL SELLERS The mortgage collateral to be included in a trust will be purchased by the depositor directly or indirectly, through Residential Funding Corporation or other affiliates, from mortgage collateral sellers that may be banks, savings and loan associations, credit unions, insurance companies, mortgage bankers, investment banking firms, insurance companies, the FDIC, and other mortgage loan originators or sellers not affiliated with the depositor. The mortgage collateral sellers may include Homecomings Financial Network, Inc. and GMAC Mortgage Corporation and its affiliates, each of which is an affiliate of the depositor. Such purchases may occur by one or more of the following methods: o 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; o one or more direct or indirect purchases through the AlterNet Mortgage Program or the Credit Gap Program; or o one or more purchases from affiliated sellers. Mortgage loans may be purchased under agreements relating to ongoing purchases of mortgage loans by Residential Funding Corporation. The prospectus supplement for a series of certificates will disclose the method or methods used to acquire the mortgage collateral for the 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 accompanying prospectus supplement. QUALIFICATIONS OF SELLERS Each AlterNet Program Seller and Credit Gap Program Seller is selected by Residential Funding Corporation on the basis of criteria described in the Guide. An AlterNet Program Seller or a Credit Gap 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 AlterNet Program Sellers and Credit Gap Program Sellers. If an AlterNet Program Seller or a Credit Gap Program Seller becomes subject to the direct or indirect control of the FDIC, or if an AlterNet Program Seller's or a Credit Gap Program Seller's net worth, financial performance or delinquency and foreclosure rates are adversely impacted, the institution may continue to be treated as an AlterNet Program Seller or a Credit Gap Program Seller, as applicable. Any event may adversely affect the ability of any such AlterNet Program Seller or Credit Gap 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 Except in the case of a Designated Seller Transaction, Residential Funding Corporation will provide with respect to each mortgage loan, including AlterNet loans and Credit Gap loans, or 23
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contracts constituting a part of the trust, all of the representations and warranties required by the rating agency or agencies rating a specific series of certificates. In a Designated Seller Transaction, the Designated Seller would make substantially the same representations and warranties, which are not expected to vary in any material respect. Residential Funding Corporation will generally represent and warrant that: o as of the cut-off date, the information described in a listing of the related mortgage loan or contract was true and correct in all material respects; o except in the case of Cooperative Loans, a policy of title insurance in the form and amount required by the Guide or an equivalent protection was effective or an 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; o to the best of Residential Funding Corporation's knowledge, if required by applicable underwriting standards, the mortgage loan or contract is the subject of a primary insurance policy; o Residential Funding Corporation 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 Servicemembers Civil Relief Act, as amended, or Relief Act, and except with respect to any buy-down agreement for a Buy-Down Mortgage Loan; o each mortgaged property is free of material damage and is in good repair; o each mortgage loan complied in all material respects with all applicable local, state and federal laws at the time of origination; and o 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 Corporation that materially adversely affects the interests of the certificateholders in the mortgage loan or contract, Residential Funding Corporation will be obligated to repurchase any mortgage loan or contract or substitute for the mortgage loan or contract as described below. In addition, except in the case of a Designated Seller Transaction, Residential Funding Corporation 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 lien having at least the priority represented and warranted in the related pooling and servicing agreement on or, in the case of a contract or a Cooperative Loan, a perfected security interest in, the related mortgaged property, subject only to the following: o liens of real property taxes and assessments not yet due and payable; o covenants, conditions and restrictions, rights of way, easements and other matters of public record as of the date of recording of such mortgage and certain other permissible title exceptions; o liens of any senior mortgages, in the case of junior mortgage loans; and 24
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o 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, except in the case of a Designated Seller Transaction, with respect to any mortgage loan or contract as to which the depositor delivers to the trustee or the custodian an affidavit certifying that the original mortgage note or contract has been lost or destroyed, if the 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 Corporation will be obligated to repurchase or substitute for such mortgage loan or contract in the manner described below under "--Repurchases of Mortgage Collateral" and "--Limited Right of Substitution." Mortgage collateral sellers will typically make certain representations and warranties regarding the characteristics of the mortgage collateral that they sell. However, mortgage collateral purchased from certain unaffiliated sellers may be purchased with very limited or no representations and warranties. In addition, Residential Funding Corporation and the depositor will not assign to the trustee for the benefit of the certificateholders any of the representations and warranties made by a mortgage collateral seller regarding mortgage collateral or any remedies provided for any breach of those representations and warranties. Accordingly, unless the accompanying prospectus supplement discloses that additional representations and warranties are made by the mortgage collateral seller or other person for the benefit of the certificateholders, the only representations and warranties that will be made for the benefit of the certificateholders will be the limited representations and warranties of Residential Funding Corporation described above. If a breach of a representation and warranty made by a mortgage collateral seller is discovered that materially and adversely affects the interests of the certificateholders and that representation and warranty has been assigned to the trustee for the benefit of the certificateholders, the master servicer will be required to use its best reasonable efforts to enforce the obligation of the mortgage collateral seller to cure such breach or repurchase the mortgage collateral. In a Designated Seller Transaction, the designated seller will have made representations and warranties regarding the loans to the depositor as specified in the related prospectus supplement. These representations and warranties will be substantially the same and will not vary in any material respect to those made by Residential Funding Corporation described above. REPURCHASES OF MORTGAGE COLLATERAL If a designated seller or Residential Funding Corporation cannot cure a breach of any representation or warranty made by it and assigned to the trustee for the benefit of the certificateholders relating to an item of mortgage collateral within 90 days after notice from the master servicer, the servicer, the Certificate Administrator or the trustee, and the breach materially and adversely affects the interests of the certificateholders in the item of mortgage collateral, the designated seller or Residential Funding Corporation, as the case may be, will be obligated to purchase the item of mortgage collateral at a price described 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 designated seller or Residential Funding Corporation cannot cure certain documentary defects with respect to a mortgage loan or contract, the designated seller or Residential Funding Corporation, as applicable, will be required to 25
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repurchase the item of mortgage collateral. The purchase price for any 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 Spread, if any. In certain limited cases, a substitution may be made in lieu of such repurchase obligation. See "--Limited Right of Substitution" below. 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 Corporation 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. 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 use its best reasonable efforts to enforce the repurchase obligation of the designated seller or Residential Funding Corporation of which it has knowledge due to a breach of a representation and warranty that was made to or assigned to the trustee (to the extent applicable), 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. The master servicer is not obligated to review, and will not review, every loan that is in foreclosure or is delinquent to determine if a breach of a representation and warranty has occurred. The master servicer will maintain policies and procedures regarding repurchase practices that are consistent with its general servicing activities. These policies and procedures generally will limit review of loans that are seasoned and these policies and procedures are subject to change, in good faith, to reflect the master servicer's current servicing activities. Application of these policies and procedures may result in losses being borne by the related credit enhancement and, to the extent not available, the related certificateholders. Furthermore, 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 remedies if it determines that one remedy is more likely to result in a greater recovery. In accordance with the above described practices, the master servicer or servicer will not be required to enforce any purchase obligation of a designated seller, Residential Funding Corporation or seller arising from any misrepresentation by the designated seller, Residential Funding Corporation or seller, if the master servicer or servicer determines in the reasonable exercise of its business judgment that the matters related to the misrepresentation did not directly cause or are not likely to directly cause a loss on the related mortgage loan. In the case of a Designated Seller Transaction where the seller fails to repurchase a mortgage loan and neither the depositor, Residential Funding Corporation nor any other entity has assumed the representations and warranties, the repurchase obligation of the seller will not become an obligation of the depositor or Residential Funding Corporation. The foregoing obligations will constitute the sole remedies available to certificateholders or the trustee for a breach of any representation by Residential Funding Corporation in its capacity as a seller of mortgage loans to the depositor, or for any other event giving rise to the obligations. 26
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Neither the depositor nor the master servicer or servicer will be obligated to purchase a mortgage loan if a designated seller defaults on its obligation to do so, and no assurance can be given that the designated sellers will carry out those obligations with respect to mortgage loans. This type of default by a seller or designated seller is not a default by the depositor or by the master servicer or servicer. Any mortgage loan not so purchased or substituted for shall remain in the related trust and any losses related thereto shall be allocated to the related credit enhancement, and to the extent not available, to the related certificates. LIMITED RIGHT OF SUBSTITUTION In the case of a mortgage loan or contract required to be repurchased from the trust the related mortgage collateral seller, a designated seller or Residential Funding Corporation, as applicable, may substitute a new mortgage loan or contract for the repurchased mortgage loan or contract that was removed from the trust, during the limited time period described below. Under some circumstances, any substitution must be effected within 120 days of the date of the issuance of the certificates with respect to a trust. With respect to a trust for which a REMIC election is to be made, the substitution must be effected within two years of the date of the issuance of the certificates, and may not be made unless an opinion of counsel is delivered to the effect that the substitution would not cause the trust to fail to qualify as a REMIC and either (a) an opinion of counsel is delivered to the effect that such substitution would not result in a prohibited transaction tax under the Internal Revenue Code or (b) the trust is indemnified for any prohibited transaction tax that may result from the substitution. In most cases, any qualified substitute mortgage loan or qualified substitute contract will, on the date of substitution: o have an outstanding principal balance, after deduction of the principal portion of the monthly payment due in the month of substitution, not in excess of the outstanding principal balance of the repurchased mortgage loan or repurchased contract; o 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; o have an LTV ratio at the time of substitution no higher than that of the repurchased mortgage loan or repurchased contract; o 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; o be secured by mortgaged property located in the United States, unless the repurchased mortgage loan was a Mexico Mortgage Loan or a Puerto Rico mortgage loan, in which case the qualified substitute mortgage loan may be a Mexico Mortgage Loan or a Puerto Rico mortgage loan, respectively; and o comply with all of the representations and warranties described in the related pooling and servicing agreement as of the date of substitution. 27
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If 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 the 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. The prospectus supplement will indicate whether a Designated Seller will have the option to substitute for a mortgage loan or contract that it is obligated to repurchase in connection with a breach of representation and warranty. DESCRIPTION OF THE CERTIFICATES GENERAL The certificates will be issued in series. Each series of certificates or, in some instances, two or more series of certificates, will be issued under a pooling and servicing agreement or, in the case of certificates backed by mortgage 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 of which this prospectus is a part. Each pooling and servicing agreement or trust agreement will be filed with the Securities and Exchange Commission as an exhibit to a Form 8-K. The following summaries, together with additional summaries under "The Pooling and Servicing Agreement" below, describe all material terms and provisions relating to the certificates common to each pooling and servicing agreement or trust agreement. All references to a "pooling and servicing agreement" and any discussion of the provisions of any pooling and servicing agreement 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 accompanying prospectus supplement. Each series of certificates may consist of any one or a combination of the following types of certificates: Accretion Directed A class that receives principal payments from the accreted interest from specified accrual classes. An accretion directed class also may receive principal payments from principal paid on the underlying pool of assets. Accrual A class that accretes the amount of accrued interest otherwise distributable on the class, which amount will be added as principal to the principal balance of the class on each applicable distribution date. The accretion may continue until some specified event has occurred or until the accrual class is retired. Companion A class that receives principal payments on any 28
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distribution date only if scheduled payments have been made on specified planned principal classes, targeted principal classes or scheduled principal classes. Component A class consisting of "components." The components of a class of component certificates may have different principal and interest payment characteristics but together constitute a single class. Each component of a class of component certificates may be identified as falling into one or more of the categories. Fixed Rate A class with an interest rate that is fixed throughout the life of the class. Floating Rate A class with an interest rate that resets periodically based upon a designated index and that varies directly with changes in the index. Interest Only A class having no principal balance and bearing interest on the related notional amount. The notional amount is used for purposes of the determination of interest distribution. Inverse Floating Rate A class with an interest rate that resets periodically based upon a designated index and that varies inversely with changes in the index. Lockout A class that, for the period of time specified in the related prospectus supplement, generally will not receive (in other words, is locked out of) (1) principal prepayments on the underlying pool of assets that are allocated disproportionately to the senior certificates because of the shifting interest structure of the certificates in the trust and/or (2) scheduled principal payments on the underlying pool of assets, as specified in the related prospectus supplement. During the lock-out period, the portion of the principal distributions on the underlying pool of assets that the lockout class is locked out of will be distributed to the other classes of senior certificates. Partial Accrual A class that accretes a portion of the amount of accrued interest on it, which amount will be 29
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added to the principal balance of the class on each applicable distribution date, with the remainder of the accrued interest to be distributed currently as interest on the class. The accretion may continue until a specified event has occurred or until the partial accrual class is retired. Principal Only A class that does not bear interest and is entitled to receive only distributions of principal. Planned Principal or PACs A class that is designed to receive principal payments using a predetermined principal balance schedule derived by assuming two constant prepayment rates for the underlying pool of assets. These two rates are the endpoints for the "structuring range" for the planned principal class. The planned principal classes in any series of certificates may be subdivided into different categories (e.g., primary planned principal classes, secondary planned principal classes and so forth) having different effective structuring ranges and different principal payment priorities. The structuring range for the secondary planned principal class of a series of certificates will be narrower than that for the primary planned principal class of the series. Scheduled Principal A class that is designed to receive principal payments using a predetermined principal balance schedule but is not designated as a planned principal class or targeted principal class. In many cases, the schedule is derived by assuming two constant prepayment rates for the underlying pool of assets. These two rates are the endpoints for the "structuring range" for the scheduled principal class. Senior Support A class that absorbs the realized losses other than excess losses that would otherwise be allocated to a super senior class after the related classes of subordinated certificates are no longer outstanding. Sequential Pay Classes that receive principal payments in a prescribed sequence, that do not have predetermined principal balance schedules and 30
