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Filed pursuant to Rule 424(b)(5)
Registration No. 333-68951-01
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED SEPTEMBER 21, 1999)
GE CAPITAL MORTGAGE FUNDING CORPORATION 1999-HE3 TRUST
Issuer
GE CAPITAL MORTGAGE FUNDING CORPORATION
Depositor
$413,097,000
(Approximate)
REMIC HOME EQUITY LOAN PASS-THROUGH CERTIFICATES, SERIES 1999-HE3
PRINCIPAL AND INTEREST PAYABLE MONTHLY, BEGINNING OCTOBER 25, 1999
THE TRUST WILL ISSUE:
- nine classes of senior certificates; and
- six classes of junior certificates.
For a description of the classes of certificates offered by this prospectus
supplement, see "Securities Offered" on page S-3. Some of these classes are
listed in the table below.
The assets of the trust will include a pool of closed-end, fixed-rate, first or
second lien, one- to four-family residential home equity mortgage loans. The
stated maturities of the mortgage loans will range from 5 to 30 years.
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CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-8 OF THIS PROSPECTUS
SUPPLEMENT.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT DEPOSITOR
--------- -------- ---------
Class A1 Certificates........................ 100.000000% 0.225% 99.775000%
Class A2 Certificates........................ 100.000000 0.225 99.775000
Class A3 Certificates........................ 100.000000 0.225 99.775000
Class A4 Certificates........................ 100.000000 0.225 99.775000
Class A5 Certificates........................ 100.000000 0.225 99.775000
Class A6 Certificates........................ 100.000000 0.225 99.775000
Class M Certificates......................... 100.000000 0.225 99.775000
Class B1 Certificates........................ 100.000000 0.225 99.775000
Class B2 Certificates........................ 99.390625 0.225 99.165625
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(1) Plus interest accrued from September 1, 1999.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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The certificates offered by this prospectus supplement other than the residual
certificates will be purchased by both underwriters. The residual certificates
will be purchased by Prudential Securities Incorporated, who will sell them to
investors at varying prices determined at the time of sale. The proceeds to the
depositor from the sale of the offered certificates will be approximately
99.759629% of the total principal balance of those certificates plus accrued
interest, before deducting expenses. Each underwriter's commission will be the
difference between the price it pays for the certificates and the amount it
receives from their sale to the public. You should refer to "Plan of
Distribution" in this prospectus supplement for a further description of
underwriting commissions. The certificates will be available for delivery to
investors on or about September 23, 1999.
PRUDENTIAL SECURITIES [GREENWICH CAPITAL LOGO]
The date of this prospectus supplement is September 21, 1999.
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IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS
We provide information to you about the certificates offered by this
prospectus supplement and the underlying trust in two separate documents: (1)
the accompanying prospectus, which provides general information, some of which
may not apply to your certificates or trust, and (2) this prospectus supplement,
which describes the specific terms of your certificates and the assets in your
trust. You should read both of these documents together.
This prospectus supplement will supplement and enhance the disclosure in
the prospectus for purposes of your certificates.
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SUMMARY OF TERMS
This summary highlights selected information from this document and does
not contain all of the information that you need to consider in making your
investment decision. This summary contains an overview of certain concepts and
other information to aid your understanding. All of the information contained in
this summary is qualified by the more detailed explanation described in other
parts of this prospectus supplement and the accompanying prospectus.
THE ISSUER
The issuer of the certificates will be GE Capital Mortgage Funding
Corporation 1999-HE3 Trust. The trust was created by us for the sole purpose of
issuing the certificates.
We will sell the mortgage loans underlying the certificates to the trust.
We will acquire these mortgage loans from GE Capital Mortgage Services, Inc.
SECURITIES OFFERED
The total original principal balance of the certificates will be
approximately $434,153,613. The following table shows the approximate initial
principal balance, annual certificate interest rate and minimum denomination of
each class of certificates offered by this prospectus supplement:
CLASS CERTIFICATE CERTIFICATE MINIMUM
PRINCIPAL BALANCE(1) INTEREST RATE DENOMINATION
-------------------- ------------- -------------
SENIOR CERTIFICATES
Class A1............................... $137,500,000 6.870% $ 25,000
Class A2............................... 44,000,000 6.995 25,000
Class A3............................... 83,000,000 7.110 25,000
Class A4............................... 52,000,000 7.460 25,000
Class A5............................... 23,441,000 7.795(2) 25,000
Class A6............................... 37,771,000 7.450 25,000
Class R1............................... 500 (3) (4)
Class R2............................... 500 (3) (4)
JUNIOR CERTIFICATES
Class M................................ 13,025,000 7.775(2) 100,000
Class B1............................... 11,939,000 8.315(2) 100,000
Class B2............................... 10,420,000 9.186(5) 100,000
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(1) Approximate, subject to adjustment as described in this prospectus
supplement.
(2) Interest will accrue on these certificates at the rate shown above for the
accrual period relating to the first distribution date. Thereafter, interest
will accrue on these certificates at a rate that is the lesser of (a) the
rate shown above and (b) the weighted average annual interest rate of the
mortgage loans in the pool, net of servicing fees.
(3) This class of certificates pays only principal and will not accrue interest.
(4) This class of certificates will be issued as a single certificate in
definitive physical form.
(5) Interest will accrue on these certificates at the rate shown above for the
accrual period relating to the first distribution date. Thereafter, interest
will accrue on these certificates at the weighted average annual interest
rate of the mortgage loans in the pool, net of servicing fees.
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The Class A1 through Class A6 Certificates, the Class S Certificates and
the residual certificates are the senior certificates. The Class R1 and the
Class R2 Certificates are the residual certificates. The Class M and the Class
B1 through Class B5 Certificates are the junior certificates.
The Class S, Class B3, Class B4 and Class B5 Certificates are not offered
by this prospectus supplement. We will initially retain the Class B3, Class B4
and Class B5 Certificates and will sell the Class S Certificates to GE Capital
Mortgage Services, Inc.
Depending on the final composition of the pool of mortgage loans sold to
the trust, the principal balance of each class of certificates may increase or
decrease from the amount listed above. The total original principal balance of
the certificates will not be less than $412,300,000 or greater than
$454,700,000.
Certificates with principal balances in excess of the minimum denominations
shown above will be issued in multiples of $1,000 above the minimum
denomination.
THE MORTGAGE LOANS
GE Capital Mortgage Services, Inc. originated or acquired all of the
mortgage loans. The mortgage loans expected to be sold to the trust have the
following characteristics as of September 1, 1999:
- Total outstanding principal balance (1): $434,153,613
- Original terms to maturity: 5 to 30 years
- Weighted average maturity: 192 months
- Weighted average annual interest rate: 9.69%
- Largest geographic concentration: 12.02% of the mortgage loans are secured
by properties located in Florida.
- Percentage of mortgage loans that are secured by 13.33%
second-priority mortgages:
- Percentage of mortgage loans that accrue 27.34%
interest on a simple interest basis:
- Percentage of mortgage loans that are balloon 46.67%
loans:
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(1) Approximate, after deducting payments of principal due or received on or
before September 1, 1999, and subject to the variance described in this
prospectus supplement.
THE SERVICER
GE Capital Mortgage Services, Inc. will directly service all of the
mortgage loans in the trust.
As servicer, GE Capital Mortgage Services, Inc. must make reasonable
efforts to collect payments due on the mortgage loans. In addition, GE Capital
Mortgage Services, Inc. must advance delinquent payments of interest on the
mortgage loans to the extent described in this prospectus supplement and will
reduce its servicing compensation to the extent described in this prospectus
supplement to reimburse certificateholders for shortfalls of interest payments.
You should refer to "GE Capital Mortgage Services, Inc." and "The Pooling
and Servicing Agreement -- Servicing Arrangement with Respect to the Mortgage
Loans" and "-- Servicing Compensation, Compensating Interest and Payment of
Expenses" in this prospectus supplement.
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DISTRIBUTIONS ON THE CERTIFICATES
The trustee will make distributions on the certificates on the 25th day of
each month. If the 25th is not a business day, the trustee will make
distributions on the next business day. The first distribution date will be
October 25, 1999.
On each distribution date, the trustee will first pay interest to the
senior certificates from funds available for distribution as interest. The
trustee will then pay interest to the junior certificates from available
interest funds in the order of priority described below. In addition, on each
distribution date, the trustee will pay principal on all certificates from the
funds available for that purpose.
Interest Payments
- The actual amount of interest you receive on your certificates on each
distribution date if your certificates are entitled to interest, will
depend on:
-- the amount of interest accrued on your certificates;
-- the total amount of funds available for interest distributions; and
-- the amount of any accrued interest not paid on your certificates on
earlier distribution dates.
- If you are a holder of a senior certificate entitled to interest
payments, the amount of interest payable to you will be in proportion to
the interest payable on all of the senior certificates together. All of
the senior certificates entitled to interest payments will receive these
payments at the same time.
- If you are a holder of a junior certificate, you will receive interest
payments only after the trustee has paid interest to:
-- all of the senior certificates; and
-- each class of junior certificates that ranks higher than your
certificates.
- The trustee will calculate interest on the basis of a 360-day year
consisting of twelve 30-day months.
Principal Payments
- The trustee will distribute principal on each class of
certificates -- other than the Class S Certificates -- from available
principal funds in the manner described in this prospectus supplement.
You should refer to "Description of the Certificates -- Distributions on
the Certificates" for a description of the amount of principal payable
to you and the priority in which it will be paid.
- The amount and timing of principal you receive on your certificates will
depend on:
-- the various priorities and formulas described in this prospectus
supplement that determine the allocation of principal payments to your
certificates; and
-- the amounts actually available for distribution as principal.
- Because of the principal allocation formulas described in this
prospectus supplement, the senior certificates entitled to principal
distributions will receive principal payments at a faster rate than the
junior certificates for at least the first nine years after the issuance
of the certificates. The Class A6 Certificates will not benefit from
this accelerated repayment. You should refer to "Description of the
Certificates -- Distributions on the Certificates -- Allocation of
Available Funds."
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OPTIONAL TERMINATION
GE Capital Mortgage Services, Inc. will have the option to purchase all the
mortgage loans and thereby effect the early retirement of the certificates when
the aggregate principal balance of the mortgage loans is less than 10% of the
aggregate principal balance of the mortgage loans as of September 1, 1999. See
"The Pooling and Servicing Agreement -- Optional Termination" in this prospectus
supplement.
CREDIT ENHANCEMENT
If you are a holder of a senior certificate, your certificate will benefit
from the credit enhancement provided by the subordination of the junior
certificates.
This subordination will benefit the senior certificates in two ways:
- The senior certificates will have a preferential right over the junior
certificates to receive funds available for interest distributions.
- The junior certificates will absorb all losses on the mortgage loans up
to the level described in this prospectus supplement.
If you are a holder of a senior certificate, you should keep in mind,
however, that the subordination of the junior certificates offers only limited
protection against the loss of your investment. See the related risk factor on
page S-11.
If you are a holder of a junior certificate, your certificate will benefit
from the credit enhancement provided by the subordination of any lower-ranking
classes of junior certificates. This subordination will, however, offer only
limited protection against the loss of your investment.
FEDERAL INCOME TAX CONSEQUENCES
The trust will be treated as a two-tier REMIC for federal income tax
purposes. The certificates other than the Class R1 and Class R2 Certificates
will be treated as regular interests in the upper-tier REMIC. The Class R1
Certificates will be treated as the residual interest in the lower-tier REMIC,
and the Class R2 Certificates will be treated as the residual interest in the
upper-tier REMIC.
All of the regular interest certificates will be treated as debt for tax
purposes. In addition, unless you are a holder of the residual certificates, you
will be required to report income on your certificates under the accrual method
of accounting. Under the accrual method of accounting, you may be required to
report income for federal income tax purposes in advance of receiving a
corresponding cash distribution.
The particular federal income tax consequences of your investment will
depend upon the class of certificates you buy. You should consider carefully the
tax consequences of an investment in the following classes of certificates:
- certain classes of certificates, which may be issued with original issue
discount;
- the residual certificates, which will be subject to special rules that
could significantly reduce their after-tax yield; and
- the junior certificates, whose reported income may exceed the amount of
cash actually received.
You should refer to "Federal Income Tax Consequences" in this prospectus
supplement and "Federal Income Tax Consequences -- REMIC Certificates" in the
accompanying prospectus to determine the tax consequences to you of an
investment in the certificates.
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LEGAL INVESTMENT
The certificates offered by this prospectus will not constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984. You should consult your own legal advisors to determine whether,
and to what extent, you can invest in the certificates. See "Legal Investment
Matters" in this prospectus supplement for important information concerning
possible restrictions on the ownership of the certificates by regulated
institutions.
ERISA CONSIDERATIONS
If you are investing the assets of an employee benefit plan that is subject
to ERISA or to Section 4975 of the federal income tax code, you may not acquire
the Class M, Class B1, Class B2, Class R1 or Class R2 Certificates. In addition,
you should consider carefully the information presented in "ERISA
Considerations" in this prospectus supplement and in the accompanying
prospectus.
CERTIFICATE RATINGS
The certificates must receive the ratings indicated under "Certificate
Ratings" in this prospectus supplement from Fitch IBCA, Inc. and/or Moody's
Investors Service, Inc. at the time of their initial issuance. You should refer
to "Certificate Ratings" to learn more about the significance and limitation of
ratings.
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RISK FACTORS
AN INVESTMENT IN THE The certificates are not suitable investments for
CERTIFICATES MAY NOT BE all investors. In particular, you should not
SUITABLE FOR YOU purchase any class of offered certificates unless
you understand the prepayment, credit, liquidity
and market risks associated with that class.
The certificates are complex securities. You should
possess, either alone or together with an
investment advisor, the expertise necessary to
evaluate the information contained in this
prospectus supplement and the accompanying
prospectus in the context of your financial
situation and tolerance for risk.
You should carefully consider, among other things,
the factors described below before purchasing the
certificates.
LOSSES AND DELINQUENT Payments on the mortgage loans will not be insured
PAYMENTS ON THE MORTGAGE by the government or any other person. Moreover,
LOANS MAY REDUCE THE GE Capital Mortgage Services, Inc., as servicer,
YIELD ON YOUR CERTIFICATES has only a limited obligation to make advances
for delinquent installments of interest, as
described in "The Pooling and Servicing
Agreement -- Advances." Consequently, the
certificates will absorb the losses resulting
from delinquent payments, and the yield on your
certificates could be lower than you expect. You
should refer to "Description of the Mortgage Pool
and the Mortgaged Properties -- The Mortgage
Loans" for information about the percentage of
mortgage loans in the pool that has been
delinquent for more than 30 days as of September
1, 1999.
If a mortgage loan is in default, or if default is
reasonably foreseeable, GE Capital Mortgage
Services, Inc., as servicer of the mortgage
loans, may permit a modification to reduce the
principal balance or extend the term of such
mortgage loan. Such modifications, while intended
to reduce potential losses experienced by you,
could adversely affect the yield on your
certificates.
In addition, if you are buying a class of
certificates that ranks junior to another class
of certificates, you will be more likely than the
holder of a certificate senior to yours to
experience losses as a result of interest
defaults or liquidation losses on the underlying
mortgage loans. This is because interest defaults
and liquidation losses, as well as reductions in
the principal balance of mortgage loans due to
servicer modifications, are first allocated to
junior certificates, as described in "Description
of the Certificates -- Allocation of Realized
Losses on the Certificates" and "-- Distributions
on the Certificates -- Allocation of Available
Funds" in this prospectus supplement.
SOME OF THE LOANS IN THE The payment schedules for most of the mortgage
MORTGAGE POOL ARE MORE loans in the pool require the borrower to pay off
LIKELY TO DEFAULT THAN the principal balance of the loan gradually over
OTHERS, AND HIGHER the life of the loan. Some of the mortgage loans
THAN EXPECTED DEFAULTS in the pool, however, have payment schedules
ON THESE LOANS COULD under which the borrower makes relatively small
REDUCE THE YIELD ON payments of principal over the life of the loan,
YOUR CERTIFICATES and then must make a large final payment at
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maturity that pays off the entire principal
balance outstanding. This final payment is
usually much larger than the previous monthly
payments. Because the borrower's ability to make
this final payment usually depends on the ability
to refinance the loan or sell the underlying
property, the risk of default is greater than on
other types of loans. High rates of default on
these types of loans in the pool will result in
greater losses on your certificates.
The ability of a borrower to refinance the type of
loan described above or sell the mortgaged
property will depend upon a number of factors,
including:
- the level of mortgage interest rates;
- the borrower's equity in the mortgaged
property;
- general economic conditions; and
- the availability of credit.
We cannot predict how these factors will affect the
default rate of these mortgage loans in the pool.
You should refer to "Description of the Mortgage
Pool and the Mortgaged Properties -- The Mortgage
Loans" for information on the percentage of loans
in the mortgage loan pool that consists of these
loans.
WE MAY NOT BE ABLE TO Many of the mortgage loans in the pool owned by the
RECOVER AMOUNTS OWED trust are junior to other mortgages on the same
ON SECOND-PRIORITY property. These other mortgages are not owned by
MORTGAGES IN THE POOL, the trust. If the holder of a senior mortgage
WHICH MAY REDUCE THE forecloses, the trust, as holder of the junior
YIELD ON YOUR mortgage, will receive only those amounts that
CERTIFICATES are left over from the sale of the mortgaged
property after the senior mortgage is fully paid
off. This remaining amount may not be enough to
pay off the junior mortgage, and your
certificates may bear the resulting loss.
Although GE Capital Mortgage Services, Inc. has
the option of advancing money to a senior lender,
as described in "The Pooling and Servicing
Agreement -- Servicing Arrangements with Respect
to the Mortgage Loans," it has no obligation to
do so.
WE CANNOT GUARANTEE YOU The amounts you receive on your certificates will
REGULAR PAYMENTS ON YOUR depend on the amount and timing of the payments
CERTIFICATES borrowers make on the mortgage loans. Because we
cannot predict the rate at which borrowers will
repay their loans, you may receive distributions
on your certificates in amounts that are larger
or smaller than you expect. In addition, the life
of your certificates may be longer or shorter
than anticipated. Because of this, we cannot
guarantee that you will receive distributions at
any specific future date or in any specific
amount.
PREPAYMENT RATES THAT ARE The yield to maturity on your certificates will
FASTER OR SLOWER THAN YOU depend primarily on the purchase price of your
EXPECT MAY REDUCE THE certificates and the rate of principal payments
YIELD ON YOUR CERTIFICATES on the mortgage loans in the trust. Unexpected
changes in prepayment rates could have the
following negative effects:
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- If you bought your certificates for more than
their face amount, the yield on your
certificates will drop if principal payments
occur at a rate faster than you expect.
- If you bought your certificates for less than
their face amount, the yield on your
certificates will drop if principal payments
occur at a rate slower than you expect.
For a more detailed discussion of the sensitivity
of certain classes to prepayment rates and a
description of the factors that may influence
prepayments, see "Yield and Weighted Average Life
Considerations" in this prospectus supplement and
"Yield, Maturity and Weighted Average Life
Considerations" in the prospectus.
YOU MAY BE UNABLE TO Rapid prepayment rates on the mortgage loans are
REINVEST DISTRIBUTIONS likely to coincide with periods of low prevailing
FROM THE CERTIFICATES interest rates. During these periods, the yield
IN COMPARABLE INVESTMENTS at which you may be able to reinvest amounts
received as payments on your certificates may be
lower than the yield on your certificates.
Conversely, slow prepayment rates on the mortgage
loans are likely to coincide with periods of high
interest rates. During these periods, the amount
of payments available to you for reinvestment at
high rates may be relatively low.
See "Yield and Weighted Average Life
Considerations" in this prospectus supplement and
"Yield, Maturity and Weighted Average Life
Considerations" in the prospectus for more
discussion of the effect of prepayments.
PREPAYMENTS MAY CAUSE The actual interest rate on your certificate may be
REDUCTIONS IN INTEREST less than the interest rate stated in this
DISTRIBUTIONS ON YOUR prospectus supplement. Your certificates will be
CERTIFICATES allocated any interest shortfalls that we do not
compensate for as described in this prospectus
supplement. The circumstances under which these
interest shortfalls will occur are described in
"Description of the Certificates -- Distributions
on the Certificates" in this prospectus
supplement.
THE CONCENTRATION OF A significant number of the mortgage loans in the
MORTGAGE LOANS IN trust are secured by properties located in
SPECIFIC GEOGRAPHIC Florida, New York, Massachusetts, California,
AREAS MAY INCREASE THE Illinois, New Jersey and Maryland. Any
RISK OF LOSS ON THOSE deterioration in the real estate market or
MORTGAGE LOANS AND REDUCE economy of any of these states could result in
THE YIELD ON YOUR higher rates of loss and delinquency than
CERTIFICATES expected on the mortgage loans. In addition,
these states or regions may experience natural
disasters, such as earthquakes, fires, floods and
hurricanes, which may not be fully insured
against and which may result in property damage
and losses on the mortgage loans. Certain East
Coast states recently declared a state of
emergency in response to Hurricane Floyd. These
events may adversely affect the funds available
to make payments on your certificates, which may
in turn reduce the yield on your certificates.
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See "Description of the Mortgage Pool and the
Mortgaged Properties" in this prospectus
supplement for more information on the location
of the mortgage loans and the potential
consequences of Hurricane Floyd.
LOSSES ON THE MORTGAGE A decline in real estate values or in economic
LOANS MAY BE HIGHER THAN conditions generally could increase the rates of
EXPECTED, WHICH MAY delinquencies, foreclosures and losses on the
LOWER THE YIELD ON mortgage loans to a level that is significantly
YOUR CERTIFICATES higher than those experienced currently. This in
turn will reduce the yield on your certificates,
if the credit enhancement described in this
prospectus supplement is not enough to protect
your certificates from these losses.
THE SUBORDINATION PROVIDED As described in "Description of the
BY THE JUNIOR CERTIFICATES Certificates -- Allocation of Realized Losses,"
MAY NOT BE ADEQUATE TO losses will be allocated first to the junior
PROTECT HIGHER-RANKING certificates, in inverse order of priority.
CERTIFICATES FROM ALL Losses may be severe enough, however, to reduce
LOSSES the aggregate principal balance of the junior
certificates to zero. If this occurs, the senior
certificates will bear their share of losses
thereafter.
In addition, certain types of losses -- referred to
in this prospectus supplement as "Excess
Losses" -- will be borne pro rata by the senior
certificates and the junior certificates after a
specified amount of these losses are borne solely
by the junior certificates.
IF GE CAPITAL MORTGAGE GE Capital Mortgage Services, Inc. may, at its
SERVICES, INC. EXERCISES option, terminate the trust under the
ITS OPTION TO TERMINATE circumstances described in "The Pooling and
THE TRUST, THE YIELD ON Servicing Agreement -- Optional Termination" in
YOUR CERTIFICATES COULD this prospectus supplement. If the proceeds
BE LOWER THAN EXPECTED realized upon termination are less than the
outstanding principal balance on the certificates
and accrued interest thereon, your certificates
may bear their share of the resulting shortfall.
As a result, you may not fully recover your
investment and could potentially suffer losses.
In addition, termination of the trust will result
in the early retirement of your certificates,
which will shorten the average life of the
certificates and potentially lower their yield.
You should refer to "The Pooling and Servicing
Agreement -- Optional Termination" for a
discussion of additional consequences of the
trust's early termination.
YOU MAY NOT BE ABLE TO The certificates will not be listed on any
RESELL YOUR CERTIFICATES securities exchange, and a resale market for the
certificates may not develop. Although each
underwriter of this offering intends to create a
resale market for the certificates it is
offering, neither underwriter has any obligation
to do so. If a market for the certificates does
develop, it may not continue. Moreover, this
market may not be liquid enough to allow you to
resell your certificates or to resell them at the
price you desire.
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YOU WILL NOT RECEIVE Unless you are a purchaser of a residual
PHYSICAL CERTIFICATES, certificate, your ownership of the certificates
WHICH CAN CAUSE DELAYS will be registered electronically with DTC. The
IN DISTRIBUTIONS AND lack of physical certificates could:
HAMPER YOUR ABILITY TO
PLEDGE OR RESELL YOUR - result in payment delays on the certificates
CERTIFICATES because the trustee will be sending
distributions on the certificates to DTC
instead of directly to you;
- make it difficult for you to pledge your
certificates if physical certificates are
required by the party demanding the pledge;
and
- hinder your ability to resell the certificates
because some investors may be unwilling to buy
certificates that are not in physical form.
THE FAILURE OF GE CAPITAL Many computer systems and microprocessors with data
MORTGAGE SERVICES, INC. functions, including those in non-information
OR THAT OF THIRD PARTIES technology equipment and systems, use only two
TO BE YEAR 2000 COMPUTER digits to identify a year in the date field with
READY COULD DISRUPT THE the assumption that the first two digits of the
DISTRIBUTIONS ON YOUR year are always "19." Consequently, on January 1,
CERTIFICATES 2000, computers that are not year 2000 compliant
may read the year as 1900 and malfunction.
GE Capital Mortgage Services, Inc. has completed
implementation of a plan, which is described in
"GE Capital Mortgage Services, Inc. -- Year 2000
Computer Readiness" in the prospectus, to become
year 2000 compliant. We cannot guarantee,
however, that these efforts to achieve year 2000
readiness will be fully effective. Moreover, we
cannot guarantee that any of GE Capital Mortgage
Services, Inc.'s third-party service providers,
or ours, such as trustees, borrowers' banks, loan
servicers and DTC, or companies that insure the
mortgage loans or mortgaged properties, will be
year 2000 ready. We also cannot assure you that
any future developments in connection with the
readiness of GE Capital Mortgage Services, Inc.
or third parties will be those that it has
anticipated.
GE Capital Mortgage Services, Inc.'s failure, or
the failure of its third-party service providers,
or ours, or insurers, to become fully year 2000
ready could disrupt, at least temporarily, its
ability to carry out the servicing duties
described in this prospectus supplement,
including the calculation of amounts
distributable to you and the timely transfer of
funds to the trustee for your benefit. Your
investment in the certificates could consequently
suffer.
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INDEX OF DEFINITIONS
You can find a list of capitalized terms used in this prospectus
supplement, and the pages on which they are defined, under the caption "Index of
Certain Prospectus Supplement Definitions" beginning on page S-70 of this
prospectus supplement. Any capitalized terms that are not defined in the
prospectus supplement are defined in the accompanying prospectus. See "Index of
Certain Prospectus Definitions" on page 92 of the accompanying prospectus.
DESCRIPTION OF THE MORTGAGE POOL AND THE MORTGAGED PROPERTIES
GENERAL
The certificates described in this prospectus supplement will represent the
entire beneficial ownership interest in the trust that is issuing these
certificates. The assets of the trust will consist primarily of a pool of
closed-end, fixed-rate, home equity mortgage loans. The mortgage loans are
secured by mortgages, deeds of trust or other security instruments creating
first or second liens on one- to four-family residential properties. GE Capital
Mortgage Funding Corporation("Funding") is depositing the mortgage loans in the
trust.
Certain data with respect to the mortgage loans expected to be included in
the trust are set forth below. A description of the final mortgage loan pool on
a Current Report on From 8-K will be available to purchasers of the certificates
at or before, and will be filed by Funding with the SEC within fifteen days
after the initial delivery of the certificates offered hereby. This definitive
description will indicate the extent to which the characteristics of the
mortgage loans vary from those set forth in this prospectus supplement. It will
specify the precise aggregate principal balance of the mortgage loans as of the
first day of the month of the creation of the trust (the "Cut-off Date") and
will also include statistical data relating to the final mortgage loans
comparable in scope to that set forth with respect to the expected loan pool on
pages S-15 through S-23 of this prospectus supplement. The definitive
description also will specify the original principal balance of each class of
certificates, the notional principal balance of the Class S Certificates and the
Class A6 Certificate Percentage on the date of issuance of the certificates. The
Pooling and Servicing Agreement under which the certificates will be issued and
its exhibits will be filed as an exhibit to the definitive description of the
final mortgage loan pool.
The "Principal Balance" of a mortgage loan as of any Distribution Date (as
defined herein) is, in the case of a self-amortizing mortgage loan, the unpaid
principal balance of such mortgage loan as specified in the amortization
schedule at the time relating thereto as of the month preceding the month of
such Distribution Date, before giving effect to any scheduled payments of
principal due in such month and after giving effect to any principal prepayments
in full received through and including the 15th day of such month from the
related borrower. In the case of a simple interest mortgage loan, the "Principal
Balance" will be the unpaid principal balance thereof as of the calendar month
preceding the month of such Distribution Date, before giving effect to the
regularly scheduled payment due in such month and after giving effect to any
principal prepayments in full received through and including the 15th day of
such month from the mortgagor. The Principal Balance of any mortgage loan as of
the Cut-off Date will be the unpaid principal balance thereof as of such date.
The "Due Date" for a mortgage loan is the date during any month on which a
payment is first due.
Each mortgage loan is required to be covered by a standard hazard insurance
policy. See "Servicing of the Mortgage Loans -- Hazard Insurance" in the
Prospectus.
For a description of the underwriting standards generally applicable to the
mortgage loans, see "The Home Equity Loan Program" herein.
S-13
14
THE MORTGAGE LOANS
The mortgage loans will have an aggregate principal balance as of the
Cut-off Date, after application of payments of principal due on or before such
date, of approximately $434,153,613. This amount is subject to a permitted
variance such that the aggregate principal balance will not be less than
$412,300,000 or greater than $454,700,000.
Prior to issuance of the certificates, we will not remove from the expected
mortgage pool more than 5% of the mortgage loans, measured by Principal Balance
as of the Cut-off Date, unless a revised prospectus supplement is delivered to
prospective investors. In addition, prior to issuance of the certificates, we
will not add mortgage loans to the mortgage pool if this would result in more
than a 5% increase in the size of the mortgage pool, measured by Principal
Balance as of the Cut-off Date, unless a revised prospectus supplement is
delivered to prospective investors.
The mortgage loans in the trust are expected to have the following
characteristics (by Principal Balance of all the mortgage loans) as of the
Cut-off Date:
- The interest rates borne by the mortgage loans are expected to range from
approximately 6.85% to 15.44% per annum, and the weighted average
mortgage rate as of the Cut-off Date of the mortgage loans is expected to
be approximately 9.69% per annum.
- The principal balances of the mortgage loans are expected to range from
approximately $2,663 to $497,000 and the average principal balance of the
mortgage loans is expected to be approximately $68,478.49 after
application of principal payments due or received on or before the
Cut-off Date.
- It is expected that the month and year of the earliest origination date
of any mortgage loan will be March 1991, and the month and year of the
latest scheduled maturity date of any such mortgage loan will be
September 2029.
- All of the mortgage loans will have original terms to maturity of
approximately 5 years to 30 years.
- The remaining months to stated maturity for the mortgage loans as of the
Cut-off Date are expected to range from approximately 29 months to 360
months, and the weighted average remaining months to stated maturity of
the mortgage loans as of the Cut-off Date is expected to be approximately
192 months.
- It is expected that approximately 46.67% of the mortgage loans will be
loans that have original terms to maturity that are shorter than their
amortization schedules, leaving final payments ("Balloon Payments") due
on the maturity dates that are significantly larger than other monthly
payments (such loans, "Balloon Loans").
- The weighted average remaining term to stated maturity of the Balloon
Loans is expected to be approximately 147 months.
- The Home Equity Loan-to-Value Ratios (as defined herein) of the mortgage
loans at origination are expected to range from approximately 2.04% to
95.38%, and the weighted average of the Home Equity Loan-to-Value Ratios
of the mortgage loans at origination is expected to be approximately
68.22%.
- The Second-Lien Combined Loan-to-Value Ratio (as defined herein) of the
second-lien mortgage loans at origination is expected to range from
approximately 18.59% to 102.31%, and the weighted average of the
Second-Lien Combined Loan-to-Value Ratios of the second-lien mortgage
loans at origination is expected to be approximately 86.93%.
S-14
15
- Approximately 61.09% of the mortgage loans are expected to be
purchase-money loans used by the borrowers to acquire the related
mortgaged properties.
- No more than approximately 0.50% of the mortgage loans will be secured by
mortgaged properties located in any one postal zip code area.
- No more than approximately 5.00% of the mortgage loans are expected to
have been originated under any no income verification programs of GE
Capital Mortgage Services, Inc. ("GECMSI"), as described under "The Home
Equity Loans -- Underwriting Procedures Relating to Home Equity Loans" in
this prospectus supplement.
Set forth below is a description of certain characteristics of the mortgage
pool and the mortgage loans expected to be included therein, subject to the
variance described herein. The sum of the percentages may not equal 100% due to
rounding.
CUT-OFF DATE PRINCIPAL BALANCES
PERCENTAGE OF
CUT-OFF DATE
RANGE OF CUT-OFF DATE NUMBER OF CUT-OFF DATE AGGREGATE
PRINCIPAL BALANCES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
--------------------- -------------- ----------------- ----------------------
$ 0 - 10,000.00............... 62 $ 505,918.22 0.12%
10,000.01 - 20,000.00................ 480 7,654,390.76 1.76
20,000.01 - 30,000.00................ 682 17,442,399.93 4.02
30,000.01 - 40,000.00................ 736 25,992,788.81 5.99
40,000.01 - 50,000.00................ 728 32,997,220.15 7.60
50,000.01 - 60,000.00................ 662 36,449,243.61 8.40
60,000.01 - 75,000.00................ 846 57,124,898.17 13.16
75,000.01 - 100,000.00................ 996 86,768,608.55 19.99
100,000.01 - 150,000.00................ 800 96,156,651.74 22.15
150,000.01 - 200,000.00................ 215 36,878,707.50 8.49
200,000.01 - 250,000.00................ 68 15,093,078.06 3.48
250,000.01 - 300,000.00................ 33 9,124,043.16 2.10
300,000.01 - 350,000.00................ 11 3,604,688.22 0.83
350,000.01 - 400,000.00................ 17 6,560,804.92 1.51
400,000.01 - 497,000.00................ 4 1,800,171.49 0.41
----- --------------- ------
Total........................ 6,340 $434,153,613.29 100.00%
===== =============== ======
S-15
16
MORTGAGE RATES
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF CUT-OFF DATE AGGREGATE
RANGE OF MORTGAGE RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------------- -------------- ----------------- -----------------
0 - 7.500%.......................... 61 $ 4,264,834.85 0.98%
7.501 - 8.000............................ 481 31,227,298.25 7.19
8.001 - 8.500............................ 751 55,892,678.17 12.87
8.501 - 9.000............................ 1,075 77,439,114.98 17.84
9.001 - 9.500............................ 821 58,098,351.91 13.38
9.501 - 10.000............................ 886 64,837,408.23 14.93
10.001 - 10.500............................ 453 32,238,431.81 7.43
10.501 - 11.000............................ 578 40,250,321.72 9.27
11.001 - 11.500............................ 401 25,536,355.63 5.88
11.501 - 12.000............................ 401 21,391,391.42 4.93
12.001 - 12.500............................ 186 10,029,443.87 2.31
12.501 - 13.000............................ 131 6,758,075.97 1.56
13.001 - 13.500............................ 32 1,973,629.80 0.45
13.501 - 14.000............................ 34 2,131,521.97 0.49
14.001 - 14.500............................ 15 449,983.75 0.10
14.501 - 15.000............................ 22 1,232,671.58 0.28
15.001 - 15.440............................ 12 402,099.38 0.09
----- --------------- ------
Total............................ 6,340 $434,153,613.29 100.00%
===== =============== ======
S-16
17
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
PERCENTAGE OF
NUMBER OF CUT-OFF DATE CUT-OFF DATE AGGREGATE
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----- -------------- ----------------- ----------------------
Alabama.................................. 92 $ 5,133,515.04 1.18%
Arizona.................................. 23 1,141,314.31 0.26
Arkansas................................. 11 671,165.39 0.15
California............................... 356 32,532,621.47 7.49
Colorado................................. 72 5,327,237.67 1.23
Connecticut.............................. 259 20,726,326.94 4.77
Delaware................................. 56 4,116,606.66 0.95
District of Columbia..................... 84 6,690,025.67 1.54
Florida.................................. 994 52,174,874.95 12.02
Georgia.................................. 164 11,209,493.76 2.58
Hawaii................................... 2 79,903.07 0.02
Idaho.................................... 6 362,036.98 0.08
Illinois................................. 410 29,618,176.84 6.82
Indiana.................................. 121 5,966,522.93 1.37
Iowa..................................... 5 203,998.94 0.05
Kansas................................... 6 396,432.76 0.09
Kentucky................................. 30 1,928,871.80 0.44
Louisiana................................ 22 1,433,808.78 0.33
Maine.................................... 7 594,031.33 0.14
Maryland................................. 362 26,589,908.88 6.12
Massachusetts............................ 347 27,352,396.64 6.30
Michigan................................. 125 7,918,551.30 1.82
Minnesota................................ 20 1,277,968.59 0.29
Mississippi.............................. 19 833,344.22 0.19
Missouri................................. 106 5,371,057.79 1.24
Montana.................................. 1 15,992.28 0.01
Nebraska................................. 21 1,333,173.33 0.31
Nevada................................... 13 467,134.69 0.11
New Hampshire............................ 35 2,566,382.43 0.59
New Jersey............................... 345 28,075,938.51 6.47
New Mexico............................... 31 1,880,484.41 0.43
New York................................. 585 46,082,090.20 10.61
North Carolina........................... 233 13,198,719.61 3.04
North Dakota............................. 1 94,951.67 0.02
Ohio..................................... 155 10,063,837.13 2.32
Oklahoma................................. 15 775,918.10 0.18
Oregon................................... 61 4,616,029.60 1.06
Pennsylvania............................. 338 20,815,939.83 4.79
Rhode Island............................. 175 12,889,926.16 2.97
South Carolina........................... 226 12,228,316.34 2.82
Tennessee................................ 112 7,662,167.41 1.76
Texas.................................... 28 2,626,222.82 0.60
Utah..................................... 22 1,631,843.59 0.38
Vermont.................................. 5 314,448.46 0.07
Virginia................................. 132 8,399,658.98 1.93
Washington............................... 80 7,100,854.47 1.64
West Virginia............................ 8 491,921.46 0.11
Wisconsin................................ 15 951,322.31 0.22
Wyoming.................................. 4 220,146.79 0.05
----- --------------- --------
Total.......................... 6,340 $434,153,613.29 100.00%
===== =============== ========
S-17
18
PRIORITY OF MORTGAGE LOANS
PERCENTAGE OF
CUT-OFF DATE
AGGREGATE
NUMBER OF CUT-OFF DATE PRINCIPAL
PRIORITY MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
-------- -------------- ----------------- -------------
First-priority................................ 4,845 $376,289,699.45 86.67%
Second-priority............................... 1,495 57,863,913.84 13.33
----- --------------- ------
Total............................... 6,340 $434,153,613.29 100.00%
===== =============== ======
YEAR OF ORIGINATION
PERCENTAGE OF
CUT-OFF DATE
AGGREGATE
NUMBER OF CUT-OFF DATE PRINCIPAL
YEAR OF ORIGINATION MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
------------------- -------------- ----------------- -------------
1991.......................................... 14 $ 1,323,486.78 0.30%
1992.......................................... 295 21,821,649.62 5.03
1993.......................................... 1,296 84,336,601.10 19.43
1994.......................................... 973 61,263,747.76 14.11
1997.......................................... 3 330,110.03 0.08
1998.......................................... 61 4,501,491.11 1.04
1999.......................................... 3,698 260,576,526.89 60.02
----- --------------- ------
6,340 $434,153,613.29 100.00%
===== =============== ======
S-18
19
MONTHS REMAINING TO STATED MATURITY AS OF THE CUT-OFF DATE
PERCENTAGE OF
RANGE OF CUT-OFF DATE
NUMBER OF MONTHS AGGREGATE
REMAINING NUMBER OF CUT-OFF DATE PRINCIPAL
TO STATED MATURITY MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
------------------ -------------- ----------------- -------------
25 - 36..................................... 1 $ 16,668.84 0.00%
49 - 60..................................... 51 1,159,395.59 0.27
61 - 72..................................... 11 413,534.56 0.10
73 - 84..................................... 48 2,132,790.47 0.49
85 - 96..................................... 140 10,869,595.18 2.50
97 - 108..................................... 725 46,808,273.83 10.78
109 - 120..................................... 1,334 81,926,668.94 18.87
121 - 132..................................... 61 3,804,848.57 0.88
133 - 144..................................... 2 66,374.65 0.02
145 - 156..................................... 13 940,636.60 0.22
157 - 168..................................... 144 8,954,484.38 2.06
169 - 180..................................... 2,209 157,392,912.04 36.25
181 - 192..................................... 14 727,666.21 0.17
229 - 240..................................... 775 41,546,017.68 9.57
277 - 288..................................... 1 94,349.66 0.02
289 - 300..................................... 24 1,875,866.19 0.43
337 - 348..................................... 2 118,640.00 0.03
349 - 361..................................... 785 75,304,889.90 17.35
----- --------------- ------
Total............................... 6,340 $434,153,613.29 100.00%
===== =============== ======
TYPES OF MORTGAGED PROPERTIES
PERCENTAGE OF
CUT-OFF DATE
AGGREGATE
NUMBER OF CUT-OFF DATE PRINCIPAL
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
------------- -------------- ----------------- -------------
Manufactured housing.......................... 161 $ 8,825,796.43 2.03%
2-4 family.................................... 399 29,259,293.81 6.74
Condominiums.................................. 125 6,910,804.49 1.59
Cooperative................................... 4 514,480.38 0.12
Single-family detached........................ 5,287 367,726,891.18 84.70
Single-family attached........................ 364 20,916,347.00 4.82
----- --------------- ------
Total............................... 6,340 $434,153,613.29 100.00%
===== =============== ======
S-19
20
USE OF MORTGAGED PROPERTIES(1)
PERCENTAGE OF
CUT-OFF DATE
AGGREGATE
NUMBER OF CUT-OFF DATE PRINCIPAL
USE MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
--- -------------- ----------------- -------------
Primary residence............................. 5,994 $414,739,076.00 95.53%
Non-primary residence(2)...................... 346 19,414,537.29 4.47
----- --------------- ------
Total............................... 6,340 $434,153,613.29 100.00%
===== =============== ======
- -------------------------
(1) Based on information supplied by the mortgagor in the loan application.
(2) We believe that the majority of the non-primary residences are investment
properties.
SECOND-LIEN COMBINED LOAN-TO-VALUE RATIO(1)(2)
(FOR SECOND-LIEN MORTGAGE LOANS)
PERCENTAGE OF
CUT-OFF DATE
AGGREGATE
PRINCIPAL
NUMBER OF BALANCE OF
MORTGAGE LOANS MORTGAGE
IN A LOANS IN A
RANGE OF SECOND-LIEN SECOND-LIEN CUT-OFF DATE SECOND-LIEN
COMBINED LOAN-TO-VALUE RATIOS POSITION PRINCIPAL BALANCE POSITION
----------------------------- -------------- ----------------- -------------
10.01 - 20.00%........................... 2 $ 19,744.91 0.03%
20.01 - 30.00............................ 5 100,201.25 0.17
30.01 - 40.00............................ 4 101,374.58 0.18
40.01 - 50.00............................ 17 737,470.77 1.27
50.01 - 60.00............................ 35 1,477,049.43 2.55
60.01 - 70.00............................ 72 3,918,973.97 6.77
70.01 - 75.00............................ 88 3,727,202.79 6.44
75.01 - 80.00............................ 188 7,239,993.26 12.51
80.01 - 85.00............................ 157 7,751,868.65 13.40
85.01 - 90.00............................ 160 6,343,913.08 10.96
90.01 - 95.00............................ 142 5,203,033.36 8.99
95.01 - 102.31............................ 625 21,243,087.79 36.71
----- -------------- ------
Total........................... 1,495 $57,863,913.84 100.00%
===== ============== ======
- -------------------------
(1) The "Second-Lien Combined Loan-to-Value Ratio" of a second-lien mortgage
loan is the ratio (expressed as a percentage) that the sum of the original
principal balance of such mortgage loan and the then current principal
balance of the related first-lien mortgage loan, bears to the appraised
value of the related mortgaged property at the time such mortgage loan was
originated (or if the proceeds of such mortgage loan were used to refinance
an existing mortgage, the appraised value based on a recent appraisal).
(2) The weighted average of the Second-Lien Combined Loan-to-Value Ratios of the
second-lien mortgage loans is expected to be approximately 86.93%.
S-20
21
HOME EQUITY LOAN-TO-VALUE RATIO(1)(2)
PERCENTAGE OF
CUT-OFF DATE
AGGREGATE
PRINCIPAL
CUT-OFF DATE BALANCE OF
RANGE OF HOME EQUITY NUMBER OF PRINCIPAL MORTGAGE
LOAN-TO-VALUE RATIOS MORTGAGE LOANS BALANCE LOANS
-------------------- -------------- --------------- -------------
0.00 - 10.00%............................ 155 $ 3,372,302.40 0.78%
10.01 - 20.00............................. 843 29,382,144.95 6.77
20.01 - 30.00............................. 430 17,763,706.40 4.09
30.01 - 40.00............................. 224 11,594,748.57 2.67
40.01 - 50.00............................. 242 13,557,235.49 3.12
50.01 - 60.00............................. 367 23,298,260.60 5.37
60.01 - 70.00............................. 807 57,023,424.23 13.13
70.01 - 75.00............................. 642 50,976,954.06 11.74
75.01 - 80.00............................. 1,539 125,172,669.80 28.83
80.01 - 85.00............................. 669 57,779,449.36 13.31
85.01 - 90.00............................. 421 44,066,120.19 10.15
90.01 - 95.38............................. 1 166,597.24 0.04
----- --------------- ------
Total........................... 6,340 $434,153,613.29 100.00%
===== =============== ======
- -------------------------
(1) The "Home Equity Loan-to-Value Ratio" of a mortgage loan is the ratio
(expressed as a percentage) that the original principal balance of such
mortgage loan bears to the appraised value (or, with respect to
approximately 61.18% of the mortgage loans, the lesser of (a) the appraised
value or (b) the selling price) of the related mortgaged property at the
time such mortgage loan was originated (or if the proceeds of such mortgage
loan were used to refinance an existing mortgage, the appraised value based
on a recent appraisal).
(2) The weighted average of the Home Equity Loan-to-Value Ratios of the mortgage
loans is expected to be approximately 68.22%. The weighted average of the
Home Equity Loan-to-Value Ratios for the first-lien mortgage loans and the
second-lien mortgage loans is expected to be approximately 75.28% and
22.30%, respectively.
S-21
22
HOME EQUITY LOAN RATIO(1)(2)
(FOR SECOND-LIEN MORTGAGE LOANS)
PERCENTAGE OF
CUT-OFF DATE
AGGREGATE PRINCIPAL
BALANCE OF
NUMBER OF MORTGAGE
MORTGAGE LOANS LOANS IN A
RANGE OF HOME EQUITY IN A SECOND- CUT-OFF DATE SECOND-LIEN
LOAN RATIOS LIEN POSITION PRINCIPAL BALANCE POSITION
-------------------- -------------- ----------------- -------------------
0.00 - 10.00%....................... 57 $ 980,969.65 1.70%
10.01 - 20.00........................ 729 22,151,516.20 38.28
20.01 - 30.00........................ 440 18,806,490.73 32.50
30.01 - 40.00........................ 160 9,014,515.26 15.58
40.01 - 50.00........................ 63 4,586,546.57 7.93
50.01 - 60.00........................ 19 923,355.35 1.60
60.01 - 70.00........................ 14 874,303.56 1.51
70.01 - 75.00........................ 3 82,218.80 0.14
75.01 - 80.00........................ 4 200,285.37 0.35
80.01 - 85.00........................ 4 186,648.86 0.32
85.01 - 90.00........................ 1 29,689.47 0.05
90.01 - 92.28........................ 1 27,374.02 0.05
----- -------------- ------
Total....................... 1,495 $57,863,913.84 100.00%
===== ============== ======
- -------------------------
(1) The "Home Equity Loan Ratio" of a second-lien mortgage loan is the ratio
(expressed as a percentage) that the original principal balance of such
mortgage loan bears to the total of the original principal balance of such
mortgage loan plus the outstanding amount of the related first-lien mortgage
loan at the time such mortgage loan was originated.
(2) The weighted average of the Home Equity Loan Ratios of the second-lien
mortgage loans is expected to be approximately 26.00%.
LOAN TYPE
PERCENTAGE OF
CUT-OFF DATE
AGGREGATE
NUMBER OF CUT-OFF DATE PRINCIPAL
TYPE MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
---- -------------- ----------------- -------------
Balloon................................... 2,296 $202,618,967.70 46.67%
Fully amortizing.......................... 4,044 231,534,645.59 53.33
----- --------------- ------
Total........................... 6,340 $434,153,613.29 100.00%
===== =============== ======
S-22
23
MONTHS REMAINING TO STATED MATURITY AS OF THE CUT-OFF DATE
(FOR BALLOON LOANS)
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF MONTHS AGGREGATE
REMAINING TO PRINCIPAL
STATED MATURITY NUMBER OF BALLOON CUT-OFF DATE BALANCE OF
AS OF CUT-OFF DATE MORTGAGE LOANS PRINCIPAL BALANCE BALLOON LOANS
------------------ ----------------- ----------------- -------------
24-36.................................. 1 $ 16,668.84 0.01%
48-60.................................. 5 180,961.54 0.09
61-72.................................. 6 303,988.84 0.15
73-84.................................. 31 1,772,190.49 0.87
85-96.................................. 85 8,264,444.90 4.08
97-108................................. 324 28,066,368.82 13.85
109-120................................ 586 48,626,451.19 24.00
121-132................................ 31 2,444,135.42 1.21
133-180................................ 1,226 112,878,507.66 55.71
181-360................................ 1 65,250.00 0.03
----- --------------- ------
Total............................. 2,296 $202,618,967.70 100.00%
===== =============== ======
The following describes certain delinquency characteristics as of the
Cut-off Date of the mortgage loans expected to comprise the mortgage loan pool:
- - No more than 0.25% of the mortgage loans (by Principal Balance of all of the
mortgage loans) is 30 days or more delinquent in payment as of the Cut-off
Date.
- - During the 12 months preceding the Cut-off Date, 233 mortgage loans, with an
aggregate Principal Balance as of the Cut-off Date of approximately
$15,127,693 and comprising approximately 3.48% of the mortgage pool (by
Principal Balance as of the Cut-off Date), had been delinquent in payment for
a period of at least 30 days (but less than 60 days) two or more times, and 47
mortgage loans, with an aggregate Principal Balance as of the Cut-off Date of
approximately $3,001,476 and comprising approximately 0.69% of the mortgage
pool (by Principal Balance as of the Cut-off Date) had been delinquent in
payment for a period of at least 60 days (but less than 90 days) two or more
times. See "Delinquency, Foreclosure and Loan Loss Experience of GECMSI's Home
Equity Loan Servicing Portfolio" herein.
The mortgage pool includes mortgage loans which are located in certain East
Coast states affected by Hurricane Floyd. A portion of these mortgage loans are
located in states that have declared a state of emergency. GECMSI has not
undertaken the physical inspection of any mortgaged properties. As a result,
there can be no assurance that material damage to any mortgaged property has not
occurred. There also can be no assurance that a continuation of the effects of
the hurricane such as severe flooding will not result in material damage to
mortgaged properties after the date hereof. In addition, the hurricane or the
effects thereof may have caused significant economic disruption in the affected
regions and may result in loss of employment by borrowers and other conditions
that could adversely affect the level of delinquencies and defaults experienced
on the mortgage loans.
Under the mortgage loan sale and contribution agreement between GECMSI and
Funding, which agreement will be assigned to the Trustee, GECMSI will represent
and warrant that each mortgaged property is free of material damage and in good
repair as of the date of issuance of the certificates (the "Closing Date"). In
the event of an uncured breach of such representation and warranty that
materially and adversely affects the interests of certificateholders, GECMSI
will be required to repurchase the affected mortgage loan from the trust or
substitute another mortgage loan
S-23
24
therefor. If any damage occurs after the Closing Date, GECMSI will have no such
obligations. See "The Pooling and Servicing Agreement -- Repurchase or
Substitution" in the prospectus.
Damage to a mortgaged property that occurs as a result of a hurricane or
flooding may not be covered by insurance. The standard hazard policies covering
the mortgage loans do not typically cover damage caused by flooding and may not
cover damage caused by hurricanes. To the extent that any insurance proceeds
received with respect to any damaged mortgaged properties are not applied to the
restoration thereof, such proceeds will be used to prepay the related mortgage
loans in whole or in part. Any repurchases or prepayments of the mortgage loans
may reduce the weighted average lives of the certificates offered hereby and
will reduce the yields on the classes of certificates purchased at a premium.
TERMS OF THE MORTGAGE LOANS
The mortgage loans accrue interest on a simple interest basis or a
self-amortizing basis. Approximately 72.66% of the mortgage loans are expected
to be self-amortizing mortgage loans, and approximately 27.34% of the mortgage
loans are expected to be simple interest mortgage loans, in each case by
Principal Balance as of the Cut-off Date.
For simple interest mortgage loans, the amount of the loan is amortized
over a series of equal monthly payments. Each monthly interest payment is
calculated by multiplying the outstanding principal balance of the loan by the
stated interest rate. Such product is then multiplied by a fraction, the
numerator of which is the number of days elapsed since the preceding payment of
interest was made and the denominator of which is either 365 or 360, depending
on applicable state law. Payments received on a simple interest mortgage loan
are applied first to interest accrued to the date payment is received and second
to reduce the unpaid principal balance of the mortgage loan. Accordingly, if a
mortgagor makes a payment on the mortgage loan less than 30 days after the
previous payment, the interest collected for the period since the preceding
payment was made will be less than 30 days' interest, and the amount of
principal repaid in such month will be correspondingly greater. Conversely, if a
mortgagor makes a payment on the mortgage loan more than 30 days after the
previous payment, the interest collected for the period since the preceding
payment was made will be greater than 30 days' interest, and the amount of
principal repaid in the month will be correspondingly reduced. As a result,
based on the payment characteristics of a particular mortgagor, the principal
due on the final Due Date of a simple interest mortgage loan may vary from the
principal payment that would be made if payments for such mortgage loan were
always made on their Due Dates.
For self-amortizing mortgage loans, interest will be calculated based on a
360-day year of twelve 30-day months. When a full prepayment of principal is
made on a self-amortizing mortgage loan during a month, the mortgagor is charged
interest only on the days of the month actually elapsed up to the date of such
prepayment, at a daily interest rate that is applied to the principal amount of
the loan so prepaid. When a partial prepayment of principal is made on a
self-amortizing mortgage loan (other than an Early Installment, as defined
herein) during a month, the mortgagor generally is not charged interest on the
amount of the partial prepayment during the month in which such prepayment is
made.
If a mortgagor pays more than one installment on a simple interest mortgage
loan at a time, the regular installment will be treated as described above.
However, the entire amount of the additional installment will be treated as a
receipt of one or more regular principal payments and applied to reduce the
principal balance of the related mortgage loan. Although such mortgagor will not
be required to make the next monthly installment, interest will continue to
accrue on the principal balance of such mortgage loan, as reduced by the
application of the early installment. As a result, when such mortgagor pays the
next required installment on a simple interest mortgage loan, such
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payment may be insufficient to cover the interest that has accrued since the
last payment by the mortgagor. Notwithstanding such insufficiency, such mortgage
loan would be considered to be current. This situation would continue until the
monthly installments are once again sufficient to cover all accrued interest and
to reduce the principal balance of such mortgage loan. Depending on the
principal balance and interest rate of the related mortgage loan and on the
number of installments paid early, there may be extended periods of time during
which simple interest mortgage loans in respect of which such additional
installments have been made are not amortizing and are considered current.
The various mortgage loans have different Due Dates throughout each month
based on their respective loan closing dates. The monthly Due Date for each
mortgage loan is fixed at loan closing, except that all mortgagors who are
current in their loan payments have one opportunity during the life of their
loans to change their respective monthly Due Dates to a date up to fifteen days
later than their respective original Due Dates. GECMSI will service mortgage
loans whose Due Dates have been so changed based on the new Due Dates and will
require the mortgagors to pay a one-time interest charge, which GECMSI will
retain as servicing compensation, for the number of days that the Due Date has
been extended. However, GECMSI, as servicer, will advance interest to the trust
based on the original payment Due Dates for the life of any mortgage loans that
have become subject to a change in Due Date, subject to any determination by it
that such an advance is a Nonrecoverable Advance (as defined herein). See "The
Pooling and Servicing Agreement -- Advances" herein.
Borrowers may prepay their loans, in whole or in part, at any time. It is
expected that no more than approximately 20.36% of the mortgage loans, by
Principal Balance as of the Cut-off Date, required the mortgagor to pay a
prepayment premium that had not expired as of the Cut-off Date. Prepayment
premiums are generally expected to range from 1% to 9% of the principal amount
prepaid and substantially all of the prepayment premiums are scheduled to expire
by the end of September 2004.
