SEC Division of Investment Management staff letter: American Home Finance Corp.

KAYE SCH0LER RMAN HAYS HANDLER
1575 EYE STREET NW
WASHINGTON D.C 20005
WENNETH FEINSERO NEW YOrnt 0lrICC 00 45PARAVCNUE NEW YOK N.Y 10022 ALlAN M0X 212 79 0400 WILLIAM l.ANE .18 October 1980 125 WORTh AVENUE PALM 08CM Ft.A 33460 1305 033-5151 INVESTMENT COMPANY ACT OF 1940 SECTIONS 3c and 6c 3.lL BY HAND Sidney Cirnmet Esquire 11 Chief _________ Counsel 7--.- Division of Investment Managemulab11ity 57///g Securities and Exchange Commission --1---.7 500 North Capitol Street Northwest Washington 20549 Re American Home Finance Corporation Dear 12r Cimmet Our client American Home Finance Corporation Financet is preparing to file with the Securities and Exchange Commission Registration Statement on Form Sli relating to proposed issu ance of bonds which will be secured by mortgage-backed certificates guaranteed by the Government National Mortgage Association Accompanying this letter is letter requesting the Division to advise us that it will take no-action position with respect to the issuance of the bonds described without regis tration of Finance under the Investment Company Act of 1940 the Act Alternatively the letter requests that Finance be exempted from the provisions of such Act pursuant to Section 6c thereof Reference is made to two letters dated September 30 1980 from Joseph Connolly to you requesting similiar advice or exemp tion based on different set of facts Since the submission of the September 30 letters Finance has decided to restructure the proposed bond offering and accordingly the noaction1 request accompanying this letter is hereby submitted We further respect￾fully request that the September 30 letters be withdrawn from your consideration

KAVE SCH0LER FIERMAN HAYS HANDLER Sidney Cinunet Esq Qctober 1980 Continental The financing will be accomplished through the issuance by Finance of 30year bonds in series each series to be secured by mortgagebacked certificates the GNMA Cer tificates issued by Mortgage and guaranteed by the Govern ment National Mortgage Association GNMA together with cash reserve fund The GNMA Certificates securing each series will be selected and transferred to Finance prior to the is suance of that series Finance will not acquire or dispose of any GNMA Certificates other than in connection with the original issuance of each series of bonds The cash reserve funds which will constitute less than 10% of Finances assets may be invested only in shortterm obligations of the U.S government or any agency thereof obligations of the Federal National Mortgage Association prime commercial paper and bank deposits or certificates of deposit Payments received with respect to the GNMA Certificates may be temporarily in vested in the same manner Finance will not engage in any other business and is not expected to have any significant assets other than those securing the bonds
Section 3c of the Act provides an exemption
from registration as an investment company for any person who is not engaged in the business of issuing redeemable securities and who is primarily engaged in purchasing or otherwise acquiring mortgages or other liens on or interests in real estate Finance Engaged In Purchasing Interests In Real Estate The bonds to be issued by Finance will be secured by GNMA Certificates purchased by Finance from Mortgage the issuer of the GNMA Certificates The nature of the GNMA Cer tificates as interests in real estate is best understood by reviewing the procedure pursuant to which they are issued Mortgage as originator of mortgage loans on single family residences constructed and sold by American Coninenta1 assigns the mortgage loans to custodian for the benefit of GNMA and pays GNMA fee in exchange for GNMAs agreement to guarantee mortgagebacked certificates to be issued by Mortgage The GNMA Certificates are based on and backed by all of the mortgage loans pooled by Mortgage and held by the custodian They provide for the payment by Mortgage to the certificate hclder of fixed monthly payments of principal and interest plus passthrough to such holders of prepayments made on the mortgage loans and proceeds of foreclosures In the event that

