UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 1-12979
HomeSide Lending, Inc.
(Exact name of registrant as specified in its charter)
Florida 59-2725415
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7301 Baymeadows Way, Jacksonville, FL 32256
(Address of principal executive offices) (Zip Code)
(904) 281-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _x_ No __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 14, 1999
Common stock $1.00 par value 100 shares
FINANCIAL INFORMATION
ITEM 1. Financial Statements
<TABLE>
<CAPTION>
HOMESIDE LENDING, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Share Data)
(Unaudited)
March 31, 1999 September 30, 1998
------------------- -----------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 56,089 $ 35,008
Mortgage loans held for sale, net 1,849,792 2,048,989
Mortgage servicing rights, net 2,813,128 1,766,214
Early pool buyout advances 453,327 759,579
Accounts receivable, net 227,800 272,005
Premises and equipment, net 54,578 45,657
Goodwill, net 662,915 677,049
Other assets 87,587 115,654
------------------- -----------------------
Total Assets $ 6,205,216 $ 5,720,155
=================== =======================
LIABILITIES AND STOCKHOLDER'S EQUITY
Notes payable $ 3,033,200 $ 2,749,000
Accounts payable and accrued liabilities 413,770 236,940
Deferred income taxes 221,875 192,781
Long-term debt 1,185,287 1,185,926
------------------- -----------------------
Total Liabilities 4,854,132 4,364,647
------------------- -----------------------
Stockholder's Equity:
Common stock:
Common stock, $1.00 par value, 100 shares authorized, issued, and
outstanding, all pledged as second priority collateral on the
long-term debt of the Parent - -
Additional paid-in capital 1,323,071 1,322,387
Retained earnings 28,013 33,121
------------------- -----------------------
Total Stockholder's Equity 1,351,084 1,355,508
------------------- -----------------------
Total Liabilities and Stockholder's Equity $ 6,205,216 $ 5,720,155
=================== =======================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
HOMESIDE LENDING, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(Dollars in Thousands)
For the Three For the Period
Months Ended from February 11,
March 31, 1999 1998 to
March 31, 1998
------------------ --------------------
<S> <C> <C>
REVENUES:
Mortgage servicing fees $ 143,537 $ 63,585
Amortization of mortgage servicing rights (96,119) (36,976)
------------------ --------------------
Net servicing revenue 47,418 26,609
Interest income 50,423 18,290
Interest expense (32,582) (13,629)
------------------ --------------------
Net interest revenue 17,841 4,661
Net mortgage origination revenue 41,639 14,269
Other income 726 619
------------------ --------------------
Total Revenues 107,624 46,158
EXPENSES:
Salaries and employee benefits 33,814 14,630
Occupancy and equipment 6,697 2,394
Servicing losses on investor-owned loans
and foreclosure-related expenses 8,859 1,823
Goodwill amortization 8,746 4,870
Other expenses 15,741 8,033
------------------ --------------------
Total Expenses 73,857 31,750
Income before income taxes 33,767 14,408
Income tax expense 16,580 7,518
------------------ --------------------
Net income $ 17,187 $ 6,890
================== ====================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
HOMESIDE LENDING, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(Dollars in Thousands)
Predecessor
For the Six For the Period For the Period
Months Ended from February 11, From September 1,
March 31, 1999 1998 to 1997 to February
March 31, 1998 10, 1998
----------------- -------------------- --------------------
<S> <C> <C> <C>
REVENUES:
Mortgage servicing fees $276,734 $63,585 $192,475
Amortization of mortgage servicing rights (179,066) (36,976) (106,190)
----------------- -------------------- --------------------
Net servicing revenue 97,668 26,609 86,285
Interest income 96,598 18,290 51,166
Interest expense (62,301) (13,629) (43,897)
----------------- -------------------- --------------------
Net interest revenue 34,297 4,661 7,269
Net mortgage origination revenue 79,925 14,269 46,696
Other income 2,513 619 634
----------------- -------------------- --------------------
Total Revenues 214,403 46,158 140,884
EXPENSES:
Salaries and employee benefits 68,328 14,630 36,137
Occupancy and equipment 13,144 2,394 7,820
Servicing losses on investor-owned loans
and foreclosure-related expenses 18,643 1,823 11,465
Goodwill amortization 17,453 4,870 283
Other expenses 31,943 8,033 18,480
----------------- -------------------- --------------------
Total Expenses 149,511 31,750 74,185
Income before income taxes 64,892 14,408 66,699
Income tax expense 32,115 7,518 26,010
----------------- -------------------- --------------------
Net income $32,777 $6,890 $40,689
================= ==================== ====================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
HOMESIDE LENDING, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(Dollars in Thousands)
For the Three For the Period from
Months Ended February 11, 1998
March 31, 1999 to March 31, 1998
------------------- ---------------------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income $17,187 $6,890
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization of mortgage servicing rights 96,119 36,976
Depreciation and amortization 10,542 5,608
Servicing losses on investor-owned loans 2,962 1,193
Change in deferred income tax liability 12,785 7,518
Origination, purchase and sale of loans held for sale, net of
repayments 367,189 (358,895)
Change in accounts receivable 32,897 (56,462)
Change in other assets and accounts payable and accrued
liabilities 57,947 122,425
------------------- ---------------------
Net cash provided by (used in) operating activities 597,628 (234,747)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of premises and equipment, net (5,855) (3,882)
Acquisition of mortgage servicing rights (418,578) (162,259)
Net (purchase of) proceeds from risk management contracts (253,527) 14,185
Early pool buyout reimbursements (advances) 33,700 (74,910)
------------------- ---------------------
Net cash used in investing activities (644,260) (226,866)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Net borrowings from banks 41,000 383,791
Repayments of commercial paper, net (30,167) -
Issuance of notes payable - 60,000
Payment of debt issue costs - (208)
Repayment of long-term debt (120) (38)
------------------- ---------------------
Net cash provided by financing activities 10,713 443,545
Net decrease increase in cash and cash equivalents (35,919) (18,068)
Cash and cash equivalents at beginning of period 92,008 32,113
------------------- ---------------------
Cash and cash equivalents at end of period $56,089 $14,045
=================== =====================
Supplemental disclosure of cash flow information:
Interest paid $ 36,288 $ 13,505
Income taxes paid $ 3,791 -
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
HOMESIDE LENDING, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(Dollars in Thousands)
Predecessor
For the Six For the Period from For the Period from
Months Ended February 11, 1998 September 1, 1997
March 31, 1999 to March 31, 1998 to February 10, 1998
------------------ --------------------- ---------------------
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income $32,777 $6,890 $40,689
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of mortgage servicing rights 179,066 36,976 106,190
Depreciation and amortization 21,105 5,608 4,893
Servicing losses on investor-owned loans 6,635 1,193 5,781
Change in deferred income tax liability 29,094 7,518 28,983
Origination, purchase and sale of loans held for sale, net of
repayments 199,197 (358,895) (211,035)
Change in accounts receivable 37,339 (56,462) (48,484)
Change in other assets and accounts payable and accrued
liabilities 120,047 122,425 (77,196)
------------------ ---------------------------------------------
Net cash provided by (used in) operating activities 625,260 (234,747) (150,179)
CASH FLOWS USED IN BY INVESTING ACTIVITIES:
Purchase of premises and equipment, net (12,312) (3,882) (12,037)
Acquisition of mortgage servicing rights (672,812) (162,259) (261,387)
Net (purchase of) proceeds from risk management contracts (474,460) 14,185 218,306
Early pool buyout reimbursements (advances) 306,252 (74,910) (5,692)
------------------ --------------------- ---------------------
Net cash used in investing activities (853,332) (226,866) (60,810)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Net (repayments to) borrowings from banks (990,899) 383,791 206,627
Issuance of commercial paper 1,278,200 - -
Issuance of notes payable - 60,000 45,000
Payment of debt issue costs - (208) (885)
Repayment of long-term debt (302) (38) (358)
Dividends paid to the Parent (37,846) - (7,313)
------------------ --------------------- ---------------------
Net cash provided by financing activities 249,153 443,545 243,071
Net increase (decrease) in cash and cash equivalents
21,081 (18,068) 32,082
Cash and cash equivalents at beginning of period 35,008 32,113 31
------------------ --------------------- ---------------------
Cash and cash equivalents at end of period $56,089 $14,045 $32,113
================== ===================== =====================
Supplemental disclosure of cash flow information:
Interest paid $ 74,424 $ 13,505 $44,933
Income taxes paid $ 18,744 - $(2,973)
</TABLE>
The accompanying notes are an integral part of these financial statements.
HOMESIDE LENDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included.
On February 10, 1998, National Australia Bank, Ltd. (the "National")
acquired all outstanding shares of the common stock of HomeSide International,
Inc. (the "Parent") and HomeSide Lending, Inc. ("HomeSide" or the "Company")
adopted a fiscal year end of September 30 to conform to the fiscal year of the
National. Accordingly, comparative financial statements for the same period in
the prior year have not been presented. Instead, a comparison of the period of
the prior year that most closely corresponds to the present period is presented.
HomeSide's operating results are not directly comparable to its historical
operating results due, in part, to different balance sheet valuations (estimated
fair value as compared to historical cost). In addition, because HomeSide's
operating results are produced and managed on a quarterly basis, it is not
practicable to furnish a period prior to February 11, 1998 that corresponds to
any period other than the period reported according to the predecessor's prior
fiscal year periods.
Operating results for the three and six months ended March 31, 1999, the
period from February 11, 1998 to March 31, 1998, and the predecessor period from
September 1, 1997 to February 10, 1998 are not necessarily indicative of the
results that may be expected for the fiscal period ending September 30, 1999.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Form 10-K for the period from February 11,
1998 to September 30, 1998 of HomeSide Lending, Inc.
2. ORGANIZATION
On December 11, 1995, HomeSide was formed by an investor group, consisting
of Thomas H. Lee Company and Madison Dearborn Partners (collectively, the
"Investors"), and signed a definitive stock purchase agreement with The First
National Bank of Boston ("BankBoston") for the purpose of acquiring certain
assets and liabilities of the mortgage banking business owned by BankBoston.
BankBoston received cash and an ownership interest in HomeSide . The transaction
closed on March 15, 1996 and HomeSide began operations on March 16, 1996.
On May 31, 1996, Barnett Banks, Inc. ("Barnett") sold certain of its
mortgage banking operations, primarily its servicing portfolio, mortgage
servicing operations and proprietary mortgage banking software systems, to
HomeSide . Barnett received cash and an ownership interest in HomeSide . The
accompanying financial statements reflect the effects of both of these
acquisitions. From May 31, 1996 until the 1997 public offering of common stock,
the Investors, BankBoston and Barnett each owned approximately one-third of
HomeSide . Following the public offering, the Investors, BankBoston and Barnett
owned in the aggregate approximately 79% of the outstanding common stock.
On January 9, 1998, NationsBank Corporation, now BankAmerica Corporation,
acquired all the outstanding common stock of Barnett Banks, Inc.
On February 10, 1998, the National acquired all outstanding shares of the
common stock of the Parent. As consideration, the National paid $27.825 per
share for all of the outstanding common stock and $17.7 million cash to retire
all outstanding stock options. The total purchase price was approximately $1.2
billion. The National paid for the purchase with borrowed and available funds.
The transaction was accounted for as a purchase. As a result, all assets and
liabilities were recorded at their fair value on February 11, 1998, and the
purchase price in excess of the fair value of net assets acquired of $713.6
million was recorded as goodwill. Following the transaction described above, the
National now owns 100% of the Parent's common stock and the Parent has become an
indirect wholly-owned subsidiary of the National. HomeSide also adopted a fiscal
year end of September 30 to conform to the fiscal year of the National.
3. ACQUISITIONS
On November 23, 1998, HomeSide agreed to purchase or sub-service
approximately $5 billion in mortgage servicing from People's Bank, the largest
mortgage lender in Connecticut. People's Bank also became a Preferred Partner,
committing to sell a significant portion of the residential mortgage loans it
originates to HomeSide for five years.
On March 4, 1999, HomeSide agreed to purchase or sub-service the servicing
portfolio of First Chicago NBD Mortgage Company ("First Chicago"). This
transaction represents an expansion of HomeSide's strategic alliance with Banc
One Mortgage Corporation and an increase in HomeSide's servicing portfolio of
approximately $18 billion. In addition, First Chicago has committed to sell the
servicing rights associated with its residential mortgage production to HomeSide
on a flow basis.
4. MORTGAGE SERVICING RIGHTS
The change in the balance of mortgage servicing rights was as follows (in
thousands):
Balance, September 30, 1998 $1,766,214
Additions 672,812
Sales of servicing -
Deferred hedge loss 553,168
Amortization (179,066)
-----------------
Balance, March 31, 1999 $2,813,128
=================
5. NOTES PAYABLE
Notes payable consist of the following (in thousands):
<TABLE>
<CAPTION>
Weighted Average Interest Rate
Total Outstanding At Period End During the Period
<S> <C> <C> <C>
Commercial paper $ 1,278,200 4.98% 5.05%
National Australia Bank unsecured facility 1,755,000 4.97% 5.12%
======================
Total, March 31, 1999 $ 3,033,200
======================
Bank line of credit $ 995,000 5.88% 5.96%
National Australia Bank unsecured facility 1,754,000 5.66% 5.67%
======================
Total, September 30, 1998 $ 2,749,000
======================
</TABLE>
On October 21, 1998, HomeSide established a $1.5 billion commercial paper
program. The program is supported by the Company's bank line of credit and
outstanding commercial paper reduces available borrowings under the bank line of
credit. At March 31, 1999, a total of $1.3 billion of commercial paper was
outstanding. The weighted average interest rates on commercial paper outstanding
during the three and six month periods ended March 31, 1999 were 5.05% and
5.18%, respectively.
On June 23, 1998, HomeSide entered into an agreement for an unsecured
revolving credit facility with the National. HomeSide can borrow up to $2.1
billion, subject to limits imposed by regulatory authorities. As of March 31,
1999, regulations limited the National's ability to lend funds to HomeSide , a
non-bank affiliate, to $2.0 billion. The interest rate is charged at the
corresponding LIBOR rate. At March 31, 1999, the amount outstanding under this
credit facility totaled $1.8 billion. The weighted average interest rate on
outstanding borrowings under this facility during the three and six months ended
March 31, 1999 were 5.12% and 5.29%, respectively.
HomeSide borrows funds on a demand basis from an independent syndicate of
banks under a $2.0 billion credit facility which, at the request of HomeSide,
may be increased to $3.0 billion. The line of credit includes both a warehouse
credit facility, which is limited to 98% of the fair value of eligible mortgage
loans held for sale, and a servicing-related facility, which is capped at $760.0
million. Borrowings under the bank line of credit bear interest at rates per
annum, based on, at HomeSide's option (A) the highest of (i) the lead bank's
prime rate, (ii) the secondary market rate of certificates of deposit plus 100
basis points and (iii) the federal funds rate in effect from time to time plus
0.5% or (B) various rates based on federal fund rates. On February 14, 2000, the
line of credit will terminate. The credit agreement contains covenants that
impose limitations and restrictions on HomeSide, including requirements to
maintain certain net worth and ratio requirements. Under certain circumstances
set forth in the credit agreement, borrowings under the agreement become
collateralized by HomeSide's assets. HomeSide is in compliance with all
requirements included in the credit agreement. At March 31, 1999, the primary
purpose of the credit facility was to provide liquidity back-up for HomeSide's
$1.5 billion commercial paper program and there was no balance outstanding under
the credit line. At September 30, 1998, the amount outstanding under the credit
line, all of which was under the warehouse credit facility, was $1.0 billion.
6. LONG-TERM DEBT
11.25 % Notes
On May 14, 1996, the Parent issued $200.0 million of 11.25% notes (the
"Parent Notes") maturing on May 15, 2003, and paying interest semiannually in
arrears on May 15 and November 15 of each year. The Parent Notes are redeemable
at the option of HomeSide, in whole or in part, at any time on or after May 15,
2001, at certain fixed redemption prices. The indenture contains covenants that
impose limitations and restrictions, including requirements to maintain certain
net worth and ratio requirements. In addition, the Parent Notes are secured by a
second priority pledge of the common stock of HomeSide Lending. HomeSide is in
compliance with all net worth and ratio requirements included in the indenture
relating to the Parent Notes. HomeSide used a portion of the proceeds from its
February 5, 1997 offering of common stock to pre-pay $70.0 million of the Parent
Notes at a premium of $7.9 million. The amount outstanding at March 31, 1999 was
$130.0 million. The balance of the Parent Notes at March 31, 1999, including the
fair value adjustment resulting from the merger with the National, was $149.4
million.
Medium-term notes
As of March 31, 1999, outstanding medium-term notes issued by HomeSide
Lending under a $1.5 billion shelf registration statement were as follows (in
thousands):
Issue Date Outstanding Balance Coupon Rate Maturity Date
May 20, 1997 $ 250,000 6.875% May 15, 2000
June 30, 1997 200,000 6.875% June 30, 2002
June 30, 1997 40,000 6.820% July 2, 2001
July 1, 1997 15,000 6.860% July 2, 2001
July 31, 1997 200,000 6.750% August 1, 2004
September 15, 1997 45,000 6.770% September 17, 2001
March 19, 1998 60,000 5.6875% March 20, 2000
April 23, 1998 125,000 5.7875% April, 24, 2001
May 22, 1998 225,000 6.200% May 15, 2003
------------------------
Total $ 1,160,000
========================
As of March 31, 1999, $850.0 million of the outstanding, fixed rate
medium-term notes had been effectively converted by interest rate swap
agreements to floating-rate notes. The weighted average borrowing rates on
medium-term borrowings issued for the three and six months ended March 31, 1999,
including the effect of the interest rate swap agreements, were 5.80% and 5.86%,
respectively. Net proceeds from the issuances were primarily used to reduce the
amounts outstanding under the bank credit agreement and to fund a $16.6 billion
portfolio acquisition from Banc One. The balance of the medium-term notes at
March 31, 1999, including the fair value adjustment resulting from the merger
with the National, was $1.2 billion.
Mortgage note payable
In connection with the acquisition of BancBoston Mortgage Corporation,
HomeSide assumed a mortgage note payable that is due in 2017 and bears interest
at a stated rate of 9.5%. HomeSide's main office building is pledged as
collateral for the mortgage note payable. The balance of the mortgage payable at
March 31, 1999, including the fair value adjustments resulting from the merger
with the National, was $24.0 million.
7. EARLY POOL BUYOUT ADVANCES AND SALES
On November 30, 1998, HomeSide Lending formed a wholly-owned subsidiary,
HomeSide Funding, Inc. ("HomeSide Funding"), whose sole purpose is to acquire
delinquent loans from HomeSide's servicing portfolio that are insured by the
Federal Housing Administration or guaranteed by the Department of Veterans
Affairs. The purchases are funded through sales to a trust. HomeSide Funding is
a non-consolidated, qualifying special purpose entity.
In December 1998, HomeSide Lending entered into a Pooling and Servicing
Agreement with Bank One Trust Company, N.A., as Trustee, and HomeSide Funding,
as Transferor, pursuant to which approximately $92 million and $283 million of
delinquent mortgage loans were sold to HomeSide Funding during the three and six
month periods ending March 31, 1999, respectively. Subsequently, these loans
were sold to the HomeSide Mortgage Loan Buyout Trust 1998-A.
8. NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement standardizes the accounting for
derivative instruments and hedging activities by requiring that an entity
recognize those items as assets or liabilities in the statement of financial
position and measure them at fair value. If certain conditions are met, a
derivative instrument may be specifically designated as (a) a hedge of the
exposure to changes in the fair value of a recognized asset or liability, or of
an unrecognized firm commitment, (b) a hedge of the exposure to variability in
the cash flows of a recognized asset, liability or forecasted transaction or (c)
a hedge of the foreign currency exposure of an unrecognized firm commitment, an
available-for-sale security, a forecasted transaction or a net investment in a
foreign operation. This statement is effective for fiscal quarters of fiscal
years beginning after June 15, 1999. Management has not yet determined the
impact of this statement on the financial statements of HomeSide.
In October 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 134, "Accounting for
Mortgage-Backed Securities Retained after Securitization of Mortgage Loans Held
for Sale by a Mortgage Banking Enterprise." This statement further amends
Statement No. 65 to require that after the securitization of mortgage loans held
for sale, an entity engaged in mortgage banking activities classify the
resulting mortgage-backed securities or other retained interests based on its
ability and intent to sell or hold those investments. This statement was
effective for the first fiscal quarter beginning after December 15, 1998.
Management has determined that the impact of this statement on the presentation
of the financial statements of HomeSide is immaterial.
9. DIVIDENDS
On October 1, 1998 the Company paid a dividend to the Parent in the amount
of $37.8 million.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
HomeSide Lending, Inc. ("HomeSide or the "Company") is one of the largest
full service residential mortgage banking companies in the United States.
HomeSide's strategy emphasizes variable cost mortgage origination, low cost
servicing, and effective risk management. Headquartered in Jacksonville,
Florida, HomeSide ranks as the 9th largest originator and the 6th largest
servicer in the United States at September 30, 1998, based on data published by
Inside Mortgage Finance .
HomeSide plans to build its core operations through (i) improved
economies of scale in servicing costs; (ii) increased productivity using
proprietary technology; and (iii) expanded and diversified variable cost
origination channels. In addition, HomeSide intends to pursue additional loan
portfolio acquisitions and strategic origination relationships similar to the
existing BankBoston, Banc One, and People's Bank relationships.
On February 10, 1998, National Australia Bank, Ltd. (the "National")
acquired all outstanding shares of the common stock of HomeSide International,
Inc. (the "Parent"). As consideration, the National paid $27.825 per share for
all of the outstanding common stock and $17.7 million cash to retire all
outstanding stock options. The total purchase price was approximately $1.2
billion. The transaction was accounted for as a purchase. As a result, all
assets and liabilities were recorded at their fair value on February 11, 1998,
and the purchase price in excess of the fair value of net assets acquired of
$713.6 million was recorded as goodwill. Following the transaction described
above, the National owns 100% of the Parent's common stock and the Parent has
become an indirect wholly-owned subsidiary of the National.
As a result of the merger with the National, HomeSide adopted a fiscal
year end of September 30 to conform to the fiscal year of the National.
Accordingly, comparative financial statements for the same period in the prior
year have not been presented. Instead, a comparison of the period of the prior
year that most closely corresponds to the present period is presented.
HomeSide's operating results are not directly comparable to its historical
operating results due, in part, to different balance sheet valuations (estimated
fair value as compared to historical cost). In addition, because HomeSide's
operating results are produced and managed on a quarterly basis, it is not
practicable to furnish a period prior to February 11, 1998 that corresponds to
any period other than the periods reported according to the predecessor's prior
fiscal year periods. Therefore, the prior period from February 11, 1998 to March
31, 1998 and the predecessor period from September 1, 1997 to December 10, 1998
have been presented in accordance with Regulation 15d-10(e)(4).
Operating results for the three and six months ended March 31, 1999 and
the period from February 11, 1998 to March 31, 1998 are not necessarily
indicative of the results that may be expected for the fiscal year ending
September 30, 1999. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Form 10-K for the fiscal period
from February 11, 1998 to September 30, 1998 of HomeSide Lending, Inc.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. This Quarterly Report on Form
10-Q contains forward-looking statements which reflect the Company's current
views with respect to future events and financial performance. These
forward-looking statements are subject to certain risks and uncertainties,
including those identified below, which could cause actual results to differ
materially from historical results or those anticipated. The words "believe,"
"expect," "anticipate," "intend," "estimate" and other expressions which
indicate future events and trends identify forward-looking statements, which
speak only as of their dates. The Company undertakes no obligation to publicly
update or revise any forward-looking statements whether as a result of new
information, future events or otherwise. The following factors could cause
actual results to differ materially from historical results or those
anticipated: (1) the Company's ability to grow which depends on its ability to
obtain additional financing in the future for originating loans, investment in
servicing rights, working capital, capital expenditure and general corporate
purposes, (2) economic downturns may negatively affect the Company's
profitability as the frequency of loan default tends to increase in such
environments and (3) changes in interest rates may affect the volume of loan
originations and acquisitions, the interest rate spread on loans held for sale,
the amount of gain or loss on the sale of loans and the value of the Company's
servicing portfolio. These risks and uncertainties are more fully detailed in
the Company's filings with the Securities and Exchange Commission.
Loan Production Activities
As a multi-channel loan production lender, HomeSide has one of the
industry's largest correspondent lending production operations, a full-service
brokered loan program and a national production center for consumer direct
mortgage lending. HomeSide also purchases servicing rights in bulk from time to
time. By focusing on production channels with a variable cost structure,
HomeSide eliminates the fixed costs associated with traditional mortgage branch
offices. Without the burden of high fixed cost origination overhead, HomeSide is
well positioned to weather a variety of interest rate environments.
The following information regarding loan production activities for
HomeSide is presented to aid in understanding the results of operations and
financial condition of HomeSide for the three and six months ended March 31,
1999, the period from February 11, 1998 to March 31, 1998, and the predecessor
period from September 1, 1997 to February 10, 1998 (in millions):
<TABLE>
<CAPTION>
Predecessor
For the Three For the Period For the Six For the Period For the Period
Months Ended From February 11, Months Ended From February 11, From September 1,
March 31, 1999 1998 to March 31, March 31, 1999 1998 to March 31, 1997 to February
1998 1998 10, 1998
----------------- -------------------- ----------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C>
Correspondent $ 5,296 $2,325 $ 10,594 $2,325 $ 6,280
Co-issue 1,043 1,488 1,915 1,488 2,907
Broker 1,160 372 2,250 372 609
----------------- -------------------- ----------------- -------------------- --------------------
Total wholesale 7,499 4,185 14,759 4,185 9,796
Direct 360 97 683 97 193
Total production 7,859 4,282 15,442 4,282 9,989
Bulk acquisitions 22,037 2 29,083 2 1,465
----------------- -------------------- ----------------- -------------------- --------------------
Total production and
Acquisitions $29,896 $4,284 $ 44,525 $4,284 $11,454
================= ==================== ================= ==================== ====================
</TABLE>
Total loan production, excluding bulk acquisitions, was $7.9 billion for
the three months ended March 31, 1999 compared to $4.3 billion for the period
from February 11, 1998 to March 31, 1998, a 8% annualized decrease. Loan
production was $15.4 billion for the six months ended March 31, 1999, compared
to $10.0 billion for the predecessor period from September 1, 1997 to February
10, 1998 and $4.3 billion for the period from February 11, 1998 combined with
March 31, 1998. On an annualized basis, loan production increased 26% for the
six months ended March 31, 1999 from the predecessor period from September 1,
1997 to February 10, 1998 and the period from February 11, 1998 to March 31,
1998 combined. For the six months ended March 31, 1999, HomeSide's correspondent
lending and broker channels were the primary contributors to production volume.
