<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 2000
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
------------ ------------
Commission file number: 001-13417
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 13-3950486
(State or other Jurisdiction of ( I.R.S. Employer Identification No.)
Incorporation or Organization)
90 WEST STREET, SUITE 2210, NEW YORK, NY 10006
(Address of principal executive offices) (Zip Code)
(212) 732-5086
(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 [ ]
The registrant had 5,748,924 shares of common stock outstanding as
of April 21, 2000.
<PAGE> 2
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
FORM 10-Q
For the Quarter Ended March 31, 2000
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of March
31, 2000 and December 31, 1999 3
Consolidated Statements of Operations
for the Three Months Ended March 31, 2000 and 1999 4
Consolidated Statement of Stockholders'
Equity for the Three Months Ended March 31, 2000 5
Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 27
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 40
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 44
Item 2. Changes in Securities 44
Item 3. Defaults Upon Senior Securities 44
Item 4. Submission of Matters to a Vote of Security Holders 44
Item 5. Other Information 44
Item 6. Exhibits and Reports on Form 8-K 44
Signatures 45
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except as noted)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 2000 1999
--------- ------------
(unaudited)
<S> <C> <C>
Mortgage loans:
Held for sale $ 354 $ 251
Collateral for CMOs 256,698 269,833
Mortgage securities:
Available for sale 46,527 48,529
Held to maturity 8,175 8,238
Trading 6,101 5,919
Cash and cash equivalents 1,118 18,022
Accrued interest receivable 2,731 2,926
Equity investments
Hanover Capital Partners Ltd. 1,652 1,466
Hanover Capital Partners 2, Inc. -- --
HanoverTrade.com, Inc. (54) (30)
Notes receivable from related parties 8,775 8,187
Due from related parties 351 232
Other receivables 84 151
Prepaid expenses and other assets 2,177 1,910
--------- ---------
TOTAL ASSETS $ 334,689 $ 365,634
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Reverse repurchase agreements $ 38,338 $ 55,722
CMO borrowing 242,158 254,963
Accrued interest payable 1,991 2,433
Dividends payable -- 583
Due to related party 33 88
Accrued expenses and other liabilities 1,386 1,339
--------- ---------
TOTAL LIABILITIES 283,906 315,128
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01
authorized, 10 million shares, issued
and outstanding, -0- shares -- --
Common stock, par value $.01
authorized, 90 million shares, 5,748,924 and
5,826,899 shares outstanding at March 31, 2000
and December 31, 1999, respectively 58 58
Additional paid-in-capital 75,590 75,840
Retained earnings (deficit) (24,806) (25,496)
Accumulated other comprehensive (loss) income (59) 104
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 50,783 50,506
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 334,689 $ 365,634
========= =========
</TABLE>
See notes to consolidated financial statements
3
<PAGE> 4
HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
THREE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
<S> <C> <C>
REVENUES:
Interest income $ 6,674 $ 8,414
Interest expense 5,190 6,363
------- -------
Net interest income 1,484 2,051
Loan loss provision 103 119
------- -------
Net interest income
after loan loss provision 1,381 1,932
Gain on sale of servicing rights -- 342
Gain on sale of mortgage assets -- 163
Gain on mark to market of mortgage
securities, net of associated hedge 199 --
------- -------
Total revenue 1,580 2,437
EXPENSES:
Personnel 357 190
Management and administrative 222 194
Due diligence -- 63
Legal and professional 193 224
Financing/commitment fees 63 76
Other 145 78
------- -------
Total expenses 980 825
------- -------
Operating income 600 1,612
Equity in income/(loss) of unconsolidated
subsidiaries
Hanover Capital Partners Ltd. 114 (408)
Hanover Capital Partners 2, Inc. -- (468)
HanoverTrade.com, Inc. (24) --
------- -------
NET INCOME $ 690 $ 736
======= =======
BASIC EARNINGS PER SHARE $ 0.12 $ 0.12
======= =======
DILUTED EARNINGS PER SHARE $ 0.12 $ 0.11
======= =======
</TABLE>
See notes to consolidated financial statements
4
<PAGE> 5
HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2000
(in thousands except share data)
(unaudited)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL RETAINED OTHER
------------------ PAID-IN COMPREHENSIVE EARNINGS COMPREHENSIVE
SHARES AMOUNT CAPITAL INCOME (LOSS) (DEFICIT) INCOME TOTAL
--------- ------ ---------- ------------- --------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999 5,826,899 $ 58 $ 75,840 $(25,496) $ 104 $ 50,506
Repurchase of common stock (77,975) (250) (250)
Comprehensive income:
Net income $ 690 690 690
Other comprehensive (loss):
Change in net unrealized
gain (loss) on securities
available for sale (236) (236) (236)
Equity in other
comprehensive income
of unconsolidated 73 73 73
subsidiary --------
Comprehensive income: $ 527
========
--------- ------ -------- --------- -------- --------
Balance, March 31, 2000 5,748,924 $ 58 $ 75,590 $ (24,806) $ (59) $ 50,783
========= ====== ======== ========= ======== ========
</TABLE>
See notes to consolidated financial statements
5
<PAGE> 6
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
THREE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 690 $ 736
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Amortization of net premium and deferred costs 266 747
Loan loss provision 103 119
(Gain) on sale of servicing rights -- (342)
(Gain) on sale of mortgage assets -- (163)
(Gain) on mark to market of mortgage assets, net of
associated hedge (199) --
Equity in (income) loss of unconsolidated subsidiaries (90) 876
Decrease in accrued interest receivable 195 444
(Increase) decrease in loans to related parties (588) 167
(Increase) in due from related parties (119) (13)
Decrease in other receivables 67 493
(Increase) decrease in prepaid expenses and other assets (267) 77
Increase (decrease) in accrued interest payable (442) 477
Increase in deferred income -- 591
Increase (decrease) in due to related party (55) 7
Increase in accrued expenses and other liabilities 47 76
--------- ---------
Net cash (used in) provided by operating activities (392) 4,292
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in mortgage loans (103) 45,274
Principal payments received on mortgage securities 1,674 4,177
Principal payments received on collateral for CMOs 12,940 10,777
Proceeds from sale of mortgage securities -- 2,249
Proceeds from sale of mortgage servicing -- 190
--------- ---------
Net cash provided by investing activities 14,511 62,667
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayment of) reverse repurchase agreement (17,385) (176,681)
Net borrowing from CMOs -- 130,095
Principal payments on CMOs (12,805) (8,539)
Repurchase of common stock (250) (982)
Payment of dividends (583) (695)
--------- ---------
Net cash (used in) financing activities (31,023) (56,802)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (16,904) 10,157
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 18,022 11,837
--------- ---------
CASH AND EQUIVALENTS, END OF PERIOD $ 1,118 $ 21,994
========= =========
SUPPLEMENTAL SCHEDULE OF NON CASH ACTIVITIES
Cash paid during the period for:
Income taxes: $ 4 $ 1
========= =========
Interest $ 1,067 $ 5,886
========= =========
</TABLE>
See notes to consolidated financial statements
6
<PAGE> 7
HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
GENERAL
Hanover Capital Mortgage Holdings, Inc. ("Hanover") was incorporated in Maryland
on June 10, 1997. Hanover is a real estate investment trust ("REIT"), formed to
operate as a specialty finance company. The principal business strategy of
Hanover and its wholly-owned subsidiaries, (together referred to as the
"Company") is to (i) acquire primarily single-family mortgage loans that are at
least twelve months old or that were intended to be of certain credit quality
but that do not meet the originally intended market parameters due to errors or
credit deterioration, (ii) securitize the mortgage loans and retain interests
therein and (iii) acquire subordinated mortgage securities similar in nature to
the retained interests generated from internal securitizations. The principal
business strategy of the Company's primary unconsolidated subsidiary, Hanover
Capital Partners Ltd. ("HCP"), is to generate consulting and other fee income by
(i) performing loan file due diligence reviews for third parties, (ii)
performing loan sale advisory services, and (iii) brokering and trading
portfolios of loans. Prior to June 30, 1999, HCP's wholly owned subsidiary,
Hanover Capital Mortgage Corporation ("HCMC") originated multifamily and
commercial loans and substantially all charges associated with its
discontinuance were recognized in the quarter ended June 30, 1999. The Company's
principal business objective is to generate net interest income on its portfolio
of mortgage loans and mortgage securities, and to generate fee income through
HCP. The Company acquires single-family mortgage loans through a network of
sales representatives targeting financial institutions throughout the United
States.
CAPITALIZATION
In September 1997, Hanover raised net proceeds of approximately $79 million in
its initial public offering (the "IPO"). In the IPO, Hanover sold 5,750,000
units (each unit consisting of one share of common stock, par value $.01 and one
stock warrant) at $15.00 per unit including 750,000 units sold pursuant to the
underwriters' over-allotment option, which was exercised in full. Each warrant,
as adjusted on January 1, 1999, entitles the holder to purchase 1.0302 shares of
common stock at the adjusted price of $14.56 per share of common stock. The
warrants became exercisable on March 19, 1998 and expire on September 15, 2000.
The Company utilized substantially all of the net proceeds of the IPO to fund
leveraged purchases of mortgage loans and mortgage backed securities ("MBS"). As
of March 31, 2000, there were 6,217,877 warrants outstanding, including 172,500
warrants issued pursuant to the underwriters over-allotment option.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Hanover Capital
Mortgage Holdings, Inc. and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
7
<PAGE> 8
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
by the management of the Company on the accrual basis in accordance with
generally accepted accounting principles ("GAAP") for interim financial
information and in conformity with the rules and regulations of the Securities
and Exchange Commission. 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. The results of operations for the three months ended March
31, 2000 are not necessarily indicative of the results that may be expected for
the full year. For further information, refer to the audited financial
statements and footnotes included in the Company's 1999 Form 10-K.
USE OF ESTIMATES; RISKS AND UNCERTAINTIES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The Company's estimates and
assumptions primarily arise from risks and uncertainties associated with
interest rate volatility, credit exposure and regulatory changes. Although
management is not currently aware of any factors that would significantly change
its estimates and assumptions in the near term, future changes in market trends
and conditions may occur which could cause actual results to differ materially.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, overnight investments deposited
with banks and government securities with maturities less than 30 days.
MORTGAGE LOANS
The Company's policy is to classify each of its mortgage loans as held for sale
as they are purchased and each asset is monitored for a period of time,
generally four to nine months, prior to making a determination as to whether the
asset will be classified as held to maturity. Mortgage loans that are
securitized in a collateralized mortgage obligation ("CMO") are classified as
collateral for CMOs as of the closing date of the CMO. All mortgage loans
designated as held for sale are reported at the lower of cost or market, with
unrealized losses reported as a charge to earnings in the current period.
Mortgage loans designated as held to maturity and CMO collateral are reported at
the lower of the original cost of the mortgaged loans or the market value of the
mortgage loans as of the date they were designated as CMO collateral or held to
maturity.
Premiums, discounts and certain deferred costs associated with the purchase of
mortgage loans are amortized into interest income over the lives of the mortgage
loans using the effective yield method adjusted for the effects of estimated
prepayments. Mortgage loan transactions are recorded on the date the mortgage
loans are purchased or sold. Purchases of new mortgage loans are recorded when
all significant uncertainties regarding the characteristics of the mortgage
loans are removed, generally on or shortly before settlement date. Realized
gains and losses on mortgage loan transactions are determined on the specific
identification basis.
8
<PAGE> 9
The accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest income is
reversed. Interest income is subsequently recognized only to the extent cash
payments are received.
The Company has limited its exposure to credit losses on its portfolio of
mortgage loans by performing an in-depth due diligence on every loan purchased.
The due diligence encompasses the borrower's credit, the enforceability of the
documents, and the value of the mortgage property. In addition, many mortgage
loans are guaranteed by an agency of the federal government or private mortgage
insurance. The Company monitors the delinquencies and losses on the underlying
mortgages and makes a provision for known losses as well as unidentified
potential losses in its mortgage loan portfolio if the impairment is deemed to
be other than temporary. The provision is based on management's assessment of
numerous factors affecting its portfolio of mortgage loans including, but not
limited to, current and projected economic conditions, delinquency status,
losses to date on mortgages and remaining credit protection.
MORTGAGE SECURITIES
The Company's policy is to generally classify mortgage securities as available
for sale as they are acquired. Each available for sale mortgage security is
monitored for a period of time prior to making a determination whether the asset
will be classified as held to maturity or trading. Management reevaluates the
classification of the mortgage securities on a quarterly basis.
Mortgage securities designated as available for sale are reported at fair value,
with unrealized gains and losses excluded from earnings and reported as a
separate component of stockholders' equity.
Mortgage securities designated as trading are reported at fair value. Gains and
losses resulting from changes in fair value are recorded as income or expense
and included in earnings.
Mortgage securities classified as held to maturity are carried at the fair value
of the security at the time the designation is made. Any fair value adjustment
is reflected as a separate component of stockholders' equity and as a cost
adjustment of the mortgage security as of the date of the classification and is
amortized into interest income as a yield adjustment.
The Company makes periodic evaluations of all mortgage securities to determine
whether an other than temporary impairment is considered to have occurred. If a
decline in the fair value is judged to be other than temporary, the cost basis
of the mortgage security will be marked to fair value, resulting in a current
period loss in the consolidated statement of operations. The new cost basis
shall not be changed for further increases in market value; however, further
increases in market value will be reflected separately in the equity section of
the Company's balance sheet.
Premiums, discounts and certain deferred costs associated with the acquisition
of mortgage securities are amortized into interest income over the lives of the
securities using the effective yield method adjusted for the effects of
estimated prepayments. Mortgage securities transactions are recorded on the date
the mortgage securities are purchased or sold. Purchases of new issue mortgage
securities are recorded when all significant uncertainties regarding the
characteristics of the mortgage securities are removed, generally on or shortly
before settlement date. Realized gains and losses on mortgage securities
transactions are determined on the specific identification basis.
The Company purchases both investment grade and below investment grade mortgage
backed securities. Below investment grade MBS have the potential to absorb
credit losses caused by delinquencies and defaults on the underlying mortgage
loans. When purchasing below investment grade MBS, the
9
<PAGE> 10
Company leverages HCP's due diligence operations and management's substantial
mortgage credit expertise to make a thorough evaluation of the underlying
mortgage loan collateral. The Company monitors the delinquencies and defaults on
the underlying mortgages of its mortgage securities and, if an impairment is
deemed to be other than temporary, makes a provision for known losses as well as
unidentified potential losses. The provision is based on management's assessment
of numerous factors affecting its portfolio of mortgage securities including,
but not limited to, current and projected economic conditions, delinquency
status, credit losses to date on underlying mortgages and remaining credit
protection. The provision is made by reducing the cost basis of the individual
security and the amount of such write-down is recorded as a realized loss,
thereby reducing earnings. Provisions for credit losses do not reduce taxable
income and therefore do not affect the dividends paid by the Company to
stockholders in the period the provisions are taken. Actual losses realized by
the Company reduce taxable income in the period the actual loss is realized and
may affect the dividends paid to stockholders for that tax year.