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that under all circumstances receive payments of principal continuously from the first distribution date on which they receive principal until they are retired. A single class that receives principal payments before or after all other classes in the same series of certificates may be identified as a sequential pay class. Super Senior A class that will not bear its proportionate share of realized losses (other than excess losses) as its share is directed to another class, referred to as the "senior support class" until the class certificate balance of the support class is reduced to zero. Targeted Principal or TACs A class that is designed to receive principal payments using a predetermined principal balance schedule derived by assuming a single constant prepayment rate for the underlying pool of assets. Variable Rate A class with an interest rate that resets periodically and is calculated by reference to the rate or rates of interest applicable to specified assets or instruments (e.g., the mortgage rates borne by the underlying mortgage loans). Credit support for each series of certificates may be provided by a mortgage pool insurance policy, mortgage insurance policy, special hazard insurance policy, bankruptcy bond, letter of credit, purchase obligation, reserve fund, certificate insurance policy, surety bond 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 accompanying 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 accompanying prospectus supplement, and will be transferable and exchangeable at the corporate trust office of the certificate registrar appointed under the related pooling and servicing agreement to register the certificates. 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 or holder refers to the entity whose name appears on the records of the certificate registrar or, if applicable, a transfer agent, as the registered holder of the certificate. 31
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If issued in book-entry form, the classes of a series of certificates will be initially issued through the book-entry facilities of The Depository Trust Company, or DTC. No global security representing book-entry certificates may be transferred except as a whole by DTC to a nominee of DTC, or by a nominee of DTC to another nominee of DTC. DTC or its nominee will be the only registered holder of the certificates and will be considered the sole representative of the beneficial owners of certificates for all purposes. The registration of the global securities in the name of Cede & Co. will not affect beneficial ownership and is performed merely to facilitate subsequent transfers. The book-entry system is also used because it eliminates the need for physical movement of securities. The laws of some jurisdictions, however, may require some purchasers to take physical delivery of their securities in definitive form. These laws may impair the ability to own or transfer book-entry certificates. Purchasers of securities in the United States may hold interests in the global certificates through DTC, either directly, if they are participants in that system, or otherwise indirectly through a participant in DTC. Purchasers of securities in Europe may hold interests in the global securities through Clearstream, Luxembourg, or through Euroclear Bank S.A./N.V., as operator of the Euroclear system. Because DTC will be the only registered owner of the global securities, Clearstream, Luxembourg and Euroclear will hold positions through their respective U.S. depositories, which in turn will hold positions 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 DTC participants, which include securities brokers and dealers, banks, trust companies and clearing corporations. DTC together with the Clearstream and Euroclear System participating organizations facilitates the clearance and settlement of securities transactions between participants through electronic book-entry changes in the accounts of participants. Other institutions that are not participants but indirect participants which clear through or maintain a custodial relationship with participants have indirect access to DTC's clearance system. The accompanying prospectus supplement will specify whether a beneficial owner in an interest in any book-entry certificate will be entitled to receive a certificate representing that interest in registered, certificated form, unless either (i) DTC ceases to act as depository for that certificate and a successor depository is not obtained, or (ii) the depositor notifies DTC of its intent to terminate the book-entry system and, upon receipt of a notice of intent from DTC, the participants holding beneficial interests in the book-entry certificates agree to initiate a termination. Upon the occurrence of one of the foregoing events, 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 the definitive certificates as certificateholders under the pooling and servicing agreement. 32
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Prior to any such event, beneficial owners will not be recognized by the trustee, the master servicer, the servicer or the Certificate Administrator 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 their 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 the beneficial owner is a participant or indirectly through participants and, if applicable, indirect participants. Under the procedures of DTC, transfers of the beneficial ownership of any book-entry certificates will be required to be made in minimum denominations specified in the accompanying prospectus supplement. The ability of a beneficial owner to pledge book-entry certificates to persons or entities that are not participants in the DTC system, or to otherwise act for the certificates, may be limited because of the lack of physical certificates evidencing the certificates and because DTC may act only on behalf of participants. Because of time zone differences, the securities account of a Clearstream or Euroclear System participant as a result of a transaction with a DTC participant, other than a depositary holding on behalf of Clearstream or Euroclear System, will be credited during a subsequent securities settlement processing day, which must be a business day for Clearstream or Euroclear System, as the case may be, immediately following the DTC settlement date. Credits or any transactions in those securities settled during this processing will be reported to the relevant Euroclear System participant or Clearstream participants on that business day. Cash received in Clearstream or Euroclear System as a result of sales of securities by or through a Clearstream participant or Euroclear System participant to a DTC participant, other than the depositary for Clearstream or Euroclear System, will be received with value on the DTC settlement date, but will be available in the relevant Clearstream or Euroclear System cash account only as of the business day following settlement in DTC. Transfers between participants will occur in accordance with DTC rules. Transfers between Clearstream participants and Euroclear System participants will occur in accordance with their respective rules and operating procedures. Cross-market transfers between persons holding directly or indirectly through DTC, on the one hand, and directly or indirectly through Clearstream participants or Euroclear System 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, the cross market transactions will require delivery of instructions to the relevant European international clearing system by the counterparty in that system in accordance with its rules and procedures and within its established deadlines defined with respect to 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. Clearstream participants and Euroclear System participants may not deliver instructions directly to the depositaries. Clearstream, as a professional depository, holds securities for its participating organizations and facilitates the clearance and settlement of securities transactions between Clearstream participants through electronic book-entry changes in accounts of Clearstream participants, thereby 33
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eliminating the need for physical movement of certificates. As a professional depository, Clearstream is subject to regulation by the Luxembourg Monetary Institute. Euroclear System was created to hold securities for participants of Euroclear System and to clear and settle transactions between Euroclear System 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. The Euroclear System operator is Euroclear Bank S.A./N.V., under contract with the clearance cooperative, Euroclear System Clearance Systems S.C., a Belgian co-operative corporation. All operations are conducted by the Euroclear System operator, and all Euroclear System securities clearance accounts and Euroclear System cash accounts are accounts with the Euroclear System operator, not the clearance cooperative. The clearance cooperative establishes policy for Euroclear System on behalf of Euroclear System participants. Securities clearance accounts and cash accounts with the Euroclear System operator are governed by the terms and conditions Governing Use of Euroclear System and the related operating procedures of the Euroclear System and applicable Belgian law. The terms and conditions govern transfers of securities and cash within Euroclear System, withdrawals of securities and cash from Euroclear System, and receipts of payments with respect to securities in Euroclear System. All securities in Euroclear System are held on a fungible basis without attribution of specific certificates to specific securities clearance accounts. Distributions on the book-entry certificates will be forwarded by the trustee to DTC, and DTC will be responsible for forwarding those payments to participants, each of which will be responsible for disbursing the payments to the beneficial owners it represents or, if applicable, to indirect participants. Accordingly, beneficial owners may experience delays in the receipt of payments relating to 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 those actions. None of the master servicer, the servicer, the depositor, the Certificate Administrator, the trustee or any of their respective affiliates has undertaken any responsibility or assumed any responsibility 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 those beneficial ownership interests. ASSIGNMENT OF MORTGAGE LOANS At the time of issuance of a series of certificates, the depositor will cause the mortgage loans or mortgage securities and any other assets being included in the related trust to be assigned to the trustee or its nominee, which may be the custodian, together with, if specified in the accompanying prospectus supplement, all principal and interest received on the mortgage loans or mortgage securities after the last day of the month of the cut-off date, other than principal and interest due on or before such date and any Spread. The trustee will, concurrently with that assignment, deliver a series of certificates to the depositor in exchange for the mortgage loans or mortgage securities. 34
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Each mortgage loan or mortgage security will be identified in a schedule appearing as an exhibit to the related pooling and servicing agreement. Each schedule of mortgage loans 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 LTV ratio or CLTV ratio and junior mortgage ratio, as applicable, at origination or modification, without regard to any secondary financing. If stated in the accompanying prospectus supplement, and in accordance with the rules of membership of Merscorp, Inc. and/or Mortgage Electronic Registration Systems, Inc. or, MERS, assignments of the mortgages for the mortgage loans in the related trust will be registered electronically through Mortgage Electronic Registration Systems, Inc., or MERS(R) System. For 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 of those mortgage loans. In addition, except as described in the accompanying prospectus supplement, the depositor will, as to each mortgage loan other than mortgage loans underlying any mortgage securities, deliver to the trustee, or to the custodian, a set of legal documents relating to each mortgage loan that are in possession of the depositor, including: o 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; o the mortgage, except for any mortgage not returned from the public recording office, with evidence of recording indicated thereon or a copy of the mortgage with evidence of recording indicated thereon or, in the case of a Cooperative Loan or Mexico Mortgage Loan, the respective security agreements and any applicable financing statements; o an assignment in recordable form of the mortgage, or evidence that the mortgage is held for the trustee through the MERS(R) System, or a copy of such assignment with evidence of recording indicated thereon or, for a Cooperative Loan, an assignment of the respective security agreements, any applicable financing statements, recognition agreements, relevant stock certificates, related blank stock powers and the related proprietary leases or occupancy agreements and, for a mixed-use mortgage loan, the assignment of leases, rents and profits, if separate from the mortgage, and an executed reassignment of the assignment of leases, rents and profits and, for a Mexico Mortgage Loan, an assignment of the mortgagor's beneficial interest in the Mexican trust; and o if applicable, any riders or modifications to the mortgage note and mortgage, together with any other documents at such times as described in the related pooling and servicing agreement. The 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 accompanying prospectus supplement, the depositor may not be required to deliver one or more of the related 35
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documents if any of the documents are missing from the files of the party from whom the mortgage loan was purchased. If, for 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 or a delay in the receipt of information necessary to prepare the related assignment, the depositor will deliver or cause to be delivered to the trustee or the custodian a copy of the 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. Any mortgage for a mortgage loan secured by mortgaged property located in Puerto Rico will be either a Direct Puerto Rico Mortgage or an Endorsable Puerto Rico Mortgage. Endorsable Puerto Rico Mortgages do not require an assignment to transfer the related lien. Rather, transfer of those mortgages follows an effective endorsement of the related mortgage note and, therefore, delivery of the assignment referred to in the third clause listed in the third preceding paragraph would be inapplicable. Direct Puerto Rico Mortgages, however, require an assignment to be recorded for any transfer of the related lien and the assignment would be delivered to the trustee, or the custodian. Assignments of the 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, the 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 the mortgage loan. ASSIGNMENT OF THE 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 Spread. Each contract will be identified in a schedule appearing as an exhibit to the pooling and servicing agreement. The schedule will include, among other things, information as to the principal amount and the adjusted principal balance of each contract as of the close of business on the cut-off date, as well as information respecting 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 to the trustee, or to 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 financing statement to be executed by the depositor identifying the trustee as the secured party and identifying all contracts as collateral. However, 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 36
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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 documents in trust for the benefit of the certificateholders and, within 90 days after receipt thereof, will review such documents. If any such document is found to be defective in any material respect, the trustee or the custodian shall promptly notify Residential Funding Corporation or the designated seller, if any, and the depositor. If Residential Funding Corporation or the designated seller, as the case may be, cannot cure the defect within 60 days, or within the period specified in the accompanying prospectus supplement, after notice of the defect is given, Residential Funding or designated seller, as applicable will be obligated no later than 90 days after such notice, or within the period specified in the accompanying prospectus supplement, to either repurchase the related mortgage loan or contract or any related property from the trustee or substitute a new mortgage loan or contract in accordance with the standards described in this prospectus under "The Trust -- Repurchases of Mortgage Collateral." The obligation of Residential Funding and designated seller 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. Any mortgage loan not so purchased or substituted shall remain in the related trust. ASSIGNMENT OF MORTGAGE 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 mortgage securities and other property to be included in the trust for a series. The assignment will include all principal and interest due on or with respect to the mortgage securities after the cut-off date specified in the accompanying prospectus supplement, except for any Spread. The depositor will cause the mortgage securities to be registered in the name of the trustee or its nominee, and the trustee will concurrently authenticate and deliver the certificates. The accompanying prospectus supplement will specify whether the trustee will be in possession of or be assignee of record of any underlying assets for a mortgage security. Each mortgage security will be identified in a schedule appearing as an exhibit to the related pooling and servicing agreement, which will specify as to each mortgage security information regarding the original principal amount and outstanding principal balance of each mortgage security as of the cut-off date, as well as the annual pass-through rate or interest rate for each mortgage security conveyed to the trustee. SPREAD The depositor, the servicer, the mortgage collateral seller, the master servicer or any of their affiliates, or any other entity specified in the accompanying prospectus supplement may retain or be paid a portion of interest due with respect to the related mortgage collateral, which will be an uncertificated interest in the mortgage collateral. The payment of any Spread will be disclosed in the accompanying prospectus supplement. This payment may be in addition to any other payment, including a servicing fee, that the specified entity is otherwise entitled to receive with respect to the mortgage collateral. Any payment of this sort on an item of mortgage collateral will represent a specified portion of the interest payable thereon. The interest portion of a Realized Loss and any 37