The correspondent lending channel volume increased 14% on an annualized basis
for the three months ended March 31, 1998 compared to the period from February
11, 1998 to March 31, 1998. Correspondent lending volume increased 44% on an
annualized basis for the six months ended March 31, 1999 compared to the
predecessor period from September 1, 1997 to February 10, 1998 and the period
from February 11, 1998 to March 31, 1998 combined. A primary contributor to the
increase was the addition of Banc One and People's Bank as Preferred Partners on
June 5, 1998 and November 23, 1998, respectively. As a Preferred Partners, Banc
One and People's Bank will sell a significant portion of the residential
mortgage loans they originate to HomeSide for five years.
On May 29, 1998, HomeSide also purchased the operations of
NationsBank's subsidiary Loan America, a national broker network. This purchase
is contributing to HomeSide's expansion of its broker network, a production
channel that is key to HomeSide's variable cost origination strategy. The broker
channel volume increased 56% on an annualized basis for the three months ended
March 31, 1999 compared to the period from February 11, 1998 to March 31, 1998.
The broker channel increased 168% on an annualized basis for the six months
ended March 31, 1999 compared to the predecessor period from September 1, 1997
to February 10, 1998 and the period from February 11, 1998 to March 31, 1998
combined.
The interest rate environment has significantly affected the size of the
mortgage origination market. When interest rates decline, increasing numbers of
mortgagees refinance their loans. As a result, the mortgage origination market
grows. During this period of high refinances, HomeSide has strived to keep
production at a level which is sustainable should the market size return to 1997
and 1996 volumes. As an alternative, HomeSide has emphasized its acquisitions
strategy to maintain and increase the servicing portfolio size during this
period of relatively high portfolio runoff.
HomeSide completed bulk acquisitions totaling $22.0 billion and $29.1
billion during the three and six months ended March 31, 1999, respectively. Bulk
acquisitions for the period from February 11, 1998 to March 31, 1998 were $2.0
million. For the predecessor period from September 1, 1997 to February 10, 1998
and the period from February 10, 1998 to March 31, 1998 combined, bulk
acquisitions were $1.5 billion. The increase in purchases is a continuation of
HomeSide's targeted approach to grow the servicing portfolio. Included in these
bulk acquisitions is the March 4, 1999 purchase of First Chicago NBD Mortgage
Company's ("First Chicago") servicing portfolio. This bulk acquisition, which
represents an expansion of HomeSide's strategic alliance with Banc One,
increased HomeSide's servicing portfolio by approximately $18 billion. In
addition, First Chicago has committed to sell the servicing rights associated
with its residential mortgage originations to HomeSide on a flow basis. Also
included in bulk acquisitions are $5 billion in mortgage loans purchased from
People's Bank on November 23, 1998 and approximately $2.8 billion in mortgage
loans purchased on March 31, 1999 from another significant non-bank originator
of mortgages in the United States. This non-bank originator has also agreed to
sell $7 billion of its mortgage production to HomeSide each year. People's Bank,
the largest mortgage lender in Connecticut, also became a Preferred Partner and
has committed to sell its residential mortgage originations to HomeSide for five
years.
HomeSide continues to examine a number of ways to diversify and grow
revenue sources from its existing and new customer base. As part of this effort,
HomeSide has formed an alliance with a subprime mortgage lender, which allows
HomeSide to offer additional mortgage-related products to the production
network.
Servicing Portfolio
Management believes that HomeSide is one of the most efficient mortgage
servicers in the industry based on its servicing cost per loan and the number of
loans serviced per employee. The servicing operation makes extensive use of
state-of-the-art technology, process re-engineering and expense management. With
a portfolio size of $139 billion, HomeSide services the loans of approximately
1.6 million homeowners from across the United States and is committed to
protecting the value of this important asset by a sophisticated risk management
strategy. HomeSide anticipates its low cost of servicing loans will continue to
maximize the bottom-line impact of its growing servicing portfolio. HomeSide's
focus on efficient and low cost processes is pursued through the selective use
of automation, strategic outsourcing of selected servicing functions and
effective control of delinquencies and foreclosures.
The following information on the dollar amounts of loans serviced is
presented to aid in understanding the results of operations and financial
condition of HomeSide for the three and six months ended March 31, 1999, the
period from February 11, 1998 to March 31, 1998, and the predecessor period from
September 1, 1997 to February 10, 1998 (in millions):
<TABLE>
<CAPTION>
Predecessor
For the Three For the Period For the Six For the Period For the Period
Months Ended From February 11, Months Ended From February 11, From September 1,
March 31, 1999 1998 to March 31, March 31, 1999 1998 to March 31, 1997 to February
1998 1998 10, 1998
----------------- -------------------- ----------------- -------------------- -------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of
Period $ 117,962 $ 98,906 $114,902 $ 98,906 $95 429
Additions 29,896 4,284 44,525 4,284 11,454
Scheduled amortization 779 319 1,550 319 971
Prepayments 7,505 3,820 17,029 3,820 6,330
Foreclosures 280 129 593 129 370
Sales of servicing 417 40 1,378 40 306
----------------- -------------------- ----------------- -------------------- -------------------
Total reductions 8,981 4,308 20,550 4,308 7,977
----------------- -------------------- ----------------- -------------------- -------------------
Balance at end of period $138,877 $ 98,882 $ 138,877 $ 98,882 $98,906
================= ==================== ================= ==================== ===================
</TABLE>
The number of loans serviced at March 31, 1999 was 1,626,801 compared to
1,165,587 at March 31, 1998. HomeSide's strategy is to build its mortgage
servicing portfolio by concentrating on variable cost loan origination
strategies, and as a result, benefit from improved economies of scale. A key to
HomeSide's future growth is its proprietary servicing software. This system
allows HomeSide to double the number of loans typically serviced on a single
system. For the three and six months ended March 31, 1999, substantially all of
the servicing portfolio is serviced on the proprietary system.
Results of Operations
For the three months ended March 31, 1999 compared to the period from February
11, 1998 to March 31, 1998
Summary
HomeSide's net income, excluding goodwill amortization from the
acquisition of HomeSide by the National, increased 10% on an annualized basis to
$25.9 million for the three months ended March 31, 1999 compared to $11.8
million for the period from February 11, 1998 to March 31, 1998. Net income
after the goodwill amortization from the acquisition of HomeSide by the National
for the three months ended March 31, 1999 was $17.2 million. Total revenues for
the three months ended March 31, 1999 were $107.6 million compared to $46.2
million for the period from February 11, 1998 to March 31, 1998, an 17%
annualized increase. The increases in net income, excluding goodwill
amortization, and revenues for the three months ended March 31, 1999 compared to
the period from February 11, 1998 to March 31, 1998 were primarily attributable
to increases in net mortgage origination revenue and net interest revenue. Net
mortgage origination revenue increased on an annualized basis primarily due to
increased margins on loan production activities. Net interest revenue increased
on an annualized basis due to increases in the balances of average
interest-earning assets and as a result of reduced borrowing costs from improved
credit ratings and the issuance of medium-term notes and commercial paper. Net
servicing revenue decreased on an annualized basis, primarily due to an increase
in amortization expense, partially offset by an increase in the servicing
portfolio. Declining interest rates increased mortgage prepayment speeds and
consequently increased amortization expense. Total expenses increased as a
result of expenses associated with the growing mortgage servicing portfolio and
high loan prepayment activity.
Net Servicing Revenue
Net servicing revenue was $47.4 million for the three months ended March
31, 1999 compared to $26.6 million for the period from February 11, 1998 to
March 31, 1998, an 11% annualized decrease. Net servicing revenue is comprised
of mortgage servicing fees, ancillary servicing revenue, and amortization of
mortgage servicing rights.
Mortgage servicing fees increased 13% on an annualized basis to $143.5
million for the three months ended March 31, 1999 compared to $63.6 million for
the period from February 11, 1998 to March 31, 1998, primarily as a result of
portfolio growth. The servicing portfolio increased $40.0 billion to $138.9
billion at March 31, 1999 compared to $98.9 billion at March 31, 1998, a 40%
increase. A significant portion of this portfolio growth was due to the
purchases of Banc One Mortgage's $16.6 billion servicing portfolio on June 5,
1998 and First Chicago NBD Mortgage Company's $18 billion servicing portfolio on
March 4, 1999. HomeSide's weighted average interest rates of the mortgage loans
in the servicing portfolio were 7.55% and 7.82% at March 31, 1999 and March 31,
1998, respectively. The weighted average servicing fee, including ancillary
income, for the servicing portfolio was 0.471% for the three months ended March
31, 1999 compared to 0.463% for the period from February 11, 1998 to March 31,
1998. The increase in the weighted average servicing fee was due to growth of
ancillary revenues, including late fees and other mortgage related products.
Amortization expense was $96.1 million for the three months ended March
31, 1999 compared to $37.0 million for the period from February 11, 1998 to
March 31, 1998, a 30% annualized increase. Amortization expense increased mainly
as a result of a higher average balance of mortgage servicing rights and a
decrease of 13 basis points in average mortgage interest rates from 7.35% at
March 31, 1998 to 7.22% at March 31, 1999. Amortization charges are highly
dependent upon the level of prepayments during the period and changes in
prepayment expectations, which are significantly influenced by the direction and
level of long-term interest rate movements. A decrease in mortgage interest
rates results in an increase in prepayment estimates used in calculating
periodic amortization expense. Because mortgage servicing rights are amortized
over the expected period of service fee revenues, an increase in mortgage
prepayment activity typically results in a shorter estimated life of the
mortgage servicing assets and, accordingly, higher amortization expense.
Net Interest Revenue
Net interest revenue is driven by the level of interest rates, the
direction in which rates are moving and the spread between short and long-term
interest rates and the rates at which HomeSide is able to borrow. These factors
influence the size of the residential mortgage origination market, HomeSide's
loan production volumes and the interest rates HomeSide earns on loans and pays
to its lenders.
Loan refinancing levels are the largest contributor to changes in the size
of the mortgage origination market. To reduce the cost of their home mortgages,
borrowers tend to refinance their loans during periods of declining interest
rates, increasing the size of the origination market and HomeSide's loan
production volumes. Higher loan production volumes result in higher average
balances of loans held for sale and consequently higher levels of interest
income from interest earned on such loans prior to their sale. This higher level
of interest income due to increased volumes is partially offset by the lower
rates earned on the loans.
Overall borrowing costs also fluctuate with changes in interest rates.
Currently, the interest expense HomeSide pays to finance mortgage loans held for
sale and other net assets is generally calculated with reference to short-term
interest rates. In addition, because mortgage loans held for sale earn interest
based on longer term interest rates, the level of net interest revenue is also
influenced by the spread between long-term and short-term interest rates.
Net interest revenue totaled $17.8 million for the three months ended
March 31, 1999 compared to $4.7 million for the period from February 11, 1998 to
March 31, 1998, a 91% annualized increase. The increase in net interest revenue
was primarily due to increases in the average balances of loans held for sale,
escrow deposits, and early pool buyout advances. The average balance for
mortgage loans held for sale for the three months ended March 31, 1999 was $2.3
billion, compared to $1.3 billion for the period from February 11, 1998 to March
31, 1998. The average balance for escrow deposits for the three months ended
March 31, 1999 was $2.8 billion, compared to $2.5 billion for the period from
February 11, 1998 to March 31, 1998. The average balance for early pool buyout
advances for the three months ended March 31, 1999 was $0.5 billion, compared to
$0.4 billion for the period from February 11, 1998 to March 31, 1998. Lower
funding rates obtained through improved credit ratings and the issuance of
medium-term notes and commercial paper also contributed to increases in net
interest income.
Net Mortgage Origination Revenue
Net mortgage origination revenue is comprised of fees earned on the
origination of mortgage loans, gains and losses on the sale of loans, gains and
losses resulting from hedging of secondary marketing activities and fees charged
to review loan documents for purchased loan production.
Net mortgage origination revenue was $41.6 million for the three months
ended March 31, 1999 compared to $14.3 million for the period from February 11,
1998 to March 31, 1998, a 46% annualized increase. This increase was primarily
due to an increase in margins caused by a declining interest rate environment.
Other Income
Other income for the three months ended March 31, 1999 was $0.7 million
compared to $0.6 million for the period from February 11, 1998 to March 31,
1998, a 41% annualized decrease. The decrease was due to volume decreases in
real estate tax service fees.
Salaries and Employee Benefits
Salaries and employee benefits expense was $33.8 million for the three
months ended March 31, 1999 compared to $14.6 million for the period from
February 11, 1998 to March 31, 1998, a 16% annualized increase. The average
number of full-time equivalent employees was 2,647 for the three months ended
March 31, 1999 compared to 1,968 for the period from February 11, 1998 to March
31, 1998. The increases in salaries and employee benefits expense and average
number of full-time equivalent employees are primarily attributable to
additional expenses and employees to service the growing mortgage servicing
portfolio and increased prepayment activity.
Occupancy and Equipment Expense
Occupancy and equipment expense primarily includes rental expense, repairs
and maintenance costs, certain computer software expenses and depreciation of
HomeSide's premises and equipment. Occupancy and equipment expense for the three
months ended March 31, 1999 was $6.7 million compared to $2.4 million for the
period from February 11, 1998 to March 31, 1998, a 40% annualized increase. The
increase in expense was mainly due to the increased expenses incurred to enhance
processing systems and technology expenditures necessary to support targeted
business growth.
Servicing Losses on Investor-Owned Loans and Foreclosure-Related Expenses
Servicing losses on investor-owned loans represent anticipated losses
primarily attributable to servicing FHA and VA loans for investors. These
amounts include actual losses for the final disposition of loans,
non-recoverable foreclosure costs, accrued interest for which payment has been
curtailed and estimates for potential losses based on HomeSide's experience as a
servicer of government loans.
The servicing losses on investor-owned loans and foreclosure-related
expenses totaled $8.9 million for the three months ended March 31, 1999 compared
to $1.8 million for the period from February 11, 1998 to March 31, 1998. The
increase was due to the growth of the portfolio and increased foreclosure
losses, which may continue at this level as the servicing portfolio ages.
Included in the balance of accounts payable and accrued liabilities at
March 31, 1999 is a reserve for estimated servicing losses on investor-owned
loans of $21.7 million. The reserve has been established for potential losses
related to the mortgage servicing portfolio. Increases to the reserve are
charged to earnings as servicing losses on investor-owned loans. The reserve is
decreased for actual losses incurred related to the mortgage servicing
portfolio. HomeSide's historical loss experience on VA loans generally has been
consistent with industry experience. Management believes that HomeSide has an
adequate level of reserve based on servicing volume, portfolio composition,
credit quality and historical loss rates, as well as estimated future losses.
Servicing losses are generally greatest during the three to six year age of the
loan.
The following table sets forth HomeSide's delinquency and foreclosure
experience:
<TABLE>
<CAPTION>
Servicing Portfolio Delinquencies
(percent by loan count)
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
Servicing Portfolio Delinquencies, excluding bankruptcies (at end of period)
30 days 2.85% 3.20%
60 days 0.56% 0.67%
90+ days 0.57% 0.61%
==================== ===================
Total past due 3.98% 4.48%
==================== ===================
Foreclosures pending 0.77% 0.80%
==================== ===================
</TABLE>
As a result of a larger and more mature portfolio at March 31, 1999
compared to March 31, 1998, servicing losses on investor-owned loans and
foreclosure-related expenses increased while servicing portfolio delinquencies
decreased.
Other Expenses and Goodwill Amortization
Other expenses consist mainly of professional fees, communications
expense, advertising and public relations, data processing expenses and certain
loan origination expenses. The level of other expenses fluctuates in part based
upon the level of HomeSide's mortgage servicing portfolio and loan production
volumes.
Other expenses, excluding goodwill amortization from the acquisition of
HomeSide by National Australia Bank, were $15.7 million for the three months
ended March 31, 1999 compared to $8.0 million for the period from February 11,
1998 to March 31, 1998, a 2% annualized decrease. The decrease in other expenses
was primarily due to expenses associated with lower annualized production
volumes. Goodwill amortization was $8.7 million and $4.9 million, respectively,
for the three months ended March 31, 1999 and the period from February 11, 1998
to March 31, 1998.
Income Tax Expense
HomeSide's income tax expense was $16.6 million for the three months ended
March 31, 1999 compared to $7.5 million for the period from February 11, 1998 to
March 31, 1998. The effective income tax rates for the three months ended March
31, 1999 and the period from February 11, 1998 to March 31, 1998 were 49% and
52%, respectively.
Results of Operations
For the six months ended March 31, 1999 compared to the period from February 11,
1998 to March 31, 1998 and the predecessor period from September 1, 1997 to
February 10, 1998 combined
Summary
HomeSide's net income, excluding goodwill amortization from the
acquisition of HomeSide by the National, was $50.2 million for the six months
ended March 31, 1999, an 11% annualized increase compared to $11.8 million for
the period from February 11, 1998 to March 31, 1998 combined with $41.0 million
for the predecessor period from September 31, 1997 to February 10, 1998. Net
income after the goodwill amortization from the acquisition of HomeSide by the
National for the six months ended March 31, 1999 was $32.8 million. Total
revenues for the six months ended March 31, 1999 were $214.4 million compared to
$46.2 million for the period from February 11, 1998 to March 31, 1998 and $140.9
million for the predecessor period from September 1, 1997 to February 10, 1998,
a 34% annualized increase. The increases in net income, excluding goodwill
amortization, and revenues for the six months ended March 31, 1999 compared to
the period from February 11, 1998 to March 31, 1998 combined with the
predecessor period from September 1, 1997 to February 10, 1998 were primarily
attributable to increases in net mortgage origination revenue and net interest
revenue. Net mortgage origination revenue increased on an annualized basis
primarily due to increased production volumes and margins on loan production
activities. Net interest revenue increased on an annualized basis due to
increases in the balances of average interest-earning assets and as a result of
reduced borrowing costs from improved credit ratings and the issuance of
medium-term notes and commercial paper. Net servicing revenue was approximately
equal on an annualized basis primarily due to an increase in amortization
expense, offset by an increase in the servicing portfolio. Declining interest
rates increased mortgage prepayments speeds and consequently increased
amortization expense. Total expenses increased on an annualized basis as a
result of increases in production volume, expenses associated with the growing
mortgage servicing portfolio and high loan prepayment activity.
Net Servicing Revenue
Net servicing revenue was $97.7 million for the six months ended March 31,
1999 compared to $26.9 million for the period from February 11, 1998 to March
31, 1998 and $86.3 million for the predecessor period from September 1, 1997 to
February 10, 1998, aproximately equal on an annualized basis. Net servicing
revenue is comprised of mortgage servicing fees, ancillary servicing revenue,
and amortization of mortgage servicing rights.
Mortgage servicing fees increased 26% on an annualized basis to $276.7
million for the six months ended March 31, 1999 compared to $63.6 million for
the period from February 11, 1998 to March 31, 1998 combined with $192.5 million
for the predecessor period from September 1, 1997 to February 10, 1998,
primarily as a result of portfolio growth. The servicing portfolio increased
$40.0 billion to $138.9 billion at March 31, 1999 compared to $98.9 billion at
March 31, 1998, a 40% increase. A significant portion of this portfolio growth
was due to the purchases of Banc One Mortgage's $16.6 billion servicing
portfolio on June 5, 1998 and First Chicago NBD Mortgage Company's $18 billion
servicing portfolio on March 4, 1999. HomeSide's weighted average interest rate
of the mortgage loans in the servicing portfolio was 7.55% and 7.82% at March
31, 1999 and March 31, 1998, respectively. The weighted average servicing fee,
including ancillary income, for the servicing portfolio was 0.469% for the six
months ended March 31, 1999 compared to 0.463% for the period from February 11,
1998 to March 31, 1998 and 0.451% for the predecessor period from September 1,
1997 to February 10, 1998. The increase in the weighted average servicing fee
was due to growth of ancillary revenues, including late fees and other mortgage
related products.
Amortization expense was $179.1 million for the six months ended March 31,
1999 compared to $37.0 million for the period from February 11, 1998 to March
31, 1998 combined with $106.2 million for the predecessor period from September
1, 1997 to February 10, 1998, a 46% annualized increase. Amortization expense
increased mainly as a result of a higher average balance of mortgage servicing
rights and a decrease of 13 basis points in average mortgage interest rates from
7.35% at March 31, 1998 to 7.22% at March 31, 1999. Amortization charges are
highly dependent upon the level of prepayments during the period and changes in
prepayment expectations, which are significantly influenced by the direction and
level of long-term interest rate movements. A decrease in mortgage interest
rates results in an increase in prepayment estimates used in calculating
periodic amortization expense. Because mortgage servicing rights are amortized
over the expected period of service fee revenues, an increase in mortgage
prepayment activity typically results in a shorter estimated life of the
mortgage servicing assets and, accordingly, higher amortization expense.
Net Interest Revenue
Net interest revenue is driven by the level of interest rates, the
direction in which rates are moving and the spread between short and long-term
interest rates and the rates at which HomeSide is able to borrow. These factors
influence the size of the residential mortgage origination market, HomeSide's
loan production volumes and the interest rates HomeSide earns on loans and pays
to its lenders.
Loan refinancing levels are the largest contributor to changes in the size
of the mortgage origination market. To reduce the cost of their home mortgages,
borrowers tend to refinance their loans during periods of declining interest
rates, increasing the size of the origination market and HomeSide's loan
production volumes. Higher loan production volumes result in higher average
balances of loans held for sale and consequently higher levels of interest
income from interest earned on such loans prior to their sale. This higher level
of interest income due to increased volumes is partially offset by the lower
rates earned on the loans.
Overall borrowing costs also fluctuate with changes in interest rates.
Currently, the interest expense HomeSide pays to finance mortgage loans held for
sale and other net assets is generally calculated with reference to short-term
interest rates. In addition, because mortgage loans held for sale earn interest
based on longer term interest rates, the level of net interest revenue is also
influenced by the spread between long-term and short-term interest rates.
Net interest revenue totaled $34.3 million for the six months ended March
31, 1999 compared to $4.7 million for the period from February 11, 1998 to March
31, 1998 combined with $7.3 million for the predecessor period from September 1,
1997 to February 10, 1998. Increases in net interest revenue on an annualized
basis were primarily due to increases in net interest earned on mortgage loans
held for sale, escrow deposits, and early pool buyout advances. Lower funding
rates obtained through improved credit ratings and the issue of medium-term
notes and commercial paper also contributed to increases in net interest income.
Net Mortgage Origination Revenue
Net mortgage origination revenue is comprised of fees earned on the
origination of mortgage loans, gains and losses on the sale of loans, gains and
losses resulting from hedging of secondary marketing activities and fees charged
to review loan documents for purchased loan production.
Net mortgage origination revenue was $79.9 million for the six months
ended March 31, 1999 compared to $14.3 million for the period from February 11,
1998 to March 31, 1998 combined with $46.7 million for the predecessor period
from September 1, 1997 to February 10, 1998, a 53% annualized increase. This
increase was due to increases in production volumes and margins due to a
declining interest rate environment.
Other Income
Other income for the six months ended March 31, 1999 was $2.5 million
compared to $0.6 million for the period from February 11, 1998 to March 31, 1998
combined with $0.6 million for the predecessor period from September 1, 1997 to
February 10, 1998, a 134% annualized increase. The annualized increase was
primarily due to volume increases in real estate tax service fees.
Salaries and Employee Benefits
Salaries and employee benefits expense was $68.3 million for the six
months ended March 31, 1999 compared to $14.6 million for the period from
February 11, 1998 to March 31, 1998 combined with $36.1 million for the
predecessor period from September 1, 1997 to February 10, 1998, a 57% annualized
increase. The average number of full-time equivalent employees was 2,572 for the
six months ended March 31, 1999 compared to 1,968 for the period from February
11, 1998 to March 31, 1998 and 1,848 for the predecessor period from September
1, 1997 to February 10, 1998. The increases in salaries and employee benefits
expense and average number of full-time equivalent employees are primarily
attributable to additional expenses and employees to service the growing
mortgage servicing portfolio, increased prepayment activity and increased
production volume.
Occupancy and Equipment Expense
Occupancy and equipment expense primarily includes rental expense, repairs
and maintenance costs, certain computer software expenses and depreciation of
HomeSide's premises and equipment. Occupancy and equipment expense for the six
months ended March 31, 1999 was $13.1 million compared to $2.4 million for the
period from February 11, 1998 to March 31, 1998 combined with $7.8 million for
the predecessor period from September 1, 1997 to February 10, 1998, a 50%
annualized increase. The increase in expense was mainly due to the increased
expenses incurred to enhance processing systems and technology expenditures
necessary to support targeted business growth.
Servicing Losses on Investor-Owned Loans and Foreclosure-Related Expenses
Servicing losses on investor-owned loans represent anticipated losses
primarily attributable to servicing FHA and VA loans for investors. These
amounts include actual losses for the final disposition of loans,
non-recoverable foreclosure costs, accrued interest for which payment has been
curtailed and estimates for potential losses based on HomeSide's experience as a
servicer of government loans.
The servicing losses on investor-owned loans and foreclosure-related
expenses totaled $18.6 million for the six months ended March 31, 1999 compared
to $1.8 million for the period from February 11, 1998 to March 31, 1998 combined
with $11.5 million for the predecessor period from September 1, 1997 to February
10, 1998, a 64% annualized increase. The increase was due to the growth of the
portfolio and increased foreclosure losses, which may continue at this level as
the servicing portfolio ages.
Included in the balance of accounts payable and accrued liabilities at
March 31, 1999 is a reserve for estimated servicing losses on investor-owned
loans of $21.7 million. The reserve has been established for potential losses
related to the mortgage servicing portfolio. Increases to the reserve are
charged to earnings as servicing losses on investor-owned loans. The reserve is
decreased for actual losses incurred related to the mortgage servicing
portfolio. HomeSide's historical loss experience on VA loans generally has been
consistent with industry experience. Management believes that HomeSide has an
adequate level of reserve based on servicing volume, portfolio composition,
credit quality and historical loss rates, as well as estimated future losses.
Servicing losses are generally greatest during the three to six year age of the
loan.