EQUITY INVESTMENTS
Hanover records its investment in Hanover Capital Partners Ltd. ("HCP"), Hanover
Capital Partners 2, Inc. ("HCP-2"), and HanoverTrade.com, Inc. ("HTC") on the
equity method. Accordingly, Hanover records 97% of the earnings or losses of HCP
and HTC, and, until September 30, 1999, 99% of the earnings or losses of HCP-2
through its ownership of all of the non-voting preferred stock of HCP, HTC and
HCP-2, respectively. After writing off its investment in HCP-2 in September,
1999, Hanover stopped recording earnings or losses of HCP-2. Hanover believes
that HCP-2 has no value.
Hanover generally has no right to control the affairs of HCP, HCP-2 or HTC
because Hanover's investment in those companies is based solely on ownership of
non-voting preferred stock. Even though Hanover has no right to control the
affairs of these companies, management believes that Hanover has the ability to
exert significant influence over these companies and therefore these investments
are accounted for on the equity method.
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements are accounted for as collateralized financing
transactions and recorded at their contractual amounts, plus accrued interest.
FINANCIAL INSTRUMENTS
The Company from time to time enters into interest rate hedge mechanisms
(forward sales of Agency mortgage securities) to manage its exposure to market
pricing changes in connection with the purchase, holding of, securitization and
sale of its mortgage loan and mortgage securities portfolio. The Company
generally closes out the hedge position to coincide with the related sale or
securitization transactions. Gains and losses on mortgage loan hedge positions
are either (i) deferred as an adjustment to the carrying value of the related
loans until the loan has been funded and securitized, after which the gains or
losses will be amortized into income over the remaining life of the loan using a
method that approximates the effective yield method, or (ii) deferred until such
time as the related loans are sold. Gains or losses on hedge positions
associated with mortgage securities held in a trading account are recognized as
income or loss in each period.
The Company also enters into interest rate caps to manage its interest rate
exposure on certain reverse repurchase agreement and CMO financing. The cost of
the interest rate caps is amortized over the life of the interest rate cap and
is reflected as a portion of interest expense in the consolidated statement of
operations. Any payments received under the interest rate cap agreements are
recorded as a reduction of interest expense on the reverse repurchase agreement
financing.
10
<PAGE> 11
For derivative financial instruments designated as hedge instruments, the
Company periodically evaluates the effectiveness of these hedges against the
financial instrument being hedged under various interest rate scenarios. The
Company utilized hedge deferral accounting procedures in accounting for its
hedging program so long as there is adequate correlation between the hedged
results and the change in value of the hedged financial instrument. If the hedge
instrument performance does not result in adequate correlation between the
changes in value of the hedge instrument and the related hedged financial
instrument, the Company will terminate hedge deferral accounting and mark the
carrying value of the hedge instrument to market. If a hedge instrument is sold
or matures, or the criteria that was anticipated at the time the hedge
instrument was entered into no longer exists, the hedge instrument is no longer
accounted for as a hedge. Under these circumstances, the accumulated change in
the market value of the hedge is recognized in current period income or loss to
the extent that the effects of interest rate or price changes of the hedged item
have not offset the hedged results.
INCOME TAXES
Hanover has elected to be taxed as a real estate investment trust ("REIT") and
intends to comply with the provisions of the Internal Revenue Code of 1986, as
amended (the "Code") with respect thereto. Accordingly, Hanover will not be
subject to Federal or state income tax to the extent that its annual
distributions to stockholders are equal to at least 95% of its taxable income
and as long as certain asset, income and stock ownership tests are met.
Effective January 1, 2001, the distribution requirement will be reduced from 95%
to 90%.
EARNINGS PER SHARE
Basic earnings or loss per share excludes dilution and is computed by dividing
income or loss available to common stockholders by the weighted average number
of common shares outstanding during the period. Diluted earnings or loss per
share reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock
that then shared in earnings and losses. Shares issued during the period and
shares reacquired during the period are weighted for the period they were
outstanding.
COMPREHENSIVE INCOME
Accounting principles generally require that recognized revenue, expenses, gains
and losses be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on available for sale
securities, are reported as a separate component of the equity section of the
consolidated balance sheets, such items, along with net income, are components
of comprehensive income.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The FASB issued SFAS 133 Accounting for Derivative Instruments and Hedging
Activities ("SFAS 133") in June 1998. SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. Management's preliminary evaluation of
SFAS 133 indicates the implementation of SFAS 133 will not result in any
material changes to the Company's consolidated statement of operations. SFAS
137, issued in June 1999, delayed the effective date of SFAS 133 to make it
effective for quarters in fiscal years beginning after June 15, 2000.
11
<PAGE> 12
3. MORTGAGE LOANS
At March 31,2000 management had made the determination that $354,000 of mortgage
loans were held for sale. No mortgage loans were designated as held to maturity
and $256,698,000 of mortgage loans were held as collateralized mortgage
obligation ("CMO") collateral.
HELD FOR SALE
The following table summarizes certain characteristics of the Company's
single-family mortgage loan pools, held for sale portfolio which are carried at
the lower of cost or market (dollars in thousands):
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
------------------------------- ------------------------------
Fixed Adjustable Fixed Adjustable
Rate Rate Total Rate Rate Total
<S> <C> <C> <C> <C> <C> <C>
Principal amount of mortgage loans $ 70 $284 $354 $ 45 $206 $251
Net premium (discount) and deferred cost -- -- -- -- -- --
Loan loss allowance -- -- -- -- -- --
---- ---- ---- ---- ---- ----
Carrying cost of mortgage loans $ 70 $284 $354 $ 45 $206 $251
Mix 19.77% 80.23% 100.00% 17.93% 82.07% 100.00%
Weighted average net coupon 8.125% 9.511% 8.402% 9.261% 8.125% 8.329%
Weighted average maturity (a) 189 105 172 141 194 184
</TABLE>
(a) Weighted average maturity reflects the number of months until maturity.
COLLATERAL FOR CMOS
In April 1998, the Company issued its first CMO securitization transaction,
Hanover Capital SPC, Inc. Series 1998-A ("1998-A"). $102,977,000 (par value) of
single family fixed rate residential mortgage loans were assigned as collateral
for the 1998-A securitization. In March 1999, the Company completed its second
CMO securitization transaction, Hanover Grantor Trust 1999-A ("1999-A").
$138,357,000 (par value) of single family fixed and adjustable rate residential
loans were assigned as collateral for the 1999-A securitization. In August 1999,
the Company completed its third CMO securitization transaction, Hanover Capital
Trust 1999-B ("1999-B"). $111,575,000 (par value) of single family fixed and
adjustable rate residential loans were assigned as collateral for the 1999-B
securitization. The Company has limited exposure to credit risk retained on
loans it has securitized through the issuance of CMOs.
The following table summarizes the Company's single-family fixed and adjustable
rate mortgage loan pools held as CMO collateral (dollars in thousands):
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
----------------------------------------------- -----------------------------------------
Fixed Adjustable Fixed Adjustable
Rate Rate Total Rate Rate Total
<S> <C> <C> <C> <C> <C> <C>
Principal amount of mortgage loans $ 166,876 $ 88,361 $ 255,237 $ 174,761 $ 93,419 $ 268,180
Net premium (discount)
and deferred costs 2,191 (144) 2,047 2,361 (165) 2,196
Loan loss allowance (401) (185) (586) (371) (172) (543)
--------- --------- --------- --------- --------- ---------
Carrying cost of mortgage loans $ 168,666 $ 88,032 $ 256,698 $ 176,751 $ 93,082 $ 269,833
========= ========= ========= ========= ========= =========
Mix 65.71% 34.29% 100.00% 65.50% 34.50% 100.00%
Weighted average net coupon 8.278% 7.359% 7.960% 8.310% 7.180% 7.916%
Weighted average maturity 220 247 229 221 249 231
</TABLE>
12
<PAGE> 13
The adjustable rate mortgage loans assigned as CMO collateral at March 31, 2000
had 17 reference rate indexes with a weighted average 6 month repricing period
and a weighted average net life cap of 13.79%.
The adjustable rate mortgage loans assigned as CMO collateral at December 31,
1999 had 18 reference rate indexes with a weighted average 4 month repricing
period and a weighted average net life cap of 13.82%.
The average effective yield, which includes the amortization of net premiums,
discounts and certain deferred costs, for the periods shown below on the CMO
collateral were as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Quarter ended March 31 7.205% 6.825% N/A
Quarter ended June 30 7.076% 7.158%
Quarter ended September 30 6.781% 7.071%
Quarter ended December 31 7.201% 6.230%
------ ------
6.991% 6.832%
====== ======
</TABLE>
4. MORTGAGE SECURITIES
At March 31, 2000, the Company had $43,733,000 of fixed rate FNMA
mortgage-backed securities, all classified as available for sale, and
$17,070,000 of fixed rate private-placement mortgage-backed securities,
classified as available for sale, held to maturity, and trading, as shown in the
table below (dollars in thousands).
<TABLE>
<CAPTION>
FIXED RATE FNMA MORTGAGE-BACKED SECURITIES
MARCH 31, 2000
---------------------------------------------------
Available Held
For to
Sale (a) Maturity Trading Total
---------- ----------- ---------- ------
<S> <C> <C> <C> <C>
Principal balance of mortgage securities $ 44,578 $ -- $ -- $ 44,578
Net premium and deferred costs 809 -- -- 809
-------- ------------ ---------- --------
Total amortized cost of mortgage securities 45,387 -- -- 45,387
Gross unrealized loss (1,654) -- -- (1,654)
-------- ------------ ---------- --------
Carrying cost of mortgage securities $ 43,733 $ -- $ -- $ 43,733
Mix 100% -- -- 100%
Weighted average net coupon 7.445% -- -- 7.445%
Weighted average maturity 245 -- -- 245
</TABLE>
<TABLE>
<CAPTION>
FIXED RATE FNMA MORTGAGE-BACKED SECURITIES
DECEMBER 31, 1999
--------------------------------------------------
Available Held
For For
Sale (a) Maturity Trading Total
---------- ----------- ---------- ------
<S> <C> <C> <C> <C>
Principal balance of mortgage securities $ 46,156 $ -- $ -- $ 46,156
Net premium and deferred costs 863 -- -- 863
-------- ------------ ---------- --------
Total amortized cost of mortgage securities 47,019 -- -- 47,019
Gross unrealized loss (1,540) -- -- (1,540)
-------- ------------ ---------- --------
Carrying cost of mortgage securities $ 45,479 $ -- $ -- $ 45,479
Mix 100% -- -- 100%
Weighted average net coupon 7.451% -- -- 7.451%
Weighted average maturity 246 -- -- 246
</TABLE>
<TABLE>
<CAPTION>
FIXED RATE PRIVATE PLACEMENT MORTGAGE-BACKED SECURITIES
MARCH 31, 2000
-----------------------------------------------------------
Available Held
For to
Sale (b) Maturity (c) Trading (d) Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Principal balance of mortgage securities $ -- $ 13,657 $ 7,080 $ 20,737
Net premium (discount) and deferred costs 1,419 (5,171) (979) (4,731)
----------- ----------- ----------- -----------
Total amortized cost of mortgage securities 1,419 8,486 6,101 16,006
Loan loss allowance -- (311) -- (311)
Gross unrealized gain 1,375 -- -- 1,375
----------- ----------- ----------- -----------
Carrying cost of mortgage securities $ 2,794 $ 8,175 $ 6,101 $ 17,070
Mix 16.37% 47.89% 35.74% 100%
Principal balance of mortgage loans $ 199,561 $ 1,242,485 $ 199,561 $ 1,242,485
Weighted average net coupon 0.763% 5.943% 6.597% 1.158%
Weighted average maturity 292 299 292 299
</TABLE>
<TABLE>
<CAPTION>
FIXED RATE PRIVATE PLACEMENT MORTGAGE-BACKED SECURITIES
DECEMBER 31, 1999
-----------------------------------------------------------
Available Held
For For
Sale (b) Maturity (c) Trading (d) Total
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Principal balance of mortgage securities $ -- $ 13,735 $ 7,105 $ 20,840
Net premium (discount) and deferred costs 1,554 (5,241) (1,186) (4,873)
----------- ----------- ----------- -----------
Total amortized cost of mortgage securities 1,554 8,494 5,919 15,967
Loan loss allowance -- (256) -- (256)
Gross unrealized gain 1,496 -- -- 1,496
----------- ----------- ----------- -----------
Carrying cost of mortgage securities $ 3,050 $ 8,238 $ 5,919 $ 17,207
Mix 17.73% 47.87% 34.40% 100%
Principal balance of mortgage loans $ 208,447 $ 1,271,860 $ 208,447 $ 1,480,307
Weighted average net coupon 0.768% 5.932% 6.597% 1.147%
Weighted average maturity 295 303 295 300
</TABLE>
13
<PAGE> 14
The Company also has substantially all of the economic benefit and risks
associated with $17,270,000 fixed rate private-placement subordinate mortgage
backed securities held by its affiliate, HCP. Although HCP's balance sheet is
not consolidated in the Company's consolidated balance sheet, the Company
receives 97% of HCP's income and has guaranteed HCP's debts associated with
these securities. See Note 6 "Equity Investments."
<TABLE>
<CAPTION>
FIXED RATE PRIVATE PLACEMENT MORTGAGE-BACKED SECURITIES
(HELD BY AFFILIATE)
MARCH 31, 2000
---------------------------------------------------------
Available Held
For to
Sale (e) Maturity Trading Total
----------- -------------- ---------- -----------
<S> <C> <C> <C> <C>
Principal balance of mortgage securities $ 38,972 $ -- $ -- $ 38,972
Net premium (discount) and deferred costs (21,560) -- -- (21,560)
----------- -------------- ---------- -----------
Total amortized cost of mortgage securities $ 17,412 $ -- $ -- $ 17,412
Loan loss allowance (514) -- -- (514)
Gross unrealized gain 372 -- -- 372
----------- -------------- ---------- -----------
Carrying cost of mortgage securities $17,270 $ -- $ -- $ 17,270
Mix 100% -- -- 100%
Principal balance of mortgage loans $ 5,879,365 -- -- $ 5,879,365
Weighted average net coupon 6.651% -- -- 6.651%
Weighted average maturity 341 -- -- 341
</TABLE>
<TABLE>
<CAPTION>
FIXED RATE PRIVATE PLACEMENT MORTGAGE-BACKED SECURITIES
(HELD BY AFFILIATE)
DECEMBER 31, 1999
------------------------------------------------------
Available Held
For For
Sale Maturity Trading Total
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Principal balance of mortgage securities $ 33,401 $ -- $ -- $ 33,401
Net premium (discount) and deferred costs (19,175) -- -- (19,175)
----------- ---------- ---------- -----------
Total amortized cost of mortgage securities $ 14,226 $ -- $ -- $ 14,226
Loan loss allowance (285) -- -- (285)
Gross unrealized gain 239 -- -- 239
----------- ---------- ---------- -----------
Carrying cost of mortgage securities $ 14,180 $ -- $ -- $ 14,180
Mix 100% -- -- 100%
Principal balance of mortgage loans $ 5,171,979 -- -- $ 5,171,979
Weighted average net coupon 6.520% -- -- 6.520%
Weighted average maturity 345 -- -- 345
</TABLE>
(a) Represents 31 fixed rate FNMA pass-through certificates that the Company
received in exchange for a like amount of fixed rate mortgage loans in
December 1998, and one FNMA pass-through certificate purchased from a
"Wall Street" dealer firm. The coupon interest rates range from 6.00% to
10.50%. These certificates generate normal principal and interest
remittances to the Company on a monthly basis.
