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accompanying this letter is hereby submitted We further respectfully request that the September 30 letters be withdrawn from your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
fr

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
-1

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