The following table sets forth HomeSide's delinquency and foreclosure
experience:
<TABLE>
<CAPTION>
Servicing Portfolio Delinquencies
(percent by loan count)
March 31, 1999 March 31, 1998
<S> <C> <C>
Servicing Portfolio Delinquencies, excluding bankruptcies (at end of period)
30 days 2.85% 3.20%
60 days 0.56% 0.67%
90+ days 0.57% 0.61%
==================== ===================
Total past due 3.98% 4.48%
==================== ===================
Foreclosures pending 0.77% 0.80%
==================== ===================
</TABLE>
As a result of a larger and more mature portfolio at March 31, 1999
compared to March 31, 1998, servicing losses on investor-owned loans and
foreclosure-related expenses increased while servicing portfolio delinquencies
decreased.
Other Expenses and Goodwill Amortization
Other expenses consist mainly of professional fees, communications
expense, advertising and public relations, data processing expenses and certain
loan origination expenses. The level of other expenses fluctuates in part based
upon the level of HomeSide's mortgage servicing portfolio and loan production
volumes.
Other expenses, excluding goodwill amortization from the acquisition of
HomeSide by National Australia Bank, were $31.9 million for the six months ended
March 31, 1999 compared to $8.0 million for the period from February 11, 1998 to
March 31, 1998 combined with $18.5 million for the predecessor period from
September 1, 1997 to February 10, 1998, a 41% annualized increase. This
annualized increase was primarily due to increased production volumes. Goodwill
amortization totaled $17.5 million for the six months ended March 31, 1999, $4.9
million for the period from February 11, 1998 to March 31, 1998 and $0.3 million
for the predecessor period from September 1, 1997 to February 10, 1998. The
increase was due to the purchase of HomeSide by National Australia Bank on
February 10, 1998.
Income Tax Expense
HomeSide's income tax expense was $32.1 million for the six months ended
March 31, 1999 compared to $7.5 million for the period from February 11, 1998 to
March 31, 1998 and $26.0 million for the predecessor period from September 1,
1997 to February 10, 1998. The effective income tax rates for the six months
ended March 31, 1999 and the period from February 11, 1998 to March 31, 1998
were 49% and 52%, respectively. The effective income tax rate for the
predecessor period from September 1, 1997 to February 10, 1998 was 39%. The
increase from the predecessor period was due to the tax effects of goodwill as a
result of the merger with the National.
Risk Management Activities
HomeSide has a risk management program designed to protect the economic
value of its mortgage servicing portfolio from declines in value due to
increases in estimated loan prepayment speeds, which are primarily influenced by
declines in interest rates. When loans prepay faster than anticipated, the cash
flow HomeSide expects to receive from servicing such loans is reduced. The value
of mortgage servicing rights is based on the present value of the cash flows to
be received over the life of the loan and therefore, the value of the servicing
portfolio declines as prepayments increase.
During the six months ended March 31, 1999, HomeSide utilized options on
U.S. Treasury bond and note futures, U.S. Treasury bond and note futures, and
interest rate swaps and caps to protect a significant portion of the market
value of its mortgage servicing portfolio from a decline in value. The risk
management contracts used by HomeSide have characteristics such that they tend
to increase in value as interest rates decline. Conversely, these risk
management contracts tend to decline in value as interest rates rise.
Accordingly, changes in value of these risk management instruments will tend to
move inversely with changes in value of HomeSide's mortgage servicing rights.
These risk management instruments are designated as hedges on the purchase
date and such designation is at a level at least as specific as the level at
which mortgage servicing rights are evaluated for impairment. The risk
management instruments are marked-to-market with changes in market value
deferred and applied as an adjustment to the basis of the related mortgage
servicing right asset being hedged. As a result, any changes in market value
that are deferred are amortized and evaluated for impairment in the same manner
as the related mortgage servicing rights. The effectiveness of HomeSide's
hedging activity can be measured by the correlation between changes in the value
of the risk management instruments and changes in the value of HomeSide's
mortgage servicing rights. This correlation is assessed on a quarterly basis to
ensure that high correlation is maintained over the term of the hedging program.
If management's ongoing assessment of correlation indicates that high
correlation is not being achieved, the Company will discontinue the application
of hedge accounting and recognize a gain or loss to the extent the hedge results
have not been offset by changes in value of the hedged asset during the hedge
period. During the periods presented, HomeSide has experienced a high measure of
correlation between changes in the value of mortgage servicing rights and the
risk management contracts. However, in periods of rising interest rates, the
increase in values of mortgage servicing rights may outpace the decline in value
of the options included in the hedge position, because the loss on the options
is limited to the premium paid.
During the six months ended March 31, 1999, deferred losses on risk
management contracts resulted in net deferred hedge losses of $176.8 million
which are included in the carrying value of mortgage servicing rights. Activity
in the deferred hedge account during the six months ended March 31, 1999 is as
follows (in thousands):
Net deferred hedge balance at September 30, 1998 $ 389,572
Net deferred hedge loss (553,168)
Amortization ( 13,192)
================
Net deferred hedge balance at March 31, 1999 (176,788)
================
HomeSide's future cash needs as they relate to its hedging program will be
influenced by such factors as long-term interest rates, loan production levels
and growth in the mortgage servicing portfolio. The fair value of open risk
management contracts at March 31, 1999 was $(9.7) million. This amount is
comprised of interest rate swaps with a fair value of $(68.8) million, partially
offset by U.S. Treasury bonds and futures with a fair market value of $59.1
million. The treasury bonds and futures are included in Other Assets and Other
Liabilities in the accompanying consolidated balance sheet. See "Liquidity and
Capital Resources" for further discussion of HomeSide's sources and uses of
cash. See Note 3 of Notes to Consolidated Financial Statements for a description
of HomeSide's accounting policy for its risk management contracts and Notes 13
and 14 of Notes to Consolidated Financial Statements for additional fair value
disclosures with respect to HomeSide's risk management contracts included in
HomeSide's Form 10-K for the period from February 11, 1998 to September 30,
1998.
Liquidity and Capital Resources
The Company's principal financing needs are the financing of loan
origination activities and the investment in mortgage servicing rights. To meet
these needs, the Company currently utilizes funding from its commercial paper
program, a credit facility with the National, medium-term notes, an independent
syndicate of banks, including a warehouse credit facility and a
servicing-related facility, and cash flow from operations. HomeSide continues to
investigate and pursue alternative and supplementary methods to finance its
growing operations through the public and private capital markets. These may
include methods designed to expand the Company's financial capacity and reduce
its cost of capital. In addition, to facilitate the sale and distribution of
certain mortgage products, HomeSide Mortgage Securities, Inc., a wholly-owned
subsidiary of HomeSide Lending, Inc., may continue to issue mortgage-backed
securities.
Operations
Net cash provided by operations for the three and six months ended March
31, 1999 was $597.7 million and $625.3 million, respectively. Net cash used in
operations for the period from February 11, 1998 to March 31, 1998 was $234.7
million. Net cash used in operations for the predecessor period from September
1, 1997 to February 10, 1998 was $150.2 million. Cash provided from servicing
fee income, loan sales and principal repayments was partially offset by cash
used for the origination and purchase of mortgage loans held for sale and to pay
corporate expenses. Cash flows from loan originations are dependent upon current
economic conditions and the level of long-term interest rates. Decreases in
long-term interest rates generally result in higher loan refinancing activity,
which results in higher cash demands to meet increased loan production levels.
Higher cash demands to meet increased loan production levels are primarily met
through borrowings and loan sales.
<PAGE>
Investing
Net cash used in investing activities for the three and six months ended
March 31, 1999 were $644.3 million and $853.3 million, respectively. Net cash
provided by investing activities for the period from February 11, 1998 to March
31, 1998 was $226.9 million. Net cash used in investing activities for the
predecessor period from September 1, 1997 to February 10, 1998 was $60.8
million. Cash used in investing activities was primarily for the purchase of
mortgage servicing rights, risk management contracts, and early pool buyout
advances. Cash was provided by proceeds from risk management contracts and early
pool buyout reimbursements. Other assets decreased $28.1 million to $87.6
million at March 31, 1999 from $115.7 million at September 30, 1998 primarily as
a result of decreases in HomeSide's hedge assets. Early pool buyout advances
totaled $453.3 million at March 31, 1999 compared to $759.6 million at September
30, 1998 as a result of re-instatements and sales of advances to HomeSide
Funding, Inc. Future uses of cash for investing activities will be dependent on
the mortgage origination market and HomeSide's hedging needs. HomeSide is not
able to estimate the timing and amount of cash uses for future acquisitions of
other mortgage banking entities, if such acquisitions were to occur.
Financing
Net cash provided by financing activities for the three and six months ended
March 31, 1999 were $10.7 million and $249.2 million, respectively. Net cash
provided by financing activities for the period from February 11, 1998 to March
31, 1998 was $443.5 million. Net cash provided by financing activities for the
predecessor period from September 1, 1997 to February 10, 1998 was $243.1
million. Cash was provided by the issuance of commercial paper and medium-term
notes, borrowings from the National, and borrowings on HomeSide's line of credit
during the periods. Cash was used to repay borrowings from the National,
commercial paper, borrowings on the line of credit and to pay dividends to the
Parent.
HomeSide expects that to the extent cash generated from operations is
inadequate to meet its liquidity needs, those needs can be met through financing
from its bank credit facility and other facilities which may be entered into
from time to time, as well as from the issuance of debt securities in the public
markets. Accordingly, HomeSide does not currently anticipate that it will make
sales of servicing rights to any significant degree for the purpose of
generating cash. Nevertheless, in addition to its cash and mortgage loans held
for sale balances, HomeSide's portfolio of mortgage servicing rights provides a
potential source of funds to meet liquidity requirements, especially in periods
of rising interest rates when loan origination volume slows. Repurchase
agreements also provide an alternative to the bank line of credit for mortgages
held for sale. Future cash needs are highly dependent on future loan production
and servicing results, which are influenced by changes in long-term interest
rates.
Year 2000
General. In common with many business users of computers around the world, the
Company has investigated to what extent the date change from 1999 to 2000 may
affect its business. The Company has established a program designed to minimize
the impact of the change to 2000 on the Company and its customers. The Board of
Directors has made the work associated with the change to 2000 a key priority
for management.
The Company uses and is dependent upon a significant number of computer software
programs and operating systems to conduct its business. Such programs and
systems include those developed and maintained by the Company, software and
systems purchased from outside vendors and software and systems used by the
Company's third party providers. The Company recognizes that the Year 2000 issue
is one of the most complex data processing problems faced by businesses
worldwide. As the Company approaches the century change, its primary objective
is to maintain "business as usual."
The Company began its information technology Year 2000 assessment and
remediation efforts in the third quarter of calendar year 1996 under the
sponsorship of its executive management. A formal, enterprise-wide program
commenced in January 1998. The Year 2000 issue has been identified as a top
priority. The Company's executive management and Board of Directors are provided
with frequent detailed updates. The Company has dedicated resources to assess,
repair and test programs, applications, equipment and facilities. The Company
has established a Year 2000 Program Office that is coordinating the preparations
for the change to 2000 with each business unit throughout the Company.
The Company's program involves an extensive review of its own operations and
scoping the work that needs to be completed to minimize any potential impact.
This includes reviewing the possible effects on the Company arising out of how
third parties manage their transition to 2000. The work demonstrates that there
are two possible key impacts:
Internal - the change to 2000 could cause interruptions, errors in
calculations or delays to the Company's critical business processes via
unexpected system or application malfunctioning.
External - the impact on the Company's own operations from third
parties, including customers, vendors, suppliers, regulators and
electronic distribution channels which may be impacted by the change to
2000. This includes any secondary or systemic impact that may arise
from the change to 2000 and the risk of disruption in the capital and
secondary mortgage markets on which the Company is dependent.
The Company's strategy for addressing Year 2000 focuses on four teams, which
together address all aspects of the Company's business. The Information
Technology team addresses all of the Mainframe, LAN and client server
applications. The End User Computing (or Business) team addresses the business
risks within each of the operating departments, including facilities' risk. This
area of the strategy involves the greatest concentration of embedded chips. The
Enterprise team addresses the corporate-wide risks posed by the Year 2000,
including business continuity planning to be implemented by individual business
units. Finally, the Year 2000 Program Office coordinates the Company's Year 2000
readiness efforts and is responsible for communications, vendor management,
project documentation and reporting. The Company's Year 2000 Program Office and
overall Year 2000 Program are managed by a Year 2000 Program Director whose
full-time resources and responsibilities are dedicated to this effort under the
sponsorship of the President and Chief Operating Officer and the Chief
Information Officer.
Throughout all phases of the Year 2000 Program, including the inventory and
assessment phases, the Year 2000 teams aim to complete all required work while
minimizing disruption to the current service delivery levels of the Company.
Central management of the project is executed using fully dedicated staff with
high levels of subject matter knowledge. In order to speed the assessment and
remediation aspects of the mainframe and client server IT projects, a factory
philosophy has been adopted using Paragon Computer Professionals, Inc. as the
primary outsourcer. Contractors are used internally where subject matter
expertise is not required.
State of Readiness. The Company's approach to preparing for the change to 2000
includes a standard set of methods and tools, customized as applicable to each
team, to coordinate and drive the project to completion. The approach consists
of six phases:
1. Assessment - Defining each system and process to determine if there are
date dependencies and how to resolve them. For business continuity
purposes, assessment includes identifying event and dependency risk.
2. Remediation - Implementing the steps identified in the assessment phase,
including code remediation and development of contingency plans.
3. Testing - Developing and implementing test plans to determine if remediated
code is correct and assurance testing of business continuity plans.
4. Implementation - Moving all approved changes from testing into production
and execution of contingency plans as may be required.
5. Check-Off - Formally acknowledging that each process has been implemented
and is functioning correctly.
6. Clean Management - Employing procedures and practices to prevent the
reintroduction of non-compliant applications, products and processes into
the operating environment, once Check-Off has been completed.
The Company's Information Technology and Business Teams have completed their
assessment of the Company's systems and business processes for Year 2000
vulnerability. The assessment has included substantially all hardware and
software systems, embedded systems, buildings and equipment, and business
processes. The assessment has also included a review of the Company's
dependencies on third parties, including vendors, suppliers and customers.
The Company established in its Year 2000 Program certain key milestones and an
internal timetable for the change to 2000 in line with its regulator's suggested
completion dates for core systems. These were:
o Assessment of substantially all systems and processes by July 31, 1998 -
Completed
o Remediation and internal testing of all mission critical applications by
December 31, 1998 - Completed
o End-to-end testing of all mission critical systems with material third
parties to be substantially completed by March 31, 1999; and
o Remediation and testing of all non-mission critical systems to be
substantially completed by June 30, 1999 and clean management of all
systems through 1999.
The Company has completed its assessment of all systems and processes.
Remediation and internal testing of mission critical systems is substantially
complete. Set forth below is a graphical depiction of the Company's state of
readiness in the first five action phases of the Company's project plan, divided
to show progress as to the Information Technology (IT) portion of the project,
the Company's two primary servicing systems, and the end-user computing portion
of the project.
<TABLE>
<CAPTION>
IT Achievements (excludes servicing systems)
Date % Complete
<S> <C> <C>
Assessment
Full assessment of all IT components impacted by the turn of the century. 6/30/98 100%
Remediation
Repair or Replace all IT components found to be non-compliant. 9/30/98 68%
10/31/98 91%
12/31/98 100%
Testing Internal
Test all IT Y2K impacted internal components in a simulated and real future 9/30/98 30%
date environment. 10/31/98 41%
12/11/98 76%
12/31/98 80%
1/31/99 93%
3/31/99 100%
Testing External
Testing with customers, and vendors/service providers. 12/11/98 0%
1/31/99 0%
3/31/99 42%
4/30/99 42%
6/30/99 100%
Implementation
Place into the production operating environment all IT components tested 9/30/98 17%
and deemed to be Y2K ready. 10/31/98 26%
12/31/98 87%
1/31/99 89%
3/31/99 100%
Check-off
Official sign-off by the business and technology owner of the component 9/30/98 5%
that the component is Y2K ready. 10/31/98 17%
12/31/98 65%
1/31/99 78%
3/31/99 83%
4/30/99 100%
</TABLE>
The chart set forth above shows the status of completion of the number of gross
technology applications identified by the Company for remediation measured by
each of the various phases of the Company's Year 2000 Program. This chart
measures the progress on thirty-four (34) key Information Technology
applications, of which fourteen (14) have been designated as mission critical.
As to these thirty-four (34) key applications, as of December 31, 1998,
assessment was 100% complete, remediation was 100% complete, and internal
testing was 80% complete. As to the thirty-four (34) key applications, as of
March 31, 1999, internal testing was completed in accordance with the Company's
test strategy and applicable test plans. As at that date, End-to-End testing
with material third parties was 42% complete. As to these thirty-four (34) key
applications, as of April 30, 1999, the most recent date for which information
is available prior to this filing, internal testing was completed in accordance
with the Company's test strategy and applicable test plans. As at that date,
End-to-End testing with material third parties remained at 42% complete for the
reasons set out below.
End-to-End testing with external parties is ongoing. The Company had initially
established an internal milestone of March 31, 1999 for completion of End-to-End
testing with material external parties. This milestone is more ambitious than
the regulatory deadline of June 30, 1999 established by the FFIEC for completing
external testing. The Company worked extensively with material external parties,
including key vendors, suppliers and counter-parties, throughout the fourth
quarter of 1998 and the first quarter of 1999 to produce test plans and prepare
for End-to-End testing. Although substantially all test plans were produced and
delivered to material external parties by March 31, 1999, delays in responses
from them prevented the Company from achieving its March 31, 1999 milestone.
Many of the Company's material external parties are vendors and suppliers. The
Company recognized that many of our key vendors have regulatory requirements and
material third party dependencies of their own, and that those requirements and
dependencies had to be prioritized above testing with the Company. The Company
values its relationships with its key vendors and has worked with them to
accommodate their competing priorities even those that necessitated extending
the Company's own date for this milestone.
As of April 30, 1999, the Company had successfully completed external testing
with several key vendors and counter-parties, including Fannie Mae, Freddie Mac
and Ginnie Mae. Testing with material external parties is expected to be
substantially complete by June 30, 1999, the FFIEC deadline.
As to the fourteen (14) mission critical applications (excluding servicing
systems which are separately discussed below), as of December 31, 1998,
assessment was 100% complete, remediation was 100% completed, and internal
testing was 88% complete. As of January 31, 1999, internal testing of these
mission critical applications was completed in accordance with the Company's
test strategy and applicable test plans. Since that date, the Company has
engaged in additional assurance testing and clean management of the
applications, a process that will continue throughout 1999.
The Company's two most critical business applications are its primary mortgage
servicing software systems: MSP (licensed from and supported by Alltel
Information Services, Inc.) and ALSS (a proprietary software system supported by
the Company). Because of their critical importance to the Company's operations,
these systems are not included in the above chart. Rather, progress as to these
two systems is set forth separately in the chart below. As to these two systems,
as of December 31, 1998, assessment was 100% complete, remediation was 100%
complete, and internal testing was 95% complete. As to these two systems, as of
January 31, 1999, internal testing was completed in accordance with the
Company's test strategy and applicable test plans. Since that date, the Company
has engaged in additional assurance testing and clean management of the
applications, a process that will continue throughout 1999. As to these two
systems, as of March 31, 1999, external testing was 80% complete. As to these
two systems, as of April 30, 1999, the most recent date for which information is
available prior to this filing, external testing was 88% complete.
<TABLE>
<CAPTION>
IT Achievements (servicing systems)
Date % Complete
<S> <C> <C>
Assessment
Full assessment of all IT components impacted by the turn of the century. 9/30/98 100%
Remediation
Repair or Replace all IT components found to be non-compliant. 9/30/98 90%
12/31/98 100%
Testing Internal
Test all IT Y2K impacted internal components in a simulated and real future 12/31/98 95%
date environment. 1/31/99 100%
3/31/99 100%
Testing External
Testing with customers, and vendors/service providers. 12/31/98 0%
1/31/99 0%
3/31/99 80%
3/31/99 88%
3/31/99 100%
Implementation
Place into the production operating environment all IT components tested 12/31/98 50%
and deemed to be Y2K ready. 1/31/99 50%
3/31/99 100%
Check-off
Official sign-off by the business and technology owner of the component 12/31/98 50%
that the component is Y2K ready. 1/31/99 50%
3/31/99 50%
6/30/99 100%
</TABLE>
The Company's Year 2000 Program also addresses end-user computing issues
presented by the year 2000 change. The following chart depicts the Company's
progress in addressing systems and business processes other than information
technology systems. As to those business processes and systems, as of December
31, 1998, assessment was 100% complete, remediation was 96% complete and testing
was 56% complete. As to those business processes and systems, as of March 31,
1999, remediation was substantially complete and testing was 83% complete.
Testing, Implementation and Check-Off is scheduled to be completed prior to June
30, 1999.
<TABLE>
<CAPTION>
End-User Computing Achievements
Date % Complete
<S> <C> <C>
Assessment
Full assessment of all non-IT components impacted by the turn of the century. 12/31/98 100%
Remediation
Repair or replace all non-IT components found to be non-compliant. 12/31/98 96%
3/31/99 97%
6/30/99 100%
Testing
Test all non-IT Y2K impacted components in a simulated and real future date 12/31/98 56%
environment. Includes testing with customers, and vendors/service providers. 1/31/99 76%
3/31/99 83%
6/30/99 100%
Implementation
Place into the production operating environment all non-IT components 12/31/98 22%
tested and deemed to be Y2K ready. 1/31/99 76%
3/31/99 79%
6/30/99 100%
Check-off
Official sign-off by the business owner of the non-IT component that the 12/31/98 28%
component is Y2K ready. 1/31/99 69%
3/31/99 74%
6/30/99 100%
</TABLE>
The information set forth above is not weighted to reflect the relative
criticality of individual applications. Moreover, not all applications require
the same level of effort for remediation and testing. Therefore, a significant
percentage of completion of one phase of the program, taken out of context, may
not fully reflect the Company's overall state of preparedness. In addition, the
reality of the Year 2000 work, its breadth, dependencies and linkages (including
satisfactory and timely delivery by key vendors) means that there may be some
work which will not be completed by the milestone target.
The Company has relationships with vendors, customers and other third parties
that rely on software and systems that may not be ready for the change to 2000.
However, it is not possible in all cases to obtain complete, accurate and timely
information regarding the Year 2000 programs of third parties. Further, the
Company's ability to direct such third parties efforts or change relations with
such third parties is often limited. There can be no assurance that third
parties on which the Company relies will complete their Year 2000 programs on
time or that Year 2000 failures by such third parties will not have a material
adverse effect on the Company's results of operations.
The Company is currently reviewing the Year 2000 efforts of its mission critical
vendors, customers and service providers. The Company has identified a number of
mission critical third parties whose Year 2000 failure may reasonably be
expected to have a material adverse impact on the Company's results of
operations. Examples of such third parties include: the Company's primary
software licensor, Alltel Information Services, Inc.; the Company's sole
provider of insurance processing services; the Company's sole provider of tax
payment services; and the Company's sole provider of foreclosure services.
Catastrophic failure by any of these parties would have a material adverse
effect on the Company. The Company is targeting these mission critical third
parties for particular scrutiny regarding their preparations for the change to
2000. That process is ongoing.
As of March 31, 1999, HomeSide successfully completed the mandatory components
of the MBA Year 2000 Readiness Test. Optional components of the MBA Year 2000
Readiness Test will be complete by June 30, 1999.
The Company has been successful in negotiating Year 2000 amendments to its
contracts with several mission critical vendors. These amendments contain
representations and warranties by the vendors as to their state of readiness to
meet the Year 2000 challenge and indemnification and other remedies in favor of
the Company in the event the Company suffers a loss because the vendor does not
successfully manage the change to 2000.
Cost of Year 2000 Efforts. The Company acknowledges that work needs to be
carried out in virtually all aspects of its business to ensure that the Company
successfully manages the change to 2000. The Company presently estimates these
costs to total approximately $13.5 million. The Company has revised its Year
2000 budget from $15.0 million to $13.5 million. The adjustment to the budget
resulted from lower than anticipated expenses relating to: (1) the Company's
primary remediation contractor, (2) software upgrades, (3) non-Y2K compliant
equipment write-offs, (4) contract labor expenses, and (5) accounting charges
resulting from capitalization of certain software costs which were budgeted to
have been expensed.
Year 2000 costs are based on management's best estimates, which were derived
utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. The
Company does not separately track the indirect costs incurred in its Year 2000
program.
Through March 31, 1999, the Company had expended approximately $7.9 million of
its total Year 2000 budget. Through April 30, 1999, the most recent date for
which information is available prior to this filing, the Company had expended
approximately $8.3 million of its total Year 2000 budget. The Company previously
reported that it anticipated significant expenditures during the first quarter
of 1999 associated with End-to-End testing. As noted above, some of that testing
will now occur during the second quarter and, consequently, those expenditures
will be distributed over the first and second quarter.
The Company anticipates significant expenditures associated with employee
retention efforts, continued testing, clean management of systems, business
continuity and transition planning and maintenance of its Year 2000 Program
Office through March 31, 2000. The Company has allocated $1.7 million of its
total Year 2000 budget to transition management during the period of 1 June,
1999 through January 31, 2000. Additional expenses will be incurred through
March 31, 2000. Clean management of systems involves developing and implementing
procedures and practices to prevent the reintroduction of non-compliant
applications, products and processes into the operating environment once
Check-Off has been completed. The Company has developed and implemented a Clean
Management Strategy on a Company-wide basis. Transition planning is concerned
with identifying and preparing for specific issues and risks associated with the
period of October 1, 1999 through January 31, 2000. The Company is in the
process of developing and implementing a Transition Strategy. The objective of
the Company in transition planning is to ensure a Company-wide capability to
manage externally generated events as and when they might arise. As part of the
Company's transition planning and overall Year 2000 Program, the Company has
established a moratorium period using a scaled implementation plan to restrict
the introduction of minor, significant and major changes to systems or business
processes. The moratorium period will not impair the Company's ability to
conduct its core businesses and meet the needs of its customers. The Company's
Year 2000 Program will continue until the end of March 2000. Activities planned
for the first quarter of 2000 include:
o Monitoring and verification activities surrounding business information
systems;
o Implementation of maintenance programs associated with the system changes
made to manage the date change to 2000; o Working with customers and
suppliers regarding any impacts they may have sustained as a result of the
date change to 2000; and
o Completing a formal post-implementation review of the Year 2000 Program to
assess achievements and lessons learned.
The Company expensed its remediation costs as they were incurred, with the
exception of new hardware and software purchases, which were capitalized. The
source of funds for Year 2000 remediation is operating income of the Company.