(b) At March 31, 2000 and December 31, 1999, represents six interest only
notes purchased from an affiliate, Hanover Capital Partners 2, Inc.
("HCP-2"), in a private placement in October 1998 in connection with the
1998-B securitization.
The interest only notes generate monthly interest remittances to the
Company (subject to the availability of funds) from the excess interest
generated from the underlying mortgages after deducting all service fees
and the coupon interest rate on the applicable notes. The interest rate on
each of the interest only notes is based on a notional amount (the
principal balance of those mortgage loans with an interest rate in excess
of the related note coupon interest rate). The notional amounts decline
each month to reflect the related normal principal amortization,
curtailments and prepayments for the related underlying mortgage loans.
The interest only notes are divided into two major categories: at March
31, 2000, the first group had an effective weighted average interest rate
of 1.045% on a notional balance of $169,459,000; and the second group had
an effective weighted average interest rate of 0.25% on a notional balance
of $93,447,000. At December 31, 1999, the first group had an effective
weighted average interest rate of 1.055% on a notional balance of
$177,641,000 and the second group had an effective weighted average
interest rate of 0.25% on a notional balance of $98,071,000.
(c) At March 31, 2000 and December 31, 1999, represents twelve below
investment grade subordinate MBS purchased from third parties in the
second quarter of 1999; and two investment grade ("BBB")
14
<PAGE> 15
subordinate MBS, six below investment grade subordinate MBS and three
investment grade ("AAA") principal only notes purchased from HCP-2 in
October 1998 in connection with the 1998-B securitization.
The coupon interest rates on the twelve below investment grade subordinate
MBS purchased from third parties are fixed and range from 6.25% to 6.68%.
These notes generate normal principal and interest remittances to the
Company on a monthly basis. These notes represented a $6,068,000
(principal balance) subordinated interest in $1,042,925,000 of mortgage
loans at March 31, 2000. These notes were carried at $3,629,000 at March
31, 2000 and at $3,640,000 at December 31, 1999.
The coupon interest rates on the eight 1998-B subordinate MBS are fixed
and range from 6.50% to 6.75%. These notes generate normal principal and
interest remittances to the Company on a monthly basis. The 1998-B
subordinate MBS represented a $6,338,000 (principal balance) subordinated
interest in $199,561,000 of mortgage loans at March 31, 2000 and a
$6,360,000 subordinated interest in $208,447,000 of mortgage loans at
December 31, 1999. These notes were carried at $3,515,000 at March 31,
2000 and at $3,546,000 at December 31, 1999.
The three 1998-B principal only notes do not pay interest. These notes
generate principal remittances, and are carried at a discount to face
value. The difference between the carrying value and the face amount is
accreted into income on the constant yield method. These notes had a
principal balance of $1,252,000 and $1,281,000 at March 31, 2000 and
December 31, 1999, and were carried at $1,031,000 and at $1,052,000 at
March 31, 2000 and December 31, 1999.
(d) Represents four investment grade subordinate MBS ("AA" and "A") purchased
from HCP-2, in October 1998 in connection with the 1998-B securitization.
The coupon interest rates on the investment grade notes are fixed and
range from 6.50% to 6.75%. These notes generate normal principal and
interest remittances to the Company on a monthly basis. These notes are
carried at fair value.
(e) At March 31, 2000, represents seventeen below investment grade subordinate
MBS purchased from third parties in the third quarter of 1999 and thirteen
below investment grade subordinate MBS purchased from third parties in the
first quarter of 2000. The coupon interest rates on these notes are fixed
and range from 6.25% to 7.25%. These notes generate normal principal and
interest remittances to the Company on a monthly basis. These thirty notes
represented a $38,972,000 (principal balance) subordinated interest in
$5,879,365,000 of mortgage loans at March 31, 2000. These notes were
carried at $17,270,000 at March 31, 2000 on the balance sheet of HCP.
Although HCP's balance sheet is not consolidated in the Company's
consolidated balance sheet, the Company receives 97% of HCP's income and
has guaranteed HCP's debts associated with these securities. See Note 6
"Equity Investments."
The carrying value at March 31, 2000 of the Company's mortgage securities by
contractual maturity dates are presented below (dollars in thousands):
<TABLE>
<CAPTION>
Available for Sale Held to Maturity Trading
Carrying Value Carrying Value Carrying Value
------------------ ---------------- --------------
<S> <C> <C> <C>
Due after ten years $46,527 $8,175 $6,101
</TABLE>
15
<PAGE> 16
As mentioned above, actual maturities may differ from stated maturities because
borrowers usually have the right to prepay certain obligations, often times
without penalties. Maturities of mortgage securities depend on the repayment
characteristics and experience of the underlying mortgage loans.
The average effective yield, which includes amortization of net premiums,
(discounts) and deferred costs, for the periods shown below on the combined
available for sale, held to maturity and trading mortgage securities portfolio
(excluding securities owned by HCP) were as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Quarter ended March 31 9.905% 8.784% 6.116%
Quarter ended June 30 8.752% 3.992%
Quarter ended September 30 (1.335)% 4.528%
Quarter ended December 31 9.701% 7.520%
------- -------
6.494% 5.170%
======= =======
</TABLE>
There were no sales of mortgage securities during the first quarter of 2000. The
proceeds, gross realized gains and losses from sales of available for sale
mortgage securities in the first quarter of 1999 were as follows (dollars in
thousands):
<TABLE>
<CAPTION>
REALIZED
PROCEEDS GAIN (LOSS)
-------- -----------
<S> <C> <C>
Hanover Capital 1998-B Subordinate MBS (a) $2,232 $146
</TABLE>
(a) relates to the sale in March 1999 of six subordinate MBS acquired in
connection with the 1998-B securitization in October 1998.
5. LOAN LOSS ALLOWANCE
The provision for loan loss charged to expense is based upon actual credit loss
experience and management's estimate and evaluation of potential losses in the
existing mortgage loan and mortgage securities portfolio, including the
evaluation of impaired loans. The following table summarizes the activity in the
loan loss allowance for the following periods (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
------------------ ------------------
<S> <C> <C>
Balance, beginning of period $ 799 $ 373
Loan loss provision 103 119
Transfers/sales -- 39
Charge-offs (5) (6)
Recoveries -- --
----- -----
Balance, end of period $ 897 $ 525
===== =====
</TABLE>
6. EQUITY INVESTMENTS
Hanover owns 100% of the non-voting preferred stock of Hanover Capital Partners
Ltd. ("HCP"), which entitles Hanover to receive 97% of the earnings or losses of
HCP and its wholly owned subsidiaries. Hanover also owns 100% of the non-voting
preferred stock of Hanover Capital Partners 2, Inc. ("HCP-2"), which entitles
Hanover to receive 99% of the earnings or losses of HCP-2 and its wholly owned
subsidiary. In June 1999, the Company acquired 100% of the non-voting preferred
stock of HanoverTrade.com, Inc. ("HTC") which entitles Hanover to receive 97% of
the earnings or losses of HTC.
16
<PAGE> 17
Hanover currently conducts substantially all of its taxable consulting
operations (i.e. due diligence consulting, loan sale advisory, and loan
brokering and trading) through HCP. HCP-2 was organized in October 1998 to
facilitate the securitization of $318 million of fixed and adjustable rate
residential mortgage loans in connection with the issuance of the 1998-B
security. HCP-2 does not conduct any ongoing business. The Company wrote off its
remaining investment in HCP-2 in September, 1999. HTC was organized in June 1999
to develop an E-commerce business to broker mortgage loan pools to financial
institutions via the internet.
HCP and its subsidiaries operate as a specialty finance company which is
principally engaged in performing due diligence, consulting and mortgage
investment banking services. A wholly-owned subsidiary of HCP, Hanover Capital
Mortgage Corporation, is a servicer of multifamily mortgage loans and, prior to
June 1999, was an originator of multifamily and commercial loans. HCMC's
origination operations were discontinued in June 1999. Another wholly-owned
subsidiary of HCP, Hanover Capital Securities, Inc. is a registered
broker/dealer with the Securities and Exchange Commission.
Until September 30, 1999, when Hanover wrote off its investment in HCP-2,
Hanover recorded 99% of the earnings or losses of HCP-2 through its ownership of
all the non-voting preferred stock of HCP-2. After September 30, 1999 Hanover
has not recorded earning or losses of HCP-2
The table below reflects the activity recorded in Hanover's equity investments
for the following periods (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 2000 DECEMBER 31, 1999
----------------------------------------------- -------------------------------------------------
HCP HCP-2 HTC Total HCP HCP-2 HTC Total
------- ---------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning balance $ 1,466 $ -- $ (30) $ 1,436 $ 1,761 $ 5,728 $ -- $7,489
Applicable % of
net income(loss) 114 -- (24) 90 (443) (1,300) (31) (1,774)
Applicable % of
comprehensive gain 73 -- -- 73 148 -- -- 148
Capital contribution -- -- -- -- -- -- 1 1
Write off of investment -- -- -- -- (4,428) -- (4,428)
------- ---------- ------- ------- ------- ------- ------- -------
Ending Balance $ 1,653 $ -- $ (54) $ 1,599 $ 1,466 $ -- $ (30) $ 1,436
======= ========== ======= ======= ======= ======= ======= =======
</TABLE>
17
<PAGE> 18
HANOVER CAPITAL PARTNERS LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except as noted)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 2000 1999
-------- ------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 492 $ 534
Accounts receivable 740 669
Receivables from related parties 109 187
Accrued interest receivable 215 181
Accrued revenue on contracts in progress 998 762
Prepaid expenses and other current assets 185 170
-------- --------
Total current assets 2,739 2,503
PROPERTY AND EQUIPMENT-Net 108 57
NET INVESTMENT IN MORTGAGE SECURITIES
AVAILABLE FOR SALE 17,270 14,180
OTHER ASSETS 816 1,032
-------- --------
TOTAL ASSETS $ 20,933 $ 17,772
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Reverse repurchase agreement $ 13,141 $ 10,842
Accounts payable and accrued expenses 595 509
Notes payable to related parties 5,484 4,896
Other liabilities 10 14
-------- --------
Total current liabilities 19,230 16,261
-------- --------
TOTAL LIABILITIES 19,230 16,261
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock: $.01 par value, 100,000 shares authorized
97,000 shares outstanding at March 31, 2000 and December 31, 1999 1 1
Common stock:
Class A: $.01 par value, 5,000 shares authorized
3,000 shares outstanding at March 31, 2000 and December 31, 1999 -- --
Additional paid-in-capital 2,840 2,840
Retained earnings (deficit) (1,355) (1,472)
Accumulated other comprehensive income 217 142
-------- --------
TOTAL STOCKHOLDERS' EQUITY 1,703 1,511
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 20,933 $ 17,772
======== ========
</TABLE>
18
<PAGE> 19
HANOVER CAPITAL PARTNERS LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
THREE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
<S> <C> <C>
REVENUES:
Due diligence fees $ 1,542 $ 884
Mortgage sales and servicing 12 72
Assignments fees 171 -
Loan brokering and other income 7 226
Net interest income on mortgage securities 315 -
----- -----
Total revenues 2,047 1,182
----- -----
EXPENSES:
Personnel expense 1,479 1,287
General and administrative expense 82 155
Other expenses 169 266
Interest expense 97 14
Depreciation and amortization 12 20
----- -----
Total expenses 1,839 1,742
----- -----
INCOME (LOSS) BEFORE INCOME TAXES 208 (560)
INCOME TAX PROVISION (BENEFIT) 91 (140)
----- -----
NET INCOME (LOSS) $ 117 $ (420)
===== ======
</TABLE>
HCP and its subsidiaries operate as a specialty finance company which is
principally engaged in performing due diligence, mortgage and investment banking
services. A wholly-owned subsidiary of HCP, Hanover Capital Mortgage Corporation
("HCMC"), was an originator and servicer of multifamily mortgage loans until
June 1999. Another wholly-owned subsidiary of HCP, Hanover Capital Securities,
Inc. ("HCS") is a registered broker/dealer with the Securities and Exchange
Commission
7. NOTES RECEIVABLE FROM RELATED PARTIES
In connection with Hanover's original formation transactions in September 1997,
Hanover agreed to lend a maximum of $1,750,000 collectively, to four
officer/stockholders (collectively referred to as the "Original Principals") to
enable the Principals to pay personal income taxes on the gains they must
recognize upon contributing their HCP preferred stock to the Company for shares
of Hanover's common stock. The loans are secured solely by 116,667 shares of
Hanover's common stock owned by the Principals, collectively. The loans bear
interest at the lowest applicable Federal tax rate during the month the loans
are made. At March 31, 2000 Hanover had loaned the Principals the full
$1,750,000. These loans bear interest at 6.02% (on $482,600 of loans) and 5.70%
(on $1,267,400 of loans) at March 31, 2000.
19
<PAGE> 20
In March 1998, Hanover agreed to lend up to an additional $1,500,000 in
unsecured loans to the Principals, in lieu of incurring the costs and expenses
Hanover was required to pay associated with the registration of 100,000 shares
of Hanover's common stock owned by the Principals. Pursuant to such agreement,
Hanover loaned the Principals an additional $1,203,880 in April 1998. These
additional loans are due and payable on March 31, 2001 and bear interest at
5.51%.
In November 1998, Hanover agreed to lend an additional $226,693 in unsecured
loans to the Principals. These loans are due and payable in November 2002 and
bear interest at 4.47% (the lowest applicable Federal tax rate in November
1999). A portion of these loans ($69,148) was repaid in February 1999, and
another portion ($61,837) was forgiven on January 28, 2000. The Company reserved
for this forgiveness on September 30, 1999. At March 31, 2000, the balance of
these loans, net of the reserved amount, was $95,708.
During the first quarter of 2000 and the year ended December 31, 1999 Hanover
advanced funds to HCP pursuant to an unsecured loan agreement. These loans to
HCP bear interest at 1.00% below the prime rate. At March 31, 2000 the loans
outstanding to HCP totaled $5,484,082.
Amounts due from related parties and due to related parties are detailed below
(dollars in thousands):
<TABLE>
<CAPTION>
INTERCOMPANY BALANCES
---------------------------------
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
Due from HanoverTrade $ 212 $ 121
Due from HCP-2 1 --
Due from Hanover Capital Mortgage Corp. 39 6
------ ------
$ 252 $ 127
====== ======
Due to Hanover Capital Partners $ 33 $ 88
====== =======
</TABLE>
<TABLE>
<CAPTION>
NOTES RECEIVABLE
---------------------------------
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
Principals (a) (b) (c) (e) $ 3,291 $ 3,049
HCP (d) 5,484 4,869
------- -------
$ 8,775 $ 7,918
======= =======
</TABLE>
(a) Amounts reported for 2000 include loans to John A. Burchett, George J.