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partial recovery of interest on an item of mortgage collateral will be allocated between the owners of any Spread and the certificateholders entitled to payments of interest as provided in the applicable pooling and servicing agreement. PAYMENTS ON MORTGAGE COLLATERAL COLLECTION OF PAYMENTS ON MORTGAGE LOANS AND CONTRACTS The servicer or the master servicer, as applicable, will deposit or will cause to be deposited into the Custodial Account payments and collections received by it subsequent to the cut-off date, other than payments due on or before the cut-off date, as specifically described in the related pooling and servicing agreement, which in most cases, except as otherwise provided, will include the following: o all payments on account of principal of the mortgage loans or contracts comprising a trust; o all payments on account of interest on the mortgage loans or contracts comprising that trust, net of the portion of each payment thereof retained by the servicer or subservicer, if any, as Spread, and its servicing or other compensation; o Liquidation Proceeds; o all subsequent recoveries of amounts related to a mortgage loan as to which the master servicer had previously determined that no further amounts would be recoverable, resulting in a realized loss, net of unreimbursed liquidation expenses and Servicing Advances; o 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; o any Buy-Down Funds and, if applicable, investment earnings thereon, required to be paid to certificateholders; o all proceeds of any mortgage loan or contract in the trust purchased or, in the case of a substitution, amounts representing a principal adjustment, by the master servicer, the depositor, the designated seller, Residential Funding Corporation, any subservicer or mortgage collateral seller or any other person under the terms of the pooling and servicing agreement as described under "The Trusts--Representations With Respect to Mortgage Collateral" and "--Repurchases of Mortgage Collateral;" o any amount required to be deposited by the master servicer in connection with losses realized on investments of funds held in the Custodial Account; and 38
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o any amounts required to be transferred from the Certificate Account to the Custodial Account. In addition to the Custodial Account, the master servicer or servicer will establish and maintain the Certificate Account. Both the Custodial Account and the Certificate Account must be either: o 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 the certificates; o 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 so 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 those funds that is superior to the claims of any other depositors or creditors of the depository institution with which the accounts are maintained; o in the case of the Custodial Account, a trust account or accounts maintained in either the corporate trust department or the corporate asset services department of a financial institution which has debt obligations that meet specified rating criteria; o in the case of the Certificate Account, a trust account or accounts maintained with the trustee; or o any other Eligible Account. The collateral that is eligible to secure amounts in an Eligible Account is limited to some Permitted Investments. A Certificate Account may be maintained as an interest-bearing or a non-interest-bearing account, or funds therein may be invested in Permitted Investments as described below. The Custodial Account may contain funds relating to more than one series of certificates as well as payments received on other mortgage loans and assets serviced or master serviced by the master servicer that have been deposited into the Custodial Account. The accompanying prospectus supplement will specify when 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 that distribution date. The master servicer, the servicer or the trustee will also deposit or cause to be deposited into the Certificate Account: o the amount of any Advances made by the master servicer or the servicer as described in this prospectus under "--Advances;" o any payments under any letter of credit or any certificate insurance policy, and any amounts required to be transferred to the Certificate Account from a reserve fund, as described under "Description of Credit Enhancement" below; 39
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o 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; o any distributions received on any mortgage securities included in the trust; and o any other amounts as described in the related pooling and servicing agreement. The portion of any payment received by the master servicer or the servicer relating to a mortgage loan that is allocable to Spread will typically be deposited into the Custodial Account, but 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. All income and gain realized from any 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 the loss. BUY-DOWN MORTGAGE LOANS For each Buy-Down Mortgage Loan, the subservicer will deposit the related Buy-Down Funds provided to it in a Buy-Down Account which will comply with the requirements described in this prospectus with respect to a Subservicing Account. Generally, the terms of all Buy-Down Mortgage Loans provide for the contribution of Buy-Down Funds in an amount equal to or exceeding either (i) the total payments to be made from those funds under the related buy-down plan or (ii) if the Buy-Down Funds are to be deposited on a discounted basis, that amount of Buy-Down Funds which, together with investment earnings thereon at a rate as described in the Guide from time to time will support the scheduled level of payments due under the Buy-Down Mortgage Loan. Neither the master servicer nor the depositor will be obligated to add to any discounted Buy-Down Funds any of its own funds should investment earnings prove insufficient to maintain the scheduled level of payments. To the extent that any insufficiency is not recoverable from the mortgagor or, in an appropriate case, from the subservicer, distributions to certificateholders may be affected. For each Buy-Down Mortgage Loan, the subservicer will withdraw from the Buy-Down Account and remit to the master servicer on or before the date specified in the applicable subservicing agreement the amount, if any, of the Buy-Down Funds, and, if applicable, investment earnings thereon, for each Buy-Down Mortgage Loan that, when added to the amount due from the mortgagor on the Buy-Down Mortgage Loan, equals the full monthly payment which would be due on the Buy-Down Mortgage Loan if it were not subject to the buy-down plan. The Buy-Down Funds will in no event be a part of the related trust. 40
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If the mortgagor on a Buy-Down Mortgage Loan prepays the mortgage loan in its entirety during the Buy-Down Period, the applicable subservicer will withdraw from the Buy-Down Account and remit to the mortgagor or any other designated party in accordance with the related buy-down plan any Buy-Down Funds remaining in the Buy-Down Account. If a prepayment by a mortgagor during the Buy-Down Period together with Buy-Down Funds will result in full prepayment of a Buy-Down Mortgage Loan, the subservicer will, in most cases, be required to withdraw from the Buy-Down Account and remit to the master servicer the Buy-Down Funds and investment earnings thereon, if any, which together with such prepayment will result in a prepayment in full; provided that Buy-Down Funds may not be available to cover a prepayment under some mortgage loan programs. Any Buy-Down Funds so remitted to the master servicer in connection with a prepayment described in the preceding sentence will be deemed to reduce the amount that would be required to be paid by the mortgagor to repay fully the related mortgage loan if the mortgage loan were not subject to the buy-down plan. Any investment earnings remaining in the Buy-Down Account after prepayment or after termination of the Buy-Down Period will be remitted to the related mortgagor or any other designated party under the buy-down agreement. If the mortgagor defaults during the Buy-Down Period with respect to a Buy-Down Mortgage Loan and the property securing that Buy-Down Mortgage Loan is sold in liquidation either by the master servicer, the primary insurer, the pool insurer under the mortgage pool insurance policy or any other insurer, the subservicer will be required to withdraw from the Buy-Down Account the Buy-Down Funds and all investment earnings thereon, if any, and remit the same to the master servicer or, if instructed by the master servicer, pay the same to the primary insurer or the pool insurer, as the case may be, if the mortgaged property is transferred to that insurer and the insurer pays all of the loss incurred relating to such default. Because Buy-Down Funds may have been provided by a third party such as the seller of the Mortgaged Property, a home builder, or an employer, such funds may be subject to third party claims, offsets, defenses or counterclaims in the event of a dispute between the mortgagor and such third party or otherwise. In addition, upon foreclosure the inclusion of personal property collateral may present additional defenses for the mortgagor to assert. COLLECTION OF PAYMENTS ON MORTGAGE SECURITIES The trustee or the Certificate Administrator, as specified in the accompanying prospectus supplement, will deposit in the Certificate Account all payments on the mortgage securities as they are received after the cut-off date. If the trustee has not received a distribution for any mortgage 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 mortgage security to make such payment as promptly as possible and legally permitted. The trustee may take any legal action against the related issuer or guarantor as is appropriate under the circumstances, including the prosecution of any claims in connection therewith. The reasonable legal fees and expenses incurred by the trustee in connection with the prosecution of any legal action will be reimbursable to the trustee out of the proceeds of the action and will be retained by the trustee prior to the deposit of any remaining proceeds in the Certificate Account pending distribution thereof to the certificateholders of the affected series. If the trustee has reason to believe that the proceeds of the legal action may be insufficient to cover its projected legal fees and expenses, the trustee will notify 41
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the related certificateholders that it is not obligated to pursue any available remedies unless adequate indemnity for its legal fees and expenses is provided by the 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 various purposes, as specifically described in the related pooling and servicing agreement, which in most cases will include the following: o 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;" o to reimburse itself or any subservicer for Advances, or for Servicing Advances, out of late payments, Insurance Proceeds, Liquidation Proceeds, any proceeds relating to any REO Mortgage Loan or collections on the mortgage loan or contract with respect to which those Advances or Servicing Advances were made; o to pay to itself or any subservicer unpaid servicing fees and subservicing fees, out of payments or collections of interest on each mortgage loan or contract; o to pay to itself as additional servicing compensation any investment income on funds deposited in the Custodial Account, any amounts remitted by subservicers as interest on partial prepayments on the mortgage loans or contracts, and, if so provided in the pooling and servicing agreement, any profits realized upon disposition of a mortgaged property acquired by deed in lieu of foreclosure or repossession or otherwise allowed under the pooling and servicing agreement; o to pay to itself, a subservicer, Residential Funding Corporation, the depositor, the designated seller or the mortgage collateral seller all amounts received on each mortgage loan or contract purchased, repurchased or removed under 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; o to pay the depositor or its assignee, or any other party named in the accompanying prospectus supplement, all amounts allocable to the 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; o to reimburse itself or any subservicer for any Nonrecoverable Advance and for Advances that have been capitalized by adding the delinquent interest and other amounts owed under the mortgage loan or contract to the principal balance of the mortgage loan or contract, in accordance with the terms of the pooling and servicing agreement; o to reimburse itself or the depositor for other expenses incurred for which it or the depositor is entitled to reimbursement, including reimbursement in connection with 42
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enforcing any repurchase, substitution or indemnification obligation of any seller that is assigned to the trustee for the benefit of the certificateholder, or against which it or the depositor is indemnified under the pooling and servicing agreement; o to withdraw any amount deposited in the Custodial Account that was not required to be deposited therein; and o to clear the Custodial Account of amounts relating to the corresponding mortgage loans or contracts in connection with the termination of the trust under the pooling and servicing agreement, as described in "The Pooling and Servicing Agreement--Termination; Retirement of Certificates." DISTRIBUTIONS Beginning on the distribution date in the month next succeeding the month in which the cut-off date occurs, or any other date as may be described in the accompanying prospectus supplement, for a series of certificates, distribution of principal and interest, or, where applicable, of principal only or interest only, on each class of certificates entitled to such payments will be made 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 distributions will be made to the persons who are registered as the holders of the certificates at the close of business on the last business day of the preceding month or on such other day as is specified in the accompanying prospectus supplement. 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, if the certificateholder has so notified the trustee, the master servicer, the Certificate Administrator or the paying agent, as the case may be, and the applicable pooling and servicing agreement provides for that form of payment, or by check mailed to the address of the person entitled to such payment as it appears on the certificate register. The final distribution in retirement of the certificates of any class, other than a subordinate class, will be made only upon presentation and surrender of the certificates at the office or agency of the trustee specified in the notice to the certificateholders. Distributions will be made to each certificateholder in accordance with that holder's percentage interest in a particular class. As a result of the provisions described below under "--Realization Upon Defaulted Mortgage Loans or Contracts," under which the certificate principal balance of a class of subordinate certificates can be increased in certain circumstances after it was previously reduced to zero, each certificate of a subordinate class of certificates will be considered to remain outstanding until the termination of the related trust, even if the certificate principal balance thereof has been reduced to zero. 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 accompanying prospectus supplement. Distributions of interest on each class of certificates will be made prior to distributions of principal thereon. Each class of certificates, other 43
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than classes of strip certificates, may have a different specified interest rate, or pass-through rate, which may be a fixed, variable or adjustable pass-through rate, or any combination of two or more pass-through rates. The accompanying prospectus supplement will specify the pass-through rate or rates for each class, or the initial pass-through rate or rates and the method for determining the pass-through rate or rates. The accompanying prospectus supplement will describe the manner of interest accruals and payments. In general, interest on the certificates will accrue during each calendar month and will be payable on the distribution date in the following calendar month. If stated in the accompanying prospectus supplement, interest on any class of certificates for any distribution date may be limited to the extent of available funds for that distribution date. The accompanying prospectus supplement will describe the method of calculating interest on the certificates. In general, 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 last day of the preceding month of a class of certificates, or on such other day as is specified in the accompanying prospectus supplement, an amount equal to the percentage interest represented by the certificate held by that holder multiplied by that class's Distribution Amount. 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 of principal, and any schedule or formula or other provisions applicable to that determination, including distributions among multiple classes of senior certificates or subordinate certificates, shall be described in the accompanying prospectus supplement. Distributions of principal on any class of certificates will be made on a pro rata basis among all of the certificates of that class. On or prior to the 20th day, or, if the 20th day is not a business day, the next business day, of the month of distribution, 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 immediately succeeding distribution date. Prior to the close of business on the business day next succeeding each determination date, the master servicer or the Certificate Administrator, as applicable, will furnish a statement to the trustee with information 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 provides an example of the flow of funds as it would relate to a hypothetical series of certificates backed by mortgage loans or contracts that are issued, and with a cut-off date occurring, in August 2006: 44
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DATE NOTE DESCRIPTION --------------------- ------------------- -------------------------------------- August 1 (A) Cut-off date. August2-31 (B) Servicers or subservicers, as applicable, receive any Principal Prepayments and applicable interest thereon. August 31 (C) Record date. August 2-September 1 (D) The due dates for payments on a mortgage loan or contract. September 18 (E) Servicers or subservicers remit to the master servicer or servicer, as applicable, scheduled payments of principal and interest due during the related Due Period and received or advanced by them. September 23 (F) Determination date. September 25 (G) Distribution date. Succeeding months follow the pattern of (B) through (G), except that for succeeding months, (B) will also include the first day of that month. A series of certificates may have different Prepayment Periods, Due Periods, cut-off dates, record dates, remittance dates, determination dates and/or distribution dates than those described 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 August 1 after deducting principal payments due on or before that date or such other date as may be specified in the accompanying prospectus supplement. Those principal payments due on or before August 1 and the accompanying interest payments, and any Principal Prepayments received as of the close of business on August 1 are not part of the mortgage pool or contract pool and will not be passed through to certificateholders. (B) Any 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 from such prepaid amounts for the month in which the partial Principal Prepayments were received. (C) Distributions on September 25 will be made to certificateholders of record at the close of business on August 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 those payments. Funds required to be remitted from the Subservicing Accounts or 45