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DESCRIPTION OF THE CERTIFICATES
GENERAL
The certificates will be issued pursuant to a Pooling and Servicing
Agreement (the "Agreement") to be dated as of the Cut-off Date among Funding, as
depositor of the mortgage loans, GECMSI, as servicer of the mortgage loans, and
Bank One, National Association, as Trustee. See the prospectus for important
additional information regarding the terms and conditions of the Agreement and
the certificates. The certificates will be issued in the classes offered by this
prospectus supplement, together with the Class B3, Class B4, Class B5 and Class
S Certificates, none of which are offered hereby. The certificates will be
issued in the aggregate original principal balance of approximately
$434,153,613, subject to a permitted variance such that the aggregate original
principal balance of the certificates will not be less than $412,300,000 or
greater than $454,700,000. Any such variance will be allocated so as to
approximate the material characteristics of the classes of certificates
described herein.
As described below, each class of certificates offered hereby, other than
the residual certificates, will be issued in book-entry form. Beneficial
interests in these certificates (the "Book-Entry Certificates") will be held by
investors through the book-entry facilities of The Depository Trust Company, as
described below, in the minimum denominations described in the summary of this
prospectus supplement. Notwithstanding the minimum denominations of the
certificates described in the summary, one certificate of each class other than
the residual certificates may be issued in a lower amount. Notwithstanding the
integral multiple requirements described in the summary, one certificate of each
class other than the residual certificates may evidence an additional amount
equal to the remaining principal balance thereof.
BOOK-ENTRY CERTIFICATES
Each class of the Book-Entry Certificates will be registered as a single
certificate held by a nominee of The Depository Trust Company, which is known as
DTC. For purposes of this discussion, the term DTC also refers to any successor
depository selected by DTC. Funding has been informed by DTC that its nominee
will be Cede & Co. Accordingly, Cede & Co. is expected to be the holder of
record of the Book-Entry Certificates. Except as described below, no person
acquiring a Book-Entry Certificate (each, a "beneficial owner") will be entitled
to receive a definitive physical certificate representing such certificate.
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm, that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC if
the beneficial owner's Financial Intermediary is not a DTC participant).
Therefore, the beneficial owner must rely on the foregoing procedures to
evidence its beneficial ownership of a Book-Entry Certificate. Beneficial
ownership of a Book-Entry Certificate may only be transferred by compliance with
the procedures of such Financial Intermediaries and participants.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each of its participants in the Book-Entry Certificates,
whether held for its own account or as a nominee for another person. In general,
beneficial ownership of Book-Entry Certificates will be subject to the rules,
regulations and procedures governing DTC and its participants as in effect from
time to time.
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Distributions of principal of and interest on the Book-Entry Certificates
will be made on each Distribution Date by the Trustee to DTC. DTC will be
responsible for crediting the amount of such payments to the accounts of the
applicable participants in accordance with DTC's normal procedures. Each DTC
participant will be responsible for disbursing such payments to the beneficial
owners of the Book-Entry Certificates that it represents and to each Financial
Intermediary for which it acts as agent. Each such Financial Intermediary will
be responsible for disbursing funds to the beneficial owners of the Book-Entry
Certificates that it represents.
As a result, under a book-entry format, beneficial owners of the Book-Entry
Certificates may experience some delay in their receipt of payments. Because DTC
can only act on behalf of Financial Intermediaries, the ability of a beneficial
owner to pledge Book-Entry Certificates to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
Book-Entry Certificates, may be limited due to the lack of physical certificates
for such Book-Entry Certificates. In addition, issuance of the Book-Entry
Certificates in book-entry form may reduce the liquidity of such certificates in
the secondary market since certain potential investors may be unwilling to
purchase certificates for which they cannot obtain physical certificates.
DTC has advised Funding and the Trustee that, unless and until definitive
physical certificates are issued, DTC will take any action permitted to be taken
by a holder of a certificate under the Agreement only at the direction of one or
more Financial Intermediaries to whose DTC accounts the Book-Entry Certificates
are credited. DTC may take conflicting actions with respect to other Book-Entry
Certificates to the extent that such actions are taken on behalf of Financial
Intermediaries whose holdings include such Book-Entry Certificates.
Definitive physical certificates will be issued to beneficial owners of the
related Book-Entry Certificates, or their nominees, rather than to DTC, only if
(a) DTC or Funding advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depository with respect to the certificates and Funding or the Trustee is unable
to locate a qualified successor, (b) Funding, at its sole option, elects to
terminate the book-entry system through DTC, or (c) after the occurrence of an
Event of Default as described in the accompanying prospectus, beneficial owners
of the Book-Entry Certificates aggregating not less than 51% of the aggregate
voting rights allocated thereto advise the Trustee and DTC through the Financial
Intermediaries in writing that the continuation of a book-entry system through
DTC (or a successor thereto) is no longer in the best interests of beneficial
owners of the certificates.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
definitive physical certificates. Upon surrender by DTC of the global
certificate or certificates representing the certificates and instructions for
re-registration, the Trustee will issue definitive physical certificates, and
thereafter the Trustee will recognize the holders of such certificates as
certificateholders under the Agreement. Following the issuance of definitive
physical certificates, distribution of principal and interest on the
certificates will be made by the Trustee directly to holders of these
certificates in accordance with the procedures set forth in the Agreement.
The Agreement will provide that, if definitive physical certificates are
issued in respect of the Class M, Class B1 or Class B2 Certificates, no transfer
of such a certificate may be made unless the Trustee has received (1) a
certificate to the effect that the proposed transferee is not an ERISA Plan (as
defined herein) or that the transferee is an insurance company investing assets
of its general account and the exemption provided by Section III(a) of the
Department of Labor Prohibited Transaction Class Exemption 95-60, 60 Fed. Reg.
35925 (July 12, 1995), applies to such transferee's acquisition and holding of
such certificate or (2) an opinion of counsel relating to such transfer in form
and substance satisfactory to the Trustee, GECMSI and Funding. See "ERISA
Considerations" herein.
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NON-BOOK-ENTRY CERTIFICATES
The residual certificates (the "Non-Book-Entry Certificates") will be
issued in fully-registered, certificated form. The Non-Book-Entry Certificates
will be transferable and exchangeable on a certificate register to be maintained
at the corporate trust office in the city in which the Trustee is located or
such other office or agency maintained for such purposes by the Trustee in New
York City. Under the Agreement, the Trustee will initially be appointed as the
certificate registrar. No service charge will be made for any registration of
transfer or exchange of the residual certificates, but payment of a sum
sufficient to cover any tax or other governmental charge may be required by the
Trustee. The residual certificates will be subject to certain restrictions on
transfer. See "--Restrictions on Transfer of the Residual Certificates" herein.
Distributions of principal and interest, if any, on each Distribution Date
on the Non-Book-Entry Certificates will be made to the persons in whose names
such certificates are registered at the close of business on the last business
day of the month immediately preceding the month of such Distribution Date (the
"Record Date"). Distributions will be made by check or money order mailed to the
person entitled thereto at the address appearing in the certificate register or,
upon written request by the certificateholder to the Trustee, by wire transfer
to a United States depository institution designated by such certificateholder
and acceptable to the Trustee or by such other means of payment as such
certificateholder and the Trustee may agree; provided, however, that the final
distribution in retirement of the Non-Book-Entry Certificates will be made only
upon presentation and surrender of such certificates at the office or agency of
the Trustee specified in the notice to the holders thereof of such final
distribution.
AVAILABLE FUNDS
The amount of funds ("Available Funds") in respect of the mortgage pool
that will be available for distribution to holders of the certificates on each
Distribution Date is described in the accompanying prospectus under "Collection
and Other Servicing Procedures -- Loan Payment Record," except as described
below.
The portion of Available Funds for any Distribution Date representing
payments received on account of principal of the mortgage loans is the
"Available Principal Funds," and the portion of Available Funds for any
Distribution Date representing payments received on account of interest on the
mortgage loans is the "Available Interest Funds."
Notwithstanding the foregoing:
- any Simple Interest Payment (as defined herein) or any advance by GECMSI
in respect of delinquent interest payments on a mortgage loan as
described herein relating to a Distribution Date will be included in the
Available Interest Funds for that Distribution Date;
- any Nonrecoverable Advances (as defined herein) reimbursed to GECMSI will
be deducted from Available Interest Funds; and
- the Available Principal Funds for any Distribution Date will include
principal payments in respect of the mortgage loans that are actually
received by GECMSI as servicer during the calendar month immediately
preceding that Distribution Date, except that principal prepayments in
full with respect to any mortgage loan will be included in the Available
Principal Funds as provided under "Collection and Other Servicing
Procedures -- Loan Payment Record" in the prospectus.
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DISTRIBUTIONS ON THE CERTIFICATES
Interest
Interest on the certificates will be distributed monthly on the 25(th) day
of each month or, if such 25(th) day is not a business day, on the succeeding
business day (each, a "Distribution Date") commencing in October 1999 in an
aggregate amount equal to the Available Interest Funds for such Distribution
Date. On each Distribution Date, the Available Interest Funds will be
distributed in the following order of priority among the certificates:
first, pro rata to the classes of senior certificates other than the
residual certificates, the Accrued Certificate Interest on each such class
of certificates for such Distribution Date, less the applicable Interest
Percentage of any Unpaid Net Simple Interest Shortfall, any shortfall in
available amounts being allocated among such classes in proportion to the
amount of Accrued Certificate Interest otherwise distributable thereon;
second, pro rata to the classes of senior certificates other than the
residual certificates, any Accrued Certificate Interest thereon remaining
undistributed from previous Distribution Dates (including any related
Unpaid Net Simple Shortfalls previously allocated to such classes), to the
extent of remaining Available Interest Funds, any shortfall in available
amounts being allocated among such classes in proportion to the amount of
such Accrued Certificate Interest remaining undistributed for each class
for such Distribution Date;
third, to the Class M Certificates, to the extent of remaining
Available Interest Funds, in the following order: (a) the Accrued
Certificate Interest thereon for such Distribution Date (less the
applicable Interest Percentage of any Unpaid Net Simple Interest Shortfall)
and (b) any Accrued Certificate Interest thereon remaining undistributed
from previous Distribution Dates (including any related Unpaid Net Simple
Interest Shortfall previously allocated to such class);
fourth, to the Class B1 Certificates, to the extent of remaining
Available Interest Funds, in the following order: (a) the Accrued
Certificate Interest thereon for such Distribution Date (less the
applicable Interest Percentage of any Unpaid Net Simple Interest Shortfall)
and (b) any Accrued Certificate Interest thereon remaining undistributed
from previous Distribution Dates (including any related Unpaid Net Simple
Interest Shortfall previously allocated to such class);
fifth, to the Class B2 Certificates, to the extent of remaining
Available Interest Funds, in the following order: (a) the Accrued
Certificate Interest thereon for such Distribution Date (less the
applicable Interest Percentage of any Unpaid Net Simple Interest Shortfall)
and (b) any Accrued Certificate Interest thereon remaining undistributed
from previous Distribution Dates (including any related Unpaid Net Simple
Interest Shortfall previously allocated to such class); and
sixth, sequentially, to the Class B3, Class B4 and Class B5
Certificates, to the extent of remaining Available Interest Funds, in the
following order: (a) the Accrued Certificate Interest thereon for such
Distribution Date (less the applicable Interest Percentage of any Unpaid
Net Simple Interest Shortfall) and (b) any Accrued Certificate Interest
thereon remaining undistributed from previous Distribution Dates (including
any related Unpaid Net Simple Interest Shortfall previously allocated to
such class).
Interest will accrue on the certificates offered hereby, other than the
residual certificates, at the respective interest rates set forth in the summary
of this prospectus supplement or described below during each one-month period
ending on the last day of the month preceding the month in which each
Distribution Date occurs (each, an "Interest Accrual Period"). Interest will be
calculated on the basis of a 360-day year consisting of twelve 30-day months.
Interest will accrue on the Class A5, Class M and Class B1 Certificates
during the initial Interest Accrual Period at an interest rate of 7.795%, 7.775%
and 8.315% per annum, respectively,
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and during each subsequent Interest Accrual Period at an interest rate equal to
the lesser of (1) 7.795%, 7.775% and 8.315% per annum, respectively, and (2) the
Weighted Average Net Mortgage Rate for the related Interest Accrual Period.
Interest will accrue on the Class B2, Class B3, Class B4 and Class B5
Certificates at the Weighted Average Net Mortgage Rate during each Interest
Accrual Period.
Interest will accrue on the Class S Certificates during each Interest
Accrual Period at a per annum interest rate equal to the Weighted Average Net
Mortgage Rate less the weighted average (by Class Certificate Principal Balance)
of the interest rates of the other classes of certificates. The per annum
interest rate on the Class S Certificates for the first Interest Accrual Period
is expected to be approximately 1.852%.
As used in this prospectus supplement, the following terms have the
meanings set forth below:
- The "Weighted Average Net Mortgage Rate" for any Interest Accrual Period
is the weighted average (by Principal Balance) of the Net Mortgage Rates
on the mortgage loans as of the first day of such Interest Accrual
Period, as determined by GECMSI as servicer. Any mortgage loans which
have been prepaid in full (or, in the case of a mortgage loan master-
serviced by GECMSI, of which GECMSI receives notice) on or prior to the
fifteenth day of the month in which such Interest Accrual Period occurs
will not be included in the above calculation. The Weighted Average Net
Mortgage Rate for the first Interest Accrual Period will be the weighted
average (by Principal Balance) of the Net Mortgage Rates on the mortgage
loans as of the Cut-off Date and is expected to be approximately 9.186%
per annum.
- The "Net Mortgage Rate" of any mortgage loan equals the interest rate of
such mortgage loan net of the applicable servicing fee (as defined
herein). See "The Pooling and Servicing Agreement -- Servicing
Compensation, Compensating Interest and Payment of Expenses" herein.
- The "Accrued Certificate Interest" for any certificate entitled to
distributions of interest for any Distribution Date will equal the
interest accrued during the related Interest Accrual Period at the
applicable interest rate on the Certificate Principal Balance of such
certificate immediately prior to such Distribution Date, less such
certificate's share of any Net Interest Shortfall (as defined below), the
interest portion of any Excess Losses (as defined herein) through the
Cross-Over Date and, after the Cross-Over Date, the interest portion of
any Realized Losses including Excess Losses.
- The "Certificate Principal Balance" of any certificate as of any
Distribution Date will equal such certificate's principal balance on the
date of the initial issuance of the certificates as reduced, but not
below zero, by:
-- all amounts distributed on previous Distribution Dates on such
certificate on account of principal;
-- the principal portion of all Realized Losses previously allocated to
such certificate; and
-- in the case of the junior certificates, such certificate's pro rata
share, if any, of the Junior Certificate Writedown Amount (as defined
below) for previous Distribution Dates.
- The "Class Certificate Principal Balance" of a class as of any
Distribution Date will equal the aggregate Certificate Principal Balances
of all the certificates of that class on such Distribution Date.
- As of any Distribution Date, the "Junior Certificate Writedown Amount"
will equal the amount by which (1) the sum of the Class Certificate
Principal Balances of all the certificates, after giving effect to the
distribution of principal and the application of Realized
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Losses in reduction of the Certificate Principal Balances of the
certificates on such Distribution Date, exceeds (2) the aggregate
Principal Balance of the mortgage loans on the first day of the month of
such Distribution Date less any Deficient Valuations (as defined herein)
occurring on or prior to the Bankruptcy Coverage Termination Date (as
defined herein).
- The aggregate "Notional Principal Balance" of the Class S Certificates as
of any Distribution Date will equal the aggregate Principal Balance of
the mortgage loans with respect to such Distribution Date.
- The "Interest Percentage" is, with respect to any class of certificates
and any Distribution Date, the ratio (expressed as a decimal carried to
six places) of the Accrued Certificate Interest for such class to the
Accrued Certificate Interest for all classes, in each case with respect
to such Distribution Date.
- The "Net Simple Interest Shortfall" for any Distribution Date will be
equal to the excess, if any, of (1) 30 days' interest at the weighted
average of the Net Mortgage Rates of the simple interest mortgage loans
as of the first day of the applicable Interest Accrual Period, as
determined by GECMSI, as servicer, on an amount equal to the aggregate
Principal Balance of the simple interest mortgage loans with respect to
such Distribution Date, calculated on the basis of a 360-day year
consisting of twelve 30-day months, over (2) the amount of interest
received by GECMSI as servicer in the month preceding the month in which
such Distribution Date occurs in respect of such simple interest mortgage
loans, net of the related servicing fees.
- The "Net Simple Interest Excess" for any Distribution Date will be the
excess, if any, of the amount described in clause (2) of the preceding
sentence over the amount described in clause (1) of the preceding
sentence. For this purpose, the amount of interest received in respect of
the simple interest mortgage loans in any month shall be deemed (a) to
include any advances of interest made by GECMSI as servicer in such month
in respect of such simple interest mortgage loans, and (b) to be reduced
by any amounts paid to GECMSI as servicer in such month in reimbursement
of advances previously made by GECMSI in respect of such simple interest
mortgage loans (including simple interest mortgage loans that, at the
time of reimbursement, are no longer part of the trust).
- The "Unpaid Net Simple Interest Shortfall" for any Distribution Date will
be equal to the excess, if any, of (1) any Net Simple Interest Shortfall
for such Distribution Date, over (2) any Simple Interest Payment (as
defined under "The Pooling and Servicing Agreement -- Simple Interest
Payments" herein) for such Distribution Date.
- With respect to any Distribution Date, the "Net Interest Shortfall" will
equal the excess of the aggregate Interest Shortfalls with respect to
such Distribution Date over the Compensating Interest Payment (as defined
under "The Pooling and Servicing Agreement -- Servicing Compensation,
Compensating Interest and Payment of Expenses" herein), if any, for such
Distribution Date.
- With respect to any Distribution Date, an "Interest Shortfall" in respect
of a self-amortizing mortgage loan will result from (1) any voluntary
prepayment of principal in full on such mortgage loan received from the
sixteenth day (or, in the case of the first Distribution Date, from the
Cut-off Date) through the last day of the month preceding such
Distribution Date and (2) any partial prepayment of principal on such
self-amortizing mortgage loan (other than an Early Installment) by the
mortgagor during the month preceding such Distribution Date. With respect
to any Distribution Date, an "Interest Shortfall" in respect of either a
self-amortizing mortgage loan or a simple interest mortgage loan will
result from a reduction in the
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interest rate on such mortgage loan due to the application of the
Soldiers' and Sailors' Civil Relief Act of 1940 whereby, in general,
members of the Armed Forces who entered into mortgages prior to the
commencement of military service may have the interest rates on those
mortgage loans reduced for the duration of their active military service.
See "Certain Legal Aspects of the Mortgage Loans -- Soldiers' and
Sailors' Civil Relief Act" in the Prospectus.
As to any Distribution Date and any self-amortizing mortgage loan with
respect to which a prepayment in full has occurred as described above, the
resulting "Interest Shortfall" generally will equal the difference between one
month's interest at the Net Mortgage Rate on the Principal Balance of such
mortgage loan, and the amount of interest at the Net Mortgage Rate actually
received with respect to such mortgage loan. In the case of a partial prepayment
in respect of a self-amortizing mortgage loan (other than an Early Installment),
the resulting "Interest Shortfall" will equal one month's interest at the
applicable Net Mortgage Rate on the amount of such prepayment.
Any Net Interest Shortfall, the interest portion of any Excess Losses
through the Cross-Over Date and, after the Cross-Over Date, the interest portion
of any Realized Losses (see "-- Allocation of Realized Losses on the
Certificates" below) will, on each Distribution Date, be allocated among all the
outstanding certificates entitled to distributions of interest in proportion to
the amount of Accrued Certificate Interest that would have been allocated
thereto in the absence of such shortfall and losses.
The interest portion of any Realized Losses (other than Excess Losses)
occurring prior to the Cross-Over Date will not be allocated among any
certificates, but will reduce the amount of Available Interest Funds on the
related Distribution Date. As a result of the subordination of the junior
certificates in right of distribution, such losses will be borne first by the
outstanding junior certificates in inverse order of priority.
If the Available Interest Funds are insufficient on any Distribution Date
to distribute the aggregate Accrued Certificate Interest on the senior
certificates entitled to distributions of interest (after taking into account
any related Unpaid Net Simple Interest Shortfall), any shortfall in available
amounts will be allocated among such classes of senior certificates in
proportion to the amounts of Accrued Certificate Interest otherwise
distributable thereon. The amount of any such undistributed Accrued Certificate
Interest (including any related Unpaid Net Simple Interest Shortfalls) will be
added to the amount of interest to be distributed on the senior certificates on
subsequent Distribution Dates in accordance with priority second under
"-- Interest" above. No interest will accrue on any Accrued Certificate Interest
remaining undistributed from previous Distribution Dates.
Principal
Principal on the certificates will be distributed monthly on each
Distribution Date commencing in October 1999 in an aggregate amount equal to the
Available Principal Funds for such Distribution Date.
On each Distribution Date, the Senior Principal Distribution Amount will be
distributed to the senior certificates (other than the Class S Certificates), in
reduction of the Class Certificate Principal Balances thereof in the following
order of priority:
(a) to the Class A6 Certificates, the Class A6 Principal Distribution
Amount (as defined below), if any, for such Distribution Date, until the
Class Certificate Principal Balance thereof has been reduced to zero; and
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(b) to the other senior certificates, an amount equal to the Senior
Principal Distribution Amount for such Distribution Date less the Class A6
Principal Distribution Amount, if any, for such date, in the following
order of priority:
(1) pro rata, to the Class R1 and Class R2 Certificates, until the
Class Certificate Principal Balances thereof have each been reduced to
zero;
(2) to the Class A1 Certificates, until the Class Certificate
Principal Balance thereof has been reduced to zero;
(3) to the Class A2 Certificates, until the Class Certificate
Principal Balance thereof has been reduced to zero;
(4) to the Class A3 Certificates, until the Class Certificate
Principal Balance thereof has been reduced to zero;
(5) to the Class A4 Certificates, until the Class Certificate
Principal Balance thereof has been reduced to zero; and
(6) to the Class A5 Certificates, until the Class Certificate
Principal Balance thereof has been reduced to zero.
On each Distribution Date after the Distribution Date on which the
respective Class Certificate Principal Balances of the junior certificates are
reduced to zero (the "Cross-Over Date"), distributions of principal on the
outstanding senior certificates entitled to distributions of principal will be
made pro rata among all such certificates, regardless of the allocation, or
sequential nature, of principal payments described in the preceding paragraph.
The Class A6 Certificates will receive no distributions of principal during the
first three years after the Cut-off Date, except as otherwise described herein
on the earlier of the Senior Transition Date (as defined herein) and the
Cross-Over Date.
On each Distribution Date, each class of junior certificates will be
entitled to receive its Allocable Share (as defined herein) for such
Distribution Date.
The "Senior Principal Distribution Amount" with respect to each
Distribution Date will be an amount equal to the sum of:
(1) the Senior Percentage (as defined below) of all payments of principal
actually received by GECMSI on each mortgage loan in the calendar month
preceding the month in which the Distribution Date occurs (including
the principal portion of any Early Installment), other than those
payments of principal described in clauses (2) through (5) below;
(2) the Senior Prepayment Percentage (as defined below) of the Principal
Balance of each mortgage loan which was the subject of a prepayment in
full received by GECMSI (or, in the case of a mortgage loan
master-serviced by GECMSI, of which GECMSI receives notice) during the
applicable Prepayment Period (as defined below);
(3) the Senior Prepayment Percentage of all partial prepayments of
principal received with respect to self-amortizing mortgage loans,
other than Early Installments, during the related Prepayment Period;
(4) the Senior Prepayment Percentage of the sum of (a) the net liquidation
proceeds allocable to principal on each mortgage loan which became a
Liquidated Mortgage Loan during the related Prepayment Period, other
than mortgage loans described in clause (b), and (b) the principal
balance of each mortgage loan that was purchased by a private mortgage
insurer during the related Prepayment Period as an alternative to
paying a claim under the related insurance policy; and
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(5) the Senior Prepayment Percentage of the sum of (a) the Principal
Balance of each mortgage loan which was repurchased by GECMSI or
Funding in connection with such Distribution Date and (b) the
difference, if any, between the Principal Balance of a mortgage loan
that has been replaced by GECMSI or Funding with a substitute mortgage
loan pursuant to the Agreement in connection with such Distribution
Date and the Principal Balance of such substitute mortgage loan.
With respect to any mortgage loan that was the subject of a voluntary
prepayment in full and any Distribution Date, the "Prepayment Period" is the
period from the sixteenth day of the month preceding the month of such
Distribution Date (or, in the case of the first Distribution Date, from the
Cut-off Date) through the fifteenth day of the month of such Distribution Date.
With respect to any other unscheduled prepayment of principal of any mortgage
loan and any Distribution Date, the "Prepayment Period" is the month preceding
the month of such Distribution Date.
The "Senior Percentage" on any Distribution Date will equal the lesser of
100% and the percentage (carried to six places rounded up) obtained by dividing
the aggregate Certificate Principal Balances of all the senior certificates
immediately preceding such Distribution Date by the aggregate Certificate
Principal Balances of all the certificates immediately preceding such
Distribution Date. The initial Senior Percentage is expected to be approximately
87.00%.
The "Senior Prepayment Percentage" on any Distribution Date occurring
during the periods set forth below will be as follows:
PERIOD (DATES INCLUSIVE) SENIOR PREPAYMENT PERCENTAGE
------------------------ ----------------------------
October 1999 - September 2004............. 100%
October 2004 - September 2005............. Senior Percentage plus 70% of the Junior
Percentage
October 2005 - September 2006............. Senior Percentage plus 60% of the Junior
Percentage
October 2006 - September 2007............. Senior Percentage plus 40% of the Junior
Percentage
October 2007 - September 2008............. Senior Percentage plus 20% of the Junior
Percentage
October 2008 and thereafter............... Senior Percentage
Notwithstanding the foregoing, if the Senior Percentage on any Distribution
Date exceeds the initial Senior Percentage, the Senior Prepayment Percentage for
such Distribution Date will equal 100%.
In addition, the reduction of the Senior Prepayment Percentage below the
level in effect for the most recent prior period specified in the table above
shall be effective on any Distribution Date only if, as of the last day of the
month preceding such Distribution Date:
(1) the aggregate Principal Balance of mortgage loans delinquent 60
days or more (including for this purpose (a) any mortgage loans in
foreclosure, (b) any mortgage loans the Principal Balance of which has been
reduced in a Servicer Modification and (c) mortgage loans with respect to
which the related mortgaged property has been acquired by the trust, but
excluding any mortgage loan whose term has been extended in a Servicer
Modification so long as that loan is not delinquent 60 days or more under
its new payment schedule) does not exceed 50% of the aggregate Class
Certificate Principal Balance of the junior certificates as of such date;
and
(2) cumulative Realized Losses do not exceed:
(a) 30% of the aggregate Class Certificate Principal Balance of the
junior certificates as of the date of issuance of the certificates (the
"Original Junior Principal Balance") if such Distribution Date occurs
between and including October 2004 and September 2005;
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(b) 35% of the Original Junior Principal Balance if such
Distribution Date occurs between and including October 2005 and
September 2006;
(c) 40% of the Original Junior Principal Balance if such
Distribution Date occurs between and including October 2006 and
September 2007;
(d) 45% of the Original Junior Principal Balance if such
Distribution Date occurs between and including October 2007 and
September 2008; and
(e) 50% of the Original Junior Principal Balance if such
Distribution Date occurs during or after October 2008 (such limitation
being the "Senior Prepayment Percentage Stepdown Limitation").
The "Class A6 Principal Distribution Amount" with respect to any
Distribution Date will be an amount, not to exceed the Senior Principal
Distribution Amount, equal to the product of (a) the Senior Principal
Distribution Amount for such Distribution Date, (b) the Class A6 Certificate
Percentage for such Distribution Date and (c) the Class A6 Distribution
Percentage for such Distribution Date; provided that on the Distribution Date on
which the Class Certificate Principal Balances of the other senior certificates
are reduced to zero (the "Senior Transition Date"), the Class A6 Principal
Distribution Amount will be equal to the remaining Senior Principal Distribution
Amount for such Distribution Date after distributions of principal on the other
senior certificates.
The "Class A6 Certificate Percentage" with respect to any Distribution Date
is the percentage obtained by dividing (a) the Class Certificate Principal
Balance of the Class A6 Certificates immediately preceding such Distribution
Date by (b) the aggregate Certificate Principal Balance of all the senior
certificates immediately preceding such Distribution Date.
The "Class A6 Distribution Percentage" for any Distribution Date occurring
during the periods set forth below will be as follows:
CLASS A6
PERIOD (DATES INCLUSIVE) DISTRIBUTION PERCENTAGE
------------------------ -----------------------
October 1999 - September 2002............................... 0%
October 2002 - September 2004............................... 45%
October 2004 - September 2005............................... 80%
October 2005 - September 2006............................... 100%
October 2006 and thereafter................................. 300%
provided that on any Distribution Date following the Senior Transition Date, the
Class A6 Distribution Percentage will equal 100% for such Distribution Date.
The "Junior Percentage" on any Distribution Date will equal 100% minus the
Senior Percentage. The "Junior Prepayment Percentage" will equal 100% minus the
Senior Prepayment Percentage, except that on any Distribution Date after the
respective Class Certificate Principal Balances of the senior certificates have
each been reduced to zero (the "Final Senior Distribution Date"), the Junior
Prepayment Percentage will equal 100%. The initial Junior Percentage is expected
to be approximately 13.00%.
The "Junior Principal Distribution Amount" with respect to each
Distribution Date will be an amount equal to the sum of:
(1) the Junior Percentage of all payments of principal actually received by
GECMSI on each outstanding mortgage loan in the calendar month
preceding the month in which the Distribution Date occurs, including
the principal portion of any Early Installment, other than those
payments described in clauses (2) through (5) below;
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(2) the Junior Prepayment Percentage of the Principal Balance of each
mortgage loan which was the subject of a prepayment in full received by
GECMSI (or, in the case of a mortgage loan master-serviced by GECMSI,
of which GECMSI receives notice) during the applicable Prepayment
Period;
(3) the Junior Prepayment Percentage of all partial prepayments of
principal received with respect to self-amortizing mortgage loans,
other than Early Installments, during the related Prepayment Period;
(4) the Junior Prepayment Percentage of the sum of (a) the net liquidation
proceeds allocable to principal received during the related Prepayment
Period in respect of each Liquidated Mortgage Loan, other than mortgage
loans described in clause (b), and (b) the Principal Balance of each
mortgage loan that was purchased by a private mortgage insurer during
the related Prepayment Period as an alternative to paying a claim under
the related insurance policy; and
(5) the Junior Prepayment Percentage of the sum of (a) the Principal
Balance of each mortgage loan which was repurchased by GECMSI or
Funding in connection with such Distribution Date and (b) the
difference, if any, between the Principal Balance of a mortgage loan
that has been replaced by GECMSI or Funding with a substitute mortgage
loan under the Agreement in connection with such Distribution Date and
the Principal Balance of such substitute mortgage loan.
The "Allocable Share" with respect to any class of junior certificates on
any Distribution Date will generally equal such class's pro rata share (based on
the Class Certificate Principal Balance of each class entitled thereto) of each
of the components of the Junior Principal Distribution Amount described above;
provided, that, except as described in the second succeeding sentence, no Class
B1, Class B2, Class B3, Class B4 or Class B5 Certificate (together, the "Class B
Certificates") shall be entitled on any Distribution Date to receive
distributions pursuant to clauses (2), (3) and (5) of the definition of Junior
Principal Distribution Amount unless the Class Prepayment Distribution Trigger
for the related class is satisfied for such Distribution Date.
The "Class Prepayment Distribution Trigger" for a class of Class B
Certificates for any Distribution Date is satisfied if the fraction (expressed
as a percentage), the numerator of which is the aggregate Class Certificate
Principal Balance of such class and each class subordinate thereto, if any, and
the denominator of which is the principal balance of the mortgage loan pool with
respect to such Distribution Date, equals or exceeds such percentage calculated
as of the date of issuance of the certificates. If, on any Distribution Date,
the Class Certificate Principal Balance of the Class M Certificates or of any
class of Class B Certificates for which the related Class Prepayment
Distribution Trigger was satisfied on such Distribution Date is reduced to zero,
any amounts distributable to such class under clauses (2), (3) and (5) of the
definition of Junior Principal Distribution Amount, to the extent of such
class's remaining Allocable Share, shall be distributed to the remaining classes
of junior certificates in reduction of their respective Class Certificate
Principal Balances in order of priority. If the Class Prepayment Distribution
Trigger is not satisfied for any class of Class B Certificates on any
Distribution Date, this may have the effect of accelerating the amortization of
more senior ranking classes of junior certificates because the amount otherwise
distributable to such class under clauses (2), (3) and (5) of the definition of
Junior Principal Distribution Amount will be distributable among the outstanding
Class M Certificates and each class of the Class B Certificates as to which the
related Class Prepayment Distribution Trigger has been satisfied on a pro rata
basis.
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Example of Distributions
For an example of hypothetical distributions on the certificates for a
particular Distribution Date, see "Description of the Certificates -- Example of
Distributions" in the accompanying prospectus.
ALLOCATION OF REALIZED LOSSES ON THE CERTIFICATES
A "Realized Loss" is
- as to any Liquidated Mortgage Loan (as defined below), the unpaid
principal balance thereof plus accrued and unpaid interest thereon at the
Net Mortgage Rate through the last day of the month of liquidation, less
the net proceeds from the liquidation of, and any insurance proceeds
from, such mortgage loan and the related mortgaged property.
- as to any mortgage loan, a Deficient Valuation (as defined below).
- as to any mortgage loan, a reduction in the principal balance thereof
resulting from a Servicer Modification (as defined below).
A "Liquidated Mortgage Loan" is any defaulted mortgage loan as to which
GECMSI has determined that all amounts which it expects to recover from or on
account of such mortgage loan have been recovered.
A Deficient Valuation may result from the personal bankruptcy of a
mortgagor if the bankruptcy court establishes the value of the mortgaged
property at an amount less than the then outstanding principal balance of the
mortgage loan secured by such mortgaged property and reduces the secured debt to
such value. In such case, the trust, as the holder of such mortgage loan, would
become an unsecured creditor to the extent of the difference between the
outstanding principal balance of such mortgage loan and such reduced secured
debt (such difference, a "Deficient Valuation").
If a mortgage loan is in default, or if default is reasonably foreseeable,
GECMSI, as servicer, may permit a modification of such mortgage loan to reduce
its Principal Balance and/or extend its term to a term not longer than the
latest maturity date of any other mortgage loan in the pool (any such
modification, a "Servicer Modification"). Any such principal reduction shall
constitute a Realized Loss at the time of such reduction. An extension of the
term will not result in a Realized Loss unless coupled with a principal
reduction.
An "Excess Loss" is any Deficient Valuation, Fraud Loss or Special Hazard
Loss (each a type of Realized Loss) occurring after, respectively, the
Bankruptcy Coverage Termination Date, Fraud Coverage Termination Date or Special
Hazard Termination Date, each as defined below.
A "Non-Excess Realized Loss" is any Realized Loss other than an Excess
Loss.
A "Fraud Loss" is any Realized Loss attributable to fraud in the
origination of the related mortgage loan.
A "Special Hazard Loss" is a Realized Loss attributable to damage or a
direct physical loss suffered by a mortgaged property -- including any Realized
Loss due to the presence or suspected presence of hazardous wastes or substances
on a mortgaged property -- other than any such damage or loss covered by a
hazard policy or a flood insurance policy required to be maintained in respect
of such mortgaged property under the Agreement or any loss due to normal wear
and tear or certain other causes.
Losses Allocable to Certificates
Prior to the Cross-Over Date (and on such date under certain
circumstances), the principal portion of any Non-Excess Realized Loss will be
allocated among the outstanding classes of junior
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certificates, in inverse order of priority, until the Class Certificate
Principal Balance of each such class has been reduced to zero (i.e., Non-Excess
Realized Losses will be allocated first to the Class B5 Certificates while such
certificates are outstanding, second to the Class B4 Certificates, and so on).
Fraud Losses, Special Hazard Losses and Deficient Valuations occurring prior to
the Fraud Coverage Termination Date, Special Hazard Termination Date and
Bankruptcy Coverage Termination Date, respectively, will be allocated to the
junior certificates in the manner described in the preceding sentence.
Commencing on the Cross-Over Date, the principal portion of any Realized
Loss will be allocated among the outstanding classes of senior certificates
entitled to principal distributions pro rata based upon their Class Certificate
Principal Balances.
As indicated above, Fraud Losses, Special Hazard Losses and Deficient
Valuations occurring after the Fraud Coverage Termination Date, Special Hazard
Termination Date and Bankruptcy Coverage Termination Date, respectively, will be
Excess Losses. The principal portion of any Excess Loss on a mortgage loan for
any Distribution Date (whether occurring before, on or after the Cross-Over
Date) will be allocated pro rata among all outstanding classes of certificates
entitled to principal distributions based on their Class Certificate Principal
Balances.
Fraud Coverage Termination Date. The "Fraud Coverage Termination Date" is
the Distribution Date upon which the Fraud Loss Amount has been reduced to zero
or a negative number (or the Cross-Over Date, if earlier). Upon the initial
issuance of the certificates, the "Fraud Loss Amount" will equal approximately
$4,341,536 (approximately 1% of the aggregate Principal Balances of the mortgage
loans as of the Cut-off Date). As of any Distribution Date prior to the first
anniversary of the Cut-off Date, the Fraud Loss Amount will equal approximately
$4,341,536, minus the aggregate amount of Fraud Losses that would have been
allocated to the junior certificates in the absence of the Loss Allocation
Limitation since the Cut-off Date. As of any Distribution Date from the first to
the fourth anniversaries of the Cut-off Date, the Fraud Loss Amount will equal
(1) the lesser of (a) the Fraud Loss Amount as of the most recent anniversary of
the Cut-off Date and (b) 1% of the aggregate outstanding principal balance of
all of the mortgage loans as of the most recent anniversary of the Cut-off Date
minus (2) the Fraud Losses that would have been allocated to the junior
certificates in the absence of the Loss Allocation Limitation since the most
recent anniversary of the Cut-off Date. After the fourth anniversary of the
Cut-off Date, the Fraud Loss Amount shall be zero.
Special Hazard Termination Date. The "Special Hazard Termination Date" is
the Distribution Date upon which the Special Hazard Loss Amount has been reduced
to zero or a negative number (or the Cross-Over Date, if earlier). Upon the
initial issuance of the certificates, the "Special Hazard Loss Amount" will
equal approximately $2,170,768 (approximately 0.50% of the aggregate Scheduled
Principal Balances of the mortgage loans as of the Cut-off Date). As of any
Distribution Date, the Special Hazard Loss Amount will equal approximately
$2,170,768 minus the sum of (1) the aggregate amount of Special Hazard Losses
that would have been previously allocated to the junior certificates in the
absence of the Loss Allocation Limitation and (2) the Adjustment Amount. For
each anniversary of the Cut-off Date, the "Adjustment Amount" shall be equal to
the amount, if any, by which the Special Hazard Loss Amount (without giving
effect to the deduction of the Adjustment Amount for such anniversary) exceeds
the lesser of:
(a) an amount calculated by GECMSI and approved by each of Fitch and
Moody's (each as defined herein), which amount shall not be less than
$500,000; and
(b) the greater of (x) 1% (or if greater than 1%, the highest
percentage of mortgage loans by principal balance secured by mortgaged
properties in any California zip code) of the outstanding principal balance
of all the mortgage loans on the Distribution Date immediately
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preceding such anniversary and (y) twice the outstanding principal balance
of the mortgage loan which has the largest outstanding principal balance on
the Distribution Date immediately preceding such anniversary.
Bankruptcy Coverage Termination Date. The "Bankruptcy Coverage Termination
Date" is the Distribution Date upon which the Bankruptcy Loss Amount has been
reduced to zero or a negative number (or the Cross-Over Date, if earlier). On
each Distribution Date, the "Bankruptcy Loss Amount" will equal approximately
$75,000 (approximately 0.02% of the aggregate Principal Balances of the mortgage
loans as of the Cut-off Date), subject to reduction as described in the
Agreement, minus the aggregate amount of previous Deficient Valuations. The
Bankruptcy Loss Amount and the manner of reduction thereof described in the
Agreement may be reduced or modified upon written confirmation from Fitch and
Moody's that such reduction or modification will not adversely affect the then
current ratings of the senior certificates by Fitch and Moody's. Such reduction
may adversely affect the coverage provided by subordination with respect to
Deficient Valuations.
Method of Allocating Realized Losses
All allocations of Realized Losses to a class of certificates will be
accomplished on a Distribution Date by reducing the Class Certificate Principal
Balance thereof by the appropriate share of any such losses occurring during the
month preceding the month of such Distribution Date and, accordingly, will be
taken into account in determining the distributions of principal and interest on
such certificates commencing on the following Distribution Date.
The interest portion of all Realized Losses will be allocated among the
outstanding classes of certificates entitled to distributions of interest to the
extent described under "-- Distributions on the Certificates -- Interest" above.
No reduction of the Class Certificate Principal Balance of any class will
be made on any Distribution Date on account of any Realized Loss to the extent
that such reduction would have the effect of reducing the aggregate Certificate
Principal Balance of all of the certificates as of such Distribution Date to an
amount less than the aggregate Principal Balance of the mortgage loans as of the
first day of the month of such Distribution Date, less any Deficient Valuations
occurring on or prior to the Bankruptcy Coverage Termination Date (such
limitation being the "Loss Allocation Limitation").
ADDITIONAL RIGHTS OF THE RESIDUAL CERTIFICATEHOLDERS
In addition to distributions of principal and interest to the holders of
the residual certificates as described under "Distributions on the Certificates"
in this prospectus supplement:
(1) The Class R2 Certificates will be entitled to receive:
(a) the amount, if any, of Available Funds remaining in the upper-tier
REMIC on any Distribution Date after distributions of interest and
principal are made on the certificates on such date; and
(b) the proceeds, if any, of the assets of the trust remaining in the
upper-tier REMIC after the Class Certificate Principal Balances of all
classes of certificates have each been reduced to zero.
(2) The Class R1 Certificates will be entitled to receive:
(a) the amount, if any, of Available Funds remaining in the lower-tier
REMIC on any Distribution Date after distributions of interest and
principal are made on the certificates on such date;
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(b) the proceeds, if any, of the assets of the trust remaining in the
lower-tier REMIC after the Class Certificate Principal Balances of all
classes of certificates have each been reduced to zero; and
(c) the amount of any Unanticipated Recoveries received by GECMSI in
the calendar month preceding the month of a Distribution Date and not
otherwise allocated to other classes of certificates as described in
"Collection and Other Servicing Procedures -- Unanticipated Recoveries of
Losses on the Mortgages Loans" in the accompanying prospectus.
It is not anticipated that any material assets will be remaining for such
distributions on the residual certificates at any such time. See "Federal Income
Tax Consequences -- Residual Certificates" herein.
SUBORDINATION
Priority of Senior Certificates
As of the date of the initial issuance of the certificates, the aggregate
Certificate Principal Balance of the junior certificates will equal
approximately 13.00% of the aggregate Certificate Principal Balance of all the
classes of certificates. The rights of the holders of the junior certificates to
receive interest distributions with respect to the mortgage loans will be
subordinate to such rights of the holders of the senior certificates to receive
interest distributions to the extent described above. The subordination of the
junior certificates is intended:
(1) to enhance the likelihood of regular receipt by the holders of the
senior certificates (to the extent of the subordination of the junior
certificates) of the full amount of the monthly distributions of interest
allocable to the senior certificates; and
(2) to afford the holders of the senior certificates (to the extent of
the subordination of the junior certificates) protection against Realized
Losses, to the extent described above.
If Realized Losses exceed the credit support provided to the senior certificates
through subordination, or if Excess Losses occur, all or a portion of such
losses will be borne by the senior certificates.
The protection afforded to the holders of senior certificates by means of
the subordination feature will be accomplished by:
(1) the preferential right of such holders to receive interest
distributions prior to any such distributions being made on a Distribution
Date in respect of the junior certificates in accordance with the paydown
rules specified above under "-- Distributions on the
Certificates -- Interest"; and
(2) the allocation to the junior certificates of the principal portion
of any Non-Excess Realized Loss to the extent set forth herein. The
allocation of the principal portion of Realized Losses (as set forth
herein) to the junior certificates on any Distribution Date will decrease
the protection provided to the senior certificates then outstanding on
future Distribution Dates by reducing the aggregate Certificate Principal
Balance of the junior certificates then outstanding.
In addition, in order to extend the period during which the junior
certificates remain available as credit enhancement for the senior certificates,
the entire amount of any prepayment in full or certain other unscheduled
recovery of principal as described herein with respect to a mortgage loan and
any prepayment in part with respect to a self-amortizing mortgage loan (other
than an Early Installment) will be allocated to the senior certificates entitled
to principal distributions, as a group, during at least the first five years
after the date of initial issuance of the certificates, with such allocation
being subject to reduction thereafter as described herein. This allocation has
the effect of accelerating the amortization of such senior certificates as a
group while, in the absence of losses in respect of the
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mortgage loans, increasing the percentage interest in the principal balance of
the mortgage loans evidenced by the junior certificates. With respect to the
senior certificates, such amounts otherwise allocable to the Class A6
Certificates will be allocated to the Class A1, Class A2, Class A3, Class A4,
Class A5, Class R1 and Class R2 Certificates during the first three years after
the date of initial issuance of the certificates, with such allocation being
subject to reduction thereafter as described herein (except as otherwise
described herein on or following the Senior Transition Date, and except that
such amounts will be allocated pro rata among all the senior certificates
entitled to principal distributions after the Cross-Over Date).
After the payment of interest distributable in respect of the senior
certificates on each Distribution Date, the junior certificates will be entitled
on such date to the remaining portion, if any, of the Available Interest Funds
in an aggregate amount equal to the Accrued Certificate Interest on the junior
certificates for such date and any remaining undistributed Accrued Certificate
Interest thereon from previous Distribution Dates. Amounts so distributed to
junior certificateholders will not be available to cover any delinquencies or
any Realized Losses in respect of subsequent Distribution Dates.
Priority Among Junior Certificates
As of the date of the initial issuance of the certificates, the aggregate
Certificate Principal Balance of the Class B3, Class B4 and Class B5
Certificates, all of which are subordinate in right as to respective
distributions of interest to the junior certificates offered hereby, will equal
approximately 4.85% of the initial aggregate Certificate Principal Balance of
all of the certificates and approximately 37.31% of the initial aggregate
Certificate Principal Balance of all of the junior certificates. On each
Distribution Date, the holders of any particular class of junior certificates,
other than the Class B5 Certificates, will have a preferential right to receive
the amounts due them in respect of interest on such Distribution Date out of
Available Interest Funds prior to any distribution being made on such date on
each class of certificates ranking junior to such class. In addition, except as
described herein, the principal portion of any Non-Excess Realized Loss with
respect to a mortgage loan will be allocated, to the extent set forth herein, in
reduction of the Class Certificate Principal Balances of the junior certificates
in inverse order of priority of such certificates. The effect of the allocation
of such Realized Losses to a class of junior certificates will be to reduce
future distributions allocable to such class and increase the relative portion
of distributions allocable to more senior classes of certificates.
In order to maintain the relative levels of subordination among the junior
certificates, prepayments in full, prepayments in part with respect to
self-amortizing mortgage loans (other than Early Installments) and certain other
unscheduled recoveries of principal as described herein in respect of the
mortgage loans (which will not be distributable to the junior certificates for
at least the first five years after the date of initial issuance of the
certificates, except as otherwise described herein on or following the Final
Senior Distribution Date) will not be distributable to the holders of any class
of Class B Certificates on any Distribution Date for which the related Class
Prepayment Distribution Trigger is not satisfied, except as described above. See
"-- Distributions on the Certificates -- Principal." If the Class Prepayment
Distribution Trigger is not satisfied with respect to any class of Class B
Certificates, the amortization of more senior ranking classes of junior
certificates may occur more rapidly than would otherwise have been the case and,
in the absence of losses in respect of the mortgage loans, the percentage
interest in the principal balance of the mortgage loans evidenced by such Class
B Certificates may increase.
As a result of the subordination of any class of certificates, such class
of certificates will be more sensitive than more senior ranking classes of
certificates the rate of delinquencies and defaults on the mortgage loans, and
under certain circumstances investors in such certificates may not recover their
initial investment.
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RESTRICTIONS ON TRANSFER OF THE RESIDUAL CERTIFICATES
The residual certificates will be subject to the restrictions on transfer
described in the prospectus under "Federal Income Tax Consequences -- REMIC
Certificates -- Transfers of Residual Certificates -- Disqualified
Organizations," "-- Foreign Investors" and "-- Noneconomic Residual Interests."
In addition, the Agreement provides that the residual certificates may not be
acquired by an ERISA Plan. The residual certificates will contain a legend
describing the foregoing restrictions.
YIELD AND WEIGHTED AVERAGE LIFE CONSIDERATIONS
YIELD
The effective yield on the certificates will depend upon, among other
things, the price at which the certificates are purchased and the rate and
timing of payments of principal (including both scheduled and unscheduled
payments) of the mortgage loans underlying the certificates.
You should refer to "Yield, Maturity and Weighted Average Life
Considerations" in the prospectus and the text below for a discussion of the
factors that could affect the yield of your certificates.
The entire amount of any principal payment (including scheduled payments
and prepayments and other unscheduled recoveries of principal) with respect to a
mortgage loan allocable to the senior certificates will be allocated solely to
the Class A1, Class A2, Class A3, Class A4, Class A5, Class R1 and Class R2
Certificates during the first three years after the Cut-off Date (with such
allocation being subject to reduction thereafter as described herein), except as
otherwise described herein on or following the Senior Transition Date, provided
that such amounts will be allocated pro rata among all senior certificates other
than the Class S Certificates after the Cross-Over Date. This allocation prior
to the Senior Transition Date is designed to accelerate the allocation of
principal payments and certain other unscheduled recoveries on the mortgage
loans to the holders of the Class A1, Class A2, Class A3, Class A4, Class A5,
Class R1 and Class R2 Certificates while increasing the percentage interest in
the principal balance of the mortgage loans evidenced by the Class A6
Certificates.
The yields on the certificates other than the residual certificates will be
adversely affected if any Unpaid Net Simple Interest Shortfalls occur in respect
of the related mortgage loans. See "Description of the
Certificates -- Distributions on the Certificates -- Interest" herein.
The effective yield to holders of the certificates (other than the residual
certificates) will be lower than the yield otherwise produced by the applicable
interest rates and the applicable purchase prices thereof because, while
interest will accrue from the first day of each month, the distribution of such
interest will not be made until the 25th day (or if such day is not a business
day, the immediately following business day) of the month following the month of
accrual. In addition, the effective yield on the certificates (other than the
residual certificates) will be affected by any Net Interest Shortfall and the
interest portion of certain Realized Losses. See "Description of the
Certificates" herein.
THE CLASS A5, CLASS M, CLASS B1, AND CLASS B2 CERTIFICATES
The interest rate applicable to the Class A5, Class M and Class B1
Certificates on any Distribution Date other than the first Distribution Date
will equal the lesser of (a) 7.795%, 7.775% and 8.315% per annum, respectively,
and (b) the Weighted Average Net Mortgage Rate on the mortgage loans for the
related Interest Accrual Period. The interest rate applicable to the Class B2
Certificates on any Distribution Date other than the first Distribution Date
will equal the Weighted Average Net Mortgage Rate on the mortgage loans for the
related Interest Accrual Period. As a result, payments of principal (including
prepayments) of the mortgage loans having Net Mortgage Rates which exceed the
Weighted Average Net Mortgage Rate on the mortgage loans may reduce
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the interest rate and yield on these certificates. The Net Mortgage Rates of the
mortgage loans are expected to range from approximately 6.35% to 14.94% per
annum initially, and under certain scenarios it is likely that principal
payments will be concentrated among mortgage loans with higher Net Mortgage
Rates, thus potentially reducing the certificate interest rate on these
certificates. The Weighted Average Net Mortgage Rate on the mortgage loans as of
the Cut-off Date is expected to be approximately 9.186% per annum.
PRINCIPAL DISTRIBUTIONS; PREPAYMENTS
The rate of distribution of principal of the certificates (and the
aggregate amount of interest payable on any class of interest-only certificates)
will be affected primarily by the amount and timing of principal payments
received on or in respect of the mortgage loans. Such principal payments will
include scheduled payments and disproportionately high principal payments
arising from early payments of monthly installments on simple interest mortgage
loans, as well as voluntary prepayments by borrowers (such as, for example,
prepayments in full due to refinancings, including refinancings made by GECMSI
in the ordinary course of conducting its mortgage banking business, some of
which refinancings may be solicited by GECMSI, or prepayments of mortgage loans
in connection with biweekly payment programs, participation in which may be
solicited by GECMSI) and prepayments resulting from foreclosure, condemnation
and other dispositions of the mortgaged properties and from repurchase by GECMSI
or Funding of any mortgage loan as to which there has been a material breach of
warranty or defect in documentation (or deposit of certain amounts in respect of
delivery of a substitute mortgage loan therefor). See "Yield, Maturity and
Weighted Average Life Considerations" in the prospectus. Mortgagors are
permitted to prepay the mortgage loans, in whole or in part, at any time. It is
expected that no more than approximately 20.36% of the mortgage loans, by
Principal Balance as of the Cut-off Date, required the mortgagor to pay a
prepayment premium that had not expired as of the Cut-off Date. Substantially
all of the prepayment premiums are scheduled to expire by the end of September
2004. Any prepayment premiums received by GECMSI will be retained as servicing
compensation. See "Description of the Mortgage Pool and the Mortgaged
Properties -- Terms of the Mortgage Loans."
Funding is not aware of any publicly available studies relating to the
prepayment of home equity mortgage loans substantially similar to the mortgage
loans. A number of factors suggest that the prepayment behavior of a pool of
closed-end home equity loans may be significantly different from that of a pool
of first-priority, one- to four-family, purchase money mortgage loans with
equivalent interest rates and maturities, although these factors could give rise
to prepayments on home equity loans at either a faster or slower rate than
prepayments on first-priority, purchase money mortgage loans. No assurance can
be given as to the rate at which prepayments will be made on the mortgage loans.
The yields on and the weighted average lives of the certificates will depend in
part on the rate of principal payments, including prepayments, received in
respect of the mortgage loans.
Voluntary prepayments in full of principal on the mortgage loans received
by GECMSI (or, in the case of mortgage loans master-serviced by GECMSI, of which
GECMSI receives notice) from the first day through the fifteenth day of each
month (other than the month of the Cut-off Date) are passed through to the
related certificateholders in the month of receipt or payment. See "The Pooling
and Servicing Agreement -- Certain Refinancings" in the prospectus. Voluntary
prepayments of principal in full received from the sixteenth day (or, in the
case of the month of the Cut-off Date, from the Cut-off Date) through the last
day of each month, and all voluntary partial prepayments of principal on the
self-amortizing mortgage loans (including the principal portion of Early
Installments) are passed through to the related certificateholders in the month
following the month of receipt or payment. Any prepayment of a mortgage loan or
liquidation of a mortgage loan (by foreclosure proceedings or by virtue of the
purchase of a mortgage loan in advance of its stated maturity as required or
permitted by the Agreement) will generally have the effect of passing through to
the
S-43
44
certificateholders principal amounts (or, in the case of the related Class S
Certificates, reducing the Notional Principal Balance thereof) which would
otherwise be passed through (or reduced) in amortized increments over the
remaining term of such mortgage loan.
The entire amount of any prepayment in full, any prepayment in part with
respect to a self-amortizing mortgage loan (other than an Early Installment) and
any other unscheduled recovery of principal as described herein with respect to
a mortgage loan will be allocated solely to the outstanding senior certificates
entitled to distributions of principal, as a group, during at least the first
five years after the date of initial issuance of the certificates (with such
allocation being subject to reduction thereafter as described herein). This
allocation has the effect of accelerating the amortization of the senior
certificates while, in the absence of losses in respect of the mortgage loans,
increasing the percentage interest in the aggregate principal balance of the
mortgage loans evidenced by the junior certificates. The portion of such amounts
otherwise allocable to the Class A6 Certificates will be allocated to the other
senior certificates entitled to distributions of principal during the first
three years after the Cut-off Date (with such allocation being subject to
reduction thereafter as described herein), except as otherwise provided herein
on or after the Senior Transition Date, and except that such amounts will be
allocated pro rata among all senior certificates entitled to distributions of
principal after the Cross-Over Date. This allocation among the classes of senior
certificates is designed to accelerate the allocation of certain prepayments and
certain other unscheduled recoveries on the mortgage loans to holders of the
senior certificates entitled to distributions of principal other than the Class
A6 Certificates relative to the Class A6 Certificates. See "Description of the
Certificates -- Distributions on the Certificates -- Principal" herein.