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KAYE ScH0LER FIERMAN HAYs HANDLER Sidney Cimmet Esq October 1980 Mortgage is unable to pay the amounts due on the GNMA Certif icates GNMA will make such payment directly to the certificate holder The GNMA Certificate by its terms represents an un divided interest in the pool of mortgage loans which secures it Ihe GNMA Certificate states FURTHER THE ISSUER CERTIFIES That this Certificate and each of the like securities composing the entire issue of which it is part is proportionately based on and backed by all the mortgages pooled by the Issuer and identified col lectively in the records of the Govern ment National Mortgage Association by the mortgage pool set forth herein all such mortgages being insured under the National Housing Act or Title of the Housing Act of 1949 or insured or guaranteed under the Servicemens Readjustment Act of 1944 or Chapter 37 or Title 38 United States Code and that with respect to this Cer tificate the base and backing is in the proportion that the principal amount set forth bears to the total of such pool such total being equal to the aggregate of the principal amounts of like securi ties composing the entire issue of which this Certificate is part and being equal to the aggregate of the principal amounts outstanding on the mortgages com posing such pool and that the Holder is the owner of an undivided beneficial in terest in the pool in the foregoing proportion emphasis added Accordingly the GNMA Certificates represent an interest in real estate i.e the underlying mortgages Bonds Are Not Redeemable Securities We understand that debt securities are customarily structured to permit the holders thereof at their option to redeem the securities at their principal amount prior to stated maturity subject to certain dollar limitations as to each holder In the caseoL the bonds it is proposed that rather than the issuer creating fixed annual fund such re

KAYE ScH0LER FIERMAN HAYS HANDLER Sidney Cimmet Esq October 1980 demptions may be made only to the extent of payments of prin cipal of the underlying GNMA Certificate derived from sched uled amortization prepayments foreclosures and insurance proceeds of the residential mortgage loans securing the GNMA Certificate Finance would not in any calendar quarter redeem more than $10000 in principal amount of any series of bonds held by any one holder unless the record holder of the bonds in question was deceased It is expected that the primary source of funds for redemptions will be passthrough payments of the underlying GNMA Certificates through prepayments of the residential mort gage loans securing the GNMA Certificates The prepayment pattern of any particular group of residential mortgage loans cannot be predicted however the experience of the Federal Housing Administration and the mortgage banking industry sug gests that large portion of the underlying mortgage loans will be prepaid prior to maturity of the bonds Prior to 1970 Section 3c of the Act did not condition the availability of the exemption on not being en gaged in the business of issuing redeemable securities The legislative history of the 1970 amendment which added that condition indicates that The amendment applies only to those companies which purport to model themselves after openend companies by issuing security redeemable at the option of the holder.1
Section 2a 32 of the Act defines redeemable
security as any security other than shortterm paper under the terms of which the holder upon its presentation to the issuer or to person designated by the issuer is enti tled whether absolutely or only out of surplus to receive approximately his proportionate share of the issuers cur rent net assets or the cash equivalent thereof Report of the Senate Committee on Banking and Currency dated May 21 1969 19703 U.S Code Congressional and Administrative News 4933

KAVE SCHOLER FIERMAN HAYS HANDLER Sidney Cimmet Esq October 1980 The proposed redemption features of the bonds do not appear to come within the terms of this definition Hold ers of the bonds are neither absolutely entitled to redeem them nor only entitled to redeem them out of surplus rather redemptions are made from the liquidation of the underlying GNMA Certificates through scheduled amortizatipn prepayments foreclosure and insurance proceedsof the residential mortgage loans securing the GNMA Certificates In addition the amount received upon redemption is limited to the principal amount of the redeemed bonds and is not based upon proportionate share of the issuers current net assets General Finally neither the proposed operations of Finance nor the proposed plan of distribution resembles those of typical openend company which is engaged in continuous offering of its own securities as well as continuous purchases and sales of the securities of others Based on the foregoing we respectfully request that the Division take noaction position with respect to Finances status as an investment company and the proposed issuance of its bonds If the Division concludes that it is unable to do so we respectfully request that the Division recommend to the Commission that Finance be exempted from the provisions of the Act pursuant to Section 6c thereof Very ours Connol1j-t