The percentage of the Company's information technology budget devoted to Year
2000 efforts in the quarter ended March 31, 1998 was approximately 12%. The
Company is unable to readily determine the cost of replacement of non-compliant
systems that are being replaced in the ordinary course of business. No
significant information technology projects have been deferred due to Year 2000
efforts.
The Company's Year 2000 Program is complex and reliant upon coordination with
numerous third parties. Accordingly, the effort and costs in any given period
will depend upon progress. The Company's current Year 2000 budget of $13.5
million is based on the current status of the Year 2000 Program and is subject
to change. The budget of $13.5 million does not take into account any potential
losses the Company may suffer as a result of Year 2000 failures, or any claims
for loss or damage that may be asserted against the Company by third parties,
which may result if the Company or third parties do not successfully manage the
effect of the Year 2000 date change.
Risks. The Company's risk management office is actively involved in the
Company's Year 2000 Program. The most reasonably likely worst case Year 2000
scenario, disregarding the Company's remediation efforts and contingency
planning, is a failure in its loan servicing software and/or systems. Such a
failure would result in material disruption in the Company's operations
preventing it from discharging its contractual obligations to service mortgage
loans in an accurate and timely fashion. The consequences of such disruption
could include, among other things, revocation of the Company's status as an
FHA/VA approved lender/servicer or Ginnie Mae/Fannie Mae/Freddie Mac approved
seller/servicer, incorrect processing and/or reporting of payments to consumers
and investors, a material loss of revenue, and litigation with third parties
alleging losses related to servicing failure.
While working to ensure that the Company's primary objective of business as
usual before, during and through 2000 is achieved, there can be no guarantee
that its Year 2000 program will be successful in all respects or that the date
change for 1999 to 2000 will not materially affect the Company's business in
some form.
Contingency Planning. The Company's Year 2000 Program is based on the assumption
that 100% impact coverage is neither feasible nor practical. It is possible that
the Company or third parties on which the Company depends may have unplanned
system difficulties during the transition through 2000, or that third parties
may not successfully manage the change to 2000; therefore, an integral part of
the Company's Year 2000 Program is the development of contingency plans in
anticipation of systems or third party failure. These contingency plans have
been developed for individual applications, systems and business processes.
Individual departments within the Company, including information technology,
acting under the supervision and direction of the Year 2000 Program Enterprise
team, have (a) identified applicable Year 2000 events and threats, (b)
considered the likelihood of occurrence, (c) determined the severity of impact
of such events and threats, and (d) created preventive and continuity plans to
address such events and threats. In addition, corporate-wide transition
planning, which involves the planning for and management of activities relating
to the previously identified Year 2000 events and threats, is underway. Given
the potential scope of Year 2000 events, it is possible that despite
considerable planning, the Company's business continuity plans for the date
change to 2000 may only assist in the reduction of the degree of disruption
rather than its avoidance.
The foregoing disclosure, including the description of a worst case Year 2000
scenario, is furnished in response to and in compliance with the Statement of
the Commission Regarding Disclosure of Year 2000 Issues and Consequences by
Public Companies, Investment Advisers, Investment Companies, and Municipal
Securities Issuers, Securities Act Rel. No. 33-7448 (July 30, 1998).
Quantitative and Qualitative Market Risk
There have been no material changes in the Company's market risk from
September 30, 1998. For information regarding the Company's market risk, refer
to Form 10-K for the fiscal year ended September 30, 1998 of HomeSide
International, Inc.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
HomeSide is a defendant in a number of legal proceedings arising in the
normal course of business. HomeSide, in management's estimation, has recorded
adequate reserves in the financial statements for pending litigation.
Management, after reviewing all actions and proceedings pending against or
involving HomeSide, considers that the aggregate liability or loss, if any,
resulting from the final outcome of these proceedings will not have a material
effect on the financial position of HomeSide.
In recent years, the mortgage banking industry has been subject to class
action lawsuits which allege violations of federal and state laws and
regulations, including the propriety of collecting and paying various fees and
charges. Class action lawsuits may be filed in the future against the mortgage
banking industry.
ITEM 6. Exhibits and Reports on Form 8-K
(a) The following documents are filed as a part of this Report:
Number Description
10.1 Mortgage Loan Servicing Purchase and Sale Agreement dated
February 26, 1999 between HomeSide Lending, Inc. and First
Chicago NBD Mortgage Company
10.2 First Amendment dated March 31, 1999 to Mortgage Loan
Servicing Purchase and Sale Agreement between HomeSide
Lending, Inc. and First Chicago NBD Mortgage Company
12 Computation of the Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
(b) Reports on form 8-K
HomeSide filed a report on Form 8-K, Item 5, dated April 22, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HomeSide International, Inc.
(Registrant)
Date: May 14, 1999 By: /s/ Hugh R. Harris
------------------
Hugh R. Harris
Chief Executive Officer (Principal
Executive Officer)
Date: May 14, 1999 By: /s/ W. Blake Wilson
-------------------
W. Blake Wilson
Executive Vice President, Chief
Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
MORTGAGE LOAN SERVICING PURCHASE AND SALE AGREEMENT
Bulk Purchase
- --------------------------------------------------------------------------------
First Chicago NBD Mortgage Company, 900 Tower Drive, Troy, Michigan 48008
Date of Agreement: February 26, 1999 Seller Contact Person: Brad Connor
Phone No: (317) 321-8403
Fax No: (317) 321-8468
- --------------------------------------------------------------------------------
<PAGE>
This Mortgage Loan Servicing Purchase and Sale Agreement (the "Agreement") is
entered into as of the date shown above by and between the Buyer and the Seller
and applies to any of the transactions described below.
RECITALS.
1. The Seller owns the Servicing Rights to certain Mortgage Loans, both as
defined below.
2. The Seller desires to sell to the Buyer all right, title, and interest in
and to the Servicing Rights to certain Mortgage Loans and the Mortgage
Documents, Custodial Files, Escrow Accounts, and other records relating to
the Mortgage Loans, all as defined below, on the terms and conditions set
forth below in this Agreement.
3. The Buyer desires to buy from the Seller all right, title, and interest in
and to the Servicing Rights to certain Mortgage Loans and the Mortgage
Documents, Custodial Files, Escrow Accounts, and other records relating to
the Mortgage Loans, on the terms and conditions set forth below in this
Agreement.
IN CONSIDERATION of the mutual promises made in this Agreement and other good
and valuable consideration, the receipt and sufficiency of which are
acknowledged, the Buyer and the Seller agree as follows:
<PAGE>
ARTICLE 1.
DEFINITIONS
<PAGE>
As used in this Agreement, the following capitalized terms shall have the
meanings given to them below:
"Adjustment Date" means the fifth Business Day after the Transfer Date.
"Advances" means the outstanding moneys advanced by the Seller from its funds in
connection with its servicing of the Mortgage Loans and for which the Seller has
a right to be reimbursed from Mortgagors, insurers, Agencies, or others
(including, but not limited to, principal, interest, taxes, ground rents,
assessments, insurance premiums, release fees, and other expenses) except for
Overcollateralized Pool Amounts.
"Affiliate" means an entity that, directly or indirectly, through one or more
intermediaries, controls, is controlled by, or is under common control with,
another entity. For purposes of this definition, "control," "controlled by," and
"under common control with" means the direct or indirect possession of ordinary
voting power to elect a majority of the board of directors or comparable body of
an entity.
"Agency" means FNMA, FHLMC, FHA, GNMA, HUD, and/or VA, as applicable.
"Agreement" means this Mortgage Loan Servicing Purchase and Sale Agreement.
"Agreement Date" means after the close of business on February 26, 1999.
"Applicable Requirements" means (a) all contractual obligations of the Seller,
Prior Originator, and/or Prior Servicer, including, but not limited to, the
contractual obligations in this Agreement, the Mortgage Documents, the Investor
Servicing Agreements, and applicable Guides and other agreements for which any
such entity is responsible; (b) all applicable federal, state, and local
statutes, rules, regulations, and ordinances binding on the Seller, Servicer,
Prior Originator, and/or Prior Servicer; (c) all other applicable requirements
and guidelines of each governmental agency, board, commission, instrumentality,
and other governmental body or office having jurisdiction, including, but not
limited to, those of any Investor or Insurer; (d) all other applicable judicial
and administrative judgments, orders, awards, and injunctions; and (e) the
reasonable and customary mortgage servicing practices of prudent mortgage
lending institutions that service mortgage loans of the same type as the
Mortgage Loans in the jurisdictions where the Mortgaged Properties are located.
"Assignment" means, with respect to a Mortgage Loan, (a) a written instrument
that, when recorded in the appropriate office of the local jurisdiction in which
the related Mortgaged Property is situated, will properly reflect the transfer
of such Mortgage from the transferor to the transferee; or (b) an electronic
transmission to MERS identifying the Buyer as the Servicer of record of such
Mortgage Loan, as the case may be.
"Borrower" means each obligor under a Mortgage Note.
"Bucket 1" means the Mortgage Loans identified as "Bucket 1" in Exhibit A to
this Agreement, and excluding those Mortgage Loans identified in Exhibit A-1.
"Bucket 2" means the Mortgage Loans identified as "Bucket 2" in Exhibit A to
this Agreement.
"Bucket 3" means the Mortgage Loans identified as "Bucket 3" in Exhibit A to
this Agreement.
"Business Day" means any day other than a Saturday, Sunday, federal holiday, or
any day on which the Buyer is not open for business.
"Buydown" means any reduction in a Borrower's monthly Mortgage Loan payment
required under a Mortgage Note or otherwise provided for in a related document.
"Buyer" means HomeSide Lending, Inc., a business corporation organized under the
laws of the state of Florida and with its principal place of business at 7301
Baymeadows Way, Jacksonville, Florida 32256.
"Claim Notice" means a written notice of a claim for indemnification under
Sections 11.5 by an agent of the Buyer with a title no less senior than
"supervisor" or 11.6 below by an agent of the Seller with a title no less senior
than "supervisor".
"Conventional Loan" means any Mortgage Loan other than an FHA Loan or VA Loan.
"Custodial Account" means each deposit account maintained by the Seller that:
(a) complies with Investor requirements, and (b) contains P&I or T&I.
"Custodial File" means all of the documents that must be maintained on file with
the Custodian under Applicable Requirements.
"Custodian" means the financial institution designated by the Buyer to hold in
trust the Pool documents and Custodial Files, as required by the applicable
Guide. Unless otherwise expressly stated below, the Custodian shall be Bank One
Trust Company, N.A. or an Investor that, as of the Agreement Date, acted as
custodian for the Seller.
"Cutoff Date" means the Business Day immediately preceding the Transfer Date.
"Damages" means any and all assessments, judgments, claims, liabilities, losses,
costs, damages, or expenses, including, but not limited to, interest, penalties,
and reasonable attorneys' fees, expenses, and disbursements in connection with
an action, suit, or proceeding, and the cost of any letter of credit required by
GNMA.
"Delinquent" means, with respect to a Mortgage Loan Payment, a payment that has
not been received by the Seller before the end of the month during which such
Mortgage Loan Payment was due.
"Delinquent Mortgage Loans" means the Mortgage Loans that are: (a) three (3)
months Delinquent, (b) in bankruptcy and one or more months Delinquent, or (c)
in foreclosure or subject to an assignment of deed in lieu of foreclosure.
"Document Holdback" means the hold-back of a portion of the Purchase Price
relating to the Document Holdback Items in the manner set forth in Section
2.3(c) of this Agreement.
"Document Holdback Items" means the Mortgage Documents required to recertify the
related Pools that remain outstanding and have not been delivered to the Buyer
as of the Transfer Date.
"Escrow Accounts" means Mortgage Loan escrow/impound accounts for taxes,
insurance, assessments, ground rents, Buydowns, loss drafts, suspense balances,
and any other such amounts that are maintained by the Seller as a fiduciary for
the Borrowers and relate to the Servicing Rights.
"Federal Funds Rate" means, for any Business Day, the weighted average of the
rates on overnight federal funds transactions with members of the Federal
Reserve Syatem arranged by federal funds brokers, as published on the
immediately following Business Day by the Federal Reserve Bank of New York.
"FHA" means the Federal Housing Administration or any successor to the FHA.
"FHA Loan" means a Mortgage Loan that is insured or is eligible to be insured by
the FHA.
"Flood Service Fee" means a flood service fee paid by the Seller to Flood
Service Provider or the Buyer to obtain flood certification and "life of loan"
tracking and notification services relating to the Mortgage Loans.
"Flood Service Provider" means the company which provides a transferable flood
certification and "life of loan" tracking service for the Mortgage Loans. The
list of "life of loan" Flood Service Providers acceptable to the Buyer is set
forth in Exhibit G to this Agreement. The Flood Service Provider shall guarantee
the accuracy of the flood status determination and any future flood zone
changes.
"FNMA" means the Federal National Mortgage Association or any successor to FNMA.
"FNMA Mortgage Loans" means the Mortgage Loans owned by FNMA.
"FHLMC" means the Federal Home Loan Mortgage Corporation or any successor to
FHLMC.
"FHLMC Mortgage Loans" means the Mortgage Loans owned by FHLMC.
"GNMA" means the Government National Mortgage Association or any successor to
GNMA.
"GNMA Mortgage Loans" means the Mortgage Loans in a Pool that back Securities
guaranteed by GNMA.
"Guide" means: (a) the FNMA Selling and Servicing Guides with respect to FNMA
Mortgage Loans, as amended from time to; (b) the FHLMC Sellers' and Servicers'
Guides with respect to FHLMC Mortgage Loans; (c) the Handbook GNMA 5500.1,
Government National Mortgage Association GNMA I Mortgage-Backed Securities Guide
or the Handbook GNMA 5500.2, Government National Mortgage Association GNMA II
Mortgage-Backed Securities Guide with respect to the GNMA Mortgage Loans; (d)
the HUD 4155.1 REV-4, Mortgage Credit Analysis for Mortgage Insurance on 1-to-4
Family Properties, HUD 4000.2 REV-2, Mortgagee Handbook Application Through
Insurance (Single Family), HUD 4000.4 REV-1, Single Family Direct Endorsement
Program, HUD 4145.1 REV-2, Architectural Processing and Inspections For Home
Mortgage Insurance, 4150.1 REV-1 Valuation Analysis for Home Mortgage Insurance,
HUD 4060.1 REV-1, Mortgagee Approval Handbook; (e) the VA Lender's Handbook; and
(f) seller or servicer guide or manual published from time to time by a Private
Investor, in each case as such Guide may be amended from time to time by the
applicable Investor. Such amendments shall include, but not be limited to, any
amendment and/or approval entered into between the Seller and an Investor
relating to the applicable Guide or the underlying Investor's "Seller/Servicer
Contract", provided that (i) the benefits of any such amendment and approval
shall accrue to and shall be enjoyed by the Buyer; (ii) such amendment and
approval shall not materially increase the Buyer's obligations,
responsibilities, liabilities, costs or expenses under this Agreement or under
an Investor Servicing Agreement; and (iii) such amendment or approval shall not
decrease the Buyer's rights or benefits under this Agreement or under any
Investor Servicing Agreement.
"HUD" means the United States Department of Housing and Urban Development, or
any successor to HUD.
"HUD Repo Mortgage Loan" means a Mortgage Loan, the Mortgage Property of which
was sold to the related Borrower by HUD.
"Indemnified Buyer Entities" means the Buyer and its Affiliates and each of
their respective current, former and future officers, directors, agents, and
employees.
"Indemnified Seller Entities" means the Seller and its Affiliates and each of
their respective current, former and future officers, directors, agents, and
employees.
"Insurer" means any entity that insures or guarantees all or part of the risk of
loss on a Mortgage Loan, including, but not limited to, any Investor and any
private mortgage insurance provider, standard hazard insurance provider, flood
insurance provider, earthquake insurance provider or title insurance provider.
"Interim Servicing Agreement" means the Interim Servicing Agreement between the
Buyer and the Seller in the form of Exhibit D to this Agreement, which sets
forth the Seller's Servicing obligations between the Agreement Date and the
Transfer Date.
"Investor" means an Agency and/or Private Investor, as applicable.
"Investor Consent" means the written consent or approval of an Investor to the
transfer of the applicable Servicing Rights from the Seller to the Buyer that,
in the Buyer's reasonable discretion, does not reduce or limit the Buyer's
rights or compensation under the applicable Investor Servicing Agreements or
impose an undue burden on the Servicer.
"Investor Servicing Agreements" means the agreements between the Seller and the
applicable Investor under which the Seller currently is Servicing the Mortgage
Loans owned by such Investor.
"MBS" means a guaranteed mortgage pass-through certificate issued by FNMA, GNMA
or a Private Investor, as the case may be.
"MERS" means the Mortgage Electronic Registration Systems, Inc., a business
corporation with its principal place of business situated at 8201 Greensboro
Drive, Suite 350, McLean, Virginia 22102.
"Mortgage" means a first lien mortgage, deed of trust, or other such security
instrument that is executed by a Mortgagor pledging the Mortgaged Property as
security for repayment of a Mortgage Note.
"Mortgage Documents" means all documents required by an Investor to originate
and service a Mortgage Loan and issue a Security.
"Mortgage Loan" means a residential mortgage loan that is: (a) secured by a
Mortgage, (b) eligible to be included in a Security, and (c) listed in Exhibit
A of this Agreement.
"Mortgage Loan Payment" means the amount of each scheduled installment for a
Mortgage Loan, whether for principal, interest, escrow, or other purposes, under
the terms of the Mortgage and Mortgage Note.
"Mortgage Note" means the written promise of a Borrower to pay a sum of money in
United States dollars at a stated interest rate over a specified term, and which
is secured by a Mortgage.
"Mortgaged Property" means the real property, together with the one-to-four
family dwelling and any other improvements situated on such real property, that
have been pledged by a Mortgagor under a Mortgage as collateral to secure the
obligation under a related Mortgage Note.
"Mortgagor" means each person who executes a Mortgage.
"Operating Agreement" means the Operating Agreement entered into by and among
BANK ONE CORPORATION (formerly known as Banc One Corporation), Banc One Mortgage
Corporation, and the Buyer as of April 1, 1998.
"Overcollateralized Pool Amounts" means, the amount of the scheduled principal
balance within a pool has been reduced due to an error by the Seller or prior
Servicer.
"Payment Date" means March 3, 1999.
"P & I" means principal and interest.
"PC" means a mortgage participation certificate issued by FHLMC or a Private
Investor.
"Pool" means the Mortgage Loans and related Mortgage Documents that are
assembled to back the issuance of a Security.
"Prime Rate" means the highest Prime Rate set forth in the Money Rates section
of the Wall Street Journal.
"Prior Originator" means any entity that originated a Mortgage Loan, other than
the Seller.
"Prior Servicer" means any Servicer that serviced or subserviced a Mortgage Loan
prior to the Seller's commencement of Servicing.
"Private Investor" means an investor other than an Agency or the Seller and
identified Exhibit I attached to this Agreement.
"Private Investor Consent Holdback" means with respect to each Bucket, the (a)
principal balance of the Private Investor Mortgage Loans (as of the Agreement
Date) that have not received an Investor Consent and are not Delinquent,
MULTIPLED by (b) Purchase Price Percentage for the applicable Bucket.
"Private Investor Mortgage Loans" means Mortgage Loans owned by a Private
Investor.
"Purchase Price" means the purchase price for the Servicing Rights, as described
in Section 2.2 below.
"Purchase Price Percentage" means the percentage to be paid by the Buyer for the
Servicing Rights, as described in Section 2.2 below.
"Rapid Reply Loan" means a Mortgage Loan (a) that is marketed by the Seller
under the brand name "Rapid Reply"; (b) that is sold to or pooled with FNMA on a
non-Recourse basis; (c) that is the subject of a separate agreement between the
Seller and FNMA under which the Seller (as seller but not servicer) assumes
Recourse liability relating to such Mortgage Loan, and (d) with respect to which
such Recourse liability is not assumed by any transferee servicer (including the
Buyer)."
"Recourse" means any arrangement where the Seller bears the risk of any of the
ultimate credit losses relating to a default under or foreclosure of a Mortgage
Loan not owned by the Seller.
"Remaining Documents" has the same meaning as set forth in Section 2.4(a) below.
"REO" means any Mortgaged Property owned by the Servicer as a result of a
foreclosure or similar action, whether for its own account or on behalf of an
Investor.
"Security" means an MBS or a PC, in each case representing or backed by a
Pool that is the subject of a transaction under this Agreement.
"Seller" means First Chicago NBD Mortgage Company and any successor thereto.
"Servicer" means the entity that is responsible for Servicing the Mortgage
Loans.
"Servicing" means the performance of Mortgage Loan servicing functions,
including, but not limited to: (a) collecting and disbursing funds held in trust
to pay taxes, hazard insurance, mortgage insurance, and other items as they
become due, (b) paying interest on Escrow Accounts as required by the Applicable
Requirements, (c) collecting and remitting principal and interest payments to
investors, (d) resolving defaulted Mortgage Loans, and (e) administering REO.
"Servicing Fee" means the servicing fee and excess Servicing compensation which
the Servicer is entitled to receive under any Investor Servicing Agreement.
"Servicing File" means a file containing any and all documents required by an
Investor and the Buyer to service Mortgage Loans and Securities on behalf of
such Investor, including, but not limited to, the documents set forth in
Schedule C to Exhibit B to this Agreement.
"Servicing Rights" means the right to receive the Servicing Fee and any other
income or any other benefit relating to or arising out of the Servicing Rights
purchased by the Buyer under this Agreement, including, but not limited to, the
right to hold the Escrow Accounts.
"Tax Service Provider" means First American Real Estate Tax Service,
Transamerica Real Estate Tax Service, or any other such provider designated from
time to time by the Buyer, as applicable.
"Tax Service Fee" means a tax service fee paid by the Seller to Tax Service
Provider to obtain tax services relating to the Mortgage Loans.
"T & I" means the taxes, insurance and any additional amount other than P&I that
is or should be contained in an Escrow Account.
"Transfer Date" means: (a) June 1, 1999 for the FNMA Mortgage Loans, (b) May 16,
1999 for the FHLMC Mortgage Loans, (c) June 1, 1999 for the GNMA Mortgage Loans
and (d) June 1, 1999 or May 16, 1999, as the case may be, for the Private
Investor Mortgage Loans. If a Transfer Date does not occur by the applicable
date set forth in this paragraph, it shall occur as soon as the conditions
precedent in Articles 9 and 10 below have been satisfied and the Applicable
Requirements will allow.
"VA" means the Department of Veterans Affairs or any successor to VA.
"VA Buydown" means a waiver by the Servicer of a portion of the debt under a VA
Loan that causes the VA to pay off the remaining amount of debt owed for such
Mortgage Loan and acquire the Mortgaged Property.
"VA Loan" means a Mortgage Loan that is guaranteed or eligible to be guaranteed
by the VA.
"VA No Bid" means a delinquent Mortgage Loan that the VA intends to pay the VA
guarantee and leave the Mortgaged Property with the Servicer.
"VA Repo Mortgage Loan" means a Mortgage Loan, the Mortgaged Property of which
was sold to the related Borrower by the VA.
"Warehouse Loan" means a Mortgage Loan that is owned by the Seller as of
November 30, 1998 and intended to be but not yet sold to an Investor.
<PAGE>
ARTICLE 2.
DELIVERY OF SERVICING RIGHTS AND
PAYMENT OF PURCHASE PRICE.
<PAGE>
2.1. DELIVERY OF SERVICING RIGHTS AND RELATED ASSETS.
(a) Agreement Date. The following shall occur on the Agreement Date:
The Seller shall sell, assign, transfer and deliver to the Buyer all right,
title, and interest (other than actual legal title) in and to the Servicing
Rights described in Exhibit A to this Agreement, Advances, Mortgage Documents,
Investor Servicing Agreements, Custodial Files, Escrow Accounts, and other
documents and records relating to the Mortgage Loans. The Buyer shall be
entitled to all of the economic benefits, and bear the economic burdens,
associated with the Servicing Rights as of the Agreement Date, notwithstanding
the fact that legal title to the Servicing Rights shall pass to the Buyer as of
the applicable Transfer Date.
(b) Transfer Date. On each applicable Transfer Date, the Seller shall sell,
assign, transfer and deliver to the Buyer actual legal title in and to the
relevant portions of the Servicing Rights.
(c) Mandatory Delivery. The delivery of Servicing Rights by the Seller and the
acceptance of Servicing Rights by the Buyer are not optional unless either party
terminates this Agreement as set forth below. The Seller's failure to sell and
deliver the Servicing Rights to the Buyer will be a breach of the Seller's
obligations under this Agreement.
2.2. CALCULATING THE PURCHASE PRICE.
The Buyer will pay the Purchase Price to the Seller in an amount equal to:
[CONFIDENTIAL TREATMENT REQUESTED]
The Buyer shall pay to the Seller interest on the outstanding balance of the
Purchase Price, other than the Purchase Price relating to the Servicing Rights
for which the required Private Investor Consents are not obtained. Such interest
shall be the same rate as the earnings enjoyed by the Buyer on the Float, as
defined below in the Interim Servicing Agreement, during the Interim Servicing
Period.
2.3. TIMING OF PURCHASE PRICE.
The Buyer will pay to the Seller the Purchase Price as follows:
(a) On the Payment Date, twenty percent (20%) of the Purchase Price PLUS
interest thereon at the Float Interest Rate from and including the
Agreement Date to but not including the Payment Date.. The Buyer's
calculation of the payment under this subparagraph (a) will be based on
schedules provided by the Seller to the Buyer one (1) Business Days prior
to the Agreement Date.
(b) Subject to the Private Investor Consent Holdback, seventy percent (70%) of
the Purchase Price no later than three (3) business days after the date on
which the Seller has evidenced delivery of: (i) all of the Mortgage
Documents and Servicing Files in the Seller's possession; but only to the
extent that, that such Mortgage Documents and Servicing Files are
sufficient to allow the Buyer to assume ownership of the Servicing Rights
and service the Mortgage Loans under Applicable Requirements; (ii) all
amounts from each Custodial Account and Escrow Account, net of Advances
made in accordance with Applicable Requirements; (iii) all computer tapes
and other documents reasonably required by the Buyer for the Servicing and
reconciliation of the Mortgage Loans; and (iv) the Seller's custodian has
delivered to the Buyer's Custodian all of the Custodial Files in the
possession of the Seller's custodian; and (v) the applicable Investor
Consents relating to the Agencies; provided, however, that if the payment
------------------- made by the Buyer under subparagraph (a) is not exactly
90%, the payment under this subparagraph (b), when added to the amount paid
under subparagraph (a), will be equal to 90% of the Purchase Price.
With respect to Private Investor Mortgage Loans for which Investor Consents
required by the applicable Investors have not been received, the Buyer
shall retain the Private Investor Consent Holdback from the Purchase Price.