Ostendorf, Irma N. Tavares, Joyce S. Mizerak, and Thomas P. Kaplan, the
five most senior officers/stockholders of Hanover. Amounts reported for
1999 include loans to John A. Burchett, George J. Ostendorf, Irma N.
Tavares and Joyce S. Mizerak.
(b) In March 1999, Hanover agreed to amend certain notes receivable
(aggregating $1,203,880) from the Principals that had a scheduled maturity
date of March 31, 1999, by extending the maturity date for two additional
years. The notes were also modified to provide for accelerated repayment
by a Principal in the event of such Principals' voluntary termination of
employment.
20
<PAGE> 21
(c) Pursuant to the note agreements, the Company loaned the Principals
$143,000 to purchase common stock in HCP-2 in order to complete the 1998-B
securitization transaction. The Principals subsequently made payments on
the loans totaling $69,000. In September 1999, the Company reserved for an
expected forgiveness of $62,000 of these loans. This amount was
subsequently forgiven on January 28, 2000. Summarized below is the change
in Principals loans during the first quarter of 2000:
<TABLE>
<S> <C>
Balance at January 1, 2000 $3,291
Loan repayments -0-
Provision for loan forgiveness -0-
------
Balance at March 31, 2000 $3,291
======
</TABLE>
(d) In the first quarter of 2000 the Company advanced $1,298,000 to HCP to
fund the purchase of certain subordinated mortgage securities pursuant to
an unsecured loan agreement. In September 1999 the Company advanced
$3,041,000 to HCP to fund the purchase of certain subordinated mortgage
securities pursuant to an unsecured loan agreement.
(e) In September 1999 the Company loaned Mr. Kaplan $242,000 to purchase stock
in the Company, pursuant to his employment agreement. The loan bears
interest at 5.29% and is secured by the stock purchased. Mr. Kaplan's loan
was reclassed to principal loans January 1, 2000.
(f) In March 2000, the Company amended the terms of the notes due from Mr.
Burchett, Ms. Mizerak, Mr. Ostendorf and Ms. Tavares to provide that the
notes would be forgiven in the event of certain changes in control.
8. REVERSE REPURCHASE AGREEMENTS
At March 31, 2000 the Company had a total of $75 million of committed mortgage
asset reverse repurchase agreement financing available pursuant to master
reverse repurchase agreements with two lenders. All borrowings pursuant to the
master reverse repurchase agreements are secured by mortgage loans or other
securities.
The reverse repurchase agreements collateralized by mortgage loans are short
term borrowings with interest rates that vary from LIBOR plus 125 basis points
to LIBOR plus 238 basis points. The lender will typically finance an amount
equal to 80% to 97% of the market value of the pledged collateral (mortgage
loans) depending on certain characteristics of the collateral (delinquencies,
liens, aging, etc.). The reverse repurchase agreement financing rates for
mortgage securities, accomplished through individual Public Securities
Association (PSA) agreements and through existing reverse repurchase agreements,
bear interest rates that vary from LIBOR to LIBOR plus 288 basis points. The
lender will typically finance an amount equal to 50% to 97% of the market value
of the mortgage securities, depending on the nature of the collateral.
At March 31, 2000 the Company had no outstanding borrowings on mortgage loans
under the above mentioned reverse repurchase agreements.
At March 31, 2000, the Company had outstanding borrowings on retained CMO
securities of $3,342,000 with a weighted average borrowing rate of 8.03% and a
weighted average remaining maturity of less than one month. Retained CMO
securities represent the Company's net investment in the CMOs issued by the
Company. The reverse repurchase financing borrowings at March 31, 2000 were
collateralized by securities with a cost basis of $7,066,000.
21
<PAGE> 22
At March 31, 2000, the Company had outstanding reverse repurchase agreement
financing for mortgage securities (other than retained CMO securities) of
$34,996,000 with a weighted average borrowing rate of 5.97% and a remaining
maturity of less than one month. These mortgage securities are mortgage
securities that the Company has purchased or created in transactions other than
CMOs. The repurchase agreement financing at March 31, 2000 was collateralized by
securities with a cost basis of $49,033,000.
The table below details the scheduled maturities of the Company's committed
master reverse repurchase agreements at March 31, 2000, as modified as of May
2000.
<TABLE>
<CAPTION>
Maximum Borrowing Maturity Date
----------------- -------------
<S> <C>
$50 million May 2000
$25 million March 2001
</TABLE>
Information pertaining to reverse repurchase agreement financing as of and for
the three months and year ended March 31, 2000 and December 31, 1999 is
summarized as follows (dollars in thousands):
REVERSE REPO FINANCING
THREE MONTHS ENDED MARCH 31, 2000
---------------------------------
<TABLE>
<CAPTION>
OTHER
MORTGAGE RETAINED CMO MORTGAGE
LOANS SECURITIES SECURITIES
-------- ------------ ----------
<S> <C> <C> <C>
REVERSE REPURCHASE AGREEMENTS
Balance of borrowing at end of period -- $3,342 $34,996
Average borrowing balance during the period -- $3,346 $38,249
Average interest rate during the period -- 8.026% 5.968%
Maximum month-end borrowing balance
during the period -- $3,343 $41,960
COLLATERAL UNDERLYING THE AGREEMENTS
Balance at end of period - carrying value -- $7,066 $49,033
</TABLE>
REVERSE REPO FINANCING
YEAR ENDED DECEMBER 31, 1999
----------------------------
<TABLE>
<CAPTION>
OTHER
MORTGAGE RETAINED CMO MORTGAGE
LOANS SECURITIES SECURITIES
-------- ------------ ----------
<S> <C> <C> <C>
REVERSE REPURCHASE AGREEMENTS
Balance of borrowing at end of period -- $3,366 $52,356
Average borrowing balance during the period $ 93,998 $2,244 $53,638
Average interest rate during the period 6.364% 7.164% 5.510%
Maximum month-end borrowing balance
during the period $283,837 $3,393 $61,559
COLLATERAL UNDERLYING THE AGREEMENTS
Balance at end of period - carrying value -- $7,201 $60,465
</TABLE>
22
<PAGE> 23
Additional information pertaining to individual reverse repurchase agreement
lenders at March 31, 2000 is summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
Weighted
Reverse Average
Repurchase Accrued Total Underlying Maturity
Lender Type of Collateral Financing Interest Financing Collateral Date
- ------ ------------------ ---------- -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Lender A (committed) Retained CMO Securities $ 3,342 $ 17 $ 3,359 $ 7,066 March 28, 2001
Lender B Mortgage Securities 26,220 26 26,246 37,907 April 26, 2000(a)
Lender C Mortgage Securities 7,827 7 7,834 9,714 April 26, 2000(a)
Lender D Mortgage Securities 475 -- 475 704 April 27, 2000(a)
Lender E Mortgage Securities 474 -- 474 707 April 27, 2000(a)
------- ------- ------- -------
Total $38,338 $ 50 $38,388 $56,098
======= ======= ======= =======
</TABLE>
(a) These borrowings are pursuant to uncommitted lines of credit which are
typically renewed monthly.
9. CMO BORROWING
The Company issued its first CMO (also referred to as mortgage-backed bonds
borrowing) secured by fixed rate mortgage loans in April 1998, and issued
subsequent CMO borrowings secured by fixed rate and adjustable rate mortgage
loans in March 1999 and August 1999. For GAAP purposes, the mortgage loans
financed through the issuance of CMOs are treated as assets of the Company and
the CMOs are treated as debt of the Company. Borrower remittances received on
the CMO collateral are used to make payments on the CMOs. The obligations of the
CMO are payable solely from the underlying mortgage loans collateralizing the
debt and otherwise are non-recourse to the Company. The maturity of each class
of CMO is directly affected by principal prepayments on the related CMO
collateral. Each class of CMO is also subject to redemption according to
specific terms of the respective indenture agreements. As a result, the actual
maturity of any class of CMO is likely to occur earlier than its stated
maturity.
Information pertaining to the CMOs as of and for the quarter ended March 31,
2000 is summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
1999-B 1999-A 1998-A
SECURITIZATION SECURITIZATION SECURITIZATION TOTAL
-------------- -------------- -------------- --------
<S> <C> <C> <C> <C>
Balance of borrowing at end of period $ 88,579 $101,580 $ 51,999 $242,158
Average borrowing balance during the period $ 91,089 $103,550 $ 53,016 $247,655
Average interest rate during the period 7.077% 7.233% 6.879% 7.261%
Interest rate at end of period 7.166% 7.156% 6.956% 7.117%
Maximum month-end borrowing balance
during the period $ 91,795 $103,997 $ 53,365 $249,157
CMO collateral
Balance at end of period - carrying balance $ 92,365 $109,054 $ 55,279 $256,698
</TABLE>
Information pertaining to the CMOs as of and for the year ended December 31,
1999 is summarized as follows (dollars in thousands):
23
<PAGE> 24
<TABLE>
<CAPTION>
1999-B 1999-A 1998-A
SECURITIZATION SECURITIZATION SECURITIZATION TOTAL
-------------- -------------- -------------- --------
<S> <C> <C> <C> <C>
Balance of borrowing at end of period $ 94,718 $105,993 $ 54,252 $254,963
Average borrowing balance during the period $ 98,658 $108,977 $ 57,634 $265,270
Average interest rate during the period 6.250% 7.063% 6.670% 6.675%
Interest rate at end of period 6.380% 7.131% 6.947% 6.813%
Maximum month-end borrowing balance
during the period $ 99,973 $110,513 $ 59,088 $269,575
CMO collateral
Balance at end of period - carrying balance $ 98,507 $113,662 $ 57,664 $269,833
</TABLE>
10. COMMON STOCK REPURCHASES
In July 1998, the Board of Directors of the Company authorized a share
repurchase program pursuant to which the Company was authorized to repurchase up
to 646,880 shares of the Company's outstanding common stock. The repurchases
were made from time to time in open market transactions. During the year ended
December 31, 1998, the Company repurchased a total of 146,900 shares of its
common stock at an average price of $9.16 per share for a total cost of
$1,345,000. During the year ended December 31, 1999, the Company repurchased a
total of 495,000 shares at an average price of $4.51 per share for a total cost
of $2,236,000. Through December 31, 1999 the Company had repurchased a total of
641,900 shares at an average price of $5.58 per share for a total of $3,580,000.
In October, 1999, the Board of Directors of the Company authorized a second
share repurchase program pursuant to which the Company was authorized to
repurchase up to 1,000,000 shares of its outstanding common stock from time to
time in open market transactions. During the quarter ended March 31, 2000, the
Company repurchased 77,975 shares at an average price of $3.22 per share for a
total of $250,000 pursuant to the second share repurchase program.
11. AFFILIATED PARTY TRANSACTIONS
The Company engaged HCP pursuant to a Management Agreement to render among other
things, due diligence, asset management and administrative services.
The consolidated statement of operations of the Company for the quarter ended
March 31, 2000 includes management and administrative expenses of $222,000
relating to billings from HCP. The 1999 consolidated statement of operations of
the Company for the three months ended March 31, 1999 includes management and
administrative expenses of $194,000 and due diligence expenses of $63,000
relating to billings from HCP. The 1999 consolidated statement of operations
also reflects a reduction in personnel expenses for a portion of salaries
allocated (and billed) to HCP.
During the three months ended March 31, 2000 and 1999 the Company recorded
$46,000 and $43,000 of interest income generated from loans to the Principals
and $97,000 and $8,000 of interest income from loans to HCP. The term of the
Management Agreement continues until December 31, 2000 with subsequent renewal.
24
<PAGE> 25
12. EARNINGS PER SHARE
Calculations for earnings per share are show below (dollars in thousands, except
per share data):
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
2000 1999
------------ ------------
<S> <C> <C>
EARNINGS PER SHARE BASIC:
Net income [numerator] $ 690 $ 736
========== ==========
Average common shares
outstanding [denominator] 5,814,322 6,244,955
========== ==========
Per share $ 0.12 $ 0.12
========== ==========
EARNINGS PER SHARE DILUTED:
Net income [numerator] $ 690 $ 736
========== ==========
Average common shares
Outstanding 5,814,322 6,244,955
========== ==========
Add: Incremental shares from assumed conversion of Warrants
0 163,645
---------- ----------
Dilutive potential common shares 0 163,645
---------- ----------
Adjusted weighted average shares outstanding [denominator] 5,814,322 6,408,600
========== ==========
Per share $ 0.12 $ 0.11
========== ==========
</TABLE>
13. STOCK WARRANTS AND STOCK OPTIONS
In November 1998 Hanover entered into a short term financing agreement (that has
since terminated) with Residential Funding Corporation ("RFC"). In connection
with that financing arrangement, Hanover in April 1999 executed a Warrant
Agreement to issue to RFC warrants to purchase 299,999 shares of Hanover's
common stock. The warrants are exercisable at a price per share equal to the
closing price of Hanover's common stock on the American Stock Exchange on the
date of the November agreement, which was $4.00 per share. The warrants expire
after five years, in April 2004.
14. GAIN ON SALE OF SERVICING RIGHTS
On March 31, 1999 Hanover entered into an agreement to sell the servicing rights
on $148 million of single-family mortgage loans. The total income from the sale
of mortgage servicing rights was $566,000. The gain on sale of mortgage
servicing rights was $540,000 and the balance of the income ($26,000) relating
to mortgage loans classified as held for sale, was deferred and was amortized
into interest income in 1999 over the lives of the mortgage loans using the
effective yield method until the mortgage loans were securitized in August 1999.
25
<PAGE> 26
15. COMMITMENTS AND CONTINGENCIES
Hanover has guaranteed two reverse repurchase financing agreements for HCP. The
amount of reverse repurchase financing outstanding at March 31, 2000 was
$13,141,109.
16. SUBSEQUENT EVENTS
On April 28, 2000 a $0.12 cash dividend was declared by the Board of Directors
to be paid on May 22, 2000 to stockholders of record as of May 15, 2000.
On April 27, 2000, the Company's affiliate, HCP, purchased $907,904, (principal
balance) of subordinate mortgage backed securities at purchase prices of
$523,670. HCP funded these purchases with a loan of $528,588 from the Company.
On April 11, 2000, Hanover adopted a Stockholder Protection Rights Agreement,
and a dividend of one right for each share of the Company's common stock was
declared by the Board of Directors to be distributed on April 28, 2000 to
stockholders of record as of April 28, 2000.
26
<PAGE> 27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Hanover Capital Mortgage Holdings, Inc. ("Hanover") was incorporated in Maryland
on June 10, 1997. Hanover is a real estate investment trust ("REIT"), formed to
operate as a specialty finance company. The principal business strategy of
Hanover and its wholly-owned subsidiaries (together referred to as the
"Company") is to (i) acquire primarily single-family mortgage loans that are at
least twelve months old or that were intended to be of certain credit quality
but that do not meet the originally intended market parameters due to errors or
credit deterioration, (ii) securitize the mortgage loans and retain interests
therein and (iii) acquire subordinated mortgage securities similar in nature to
the retained interests generated from internal securitizations. The principal
business strategy of the Company's primary unconsolidated subsidiary, Hanover
Capital Partners Ltd. ("HCP"), is to generate consulting fee income by (i)
performing loan file due diligence reviews for third parties, (ii) performing
loan sale advisory services and (iii) brokering and trading portfolios of loans.