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collection accounts to the master servicer or servicer, as applicable, will be remitted on September 18, 2006 together with any required Advances by the servicer or subservicers, except that Principal Prepayments in full and Principal Prepayments in part received by subservicers during the month of August will have been remitted to the master servicer or the servicer, as applicable, within five business days of receipt. (F) On September 23, the master servicer or servicer will determine the amounts of principal and interest that will be passed through on September 25 to the holders of each class of certificates. The master servicer or servicer will be obligated to distribute those payments due during the related Due Period that have been received from subservicers or servicers prior to and including September 18, as well as all Principal Prepayments received on mortgage loans in August, with interest adjusted to the pass-through rates applicable to the respective classes of certificates and reduced on account of Principal Prepayments as described in clause (B) above. Distributions to the holders of senior certificates, if any, on September 25 may include amounts otherwise distributable to the holders of the related subordinate certificates, amounts withdrawn from any reserve fund, amounts drawn against any certificate insurance policy and amounts advanced by the master servicer or the servicer under the circumstances described in "Subordination" and "--Advances." (G) On September 25, the amounts determined on September 23 will be distributed to certificateholders. If provided in the accompanying prospectus supplement, the distribution date for any series of certificates as to which the trust includes mortgage 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 the mortgage securities. ADVANCES As to each series of certificates, the master servicer or the servicer will make Advances on or before each distribution date, but only to the extent that the 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. The amount of any Advance will be determined based on the amount payable under the mortgage loan as adjusted from time to time and as may be modified as described in this prospectus under "--Servicing and Administration of Mortgage Collateral," and no Advance will be required in connection with any reduction in amounts payable under the Relief Act or as a result of certain actions taken by a bankruptcy court. As specified in the accompanying prospectus supplement for any series of certificates as to which the trust includes mortgage securities, any advancing obligations will be under the terms of the mortgage securities and may differ from the provisions relating to Advances described in this prospectus. Advances are intended to maintain a regular flow of scheduled interest and principal payments to related certificateholders. Advances do not represent an obligation of the master servicer or 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, those funds 46
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will be required to be replaced on or before any future distribution date to the extent that funds in the Certificate Account on that 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 those amounts were advanced, including 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 Corporation, a subservicer, the designated seller or a mortgage collateral seller. Advances will also be reimbursable from cash otherwise distributable to certificateholders to the extent that the master servicer or servicer shall determine that any Advances previously made are not ultimately recoverable as described in the third preceding paragraph. In addition, Advances will be reimbursable from cash otherwise distributable to certificateholders if they have been capitalized by adding the delinquent interest to the outstanding principal balance of the related mortgage loan or contract, as described under "--Servicing and Administration of Mortgage Collateral." For any senior/subordinate series, so long as the related subordinate certificates remain outstanding with a certificate principal balance greater than zero and except for Special Hazard Losses, Fraud Losses and Bankruptcy Losses, in each case in excess of specified amounts, and Extraordinary Losses, the Advances may be reimbursable first out of amounts otherwise distributable to holders of the subordinate certificates, if any. The master servicer or the servicer may also be obligated to make Servicing Advances, to the extent recoverable out of Liquidation Proceeds or otherwise, for some 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. If the short-term or long-term obligations of the provider of the support are downgraded by a rating agency rating the related certificates or if any collateral supporting such obligation is not performing or is removed under the terms of any agreement described in the accompanying prospectus supplement, the certificates may also be downgraded. PREPAYMENT INTEREST SHORTFALLS When a mortgagor prepays a mortgage loan or contract in full between scheduled due dates for the mortgage loan or contract, the mortgagor pays interest on the amount prepaid only to but not including the date on which the 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. If stated in the accompanying prospectus supplement, to the extent funds are available from the servicing fee, the master servicer or servicer may make an additional payment to certificateholders out of the servicing fee otherwise payable to it for any mortgage loan that prepaid during the related prepayment period equal to the Compensating Interest for that mortgage loan or contract from the date of the prepayment to the related due date. Compensating Interest will be limited to the aggregate amount specified in the accompanying prospectus supplement and may not be sufficient to cover the Prepayment Interest Shortfall. If so disclosed in the accompanying 47
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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." FUNDING ACCOUNT A pooling and servicing agreement or other agreement may provide for the transfer by the sellers of additional mortgage loans to the related trust after the closing date for the related certificates. Any additional mortgage loans will be required to conform to the requirements described in the related pooling and servicing agreement or other agreement providing for such transfer. If a Funding Account is established, all or a portion of the proceeds of the sale of one or more classes of certificates of the related series or a portion of collections on the mortgage loans relating to principal will be deposited in such account to be released as additional mortgage loans are transferred. A Funding Account will be required to be maintained as an Eligible Account. All amounts in the Funding Account will be required to be invested in Permitted Investments and the amount held in the Funding Account shall at no time exceed 25% of the aggregate outstanding principal balance of the certificates. The related pooling and servicing agreement or other agreement providing for the transfer of additional mortgage loans will provide that all transfers must be made within 90 days, and that amounts set aside to fund the transfers, whether in a Funding Account or otherwise, and not so applied within the required period of time will be deemed to be Principal Prepayments and applied in the manner described in the prospectus supplement. REPORTS TO 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, or will make available to each certificateholder of record in the manner described in the accompanying prospectus supplement, a statement or statements with respect to the related trust setting forth the information described in the related pooling and servicing agreement. The information will include the following (as applicable): o the applicable record date, determination date and distribution date; o the aggregate amount of payments received with respect to the mortgage loans, including prepayment amounts; o the servicing fee payable to the master servicer and the subservicer; o the amount of any other fees or expenses paid, and the identity of the party receiving such fees or expenses; o the amount, if any, of the distribution allocable to principal; o the amount, if any, of the distribution allocable to interest and the amount, if any, of any shortfall in the amount of interest and principal; o the outstanding principal balance or notional amount of each class of certificates before and after giving effect to the distribution of principal on that distribution date; 48
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o updated pool composition information, including weighted average interest rate and weighted average remaining term; o the book value of any property acquired by the trust through foreclosure or grant of a deed in lieu of foreclosure; o the balance of the reserve fund, if any, at the opening of business and the close of business on that distribution date; o the percentage of the outstanding principal balances of the senior certificates, if applicable, after giving effect to the distributions on that distribution date; o in the case of certificates benefiting from alternative credit enhancement arrangements described in a prospectus supplement, the amount of coverage under alternative arrangements as of the close of business on the applicable determination date and a description of any alternative credit enhancement; o if applicable, the Special Hazard Amount, Fraud Loss Amount and Bankruptcy Amount as of the close of business on the applicable distribution date and a description of any change in the calculation of those amounts; o the aggregate unpaid principal balance of the mortgage collateral after giving effect to the distribution of principal on that distribution date, and the number of mortgage loans at the beginning and end of the reporting period; o based on the most recent reports furnished by subservicers, the number and aggregate principal balances of any items of mortgage collateral in the related trust that are delinquent (a) 30-59 days, (b) 60-89 days and (c) 90 or more days, and that are in foreclosure; o the amount of any losses on the mortgage loans during the reporting period; o information about the amount, terms and general purpose of any advances made or reimbursed during the reporting period; o any material modifications, extensions or waivers to the terms of the mortgage loans during the reporting period or that have cumulatively become material over time; o any material breaches of mortgage loan representations or warranties or covenants in the pooling and servicing agreement; and o for any series of certificates as to which the trust includes mortgage securities, any additional information as required under the related pooling and servicing agreement. In addition to the information described above, reports to certificateholders will contain any other information as is described in the applicable pooling and servicing agreement, which may 49
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include, without limitation, information as to Advances, reimbursements to subservicers, the servicer 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 on request a report to each person that was a holder of record of any class of certificates at any time during that calendar year. The report will include information as to the aggregate of amounts reported under the first two items in the list above for that calendar year or, if the person was a holder of record of a class of certificates during a portion of that calendar year, for the applicable portion of that 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 servicer 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. For any series of certificates for which the trust includes mortgage securities, the master servicer's or Certificate Administrator's servicing and administration obligations will be described in the accompanying prospectus supplement. Under each pooling and servicing agreement, the servicer or the master servicer may enter into subservicing agreements with one or more subservicers 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 the subservicing agreement. A subservicer may be an affiliate of the depositor. 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 the servicer or the master servicer alone were servicing such mortgage loans or contracts. COLLECTION AND OTHER SERVICING PROCEDURES The servicer or the master servicer, directly or through subservicers, as the case may be, 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 the 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 the mortgage loan or contract or 50
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any coverage provided by any alternative credit enhancement will not be adversely affected thereby. The master servicer may also waive or modify any term of a mortgage loan so long as the master servicer has determined that the waiver or modification is not materially adverse to any certificateholders, taking into account any estimated loss that may result absent that action. For any series of certificates as to which the trust includes mortgage securities, the master servicer's servicing and administration obligations will be under the terms of those mortgage securities. In instances in which a mortgage loan or contract is in default or if default is reasonably foreseeable, and if determined by the master servicer to be in the best interests of the related certificateholders, the master servicer or servicer may permit modifications of the mortgage loan or contract rather than proceeding with foreclosure. In making this determination, the estimated Realized Loss that might result if the mortgage loan or contract were liquidated would be taken into account. These modifications may have the effect of, among other things, reducing the mortgage rate, forgiving payments of principal, interest or other amounts owed under the mortgage loan, such as taxes and insurance premiums, extending the final maturity date of the mortgage loan, capitalizing delinquent interest and other amounts owed under the mortgage loan or contract by adding that amount to the unpaid principal balance of the mortgage loan or contract, or any combination of these or other modifications. Any modified mortgage loan or contract may remain in the related trust, and the reduction in collections resulting from the modification may result in reduced distributions of interest or principal on, or may extend the final maturity of, one or more classes of the related certificates. 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 so that the monthly payment is recalculated as an amount that will fully amortize its remaining principal amount by the original maturity date based on the original mortgage rate, provided that the 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 for a given trust may establish and maintain an 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 unless, in the case of junior mortgage loans, the mortgagor is required to escrow such amounts under the senior mortgage documents. Withdrawals from any 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 the escrow account, if required, to repair or otherwise protect the mortgage 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 the escrow accounts when a deficiency exists therein. The master servicer, servicer or subservicer will be entitled to reimbursement for any advances from the Custodial Account. Other duties and responsibilities of each servicer, the master servicer and the Certificate Administrator are described above under "--Payments on Mortgage Collateral." 51
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SPECIAL SERVICING The pooling and servicing agreement for a series of certificates may name a Special Servicer, which may be an affiliate of Residential Funding Corporation. The Special Servicer will be responsible for the servicing of certain delinquent mortgage loans or contracts as described in the prospectus supplement. The Special Servicer may have certain discretion to extend relief to mortgagors whose payments become delinquent. The Special Servicer may be permitted to grant a period of temporary indulgence to a mortgagor or may enter into a liquidating plan providing for repayment by the mortgagor, in each case without the prior approval of the master servicer or the servicer, as applicable. Other types of forbearance typically will require the approval of the master servicer or servicer, as applicable. In addition, the master servicer or 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. Under the terms of those agreements, the holder may, for some delinquent mortgage loans: o instruct the master servicer or servicer to commence or delay foreclosure proceedings, provided that the holder deposits a specified amount of cash with the master servicer or servicer which will be available for distribution to certificateholders if Liquidation Proceeds are less than they otherwise may have been had the master servicer or servicer acted under its normal servicing procedures; o instruct the master servicer or servicer to purchase the mortgage loans from the trust prior to the commencement of foreclosure proceedings at the purchase price and to resell the mortgage loans to the holder, in which case any subsequent loss with respect to the mortgage loans will not be allocated to the certificateholders; or o become, or designate a third party to become, a subservicer with respect to the mortgage loans so long as (i) the master servicer or servicer has the right to transfer the subservicing rights and obligations of the mortgage loans to another subservicer at any time or (ii) the holder or its servicing designee is required to service the mortgage loans according to the master servicer's or servicer's servicing guidelines. In addition, the accompanying prospectus supplement may provide for the other types of special servicing arrangements. ENFORCEMENT OF "DUE-ON-SALE" CLAUSES When any mortgaged property relating to a mortgage loan or contract, other than an ARM loan, 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 52
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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, under 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. An 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 the 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. 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. In connection with any 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. REALIZATION UPON DEFAULTED MORTGAGE LOANS OR CONTRACTS For a mortgage loan in default, the master servicer or the related subservicer will decide whether to foreclose upon the mortgaged property or write off the principal balance of the mortgage loan or contract as a bad debt. In connection with such decision, the master servicer or the related subservicer will, following usual practices in connection with senior and junior mortgage servicing activities, estimate the proceeds expected to be received and the expenses expected to be incurred in connection with such foreclosure to determine whether a foreclosure proceeding is appropriate. For any junior mortgage loan, following any default, if the senior mortgage holder commences a foreclosure action it is likely that such mortgage loan will be written off as bad debt with no foreclosure proceeding unless foreclosure proceeds for such mortgage loan are expected to at least satisfy the related senior mortgage loan in full and to pay foreclosure costs. Similarly, the expense and delay that may be associated with foreclosing on the mortgagor's beneficial interest in the Mexican trust following a default on a Mexico Mortgage Loan, particularly if eviction or other proceedings are required to be commenced in the Mexican courts, may make attempts to realize on the collateral securing the Mexico Mortgage Loans uneconomical, thus significantly increasing the amount of the loss on the Mexico Mortgage Loan. 53