Each month after the Agreement Date, the Buyer shall release to the Seller
(i) the unpaid principal balance (as of the Agreement Date) of all of the
Private Investor Mortgage Loans within the applicable Bucket that have
received an Investor Consent during such month and are not Delinquent as of
the Agreement Date, MULTIPLIED by (ii) the applicable Purchase Price
Percentage for such Bucket.
(c) Ten percent (10%) of the Purchase Price (the "Holdback") no later than
three (3) Business Days after the date on which the Buyer has verified that
the Buyer has received all of the remaining Mortgage Documents required to
recertify the related Pools. . Notwithstanding the above, the Buyer shall
release ten percent (10%) of the Document Holdback to the Seller in each
instance when the Buyer receives ten percent (10%) of the Document Holdback
Items. The Buyer shall retain a minimum Document Holdback equal to ten
percent (10%) of the Document Holdback. The Buyer shall release such
minimum Document Holdback to the Seller upon receipt of:
(i) all outstanding Document Holdback Items; or
(ii)an officer's certificate from the Seller stating that the Seller, upon
completion of due diligence and commercially reasonable efforts to
locate the Document Holdback Items, is unable to locate any further
Document Holdback Items; together with a letter agreement indemnifying
the Buyer against any Damages relating to or arising out of the
remaining Document Holdback Items.
2.4. No Audit For Mortgage Documents.
The Seller acknowledges and understands that:
(a) the Buyer shall release the Holdback to the Seller under the terms of
Section 2.3(c) above without requiring the Seller to first deliver all of the
undelivered Mortgage Documents and Servicing Files (the "Remaining Documents"),
other than the Mortgage Documents required to recertify the related Pools;
(b) the Buyer shall not perform, and shall not require the Seller to perform, a
common and customary audit of the Mortgage Documents and Servicing Files to
determine the scope of the Remaining Documents; and
(c) without limiting its other obligations and liabilities under this Agreement,
the Seller shall indemnify and hold the Buyer harmless from and against any and
all Damages relating to the Seller's failure to deliver all of the Remaining
Documents to the Buyer (including, but not limited to, repurchasing a Mortgage
Loan under the terms of Article 11 below) without first inquiring as to whether
the Buyer was the cause of or responsible for any such missing, lost, or
destroyed Remaining Document (other than Remaining Documents that are missing or
destroyed as a result of the destruction of a significant portion of the
Servicing Files that have been delivered to and are maintained by the Buyer due
to the negligence of the Buyer or third party (other than the Seller or an
agent, employee, officer or Affiliate thereof), fire, flood, Act of God, or
other such catastrophic event.)
2.5. CORRECTIONS.
If, within one hundred and eighty (180) days after the applicable Transfer Date:
(i) the principal balance of any Mortgage Loan used in computing the amount of
the Purchase Price is be found to be incorrect, or (ii) any other item that
affects the Purchase Price is found to be incorrect, then the Purchase Price
will be adjusted promptly, and adjustments will be made to the appropriate
party.
<PAGE>
ARTICLE 3.
THE BUYER'S AND SELLER'S OBLIGATIONS BEFORE THE TRANSFER DATE.
<PAGE>
The Buyer and the Seller shall comply with the following terms and conditions
before each Transfer Date:
3.1. EXAMINING MORTGAGE DOCUMENTS.
The Buyer may review the Mortgage Documents and the Seller's books, records, and
accounts relating to the Mortgage Loans. However, the Buyer and the Seller shall
not construe any such review, the Buyer's execution of this Agreement, or the
occurrence of the Agreement Date to constitute the Buyer's waiver of any (a)
breach of any of the Seller's covenants, obligations, representations, or
warranties under this Agreement; or (b) of the Buyer's remedies for any such
breach under this Agreement, whether such remedy arises under the terms of this
Agreement, at law, or in equity.
3.2. SELLER'S SERVICING OBLIGATIONS.
The Seller will perform all of the Seller's Servicing obligations until each
applicable Transfer Date. After each Transfer Date and through and including
each Adjustment Date, the Seller shall maintain all Escrow Accounts and
Custodial Accounts and perform all of its other obligations under this Agreement
in compliance with all Applicable Requirements.
3.3. INVESTOR APPROVAL.
The Seller shall, at its sole cost, obtain the applicable Investor Consents no
later than twenty (20) calendar days before each applicable Transfer Date, and
shall deliver to the Buyer a copy of such Investor Consents no later than such
date. The Seller shall begin its efforts to obtain such approval no later than
five (5) Business Days after the date of this Agreement. The Seller shall pay
any and all transfer fees and any related amounts charged by any applicable
Investor.
Notwithstanding the above, the Buyer shall not require the Seller to provide an
Investor Consent for a Mortgage Loan if the applicable Investor does not require
the Seller to obtain an Investor Consent to transfer the Servicing Rights to the
Buyer.
If the Seller fails to obtain any such Investor Consent from a Private Investor,
the Buyer shall (a) not pay for the related Servicing Rights until and unless
the Seller provides the Buyer with such Investor Consent; and (b) nevertheless
accept the transfer of the related Servicing Rights on the applicable Transfer
Date. If any such Private Investor requires the Buyer to transfer such Servicing
Rights to such Private Investor or its designee servicer, the Seller shall
indemnify and hold the Buyer harmless from and against any and all Damages
relating to or arising out of the transfer of such Servicing Rights.
3.4. BORROWER COMMUNICATIONS.
The Seller and the Buyer will give a joint written notice to each Borrower of
the transfer of the Servicing Rights to the Buyer in compliance with the
Applicable Requirements, including, but not limited to, the Real Estate
Settlement Procedures Act and its implementing Regulation X. The form and
substance of such notice shall be substantially the same as the form set forth
in Schedule B to Exhibit B to this Agreement, and the costs thereof shall be
shared equally by the Buyer and the Seller.
3.5. TAX SERVICE COMMUNICATIONS WITH Tax Service Provider.
The Seller will give Tax Service Provider written notice of the transfer of the
Servicing Rights to the Buyer, and will cause Tax Service Provider to notify, at
the Seller's expense, each applicable taxing authority of such transfer in the
manner described in Exhibit B.
3.6. INSURANCE COMMUNICATIONS.
3.6.1. Commercial Insurance Carriers. The Seller will give written notice to
each insurance carrier of the transfer of Servicing Rights to the Buyer in the
manner described in Exhibit B.
3.6.2. FHA Insurance. To the extent applicable, the Seller will give notice to
the FHA of the transfer of the Servicing Rights to the Buyer in accordance with
the FHA Guide and requirements.
3.7. ACCESS TO INFORMATION.
The Seller will give to the Buyer and its counsel, accountants, and other
representatives reasonable access during normal business hours throughout the
period before the Transfer Date, to all of Seller's files, books, and records
relating to the Mortgage Loans, Servicing Rights, Escrow Accounts, and/or
Custodial Accounts.
3.8. TAX SERVICE CONTRACTS.
The Seller will transfer to the Buyer a Tax Service Provider "life of loan"
transferable contract for each Mortgage Loan.
There will be no transfer fee payable by the Seller if the Tax Service Provider
is Transamerica Real Estate Tax Service.
There will be a four dollar and fifty cent ($4.50) transfer fee per Mortgage
Loan payable by the Seller to the Buyer if the Tax Service Provider is First
American Real Estate Tax Service.
3.9. FLOOD TRACKING SERVICE CONTRACTS.
The Seller will provide the Buyer with a transferable flood certification for
each Mortgage Loan if required by Applicable Requirements and "life of loan"
notification services for each Mortgage Loan.
3.10. TRANSFER INSTRUCTIONS.
The Seller shall comply with the transfer instructions set forth in Exhibit B to
this Agreement.
<PAGE>
ARTICLE 4.
OBLIGATIONS ON AND AFTER THE TRANSFER DATE.
<PAGE>
4.1. TRANSFER SERVICING RIGHTS.
The Seller will transfer the applicable Servicing Rights to the Buyer on each
applicable Transfer Date.
4.2. SELLER WILL ASSIGN THE MORTGAGE LOANS TO THE BUYER.
4.2.1. Assignments From the Seller to the Buyer. The Seller will assign to the
Buyer, or to a designee appointed by Buyer, by appropriate endorsements and
Assignments, all of the Seller's right, title and interest in and to the
Servicing Rights. With respect to each Mortgage Loan for which an entity other
than the applicable Investor is the mortgagee of record, the Seller will prepare
the endorsements and prepare and record such Assignments (including all
intervening Assignments) in the manner described below at its sole cost and
expense. The Seller will not use: (a) blanket Assignments, or (b) facsimile
signatures on any Assignment.
4.2.2. Seller Initiates Eletronic Transmssions with MERS. With respect to each
Mortgage Loan for which an entity other than the applicable Investor is the
mortgagee of record the Seller shall create MERS identification numbers relating
to each Mortgage Loan in the manner required by MERS. The Seller shall initiate
with MERS electronic transmissions of such MERS identification numbers and
certain other information required by MERS. Such electronic transmissions shall
identify the Buyer as the Servicer of record of such Mortgage Loans. The Buyer
shall pay all fees charged by MERS in connection with the registration of such
Mortgage Loans with MERS.
4.2.3. Prepare Assignments to MERS. At the Seller's sole cost and expense, the
Seller shall:
(a) prepare (or cause to be prepared) and properly record (or cause to be
recorded) Assignments from the Seller to MERS; and
(b) promptly after recording each such Assignment, transmit to the Buyer and
MERS such related recording information as shall be required by MERS.
4.3. ASSIGNMENTS FROM THE BUYER TO THE AGENCY.
With respect to each Mortgage Loan for which an entity other than the applicable
Investor is the mortgagee of record, the Seller will, if required by the
applicable Investor, prepare Assignments of Mortgages from MERS to the
applicable Investor at the Seller's sole cost and expense, and will provide such
Assignments to the Buyer within the time period set forth in Exhibit B to this
Agreement. The Buyer shall pay its own expenses relating to MERS' signature.
4.4. Delivering Mortgage Documents Available On Tne Transfer Date To The Buyer.
Within the time period set forth in Exhibit B to this Agreement and at its sole
cost, the Seller will:
(a) deliver the Servicing Files and related Mortgage Documents to the Buyer,
and
(b) cause the Seller's custodian to deliver the Custodial Files to the Buyer's
Custodian.
4.5. DELIVERING ADDITIONAL MORTGAGE DOCUMENTS TO THE BUYER.
The Seller will deliver to the Buyer all of the documents set forth in Exhibit B
under the heading "Assignment Preparation, Recertification, and Final
Documentation Tasks" Within 360 days following the applicable Transfer Date.
4.6. Conversion Tapes.
4.6.1. In General. The Seller will provide the Buyer, at the Seller's sole cost
and in accordance with the schedules set forth in Exhibits B and C, machine
readable tape or other media containing such Servicing information as may
reasonably be required by the Buyer, including, but not limited to: (a) master
file tapes supported by trial balances with totals by investors (2 sets), (b)
pool tapes, and (c) the Seller's record layouts together with any and all
necessary supporting documentation produced by any other mini or personal
computer of the Seller. Such media will be in a form acceptable to the Buyer.
4.6.2. Correct Defective Information. Before delivering to the Buyer each
scheduled tape containing the information described in Section 4.6.1 above, the
Seller will correct such information that the Buyer or the Seller has identified
as defective.
4.6.3. Update Information. The Seller will correct and update the information
described in Section 4.6.1 above, including, but not limited to, information
commonly kept and maintained in conformance with the Applicable Requirements.
4.7. SELLER PAYS ESCROW DISBURSEMENTS.
4.7.1. When the Seller Must Pay Escrows. The Seller will be solely responsible
for making any and all Escrow Account disbursements for a Mortgage Loan if (a)
the disbursements are due and payable at any time up to thirty (30) days after
each applicable Transfer Date; and (b) the Seller has possession of the bill or
such bill is available for release. The Seller will make all such disbursements
prior to each applicable Transfer Date, and will not make any such disbursements
after any such Transfer Date.
The Seller will bear any and all penalties, costs, and losses relating to or
arising out of the failure to make timely tax, homeowner's insurance (fire,
hazard and extended coverage), flood insurance, PMI payments, and any other
items for which the Seller has escrowed for such Mortgage Loans.
Without limiting the above, the Seller will reimburse the Buyer immediately on
receipt of the Buyer's written demand and substantiation thereof for any and all
costs and expenses relating to: (a) obtaining temporary and/or permanent
insurance coverage that is not recoverable from the Mortgagor, and (b) losses
and/or damage to any Mortgaged Property that is uninsured as a result of the
Seller's failure to comply with the terms and conditions of this Section 4.7.1.
4.7.2. Seller Must Give the Buyer a List of Taxes and Insurance Due Within the
time period set forth in Exhibit B to this Agreement, the Seller will provide
the Buyer with a written list of all Mortgage Loans with respect to which the
Seller has failed to comply with Section 4.7.1 above and taxes and/or insurance
are due and payable at any time up to thirty (30) days after each applicable
Transfer Date and remain unpaid as of each such Transfer Date..
4.8. Mortgage Payments Received After Transfer Date.
The Seller will deliver to the Buyer by overnight courier each Mortgage Loan
Payment received by the Seller each day during the thirty (30)-day period
following each applicable Transfer Date. The Seller will deliver to the Buyer by
first class mail each Mortgage Loan Payment received by the Seller each day
after the applicable thirty (30)-day period has ended. Each Mortgage Loan
Payment will be accompanied by: (a) an endorsement assigning such payment to the
Buyer, and (b) information sufficient to permit the Buyer to process each such
payment.
With respect to Mortgage Loan Payments for Mortgage Loans accepted by the Seller
at an Affiliate branch bank, the Seller shall deliver to the Buyer within
twenty-four (24) hours after receipt of such payment (a) an electronic file
detailing such Mortgage Loan Payments in a format mutually acceptable to the
parties; and (b) a wire transfer in the amount of such Mortgage Loan Payments,
in immediately available funds. If any such Affiliate branch bank misdirects
such a Mortgage Loan Payment, the Seller shall make the Buyer whole in the
amount of any such misdirected Mortgage Loan Payment within five (5) Business
Days after receipt of proof of payment from the Mortgagor.
4.9. Misapplied and Returned PaymentS.
The Seller shall promptly resolve any Mortgage Loan Payments that have been
misapplied by the Seller, and shall immediately notify the Buyer when the Seller
becomes aware of any such misapplied payments.
4.10. Transfer and Reconciliation of Custodial P&I and T&I AccountS.
4.10.1. The Seller Will Deliver P&I and T&I to the Buyer. Within the time period
set forth in Exhibit B to this Agreement, the Seller will wire transfer to the
Buyer all funds held in Custodial Accounts for P&I, T&I, suspense, Buydown, loss
drafts, special escrows, replacement reserves, other suspense funds, and any
other monies and fees with respect to which the Seller has collected such funds
in a Custodial Account and not yet performed the related services, less an
amount equal to 100% of any documented Advances made by the Seller I in
accordance with the Applicable Requirements. The P&I delivered by the Seller to
the Buyer shall be in an amount equal to the expected cash from the applicable
Pool(s). The Seller will pay to the Buyer the amount of any such advance that is
disallowed by an Investor no later than five (5) Business Days after the Seller
has received notice of such disallowance.
4.10.2. The Seller Will Reimburse the Buyer for Deficient Accounts. The Seller
will wire transfer to the Buyer the amount of any deficiency in any suspense
account, Buydown account, GPM, or subsidy account no later than five (5)
Business Days after the Buyer has given the Seller notice of such deficiency.
The Seller will give the Buyer hard copy records identifying all funds in
suspense or pending application or disbursement, including, but not limited to,
a complete description of the purpose of such funds.
4.10.3. The Seller Will Apply Suspense Balances to the Mortgagor's Account
Notwithstanding anything in this Agreement to the contrary, the Seller will
apply any outstanding suspense balances (except Buydown and loss draft balances)
to the Mortgagor's account on or before the Transfer Date which should have been
so applied in accordance with the Applicable Requirements.
4.11. Payment of Security Holder Remittances.
The party specified by the applicable Investor will pay the Investor remittances
due and owing during the month in which the Transfer Date occurs. The Buyer and
the Seller will cooperate in complying with the Investor's instructions and the
Transfer Instruction set forth in Exhibit B to this Agreement, and will
reimburse the other as appropriate. The Seller will change the applicable issuer
number on the Seller's Servicing system to the Buyer's issuer number after the
Seller has completed its final security holder remittance.
4.12. SUPPLEMENTARY INFORMATION.
The Seller will promptly give the Buyer any and all information that is
reasonably necessary for the Buyer to Service the Mortgage Loans.
4.13. POOL RECONCILIATION.
The Seller shall properly perform the Pool-to-Security balance reconciliations
and the expected cash reconciliations. The Seller shall cure or cause to be
cured any out-of-balance conditions on any of the Pools prior to the applicable
Transfer Date.
<PAGE>
ARTICLE 5
MUTUAL REPRESENTATIONS AND WARRANTIES
<PAGE>
The Seller and the Buyer each represents, warrants, and agrees that, as of the
date of this Agreement:
5.1. PARTY IS DULY ORGANIZED.
It is a duly organized and validly existing corporation, is in good standing
under the laws of the jurisdiction of organization, and has the requisite power
and authority to enter into this Agreement and any other agreements to which
both are party and that are contemplated by this Agreement.
5.2. AGREEMENT IS DULY AUTHORIZED.
It has all requisite corporate power, authority, and capacity to enter into this
Agreement and to perform the obligations required of it under this Agreement.
The execution and delivery of this Agreement and the Interim Servicing Agreement
and the consummation of the transactions contemplated by this Agreement and the
Interim Servicing Agreement, have each been duly and validly authorized by all
necessary corporate action.
This Agreement and the Interim Servicing Agreement constitute the valid and
legally binding agreements of the Seller, enforceable in accordance with their
terms, except as they may be limited by bankruptcy, insolvency, reorganization,
or other laws affecting the enforcement of creditors' rights and by general
equity principles, and no offset, counterclaim, or defense exists to the full
performance of this Agreement and the Interim Servicing Agreement.
5.3. AGREEMENT DOES NOT VIOLATE ANY OTHER OBLIGATION.
Insofar as its capacity to carry out any obligation under this Agreement is
concerned, it is not in violation of any provision of any charter, certificate
of incorporation, by-law, mortgage, indenture, indebtedness, agreement,
instrument, judgment, decree, order, statute, rule, or regulation, and there is
no such provision that adversely affects its capacity to carry out such
obligations.
Its execution of and performance pursuant to this Agreement will not result in
such violation.
5.4. PARTY IS APPROVED SELLER/SERVICER.
It is an approved: (a) Seller/Servicer with FNMA and FHLMC and is in good
standing with both FNMA and FHLMC, and (b) issuer with GNMA, and is in good
standing with GNMA.
5.5. PARTY IS DULY LICENSED.
It holds the required licenses and is in compliance with all state and federal
laws governing the transfer and Servicing of Mortgage Loans to be transferred
under this Agreement.
5.6. WARRANTIES SURVIVE.
It agrees that all warranties and obligations under this Agreement are perpetual
and will survive the termination of this Agreement.
<PAGE>
ARTICLE 6.
SELLER'S REPRESENTATIONS AND WARRANTIES
RELATING TO THE MORTGAGE LOANS.
<PAGE>
The Seller represents and warrants to the Buyer with respect to each Mortgage
Loan that, as of the Agreement Date, to and including the Transfer Date:
6.1. NOTE AND MORTGAGE ARE Valid OBLIGATIONS OF THE OBLIGORS.
The Mortgage Note and the related Mortgage are genuine and each is the legal,
valid, and binding obligation of the related Borrower and Mortgagor, enforceable
in accordance with their respective terms, except as such enforceability may be
limited by (a) applicable bankruptcy, reorganization, insolvency, moratorium and
other laws affecting creditors' rights or debtors' obligations from time to time
in effect, and (b) the availability of the remedy of specific performance or
injunctive relief or any other equitable remedy..
All parties to the Mortgage Note and the Mortgage had legal capacity to execute
the Mortgage Note and the Mortgage, and each Mortgage Note and Mortgage has been
duly and properly executed by such parties.
Except as permitted by the Applicable Requirements, there is no homestead or
other exemption available to a Mortgagor that could interfere with the right to
sell the Mortgaged Property by trustee's sale or the right to foreclose the
Mortgage.
6.2. First liens Free of Encumbrance.
The Mortgage is a valid and existing first lien on the Mortgaged Property
described in the Mortgage, and the Mortgaged Property is free and clear of all
encumbrances and liens, including, but not limited to, mechanics' liens and
materialmen's liens, having priority over the first lien of the Mortgage except
for liens for real estate taxes and special assessments not yet due and payable,
and no rights are outstanding that under the law could give rise to such lien,
except for those liens excepted under Section 6.10 below.
6.3. Loans Satisfy The Guide.
Each Mortgage Loan satisfies the requirements and terms set forth in the
applicable Investor's Guide in effect at the time of delivery to the applicable
Investor, and the inclusion of each such Mortgage Loan in a Pool satisfies the
requirements and terms set forth in the applicable Investor's Guide. There is no
circumstance or condition relating to a Mortgage Loan, the Mortgaged Property,
the Mortgage Documents, the Borrower, or the Borrower's credit standing that can
reasonably be expected to cause an Investor to regard a Mortgage Loan as not
eligible for insurance coverage or guaranty, as applicable, or to regard a
Mortgage Loan as not eligible for a Pool.
Except for Rapid Reply Loans, the Investor commitments under which the Mortgage
Loans were sold to the applicable Investor do not create any material
obligations or material liability on the Servicer that are in addition to
contemporary customary servicing provisions contained in standard Investor
Servicing Agreements.
Each Investor Servicing Agreement delivered to the Buyer is an executed original
or is a certified copy of the original as it may have been amended and is a
true, correct, and complete copy of such Investor Servicing Agreement. Each
Investor Servicing Agreement is in full force and effect and has not been
amended, modified, or altered other than as provided to the Buyer in writing.
The Seller is not a party to any agreement, settlement, litigation, or any other
understanding with any Investor, court, governmental agency, or any other entity
that materially and adversely affects the Seller's Servicing obligations and/or
practices.
6.4. No Person or Mortgage Released.
No party to the Mortgage Note or Mortgage has been released in whole or in part
from the Mortgage Note or the Mortgage, and no part of the Mortgaged Property
has been released from the Mortgage. Nothing in this Section 6.4 is intended to
limit the Seller's ability to release a party to such instrument upon valid
consent from the applicable Investor.
6.5. No Tax LIENS.
Except as disclosed by the Seller to the Buyer, there was no delinquent tax or
delinquent assessment lien against the Mortgaged Property either at the time the
related Mortgage Loan was closed or on the Transfer Date.
6.6. Seller Has Paid All Taxes and Assessments.
All taxes, governmental assessments, hazard insurance premiums, flood insurance
premiums, mortgage insurance premiums, leasehold payments, or ground rents that
previously became due have been paid.
6.7. No Defense To Payment.
The Mortgage Loan is not subject to any right of rescission, set-off,
counterclaim, or defense, including the defense of usury, nor will the operation
of any of the terms of the Mortgage Note or the Mortgage, or the exercise of any
right thereunder, render either the Mortgage Note or the Mortgage unenforceable,
in whole or in part, or subject either to any right of rescission, set-off,
counterclaim, or defense, including the defense of usury, and no such right of
rescission, set-off, counterclaim, or defense has been asserted with respect
thereto.
6.8. Loans Comply With Law.
Each Mortgage Loan application was taken and processed, and each Mortgage Loan
was made in compliance with, all Applicable Requirements, including without
limitation: Usury, the Equal Credit Opportunity Act and its implementing
Regulation B, the Real Estate Settlement Procedures Act and its implementing
Regulation X, the Financial Institutions Reform Recovery And Enforcement Act and
its implementing regulations, Federal Deposit Insurance Corporation Improvement
Act, the Truth-In-Lending Act and its implementing Regulation Z, the Fair Credit
Reporting Act and any applicable state credit reporting laws, the Fair Debt
Collection Practices Act, the Fair Housing Act, and Fair Lending Laws in all
material respects, and consummation of the transactions contemplated hereby,
including, without limitation, the receipt of interest by the Buyer or its
designees and their successors in interest will not involve the violation of any
such laws.
6.9. Adequate Remedies of Holder.
Each Mortgage contains customary and enforceable provisions that give the holder
of the Mortgage adequate rights and remedies to realize against the Mortgaged
Property and to benefit from its security, including, but not limited to: (a) in
the case of a Mortgage designated as a Deed of Trust, by trustee's sale; and (b)
otherwise by foreclosure subject, in each case, to any limitations arising from
any bankruptcy, insolvency or other similar laws for the benefit of debtors.
6.10. Title Insurance.
A title insurance policy or other evidence of title acceptable to the applicable
Investor has been issued for each Mortgage Loan insuring the Seller, its
successors and assigns, in an amount no less than the outstanding Mortgage Loan
principal balance, that the related Mortgage is a valid lien on the Mortgaged
Property and that the Mortgaged Property is free and clear of all encumbrances
and liens having priority over the lien of the Mortgage, except for: (a) liens
for real estate taxes and special assessments not yet due and payable, (b)
covenants, restrictions, rights of way, easements, and other matters customary
and acceptable to institutional lenders and title insurance companies in the
jurisdictions in which such Mortgaged Property is located, and (c) easements and
restrictions of record being acceptable to the Agencies and to the Buyer, and
specifically identified in the title insurance policy. Unless the Mortgaged
Property is within a jurisdiction where title insurance was unavailable, or the
form of title evidence is not the general form, a mortgage title insurance
policy on current prescribed ALTA form, or such other form of title insurance
policy with a carrier acceptable to the Agencies and reasonably acceptable to
the Buyer, is in effect as to the Mortgaged Property.
6.11. No Condemnation Proceedings.
There is no proceeding pending for the total or partial condemnation of the
Mortgaged Property and such property is undamaged by waste, fire, earthquake or
earth movement, windstorm, flood, tornado, or other casualty, or if damaged,
then the Mortgaged Property is adequately insured therefor so as to affect
adversely the value of the Mortgaged Property as security for the Mortgage Loan
or the use for which the premises were intended.
6.12. No Violation of Zoning Laws.
No improvements located on or being part of the Mortgaged Property are in
violation of any applicable zoning law or regulation. All inspections, licenses,
and certificates required to be made or issued with respect to all occupied
portions of the Mortgaged Property and, with respect to the use and occupancy of
the same, including, but not limited to, certificates of occupancy and fire
underwriting certificates, have been made or obtained from the appropriate
authorities.