If a mortgagor on a self-amortizing mortgage loan both (1) pays more than
one installment at a time and (2) designates such additional installment as an
advance installment of a scheduled principal and interest payment (an "Early
Installment"), the principal portion of such Early Installment will also be
passed through as principal in reduction of the Certificate Principal Balance of
such certificates on the Distribution Date immediately following the calendar
month in which such payment was received. A portion of each Early Installment
equal to the aggregate amount of interest due in each month (other than the
month of payment) covered by such Early Installment will be retained by GECMSI,
as servicer, pending payment to certificateholders. An amount equal to the
interest due in each month covered by such Early Installment will be passed
through to Certificateholders on the Distribution Date immediately following
such month.
When a full prepayment is made on a mortgage loan, the mortgagor is charged
interest ("Prepayment Interest") on the days in the month actually elapsed up to
the date of such prepayment, at a daily interest rate (determined by dividing
the mortgage loan rate by 360, or 365 in the case of certain simple interest
mortgage loans) which is applied to the principal amount of the loan so prepaid.
When such a prepayment is made during the period from the sixteenth day through
the last day of any month (and from the Cut-off Date through the fifteenth day
of the month of the Cut-off Date), such Prepayment Interest is passed through to
the related certificateholders in the month following its receipt and the amount
of interest thus distributed to such certificateholders, to the extent not
offset by a Compensating Interest Payment or a Simple Interest Payment (each as
defined herein), will be less than the amount which would have been distributed
in the absence of such prepayment. The payment of a claim under certain
insurance policies may also cause a reduction in the amount of interest passed
through. Shortfalls described in this paragraph will be borne by the related
certificateholders to the extent described herein. See "Description of the
Certificates -- Distributions on the Certificates -- Interest" herein.
Any partial prepayment on a self-amortizing mortgage loan will be applied
to the balance of the related mortgage loan as of the first day of the month of
receipt, will be passed through to the related certificateholders in the
following month and, to the extent not offset by a Compensating Interest
S-44
45
Payment, will reduce the aggregate amount of interest distributable to such
certificateholders in such month in an amount equal to 30 days of interest at
the related Net Mortgage Rate on the amount of such prepayment.
PAYMENTS ON SIMPLE INTEREST MORTGAGE LOANS
Approximately 27.34% of the mortgage loans (by Principal Balance as of the
Cut-off Date) are expected to be simple interest mortgage loans. In addition to
principal prepayments in full, the making of a payment on a simple interest
mortgage loan in any month less than 30 days after the previous payment may
result in the collection of less than 30 days' interest on such mortgage loan in
such month. Conversely, if a payment on a simple interest mortgage loan in any
month is made more than 30 days after the previous payment, the collection of
interest on such mortgage loan for such month may be greater than 30 days'
interest on such mortgage loan. In the event that a mortgagor makes a monthly
payment prior to its Due Date, GECMSI will be required to make a Simple Interest
Payment (up to the amount of its servicing fee, less any Compensating Interest
Payments and certain other amounts described herein) to compensate for any
resulting Net Simple Interest Shortfall. See "The Pooling and Servicing
Agreement -- Simple Interest Payments" herein. Any shortfalls in interest
attributable to the receipt of payments on simple interest mortgage loans less
than 30 days after the previous payment, to the extent not offset by a Simple
Interest Payment or excess interest received with respect to simple interest
mortgage loans which pay more than 30 days after the previous payment, will
produce a lower yield on the related certificates than would otherwise be the
case. In addition, the extent to which simple interest mortgage loans experience
early or late payments will correspondingly change the amount of principal
received during a month and accordingly may change the amount of principal to be
distributed on the related Distribution Date.
If a mortgagor on a simple interest mortgage loan pays more than one
installment at a time, the entire amount of the additional installment will be
treated as a regular principal payment and will be passed through as principal
on the related certificates on the Distribution Date immediately following the
calendar month in which such payment was received. Because each such mortgagor
will not be required to make the next regularly scheduled installment, interest
will continue to accrue on the principal balance of the related mortgage loan,
as reduced by the application of the early installment. As a result, when such
mortgagor on a simple interest mortgage loan pays the next required installment,
the installment so paid may be insufficient to cover the interest that has
accrued since the last payment by such mortgagor. Notwithstanding such
insufficiency, the related mortgage loan would be considered to be current
(although GECMSI may be required to make a Simple Interest Payment, to the
limited extent described herein). In addition, other than its obligation to make
any required Simple Interest Payment, GECMSI will not be required to advance the
amount of such insufficiency. This situation will continue until the
installments are once again sufficient to cover all accrued interest and to
reduce the Principal Balance of such mortgage loan. Depending on the Principal
Balance and mortgage loan rate of the simple interest mortgage loans that pay
early and on the number of installments that are paid early, there may be
extended periods of time during which such mortgage loans that are not
amortizing are nonetheless considered current. See "Description of the Mortgage
Pool and the Mortgaged Properties -- Terms of the Mortgage Loans."
THE CLASS M, CLASS B1 AND CLASS B2 CERTIFICATES
The rate of payment of principal, the aggregate amount of distributions and
the yield to maturity of the Class M, Class B1 and Class B2 Certificates will be
affected by the rate of prepayments on the mortgage loans, as well as the rate
of mortgagor defaults resulting in Realized Losses, by the severity of those
losses and by the timing thereof. See "Description of the
Certificates -- Allocation of Realized Losses on the Certificates" herein for a
description of the manner in which such losses are borne by the holders of the
certificates. If the purchaser of a Class M, Class B1 or Class B2
S-45
46
Certificate calculates its anticipated yield based on an assumed rate of default
and amount of Realized Losses that is lower than the default rate and the amount
of losses actually incurred, its actual yield to maturity may be lower than that
so calculated and could be negative. The timing of defaults and losses will also
affect an investor's actual yield to maturity, even if the average rate of
defaults and severity of losses are consistent with an investor's expectations.
In general, the earlier a loss occurs, the greater the effect on an investor's
yield to maturity.
The yields to maturity on the classes of Class B Certificates with higher
numerical designations will be more sensitive to losses due to liquidations of
defaulted mortgage loans than will the yields on such classes with lower
numerical designations, and the yields to maturity on all of the Class B
Certificates will be more sensitive to such losses than will the yields on the
other classes of certificates. The yields to maturity on the Class M
Certificates will be more sensitive to such losses than will the yields on the
senior certificates and less sensitive than the yields on the Class B
Certificates. The junior certificates will be more sensitive to losses due to
liquidations of defaulted mortgage loans because the entire amount of such
losses will be allocable to such certificates in inverse order of priority,
except as provided herein. To the extent not covered by GECMSI's advances of
delinquent monthly payments of interest, delinquencies on the mortgage loans may
also have a relatively greater effect:
(1) on the yields to investors in the Class B Certificates with higher
numerical designations than on the yields to investors in those Class B
Certificates with lower numerical designations;
(2) on the yields to investors in the Class B Certificates than on the
yields to investors in the other classes of the certificates; and
(3) on the yields to investors in the Class M Certificates than on the
yields to investors in the senior certificates.
As described above under "Description of the Certificates -- Distributions
on the Certificates -- Interest" and "-- Principal," "-- Allocation of Realized
Losses on the Certificates" and "-- Subordination," amounts otherwise
distributable to holders of any class of Class B Certificates will be made
available to protect the holders of the more senior ranking classes of the
certificates against interruptions in distributions due to certain mortgagor
delinquencies. Amounts otherwise distributable to holders of the Class M
Certificates will be made available to protect the holders of the senior
certificates against interruptions in distributions due to certain mortgagor
delinquencies. Such delinquencies, even if subsequently cured, may affect the
timing of the receipt of distributions by the holders of the junior
certificates.
To the extent that the Class M, Class B1 or Class B2 Certificates are being
purchased at a discount from their initial Class Certificate Principal Balances,
if the purchaser of such a certificate calculates its yield to maturity based on
an assumed rate of payment of principal faster than that actually received on
such certificate, its actual yield to maturity may be lower than that so
calculated.
FINAL PAYMENT CONSIDERATIONS
The rate of payment of principal of the certificates will depend on the
rate of payment of principal of the related mortgage loans (including
prepayments, defaults, delinquencies, liquidations and term extensions due to
Servicer Modifications) which, in turn, will depend on the characteristics of
the mortgage loans, the level of prevailing interest rates and other economic,
geographic, social and other factors, and no assurance can be given as to the
actual payment experience. As of the Cut-off Date, the month and year of the
latest scheduled maturity of a mortgage loan is expected to be September 2029.
In addition, to the extent delinquencies and defaults are not offset by the
effect of the subordination of the certificates junior to the certificates
offered hereby, delinquencies and defaults could affect the actual maturity of
the certificates offered hereby.
S-46
47
WEIGHTED AVERAGE LIVES OF THE CERTIFICATES
The weighted average life of a certificate is determined by:
- multiplying the reduction, if any, in the principal balance thereof on
each Distribution Date by the number of years from the date of issuance
to such Distribution Date;
- summing the results; and
- dividing the sum by the aggregate reductions in the principal balance of
such certificate.
The weighted average lives of the certificates will be affected, to varying
degrees, by the rate of principal payments on the related mortgage loans, the
timing of changes in such rate of payments and the priority sequence of
distributions of principal of such certificates. The interaction of the
foregoing factors may have different effects on the various classes of the
certificates and the effects on any class may vary at different times during the
life of such class. Further, to the extent the prices of a class of certificates
represent discounts or premiums to their respective original principal balances,
variability in the weighted average lives of such classes of certificates could
result in variability in the related yields to maturity.
The model used in this prospectus supplement is the prepayment assumption
which represents an assumed, variable annualized rate of prepayment each month
relative to the then outstanding principal balance of a pool of mortgage loans
for the life of such mortgage loans. This prepayment assumption assumes that a
pool of loans prepays in the first month at a constant prepayment rate that
corresponds to one-tenth of the percentage rate that applies in the tenth month
and increases by an additional one-tenth each month thereafter until the tenth
month. A 21% prepayment assumption assumes constant prepayment rates of 2.1% per
annum of the then outstanding principal balance of the mortgage loans in the
first month following the origination of such mortgage loans and an additional
2.1% per annum in each month thereafter until the tenth month. Beginning in the
tenth month and in each month thereafter during the life of such mortgage loans,
a 21% prepayment assumption assumes a constant prepayment rate of 21% per annum
each month.
As used in the table below, 0% prepayment assumption assumes prepayment
rates equal to 0% of the prepayment assumption, i.e., no prepayments. Prepayment
assumptions of 16%, 19%, 23% and 25% represent assumed, variable rates of
prepayments determined on the same basis as a 21% prepayment assumption, with
16%, 19%, 23% and 25% and 1.6%, 1.9%, 2.3% and 2.5%, as applicable, substituted
for 21% and 2.1%, respectively, in the calculation. The model does not purport
to be either a historical description of the prepayment experience of any pool
of mortgage loans or a prediction of the anticipated rate of prepayment of any
pool of mortgage loans, including the mortgage loan in the trust.
Tables of Class Certificate Principal Balances
The following tables set forth the percentages of the initial Class
Certificate Principal Balance of each class of certificates offered hereby that
would be outstanding after each of the dates shown at the specified prepayment
assumption percentages and the corresponding weighted average life of each such
class of certificates. For purposes of calculations under the columns at the
indicated prepayment assumption percentages set forth in the tables, it is
assumed with respect to the mortgage loans (the "Modeling Assumptions") that:
(1) the distributions in respect of the certificates are made and received
in cash on the 25th day of each month commencing in October 1999;
(2) the mortgage loans prepay (without prepayment premiums) at the
specified prepayment assumption percentages;
S-47
48
(3) the aggregate outstanding Scheduled Principal Balance of the mortgage
loans as of the Cut-off Date is $434,153,613.29;
(4) no defaults or delinquencies in the payment by mortgagors of principal
of and interest on the mortgage loans are experienced, no Servicer
Modifications are made, and GECMSI and Funding do not repurchase any
of the mortgage loans as permitted or required by the Agreement;
(5) GECMSI does not exercise its option to purchase all the mortgage loans
in the trust as described under the caption "The Pooling and Servicing
Agreement -- Termination" herein;
(6) scheduled monthly payments on the mortgage loans are received on the
Due Dates in each month, and are computed prior to giving effect to
prepayments received in the prior month;
(7) prepayments representing payment in full of individual mortgage loans
are received on the last day of each month (commencing September 1999)
and include 30 days' interest thereon, and no Interest Shortfalls
occur in respect of the mortgage loans;
(8) the scheduled monthly payment for each mortgage loan has been
calculated based on its outstanding balance, interest rate and
remaining term to maturity such that the mortgage loan will amortize
in amounts sufficient to repay the remaining balance of the mortgage
loan by its remaining term to maturity (except with respect to Balloon
Payments);
(9) if the mortgage loan is a Balloon Loan, the last payment made on such
mortgage loan is made on its Due Date together with 30 days' interest
thereon and, therefore, no Interest Shortfall results from such final
payment;
(10) the initial Class Certificate Principal Balance and interest rate on
the certificates offered hereby are as indicated in the summary of
this prospectus supplement;
(11) the date of the initial issuance of the certificates is September 23,
1999;
(12) the mortgage pool consists of 9 mortgage loans having the
characteristics set forth below;
(13) the Net Mortgage Rate of each mortgage loan equals the mortgage loan
rate for such mortgage loan, less 0.50% per annum;
(14) the amount distributable to certificateholders is not reduced by the
incurrence of any expenses by the trust; and
(15) no Net Simple Interest Shortfalls or Net Simple Interest Excesses
occur with respect to the Simple Interest Loans.
S-48
49
For purposes of the tables on the following pages it is also assumed that
the mortgage loan pool consists of mortgage loans having the following
characteristics:
ORIGINAL REMAINING REMAINING
AMORTIZATION NET AMORTIZATION TERM TO
TERM CURRENT MORTGAGE TERM MATURITY AGE
AMORTIZATION TYPE (IN MONTHS) BALANCE RATE (IN MONTHS) (IN MONTHS) (IN MONTHS)
----------------- ------------ --------------- -------- ------------ ----------- -----------
Fully Amortizing............... 180 $ 52,125,525.45 8.178% 109 109 71
Fully Amortizing............... 240 25,852,640.06 8.292 170 170 70
Fully Amortizing............... 360 892,886.63 8.343 292 292 68
Fully Amortizing............... 108 5,331,040.49 9.114 106 106 2
Fully Amortizing............... 180 29,350,926.16 9.863 178 178 2
Fully Amortizing............... 240 41,546,017.68 9.802 239 239 1
Fully Amortizing............... 359 76,435,609.12 9.570 357 357 2
Balloon........................ 360 89,675,210.04 8.266 288 108 72
Balloon........................ 360 112,943,757.66 9.934 358 178 2
--------------- ------
Total.................. $434,153,613.29 9.186%(1)
===============
- -------------------------
(1) Represents the Weighted Average Net Mortgage Rate of the assumed mortgage
loan pool.
It is not likely that the mortgage loans will prepay at a constant rate. In
addition, if the actual terms and payment and performance characteristics of the
mortgage loans included in the mortgage loan pool differ from those assumed in
the Modeling Assumptions used in calculating the percentages set forth in this
table, the actual Class Certificate Principal Balance of each class of
certificates outstanding at any time and the actual weighted average life of
each class of certificates may differ (which difference could be material) from
the corresponding information in the table for each indicated prepayment
assumption percentage.
S-49
50
PERCENT OF ORIGINAL CLASS CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING OF THE CERTIFICATES
CLASS A1
PREPAYMENT ASSUMPTION
---------------------------------------------
DISTRIBUTION DATE 0% 16% 19% 21% 23% 25%
----------------- -- --- --- --- --- ---
Initial Percent..... 100 100 100 100 100 100
September 2000...... 94 52 44 39 33 28
September 2001...... 88 5 0 0 0 0
September 2002...... 81 0 0 0 0 0
September 2003...... 74 0 0 0 0 0
September 2004...... 66 0 0 0 0 0
September 2005...... 58 0 0 0 0 0
September 2006...... 49 0 0 0 0 0
September 2007...... 42 0 0 0 0 0
September 2008...... 0 0 0 0 0 0
September 2009...... 0 0 0 0 0 0
September 2010...... 0 0 0 0 0 0
September 2011...... 0 0 0 0 0 0
September 2012...... 0 0 0 0 0 0
September 2013...... 0 0 0 0 0 0
September 2014...... 0 0 0 0 0 0
September 2015...... 0 0 0 0 0 0
September 2016...... 0 0 0 0 0 0
September 2017...... 0 0 0 0 0 0
September 2018...... 0 0 0 0 0 0
September 2019...... 0 0 0 0 0 0
September 2020...... 0 0 0 0 0 0
September 2021...... 0 0 0 0 0 0
September 2022...... 0 0 0 0 0 0
September 2023...... 0 0 0 0 0 0
September 2024...... 0 0 0 0 0 0
September 2025...... 0 0 0 0 0 0
September 2026...... 0 0 0 0 0 0
September 2027...... 0 0 0 0 0 0
September 2028...... 0 0 0 0 0 0
September 2029...... 0 0 0 0 0 0
Weighted Average
Life
(in years)(1).... 6.2 1.1 1.0 0.9 0.8 0.8
CLASS A2
PREPAYMENT ASSUMPTION
---------------------------------------------
DISTRIBUTION DATE 0% 16% 19% 21% 23% 25%
----------------- -- --- --- --- --- ---
Initial Percent..... 100 100 100 100 100 100
September 2000...... 100 100 100 100 100 100
September 2001...... 100 100 72 43 15 0
September 2002...... 100 0 0 0 0 0
September 2003...... 100 0 0 0 0 0
September 2004...... 100 0 0 0 0 0
September 2005...... 100 0 0 0 0 0
September 2006...... 100 0 0 0 0 0
September 2007...... 100 0 0 0 0 0
September 2008...... 97 0 0 0 0 0
September 2009...... 80 0 0 0 0 0
September 2010...... 63 0 0 0 0 0
September 2011...... 44 0 0 0 0 0
September 2012...... 23 0 0 0 0 0
September 2013...... 0 0 0 0 0 0
September 2014...... 0 0 0 0 0 0
September 2015...... 0 0 0 0 0 0
September 2016...... 0 0 0 0 0 0
September 2017...... 0 0 0 0 0 0
September 2018...... 0 0 0 0 0 0
September 2019...... 0 0 0 0 0 0
September 2020...... 0 0 0 0 0 0
September 2021...... 0 0 0 0 0 0
September 2022...... 0 0 0 0 0 0
September 2023...... 0 0 0 0 0 0
September 2024...... 0 0 0 0 0 0
September 2025...... 0 0 0 0 0 0
September 2026...... 0 0 0 0 0 0
September 2027...... 0 0 0 0 0 0
September 2028...... 0 0 0 0 0 0
September 2029...... 0 0 0 0 0 0
Weighted Average
Life
(in years)(1).... 11.6 2.6 2.2 2.0 1.8 1.7
- -------------------------
(1) The weighted average life is determined as described on page S-47.
S-50
51
PERCENT OF ORIGINAL CLASS CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING OF THE CERTIFICATES
CLASS A3
PREPAYMENT ASSUMPTION
---------------------------------------------
DISTRIBUTION DATE 0% 16% 19% 21% 23% 25%
----------------- -- --- --- --- --- ---
Initial Percent..... 100 100 100 100 100 100
September 2000...... 100 100 100 100 100 100
September 2001...... 100 100 100 100 100 94
September 2002...... 100 97 68 50 32 16
September 2003...... 100 49 19 0 0 0
September 2004...... 100 11 0 0 0 0
September 2005...... 100 0 0 0 0 0
September 2006...... 100 0 0 0 0 0
September 2007...... 100 0 0 0 0 0
September 2008...... 100 0 0 0 0 0
September 2009...... 100 0 0 0 0 0
September 2010...... 100 0 0 0 0 0
September 2011...... 100 0 0 0 0 0
September 2012...... 100 0 0 0 0 0
September 2013...... 100 0 0 0 0 0
September 2014...... 0 0 0 0 0 0
September 2015...... 0 0 0 0 0 0
September 2016...... 0 0 0 0 0 0
September 2017...... 0 0 0 0 0 0
September 2018...... 0 0 0 0 0 0
September 2019...... 0 0 0 0 0 0
September 2020...... 0 0 0 0 0 0
September 2021...... 0 0 0 0 0 0
September 2022...... 0 0 0 0 0 0
September 2023...... 0 0 0 0 0 0
September 2024...... 0 0 0 0 0 0
September 2025...... 0 0 0 0 0 0
September 2026...... 0 0 0 0 0 0
September 2027...... 0 0 0 0 0 0
September 2028...... 0 0 0 0 0 0
September 2029...... 0 0 0 0 0 0
Weighted Average
Life
(in years)(1).... 14.8 4.1 3.4 3.1 2.8 2.6
CLASS A4
PREPAYMENT ASSUMPTION
---------------------------------------------
DISTRIBUTION DATE 0% 16% 19% 21% 23% 25%
----------------- -- --- --- --- --- ---
Initial Percent..... 100 100 100 100 100 100
September 2000...... 100 100 100 100 100 100
September 2001...... 100 100 100 100 100 100
September 2002...... 100 100 100 100 100 100
September 2003...... 100 100 100 100 73 48
September 2004...... 100 100 69 42 17 0
September 2005...... 100 76 33 10 0 0
September 2006...... 100 47 10 0 0 0
September 2007...... 100 36 4 0 0 0
September 2008...... 100 11 0 0 0 0
September 2009...... 100 0 0 0 0 0
September 2010...... 100 0 0 0 0 0
September 2011...... 100 0 0 0 0 0
September 2012...... 100 0 0 0 0 0
September 2013...... 100 0 0 0 0 0
September 2014...... 92 0 0 0 0 0
September 2015...... 83 0 0 0 0 0
September 2016...... 74 0 0 0 0 0
September 2017...... 63 0 0 0 0 0
September 2018...... 52 0 0 0 0 0
September 2019...... 39 0 0 0 0 0
September 2020...... 34 0 0 0 0 0
September 2021...... 28 0 0 0 0 0
September 2022...... 21 0 0 0 0 0
September 2023...... 14 0 0 0 0 0
September 2024...... 6 0 0 0 0 0
September 2025...... 0 0 0 0 0 0
September 2026...... 0 0 0 0 0 0
September 2027...... 0 0 0 0 0 0
September 2028...... 0 0 0 0 0 0
September 2029...... 0 0 0 0 0 0
Weighted Average
Life
(in years)(1).... 19.6 7.3 5.8 5.0 4.5 4.1
- -------------------------
(1) The weighted average life is determined as described on page S-47.
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PERCENT OF ORIGINAL CLASS CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING OF THE CERTIFICATES
CLASS A5
PREPAYMENT ASSUMPTION
---------------------------------------------
DISTRIBUTION DATE 0% 16% 19% 21% 23% 25%
----------------- -- --- --- --- --- ---
Initial Percent..... 100 100 100 100 100 100
September 2000...... 100 100 100 100 100 100
September 2001...... 100 100 100 100 100 100
September 2002...... 100 100 100 100 100 100
September 2003...... 100 100 100 100 100 100
September 2004...... 100 100 100 100 100 91
September 2005...... 100 100 100 100 78 42
September 2006...... 100 100 100 79 45 20
September 2007...... 100 100 100 72 42 18
September 2008...... 100 100 72 46 24 8
September 2009...... 100 100 57 35 18 6
September 2010...... 100 82 44 27 14 4
September 2011...... 100 66 34 20 10 3
September 2012...... 100 53 26 15 7 2
September 2013...... 100 41 20 11 5 1
September 2014...... 100 15 7 4 2 0
September 2015...... 100 12 5 3 1 0
September 2016...... 100 9 4 2 1 0
September 2017...... 100 7 3 2 1 0
September 2018...... 100 5 2 1 0 0
September 2019...... 100 4 2 1 0 0
September 2020...... 100 3 1 1 0 0
September 2021...... 100 2 1 0 0 0
September 2022...... 100 2 1 0 0 0
September 2023...... 100 1 0 0 0 0
September 2024...... 100 1 0 0 0 0
September 2025...... 94 1 0 0 0 0
September 2026...... 72 0 0 0 0 0
September 2027...... 48 0 0 0 0 0
September 2028...... 22 0 0 0 0 0
September 2029...... 0 0 0 0 0 0
Weighted Average
Life
(in years)(1).... 27.9 13.7 11.5 9.9 8.1 6.5
CLASS A6
PREPAYMENT ASSUMPTION
---------------------------------------------
DISTRIBUTION DATE 0% 16% 19% 21% 23% 25%
----------------- -- --- --- --- --- ---
Initial Percent..... 100 100 100 100 100 100
September 2000...... 100 100 100 100 100 100
September 2001...... 100 100 100 100 100 100
September 2002...... 100 100 100 100 100 100
September 2003...... 99 89 87 85 83 81
September 2004...... 97 79 74 71 67 63
September 2005...... 94 64 57 52 46 39
September 2006...... 90 48 40 33 27 19
September 2007...... 77 21 14 10 6 2
September 2008...... 18 3 1 1 0 0
September 2009...... 16 1 1 0 0 0
September 2010...... 14 1 0 0 0 0
September 2011...... 12 0 0 0 0 0
September 2012...... 10 0 0 0 0 0
September 2013...... 8 0 0 0 0 0
September 2014...... 0 0 0 0 0 0
September 2015...... 0 0 0 0 0 0
September 2016...... 0 0 0 0 0 0
September 2017...... 0 0 0 0 0 0
September 2018...... 0 0 0 0 0 0
September 2019...... 0 0 0 0 0 0
September 2020...... 0 0 0 0 0 0
September 2021...... 0 0 0 0 0 0
September 2022...... 0 0 0 0 0 0
September 2023...... 0 0 0 0 0 0
September 2024...... 0 0 0 0 0 0
September 2025...... 0 0 0 0 0 0
September 2026...... 0 0 0 0 0 0
September 2027...... 0 0 0 0 0 0
September 2028...... 0 0 0 0 0 0
September 2029...... 0 0 0 0 0 0
Weighted Average
Life
(in years)(1).... 9.2 6.6 6.3 6.0 5.8 5.6
- -------------------------
(1) The weighted average life is determined as described on page S-47.
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PERCENT OF ORIGINAL CLASS CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING OF THE CERTIFICATES
CLASSES R1 AND R2
PREPAYMENT ASSUMPTION
---------------------------------------------
DISTRIBUTION DATE 0% 16% 19% 21% 23% 25%
----------------- -- --- --- --- --- ---
Initial Percent..... 100 100 100 100 100 100
September 2000...... 0 0 0 0 0 0
September 2001...... 0 0 0 0 0 0
September 2002...... 0 0 0 0 0 0
September 2003...... 0 0 0 0 0 0
September 2004...... 0 0 0 0 0 0
September 2005...... 0 0 0 0 0 0
September 2006...... 0 0 0 0 0 0
September 2007...... 0 0 0 0 0 0
September 2008...... 0 0 0 0 0 0
September 2009...... 0 0 0 0 0 0
September 2010...... 0 0 0 0 0 0
September 2011...... 0 0 0 0 0 0
September 2012...... 0 0 0 0 0 0
September 2013...... 0 0 0 0 0 0
September 2014...... 0 0 0 0 0 0
September 2015...... 0 0 0 0 0 0
September 2016...... 0 0 0 0 0 0
September 2017...... 0 0 0 0 0 0
September 2018...... 0 0 0 0 0 0
September 2019...... 0 0 0 0 0 0
September 2020...... 0 0 0 0 0 0
September 2021...... 0 0 0 0 0 0
September 2022...... 0 0 0 0 0 0
September 2023...... 0 0 0 0 0 0
September 2024...... 0 0 0 0 0 0
September 2025...... 0 0 0 0 0 0
September 2026...... 0 0 0 0 0 0
September 2027...... 0 0 0 0 0 0
September 2028...... 0 0 0 0 0 0
September 2029...... 0 0 0 0 0 0
Weighted Average
Life
(in years)(1).... 0.1 0.1 0.1 0.1 0.1 0.1
CLASSES M, B1 AND B2
PREPAYMENT ASSUMPTION
---------------------------------------------
DISTRIBUTION DATE 0% 16% 19% 21% 23% 25%
----------------- -- --- --- --- --- ---
Initial Percent..... 100 100 100 100 100 100
September 2000...... 98 98 98 98 98 98
September 2001...... 96 96 96 96 96 96
September 2002...... 93 93 93 93 93 93
September 2003...... 90 91 91 91 91 91
September 2004...... 87 88 88 88 88 88
September 2005...... 84 80 79 79 78 77
September 2006...... 80 71 70 69 67 66
September 2007...... 77 61 59 57 55 53
September 2008...... 55 39 36 34 33 31
September 2009...... 53 31 28 26 24 22
September 2010...... 51 25 22 20 18 16
September 2011...... 48 20 17 15 13 11
September 2012...... 46 16 13 11 10 8
September 2013...... 43 13 10 8 7 6
September 2014...... 19 5 3 3 2 2
September 2015...... 18 4 3 2 2 1
September 2016...... 16 3 2 2 1 1
September 2017...... 15 2 1 1 1 1
September 2018...... 13 2 1 1 1 0
September 2019...... 12 1 1 1 0 0
September 2020...... 11 1 1 0 0 0
September 2021...... 10 1 0 0 0 0
September 2022...... 9 1 0 0 0 0
September 2023...... 8 0 0 0 0 0
September 2024...... 7 0 0 0 0 0
September 2025...... 6 0 0 0 0 0
September 2026...... 4 0 0 0 0 0
September 2027...... 3 0 0 0 0 0
September 2028...... 1 0 0 0 0 0
September 2029...... 0 0 0 0 0 0
Weighted Average
Life
(in years)(1).... 12.2 9.0 8.7 8.5 8.4 8.2
- -------------------------
(1) The weighted average life is determined as described on page S-47.
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GE CAPITAL MORTGAGE FUNDING CORPORATION
Funding, a wholly-owned subsidiary of GECMSI, is a limited purpose
corporation organized under Delaware law on December 9, 1998. Funding maintains
its principal executive office at Three Executive Campus, Suite W602, Cherry
Hill, New Jersey 08002. Its telephone number is (609) 661-5881.
It is anticipated that Funding will retain the Class B3, Class B4 and Class
B5 Certificates. For more information about Funding, including the possible
consequences to certificateholders of Funding's retention of these subordinate
classes of certificates, see "GE Capital Mortgage Funding Corporation" in the
accompanying prospectus.
GE CAPITAL MORTGAGE SERVICES, INC.
GECMSI, a wholly-owned subsidiary of GE Capital Mortgage Corporation, is a
New Jersey corporation originally incorporated in 1949. The principal executive
office of GECMSI is located at Three Executive Campus, Cherry Hill, New Jersey
08002, telephone (609) 661-6100. For a general description of GECMSI and its
activities, see "GE Capital Mortgage Services, Inc." in the accompanying
prospectus.
GECMSI currently maintains an electronic bulletin board, accessible by
computer modem, which provides certain information about loans included in
various series of mortgage pass-through securities that GECMSI and Funding have
publicly offered. GECMSI and Funding make no representation or warranty that
such information will be suitable for any particular purpose and GECMSI and
Funding assume no responsibility for the accuracy or completeness of any
information that is generated by others using such information. GECMSI has no
obligation to maintain the bulletin board and may stop maintaining it at any
time. For further information concerning the bulletin board, you should call
800-544-3466, extension 5515.
Funding will acquire the mortgage loans from GECMSI and sell them to the
trust. The following section describes GECMSI's Home Equity Loan program.
THE HOME EQUITY LOAN PROGRAM
GENERAL
GECMSI is engaged in the business of acquiring and servicing residential
mortgage loans secured by liens on one- to four-family homes. GECMSI originates,
acquires and services closed-end, fixed rate and adjustable rate, first-and
second-lien home equity mortgage loans. GECMSI originates home equity loans
through its retail lending program and acquires home equity loans through its
wholesale program. "Retail loans" are generally originated through mortgage
brokers eligible to refer home equity loan applications to GECMSI. Such loans
are generally underwritten by GECMSI and processed primarily by the mortgage
broker and closed by GECMSI in GECMSI's name. It is expected that approximately
47.01% of the mortgage loans in the trust, by Principal Balance as of the
Cut-off Date, will be retail loans that were originated by GECMSI. "Wholesale
loans" are purchased from approved correspondent lenders, and in negotiated
transactions from other third parties. Home equity loans acquired from
correspondent lenders are generally closed in the name of the applicable
correspondent lenders and are subsequently sold and assigned to GECMSI.
Correspondent lenders selling home equity loans to GECMSI are generally required
to follow GECMSI's loan underwriting policies, which are described below, or,
with respect to home equity loans acquired by GECMSI from correspondent lenders
in negotiated transactions, GECMSI underwrites such home equity loans in
accordance with GECMSI's loan underwriting policies before acquiring them. It is
expected that
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approximately 52.99% of the mortgage loans in the trust, by Principal Balance as
of the Cut-off Date, will be wholesale loans.
UNDERWRITING PROCEDURES RELATING TO HOME EQUITY LOANS
GECMSI's underwriting procedures are intended to evaluate the prospective
mortgagor's credit standing and ability to repay the home equity loan, as well
as the value and adequacy of the underlying mortgaged property that serves as
collateral for the home equity loan.
All home equity loan applications received by GECMSI are subject to a
credit investigation. As part of such investigation, GECMSI (1) reviews at least
two independent credit bureau reports (which may consist of a merged report),
(2) except in connection with home equity loans originated under one of its no
income verification programs, obtains verification of employment, which
generally includes a current pay stub and the borrower's most recent W-2 form or
federal tax return (or, for self-employed individuals, tax returns from the
previous two years), (3) conducts a title search and (4) obtains an independent
appraisal of the property, as described further below.
After the investigation is completed, a decision is made to accept or
reject the loan application. Generally, borrowers must have a debt-to-income
ratio not greater than 60% for their application to be approved.
GECMSI generally has not made first-lien home equity loans with a Home
Equity Loan-to-Value Ratio exceeding 90%. However, the Total Combined
Loan-to-Value Ratio may exceed 90% in cases where the first-lien home equity
loan secured by the related mortgaged property has a loan-to-value ratio not
exceeding 80%. GECMSI also generally has not made second-lien home equity loans
when the Second-Lien Combined Loan-to-Value Ratio has exceeded 85%. GECMSI's
determination of an acceptable Total Combined Loan-to-Value Ratio or Second-Lien
Combined Loan-to-Value Ratio, as the case may be, for a particular home equity
loan application is based on the credit rating of the borrower, the quality,
condition and appreciation history of the related property and prospective
market conditions with regard to such property.
Certain home equity loans may be originated under GECMSI's no income
verification programs. In order to qualify for these programs, a borrower
generally must have a debt-to-income ratio of no greater than 60%, and a Total
Combined Loan-to-Value Ratio or Second-Lien Combined Loan-to-Value Ratio, as the
case may be, of no greater than 80%. The credit investigation of an applicant
for a loan under these programs is generally the same as described above, except
that the income of the borrower will not be verified. GECMSI generally verifies,
however, that the borrower has sufficient assets to cover certain closing costs
associated with these loans.
For further information respecting the underwriting standards applicable to
home equity loans, see "The Trusts -- The Mortgage Loans -- Loan Underwriting
Policies" in the prospectus.
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DELINQUENCY, FORECLOSURE AND LOAN LOSS EXPERIENCE OF GECMSI'S
HOME EQUITY LOAN SERVICING PORTFOLIO
The following tables set forth certain information concerning the
delinquency and foreclosure (including pending foreclosures) experience on home
equity loans included in GECMSI's servicing portfolio.
AS OF DECEMBER 31, AS OF DECEMBER 31, AS OF DECEMBER 31,
1996 1997 1998
------------------- ------------------- -------------------
BY NO. BY DOLLAR BY NO. BY DOLLAR BY NO. BY DOLLAR
OF AMOUNT OF OF AMOUNT OF OF AMOUNT OF
LOANS LOANS LOANS LOANS LOANS LOANS
------ ---------- ------ ---------- ------ ----------
(DOLLAR AMOUNTS IN THOUSANDS)
Total home equity loan portfolio.............. 40,130 $2,626,039 48,826 $2,975,681 49,256 $3,112,845
====== ========== ====== ========== ====== ==========
Period of delinquency(1)
One payment(2).............................. 751 $ 40,502 783 $ 45,052 649 $ 36,849
Two payments(2)............................. 169 9,463 278 16,911 231 12,976
Three payments or more(3)................... 760 47,918 1,234 80,319 1,530 104,290
------ ---------- ------ ---------- ------ ----------
Total delinquent loans............... 1,680 $ 97,883 2,295 $ 142,282 2,410 $ 154,115
====== ========== ====== ========== ====== ==========
Percent of portfolio.......................... 4.19% 3.73% 4.70% 4.78% 4.89% 4.95%
AS OF JUNE 30, AS OF JUNE 30,
1998 1999
------------------- -------------------
BY NO. BY DOLLAR BY NO. BY DOLLAR
OF AMOUNT OF OF AMOUNT OF
LOANS LOANS LOANS LOANS
------ ---------- ------ ----------
(DOLLAR AMOUNTS IN THOUSANDS)
Total home equity loan portfolio............................ 47,637 $2,936,784 48,244 $3,070,451
====== ========== ====== ==========
Period of delinquency(1)
One payment(2)............................................ 520 $ 26,636 493 $ 30,699
Two payments(2)........................................... 153 $ 10,061 176 $ 10,025
Three payments or more(3)................................. 1,314 $ 89,252 1,468 $ 101,614
------ ---------- ------ ----------
Total delinquent loans............................. 1,987 $ 125,949 2,137 $ 142,338
====== ========== ====== ==========
Percent of portfolio........................................ 4.17% 4.29% 4.43% 4.64%
- -------------------------
(1) The indicated periods of delinquency are based on the number of days past
due on a contractual basis. No home equity loan is considered delinquent for
these purposes until after the monthly anniversary of its contractual due
date (e.g., a mortgage loan with a payment due on January 1st would first be
considered one payment delinquent after February 1st). The delinquencies
reported above were determined as of the dates indicated.
(2) Includes loans for which the borrowers are in bankruptcy.
(3) Includes all loans in foreclosure and loans for which the borrowers are in
bankruptcy.
AS OF DECEMBER 31,
------------------------------------
1996 1997 1998
---------- ---------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)
Total home equity loan portfolio............................ $2,626,039 $2,975,681 $3,112,845
Foreclosed loans (Real estate owned ("REO")
properties)(1)............................................ $ 9,189 $ 5,505 $ 9,104
Foreclosure ratio........................................... 0.35% 0.18% 0.29%
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AS OF JUNE 30,
------------------------------
1998 1999
------------ ------------
(DOLLAR AMOUNTS IN THOUSANDS)
Total home equity loan portfolio............................ $2,936,784 $3,070,451
Foreclosed loans (REO properties)(1)........................ $ 7,724 $ 10,524
Foreclosure ratio........................................... 0.26% 0.34%
- -------------------------
(1) Foreclosed loans represent the amount of funds invested by GECMSI or an
investor, in properties, the title to each of which has been acquired by
GECMSI or investors following foreclosure or delivery of a deed in lieu of
foreclosure, and which have not been liquidated at the end of the period
indicated. The amount of funds invested by GECMSI for a property includes
the principal balance of the related home equity loan, interest paid to
investors through the date of the repurchase of such loan from an investor
pool and expenses associated with foreclosing on such loan, and maintaining
and selling the related property. The length of time necessary to complete
the liquidation of such mortgaged properties may be affected by prevailing
economic conditions and the marketability of the mortgaged properties.
GECMSI is not currently aware of specific trends that have affected its
recent delinquency and loss experience, nor is GECMSI currently aware of any
trends that are likely to affect the future performance of its servicing
portfolio.
The following tables set forth certain information concerning net loan loss
experience of GECMSI for the indicated periods, with respect to home equity
loans included in its servicing portfolio. Net losses for each period below have
been calculated to equal (a) with respect to second-lien mortgage loans written
off as uncollectible, the principal amount of such loan, net of any subsequent
recoveries, together with legal and other fees and expenses associated with
monitoring the foreclosure of the related first lien, which expenses were
incurred prior to GECMSI's decision to write off such second-lien mortgage loan
as uncollectible, and (b) with respect to foreclosed properties liquidated
during the period, the principal amount of the related mortgage loans less the
net proceeds of the sale of the related properties, together with expenses
associated with maintaining, repairing and selling such properties. Net losses
also include the amount of interest paid to investors through the date of
repurchase of the mortgage loans referred to in (a) and (b) above from an
investor pool.
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1997 1998
---------- ---------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)
Number of home equity loans serviced........................ 40,130 48,826 49,256
Aggregate loan balance of home equity loans serviced........ $2,626,039 $2,975,681 $3,112,845
Net losses(2):
By dollar amount........................................ $8,756 $8,210 $11,499
Percentage(3)........................................... 0.33% 0.28% 0.37%
THREE MONTHS ENDED
JUNE 30,
-----------------------
1998 1999
---------- ----------
(DOLLAR AMOUNTS IN
THOUSANDS)
Number of home equity loans serviced(1)..................... 47,637 48,244
Aggregate loan balance of home equity loans serviced........ $2,936,784 $3,070,451
Net losses(2):
By dollar amount........................................ $ 3,904 $ 6,613
Percentage(1)........................................... 0.13% 0.22%
- -------------------------
(1) As of the end of the indicated period.
(2) Net loss data is given with respect to home equity loans serviced by GECMSI,
other than home equity loans as to which certain third-party investors,
pursuant to contractual arrangement, assume responsibility for the
liquidation and ultimate disposition of the mortgaged properties securing
such home equity loans generally after
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the foreclosure process is completed. As of December 31, 1996, December 31,
1997 and December 31, 1998, approximately 32%, 23% and 20%, respectively (by
aggregate loan balance), of GECMSI's home equity loan servicing portfolio
included loans subject to these arrangements.
(3) As a percentage of aggregate year-end balance.
The delinquency and foreclosure experience set forth above is historical
and is based on the servicing of mortgage loans that may not be representative
of the mortgage loans in the mortgage loan pool. Consequently, there can be no
assurance that the delinquency and foreclosure experience on the mortgage loans
in the mortgage loan pool will be consistent with the data set forth above. The
servicing portfolio, for example, includes mortgage loans having a wide variety
of payment characteristics (e.g., simple interest mortgage loans,
self-amortizing mortgage loans and balloon loans), mortgage loans secured by
first and second liens on mortgaged properties and mortgage loans secured by
mortgaged properties in geographic locations that may not be representative of
the geographic locations of the mortgage loans in the mortgage loan pool. The
servicing portfolio also includes mortgage loans originated in accordance with
GECMSI's then applicable underwriting policies as well as mortgage loans not
originated in accordance with such policies.
The servicing portfolio includes many mortgage loans which have not been
outstanding long enough to have seasoned to a point where delinquencies would be
fully reflected. In the absence of such substantial continuous additions of
servicing for recently originated mortgage loans to the servicing portfolio, it
is possible that the delinquency and foreclosure percentages experienced in the
future could be significantly higher than those indicated in the tables above.
Investors should further note that a number of social, economic, tax,
geographic, demographic, legal and other factors may adversely affect the timely
payment by borrowers of scheduled payments of principal and interest on the
mortgage loans in the servicing portfolio, which could, in turn, cause an
increase in delinquency and foreclosure rates. These factors include economic
conditions, either nationally or in geographic areas where GECMSI's servicing
portfolio tends to be concentrated, the age of the mortgage loans, the
geographic distribution of the mortgaged properties, the payment terms of the
mortgages, the characteristics of the mortgagors, enforceability of due-on-sale
clauses and servicing decisions.
USE OF PROCEEDS
The net proceeds from the sale of the certificates offered hereby will be
used by Funding to purchase the mortgage loans in the trust from GECMSI.
THE POOLING AND SERVICING AGREEMENT
The certificates will be issued pursuant to the Agreement. The following
summaries describe the material provisions of the Agreement that are unique to
this offering of certificates. See "The Pooling and Servicing Agreement" in the
accompanying prospectus for summaries of the other material provisions of the
Agreement. The summaries below do not purport to be complete and are subject to,
and qualified in their entirety by reference to, the provisions of the
Agreement. Where particular provisions or terms used in the Agreement are
referred to, those provisions or terms are as specified in the Agreement.
SERVICING ARRANGEMENT WITH RESPECT TO THE MORTGAGE LOANS
It is expected that GECMSI initially will directly service all of the
mortgage loans. The Agreement permits GECMSI to use other primary servicing
agents from time to time. See "Servicing of the Mortgage Loans" in the
accompanying prospectus.
GECMSI, in its capacity as servicer and acting as agent for the Trustee,
will not consent to the placement of a subsequent senior mortgage or deed of
trust on any mortgaged property, except in the
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case of a Permitted Senior Loan (as defined below). If, notwithstanding the
foregoing, any mortgage loan (other than a Permitted Senior Loan) secured by a
lien or liens ranking senior to that of a mortgage loan is consented to by
GECMSI, the Agreement will require that GECMSI purchase such mortgage loan at
the purchase price therefor, but only in the event that foreclosure proceedings
are commenced in respect of such mortgage loan. The Agreement will further
provide that such purchase obligation will be the sole remedy available to
holders of the certificates or the Trustee against GECMSI respecting such
breach. Under the Agreement, a "Permitted Senior Loan" is a mortgage loan (1) as
to which the proceeds therefrom were used to refinance an existing mortgage loan
ranking senior to a mortgage loan and (2) as to which certain conditions
described in the Agreement have been satisfied.
Subject to applicable law, all legal expenses in connection with
foreclosure proceedings initiated by GECMSI are assessed to, and become the
responsibility of, the related mortgagor.
GECMSI may not foreclose on any property securing a mortgage loan unless it
forecloses subject to any senior mortgage and any outstanding property taxes.
GECMSI generally will pay the entire amount due on such senior mortgage loan to
the senior mortgagee at or prior to the foreclosure sale. If any senior mortgage
is in default after GECMSI has initiated its foreclosure action, GECMSI may
advance funds to keep the senior mortgage current until such time as GECMSI
satisfies such senior mortgage. In the event foreclosure proceedings have been
instituted on any senior mortgage prior to the initiation of GECMSI's
foreclosure action, GECMSI may monitor the foreclosure proceedings, institute
its own foreclosure proceedings, satisfy the senior mortgage at the time of the
foreclosure sale or take other action to protect its interest in the related
property, including bidding on the property at the time of any foreclosure sale.
GECMSI will be reimbursed for any expenses incurred or advances made in
connection with the liquidation of a defaulted mortgage loan out of liquidation
proceeds or insurance proceeds on such defaulted mortgage loan. GECMSI will not
be under any obligation to make any such advance, and in any event GECMSI will
refrain from taking any such action based upon its determination that any
amounts so paid will not be recoverable from proceeds from the disposition of
the related mortgaged property. See "Servicing of the Mortgage
Loans -- Collection and Other Servicing Procedures -- The Mortgage Loans" in the
prospectus.
SERVICER MODIFICATIONS
Under the Agreement, GECMSI, as servicer, may permit the modification of a
mortgage loan to reduce its Principal Balance and/or extend its term (any such
modification, a "Servicer Modification") if such mortgage loan is in default or
a default is reasonably foreseeable. In the event of a term extension, a new
amortization schedule will be created to fully amortize the loan in equal
monthly installments over the new term, based on the remaining Principal Balance
of the loan (as reduced, if applicable) and the existing interest rate. However,
GECMSI may, in connection with a Servicer Modification, convert a Balloon Loan
into a fully amortizing loan or convert a fully amortizing loan into a Balloon
Loan. The interest rate of a mortgage loan will not be changed in connection
with a Servicer Modification, and no loan term may be extended beyond the latest
maturity date off any mortgage loan then in the pool. GECMSI will only be
permitted to enter into Servicer Modifications in a manner that preserves the
lien position of the related mortgage loan. The Agreement will provide that
GECMSI may not enter into Servicer Modifications that either (i) extend the term
of mortgage loans if the aggregate unpaid Principal Balance of mortgage loans
whose terms have been extended exceeds, as of the time of such extensions, 5% of
the aggregate Principal Balance of the mortgage pool as of the Cut-off Date or
(ii) reduce the Principal Balance of mortgage loans if the aggregate unpaid
Principal Balance of mortgage loans whose Principal Balances have been reduced
exceeds, as of the time of such extensions, 5% of the aggregate Principal
Balance of the mortgage pool as of the Cut-off Date, unless in either such case
GECMSI delivers to the trustee a letter from each rating agency which originally
rated the certificates to the effect that
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additional extensions or reductions of Principal Balance would not cause such
rating agency to withdraw, qualify or reduce its then current ratings of the
certificates. In addition to Servicer Modifications, GECMSI may waive any late
payment charge and arrange for a deferred payment schedule as described under
"Servicing of the Mortgage Loans -- Collection and Other Servicing Procedures"
in the prospectus.
All calculations relating to distributions of principal and interest on the
certificates will be made giving effect to the new terms of the mortgage loans
that are the subject of Servicing Modifications, except as described herein
under the definition of Senior Prepayment Percentage. In addition, any advances
of delinquent installments of interest required to be advanced by GECMSI will be
based on the new payment terms of these mortgage loans.
COLLECTION ACCOUNT
The Agreement provides that if GECMSI or the Trustee obtains actual notice
or knowledge of the occurrence of a Trigger Event, GECMSI will, in lieu of the
Loan Payment Record described under the caption "Servicing of the Mortgage
Loans -- Loan Payment Record" in the accompanying prospectus, establish and
maintain or cause to be established and maintained a separate account (the
"Collection Account") for the certificates for the collection of payments on the
mortgage loans; provided, however, that such action will not be required if
GECMSI delivers to the Trustee a letter from each rating agency which originally
rated the certificates to the effect that the failure to take such action would
not cause such rating agency to withdraw or reduce its then current rating of
such certificates. If established, such Collection Account would be:
- maintained with a depository institution the debt obligations of which
are, at the time of any deposit therein, rated by each of Fitch IBCA,
Inc. ("Fitch") and Moody's Investors Service, Inc. ("Moody's") in one of
its two highest long-term rating categories and by Moody's in its highest
short-term rating category;
- an account or accounts the deposits in which are fully insured by either
the Bank Insurance Fund (the "BIF") of the Federal Deposit Insurance
Corporation (the "FDIC") or the Savings Association Insurance Fund (as
successor to the Federal Savings and Loan Insurance Corporation) of the
FDIC (the "SAIF");
- an account or accounts with a depository institution, which accounts are
insured by the BIF or SAIF (to the limits established by the FDIC), and
which uninsured deposits are invested in United States government
securities or other high quality investments, or are otherwise secured to
the extent required by Fitch and Moody's such that, as evidenced by an
opinion of counsel, the holders of the certificates have a claim with
respect to the funds in the account or a perfected first security
interest against any collateral securing such funds that is superior to
claims of any other depositors or creditors of the depository institution
with which the account is maintained;
- a trust account maintained with the corporate trust department of a
federal or state chartered depository institution or trust company with
trust powers and acting in its fiduciary capacity for the benefit of the
Trustee; or
- an account as will not cause either Moody's or Fitch to downgrade or
withdraw its then-current ratings assigned to the certificates.
If a Collection Account is established for the certificates, all amounts
credited or debited to the Loan Payment Record in the manner described under the
caption "Servicing of the Mortgage Loans -- Loan Payment Record" will instead be
deposited or withdrawn from the related Collection Account. See "Servicing of
the Mortgage Loans -- Loan Payment Record" in the accompanying prospectus.
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Prior to the occurrence of a Trigger Event, GECMSI will transfer to the
Certificate Account, in next day funds, the Available Funds for the related
Distribution Date on the business day immediately preceding such Distribution
Date.
ADVANCES
In the event that any mortgagor fails to make any payment of interest
required under the terms of a mortgage loan, GECMSI, as servicer, will advance
the entire amount of such payment (in the amount that would be due on the
related Due Date, in the case of a simple interest mortgage loan), net of the
applicable servicing fee, less the amount of any such payment that GECMSI
reasonably believes will not be recoverable out of liquidation proceeds or
otherwise. See "Servicing of the Mortgage Loans -- Advances" in the accompanying
prospectus for more information. GECMSI will have no obligation to advance
delinquent payments of principal on the mortgage loans.
As a result of the subordination of the junior certificates, the effect of
reimbursements to GECMSI of previous advances from liquidation or insurance
proceeds and of nonrecoverable advances will generally be borne by the holders
of the junior certificates (to the extent then outstanding) in inverse order of
priority before they are borne by holders of the senior certificates.
Any failure by GECMSI to make an advance of delinquent installments of
interest on the mortgage loans as required under the Agreement will constitute
an Event of Default as defined thereunder, in which case the Trustee, as
successor to GECMSI in its capacity as servicer of the mortgage loans, will be
obligated to make any such advance, in accordance with the terms of the
Agreement unless prohibited by applicable law from doing so.
PURCHASES OF DEFAULTED MORTGAGE LOANS
Under the Agreement, GECMSI will have the option (but not the obligation)
to purchase any mortgage loan as to which the mortgagor has failed to make
unexcused payment in full of three or more consecutive scheduled payments of
principal and interest (a "Defaulted Mortgage Loan"). Any such purchase will be
for a price equal to 100% of the outstanding principal balance of such mortgage
loan, plus accrued and unpaid interest thereon at the Net Mortgage Rate, less
any amounts representing previously unreimbursed advances. The purchase price
for any Defaulted Mortgage Loan will be deposited in the Certificate Account on
the business day prior to the Distribution Date on which the proceeds of such
purchase are to be distributed to the related certificateholders.
SERVICING COMPENSATION, COMPENSATING INTEREST AND PAYMENT OF EXPENSES
GECMSI's primary compensation for its servicing activities will come from
the payment to it, with respect to each interest payment on any mortgage loan,
of the servicing fee at the rate described below. As to each mortgage loan, the
servicing fee rate will be a fixed rate per annum of the outstanding principal
balance of such mortgage loan. The servicing fee rate for each mortgage loan is
expected to be 0.50%. The aggregate servicing compensation to GECMSI could vary
depending on the prepayment experience of the mortgage loans. The servicing
compensation of any direct servicer of any mortgage loan retained by GECMSI will
be paid out of the related servicing fee, and GECMSI will retain the balance as
part of its servicing compensation (subject to its obligation to make
Compensating Interest Payments and Simple Interest Payments, as described
below).
To the extent any voluntary prepayment on a self-amortizing mortgage loan
results in an Interest Shortfall (as described in clauses (1) and (2) of the
definition thereof) with respect to any Distribution Date, GECMSI will be
obligated to remit an amount (such amount, a "Compensating Interest Payment")
sufficient to pass through to certificateholders the full amount of interest to
which they would have been entitled in the absence of such prepayment, but in no
event greater than the lesser of (a) 1/12th of 0.125% of the aggregate Principal
Balance of the mortgage loans for such
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Distribution Date and (b) the aggregate amount received by GECMSI on account of
its servicing fees (net of any servicing compensation paid to any direct
servicer) in respect of such mortgage loans in connection with such Distribution
Date.
There can be no assurance that the aggregate amount received by GECMSI on
account of its servicing fees (net of any servicing compensation paid to any
direct servicer) will be sufficient to pay any Compensating Interest Payments
and Simple Interest Payments that would otherwise be made if such payments were
not limited by the amount of GECMSI's servicing compensation.
GECMSI will retain, as additional servicing compensation, amounts in
respect of interest paid by borrowers in connection with any principal
prepayment in full received by GECMSI on a self-amortizing mortgage loan from
the first day through the fifteenth day of each month, other than the month of
the Cut-off Date.
GECMSI will pay expenses incurred in connection with its responsibilities
under the Agreement, subject to limited reimbursement as described herein and in
the accompanying prospectus. See "Servicing of the Mortgage Loans -- Servicing
and Other Compensation and Payment of Expenses" in the accompanying prospectus
for information regarding other possible compensation to GECMSI.
SIMPLE INTEREST PAYMENTS
In the event that there is a Net Simple Interest Shortfall for any
Distribution Date, GECMSI will be obligated to remit to the Trustee on the
related Deposit Date an amount (a "Simple Interest Payment") equal to the lesser
of (1) the amount of such Net Simple Interest Shortfall and (2) the sum of (a)
the aggregate amount received by GECMSI on account of its servicing fees (net of
any compensation paid to any direct servicer) in connection with such
Distribution Date, less any Compensating Interest Payment in respect of such
Distribution Date, and (b) the Simple Interest Excess Amount for such
Distribution Date.
In the event that there is a Net Simple Interest Excess on any Distribution
Date, such excess will be applied to the distribution of interest pursuant to
priority second under "Description of the Certificates -- Distributions on the
Certificates -- Interest" to the extent of Unpaid Net Simple Interest Shortfalls
for all prior Distribution Dates, less all amounts distributed pursuant to such
priority second in respect of Unpaid Net Simple Interest Shortfalls on such
prior Distribution Dates.