f9 AR IDOl
CXir Ref No 80314--CC
American HaTe Finance
RSiONSE CF THE OFFICE CF CHIEF COVSEL Corporation DIVISION OF INVESTMENI M.NAGEMENT File No 132-3 Based on the representations contained in your letters of Octcber Novnber and tcernber 1980 we wuld not reccmmend any action to the Ccriinission against American Hare Finance Corporation Finance under the Investment Canany Act of 1940 Act if without registering under the Act in reliance upon your opinion as counsel that it is excepted fran the defini tion of investment ccxnpany by Section 3c of the Act it engages primarily in investing in modified passthrough certificates guaranteed by the Government National brtgage Association GNMA certificates and issues series of bonds secured by such GMA certificates As we understand it Finance will own all of the GMA certificates tich are based on and backed by pool of mortgages underlying any G\MA certificate it owns and Finance will hold such GMA certificates until they mature or are pai1 off or until Finance repurchases all of the bonds which it has issued that are secured by said aMA certificates In these circumstances we xuld consi der the GNMA certificates although they are clearly securities within the mean ing of Section 2a36 of the Act to be included within the rhrase inortaages aid other liens on and interests in real estate in Section 3c of the Act F.irthermore we understand that there are three ways that holders of Finances bonds could receive payment of the principal amount of their bonds plus accrued interest prior to maturity at the bondholders option at Fi nance option or mardatorily as required by the bond indenture Payments at the bondholders option rould be limited cuarterly for each series to the the extent that Finance has sums available in that series of bonds redenption fund consisting of scheduled payments and prepayments of principal on the QIMA certificate securing that series of bonds and unless the redanpt ion fund has amounts available to satisfy all prepayment requests only up to $10000 per bondholder $100000 if the estate of deceased bondholder makes the request Under these circumstances we ou1d not consider Finances bonds to be redeeinable securities for purposes of Section 3c of the Act Stanley Deputy LKoltun/jab/jlw

BY HAND
Sidney Cimmet Esq
Chief Counsel
Division of Investment Management Securities and Exchange Commission 500 North Capitol Street N.W Washington D.C 20549 INVESTMENT COMPANY ACT OF 1940 SECTIONS 3c5 and 6c Re American Home Finance Corporation Dear Mr Cimmet We are counsel to American Home Finance Corporation Finance whollyowned subsidiary of American Continental Mortgage Company Mortgage which is in turn whollyowned subsidiary of American Continental Corporation American Continental On behalf of Finance we respectfully request that the Division advise us that it will take noaction posi tion with respect to the issuance of the bonds described be low without registration of Finance under the Investment Company Act of 1940 the Act Alternatively if the Divi sion is unable to take noaction position we respectfully request that Finance be exempted from the provisions of the Act pursuant to Section 6c thereof Finance was organized recently by American Continen tal and Mortgage in order to facilitate the financing of resi dential mortgages on homes manufactured and sold by American ON HANDLER FREDERICK UVINOSTON STANLEY D.wAXBERG JOSEPH G.CONNOLLY SIDNEY .1 SILSERNAN STANLEY �08INSON FREOA.FREUND STUART MARKS SAUL COHEN NINKIN WILLIAM ISAACSON SHELDON OI.IENSIS FRED FISI4NAN GERALD FELLER DONEN Gt.Elek JOSHUA GREENBERG DAVID KLIHGSBCRG MILTON SCHUBIN PETER FISHSEIN PAUL CURRAN SEYMOUR CHAUF LAWRENCE NEWMAN PETER WElL STANLEY LESSER DAVID GOLDBERG MELVIN NICHAELSON DONALD CURRIE JULIUS RtRNAPI MICHAEL NALINA KAYE SCH0LER FIERMAN HAYS HANDLER 425 PARK AVENUE MARTIN $.SAINAN NEW YORK N.Y 0022 JOHN OUNNE JOHN FRIEDMAN SIDNEY KWESTEL 212 759-8400 STANLEY ROSENBERG JAY STRUM ALLEN IIEZSBON GERALD SOBEL RONALD LUNGER CLZASETH HEAD HENRY UMAN JEFFREY EPSTEIN MICHAEL BLECHNAN WILLIAM BORCHARD ALLAN PEPPER FREDRIC YERMAM ANDREA CHRISTENSEN HARVEY BRECHER DAVID RYAN October 1980 RICHARD CION MARK LOTHROP RANDOLPH SHERMAN ALFRED BIANCO BARBARA SINGER THOMAS RICHARD SELTZER STEVEN .J GLASSNAN RICHARD HELLSTERN STANLEY FULD SPECIAL COUNSEL JACOB SCHOLtR JAMES HAYS ALFRED BLUNROSCN VICTOR ZONANA JAMES HENRY JOHN BALL COUMSCL 125 WORTH AVENUE PALM BEACH FLA 33480 105 033SISI NORRIS ENGELSCRG RESIDENT PASYNES CALC AODSEBS KAYEMACLER NEW YORK TELEX NUMSENS NEW YORK DOMESTIC 128521 NEW YORK INTL 534860 PARIS LEFCBVRE 650S71F NO LONITYCO IN NIX TUSk