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Any acquisition of title and cancellation of any REO Mortgage Loan or REO Contract will be considered for most purposes to be an outstanding mortgage loan or contract held in the trust until it is converted into a Liquidated Mortgage Loan or Liquidated Contract. For purposes of calculations of amounts distributable to certificateholders relating to an REO Mortgage Loan or an REO Contract, the amortization schedule in effect at the time of any acquisition of title, before any adjustment 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, the amortization schedule will be deemed to have adjusted in accordance with any interest rate changes occurring on any adjustment date, so long as the 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 in the second succeeding paragraph, received by the subservicer, servicer or the master servicer on the mortgaged property prior to its disposition will be deposited in the Custodial Account on receipt and will be available at that time for making payments to certificateholders. For a mortgage loan or contract in default, the master servicer or servicer may pursue foreclosure or similar remedies subject to any senior loan positions and certain other restrictions pertaining to junior loans as described under "Certain Legal Aspects of Mortgage Loans and Contracts" 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 remedies if it determines that one remedy is more likely to result in a greater recovery. Upon the first to occur of final liquidation and a repurchase or substitution under a breach of a representation and warranty, the 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. In some cases, the master servicer or servicer will treat a second lien loan that is 180 days or more delinquent as having been finally liquidated. Any additional liquidation expenses relating to the mortgage loan or contract thereafter incurred will be reimbursable to the master servicer, servicer or any subservicer from any amounts otherwise distributable to the related certificateholders, or may be offset by any subsequent recovery related to the 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 the defaulted mortgage loan or contract. For some series of certificates, the applicable form of credit enhancement may provide, to the extent of coverage, that a defaulted mortgage loan or contract or REO Mortgage Loan or REO Contract will be removed from the trust prior to its final liquidation. 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. If a defaulted mortgage loan or contract or REO Mortgage 54
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Loan or REO Contract is not removed from the trust prior to final liquidation, then, upon its final liquidation, if a loss is realized which is not covered by any applicable form of credit enhancement or other insurance, the certificateholders will bear the 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 servicer will be entitled to retain that gain as additional servicing compensation unless the accompanying prospectus supplement provides otherwise. If specified in the accompanying prospectus supplement, if a final liquidation of a mortgage loan or contract resulted in a Realized Loss and thereafter the master servicer or servicer receives a subsequent recovery specifically related to that 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 certificateholders in the same manner as repurchase proceeds or liquidation proceeds received in the prior calendar month, to the extent that the related Realized Loss was allocated to any class of certificates. In addition, if so specified in the accompanying prospectus supplement, the certificate principal balance of the class of subordinate certificates with the highest payment priority to which Realized Losses have been allocated will be increased to the extent that such subsequent recoveries are distributed as principal to any classes of certificates. However, the certificate principal balance of that class of subordinate certificates will not be increased by more than the amount of Realized Losses previously applied to reduce the certificate principal balance of that class of certificates. The amount of any remaining subsequent recoveries will be applied to increase the certificate principal balance of the class of certificates with the next lower payment priority; however, the certificate principal balance of that class of certificates will not be increased by more than the amount of Realized Losses previously applied to reduce the certificate principal balance of that class of certificates, and so on. Holders of certificates whose certificate principal balance is increased in this manner will not be entitled to interest on the increased balance for any interest accrual period preceding the distribution date on which the increase occurs. The foregoing provisions will apply even if the certificate principal balance of a class of subordinate certificates was previously reduced to zero. Accordingly, each class of subordinate certificates will be considered to remain outstanding until the termination of the related trust. In the case of a series of certificates other than a senior/subordinate series, if so provided in the accompanying prospectus supplement, the applicable form of credit enhancement may provide for reinstatement in accordance with specified conditions if, following the final liquidation of a mortgage loan or contract and a draw under the related credit enhancement, subsequent recoveries are received. 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." The market value of any Mixed-Use Property obtained in foreclosure or by deed in lieu of foreclosure will be based substantially on the operating income obtained from renting the commercial and dwelling units. Since a default on a mortgage loan secured by Mixed-Use Property is likely to have occurred because operating income, net of expenses, is insufficient to make debt service payments on the related mortgage loan, it can be anticipated that the market value of that property will be less than was anticipated when the related mortgage loan was originated. To the 55
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extent that the equity in the property does not absorb the loss in market value and the loss is not covered by other credit support, a loss may be experienced by the related trust. 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 mortgage securities in the manner described in the accompanying prospectus supplement. DESCRIPTION OF CREDIT ENHANCEMENT GENERAL As described in the accompanying prospectus supplement, credit support provided for each series of certificates may include one or more or any combination of the following: o a letter of credit; o subordination provided by any class of subordinated certificates for the related series; o overcollateralization; o a mortgage pool insurance policy, special hazard insurance policy, mortgage insurance policy, bankruptcy bond, mortgage repurchase bond or other types of insurance policies, or a secured or unsecured corporate guaranty, as described in the accompanying prospectus supplement; o a reserve fund; o a certificate insurance policy or surety bond; o derivatives products, as described in the accompanying prospectus supplement; or o another form as may be described in the accompanying prospectus supplement. Credit support for each series of certificates may be comprised of one or more of the above components. Each component may have a dollar limit and may provide coverage with respect to Realized Losses that are: o Defaulted Mortgage Losses; o Special Hazard Losses; o Bankruptcy Losses; and o Fraud Losses. 56
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Most forms of credit support will not provide protection against all risks of loss and will not guarantee repayment of the entire outstanding principal balance of the certificates and interest thereon. If losses occur that exceed the amount covered by credit support or are of a type that is 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 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 described in this prospectus and in the accompanying prospectus supplement, o coverage with respect to Defaulted Mortgage Losses may be provided by a mortgage pool insurance policy, o coverage with respect to Special Hazard Losses may be provided by a special hazard insurance policy, o coverage with respect to Bankruptcy Losses may be provided by a bankruptcy bond and o coverage with respect to Fraud Losses may be provided by a mortgage pool insurance policy or mortgage repurchase bond. In addition, if stated in the accompanying 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 those losses, in the form of subordination of one or more classes of certificates as described under "Subordination," or in the form of a certificate insurance policy, a letter of credit, a mortgage pool insurance policy, surety bonds or other types of insurance policies, other secured or unsecured corporate guarantees or in any other substantially similar form as may be described in the accompanying prospectus supplement, or in the form of a combination of two or more of the foregoing. If stated in the accompanying prospectus supplement, limited credit enhancement may be provided to cover Defaulted Mortgage Losses with respect to mortgage loans with LTV ratios at origination of over 80% that are not insured by a primary insurance policy, to the extent that those losses would be covered under a primary insurance policy if obtained, or may be provided in lieu of title insurance coverage, in the form of a corporate guaranty or in other forms described in this section. As described in the pooling and servicing agreement, credit support may apply to all of the mortgage loans or to some mortgage loans contained in a mortgage pool. In addition, the credit support may be provided by an assignment of the right to receive cash amounts, a deposit of cash into a reserve fund or other pledged assets, or by banks, insurance companies, guarantees or any combination of credit support identified in the accompanying prospectus supplement. Each prospectus supplement will include a description of: o the amount payable under the credit enhancement arrangement, if any, provided with respect to a series; 57
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o any conditions to payment thereunder not otherwise described in this prospectus; o the conditions under which the amount payable under the credit support may be reduced and under which the credit support may be terminated or replaced; and o the material provisions of any agreement relating to the credit support. Additionally, each prospectus supplement will contain information with respect to the issuer of any third-party credit enhancement, if applicable. The pooling and servicing agreement or other documents may be modified in connection with the provisions of any credit enhancement arrangement to provide for reimbursement rights, control rights or other provisions that may be required by the credit enhancer. To the extent provided in the applicable pooling and servicing agreement, the credit enhancement arrangements may be periodically modified, reduced and substituted for based on the performance of or on the aggregate outstanding principal balance of the mortgage loans covered thereby. See "Description of Credit Enhancement--Reduction or Substitution of Credit Enhancement." If specified in the accompanying prospectus supplement, credit support for a series of certificates may cover one or more other series of certificates. 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 the policies, copies of which typically will be exhibits to the Form 8-K to be filed with the Securities and Exchange Commission in connection with the issuance of the related series of certificates. LETTERS OF CREDIT If any component of credit enhancement as to any series of certificates is to be provided by a letter of credit, a 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 accompanying prospectus supplement. On or before each distribution date, the letter of credit bank will be required to make 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. SUBORDINATION A senior/subordinate series of certificates will consist of one or more classes of senior certificates and one or more classes of subordinate certificates, as specified in the accompanying 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 accompanying prospectus supplement. In addition, some classes of senior or subordinate certificates may be senior to other classes of senior or subordinate certificates, as specified in the accompanying prospectus supplement. 58
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For any senior/subordinate series, the total amount available for distribution on each distribution date, as well as the method for allocating that amount among the various classes of certificates included in the series, will be described in the accompanying prospectus supplement. In most cases, for any series, the amount available for distribution will be allocated first to interest on the senior certificates of that series, and then to principal of the senior certificates up to the amounts described in the accompanying prospectus supplement, prior to allocation of any amounts to the subordinate certificates. If so provided in the pooling and servicing agreement, the master servicer or servicer may be permitted, under certain circumstances, to purchase any mortgage loan or contract that is three or more months delinquent in payments of principal and interest, at the repurchase price. Any Realized Loss subsequently incurred in connection with any such mortgage loan may be, under certain circumstances, passed through to the holders of then-outstanding certificates with a certificate principal balance greater than zero of the related series in the same manner as Realized Losses on mortgage loans that have not been so purchased, unless that purchase was made upon the request of the holder of the most junior class of certificates of the related series. See "Description of the Certificates--Servicing and Administration of Mortgage Collateral--Special Servicing" above. 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 and the owner of the Spread and, as to certain classes of subordinated certificates, may be subordinate to the rights of other subordinate certificateholders. Except as noted below, Realized Losses will be allocated to the subordinate certificates of the related series until their outstanding principal balances have been reduced to zero. Additional Realized Losses, if any, will be allocated to the senior certificates. If the series includes more than one class of senior certificates, the accompanying prospectus supplement will describe how Realized Losses are allocated. In general, Realized Losses will be allocated on a pro rata basis among all of the senior certificates in proportion to their respective outstanding principal balances. If described in the accompanying prospectus supplement, some classes of senior certificates may be allocated Realized Losses before other classes of senior certificates. The accompanying prospectus supplement will describe how Special Hazard Losses in excess of the Special Hazard Amount will be allocated among all outstanding classes of certificates. In general, such losses will be allocated among all outstanding classes of certificates of the related series on a pro rata basis in proportion to their outstanding principal balances. 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 the Fraud Loss Amount and Bankruptcy Amount, and the subordinate certificates may provide no coverage with respect to Extraordinary Losses or other specified types of losses, which will be described in the accompanying prospectus supplement, in which case those losses would be allocated on a pro rata basis among all outstanding classes of certificates in accordance with their respective certificate principal balances as described in the accompanying prospectus supplement. Each of the Special Hazard Amount, Fraud Loss Amount and Bankruptcy Amount may be subject to periodic reductions and may be subject to further reduction or termination, without the consent of the 59
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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. In most cases, any allocation of a Realized Loss, including a Special Hazard Loss, Fraud Loss or Bankruptcy Loss, to a certificate in a senior/subordinate series will be made by reducing its outstanding principal balance as of the distribution date following the calendar month in which the Realized Loss was incurred. The rights of holders of the various classes of certificates of any series to receive distributions of principal and interest is determined by the aggregate outstanding principal balance of each class or, if applicable, the related notional amount. The outstanding principal balance of any certificate will be reduced by all amounts previously distributed on that certificate representing 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 described in the accompanying prospectus supplement, holders of senior certificates may be entitled to receive a disproportionately larger amount of prepayments received during specified periods, which will have the effect, absent offsetting losses, of accelerating the amortization of the senior certificates and increasing the respective percentage ownership interest evidenced by the subordinate certificates in the related trust, with a corresponding decrease in the percentage of the outstanding principal balances of the senior certificates, thereby preserving the availability of the subordination provided by the subordinate certificates. In addition, some Realized Losses will be allocated first to subordinate certificates by reduction of their outstanding principal balance, 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 accompanying prospectus supplement, some 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 accompanying prospectus supplement. In lieu of the foregoing provisions, subordination may be effected by limiting the rights of the holders of subordinate certificates to receive the Subordinate Amount to the extent described in the accompanying prospectus supplement. As specified in the accompanying prospectus supplement, the Subordinate Amount may be reduced based upon the amount of losses borne by the holders of the subordinate certificates as a result of the subordination, a specified schedule or other method of reduction as the prospectus supplement may specify. The exact terms and provisions of the subordination of any subordinate certificate will be described in the accompanying prospectus supplement. OVERCOLLATERALIZATION AND EXCESS CASH FLOW If stated in the accompanying 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 60