6.13. Proceeds Fully Disbursed.
Except for Escrow Account funds retained for completion of Mortgaged Property
improvements, the proceeds of the Mortgage Loans have been fully disbursed,
there is no requirement for future Advances thereunder, and any and all
requirements as to completion of any on-site or off-site improvements and as to
disbursements of any Escrow Account funds therefore have been complied with. All
costs, fees and expenses incurred in making, closing or recording the Mortgage
Loans has been paid by the Seller or a Prior Originator.
6.14. Due On Sale.
Each Mortgage contains a provision acceptable to the Agencies for the
acceleration of the payment of the unpaid principal balance of the Mortgage Loan
in the event the related Mortgaged Property is sold or transferred without the
prior consent of the mortgagee thereunder, unless prohibited by state law, and
subject to any limitations arising from any bankruptcy, insolvency or other
similar laws for the benefit of debtors.
6.15. Origination, COLLECTION, AND SERVICING Practices.
The origination, collection, and Servicing practices used by the Seller and any
Prior Originator or Prior Servicer of each Mortgage Loan have been in all
respects legal, proper, prudent, customary in the mortgage servicing business,
and in accordance with the applicable Guide and Investor Servicing Agreements.
The Escrow Accounts have been maintained in accordance with, and are in all
respects in compliance with the Applicable Requirements. There are no Escrow
Account deposits or payments or other charges or prepayments due to the Seller
have been capitalized under any Mortgage or the related Mortgage Note other than
in compliance with Applicable Requirements.
6.16. Hazard Insurance.
There is in force for each Mortgaged Property a hazard insurance policy that:
(a) is acceptable to the applicable Investor and the Insurer, (b) contains a
standard mortgagee clause, (c) insures against loss or damage by fire, all other
hazards set forth in the standard extended coverage form of endorsement, and any
other insurable risks against hazards required by the applicable Investor, and
(d) has been issued in an amount equal to the lesser of the outstanding
principal balance of the Mortgage Loan or the full insurable value of the
improvements to the Mortgaged Property. In addition, if required by the Flood
Disaster Protection Act of 1973, the Mortgaged Property is protected by a flood
insurance policy in an amount representing coverage equal to the lesser of the
outstanding principal balance of the Mortgage Loan or the maximum amount of
insurance that is available under the Flood Disaster Protection Act of 1973. The
improvements to the Mortgaged Property have not been affected in any substantial
manner or suffered any material loss as a result of any fire, explosion,
accident, strike, riot, war, or act of God or the public enemy as of the
Transfer Date, except as disclosed by the Seller to the Buyer in accordance with
Exhibit B to this Agreement. All such insurance policies remain in full force
and effect.
6.17. LOCATION OF IMPROVEMENTS; NO ENCROACHMENTS.
All of the improvements that were included for the purpose of determining the
appraised value of the Mortgaged Property lie wholly within the boundaries and
building restriction lines of such property, and no improvements on adjoining
properties encroach upon the Mortgaged Property unless covered by title
insurance and/or waivers.
6.18. PMI.
Each Mortgage Loan required by an Investor to have private mortgage insurance
have Custodial Accounts containing T&I funds relating to private mortgage
insurance and a related insurance policy. With respect to each private mortgage
insurance policy: (a) all provisions of such private mortgage insurance policy
have been and are being complied with, and (b) such policy is in full force and
effect, and (c) all premiums due under such policy before the applicable
Transfer Date will be paid prior to such Transfer Date. Any Mortgage Loan
subject to any such private mortgage insurance policy obligates the Borrower to
maintain such private mortgage insurance policy and pay all such premiums and
charges in connection therewith. Each private mortgage insurance company will be
acceptable to the applicable Investor.
6.19. FHA INSURANCE AND VA GUARANTY.
Each Mortgage Loan to be insured by the FHA is eligible for FHA insurance, and
the FHA insurance premiums that are due and payable for each such Mortgage Loan
have been paid by the Seller or the Seller has caused such premiums to be paid.
Each Mortgage Loan to be guaranteed by the VA is eligible for a VA guaranty, and
any VA fees that are due and payable for each such Mortgage Loan have been paid
by the Seller or the Seller has caused such VA fees to be paid.
6.20. OPTIONAL INSURANCE.
Within the time period set forth in Exhibit B to this Agreement, the Seller has
given the Buyer a list of each Mortgage Loan that has credit life insurance,
accidental death insurance, disability insurance, unemployment insurance, or any
other such optional insurance, the premiums of which are paid into an Escrow
Account. The Seller has serviced each Mortgage Loan with such optional insurance
properly and in accordance with the Mortgage Documents and applicable insurance
policies, including, but not limited to: (a) applying and collecting insurance
premiums, (b) maintaining complete and accurate records relating to such
insurance, (c) processing and paying claims, and (d) handling all related
correspondence.
6.21. Appraisals.
For each Mortgaged Property, an appraisal has been made that conforms with the
Applicable Requirements.
6.22. Mortgaged Property Located In The U.S.
Except as disclosed to the Buyer, the Mortgaged Property is located in the
continental United States or the State of Hawaii, and all such Mortgage Loans
consist of a single parcel of real property with a detached one-to-four family
dwelling, a townhouse, or an individual condominium unit in a development.
6.23. NO Superfund Site.
The Mortgaged Property is not located on a superfund site as defined by the
Comprehensive Environmental Response Compensation and Liability Act, 42 U.S.C.
Sections 9601 et seq.
6.24. Documents Comply With Guide.
The Mortgage Documents satisfy each of the requirements of the applicable Guide
and the Buyer, and the Mortgage Documents have been duly executed and are in a
form acceptable to the applicable Investor.
Each Mortgage Note, Mortgage, and appraisal are on forms acceptable to the
applicable Investor, and the Mortgage Loan was originated, serviced, and
delivered, as applicable, in accordance with the applicable Guide.
6.25. Custodial AND SERVICING FILES.
All documents that are required to be in the Custodial File and the Servicing
File will be provided to the Buyer by the Seller in accordance with the
applicable Guide and the Transfer Instructions set forth in Exhibit B to this
Agreement.
6.26. Assign Mortgage To Buyer.
Each Mortgage Loan, regardless of which entity originated such Mortgage Loan,
will be transferred and assigned to the Buyer by the Seller pursuant to
appropriate endorsement and Assignment of the Mortgage Loan and will be subject
to the representations, warranties, and covenants of the Seller as provided in
this Agreement.
6.27. UNPAID BALANCE.
The amount of the unpaid principal balance for each Mortgage Note as of the
Agreement Date is set forth in the conversion tape provided to the Buyer by the
Seller.
6.28. MORTGAGED PROPERTY TAX IDENTIFICATION.
Each Mortgaged Property tax identification and Mortgaged Property description is
accurate, complete, and legally sufficient. Tax segregation, where required, has
been completed.
6.29. INTEREST ON ESCROW ACCOUNTS.
The Seller has credited to each Borrower's account all interest required to be
paid on any Escrow Account through the Transfer Date. The Seller will provide to
the Buyer evidence of each such payment upon the Buyer's request. If required by
the Applicable Requirements, the Seller has implemented backup withholding of
interest accrual on each such Escrow Account, and the Seller will provide to the
Buyer evidence of each such backup withholding on or before the Transfer Date.
6.30. PAYOFF STATEMENTS.
Each Mortgage Loan payoff and assumption statement provided by the Seller or a
Prior Servicer to a Mortgagor, Borrower, or his/her agent was complete and
accurate.
6.31. CUSTODIAL ACCOUNTS WITH T&I.
There are Custodial Accounts containing T&I funds for each Mortgage Loan that is
required by an applicable Investor to have such funds held in such a Custodial
Account. All T&I funds (whether voluntary or required by an Investor) have been
created and maintained in compliance, in all material respects, with: (a) the
applicable Guide, (b) the applicable Investor's requirements, (c) the Mortgage
Documents, and (d) Applicable Requirements. Each Custodial Account contains T&I
funds in the proper amount. Without limiting the above, the Seller has credited
to each Borrower's account all interest required to be paid on any Custodial
Account through the applicable Transfer Date. The Seller shall provide to the
Buyer evidence of each such payment upon the Buyer's request. If required by
Applicable Requirements, the Seller has implemented backup withholding of
interest accrual on T&I funds within a Custodial Account, and the Seller shall
provide to the Buyer evidence of each such backup withholding on or before the
applicable Agreement Date. The Seller has complied with Applicable Requirements,
including, but not limited to, the Real Estate Settlement Procedures Act and its
implementing Regulation X with respect to the establishment of T&I within a
Custodial Account.
6.32. ESCROW ANALYSIS.
The Seller has: (a) analyzed the payments into each Escrow Account, (b) analyzed
the disbursements from each Escrow Account, (c) made the appropriate adjustments
to each Escrow Account that has a deficiency or surplus, and (d) performed any
additional analysis and made any additional adjustments as may be required by
the Applicable Requirements.
6.33. Bi-Weekly Mortgages.
Except as disclosed by the Seller to the Buyer, there are no bi-weekly Mortgage
Loans relating to the Servicing Rights.
6.34. Pledged Accounts.
There are no pledged accounts relating to a Mortgage Loan that must be
maintained or administered by the Buyer except for a pledged account (a)
relating to a Mortgage Loan without an Escrow Account; and (b) the proceeds of
which may, but need not be, used by the Servicer to pay for any deficiency in a
real estate tax payment that otherwise would have been paid from the funds
contained in such Escrow Account.
6.35. Pool Balance.
The principal balances outstanding and owing on the Mortgage Loans in each Pool
are greater than or equal to the amounts owing to the security holders of the
related MBS or PC.
6.36. BUYDOWN FUNDS.
For each Mortgage Loan with a Buydown, the Seller has deposited the Buydown
funds into the Escrow Account and supplemented the Borrower's Mortgage Loan
payments in accordance with the related Buydown agreement and applicable Guide.
6.37. Seller's Statements Are True And Accurate.
No representation, warranty, or written statement made by the Seller in this
Agreement or in any exhibit, schedule, written statement, or certificate given
to the Buyer in connection with the transactions contemplated by this
Agreementincluding, but not limited to, the magnetic tape provided by the Seller
to Cohane Rafferty Securities, Inc, contains or will contain any untrue
statement of a material fact or omits or will omit to state a material fact
necessary to make the statements in this Agreement or in any of such statements
and certificates not misleading.
6.38. Seller's Books and Records.
The Seller's books, records, and accounts relating to the Mortgage Loans are and
shall continue to be maintained in accordance with all Applicable Requirements.
6.39. Soldiers' and Sailors' Civil Relief Act of 1940.
Each of the Mortgage Loans, the terms of which have been adjusted due to the
Soldiers' and Sailors' Civil Relief Act of 1940, as amended, is identified in
accordance with the instructions set forth in Exhibit B to this Agreement and
segregated by investor and accounting group. Each Mortgage Loan that is the
subject of a Borrower's request for an adjustment under the Soldiers' and
Sailors' Civil Relief Act of 1940, as amended, is separately identified in
accordance with the Transfer Instructions set forth in Exhibit B to this
Agreement.
6.40. Fraud.
No Mortgage has been originated through any type of fraud or deceit, by the
Seller, the Borrower, Prior Originator, or any other third party.
6.41. Social Security Numbers.
The Seller has complied with all Internal Revenue Service requirements relating
to or arising out of the procurement of a Social Security number. The Social
Security numbers ascribed to the Borrower in any document contained in the
Servicing File is such Borrower's true and correct Social Security number.
6.42. Wisconsin Taxes.
Each Mortgage Loan pertaining to a Mortgaged Property situated in the state of
Wisconsin is identified in accordance with the Transfer Instructions set forth
in Exhibit B to this Agreement by Mortgage Loan account number and by the tax
payment option selected by the Borrower.
6.43 FORFEITURE UNDER CONTROLLED SUBSTANCE LAWS.
There is or will be no forfeiture of any Mortgaged Property to the United States
under 21 U.S.C. ss.881 or to any other governmental entity, including, but not
limited to, any state or municipality under any comparable state or local law by
reason that: (i) the Mortgaged Property is proceeds traceable to an exchange for
a controlled substance, (ii) the Mortgage Property was purchased with proceeds
traceable to an exchange for a controlled substance, (iii) the Mortgaged
Property was used and was intended to be used to facilitate the commission of a
violation of 21 U.S.C. section 841, and/or (iv) the Mortgaged Property was used
in a manner violating a state or local law comparable to 21 U.S.C. section 841,
such that the Buyer cannot prevail in asserting an "innocent owner" defense due
to the acts or omissions of the Seller or any Prior Originator of a Mortgage
Loan.
6.44. REFINANCING.
The Seller has not represented or promised to any Borrower that the Seller would
refinance the Borrower's Mortgage Loan at any time after the date of the
Offering Letter.
6.45. WAREHOUSE LOANS.
Each Warehouse Loan is eligible for sale and delivery to an Investor and shall
be sold and delivered to such Investor.
6.46. WARRANTIES SURVIVE.
The Seller agrees that all warranties and obligations under this Agreement are
perpetual and will survive the termination of this Agreement.
<PAGE>
ARTICLE 7.
SELLER'S REPRESENTATIONS AND WARRANTIES
WITH RESPECT TO SERVICING RIGHTS AND SECURITIES.
<PAGE>
The Seller represents and warrants to the Buyer with respect to the Servicing
Rights and the Securities that, as of the Transfer Date:
7.1. Good And Marketable Title.
The Seller owns and has good and marketable title to the Servicing Rights and
all related Custodial Accounts, and has the complete right and power to transfer
the Servicing Rights to the Buyer, free and clear of all liens, claims, charges,
defenses, offsets, and encumbrances, including, but not limited to, those of the
Seller or any Prior Servicer arising by, through, or under the Seller, any Prior
Originator, or Prior Servicer. The Seller is not obligated either contractually
or otherwise to sell the Servicing Rights to any other person or entity.
7.2. No Encumbrances.
The transfer of the Servicing Rights by the Seller to the Buyer will be free and
clear of any and all adverse claims and encumbrances, and there has been and is
no assignment, sale, or hypothecation thereof, except as contemplated by this
Agreement.
7.3. LOANS PROPERLY SERVICED.
All Mortgage Loans and related Escrow Accounts have been serviced at all times
in accordance with the Applicable Requirements.
7.4. ALL REPORTS FILED.
The Seller and all Prior Servicers have filed all reports required by all
Applicable Requirements.
7.5. No Accrued Liabilities.
The Seller has no accrued liabilities relating to the Mortgage Loans or the
Servicing Rights, and there are no circumstances under which such accrued
liabilities will arise against the Seller or the Buyer with respect to
occurrences before the Transfer Date. The Seller will pay any and all
termination fees relating to the transfer of the Servicing Rights under this
Agreement.
7.6. COMPLIANCE WITH CONTRACTS AND AGENCY AGREEMENTS.
The Seller has complied with all of the terms and obligations of all contracts
to which the Seller is a party, and with all Applicable Requirements that might
affect any of the Servicing Rights and/or the Mortgage Loans. No event has
occurred or is continuing that under the provisions of any Investor Servicing
Agreement, Guide, or any other document or agreement, but for the passage of
time or the giving of notice, or both, would constitute an event of default
thereunder. The Seller has not received any notice or other information from an
Investor that it has or intends to terminate an Investor Servicing Agreement or
requires the sale, substitution, or withdrawal of a Mortgage Loan. The Seller
has not done or failed to do any act or thing that may materially and adversely
affect the Servicing Rights.
7.7. Filing Reports.
For each Mortgage Loan, the Seller has filed or will file, within the time
limits required by Applicable Requirements, all required reports including, but
not limited to, reports to all governmental agencies having jurisdiction over
the Servicing Rights and all reports required to be made by the Internal Revenue
Code of 1986, as amended. The Seller will provide to each Borrower before
January 31, 2000 or any such earlier date as may be required by the Applicable
Requirements, a "year-end statement" for the period ended on the day immediately
prior to the Transfer Date, in compliance with the Applicable Requirements. The
Seller's "goodbye letter" (the mortgage servicing transfer letter required by
the Real Estate Settlement Procedures Act) will prominently state that the
Seller will be mailing the year-end statement to the Borrower by such date.
7.8. Litigation.
There is no litigation, proceeding, or governmental investigation pending or
threatened, and the Seller does not know of any basis for any such litigation,
proceeding, or governmental investigation or any order, injunction, or decree
outstanding that does or might materially and adversely affect any of the
Mortgage Loans or the Servicing Rights.
7.9. COMPLIANCE WITH LAW AND AGENCY REQUIREMENTS.
The Seller has not violated any Applicable Requirements in a way that may
materially affect any of the Servicing Rights.
7.10. No Accrued Liabilities.
[This Section Has Been Left Intentionally Blank.]
7.11. Sole Servicer.
The Seller is the sole Servicer of the Mortgage Loans.
7.12. Investor Servicing Agreements.
The Seller will provide to the Buyer the Investor Servicing Agreements under
which the Seller currently is Servicing the Mortgage Loans in accordance with
the Transfer Instructions set forth in Exhibit B to this Agreement. The Seller
represents that the Investor Servicing Agreements for each Agency is a standard
Investor Servicing Agreements for such Agency and fully authorize the Servicing
Fee the Seller is collecting for the Mortgage Loans.
7.13. CUSTODIAL ACCOUNT.
Each Custodial Account has been established and continuously maintained in
accordance with the Applicable Requirements. Each Mortgage Loan payment received
by the Seller or any Prior Servicer has been duly deposited in a timely manner
to the applicable Custodial Account. Each disbursement from a Custodial Account
has been made in accordance with the Applicable Requirements.
7.14. Conduct of the Seller's Business Pending the Transfer Date.
Between the Agreement Date and the Transfer Date: (a) the Seller's business will
only be conducted in the ordinary course, and (b) the Seller will preserve the
Servicing Rights.
7.15. WARRANTIES SURVIVE.
The Seller agrees that all warranties and obligations under this Agreement are
perpetual and will survive the termination of this Agreement.
<PAGE>
ARTICLE 8.
COVENANTS
<PAGE>
8.1. TAKING NECESSARY ACTION; FURTHER ASSURANCES.
(a) Make Transactions Effective. The Buyer and the Seller shall use commercially
reasonable efforts to take all action and promptly to do all things necessary or
advisable to consummate and make effective the transactions contemplated by this
Agreement.
(b) Filings and Consents. The Seller shall obtain Investor Consents under the
terms set forth in Section 3.3 above. The Buyer shall (i) as soon as practicable
after the Agreement Date, make such filings relating to regulatory
authorizations, licenses and permits as may be required or advisable to be filed
by it in connection with the transactions contemplated by this Agreement, and
(ii) use its commercially reasonable efforts to consult with and keep Seller
informed as to the status of such matters.
(c) Seller Will Cooperate With Buyer. The Seller shall comply with its
obligations described in Section 3.3 above and cooperate with the Buyer in the
preparation of all filings described in subparagraph (b) above, including
providing any information as the Buyer may reasonably request.
(d) Execute Further Instruments. The Buyer and the Seller shall cooperate with
each other, and execute and deliver, or use commercially reasonable efforts to
cause to be executed and delivered, all such other instruments, including
instruments of conveyance, assignment and transfer, and to make all filings with
and to obtain all approvals and consents, and take all such other actions as any
party may request of the other from time to time, consistent with the terms of
this Agreement, in order to effectuate the provisions and purposes of this
Agreement and the transactions contemplated hereby.
(e) Take Further Actions. After the Agreement Date, the Seller shall take such
additional actions as may be necessary to fully vest in the Buyer the full use
and enjoyment of the Servicing Rights, including execution of any additional
documents evidencing transfer of title and obtaining any requisite consent from
any of the Seller's Affiliates to the assignment to the Buyer of any agreement
necessary or appropriate to effectuate the transactions contemplated by this
Agreement.
8.2. CONDUCT OF BUSINESS.
During the period from the Agreement Date to the Transfer Date, the Seller,
jointly and severally, agrees that:
(a) Maintain Business. Except to the extent that the Buyer provides prior
written consent to do otherwise, or except as expressly permitted or required by
this Agreement, the Seller shall (i) maintain its corporate existence in good
standing, (ii) maintain the general character of its residential mortgage loan
business and conduct such business in a commercially reasonable manner
consistent with past practice, (iii) maintain proper business and accounting
records relative to its mortgage servicing business, and (iv) maintain presently
existing insurance coverages with respect to the Servicing Rights and to its
mortgage servicing business;
(b) No Termination of Investor Servicing Agreements. Without the prior written
consent of the Buyer or except as expressly permitted or required by this
Agreement, the Seller shall not terminate any Investor Servicing Agreement.
8.3. SOLICITATION FOR REFINANCES.
With respect to the rights of the parties to solicit Mortgagors for products and
services, the Seller and the Buyer shall have the same rights and obligations as
are set forth in the Marketing Agreement entered into by and between Bank One
Corporation (formerly known as Banc One Corporation) and HomeSide International,
Inc. (formerly known as HomeSide, Inc.) as of April 1, 1998, as may be amended
from time to time, as if the Buyer, the Seller and such Mortgage Loans were the
subject of such Marketing Agreement
8.4. FINAL CERTIFICATION AND RECERTIFICATION.
(a) Seller's Obligations. Prior to the applicable Transfer Date, the Seller
shall obtain in a timely manner the final certification or recertification of
any Pool with a deadline for final document certification or recertification
that occurs on or before the Agreement Date. Seller shall provide and pay the
cost of any letter of credit required by GNMA for the final certification or
recertification of the Servicing.
(b) Buyer's Obligations. The Buyer shall use commercially reasonable efforts to
obtain in a timely manner the final certification or recertification of any Pool
with a deadline for final certification or recertification that occurs after the
Agreement Date, including the recertification of Pools relating to the transfer
of the Servicing Rights to the Buyer. The Seller shall provide and pay the cost
of any letter of credit required by GNMA for the final certification or
recertification of the Servicing.
8.5. POWER OF ATTORNEY.
The Seller irrevocably constitutes and appoints the Buyer and its duly
authorized officers as the Seller's agent and attorney-in-fact coupled with an
interest, to endorse checks and other instruments of payment with respect to the
Mortgage Loans.
8.6. CONFIDENTIALITY.
The Seller and its Affiliates shall not at any time after the Agreement Date
make use of or disclose to any person any information of a proprietary or
confidential nature relating to the Servicing Rights, except such information
may be disclosed (a) where necessary, to any person in connection with the
obtaining of the consents contemplated or required by the terms of this
Agreement, (b) if required by court order, decree or any applicable law, (c)
during the course of or in connection with any litigation or claims with respect
to obligations or liabilities relating to the Servicing Rights as conducted
prior to the Agreement Date, including any governmental investigation,
arbitration or other proceeding in connection therewith, (d) if required in
connection with any regulatory, governmental or related investigation, inquiry
or proceeding or any regulatory compliance requirements imposed upon Seller or
any of its Affiliates or (e) to credit rating agencies.
Except as contemplated by the terms of this Agreement or as may otherwise be
required by law, neither Seller nor Buyer, nor any of their respective
Affiliates, will disclose the terms of this Agreement to any person not a party
to this Agreement (other than Affiliates, who shall be bound by this provision.
The Seller and the Buyer shall consult with each other prior to issuing any
press release relating to the transactions contemplated by this Agreement.
8.7. WAREHOUSE LOANS.
The Seller shall cause the servicing fee for a Warehouse Loan to be no less
than:
(a) 0.25% for fixed rate Conventional Loans;
(b) 0.25% for adjustable rate Conventional Loans with an initial fixed rate
period greater than or equal to five (5) years;
(c) 0.375% for adjustable rate Conventional Loans with an initial fixed rate
period less than five (5) years; and
(d) 0.44% for FHA Loans and VA Loans.
8.8. MICHIGAN TAXES.
The Buyer shall use commercially reasonable efforts to pay before the end of
each calendar year each tax bill for which (a) the related Mortgaged Property is
situated in the State of Michigan; and (b) the applicable taxing authority has
issued such bill to the Buyer or its designee at least thirty (30) days prior to
the end of each calendar year.
<PAGE>
ARTICLE 9.
CONDITIONS PRECEDENT TO THE BUYER'S OBLIGATIONS.
<PAGE>
The Buyer's obligations under this Agreement are subject to the satisfaction of
each of the following conditions:
9.1. INSPECTION AND VERIFICATION.
The Buyer has the opportunity to inspect and review the Seller's books, records,
accounts, quality control policies and procedures, and underwriting policies and
procedures relating to the Mortgage Loans and Pools at least fifteen (15) days
before the Agreement Date. Such books, records, accounts, quality control
policies and procedures, and underwriting policies must be satisfactory to the
Buyer.
9.2. CORRECT REPRESENTATIONS AND WARRANTIES.
Each of the Seller's representations and warranties under this Agreement is true
and correct as of the date of this Agreement, and remains true and correct as of
the Agreement Date and the Transfer Date.
9.3. SELLER COMPLIES WITH each OBLIGATION.
The Seller has complied with and performed each term, covenant, and condition of
this Agreement applicable to the Seller.
9.4. investor Approvals.
The Seller will, at its sole expense, obtain the approval of each Investor to
transfer the Servicing Rights from the Seller to the Buyer under this Agreement.
9.5. Corporate RESOLUTIONS.
The Seller will deliver to the Buyer before the Agreement Date a copy of the
Seller's corporate resolution approving the execution and delivery of this
Agreement and the consummation of the transactions contemplated by this
Agreement, together with such other officer's certificates, certificates of
incumbency and other evidences of corporate authority as the Buyer or its
counsel may reasonably request.
9.6. Legal opinion.
The Seller will provide an opinion of counsel to the Buyer as of the date of
this Agreement and the Agreement Date. Such opinion will be in form and
substance satisfactory to the Buyer and its counsel, and will provide that:
(a) The Seller is a Corporation, duly organized, validly existing, and in good
standing under the laws of the jurisdiction in which it was organized, and
has all requisite corporate power to enter into this Agreement and to
consummate the transactions contemplated by this Agreement;
(b) This Agreement has been duly authorized, executed, and delivered by the
Seller and, assuming the due authorization, execution, and delivery by the
Buyer, is a legally valid and binding obligation of the Seller enforceable
in accordance with its terms, except as such enforceability may be limited
by (i) applicable bankruptcy, reorganization, insolvency, moratorium, and
other laws affecting creditors' rights or debtors' obligations from time to
time in effect, and (ii) the availability of the remedy of specific
performance or injunctive relief or any other equitable remedy;
(c) To the knowledge of such counsel, with the exception of the lawsuits
identified on Exhibit E, there are no legal actions pending or threatened
that would or might affect the Servicing Rights or the Seller's ability to
transfer the same or to consummate the transactions contemplated by this
Agreement; and
(d) The Seller has the right and authority to transfer the Servicing Rights as
contemplated by this Agreement, subject to Investor approval, and, to the
knowledge of such counsel, no other entity has any right in or to the
Servicing Rights. There are no liens, claims, or encumbrances on the
Servicing Rights. The transfer, assignment, and delivery of the Servicing
Rights and of the Escrow Accounts in accordance with the terms of this
Agreement will vest in the Buyer all rights as Servicer free and clear of
any and all claims, charges, defenses, offsets, and encumbrances of any
kind or nature whatsoever.