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KAYC ScH0LER FIERMAN HAYS HANoLR Sidney Cimmet Esquire October 1980
Page Two
We would very much appreciate having the opportunity to discuss the accompanying letter with you prior.. .to the taking of any action which might be adverse to the request contained therein Please feel free to call Joseph Connolly or in his absence the undersigned collect 2127598400 if you wish to discuss any aspect of this request Very truly rs LTh Joshua Fishman Enclosure

KAVE SCHOLER FIER MAN HAYS HANDLER 425 PARK AVENUE CABLt ADDRESSES 125 WORTH AVENUE KAYEMACIER NEW vo NEW Y0 10022 PALM BEACH LA 33450 BAYEMACI.ER NEUILLY/SEINC 305 533-5151 TELEX NUMBERS NtW YORK DOMESTIC 22 2I2 7598400 NEW YORI INTL 234560 Ris LEFLBvRE 620971F November 1980 FEDERAL EXPRESS Lawrence Koltun Esq Securities and Exchange Commission 500 North Capitol Street N.W Washington D.C 20549 Re American Home Finance Corporation Dear Larry In accordance with our discussion today enclosed are four copies of supplement to our request for no-action dated October 1980 Also enclosed is copy of our September 30 1980 letter Sincere ly..ypurs Joshua Fishman JEF/mie Enclosures

INVESTMENT COMPANY ACT OF 1940
SECTIONS 3c and 6c
FEDERAL EXPRESS
Lawrence Koltun Esq
Securities and Exchange Commission 500 North Capitol Street N.W Washington D.C 20549 Re American Home Finance Corporation Dear Mr Koltun This letter supplements our letter dated October 1980 relating to the proposed issuance of bonds by our client American Home Finance Corporation Finance Since the submission of that letter Finance has negotiated certain changes in the proposed offering with prospective under writer which changes relate primarily to the redemption features of the bonds to be offered It is currently contemplated that the bonds will be subject to redemption at the option of the holders subject to certain limitations and at the option of Finance under certain circumstances In addition Finance will be obligated to redeem bonds under other more limited circumstances MILTON HANDLER FREOERICII I.IVINGSTON STANLEY O.WAXSERG 10SEP14 CONNOLLY SILSERMAI4 NLEY ROBINSON FREUND STUART MAR55 SAUL COHEN NIMSIN WILLIAM ISAACSON SHELDON OLIENSIS FRED FISHNAN GERALD FELLER DONEM GLEICK JOSHUA GREENBERG DAVID KLINGSBERQ MILTON .1 SCNU$IN PETER FISHUCIN PAUL CURRAN SEYMOUR ItCHALIF LAWRENCE NEWMAN PETER WElL STANLEY LESSER DAVID GOLDBERG MELVIN MICHAELSON DONALD CURRIE JULIUS BERMAN MICHAEL MALINA KArE ScH0LER FIERMAN HAYS HANDLER 425 PARK AVENUE NARTINS.SAIMAN NEW YORK N.Y 10022 JOHN DUNNE JOHN FRIEDMAN SIDNEY SWESTEL 22 759 8400 STANLEY ROSENBERG JAY STRUM ALLEN KEZSBOM GERALD SOSEL RONALD LUNGER November 1980 ELIZABETH HEAD HENRY UMAN JEFFREY EPSTEIN MICHAEL eLEcHNAN WILLIAM SORCUARD ALLAN PEPPER FREDRIC YERMAN ANDREA CHRISTENSEN HARVEY SRECHER DAVID RYAN MILTON SHERMAN RICHARD CION MARK LOTHPOP RANDOLPH SHERMAN ALFRED BIANCO BARBARA SINGER THOMAS RICHARD SELTZER STEVEN .1 GLASSNAN RICHARD HELLSTERN STANLEY FIJLO SPECIAL COUNSEL JACOB SCHOLER JAMES HAYS ALFRED W.BLUMROSEN VICTOR 2ONANA JAMES HENRY JOHN BALI COUSEL 125 WORTH AVENUE PALM BEACH FLA 33450 305 O33SI5I MORRIS ENGELBERO RESIDENT PARTNER CABLE ADDRESS KAYEMACLER NEW YORK TELES NUMtN5 NEW YORK DOMESTIC IZCSZI NEW YORK INTL 234560 PARIS LEFEBVPE 620BhP IOt U0MtD IN NEW NOSE