Prior to June 30, 1999, HCP was also engaged in the business of originating
multifamily and commercial loans.
The Company's principal business objective is to generate net interest income on
its portfolio of mortgage loans and mortgage securities, and to generate fee
income through HCP. The Company acquires single-family mortgage loans through a
network of sales representatives targeting financial institutions throughout the
United States. Hanover operates as a tax-advantaged REIT and is generally not
subject to Federal and state income tax to the extent that it distributes its
earnings to its stockholders and maintains its qualification as a REIT. Taxable
affiliates of Hanover, however, are subject to Federal and state income tax.
Hanover has engaged HCP to render due diligence, asset management and
administrative services pursuant to a Management Agreement.
The Company's generation of net income is dependent upon (i) the spread between
interest earned on its investment portfolio and the cost of borrowed funds to
finance the investment portfolio; and (ii) the aggregate amount of the
investment portfolio on the Company's balance sheet. The Company strives to
create a diversified portfolio of investments that in the aggregate generates
increasing net income in a variety of interest rate and prepayment rate
environments and preserves the equity base of the Company. The Company's primary
strategy for its mortgage loan investment portfolio entails (1) efficient
acquisition pricing of mortgage loans, (2) financing in the short term by
reverse repurchase agreements or lines of credit, (3) hedging in the short term
to offset potential adverse effects of changes in interest rates, (4)
stratifying and segregating mortgage loans in securitizations to replace short
term financing with collateralized mortgage obligations (CMO), real estate
mortgage investment conduits (REMIC) or other types of long term debt financing,
thereby eliminating the majority of refinancing and interest rate risk and (5)
retaining certain residual interests of the securitization resulting in
increased yields.
27
<PAGE> 28
RESULTS OF OPERATIONS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
------------------------
March 31, March 31,
2000 1999
--------- ----------
<S> <C> <C>
Net interest income $ 1,484 $ 2,051
Loan loss provision (103) (119)
Gain on sale of servicing rights -- 342
Gain on sale of mortgage assets -- 163
Gain on mark to market of mortgage assets, net of
associated hedge 199 --
------- -------
Total revenues 1,580 2,437
Expenses 980 825
------- -------
Operating income 600 1,612
Equity in income of unconsolidated subsidiaries 90 (876)
------- -------
Net income $ 690 $ 736
======= =======
Basic earnings per share $ 0.12 $ 0.12
======= =======
Dividends declared per share $ 0.12 $ 0.20
======= =======
</TABLE>
The Company recorded a net income of $690,000 or $0.12 per share based on
5,814,322 weighted shares of common stock outstanding for the three months ended
March 31, 2000 compared to a net income of $736,000 or $0.12 per share based on
6,244,955 weighted shares of common stock outstanding for the three months ended
March 31, 1999. Total revenue for the first quarter of 2000 was $1,580,000
compared with $2,437,000 for the first quarter of 1999. The first quarter 2000
revenue was enhanced by net mark to market gains of $199,000 on mortgage
securities held in a trading account and by the recovery of $197,000 of mortgage
interest previously written off. The first quarter of 1999 benefited from a gain
on sale of servicing rights of $342,000 and from a gain on sale of mortgage
assets of $163,000.
The Company's equity in income of Hanover Capital Partners Ltd. ("HCP"), its
consulting subsidiary, increased from a loss of ($408,000) in the three months
ended March 31, 1999 to income of $114,000 for the three months ended March 31,
2000. The Company believes that its increased focus on building fee income
revenue in HCP is beginning to bear fruit. HCP's total revenue for the first
quarter of 2000 was $2,047,000 compared with $1,182,000 for the first quarter of
1999, a 73.1% increase. Due diligence fees were $1,542,000, an increase of
$658,000 or 74.4% over the $884,000 earned in the first quarter of 1999. HCP's
investments in subordinate mortgage backed securities contributed $315,000 of
net interest income (net of interest expense and loan loss provision) for the
first quarter of 2000. These increases were offset by a decrease in mortgage
sales and loan brokering revenue from $298,000 in the first quarter of 1999 to
$19,000 for the first quarter of 2000.
During the three months ended March 31, 2000, the Company did not record any
equity in losses of HCP-2. In the three months ended March 31, 1999, the Company
reflected equity in losses of HCP-2 of $468,000. The Company has elected to
liquidate HCP-2, and in connection with this decision took a provision of
$4,793,000 and recognized certain other operating expenses in the
28
<PAGE> 29
quarter ended September 30, 1999. The Company does not anticipate any future
losses from HCP-2.
Also included in the equity in loss of unconsolidated subsidiaries is a
($24,000) loss from a recently organized subsidiary, HanoverTrade.com, Inc.
("HTC"). HTC was organized in June 1999 to develop an E-commerce business to
broker mortgage loan pools to financial institutions and other finance companies
via the internet.
Operating expenses for the three months ended March 31, 2000 were $980,000,
compared to $825,000 for the three months ended March 31, 1999. Personnel
expenses increased $167,000 resulting primarily from the reallocation of certain
personnel expenses from HCP to the Company to better reflect the proper
allocation of the affected individuals' time, and from the addition of a new
chief financial officer in July 1999. Due diligence expenses decreased $63,000
and this savings was offset by an increase in premises expenses previously
allocated to HCP
The Management Agreement by and between Hanover and HCP, whereby HCP provides
Hanover due diligence, asset management and administrative services, was amended
in September 1999 (retroactive to July 1, 1999). The amendment reallocated
certain asset management and administrative service expenses between Hanover and
HCP to more accurately reflect current top management personnel expense and
certain other occupancy related charges. As a result of this amendment, the
Company recorded additional personnel and occupancy expenses that were
previously allocated to HCP. Hanover will continue to record similar expenses in
future periods.
The Company's first quarter 2000 and 1999 operating expenses did not include any
incentive bonus compensation pursuant to the Company's incentive bonus plan. In
order for the eligible participants to earn incentive bonus compensation, the
rate of return on shareholders' investment must exceed the average ten-year U.S.
Treasury rate during the year plus 4.0%.
The table below highlights the Company's historical trends and components of
return on average equity.
COMPONENTS OF ANNUALIZED RETURN ON AVERAGE EQUITY (1)
<TABLE>
<CAPTION>
Gain (loss) on Other Equity in
Net Interest Sale of Gains or Operating Earnings (Loss) Annualized
For the Income/ Assets/ (Losses)/ Expenses/ of Subsidiaries/ Return on
Quarter Ended Equity Equity Equity Equity Equity Equity
------------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
June 30, 1997 (2) 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
September 30, 1997 (3) 4.85% 0.00% 0.00% 3.59% 0.97% 2.23%
December 31, 1997 7.71% 0.18% 0.00% 4.26% (1.41)% 2.22%
March 31, 1998 10.78% 0.00% 0.00% 4.37% (0.03)% 6.38%
June 30, 1998 3.47% (0.25)% 0.00% 5.00% (1.50)% (3.28)%
September 30, 1998 8.23% 0.00% 0.00% 4.89% (1.52)% 1.82%
December 31, 1998 11.12% (32.76)% 0.00% 7.55% (4.89)% (34.08)%
March 31, 1999 11.36% 2.97% 0.00% 4.85% (5.15)% 4.33%
June 30, 1999 9.89% 0.01% 0.00% 5.25% (4.30)% 0.35%
September 30, 1999 (6.57)% 1.19% (75.10)% 8.65% (3.65)% (92.78)%
December 31, 1999 11.01% 0.00% 0.13% 9.46% 2.81% 4.51%
March 31, 2000 10.91% 1.57% 0.00% 7.74% 0.71% 5.45%
</TABLE>
29
<PAGE> 30
(1) Average equity excludes unrealized loss on investments available for sale.
(2) The Company was organized on June 10, 1997, but did not begin operations
until September 19, 1997.
(3) Average equity for this period is based on the equity balance at September
19, 1997 (IPO date) and the equity balance at September 30, 1997,
excluding unrealized loss on investments available for sale.
The following table reflects the average balances for each major category of the
Company's interest earning assets as well as the Company's interest bearing
liabilities with the corresponding effective rate of interest annualized for the
periods shown below (dollars in thousands):
<TABLE>
<CAPTION>
Interest Earning Assets and Related Liabilities
Quarter Ended Quarter Ended
March 31, 2000 March 31, 1999
Average Effective Average Effective
Balance Rate(1) Balance Rate(1)
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Interest earning assets:
Mortgage loans $ 334 251.635% $246,329 7.092%
CMO collateral 262,909 7.205% 124,784 6.825%
FNMA MBS 44,515 7.041% 57,552 6.783%
Private placement notes 17,390 17.226% 18,334 15.069%
-------- ----------- -------- -----------
$325,148 7.970% $446,999 7.306%
-------- ----------- -------- -----------
Interest bearing liabilities:
Reverse repurchase borrowings on
mortgage loans -- 0.000% $225,835 6.432%
CMO borrowings $247,655 7.348% 98,357 6.879%
Reverse repurchase borrowings on:
CMO collateral 3,346 8.026% 18,194 5.956%
FNMA MBS 33,957 5.927% 56,420 5.069%
Private placement notes 4,292 6.539% 4,037 5.455%
-------- ----------- -------- -----------
$289,250 7.177% 402,843 6.319%
-------- ----------- -------- -----------
Net interest earning assets $ 35,898 $ 44,156
======== ========
Net interest spread 0.793% 0.986%
=========== ===========
Yield on net interest earning
assets (2) 14.360% 16.303%
=========== ===========
</TABLE>
(1) Loan loss provisions are excluded in the above calculations.
(2) Yield on net interest earning assets is computed by dividing the
applicable net interest income by the average daily balance of net
interest earning assets.
NET INTEREST INCOME
Net interest income for the quarter ended March 31, 2000 was $1,484,000 compared
to net interest income of $2,051,000 for 1999. The following table reflects net
interest income generated for each period (dollars in thousands):
30
<PAGE> 31
<TABLE>
<CAPTION>
Net Interest Income
Quarter Ended
-----------------------
March 31, March 31,
2000 1999
--------- -----------
<S> <C> <C>
Mortgage loans $ 210 $ 736
CMO collateral 119 166
FNMA MBS 280 261
Private placement notes 679 637
Other 196 251
--------- ---------
Total net interest income $ 1,484 $ 2,051
========= =========
</TABLE>
Mortgage Loans Held for Sale
Net interest income generated from investments in mortgage loans (classified as
held for sale) during the quarters ended March 31, 2000 and 1999, respectively,
is detailed below (dollars in thousands):
<TABLE>
<CAPTION>
Mortgage Loans Held for Sale
Quarter Ended
----------------------------
March 31, March 31,
2000 1999
--------- ---------
<S> <C> <C>
Average asset balance $ 334 $246,329
Average repo borrowing balance -0- 225,835
-------- --------
Net interest earning assets $ 334 $ 20,494
Average leverage ratio 0% 91.680%
Effective interest income rate 251.635% 7.092%
Effective interest expense rate 0.0% 6.432%
-------- --------
Net interest spread 251.635% 0.660%
Interest income $ 210 $ 4,367
Interest expense 0 3,631
-------- --------
Net interest income $ 210 $ 736
======== ========
Yield on net interest earning assets 251.635% 14.369%
</TABLE>
In March 1999, the Company securitized $138,357,000 (par value) of mortgage
loans and in August 1999, the Company securitized $111,575,000 (par value) of
mortgage loans. These loans were transferred from the held for sale category to
the CMO collateral category. As a result of these transactions, the Company's
mortgage loans held for sale and held to maturity portfolios were essentially
eliminated. Accordingly, the Company's net interest income from mortgage loans
held for sale and held to maturity declined to $210,000 in the quarter ended
March 31, 2000 compared to $736,000 in 1999. Net interest income for the quarter
ended March 31, 2000 was enhanced by a recovery of $197,000 of interest which
had previously been written off. The Company did not purchase any mortgage loans
during the quarters ended March 31, 2000 and 1999 respectively.
Mortgage Loans - CMO Collateral
Net interest income generated from the Mortgage Loans - CMO collateral during
the first quarter of 2000 and 1999 and 1998 is detailed below (dollars in
thousands):
31
<PAGE> 32
<TABLE>
<CAPTION>
Mortgage Loans - CMO Collateral
Quarter Ended
-------------------------------
March 31, March 31,
2000 1999
--------- ---------
<S> <C> <C>
Average asset balance $ 262,909 $ 124,784
Average CMO borrowing balance 247,655 98,357
Average repo borrowing balance 3,346 18,194
--------- ---------
Net interest earning assets $ 11,908 $ 8,233
Average leverage ratio 95.470% 93.402%
Effective interest income rate 7.205% 6.825%
Effective interest expense rate 7.357% 6.737%
--------- ---------
Net interest spread (0.152%) 0.088%
Interest income $ 4,736 $ 2,129
Interest expense 4,617 1,963
--------- ---------
Net interest income $ 119 $ 166
========= =========
Yield on net interest earning assets 4.005% 8.065%
</TABLE>
In 1999, the Company securitized $249,932,000 (par value) of mortgage loans in
two securitizations, $138,357,000 (par value) in March 1999 and $111,575,000
(par value) in August 1999. The securitizations were accomplished in a
grantor/owner trust format (CMO) through a wholly-owned subsidiary, Hanover
SPC-A, Inc. The transactions were accounted for as financings for both GAAP and
tax accounting purposes. In 1998, the Company securitized $102,977,000 in a
REMIC CMO format. This transaction was accounted for as a financing for GAAP and
a sale for tax.
In a GAAP financing, the Company continues to record 100% of the interest
income, net of servicing and other fees, generated by the mortgage loans. The
primary source of financing for these mortgage loans was the CMO borrowing.
These financings represent the liability for certain investment grade mortgage
notes issued by the Company. The interest expense on this financing represents
the coupon interest amount to be paid to those note holders.
The Company's net equity in these transactions was leveraged through reverse
repurchase financing. At March 31, 2000 the Company had $3,342,000 of reverse
repurchase financing against its net equity in these transactions.
Interest expense includes the interest on CMO borrowings, interest on the
related reverse repurchase agreements and amortization of certain deferred
financing costs and interest rate caps.
FNMA Mortgage Securities
Net interest income in the first quarter of 2000 and 1999 generated from
investments in FNMA mortgage securities is detailed below (dollars in
thousands):
32
<PAGE> 33
<TABLE>
<CAPTION>
FNMA Mortgage Securities
Quarter Ended
-----------------------
March 31, March 31,
2000 1999
--------- ---------
<S> <C> <C>
Average asset balance $44,515 $57,552
Average repo borrowing balance 33,957 56,420
------- -------
Net interest earning assets $10,558 $ 1,132
Average leverage ratio 76.282% 98.033%
Effective interest income rate 7.041% 6.783%
Effective interest expense rate 5.927% 5.069%
------- -------
Net interest spread 1.114% 1.714%
Interest income $ 783 $ 976
Interest expense 503 715
------- -------
Net interest income $ 280 $ 261
======= =======
Yield on net interest earning assets 10.623% 92.226%
</TABLE>
In August 1998, the Company exchanged $17.4 million of adjustable rate mortgage
loans for a like amount of mortgage securities in the form of five FNMA
certificates. All of these mortgage certificates were subsequently sold with
recourse in October 1998. In December 1998, the Company exchanged $55.2 million
of fixed rate mortgage loans (without recourse) for a like amount of mortgage
securities in the form of 31 FNMA certificates. In March 1998, the Company
purchased $4,122,000 of FNMA passthrough certificates from a Wall Street dealer
firm.