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collateral, thereby creating overcollateralization and additional protection to the certificateholders, as specified in the accompanying prospectus supplement. Additionally, some of this excess cash flow may be used to protect the certificates against some Realized Losses by making an additional payment of principal on the certificates up to the amount of the Realized Loss. MORTGAGE POOL INSURANCE POLICIES AND MORTGAGE INSURANCE POLICIES Protection against losses on all or a portion of the mortgage loans in a mortgage loan pool may be obtained by the depositor for a trust in the form of a mortgage pool insurance policy or a mortgage insurance policy. A mortgage pool insurance policy covers specified losses on mortgage loans to the extent that the primary insurance policy, if required, is not sufficient to cover the loss. Generally, the insurer's payment obligations under a mortgage pool insurance policy are limited to a certain amount, which will be stated in the prospectus supplement. As used in this prospectus, a mortgage insurance policy is a policy that provides primary mortgage insurance on all of the mortgage loans that are subject to the policy. The insurer's payment obligations will be limited to the amount stated in the prospectus supplement, if applicable. Each mortgage pool insurance policy or mortgage insurance policy, in accordance with the limitations described in this prospectus and in the prospectus supplement, if any, will cover Defaulted Mortgage Losses on mortgage loans in an amount specified in the prospectus supplement. As described under "--Maintenance of Credit Enhancement," the master servicer, servicer or Certificate Administrator will use its best reasonable efforts to maintain the mortgage pool insurance policy or mortgage insurance policy and to present claims to the insurer on behalf of itself, the trustee and the certificateholders. The mortgage pool insurance policies and mortgage insurance policies, however, are not blanket policies against loss, since claims may only be made respecting particular defaulted mortgage loans and only upon satisfaction of specified conditions precedent described in the succeeding paragraph. Unless specified in the accompanying prospectus supplement, the mortgage pool insurance policies may not cover losses due to a failure to pay or denial of a claim under a primary insurance policy, irrespective of the reason. As more specifically provided in the accompanying prospectus supplement, each mortgage pool insurance policy or mortgage insurance policy will provide for conditions under which claims may be presented and covered under the policy. Upon satisfaction of these conditions, the insurer will have the option either (a) to purchase the property securing the defaulted mortgage loan at a price described in the prospectus supplement, or (b) to pay the portion of the loss specified in the prospectus supplement. In the case of a mortgage pool insurance policy, payments (i) may be reduced because of an aggregate payment limitation on the policy and (ii) may be net of some amounts paid or assumed to have been paid under any related primary insurance policy. Certificateholders may 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 or a mortgage insurance policy because the insurer may not be required to remit unpaid interest through the end of the month in which the 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 or mortgage 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 or mortgage insurance policy, as those amounts may not be covered by payments under the applicable policy and 61
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may 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 those policies), from the related hazard insurance policy or applicable special hazard insurance policy are insufficient to restore the damaged property to a condition sufficient to permit recovery under the mortgage pool insurance policy or mortgage 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) 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) the expenses will be recoverable by it through Liquidation Proceeds or Insurance Proceeds. Some mortgage pool insurance policies, mortgage insurance policies and primary insurance policies will not insure against loss sustained by reason of a default arising from, among other things, fraud or negligence in the origination or servicing of a loan, including misrepresentation by the mortgagor, the mortgage collateral seller or other persons involved in the origination of the mortgage loan, failure to construct a mortgaged property in accordance with plans and specifications, or bankruptcy, unless, if specified in the accompanying prospectus supplement, an endorsement to the mortgage pool insurance policy or mortgage insurance policy provides for insurance against that type of loss. Depending upon the nature of the event, a breach of a representation made by Residential Funding Corporation or other designated seller may also have occurred. If that representation materially and adversely affects the interests of certificateholders and cannot be cured, that breach may give rise to a repurchase obligation on the part of Residential Funding Corporation or other designated seller, as described under "The Trusts--Representations With Respect to Mortgage Collateral." 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 some expenses incurred by the master servicer, servicer or subservicer as well as accrued interest on delinquent mortgage loans, in most cases to the date of payment of the claim or to the date that the claim is submitted to the insurer. See "Certain Legal Aspects of Mortgage Loans and Contracts." 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 relating to a delinquent mortgage loan would be recoverable to it from the proceeds of the liquidation of the mortgage loan or otherwise, the master servicer or servicer would not be obligated to make an Advance respecting any delinquency since the Advance would not be ultimately recoverable to it from either the mortgage pool insurance policy or from any other related source. See "Description of the Certificates--Advances." If specified in the prospectus supplement, a mortgage insurance policy may have a similar limit on the aggregate amount of coverage for losses. Since each mortgage pool insurance policy and mortgage insurance policy generally will require that the property subject to a defaulted mortgage loan be restored to its original condition prior to claiming against the insurer, those policies will not provide coverage against hazard losses. As described under "Insurance Policies on Mortgage Loans or Contracts--Standard Hazard 62
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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 the mortgaged property. Additionally, no coverage for Special Hazard Losses, Fraud Losses or Bankruptcy Losses will cover all risks, and the amount of any such coverage will be limited. See "--Special Hazard Insurance Policies" 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 that are similar to the mortgage pool insurance policies and mortgage insurance policies described above. SPECIAL HAZARD INSURANCE POLICIES Any insurance policy covering Special Hazard Losses obtained for a trust will be issued by the insurer named in the accompanying prospectus supplement. Each special hazard insurance policy subject to limitations described in this paragraph and in the accompanying prospectus supplement, if any, will protect the related certificateholders from Special Hazard Losses. Aggregate claims under a special hazard insurance policy will be limited to the amount described in the accompanying prospectus supplement and will be subject to reduction as described in the accompanying prospectus supplement. 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. In accordance with 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 the 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 the subservicer, the insurer will pay the lesser of (i) the cost of repair or replacement of the related property or (ii) upon transfer of the property to the insurer, the unpaid principal balance of the mortgage loan or contract at the time of acquisition of the related 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 the subservicer with respect to the related 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 some expenses is paid by the special hazard insurer, the amount of further coverage under the related special hazard insurance policy will be reduced by that 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 that 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 the policy may be validly presented with respect to the defaulted mortgage loan or contract secured by the related property. The payment described under (ii) above will render presentation of a claim relating to a mortgage loan or contract under the related mortgage pool insurance policy or contract pool insurance policy unnecessary. 63
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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 some 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 described in the accompanying prospectus supplement, coverage relating to Special Hazard Losses for a series of certificates may be provided, by means of a representation of the depositor or Residential Funding Corporation. BANKRUPTCY BONDS In the event of a personal bankruptcy of a mortgagor and a filing under Chapter 13 of the Bankruptcy Code, a bankruptcy court may establish the value of the mortgaged property of the mortgagor at a proceeding resulting in a Deficient Valuation. Under current law, Deficient Valuations are not permitted with respect to first liens on the related mortgaged property, but may occur with respect to a mortgage loan secured by a junior lien if the value of the related mortgaged property at the time of the filing is less than the amount of any first lien. In addition, other modifications of the terms of a mortgage loan or contract can result from a bankruptcy proceeding without a permanent forgiveness of the principal amount of the mortgage loan, including a Debt Service Reduction. See "Certain Legal Aspects of Mortgage Loans and Contracts--The Mortgage Loans--Anti-Deficiency Legislation and Other Limitations on Lenders." Any bankruptcy policy 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 accompanying prospectus supplement. The level of coverage under each bankruptcy policy will be described in the accompanying prospectus supplement. RESERVE FUNDS If stated in the accompanying prospectus supplement, the depositor will deposit or cause to be deposited in a reserve fund, any combination of cash or Permitted Investments in specified amounts, or any other instrument satisfactory to the rating agency or agencies, which will be applied and maintained in the manner and under the conditions specified in the accompanying prospectus supplement. Instead of or in addition to that deposit, to the extent described in the accompanying prospectus supplement, a reserve fund may be funded through application of all or a portion of amounts otherwise payable on any related subordinate certificates, from the Spread or otherwise. To the extent that the funding of the reserve fund is dependent on amounts otherwise payable on related subordinate certificates, 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 the funding is dependent are lower than anticipated. For any series of certificates as to which credit enhancement includes a letter of credit, if stated in the accompanying prospectus supplement, under specified 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 64
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servicer or servicer for outstanding Advances, or may be used for other purposes, in the manner and to the extent specified in the accompanying prospectus supplement. If stated in the accompanying prospectus supplement, amounts in a reserve fund may be available only to cover specific types of losses, or losses on specific mortgage loans. A reserve fund may provide coverage to more than one series of certificates, if described in the accompanying prospectus supplement. The trustee will have a perfected security interest for the benefit of the certificateholders in the assets in the reserve fund, unless the assets are owned by the related trust. However, to the extent that the depositor, any affiliate of the depositor or any other entity has an interest in any reserve fund, in the event of the bankruptcy, receivership or insolvency of that entity, there could be delays in withdrawals from the reserve fund and the corresponding payments to the certificateholders. These 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 accompanying prospectus supplement. CERTIFICATE INSURANCE POLICIES; SURETY BONDS The depositor may obtain one or more certificate insurance policies or guaranties or one or more surety bonds, or one or more guarantees issued by insurers or other parties acceptable to the rating agency or agencies rating the certificates offered insuring the holders of one or more classes of certificates the payment of amounts due in accordance with the terms of that class or those classes of certificates. Any certificate insurance policy, surety bond or guaranty will have the characteristics described in, and will be in accordance with any limitations and exceptions described in, the accompanying 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 the credit enhancement in full force and effect throughout the term of the applicable pooling and servicing 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. The master servicer, the servicer or the Certificate Administrator will agree to pay the premiums for each mortgage pool insurance policy, special hazard insurance policy, mortgage insurance policy, bankruptcy policy, certificate insurance policy or surety bond, as applicable, on a timely basis, unless the premiums are paid directly by the trust. If specified in the prospectus supplement, as to mortgage pool insurance policies generally, if the related insurer ceases to be a Qualified Insurer, 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 65
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policy or bond with a total coverage equal to the then-outstanding coverage of the policy or bond. If the cost of the replacement policy is greater than the cost of the existing policy or bond, the coverage of the replacement policy or bond will, unless otherwise agreed to by the depositor, be reduced to a level so that its premium rate does not exceed the premium rate on the original insurance policy. 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, mortgage insurance policy, contract pool insurance policy or any related primary insurance policy, the master servicer is not required to expend its own funds to restore the damaged property unless it determines (i) that restoration will increase the proceeds to one or more classes of certificateholders on liquidation of the mortgage loan after reimbursement of the master servicer for its expenses and (ii) that the expenses will be recoverable by it through Liquidation Proceeds or Insurance Proceeds. If recovery under any letter of credit, mortgage pool insurance policy, mortgage insurance policy, contract pool insurance policy, other credit enhancement or any related primary insurance policy is not available because the master servicer has been unable to make the above determinations, has made the determinations incorrectly or recovery is not available for any other reason, the master servicer is nevertheless obligated to follow whatever normal practices and procedures, in accordance with the preceding sentence, that it deems necessary or advisable to realize upon the defaulted mortgage loan and if this determination has been incorrectly made, is entitled to reimbursement of its expenses in connection with the restoration. REDUCTION OR SUBSTITUTION OF CREDIT ENHANCEMENT The amount of credit support provided with respect to any series of certificates and relating to various types of losses incurred may be reduced under specified circumstances. In most cases, the amount available as credit support will be subject to periodic reduction on a non-discretionary basis in accordance with a schedule or formula described in the accompanying prospectus supplement. Additionally, in most cases, the 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 and with consent of the related credit enhancer, if applicable. Furthermore, if 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 neither the master servicer, the servicer, the Certificate Administrator nor the depositor will 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 any credit support with other credit enhancement instruments issued by obligors whose credit ratings are equivalent to the downgraded level and in lower amounts that would satisfy the 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 66
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permitted reduction in the amount of credit enhancement will result in a release of all or a portion of the assets in the reserve fund to the depositor, the master servicer or any other person that is entitled to the credit support. Any assets so released and any amount by which the credit enhancement is reduced 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 to certificateholders of adverse changes in interest rates, and other yield supplement agreements or similar yield maintenance arrangements that do not involve swap agreements or other notional principal contracts. An interest rate swap is an agreement between two parties to exchange a stream of interest payments on an agreed hypothetical or "notional" principal amount. No principal amount is exchanged between the counterparties to an interest rate swap. In the typical swap, one party agrees to pay a fixed-rate on a notional principal amount, while the counterparty pays a floating rate based on one or more reference interest rates including the London Interbank Offered Rate, or LIBOR, a specified bank's prime rate or U.S. Treasury Bill rates. Interest rate swaps also permit counterparties to exchange a floating rate obligation based upon one reference interest rate (such as LIBOR) for a floating rate obligation based upon another referenced interest rate (such as U.S. Treasury Bill rates). 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 some circumstances, there can be no assurance that the trust will be able to terminate a swap or yield supplement agreement when it would be economically advantageous to the trust to do so. PURCHASE OBLIGATIONS Some types of mortgage collateral and classes of certificates of any series, as specified in the accompanying prospectus supplement, may be subject to a purchase obligation. The terms and conditions of each purchase obligation, including the purchase price, timing and payment procedure, will be described in the accompanying prospectus supplement. A purchase obligation with respect to mortgage collateral may apply to the mortgage collateral or to the related certificates. Each purchase obligation may be a secured or unsecured obligation of its provider, which may include a bank or other financial institution or an insurance company. Each purchase 67
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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 the 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, at times, a primary insurance policy. The descriptions of any insurance policies contained 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 forms of policies. PRIMARY INSURANCE POLICIES In general, and except as described below, (i) each mortgage loan having an LTV ratio at origination of over 80% will be covered by a primary mortgage guaranty insurance policy insuring against default on the mortgage loan up to an amount described in the accompanying prospectus supplement, unless and until the principal balance of the mortgage loan is reduced to a level that would produce an LTV ratio equal to or less than 80%, and (ii) the depositor or Residential Funding Corporation will represent and warrant that, to the best of its knowledge, the mortgage loans are so covered. However, the foregoing standard may vary significantly depending on the characteristics of the mortgage loans and the applicable underwriting standards. A mortgage loan will not be considered to be an exception to the foregoing standard if no primary insurance policy was obtained at origination but the mortgage loan has amortized to an 80% or less LTV ratio level as of the applicable cut-off date. In most cases, the depositor will have the ability to cancel any primary insurance policy if the LTV ratio of the mortgage loan is reduced to 80% or less (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 the closing date. Junior mortgage loans usually will not be required by the depositor to be covered by a primary mortgage guaranty insurance policy insuring against default on the mortgage loan. A primary insurance policy is generally obtained with respect to an individual mortgage loan. It may be required to be obtained and paid for by the borrower, or may be paid for by the master servicer, the servicer, the seller or a third party. Under a federal statute, mortgagors with respect to many residential mortgage loans originated on or after July 29, 1999 will have a right to request the cancellation of any private mortgage insurance policy insuring loans when the outstanding principal amount of the mortgage loan has been reduced or is scheduled to have been reduced to 80% or less of the value of the mortgaged property at the time the mortgage loan was originated. The mortgagor's right to request the cancellation of the policy is subject to certain conditions, including (i) the condition that no monthly payment has been thirty days or more past due during the twelve months prior to the cancellation date, and no monthly payment has been sixty days or more past due during the twelve months prior to that period, (ii) there has been no decline in the value of the mortgaged property since the time the mortgage loan was originated and (iii) the mortgaged property is not encumbered by subordinate liens. In addition, any requirement for private mortgage insurance will 68