KAVE ScH0LER FIERMAN HAYS HANDLER Lawrence Koltun Esq November 1980 Optional Redemptions Bondholders will have the right to request that their bonds be redeemed on quarterly basis Such redemptions will be limited to amounts in Redemption Fund consisting of payments of principal of the GNMA Certificates securing the bonds derived from scheduled amortization prepayments fore closures and insurance proceeds of the residential mortgage loans securing the GNMA Certificates Finance would not in any calendar quarter redeem more than $10000 in principal amount of any series of bonds held by any one holder unless the record holder of the bonds in question was deceased or unless there were amounts remaining in the Redemption Fund after redeeming bonds of other holders within the $10000 limitation Optional Redemptions by Finance As currently contemplated Finance will be entitled to redeem bonds of any series prior to the 6th anniversary of the issuance of such series if the outstanding principal balance of the GNMA Certificates securing such series of bonds declined to 20% of the original principal balance of such GNMA Certificates which reduction would indicate that the Certifi cates and the underlying mortgage loans would have been substantially prepaid and at any time on or after the 6th anniversary of the issuance of such series Mandatory Redemptions by Finance It is anticipated that Finance will be obligated to redeem bonds of series quarterly to the extent any amounts remain in the Redemption Fund after making all redemptions at the option of the holders if the Redemption Fund cannot be invested in short-term obligations of the United States Government or any agency thereof obligations of the Federal National Mortgage Association prime commercial paper and bank deposits or certificates of deposits at rate of interest at least equal to the rate on series of bonds and the cash reserve fund which is pledged as additional security for such series of bonds has been reduced below 75% of its required level

KAYE ScH0LER FIERMAN HAYS HANDLER Lawrence Koltun Esq November 1980 In the case of all redemptions whether at the option of the holders or Finance the redemption price will be equal to 100% of the unpaid principal amount of the bond plus accrued but unpaid interest Although the redemption features described herein are slightly different from the features described in our October letter we continue to be of the opinion that these redemption features do not cause the bonds to come within the terms of the definition of redeemable security in Section 2a 32 of the Investment Company Act of 1940 Holders of the bonds continue to be neither absolutely entitled to redeem them nor only entitled to redeem them out of surplus rather redemptions are made from Redemption Fund consisting of payments resulting from the liquidation of the underlying GNMA Certificates In addition the amount to be received upon redemption will be limited to the principal amount of the redeemed bonds plus accrued interest and will not be based upon proportionate share of Finances current net assets Please feel free to call the undersigned or in his absence Joshua Fishman if you have any further questions regarding this matter