Interest expense includes the interest on the related reverse repurchase
agreements and amortization of deferred financing costs and interest rate caps.
Private Placement MBS
Net interest income (expense) generated from private placement mortgage-backed
securities is detailed below (dollars in thousands):
<TABLE>
<CAPTION>
Private Placement MBS
Quarter Ended
-----------------------
March 31, March 31,
2000 1999
--------- ---------
<S> <C> <C>
Average asset balance $17,390 $18,334
Average repo borrowing balance 4,292 4,037
------- -------
Net interest earning assets $13,098 $14,297
Average leverage ratio 24.682% 22.019%
Effective interest income rate 17.226% 15.069%
Effective interest expense rate 6.539% 5.455%
------- -------
Net interest spread 10.687% 9.614%
Interest income $ 749 $ 692
Interest expense 70 55
------- -------
Net interest income $ 679 $ 637
======= =======
Yield on net interest earning assets 20.728% 17.784%
</TABLE>
33
<PAGE> 34
The Private Placement MBS category includes (1) subordinate MBS, interest only
notes, and principal only notes that the Company created in its second
securitization, 1998-B, and (2) starting in June 1999, subordinate MBS that the
company purchased in the open market.
In October 1998, the Company completed its second private placement REMIC
securitization transaction, the 1998-B securitization. Hanover contributed
certain mortgage loan collateral to its newly organized unconsolidated
subsidiary, HCP-2. This had the effect of removing the mortgage loan collateral
from Hanover's balance sheet for GAAP and tax accounting purposes. HCP-2
accounted for the transaction as a financing for GAAP and as a sale for tax
accounting purposes.
The Company's investment in 1998-B private placement MBS at March 31, 2000
includes a $13,440,000 investment in six investment grade ("AA", "A" and "BBB")
notes, six interest only notes, six below investment grade notes and three
principal only notes. The Company's investment in 1998-B private placement MBS
at December 31, 1999 includes a $13,567,000 investment in the same securities.
The 1998-B interest only notes will be adversely affected more than other notes
by higher than expected prepayment speeds on underlying mortgage loans with
interest rates in excess of the net coupon rate. In all likelihood, mortgages
with higher interest rates will be repaid more rapidly than mortgages with lower
interest rates.
In the second quarter of 1999, the Company purchased twelve below investment
grade subordinate MBS from third parties. At March 31, 2000, these securities
had an aggregate book value $3,629,436.
Other interest income
Interest income generated during 2000 and 1999 from non-mortgage assets is
detailed below (dollars in thousands):
<TABLE>
<CAPTION>
Other Interest Income
Quarter Ended
--------------------------
March 31, March 31,
2000 1999
----- -----
<S> <C> <C>
Overnight investing $ 52 $ 199
Related party notes 144 52
----- -----
$ 196 $ 251
===== =====
</TABLE>
Interest income recorded on overnight investing was generated for the most part
from investing excess cash in Federal Home Loan Bank discount notes and, to a
much lesser extent, investments in the highest rated commercial paper and
savings accounts. Interest rates on overnight investments ranged from 4.80% to
5.81%.
The Company had maintained a significantly higher liquidity balance in the first
quarter of 1999 as compared to 2000. (Cash and cash equivalent balances at March
31, 2000 and 1999 were $1,118,000 and $21,994,000, respectively.) Accordingly,
interest income generated from overnight investing was considerably higher in
1999. In the first quarter of 2000, excess cash was applied to reduce borrowings
against FNMA collateral.
34
<PAGE> 35
Notes receivable due from HCP earn interest at the prime rate less one percent.
The balance due from HCP at March 31, 2000 and 1999 was $5,484,000 and $603,000,
respectively. Notes receivable due from Principals earn interest at the lowest
applicable Federal rate in effect at the time of the loan. The balance due from
Principals at March 31, 2000 and 1999 was $3,291,000 and $3,123,000,
respectively.
In February 2000 Hanover advanced $1,297,000 to HCP to fund the purchase of
certain third party private placement notes by HCP. This advance is included in
the notes receivable due from HCP at March 31, 2000.
TAXABLE INCOME
Hanover's taxable income for the quarter ended March 31, 2000 is estimated at
$377,000. Taxable income differs from GAAP net income for the quarter ended
March 31, 2000 due to various recurring and one time book/tax differences. The
following table details the major book/tax differences in arriving at the
estimated taxable income for the quarter ended March 31, 2000 (dollars in
thousands):
<TABLE>
<S> <C>
GAAP net income $ 690
Recurring adjustments:
Add: Loan loss provision, net of realized losses 98
Less: Tax amortization of net premiums
on mortgages, CMO collateral and
mortgage securities and interest accrual
in excess of GAAP amortization and
interest accrual (304)
Equity in income of unconsolidated subsidiaries (90)
Other (17)
-----
Estimated taxable income $ 377
=====
</TABLE>
As a REIT, Hanover is required to declare dividends amounting to 85% of each
year's taxable income by the end of each calendar year and to have declared
dividends amounting to 95% of Hanover's taxable income for each year by the time
Hanover files its Federal tax return. Therefore, a REIT generally passes through
substantially all of its earnings to shareholders without paying Federal income
tax at the corporate level.
LIQUIDITY
With the completion of the 1999-B securitization in August 1999, and the
concomitant reduction of mortgage loans held for sale to close to zero, the
Company believes it has substantially reduced its exposure to liquidity events.
The Company expects to meet its future short-term and long-term liquidity
requirements generally from its existing working capital, cash flow provided by
operations, reverse repurchase agreements and other possible sources of
financing, including CMOs and REMICs. The Company considers its ability to
generate cash to be adequate to meet operating requirements both short-term and
long-term.
The Company's remaining exposure to market-driven liquidity events is limited to
the short-term reverse repurchase financing it has in place against its
mortgage-backed securities. If a
35
<PAGE> 36
significant decline in the market value of the Company's mortgage-backed
securities portfolio should occur, the Company's available liquidity from
existing sources and ability to access additional sources of credit may be
reduced. As a result of such a reduction in liquidity, the Company may be forced
to sell certain investments in order to maintain liquidity. If required, these
sales could be made at prices lower than the carrying value of such assets,
which could result in losses.
The Company had two committed reverse repurchase agreement lines of credit in
place at March 31, 2000 and four uncommitted lines of credit. Management may add
additional committed and uncommitted lines of credit in the future.
Net cash used in operating activities for the quarter ended March 31, 2000 was
$392,000 compared to net income of $690,000. The most significant uses of cash
not reflected in net income were loans to related parties of $588,000,
consisting primarily of loans to HCP which were used to fund purchases by HCP of
subordinate MBS, and a decrease of $442,000 in accrued interest payable.
Net cash provided by investing activities amounted to $14,511,000 for the
quarter ended March 31, 2000. The majority of cash proceeds from investing
activities was generated from principal payments received on collateral for CMOs
of $12,940,000 and principal payments received on mortgage securities of
$1,674,000.
Net cash used in financing activities totaled $31,023,000 during the quarter
ended March 31, 2000. The Company made net repayments to its reverse repurchase
lenders of $17,384,000 and principal payments on CMOs of $12,805,000. The
Company also paid dividends of $583,000 and purchased an additional 77,975
shares of its common stock for $250,000 during this period.
CAPITAL RESOURCES
The Company had no significant capital expenditure during the first quarter of
2000 and management does not anticipate the need for any material capital
expenditures in the near future.
YEAR 2000 (Y2K) DISCLOSURE
The Company did not experience any material Y2K issues. Nevertheless, there
still remain some future dates that could potentially cause computer systems
problems.
The Company did not incur any significant costs associated with Y2K
non-compliance by its third party vendors. The Company does not own any non-IT
systems (i.e. elevator systems, building air management systems, security and
fire control systems). The Company received written and/or verbal confirmation
that the non-IT systems located in the Company's principal leased facilities are
all Y2K compliant.
OTHER MATTERS
REIT Requirements
Hanover has elected to be treated as a REIT for tax purposes, pursuant to the
Internal Revenue Code of 1986 , as amended (sometimes referred to as the
"Code"). Hanover believes that it was
36
<PAGE> 37
in full compliance with the REIT tax rules as of March 31, 2000 and intends to
remain in compliance with all REIT tax rules. If Hanover fails to qualify as a
REIT in any taxable year and certain relief provisions of the Code do not apply,
Hanover will be subject to Federal income tax as a regular, domestic
corporation, and its stockholders will be subject to tax in the same manner as
stockholders of a regular corporation. Distributions to its stockholders in any
year in which Hanover fails to qualify as a REIT would not be deductible by
Hanover in computing its taxable income. As a result, Hanover could be subject
to income tax liability, thereby significantly reducing or eliminating the
amount of cash available for distribution to its stockholders. Further, Hanover
could also be disqualified from re-electing REIT status for the four taxable
years following the year during which it became disqualified.
Investments in Certain Mortgage Assets
The Company takes certain risks in investing in subprime single-family mortgage
loans and securities collateralized by such loans. If these mortgage loans are
missing relevant documents, such as the original note, they may be difficult to
enforce. These mortgage loans may also have inadequate property valuations. In
addition, if a single-family mortgage loan has a poor payment history, it is
more likely to have future delinquencies because of poor borrower payment habits
or a continuing cash flow problem.
Defaults on Mortgage Assets
The Company makes long-term investments in mortgage assets and securities.
During the time it holds mortgage assets for investment, the Company is subject
to the risks of borrower defaults and bankruptcies and hazard losses (such as
those occurring from earthquakes or floods) that are not covered by insurance.
If a default occurs on any mortgage loan held by the Company or on any mortgage
loan collateralizing below investment grade MBS held by the Company, the Company
will bear the risk of loss of principal to the extent of any deficiency between
the value of the mortgaged property, plus any payments from an insurer or
guarantor, and the amount owing on the mortgage loan.
If the Company were to invest in commercial mortgage loans, the Company may be
subject to certain additional risks. Commercial properties tend to be unique and
more difficult to value than single-family residential properties. Commercial
mortgage loans often have shorter maturities than single-family mortgage loans
and often have a significant principal balance or "balloon" due on maturity. A
balloon payment creates a greater risk for the lender because the ability of a
borrower to make a balloon payment normally depends on its ability to refinance
the loan or sell the related property at a price sufficient to permit the
borrower to make the payment. Commercial mortgage lending is generally viewed as
exposing the lender to a relatively greater risk of loss than single-family
mortgage lending because it usually involves larger mortgage loans to single
borrowers or groups of related borrowers and the repayment of the loans is
typically dependent upon the successful operation of the related properties. As
of March 31, 2000, the Company did not have any commercial mortgage loan
investments. However, the Company may elect to make such investments.
Negative Effects of Fluctuating Interest Rates
Changes in interest rates may impact the Company's earnings in various ways.
While the Company anticipates that over the long term less than 25% of its
mortgage loans will be
37
<PAGE> 38
adjustable rate mortgages ("ARMs"), rising short term interest rates may
negatively affect the Company's earnings in the short term. Increases in the
interest rate on an ARM loan are generally limited to either 1% or 2% per
adjustment period. ARM loans owned by the Company are subject to such
limitations, while adjustments in the interest rate on the Company's borrowings
are not correspondingly limited. As a result, in periods of rising interest
rates, the Company's net interest income could temporarily decline.
The rate of prepayment on the Company's mortgage loans may increase if interest
rates decline, or if the difference between long-term and short-term interest
rates diminishes. Increased prepayments would cause the Company to amortize any
premiums paid on the acquisition of its mortgage loans faster than currently
anticipated, resulting in a reduced yield on its mortgage loans. Additionally,
to the extent proceeds of prepayments cannot be reinvested at a rate of interest
at least equal to the rate previously earned on the prepaid mortgage loans, the
Company's earnings may be adversely affected.
Insufficient Demand for Mortgage Loans and the Company's Loan Products
The availability of mortgage loans that meet the Company's criteria depends on,
among other things, the size of and level of activity in the residential,
multifamily and commercial real estate lending markets. The size and level of
activity in these markets, in turn, depends on the level of interest rates,
regional and national economic conditions, inflation and deflation in property
values and the general regulatory and tax environment as it relates to mortgage
lending. If the Company can not obtain sufficient mortgage loans or mortgage
securities that meet its criteria, its business will be adversely affected.
Investment Company Act
The Company at all times intends to conduct its business so as not to become
regulated as an investment company under the Investment Company Act. If the
Company were to become regulated as an investment company, the Company's use of
leverage would be substantially reduced. The Investment Company Act exempts
entities that are "primarily engaged in the business of purchasing or otherwise
acquiring mortgages and other liens on interest in real estate" ("Qualifying
Interests"). Under current interpretation of the staff of the Securities and
Exchange Commission, in order to qualify for this exemption, the Company must
maintain at least 55% of its assets directly in Qualifying Interests. As of
March 31, 2000, Management calculates that the Company is in compliance with
this requirement.
Clinton Administration Proposal
The Clinton's administration for the fiscal year 2001 budget proposal was
announced on February 1, 2000. The proposed budget would amend the tax rules
relating to the distribution of a REIT's income. Under current law, a REIT is
required to distribute at least 85% of its ordinary income and 95% of its
capital gains during a taxable year in order to avoid a 4% excise tax on the
undistributed amount. Under the Clinton Administration proposal, a REIT would be
required to distribute 98% of both ordinary income and capital gain net income
to avoid the excise tax. If this proposal was enacted, it would be effective for
calendar years beginning after December 31, 2000.
38
<PAGE> 39
As in previous Clinton Administration proposals, the administration proposes a
"closely held REIT" ownership test, under which no "person" (i.e., a
corporation, partnership or trust, including a pension or profit sharing trust)
could own stock of a REIT possessing 50% or more the total combined voting power
of all classes of voting stock or 50% or more of the total value of shares of
all classes of stock. This 2001 proposal contains an exception for REITs owning
more than 50% of another REIT. Further, there is a newly proposed "limited
look-through rule" for partnerships that own REITs. There is no exception for
publicly traded REITs. This proposal, if enacted, would be effective for
entities electing REIT status for taxable years beginning on or after the date
of first committee action (an entity that has elected REIT status prior to this
date will avoid these restrictions so long as it has sufficient business assets
or activities as of such date). It is presently uncertain whether these REIT
proposals , or any other proposals regarding REITs, will be enacted.
State and Local Taxes
Hanover and its shareholders may be subject to state or local taxation in
various jurisdictions, including those in which it or they transact business or
reside. The state and local tax treatment of Hanover and its shareholders may
not conform to federal income tax consequence discussed above. Consequently,
prospective shareholders should consult their own tax advisors regarding the
effect of state and local tax laws on an investment in Hanover shares.
IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
The preceding section, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and other sections of this Quarterly
Report contain various "forward-looking statements" within the meaning of
Section 27A of the Securities Exchange Act of 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended. These forward-looking
statements represent the Company's expectations or beliefs concerning future
events, including, without limitation, statements containing the words
"believes," "anticipates," "expects" and words of similar import; and also
including, without limitation, the following: statements regarding the Company's
continuing ability to target and acquire mortgage loans; expected availability
of the master reverse repurchase agreement financing; the sufficiency of the
Company's working capital, cash flows and financing to support the Company's
future operating and capital requirements; results of operations and overall
financial performance; the expected dividend distribution rate; and the expected
tax treatment of the Company's operations. Such forward-looking statements
relate to future events and the future financial performance of the Company and
the industry and involve known and unknown risks, uncertainties and other
important factors which could cause actual results, performance or achievements
of the Company or industry to differ materially from the future results,
performance or achievements expressed or implied by such forward-looking
statements.
Investors should carefully consider the various factors identified in
"Management's Discussion and Analysis of Financial Condition and Results of
Operation - Other Matters," and elsewhere in this Report that could cause actual
results to differ materially from the results predicted in the forward-looking
statements. Further, the Company specifically cautions investors to consider the
following important factors in conjunction with the forward-looking statements:
the possible decline in the Company's ability to locate and acquire mortgage
loans; the possible adverse effect of changing economic conditions, including
fluctuations in interest rates and changes in the real estate market both
locally and nationally; the effect of severe weather or natural
39
<PAGE> 40
disasters; the effect of competitive pressures from other financial
institutions, including other mortgage REIT's; and the possible changes, if any,
in the REIT rules. Because of the foregoing factors, the actual results achieved
by the Company in the future may differ materially from the expected results
described in the forward-looking statements.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
During the first quarter of 2000 the Company used certain derivative financial
instruments (for purposes other than trading) as hedges of anticipated
transactions relating to its investment portfolio.
The Company from time to time enters into interest rate hedge mechanisms
(forward sales of Agency mortgage securities) to manage its exposure to market
pricing changes in connection with the purchase, holding of, securitization and
sale of its fixed rate mortgage loan portfolio and certain mortgage securities.
The Company generally closes out the hedge position to coincide with the related
sale or securitization transactions and recognizes the results of the hedge
transaction in determining the amount of the related gain or loss for loans or
securities sold, or as a basis adjustment to loans held to maturity.
At March 31, 2000 the Company had forward commitments to sell $6.8 million (par
value) of Agency mortgage securities that had not yet settled. This forward sale
was entered into to hedge the expected sale of approximately $7 million
principal balance of AA and A rated subordinate mortgage-backed securities held
in a trading account.
The Company generally hedges its "held for sale" fixed rate mortgage loan pools
by selling short similar coupon and duration matched Agency securities, usually
for 30 to 60 day periods. This hedging of mortgage assets should, if properly
executed, adjust the carrying value of the hedged fixed mortgage loan pools to
reflect current market pricing. The costs or gains of the individual hedging
transactions can vary greatly depending upon market conditions. Net hedging
losses on the fixed rate mortgage pools were $8,000 during the first quarter of
2000.
The primary risk associated with selling short Agency securities relates to
changes in interest rates. Generally, as market interest rates increase, the
market value of the hedged asset (fixed rate mortgage loans) will decrease. The
net effect of increasing interest rates will generally be a favorable or gain
settlement on the forward sale of the Agency security; this gain should offset a
corresponding decline in the value of the hedged assets. Conversely, if interest
rates decrease, the market value of the hedged asset will generally increase.
The net effect of decreasing interest rates will generally be an unfavorable or
loss settlement on the forward sale of the Agency security; this loss should be
offset by a corresponding gain in value of the hedged assets. To mitigate
interest rate risk an effective matching of Agency securities with the hedged
assets needs to be monitored closely. Senior Management continually monitors the
changes in weighted average duration and coupons of the hedged assets and will
appropriately adjust the amount, duration and coupon of future forward sales of
Agency securities.
The Company also enters into interest rate hedge mechanisms (interest rate caps)
to manage its interest rate exposure on certain reverse repurchase agreement
financing and floating rate CMOs. The cost of the interest rate caps is
amortized over the life of the interest rate cap and is reflected as a portion
of interest expense in the consolidated statement of operations.
40
<PAGE> 41
At March 31, 2000 the Company had the following interest rate caps in effect
(dollars in thousands):
<TABLE>
<CAPTION>
NOTIONAL AMOUNT INDEX STRIKE % MATURITY DATE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 28,171 3 Month LIBOR 5.75% March, 2001
27,277 3 Month LIBOR 5.75% April, 2001
75,000 1 Month LIBOR 7.25% August, 2002
35,000 1 Month LIBOR 7.75% August, 2004
--------
$165,448
========
</TABLE>
In addition, the Company's affiliate, HCP, had the following interest rate caps
in effect at March 31, 2000:
<TABLE>
<CAPTION>
NOTIONAL AMOUNT INDEX STRIKE % MATURITY DATE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$11,000 3 month LIBOR 7.695% October, 2003
</TABLE>
The primary risk associated with interest rate caps relates to interest rate
increases. The interest rate caps provide a cost of funds hedge against interest
rates that exceed the strike rate, subject to the limitation of the notional
amount of financing.
INTEREST RATE SENSITIVITY
Interest Rate Mismatch Risk - Reverse Repo Financing
At March 31, 2000, the Company owned a de minimus amount of mortgage loans held
for sale. If the Company resumes its strategy of purchasing mortgage loans, it
would finance these assets during the initial period (the time period during
which management analyzes the loans in detail and corrects deficiencies where
possible before securitizing the loans) with reverse repurchase agreement
("repo") financing or with equity alone in certain instances. In this scenario,
the Company would be exposed to the mismatch between the cost of funds on its
repo financing and the yield on the mortgage loans. The Company's repo financing
agreements at March 31, 2000 were indexed to LIBOR plus a spread of 125 to 238
basis points. This financing generally is rolled and matures every 30 to 90
days. Accordingly, any increases in LIBOR will tend to reduce net interest
income and any decreases in LIBOR will tend to increase net interest income.
The Company also has floating rate reverse repurchase financing for certain
fixed-rate mortgage backed securities. At March 31, 2000, the Company had a
total of $34,996,000 of floating rate reverse repo financing compared to
$60,803,000 of fixed rate mortgage-backed securities investments, and the
Company's affiliate, HCP, had $13,141,000 of such financing against $17,270,000
of fixed-rate securities. The Company has attempted to hedge exposure by using
the rate caps described above.
Price Risk
The market value of mortgage loans and mortgage securities will fluctuate with
changes in interest rates. In the case of mortgage loans held for sale and
mortgage securities available for sale or held for trading, the Company will be
required to record changes in the market value of
41
<PAGE> 42
such assets. In the case of mortgage loans held for sale and mortgage securities
held in trading, the Company generally attempts to hedge these changes through
the short sale of mortgage securities, described above. At March 31, 2000, the
Company did not have any significant mortgage loans held for sale. The mortgage
securities held in trading were hedged with the short sale of mortgage
securities described above.
In the case of mortgage loans held for sale, hedging gains and losses and other
related hedging costs are deferred and are recorded as an adjustment of the
hedged assets or liabilities. The hedging gains ("Hedging Gains") and losses
("Hedging Costs") along with the other related hedging costs are amortized over
the estimated life of the asset or liability. This hedging of mortgage assets
should, if properly executed, adjust the carrying value of the fixed mortgage
loan pools to reflect current market pricing. The costs of the individual
hedging transactions can vary greatly depending upon the market conditions. Net
Hedging Costs on fixed mortgage pools were $8,000 through the first quarter of
2000.
Prepayment Risk
Interest income on the mortgage loan and mortgage securities portfolio is also
negatively affected by prepayments on mortgage loan pools or MBS purchased at a
premium and positively impacted by prepayments on mortgage loan pools or MBS
purchased at a discount. The Company assigns an anticipated prepayment speed to
each mortgage pool and MBS at the time of purchase and records the appropriate
amortization of the premium or discount over the estimated life of the mortgage
loan pool or MBS. To the extent the actual prepayment speeds vary significantly
from the anticipated prepayment speeds for an extended period of time, the
Company will adjust the anticipated prepayment speeds and amortization of the
premium or discount accordingly. This will negatively (in the case of
accelerated amortization of premiums or decelerated amortization of discounts)
or positively (in the case of decelerated amortization of premiums or
accelerated amortization of discounts) impact net interest income.
Delinquency and Default Risk
Increases in delinquency rates and defaults by borrowers on their mortgages can
also negatively impact the Company's net interest income. The Company monitors
delinquencies and defaults in its mortgage loan portfolio in three categories:
government, conventional and uninsured. It adjusts its loan loss provision
policy and non-interest accrual policy in accordance with changes in the
delinquency and default trends.
Securitized Mortgage Loan Assets
With respect to the match funding of assets and liabilities, the CMO collateral
relating to the 1998-A, 1999-A and 1999-B securitizations reflect $168,666,000
of fixed rate mortgage loans and $88,032,000 of adjustable rate mortgage loans
at March 31, 2000. The primary financing for this asset category is the CMOs
($242,158,000) and to a much lesser extent repo agreements ($3,342,000). The
repo financing, which is indexed to LIBOR, is subject to interest rate
volatility as the repo agreement matures and is extended. The financing provided
by the CMOs for the 1998-A and 1999-A securitizations lock in long-term fixed
financing and thereby eliminates most interest rate risk. The financing for the
1999-B securitization is indexed to LIBOR. Accordingly, the Company has hedged
this interest rate risk through the purchase of
42
<PAGE> 43
interest rate caps. The Company purchased amortizing interest rate caps with
notional balances of $110 million in August 1999 to hedge the 1999-B
securitization.
Mortgage Securities
At March 31, 2000 the Company owned certain fixed rate Agency and private
placement mortgage securities and certain interest only and principal only
private placement mortgage securities ($60,803,000). The coupon interest rates
on the fixed rate mortgage securities would not be affected by changes in
interest rates. The interest only notes remit monthly interest generated from
the underlying mortgages after deducting all service fees and the coupon
interest rate on the applicable notes. The interest rate on each of the interest
only notes is based on a notional amount (the principal balance of those
mortgage loans with an interest rate in excess of the related note coupon
interest rate). The notional amounts decline each month to reflect the related
normal principal amortization, curtailments and prepayments for the related
underlying mortgage loans. Accordingly, net interest income on the mortgage
securities portfolio would be negatively affected by prepayments on mortgage
loans underlying the mortgage securities and would further be negatively
affected to the extent that higher rated coupon mortgage loans paid off more
rapidly than lower rated coupon mortgage loans.
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<PAGE> 44
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the first quarter of 2000, there were no material
developments with respect to legal proceedings to which the
Company or any of its affiliates have been a party.
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Robert E. Campbell has resigned from the Company's Board of Directors.
Mr. Campbell cited increasing commitments to the Robert Wood Johnson
Foundation and other charitable organizations as the reason for his
resignation. The Board elected James F. Stone to replace Mr. Campbell.
Mr. Stone is a retired general partner of First American Capital. Among
his professional affiliations, Mr. Stone is a member of the Board of
Magic Seasoning Blends, Fiber Composites Corporation of North Carolina,
Oracle Lens Manufacturing Company, and the South County Hospital in
Rhode Island.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed with this Form 10-Q
Exhibit 27 Financial Data Schedule.
Exhibit 10.31 Amended and Restated Master Loan and Security
Agreement by and between Greenwich Capital
Financial Products, Inc., Hanover Capital
Mortgage Holdings, Inc. and Hanover Capital
Partners Ltd. dated as of March 27, 2000.
Exhibit 10.32.1 Third Amendment to Warehousing Credit and
Security Agreement dated as of April 30, 1999
by and between Bank United and the Company.
Exhibit 10.33* Stockholder Protection Rights Agreement.
(b) Reports on Form 8-K
On April 21, 2000 the Company filed a report on Form 8-K,
describing the terms of a shareholder rights plan adopted on
April 11, 2000.
* Incorporated by reference to the Company's report on Form 8-K filed April 21,
2000.
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<PAGE> 45
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.
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
By: /s/ John A. Burchett
Dated: May 15, 2000 -------------------------------------------
------------
John A. Burchett
Chairman of the Board of Directors
By: /s/ Thomas P. Kaplan
Dated: May 15, 2000 -------------------------------------------
------------
Thomas P. Kaplan
Chief Financial Officer
45
<PAGE> 1
Exhibit 10.31
AMENDED AND RESTATED MASTER LOAN AND SECURITY AGREEMENT
Dated as of March 27, 2000
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
as Borrower
HANOVER CAPITAL PARTNERS, LTD.
as Borrower
and
GREENWICH CAPITAL FINANCIAL PRODUCTS, INC.