Any remaining Net Simple Interest Excess will be paid to GECMSI as
additional servicing compensation.
The "Simple Interest Excess Amount" for any Distribution Date will be equal
to the greater of (1) zero and (2) the aggregate of any Net Simple Interest
Excess paid to GECMSI in connection with prior Distribution Dates, minus any
Simple Interest Payments made by GECMSI in connection with prior Distribution
Dates.
TRUSTEE
The Trustee for the certificates offered hereby will be Bank One, National
Association, a national banking association. The Corporate Trust Office of the
Trustee is located at 1 Bank One Plaza, Mail Suite IL1-0126, Chicago, Illinois
60670-0126, except that for certain purposes under the Agreement such office is
located at 14 Wall Street, 8th Floor, New York, N.Y. 10005. 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. In addition, GECMSI (and its affiliates) maintain banking
relationships with the Trustee in the ordinary course of their respective
businesses.
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OPTIONAL TERMINATION
GECMSI may, at its option, purchase all of the mortgage loans underlying
the certificates and thereby effect the early retirement of the certificates and
cause the termination of the trust on any Distribution Date after the aggregate
Principal Balance of the mortgage loans is less than 10% of the aggregate
Principal Balance thereof as of the Cut-off Date. Under the Agreement, the
Trustee will provide notice to certificateholders of this final Distribution.
This notice will state:
(1) the distribution date on which the final distribution will be made;
(2) the amount of the final distribution; and
(3) that the final distribution on each certificate will be paid only upon
surrender of such certificate.
GECMSI may not exercise this option unless the Trustee has received an
opinion of counsel that the exercise of such option will not subject the trust
to a tax on prohibited transactions or result in the failure of the lower-tier
REMIC or the upper-tier REMIC to qualify as a REMIC.
In accordance with the Agreement, any such purchase by GECMSI of the assets
included in the trust will be at a price equal to the sum of:
(1) 100% of the unpaid principal balance of each mortgage loan in the
trust, other than a mortgage loan described in clause (2) below, as of
the first day of the month of such repurchase, plus accrued and unpaid
interest thereon to the first day of the month of such repurchase at
the related Net Mortgage Rate, less any amounts representing previously
unreimbursed advances; and
(2) the appraised value of any property acquired in respect of a related
mortgage loan less any amounts representing previously unreimbursed
advances in respect thereof and a good faith estimate of liquidation
expenses.
The Available Funds on the final Distribution Date will be allocated to
each class of certificates in accordance with the priorities described under
"Description of the Certificates -- Distributions on the
Certificates -- Allocation of Available Funds." Accordingly, if the Available
Funds on the final Distribution Date are less than the aggregate principal
balance of all outstanding certificates plus accrued and unpaid interest
thereon, then in the event that such Distribution Date occurs:
- prior to the Cross-over Date, any resulting shortfall in accrued interest
on the certificates will be allocated first, to the junior certificates
in inverse order of priority and second, pro rata to the senior
certificates; and
- on or after the Cross-over Date, any resulting shortfall in accrued
interest on the certificates will be borne pro rata by the senior
certificates; and
- at any time, any resulting shortfall in principal will be borne pro rata
by all outstanding certificates entitled to distributions of principal.
No holder of any certificates will be entitled to any Unanticipated
Recoveries received with respect to any mortgage loan after the termination of
the trust. See "Servicing of the Mortgage Loans -- Unanticipated Recoveries of
Losses on the Mortgage Loans" in the prospectus.
VOTING RIGHTS
The Class S Certificates in the aggregate will be allocated 4% of the votes
and the other classes of certificates in the aggregate will be allocated 96% of
the votes, eligible to be cast in connection with any vote of all
certificateholders under the Agreement. Votes allocated to the certificates
other than the Class S Certificates will be allocated among such classes (and
among the certificates within each such class) in proportion to their Class
Certificate Principal Balances or Certificate Principal Balances, as the case
may be.
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FEDERAL INCOME TAX CONSEQUENCES
The following discussion, insofar as it states conclusions of law,
represents the opinion of Cleary, Gottlieb, Steen & Hamilton, special counsel to
Funding.
An election will be made to treat the trust as a two-tier REMIC for federal
income tax purposes.
The certificates other than the residual certificates (the "Regular
Certificates") will be designated as "regular interests" in the upper-tier
REMIC. The Class R1 Certificates will be designated as the "residual interest"
in the lower-tier REMIC, and the Class R2 Certificates will be designated as the
"residual interest" in the upper-tier REMIC.
Regular Certificates
The Regular Certificates generally will be treated as debt instruments
issued by the upper-tier REMIC for federal income tax purposes. Income on
Regular Certificates must be reported under an accrual method of accounting.
Certain classes of Regular Certificates may be issued with original issue
discount in an amount equal to the excess of their initial respective Class
Certificate Principal Balances (plus accrued interest from the last day
preceding the issue date corresponding to a Distribution Date through the issue
date) over their issue prices (including all accrued interest). The prepayment
assumption that is to be used in determining the rate of accrual of original
issue discount and whether the original issue discount is considered de minimis,
and that may be used by a holder of a Regular Certificate to amortize premium,
will be 21% of the prepayment assumption described on page S-47 above. No
representation is made as to the actual rate at which the mortgage loans will
prepay. See "Federal Income Tax Consequences -- REMIC Certificates -- Income
from Regular Certificates" in the accompanying prospectus.
The Class A5, Class M and Class B1 Certificates provide for interest
payments based on a varying interest rate equal to the lesser of (a) 7.795%,
7.775% and 8.315% per annum, respectively, and (b) the Weighted Average Net
Mortgage Rate on the mortgage loans for the related Interest Accrual Period. The
Class B2 Certificates provide for interest payments based on a varying interest
rate equal to the Weighted Average Net Mortgage Rate on the mortgage loans for
the related Interest Accrual Period. However, these three classes of
certificates technically will not constitute "variable rate debt instruments"
("VRDIs") within the meaning of the original issue discount rules of the
Internal Revenue Code of 1986 (the "Code"), as amended, and the tax treatment of
such certificates thus is not entirely clear. Nevertheless, until further
guidance is provided, it would appear reasonable to accrue interest income under
these certificates in accordance with the rules applicable to VRDIs. See
"Federal Income Tax Consequences -- REMIC Certificates -- Income from Regular
Certificates -- Variable Rate Regular Certificates" in the accompanying
prospectus.
The requirement to report income on a Regular Certificate under an accrual
method may result in the inclusion of amounts in income that are not currently
distributed in cash. In the case of a junior certificate, accrued income may
exceed cash distributions as a result of the preferential right of classes of
senior certificates to receive cash distributions in the event of losses or
delinquencies on mortgage loans. Prospective purchasers of junior certificates
should consult their tax advisors regarding the timing of income from those
certificates and the timing and character of any deductions that may be
available with respect to principal or accrued interest that is not paid. See
"Federal Income Tax Consequences -- REMIC Certificates -- Income from Regular
Certificates" in the accompanying prospectus.
Residual Certificates
The holders of the Class R1 and Class R2 Certificates must include the
taxable income of the lower-tier REMIC and the upper-tier REMIC, respectively,
in their federal taxable income. The
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resulting tax liability of the holders may exceed cash distributions to such
holders during certain periods. All or a portion of the taxable income from the
residual certificates recognized by a holder may be treated as "excess
inclusion" income, which with limited exceptions is subject to U.S. federal
income tax in all events.
Under Treasury regulations, the residual certificates may be considered to
be "noneconomic residual interests" at the time they are issued, in which event
certain transfers thereof would be disregarded for federal income tax purposes.
Prospective purchasers of the residual certificates should consider
carefully the tax consequences of an investment in residual certificates
discussed in the prospectus and should consult their own tax advisors with
respect to those consequences. See "Federal Income Tax Consequences -- REMIC
Certificates -- Income from Residual Certificates; -- Taxation of Certain
Foreign Investors -- Servicing Compensation and Other REMIC Pool
Expense -- Transfers of Residual Certificates."
ERISA CONSIDERATIONS
As described in the prospectus under "ERISA Considerations," the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and the Code
impose certain duties and restrictions on any person which is an employee
benefit plan within the meaning of Section 3(3) of ERISA subject to ERISA or a
plan subject to Section 4975 of the Code or any person utilizing the assets of
such employee benefit plan or other plan (an "ERISA Plan") and certain persons
who perform services for ERISA Plans. For example, unless exempted, an
investment by an ERISA Plan in the certificates offered hereby may constitute or
give rise to a prohibited transaction under ERISA or Section 4975 of the Code.
See "ERISA Considerations" in the accompanying prospectus.
The United States Department of Labor (the "DOL") has issued to Prudential
Securities Incorporated and Greenwich Capital Markets, Inc. individual
administrative exemptions, Prohibited Transaction Exemption 90-32 (55 Fed. Reg.
23147, June 6, 1990), as amended, and Prohibited Transaction Exemption 90-59 (55
Fed. Reg. 36724, September 6, 1990), as amended, respectively (together, the
"Exemptions"), from certain of the prohibited transaction provisions of ERISA
with respect to the initial purchase, the holding, and the subsequent resale by
an ERISA Plan of certificates in pass-through trusts that meet the conditions
and requirements of the Exemptions. The Exemptions might apply to the
acquisition, holding and resale of the senior certificates offered hereby by an
ERISA Plan, provided that specified conditions are met.
Among the conditions which would have to be satisfied for each of the
Exemptions to apply to the acquisition by an ERISA Plan of the senior
certificates offered hereby are the following:
- the underwriters are the sole underwriters or the managers or co-managers
of the underwriting syndicate for the certificates;
- the certificates are rated in one of the three highest generic rating
categories by Fitch, Moody's, Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, Inc. or Duff & Phelps Credit
Rating Co. at the time of the acquisition of such certificates by the
ERISA Plan;
- the certificates represent a beneficial ownership interest in, among
other things, obligations that bear interest or are purchased at a
discount and which are secured by single-family residential, multifamily
residential or commercial real property (including obligations secured by
leasehold interests on residential or commercial real property), or
fractional undivided interests in such obligations;
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- the certificates are not subordinated to other certificates issued by the
trust in respect of the mortgage pool;
- the ERISA Plan investing in the certificates is an "accredited investor"
as defined in Rule 501(a)(1) of Regulation D of the Securities and
Exchange Commission under the Securities Act of 1933;
- the acquisition of the certificates is on terms that are at least as
favorable to the ERISA Plan as they would be in an arm's length
transaction with an unrelated third party;
- the Trustee is not an affiliate of any member of the "Restricted Group"
(as defined below); and
- the compensation to the underwriters represents not more than reasonable
compensation for underwriting the certificates, the proceeds to Funding
pursuant to the assignment of the mortgage loans (or interests therein)
to the Trustee represent not more than the fair market value of such
mortgage loans (or interests) and the sum of all payments made to and
retained by GECMSI represents not more than reasonable compensation for
GECMSI's services under the Agreement and reimbursement of GECMSI's
reasonable expenses in connection therewith.
In addition, if certain additional conditions specified in the Exemptions
are satisfied, the Exemptions may provide an exemption from the prohibited
transaction provisions of ERISA relating to possible self-dealing transactions
by fiduciaries who have discretionary authority, or render investment advice,
with respect to ERISA Plan assets used to purchase the senior certificates
offered hereby if the fiduciary (or its affiliate) is an obligor on any of the
mortgage loans.
The Exemptions would not be available with respect to ERISA Plans sponsored
by any of the following entities (or any affiliate of any such entity):
- GECMSI or Funding;
- Prudential Securities Incorporated or Greenwich Capital Markets, Inc.;
- the Trustee;
- any entity that provides insurance or other credit enhancement to the
trust in respect of the mortgage pool; or
- any obligor with respect to mortgage loans included in the mortgage pool
constituting more than five percent of the aggregate unamortized
principal balance of the assets in such mortgage loan pool (the
"Restricted Group").
Before purchasing any certificate offered hereby, a fiduciary of an ERISA
Plan should make its own determination as to the availability of the exemptive
relief provided in the Exemptions or the availability of any other prohibited
transaction exemptions, and whether the conditions of any such exemption will be
applicable to such certificate.
The Exemptions do not apply to the initial purchase, the holding or the
subsequent resale of the Class M, Class B1 and Class B2 Certificates because
such certificates are subordinate to certain other classes of certificates.
ACCORDINGLY, ERISA PLANS MAY NOT PURCHASE THE CLASS M, CLASS B1 OR CLASS B2
CERTIFICATES, except that any insurance company may purchase such certificates
with assets of its general account if the exemptive relief granted by the DOL
for transactions involving insurance company general accounts in Prohibited
Transaction Exemption 95-60, 60 Fed. Reg. 35925 (July 12, 1995) is available
with respect to such investment. Any insurance company proposing to purchase
such certificates for its general account should consider whether such relief
would be available.
Any fiduciary of an ERISA Plan considering whether to purchase any
certificate offered hereby should not only consider the applicability of
exemptive relief, but should also carefully review with its
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own legal advisors the applicability of the fiduciary duty and prohibited
transaction provisions of ERISA and the Code to such investment. See "ERISA
Considerations" in the accompanying prospectus.
A qualified pension plan or other entity that is exempt from federal income
taxation pursuant to Section 501 of the Code (a "Tax-Exempt Investor")
nonetheless will be subject to federal income taxation to the extent that its
income is "unrelated business taxable income" within the meaning of Section 512
of the Code. The residual certificates constitute the residual interests in the
respective REMICs constituted by the trust, and all "excess inclusions"
allocated to the residual certificates, if held by a Tax-Exempt Investor, will
be considered "unrelated business taxable income" and thus will be subject to
federal income tax. See "Federal Income Tax Consequences -- Residual
Certificates" herein and "Federal Income Tax Consequences -- Federal Income Tax
Consequences for REMIC Certificates -- Taxation of Residual Certificates" in the
prospectus.
The Agreement will contain certain restrictions on the transferability of
the Class M, Class B1 and Class B2 Certificates. See "Description of the
Certificates -- Book-Entry Certificates" herein. The Agreement provides that the
residual certificates may not be acquired by or transferred to an ERISA Plan.
See "Description of the Certificates -- Restrictions on Transfer of the Residual
Certificates" herein.
LEGAL INVESTMENT MATTERS
The certificates offered hereby will not constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA"). The appropriate characterization of the certificates offered
hereby under various legal investment restrictions, and thus the ability of
investors subject to these restrictions to purchase the certificates offered
hereby, may be subject to significant interpretive uncertainties. All investors
whose investment authority is subject to legal restrictions should consult their
own legal advisors to determine whether, and to what extent, the certificates
offered hereby will constitute legal investments for them.
Funding makes no representation as to the proper characterization of the
certificates offered hereby for legal investment of financial institution
regulatory purposes, or as to the ability of particular investors to purchase
the certificates offered hereby under applicable legal investment restrictions.
The uncertainties described above (and any unfavorable future determinations
concerning legal investment or financial institution regulatory characteristics
of the certificates offered hereby) may adversely affect the liquidity of the
certificates offered hereby.
PLAN OF DISTRIBUTION
Subject to the terms and conditions set forth in an Underwriting Agreement
among Funding, GECMSI and the underwriters, Funding, as seller, has agreed to
sell to each of the underwriters, and each underwriter has severally agreed to
purchase, the Certificate Principal Balance of each class of certificates
offered hereby (other than the residual certificates) set forth opposite its
name below. Pursuant to the Underwriting Agreement, Prudential Securities
Incorporated has agreed to purchase the entire Class Certificate Principal
Balance of the Class R1 and Class R2 Certificates.
UNDERWRITER CLASS A1 CLASS A2 CLASS A3 CLASS A4 CLASS A5 CLASS A6 CLASS M
- ----------- ------------ ----------- ----------- ----------- ----------- ----------- -----------
Prudential Securities
Incorporated................. $ 68,750,000 $22,000,000 $41,500,000 $26,000,000 $11,721,000 $18,886,000 $ 6,513,000
Greenwich Capital Markets,
Inc. ........................ 68,750,000 22,000,000 41,500,000 26,000,000 11,720,000 18,885,000 6,512,000
------------ ----------- ----------- ----------- ----------- ----------- -----------
Total...................... $137,500,000 $44,000,000 $83,000,000 $52,000,000 $23,441,000 $37,771,000 $13,025,000
============ =========== =========== =========== =========== =========== ===========
UNDERWRITER CLASS B1 CLASS B2
- ----------- ----------- -----------
Prudential Securities
Incorporated................. $ 5,970,000 $ 5,210,000
Greenwich Capital Markets,
Inc. ........................ 5,969,000 5,210,000
----------- -----------
Total...................... $11,939,000 $10,420,000
=========== ===========
In the Underwriting Agreement, the underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all of the certificates
offered hereby of the applicable classes,
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if any are purchased. Funding has been advised by the underwriters that they
propose initially to offer the Class A1 through Class A6, Class M, Class B1 and
Class B2 Certificates to the public at the respective offering prices set forth
on the cover page hereof and that Prudential Securities Incorporated and
Greenwich Capital Markets, Inc. propose initially to offer all of such
certificates to certain dealers at such price less a selling concession not in
excess of the respective amounts set forth in the table below (expressed as a
percentage of Certificate Principal Balance).
SELLING
CONCESSION
----------
Class A1............................................. 0.90%
Class A2............................................. 1.20
Class A3............................................. 1.35
Class A4............................................. 1.60
Class A5............................................. 2.00
Class A6............................................. 1.75
Class M.............................................. 2.00
Class B1............................................. 2.50
Class B2............................................. 3.00
After the initial public offering, such prices and concessions may be changed.
Until the distribution of the Class A1 through Class A6, Class M, Class B1
and Class B2 Certificates is completed, rules of the Securities and Exchange
Commission may limit the ability of the underwriters to bid for and purchase
such certificates. As an exception to these rules, the underwriters are
permitted to engage in certain transactions that stabilize the price of such
certificates. Such transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of such certificates. If the
underwriters create a short position in any such class of certificates in
connection with the offering, i.e., if they sell more of any such class than is
set forth on the cover page of this prospectus supplement, the underwriters may
reduce that short position by purchasing such certificates in the open market.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
The underwriters make no representation or prediction as to the direction
or magnitude of any effect that the transactions described above may have on the
prices of such certificates. In addition, the underwriters make no
representation that such underwriters will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
Distribution of the Class R1 and Class R2 Certificates will be made by
Prudential Securities Incorporated from time to time in negotiated transactions
or otherwise at varying prices to be determined at the time of sale.
Funding and GECMSI have agreed to indemnify the underwriters against, or
make contributions to the underwriters with respect to, certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
CERTIFICATE RATINGS
It is a condition of issuance of the certificates that the senior
certificates offered hereby, other than the Class R1 and Class R2 Certificates,
be rated "AAA" by Fitch and "Aaa" by Moody's, that
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the Class R1 and Class R2 Certificates be rated "AAA" by Fitch, and that the
Class M, Class B1 and Class B2 Certificates be rated "AA," "A" and "BBB,"
respectively, by Fitch.
The ratings assigned by Fitch to mortgage pass-through certificates address
the likelihood of the receipt by certificateholders of all distributions to
which such certificateholders are entitled. Fitch's ratings address the
structural and legal aspects associated with the certificates, including the
nature of the underlying mortgage loans and the credit quality of the credit
support provider. Fitch's ratings on mortgage pass-through certificates do not
represent any assessment of the likelihood or rate of principal prepayments.
The ratings of Moody's on mortgage pass-through certificates address the
likelihood of the receipt by certificateholders of all distributions to which
such certificateholders are entitled. Moody's rating opinions address the
structural and legal issues and tax-related aspects associated with the
certificates, including the nature of the underlying mortgage loans and the
credit quality of the credit support provider, if any. Moody's ratings on
pass-through certificates do not represent any assessment of the likelihood that
principal prepayments may differ from those originally anticipated.
The ratings of Moody's and Fitch do not address the possibility that, as a
result of principal prepayments, certificateholders may receive a lower than
anticipated yield.
The ratings of the certificates should be evaluated independently from
similar ratings on other types of securities. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision or
withdrawal at any time by the assigning rating agency.
Funding has not requested a rating of the certificates offered hereby by
any rating agency other than Moody's and Fitch and Funding has not provided
information relating to the certificates offered hereby or the mortgage loans to
any rating agency other than Moody's and Fitch. However, there can be no
assurance as to whether any other rating agency will rate the certificates
offered hereby or, if another rating agency rates such certificates, what rating
would be assigned to such certificates by such rating agency. Any such
unsolicited rating assigned by another rating agency to the certificates offered
hereby may be lower than the rating assigned to such certificates by either, or
both, of Moody's and Fitch.
LEGAL MATTERS
Certain legal matters in respect of the certificates will be passed upon
for Funding by Cleary, Gottlieb, Steen & Hamilton, New York, New York and for
the underwriters by Brown & Wood LLP, Washington, D.C.
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INDEX OF CERTAIN PROSPECTUS SUPPLEMENT DEFINITIONS
DEFINED TERM PAGE
------------ ----
Accrued Certificate Interest................................ S-30
Adjustment Amount........................................... S-38
Agreement................................................... S-26
Allocable Share............................................. S-36
Available Funds............................................. S-28
Available Interest Funds.................................... S-28
Available Principal Funds................................... S-28
Balloon Loans............................................... S-14
Balloon Payments............................................ S-14
Bankruptcy Coverage Termination Date........................ S-39
Bankruptcy Loss Amount...................................... S-39
beneficial owner............................................ S-26
BIF......................................................... S-60
Book-Entry Certificates..................................... S-26
Certificate Principal Balance............................... S-30
Class A6 Certificate Percentage............................. S-35
Class A6 Distribution Percentage............................ S-35
Class A6 Principal Distribution Amount...................... S-35
Class B Certificates........................................ S-36
Class Certificate Principal Balance......................... S-30
Class Prepayment Distribution Trigger....................... S-36
Closing Date................................................ S-23
Code........................................................ S-64
Collection Account.......................................... S-60
Compensating Interest Payment............................... S-61
Cross-Over Date............................................. S-33
Cut-off Date................................................ S-13
Defaulted Mortgage Loan..................................... S-61
Deficient Valuation......................................... S-37
Distribution Date........................................... S-29
DOL......................................................... S-65
Due Date.................................................... S-13
Early Installment........................................... S-44
ERISA....................................................... S-65
ERISA Plan.................................................. S-65
Excess Loss................................................. S-37
Exemptions.................................................. S-65
FDIC........................................................ S-60
Final Senior Distribution Date.............................. S-60
Financial Intermediary...................................... S-26
Fitch....................................................... S-60
Fraud Coverage Termination Date............................. S-38
Fraud Loss.................................................. S-37
Fraud Loss Amount........................................... S-38
Funding..................................................... S-13
GECMSI...................................................... S-15
Home Equity Loan Ratio...................................... S-22
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DEFINED TERM PAGE
------------ ----
Home Equity Loan-to-Value Ratio............................. S-21
Interest Accrual Period..................................... S-29
Interest Percentage......................................... S-31
Interest Shortfall.......................................... S-31
Junior Certificate Writedown Amount......................... S-30
Junior Percentage........................................... S-35
Junior Prepayment Percentage................................ S-35
Junior Principal Distribution Amount........................ S-35
Liquidated Mortgage Loan.................................... S-37
Loss Allocation Limitation.................................. S-39
Modeling Assumptions........................................ S-47
Moody's..................................................... S-60
mortgage related securities................................. S-67
Net Interest Shortfall...................................... S-31
Net Mortgage Rate........................................... S-30
Net Simple Interest Excess.................................. S-31
Net Simple Interest Shortfall............................... S-31
Non-Book-Entry Certificates................................. S-28
Non-Excess Realized Loss.................................... S-37
Notional Principal Balance.................................. S-31
Original Junior Principal Balance........................... S-34
Permitted Senior Loan....................................... S-59
Prepayment Interest......................................... S-44
Prepayment Period........................................... S-34
Principal Balance........................................... S-13
Realized Loss............................................... S-37
Record Date................................................. S-28
Regular Certificates........................................ S-64
regular interests........................................... S-63
REO......................................................... S-57
residual interest........................................... S-64
Restricted Group............................................ S-66
Retail loans................................................ S-54
SAIF........................................................ S-60
Second-Lien Combined Loan-to-Value Ratio.................... S-20
Senior Percentage........................................... S-34
Senior Prepayment Percentage................................ S-34
Senior Prepayment Percentage Stepdown Limitation............ S-35
Senior Principal Distribution Amount........................ S-33
Senior Transition Date...................................... S-35
Servicer Modification....................................... S-37
Simple Interest Excess Amount............................... S-62
Simple Interest Payment..................................... S-62
SMMEA....................................................... S-67
Special Hazard Loss......................................... S-37
Special Hazard Loss Amount.................................. S-38
Special Hazard Termination Date............................. S-38
Tax-Exempt Investor......................................... S-67
Trustee..................................................... S-62
S-71
72
DEFINED TERM PAGE
------------ ----
Unpaid Net Simple Interest Shortfall........................ S-31
VRDIs....................................................... S-64
Weighted Average Net Mortgage Rate.......................... S-30
Wholesale Loans............................................. S-54
S-72
73
PROSPECTUS
GE CAPITAL MORTGAGE SERVICES, INC.
GE CAPITAL MORTGAGE FUNDING CORPORATION
(DEPOSITORS)
MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES BY SEPARATE TRUSTS)
------------------------------
EACH SERIES OF CERTIFICATES:
- will consist of one or more classes of mortgage pass-through certificates
representing interests in the assets of a trust;
- will receive principal and interest only from payments collected on the
assets of the related trust; and
- will not be insured or guaranteed by any government agency or
instrumentality and will not be obligations of GE Capital Mortgage
Services, Inc., GE Capital Mortgage Funding Corporation or any related
companies.
EACH TRUST:
- will own a pool of mortgage loans sold to the trust by either GE Capital
Mortgage Services, Inc. or GE Capital Mortgage Funding Corporation;
- will be serviced by GE Capital Mortgage Services, Inc.; and
- will include mortgage loans secured by first or second liens on:
-- one- to four-family residential properties; and
-- rights to own and occupy apartments in cooperative buildings.
------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS SEPTEMBER 21, 1999.
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TABLE OF CONTENTS
CAPTION PAGE
------- ----
Description of the Certificates..... 1
The Agreements.................... 1
Form of Certificates.............. 2
Classes of Certificates........... 2
Distributions of Principal and
Interest.......................... 4
Example of Distributions.......... 6
Optional Termination of a Trust... 8
The Trusts.......................... 9
The Mortgage Loans................ 10
Appraisals........................ 18
Credit Enhancement.................. 19
Types of Enhancements............. 19
Subordination..................... 20
Purchase of Liquidating Loans..... 21
Limited Guarantee of the
Guarantor...................... 22
Cross-Support..................... 23
Pool Insurance.................... 23
Special Hazard Insurance.......... 24
Bankruptcy Bond................... 25
Repurchase Bond................... 26
Guaranteed Investment Contracts... 26
Reserve Accounts.................. 26
Other Insurance, Guarantees and
Similar Instruments or
Agreements........................ 27
Yield, Maturity And Weighted Average
Life Considerations................. 27
General........................... 27
Effective Interest Rate........... 30
Servicing of the Mortgage Loans..... 31
Collection and Other Servicing
Procedures........................ 32
Private Mortgage Insurance........ 35
Hazard Insurance.................. 37
Unanticipated Recoveries of Losses
on the Mortgage Loans............. 38
Advances.......................... 39
Loan Payment Record............... 40
Servicing and Other Compensation
and Payment of Expenses........... 42
Resignation, Succession and
Indemnification of GECMSI, as
Servicer, and the Depositor....... 43
The Pooling and Servicing
Agreement......................... 44
Assignment of Mortgage Loans...... 44
Repurchase or Substitution........ 48
Certain Refinancings.............. 49
Evidence as to Compliance......... 50
List of Certificateholders........ 50
The Trustee....................... 50
CAPTION PAGE
------- ----
Administration of the Certificate
Account........................... 51
Reports to Certificateholders..... 52
Events of Default................. 53
Rights Upon Event of Default...... 53
Amendment......................... 54
Termination....................... 55
Governing Law..................... 55
GE Capital Mortgage Services,
Inc. ............................... 56
Delinquency and Foreclosure
Experience........................ 56
Year 2000 Computer Readiness...... 56
Legal Proceedings................. 57
GE Capital Mortgage Funding
Corporation......................... 57
Risk of Recharacterization........ 58
Where You Can Find More Information
about GE Capital Mortgage Services,
Inc. and GE Capital Mortgage Funding
Corporation......................... 59
The Guarantor....................... 59
Certain Legal Aspects of the
Mortgage Loans...................... 59
General........................... 59
Foreclosure....................... 61
Cooperative Loans................. 63
Junior Mortgages; Rights of Senior
Mortgagees........................ 64
Right of Redemption............... 65
Anti-Deficiency Legislation and
Other Limitations on Lenders...... 65
Enforceability of Certain
Provisions..................... 66
Applicability of Usury Laws....... 67
Soldiers' and Sailors' Civil
Relief Act........................ 68
Environmental Considerations...... 68
Legal Investment Matters............ 69
ERISA Considerations................ 70
Federal Income Tax Consequences..... 72
General........................... 72
REMIC Elections................... 72
REMIC Certificates................ 73
Non-REMIC Certificates............ 85
Trust as Grantor Trust............ 85
Status of the Certificates........ 86
Backup Withholding................ 89
Plan of Distribution................ 89
Use of Proceeds..................... 90
Legal Matters....................... 91
Financial Information............... 91
Index of Certain Prospectus
Definitions....................... 92
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DESCRIPTION OF THE CERTIFICATES
The certificates comprising each series of certificates will represent the
entire beneficial ownership interest in a distinct trust that will issue those
certificates. A series of certificates will be issued under a separate pooling
and servicing agreement entered into among GE Capital Mortgage Services, Inc.
("GECMSI") or GE Capital Mortgage Funding Corporation ("Funding"), as depositor
of the assets in each trust, GECMSI, as servicer of the assets, and a commercial
bank or trust company acting as trustee for the benefit of certificateholders of
the related series.
THE AGREEMENTS
The provisions of each pooling and servicing agreement will vary depending
upon the nature of the certificates to be issued and the nature of the related
trust. This prospectus summarizes the material provisions which may appear in
each agreement. The prospectus supplement for a series of certificates will
describe any other material provision of the agreement relating to such series.
GECMSI will provide certificateholders, without charge, on written request, a
copy of the pooling and servicing agreement for any series. Requests should be
addressed to GE Capital Mortgage Services, Inc., Three Executive Campus, Cherry
Hill, New Jersey 08002, Attention: General Counsel. The pooling and servicing
agreement relating to a series of certificates will be filed by GECMSI or
Funding, as applicable, with the SEC within 15 days after the date of issuance
of such series of certificates.
Source of Funds for Payment
The certificates of a series will be entitled to payment only from the
proceeds from the assets included in the trust issuing such series. You will not
be entitled to payments from the assets included in any other trust established
by GECMSI or Funding. The certificates are not obligations of General Electric
Company, General Electric Capital Corporation, GE Capital Mortgage Corporation,
General Electric Mortgage Insurance Corporation, GECMSI, Funding or any other
affiliate of GECMSI or Funding. The certificates will not be guaranteed by any
governmental agency or any other person.
The depositor and the servicer of the mortgage loans for a trust will each
have limited obligations to the trust. Unless otherwise stated in the prospectus
supplement:
- The depositor's obligations will be limited to repurchasing mortgage
loans or cooperative apartment loans in the trust if the depositor
breaches its representations and warranties concerning the loans.
- The only obligations of GECMSI as servicer for the trust will be its
contractual servicing and/or master servicing obligations, including any
obligation under certain limited circumstances to make advances of
delinquent installments of principal, interest or both, adjusted in the
case of interest to the weighted average rate at which interest accrues
on the related series of certificates. This obligation will arise when
any borrower fails to make any payment of interest or, except in the case
of a home equity loan, principal required under the terms of a mortgage
loan in the trust. GECMSI will be obligated to advance the entire amount
of such payment, net of the applicable servicing fee, less the amount of
the payment that GECMSI reasonably believes will not be recoverable to it
out of liquidation proceeds or otherwise. You should refer to "The
Pooling and Servicing Agreement --
77
Assignment of Assets" and "-- Repurchase or Substitution" and Servicing
of the Mortgage Loans -- Advances" in this prospectus.
The mortgage loans in the trust will not be insured or guaranteed by any
governmental entity or, except as specified in the prospectus supplement, by any
other person. You may experience delays in distributions on your certificates or
losses on your certificates if delinquent payments or losses on defaulted
mortgage loans are not advanced by the servicer or another person or paid from
any credit enhancement arrangement in your trust.
FORM OF CERTIFICATES
The certificates of each series will be issued in fully-registered form
only. The minimum original principal balance or notional principal balance that
may be represented by a certificate (the "denomination") will be specified in
the prospectus supplement. The original principal balance of each certificate
will equal the aggregate distributions allocable to principal to which such
certificate is entitled. Unless otherwise stated in the prospectus supplement,
interest distributions on each certificate that is not entitled to distributions
allocable to principal will be calculated based on the notional principal
balance of such certificate. The notional principal balance of a certificate
will not evidence an interest in or entitlement to distributions allocable to
principal but will be used solely for convenience in determining the interest
payable on such certificate, the denomination of the certificate and the voting
rights of its holder. You will not receive the notional principal balance of
your certificate.
Except for global certificates described in the next paragraph, you may
transfer and exchange your certificates on a certificate register to be
maintained at the corporate trust office of the trustee or an office or agency
maintained for such purposes by the trustee in New York City. Unless otherwise
stated in the prospectus supplement, the trustee will initially act as the
certificate registrar. Unless otherwise stated in the prospectus supplement, no
service charge will be made for any registration of transfer or exchange of
certificates, but payment of a sum sufficient to cover any tax or other
governmental charge may be required. Before a certificate is properly presented
for transfer, GECMSI, the trustee, the certificate registrar and any of their
agents may treat the person in whose name a certificate is registered as the
owner of such certificate for the purpose of receiving distributions of
principal and interest and for all other purposes under the pooling and
servicing agreement.
For certain classes of certificates specified in the applicable prospectus
supplement, investors will not have the right to receive physical certificates
evidencing their ownership except under limited circumstances. Instead, the
trust will issue the certificates in the form of global certificates, which will
be held by The Depository Trust Company, known as DTC, or its nominee. Financial
institutions that are direct or indirect participants in DTC will record
beneficial ownership of a certificate by individual investors in the authorized
denominations.
CLASSES OF CERTIFICATES
Each series of certificates will be issued in a single class or in two or
more classes. The certificates of each class will be entitled to receive:
- any distributions from the assets of the trust that are allocable to
principal, in the aggregate amount of the original principal balance, if
any, of such class of certificates; and
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78
- any distributions from the assets of the trust that are allocable to
interest on the principal balance or notional principal balance of such
certificates at the interest rate, if any, payable on such class of
certificates.
If stated in the prospectus supplement, one or more classes of a series of
certificates may be entitled to receive all amounts payable on a specific group
of assets in the related trust.
If stated in the prospectus supplement, the certificates will have an
aggregate original principal balance equal to the aggregate unpaid principal
balance of the mortgage loans as of the close of business on the first day of
the month of creation of the trust (the "Cut-off Date") after deducting payments
of principal due on or before, and prepayments of principal received before, the
Cut-off Date. The certificates will bear interest in the aggregate equal to the
weighted average of the Remittance Rates. The "Remittance Rate" will equal the
rate of interest payable on each mortgage loan in the pool minus GECMSI's
servicing fee as described herein, the servicing fee of any third party servicer
of the mortgage loans and such other amounts (including fees payable to GECMSI
as master servicer, if applicable) as are stated in the prospectus supplement.
If stated in the prospectus supplement, the original principal balance of the
certificates and the interest rate on the classes of certificates will be
determined based on the cash flow on the mortgage loans.
Each class of certificates that is entitled to distributions allocable to
interest will bear interest at a fixed rate or a rate that is subject to change
from time to time (a) in accordance with a schedule, (b) in reference to a
widely published interest rate index such as the London Interbank Offered Rate
(LIBOR) or (c) otherwise, in each case as specified in the prospectus
supplement. One or more classes of certificates may provide for interest that
accrues, but is not currently payable ("Accrual Certificates"). With respect to
any class of Accrual Certificates, if stated in the prospectus supplement, any
interest that has accrued but is not paid on a given distribution date will be
added to the aggregate principal balance of such class of certificates on that
distribution date, as described below under "-- Distributions of Principal and
Interest."
A series of certificates may include one or more classes entitled only to
distributions:
- allocable to interest;
- allocable to principal (and allocable as between scheduled payments of
principal and Principal Prepayments, as defined below); or
- allocable to both principal (and allocable as between scheduled payments
of principal and Principal Prepayments) and interest.
A series of certificates may consist of one or more classes as to which
distributions will be allocated:
- on the basis of collections from designated portions of the assets of the
trust;
- in accordance with a schedule or formula;
- in relation to the occurrence of events; or
- otherwise, in each case as stated in the prospectus supplement.
The timing and amounts of such distributions may vary among classes, over
time or otherwise, in each case as stated in the prospectus supplement.
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79
The taking of action with respect to certain amendments to the pooling and
servicing agreement will require the consent of the holders of the certificates.
Consent is required of certificateholders evidencing interests aggregating
either not less than 66% of all interests in the related trust or not less than
66% of all interests of each class that would be adversely affected by the
amendment. Every certificateholder must consent to an amendment that would
reduce the amount of, or delay the timing of, distributions on the certificates
or collection of payments on mortgage loans. The voting rights allocated to each
class of certificates will be specified in the prospectus supplement. Votes may
be allocated in different proportions among classes of certificates depending on
whether the certificates of a class have a principal balance or a notional
principal balance. See "The Pooling and Servicing Agreement -- Amendment" in
this prospectus.
DISTRIBUTIONS OF PRINCIPAL AND INTEREST
General
Distributions of principal and interest at the applicable interest rate (if
any) on the certificates will be made by the trustee out of funds available on
the distribution dates specified in the prospectus supplement. Distribution
dates may be monthly, quarterly, semiannually or at another interval specified
in the prospectus supplement. Distributions will be made to the persons in whose
names the certificates are registered at the close of business on the last
business day of the preceding month (each, a "Record Date"). Distributions will
be made by check or money order mailed to the person entitled thereto at the
address appearing in the certificate register or, if specified in the prospectus
supplement, in the case of certificates that are of a certain minimum
denomination as specified in the prospectus supplement, upon written request by
the certificateholder, by wire transfer or by such other means as are agreed
upon with the person entitled thereto. The final distribution in retirement of
the certificates will be made only upon presentation and surrender of the
certificates at the office or agency of the trustee specified in the notice to
certificateholders of such final distribution. All distributions on global
certificates held by DTC will be made to DTC, which will credit the accounts of
its direct participants. If you hold an interest in a global certificate, you
will have to rely on your financial intermediary to forward you the payments.
Distributions allocable to principal and interest on the certificates will
be made by the trustee out of, and only to the extent of, funds in a separate
account established and maintained under the pooling and servicing agreement for
the benefit of holders of the certificates of the related series (the
"Certificate Account"). As between certificates of different classes and as
between distributions of principal (and, if applicable, between distributions of
Principal Prepayments and scheduled payments of principal) and interest,
distributions made on any distribution date will be applied in the manner
specified in the prospectus supplement. Unless otherwise stated in the
prospectus supplement, distributions to any class of certificates will be made
pro rata to all certificateholders of that class. If stated in the prospectus
supplement, the amounts received by the trustee as described below under "The
Trusts" will be invested in the following, or in other investments specified in
the prospectus supplement, which together constitute the "Eligible Investments":
(1) obligations of, or guaranteed as to timely receipt of principal
and interest by, the United States or any agency or instrumentality thereof
when such obligations are backed by the full faith and credit of the United
States;
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(2) repurchase agreements on obligations specified in clause (1),
provided that the unsecured obligations of the party agreeing to repurchase
such obligations are at the time rated by each rating agency rating the
certificates in the highest long-term rating category;
(3) federal funds, certificates of deposit, time deposits and banker's
acceptances, of any U.S. depository institution or trust company
incorporated under the laws of the United States or any state, provided
that the debt obligations of such depository institution or trust company
at the date of acquisition thereof have been rated by each rating agency
rating the certificates in the highest long-term rating category;
(4) commercial paper of any corporation incorporated under the laws of
the United States or any state thereof which on the date of acquisition has
the highest short term rating of each rating agency rating the
certificates; and
(5) other obligations or securities that are acceptable to each rating
agency rating the certificates as an Eligible Investment hereunder and will
not, as evidenced in writing, result in a reduction or withdrawal in the
then current rating of the certificates.
All income or other gain from such investments will be deposited in the
Certificate Account and will be available to make payments on the certificates
on the next succeeding distribution date in the manner specified in the
prospectus supplement.
Distributions of Interest
Unless otherwise stated in the prospectus supplement, interest will accrue
on each class of certificates entitled to interest from the date, at the
interest rate and for the periods (each, an "Interest Accrual Period") specified
in the prospectus supplement. Interest will accrue on the aggregate principal
balance of your certificate, or if your certificate is an interest-only class,
interest will accrue on its notional principal balance. To the extent funds are
available therefor, interest accrued during each Interest Accrual Period will be
distributable on the distribution dates specified in the prospectus supplement
until the aggregate principal balance of the certificates of such class has been
distributed in full or, in the case of interest-only classes, until the
aggregate notional principal balance of such certificates is reduced to zero.
Unless otherwise stated in the prospectus supplement, distributions of interest
on each class of Accrual Certificates will commence only after the occurrence of
the events specified in the prospectus supplement. Unless otherwise stated in
the prospectus supplement, prior to such time, the aggregate principal balance
of such class of Accrual Certificates will increase on each distribution date by
the amount of interest that would have been distributed on such class but that
was not required to be distributed to such class on such distribution date. Any
such class of Accrual Certificates will thereafter accrue interest on its
outstanding principal balance as so stated.
Distributions of Principal
Unless otherwise stated in the prospectus supplement, the aggregate
principal balance of any class of certificates entitled to distributions of
principal will be:
- the aggregate original principal balance of such class of certificates;
minus
- all distributions made to the holders of such certificates as allocable
to principal; minus
- all realized losses allocated to such class; and plus
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81
- in the case of Accrual Certificates, unless otherwise stated in the
prospectus supplement, all interest accrued less its allocable share of
shortfalls, but not then distributable on such Accrual Certificates.
The prospectus supplement will specify the method by which the amount of
principal to be distributed on the certificates on each distribution date will
be calculated and the manner in which such amount will be allocated among the
classes of certificates entitled to distributions of principal.
If stated in the prospectus supplement, one or more classes of senior
certificates will be entitled to receive all or a disproportionate percentage of
the payments or other recoveries of principal on a mortgage loan which are
received in advance of their scheduled due dates and not accompanied by amounts
of interest representing scheduled interest due after the month of such payments
("Principal Prepayments") in the percentages and under the circumstances or for
the periods specified in the prospectus supplement. Any such allocation of
Principal Prepayments to such senior classes will have the effect of
accelerating the reduction of the principal balances of the certificates for
those classes while increasing the interests in the trust held by the other,
subordinate, classes. Increasing the interests of the subordinated certificates
relative to that of the senior certificates is intended to preserve the benefits
to the senior certificates of the subordination provided by the subordinated
certificates. See "Credit Enhancement -- Subordination."
Unscheduled Distributions
If stated in the prospectus supplement, the trustee will make unscheduled
distributions of principal on the certificates at the time and in the amount
specified if the amount anticipated to be on deposit in the Certificate Account
on the next date of distribution on the certificates, together with, if
applicable, any amounts available to be withdrawn from any reserve account, may
be insufficient to make required distributions on the certificates on such
distribution date. Unless otherwise stated in the prospectus supplement, the
amount of any such unscheduled distribution that is allocable to principal will
not exceed the amount that would otherwise have been required to be distributed
as principal on the certificates on the next distribution date. Unless otherwise
stated in the prospectus supplement, all distributions allocable to principal in
any unscheduled distribution will be made in the same priority and manner as
distributions of principal on the certificates would have been made on the next
distribution date. Notice of any unscheduled distribution will be given by the
trustee prior to the date of such distribution.
EXAMPLE OF DISTRIBUTIONS
The following chart sets forth an example of hypothetical distributions on
a series of the certificates for the distribution date occurring in May 1999,
assuming such certificates are issued during March 1999. All references to the
trust, certificateholders, mortgage loans, Loan Payment Record and Certificate
Account refer to those related to such series of certificates. We have assumed
that all dates are business days. The following discussion of the allocation of
mortgage loan payments as between principal and interest would not necessarily
apply to simple-interest home equity loans or mortgage loans that do not provide
for payments of principal and interest in arrears on a monthly basis, and if a
series of certificates is backed by a material amount of such mortgage loans,
the prospectus supplement will describe the allocation of such payments and the
manner in which distributions thereof will be made to certificateholders. If, as
stated in the prospectus supplement, one or more classes of a series of
certificates are payable from a specific group of assets in the related trust,
the following discussion would be applicable to such classes and the mortgage
loans from which such payments will be made on such certificates.
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MARCH 1...................... Cut-off Date. The aggregate unpaid principal
balance of the mortgage loans after deducting
principal payments due and payable on or before
March 1 and Principal Prepayments received
before March 1 will be included in the trust.
These deducted principal payments and Principal
Prepayments will be retained by Funding or
GECMSI and will not be included in the trust or
passed through to certificateholders.
APRIL 1-30................... Voluntary principal prepayments in full, and
interest thereon to the date of prepayment,
received from April 16 through April 30 will be
passed through to the related certificateholders
on May 25, 1999. Voluntary principal prepayments
in full received by the servicer -- or, in the
case of mortgage loans master-serviced by the
servicer, of which the servicer receives
notice -- from April 1 through April 15 will be
passed through to the certificateholders, net of
any interest thereon, in the month of their
receipt. Other unscheduled prepayments received
at any time during the month will be passed
through to the related certificateholders on May
25.
APRIL 30..................... Record Date. Distributions on May 25 will be
made to certificateholders of record at the
close of business on the last business day of
March.
MAY 1-17..................... Through May 15, the servicer receives -- or, in
the case of mortgage loans master-serviced by
the servicer, receives notice of -- any
voluntary principal prepayments in full and
interest thereon to the date of prepayment. Such
principal prepayments, net of any interest, will
be credited to the Loan Payment Record and
deposited into the Certificate Account for
distribution to the related certificateholders
on May 25. Through May 17, the servicer receives
interest on April 1 principal balances plus
principal due May 1. Payments due on May 1 from
mortgagors will be credited to the Loan Payment
Record as received. Such payments will include
the scheduled principal payments received, plus
one month's interest on the April 1 principal
balances, less interest to the extent described
above on the prepaid amount of any mortgage loan
prepaid during April. Payments received from
mortgagors after May 15 will be subject to a
late charge in accordance with the terms of the
related mortgage instruments. These late charges
will be retained by the servicer.
MAY 18....................... Determination Date. On the fifth business day
preceding the distribution date, GECMSI
determines the aggregate amount of distributions
to be made on the certificates on the following
distribution date.
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83
MAY 23....................... GECMSI furnishes notice of the distribution
amount to the trustee on the second business day
preceding the distribution date.
MAY 24....................... Deposit Date. On the business day preceding the
distribution date, GECMSI transfers amounts to
be distributed to certificateholders in the
Certificate Account.
MAY 25....................... Distribution Date. On May 25, the trustee will
distribute to certificateholders the aggregate
amounts set forth in the notice it received from
GECMSI on May 23. If a payment due May 1 is
received from a mortgagor on or after the date
on which GECMSI determines the aggregate amount
of distributions to be made on the certificates
and the servicer has advanced funds in the
amount of such payment to the
certificateholders, such late payment will be
paid to GECMSI. If no such advance has been
made, such late payment will be passed through
to such certificateholders at the time of the
next distribution.
OPTIONAL TERMINATION OF A TRUST
If stated in the prospectus supplement, either GECMSI, Funding or the
holders of one or more classes of certificates specified in the prospectus
supplement may, at its or their option, effect early termination of the trust,
on any distribution date after the time specified in the prospectus supplement,
by purchasing all of the certificates or the assets in the trust at a price and
in accordance with the procedures specified in the prospectus supplement. The
proceeds of this sale will be applied on such distribution date to the
distribution in full of the principal balance of each outstanding certificate
entitled to distributions allocable to principal and to accrued interest at the
applicable interest rate to the date specified in the prospectus supplement on
each certificate entitled to distributions allocable to interest, or to such
other amount as is specified in the prospectus supplement. Notice of such
optional termination will be given by the trustee prior to such distribution
date. The proceeds realized upon an early termination may be less than the total
principal balance of all outstanding certificates plus accrued and unpaid
interest. In this case, the resulting shortfall will be allocated among the
certificates as described in the prospectus supplement.
It is anticipated that GECMSI, Funding or the holders of designated classes
of certificates that can exercise an early termination option will buy the
assets in the trust for a price equal to the sum of the following:
- the unpaid principal balance of each mortgage loan on the first day of
the month of repurchase, plus accrued interest to such date at the
Remittance Rate for the certificates issued by the trust; plus
- the appraised value of any mortgaged properties acquired by the trust, as
determined by an appraiser mutually agreed upon with the trustee; minus
- the servicer's good faith estimate of liquidation expenses that would be
incurred in disposing of these mortgaged properties; and minus
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84
- unreimbursed monthly advances of principal or interest by the servicer if
it is the person exercising the early termination option.
The assets will be sold by the trust in connection with any early
termination without representation or warranty, except as to the trust's title,
and without recourse. No holder of any class of certificates will be entitled to
any share of unanticipated recoveries received after the termination of the
trust. See "Unanticipated Recoveries of Losses on the Mortgage Loans" in this
prospectus.
THE TRUSTS
The trust issuing a series of certificates may include the following
assets:
- the mortgage loans subject to the related pooling and servicing agreement
from time to time;
- all payments (subject, if specified in the prospectus supplement, to
certain exclusions) in respect of such mortgage loans, adjusted for the
applicable Remittance Rates;
- if specified in the prospectus supplement, reinvestment income on such
payments;
- all property acquired by foreclosure or deed in lieu of foreclosure with
respect to any mortgage loan;
- all rights of the depositor of the mortgage loans under any private
mortgage insurance policies and any other insurance policies required to
be maintained in respect of the mortgage loans;
- if Funding acts as depositor, its rights and remedies under the Loan Sale
Agreement (as defined below); and
- if so specified in the prospectus supplement, one or more of the
following:
- any Reserve Accounts;
- any loan as to which either (1) liquidation proceedings have been
commenced and any equitable or statutory right to reinstate such
mortgage loan has expired or (2) GECMSI, as servicer, has agreed to
accept a deed in lieu of foreclosure, in each case for a price equal
to 100% of the principal balance of such mortgage loan, plus, unless
otherwise stated in the prospectus supplement, one month's interest
thereon at the applicable Remittance Rate (a "Liquidating Loan");
- an advance of interest or principal by the servicer;
- a guarantee that deposits will be made to the Certificate Account (a
"Deposit Guarantee"); or
- any pool insurance, special hazard insurance or other insurance,
guarantee or similar instruments or agreements.
GECMSI will have originated or acquired each mortgage loan included in a
trust. If Funding acts as the depositor of the mortgage loans in the trust, it
will have acquired the related mortgage loans from GECMSI pursuant to a loan
sale agreement (a "Loan Sale Agreement").
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The following is a brief description of the mortgage loans expected to be
included in the trusts. If definitive information respecting the final pool of
mortgage loans is not known at the time the related series of certificates
initially is offered, information of the nature described below with respect to
the anticipated pool will be provided in the prospectus supplement, and
definitive information with respect to the final pool will be set forth in a
report on Form 8-K to be filed with the Securities and Exchange Commission
within fifteen days after the initial issuance of such certificates. The
definitive description of the mortgage loan pool will specify:
- the precise aggregate Scheduled Principal Balance, as defined in the
prospectus supplement, of the mortgage loans as of the Cut-off Date;
- years of origination;
- mortgage interest rates borne by the mortgage loans;
- original loan-to-value ratios;
- types of properties securing the mortgage loans; and
- geographical distribution of the mortgage loans by state.
The definitive description of the mortgage pool also will specify the
original principal balance, or, in the case of interest-only certificates, the
notional principal balance, of each class of certificates on the date of
issuance of the certificates, and information regarding the exact amount of any
forms of credit enhancement, if applicable. The aggregate principal balance of
the final pool will be within 5% of the amount stated in the prospectus
supplement. A copy of the pooling and servicing agreement for each trust and its
exhibits with respect to each series of certificates will be attached to the
definitive description and will be available for inspection at the corporate
trust office of the trustee specified in the related prospectus supplement. A
schedule of the mortgage loans relating to such series will be attached to the
pooling and servicing agreement delivered to the trustee upon delivery of the
certificates.
THE MORTGAGE LOANS
Description of the Mortgage Loans
The mortgage loans will be evidenced by promissory notes secured by
mortgages or deeds of trust. The mortgages create the following liens:
- first liens on residential properties;
- first or second liens on mortgaged properties securing closed-end home
equity loans ("Home Equity Loans"); or
- first liens on long-term leases of mortgaged properties.
The mortgage loans will be within the broad classification of one- to
four-family mortgage loans. These are defined generally as (1) loans secured by
mortgages on residences housing one to four families, (2) apartment loans
secured by mortgages on condominium units and (3) loans secured by mortgages on
leasehold estates. The mortgage loans may include cooperative apartment loans
("Cooperative Loans") secured by security interests in shares issued by private,
non-profit, cooperative housing corporations and in the related proprietary
leases or occupancy agreements granting exclusive rights to owners to occupy
specific apartments in a cooperative building.
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The mortgage loans will be "conventional" mortgage loans; i.e., they will
not be insured or guaranteed by any governmental agency.
The mortgaged properties securing the mortgage loans will be located in one
or more states in the United States, the District of Columbia, Puerto Rico,
Guam, the U.S. Virgin Islands and other territories of the United States and may
include investment properties and vacation and second homes.
Each mortgage loan will be selected by the depositor of the mortgage loans
for inclusion in a trust from among those originated or acquired by GECMSI in
the ordinary course of its mortgage lending activities, including newly
originated loans.
Unless otherwise stated in the prospectus supplement, the mortgage loans
(other than Home Equity Loans) will have initial principal balances of not less
than the minimum amount permitted under the laws of the state where the related
mortgaged property is located and not more than $1,000,000 and will have
original maturities of 10 to 30 years. Unless otherwise stated in the prospectus
supplement, principal and interest on the mortgage loans (other than Home Equity
Loans that employ the simple interest method) will be payable on the first day
of each month, and interest will be calculated based on a 360-day year of twelve
30-day months. When a full payment of principal is made on a mortgage loan
during a month, the mortgagor is charged interest only on the days of the month
actually elapsed up to the date of such prepayment, at a daily interest rate
that is applied to the principal amount of the loan so prepaid. When a partial
prepayment of principal is made on a mortgage loan other than a Home Equity Loan
during a month, the mortgagor generally will not be charged interest on the
amount of the partial prepayment during the month in which such prepayment is
made.
If stated in the prospectus supplement, all or a portion of the mortgage
loans included in a trust may be Home Equity Loans. The Home Equity Loan portion
of any trust may consist of loans secured by first liens or by first and second
liens. Unless otherwise stated in the prospectus supplement, Home Equity Loans
will have initial principal balances within the ranges permitted under the laws
of the state where the related mortgaged property is located and will have
original maturities of 5 to 30 years. Interest on Home Equity Loans will be
calculated on the basis of either a 360-day year or 365-day year, depending on
applicable state law. As specified in the prospectus supplement, interest on
Home Equity Loans will accrue on a simple interest basis or on a
fully-amortizing basis. Under the simple interest method, regularly scheduled
payments, which are based on the amortization of the loan over a series of equal
monthly payments, and other payments are applied first to interest accrued to
the date payment is received, then to principal. See "Yield, Maturity and
Weighted Average Life Considerations."
GECMSI also originates and acquires balloon loans. If stated in the
prospectus supplement, the Home Equity Loans may include balloon loans. Such
loans may be originated with a stated maturity of 15 years but may on occasion
be originated with a shorter stated maturity. Notwithstanding the 15-year
maturity, level monthly payments on such a balloon loan would typically be
calculated on an amortization -- i.e., principal reduction -- schedule based on
a 30-year maturity. As a result, upon the maturity of a balloon loan, the
borrower will be required to make a balloon payment, which will be significantly
larger than such borrower's previous monthly payments. The ability of such
borrower to repay the balloon loan at maturity frequently will depend on such
borrower's ability to refinance the loan.