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automatically terminate when the scheduled principal balance of the mortgage loan, based on the original amortization schedule for the mortgage loan, is reduced to 78% or less of the value of the mortgaged property at the time of origination, provided the mortgage loan is current. The legislation requires that mortgagors be provided written notice of their cancellation rights at the origination of the mortgage loans. If the requirement for private mortgage insurance is not otherwise canceled or terminated in the circumstances described above, it must be terminated no later than the first day of the month immediately following the date that is the midpoint of the loan's amortization period, if, on that date, the borrower is current on the payments required by the terms of the loan. The mortgagee's or servicer's failure to comply with the law could subject such parties to civil money penalties but would not affect the validity or enforceability of the mortgage loan. The law does not preempt any state law regulating private mortgage insurance except to the extent that such law is inconsistent with the federal law and then only to the extent of the inconsistency. In most cases, Mexico Mortgage Loans will have LTV ratios of less than 80% and will not be insured under a primary insurance policy. Primary mortgage insurance or similar credit enhancement on a Mexico Mortgage Loan may be issued by a private corporation or a governmental agency and may be in the form of a guarantee, insurance policy or another type of credit enhancement. Mortgage loans that are subject to negative amortization will only be covered by a primary insurance policy if that coverage was required upon their origination, notwithstanding that subsequent negative amortization may cause that mortgage loan's LTV ratio, based on the then-current balance, to subsequently exceed the limits that would have required coverage upon their origination. While the terms and conditions of the primary insurance policies issued by one primary mortgage guaranty insurer will usually differ from those in primary insurance policies issued by other primary insurers, each primary insurance policy generally will pay either: o the insured percentage of the loss on the related mortgaged property; o the entire amount of the loss, after receipt by the primary insurer of good and merchantable title to, and possession of, the mortgaged property; or o 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 in most cases consist of the unpaid principal amount of such mortgage loan and accrued and unpaid interest thereon and reimbursement of some expenses, less: 69
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o rents or other payments received by the insured (other than the proceeds of hazard insurance) that are derived from the related mortgaged property; o hazard insurance proceeds received by the insured in excess of the amount required to restore the mortgaged property and which have not been applied to the payment of the mortgage loan; o amounts expended but not approved by the primary insurer; o claim payments previously made on the mortgage loan; and o unpaid premiums and 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: o 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; o 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 o tender to the primary insurer good and merchantable title to, and possession of, the mortgaged property. For any certificates offered under this prospectus, the master servicer or servicer will maintain or cause each subservicer to maintain, as the case may be, in full force and effect and to the extent coverage is available a primary insurance policy with regard to each mortgage loan for which coverage is required under the standard described above unless an exception to such standard applies or alternate credit enhancement is provided as described in the accompanying prospectus supplement; provided that the primary insurance policy was in place as of the cut-off date and the depositor had knowledge of such primary insurance policy. 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. Most coverage will be in an amount equal to the lesser of the principal balance of the mortgage loan and, in the case of junior mortgage loans, the principal balance of any senior mortgage loans, the guaranteed replacement value, 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 the hazard policies to be maintained or shall obtain a blanket policy insuring against losses on the mortgage loans.The 70
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master servicer may satisfy its obligation to cause hazard policies to be maintained by maintaining a blanket policy insuring against losses on those 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. If junior mortgage loans are included within any trust, investors should also consider the application of hazard insurance proceeds discussed in this prospectus under "Certain Legal Aspects of Mortgage Loans and Contracts -- The Mortgage Loans -- Junior Mortgages, Rights of Senior Mortgagees." The standard form of fire and extended coverage policy covers physical damage to or destruction of the improvements on the property by fire, lightning, explosion, smoke, windstorm, hail, riot, strike and civil commotion, in accordance with the conditions and exclusions specified in each policy. The policies relating to the mortgage loans will be underwritten by different insurers under different state laws in accordance with different applicable state forms and therefore will not contain identical terms and conditions, the basic terms of which are dictated by respective state laws. These policies typically do not cover any physical damage resulting from the following: war, revolution, governmental actions, floods and other water-related causes, earth movement, including earthquakes, landslides and mudflows, nuclear reactions, wet or dry rot, vermin, rodents, insects or domestic animals, theft and, in some cases, vandalism. The foregoing list is merely indicative of some kinds of uninsured risks and is not intended to be all-inclusive. Where the improvements securing a mortgage loan are located in a federally designated flood area at the time of origination of that mortgage loan, the pooling and servicing agreement typically 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 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, typically 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, this clause usually 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) the proportion of the loss as the amount of insurance carried bears to the specified percentage of the full replacement cost of the 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 accompanying prospectus supplement, afforded by subordination, and "Description of Credit Enhancement--Special Hazard Insurance Policies" for a description of the limited protection afforded by any special hazard insurance policy against losses occasioned by hazards which are otherwise uninsured against. 71
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For mixed-use mortgage loans, some additional insurance policies may be required, including, but not limited to, loss of rent endorsements, business interruption insurance, comprehensive public liability insurance and general liability insurance for bodily injury and property damage, and the related pooling and servicing agreement may require the master servicer or servicer to maintain that insurance with respect to any related mortgaged properties secured by REO Mortgage Loans. Hazard insurance on the Mexican properties will usually be provided by insurers located in Mexico. The depositor may not be able to obtain as much information about the financial condition of the companies issuing hazard insurance policies in Mexico as it is able to obtain with respect to companies based in the United States. The ability of the insurers to pay claims also may be affected by, among other things, adverse political and economic developments in Mexico. 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 that 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 the policies in the state in which the manufactured home is located, and in an amount that is not less than the maximum insurable value of the manufactured home or the principal balance due from the mortgagor on the related contract, whichever is less. 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 maintain at its expense hazard insurance for the manufactured home or indemnify the trustee against any damage to the manufactured home prior to resale or other disposition. THE DEPOSITOR The depositor is an indirect wholly-owned subsidiary of GMAC Mortgage Group, Inc., which is a wholly-owned subsidiary of General Motors Acceptance Corporation which is a wholly-owned subsidiary of General Motors Corporation. The depositor is a Delaware corporation incorporated in August 1995. The depositor was organized for the purpose of acquiring subprime mortgage loans and contracts and depositing these loans and contracts into issuing entities that issue securities backed by such mortgage loans and contracts. The depositor does not engage in any other activities and does not have, nor is it expected in the future to have, any significant asset. The depositor anticipates that it will in many cases have acquired mortgage loans indirectly through Residential Funding Corporation, which is also an indirect wholly-owned subsidiary of GMAC Mortgage Group, Inc. 72
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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 limited representations and warranties made by the depositor. The depositor maintains its principal office at 8400 Normandale Lake Boulevard, Suite 250, Minneapolis, Minnesota 55437. Its telephone number is (952) 857-7000. RESIDENTIAL FUNDING CORPORATION Residential Funding Corporation, an affiliate of the depositor, will act as the sponsor and master servicer or Certificate Administrator for each series of certificates, except in the case of a Designated Seller Transaction. THE POOLING AND SERVICING AGREEMENT As described in this prospectus under "Introduction" and "Description of the Certificates--General," each series of certificates will be issued under a pooling and servicing agreement as described in that section. The following summaries describe additional provisions common to each pooling and servicing agreement. 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 at the percentage per annum described in the accompanying prospectus supplement of the outstanding principal balance of each mortgage loan or contract. Any subservicer will also be entitled to the servicing fee as described in the accompanying prospectus supplement. The servicer or the master servicer, if any, will deduct the servicing fee for the mortgage loans or contracts underlying the certificates of a series in an amount to be specified in the accompanying prospectus supplement. The servicing fees may be fixed or variable. In addition, the master servicer, any servicer or the relevant subservicers, if any, will be entitled to servicing compensation in the form of assumption fees, late payment charges or excess proceeds following disposition of property in connection with defaulted mortgage loans or contracts and any earnings on investments held in the Certificate Account or any Custodial Account, to the extent not applied as Compensating Interest. Any 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 mortgage securities, the compensation payable to the master servicer or Certificate Administrator for servicing and administering such mortgage securities on behalf of the holders of such certificates may be based on a percentage per annum described in the accompanying prospectus supplement of the outstanding balance of such mortgage securities and may be retained from distributions of interest thereon, if stated in the accompanying prospectus supplement. In addition, some reasonable duties of the master servicer may be performed by an affiliate of the master servicer who will be entitled to compensation for performance of those duties. The master servicer will pay or cause to be paid some of the ongoing expenses associated with each trust and incurred by it in connection with its responsibilities under the pooling and servicing agreement, including, without limitation, payment of any fee or other amount payable for 73
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any alternative credit enhancement arrangements, payment of the fees and disbursements of the trustee, any custodian appointed by the trustee, the certificate registrar and any paying agent, and payment of expenses incurred in enforcing the obligations of subservicers and sellers. The master servicer will be entitled to reimbursement of expenses incurred in enforcing the obligations of subservicers and sellers under limited circumstances. In addition, as indicated in the preceding section, the master servicer will be entitled to reimbursements for some of the expenses incurred by it in connection with Liquidated Mortgage Loans and in connection with the restoration of mortgaged properties, such right of reimbursement being prior to the rights of certificateholders to receive any related Liquidation Proceeds, including Insurance Proceeds. EVIDENCE AS TO COMPLIANCE Each pooling and servicing agreement will require the master servicer to deliver to the trustee, on or before the date in each year specified in the related pooling and servicing agreement, and, if required, file with the Commission as part of a Report on Form 10-K filed on behalf of each issuing entity, the following documents: o a report regarding its assessment of compliance during the preceding calendar year with all applicable servicing criteria set forth in relevant Commission regulations with respect to asset-backed securities transactions taken as a whole involving the master servicer that are backed by the same types of assets as those backing the certificates, as well as similar reports on assessment of compliance received from certain other parties participating in the servicing function as required by relevant Commission regulations; o with respect to each assessment report described immediately above, a report by a registered public accounting firm that attests to, and reports on, the assessment made by the asserting party, as set forth in relevant Commission regulations; and o a servicer compliance certificate, signed by an authorized officer of the master servicer, to the effect that: o A review of the master servicer's activities during the reporting period and of its performance under the applicable pooling and servicing agreement has been made under such officer's supervision; and o To the best of such officer's knowledge, based on such review, the master servicer has fulfilled all its obligations under the pooling and servicing agreement in all material respects throughout the period referenced in such servicer compliance certificate, or, if there has been a failure to fulfill any such obligation, in any material respect, specifying each such failure known to such officer and the nature and status thereof. The master servicer's obligation to deliver to the trustee any assessment or attestation report described above and, if required, to file the same with the Commission, is limited to those reports prepared by the master servicer and, in the case of reports prepared by any other party, those reports actually received by the master servicer on or before March 31 in each year. In addition, each servicer or subservicer participating in the servicing function with respect to more than 5% of the 74
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mortgage loans will provide the foregoing assessment reports with respect to itself and each servicer or subservicer of at least 10% of the mortgage loans will provide the compliance certificate described above with respect to its servicing activities. Furthermore, if any trust includes mortgage securities, either the related prospectus supplement will specify how to locate Exchange Act reports relating to such mortgage securities or the required information will be provided in such trust's Exchange Act reports while it is a reporting entity. 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 except upon a determination that its duties thereunder are no longer permissible under applicable law. No 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 the related pooling and servicing agreement. 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 of the master servicer or the depositor, will be under any liability to the trust or the certificateholders for any action taken or for refraining from taking any action in good faith under 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 that would otherwise be imposed by reason of the failure to perform its obligations in compliance with any standard of care described in the pooling and servicing agreement. The servicer, the master servicer or the Certificate Administrator, as applicable, may, in its discretion, undertake any action that it may deem necessary or desirable for the pooling and servicing agreement and the rights and duties of the parties thereto and the interest of the related certificateholders. The legal expenses and costs of the 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 out of funds otherwise distributable to certificateholders. The master servicer will be required to maintain a fidelity bond and errors and omissions policy for its officers and employees and other persons acting on behalf of the master servicer in connection with its activities under the pooling and servicing agreement. A servicer, the master servicer or the Certificate Administrator may have other business relationships with the company, any mortgage collateral seller or their affiliates. EVENTS OF DEFAULT Events of default under the pooling and servicing agreement for a series of certificates will include: 75