Such opinion of counsel shall be prepared by the Seller, reasonably acceptable
to the Buyer, and set forth in Exhibit F to this Agreement.
9.7. UCC Releases.
The Seller will provide the Buyer with a release of each lien executed by a
secured party that has a lien on the Servicing Rights. Each release will
specify: (a) that each such lien has been terminated, (b) the name and address
of the debtor, (c) the name and address of the secured party, (d) the file
number of the financing statement, and (e) the funds necessary to release such
lien in all locations where the lien has been recorded.
9.8. Escrow AND CUSTODIAL ACCOUNTS.
The Buyer will receive a written confirmation of the Seller's wire transfer of
the Escrow Account and Custodial Account balances, suspense balances, and hazard
insurance loss draft balances in the manner described in Exhibit B to this
Agreement.
9.9. No Material Adverse Change.
There will not have been any material adverse change in the Seller or the
Servicer (financial or otherwise), the Servicing Rights, the Mortgage Loans, the
Escrow Accounts, or Seller's relationship with, or authority from, an Investor,
or the value or marketability of the Servicing Rights.
9.10. No Actions.
With the exception of the lawsuits identified on Exhibit E, there will not have
been commenced or threatened any action, suit, or proceeding against the Seller
that may materially or adversely affect the Servicing Rights, the Mortgage
Loans, the Escrow Accounts, and/or the transactions contemplated hereby.
9.11. GUARANTY.
This Agreement shall be guaranteed by NBD Bank under a guarantee agreement in
the form of Exhibit K.
9.12. signed fnma letter.
The Seller shall have received and provided to the Buyer a signed letter from
FNMA setting forth the relationships and liabilities of FNMA, the Seller, and
the Buyer with respect to the Rapid Reply Loans, the substance of which shall be
mutually acceptable to the Buyer and the Seller.
9.12. REGULATORY APPROVALS.
Each regulatory authorization, license, permit or third party consent that, in
the opinion of counsel for the Buyer, are necessary or appropriate for the
consummation of the transactions contemplated by this Agreement, shall have been
obtained without the imposition of any condition that would have a material
adverse effect or be unreasonably burdensome to the business or condition
(financial or otherwise) of the Buyer or any of its Affiliates, and any
applicable waiting period shall have expired or been terminated as of the
Agreement Date or the applicable Transfer Date, as applicable.
<PAGE>
ARTICLE 10.
CONDITIONS PRECEDENT TO THE SELLER'S OBLIGATIONS.
<PAGE>
The Seller's obligations under this Agreement are subject to the satisfaction of
each of the following conditions:
10.1. CORRECT REPRESENTATIONS AND WARRANTIES.
Each of the Buyer's representations and warranties under this Agreement is true
and correct and remains true and correct as of the Agreement Date and the
Transfer Date.
10.2. BUYER COMPLIES WITH each OBLIGATION.
The Buyer has complied with each term, covenant, and condition of this Agreement
applicable to the Buyer as of the Transfer Date.
<PAGE>
ARTICLE 11.
REPURCHASE AND INDEMNIFICATION.
<PAGE>
11.1 REASONS FOR REPURCHASE.
In addition to and not in lieu of the Buyer's rights to be indemnified by the
Seller under Section 11.5. below, the Seller shall repurchase a Mortgage Loan
(or the related Mortgaged Property if the Mortgage Loan has been foreclosed)
from the Buyer if any of the following occurs:
11.1.1. Investor Requires Buyer to Repurchase. An Investor requires the Buyer to
repurchase the Mortgage Loan from the Investor in connection with a fact or
circumstance pertaining to the period prior to the applicable Transfer Date.
11.1.2. Basis for Indemnification. There exists a basis to demand
indemnification under Section 11.5 below that materially and adversely affects
the value or marketability of the related Mortgage Loan or Servicing Rights.
11.2. Appeal and Cure Period.
11.2.1. Buyer Will Notify the Seller. If an Investor requires the Buyer to
repurchase any Mortgage Loan from the Investor in connection with a fact or
circumstance pertaining to the period prior to the applicable Transfer Date, the
Buyer will notify the Seller in writing of such repurchase requirement within
five (5) Business Days after receiving such repurchase requirement. The Buyer's
failure to give such notice to the Seller within such time period will not
relieve the Seller of its repurchase obligations unless such failure materially
and adversely prejudices the Seller's rights to appeal such repurchase to the
applicable Investor and the Seller provides the Buyer with satisfactory evidence
that the Seller would have been able to successfully appeal such repurchase but
for the Buyer's delay in providing such notice to the Seller.
11.2.2. Collection and Payment History. The Buyer will give the Seller a
collection and payment history for each such Mortgage Loan and other information
reasonably requested by the Seller to review the basis for such demand..
11.2.3. Seller's Appeal. The Seller may appeal to the Investor at its own
expense within a reasonable time, but not in excess of the time provided by the
Investor to the Buyer. If the Investor does not accept such appeal, Seller will
repurchase the Mortgage Loan within the time period set forth in Section 11.4
below.
11.3. Repurchase Price.
11.3.1. How Repurchase Price is Calculated. If the Seller repurchases a Mortgage
Loan from the Buyer, the Seller will pay to the Buyer an amount equal to:
(a) the unpaid principal balance of the Mortgage Loan as of the date of
repurchase or, in the case of a Mortgaged Property, the date of
foreclosure; PLUS
(b) accrued interest to the date of the repurchase of the Mortgage Loan by the
Seller from the Buyer, PLUS
(c) for the first five (5) years after the Transfer Date, an amount equal to
the Purchase Price Percentage multiplied by the then current unpaid
principal balance of the Mortgage Loan, PLUS
(d) any normal and reasonable costs and expenses incurred by the Buyer relating
to or arising out of such repurchase, including, but not limited to, any
and all out-of-pocket expenses, negative escrows, and Advances made on
behalf of an Investor.
11.3.2. Assign Loans to the Seller. With respect to each Mortgage Loan
repurchased by the Seller from the Buyer:
(a) the Buyer shall initiate electronic transmission to MERS identifying the
Seller as the owner of such Mortgage Loans after the Buyer has received such
payment described in Section 11.3.1 above from the Seller;
(b) the Seller shall participate in the MERS program to the extent necessary to
facilitate the re-Assignment of Mortgage Loans from the Buyer to the Seller
under the terms of this Article 11; and
(c) at the Seller's option, the Buyer shall service such Mortgage Loans on
behalf of the Seller under the terms of a Mortgage Loan Subservicing Agreement
to be entered into by and between the Buyer and the Seller.
11.4. timing for repurchases.
The Seller will complete each repurchase transaction for each Mortgage Loan that
the Seller is required to repurchase under this Agreement no later than ten (10)
Business Days after the Seller has received notice of such repurchase
requirement from the Buyer, or, in the event of an appeal under Section 11.2.3
above, no later than ten (10) Business Days after the applicable Investor does
not accept such appeal.
11.5. SELLER'S INDEMNIFICATION.
11.5.1. In General. The Seller shall indemnify the Indemnified Buyer Entities
and hold each of them harmless from and against, and shall assume liability for,
any and all Damages suffered, paid, or incurred by any Indemnified Buyer Entity
resulting from:
(a) Any misrepresentation made by the Seller in this Agreement or any initial
information provided to the Buyer;
(b) Any breach by the Seller of any of the Seller's representations or
warranties under this Agreement;
(c) Any act, or failure to act or perform any term, covenant, condition or
obligation of the Seller under this Agreement;
(d) Any and all losses incurred as a result of a VA No Bid in excess of
$100,000 in the aggregate, including, but not limited to, a VA Buydown in
lieu of such VA No-Bid, where, within two (2) years after the Agreement
Date the VA elects a No Bid a notifies the Buyer of such election, or the
Buyer makes a VA Buydown; provided that the Buyer, when commercially
reasonable, has mitigated its relevant Damages by using a VA Buydown;
(e) Damages relating to or arising out of any Recourse feature of any Mortgage
Loan or Servicing Rights;
(f) Any Investor demand for indemnification relating to an error or omission of
the Seller or Prior Originator;
(g) Damages relating to or arising out of any HUD Repo Loan or VA Repo Loan; or
(h) Damages of (x) $2,000 for each FHA Loan or VA Loan that is a Delinquent
Loan, and (y) $500 for each Conventional Loan that is a Delinquent Loan,
provided, however, that nothing in this subparagraph (h) shall affect in
any way the Buyer's right to indemnification under any other provision of
this Agreement.
11.5.2. Cumulative Remedy. The Buyer's indemnification rights under Section
11.5.1 above are in addition to and not in limitation of the Seller's repurchase
obligations in Article 5 above, any other of the Buyer's rights under this
Agreement, and any other remedies that may be available to the Buyer at law or
in equity.
11.5.3. Indemnification Procedure. The Seller's indemnification procedure shall
be as follows:
(a) Claim Notice. If an Indemnified Buyer Entity believes that a claim or other
circumstance exists that has given or may reasonably be expected to give
rise to a right of indemnification under this Section 11.5, the Indemnified
Buyer Entity shall promptly give a Claim Notice to the Seller. The Buyer's
failure to give a Claim Notice to the Seller will not relieve the Seller of
its obligation to indemnify the Indemnified Buyer Entity unless such
failure materially prejudices the Seller's rights or increases the Seller's
liability relating to the underlying claim. In such case, the Seller's
obligation to indemnify the Buyer will be reduced only by the amount that
the Seller actually has been damaged by the Indemnified Buyer Entity's
failure to provide the Claim Notice.
(b) Third Party Claims. If any claim by an Indemnified Buyer Entity relates to
a claim against the Indemnified Buyer Entity by a third party, the Seller
may elect at any time to negotiate a settlement of such claim or to defend
such claim at the Seller's own cost (subject to the last sentence of this
Section 11.5.3(b)) and with its own counsel. The Seller's counsel must be
satisfactory to the Indemnified Buyer Entity in its reasonable discretion.
If, within 30 days after an Indemnified Buyer Entity gives the Seller a
Claim Notice relating to a third party claim, the Seller (i) advises the
Indemnified Buyer Entity in writing that the Seller will not defend or
settle such claim, or (ii) fails to make such an election in writing, the
Indemnified Buyer Entity may defend, settle, or pay the claim. Until the
Seller makes an election under this Section 11.5.3(b), all of the
Indemnified Buyer Entity's reasonable costs relating to such claim will be
Damages to be indemnified by the Seller.
Each party shall give the other party such assistance as may reasonably be
requested to ensure the proper defense of such claim.
If the Seller elects to defend such claim, the Indemnified Buyer Entity may
at its own cost participate in such defense with the counsel of its choice.
Such counsel must be satisfactory to the Seller in its reasonable
discretion.
Notwithstanding the above, the Seller shall allow the Indemnified Buyer
Entity to assume part or all of such claim if the Indemnified Buyer Entity
reasonably believes such assumption is necessary to assure that (i) it may
enforce any Mortgage Loan or Servicing Rights, (ii) its method of
conducting its business is not materially impaired, (iii) its authority to
Service or originate mortgage loans is not materially impaired, or (iv) its
reputation, goodwill and/or financial condition are not materially
impaired.
Neither the Seller nor the Indemnified Buyer Entity is authorized to settle
or dispose of a claim of more than $5,000 without the other party's written
consent, which shall not be unreasonably withheld.
11.5.4. Allocation of Risk. For purposes of indemnification and repurchase under
Article 11 of this Agreement, the Seller's representations and warranties in
this Agreement shall be considered to have been made without any (a) exception
to such representations or warranties set forth in any disclosure by the Seller
to the Buyer; or (b) limitation or qualification as to materiality or knowledge
with respect to such representations and warranties. The Buyer and the Seller
intend that the Seller will indemnify and hold harmless each Indemnified Buyer
Entity from and against all Damages resulting from (a) the failure of any such
representation or warranty to be true, correct, and complete in any respect; or
(b) the Seller's failure to perform any covenant, agreement, or undertaking
under this Agreement. The Seller's indemnity shall remain in full force and
effect regardless of any of the Buyer's investigations, inquiries, or due
diligences relating to this Agreement.
11.6. BUYER'S INDEMNIFICATION.
11.6.1. In General. The Buyer shall indemnify the Indemnified Seller Entities
and hold each of them harmless from and against, and shall assume liability for,
any and all Damages suffered, paid, or incurred by any Indemnified Seller Entity
resulting from:
(a) Any breach by the Buyer of any of the Buyer's representations or warranties
under this Agreement;
(b) Any failure of the Buyer to service a Mortgage loan in accordance with
Applicable Requirements after the applicable Transfer Date; and/or
(c) Any breach by the Buyer of any covenant, obligation, or agreement under
this Agreement.
11.6.2. Cumulative Remedy. The Seller's indemnification rights under Section
11.6.1 above are in addition to and not in limitation of any other of the
Seller's rights under this Agreement, and any other remedies that may be
available to the Seller at law, or equity.
11.6.3. Indemnification Procedure. The Buyer's indemnification procedure shall
be as follows:
(a) Claim Notice. If an Indemnified Seller Entity believes that a claim or
other circumstance exists that has given or may reasonably be expected to
give rise to a right of indemnification under this Section 11.6, the
Indemnified Seller Entity shall promptly give a Claim Notice to the Buyer.
The Seller's failure to give a Claim Notice to the Buyer will not relieve
the Buyer of its obligation to indemnify the Indemnified Seller Entity
unless such failure materially prejudices the Buyer's rights or increases
the Buyer's liability relating to the underlying claim. In such case, the
Buyer's obligation to indemnify the Seller will be reduced only by the
amount that the Buyer actually has been damaged by the Indemnified Seller
Entity's failure to provide the Claim Notice.
(b) Third Party Claims. If any claim by an Indemnified Seller Entity relates to
a claim against the Indemnified Seller Entity by a third party, the Buyer
may elect at any time to negotiate a settlement of such claim or to defend
such claim at the Buyer's own cost (subject to the last sentence of this
Section 11.6.3(b)) and with its own counsel. The Buyer's counsel shall be
satisfactory to the Indemnified Seller Entity in its reasonable discretion.
If, within 30 days after an Indemnified Seller Entity gives the buyer a
Claim Notice relating to a third party claim, the Buyer (i) advises the
Indemnified Seller Entity in writing that the Buyer will not defend or
settle such claim, or (ii) fails to make such an election in writing, the
Indemnified Seller Entity may defend, settle, or pay the claim. Until the
Buyer makes an election under this Section 11.6.3(b), all of the
Indemnified Seller Entity's reasonable costs relating to such claim will be
Damages to be indemnified by the Buyer.
Each party shall give the other party such assistance as may reasonably be
requested to ensure the proper defense of such claim.
If the Buyer elects to defend such claim, the Indemnified Seller Entity may
at its own cost participate in such defense with the counsel of its choice.
Such counsel must be satisfactory to the Buyer in its reasonable
discretion.
Notwithstanding the above, the Buyer shall allow the Indemnified Seller
Entity to assume part or all of such claim if the Indemnified Seller Entity
reasonably believes such assumption is necessary to assure that (i) it may
enforce any Mortgage Loan or Servicing Rights, (ii) its method of
conducting its business is not materially impaired, (iii) its authority to
Service or originate mortgage loans is not materially impaired, or (iv) its
reputation, goodwill and/or financial condition are not materially
impaired.
Neither the Buyer nor the Indemnified Seller Entity is authorized to settle
or dispose of a claim of more than $5,000 without the other party's written
consent, which shall not be unreasonably withheld.
11.6.4. Allocation of Risk. For purposes of indemnification under Section 11.6
of this Agreement, the Buyer's representations and warranties in this Agreement
shall be considered to have been made without any limitation or qualification as
to materiality or knowledge with respect to such representations and warranties.
The Buyer and the Seller intend that the Buyer will indemnify and hold harmless
each Indemnified Seller Entity from and against all Damages resulting from (a)
the failure of any such representation or warranty to be true, correct, and
complete in any respect, or (b) the Buyer's failure to perform any covenant,
agreement, or undertaking under this Agreement.
<PAGE>
ARTICLE 12.
MISCELLANEOUS.
<PAGE>
BULK PURCHASE
12.1. NOTICES.
All notices, requests, demands, and other communications that are required or
permitted to be given under this Agreement will be in writing and will be deemed
to have been duly given if delivered personally, transmitted by facsimile (and
telephonically confirmed), mailed by registered or certified mail, return
receipt requested, postage paid, or sent by commercial overnight courier,
courier fees prepaid:
If to Buyer, to:
Mary E. St. George
First Vice President
HomeSide Lending, Inc.
7301 Baymeadows Way
Jacksonville, FL 32256
With a copy to:
Thomas A. Hajda
Deputy General Counsel
HomeSide Lending, Inc.
7301 Baymeadows Way
Jacksonville, FL 32256
If to Seller to:
Paul H. Swan
President
First Chicago NBD Mortgage Company
Bank One Center/Tower 14th Floor
Indianapolis, IN 46277
With a copy to:
Thomas J. Tate
General Counsel
First Chicago NBD Mortgage Company
Bank One Center/Tower 6th Floor
Indianapolis, IN 46277
or to such other address as the Buyer or the Seller will have specified in
writing to the other.
12.2. EXHIBITS PART OF THIS AGREEMENT.
The Exhibits are incorporated by reference into this Agreement, are made a part
of this Agreement, and will be binding on the Buyer and the Seller. The Exhibits
to this Agreement may not be amended or supplemented by the Buyer or the Seller
without the prior written agreement of the other party.
12.3. ATTORNEYS' FEES AND COSTS.
If it is determined in a judicial proceeding that either party has failed under
any provision of this Agreement, and if either party will employ attorneys or
incur other expenses for the enforcement, performance, or observance of the
terms of this Agreement, then said party, to the extent permitted by law, will
be reimbursed by the losing party, for reasonable attorneys' fees and other
out-of-pocket expenses.
12.4. BROKERS' FEES.
Each of the Buyer and the Seller represents and warrants to the other that it:
(a) has made no agreement to pay any agent, finder, broker, or any other
representative, any fee or commission in the nature of a finder's or
originator's fee arising out of or in connection with the subject matter of this
Agreement, except as they have otherwise disclosed in writing, and (b) is liable
for any and all such fees and commissions.
12.5. ASSIGNMENT AND DELEGATION.
No party may assign this Agreement to any other entity without the prior written
consent of the other party; provided, however, that the Buyer may assign and/or
delegate, in whole or in part, any of its rights under this Agreement to any of
its affiliates or subsidiaries without the prior written consent of the Seller.
12.6. AMENDMENT.
No amendment or modification to this Agreement will be valid unless executed in
writing by the Buyer and the Seller.
12.7. WAIVER.
No waiver of any right or obligation under this Agreement by any party on any
occasion will be deemed to operate as a waiver on any subsequent occasion.
12.8. PROVISIONS SEVERABLE.
If any provision of this Agreement will be held to be void or unenforceable by
any court of competent jurisdiction or any governmental regulatory agency, such
provision will be considered by all parties to be severed from this Agreement.
All remaining provisions of this Agreement will be considered by the parties to
remain in full force and effect.
12.9. GOVERNING LAW.
This Agreement is entered into in the State of Florida. Its construction and
rights, remedies, and obligations arising by, under, through, or on account of
it will be governed by the laws of the State of Florida excluding its conflict
of laws rules and will be deemed performable in the State of Florida.
12.10. NO AGENCY OR JOINT VENTURE CREATED.
This Agreement will not be deemed to constitute the Buyer and the Seller as
partners or joint venturers, nor will the Buyer or the Seller be deemed to
constitute the other as its agent, except as provided in Section 8.6.
12.11. SUCCESSORS.
This Agreement will inure to the benefit of and be binding upon the parties
hereto and their successors and assigns. Nothing in this Agreement expressed or
implied is intended to confer on any person other than the parties hereto and
their successors and assigns any rights, obligations, remedies, or liabilities.
12.12. SECTION HEADINGS.
Section headings are intended only to assist in the organization of this
Agreement and do not in any way limit or otherwise define the rights and
liabilities of the parties.
12.13. ENTIRE AGREEMENT.
This Agreement and the Exhibits to this Agreement constitute the entire
agreement between the parties and supersede all other prior communications and
understandings, written or oral, between the parties with respect to the subject
matter of this Agreement. There are no contemporaneous oral agreements.
12.14. COUNTERPARTS.
This Agreement may be executed in multiple counterparts, each of which will be
deemed an original. Regardless of the number of counterparts, the total will
constitute only one agreement.
12.15. right of setoff
The Buyer may withhold any amounts owed to the Seller, and may set off any funds
in the Buyer's possession against the Seller's outstanding obligations under
this Agreement. The Buyer may withhold such amounts and apply such funds without
demand on the Seller.
12.16. PLURALS AND GENDER.
In construing the words of this Agreement, plural constructions will include the
singular, and singular constructions will include the plural. No significance
will be attached to whether a pronoun is masculine, feminine, or neuter.
12.17. EXCLUDED AFFILIATE.
Notwithstanding the execution and performance of this Agreement, the Seller is
and shall remain (until such time as the Buyer and Seller may otherwise agree in
writing) an Excluded Affiliate under the terms of the Operating Agreement and
agreements relating to the Operating Agreement.
IN WITNESS WHEREOF, the Buyer and the Seller, as of the day first set forth
above, have caused their seals to be affixed on this instrument to be signed on
their behalf by their duly authorized officers.
<PAGE>
HOMESIDE LENDING, INC.
By: /s/ W. Blake Wilson
-------------------------------------
W. Blake Wilson
- ------------------------------------------
(Print Name)
Title: Executive Vice President
<PAGE>
FIRST CHICAGO NBD MORTGAGE COMPANY
By: /s/ Paul H. Swan
--------------------------------------
Paul H. Swan
- ------------------------------------------
(Print Name)
Title: President
----------------------------------
<PAGE>
LIST OF EXHIBITS
Exhibit A List of Mortgage Loans
Exhibit B Transfer Instructions
Exhibit C Servicing Rights Information (tape-to-tape)
Exhibit D Interim Servicing Agreement
Exhibit E Seller's Litigation
Exhibit F Seller's Opinion of Counsel
Exhibit G Acceptable Flood Service Providers
Exhibit H [This Exhibit Has Been Left Intentionally Blank.].
Exhibit I List of Private Investors
Exhibit J Float Benefit Calculation Methodology
Exhibit K Form of NBD Bank Guarantee
<PAGE>
EXHIBIT A
List of Mortgage Loans
<PAGE>
EXHIBIT B
Transfer Instructions
[To be provided]
<PAGE>
EXHIBIT D
INTERIM SERVICING AGREEMENT
Bulk Purchase
- --------------------------------------------------------------------------------
Seller Name:
Seller Address:
Type Of Business Entity:
Date of Agreement:
Seller Contact Person:
Phone No:
Fax No:
- --------------------------------------------------------------------------------
<PAGE>
This Interim Servicing Agreement is entered into as of the date shown above by
and between the Buyer and the Seller, and applies to any of the transactions
described below.
RECITALS.
1. The Buyer and the Seller have entered into a Mortgage Loan Servicing Purchase
and Sale Agreement dated the same date as this Interim Servicing Agreement (the
"Purchase and Sale Agreement") under which the Buyer will buy from the Seller
the Servicing Rights, as defined in the Purchase and Sale Agreement.
2. The Buyer desires that the Seller continue to perform the Servicing, as
defined in the Purchase and Sale Agreement, on behalf of Buyer during the
Interim Period, as defined below.
3. The Buyer and the Seller desire to set forth the manner in which the Seller
will provide the Servicing during the Interim Period.
IN CONSIDERATION of the mutual promises made in this Interim Servicing Agreement
and other good and valuable consideration, the receipt and sufficiency of which
are acknowledged, the Buyer and the Seller agree as follows:
<PAGE>
ARTICLE 1.
DEFINITIONS.
<PAGE>
The following capitalized terms shall have the meanings given to them below for
purposes of this Interim Servicing Agreement. Any capitalized term in this
Interim Servicing Agreement that is not defined below will have the meaning
given to it in the Purchase and Sale Agreement.
"Advances" means any amount required or authorized by the Applicable
Requirements to be advanced by the Seller for a Mortgage Loan to fund (a) P&I
shortfalls; (b) private mortgage insurance premiums, ground rents, taxes,
special assessments, hazard insurance premiums, flood insurance premiums, and
other Escrow Account shortfalls; (c) bankruptcy, foreclosure, and related costs;
(d) costs of preserving, inspecting, and/or repairing the Mortgaged Property;
(e) costs to convey the Mortgaged Property to an Investor or insurer; and (f)
costs relating to the Soldiers' and Sailors' Relief Act.
"Ancillary Fees" means charges for late Mortgage Loan Payments, charges for
dishonored checks, assumption fees, insurance commissions and administrative
fees, and similar charges collected from and assessed against the Mortgagors,
other than charges payable to an Investor under the applicable Guide or other
Investor agreement.
Custodial Account" means a deposit account held by the Seller in a depository
financial institution in which the Seller holds P&I and certain other funds due
to the Agencies.
"EDP" means the Seller's electronic data processing system.
"Float Benefit" means the net economic benefit resulting from prepayment
balances and balances held in the Custodial Accounts and Escrow Accounts to be
calculated using the methodology set forth in Exhibit J to this Agreement.
"Interim Period" means the period from and including the Agreement Date to but
not including the Transfer Date.
"Interim Servicing Agreement" means this Interim Servicing Agreement.