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The mortgage loans may be purchase-money loans used by the borrowers to
acquire the related mortgaged properties or may be loans used by the borrowers
to refinance existing mortgage loans. A refinancing may be a cash-out loan, the
principal balance of which exceeds the sum of the amount needed to repay the
loan being refinanced plus closing costs and points associated with the new
mortgage loan, or may be a non-cash-out or rate-and-term refinancing in which
the borrower refinances the loan solely to change the interest rate or term of
the mortgage loan.
The payment terms of the mortgage loans to be included in a trust will be
described in the related prospectus supplement and may include any of the
following features or combinations thereof or other features described in the
related prospectus supplement:
- Interest may be payable at a fixed rate, a rate adjustable from time to
time in relation to an index, a rate that is fixed for a period of time
or under certain circumstances and is followed by an adjustable rate, a
rate that otherwise varies from time to time, or a rate that is
convertible from an adjustable rate to a fixed rate. Changes to an
adjustable rate may be subject to periodic limitations, maximum rates,
minimum rates or a combination of such limitations. Accrued interest may
be deferred and added to the principal of a loan for such periods and
under such circumstances as may be specified in the related prospectus
supplement. Mortgage loans may provide for the payment of interest at a
rate lower than the specified mortgage rate for a period of time or for
the life of the loan with the amount of any difference contributed from
funds supplied by the seller of the mortgaged property or another source.
- Principal may be payable on a level debt service basis to fully amortize
the loan over its term, may be calculated on the basis of an amortization
schedule that is significantly longer than the original term to maturity
or on an interest rate that is different from the interest rate on the
mortgage loan or may not be amortized during all or a portion of the
original term. Payment of all or a substantial portion of the principal
may be due on maturity. Principal may include interest that has been
deferred and added to the principal balance of the mortgage loan. In the
case of Home Equity Loans, payments are applied first to interest accrued
to the date payment is received, then to principal.
- Monthly payments of principal and interest may be fixed for the life of
the loan, may increase over a specified period of time or may change from
period to period. Mortgage loans may include limits on periodic increases
or decreases in the amount of monthly payments and may include maximum or
minimum amounts of monthly payments.
- Prepayments of principal may be subject to a prepayment fee, which may be
fixed for the life of the loan or may decline over time, and may be
prohibited for the life of the loan or for certain periods known as
lockout periods. Certain loans may permit prepayments after expiration of
the applicable lockout period and may require the payment of a prepayment
fee in connection with any such subsequent prepayment. Other loans may
permit prepayments without payment of a fee unless the prepayment occurs
during specified time periods. The loans may include due-on-sale clauses
which permit the mortgagee to demand payment of the entire mortgage loan
in connection with the sale or certain transfers of the related mortgaged
property. Other mortgage loans may be assumable by persons meeting the
then applicable underwriting standards of GECMSI.
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It is anticipated that the mortgage loans in each trust will consist
primarily of mortgage loans secured by mortgaged properties determined by GECMSI
to be the primary residences of the borrowers. The basis for such determination
will be the making of a representation by the borrower in his or her loan
application that he or she intends to use the underlying property as his or her
primary residence.
The prospectus supplement will contain the following information regarding
the mortgage loans: (1) the interest rates, (2) the average Principal Balance,
as defined below, and the aggregate Principal Balance of the mortgage loans as
of the related Cut-off Date, (3) the years of origination and (4) the original
principal balances and the original loan-to-value ratios of the mortgage loans.
The "Principal Balance" of any mortgage loan (other than a Home Equity Loan)
will be the unpaid principal balance of such mortgage loan as of the Cut-off
Date, after deducting any principal payments due on or before the Cut-off Date,
reduced by all principal payments, including principal payments advanced
pursuant to the pooling and servicing agreement for each trust, previously
distributed to certificateholders with respect to such mortgage loan and
reported to them as allocable to principal. The "Principal Balance" of any Home
Equity Loan as of the Cut-off Date will be the unpaid principal balance thereof
as of such date. The prospectus supplement will also contain information
regarding the geographic distribution and nature of the mortgaged properties
securing the mortgage loans.
Unless otherwise stated in the prospectus supplement, the loan-to-value
ratio of any mortgage loan will be determined by dividing (1) the amount of such
loan, without taking into account any secondary financing, by (2) the Original
Value of the related mortgaged property. The principal amount of the loan, for
purposes of computation of the loan-to-value ratio of any mortgage loan, will
include any part of an origination fee that has been financed. The Original
Value of a mortgaged property is:
- in the case of a purchase money mortgage loan, the lesser of the value of
the mortgaged property, based on an appraisal thereof acceptable to
GECMSI, and the selling price; and
- in the case of any non-purchase money mortgage loan, the value of the
mortgaged property, based on either the appraised value determined in an
appraisal obtained at the time of refinancing or origination of such loan
or, if no such appraisal has been obtained, the value of the related
mortgaged property. In the latter case, the value generally will be
supported by either (1) a representation by the related correspondent as
to such value; (2) a broker's price opinion, automated appraisal,
drive-by appraisal or other certification of value; (3) an appraisal
obtained within twelve months prior to such refinancing or origination;
or (4) the sales price, if the mortgaged property was purchased within
the previous twelve months.
In the case of seasoned mortgage loans acquired by GECMSI, the values used
in calculating loan-to-value ratios may no longer be accurate valuations of the
mortgaged properties. Under GECMSI's underwriting standards, a correspondent or
other third-party seller is generally permitted to provide secondary financing
(or subordinate existing secondary financing) to, or obtain such secondary
financing for, a mortgagor contemporaneously with the origination of a mortgage
loan, provided that the combined loan-to-value ratio does not exceed GECMSI's
underwriting guidelines for the specific loan program. Secondary financing is
readily available and may be obtained by a mortgagor from a variety of lenders,
including the related correspondent or other third-party seller, at any time,
including at origination of the mortgage loan.
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Loan Production Sources
GECMSI acquires the mortgage loans that may underlie a series of
certificates in various ways:
- by purchasing mortgage loans originated or otherwise acquired by its
approved correspondents or other approved third parties;
- by closing mortgage loans originated through loan brokers eligible to
refer applications to GECMSI;
- by refinancing mortgage loans in its own servicing portfolio; and
- by originating loans with borrowers who currently have mortgage loans
serviced by GECMSI.
GECMSI may purchase loans from correspondents or other third parties either
for contemporaneous delivery or for delivery in one or more pools on a
forward-delivery basis at some future date.
GECMSI's mortgage loan correspondents and loan brokers are certain lending
institutions that satisfy GECMSI's financial and operational criteria,
demonstrate experience in originating mortgage loans and follow GECMSI's loan
underwriting standards or other loan underwriting standards approved by GECMSI.
Except as described below, GECMSI generally reviews each mortgage loan for
compliance with its underwriting standards before accepting delivery from its
correspondents. Under GECMSI's "delegated underwriting" program, however, GECMSI
delegates all underwriting functions to certain approved correspondents. In such
cases, GECMSI will not perform any underwriting functions prior to its
acquisition of the loans, instead relying on the representations and warranties
of its correspondents and on post-purchase reviews of the material loan
documents and samplings of the loans for compliance with applicable underwriting
standards. Mortgage loans originated by a correspondent may be closed in the
name of such correspondent and acquired by GECMSI or, to a lesser extent, closed
in the name of GECMSI. Mortgage loans originated by GECMSI through loan brokers
are generally underwritten by GECMSI, processed by the broker on behalf of
GECMSI as well as by GECMSI, and closed in GECMSI's name.
GECMSI purchases portfolios of loans from other third-party sellers in
negotiated transactions. Before making such purchases, GECMSI generally
determines that such sellers satisfy GECMSI's financial and operational
criteria, have demonstrated experience in originating or acquiring single-family
mortgage loans and have followed loan underwriting standards acceptable to
GECMSI.
Loans acquired from GECMSI's correspondents and brokers will generally have
been recently originated. Loans acquired in bulk whole loan sales from
correspondents and from other third parties in negotiated transactions are more
likely to include loans that have been outstanding for a period of time. The
prospectus supplement will provide information with respect to the origination
dates and the remaining terms to maturity of the mortgage loans included in the
related trust.
Loan Underwriting Policies
The mortgage loans in a trust will generally have been originated in
accordance with the underwriting standards described below. In the case of
mortgage loans sold to GECMSI by certain approved correspondents who have
exhibited strong financial performance and have delinquency and foreclosure
rates with respect to their conventional
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loan portfolios acceptable to GECMSI, GECMSI may vary some of the generally
acceptable underwriting standards and program criteria described herein, such as
required documentation levels, loan-to-value ratios and the mortgagors' debt and
income ratios. If a significant portion of the mortgage loans included in any
trust have been originated or acquired by GECMSI under materially different
standards from those described herein, the related prospectus supplement will
describe such standards.
The underwriting standards applied by GECMSI in acquiring or originating
mortgage loans are intended to evaluate the prospective borrower's credit
standing and ability to repay the loan and the value and adequacy of the
underlying mortgaged property as collateral for the loan. In applying these
standards, GECMSI must be satisfied that the value of the property being
financed supports, and will continue to support, the outstanding loan balance.
GECMSI may require that mortgage loans that are not eligible for purchase by
Freddie Mac or Fannie Mae be underwritten by a nationally-recognized third-party
underwriter approved by GECMSI. In such cases, as well as in cases of loans
originated under GECMSI's delegated underwriting program as described above in
"-- Loan Production Sources" and in the case of loans sold by certain
third-party sellers, the determination of a mortgage loan's compliance with the
underwriting standards described herein will be made by the related underwriter.
In acquiring or originating residential mortgage loans, GECMSI follows
procedures established to comply with applicable federal and state laws and
regulations. In applying for a loan, a prospective borrower is generally
required to supply detailed information for a loan application designed to
provide pertinent credit information about the prospective mortgagor, the
property to be purchased or that will serve as the security for the loan, and
the type of loan desired. The application generally includes a description of
the prospective borrower's assets and liabilities and income and expenses.
GECMSI also usually requires a credit report that summarizes the prospective
mortgagor's credit with merchants and lenders and, in the case of second-lien
Home Equity Loans, a written or telephonic verification of the first mortgage
balance and payment history. GECMSI may, as part of its overall evaluation of
the prospective borrower's creditworthiness, use a credit scoring model and/or
mortgage scoring model to evaluate in a statistical manner the expected
performance of a mortgage loan based on the pertinent credit information
concerning the prospective mortgagor supplied through national credit bureaus,
certain other information provided by the prospective borrower and an assessment
of specific mortgage loan characteristics, including loan-to-value ratio, type
of loan product and geographic location. GECMSI expects to place greater
reliance on a prospective mortgagor's credit and/or mortgage scores in the
underwriting process.
The extensiveness of the documentation that GECMSI requires in connection
with the verification of a prospective borrower's employment status, income,
assets and adequacy of funds to close varies from full documentation to limited
documentation, as further described below. GECMSI may raise or lower its
documentation requirements depending upon such factors as the net worth and
financial performance of the correspondent or other third party selling the
mortgage loans and the performance of such correspondent's mortgage loan
portfolio. In addition, GECMSI will take into account the performance of those
mortgage loans previously sold to it by such correspondent or third party
seller, as well as factors particular to a mortgage loan such as the credit
history of the individual borrower, the loan-to-value ratio of the loan and the
prospective mortgagor's credit and/or mortgage scores.
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The following paragraphs describe some of GECMSI's loan documentation
programs.
1. FULL OR ALTERNATIVE DOCUMENTATION
Under a typical full or alternative documentation loan approval process,
verification of the prospective borrower's employment status and current salary
is obtained from records prepared by the employer or by other means satisfactory
to GECMSI. Each prospective borrower who is self-employed is generally required
to submit a copy of his or her federal income tax returns. In the case of
purchase money mortgage loans, GECMSI also generally requires verification that
the borrower has adequate funds to close the mortgage loan. A prospective
borrower may be eligible for a loan approval process permitting limited
documentation if the amount of the mortgage loan, together with, in the case of
a second-lien Home Equity Loan, the unpaid principal balance of the senior
mortgage loan, would not exceed a certain percentage of the original value of
the related mortgaged property and certain other requirements are satisfied.
2. LIMITED DOCUMENTATION
The limited documentation process differs from the full or alternative
documentation process primarily in that it does not require a verification of
the borrower's employment, income and/or assets or, in certain circumstances,
verification of funds to close, and generally places greater reliance on a
prospective mortgagor's credit and/or mortgage scores. Certain of GECMSI's
programs that utilize the limited documentation loan approval process are
described below. A loan application and credit report and, when applicable, a
mortgage or rental reference are usually obtained. A current appraisal is also
generally obtained, except as described below.
3. RELOCATION LOANS
Certain of the mortgage loans (other than Home Equity Loans) may have been
originated or acquired under GECMSI's relocation loan program. Under the
relocation loan program, the related borrower must be a relocating employee, the
relocation loan must be secured by the related borrower's primary residence and
the employer generally must have paid all or a substantial portion of the
relocating employee's closing costs. A relocating employee may be either an
employee transferring from one location to another, a new hire or a participant
in a group relocation. Loan documentation for a relocation loan will generally
be similar to that required for other mortgage loans originated or acquired by
GECMSI, except with respect to the treatment of the income of the spouse of the
relocating employee. If the spouse confirms an intention to seek employment at
the new location, under certain circumstances, a portion of such spouse's income
at the old location may be counted for qualifying for a relocation loan.
Generally, for all relocation loans, the spouse's income at the old location
must also be verified.
4. NO INCOME VERIFICATION PROGRAM
Certain of the mortgage loans (other than Home Equity Loans) may have been
originated or acquired under GECMSI's No Income Verification program, pursuant
to which GECMSI generally will not verify any self-employment or other income of
the borrower. Unless otherwise stated in the prospectus supplement, in order to
qualify for the No Income Verification program, the related borrower generally
must have (1) no delinquent mortgage or rental payments during the preceding 24
months, (2) a minimum of two months' principal, interest, tax and insurance
payments in reserves after the closing of the related loan and (3) acceptable
credit scores.
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5. NO RATIO PROGRAM
Certain of the mortgage loans (other than Home Equity Loans) may have been
originated or acquired under GECMSI's No Ratio program, pursuant to which GECMSI
will verify the assets of the borrower but will not require the borrower to
either complete the income section on the loan application or satisfy any
qualifying housing-to-income or debt-to-income ratios. Unless otherwise stated
in the prospectus supplement, in order to qualify for the No Ratio program, the
related borrower generally must have (1) no delinquent mortgage or rental
payments during the preceding 24 months, (2) a minimum of six months' principal,
interest, tax and insurance payments in reserves after the closing of the
related loan and (3) strong credit scores.
6. NO INCOME NO ASSET VERIFICATION PROGRAM
Certain of the mortgage loans (other than Home Equity Loans) may have been
originated or acquired under GECMSI's No Income No Asset Verification program,
pursuant to which GECMSI will not verify any income or assets of the borrower.
This program is only available to certain approved correspondents who have
exhibited strong financial performance and have delinquency and foreclosure
rates with respect to their conventional loan portfolios acceptable to GECMSI.
Unless otherwise stated in the prospectus supplement, in order to qualify for
the No Income No Asset Verification program, the related borrower generally must
have (1) no delinquent mortgage or rental payments during the preceding 24
months, (2) a stated minimum of six months' principal, interest, tax and
insurance payments in reserves after the closing of the related loan and (3)
strong credit scores.
7. ENHANCED STREAMLINED REFINANCE PROGRAM
Certain of the mortgage loans (other than Home Equity Loans) may have been
originated or acquired under GECMSI's Enhanced Streamlined Refinance program.
Under this program, if GECMSI is currently the servicer of a borrower's
first-lien mortgage loan, GECMSI may originate a rate-and-term, rather than
cash-out, refinance loan which pays off the existing mortgage loan so long as
the existing mortgage loan is current, and the borrower has no more than one
30-day delinquent mortgage payment on the existing mortgage loan during the
preceding 12 months. Under this program, GECMSI generally will not verify any
income or assets of the borrower, and no new appraisal will be required. GECMSI
will, however, represent and warrant in the pooling and servicing agreement that
the value of the related mortgaged property is no less than the value
established at the time the existing mortgage loan was originated.
Upon receipt of appropriate verification, where required, the credit
report, and, in certain cases, the prospective borrower's credit score or
mortgage score, GECMSI (or the delegated underwriter) makes a determination as
to whether the prospective borrower has sufficient monthly income to meet the
monthly payment obligations on the proposed mortgage loan (including real estate
taxes and insurance on the subject property), plus other financial obligations
not expected to be fully repaid within the next ten months and normal monthly
living expenses. In the case of a mortgage loan with more than one borrower
where all the borrowers intend to occupy the mortgaged property, the combined
gross income of all such borrowers is considered for the above computation.
However, GECMSI may depart from a strict application of its guidelines in favor
of other credit considerations, and may permit such a departure in the case of
loans acquired from certain of its approved correspondents and other third-party
sellers. In its evaluation of seasoned
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mortgage loans which have 24 or more months of payment experience, GECMSI
generally places greater emphasis on payment history and may take into account
market and other economic trends while placing less emphasis on underwriting
factors generally applied to newly originated mortgage loans.
APPRAISALS
In assessing the adequacy of properties as collateral for mortgage loans,
an independent appraisal is generally used with respect to each property
considered for financing. Such appraisal generally entails physical inspection
of the property as well as a verification that the property is in good
condition. The appraiser estimates the value of the property based on market
values of comparable homes and, to a lesser extent, the cost of replacing the
property.
No assurance can be given that values of the mortgaged properties have
remained or will remain at the levels which existed on the dates of appraisal of
such mortgaged properties. The appraisal of any mortgaged property reflects the
individual appraiser's judgment as to value, based on the market value of
comparable homes sold within the recent past in comparable nearby locations and
on the estimated replacement cost. Because of the unique locations and special
features of certain mortgaged properties, identifying comparable properties in
nearby locations may be difficult. The appraised values of such mortgaged
properties will be based to a greater extent on adjustments made by the
appraisers to the appraised values of reasonably similar properties. If
residential real estate values generally or in particular geographic areas
decline such that the outstanding principal balances of the mortgage loans and
any secondary financing on the mortgaged properties become equal to or greater
than the values of such mortgaged properties, the actual rates of delinquencies,
foreclosures and losses could be significantly higher than those now generally
experienced in the mortgage lending industry and those now experienced on
GECMSI's servicing portfolios. To the extent that such losses are not covered by
any of the credit enhancement features described herein, they will be borne by
the holders of the related certificates.
GECMSI may not require a current appraisal in connection with certain
purchase money mortgage loans, certain refinancings and certain home equity loan
programs. The percentage of mortgage loans representing such purchase money
mortgage loans, refinancings and home equity loans (by Principal Balance of all
of the mortgage loans included in a trust as of the Cut-off Date) where an
appraisal dated within the past year has not been obtained will be specified in
the related prospectus supplement, if material. In addition, the percentage of
mortgage loans in respect of which no appraisal has been obtained will be
specified in the related prospectus supplement, if material. Generally,
appraisals in connection with a Home Equity Loan will be dated within six months
prior to the origination of such mortgage loan. In the event that there has been
a decline in value of the mortgaged properties with respect to mortgage loans
originated without current appraisals, the use of other methods in establishing
the original value of a mortgaged property and in calculating the loan-to-value
ratios of such mortgage loans may result in substantially lower loan-to-value
ratios than would be the case if new appraisals were obtained at the time of
refinancing. This may be particularly true in geographic areas where there has
been a substantial decline in property values since the date of origination of
the refinanced mortgage loans. In addition, the use of methods other than a
current appraisal to establish the original value of a mortgaged property (e.g.,
a broker's price opinion, an automated appraisal or a drive-by appraisal) may
not provide as thorough a review or as accurate an assessment of the value of
the related mortgaged property. In
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certain circumstances, GECMSI may require a current appraisal where, as a result
of deterioration in conditions in the local real estate market since the date of
origination of the refinanced mortgage loan, there is a greater probability that
the original appraisal may not accurately reflect the current market value of
the mortgaged property.
The mortgage loans in a pool will not have loan-to-value ratios in excess
of 105% of original value of the mortgaged property. Generally, mortgage loans
that GECMSI originates or acquires do not have loan-to-value ratios in excess of
95% of the original value of the mortgaged property. The prospectus supplement
for a series will describe the extent to which a pool includes mortgage loans
with loan-to-value ratios exceeding 95%. In certain cases, secondary financing,
or subordination of existing secondary financing, is permitted, provided that
the combined loan-to-value ratio does not exceed GECMSI's underwriting
guidelines for the specific loan program. Unless otherwise stated in the
prospectus supplement, mortgage loans (other than Home Equity Loans) that GECMSI
acquires or originates which have an original principal amount exceeding 80% of
original value of the mortgaged property will have private mortgage insurance.
GECMSI generally requires such coverage to continue until the loan-to-value
ratio is 80% or less. Federal law also permits the cancellation of, and requires
the termination of, private mortgage insurance on mortgaged properties that are
single-family, owner-occupied dwellings once the loan-to-value ratio falls below
certain thresholds. See "Servicing of the Mortgage Loans -- Private Mortgage
Insurance" below. GECMSI does not require private mortgage insurance with
respect to Home Equity Loans.
If Home Equity Loans constitute a material portion of the mortgage loans
included in a trust, the related prospectus supplement will describe in further
detail the underwriting standards applicable to the Home Equity Loans.
CREDIT ENHANCEMENT
TYPES OF ENHANCEMENTS
Credit enhancement may be provided with respect to one or more classes of a
series of certificates or with respect to the mortgage loans in the related
trust. Credit enhancement may be in one or more of the following forms:
- the limited obligation of GECMSI as servicer to purchase Liquidating
Loans;
- a limited financial guarantee policy;
- a limited guarantee or other similar instrument issued by the guarantor
named in the prospectus supplement, which may be an affiliate of GECMSI;
- the subordination of one or more classes of the certificates of such
series;
- the establishment of one or more reserve accounts;
- the use of a cross-support feature;
- a pool insurance policy;
- a bankruptcy bond;
- a special hazard insurance policy;
- a repurchase bond;
- a guaranteed investment contract; or
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- another method of credit enhancement described in the related prospectus
supplement.
Unless otherwise stated in the prospectus supplement, any credit
enhancement will not provide protection against all risks of loss and will not
guarantee repayment of the entire principal balance of the certificates and
interest thereon. If losses occur which exceed the amount covered by credit
enhancement or which are not covered by the credit enhancement,
certificateholders will bear their allocable share of deficiencies.
If the prospectus supplement for a series states that an institution other
than GECMSI will act as sole servicer or master servicer of the related mortgage
loans, or that GECMSI will act as master servicer of such mortgage loans under a
Supervisory Master Servicing Arrangement, as defined under "Servicing of the
Mortgage Loans," whereby other servicers will be directly obligated to perform
certain servicing duties, if so specified in such prospectus supplement, such
other master servicers or servicers may provide certain of the credit
enhancement arrangements described below in lieu of GECMSI. In such event, all
references to GECMSI as servicer under the description of such credit
enhancement set forth below should be read to refer to such other master
servicer or servicers, as the case may be.
SUBORDINATION
If so stated in the prospectus supplement, distributions in respect of
scheduled principal, Principal Prepayments, interest or any combination thereof
that otherwise would have been payable to one or more classes of subordinated
certificates of a series of senior certificates will instead be payable to
holders of one or more classes of senior certificates of such series under the
circumstances and to the extent specified in the prospectus supplement. If
stated in the prospectus supplement, delays in receipt of scheduled payments on
the mortgage loans and losses on defaulted mortgage loans will be borne first by
the various classes of subordinated certificates and thereafter by the various
classes of senior certificates, in each case under the circumstances and subject
to the limitations specified in the prospectus supplement. The aggregate
distributions in respect of delinquent payments on the mortgage loans over the
lives of the certificates or at any time, the aggregate losses in respect of
defaulted mortgage loans which must be borne by the subordinated certificates by
virtue of subordination and the amount of the distributions otherwise
distributable to the subordinated certificateholders that will be distributable
to senior certificateholders on any distribution date may be limited as
specified in the prospectus supplement. If aggregate distributions in respect of
delinquent payments on the mortgage loans or aggregate losses in respect of such
mortgage loans were to exceed the total amounts payable and available for
distribution to holders of subordinated certificates or, if applicable, were to
exceed the specified maximum amount, holders of senior certificates could
experience losses on the certificates.
In addition to or in lieu of the foregoing, if so stated in the prospectus
supplement, all or any portion of distributions otherwise payable to holders of
subordinated certificates on any distribution date may instead be deposited into
one or more reserve accounts established by the trustee. If so stated in the
prospectus supplement, such deposits may be made on each distribution date, on
each distribution date for specified periods or until the balance in the reserve
account has reached a specified amount and, following payments from the reserve
account to holders of senior certificates or otherwise, thereafter to the extent
necessary to restore the balance in the reserve account to required levels, in
each case as specified in the prospectus supplement. If so specified in the
prospectus
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supplement, amounts on deposit in the reserve account may be released to the
depositor of the mortgage loans in the trust or the holders of any class of
certificates at the times and under the circumstances specified in the
prospectus supplement.
If stated in the prospectus supplement, one or more classes of certificates
may bear the risk of certain losses on defaulted mortgage loans not covered by
other forms of credit enhancement prior to other classes of certificates. Such
subordination might be effected by reducing the principal balance of the
subordinated certificates on account of such losses, thereby decreasing the
proportionate share of distributions allocable to such certificates, or by
another means specified in the prospectus supplement.
If stated in the prospectus supplement, various classes of senior
certificates and subordinated certificates may themselves be subordinate in
their right to receive certain distributions to other classes of senior and
subordinated certificates, respectively, through a cross-support mechanism or
otherwise.
If so stated in the prospectus supplement, the same class of certificates
may constitute senior certificates with respect to certain types of payments or
certain losses and subordinated certificates with respect to other types of
payments or losses.
As between classes of senior certificates and as between classes of
subordinated certificates, distributions may be allocated among such classes (1)
in the order of their scheduled final distribution dates, (2) in accordance with
a schedule or formula, (3) in relation to the occurrence of events or (4)
otherwise, in each case as specified in the prospectus supplement. As between
classes of subordinated certificates, payments to holders of senior certificates
on account of delinquencies or losses and payments to any reserve account will
be allocated as specified in the prospectus supplement.
Unless otherwise stated in the prospectus supplement, the pooling and
servicing agreement may permit the servicer, at its option, to grant to the
holders of certain classes of subordinated certificates certain rights in
connection with the foreclosure of defaulted mortgage loans in the related
trust. See "Servicing of the Mortgage Loans -- Collection and Other Servicing
Procedures."
PURCHASE OF LIQUIDATING LOANS
GECMSI, as servicer, may be obligated, if and to the extent described in
the prospectus supplement, to purchase any Liquidating Loan. Any such obligation
of GECMSI, as servicer, may be limited as specified in the prospectus
supplement. In particular, the aggregate losses from the purchase of Liquidating
Loans that GECMSI is obligated to bear, measured as the difference between the
aggregate payments made by GECMSI into the Certificate Account in respect of
Liquidating Loans and the aggregate net proceeds received by GECMSI from the
disposition of such Loans, may be limited to an amount specified in the
prospectus supplement. After this amount is exhausted, no further Liquidating
Loans will be purchased by GECMSI, unless such amount has been restored as
described below.
If so stated in the prospectus supplement, GECMSI, as servicer, will have
the option, but not the obligation, to purchase any mortgage loan as to which
the mortgagor has failed to make unexcused payment in full of three or more
scheduled payments of principal and interest (a "Delinquent Mortgage Loan").
Unless otherwise stated in the prospectus supplement, any such purchase will be
for a price equal to 100% of the Principal Balance of such mortgage loan plus
interest thereon at the applicable Remittance Rate from the date on which
interest was last paid to the first day of the month in which such purchase
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price is to be distributed, net of any unreimbursed advances of principal and
interest thereon made by GECMSI as servicer. The purchase price for any
Delinquent Mortgage Loan will be deposited in the Certificate Account on the
next Deposit Date (as defined under "Servicing of the Mortgage Loans -- Loan
Payment Record").
The purchase by GECMSI, as servicer, of a Delinquent Mortgage Loan may
result in the diminution of the amount of GECMSI's obligations, as servicer, to
purchase Liquidating Loans, to the extent that net recoveries upon the
liquidation of such Delinquent Mortgage Loan are, or are estimated by GECMSI on
the date of such purchase to be, less than the sum of the purchase price for
such Delinquent Mortgage Loan and any previous unreimbursed advances of
delinquent installments of principal and interest (adjusted to the related
Remittance Rate) made by GECMSI with respect thereto. To the extent that actual
recoveries, net of related expenses, upon the final liquidation of such
Delinquent Mortgage Loan differ from the estimated amount thereof, the amount of
GECMSI's remaining obligation to purchase Liquidating Loans will be adjusted up
or down accordingly. If a Delinquent Mortgage Loan becomes current after its
purchase by GECMSI, any related decrease in the amount of GECMSI's obligation to
purchase Liquidating Loans will be reversed in its entirety. Liquidation
proceeds in connection with the liquidation of any mortgaged property may not be
deemed for this purpose to include the entire principal balance of any mortgage
loan made by GECMSI to facilitate such sale at a rate less than then prevailing
market rates. In estimating the net amount of proceeds recoverable upon the
liquidation of any Delinquent Mortgage Loan, GECMSI may treat as related
liquidation expenses certain costs associated with the protection of the
mortgaged property, property sales expenses and foreclosure or other similar
costs.
Following the purchase by GECMSI of any Liquidating Loan or Delinquent
Mortgage Loan as described above, and the payment by GECMSI of the purchase
price therefor, GECMSI will be entitled to receive an assignment by the trustee
of such mortgage loan, and GECMSI will thereafter own such mortgage loan free of
any further obligation to the trustee or the certificateholders with respect
thereto.
LIMITED GUARANTEE OF THE GUARANTOR
If stated in the prospectus supplement, certain obligations of GECMSI, as
servicer, under the related pooling and servicing agreement may be covered by a
limited guarantee or similar instrument, limited in scope and amount, issued by
the specified guarantor. If so specified, the guarantor may be obligated to take
one or more of the following actions in the event GECMSI fails to do so: (1)
make deposits pursuant to a Deposit Guarantee; (2) make advances (an "Advance
Guarantee"); or (3) purchase Liquidating Loans (a "Liquidating Loan Guarantee").
Any such limited guarantee will be limited in amount and a portion of the
coverage of any such limited guarantee may be separately allocated to certain
events. For example, a portion of the aggregate amount of a guarantee to
purchase Liquidating Loans may be separately allocated to Liquidating Loans due
to special hazards not covered by standard hazard insurance policies,
Liquidating Loans due to the bankruptcy of a mortgagor, and other Liquidating
Loans. The scope, amount and, if applicable, the allocation of any limited
guarantee will be described in the related prospectus supplement.
If and to the extent that the guarantor is required to make payments under
any such limited guarantee, unless otherwise stated in the prospectus
supplement, the guarantor, upon notice from the trustee, will be obligated to
deposit the amount of such payments in
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same-day funds in the Certificate Account on the day after the Deposit Date, all
as set forth more specifically in such limited guarantee. If the guarantor is
required to make any payment under a limited guarantee, the guarantor will be
subrogated, to the extent of such payment, to the rights of holders of the
certificates and shall have all rights of GECMSI under the related agreement as
described herein. Any limited guarantee issued by the guarantor will be limited
in amount or duration as specified in the prospectus supplement and may not
guarantee the full extent of GECMSI's obligations with respect to which such
limited guarantee was issued. As described in the prospectus supplement, if
applicable, the amount of any limited guarantee will be reduced by amounts
distributed by the guarantor, and not recovered by it, under all limited
guarantees issued by the guarantor with respect to the same series of
certificates and by any reduction in GECMSI's obligations with respect to which
such limited guarantee was issued.
CROSS-SUPPORT
If stated in the prospectus supplement, the beneficial ownership of
separate groups of assets included in a trust may be evidenced by separate
classes of the related series of certificates. In such case, credit enhancement
may be provided by a cross-support feature which may require that distributions
be made with respect to certificates evidencing beneficial ownership of one or
more asset groups prior to distributions to subordinated certificates evidencing
a beneficial ownership interest in other asset groups within the same trust. The
prospectus supplement for a series which includes a cross-support feature will
describe the manner and conditions for applying such cross-support feature.
If stated in the prospectus supplement, the coverage provided by one or
more forms of credit enhancement may apply concurrently to two or more separate
trusts. If applicable, the prospectus supplement will identify the trusts to
which such credit enhancement relates and the manner of determining the amount
of the coverage provided thereby and the application of such coverage to the
identified trusts.
POOL INSURANCE
In order to decrease the likelihood that certificateholders will experience
losses in respect of the mortgage loans, if stated in the prospectus supplement,
the depositor of the mortgage loans in the trust will obtain one or more pool
insurance policies. Any such policies may be in lieu of or in addition to any
obligations of GECMSI in respect of the mortgage loans. Such pool insurance
policy will, subject to the limitations described in the prospectus supplement,
cover loss by reason of default in payments on the mortgage loans up to the
amounts specified in the prospectus supplement or the definitive description of
the final mortgage loan pool filed with the SEC and for the periods specified in
the prospectus supplement. GECMSI, as servicer, will agree to use its best
reasonable efforts to maintain in effect any such pool insurance policy and to
present claims thereunder to the pool insurer on behalf of itself, the trustee
and the certificateholders. The pool insurance policy, however, is not a blanket
policy against loss, since claims thereunder may only be made respecting
particular defaulted mortgage loans and only upon satisfaction of certain
conditions precedent described below. The pool insurance policy, if any, will
not cover losses due to a failure to pay or denial of a claim under a primary
mortgage insurance policy, irrespective of the reason therefor.
Unless otherwise stated in the prospectus supplement, the original amount
of coverage under any pool insurance policy will be reduced over the life of the
related series of certificates by the aggregate dollar amount of claims paid
less the aggregate of the net
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amounts realized by the pool insurer upon disposition of all foreclosed
properties. The amount of claims paid will include expenses incurred by GECMSI
on the foreclosed properties for hazard insurance premiums and, to the extent
approved by the pool insurer, amounts paid for property taxes, the discharge of
liens, expenses required to preserve and repair the properties and foreclosure
costs, as well as accrued interest on delinquent mortgage loans to the date of
payment of the claim. See "Certain Legal Aspects of the Mortgage
Loans -- Foreclosure." Accordingly, if aggregate net claims paid under any pool
insurance policy reach the original policy limit, coverage under that pool
insurance policy will be exhausted and any further losses will be borne by one
or more classes of certificateholders unless assumed by GECMSI as servicer or
the guarantor under any obligations they may have in respect of Liquidating
Loans or by some other entity, if and to the extent specified in the prospectus
supplement.
Since any mortgage pool insurance policy may require that the property
subject to a defaulted mortgage loan be restored to its original condition prior
to claiming against the pool insurer, such policy may not provide coverage
against hazard losses. As described under "Servicing of the Mortgage
Loans -- Hazard Insurance," the hazard policies concerning 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 the full replacement cost of such losses. Even if
special hazard insurance is applicable as specified in the prospectus
supplement, no coverage in respect of special hazard losses will cover all
risks, and the amount of any such coverage will be limited. See "Special Hazard
Insurance" below. As a result, certain hazard risks will not be insured against
and will therefore be borne by certificateholders, unless otherwise assumed by
GECMSI as servicer or the guarantor under any obligations they may have in
respect of Liquidating Loans or by some other entity, as specified in the
prospectus supplement.
SPECIAL HAZARD INSURANCE
In order to decrease the likelihood that certificateholders will experience
losses in respect of the mortgage loans, if specified in the prospectus
supplement, GECMSI or Funding, as depositor of the mortgage loans in a trust,
will obtain one or more special hazard insurance policies with respect to the
mortgage loans. Any such policies may be in lieu of or in addition to any
obligations of GECMSI to advance delinquent payments in respect of the mortgage
loans. Such a special hazard insurance policy will, subject to limitations
described below and in the prospectus supplement, protect holders of
certificates from loss by reason of damage to mortgaged properties caused by
certain hazards (including earthquakes and, to a limited extent, tidal waves and
related water damage) not covered by the standard form of hazard insurance
policy for the respective states in which the mortgaged properties are located
or under flood insurance policies, if any, covering the mortgaged properties. It
also protects holders from loss from partial damage caused by reason of the
application of the co-insurance clause contained in hazard insurance policies.
Any special hazard insurance policy may not cover losses occasioned by war,
civil insurrection, certain governmental actions, errors in design, faulty
workmanship or materials (except under certain circumstances), nuclear reaction,
flood (if the mortgaged property is located in a federally designated flood
area), chemical contamination and certain other risks. Aggregate claims under
each special hazard insurance policy may be limited to a specified percentage of
the aggregate principal balance as of the Cut-off Date of the mortgage loans.
Any special hazard insurance policy may also provide that no claim may be paid
unless hazard and, if applicable, flood
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insurance on the mortgaged property has been kept in force and other protection
and preservation expenses have been paid by the servicer.
Subject to the foregoing limitations, any special hazard insurance policy
may provide that, where there has been damage to property securing a foreclosed
mortgage loan (title to which has been acquired by the insured) and to the
extent such damage is not covered by the hazard insurance policy or flood
insurance policy, if any, maintained by the mortgagor or the servicer, the
special hazard insurer will pay the lesser of (1) the cost of repair or
replacement of such property or (2) upon transfer of the property to the special
hazard insurer, the unpaid principal balance of such mortgage loan at the time
of acquisition of such property by foreclosure or deed in lieu of foreclosure,
plus accrued interest to the date of claim settlement and certain expenses
incurred by the servicer with respect to such property. If the unpaid principal
balance plus accrued interest and certain expenses is paid by the insurer, the
amount of further coverage under the related special hazard insurance policy
will be reduced by such amount less any net proceeds from the sale of the
property. Any amount paid as the cost of repair or replacement of the property
will also reduce coverage by such amount. Restoration of the property with the
proceeds described under clause (1) above will satisfy the condition under any
pool insurance policy that the property be restored before a claim under such
pool insurance policy may be validly presented with respect to the defaulted
mortgage loan secured by such property. The payment described under clause (2)
above will render unnecessary presentation of a claim in respect of such
mortgage loan under the related pool insurance policy. Therefore, so long as a
pool insurance policy remains in effect, the payment by the insurer under a
special hazard insurance policy of the cost of repair or replacement or the
unpaid principal balance of the mortgage loan plus accrued interest and certain
expenses will not affect the total insurance proceeds paid to
certificateholders, but will affect the relative amounts of coverage remaining
under the related special hazard insurance policy and pool insurance policy.
BANKRUPTCY BOND
In the event of a bankruptcy of a borrower, the bankruptcy court may
establish the value of the mortgaged property securing the related mortgage loan
at an amount less than the then outstanding principal balance of such mortgage
loan secured by such mortgaged property and could reduce the secured debt to
such value. In such case, the holder of such mortgage loan would become an
unsecured creditor to the extent of the difference between the outstanding
principal balance of such mortgage loan and such reduced secured debt. In
addition, certain other modifications of the terms of a mortgage loan can result
from a bankruptcy proceeding, including the reduction in monthly payments
required to be made by the borrower. See "Certain Legal Aspects of the Mortgage
Loans -- Enforceability of Certain Provisions." If so stated in the related
prospectus supplement, the depositor of the mortgage loans in a trust will
obtain a bankruptcy bond or similar insurance contract (the "bankruptcy bond")
for proceedings with respect to borrowers under the Bankruptcy Code. The
bankruptcy bond will cover certain losses resulting from a reduction by a
bankruptcy court of scheduled payments of principal of and interest on a
mortgage loan or a reduction by such court of the principal amount of a mortgage
loan and will cover certain unpaid interest on the amount of such a principal
reduction from the date of the filing of a bankruptcy petition.
The bankruptcy bond will provide coverage in the aggregate amount specified
in the related prospectus supplement. Such amount will be reduced by payments
made under
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such bankruptcy bond in respect of the related mortgage loans, unless otherwise
stated in the related prospectus supplement, and will not be restored.
In lieu of a bankruptcy bond, the depositor of mortgage loans in a trust
may obtain a limited guarantee to cover such bankruptcy-related losses.
REPURCHASE BOND
If so stated in the related prospectus supplement, GECMSI, as servicer,
will be obligated to repurchase any mortgage loan up to an aggregate dollar
amount specified in the related prospectus supplement for which insurance
coverage is denied due to dishonesty, misrepresentation or fraud in connection
with the origination or sale of such mortgage loan. Such obligation may be
secured by a surety bond or other instrument or mechanism guaranteeing payment
of the amount to be paid by GECMSI.
GUARANTEED INVESTMENT CONTRACTS
If so stated in the prospectus supplement, on or prior to the issue date
for a series of certificates, the trustee will enter into a guaranteed
investment contract pursuant to which all amounts deposited in the Certificate
Account, and if so specified the reserve accounts, will be invested by the
trustee and under which the issuer of the guaranteed investment contract will
pay to the trustee interest at an agreed rate per annum with respect to the
amounts so invested.
RESERVE ACCOUNTS
If stated in the prospectus supplement, cash, U.S. Treasury securities,
instruments evidencing ownership of principal or interest payments thereon,
letters of credit, demand notes, certificates of deposit, other instruments or
obligations or a combination thereof in the aggregate amount specified in the
prospectus supplement will be deposited by the depositor of the mortgage loans
on the issue date of a series of certificates in one or more accounts (each, a
"Reserve Account") established by the trustee. Such cash and the principal and
interest payments on such other instruments will be used to enhance the
likelihood of timely payment of principal of, and interest on, or, if so
specified in the prospectus supplement, to provide additional protection against
losses in respect of, the assets in the related trust, to pay the expenses of
the trust or for such other purposes specified in the prospectus supplement.
Whether or not the depositor of the mortgage loans in a trust has any obligation
to make such a deposit, certain amounts to which the subordinated
certificateholders, if any, will otherwise be entitled may instead be deposited
into the reserve account from time to time and in the amounts as specified in
the prospectus supplement. Any cash in the reserve account and the proceeds of
any other instrument upon maturity will be invested in Eligible Investments,
which, unless otherwise stated in the prospectus supplement, will include
obligations of the United States and certain agencies thereof, certificates of
deposit, certain commercial paper, time deposits and bankers acceptances sold by
eligible commercial banks and certain repurchase agreements of United States
government securities with eligible commercial banks. If a letter of credit is
deposited with the trustee, such letter of credit will be irrevocable. Unless
otherwise stated in the prospectus supplement, any instrument deposited therein
will name the trustee, in its capacity as trustee for the holders of the
certificates, as beneficiary and will be issued by an entity acceptable to each
rating agency that rates the certificates. Additional information with respect
to such instruments deposited in the reserve accounts will be set forth in the
prospectus supplement.
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Any amounts so deposited and payments on instruments so deposited will be
available for withdrawal from the reserve account for distribution to the
holders of certificates for the purposes, in the manner and at the times
specified in the prospectus supplement.
OTHER INSURANCE, GUARANTEES AND SIMILAR INSTRUMENTS OR AGREEMENTS
If stated in the prospectus supplement, the related trust may also include
insurance, guarantees, letters of credit or similar arrangements for the purpose
of:
- maintaining timely payments or providing additional protection against
losses on the assets included in such trust;
- paying administrative expenses; or
- establishing a minimum reinvestment rate on the payments made in respect
of such assets or principal payment rate on such assets.
Such arrangements may include agreements under which certificateholders are
entitled to receive amounts deposited in various accounts held by the trustee
upon the terms specified in the prospectus supplement. Such arrangements may be
in lieu of any obligation of the servicer to advance delinquent installments in
respect of the mortgage loans. See "Servicing of Mortgage Loans -- Advances."
YIELD, MATURITY AND WEIGHTED AVERAGE LIFE CONSIDERATIONS
GENERAL
The yields to maturity and weighted average lives of the certificates will
be affected primarily by the rate and timing of principal payments received on
or in respect of the mortgage loans included in the related trust. The yields to
investors will be sensitive in varying degrees to the rate of prepayments on the
mortgage loans. The extent to which the yield to maturity of a certificate is
sensitive to prepayments will depend upon the degree to which it is purchased at
a discount or premium. In the case of certificates purchased at a premium,
faster than anticipated rates of principal payments on the mortgage loans could
result in actual yields to investors that are lower than the anticipated yields,
and in the case of certain classes of such certificates could result in a
failure of investors to recover their investments. In the case of certificates
purchased at a discount, slower than anticipated rates of principal payments on
the mortgage loans could result in actual yields to investors that are lower
than the anticipated yields and could result in an extension of the weighted
average lives of such certificates.
Such principal payments will include scheduled payments as well as
Principal Prepayments (including refinancings, some of which refinancings may be
solicited by GECMSI) and prepayments resulting from foreclosure, condemnation
and other dispositions of the mortgaged properties (including amounts paid by
insurers under applicable insurance policies), from repurchase by GECMSI of any
mortgage loan as to which there has been a material breach of warranty or defect
in documentation (or deposit of certain amounts in respect of delivery of a
substitute mortgage loan), repurchase by GECMSI, the Guarantor or any other
entity of any Liquidating Loan or Delinquent Mortgage Loan, if applicable, and
from the repurchase by the servicer of all of the certificates or all of the
mortgage loans in certain circumstances. See "Description of the
Certificates -- Optional Termination of a Trust." The yield to maturity and
weighted
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average lives of the certificates may also be affected by the amount and timing
of delinquencies and losses on the mortgage loans.
After origination of the related mortgage loans, certain of the borrowers
may be solicited by GECMSI to participate in its biweekly payment programs,
under which payments equal to one-half of one full monthly payment are made in
respect of the related mortgage loan on a biweekly basis. In contrast to a
mortgage loan in respect of which payments are received once every month, a
mortgage loan involved in a biweekly payment program will produce thirteen full
monthly payments per calendar year, resulting in additional prepayments of
principal over the life of the mortgage loan. All payments of principal received
during a month in respect of a mortgage loan in a biweekly payment program will
be applied to the principal balance of such mortgage loan on the first business
day of the succeeding month and will not result in interest shortfalls.
A number of social, economic, tax, geographic, demographic, legal and other
factors may influence prepayments, delinquencies and losses. These factors may
include the age of the mortgage loans, the geographic distribution of the
mortgaged properties, the payment terms of the mortgages, the characteristics of
the mortgagors, homeowner mobility, economic conditions generally and in the
geographic area in which the mortgaged properties are located, enforceability of
due-on-sale clauses, servicing decisions, prevailing mortgage market interest
rates in relation to the interest rates on the mortgage loans, the availability
of mortgage funds, the use of second or home equity mortgage loans by
mortgagors, the availability of refinancing opportunities, the use of the
properties as second or vacation homes, the extent of the mortgagors' net equity
in the mortgaged properties and, where investment properties are securing the
mortgage loans, tax-related considerations and the availability of other
investments. The rate of principal payment may also be subject to seasonal
variations. The prepayment experience on Home Equity Loans may differ from those
of other mortgage loans and may differ between first-priority and
second-priority Home Equity Loans.
The rate of principal prepayments on pools of conventional housing loans
has fluctuated significantly in recent years. Generally, if prevailing interest
rates were to fall significantly below the interest rates on the mortgage loans,
the mortgage loans would be expected to prepay at higher rates than if
prevailing rates were to remain at or above the interest rates on the mortgage
loans. During such periods, the yields at which an investor in the certificates
may be able to reinvest amounts received as payments on the investor's
certificates may be lower than the yield on those certificates. Conversely, if
interest rates were to rise above the interest rates on the mortgage loans, the
mortgage loans would be expected to prepay at lower rates than if prevailing
rates were to remain at or below interest rates on the mortgage loans. During
such periods, the amount of payments available to an investor for reinvestment
at such high rates may be relatively low. The mortgage loans will not prepay at
any constant rate, nor will all of the mortgage loans prepay at the same rate at
any one time. The timing of changes in the rate of prepayments may significantly
affect a certificateholder's actual yield to maturity, even if the average rate
of principal payments is consistent with a certificateholder's expectation. In
general, the earlier a prepayment of principal the greater the effect on a
certificateholder's yield to maturity. As a result, the effect on a
certificateholder's yield of principal payments occurring at a rate higher or
lower than the rate anticipated by the investor during the period immediately
following the issuance of the related series of certificates will not be offset
by a subsequent like reduction or increase in the rate of principal payments.
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When a mortgage loan prepays in full, the borrower will generally be
required to pay interest on the amount of prepayment only to the prepayment
date. When a partial prepayment of principal is made on a mortgage loan (other
than a simple interest Home Equity Loan), the borrower generally will not be
required to pay interest on the amount of the partial prepayment during the
month in which such prepayment is made. In addition, unless otherwise stated in
the related prospectus supplement, a full or partial prepayment will not be
required to be passed through to certificateholders until the month following
receipt.
The prospectus supplement will specify the extent to which interest on the
Home Equity Loans in the related trust accrues on a simple interest basis. Under
the simple interest method, regularly scheduled payments, which are based on the
amortization of the loan over a series of equal monthly payments, and other
payments are applied first to interest accrued to the date payment is received
and then to reduce the unpaid principal balance of the related loan. Each
regularly scheduled monthly interest payment is calculated by multiplying the
outstanding principal balance of the loan by the stated interest rate. Such
product is then multiplied by a fraction, the numerator of which is the number
of days elapsed since the preceding payment of interest was made and the
denominator of which is either 365 or 360, depending on applicable state law.
As a result of the payment terms of simple interest Home Equity Loans, the
making of a scheduled payment on, or the prepayment of, such a Home Equity Loan
prior to its scheduled due date may result in the collection of less than one
month's interest on such Home Equity Loan for the period since the preceding
payment was made (a "Simple Interest Shortfall"). Conversely, if the scheduled
payment on such a Home Equity Loan is made after its scheduled payment date or
the Home Equity Loan is prepaid after the scheduled due date, the collection of
interest on such Home Equity Loan for such period may be greater than one
month's interest on such Home Equity Loan. In addition, the extent to which
simple interest Home Equity Loans experience early payment or late payment of
scheduled payments will correspondingly change the amount of principal received
during a monthly period and, accordingly, the amount of principal to be
distributed on the related distribution date and the amount of unpaid principal
due at the stated maturity of such Home Equity Loans. To the extent shortfalls
attributable to prepayments or the early receipt of a scheduled payment on Home
Equity Loans are not compensated for by any forms of credit enhancement or
servicer payments described in the prospectus supplement, the certificateholders
will experience delays or losses in amounts due them.
If a mortgagor pays more than one scheduled installment on a simple
interest Home Equity Loan at a time, the entire amount of the additional
installment will be treated as a principal prepayment and passed through to
certificateholders in the month following the month of receipt. In such case,
although the mortgagor will not be required to make the next regularly scheduled
installment, interest will continue to accrue on the principal balance of the
Home Equity Loan, as reduced by the application of the early installment. As a
result, when the mortgagor pays the next required installment, the installment
so paid may be insufficient to cover the interest that has accrued since the
last payment by the mortgagor. Notwithstanding such insufficiency, the
mortgagor's Home Equity Loan would be considered to be current. If specified in
the prospectus supplement, GECMSI will be required to advance the amount of such
insufficiency. This insufficiency will continue until the installment payments
received are once again sufficient to cover all accrued interest and to reduce
the principal balance of the Home Equity Loan. Depending on the principal
balance and interest rate of the related Home Equity Loan and on the number of
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installments that were paid early, there may be extended periods of time during
which Home Equity Loans that are current are not amortizing.
Factors other than those identified herein and in the prospectus supplement
could significantly affect principal prepayments at any time and over the lives
of the certificates. The relative contribution of the various factors affecting
prepayment may also vary from time to time. There can be no assurance as to the
rate of payment of principal of the mortgage loans at any time or over the lives
of the certificates.
The prospectus supplement relating to a series of certificates will discuss
in greater detail the effect of the rate and timing of principal payments
(including prepayments), delinquencies and losses on the yield, weighted average
lives and maturities of such certificates. If a series of certificates is backed
by a pool of mortgage loans that includes Home Equity Loans providing for
balloon payments at maturity, the prospectus supplement will contain information
regarding the potential effect of such mortgage loans on the weighted average
lives of such certificates.
EFFECTIVE INTEREST RATE
The mortgage loans will bear interest at fixed interest rates, payable in
arrears. Each monthly interest payment on a mortgage loan is calculated as 1/12
of the applicable interest rate times the outstanding principal balance of such
mortgage loan on the first day of the month.
Except as otherwise specified in the prospectus supplement, the effective
yield to holders of certificates entitled to interest distributions will be
lower than the yield otherwise produced by the applicable interest rate and the
applicable purchase prices thereof because while interest will accrue from the
first day of each month, the distribution of such interest will not be made
until the 25th day (or if such day is not a business day, the immediately
following business day) of the month following the month of accrual. In
addition, the effective yield on such certificates will be affected by any Net
Interest Shortfall (as defined in the prospectus supplement) and the interest
portion of certain losses. See "Description of the Certificates -- Distributions
on the Certificates" in the prospectus supplement. The yield on certificates
backed by Home Equity Loans may be adversely affected by the occurrence of
Simple Interest Shortfalls.
When a full prepayment is made on a mortgage loan, the mortgagor is charged
interest ("Prepayment Interest") on the days in the month actually elapsed up to
the date of such prepayment, at a daily interest rate (determined by dividing
the interest rate by 360, or 365 in the case of certain simple interest Home
Equity Loans) which is applied to the principal amount of the loan so prepaid.
When such a prepayment is made during the period from the sixteenth day through
the last day of any month (and from the Cut-off Date through the fifteenth day
of the month of the Cut-off Date), such Prepayment Interest is passed through
the certificateholders in the month following its receipt and the amount of
interest thus distributed to certificateholders, to the extent not supplemented
by a Compensating Interest Payment or a Simple Interest Payment (each as defined
and described in the prospectus supplement), will be less than the amount which
would have been distributed in the absence of such prepayment. The payment of a
claim under certain insurance policies or the purchase of a defaulted mortgage
loan by a private mortgage insurer may also cause a reduction in the amount of
interest passed through. A reduction in the interest rate of any mortgage loan
due to the application of the Soldiers' and Sailors' Civil Relief Act of 1940
may also reduce the amount of interest passed through to certificateholders.
Shortfalls described in this paragraph will be borne by certificateholders
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to the extent described herein. See "Description of the
Certificates -- Distributions on the Certificates -- Interest" in the prospectus
supplement.
Any partial prepayment on a mortgage loan other than a simple interest Home
Equity Loan will be applied to the balance of the related mortgage loan as of
the first day of the month of receipt, will be passed through to the
certificateholders in the following month and, to the extent not supplemented by
a Compensating Interest Payment, will reduce the aggregate amount of interest
distributable to the certificateholders in such month in an amount equal to 30
days of interest at the related Net Mortgage Rate on the amount of such
prepayment.
SERVICING OF THE MORTGAGE LOANS
With respect to each series of certificates, the related mortgage loans
will be serviced either by GECMSI as primary servicer, by GECMSI as master
servicer, by another institution as primary servicer or by another institution
as master servicer. If an institution other than GECMSI acts as primary servicer
or as master servicer for a series, GECMSI may have no servicing obligations
with respect to such series. If GECMSI or another institution acts as master
servicer with respect to a series, the related pooling and servicing agreement
may provide either (1) that the master servicer may delegate all or a portion of
the servicing duties described below to other servicers but shall remain
directly liable for all such servicing duties (a "Direct Master Servicing
Arrangement"), or (2) that certain of the servicing duties described below may
be performed directly by other servicers, pursuant to servicing agreements
entered into between such servicers and GECMSI, as seller, and assigned to the
trustee, in which event the master servicer will be obligated to supervise such
servicers' performance but will not itself be obligated to perform such duties
(a "Supervisory Master Servicing Arrangement"). Unless otherwise stated in the
prospectus supplement, if GECMSI is acting as master servicer under a Direct
Master Servicing Arrangement, the servicing agreement entered into between
GECMSI and the direct servicer will be deemed to be between GECMSI and the
direct servicer alone, and the trustee and the certificateholders will have no
claims, obligations, duties or liabilities with respect thereto. Each master
servicer will have the ability to terminate any such other servicer upon terms
that will be agreed to at or before the time the related series of certificates
is issued. Unless otherwise stated in the prospectus supplement, in the event
that the master servicer is no longer acting as such for the series, the trustee
or a successor master servicer shall succeed to the master servicer's rights
under the servicing agreement with the primary servicer.