MARflN SAlMAN
JOHN DUNNE
JOHN FRIEDMAN
SIDNEY KWESTEI STANLEY FULD
STANLEY ROSENSERO SPECIAL COUNSEl JAY STRUM JACOB SCHOI.ER ALLEN KEZSUOM JAMES HAYS GERALD SOBEL ALFRED BLUMRO5EN RONALD LUNGER VICTOR ZONANA ELIZABETH HEAD HENRY IJUAN couo.c JEFFREY EPSTEIN MICHAEL BLECHMAN WILLIAM SORCHARD 3051 033-5151 ALLAN PEPPER MORRIS INGELBERO FREDRIC YERMAN RESIDENT PARTNER ANDREA CHRISTENSEN CALE ADDRESS HARVEY DRECHER KAYEMACLER NEW YORK DAVID RYAN TEI.EA NUNSCSS MILTON SHERMAN NEW YORK DOMESTIC 125951 RICHARD dON NEW YORK INTL 234960 MARKA.LOYHROP PARISLEFEBvRE 620971F RANDOLPH SHERMAN ALFRED SIANCO BARBARA SINGER THOMAS RICHARD SELTZER STEVEN GLASSNAN RICHARDS HELLSTERN FEDERAL EXPRESS Lawrence Koltun Esq Securities and Exchange Commission 500 North Capitol Street N.W Washington D.C 20549 Re American Home Finance Corporation Dear Mr Koltun This letter supplements our letters dated October 1980 and November 1980 relating to the proposed issuance of bonds by our client American Home Finance Corporation Finance whollyowned subsidiary of American Continental Mortgage Company Mortgage This letter is intended to respond to certain questions raised in connection with the proposed offering and to confirm certain information previously furnished you orally Creation of GNMA Pool and Issuance of Certificate As previously described in our letter dated October 1980 each series of bonds to be issued by Finance will primarily be secured by one or more mortgage-backed certifi cates GNMA Certificates Mortgage as originator of mortgage loans on singlefamily residences constructed and sold by American Continental Corporation Mortgages parent corporation and its affiliates assigns the mortgage loans .9 PYI.TON HANDLER DERICK LIVINGSTON ANLEYO.WAXBERG JOSEPH G.CONNOLLY SIDNEY SILSERNAN STANLEY ROBINSON FRED FREUNO STUART MARKS SAUL COHEN NIMKIN WILLIAM ISAACSON SHELDON OLIENSIS FRED FISHMAN GERALD FELLER DONEN GLEICK JOSHUA GREENBERG DAVID IILINGSBERG MILTON .J.SCHUBIN PETER FISHBEIM PAUL CURRAN SEYMOUR CHALIF LAWRENCE NEWMAN PETER WElL STANLEY LESSER DAVID GOLDBERG MELVIN NICHAELSON DONALD .1 CURRIE JULIUS BERMAN MICHAEL NALINA KAYE ScH0LER FIERMAN HAYS HANDLER 425 PARK AVENUE NEW YORK N.Y 10022 12 759 0400 December 1980 NIB KONITYKO IN NEW YORK INVESTMENT COMPANY ACT OF 1940 SECTIONS 3c and 6c