"Interim Servicing" means the Seller's performance of Servicing functions during
the Interim Period, including, but not limited to, (a) collecting and disbursing
funds held in Escrow Accounts to pay taxes, hazard insurance, flood insurance,
private mortgage insurance, and other items as they become due, (b) collecting
and processing Mortgage Loan Payments, (c) collecting and remitting P&I payments
from the Custodial Account to the Agencies, (d) recovering payments from,
handling foreclosures for, and otherwise resolving defaulted Mortgage Loans, (e)
providing delinquency notices to all applicable guarantors and/or insurers, (f)
preparing and forwarding all remittances due during the Interim Period and the
month during which the Transfer Date occurs, (g) preparing and submitting all
cutoff reports relating to the Interim Period and the month during which the
Transfer Date occurs, (h) causing to be maintained for each Mortgaged Property
any hazard insurance, flood insurance, private mortgage insurance, and any other
insurance policy required by the Applicable Requirements, (i) enforcing any due
on sale clause contained in the applicable Mortgage Note or Mortgage after
obtaining any applicable consents and, to the extent required by the Applicable
Requirements, entering into assumption agreements with a person to whom the
Mortgaged Property will be conveyed, (j) handling and settling losses resulting
from damage to any Mortgaged Property and making arrangements to restore such
Mortgaged Property from insurance proceeds, (k) preparing, executing, and
delivering all instruments of satisfaction, cancellation, partial or full
release, and all other such instruments required by the Applicable Requirements
in connection with the Mortgaged Property, (l) preparing and submitting claims
for insurance benefits payable by any insurer in a manner so as to maximize the
amount of such insurance benefits, (m) making any interest rate and payment
adjustments required by the Mortgage Note, Mortgage, and the Applicable
Requirements, (n) paying to Mortgagors any interest on Escrow Accounts required
by the Applicable Requirements, (n) submitting all required reports to the
Agencies under the terms of the applicable Guide, (o) providing to the Buyer
standard reports available under the EDP System after each Investor cutoff date,
including, but not limited to, the month during which the Transfer Date occurs,
(p) obtaining the Buyer's prior written consent before waiving or modifying the
terms of a Mortgage Loan except as permitted by the Mortgage Note, Mortgage, and
the applicable Guide, and (q) providing such other services as typically are
performed under the Guides and Applicable Requirements for residential mortgage
loans similar to the Mortgage Loans.
"Interim Servicing Fee" means the fee paid by the Buyer to the Seller for the
Interim Servicing under this Interim Servicing Agreement
"Losses" means any and all losses, claims, damages, penalties, liabilities,
obligations, judgments, settlements, awards, demands, offsets, defenses,
counterclaims, actions, or proceedings including, but not limited to, reasonable
attorneys' fees and expenses incurred by an indemnified party in enforcing its
indemnification rights.
"Purchase and Sale Agreement" has the meaning given to it above in the Recitals
to this Interim Servicing Agreement.
"Recoverable Advances" means those Advances that the Seller or Buyer reasonably
expects to recover from Mortgagors, Agencies, insurers, or otherwise.
"Unrecoverable Advances" means those Advances that the Seller does not
reasonably expect will be Recoverable Advances.
<PAGE>
ARTICLE 2.
THE INTERIM SERVICING.
<PAGE>
2.1. IN GENERAL.
The Seller will provide the Interim Servicing to the Buyer during the Interim
Period.
2.2. THE BUYER AUTHORIZES THE SELLER TO SERVICE THE MORTGAGE LOANS.
The Buyer grants to the Seller the right to exercise and enjoy all of the
Buyer's rights, powers, and privileges under the Investor Servicing Agreements
to provide the Interim Servicing, except as otherwise provided below.
2.3. WHEN THE SELLER WILL SERVICE THE MORTGAGE LOANS.
The Seller will provide the Interim Servicing to the Buyer during the Interim
Period.
2.4. Standard of Care.
The Seller will provide the Interim Servicing in accordance with the Applicable
Requirements and with at least the same standard of care that the Seller
exercises when servicing mortgage loans for the Seller's own account.
2.5. Interim Servicing Fee.
[CONFIDENTIAL TREATMENT REQUESTED]
2.6. SELLER WILL REMIT OTHER FEES TO THE BUYER.
2.6.1. Servicing Fees. Each month, the Seller shall remit to the Buyer all
Servicing Fees less the amount of: (a) the Interim Servicing Fee, and (b) any
guarantee fee due after the Agreement Date.
2.6.2. Ancillary Fees. The Buyer shall be entitled to all Ancillary Fees from
and after the Agreement Date.
2.6.3. Float Benefits. The Buyer shall be entitled to the Float Benefits.
2.6.4. When Fees Must Be Remitted to The Buyer. The Servicing Fees and other
fees described in Sections 2.6.1,2.6.2, and 2.6.3 above will be remitted by the
Seller to the Buyer no later than the tenth (10th) day of the month immediately
following the month during which the Seller collected such fees.
2.7. CASH FLOW REPORTS.
The Seller will give the Buyer a cash flow report that reconciles all Servicing
Fees and incidental fees collected by the Seller during each month of the
Interim Servicing Period. The Seller will give each such report to the Buyer no
later than the tenth (10th) day of the month immediately following the month
during which the Seller collected such fees.
2.8. INVESTOR NOTIFICATIONS.
The Seller will notify each Investor in writing that the Seller will service the
Mortgage Loans during the Interim Period. The Buyer authorizes each applicable
Investor to communicate with, issue instructions to, accept directives from, and
otherwise deal with the Seller in the manner and to the extent permitted under
the Applicable Requirements.
2.9. BUYER WILL PAY GUARANTEE FEES.
The Buyer will pay all guarantee fees to each applicable Investor after the
Agreement Date and during the Interim Period.
2.10. SELLER'S BOOKS AND RECORDS.
2.10.1. Seller will Maintain Books and Records. The Seller will create and
maintain during the Interim Period complete and accurate records relating to:
(a) each Mortgage Loan and its related collections, (b) each Pool, and (c) each
check paid to the appropriate person (investors, security holders, etc.) as
distribution of P&I collected which records are and shall be the property of
Buyer. .
2.10.2. Buyer May Review Books and Records. The Buyer may inspect and review the
Seller's books, records, accounts, Interim Servicing practices, policies and
procedures, and quality control policies and procedures during the Interim
Servicing Period. Such books, records, accounts, Interim Servicing practices,
policies and procedures, and quality control policies and procedures will be
satisfactory to the Buyer.
2.11. TRANSFER MORTGAGE DOCUMENTS AND PAYMENTS TO THE BUYER AFTER THE INTERIM
PERIOD.
At the end of the Interim Period, the Seller will: (a) deliver to the Buyer, in
accordance with the Transfer Instructions in Exhibit B to the Purchase and Sale
Agreement, all Mortgage Documents, Servicing Files, books, records, and any
other information or data relating to the Mortgage Loans and the Pools, and (b)
pay to the Buyer any Mortgage Loan payments, related collections received by the
Seller, remaining Escrow Account balances, and foreclosure balances due at the
end of the Interim Period.
2.12. LOSSES AND EXPENSES.
2.12.1 Buyer Responsible For Direct Costs and Losses. The Buyer shall be
responsible for all actual and direct out-of-pocket losses and costs directly
relating to the Servicing, including foreclosure and REO property losses and
interest shortfalls due to the timing of prepayments. However, the Seller shall
be responsible for any losses or costs caused by the Seller's failure to comply
with its obligations under this Interim Servicing Agreement and the Applicable
Requirements.
2.12.2. Seller Must Minimize Advances and Losses. The Seller shall minimize all
Advances and Losses and maximize reimbursements for Recoverable Advances.
2.12.3. Seller Responsible For Administrative Costs. The Seller shall be solely
responsible for direct and indirect general and administrative costs relating to
the Servicing, including, but not limited to, the Seller's personnel,
facilities, supplies, postage, EDP expenses, and litigation costs relating to
the manner in which the Seller generally performs Servicing.
2.13. INSURANCE.
The Seller shall maintain at all times during the term of this Interim Servicing
Agreement an error and omissions insurance policy and a fidelity bond complying
with Investor requirements.
<PAGE>
ARTICLE 3.
REPRESENTATIONS AND WARRANTIES.
<PAGE>
3.1. BUYER'S REPRESENTATIONS AND WARRANTIES.
The Buyer represents and warrants the following to the Seller:
3.1.1 Authority and Capacity. The execution, delivery and performance by the
Buyer of this Interim Servicing Agreement has been and will remain duly and
validly authorized by all necessary corporate action. This Interim Servicing
Agreement constitutes a legal, valid, and enforceable obligation of the Buyer.
3.2. SELLER'S REPRESENTATIONS AND WARRANTIES.
The Seller represents and warrants the following to the Buyer:
3.2.1 Authority and Capacity. The execution, delivery, and performance by the
Seller of this Interim Servicing Agreement has been and will remain duly and
validly authorized by all necessary corporate action. This Interim Servicing
Agreement constitutes a legal, valid, and enforceable obligation of the Seller.
3.2.2 Notice of Breach. The Seller will immediately notify the Buyer of any
failure or anticipated failure on its part to observe and perform any warranty,
representation, covenant, or agreement required to be observed and performed by
it as Servicer.
3.2.3 Licenses. The Seller has and will maintain all Investor approvals or
licenses required to be held by it to perform its obligations under this Interim
Servicing Agreement and the Purchase and Sale Agreement.
3.2.4 Assistance. The Seller shall cooperate with and assist the Buyer as
requested by Buyer, in carrying out Buyer's covenants, agreements, duties, and
responsibilities under the Sale Agreement and in connection therewith shall
execute and deliver all such papers, documents, and instruments as may be
necessary and appropriate in furtherance thereof.
<PAGE>
ARTICLE 4.
MISCELLANEOUS.
<PAGE>
BULK AGREEMENT
4.1. TERMINATION.
4.1.1. Termination For Cause. The Buyer may take the actions described below in
this Section 4.1.1 if: (a) an Investor temporarily or permanently suspends or
terminates the Seller's right to provide the Interim Servicing; (b) the Seller
breaches any of its obligations under this Interim Servicing Agreement or the
Purchase and Sale Agreement; or (c) there is a material adverse change in the
Seller's staff, management, financial condition, or otherwise.
If any of the events described above in this Section 4.1.1 occurs, the Buyer
may: (a) terminate this Interim Servicing Agreement immediately without paying
any termination fee or other compensation; (b) require the Seller to transfer
the Servicing Rights to the Buyer immediately; and (c) seek and recover from the
Seller any damages or losses suffered as a result of any such event. Nothing in
this Section 4.1.1 shall be deemed to limit the Seller's indemnification
obligations under the Purchase and Sale Agreement.
4.1.2. Termination When the Servicing Rights Are Transferred to the Buyer. This
Interim Servicing Agreement will terminate on the Transfer Date with respect to
the Servicing Rights that are transferred to the Buyer on such date.
4.2. INDEMNIFICATION.
4.2.1. Seller's Indemnification. The Seller shall indemnify and hold the
Indemnified Buyer Entities harmless from, and shall reimburse the Indemnified
Buyer Entities for, all Losses incurred by any of them, to the extent that the
Losses directly or indirectly result from the Seller's failure to observe and
perform any or all of the Seller's terms, covenants, agreements, warranties, or
representations contained in this Interim Servicing Agreement.
4.2.2. Buyer's Indemnification. The Buyer shall indemnify and hold the
Indemnified Seller Entities harmless from, and shall reimburse the Indemnified
Seller Entities for, all Losses incurred by any of them, to the extent that the
Losses directly or indirectly result from the Buyer's failure to observe and
perform any or all of the Buyer's terms, covenants, agreements, warranties, or
representations contained in this Interim Servicing Agreement
4.3. INSURANCE.
In addition to insurance that the Investor Servicing Agreements require the
Seller to maintain, the Seller shall also at its own expense maintain at all
times during the Interim Period policies of fidelity, theft, forgery, and errors
and omissions insuranceThe amounts and coverages of such policies shall comply
with Applicable Requirements. .
4.4. NOTICES.
All notices, requests, demands and other communications that are required or
permitted to be given under this Interim Servicing Agreement will be in writing
and will be deemed to have been duly given upon the delivery or mailing of such
notice, sent by registered or certified mail, return receipt requested, postage
paid to the persons identified in Section 12.1 of the Purchase and Sale
Agreement.
4.5. ASSIGNMENT AND DELEGATION.
No party may assign this Interim Servicing Agreement or delegate any of its
functions hereunder to any other party without the prior written consent of the
other party; provided, however, that the Buyer may assign and/or delegate, in
whole or in part, any of its rights under this Interim Servicing Agreement to
any of its affiliates or subsidiaries without the prior written consent of the
Seller.
4.6. AMENDMENT.
No amendment or modification to this Interim Servicing Agreement will be valid
unless executed in writing by the Buyer and the Seller.
4.7. WAIVER.
No waiver of any right or obligation under this Interim Servicing Agreement by
any party on any occasion will be deemed to operate as a waiver on any
subsequent occasion.
4.8. PROVISIONS SEVERABLE.
If any provision of this Interim Servicing Agreement will be held to be void or
unenforceable by any court of competent jurisdiction or any governmental
regulatory agency, such provision will be considered by all parties to be
severed from this Interim Servicing Agreement. All remaining provisions of this
Interim Servicing Agreement will be considered by the parties to remain in full
force and effect.
4.9. GOVERNING LAW.
This Interim Servicing Agreement is entered into in the state of Florida. Its
construction and rights, remedies, and obligations arising by, under, through,
or on account of it will be governed by the laws of the State of Florida
excluding its conflict of laws rules and will be deemed performable in the State
of Florida.
4.10. NO AGENCY OR JOINT VENTURE CREATED.
This Interim Servicing Agreement will not be deemed to constitute the Buyer and
the Seller as partners or joint venturers, nor will the Buyer or the Seller be
deemed to constitute the other as its agent.
4.11. SUCCESSORS.
This Interim Servicing Agreement will inure to the benefit of and be binding
upon the parties hereto and their successors and assigns. Nothing in this
Interim Servicing Agreement expressed or implied is intended to confer on any
person other than the parties hereto and their successors and assigns, any
rights, obligations, remedies, or liabilities.
4.12. SECTION HEADINGS.
Section headings are intended only to assist in the organization of this Interim
Servicing Agreement and do not in any way limit or otherwise define the rights
and liabilities of the parties.
4.13. ENTIRE AGREEMENT.
This Interim Servicing Agreement and the Purchase and Sale Agreement constitute
the entire agreement among the parties and supersede all other prior
communications and understandings, written or oral, among the parties with
respect to the subject matter of this Interim Servicing Agreement. There are no
contemporaneous oral agreements.
4.14. COUNTERPARTS.
This Interim Servicing Agreement may be executed in multiple counterparts, each
of which will be deemed an original. Regardless of the number of counterparts,
the total will constitute only one Interim Servicing Agreement.
4.15. PLURALS AND GENDER.
In construing the words of this Interim Servicing Agreement, plural
constructions will include the singular, and singular constructions will include
plural. No significance will be attached to whether a pronoun is masculine,
feminine, or neuter.
IN WITNESS WHEREOF, the Buyer and the Seller have duly caused this Interim
Servicing Agreement to be executed as of the date first written above by their
respective officers, each duly authorized.
<PAGE>
HOMESIDE LENDING, INC.
By:
(Print Name)
Title:
<PAGE>
FIRST CHICAGO NBD MORTGAGE COMPANY
By:
(Print Name)
Title:
<PAGE>
52
BULK PURCHASE
EXHIBIT E
Seller's Litigation
<PAGE>
EXHIBIT F
Seller's Opinion of Counsel
<PAGE>
EXHIBIT G
Acceptable Flood Service Providers
1. Flood Data Services, Inc.
2. Transamerica
3. GeoTrac
4. Flood Zones Inc (to the extent, and only to the extent, that the Seller
provides the Buyer with an electronic conversion file in a format mutually and
reasonably acceptable to the parties.
<PAGE>
EXHIBIT H
[This Exhibit Has Been Left Intetionally Blank]
<PAGE>
EXHIBIT J
1. Calculation of Float Benefit. Promptly after the end of each calendar month
during the Interim Period, the Float Benefit shall be calculated by the Seller
by multiplying the Average Daily Balance by the Average Monthly Float Interest
Rate.
o The "Average Daily Balance" means the sum of the actual balances in the
Custodial Accounts and the Escrow Accounts each day during a calendar month
DIVIDED by the actual number of days during such calendar month.
o The "Float Interest Rate" means LIBOR minus fifteen basis points (0.15%).
o The "Average Float Interest Rate" means the sum of the Float Interest Rate
each day during a calendar month DIVIDED by the actual number of days
during such calendar month.
o "LIBOR" shall mean the London Interbank Offered Rate for deposits in U.S.
dollars with maturities of thirty (30) days, as published in Bloomberg.
2. Verification. Concurrent with the remittance described in Section 2.6.4 of
Exhibit D to this Agreement, the Seller shall provide to the Buyer any and all
bank deposit account statements relating to the Custodial Accounts and the
Escrow Accounts that evidence the actual daily balances therein.
Exhibit K
GUARANTY
To induce Homeside Lending, Inc. ("Homeside") to enter into the
purchase of approximately $10.9 Billion of residential mortgage loan servicing
rights ("Servicing Rights") from First Chicago NBD Mortgage Company (such
company and any successors, "FCNBD") the undersigned, NBD Bank, a Michigan
banking corporation, whose principal place of business of 611 Woodward Avenue,
Detroit, Michigan, ("Guarantor") has determined that executing this guaranty is
in its interest and to its financial benefit. Therefore, Guarantor hereby
guaranties to Homeside all obligations of FCNBD under the Agreement, including
but not limited to the prompt payment of all monetary liabilities of FCNBD and
its successors under the terms of the Mortgage Loan Servicing Purchase and Sale
Agreement dated March 3, 1999 (the "Agreement"). The Guarantor will not only
pay the liabilities of FCNBD, but will also reimburse Homeside for any expenses,
including reasonable attorneys' fees, that Homeside may pay in collecting from
the Guarantor. For purposes of this guaranty, monetary liabilities shall mean
those liabilities of FCNBD arising under the Agreement that may be expressed as
a U.S. Dollar amount due and owing Homeside including but not limited to,
FCNBD's indemnification and repurchase obligations under the Agreement.
Homeside shall first make any demand upon FCNBD for repurchase or
indemnification or to enforce any other rights under the Agreement against
FCNBD; however, if Homeside's demand is not met within thirty days of its
dispatch by Homeside, Homeside may pursue Guarantor in addition to FCNBD in any
way or using any method that would be appropriate under the Agreement to pursue
FCNBD without any requirement to obtain any interim or final judgment or any
order, declaration or injunction against FCNBD. Other than as set forth in
preceding sentence, Guarantor waives (a) any right to require Homeside to
proceed against FCNBD, to proceed against or exhaust any security held from
FCNBD, or to pursue any other remedy in Homeside's power whatsoever, (b) any
defense arising by reason of any disability of FCNBD; or (c) all presentments,
demands, for performance, notice of nonperformance, protests, notices of
protest, notices of dishonor. Notwithstanding the foregoing, Homeside may
proceed to enforce its rights against Guarantor immediately if FCNBD is
insolvent, subject to a proceeding in bankruptcy, subject to a receiver, or any
proceeding has been brought by or against it for receivership, reorganization,
extension, liquidation or dissolution, or if FCNBD has ceased to exist.
The Guarantor waives any right it has to receive notice of the
following matters before Homeside enforces any of its rights; (a) Homeside's
acceptance of this guaranty, (b) FCNBD's default, (c) any demand, or (d) any
action that Homeside takes regarding FCNBD or anyone else to which it is
entitled to by law or under any other agreement. HomeSide may waive or delay
enforcing any of its rights without losing them. No modification or waiver of
this guaranty is effective unless it is in writing and signed by the party
against whom it is being enforced.
This guaranty is governed by Michigan law.
Date: March 3, 1999
NBD BANK
Guarantor
By: /s/Paul H. Swan
Paul H. Swan
Senior Vice President
FIRST AMENDMENT TO
MORTGAGE LOAN SERVICING PURCHASE AND SALE AGREEMENT
- --------------------------------------------------------------------------------
First Chicago NBD Mortgage Company, 900 Tower Drive, Troy, Michigan 48008
Date of Amendment: March 31, 1999 Seller Contact Person: Brad Connor
Phone No: (317) 321-8403
Fax No: (317) 321-8468
- --------------------------------------------------------------------------------
<PAGE>
This First Amendment to the Mortgage Loan Servicing Purchase and Sale Agreement
(the "Amendment") is entered into as of the date set forth above by and between
HomeSide Lending, Inc. (the "Buyer") and First Chicago NBD Mortgage Company (the
"Seller").
RECITALS
1. The Buyer and the Seller entered into a Mortgage Loan Servicing Purchase
and Sale Agreement dated as of February 26, 1999 (the "Bulk Purchase
Agreement") under which the Buyer agreed to acquire from the Seller
approximately ten billion dollars ($10,000,000,000) of certain residential
mortgage loan servicing rights.
2. The Seller desires to sell to the Buyer, and the Buyer desires to purchase
from the Seller, additional residential mortgage loan servicing rights in
an amount equal to approximately two and one-half billion dollars
($2,500,000,000) and identified by the Seller as "Group 1" in the
electronic tape delivered by the Seller to Cohane Rafferty Securities, Inc.
on November 30, 1998 (the "Tape"), and as more particularly described in
Schedule 1 to this Amendment, all in the manner described below.
3. The Buyer and the Seller desire to set forth their understanding on any
reduction to the Purchase Price Percentages relating to the various Buckets
of Mortgage Loans caused by any adverse change in the value of the
Servicing Rights resulting from incorrect information set forth in the
Tape.
4. Capitalized terms used in this Amendment and not otherwise defined herein
shall have the same meanings given to them in the Bulk Purchase Agreement.
IN CONSIDERATION of the mutual promises made in this Amendment and other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
1. AMENDMENTS.
The parties hereby amend the Bulk Purchase Agreement as follows:
(a) Definitions. Article 1 to the Bulk Purchase Agreement is amended by adding
the following definitions.
"Agreement Date means after the close of business on February 26, 1999,
with respect to Buckets 1, 2, and 3, and after the close of business on
March 31, 1999 with respect to Bucket 4."
"Bucket 4 means the Mortgage Loans identified as "Bucket 4" in Exhibit A to
this Agreement."
"Tape means the electronic tape delivered by the Seller to Cohane Rafferty
Securities, Inc. on November 30, 1998."
(b) Calculating the Purchase Price For New Bucket 4. Section 2.2 of the Bulk
Purchase Agreement is amended by adding the following new subparagraph (d):
[CONFIDENTIAL TREATMENT REQUESTED]
(c) Data Integrity Issues. Section 2.2 is further amended by adding the
following new language at the end thereof:
"The Seller acknowledges that the information set forth in the Tape was
intended to designate all Mortgage Loans contained within a single Pool to
either be (a) entirely subserviced by the Buyer under the terms of a
Subservicing Agreement to be entered into by and between the Buyer and the
Seller; or (b) entirely the subject of Servicing Rights to be purchased by
the Buyer under the terms of this Agreement.
The Seller further acknowledges that the information in the Tape incorrectly
included (a) certain Mortgage Loans within a single Pool to be subserviced by
the Buyer under such Subservicing Agreement; and (b) certain other Mortgage
Loans within such single Pool to be purchased by the Buyer under the terms of
this Agreement.
If, after reviewing the corrected data in the Tape and determining which
Mortgage Loans shall be correctly included within each Bucket, the Buyer
determines that the value of the Servicing Rights relating to such Mortgage
Loans has been adversely affected, the Purchase Price Percentage(s) set forth
in this Section 2.2 that have been so adversely affected shall be reduced by
the Buyer to reflect the reduction in such value."
(d) Exhibit A. Exhibit A to the Bulk Purchase Agreement is amended by adding the
following description of the Bucket 4 Mortgage Loans attached hereto as Schedule
1.
2. EFFECTIVE DATE OF AMENDMENT.
This Amendment shall be effective as of the date set forth above.
3. No Further Amendments.
Except as expressly modified and amended by this Amendment, the Bulk Purchase
Agreement shall continue in full force and effect.
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this
Amendment as of the day and year first above written.
<PAGE>
HOMESIDE LENDING, INC.
By: /s/ W. Blake Wilson
------------------------------
W. Blake Wilson
- ---------------------------------
(Print Name)
Executive Vice President
- ---------------------------------
(Print Title)
<PAGE>
FIRST CHICAGO NBD MORTGAGE COMPANY
By: /s/ Paul H. Swan
--------------------------------
Paul H. Swan
- -----------------------------------
(Print Name)
President
(Print Title)
HOMESIDE LENDING, INC.
EXHIBIT 12 - COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES
(Dollar amounts in thousands)
The following table sets forth the ratio of earnings to fixed charges of
HomeSide Lending, Inc. for the three and six month periods ended March 31, 1999,
the period from February 10, 1998 to March 31, 1998, and the predecessor period
from September 1, 1997 to February 10, 1998. The ratio of earnings to fixed
charges is computed by dividing net fixed charges (interest expense on all debt
plus the interest portion of rent expense) into earnings before income taxes and
fixed charges.
<TABLE>
<CAPTION>
Predecessor
For the Three For the Period For the Six For the Period For the Period From
Months Ended February 10, 1998 Months Ended February 10, 1998 September 1,1997 To
March 31, 1999 To March 31, 1998 March 31, 1999 To March 31, 1998 February 10, 1998
-------------- ----------------- -------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Earnings before income taxes $33,767 $14,408 $64,892 $14,408 $66,699
--------------- ----------------- --------------- ----------------- ---------------
Interest expense 32,582 13,629 62,301 13,629 43,897
Interest portion of rental
expense 714 596 1,375 596 740
--------------- ----------------- --------------- ----------------- ---------------
Fixed charges 33,296 14,225 63,676 14,225 44,637
--------------- ----------------- --------------- ----------------- ---------------
Earnings before fixed charges 67,063 28,633 128,568 28,633 111,336
--------------- ----------------- --------------- ----------------- ---------------
Fixed Charges:
Interest expense 32,582 13,629 62,301 13,629 43,897
Interest portion of rental
expense 714 596 1,375 596 740
--------------- ----------------- --------------- ----------------- ---------------
Fixed charges $33,296 $14,225 $63,676 $14,225 $44,637
--------------- ----------------- --------------- ----------------- ---------------
Ratio of earnings to fixed
charges $2.01 $2.01 $2.02 $2.01 $2.49
=============== ================= =============== ================= ===============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 56,089
<SECURITIES> 0
<RECEIVABLES> 227,800
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,587,008
<PP&E> 54,578
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,205,216
<CURRENT-LIABILITIES> 3,668,845
<BONDS> 1,185,287
0
0
<COMMON> 0
<OTHER-SE> 1,351,084
<TOTAL-LIABILITY-AND-EQUITY> 6,205,216
<SALES> 0
<TOTAL-REVENUES> 107,624
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 73,857
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 33,767
<INCOME-TAX> 16,580
<INCOME-CONTINUING> 17,187
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,187
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