The prospectus supplement for each series will specify whether GECMSI or
another institution will act as primary servicer or master servicer for such
series, and if there is a master servicer, whether the master servicing
arrangement is a Direct Master Servicing Arrangement or a Supervisory Master
Servicing Arrangement. If GECMSI acts as master servicer for a series under a
Direct Master Servicing Arrangement, all references herein to GECMSI as servicer
should be read to refer to GECMSI as master servicer, as appropriate. If GECMSI
acts as master servicer for a series under a Supervisory Master Servicing
Arrangement, such references should be read to refer to the direct servicers of
such series, acting under the supervision of GECMSI as master servicer. If an
institution other than GECMSI acts as primary servicer for a series, or acts as
master servicer for such series under a Direct Master Servicing Arrangement, all
references herein to GECMSI as servicer should be read to refer to such
institution as primary or master servicer, as appropriate. If an institution
other than GECMSI acts as master servicer with
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respect to a series under a Supervisory Master Servicing Arrangement, such
references should be read to refer to the direct servicers of such series,
acting under the supervision of such institution as master servicer.
With respect to each series of certificates, except to the extent the
pooling and servicing agreement specifically prescribes other servicing
standards, the related mortgage loans will be serviced under servicing standards
substantially equivalent to those required for approval by Fannie Mae or Freddie
Mae.
COLLECTION AND OTHER SERVICING PROCEDURES
GECMSI, as servicer, will be responsible for making reasonable efforts to
collect all payments called for under the mortgage loans and shall, consistent
with each pooling and servicing agreement, follow such collection procedures as
it follows with respect to mortgage loans in its servicing portfolio which are
comparable to the mortgage loans. Consistent with the above, GECMSI, as
servicer, may, in its discretion, (1) waive any late payment charge and (2) if a
default on the related mortgage loan has occurred or is reasonably foreseeable,
arrange with the mortgagor, at any time prior to foreclosure, a schedule for the
payment of principal and interest due and unpaid for a period of up to two years
after the date upon which the arrangement with the mortgagor is entered into or
otherwise modify the terms of such mortgage loan as provided in the related
prospectus supplement. Generally, the arrangement period will not be more than
eighteen months. In the event of any such arrangement GECMSI will be responsible
for distributing funds with respect to such mortgage loan during the scheduled
period in accordance with the original amortization schedule thereof and without
regard to the temporary modification thereof. Such arrangement may not benefit
all certificateholders to the same extent.
GECMSI, as servicer, will be obligated to follow such normal practices and
procedures as it deems necessary or advisable to realize upon a defaulted
mortgage loan. In this regard, GECMSI, as servicer, may directly or through a
local assignee, sell the property at a foreclosure or trustee's sale, negotiate
with the mortgagor for a deed in lieu of foreclosure or, in the event a
deficiency judgment is available against the mortgagor or other person foreclose
against such property and proceed for the deficiency against the appropriate
person. See "Certain Legal Aspects of the Mortgage Loans -- Anti-Deficiency
Legislation and Other Limitations on Lenders" for a description of the limited
availability of deficiency judgments. The amount of the ultimate net recovery,
including the proceeds of any pool insurance or other guarantee, after
reimbursement to GECMSI, as servicer, of its expenses incurred in connection
with the liquidation of any such defaulted mortgage loan, including those
described in the next paragraph in the case of second-lien Home Equity Loans,
and prior unreimbursed advances of principal and interest, delinquent taxes,
assessments, insurance premiums and comparable items and property protection
expenses with respect thereto, will be credited to the Loan Payment Record when
realized. This amount will be distributed to certificateholders on the next
distribution date following the month of receipt. If specified in the prospectus
supplement, if such net recovery exceeds the Principal Balance of such mortgage
loan plus one month's interest thereon at the Remittance Rate, the excess will
be paid to GECMSI as additional servicing compensation. GECMSI will not be
required to expend its own funds in connection with any foreclosure or towards
the restoration of any mortgaged property unless it shall determine (1) that
such restoration or foreclosure will increase the proceeds of liquidation of the
mortgaged loan to certificateholders after reimbursement to itself for such
expenses and (2) that such expenses will be recoverable to it either through
liquidation proceeds or insurance proceeds in respect of the related mortgage
loan.
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If a REMIC election has been made with respect to all or any portion of a
trust, GECMSI will dispose of any property it acquires through foreclosure of a
related mortgage loan or otherwise before the end of the third calendar year
after the year of its acquisition unless it receives from qualified tax counsel
an opinion that it may hold such property for a longer period without adverse
tax consequences.
GECMSI, as servicer, will not be obligated to foreclose on any mortgaged
property which it believes may be contaminated with or affected by hazardous or
toxic wastes, materials or substances. See "Certain Legal Aspects of the
Mortgage Loans -- Environmental Considerations." GECMSI will not be liable to
the certificateholders of a series if it fails to foreclose on a mortgaged
property securing a mortgage loan in the related trust which it believes may be
so contaminated or affected, even if such mortgaged property is, in fact, not so
contaminated or affected. If GECMSI does not foreclose on such a mortgaged
property, the certificateholders of the related series may experience a loss on
the related mortgage loan. In addition, GECMSI will not be liable to the
certificateholders if, based on its belief that no such contamination or effect
exists, GECMSI forecloses on a mortgaged property and takes title to such
mortgaged property on behalf of the related trustee, and thereafter such
mortgaged property is determined to be so contaminated or affected.
Unless otherwise stated in the prospectus supplement relating to a series
of certificates, if GECMSI determines that all amounts which it expects to
recover from or on account of such a mortgage loan have been recovered, GECMSI's
obligation, if any, to advance delinquent installments of principal, interest or
both on such mortgage loan will cease and the Principal Balance of such mortgage
loan will be allocated in reduction of the principal balance of the certificates
of the related series in the manner in which losses are allocated as specified
in such prospectus supplement.
GECMSI may not foreclose on any mortgaged property securing a Home Equity
Loan unless it forecloses subject to any senior mortgage on such mortgaged
property and any outstanding property taxes. In the event of such foreclosure,
GECMSI generally will pay, subject to the final sentence of this paragraph, the
entire amount due on such senior mortgage loan to the senior mortgagee at or
prior to the foreclosure sale. If any senior mortgage is in default after GECMSI
has initiated its foreclosure action, GECMSI may advance funds to keep the
senior mortgage current until such time as GECMSI satisfies such senior
mortgage. In the event foreclosure proceedings have been instituted on any
senior mortgage prior to the initiation of GECMSI's foreclosure action, GECMSI
may satisfy the senior mortgage at the time of the foreclosure sale or take
other action to protect its interest in the related mortgaged property. GECMSI
will take or refrain from taking any such action based upon the standards and
considerations described in the preceding paragraph.
Unless otherwise stated in the prospectus supplement, if a series of
certificates includes one or more classes of subordinate certificates, the
pooling and servicing agreement may permit GECMSI, at its option, to grant to
the holders of certain classes of subordinate certificates (the "Loss
Certificates") certain rights in connection with the foreclosure of defaulted
mortgage loans in the related trust. Such rights may be granted on the date of
initial issuance of such series of certificates or thereafter and may or may not
inure to the benefit of successive holders of the Loss Certificates. These
rights would include, among other things, the right to receive notice from
GECMSI that foreclosure of a defaulted mortgage loan is imminent and the right
to instruct GECMSI to delay the commencement of foreclosure proceedings for up
to six months after the mortgage loan
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has become delinquent. GECMSI may also grant the holders of the Loss
Certificates the option to purchase a defaulted mortgage loan at the conclusion
of such six-month period, at a purchase price equal to its unpaid principal
balance plus accrued interest. The proceeds of such purchase would be deposited
in the related Collection Account as liquidation proceeds. It will be a
condition to the exercise of these latter rights that a reserve fund for the
benefit of holders of the other classes of certificates of such series and
GECMSI as servicer be established. An amount equal to 125% of the greater of the
Scheduled Principal Balance, as defined in the related prospectus supplement, of
the defaulted mortgage loan and the then current appraised value of the
underlying mortgaged property, together with interest at the applicable interest
rate on the mortgage loan for the period that foreclosure is delayed, must be
deposited into such reserve fund. The principal purpose of the reserve fund
would be to protect holders of the other classes of certificates of such series
from any diminution in value of the underlying mortgaged property attributable
to the delay in foreclosure. Amounts on deposit in the reserve fund may be
invested in certain specific investments acceptable to each of the rating
agencies that are rating such certificates.
The exercise by holders of the Loss Certificates of the right to delay
foreclosure will not alter the obligation of GECMSI to make any advances of
delinquent mortgage loan payments specified in the prospectus supplement. Any
such advances made by GECMSI after the date foreclosure is delayed will be
recoverable by GECMSI from amounts on deposit in the reserve fund. GECMSI will
continue to be entitled to reimbursement for Nonrecoverable Advances out of the
assets of the related trust.
The exercise by the holders of the Loss Certificates of any right to delay
commencement of foreclosure proceedings as described above could affect the
amount recovered upon the liquidation of the related mortgaged property and
could also affect the extent of any losses recognized thereon if the amounts
available in the reserve fund are not sufficient to make up the difference
between the net liquidation proceeds and the unpaid principal balance of the
related defaulted mortgage loan. There can be no assurance that this situation
would not arise under circumstances in which it could be in the interest of
other classes of certificates to proceed promptly to pursue remedies against the
mortgagor and mortgaged property in order to expedite recovery on a defaulted
mortgage loan. Any right to delay commencement of foreclosure proceedings
granted to the holders of the Loss Certificates would terminate in certain
specified circumstances, including when such class's principal balance had been
reduced to zero.
With respect to Cooperative Loans, any prospective purchaser will generally
have to obtain the approval of the board of directors of the relevant
cooperative before purchasing the shares and acquiring rights under the related
proprietary lease or occupancy agreement. See "Certain Legal Aspects of the
Mortgage Loans" herein. This approval is usually based on the purchaser's income
and net worth and numerous other factors. Although the cooperative's approval is
unlikely to be unreasonably withheld or delayed, the necessity of acquiring such
approval could limit the number of potential purchasers for those shares and
otherwise limit the trust's ability to sell and realize the value of those
shares.
In general, a "tenant-stockholder" (as defined in Section 216(b)(2) of the
Internal Revenue Code of 1986, as amended (the "Code")) of a corporation that
qualifies as a "cooperative housing corporation" within the meaning of Code
Section 216(b)(1) is allowed a deduction for amounts paid or accrued within his
taxable year to the corporation representing his proportionate share of certain
interest expenses and certain real estate taxes allowable as a deduction under
Code Section 216(a) to the corporation under Code
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Sections 163 and 164. In order for a corporation to qualify under Code Section
216(b)(1) for its taxable year in which such items are allowable as a deduction
to the corporation, such Section requires, among other things, that at least 80%
of the gross income of the corporation be derived from its tenant-stockholders,
as defined in Code Section 216(b)(2). By virtue of this requirement, the status
of a corporation for purposes of Code Section 216(b)(1) must be determined on a
year-to-year basis. Consequently, there can be no assurance that cooperatives
relating to the Cooperative Loans will qualify under such Section for any
particular year. In the event that such a cooperative fails to qualify for one
or more years, the value of the collateral securing any related Cooperative
Loans could be significantly impaired because no deduction would be allowable to
tenant-stockholders under Code Section 216(a) with respect to those years. In
view of the significance of the tax benefits accorded tenant-stockholders of a
corporation that qualifies under Code Section 216(b)(1), the likelihood that
such a failure would be permitted to continue over a period of years appears
remote.
If a mortgaged property has been or is about to be conveyed by the
mortgagor, GECMSI, as servicer, will be obligated to accelerate the maturity of
the mortgage loan, unless it reasonably believes it is unable to enforce that
mortgage loan's due-on-sale clause under applicable law or such enforcement
would adversely affect or jeopardize coverage under any related primary mortgage
insurance policy or pool insurance policy. If it reasonably believes it may be
restricted by law, for any reason, from enforcing such a due-on-sale clause,
GECMSI may enter into an assumption and modification agreement with the person
to whom such property has been or is about to be conveyed, pursuant to which
such person becomes liable under the promissory note evidencing such mortgage
loan. Any fee collected by GECMSI for entering into an assumption agreement will
be retained by GECMSI as additional servicing compensation. For a description of
circumstances in which GECMSI may be unable to enforce due-on-sale clauses, see
"Certain Legal Aspects of the Mortgage Loans -- Enforceability of Certain
Provisions." In connection with any such assumption, the interest rate borne by
the related promissory note evidencing such mortgage loan may not be decreased.
GECMSI, as servicer, will maintain with one or more depository institutions
one or more accounts into which it will deposit all payments of taxes, insurance
premiums, assessments or comparable items received for the account of the
mortgagors. Withdrawals from such account or accounts may be made only to effect
payment of taxes, insurance premiums, assessments or comparable items, to
reimburse GECMSI, or the applicable servicer, out of related collections for any
cost incurred in paying taxes, insurance premiums and assessments or otherwise
preserving or protecting the value of the mortgages, to refund to mortgagors any
amounts determined to be overages and to pay interest to mortgagors on balances
in such account or accounts to the extent required by law.
So long as it acts as servicer of the mortgage loans, GECMSI, and any
successor to GECMSI appointed as servicer following an Event of Default, will be
required to maintain certain insurance covering errors and omissions in the
performance of its obligations as servicer and certain fidelity bond coverage
ensuring against losses through wrongdoing of its officers, employees and
agents.
PRIVATE MORTGAGE INSURANCE
The mortgage loans in a pool will not have loan-to-value ratios in excess
of 105% of the original value of the mortgaged property of the mortgaged
property. Generally,
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mortgage loans that GECMSI originates or acquires do not have loan-to-value
ratios in excess of 95% of the original value of the mortgaged property. The
prospectus supplement for a series will describe the extent to which a pool
includes mortgage loans with loan-to-value ratios exceeding 95%. Unless
otherwise stated in the prospectus supplement, mortgage loans other than Home
Equity Loans that GECMSI originates or acquires usually will have private
mortgage insurance if the original principal amount of those loans exceeds 80%
of the original value of the mortgaged properties. GECMSI generally requires
such coverage to continue until the outstanding principal amount equals or is
less than 80% of the greater of the original value of the mortgaged property.
After that loan-to-value threshold is reached, a borrower may cancel its
private mortgage insurance. Under the recently enacted federal Homeowners
Protection Act, the cancellation of private mortgage insurance on single-family,
owner-occupied mortgaged properties may occur automatically or at the option of
the borrower if certain conditions are met. This act requires the automatic
cancellation of private mortgage insurance at the following times, if payments
on the mortgage loan are then current or are thereafter brought current:
- for all residential mortgage loans originated on or after July 29, 1999,
when the principal balance of the mortgage loan is first scheduled to
reach 78% (or 77% in the case of a mortgage loan determined at its
origination to be "high risk") of the original value of the mortgaged
property, based on the initial amortization schedule, or
- for all residential mortgage loans originated on or after July 29, 1999,
on the first day of the month following the midpoint of the amortization
term of the loan (e.g., 180 months in the case of a 360-month or 30-year
loan).
In addition, except with respect to a high risk loan, a borrower with a
good payment history has the option to cancel private mortgage insurance once
the principal balance of the mortgage loan is first scheduled to equal, or
actually equals, 80% of the original value of the mortgaged property. In order
to exercise this right, the borrower must satisfy the requirement of the holder
of the mortgage loan for evidence that the value of the mortgaged property has
not declined below the original value. GECMSI intends to permit borrowers to
establish the current value of the mortgaged property by one or more methods
permitted by applicable law.
Private mortgage insurance policies may be provided by General Electric
Mortgage Insurance Corporation, an affiliate of GECMSI and Funding. GECMSI does
not require private mortgage insurance policies on Home Equity Loans. A private
mortgage insurance policy may provide that, as an alternative to paying a claim
thereunder, the mortgage insurer will have the right to purchase the mortgage
loan following the receipt of a notice of default, at a purchase price equal to
the sum of the principal balance of the mortgage loan, accrued interest thereon
and the amount of certain advances made by GECMSI as servicer with respect to
the mortgage loan. The mortgage insurer may have such purchase right after the
borrower has failed to make three scheduled monthly payments, or one payment if
it is the first payment due on the mortgage loan, or after any foreclosure or
other proceeding affecting the mortgage loan or the mortgaged property has been
commenced. The proceeds of any such purchase will be distributed to
certificateholders on the applicable distribution date. A mortgage insurer may
be more likely to exercise such purchase option when prevailing interest rates
are low relative to the interest rate borne by the defaulted mortgage loan, in
order to reduce the aggregate amount of accrued interest that the insurer would
be obligated to pay upon payment of a claim.
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HAZARD INSURANCE
GECMSI, as servicer, will cause to be maintained for each mortgaged
property a hazard insurance policy. The coverage of such policy is required to
be in an amount not less than the maximum insurable value of the improvements
securing the related mortgage loan from time to time or the principal balance
owing on such mortgage loan from time to time, whichever is less. All amounts
collected by GECMSI for the benefit of the related trust under any hazard
policy, except for amounts to be applied to the restoration or repair of
property subject to the related mortgage or property acquired by foreclosure or
amounts released to the related mortgagor in accordance with GECMSI's normal
servicing procedures, will be credited to the related Loan Payment Record and
deposited in the applicable Certificate Account at the times and in the manner
described under "Loan Payment Record" below.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements on the property by fire,
lightning, explosion, smoke, windstorm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the mortgage loans will be
underwritten by different insurers and, therefore, will not contain identical
terms and conditions, the basic terms thereof are dictated by state law. Such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement, including earthquakes, landslides and mud flow, nuclear
reactions, pollution, wet or dry rot, vermin, rodents, insects or domestic
animals, theft and, in certain cases, vandalism. The foregoing list is merely
indicative of certain kinds of uninsured risks and is not intended to be all-
inclusive. If the property securing a mortgage loan is located in a federally
designated flood area, the pooling and servicing agreement will require that
flood insurance be maintained in such amounts as would be required by Fannie Mae
in connection with its mortgage loan purchase program. The depositor of the
mortgage loans in a trust may also purchase special hazard insurance against
certain of the uninsured risks described above. See "Credit
Enhancement -- Special Hazard Insurance."
Most of the properties securing the mortgage loans in a trust will be
covered by homeowners' insurance policies, which, in addition to the standard
form of fire and extended coverage, provide coverage for certain other risks.
These homeowners' policies typically contain a coinsurance clause which in
effect requires the insured at all times to carry insurance of a specified
percentage, generally 80% to 90%, of the full replacement value of the
improvements on the property in order to recover the full amount of any partial
loss. If the insured's coverage falls below this specified percentage, then the
insurer's liability in the event of partial loss will not exceed the lesser of
(1) the actual cash value (generally defined as replacement cost at the time and
place of loss, less physical depreciation) of the improvements damaged or
destroyed, or (2) such proportion of the loss as the amount of insurance carried
bears to the specified percentage of the full replacement cost of such
improvements.
Since the amount of hazard insurance GECMSI is required to cause to be
maintained on the improvements securing the mortgage loans declines as the
principal balances owing thereon decrease, if the residential properties
securing the mortgage loans appreciate in value over time, the effect of
coinsurance in the event of partial loss may be that hazard insurance proceeds
will be insufficient to restore fully the damaged property.
GECMSI, as servicer, will cause to be maintained on any mortgaged property
acquired upon foreclosure, or by deed in lieu of foreclosure, on behalf of the
trustee hazard
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insurance. The hazard insurance will consist of extended coverage in an amount
which is at least equal to the lesser of (1) the maximum insurable value from
time to time of the improvements which are a part of such property or (2) the
unpaid principal balance of the related mortgage loan, plus, in the case of a
second priority Home Equity Loan, the unpaid principal balance of any senior
mortgage loan, at the time of such foreclosure or deed in lieu of foreclosure,
plus accrued interest and the good-faith estimate of GECMSI of related
liquidation expenses to be incurred in connection therewith.
GECMSI, as servicer, may maintain, in lieu of causing individual hazard
insurance policies to be maintained with respect to each mortgage loan, one or
more blanket insurance policies covering hazard losses on the mortgage loans.
GECMSI will pay the premium for such policy on the basis described therein and
will pay any deductible amount with respect to claims under such policy relating
to the mortgage loans.
GECMSI will not require that a standard hazard or flood insurance policy be
maintained on the cooperative apartment relating to any Cooperative Loan.
Generally, the cooperative itself is responsible for maintenance of hazard
insurance for the property owned by the cooperative and the tenant-stockholders
of that cooperative do not maintain individual hazard insurance policies. To the
extent, however, that a cooperative and the related borrower on a Cooperative
Loan do not maintain such insurance or do not maintain adequate coverage or any
insurance proceeds are not applied to the restoration of damaged property, any
damage to such borrower's cooperative apartment or such cooperative building
could significantly reduce the value of the collateral securing such Cooperative
Loan.
UNANTICIPATED RECOVERIES OF LOSSES ON THE MORTGAGE LOANS
To the extent and in the manner specified in the prospectus supplement, the
principal balance of classes of certificates may be reduced by allocating to
them losses of principal that occur in connection with liquidation on the
mortgage loans in the related trust (a "Realized Loss"). Unless otherwise stated
in the prospectus supplement, holders of certificates that had previously been
allocated a Realized Loss in respect of a mortgage loan -- which holders may, in
the event of a transfer of any such certificate, be different from the holders
at the time the Realized Loss was allocated -- may receive distributions if the
servicer subsequently recovers an amount (an "Unanticipated Recovery") in
respect of such mortgage loan as a result of events such as an unanticipated
insurance settlement, tax refund or mortgagor bankruptcy distribution. In such
event, the trustee will distribute to the holders of each outstanding class to
which such Realized Loss had previously been allocated its share of such
Unanticipated Recovery in an amount not to exceed the amount of such loss
previously allocated to such class. This distribution will be made on the
distribution date in the calendar month following receipt of the Unanticipated
Recovery. Any distributions of Unanticipated Recoveries will not reduce the
principal balances of the class of certificates receiving such recoveries. If
the certificates include a class of principal-only certificates, such
principal-only class will be allocated a percentage of any Unanticipated
Recovery equal to the percentage of the loss previously allocated to it in
respect of the related mortgage loans, and the other classes of certificates,
other than interest-only certificates, that were allocated a portion of such
loss will receive a pro rata share of the balance. Notwithstanding the
foregoing, no certificateholder will be entitled to receive any share of an
Unanticipated Recovery following the distribution date on which the principal
balance of its certificates has been reduced to zero, including following the
termination of the trust. See "The Pooling and Servicing Agreement --
Termination" in this prospectus.
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ADVANCES
Unless otherwise stated in the prospectus supplement, in the event that any
borrower fails to make any payment of principal or interest required under the
terms of a mortgage loan, GECMSI, as servicer, will be obligated to advance the
entire amount of such payment adjusted in the case of any delinquent interest
payment to the applicable Remittance Rate. Unless otherwise stated in the
prospectus supplement and except as described above under "Credit
Enhancement -- Purchase of Liquidating Loans," this obligation to advance will
be limited to amounts which GECMSI reasonably believes will be recoverable by it
out of liquidation proceeds or otherwise in respect of such mortgage loan.
GECMSI, or the applicable servicer, will be entitled to reimbursement for any
such advance from related late payments on the mortgage loan as to which such
advance was made. Furthermore, unless otherwise stated in the prospectus
supplement, GECMSI, or the applicable servicer, will be entitled to
reimbursement for any such advance (1) from liquidation proceeds or insurance
proceeds received if such mortgage loan is foreclosed, and is not purchased by
GECMSI, as servicer, pursuant to any obligation it may have to purchase
Liquidating Loans, prior to any payment to certificateholders in respect of the
repossession or foreclosure and (2) from receipts or recoveries on all other
mortgage loans or from any other assets of the trust, for all or any portion of
such advance which GECMSI determines, in good faith, may not be ultimately
recoverable from such liquidation or insurance proceeds (a "Nonrecoverable
Advance"). Any Nonrecoverable Advance will be reimbursable out of the assets of
the trust. The amount of any scheduled payment required to be advanced by GECMSI
will not be affected by any agreement between GECMSI and a borrower providing
for the postponement or modification of the due date or amount of such scheduled
payment. If specified in the prospectus supplement, the trustee for the related
series will make advances of delinquent payments of principal and interest in
the event of a failure by GECMSI, as servicer, to perform such obligation.
Unless otherwise stated in the prospectus supplement, until any obligation
of GECMSI as servicer to purchase Liquidating Loans is exhausted, GECMSI will
advance delinquent installments of principal and interest, adjusted to the
applicable Remittance Rate, on the mortgage loans as described above in an
aggregate amount up to the amount of its remaining purchase obligation,
irrespective of whether GECMSI believes any such advance will be recoverable.
GECMSI's obligation to advance delinquent installments of principal and
interest, adjusted to the applicable Remittance Rate, on the mortgage loans
which it deems recoverable will be unaffected by the exhaustion of any
obligation GECMSI as servicer to purchase Liquidating Loans. In the event that
GECMSI has an obligation to purchase Liquidating Loans, any outstanding
unreimbursed advances may be charged against the amount of such obligation,
subject to reinstatement on account of net recoveries on such mortgage loan.
Any such obligation to make advances may be limited to amounts due holders
of senior certificates of the related series or may be limited to specified
periods or otherwise as specified in the prospectus supplement.
GECMSI, or the applicable servicer, will make such advances in order to
maintain a regular flow of scheduled interest and principal payments to holders
of the relevant classes of certificates. Such advances do not represent an
obligation of GECMSI or the applicable servicer to guarantee or insure against
losses.
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LOAN PAYMENT RECORD
The pooling and servicing agreement for each trust will require that
GECMSI, as servicer, establish and maintain a Loan Payment Record to which will
be credited the following payments received by GECMSI with respect to the
mortgage loans included in the related trust:
- all payments on account of principal, including Principal Prepayments
(other than principal payments due and payable on or before, and
Principal Prepayments received before, the Cut-off Date), received from
borrowers, excluding any amounts specified in the prospectus supplement;
- all payments, other than those due and payable on or before the Cut-off
Date, on account of interest received from borrowers, adjusted to the
applicable Remittance Rate, and excluding any other amounts specified in
the prospectus supplement;
- all amounts received by GECMSI, or the applicable servicer, in connection
with the liquidation of any mortgaged property, and the purchase price
including applicable interest thereon, of any mortgage loan purchased by
GECMSI pursuant to the applicable pooling and servicing agreement or any
amount paid in connection with the substitution of a mortgage loan;
- all proceeds received by GECMSI, or the applicable servicer, under any
private mortgage insurance or any title, hazard, special hazard, pool or
other insurance policy covering any mortgage loan, other than proceeds to
be applied to the restoration or repair of the property subject to the
related mortgage or released to the borrower in accordance with the
normal servicing procedures of GECMSI;
- all proceeds received in respect of any mortgaged property acquired on
behalf of the trustee;
- Unanticipated Recoveries; and
- if the trust includes mortgage loans that are secured by other collateral
(such as securities) in addition to the related property, all amounts
received by GECMSI in connection with the liquidation of such additional
collateral.
GECMSI will not be required to credit to the Loan Payment Record payments
on any mortgage loan that has been previously released from the trust, amounts
representing fees or late charge penalties payable by borrowers or amounts
received by GECMSI for the account of borrowers for application towards the
payment of taxes, insurance premiums, assessments and similar items.
Unless otherwise stated in the prospectus supplement, GECMSI, as servicer,
may, from time to time, make debits to the Loan Payment Record for the following
purposes:
- to reimburse GECMSI, or the applicable servicer, for expenses incurred by
it in connection with the liquidation of any mortgage loan, including
amounts advanced on any senior mortgage loans, and prior unreimbursed
advances of delinquent installments of principal and interest, delinquent
taxes, assessments, insurance premiums and comparable items and property
protection expenses with respect thereto, in an amount not to exceed the
amount of the proceeds from any such liquidation, including insurance
proceeds, credited to the Loan Payment Record, and, if specified in the
prospectus supplement, to the extent such proceeds, net of such expenses,
exceed the Principal Balance of such mortgage loan plus one
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month's interest thereon at the applicable Remittance Rate, to pay to
GECMSI such excess as additional servicing compensation;
- to reimburse GECMSI, or the applicable servicer, for expenses
reimbursable under any insurance policy covering a mortgage loan and
amounts expended by GECMSI in good faith in connection with the
restoration of a mortgaged property damaged by an uninsured cause, in an
amount not to exceed the proceeds from any insurance covering such
mortgage loan and any liquidation thereof credited to the Loan Payment
Record;
- to reimburse GECMSI or Funding for certain expenses relating to the
pooling and servicing agreement as to which GECMSI or Funding is entitled
to indemnification or reimbursement pursuant to the pooling and servicing
agreement;
- to pay to GECMSI amounts received in respect of any mortgage loan
purchased by GECMSI as required by the pooling and servicing agreement to
the extent that the distribution of any such amounts on the distribution
date upon which the proceeds of such purchase are distributed would make
the total amount distributed in respect thereof greater than the
Principal Balance thereof plus, unless otherwise stated in the prospectus
supplement, one month's interest thereon at the applicable Remittance
Rate, net of any unreimbursed advances of delinquent installments of
principal and interest made by GECMSI;
- to reimburse GECMSI, or, if applicable, the guarantor or any other
entity, for any previous advance of delinquent installments of principal
and interest, adjusted to the applicable Remittance Rate, in respect of
any mortgage loan to the extent of recoveries, including late payments
and liquidation proceeds, on such mortgage loan;
- to reimburse GECMSI from any borrower payment of interest or other
recovery with respect to a particular mortgage loan, to the extent not
previously retained by GECMSI, for unpaid servicing fees with respect to
such mortgage loan, subject to certain limitations;
- to reimburse GECMSI, or, if applicable, the trustee, the guarantor or any
other entity, for any Nonrecoverable Advance;
- to make deposits into the Certificate Account; and
- to deduct any amount credited to the Loan Payment Record in error.
In addition, if specified in the prospectus supplement relating to a trust
which includes second-priority Home Equity Loans, GECMSI, as servicer, will be
entitled to be reimbursed, out of payments received on a second-priority Home
Equity Loan, for funds advanced to keep the related senior mortgages current.
On the date or dates specified in the prospectus supplement (each, a
"Deposit Date") prior to each distribution date, unless otherwise stated in the
prospectus supplement, GECMSI as servicer, will transfer to the Certificate
Account the payments in respect of the mortgage loans described above, net of
any debits made thereto as described above, which were received by it after the
Cut-off Date and before the fifth business day next preceding such distribution
date (the "Determination Date"), together with any required advances of
delinquent principal and interest payments to be made by it, except (1)
Principal Prepayments received during the month of such deposit, other than as
described in the next sentence, and all related payments of interest
representing interest for the month of deposit or any portion thereof and (2)
payments which represent early receipt of scheduled payments of principal and
interest due on a date or dates subsequent
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to the first day of the month of deposit. In addition, unless otherwise stated
in the prospectus supplement, GECMSI will transfer to the Certificate Account
(1) the amount of any voluntary prepayment in full, net of any interest thereon,
received by GECMSI (or, in the case of a mortgage loan master-serviced by
GECMSI, of which GECMSI receives notice) during the period from the first day
through the fifteenth day of the month of such distribution date and (2) the
amount of any Compensating Interest Payment for such distribution date, as
described in the prospectus supplement. The net amounts described in the two
preceding sentences are the "Available Funds" for a series of certificates with
respect to any distribution date, unless the prospectus supplement specifies
that certain certificates are entitled to payments from certain specified assets
in the related trust, in which case the amounts received from such specified
assets are the "Available Funds" for such certificates, as specified in the
prospectus supplement. Available Funds shall not include Unanticipated
Recoveries. Unless otherwise stated in the prospectus supplement, all transfers
by GECMSI to the Certificate Account will be made by transfer of next-day funds.
Although such next-day funds may have been credited to the Certificate Account,
until such funds become available to the trustee under applicable law and
procedures relating to such transfers, such funds will not be available to
certificateholders. Unless otherwise stated in the prospectus supplement, prior
to transferring such funds, GECMSI may commingle payments received in respect of
the mortgage loans and may invest such payments for its own account. Income
realized on the investment of such payments pending deposit into the Certificate
Account will be retained by GECMSI as additional servicing compensation. If
GECMSI realizes any net losses on such investments, it shall deposit in the
Certificate Account an amount equal to such net loss before the next
distribution date.
As a result of GECMSI's access to payments received in respect of the
mortgage loans prior to the time such payments become available to the trustee
in the Certificate Account, creditors or a trustee-in-bankruptcy for GECMSI may
be able to assert rights in such payments superior to those of the trustee.
If specified in the prospectus supplement, GECMSI may establish, or provide
for the establishment of, an account (the "Collection Account") in lieu of the
Loan Payment Record described above. If so specified, all amounts to be credited
or debited to the Loan Payment Record will instead be deposited in or withdrawn
from the Collection Account.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
Unless otherwise stated in the prospectus supplement, GECMSI's primary
compensation for its servicing activities will come from the payment to it, with
respect to each interest payment on a mortgage loan, of all or a portion of the
difference between the interest rate for such mortgage loan and the related
Remittance Rate. In addition to the primary compensation, GECMSI will retain all
assumption fees, late payment charges and other miscellaneous charges, all to
the extent collected from borrowers and, unless otherwise stated in the
prospectus supplement, the investment income described in the second preceding
paragraph. In the event GECMSI or another institution is acting as master
servicer under an agreement, the master servicer will receive compensation with
respect to the performance of its activities as master servicer.
Unless otherwise stated in the prospectus supplement, GECMSI will be
responsible for paying all expenses incurred in connection with the servicing of
the mortgage loans, subject to limited reimbursement as described in "Loan
Payment Record" above, including, without limitation, payment of any premium for
any Advance Guarantee,
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Liquidating Loan Guarantee, Deposit Guarantee, pool insurance policy, special
hazard policy, bankruptcy bond, repurchase bond or other guarantee or surety,
payment of the fees and the disbursements of the trustee, the Administrator, if
any, and the independent accountants, payment of the compensation of any direct
servicers of the mortgage loans, payment of all fees and expenses in connection
with the realization upon defaulted mortgage loans and payment of expenses
incurred in connection with distributions and reports to certificateholders.
Unless otherwise stated in the prospectus supplement, GECMSI may assign any of
its primary servicing compensation in excess of that amount customarily retained
as servicing compensation for similar assets.
RESIGNATION, SUCCESSION AND INDEMNIFICATION OF GECMSI, AS SERVICER, AND THE
DEPOSITOR
The pooling and servicing agreement for each trust will provide that,
except as described in the second and third succeeding paragraphs, GECMSI may
not resign from its obligations and duties as servicer or master servicer
thereunder, except upon determination that GECMSI's performance of such duties
is no longer permissible under applicable law or as provided in the last
paragraph under this heading. No such resignation will become effective until
the trustee or a successor has assumed GECMSI's servicing obligations and duties
under such pooling and servicing agreement for each trust. The guarantor's
obligations under any Advance Guarantee, Liquidating Loan Guarantee or Deposit
Guarantee will, upon issuance thereof, be irrevocable, subject to certain
limited rights of assignment as described in the prospectus supplement if
applicable.
The pooling and servicing agreement will provide that none of GECMSI,
Funding, if applicable, or the guarantor, if applicable, nor any of their
respective directors, officers, employees or agents, shall be under any
liability to the trust or the certificateholders of the related series for
taking any action or for refraining from taking any action pursuant to such
pooling and servicing agreement, or for errors in judgment; provided, however,
that none of GECMSI, Funding, or the guarantor, nor any such person, will be
protected against any liability which would otherwise be imposed by reason of
willful misfeasance, bad faith or gross negligence in the performance of duties
or by reason of reckless disregard of obligations and duties thereunder. The
pooling and servicing agreement will also provide that GECMSI, Funding, if
applicable, and, the guarantor, if applicable, and their respective directors,
officers, employees and agents are entitled to indemnification by the related
trust and will be held harmless against any loss, liability or expense incurred
in connection with any legal action relating to the pooling and servicing
agreement or the certificates, other than any loss, liability or expense related
to any specific mortgage loan, except as otherwise reimbursable under the
pooling and servicing agreement or incurred by reason of willful misfeasance,
bad faith or gross negligence in the performance of duties thereunder or by
reason of reckless disregard of obligations and duties thereunder. In addition,
each pooling and servicing agreement will provide that none of GECMSI, Funding,
if applicable, the guarantor, if applicable, is under any obligation to appear
in, prosecute or defend any legal action which is not incidental to GECMSI's
servicing responsibilities under such pooling and servicing agreement or the
guarantor's payment obligations under any limited guarantee, respectively, and
which in its respective opinion may involve it in any expense or liability. Each
of GECMSI and, if applicable, the guarantor may, however, in its respective
discretion undertake any such action which it may deem necessary or desirable in
respect of such pooling and servicing agreement and the rights and duties of the
parties thereto and the interests of the certificateholders thereunder. In such
event, the legal expenses and costs of such action and any liability resulting
therefrom will be expenses, costs and liabilities of the trust, and GECMSI and,
if
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applicable, the guarantor, will be entitled to be reimbursed therefor from
amounts credited to the Loan Payment Record.
Any corporation into which GECMSI or Funding may be merged or consolidated
or any corporation resulting from any merger, conversion or consolidation to
which GECMSI or Funding is a party, or any corporation succeeding to the
business of GECMSI or Funding, or any corporation more than 50% of the voting
stock of which is owned, directly or indirectly, by General Electric Company, or
any limited partnership, the sole general partner of which is either GECMSI or a
corporation more than 50% of the voting stock of which is owned, directly or
indirectly, by General Electric Company, which assumes the obligations of GECMSI
or Funding, will be the successor of GECMSI or Funding under each pooling and
servicing agreement.
GECMSI also has the right to assign its rights, and delegate its duties and
obligations, as servicer under the pooling and servicing agreement for each
series of certificates; provided that (1) the purchaser or transferee accepting
such assignment or delegation is qualified to service mortgage loans for Fannie
Mae or Freddie Mac, (2) is reasonably satisfactory to the trustee for such
series of certificates and executes and delivers to the trustee an agreement, in
form and substance reasonably satisfactory to the trustee, which contains an
assumption by such purchaser or transferee of the due and punctual performance
and observance of each covenant and condition to be performed or observed by the
servicer under the pooling and servicing agreement from and after the date of
such agreement and (3) each applicable rating agency's rating of any
certificates of such series in effect immediately prior to such assignment or
delegation would not be qualified, downgraded or withdrawn as a result thereof.
In the case of any such assignment or delegation, GECMSI will be released from
its obligations as servicer under the pooling and servicing agreement except for
liabilities and obligations incurred prior to such assignment or delegation.
THE POOLING AND SERVICING AGREEMENT
The following, together with the description of the pooling and servicing
agreement in the prospectus supplement, describes all material provisions of the
pooling and servicing agreement relating to the applicable series of
certificates. 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 agreements. Where particular provisions or terms used in the
pooling and servicing agreements are referred to, such provisions or terms are
as specified in the pooling and servicing agreements.
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of a series of certificates, GECMSI or Funding, as
the applicable depositor of the mortgage loans into each trust and as seller,
will assign the related mortgage loans to the trustee. The depositor will also
assign to the trustee all principal and interest, subject to exclusions
specified in the prospectus supplement, received by the servicer on or with
respect to such mortgage loans on or after the Cut-off Date other than principal
and interest due and payable on or before, and Principal Prepayments received
before, the Cut-off Date. The trustee will, concurrently with such assignment,
execute, countersign and deliver the certificates to the depositor in exchange
for the mortgage loans. Each mortgage loan will be identified in a schedule
appearing as an exhibit to the pooling and servicing agreement. Such schedule
will include information as to the Principal Balance of each mortgage loan as of
the Cut-off Date, as well as
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information respecting the interest rate, the scheduled monthly payment of
principal and interest as of the Cut-off Date and the maturity date of each
promissory note evidencing the mortgage loans.
In addition, as to each mortgage loan, the depositor of the mortgage loans
in each trust, as seller, will deliver to the trustee, unless otherwise stated
in the prospectus supplement or as described below, the promissory note and
mortgage, any assumption and modification agreement and an assignment of the
mortgage to the trustee in recordable form, other than in respect of unavailable
recording information. In addition, unless otherwise stated in the prospectus
supplement, the depositor will also deliver to the trustee originals of the
recorded mortgages, any intervening assignments of the mortgages (other than
from GECMSI to Funding) and title insurance policies with respect to the
mortgage loans, as promptly as practicable, and in any case within thirty days,
after receiving all such documents from the applicable recording offices and
title insurance companies. Pending such delivery, GECMSI on behalf of the
depositor will retain and furnish to the trustee upon request copies of the
mortgages and intervening assignments of mortgage delivered for recording and
the evidence of title insurance issued at origination of the mortgage loans.
GECMSI on behalf of the depositor will retain and furnish to the trustee upon
request any applicable evidence of primary mortgage insurance so long as such
insurance remains in force.
The depositor of the mortgage loans may deliver to the trustee, in lieu of
the original promissory note, a new promissory note signed by the borrower
confirming its obligation under the original promissory note (a "Confirmatory
Mortgage Note"). Furthermore, a trust may include mortgage loans where the
original promissory note or a Confirmatory Mortgage Note is not delivered to the
trustee if the depositor instead delivers to the trustee an affidavit certifying
that the depositor was the sole owner of the indebtedness evidenced by such note
and the original thereof has been lost or destroyed and the depositor
indemnifies the trust against any loss, liability, damage, claim or expense
resulting from the depositor's failure to have delivered the original promissory
note or Confirmatory Mortgage Note. Such indemnification will be terminated if
the depositor subsequently delivers to the trustee the original promissory note
or a Confirmatory Mortgage Note. Unless otherwise stated in the applicable
prospectus supplement, no more than 1% of the mortgage loans in any mortgage
pool, measured by Principal Balance as of the related Cut-Off Date, may consist
of mortgage loans as to which the depositor has failed to deliver the original
promissory note or Confirmatory Mortgage Note. In the case of mortgage loans
purchased by Funding from GECMSI without the original promissory note or
Confirmatory Mortgage Note, Funding, as depositor, may assign to the trustee the
benefit of an affidavit and indemnification to the foregoing effect received
from GECMSI as seller under the Loan Sale Agreement.
Unless otherwise stated in the prospectus supplement, the applicable
depositor may refrain from recording the assignments of the mortgage loans to
the trustee unless GECMSI or the trustee obtains actual notice or knowledge of
the occurrence of any one or more of the following:
- GECMSI is not a wholly-owned direct or indirect subsidiary of General
Electric Company or General Electric Capital Corporation ("GE Capital")
does not own (directly or indirectly) at least two-thirds of the voting
shares of the capital stock of GECMSI;
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- the long-term senior unsecured rating of GE Capital is downgraded by the
applicable rating agency below its two highest long-term rating
categories or such rating is withdrawn;
- GE Capital is no longer obligated pursuant to the terms of a support
agreement to maintain GECMSI's net worth or liquidity (as such terms are
defined in such support agreement) at the levels stated therein, or that
such support agreement, including any amendment thereto, has been
breached, terminated or otherwise held to be unenforceable; or
- such support agreement, including any amendment thereto, is amended or
modified (each such event described in the preceding four paragraphs is
referred to herein as a "Trigger Event");
provided, however, that such recording will not be required if GECMSI delivers
to the trustee a letter from each rating agency which originally rated the
certificates to the effect that the failure to take such action would not cause
such rating agency to withdraw or reduce its then current ratings of such
certificates. For purposes of the foregoing, GECMSI, Funding or the trustee will
be deemed to have knowledge of any such downgrading if, in the exercise of
reasonable diligence, GECMSI, Funding or the trustee has or should have had
knowledge thereof. If a Trigger Event occurs, GECMSI will also promptly furnish
to the trustee the documents retained by GECMSI on behalf of Funding, if
applicable, as described in the preceding paragraph.
Although such recordation is not necessary to make the assignment of the
mortgage loans from GECMSI to Funding or from the applicable depositor to the
trustee effective, if GECMSI were to make a sale, assignment, satisfaction or
discharge of any mortgage loan prior to recording or filing the assignments to
the trustee, the other parties to such sale, assignment, satisfaction or
discharge might have rights superior to those of Funding or the trustee, as the
case may be. If GECMSI were to do so without authority under the pooling and
servicing agreement, it would be liable to the trustee on behalf of the related
certificateholders. Moreover, if insolvency proceedings relating to GECMSI or
Funding were commenced prior to such recording or filing, creditors of GECMSI or
Funding may be able to assert rights in the affected mortgage loans superior to
those of Funding or the trustee.
GECMSI will acknowledge in the pooling and servicing agreement that its
retention of record title to the mortgages is for convenience only and that it
is holding record title solely as custodian for Funding, if applicable, and for
the trustee upon transfer of the mortgage loans to the trustee.
With respect to any mortgage loans which are Cooperative Loans, the
depositor of such loans in a trust, as seller, will cause to be delivered to the
trustee the related original cooperative note endorsed to the order of the
trustee (or the lost-note affidavit and indemnification described in the second
preceding paragraph), the original security agreement, the proprietary lease or
occupancy agreement, the recognition agreement, an executed financing agreement
and the relevant stock certificate and related blank stock powers. The depositor
will file in the appropriate office an assignment and a financing statement
evidencing the trustee's security interest in each such loan.
Unless otherwise stated in the related prospectus supplement, the pooling
and servicing agreement will provide the trustee with the benefit of certain
representations and warranties relating to the mortgage loans. These
representations and warranties will be made by GECMSI in the pooling and
servicing agreement if it is acting as depositor. If
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Funding acts as depositor with respect to mortgage loans acquired from GECMSI,
Funding will assign to the trustee in the pooling and servicing agreement the
benefit of the representations and warranties, together with the remedies for a
breach thereof, made by GECMSI in the related Loan Sale Agreement.
Unless otherwise stated in the related prospectus supplement, GECMSI
generally will represent and warrant, among other things, that:
- the information set forth in the schedule of mortgage loans attached
thereto is correct in all material respects at the date or dates
respecting which such information is furnished;
- a lender's title insurance policy or binder, or other assurance of title
insurance customary in the relevant jurisdiction therefor, for each
mortgage loan (other than a Cooperative Loan) was issued on the date of
origination thereof and each such policy or binder assurance is valid and
remains in full force and effect at the issue date of the certificates;
- at the date of initial issuance of the certificates, GECMSI has good
title to and under the sole owner of the mortgage loans and the mortgage
loans are being transferred free and clear of any liens, claims and
encumbrances;
- at the issue date of the certificates, each mortgage is a valid and
enforceable first or, in the case of a second priority Home Equity Loan,
second lien on the property securing the related promissory note, subject
only to (a) the lien of current real property taxes and assessments, (b)
covenants, conditions, and restrictions, rights of way, easements and
other matters of public record as of the date of the recording of such
mortgage, such exceptions appearing of record being acceptable to
mortgage lending institutions generally in the area wherein the property
subject to the mortgage is located or specifically reflected in the
appraisal obtained by GECMSI, (c) in the case of a second-priority Home
Equity Loan, the lien of the related first mortgage, and (d) other
matters to which like properties are commonly subject which do not
materially interfere with the benefits of the security intended to be
provided by such mortgage, and such property is free of material damage
and is in good repair;
- at the issue date of the certificates, no mortgage loan is 30 or more
days delinquent and none of the mortgage loans have been past due 30 or
more days more than once during the preceding twelve months, and there
are no delinquent tax or assessment liens against the property covered by
the related mortgage;
- at the issue date of the certificates, the portion of each mortgage loan,
if any, which in the circumstances set forth above under "Servicing of
the Mortgage Loans -- Private Mortgage Insurance" should be insured with
a private mortgage insurer is so insured;
- at the issue date of the certificates, there is no valid offset, defense
or counterclaim to any mortgage or its related promissory note, including
the obligation of the mortgagor to pay the unpaid principal and interest
on such promissory note; and
- each mortgage loan at the time it was made complied in all material
respects with applicable state and federal laws, including, without
limitation, usury, equal credit opportunity and disclosure laws.
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In addition to the foregoing, if Funding acts as depositor, it will also
represent and warrant that:
- it had good title to and was the sole owner of such mortgage loans
immediately prior to the assignment thereof to the trustee; and
- no valid offset, defense or counterclaim to the mortgage or related
promissory note exists as of the issue date of the certificates as a
result of any action taken by Funding.
In the event that the depositor of mortgage loans in a trust has acquired
the mortgage loans for a series from a third party, if so specified in the
related prospectus supplement, the depositor may, in lieu of making the
representations described in the preceding paragraph, cause the entity from
which the depositor acquired such mortgage loans to make such representations
(other than those regarding the depositor's title to the mortgage loans, which
will in all events be made by the depositor), in the sales agreement pursuant to
which such mortgage loans are acquired, or if such entity is acting as a
servicer, in its servicing agreement. In such event such representations, and
the depositor's rights against such entity in the event of a breach thereof,
will be assigned to the trustee for the benefit of the holders of the
certificates of such series.
REPURCHASE OR SUBSTITUTION
The trustee will review the documents delivered to it with respect to the
assets of the related trust. Unless otherwise stated in the prospectus
supplement, if any document is not delivered or is found to be defective in any
material respect and GECMSI cannot deliver such document or cure such defect
within 60 days after notice thereof, which the trustee will undertake to give
within 45 days of the delivery of such documents, GECMSI will, not later than
the first distribution date which is more than ten days after such 60-day
period, (a) remove the affected mortgage loan from the trust and substitute one
or more other mortgage loans therefor or (b) repurchase the mortgage loan from
the trustee for a price equal to 100% of its Principal Balance plus interest
thereon at the applicable Remittance Rate from the date on which interest was
last paid to the first day of the month in which such purchase price is to be
distributed, net of any unreimbursed advances of principal and interest thereon
made by GECMSI, as servicer. Such purchase price will be deposited in the
Certificate Account on the business day preceding such distribution date. Unless
otherwise provided in the pooling and servicing agreement, this repurchase and
substitution obligation will constitute the sole remedy available to
certificateholders or the trustee on behalf of certificateholders against GECMSI
or Funding for a material defect in a document relating to a mortgage loan.
Unless otherwise stated in the prospectus supplement, GECMSI and Funding,
if acting as depositor of mortgage loans in a trust, will agree to either (a)
cure in all material respects any breach of any representation or warranty set
forth in such agreement that materially and adversely affects the interests of
the certificateholders in a mortgage loan (a "Defective Mortgage Loan") within
60 days of its discovery by GECMSI or Funding, as the case may be, or its
receipt of notice thereof from the trustee or Funding, (b) repurchase such
Defective Mortgage Loan not later than the first distribution date which is more
than ten days after such 60-day period for a price equal to 100% of its
Principal Balance plus interest thereon at the applicable Remittance Rate from
the date on which interest was last paid to the first day of the month in which
such purchase price is to be distributed, net of any unreimbursed advances of
principal and interest thereon made by GECMSI as servicer, or (c) remove the
affected mortgage loan from the trust and
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substitute one or more other mortgage loans therefor. Such purchase price will
be deposited in the Certificate Account on the business day preceding such
distribution date. Unless otherwise provided in the pooling and servicing
agreement, this repurchase or substitution obligation will constitute the sole
remedy available to certificateholders or the trustee on behalf of
certificateholders for any such breach.
If so specified in the prospectus supplement for a series where the
depositor of mortgage loans in a trust has acquired the related mortgage loans
from a third party, in lieu of agreeing to repurchase or substitute mortgage
loans as described above, the depositor may obtain such an agreement from the
entity which sold such mortgage loans, which agreement will be assigned to the
trustee for the benefit of the holders of the certificates of such series. In
such event, unless otherwise stated in the related prospectus supplement, the
depositor will have no obligation to repurchase or substitute mortgage loans if
such entity defaults in its obligation to do so.
If a mortgage loan is substituted for another mortgage loan as described
above, the new mortgage loan will, unless otherwise stated in the prospectus
supplement:
- have a Principal Balance (together with any other new mortgage loan so
substituted), as of the first distribution date following the month of
substitution, after deduction of all payments due in the month of
substitution, not in excess of the Principal Balance of the removed
mortgage loan as of such distribution date (the amount of any shortfall,
plus one month's interest thereon at the applicable Remittance Rate, to
be deposited in the Certificate Account on the business day prior to the
applicable distribution date);
- have an interest rate not less than, and not more than one percentage
point greater than, that of the removed mortgage loan;
- have a Remittance Rate equal to that of the removed mortgage loan;
- have a remaining term to stated maturity not later than, and not more
than one year less than, the remaining term to stated maturity of the
removed mortgage loan;
- have a current loan to original value not greater than that of the
removed mortgage loan; and
- in the reasonable determination of GECMSI, be of the same type, quality
and character as the removed mortgage loan (as if the defect or breach
giving rise to the substitution had not occurred) and be, as of the
substitution date, in compliance with the representations and warranties
contained in the pooling and servicing agreement.
If a REMIC election is to be made with respect to all or a portion of a
trust, any such substitution will occur within two years after the initial
issuance of the related certificates. If no REMIC election is made, any
substitution will be made within 90 days after the initial issuance of the
related certificates.
CERTAIN REFINANCINGS
The pooling and servicing agreement will provide that if GECMSI in its
individual capacity agrees to refinance any mortgage loan upon the request of
the related mortgagor, such mortgage loan will be assigned to GECMSI by the
trustee upon certification that the principal balance of such mortgage loan and
accrued and unpaid interest thereon at the Remittance Rate has been credited to
the related Loan Payment Record.
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EVIDENCE AS TO COMPLIANCE
The pooling and servicing agreement will provide that a firm of independent
public accountants will furnish to the trustee on or before March 31 of each
year, beginning with March 31 in the year which begins not less than three
months after the date of the initial issue of certificates, a report as to
compliance by GECMSI with the minimum servicing standards set forth in the
Uniform Single Attestation Program for Mortgage Bankers ("USAP") with respect to
the mortgage loans (or, if the pooling and servicing agreement relates to Home
Equity Loans, with respect to the home equity loans) in GECMSI's servicing
portfolio. In connection with the preparation of such report, GECMSI will
provide to such firm of independent public accountants a statement signed by an
officer of GECMSI to the effect that GECMSI has complied in all material
respects with the minimum servicing standards set forth in the USAP with respect
to the mortgage loans (or, if the pooling and servicing agreement relates to
Home Equity Loans, with respect to the home equity loans) in GECMSI's servicing
portfolio or, if there has been material noncompliance with such servicing
standards, describing such noncompliance.
The pooling and servicing agreement will also provide for delivery to the
trustee on or before March 31 of each year, beginning with March 31 in the year
which begins not less than three months after the date of the initial issue of
the certificates, a statement signed by an officer of GECMSI, as servicer, to
the effect that GECMSI, as servicer, has fulfilled its material obligations
under the pooling and servicing agreement throughout the preceding year or, if
there has been a default in the fulfillment of any such obligations, describing
each such default.
LIST OF CERTIFICATEHOLDERS
Upon written request of the trustee, or, if the guarantor has issued any
limited guarantee with respect to such certificates, the guarantor, the
certificate registrar will provide to the trustee, or, if applicable, the
guarantor, within fifteen days after receipt of such request, a list of the
names and addresses of all certificateholders of record of a particular series
as of the most recent Record Date for payment of distributions to
certificateholders of that series. Upon written request of three or more
certificateholders of record of a series of certificates for purposes of
communicating with other certificateholders with respect to their rights under
the pooling and servicing agreement for such series, the trustee will afford,
within five business days after the receipt of such request, such
certificateholders access during business hours to the most recent list of
certificateholders of that series held by the trustee. If such list is as of a
date more than 90 days prior to the date of receipt of a request from such
certificateholders, the trustee shall promptly request from the certificate
registrar a current list and will afford such requesting certificateholders
access to such list promptly upon receipt.
The pooling and servicing agreement will not provide for the holding of any
annual or other meetings of certificateholders.
THE TRUSTEE
Any commercial bank or trust company serving as trustee may have normal
banking relationships with GECMSI. In addition, the depositor of the mortgage
loans in a trust and the trustee acting jointly will have the power and the
responsibility for appointing co-trustees or separate trustees of all or any
part of the trust relating to a particular series of certificates. In the event
of such appointment, all rights, powers, duties and obligations conferred or
imposed upon the trustee by the pooling and servicing agreement shall be
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conferred or imposed upon the trustee and such separate trustee or co-trustee
jointly, or, in any jurisdiction in which the trustee shall be incompetent or
unqualified to perform certain acts, singly upon such separate trustee or
co-trustee who shall exercise and perform such rights, powers, duties and
obligations solely at the direction of the trustee.
The trustee will make no representations as to the validity or sufficiency
of the pooling and servicing agreement, the certificates, (other than the
signature and countersignature of the trustee on the certificates) or of any
mortgage loan or related document, and will not be accountable for the use or
application by GECMSI or Funding of any funds paid to them in respect of the
certificates or the related assets, or amounts credited to the Loan Payment
Record or deposited into the Certificate Account. If no Event of Default has
occurred, the trustee will be required to perform only those duties specifically
required of it under the pooling and servicing agreement. If an Event of Default
has occurred and is continuing, the trustee is required to exercise such of the
rights and powers vested in it by the pooling and servicing agreement, and use
the same degree of care and skill in their exercise, as a prudent person would
exercise or use under the circumstances in the conduct of his or her own
affairs. However, upon receipt of the various certificates, reports or other
instruments required to be furnished to it, the trustee will be required to
examine them to determine whether they conform to the requirements of the
pooling and servicing agreement.