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o any failure by the servicer, if the servicer is a party to the pooling and servicing agreement, or master servicer to make a required deposit to the Certificate Account or, if the master servicer is the paying agent, to distribute to the holders of any class of certificates of that series any required payment which continues unremedied for five days after the giving of written notice of the failure to the master servicer by the trustee or the depositor, or to the master servicer, the depositor and the trustee by the holders of certificates of such class evidencing not less than 25% of the aggregate percentage interests constituting that class; o any failure by the master servicer or 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 that series of certificates which continues unremedied for 30 days, or 15 days in the case of a failure to pay the premium for any insurance policy which is required to be maintained under the pooling and servicing agreement, after the giving of written notice of the failure to the master servicer or 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 that series evidencing not less than 25%, or 33% in the case of a trust including mortgage securities, of the aggregate percentage interests constituting that class; and o some events of insolvency, readjustment of debt, marshalling of assets and liabilities or similar proceedings regarding the master servicer or the Certificate Administrator and certain actions by the master servicer or the Certificate Administrator indicating its insolvency or inability to pay its obligations. A default under the terms of any mortgage 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 the 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 the pooling and servicing agreement, other than the obligation to purchase mortgage loans under some circumstances, and will be entitled to similar compensation arrangements. If a series of certificates includes credit enhancement provided by a third party credit enhancer, certain of the foregoing rights may be provided to the credit enhancer rather than the certificateholders, if so specified in the applicable prospectus supplement. If 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 76
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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 described in the pooling and servicing agreement. Pending appointment, the trustee is obligated to act in that 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. The master servicer is required to reimburse the trustee for all reasonable expenses incurred or made by the trustee in accordance with any of the provisions of the pooling and servicing agreement, except any such expenses as may arise from the trustee's negligence or bad faith. No certificateholder will have any right under a pooling and servicing agreement to institute any proceeding with respect to the pooling and servicing agreement unless the 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 that class have made written request upon the trustee to institute the 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 the request and indemnity has neglected or refused to institute any 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 the pooling and servicing agreement, unless the 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: o to cure any ambiguity; o to correct or supplement any provision therein which may be inconsistent with any other provision therein or to correct any error; o 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) the change may not adversely affect in any material respect the interests of any certificateholder, as evidenced by an opinion of counsel, and (c) the 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; o if an election to treat the related trust as a "real estate mortgage investment conduit," or REMIC, has been made, 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 77
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has received an opinion of counsel to the effect that (1) the action is necessary or desirable to maintain qualification or to avoid or minimize that risk, and (2) the 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 the 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; o to make any other provisions with respect to matters or questions arising under the pooling and servicing agreement which are not materially inconsistent with its provisions, so long as the action will not adversely affect in any material respect the interests of any certificateholder; or o 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, Certificate Administrator or 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 that class for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the 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 the 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 that class have consented to the change in the percentage. Furthermore, the applicable prospectus supplement will describe any rights a third party credit enhancer may have with respect to amendments to the pooling and servicing agreement. 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 the amendment or the exercise of any power granted to the master servicer, the Certificate Administrator, servicer, the depositor or the trustee in accordance with the amendment will not result in the imposition of a tax on the related trust or cause the trust to fail to qualify as a REMIC. TERMINATION; RETIREMENT OF CERTIFICATES The primary obligations created by the pooling and servicing agreement for each series of certificates will terminate upon the payment to the related certificateholders of all amounts held in the Certificate Account or by the entity specified in the related prospectus supplement and required to be paid to the certificateholders following the earlier of 78
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o 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 o the purchase by entity specified in the related prospectus supplement from the trust for such series of all remaining mortgage collateral and all property acquired from the mortgage collateral. Any option to purchase described in the second item above will be limited to cases in which the aggregate Stated Principal Balance of the remaining mortgage loans is less than or equal to ten percent (10%) of the initial aggregate Stated Principal Balance of the mortgage loans or such other time as may be specified in the accompanying prospectus supplement. If the holder of a class of certificates may terminate the trust and cause the outstanding certificates to be redeemed when 25% or more of the initial principal balance of the certificates is still outstanding, the term "callable" will be included in the title of the related certificates. In addition to the foregoing, entity specified in the related prospectus supplement may have the option to purchase, in whole but not in part, the certificates specified in the accompanying prospectus supplement in the manner described in the accompanying prospectus supplement. Following the purchase of such certificates, the master servicer or the servicer will effect a retirement of the certificates and the termination of the trust. 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. Any purchase described in the preceding paragraph of mortgage collateral and property acquired relating to the mortgage collateral evidenced by a series of certificates shall be made at the option of entity specified in the related prospectus supplement at the price specified in the accompanying prospectus supplement. Such entity, if not Residential Funding Corporation or an affiliate, shall be deemed to represent that one of the following will be true and correct: (i) the exercise of such option shall not result in a non-exempt prohibited transaction under ERISA or Section 4975 of the Internal Revenue Code or (ii) such entity is (A) not a party in interest with respect to any ERISA plan (other than a plan sponsored or maintained by the entity; provided that no assets of such plan are invested or deemed to be invested in the certificates) and (B) not a "benefit plan investor." The exercise of that right will effect early retirement of the certificates of that series, but the right of any entity to purchase the mortgage collateral and related property will be in accordance with the criteria, and will be at the price, described in the accompanying prospectus supplement. Early termination in this manner may adversely affect the yield to holders of some classes of the 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, if stated in the accompanying prospectus supplement, a holder of the Call Class will have the right, solely at its discretion, to terminate the related trust and thereby effect early retirement of the certificates of the series, on any distribution date after the 12th distribution date following the date of initial issuance of the related series of certificates and until the date when the optional termination rights of entity specified in the related prospectus supplement become exercisable. The Call Class will not be 79
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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 the case of a call, the holders of the certificates will be paid a price equal to the Call Price. To exercise the call, the Call certificateholder must remit to the related trustee for distribution to the certificateholders, funds equal to the Call Price. If those funds are not deposited with the related trustee, the certificates of that series will remain outstanding. In addition, in the case of a trust for which a REMIC election or elections have been made, this termination will be effected in a manner consistent with applicable Federal income tax regulations and its status as a REMIC. In connection with a call by the holder of a Call Certificate, 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 accompanying prospectus supplement. The commercial bank or trust company serving as trustee may have normal banking relationships with the depositor and/or its affiliates, including Residential Funding Corporation. The trustee may resign at any time, in which event the depositor will be obligated to appoint a successor trustee. The depositor may also remove the trustee if the trustee ceases to be eligible to continue as trustee under the pooling and servicing agreement or if the trustee becomes insolvent. Upon becoming aware of those circumstances, the depositor will be obligated to appoint a successor trustee. The trustee may also be removed at any time by the holders of 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 the certificate, the pass-through rate on any certificate entitled to payments of interest, which pass-through rate may vary if stated in the accompanying 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 the certificate or its notional amount, if applicable. In general, defaults on mortgage loans and manufactured housing contracts are expected to occur with greater frequency in their early years. The rate of default on refinance, limited documentation, stated documentation or no documentation mortgage loans, and on mortgage loans or manufactured housing contracts with high LTV ratios or CLTV ratios, as applicable, may be higher than for other types of mortgage loans or manufactured housing contracts. Likewise, the rate of default on mortgage loans or manufactured housing contracts that have been originated pursuant to lower than traditional underwriting standards may be higher than those originated under traditional standards. A trust may include mortgage loans or contracts that are one month or more delinquent at the time of offering of the related series of certificates. In addition, the rate and timing of prepayments, defaults and liquidations on the mortgage loans or contracts will be affected by the 80
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general economic condition of the region of the country or the locality in which the related mortgaged properties are located. The risk of delinquencies and loss is greater and prepayments are less likely in regions where a weak or deteriorating economy exists, as may be evidenced by, among other factors, increasing unemployment or falling property values. The risk of loss may also be greater on mortgage loans or contracts with LTV ratios or CLTV ratios greater than 80% and no primary insurance policies. In addition, manufactured homes may decline in value even in areas where real estate values generally have not declined. The yield on any class of certificates and the timing of principal payments on that class may also be affected by modifications or actions that may be approved by the master servicer as described in this prospectus under "Description of the Certificates--Servicing and Administration of Mortgage Collateral," in connection with a mortgage loan or contract that is in default, or if a default is reasonably foreseeable. The risk of loss on Interest Only Loans may be greater than on loans that require a borrower to pay principal and interest throughout the term of the loan from origination. See "The Trusts--The Mortgage Loans--Interest Only Loans." The risk of loss on mortgage loans made on Puerto Rico mortgage loans may be greater than on mortgage loans that are made to mortgagors who are United States residents and citizens or that are secured by properties located in the United States. See "Certain Legal Aspects of Mortgage Loans and Contracts." Because of the uncertainty, delays and costs that may be associated with realizing on collateral securing the Mexico Mortgage Loans, as well as the additional risks of a decline in the value and marketability of the collateral, the risk of loss with respect to Mexico Mortgage Loans may be greater than with respect to mortgage loans secured by mortgaged properties located in the United States. The risk of loss on mortgage loans made to international borrowers may also be greater than mortgage loans that are made to U.S. borrowers located in the United States. See "Certain Legal Aspects of Mortgage Loans and Contracts." The application of any withholding tax on payments made by borrowers of Mexico Mortgage Loans residing outside of the United States may increase the risk of default because the borrower may have qualified for the loan on the basis of the lower mortgage payment, and may have difficulty making the increased payments required to cover the withholding tax payments. The application of withholding tax may increase the risk of loss because the applicable taxing authorities may be permitted to place a lien on the mortgaged property or effectively prevent the transfer of an interest in the mortgaged property until any delinquent withholding taxes have been paid. To the extent that any document relating to a mortgage loan or contract is not in the possession of the trustee, the deficiency may make it difficult or impossible to realize on the mortgaged property in the event of foreclosure, which will affect the amount of Liquidation Proceeds received by the trustee. See "Description of the Certificates -- Assignment of Mortgage Loans" and "--Assignment of Contracts." The amount of interest payments with respect to each item of mortgage collateral distributed monthly to holders of a class of certificates entitled to payments of interest will be calculated, or accrued in the case of deferred interest or accrual certificates, on the basis of that class's specified percentage of each payment of interest, or accrual in the case of accrual certificates, and will be 81
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expressed as a fixed, adjustable or variable pass-through rate payable on the outstanding principal balance or notional amount of the certificate, or any combination of pass-through rates, calculated as described in this prospectus and in the accompanying prospectus supplement under "Description of the Certificates - Distributions." Holders of strip certificates or a class of certificates having a pass-through rate that varies based on the weighted average interest rate of the underlying mortgage collateral will be affected by disproportionate prepayments and repurchases of mortgage collateral having higher net interest rates or higher rates applicable to the strip certificates, as applicable. The effective yield to maturity to each holder of certificates entitled to payments of interest will be below that otherwise produced by the applicable pass-through rate and purchase price of the certificate because, while interest will accrue on each mortgage loan or contract from the first day of each month, the distribution of interest will be made on the 25th day or, if the 25th 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 mortgage securities, such other day that is specified in the accompanying 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 pass-through rates, each as specified in the accompanying prospectus supplement. A variable pass-through rate may be calculated based on the weighted average of the Net Mortgage Rates, net of servicing fees and any Spread, of the related mortgage collateral for the month preceding the distribution date. An adjustable pass-through rate may be calculated 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, optional repurchases and by purchases of mortgage collateral in the event of breaches of representations made for the 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. On the other hand, 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 anticipated at the time of purchase, the purchaser's actual yield to maturity will be lower than assumed. The effect of Principal Prepayments, liquidations and purchases on yield will be particularly significant in the case of a class of certificates entitled to payments of interest only or disproportionate payments of interest. 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 82
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mortgage rates prepay at a faster rate than mortgage loans or manufactured housing contracts with lower mortgage rates. In some circumstances, rapid prepayments may result in the failure of the holders to recoup their original investment. In addition, the yield to maturity on 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 other classes in a series including more than one class of certificates, may be relatively more sensitive to the rate of prepayment on the related mortgage collateral than other classes of certificates. The timing of changes in the rate of principal payments on or repurchases of the mortgage collateral may significantly affect an investor's actual yield to maturity, even if the average rate of principal payments experienced over time is consistent with an investor's expectation. In general, the earlier a prepayment of principal on the mortgage collateral or a repurchase of mortgage collateral, 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, the mortgagor is charged interest on the principal amount of the mortgage loan so prepaid for the number of days in the month actually elapsed up to the date of the prepayment. Prepayments in full generally will reduce the amount of interest distributed in the following month to holders of certificates entitled to distributions of interest if the resulting Prepayment Interest Shortfall is not covered by Compensating Interest. See "Description of the Certificates--Prepayment Interest Shortfalls." 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 the partial prepayment is received. As a result, 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 the 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 if such shortfall is not covered by Compensating Interest. 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." For some ARM loans, the mortgage rate at origination may be below the rate that would result if the index and margin relating thereto were applied at origination. Under the applicable underwriting standards, the mortgagor under each mortgage loan or contract usually will be qualified on the basis of the mortgage rate in effect at origination. The repayment of any such mortgage loan or contract may thus be dependent on the ability of the mortgagor to make larger 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. For any junior mortgage loans, the inability of the mortgagor to pay off the balance thereof may affect the ability of the mortgagor to obtain refinancing of any related senior mortgage loan, 83
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thereby preventing a potential improvement in the mortgagor's circumstances. Furthermore, if stated in the accompanying prospectus supplement, under the applicable pooling and servicing agreement the