KAVE ScH0LER FIERMAN HAYS HANDLER Lawrence Koltun Esq December 1980 to custodian for the benefit of the Government National Mortgage Association GNMA and pays GNIA fee in exchange for GNNAs agreement to guaranty mortgagebacked certificates to be issued by Mortgage As presently contemplated each GNMA Certificate issued by Mortgage to Finance will represent the entire beneficial interest in the pool ofmortgages backing such GNMA Certificate For example if $2000000 pool of mortgages is created one GNMA Certificate representing the beneficial interest in all of those mortgages will be issued to Finance and no other party will have beneficial interest in that pool of mortgages The mortgage loans backing each GNMl Certificate securing series of bonds will be either mortgage loans insured by the Federal Housing Administration and may be either level payment mortgage loans or graduated payment mortgage loans or mortgage loans guaranteed by the Veterans Administration and will consist of first mortgage loans on singlefamily residences constructed by American Continental Corporation or its affiliates as well as first mortgage loans on other singlefamily residences all of which will be originated by Mortgage Finances Ownership of GNMA Certificates as an Investment in an Interest in Real Estate It is our view that Finances ownership of GNMA Certificates for the purpose of issuing bonds secured by such Certificates constitutes an investment in real estate within the meaning of Section 3c of the Investment Company Act of 1940 We view Finances activities as being no different in substance from the activities of U.S Home Finance Corporation U.S Home which was granted noaction letter by the staff in reliance on Section 3c Letter available May 30 1980 In both the U.S Home case and Finances case the purpose for the issuance of the bonds is to finance mortgage loans in order to facilitate the homeselling activities of the parent corporations In the U.S Home case U.S Home purchased mortgage loans originated by its parent corporation and pledged those mortgage loans as security for the issuance of series of bonds by US Home Those mortgage loans were conventional mortgage

KAYE ScH0LER FIERMAN HAYS HANDLER Lawrence Koltun Esq December 1980 loans and were partially insured by private mortgage insurance The primary difference between the U.S Home case and the case presented here is in our view the form by which Mortgage in substance insures its mortgage loans In lieu of private mortgage insurance on the FHA and VA mortgage loans after their purchase by Finance if the transaction were patterned after the U.S Home transaction Mortgage is in effect obtaining the guaranty of GNMA on its mortgage loans prior to their transfer to Finance Accordingly the GNMA cer tificate issued by Mortgage represents merely different form of insurance for its mortgage loans In addition the GNMA guaranty is less expensive method of obtaining insurance for the mortgage loans than comparable private insurance would be Finally Finance believes that the presence of the GNMA guaranty as opposed to the private insurance used by U.S Home will enable it to issue its bonds at relatively lower rates of interest We also believe that Finances activities differ markedly from the typical unit investment trusts which purchase securities of other persons and then issue participations in such securities In our case the GNM1 Certificates are issued by Finances parent in connection with its normal practice of financing its mortgage loans and as part of an overall business plan by American Continental Corporation in implementation of its home building activities Marketing of Bonds The bonds to be issued by Finance will be marketed by means of prospectus which while recognizing that the bonds are primarily secured by GNMA Certificates the full and timely payment of principal of and interest on which is guaranteed by GNMA makes clear that the bonds themselves are an obligation solely of Finance and are not guaranteed by GNMA The payment and redemption terms of the bonds as previously described in our November 1980 letter are substantially different from those applicable to direct purchases of GNMA Certificates In addition while there is no risk to holder of GNMA Certifi cate there are risks to the holder of the bonds arising primarily from the fact that principal prepayments on the GNMA

KAYK SCHOLER FIERMAN HAYS HANDLER Lawrence Koltun Esq December 1980 Certificates received by Finance are not automatically paid to bondholders as they are to holders of the.GNMA Certificates themselves and must be reinvested at rate comparable to the rate on the bonds in order to provide sufficient income for the payment of interest on the bonds Redemption Features of the Bonds In our letter dated November 1980 we elaborated on the various redemption features applicable to the bonds optional redemption by bondholders mandatory redemptions by Finance and optional redemptions by Finance All redemptions of bonds either at the option of the bondholders or mandatory redemptions by Finance will be made only to the extent of funds available in redemption fund consisting of undistributed principal payments on the GNMA Certificates including e.g prepayment of GNMA Certificates resulting from principal prepayment and proceeds of liquidation on the mortgage loans backing the GNMA Certificates Optional redemptions by Finance which may only be redemptions of the entire outstanding principal amount of series of bonds and not partial redemption may be made from both the redemption fund and from funds otherwise acquired by Finance All mandatory redemptions by Finance will be made by random selection Please feel free to call the undersigned or in his absence Joshua Fishman if you have any further questions regarding this matter ery tru1youfs Connolly