The trustee may resign at any time, and the depositor of the loans in a
trust may remove the trustee if the trustee ceases to be eligible to continue as
such under the pooling and servicing agreement, if the trustee becomes insolvent
or in such other instances, if any, as are set forth in the pooling and
servicing agreement. Following any resignation or removal of the trustee, GECMSI
will be obligated to appoint a successor trustee, any such successor to be
approved by the guarantor if so specified in the prospectus supplement in the
event that the guarantor has issued any limited guarantee with respect to the
certificates. Any resignation or removal of the trustee and appointment of a
successor trustee does not become effective until acceptance of the appointment
by the successor trustee. The trustee and any successor trustee will at all
times: (1) be a corporation organized under the laws of the state of New York,
the state in which the initial trustee has its principal office, or the United
States of America; (2) be authorized under such laws to exercise corporate trust
powers; (3) have a combined capital and surplus of at least $50,000,000; and (4)
be subject to the supervision of a state or federal authority.
GECMSI will pay the fees and expenses of the trustee incurred in connection
with the execution of its duties under the pooling and servicing agreement and
will indemnify the trustee from, and hold it harmless against, any and all
losses, liabilities, damages, claims or expenses other than those resulting from
the negligence or bad faith of the trustee.
ADMINISTRATION OF THE CERTIFICATE ACCOUNT
The pooling and servicing agreement will require that the Certificate
Account be either:
- maintained with a depository institution the debt obligations of which
are, at the time of any deposit therein, rated at least "AA" (or the
equivalent) by each nationally recognized statistical rating organization
that rated the certificates;
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- an account or accounts the deposits in which are fully insured by either
the Bank Insurance Fund (the "BIF") of the Federal Deposit Insurance
Corporation (the "FDIC") or the Savings Association Insurance Fund
("SAIF") of the FDIC;
- an account or accounts with a depository institution, which accounts are
insured by the BIF or SAIF to the limits established by the FDIC, and
which uninsured deposits are invested in United States government
securities or other high quality investments, or are otherwise secured to
the extent required by each rating agency that rates the certificates
such that, as evidenced by an opinion of counsel, the holders of the
certificates have a claim with respect to the funds in the account or a
perfected first security interest against any collateral securing such
funds that is superior to claims of any other depositors or creditors of
the depository institution with which the account is maintained;
- a trust account maintained with the corporate trust department of a
federal or state chartered depository institution or trust company with
trust powers and acting in its fiduciary capacity for the benefit of the
trustee; or
- an account that will not cause any of the rating agencies that rates the
certificates to downgrade or withdraw their then-current rating assigned
to the certificates.
Not later than the second business day prior to each distribution date,
GECMSI, as servicer, will furnish a separate statement to the trustee for the
certificates setting forth, among other things, the amount to be distributed
with respect to the certificates on the next succeeding distribution date to
certificateholders, with amounts allocable to principal and to interest stated
separately and, if applicable, information relating to the amount available for
the purchase of Liquidating Loans.
REPORTS TO CERTIFICATEHOLDERS
At least two business days before each distribution date, unless otherwise
stated in the prospectus supplement, GECMSI, as servicer, will furnish to the
trustee for mailing to certificateholders on such distribution date, a statement
generally setting forth, to the extent applicable to any series, among other
things:
- the aggregate amount of such distribution allocable to principal,
separately identifying the amount allocable to each class and the amount
of Principal Prepayments and mortgage loans repurchased by GECMSI
included therein;
- the amount of such distribution allocable to interest -- including any
amounts added to the principal balance of any class of Accrual
Certificates resulting from the accrual of interest that is not yet
distributable thereon -- separately identifying the amount allocable to
each class;
The trustee will deliver each month's statement to certificateholders by
either mailing it to certificateholders on the distribution date or, unless
otherwise specified in the prospectus supplement, by posting it on the trustee's
internet web site not later than the distribution date for that month. In
addition to distribution date statements, the trustee may make other information
relating to the certificates available on its web site. The trustee will notify
you promptly if information that would otherwise be mailed to you will instead
be made available on its web site. Upon written request to the trustee,
certificateholders may also receive written copies of all reports and statements
concerning the related series of certificates furnished on the trustee's web
site.
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GECMSI, as servicer, will provide certificateholders which are federally
insured savings and loan associations with certain reports and with access to
information and documentation regarding the mortgage loans included in the trust
sufficient to permit such associations to comply with applicable regulations of
the Office of Thrift Supervision.
EVENTS OF DEFAULT
Events of Default under the pooling and servicing agreement will consist
of:
- any failure by GECMSI, as servicer, to distribute to certificateholders
any required payment, which failure continues unremedied for three
business days after the giving of written notice of such failure to
GECMSI by the trustee, or to GECMSI and the trustee by the holders of
certificates evidencing interests aggregating not less than 25% of each
affected class;
- any failure by GECMSI, as servicer, duly to observe or perform in any
material respect any other of its covenants or agreements in such pooling
and servicing agreement materially affecting the rights of
certificateholders which continues unremedied for 60 days after the
giving of written notice of such failure to GECMSI by the trustee, or to
GECMSI and the trustee by the holders of certificates evidencing
interests aggregating not less than 25% of each affected class;
- any failure by GECMSI, as servicer, to effect timely payment of the
premium for a pool insurance policy or a special hazard insurance policy
or limited guarantee, if any, which continues unremedied for 10 business
days after the giving of written notice of such failure by the trustee,
or to GECMSI and the trustee by the holders of certificates evidencing
interests aggregating not less than 25% of each affected class; or
- certain events of insolvency, readjustment of debt, marshaling of assets
and liabilities or similar proceedings and certain actions by GECMSI
indicating its insolvency, reorganization or inability to pay its
obligations.
RIGHTS UPON EVENT OF DEFAULT
As long as an Event of Default under the pooling and servicing agreement
remains unremedied by GECMSI, as servicer (or, if applicable, by the guarantor
pursuant to any limited guarantee), the trustee, or holders of certificates
evidencing interests aggregating not less than 51% of each affected class, may
terminate all of the rights and obligations of GECMSI as servicer under the
pooling and servicing agreement, whereupon the trustee will succeed to all the
responsibilities, duties and liabilities of GECMSI as servicer under the
agreement and will be entitled to similar compensation arrangements, provided
that if the trustee had no obligation under the agreement to make advances of
delinquent principal and interest on the mortgage loans upon the failure of
GECMSI, as servicer, to do so, or if the trustee had such obligation but is
prohibited by law or regulation from making such advances, the trustee will not
be required to assume such obligation of GECMSI. GECMSI, as servicer, shall be
entitled to payment of certain amounts payable to it under the pooling and
servicing agreement, notwithstanding the termination of its activities as
servicer. No such termination will affect in any manner the Guarantor's
obligations under any limited guarantee, except that the obligation of GECMSI,
as servicer, to make advances of delinquent payments of principal and interest,
adjusted to the applicable Remittance Rate, and, if applicable, to purchase any
Liquidating Loan will become the direct obligations of the guarantor under the
Advance Guarantee and the Liquidating Loan Guarantee, respectively, if
applicable, until a new servicer is appointed.
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In the event that the trustee is unwilling or unable so to act, it may appoint,
or petition a court of competent jurisdiction for the appointment of, a housing
and home finance institution with a net worth of at least $10,000,000 and, if
the guarantor has issued any limited guarantee with respect to the certificates,
approved by the guarantor, to act as successor to GECMSI, as servicer, under
such pooling and servicing agreement. In addition, if the guarantor has issued
any limited guarantee with respect to the related series of certificates, the
guarantor will have the right to replace any successor servicer to GECMSI with
an institution meeting the requirements described in the preceding sentence. 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 GECMSI under such
pooling and servicing agreement.
No holder of certificates will have any right under the pooling and
servicing agreement to institute any proceeding with respect to the pooling and
servicing agreement, unless such holder previously has given to the trustee
written notice of default and unless the holders of certificates of each
affected class evidencing, in the aggregate, 25% or more of the interests in
such class have made written request to the trustee to institute such proceeding
in its own name as trustee thereunder and have offered to the trustee reasonable
indemnity and the trustee for 60 days after receipt of such notice, request and
offer of indemnity has neglected or refused to institute any such proceedings.
However, the trustee is under no obligation to exercise any of the trusts or
powers vested in it by the pooling and servicing agreement or to make any
investigation of matters arising thereunder or to institute, conduct or defend
any litigation thereunder or in relation thereto at the request, order or
direction of any of the certificateholders, unless such certificateholders have
offered to the trustee reasonable security or indemnity against the costs,
expenses and liabilities which may be incurred therein or thereby.
AMENDMENT
The pooling and servicing agreement may be amended by the depositor of the
mortgage loans in the trust, as seller, GECMSI, as servicer, and the trustee,
and if the guarantor has issued any limited guarantee with respect to the
certificates, with the consent of the guarantor, but without certificateholder
consent, to cure any ambiguity, to correct or supplement any provision therein
which may be inconsistent with any other provision therein, to take any action
necessary to maintain the REMIC status of any trust as to which a REMIC election
has been made, to avoid or minimize the risk of the imposition of any tax on the
trust pursuant to the Code, or to make any other provisions with respect to
matters or questions arising under such pooling and servicing agreement which
are not materially inconsistent with the provisions of such pooling and
servicing agreement; provided that such action will not, as evidenced by an
opinion of counsel satisfactory to the trustee, adversely affect in any material
respect the interests of any certificateholders of that series. Unless otherwise
stated in the prospectus supplement, the agreement may also be amended by GECMSI
or Funding, as depositor and seller, GECMSI, as servicer, and the trustee with
the consent of holders of certificates evidencing interests aggregating either
not less than 66% of all interests in the related trust or not less than 66% of
all interests of each class of certificates affected by such amendment, for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of such agreement or of modifying in any manner the rights of
certificateholders of that series; provided, however, that no such amendment may
(1) reduce in any manner the amount of, or delay the timing of, payments
received on mortgage loans which are required to be distributed in respect of
any certificate without the consent of the holder of such
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certificate, (2) adversely affect in any material respect the interests of the
holders of any class of certificates in any manner other than as described in
(1), without the consent of the holders of certificates of such class evidencing
at least 66% of the interests of such class or (3) reduce the aforesaid
percentage of certificates, the holders of which are required to consent to any
such amendment, without the consent of the holders of all certificates of such
affected class then outstanding.
If a REMIC election has been made for all or any portion of the trust
related to any series of certificates, the trustee may not consent to any
amendment to the agreement unless it has received an opinion of qualified tax
counsel that such amendment will not subject the related trust to tax or cause
such trust to fail to qualify as a REMIC at any time that any certificates are
outstanding.
TERMINATION
The obligations of GECMSI or Funding, as depositor and seller, GECMSI, as
servicer, and the trustee created by the pooling and servicing agreement will
terminate upon the last action required to be taken by the trustee on the final
distribution date pursuant to the pooling and servicing agreement after the
earlier of (1) the maturity or other liquidation of the last mortgage loan
subject thereto or the disposition of all property acquired upon foreclosure of
any such mortgage loan or (2) the repurchase from the trust by the person
specified in the prospectus supplement of all the outstanding certificates or
all remaining assets in the trust. The pooling and servicing agreement will
establish the repurchase price for the assets in the trust and the allocation of
such purchase price among the classes of certificates. Unless otherwise stated
in the prospectus supplement, if the repurchase price, together with other funds
available to make final distributions, is less than the principal balance and
accrued interest on the certificates, such shortfall will be borne by
certificateholders as specified in the prospectus supplement. The exercise of
such right will effect early retirement of the certificates of that series, but
such person's right so to repurchase will be subject to the conditions set forth
in the related prospectus supplement. Any sale of certificates or assets by the
trustee in connection with the exercise of such repurchase right shall be made
without representation or warranty, except as to title, and without recourse. If
a REMIC election is to be made with respect to all or a portion of a trust,
there may be additional conditions to the termination of such trust which will
be described in the related prospectus supplement. In no event, however, will
the trust created by the pooling and servicing agreement continue beyond the
expiration of 21 years from the death of the survivor of certain persons named
in the agreement. The trustee will give written notice of termination of the
pooling and servicing agreement to each certificateholder, and the final
distribution will be made only upon surrender and cancellation of the
certificates at an office or agency of the trustee specified in such notice of
termination.
If specified in the prospectus supplement, the pooling and servicing
agreement will permit the trustee to sell the mortgage loans, and the other
assets of the trust in the event that payments in respect thereto are
insufficient to make payments required in the agreement. The assets of the trust
will be sold only under the circumstances and in the manner specified in the
prospectus supplement.
GOVERNING LAW
The pooling and servicing agreement provides that it shall be construed in
accordance with the laws of the State of New York, and the obligations, rights
and remedies of the
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parties to the pooling and servicing agreement will be determined in accordance
with such laws.
GE CAPITAL MORTGAGE SERVICES, INC.
GECMSI, a New Jersey corporation, is a wholly-owned subsidiary of GE
Capital Mortgage Corporation ("GECMC"). GECMC is a wholly-owned subsidiary of GE
Capital, which, in turn, is a wholly-owned indirect subsidiary of General
Electric Company. GECMSI was acquired by GECMC, effective October 1, 1990, and
thereafter changed its name to GE Capital Mortgage Services, Inc.
GECMSI is engaged in the business of originating, refinancing, acquiring
and servicing residential mortgage loans secured by one- to four-family homes.
It obtains servicing through the acquisition and origination of mortgage loans,
and the purchase of servicing rights. GECMSI is also engaged in the home equity
business and originates, acquires and services Home Equity Loans. From time to
time, GECMSI may also engage in sales of such mortgage loans and servicing
rights. See "The Trusts -- The Mortgage Loans -- Loan Production Sources" and
"-- Loan Underwriting Policies."
DELINQUENCY AND FORECLOSURE EXPERIENCE
GECMSI's delinquency and foreclosure experience on the portfolio of one-to
four-family residential mortgage loans that it services as of a recent date will
be summarized in the prospectus supplement. Such summary will include or consist
of data with respect to GECMSI's Home Equity Loan portfolio if the related trust
includes a material amount of Home Equity Loans. There can be no assurance that
GECMSI's experience with respect to the mortgage loans included in any trust
will be similar to that historically experienced by GECMSI.
YEAR 2000 COMPUTER READINESS
We are aware of the issues associated with the programming code in existing
computer systems as the year 2000 approaches. Many computer systems and
microprocessors with data functions (including those in non-information
technology equipment and systems) use only two digits to identify a year in the
date field with the assumption that the first two digits of the year are always
"19." Consequently, on January 1, 2000 computers that are not year 2000
compliant may read the year as 1900. Systems that calculate, compare or sort
using the incorrect date may malfunction.
With the assistance of external consultants, we have implemented a plan
developed last year to review and, as necessary, modify or replace existing
mission critical software and hardware. Our plan had four phases all of which we
have completed: (1) a define and measure phase, to identify and inventory
possible sources of year 2000 issues; (2) an analysis phase, to determine the
nature and extent of year 2000 issues and develop project plans to address those
issues; (3) an improve phase, in which project plans are executed and a majority
of the testing is performed; and (4) a control phase, to complete testing,
continue monitoring readiness and, where necessary, complete contingency plans.
In addition, we have participated in industry-wide, external systems and
interface tests organized by the Mortgage Bankers Association. Although we are
continuing to assess our year 2000 readiness, we cannot assure you that our
efforts to achieve year 2000 readiness will be wholly effective.
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We estimate that the total cost of implementing our year 2000 program will
be approximately $2,500,000. We cannot assure you however, that this estimate
will be accurate.
In addition to our own systems, we depend upon the proper functioning of
third-party computer and non-information technology systems. These parties
include loan sellers, loan servicers, trustees for our mortgage-backed
securities, DTC, borrowers' banks and providers of telecommunications services
and other utilities. We have initiated communications with third parties with
whom we have important financial or operational relationships to determine their
year 2000 readiness. We will ask each of these third parties to certify to us
its readiness for the year 2000, and we will conduct system testing as necessary
with many of these third parties throughout 1999. We do not yet have, however,
sufficient information from these parties to assess their remediation and
compliance efforts. Moreover, we do not have control of these third parties and
cannot assure you that they will in fact be year 2000 ready.
If our computer systems or those of the third parties mentioned above are
not fully year 2000 ready, the failure could have an adverse effect, at least
temporarily, on our ability to carry out our servicing duties described in this
prospectus and in the prospectus supplements, which include calculating and
remitting to the trustee amounts distributable to you on your certificates.
Disruptions in the collection or distribution of receipts on the mortgage loans
underlying the certificates could materially and adversely affect your
investment. Moreover, a new federal law enacted in July 1999 will prohibit us,
under certain circumstances, from foreclosing on residential mortgages that fall
into default because of a year 2000 failure. Although this law would not prevent
us from ultimately enforcing a borrower's obligations on a mortgage, it could
cause delays in that enforcement and consequently affect distributions on your
certificates. See "Certain Legal Aspects of the Mortgage Loans -- Foreclosure."
This discussion of the year 2000 issue and our plan to address the issue
and the estimated costs of doing so is forward-looking in nature and is based
upon numerous assumptions relating to future events. We make no assurances that
future developments affecting us and third parties will be those anticipated by
management.
LEGAL PROCEEDINGS
As a participant in the retail mortgage banking industry, we are from time
to time the subject of litigation in connection with our consumer mortgage
lending and servicing practices. We are not, however, presently the subject of
any such proceedings which we believe to be material, nor are we a party to any
other material legal proceedings.
GE CAPITAL MORTGAGE FUNDING CORPORATION
Funding is a Delaware corporation organized on December 9, 1998 for the
specific purpose of acquiring mortgage loans, forming trusts, acquiring, holding
and selling certificates and engaging in related transactions. Funding is a
wholly-owned subsidiary of GECMSI. Funding maintains its principal executive
office at Three Executive Campus, Suite W. 602, Cherry Hill, New Jersey 08002.
Its telephone number is (609) 661-5881.
Funding anticipates that it will use the net proceeds of the sale of a
series of certificates to pay a portion of the purchase price of the mortgage
loans, and accordingly, it does not anticipate having any significant assets
after the issuance of any certificates, but may retain certain classes of
certificates.
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RISK OF RECHARACTERIZATION
Funding may acquire mortgage loans -- referred to in this section as the
"Trust Assets" -- from GECMSI prior to transferring them to the trust. The
transfer of the Trust Assets from GECMSI to Funding and from Funding to the
trust will be structured as, and is intended to be, an absolute and
unconditional sale of the Trust Assets to the trust. However, if GECMSI or
Funding becomes subject to a bankruptcy, insolvency or similar proceeding (a
"Proceeding," and the party subject to such Proceeding, an "Affected Party"), a
receiver, conservator, liquidator, trustee or similar party might attempt to
convince the relevant court to recharacterize the direct or indirect transfer of
the Trust Assets by the Affected Party to the trust as a pledge to secure a
borrowing evidenced by the certificates, rather than a sale of the Trust Assets.
An argument in favor of recharacterization might arise if Funding initially
retains a significant subordinated interest in the related trust and,
accordingly, in the Trust Assets. If Funding is the Affected Party, a bankruptcy
trustee or similar party might argue that Funding has not parted with the risks
of ownership of the Trust Assets as a result of its retention of such
certificates. The prospectus supplement will specify if Funding retains such an
interest.
GECMSI is not expected to retain any significant subordinated interest in
any Trust Assets that it sells to Funding. However, if GECMSI is the Affected
Party in respect of a Proceeding, in order to recharacterize the transfer of the
Trust Assets by GECMSI as a secured loan, it is likely that a receiver or
similar party would have to argue that the assets and liabilities of GECMSI and
Funding should be consolidated, and that accordingly such certificates should
therefore be viewed as being held directly by GECMSI.
In the event that an attempt to recharacterize the transfer of the Trust
Assets as a secured loan were successful, the trustee, on behalf of the holders
of the related series of certificates, would have a secured claim against the
Affected Party, but might be delayed or prohibited from exercising remedies with
respect to the Trust Assets or taking actions with respect to the Affected Party
absent court approval. In addition, other collateral might be substituted for
the Trust Assets and collections on the Trust Assets or such other collateral
might be applied to make distributions of principal and interest on such
certificates at times different from those required by the pooling and servicing
agreement, post-Proceeding interest might be limited, and payment of the loan
could be accelerated, with holders of certificates losing the right to future
interest distributions. Even if such an attempt were not successful, it is
possible that distributions on such certificates would be subject to delays
while the claim was being resolved by a court.
Funding's Certificate of Incorporation limits the activities in which
Funding is permitted to engage in such manner as is intended to make the
likelihood of a Proceeding by or against Funding remote, and Funding has been
organized and is designed to operate in a manner such that its separate
existence should be respected, notwithstanding a Proceeding in respect of itself
or GECMSI. However, neither Funding nor GECMSI makes any representation as to
the likelihood of the institution of a bankruptcy proceeding by or in respect of
Funding or whether a court would order such a consolidation of the assets and
liabilities of GECMSI with those of Funding in the event of a Proceeding.
The foregoing discussion does not purport to be comprehensive. Prospective
investors are advised to consult their own legal advisors as to the possible
consequences of any Proceeding instituted by or in respect of GECMSI or Funding.
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WHERE YOU CAN FIND MORE INFORMATION ABOUT
GE CAPITAL MORTGAGE SERVICES, INC. AND
GE CAPITAL MORTGAGE FUNDING CORPORATION
We will file reports and other information with the SEC about the trust
issuing your certificates. Our SEC filings are available to the public over the
Internet at the SEC's web site at http://www.sec.gov. You may also read and copy
any document we file at the SEC's public reference rooms in Washington, D.C.,
New York, New York, and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330
for further information on their public reference rooms.
The SEC allows us to incorporate by reference the information we file with
them about the trust issuing your certificates. This means that we can disclose
important information to you by referring you to these documents. The
information incorporated by reference is an important part of this prospectus,
and information that we file later with the SEC about the trust issuing your
certificates will automatically update and supersede this information. You may
request a copy of our filings at no cost by writing or telephoning either of us
at the following address:
Corporate Secretary Corporate Secretary
GE Capital Mortgage Services, GE Capital Mortgage Funding
Inc. Corporation
Three Executive Campus Three Executive Campus, Suite W. 602
Cherry Hill, New Jersey 08002 Cherry Hill, New Jersey 08002
(609) 661-6512 (609) 661-5881
In addition, we will provide you with reports annually and as to each
distribution date containing information about the trust issuing your
certificates.
THE GUARANTOR
If specified in the prospectus supplement, an entity identified therein as
the guarantor will, to the limited extent specified, issue a limited guarantee
to guarantee certain of GECMSI's limited obligations under the related pooling
and servicing agreement. If the guarantor provides any such limited guarantee
with respect to a series of certificates, the prospectus supplement will contain
additional information about the guarantor.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans which are general in nature. Because such legal aspects are
governed primarily by applicable state law, which may differ substantially from
state to state, the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the security for the mortgage loans is situated. The summaries are qualified in
their entirety by reference to the applicable federal and state laws governing
the mortgage loans.
GENERAL
Mortgages
The mortgages will be either deeds of trust or mortgages. A mortgage
creates a lien upon the real property encumbered by the mortgage. It is not
prior to the lien for real
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estate taxes and assessments. Priority between mortgages depends on their terms
and generally on the order of filing with a state or county office. There are
two parties to a mortgage: the mortgagor, who is the borrower and homeowner or
the land trustee or the trustee of an inter vivos revocable trust (as described
below), and the mortgagee, who is the lender. Under the mortgage instrument, the
mortgagor delivers to the mortgagee a note or bond and the mortgage. In the case
of a land trust, there are three parties because title to the property is held
by a land trustee under a land trust agreement of which the borrower/homeowner
is the beneficiary; at origination of a mortgage loan, the borrower executes a
separate undertaking to make payments on the mortgage note. In the case of an
inter vivos revocable trust, there are three parties because title to the
property is held by the trustee under the trust instrument of which the home
occupant is the primary beneficiary; at origination of a mortgage loan, the
primary beneficiary and the trustee execute a mortgage note and the trustee
executes a mortgage or deed of trust, with the primary beneficiary agreeing to
be bound by its terms. Although a deed of trust is similar to a mortgage, a deed
of trust formally has three parties, the borrower-homeowner called the trustor
(similar to a mortgagor), a lender (similar to a mortgagee) called the
beneficiary, and a third-party grantee called the trustee. Under a deed of
trust, the borrower grants the property, irrevocably until the debt is paid, in
trust and generally with a power of sale, to the trustee to secure payment of
the obligation. The trustee's authority under a deed of trust and the
mortgagee's authority under a mortgage are governed by law, the express
provisions of the deed of trust or mortgage and, in some cases, the directions
of the beneficiary.
Cooperatives
Certain of the mortgage loans may be Cooperative Loans. The private,
non-profit, cooperative apartment corporation owns all the real property that
comprises the project, including the land, separate apartments and all common
areas. The cooperative is directly responsible for project management and, in
most cases, payment of real estate taxes and hazard and liability insurance. If
there is a blanket mortgage on the cooperative apartment building and/or
underlying land, as is generally the case, the cooperative, as project
mortgagor, is also responsible for meeting these mortgage obligations. A blanket
mortgage is ordinarily incurred by the cooperative in connection with the
construction or purchase of the cooperative's apartment building. The interest
of the occupant under proprietary leases or occupancy agreements to which that
cooperative is a party are generally subordinate to the interest of the holder
of the blanket mortgage in that building. If the cooperative is unable to meet
the payment obligations arising under its blanket mortgage, the mortgagee
holding the blanket mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements. In addition, the
blanket mortgage on a cooperative may provide financing in the form of a
mortgage that does not fully amortize with a significant portion of principal
being due in one lump sum at final maturity. The inability of the cooperative to
refinance this mortgage and its consequent inability to make such final payment
could lead to foreclosure by the mortgagee providing the financing. A
foreclosure in either event by the holder of the blanket mortgage could
eliminate or significantly diminish the value of any collateral held by the
lender who financed the purchase by an individual tenant-stockholder of
cooperative shares or, in the case of a trust including Cooperative Loans, the
collateral securing the Cooperative Loans.
The cooperative is owned by tenant-stockholders who, through ownership of
stock shares or membership certificates in the corporation, receive proprietary
leases or occupancy agreements which confer exclusive rights to occupy specific
units. Generally, a
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tenant-stockholder of a cooperative must make a monthly payment to the
cooperative representing such tenant-stockholder's pro rata share of the
cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and accompanying occupancy rights is financed through
a cooperative share loan evidenced by a promissory note and secured by a
security interest in the occupancy agreement or proprietary lease and in the
related cooperative shares. The lender takes possession of the share certificate
and a counterpart of the proprietary lease or occupancy agreement and a
financing statement covering the proprietary lease or occupancy agreement and
the cooperative shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of cooperative
shares.
FORECLOSURE
Mortgages
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust that authorizes
the trustee to sell the property to a third party upon any default by the
borrower under the terms of the note or deed of trust. In some states, the
trustee must record a notice of default and send a copy to the borrower-trustor
and any person who has recorded a request for a copy of a notice of default and
notice of sale. In addition, the trustee must provide notice in some states to
any other individual having an interest in the real property, including any
junior lien holders. The borrower, or any other person having a junior
encumbrance on the real estate, may, during a reinstatement period, cure the
default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation. Generally, state law controls the amount
of foreclosure expenses and costs, including attorney's fees, which may be
recovered by a lender. If the deed of trust is not reinstated, a notice of sale
must be posted in a public place and, in most states, published for a specific
period of time in one or more newspapers. In addition, some state laws require
that a copy of the notice of sale be posted on the property and sent to all
parties having an interest in the real property.
Foreclosure of a mortgage is generally accomplished by judicial action. The
action is initiated by the service of legal pleadings upon all parties having an
interest in the real property. Delays in completion of the foreclosure may
occasionally result from difficulties in locating necessary parties defendant.
Judicial foreclosure proceedings are often not protested by any of the parties
defendant. However, when the mortgagee's right to foreclose is contested, the
legal proceedings necessary to resolve the issue can be time consuming. After
the completion of judicial foreclosure, the court generally issues a judgment of
foreclosure and appoints a referee or other court officer to conduct the sale of
the property.
A sale conducted in accordance with the terms of the power of sale
contained in a mortgage or deed of trust is generally presumed to be conducted
regularly and fairly, and a conveyance of the real property by the referee
confers absolute legal title to the real property to the purchaser, free of all
junior mortgages and free of all other liens and claims subordinate to the
mortgage or deed of trust under which the sale is made (with the exception of
certain governmental liens and any redemption rights that may be granted to
borrowers pursuant to applicable state law). The purchaser's title is, however,
subject to all
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senior liens, encumbrances and mortgages. Thus, if the mortgage or deed of trust
being foreclosed is a junior mortgage or deed of trust, the referee or trustee
will convey title to the property to the purchaser, subject to the underlying
first mortgage or deed of trust and any other prior liens and claims. A
foreclosure under a junior mortgage or deed of trust generally will have no
effect on any senior mortgage or deed of trust, except that it may trigger the
right of a senior mortgagee or beneficiary to accelerate its indebtedness under
a due-on-sale clause or due on further encumbrance clause contained in the
senior mortgage.
In case of foreclosure under either a mortgage or a deed of trust, the sale
by the referee or other designated officer or by the trustee is a public sale.
However, because of the difficulty a potential buyer at the sale would have in
determining the exact status of title and because the physical condition of the
property may have deteriorated during the foreclosure proceedings, it is
uncommon for a third party to purchase the property at the foreclosure sale.
Rather, it is common for the lender to purchase the property from the trustee or
referee for an amount equal to the principal amount of the mortgage or deed of
trust, accrued and unpaid interest and expenses of foreclosure. Thereafter, the
lender will assume the burdens of ownership, including obtaining casualty
insurance and making such repairs at its own expense as are necessary to render
the property suitable for sale. The lender will commonly obtain the services of
a real estate broker and pay the broker's commission in connection with the sale
of the property. Depending upon market conditions, the ultimate proceeds of the
sale of the property may not equal the lender's investment in the property. Any
loss may be reduced by the receipt of any mortgage insurance proceeds.
Some courts have been faced with the issue of whether or not federal or
state constitutional provisions reflecting due process concerns for adequate
notice require that borrowers under deeds of trust or mortgages receive notices
in addition to the minimum prescribed by statute. For the most part, these cases
have upheld the notice provisions as being reasonable or have found that the
sale by a trustee under a deed of trust, or under a mortgage having a power of
sale, does not involve sufficient state action to afford constitutional
protections to the borrower.
Year 2000 Legislation
In July 1999, a new federal law was passed to limit legal liability for
losses due to year 2000 computer-related errors. This law will, among other
things, protect borrowers from foreclosure if their residential mortgage loans
become delinquent because an actual year 2000 failure results in the inability
to accurately or timely process their mortgage payments.
This law is not intended to extinguish or otherwise affect a borrower's
payment obligations but will instead delay the enforcement of obligations on an
otherwise defaulted mortgage loan. Borrowers seeking foreclosure protection
under this legislation must provide timely written notice and documentation of
that failure to the servicer. Absent an extension from the lender, borrowers
will then have four weeks to make up late payments on their loans. This law will
not apply to mortgage loans for which a default occurs before December 15, 1999,
or for which an imminent default is foreseeable before that date. Moreover, this
law will not protect borrowers who deliver notice of a year 2000 failure after
March 15, 2000. Mortgage loans that remain in default after the applicable grace
period will be subject to foreclosure or other enforcement.
This new law could delay our ability to foreclose on some mortgages during
the first quarter of the year 2000, which could consequently affect the
distributions on your
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certificates. For more information on risks related to the year 2000, see "GE
Capital Mortgage Services, Inc., Year 2000 Computer Readiness."
COOPERATIVE LOANS
The cooperative shares owned by the tenant-stockholder and pledged to the
lender are, in almost all cases, subject to restrictions on transfer as set
forth in the cooperative's Certificate of Incorporation and Bylaws, as well as
the proprietary lease or occupancy agreement, and may be canceled by the
cooperative for failure by the tenant-stockholder to pay rent or other
obligations or charges owed by such tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by such tenant-
stockholder. The proprietary lease or occupancy agreement generally permits the
cooperative to terminate such lease or agreement in the event an obligor fails
to make payments or defaults in the performance of covenants required
thereunder. Typically, the lender and the cooperative enter into a recognition
agreement which establishes the rights and obligations of both parties in the
event of a default by the tenant-stockholder on its obligations under the
proprietary lease or occupancy agreement. A default by the tenant-stockholder
under the proprietary lease or occupancy agreement will usually constitute a
default under the security agreement between the lender and the
tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds from a sale of the cooperative apartment,
subject, however, to the cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the cooperative loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure on a
cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
However, the requirement that the lender obtain prior approval or consent of the
cooperative before transferring the cooperative shares or assigning the
proprietary lease may result in delays in completion of foreclosure on
cooperative shares and delays in receipt of foreclosure proceeds by the related
trust. See "-- The Mortgage Loans -- General -- Cooperatives" herein.
In some states, foreclosure on the cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the Uniform Commercial
Code (the "UCC") and the security agreement relating to those shares. Article 9
of the UCC requires that a sale be conducted in a "commercially reasonable"
manner. Whether a foreclosure sale has been conducted in a commercially
reasonable manner will depend on the facts in each case. In determining
commercial reasonableness, a court will look to the notice given the debtor and
the method, manner, time, place and terms of the foreclosure. Generally, a sale
conducted according to the usual practice of banks selling similar collateral
will be considered reasonably conducted.
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Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the cooperative corporation to receive sums due under
the proprietary lease or occupancy agreement. If there are proceeds remaining,
the lender must account to the tenant-stockholder for the surplus. Conversely,
if a portion of the indebtedness remains unpaid, the tenant-stockholder is
generally responsible for the deficiency. See "Anti-Deficiency Legislation and
Other Limitations on Lenders" below.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGEES
Some of the Home Equity Loans included in a trust may be secured by
mortgages or deeds of trust that are junior to other mortgages or deeds of trust
held by GECMSI, Funding, other lenders or institutional investors. The rights of
the trustee, and therefore the certificateholders, as mortgagee under a junior
mortgage or beneficiary under a junior deed of trust are subordinate to those of
the mortgagee under the senior mortgage or beneficiary under the senior deed of
trust, including the prior rights of the senior mortgagee to receive hazard
insurance and condemnation proceeds and to cause the property securing the
mortgage loan to be sold upon default of the mortgagor or trustor, thereby
extinguishing the junior mortgagee's or junior beneficiary's lien unless the
junior mortgagee or junior beneficiary asserts its subordinate interest in the
property in foreclosure litigation and, possibly, satisfies the defaulted senior
mortgage or deed of trust. As discussed more fully below, a junior mortgagee or
junior beneficiary may satisfy a defaulted senior loan in full and, in some
states, may cure such default and bring the senior loan current, in either event
adding the amounts expended to the balance due on the junior loan. In most
states, no notice of default is required to be given to a junior mortgagee or
junior beneficiary, and junior mortgagees or junior beneficiaries are seldom
given notice of defaults on senior mortgages. In order for a foreclosure action
in some states to be effective against a junior mortgagee or junior beneficiary,
the junior mortgagee or junior beneficiary must be named in any foreclosure
action, thus giving notice to junior lienors. See "Servicing of the Mortgage
Loans -- Collection and Other Servicing Procedures."
The standard form of the mortgage or deed of trust used by most
institutional lenders, including GECMSI, confers on the mortgagee or beneficiary
the right under some circumstances both to receive all proceeds collected under
any hazard insurance policy and all awards made in connection with any
condemnation proceedings, and to apply such proceeds and awards to any
indebtedness secured by the mortgage or deed of trust in such order as the
mortgagee or beneficiary may determine. Thus, in the event improvements on the
property are damaged or destroyed by fire or other casualty, or in the event the
property is taken by condemnation, the mortgagee or beneficiary under any
underlying senior mortgages may have the prior right to collect any insurance
proceeds payable under a hazard insurance policy and any award of damages in
connection with the condemnation and to apply the same to the indebtedness
secured by the senior mortgages or deeds of trust. Proceeds in excess of the
amount of senior mortgage indebtedness, in most cases, will be applied to the
indebtedness of a junior mortgage or trust deed.
A common form of mortgage or deed of trust used by institutional lenders
typically contains a future advance clause which provides, in essence, that
additional amounts advanced to or on behalf of the mortgagor or trustor by the
mortgagee or beneficiary are to be secured by the mortgage or deed of trust.
While such a clause is valid under the laws of most states, the priority of any
advance made under the clause depends, in some states, on
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whether the advance was an obligatory or optional advance. If the mortgagee or
beneficiary is obligated to advance the additional amounts, the advance is
entitled to receive the same priority as amounts initially loaned under the
mortgage or deed of trust, notwithstanding that there may be intervening junior
mortgages or deeds of trust and other liens at the time of the advance. Where
the mortgagee or beneficiary is not obligated to advance the additional amounts
(and, in some jurisdictions, has actual knowledge of the intervening junior
mortgages or deeds of trust and other liens), the advance will be subordinate to
such intervening junior mortgages or deeds of trust and other liens. Priority of
advances under the clause rests, in many other states, on state statutes giving
priority to all advances made under the loan agreement to a "credit limit"
amount stated in the recorded mortgage.
Other provisions sometimes included in the form of the mortgage or deed of
trust used by institutional lenders, and included in some of the forms used by
GECMSI, obligate the mortgagor or trustor to pay, before delinquency, all taxes
and assessments on the property and, when due, all encumbrances, charges and
liens on the property which appear prior to the mortgage or deed of trust, to
provide and maintain fire insurance on the property, to maintain and repair the
property and not to commit or permit any waste thereof, and to appear in and
defend any action or proceeding purporting to affect the property or the rights
of the mortgagee or beneficiary under the mortgage or deed of trust. Upon a
failure of the mortgagor or trustor to perform any of these obligations, the
mortgagee or beneficiary is given the right under certain mortgages or deeds of
trust to perform the obligation itself, at its election, with the mortgagor or
trustor agreeing to reimburse the mortgagee or beneficiary for any sums expended
by the mortgagee or beneficiary on behalf of the mortgagor or trustor. All sums
so expended by the mortgagee or beneficiary become part of the indebtedness
secured by the mortgage or deed of trust. See "Servicing of the Mortgage
Loans -- Collection and Other Servicing Procedures."
RIGHT OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property from the foreclosure sale. In some
states, redemption may occur only upon payment of the entire principal balance
of the loan, accrued interest and expenses of foreclosure. In other states,
redemption may be authorized if the former borrower pays only a portion of the
sums due. The effect of a statutory right of redemption is to diminish the
ability of the lender to sell the foreclosed property. The rights of redemption
would defeat the title of any purchaser from the lender subsequent to
foreclosure or sale under a deed of trust. Consequently, the practical effect of
the redemption right is to force the lender to retain the property and pay the
expenses of ownership until the redemption period has run.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment would be a personal judgment against the
former borrower equal in most cases to the difference between the net amount
realized upon the public sale of the real property and the amount due to the
lender. Other statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy
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the full debt before bringing a personal action against the borrower. Finally,
other statutory provisions limit any deficiency judgment against the former
borrower following a judicial sale to the excess of the outstanding debt over
the fair market value of the property at the time of the public sale. The
purpose of these statutes is generally to prevent a beneficiary or a mortgagee
from obtaining a large deficiency judgment against the former borrower as a
result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws and state laws
affording relief to debtors, may interfere with or affect the ability of the
secured mortgage lender to realize upon collateral and/or enforce a deficiency
judgment. For example, with respect to federal bankruptcy law, a court with
federal bankruptcy jurisdiction may permit a debtor through his or her Chapter
11 or Chapter 13 rehabilitative plan to cure a monetary default in respect of a
mortgage loan on a debtor's residence by paying arrearages within a reasonable
time period and reinstating the original mortgage loan payment schedule even
though the lender accelerated the mortgage loan and final judgment of
foreclosure had been entered in state court, provided no sale of the residence
had yet occurred, prior to the filing of the debtor's petition. Some courts with
federal bankruptcy jurisdiction have approved plans, based on the particular
facts of the reorganization case, that effected the curing of a mortgage loan
default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property of the debtor may be modified.
These courts have suggested that such modifications may include reducing the
amount of each monthly payment, changing the rate of interest, altering the
repayment schedule and reducing the lender's security interest to the value of
the residence, thus leaving the lender a general unsecured creditor for the
difference between the value of the residence and the outstanding balance of the
loan.
The Code provides priority to certain tax liens over the lien of the
mortgage. In addition, substantive requirements are imposed upon mortgage
lenders in connection with the origination and the servicing of mortgage loans
by numerous federal and some state consumer protection laws. These laws include
the federal Truth-in-Lending Act, Real Estate Settlement Procedures Act, Equal
Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act,
their related regulations and related statutes. These federal laws impose
specific statutory liabilities upon lenders who originate mortgage loans and who
fail to comply with the provisions of the law. In some cases, this liability may
affect assignees of the mortgage loans.
Generally, Article 9 of the UCC governs foreclosure on cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
Cooperative Loan, would be the shares of the cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
ENFORCEABILITY OF CERTAIN PROVISIONS
Unless the prospectus supplement indicates otherwise, all of the mortgage
loans will contain due-on-sale clauses. These clauses permit the lender to
accelerate the maturity of a loan if the borrower sells, transfers, or conveys
the property. The enforceability of these clauses was the subject of legislation
or litigation in many states, and in some cases the enforceability of these
clauses was limited or denied. However, the Garn-St Germain
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Depository Institutions Act of 1982 (the "Garn-St Germain Act") preempts state
constitutional, statutory and case law prohibiting the enforcement of
due-on-sale clauses and permits lenders to enforce these clauses in accordance
with their terms, subject to certain limited exceptions. The Garn-St Germain Act
does encourage lenders to permit assumption of loans at the original rate of
interest or at some other rate less than the average of the original rate and
the market rate.
Due-on-sale clauses contained in mortgage loans originated by federal
savings and loan associations or federal savings banks are fully enforceable
pursuant to regulations of the OTS, which preempt state law restrictions on the
enforcement of due-on-sale clauses.
The Garn-St Germain Act also sets forth several specific instances in which
a mortgage lender covered by the Garn-St Germain Act (including federal savings
and loan associations and federal savings banks) may not exercise a due-on-sale
clause, notwithstanding the fact that a transfer of the property may have
occurred. These include intrafamily transfers, certain transfers by operation of
law, leases of fewer than three years and the creation of a junior encumbrance.
Regulations promulgated under the Garn-St Germain Act by the Federal Home Loan
Bank Board as succeeded by the OTS also prohibit the imposition of a prepayment
penalty upon the acceleration of a loan pursuant to a due-on-sale clause. If
interest rates were to rise above the interest rates on the mortgage loans, then
any inability of GECMSI or Funding to enforce due-on-sale clauses may result in
the trust including a greater number of loans bearing below-market interest
rates than would otherwise be the case, since a transferee of the property
underlying a mortgage loan would have a greater incentive in such circumstances
to assume the transferor's mortgage loan. Any inability of GECMSI to enforce
due-on-sale clauses may affect the average life of the mortgage loans and the
number of mortgage loans that may be outstanding until maturity. See "Yield,
Maturity and Weighted Average Life Considerations."
Upon foreclosure, courts have imposed general equitable principles. These
equitable principles are generally designed to relieve the borrower from the
legal effect of his defaults under the loan documents. Examples of judicial
remedies that have been fashioned include requirements that the lender undertake
affirmative and expensive actions to determine the causes for the borrower's
default and the likelihood that the borrower will be able to reinstate the loan.
In some cases, courts have substituted their judgment for the lender's judgment
and have required that lenders reinstate loans or recast payment schedules in
order to accommodate borrowers who are suffering from temporary financial
disability. In other cases, courts have limited the right of the lender to
foreclose if the default under the mortgage instrument is not monetary, such as
the borrower failing to adequately maintain the property or the borrower
executing a second mortgage or deed of trust affecting the property.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. The Office of Thrift
Supervision is authorized to issue rules and regulations and to publish
interpretations governing implementation of Title V. The statute authorized any
state to reimpose interest rate limits by adopting, before April 1, 1983, a law
or constitutional provision which expressly rejects application of the federal
law. In
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addition, even where Title V is not so rejected, any state is authorized by the
law to adopt a provision limiting discount points or other charges on mortgage
loans covered by Title V.
Pursuant to the pooling and servicing agreement for each series of
certificates, GECMSI will represent and warrant to the trustee that the mortgage
loans have been originated in compliance in all material respects with
applicable state laws, including usury laws.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Relief Act"), a borrower who enters military service
after the origination of such borrower's mortgage loan (including a borrower who
is a member of the National Guard or is in reserve status at the time of the
origination of the mortgage loan and is later called to active duty) may not be
charged interest above an annual rate of 6% during the period of such borrower's
active duty status, unless a court orders otherwise upon application of the
lender. It is possible that such interest rate limitation could have an effect,
for an indeterminate period of time, on the ability of GECMSI to collect full
amounts of interest on certain of the mortgage loans. In addition, the Relief
Act imposes limitations which would impair the ability of GECMSI to foreclose on
an affected mortgage loan during the borrower's period of active duty status.
Thus, in the event that such a mortgage loan goes into default there may be
delays and losses occasioned by the inability to realize upon the mortgaged
property in a timely fashion.
Under the applicable pooling and servicing agreement, GECMSI will not be
required to make deposits to the Certificate Account for a series of
certificates in respect of any mortgage loan as to which the Relief Act has
limited the amount of interest the related borrower is required to pay each
month, and certificateholders will bear such loss.
ENVIRONMENTAL CONSIDERATIONS
Under the federal Comprehensive Environmental Response Compensation and
Liability Act, as amended, and under state law in certain states, a secured
party which takes a deed in lieu of foreclosure, purchases a mortgaged property
at a foreclosure sale or operates a mortgaged property may become liable in
certain circumstances for the costs of remedial action if hazardous wastes or
hazardous substances have been released or disposed of on the property. Such
costs may be substantial. It is possible that such costs could reduce the
amounts otherwise distributable to the certificateholders if the related trust
were deemed to be liable for such costs and if such costs were incurred.
Moreover, under federal law and the law of certain states, a lien may be imposed
for any cleanup costs incurred by federal or state authorities on the property
that is the subject of such costs. All subsequent liens on such property are
subordinated to such lien and, in several states, even prior recorded liens,
including those of existing mortgages, are subordinated to such liens (a
"Superlien"). In the latter states, the security interest of the trustee in a
mortgaged property that is subject to such a Superlien could be adversely
affected.
Traditionally, residential mortgage lenders have not taken steps to
evaluate whether hazardous wastes or hazardous substances are present with
respect to any mortgaged property prior to the origination of the mortgage loan
or prior to foreclosure or accepting a deed in lieu of foreclosure. We make no
representation or warranty or assume any liability with respect to the absence
or effect of hazardous wastes or hazardous substances on any mortgaged property
or any casualty resulting from the presence or effect of hazardous
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wastes or hazardous substances. See "Servicing of the Mortgage
Loans -- Collection and Other Servicing Procedures."
LEGAL INVESTMENT MATTERS
Unless otherwise stated in the prospectus supplement, all of the classes of
a series of certificates offered thereby will constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA"), so long as they are rated in one of the two highest rating
categories by one or more nationally recognized statistical rating
organizations, and, as such, are legal investments for persons, trusts,
corporations, partnerships, associations, business trusts and business entities,
(including, but not limited to, state-chartered savings banks, commercial banks,
savings and loan associations and insurance companies, as well as trustees and
state government employee retirement systems,) created pursuant to or existing
under the laws of the United States or of any state, the District of Columbia
and Puerto Rico, whose authorized investments are subject to state regulation to
the same extent that, under applicable law, obligations issued by or guaranteed
as to principal and interest by the United States or any agency or
instrumentality thereof constitute legal investments for such entities. Pursuant
to SMMEA, a number of states enacted legislation, on or before the October 3,
1991 cut-off for such enactments, limiting to varying extents the ability of
certain entities (in particular, insurance companies) to invest in "mortgage
related securities," in most cases by requiring the affected investors to rely
solely upon existing state law and not SMMEA. Accordingly, the investors
affected by such legislation will be authorized to invest in the certificates
only to the extent provided in such legislation.
SMMEA also amended the legal investment authority of federally chartered
depository institutions as follows:
- federal savings and loan associations and federal savings banks may
invest in, sell or otherwise deal with mortgage related securities
without limitation as to the percentage of their assets represented
thereby;
- federal credit unions may invest in mortgage related securities; and
- national banks may purchase mortgage related securities for their own
account without regard to the limitations generally applicable to
investment securities set forth in 12 U.S.C. Section 24 (Seventh),
subject in each case to such regulations as the applicable federal
regulatory authority may prescribe.
In this connection, federal credit unions should review National Credit
Union Administration (the "NCUA") Letter to Credit Unions No. 96, as modified by
Letter to Credit Unions No. 108, which includes guidelines to assist federal
credit unions in making investment decisions for mortgage related securities.
The NCUA has adopted rules, effective December 2, 1991, which prohibit federal
credit unions from investing in certain mortgage related securities, possibly
including certain series or classes of certificates, except under limited
circumstances.
If specified in the prospectus supplement, one or more classes of a series
of certificates will not constitute "mortgage related securities" for purposes
of SMMEA. In such event, persons whose investments are subject to state or
federal regulation may not be legally authorized to invest in such classes of
certificates.
All depository institutions considering an investment in the certificates
should review the "Supervisory Policy Statement on Securities Activities" dated
January 28, 1992 (the
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"Policy Statement") of the Federal Financial Institutions Examination Council.
The Policy Statement, which has been adopted by the Board of Governors of the
Federal Reserve System, the FDIC, the Comptroller of the Currency and the Office
of Thrift Supervision, effective February 10, 1992, and by the NCUA (with
certain modifications) effective June 26, 1992, prohibits depository
institutions from investing in certain "high-risk mortgage securities"
(including securities such as certain series and classes of the certificates),
except under limited circumstances, and sets forth certain investment practices
deemed to be unsuitable for regulated institutions.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by such authorities before purchasing certificates, as
certain series or classes thereof may be deemed unsuitable investments, or may
otherwise be restricted, under such rules, policies or guidelines, in certain
instances irrespective of SMMEA.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, prudent investor provisions, percentage-of-assets limits, provisions which
may restrict or prohibit investments in securities which are not
interest-bearing or income-paying, and, with regard to any certificates issued
in book-entry form, provisions which may restrict or prohibit investments in
securities which are issued in book-entry form.
You should consult your own legal advisors in determining whether and to
what extent the certificates constitute legal investments for you.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and the Internal Revenue Code of 1986, as amended (the "Code") impose
requirements on employee benefit plans (and on certain other retirement plans
and arrangements, including individual retirement accounts and annuities, Keogh
plans and collective investment funds and separate accounts in which such plans,
accounts or arrangements are invested) subject to ERISA or Section 4975 of the
Code (collectively, "Plans") and on persons who are fiduciaries with respect to
such Plans. Among other things, ERISA requires that the assets of a Plan subject
to ERISA be held in trust and that the trustee, or other duly authorized
fiduciary, have exclusive authority and discretion to manage and control the
assets of such Plan. ERISA also imposes certain duties on persons who are
fiduciaries with respect to a Plan. Under ERISA, any person who exercises any
authority or control respecting the management or disposition of the assets of a
Plan generally is considered to be a fiduciary of such Plan. In addition to the
imposition by ERISA of general fiduciary standards of investment prudence and
diversification, ERISA and Section 4975 of the Code prohibit a broad range of
transactions involving Plan assets and persons ("Parties in Interest") having
certain specified relationships to a Plan and impose additional prohibitions
where Parties in Interest are fiduciaries with respect to such Plan.
The United States Department of Labor (the "DOL") has issued a regulation
concerning the definition of what constitutes the assets of a Plan (DOL Reg.
Section 2510.3-101). Under this regulation, the underlying assets and properties
of corporations, partnerships and certain other entities in which a Plan makes
an "equity" investment could be deemed for purposes of ERISA and Section 4975 of
the Code to be assets of the investing Plan in certain circumstances. In such a
case, the fiduciary making such an investment for the Plan could be deemed to
have delegated his or her asset
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management responsibility, the underlying assets and properties could be subject
to ERISA's reporting and disclosure requirements, and transactions involving the
underlying assets and properties could be subject to the fiduciary
responsibility requirements of ERISA and the prohibited transaction provisions
of Section 4975 of the Code. Certain exceptions to the regulation may apply in
the case of a Plan's investment in the certificates, but GECMSI and Funding
cannot predict in advance whether any such exceptions will apply due to the
factual nature of the conditions to be met. Accordingly, because the mortgage
loans may be deemed Plan assets of each Plan that purchases certificates, an
investment in the certificates by a Plan might give rise to a prohibited
transaction under ERISA Sections 406 or 407 and be subject to an excise tax
under Code Section 4975 unless a statutory or administrative exemption applies.
DOL Prohibited Transaction Class Exemption 83-1 ("PTE 83-1") exempts from
the prohibited transaction rules of ERISA and Section 4975 of the Code certain
transactions relating to the operation of residential mortgage pool investment
trusts and the purchase, sale and holding of "mortgage pool pass-through
certificates" in the initial issuance of such certificates. PTE 83-1 permits,
subject to certain conditions, transactions which might otherwise be prohibited
between Plans and Parties in Interest with respect to those Plans involving the
origination, servicing, operation and termination of mortgage pools consisting
of mortgage loans secured by first or second mortgages or deeds of trust on
single-family residential property, and the acquisition and holding of certain
mortgage pool pass-through certificates representing an interest in such
mortgage pools by Plans.
PTE 83-1 sets forth three general conditions which must be satisfied for
any transaction to be eligible for exemption: (1) the maintenance of a system of
insurance or other protection for the pooled mortgage loans and property
securing such loans, and for indemnifying certificateholders against reductions
in pass-through payments due to property damage or defaults in loan payments in
an amount not less than the greater of one percent of the aggregate principal
balance of all covered pooled mortgage loans or the principal balance of the
largest covered pooled mortgage loan; (2) the existence of a pool trustee who is
not an affiliate of the pool sponsor; and (3) a limitation on the amount of the
payments retained by the pool sponsor, together with other funds inuring to its
benefit, to not more than adequate consideration for selling the mortgage loans
plus reasonable compensation for services provided by the pool sponsor to the
mortgage pool.
Although the trustee for any series of certificates will be unaffiliated
with GECMSI and Funding, there can be no assurance that the system of insurance
or subordination will meet the general or specific conditions referred to above.
In addition, the nature of a trust's assets or the characteristics of one or
more classes of the related series of certificates may not be included within
the scope of PTE 83-1 or any other class exemption under ERISA. The prospectus
supplement will provide additional information with respect to the application
of ERISA and Section 4975 of the Code to the related certificates.
Several underwriters of mortgage-backed securities have applied for and
obtained individual ERISA prohibited transaction exemptions which are in some
respects broader than PTE 83-1. Such exemptions only apply to mortgage-backed
securities which, in addition to satisfying other conditions, are sold in an
offering with respect to which such underwriter serves as the sole or a managing
underwriter, or as a selling or placement agent. If such an exemption might be
applicable to a series of certificates, the related prospectus supplement will
refer to such possibility.
Each Plan fiduciary who is responsible for making the investment decisions
whether to purchase or commit to purchase and to hold certificates must make its
own determination
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as to whether the general and the specific conditions of PTE 83-1 have been
satisfied, or as to the availability of any other prohibited transaction
exemptions. Each Plan fiduciary should also determine whether, under the general
fiduciary standards of investment prudence and diversification, an investment in
the certificates is appropriate for the Plan, taking into account the overall
investment policy of the Plan and the composition of the Plan's investment
portfolio.
Unless otherwise stated in the prospectus supplement, the pooling and
servicing agreement will provide that the residual certificates of any series of
certificates with respect to which a REMIC election has been made may not be
acquired by a Plan.
Any Plan proposing to invest in certificates should consult with its
counsel to confirm that such investment will not result in a prohibited
transaction and will satisfy the other requirements of ERISA and the Code.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The discussion under the heading "Federal Income Tax Consequences" herein
and in the applicable prospectus supplement discusses and represents the opinion
of Cleary, Gottlieb, Steen & Hamilton pertaining to the material federal income
tax consequences of purchasing, owning and disposing of certificates. The
summary does not purport to be a description of all tax consequences that may be
relevant to a potential investor, and assumes an understanding of tax rules of
general application. It does not address special rules which may apply to
investors based on their tax status, individual circumstances or other factors
unrelated to the offering, including special rules applicable to dealers in
securities or currencies, traders in securities electing to mark to market,
banks, tax exempt investors, insurance companies, pass-through entities,
governmental organizations, or investors that will hold certificates as a
position in a "straddle" or conversion transaction, or as part of a "synthetic
security" or other integrated financial transaction. The authorities on which
this discussion is based are subject to change or differing interpretations, and
any such change or interpretation could apply retroactively. Investors are
encouraged to consult their own tax advisors regarding the certificates.
For purposes of this discussion, unless otherwise stated, the term "Owner"
will refer to the beneficial owner of a certificate.
REMIC ELECTIONS
Under the Code, an election may be made to treat each trust related to a
series of certificates (or segregated pools of assets within the trust) as a
"real estate mortgage investment conduit" ("REMIC") within the meaning of
Section 860D(a) of the Code. If one or more REMIC elections are made, the
certificates of any class will be either "regular interests" in a REMIC within
the meaning of Section 860G(a)(1) of the Code ("Regular Certificates") or
"residual interests" in a REMIC within the meaning of Section 860G(a)(2) of the
Code ("Residual Certificates"). The prospectus supplement for each series of
certificates will indicate whether an election will be made to treat each trust
as one or more REMICs, and if so, which certificates will be Regular
Certificates and which will be Residual Certificates.
If a REMIC election is made, each trust, or each portion thereof that is
treated as a separate REMIC, will be referred to as a "REMIC Pool." If a trust
is comprised of two REMIC Pools, one will be an "Upper-Tier REMIC" and one a
"Lower-Tier REMIC."
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The assets of the Lower-Tier REMIC will consist of the mortgage loans and
related trust assets. The assets of the Upper-Tier REMIC will consist of all of
the regular interests issued by the Lower-Tier REMIC.
The discussion below under the heading "REMIC Certificates" considers
series for which a REMIC election will be made. Series for which no such
election will be made are addressed under "Non-REMIC Certificates."
REMIC CERTIFICATES
The discussion in this section applies only to a series of certificates for
which a REMIC election is made.
Tax Opinion
Qualification as a REMIC requires ongoing compliance with certain
conditions. Upon the issuance of each series of certificates for which a REMIC
election is made, Cleary, Gottlieb, Steen & Hamilton, counsel to GECMSI and
Funding, will deliver its opinion generally to the effect that, with respect to
each such series of certificates, under then existing law and assuming
compliance by the depositor, the servicer and the trustee for such series with
all of the provisions of the related pooling and servicing agreement (and such
other agreements and representations as may be referred to in such opinion),
each REMIC Pool will be a REMIC, and the certificates of such series will be
treated as either Regular Certificates or Residual Certificates.
Status of Certificates
The certificates will be:
- assets described in Code Section 7701(a)(19)(C); and
- "real estate assets" under Code Section 856(c)(4)(A),
to the extent the assets of the related REMIC Pool are so treated. Interest on
the Regular Certificates will be "interest on obligations secured by mortgages
on real property or on interests in real property" within the meaning of Code
Section 856(c)(3)(B) in the same proportion that the income of the REMIC Pool is
so treated. If at all times 95% or more of the assets or income of the REMIC
Pool qualifies under the foregoing Code sections, the certificates (and income
thereon) will so qualify in their entirety. The Regular Certificates will also
qualify as "permitted assets" under Section 860L(c) of the Code.
In the event the assets of the related REMIC Pool include buy-down mortgage
loans, it is unclear whether the related buy-down funds would qualify under the
foregoing Code sections.
The rules described in the two preceding paragraphs will be applied to a
trust consisting of two REMIC Pools as if the trust were a single REMIC holding
the assets of the Lower-Tier REMIC.
Income from Regular Certificates
GENERAL
Except as otherwise provided in this tax discussion, Regular Certificates
will be taxed as newly originated debt instruments for federal income tax
purposes. Interest, original issue discount and market discount accrued on a
Regular Certificate will be ordinary
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income to the Owner. All Owners must account for interest income under the
accrual method of accounting, which may result in the inclusion of amounts in
income that are not currently distributed in cash.
On January 27, 1994, the Internal Revenue Service adopted regulations
applying the original issue discount rules of the Code (the "OID Regulations").
Except as otherwise noted, the discussion below is based on the OID Regulations.
ORIGINAL ISSUE DISCOUNT
Certain Regular Certificates may have "original issue discount." An Owner
must include original issue discount in income as it accrues, without regard to
the timing of payments.
The total amount of original issue discount on a Regular Certificate is the
excess of its "stated redemption price at maturity" over its "issue price." The
issue price for any Regular Certificate is the price (including any accrued
interest) at which a substantial portion of the class of certificates including
such Regular Certificate are first sold to the public. In general, the stated
redemption price at maturity is the sum of all payments made on the Regular
Certificate, other than payments of interest that (i) are actually payable at
least annually over the entire life of the certificates and (ii) are based on a
single fixed rate or variable rate (or certain combinations of fixed and
variable rates). The stated redemption price at maturity of a Regular
Certificate always includes its original principal amount, but generally does
not include distributions of stated interest, except in the case of Accrual
Certificates, and, as discussed below, Interest Only Certificates. An "Interest
Only Certificate" is a certificate entitled to receive distributions of some or
all of the interest on the mortgage loans or other assets in a REMIC Pool and
that has either a notional or nominal principal amount. Special rules for
Regular Certificates that provide for interest based on a variable rate are
discussed below in "Income from Regular Certificates -- Variable Rate Regular
Certificates."
With respect to an Interest Only Certificate, the stated redemption price
at maturity is likely to be the sum of all payments thereon, determined in
accordance with the Prepayment Assumption (as defined below). In that event,
Interest Only Certificates would always have original issue discount.
Alternatively, in the case of an Interest Only Certificate with some principal
amount, the stated redemption price at maturity might be determined under the
general rules described in the preceding paragraph. If, applying those rules,
the stated redemption price at maturity were considered to equal the principal
amount of such certificate, then the rules described below under "Premium" would
apply. The Prepayment Assumption is the assumed rate of prepayment of the
mortgage loans used in pricing the Regular Certificates. The Prepayment
Assumption will be set forth in the related prospectus supplement.
Under a de minimis rule, original issue discount on a Regular Certificate
will be considered zero if it is less than 0.25% of the certificate's stated
redemption price at maturity multiplied by the certificate's weighted average
maturity. The weighted average maturity of a Regular Certificate is computed
based on the number of full years (i.e., rounding down partial years) each
distribution of principal (or other amount included in the stated redemption
price at maturity) is scheduled to be outstanding. The schedule of such
distributions likely should be determined in accordance with the Prepayment
Assumption.
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The Owner of a Regular Certificate generally must include in income the
original issue discount that accrues for each day on which the Owner holds such
certificate, including the date of purchase, but excluding the date of
disposition. The original issue discount accruing in any period equals:
PV End + Dist - PV Beg
Where:
PV End = present value of all remaining distributions to be made as
of the end of the period;
Dist = distributions made during the period includible in the
stated redemption price at maturity; and
PV Beg = present value of all remaining distributions as of the
beginning of the period.
The present value of the remaining distributions is calculated based on (1)
the original yield to maturity of the Regular Certificate, (2) events (including
actual prepayments) that have occurred prior to the end of the period and (3)
the Prepayment Assumption. For these purposes, the original yield to maturity of
a Regular Certificate will be calculated based on its issue price, assuming that
the certificate will be prepaid in all periods in accordance with the Prepayment
Assumption, and with compounding at the end of each accrual period used in the
formula.
Assuming the Regular Certificates have monthly distribution dates, discount
would be computed under the formula generally for the one-month periods (or
shorter initial period) ending on each distribution date. The original issue
discount accruing during any accrual period is divided by the number of days in
the period to determine the daily portion of original issue discount for each
day.
The daily portions of original issue discount generally will increase if
prepayments on the underlying mortgage loans exceed the Prepayment Assumption
and decrease if prepayments are slower than the Prepayment Assumption (changes
in the rate of prepayments having the opposite effect in the case of an Interest
Only certificate). If the relative principal payment priorities of the classes
of Regular Certificates of a series change, any increase or decrease in the
present value of the remaining payments to be made on any such class will affect
the computation of original issue discount for the period in which the change in
payment priority occurs.
If original issue discount computed as described above is negative for any
period, the Owner generally will not be allowed a current deduction for the
negative amount but instead will be entitled to offset such amount only against
future positive original issue discount from such certificate. However, while
not free from doubt, such an Owner may be entitled to deduct "negative original
issue discount" to the extent the Owner's adjusted basis (as defined in "Sale or
Exchange of Certificates" below) in the certificate remaining after such
deduction is not less than the principal amount of the certificate.
ACQUISITION PREMIUM
If an Owner of a Regular Certificate acquires such certificate at a price
greater than its "adjusted issue price," but less than its remaining stated
redemption price at maturity, the daily portion for any day (as computed above)
is reduced by an amount equal to the product of (1) such daily portion and (2) a
fraction, the numerator of which is the amount by which the price exceeds the
adjusted issue price and the denominator of which is the sum of the daily
portions for such Regular Certificate for all days on and after the date of
purchase. The adjusted issue price of a Regular Certificate on any given day is
its
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issue price, increased by all original issue discount that has accrued on such
certificate and reduced by the amount of all previous distributions on such
certificate of amounts included in its stated redemption price at maturity.
MARKET DISCOUNT
A Regular Certificate may have market discount (as defined in the Code).
Market discount equals the excess of the adjusted issue price of a certificate
over the Owner's adjusted basis in the certificate. The Owner of a certificate
with market discount must report ordinary interest income, as the Owner receives
distributions on the certificate of principal or other amounts included in its
stated redemption price at maturity, equal to the lesser of (a) the excess of
the amount of those distributions over the amount, if any, of accrued original
issue discount on the certificate or (b) the portion of the market discount that
has accrued and not previously been included in income. Also, such Owner must
treat gain from the disposition of the certificate as ordinary income to the
extent of any accrued, but unrecognized, market discount. Alternatively, an
Owner may elect in any taxable year to include market discount in income
currently as it accrues on all market discount instruments acquired by the Owner
in that year or thereafter. An Owner may revoke such an election only with the
consent of the Internal Revenue Service.
In general terms, market discount on a Regular Certificate may be treated,
at the Owner's election, as accruing either (a) on the basis of a constant yield
(similar to the method described above for accruing original issue discount) or
(b) alternatively, either (1) in the case of a Regular Certificate issued
without original issue discount, in the ratio of stated interest distributable
in the relevant period to the total stated interest remaining to be distributed
from the beginning of such period (computed taking into account the Prepayment
Assumption) or (2) in the case of a Regular Certificate issued with original
issue discount, in the ratio of the amount of original issue discount accruing
in the relevant period to the total remaining original issue discount at the
beginning of such period. An election to accrue market discount on a Regular
Certificate on a constant yield basis is irrevocable with respect to that
certificate.
An Owner may be required to defer a portion of the deduction for interest
expense on any indebtedness that the Owner incurs or maintains in order to
purchase or carry a Regular Certificate that has market discount. The deferred
amount would not exceed the market discount that has accrued but not been taken
into income. Any such deferred interest expense is, in general, allowed as a
deduction not later than the year in which the related market discount income is
recognized.
Market discount with respect to a Regular Certificate will be considered to
be zero if such market discount is de minimis under a rule similar to that
described above in the fourth paragraph under "Original Issue Discount." Owners
should consult their own tax advisors regarding the application of the market
discount rules as well as the advisability of making any election with respect
to market discount.
Discount on a Regular Certificate that is neither original issue discount
nor market discount, as defined above, must be allocated ratably among the
principal payments on the certificate and included in income (as gain from the
sale or exchange of the certificate) as the related principal payments are made
(whether as scheduled payments or prepayments).
PREMIUM
A Regular Certificate, other than an Accrual Certificate or, as discussed
above under "Original Issue Discount," an Interest Only Certificate, purchased
at a cost (net of
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accrued interest) greater than its principal amount generally is considered to
be purchased at a premium. The Owner may elect under Code Section 171 to
amortize such premium under the constant yield method, using the Prepayment
Assumption. To the extent the amortized premium is allocable to interest income
from the Regular Certificate, it is treated as an offset to such interest rather
than as a separate deduction. An election made by an Owner would generally apply
to all its debt instruments and may not be revoked without the consent of the
Internal Revenue Service.
SPECIAL ELECTION TO APPLY OID RULES
In lieu of the rules described above with respect to de minimis discount,
acquisition premium, market discount and premium, an Owner of a Regular
Certificate may elect to accrue such discount, or adjust for such premium, by
applying the principles of the OID rules described above. An election made by a
taxpayer with respect to one obligation can affect other obligations it holds.
Owners should consult with their tax advisors regarding the merits of making
this election.
RETAIL REGULAR CERTIFICATES
For purposes of the original issue and market discount rules, a repayment
in full of a Retail Certificate that is subject to payment in units or other
increments, rather than on a pro rata basis with other Retail Certificates, will
be treated in the same manner as any other prepayment.
VARIABLE RATE REGULAR CERTIFICATES
The Regular Certificates may provide for interest that varies based on an
interest rate index. The OID Regulations provide special rules for calculating
income from certain "variable rate debt instruments" or "VRDIs." A debt
instrument must meet certain technical requirements to qualify as a VRDI, which
are outlined in the next paragraph. Under the regulations, income on a VRDI is
calculated by (1) creating a hypothetical debt instrument that pays fixed
interest at rates equivalent to the variable interest, (2) applying the original
issue discount rules of the Code to that fixed rate instrument, and (3)
adjusting the income accruing in any accrual period by the difference between
the assumed fixed interest amount and the actual amount for the period. In
general, where a variable rate on a debt instrument is based on an interest rate
index (such as LIBOR), a fixed rate equivalent to a variable rate is determined
based on the value of the index as of the issue date of the debt instrument. In
cases where rates are reset at different intervals over the life of a VRDI,
adjustments are made to ensure that the equivalent fixed rate for each accrual
period is based on the same reset interval.
A debt instrument must meet a number of requirements in order to qualify as
a VRDI. A VRDI cannot be issued at a premium above its principal amount that
exceeds a specified percentage of its principal amount (15%, or if less 1.5%
times its weighted average life). As a result, Interest Only Certificates will
never be VRDIs. Also, a debt instrument that pays interest based on a multiple
of an interest rate index is not a VRDI if the multiple is less than or equal to
0.65 or greater than 1.35, unless, in general, interest is paid based on a
single formula that lasts over the life of the instrument. A debt instrument is
not a VRDI if it is subject to caps and floors, unless they remain the same over
the life of the instrument or are not expected to change significantly the yield
on the instrument. Variable rate Regular Certificates other than Interest Only
Certificates may or may not qualify as VRDIs depending on their terms.
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In a case where a variable rate Regular Certificate does not qualify as a
VRDI, it will be treated under the OID Regulations as a contingent payment debt
instrument. The Internal Revenue Service has issued final regulations addressing
contingent payment debt instruments, but such regulations are not applicable by
their terms to REMIC regular interests. Until further guidance is forthcoming,
one method of calculating income on such a Regular Certificate that appears to
be reasonable would be to apply the principles governing VRDIs outlined above.
SUBORDINATED CERTIFICATES
Certain series of certificates may contain one or more classes of
subordinated certificates. In the event there are defaults or delinquencies on
the related mortgage loans, amounts that otherwise would be distributed on a
class of subordinated certificates may instead be distributed on other more
senior classes of certificates. Since Owners of Regular Certificates are
required to report income under an accrual method, Owners of subordinated
certificates will be required to report income without giving effect to delays
and reductions in distributions on such certificates attributable to defaults or
delinquencies on the mortgage loans, except to the extent that it can be
established that amounts are uncollectible. As a result, the amount of income
reported by an Owner of a subordinated certificate in any period could
significantly exceed the amount of cash distributed to such Owner in that
period. The Owner will eventually be allowed a loss (or be allowed to report a
lesser amount of income) to the extent that the aggregate amount of
distributions on the subordinated certificate is reduced as a result of defaults
and delinquencies on the mortgage loans. Such a loss could in some circumstances
be a capital loss. Also, the timing and amount of such losses or reductions in
income are uncertain. Owners of subordinated certificates should consult their
tax advisors on these points.
Income from Residual Certificates
TAXATION OF REMIC INCOME
Generally, Owners of Residual Certificates in a REMIC Pool ("Residual
Owners") must report ordinary income or loss equal to their pro rata shares
(based on the portion of all Residual Certificates they own) of the taxable
income or net loss of the REMIC. Such income must be reported regardless of the
timing or amounts of distributions on the Residual Certificates.
The taxable income of a REMIC Pool is generally determined under the
accrual method of accounting in the same manner as the taxable income of an
individual taxpayer. Taxable income is generally gross income, including
interest and original issue discount income, if any, on the assets of the REMIC
Pool and income from the amortization of any premium on Regular Certificates,
minus deductions. Market discount (as defined in the Code) with respect to
mortgage loans held by a REMIC Pool is recognized in the same fashion as if it
were original issue discount. Deductions include interest and original issue
discount expense on the Regular Certificates, reasonable servicing fees
attributable to the REMIC Pool, other administrative expenses and amortization
of any premium on assets of the REMIC Pool. As previously discussed, the timing
of recognition of "negative original issue discount," if any, on a Regular
Certificate is uncertain; as a result, the timing of recognition of the
corresponding income to the REMIC Pool is also uncertain.
If the trust consists of an Upper-Tier REMIC and a Lower-Tier REMIC, the
OID Regulations provide that the regular interests issued by the Lower-Tier
REMIC to the Upper-Tier REMIC will be treated as a single debt instrument for
purposes of the original
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issue discount provisions. A determination that these regular interests are not
treated as a single debt instrument would have a material adverse effect on the
Owners of Residual Certificates issued by the Lower-Tier REMIC.
A Residual Owner may not amortize the cost of its Residual Certificate.
Taxable income of the REMIC Pool, however, will not include cash received by the
REMIC Pool that represents a recovery of the REMIC Pool's initial basis in its
assets, and such basis will include the issue price of the Residual Certificates
(assuming the issue price is positive). Such recovery of basis by the REMIC Pool
will have the effect of amortization of the issue price of the Residual
Certificate over its life. The period of time over which such issue price is
effectively amortized, however, may be longer than the economic life of the
Residual Certificate. The issue price of a Residual Certificate is the price at
which a substantial portion of the class of certificates including the Residual
Certificate are first sold to the public (or if the Residual Certificate is not
publicly offered, the price paid by the first buyer).
A subsequent Residual Owner must report the same amounts of taxable income
or net loss attributable to the REMIC Pool as an original Owner. No adjustments
are made to reflect the purchase price.
LOSSES
A Residual Owner that is allocated a net loss of the REMIC Pool may not
deduct such loss currently to the extent it exceeds the Owner's adjusted basis
(as defined in "Sale or Exchange of Certificates" below) in its Residual
Certificate. A Residual Owner that is a U.S. person (as defined below in
"Taxation of Certain Foreign Investors"), however, may carry over any disallowed
loss to offset any taxable income generated by the same REMIC Pool.
EXCESS INCLUSIONS
A portion of the taxable income allocated to a Residual Certificate is
subject to special tax rules. That portion, referred to as an "excess
inclusion," is calculated for each calendar quarter and equals the excess of
such taxable income for the quarter over the daily accruals for the quarter. The
daily accruals equal the product of (1) 120% of the federal long-term rate under
Code Section 1274(d) for the month which includes the Closing Date (determined
on the basis of quarterly compounding and properly adjusted for the length of
the quarter) and (2) the adjusted issue price of the certificate at the
beginning of such quarter. The adjusted issue price of a Residual Certificate at
the beginning of a quarter is the issue price of the certificate, plus the
amount of daily accruals on the certificate for all prior quarters, decreased
(but not below zero) by any prior distributions on the certificate. If the
aggregate value of the Residual Certificates is not considered to be
"significant," then to the extent provided in Treasury regulations, a Residual
Owner's entire share of REMIC taxable income will be treated as an excess
inclusion. The regulations that have been adopted under Code Sections 860A
through 860G (the "REMIC Regulations") do not contain such a rule.
Excess inclusions generally may not be offset by unrelated losses or loss
carryforwards or carrybacks of a Residual Owner. In addition, for all taxable
years beginning after August 20, 1996, and unless a Residual Owner elects
otherwise for all other taxable years, the alternate minimum taxable income of a
Residual Owner for a taxable year may not be less than the Residual Owner's
excess inclusions for the taxable year and excess inclusions
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are disregarded when calculating a Residual Owner's alternate minimum tax net
operating loss deduction.
Excess inclusions are treated as unrelated business taxable income for an
organization subject to the tax on unrelated business income. In addition, under
Treasury regulations yet to be issued, if a real estate investment trust,
regulated investment company or certain other pass-through entities are Residual
Owners, a portion of the distributions made by such entities may be treated as
excess inclusions.
DISTRIBUTIONS
Distributions on a Residual Certificate (whether at their scheduled times
or as a result of prepayments) generally will not result in any taxable income
or loss to the Residual Owner. If the amount of any distribution exceeds a
Residual Owner's adjusted basis in its Residual Certificate, however, the
Residual Owner will recognize gain (treated as gain from the sale or exchange of
its Residual Certificate) to the extent of such excess. See "Sale or Exchange of
Certificates" below.
PROHIBITED TRANSACTIONS; SPECIAL TAXES
Net income recognized by a REMIC Pool from "prohibited transactions" is
subject to a 100% tax and is disregarded in calculating the REMIC Pool's taxable
income. In addition, a REMIC Pool is subject to federal income tax at the
highest corporate rate on "net income from foreclosure property" (which has a
technical definition). A 100% tax also applies to certain contributions to a
REMIC Pool made after it is formed. It is not anticipated that any REMIC Pool
will (1) engage in prohibited transactions in which it recognizes a significant
amount of net income, (2) receive contributions of property that are subject to
tax, or (3) derive a significant amount of net income from foreclosure property
that is subject to tax.
NEGATIVE VALUE RESIDUAL CERTIFICATES
The federal income tax treatment of any consideration paid to a transferee
on a transfer of a Residual Certificate is unclear. Such a transferee should
consult its tax advisor. The preamble to the REMIC Regulations indicates that
the Internal Revenue Service may issue future guidance on the tax treatment of
such payments.
MARK TO MARKET RULES
A REMIC residual interest that is acquired on or after January 4, 1995 is
not a "security" for the purposes of Code Section 475, and thus is not subject
to the mark to market rules.
THE METHOD OF TAXATION OF RESIDUAL CERTIFICATES DESCRIBED IN THIS SECTION
CAN PRODUCE A SIGNIFICANTLY LESS FAVORABLE AFTER-TAX RETURN FOR A RESIDUAL
CERTIFICATE THAN WOULD BE THE CASE IF THE CERTIFICATE WERE TAXABLE AS A DEBT
INSTRUMENT. ALSO, A RESIDUAL OWNER'S RETURN MAY BE ADVERSELY AFFECTED BY THE
EXCESS INCLUSIONS RULES DESCRIBED ABOVE. IN CERTAIN PERIODS, TAXABLE INCOME AND
THE RESULTING TAX LIABILITY FOR A RESIDUAL OWNER MAY EXCEED ANY DISTRIBUTIONS IT
RECEIVES. IN ADDITION, A SUBSTANTIAL TAX MAY BE IMPOSED ON CERTAIN TRANSFERORS
OF A RESIDUAL CERTIFICATE AND CERTAIN RESIDUAL OWNERS THAT ARE "PASS-THROUGH"
ENTITIES. SEE "TRANSFERS OF RESIDUAL CERTIFICATES" BELOW. INVESTORS SHOULD
CONSULT THEIR TAX ADVISORS BEFORE PURCHASING A RESIDUAL CERTIFICATE.
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Sale or Exchange of Certificates
An Owner generally will recognize gain or loss upon sale or exchange of a
Regular or Residual Certificate equal to the difference between the amount
realized and the Owner's adjusted basis in the certificate. The adjusted basis
in a certificate generally will equal the cost of the certificate, increased by
income previously recognized, and reduced (but not below zero) by previous
distributions, and by any amortized premium in the case of a Regular
Certificate, or net losses allowed as a deduction in the case of a Residual
Certificate.
Except as described below, any gain or loss on the sale or exchange of a
certificate held as a capital asset will be capital gain or loss and will be
long-term or short-term depending on whether the certificate has been held for
more than one year. Such gain or loss will be ordinary income or loss (1) for a
bank or thrift institution, and (2) in the case of a Regular Certificate, (a) to
the extent of any accrued, but unrecognized, market discount, or (b) to the
extent income recognized by the Owner is less than the income that would have
been recognized if the yield on such certificate were 110% of the applicable
federal rate under Code Section 1274(d).
A Residual Owner should be allowed a loss upon termination of the REMIC
Pool equal to the amount of the Owner's remaining adjusted basis in its Residual
Certificates. Whether the termination will be treated as a sale or exchange
(resulting in a capital loss) is unclear.
Except as provided in Treasury regulations, the wash sale rules of Code
Section 1091 will apply to dispositions of a Residual Certificate where the
seller of the interest, during the period beginning six months before the sale
or disposition of the interest and ending six months after such sale or
disposition, acquires (or enters into any other transaction that results in the
application of Code Section 1091) any REMIC residual interest, or any interest
in a "taxable mortgage pool" (such as a non-REMIC owner trust) that is
economically comparable to a residual interest.
Taxation of Certain Foreign Investors
REGULAR CERTIFICATES
A Regular Certificate held by an Owner that is a non-U.S. person (as
defined below), and that has no connection with the United States other than
owning the certificate, will not be subject to U.S. withholding or income tax
with respect to the certificate provided such Owner (i) is not a "10-percent
shareholder" within the meaning of Code Section 871(h)(3)(B) or a controlled
foreign corporation described in Code Section 881(c)(3)(C), and (ii) provides an
appropriate statement, signed under penalties of perjury, identifying the Owner
and stating, among other things, that the Owner is a non-U.S. person. If these
conditions are not met, a 30% withholding tax will apply to interest (including
original issue discount) unless an income tax treaty reduces or eliminates such
tax or unless the interest is effectively connected with the conduct of a trade
or business within the United States by such Owner. In the latter case, such
Owner will be subject to United States federal income tax with respect to all
income from the certificate at regular rates then applicable to U.S. taxpayers
(and in the case of a corporation, possibly also the branch profits tax).
The term "non-U.S. person" means any person other than a U.S. person. A
U.S. person is a citizen or resident of the United States, a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any political
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subdivision thereof, or an estate or trust that is subject to U.S. federal
income tax regardless of the source of its income.
RESIDUAL CERTIFICATES
A Residual Owner that is a non-U.S. person, and that has no connection with
the United States other than owning a Residual Certificate, will not be subject
to U.S. withholding or income tax with respect to the certificate (other than
with respect to excess inclusions) provided that (1) the conditions described in
the second preceding paragraph with respect to Regular Certificates are met and
(2) in the case of a Residual Certificate in a REMIC Pool holding mortgage
loans, the mortgage loans were originated after July 18, 1984. Excess inclusions
are subject to a 30% withholding tax in all events (notwithstanding any contrary
tax treaty provisions) when distributed to the Residual Owner (or when the
Residual Certificate is disposed of). The Code grants the Treasury Department
authority to issue regulations requiring excess inclusions to be taken into
account earlier if necessary to prevent avoidance of tax. The REMIC Regulations
do not contain such a rule. The preamble thereto states that the Internal
Revenue Service is considering issuing regulations concerning withholding on
distributions to foreign holders of residual interests to satisfy accrued tax
liability due to excess inclusions.
With respect to a Residual Certificate that has been held at any time by a
non-U.S. person, the trustee (or its agent) will be entitled to withhold (and to
pay to the Internal Revenue Service) any portion of any payment on such Residual
Certificate that the trustee reasonably determines is required to be withheld.
If the trustee (or its agent) reasonably determines that a more accurate
determination of the amount required to be withheld from a distribution can be
made within a reasonable period after the scheduled date for such distribution,
it may hold such distribution in trust for the Residual Owner until such
determination can be made.
Special tax rules and restrictions that apply to transfers of Residual
Certificates to and from non-U.S. persons are discussed in the next section.
Transfers of Residual Certificates
Special tax rules and restrictions apply to transfers of Residual
Certificates to disqualified organizations or foreign investors, and to
transfers of noneconomic Residual Certificates.
DISQUALIFIED ORGANIZATIONS
In order to comply with the REMIC rules of the Code, the pooling and
servicing agreement will provide that no legal or beneficial interest in a
Residual Certificate may be transferred to, or registered in the name of, any
person unless (1) the proposed purchaser provides to the trustee an "affidavit"
(within the meaning of the REMIC Regulations) to the effect that, among other
items, such transferee is not a "disqualified organization" (as defined below),
is not purchasing a Residual Certificate as an agent for a disqualified
organization (i.e., as a broker, nominee, or other middleman) and is not an
entity (a "Book-Entry Nominee") that holds REMIC residual securities as nominee
to facilitate the clearance and settlement of such securities through electronic
book-entry changes in accounts of participating organizations and (2) the
transferor states in writing to the trustee that it has no actual knowledge that
such affidavit is false.
If despite these restrictions a Residual Certificate is transferred to a
disqualified organization, the transfer may result in a tax equal to the product
of (1) the present value
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of the total anticipated future excess inclusions with respect to such
certificate and (2) the highest corporate marginal federal income tax rate. Such
a tax generally is imposed on the transferor, except that if the transfer is
through an agent for a disqualified organization, the agent is liable for the
tax. A transferor is not liable for such tax if the transferee furnishes to the
transferor an affidavit that the transferee is not a disqualified organization
and, as of the time of the transfer, the transferor does not have actual
knowledge that the affidavit is false.
A disqualified organization may hold an interest in a REMIC Certificate
through a "pass-thru entity" (as defined below). In that event, the pass-thru
entity is subject to tax (at the highest corporate marginal federal income tax
rate) on excess inclusions allocable to the disqualified organization. However,
such tax will not apply to the extent the pass-thru entity receives affidavits
from record holders of interests in the entity stating that they are not
disqualified organizations and the entity does not have actual knowledge that
the affidavits are false.
For these purposes, (1) "disqualified organization" means the United
States, any state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing, certain organizations that are exempt from taxation under the Code
(including tax on excess inclusions) and certain corporations operating on a
cooperative basis, and (2) "pass-thru entity" means any regulated investment
company, real estate investment trust, common trust fund, partnership, trust or
estate and certain corporations operating on a cooperative basis. Except as may
be provided in Treasury regulations, any person holding an interest in a
pass-thru entity as a nominee for another will, with respect to that interest,
be treated as a pass-thru entity. Certain additional rules also apply to
"electing large partnerships." If an electing large partnership holds a Residual
Certificate, all interests in the electing large partnership are treated as held
by disqualified organizations for the purposes of the tax on pass-through
entities described above. The exception to this tax described above for
pass-through entities that collect affidavits from their record holders is not
available to electing large partnerships.
FOREIGN INVESTORS
Under the REMIC Regulations, a transfer of a Residual Certificate to a
non-U.S. person that will not hold the certificate in connection with a U.S.
trade or business will be disregarded for all federal tax purposes if the
certificate has "tax avoidance potential." A Residual Certificate has tax
avoidance potential unless, at the time of transfer, the transferor reasonably
expects that:
(1) for each excess inclusion, the REMIC will distribute to the
transferee residual interest holder an amount that will equal at least 30
percent of the excess inclusion, and
(2) each such amount will be distributed at or after the time at which
the excess inclusion accrues and not later than the close of the calendar
year following the calendar year of accrual.
A transferor has such reasonable expectation if the above test would be met
assuming that the REMIC's mortgage loans will prepay at each rate between 50
percent and 200 percent of the Prepayment Assumption.
The REMIC Regulations also provide that a transfer of a Residual
Certificate from a non-U.S. person to a U.S. person (or to a non-U.S. person
that will hold the certificate in
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connection with a U.S. trade or business) is disregarded if the transfer has
"the effect of allowing the transferor to avoid tax on accrued excess
inclusions."
In light of these provisions, the pooling and servicing agreement provides
that a Residual Certificate may not be purchased by or transferred to any person
that is not a U.S. person, unless (1) such person holds the certificate in
connection with the conduct of a trade or business within the United States and
furnishes the transferor and the trustee with an effective Internal Revenue
Service Form 4224, or (2) the transferee delivers to both the transferor and the
trustee an opinion of nationally recognized tax counsel to the effect that such
transfer is in accordance with the requirements of the Code and the regulations
promulgated thereunder and that such transfer will not be disregarded for
federal income tax purposes.
NONECONOMIC RESIDUAL CERTIFICATES
Under the REMIC Regulations, a transfer of a "noneconomic" Residual
Certificate will be disregarded for all federal income tax purposes if a
significant purpose of the transfer is to impede the assessment or collection of
tax. Such a purpose exists if the transferor, at the time of the transfer,
either knew or should have known that the transferee would be unwilling or
unable to pay taxes due on its share of the taxable income of the REMIC. A
transferor is presumed to lack such knowledge if:
(1) the transferor conducted, at the time of the transfer, a
reasonable investigation of the financial condition of the transferee and
found that the transferee had historically paid its debts as they came due
and found no significant evidence to indicate that the transferee will not
continue to pay its debts as they become due, and
(2) the transferee represents to the transferor that it understands
that, as the holder of the noneconomic residual interest, it may incur tax
liabilities in excess of any cash flows generated by the interest and that
it intends to pay taxes associated with holding the residual interest as
they become due.
A Residual Certificate (including a certificate with significant value at
issuance) is noneconomic unless, at the time of the transfer, (1) the present
value of the expected future distributions on the certificate at least equals
the product of the present value of the anticipated excess inclusions and the
highest corporate income tax rate in effect for the year in which the transfer
occurs, and (2) the transferor reasonably expects that the transferee will
receive distributions on the certificate, at or after the time at which taxes
accrue, in an amount sufficient to pay the taxes.
The pooling and servicing agreement will provide that no legal or
beneficial interest in a Residual Certificate may be transferred to, or
registered in the name of, any person unless the transferor represents to the
trustee that it has conducted the investigation of the transferee, and made the
findings, described in the preceding paragraph, and the proposed transferee
provides to the trustee the transferee representations described in the
preceding paragraph, and agrees that it will not transfer the certificate to any
person unless that person agrees to comply with the same restrictions on future
transfers.
Servicing Compensation and Other REMIC Pool Expenses
Under Code Section 67, an individual, estate or trust is allowed certain
itemized deductions only to the extent that such deductions, in the aggregate,
exceed 2% of the Owner's adjusted gross income, and such a person is not allowed
such deductions to any extent in computing its alternative minimum tax
liability. Under Treasury regulations, if
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such a person is an Owner of a REMIC Certificate, the REMIC Pool is required to
allocate to such a person its share of the servicing fees and administrative
expenses paid by a REMIC together with an equal amount of income. Those fees and
expenses are deductible as an offset to the additional income, but subject to
the 2% floor.
In the case of a REMIC Pool that has multiple classes of Regular
Certificates with staggered maturities, fees and expenses of the REMIC Pool
would be allocated entirely to the Owners of Residual Certificates. However, if
the REMIC Pool were a "single-class REMIC" as defined in applicable Treasury
regulations, such deductions would be allocated proportionately among the
Regular and Residual Certificates.
Reporting and Administrative Matters
Annual reports will be made to the Internal Revenue Service, and to holders
of record of Regular Certificates, and Owners of Regular Certificates holding
through a broker, nominee or other middleman, that are not excepted from the
reporting requirements, of accrued interest, original issue discount,
information necessary to compute accruals of market discount, information
regarding the percentage of the REMIC Pool's assets meeting the qualified assets
tests described above under "Status of Certificates" and, where relevant,
allocated amounts of servicing fees and other Code Section 67 expenses. Holders
not receiving such reports may obtain such information from the related REMIC by
contacting the person designated in IRS Publication 938. Quarterly reports will
be made to Residual Holders showing their allocable shares of income or loss
from the REMIC Pool, excess inclusions, and Code Section 67 expenses.
The trustee will sign and file federal income tax returns for each REMIC
Pool. To the extent allowable, GECMSI will act as the tax matters person for
each REMIC Pool. Each Owner of a Residual Certificate, by the acceptance of its
Residual Certificate, agrees that GECMSI will act as the Owner's agent in the
performance of any duties required of the Owner in the event that the Owner is
the tax matters person.
An Owner of a Residual Certificate is required to treat items on its
federal income tax return consistently with the treatment of the items on the
REMIC Pool's return, unless the Owner owns 100% of the Residual Certificate for
the entire calendar year or the Owner either files a statement identifying the
inconsistency or establishes that the inconsistency resulted from incorrect
information received from the REMIC Pool. The Internal Revenue Service may
assess a deficiency resulting from a failure to comply with the consistency
requirement without instituting an administrative proceeding at the REMIC level.
Any person that holds a Residual Certificate as a nominee for another person may
be required to furnish the REMIC Pool, in a manner to be provided in Treasury
regulations, the name and address of such other person and other information.
NON-REMIC CERTIFICATES
The discussion in this section applies only to a series of certificates for
which no REMIC election is made.
TRUST AS GRANTOR TRUST
Upon issuance of each series of certificates, Cleary, Gottlieb, Steen &
Hamilton, counsel to GECMSI and Funding, will deliver its opinion to the effect
that, under then current law, assuming compliance by the applicable depositor,
the servicer and the trustee with all the provisions of the pooling and
servicing agreement (and such other agreements and representations as may be
referred to in the opinion), the trust will be classified for
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federal income tax purposes as a grantor trust and not as an association taxable
as a corporation.
Under the grantor trust rules of the Code, each Owner of a certificate will
be treated for federal income tax purposes as the owner of an undivided interest
in the mortgage loans (and any related assets) included in the trust. The Owner
will include in its gross income, gross income from the portion of the mortgage
loans allocable to the certificate, and may deduct its share of the expenses
paid by the trust that are allocable to the certificate, at the same time and to
the same extent as if it had directly purchased and held such interest in the
mortgage loans and had directly received payments thereon and paid such
expenses. If an Owner is an individual, trust or estate, the Owner will be
allowed deductions for its share of trust expenses (including reasonable
servicing fees) only to the extent that the sum of those expenses and the
Owner's other miscellaneous itemized deductions exceeds 2% of adjusted gross
income, and will not be allowed to deduct such expenses for purposes of the
alternative minimum tax. Distributions on a certificate will not be taxable to
the Owner, and the timing or amount of distributions will not affect the timing
or amount of income or deductions relating to a certificate.
STATUS OF THE CERTIFICATES
The certificates, other than Interest Only Certificates, will be:
- "real estate assets" under Code Section 856(c)(4)(A); and
- assets described in Section 7701(a)(19)(C) of the Code,
to the extent the assets of the trust are so treated. Interest income from such
certificates will be "interest on obligations secured by mortgages on real
property" under Code Section 856(c)(3)(B) to the extent the income of the trust
qualifies under that section. An "Interest Only Certificate" is a certificate
which is entitled to receive distributions of some or all of the interest on the
mortgage loans or other assets in a REMIC Pool and that has either a notional or
nominal principal amount. Although not certain, certificates that are Interest
Only Certificates should qualify under the foregoing Code sections to the same
extent as other certificates.
Possible Application of Stripped Bond Rules
The federal income tax treatment of certificates will depend on whether
they are subject to the "stripped bond" rules of Code Section 1286. In general,
certificates will be subject to those rules in the hands of an Owner if (1) the
depositor, the servicer (or anyone else) retains rights to receive more than 100
basis points of interest on any mortgage loans assigned to the trust
(disregarding rights to reasonable servicing compensation, but including rights
to fees in excess of reasonable compensation), or (2) certificates are issued in
two or more classes representing rights to non-pro rata shares of interest and
principal payments on the mortgage loans.
Notwithstanding the foregoing, a certificate will not be subject to the
stripped bond rules in the hands of an Owner unless, viewing the certificate as
a debt instrument issued by the trust, it would have original issue discount. In
general, a certificate will not have original issue discount if it pays interest
at a fixed rate, or a single variable rate, monthly over its entire life, is
issued within one month of the first distribution date, and is issued with no
more than a de minimis amount of discount below its principal amount. Discount
is de minimis if the certificate has an issue price (generally the initial
offering price at which a substantial amount of certificates are sold) that is
not less than its principal
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amount by more than .25% times the weighted average life of the certificate
(calculated by rounding down the number of years to each principal payment to
the next lowest number). For a more detailed discussion of the definition of
original issue discount, see "REMIC Certificates -- Income from Regular
Certificates -- Original Issue Discount" above.
Taxation of Certificates if Stripped Bond Rules Do Not Apply
If the stripped bond rules do not apply to a certificate, then the Owner
will be required to include in income its share of the interest payments on the
mortgage loans held by the trust in accordance with its tax accounting method.
The Owner must also account for discount or premium on the mortgage loans if it
is considered to have purchased its interest in the mortgage loans at a discount
or premium. An Owner will be considered to have purchased an interest in each
mortgage loan at a price determined by allocating its purchase price for the
certificate among the mortgage loans in proportion to their fair market values
at the time of purchase. It is likely that discount would be considered to
accrue and premium would be amortized, as described below, based on an
assumption that there will be no future prepayments of the mortgage loans, and
not based on a reasonable prepayment assumption.
DISCOUNT
The treatment of any discount relating to a mortgage loan will depend on
whether the discount is original issue discount or market discount. Discount at
which a mortgage loan is purchased will be original issue discount only if the
mortgage loan itself has original issue discount; the issuance of certificates
is not considered a new issuance of a debt instrument that can give rise to
original issue discount. A mortgage loan generally will be considered to have
original issue discount if the greater of the amount of points charged to the
borrower, or the amount of any interest foregone during any initial teaser
period, exceeds .167% of the principal amount of the mortgage loan times the
number of full years to maturity (i.e., 5% of the principal amount for a 30 year
loan), or if interest is not paid at a fixed rate or a single variable rate
(disregarding any initial teaser rate) over the life of the mortgage loan. It is
not anticipated that the amount of original issue discount, if any, accruing on
the mortgage loans in each month will be significant relative to the interest
paid currently on the mortgage loans, but there can be no assurance that this
will be the case.
In the case of a mortgage loan that is considered to have been purchased
with market discount that exceeds a de minimis amount (generally, .167% of the
principal amount times the number of whole years to maturity remaining at the
time of purchase), the Owner will be required to include in income in each month
the amount of such discount that has accrued through such month and not
previously been included in income, but limited to the amount of principal on
the mortgage loan that is received by the trust in that month. Because the
mortgage loans will provide for monthly principal payments, such discount may be
required to be included in income at a rate that is not significantly slower
than the rate at which such discount accrues. Any market discount that has not
previously been included in income will be recognized as ordinary income if and
when the mortgage loan is prepaid in full. For a more detailed discussion of the
market discount rules of the Code, see "REMIC Certificates -- Income from
Regular Certificates -- Market Discount" above.
In the case of market discount that does not exceed a de minimis amount,
the Owner generally will be required to allocate ratably the portion of such
discount that is allocable
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to a mortgage loan among the principal payments on the mortgage loan and to
include the discount in ordinary income as the related principal payments are
made (whether as scheduled payments or prepayments).
PREMIUM
In the event that a mortgage loan is purchased at a premium, the Owner may
elect under Section 171 of the Code to amortize such premium under a constant
yield method based on the yield of the mortgage loan to such Owner, provided
that such mortgage loan was originated after September 27, 1985. Premium
allocable to a mortgage loan originated on or before that date should be
allocated among the principal payments on the mortgage loan and allowed as an
ordinary deduction as principal payments are made (whether as scheduled payments
or prepayments).
Taxation of Certificates if Stripped Bond Rules Apply
If the stripped bond rules apply to a certificate, income on the
certificate will be treated as original issue discount and will be included in
income as it accrues under a constant yield method. More specifically, for
purposes of applying the original issue discount rules of the Code, the Owner
will likely be taxed as if it had purchased a newly issued, single debt
instrument providing for payments equal to the payments on the interests in the
mortgage loans allocable to the certificate, and having original issue discount
equal to the excess of the sum of such payments over the Owner's purchase price
for the certificate (which would be treated as the issue price). The amount of
original issue discount income accruing in any taxable year will be computed
generally as described above under "REMIC Certificates -- Income from Regular
Certificates -- Original Issue Discount." It is possible, however, that the
calculation must be made using as the Prepayment Assumption an assumption of
zero prepayments. If the calculation is made assuming no future prepayments,
then the Owner should be allowed to deduct currently any negative amount of
original issue discount produced by the accrual formula.
Different approaches could be applied in calculating income under the
stripped bond rules. For example, a certificate could be viewed as a collection
of separate debt instruments (one for each payment allocable to the certificate)
rather than a single debt instrument. Also, in the case of an Interest-Only
Certificate, it could be argued that certain proposed regulations governing
contingent payment debt obligations apply. Owners should consult their own tax
advisors regarding the calculation of income under the stripped bond rules.
Sales of Certificates
A certificateholder that sells a certificate will recognize gain or loss
equal to the difference between the amount realized in the sale and its adjusted
tax basis in the certificate. In general, such adjusted basis will equal the
certificateholder's cost for the certificate, increased by the amount of any
income previously reported with respect to the certificate and decreased (but
not below zero) by the amount of any distributions received thereon, the amount
of any losses previously allowable to such Owner with respect to such
certificate and any premium amortization thereon. Any such gain or loss would be
capital gain or loss if the certificate was held as a capital asset, subject to
the potential treatment of gain as ordinary income to the extent of any accrued
but unrecognized market discount under the market discount rules of the Code, if
applicable.
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Foreign Investors
Except as described in the following paragraph, an Owner that is not a U.S.
person (as defined under "REMIC Certificates -- Taxation of Foreign Investors"
above) and that is not subject to federal income tax as a result of any direct
or indirect connection to the United States in addition to its ownership of a
certificate will not be subject to United States income or withholding tax in
respect of a certificate (assuming the underlying mortgage loans were originated
after July 18, 1984), if the Owner provides an appropriate statement, signed
under penalties of perjury, identifying the Owner and stating, among other
things, that the Owner is not a U.S. person. If these conditions are not met, a
30% withholding tax will apply to interest (including original issue discount)
unless an income tax treaty reduces or eliminates such tax or unless the
interest is effectively connected with the conduct of a trade or business within
the United States by such Owner. Income effectively connected with a U.S. trade
or business will be subject to United States federal income tax at regular rates
then applicable to U.S. taxpayers (and in the case of a corporation, possibly
also the branch profits tax).
In the event the trust acquires ownership of real property located in the
United States in connection with a default on a mortgage loan, then any rental
income from such property allocable to an Owner that is not a U.S. person
generally will be subject to a 30% withholding tax. In addition, any gain from
the disposition of such real property allocable to an Owner that is not a U.S.
person may be treated as income that is effectively connected with a U.S. trade
or business under special rules governing United States real property interests.
The trust may be required to withhold tax on gain realized upon a disposition of
such real property by the trust at a 35% rate.
Reporting
Tax information will be reported annually to the Internal Revenue Service
and to holders of certificates that are not excluded from the reporting
requirements.
BACKUP WITHHOLDING
Distributions made on a certificate and proceeds from the sale of a
certificate to or through certain brokers may be subject to a "backup"
withholding tax of 31% unless, in general, the Owner of the certificate complies
with certain procedures or is a corporation or other person exempt from such
withholding. Any amounts so withheld from distributions on the certificates
would be refunded by the Internal Revenue Service or allowed as a credit against
the Owner's federal income tax.
PLAN OF DISTRIBUTION
Certificates are being offered hereby in series or in one or more classes
of a series through one or more of the various methods described below. The
prospectus supplement will describe the method of offering being utilized for
the related series or classes of certificates and will state the public offering
or purchase price of each class of certificates being offered thereby or the
method by which such price will be determined and the net proceeds to GECMSI or
Funding from the sale of each such series or class.
The certificates of each series or class will be offered through the
following methods from time to time, and offerings may be made concurrently
through more than one of these methods and an offering of a particular series or
of one or more classes of certificates
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may be made through a combination of two or more of these methods. Such methods
are as follows:
- by negotiated firm commitment underwriting and public reoffering by
underwriters;
- by placements by GECMSI or Funding with institutional investors through
dealers or agents; and
- by direct placements by GECMSI or Funding with institutional investors.
If underwriters are used in a sale of any certificates, such certificates
will be acquired by the underwriters for their own account and may be resold
from time to time in one or more transactions including negotiated transactions,
at fixed public offering prices or at varying prices to be determined at the
time of sale or at the time of commitment therefor. The managing underwriter or
underwriters with respect to the offer and sale of a particular series or class
of certificates will be set forth on the cover of the prospectus supplement
relating to such series or class and the members of the underwriting syndicate,
if any, will be named in such prospectus supplement.
In connection with the sale of the certificates, underwriters may receive
compensation from the depositor or from purchasers of the certificates in the
form of discounts, concessions or commissions. Underwriters and dealers
participating in the distribution of the certificates may be deemed to be
underwriters in connection with such certificates, and any discounts or
commissions received by them from GECMSI or Funding and any profit on the resale
of certificates by them may be deemed to be underwriting discounts and
commissions under the Securities Act of 1933, as amended (the "Securities Act").
The prospectus supplement will describe any such compensation paid by the
depositor.
It is anticipated that the underwriting agreement pertaining to the sale of
any series or class of certificates will provide that the obligations of the
underwriters will be subject to certain conditions precedent, that the
underwriters will be obligated to purchase all such certificates if any are
purchased and that the depositor will indemnify the underwriters against certain
civil liabilities, including liabilities under the Securities Act or will
contribute to payments required to be made in respect thereof.
Purchasers of certificates, including dealers, institutional investors and
sophisticated non-institutional investors, may, depending on the facts and
circumstances of such purchases, be deemed to be underwriters within the meaning
of the Securities Act, in connection with reoffers and sales by them of
certificates. Holders of certificates should consult with their legal advisors
in this regard prior to any such reoffer or sale.
With respect to any series of certificates offered other than through
underwriters, the prospectus supplement will contain information regarding the
nature of such offering and any agreements to be entered into between GECMSI or
Funding and purchasers of such certificates.
USE OF PROCEEDS
The net proceeds from sales of certificates will be added to GECMSI's or
Funding's general funds. Unless otherwise stated in the prospectus supplement,
GECMSI intends to use such proceeds for general corporate purposes, including
the acquisition of servicing rights, mortgage loans. If Funding acquires the
related mortgage loans from GECMSI, the net proceeds from sales of the related
certificates will be paid to GECMSI to acquire such assets.
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LEGAL MATTERS
The legality of the certificates offered hereby will be passed upon for
GECMSI or Funding by Cleary, Gottlieb, Steen & Hamilton, New York, New York.
Certain federal income tax matters will be passed upon for GECMSI or Funding by
Cleary, Gottlieb, Steen & Hamilton.
FINANCIAL INFORMATION
A trust will be formed with respect to each series of certificates. No
trust will have any assets or obligations prior to the issuance of the related
series of certificates. No trust will engage in any activities other than those
described herein or in the prospectus supplement. Accordingly, no financial
statement with respect to any trust is included in this prospectus or will be
included in the prospectus supplement.
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INDEX OF CERTAIN PROSPECTUS DEFINITIONS
PAGE
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Accrual Certificates........................................ 3
adjusted issue price........................................ 75
Advance Guarantee........................................... 22
Affected Party.............................................. 57
Available Funds............................................. 41
bankruptcy bond............................................. 25
BIF......................................................... 51
Book-Entry Nominee.......................................... 82
Certificate Account......................................... 4
Code........................................................ 70
Collection Account.......................................... 42
Confirmatory Mortgage Note.................................. 44
Cooperative Loans........................................... 10
Cut-off Date................................................ 3
Defective Mortgage Loan..................................... 48
Delinquent Mortgage Loan.................................... 21
denomination................................................ 2
Deposit Date................................................ 41
Deposit Guarantee........................................... 9
Determination Date.......................................... 41
Direct Master Servicing Arrangement......................... 31
disqualified organization................................... 82
DOL......................................................... 70
FDIC........................................................ 51
Funding..................................................... 1
Garn-St Germain Act......................................... 66
GE Capital.................................................. 45
GECMC....................................................... 56
GECMSI...................................................... 1
Home Equity Loans........................................... 10
Interest Accrual Period..................................... 5
Interest Only Certificate................................... 74
Liquidating Loan............................................ 9
Liquidating Loan Guarantee.................................. 22
Loan Sale Agreement......................................... 9
Loss Certificates........................................... 33
Lower-Tier REMIC............................................ 72
NCUA........................................................ 69
non-U.S. person............................................. 81
Nonrecoverable Advance...................................... 39
OID Regulations............................................. 73
Original Value.............................................. 13
Owner....................................................... 72
Parties in Interest......................................... 70
pass-thru entity............................................ 82
Plans....................................................... 70
Policy Statement............................................ 69
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PAGE
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Prepayment Interest......................................... 30
Principal Balance........................................... 13
Principal Prepayments....................................... 6
Proceeding.................................................. 57
PTE 83-1. .................................................. 70
Realized Loss............................................... 38
Record Date................................................. 4
Regular Certificates........................................ 72
regular interests........................................... 72
Relief Act.................................................. 67
REMIC....................................................... 72
REMIC Pool.................................................. 72
REMIC Regulations........................................... 79
Remittance Rate............................................. 3
Reserve Account............................................. 26
Residual Certificates....................................... 72
residual interests.......................................... 72
Residual Owners............................................. 78
SAIF........................................................ 51
Securities Act.............................................. 89
Simple Interest Payment..................................... 30
Simple Interest Shortfall................................... 29
SMMEA....................................................... 68
stated redemption price at maturity......................... 73
Superlien................................................... 68
Supervisory Master Servicing Arrangement.................... 31
Title V..................................................... 67
Trigger Event............................................... 45
UCC......................................................... 63
Unanticipated Recovery...................................... 38
Upper-Tier REMIC............................................ 72
USAP........................................................ 49
VRDIs....................................................... 77
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR
PROSPECTUS. ANY INFORMATION OR REPRESENTATIONS GIVEN OR MADE OUTSIDE OF THIS
PROSPECTUS SUPPLEMENT AND PROSPECTUS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS SUPPLEMENT AND PROSPECTUS DO NOT CONSTITUTE AN OFFER
TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
SECURITIES DESCRIBED IN THIS PROSPECTUS SUPPLEMENT OR AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL. THE INFORMATION CONTAINED IN THE PROSPECTUS SUPPLEMENT
AND PROSPECTUS IS CORRECT ONLY AS OF THE DATE RELATING TO SUCH INFORMATION;
DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR PROSPECTUS, OR ANY SALE MADE
THEREUNDER, SUBSEQUENT TO THE DATE OF THIS PROSPECTUS SUPPLEMENT SHALL NOT,
UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THE INFORMATION IS CORRECT
AS OF THAT SUBSEQUENT DATE.
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TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
----
Summary of Terms.................................. S- 3
Risk Factors...................................... S- 8
Description of the Mortgage Pool and the Mortgaged
Properties...................................... S-13
Description of the Certificates................... S-26
Yield and Weighted Average Life Considerations.... S-42
GE Capital Mortgage Funding Corporation........... S-54
GE Capital Mortgage Services, Inc................. S-54
The Home Equity Loan Program...................... S-54
Delinquency, Foreclosure and Loan Loss Experience
of GECMSI's Home Equity Loan Servicing
Portfolio....................................... S-56
Use of Proceeds................................... S-58
The Pooling and Servicing Agreement............... S-58
Federal Income Tax Consequences................... S-64
ERISA Considerations.............................. S-65
Legal Investment Matters.......................... S-67
Plan of Distribution.............................. S-67
Certificate Ratings............................... S-68
Legal Matters..................................... S-69
Index of Certain Prospectus Supplement Definitions... S-70
PROSPECTUS
Description of the Certificates................... 1
The Trusts........................................ 9
Credit Enhancement................................ 19
Yield, Maturity and Weighted Average Life
Considerations.................................. 27
Servicing of the Mortgage Loans................... 31
The Pooling and Servicing Agreement............... 44
GE Capital Mortgage Services, Inc................. 56
GE Capital Mortgage Funding Corporation........... 57
Where You Can Find More Information About GE
Capital Mortgage Services, Inc. and GE Capital
Mortgage Funding Corporation.................... 59
The Guarantor..................................... 59
Certain Legal Aspects of the Mortgage Loans....... 59
Legal Investment Matters.......................... 69
ERISA Considerations.............................. 70
Federal Income Tax Consequences................... 72
Plan of Distribution.............................. 89
Use of Proceeds................................... 90
Legal Matters..................................... 91
Financial Information............................. 91
Index of Certain Prospectus Definitions........... 92
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UNTIL DECEMBER 20, 1999, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS. THIS IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
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GE CAPITAL MORTGAGE
FUNDING CORPORATION
1999-HE3 TRUST
$413,097,000
(APPROXIMATE)
GE CAPITAL MORTGAGE
FUNDING CORPORATION
(DEPOSITOR)
REMIC HOME EQUITY LOAN
PASS-THROUGH CERTIFICATES,
SERIES 1999-HE3
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PROSPECTUS SUPPLEMENT
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PRUDENTIAL SECURITIES
[GREENWICH CAPITAL LOGO]
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SEPTEMBER 21, 1999
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