as Lender
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
RECITALS....................................................................................................... -1-
SECTION 1 Definitions and Accounting Matters.................................................. -1-
1.01 Certain Defined Terms............................................................... -1-
1.02 Accounting Terms and Determinations................................................. -24-
SECTION 2 Advances, Note and Prepayments...................................................... -24-
2.01 Advances............................................................................ -24-
2.02 Notes............................................................................... -25-
2.03 Procedure for Borrowing............................................................. -25-
2.04 Repayment of Advances; Interest..................................................... -27-
2.05 Limitation on Types of Advances; Illegality......................................... -28-
2.06 Determination of Borrowing Base; Mandatory Prepayments or Pledge.................... -28-
2.07 Optional Prepayments................................................................ -29-
2.08 Requirements of Law................................................................. -29-
2.09 Purpose of Advances................................................................. -31-
2.10 Extension of Termination Date....................................................... -31-
2.11 Extension of Maximum Pledge Period.................................................. -31-
SECTION 3 Payments; Computations; Etc.; Commitment Fee........................................ -31-
3.01 Payments............................................................................ -31-
3.02 Computations........................................................................ -31-
3.03 Commitment Fee...................................................................... -31-
3.04 Selection of Interest Period........................................................ -32-
SECTION 4 Collateral Security................................................................. -32-
4.01 Collateral; Security Interest....................................................... -32-
4.02 Further Documentation............................................................... -36-
4.03 Changes in Locations, Name, etc..................................................... -36-
4.04 Lender's Appointment as Attorney-in-Fact............................................ -36-
4.05 Performance by Lender of Borrower's Obligations..................................... -38-
4.06 Proceeds............................................................................ -38-
4.07 Remedies............................................................................ -38-
4.08 Limitation on Duties Regarding Presentation of Collateral........................... -40-
4.09 Powers Coupled with an Interest..................................................... -40-
4.10 Release of Security Interest........................................................ -40-
4.11 Establishment of the Collection Account............................................. -40-
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C>
SECTION 5 Conditions Precedent................................................................ -40-
5.01 Initial Advance..................................................................... -40-
5.02 Initial and Subsequent Advances..................................................... -42-
SECTION 6 Representations and Warranties...................................................... -47-
6.01 Financial Condition................................................................. -47-
6.02 No Change........................................................................... -47-
6.03 Corporate Existence; Compliance with Law............................................ -47-
6.04 Corporate Power; Authorization; Enforceable Obligations............................. -48-
6.05 No Legal Bar........................................................................ -48-
6.06 No Material Litigation.............................................................. -48-
6.07 No Default.......................................................................... -48-
6.08 Collateral; Collateral Security..................................................... -49-
6.09 Chief Executive Office.............................................................. -49-
6.10 Location of Books and Records....................................................... -49-
6.11 No Burdensome Restrictions.......................................................... -49-
6.12 Taxes............................................................................... -49-
6.13 Margin Regulations.................................................................. -50-
6.14 Investment Company Act; Other Regulations........................................... -50-
6.15 Subsidiaries........................................................................ -50-
6.16 Acquisition of Mortgage Loans....................................................... -50-
6.17 No Adverse Selection................................................................ -50-
6.18 Borrowers Solvent; Fraudulent Conveyance............................................ -50-
6.19 ERISA............................................................................... -50-
6.20 True and Complete Disclosure........................................................ -51-
6.21 True Sales.......................................................................... -51-
6.22 Participation Certificates.......................................................... -51-
SECTION 7 Covenants of the Borrower........................................................... -51-
7.01 Financial Statements................................................................ -51-
7.02 Existence, Etc...................................................................... -52-
7.03 Maintenance of Property; Insurance.................................................. -52-
7.04 Notices............................................................................. -53-
7.05 Other Information................................................................... -53-
7.06 Further Identification of Collateral................................................ -53-
7.07 Eligible Asset Determined to be Defective........................................... -54-
7.08 Monthly Reporting................................................................... -54-
7.09 Financial Condition Covenants....................................................... -54-
7.10 Borrowing Base Deficiency........................................................... -54-
7.11 Prohibition of Fundamental Changes.................................................. -55-
7.12 Limitation on Liens on Collateral................................................... -55-
7.13 Limitation on Transactions with Affiliates.......................................... -55-
7.14 Underwriting Guidelines............................................................. -55-
</TABLE>
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<PAGE> 4
<TABLE>
<S> <C>
7.15 Limitations on Modifications, Waivers and Extensions of Eligible Assets............. -55-
7.16 Servicing........................................................................... -55-
7.17 Limitation on Distributions......................................................... -55-
7.18 Use of Proceeds..................................................................... -55-
7.19 Restricted Payments................................................................. -56-
7.20 Reports............................................................................. -56-
7.21 Inspection.......................................................................... -56-
7.22 Further Proceeds.................................................................... -56-
7.23 Further Documentation............................................................... -56-
7.24 Taxes............................................................................... -56-
7.25 Lost Note Affidavits; Lost Instrument Affidavits ................................... -57-
7.26 Underlying Eligible Bonds .......................................................... -57-
SECTION 8 Events of Default................................................................... -57-
SECTION 9 Remedies Upon Default............................................................... -60-
SECTION 10 No Duty of Lender................................................................... -61-
SECTION 11 Miscellaneous....................................................................... -61-
11.01 Waiver.............................................................................. -61-
11.02 Notices............................................................................. -61-
11.03 Indemnification and Expenses........................................................ -61-
11.04 Amendments.......................................................................... -62-
11.05 Successors and Assigns.............................................................. -63-
11.06 Survival............................................................................ -63-
11.07 Captions............................................................................ -63-
11.08 Counterparts........................................................................ -63-
11.09 GOVERNING LAW; ETC.................................................................. -63-
11.10 SUBMISSION TO JURISDICTION; WAIVERS................................................. -63-
11.11 WAIVER OF JURY TRIAL................................................................ -64-
11.12 Acknowledgments..................................................................... -64-
11.13 Hypothecation and Pledge of Collateral.............................................. -64-
11.14 Assignments; Participations......................................................... -65-
11.15 Servicing........................................................................... -65-
11.16 Periodic Due Diligence Review....................................................... -67-
11.17 Set-Off............................................................................. -67-
11.19 Entire Agreement............................................................................. -68-
</TABLE>
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<PAGE> 5
SCHEDULES
SCHEDULE 1 Representations and Warranties re: Eligible Assets
SCHEDULE 2 Filing Jurisdictions and Offices
SCHEDULE 3 Subsidiaries
SCHEDULE 4 Litigation
EXHIBITS
EXHIBIT A Form of Promissory Note
EXHIBIT B Form of Mortgage Custodial Agreement
EXHIBIT C Form of Opinion of Counsel to Borrower
EXHIBIT D Form of Notice of Borrowing and Pledge
EXHIBIT E Underwriting Guidelines
EXHIBIT F Form of Blocked Account Agreement
EXHIBIT G Form of Mortgage Loan Tape
EXHIBIT H Form of Borrowing Base Certificate
EXHIBIT I Form of Remittance Report
EXHIBIT J Form of Instruction Letter
EXHIBIT K-1 Form of Lost Instrument Affidavit
EXHIBIT K-2 Form of Lost Note Affidavit
EXHIBIT L Form of Notice of Extension of Interest Period
iv
<PAGE> 6
AMENDED AND RESTATED MASTER LOAN AND SECURITY AGREEMENT
AMENDED AND RESTATED MASTER LOAN AND SECURITY AGREEMENT, dated as of
March 27, 2000, among HANOVER CAPITAL MORTGAGE HOLDINGS, INC. ("Hanover Capital
Holdings"), a Maryland corporation and HANOVER CAPITAL PARTNERS, LTD. ("Hanover
Capital Partners"), a New York corporation, (each, a "Borrower" and
collectively, the "Borrowers"), and GREENWICH CAPITAL FINANCIAL PRODUCTS, INC.,
a Delaware corporation (the "Lender").
RECITALS
The Borrowers entered into that certain Amended and Restated Master
Loan and Security Agreement, dated as of November 23, 1998, as amended (the
"Existing Agreement"), with the Lender to obtain financing from time to time to
provide interim funding for (i) certain Eligible Bonds (as defined herein), (ii)
certain Pledged Stock (as defined herein), (iii) certain Participation
Certificates (as defined herein), and (iv) the acquisition of certain Mortgage
Loans (as defined herein), which Mortgage Loans are to be sold or contributed by
the Borrowers to one or more trusts or other entities sponsored by the Borrowers
or an Affiliate (as defined herein) of the Borrowers, or to third-parties, and
which Eligible Bonds, Participation Certificates, Pledged Stock, and Mortgage
Loans secure Advances (as defined herein) made by the Lender thereunder.
The Borrowers and the Lender desire to amend and restate the Existing
Agreement to provide additional terms and conditions under which the Lender is
prepared to provide funding to the Borrowers from and after the date hereof.
Accordingly, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
SECTION 1 Definitions and Accounting Matters.
1.01 Certain Defined Terms. As used herein, the following terms shall
have the following meanings (all terms defined in this Section 1.01 or in other
provisions of this Loan Agreement in the singular to have the same meanings when
used in the plural and vice versa):
"A Conduit Non-Investment Grade Subordinate Bonds" shall mean a
certificated or uncertificated subordinate bond with a credit rating below
Investment Grade which (a) were sold to the Borrowers by the Lender or (b) are
acceptable to the Lender in its sole discretion and were issued by either
Residential Funding Corporation, General Electric, Independent National Mortgage
Company, Norwest Mortgage, Inc., Cendant Mortgage Corporation, Bank of America
Mortgage Securities, Chase Home Mortgage or such other nationally recognized "A"
quality conduit issuer as may be approved in writing by the Lender from time to
time in its sole discretion; provided, however, that if Lender determines that
an A Conduit Non-Investment Grade Subordinate Bond is acceptable to it, such
acceptance shall be deemed to continue for so long as such A Conduit Non-
<PAGE> 7
Investment Grade Subordinate Bond remains pledged hereunder (or until the end of
the term of this Agreement, whichever is earlier).
"Accepted Servicing Practices" shall have the meaning assigned thereto
in Section 11.15(a) hereof.
"Advance" shall mean any Committed Advance or Uncommitted Advance, as
applicable, and collectively "Advances" shall mean the sum of all Committed
Advances and Uncommitted Advances.
"Affiliate" means, with respect to any Person, any other Person which,
directly or indirectly, controls, is controlled by, or is under common control
with, such Person. For purposes of this definition, "control" (together with the
correlative meanings of "controlled by" and "under common control with") means
possession, directly or indirectly, of the power (a) to vote 10% or more of the
securities (on a fully diluted basis) having ordinary voting power for the
directors or managing general partners (or their equivalent) of such Person, or
(b) to direct or cause the direction of the management or policies of such
Person, whether through the ownership of voting securities, by contract, or
otherwise.
"Applicable Collateral Percentage" shall mean, with respect to Eligible
Bonds that are Investment Grade Bonds which are rated AA- or better by S&P and
Aa3 or better by Moody's, 75%; with respect to Eligible Bonds that are
Investment Grade Bonds which are rated A- or better by S&P and A3 or better by
Moody's, 70%; with respect to Eligible Bonds that are Investment Grade Bonds
which are rated BBB- or better by S&P and Baa3 or better by Moody's, 60%; with
respect to Eligible Bonds that are Non-Investment Grade Bonds, 60%; with respect
to Equity Certificates, 70%; with respect to A Conduit Non-Investment Grade
Subordinate Bonds which are rated BB or BB- by S&P or Moody's, 70%; with respect
to A Conduit Non-Investment Grade Subordinate Bonds which are rated B or B- by
S&P or Moody's, 60%; with respect to A Conduit Non-Investment Grade Subordinate
Bonds which are rated below B- by S&P or Moody's or unrated, 50%; and with
respect to Pledged Stock, the percentage applicable to the Underlying Eligible
Bonds owned by the applicable Eligible Entity. The Applicable Collateral
Percentage with respect to Eligible Mortgage Loans and Participation
Certificates shall be either (i) for the first 180 days following the date such
Eligible Mortgage Loan or Participation Certificate first becomes subject to the
terms of this Agreement, with respect to all Eligible Mortgage Loans (other than
Delinquent Mortgage Loans), 95%; with respect to Thirty Day Delinquent Mortgage
Loans, 90%; with respect to Sixty Day Delinquent Mortgage Loans, 85%; and with
respect to Participation Certificates, 95% multiplied by the Ownership
Percentage or (ii) thereafter, 0%.
"Applicable Margin" shall mean, with respect to Advances that are
Tranche A Advances, Tranche B Advances, Tranche C Advances, Tranche D Advances
and Tranche E Advances, respectively, the applicable rate per annum set forth
below:
<TABLE>
<S> <C>
Tranche A Advances.................... 1.25%
</TABLE>
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<PAGE> 8
<TABLE>
<S> <C>
Tranche B Advances.................... 1.55%
Tranche C Advances.................... 1.80%
Tranche D Advances.................... 2.50%
Tranche E Advances.................... 1.80%
</TABLE>
"Applicable Notice Documents" shall have the meaning provided in
Section 2.03(a) hereof.
"Appraised Value" shall mean the value set forth in an appraisal made
in connection with the origination or acquisition of the related Mortgage Loan
as the value of the Mortgaged Property.
"Asset Documents" shall mean (i) with respect to each Eligible Mortgage
Loan, the documents comprising the related Mortgage File, (ii) with respect to
each Eligible Bond, the documents comprising the related Bond File, (iii) the
Pledged Stock and (iv) with respect to Participation Certificates, the documents
comprising the original Participation Certificate File.
"Asset File" shall mean the Bond File, the Mortgage File, or the
Participation Certificate File, as applicable.
"Bankruptcy Code" shall mean the United States Bankruptcy Code of 1978,
as amended from time to time.
"Blocked Account Agreement" shall mean an agreement between Hanover
Capital Holdings, the Collection Bank, and the Lender, substantially in the form
of Exhibit F hereto, as the same may be amended, supplemented or otherwise
modified from time to time, in which Hanover Capital Holdings and Collection
Bank acknowledge the Lender's lien on the Collection Account (which lien is
hereby consented to by Hanover Capital Partners), and the Borrowers hereby grant
to the Lender the right to assume at any time exclusive dominion and control
over the distribution of all monies in the account, which control may be
exercised by Hanover Capital Holdings prior to such assumption of control by the
Lender.
"Bond/PC Custodial Agreement" shall mean that certain agreement between
the Lender and the Bond/PC Custodian setting forth (i) the procedures for
delivery and maintenance of the Eligible Bonds, Underlying Eligible Bonds,
Pledged Stock, Bond Files, Participation Certificates, and Participation
Certificate Files, and (ii) governing the establishment and maintenance of the
Lender"s "securities account" (as defined in Section 8-501(a) of the UCC) and
identifying the Bond/PC Custodian as "securities intermediary" (as defined in
Section 8-102(a)(14) of the UCC and 31 C.F.R. Section 357.2).
"Bond/PC Custodian" shall mean either (i) the Lender, (ii) Chase
Manhattan Bank or (iii) any other Person designated by the Lender, as custodian
of the Pledged Stock, Eligible Bonds, Underlying Eligible Bonds, Bond Files,
Participation Certificates, and Participation Certificate Files.
-3-
<PAGE> 9
"Bond File" shall have the meaning provided in Section 5.02(g)(vi)
hereof.
"Bond Summary" shall mean a written summary for each Eligible Bond and
Underlying Eligible Bond to be delivered by the Borrower to the Lender pursuant
to Section 2.03(a) hereof, which shall include the following information and
documentation: (i) the name of the issuer, (ii) the original principal amount,
(iii) the current principal amount, (iv) the applicable interest rate, (v) for
each bond which is publicly offered, the cusip, (vi) the name and class of the
bond, (vii) such other information as shall be mutually agreed upon by the
Borrower and the Lender, and (viii) with respect to each certificated bond, a
copy of the related certificate attached thereto.
"Borrower" shall have the meaning provided in the heading hereof.
"Borrowing Base" shall mean the aggregate Collateral Value of all
Eligible Assets that have been, and remain, pledged to the Lender hereunder.
"Borrowing Base Deficiency" shall have the meaning provided in Section
2.06 hereof.
"Business Day" shall mean any day other than (i) a Saturday or Sunday
or (ii) a day on which the New York Stock Exchange, the Federal Reserve Bank of
New York or the Mortgage Custodian is authorized or obligated by law or
executive order to be closed.
"Capital Stock" shall mean any and all shares, interests,
participations or other equivalents (however designated) of capital stock of a
corporation, any and all similar ownership interests in a Person (other than a
corporation) and any and all warrants or options to purchase any of the
foregoing.
"Cash Equivalents" shall mean (a) securities with maturities of 90 days
or less from the date of acquisition issued or fully guaranteed or insured by
the United States Government or any agency thereof, (b) certificates of deposit
and eurodollar time deposits with maturities of 90 days or less from the date of
acquisition and overnight bank deposits of any commercial bank having capital
and surplus in excess of $500,000,000, (c) repurchase obligations of any
commercial bank satisfying the requirements of clause (b) of this definition,
having a term of not more than seven days with respect to securities issued or
fully guaranteed or insured by the United States Government, (d) commercial
paper of a domestic issuer rated at least A-1 or the equivalent thereof by
Standard and Poor's Ratings Group ("S&P") or P-1 or the equivalent thereof by
Moody's Investors Service, Inc. ("Moody's") and in either case maturing within
90 days after the day of acquisition, (e) securities with maturities of 90 days
or less from the date of acquisition issued or fully guaranteed by any state,
commonwealth or territory of the United States, by any political subdivision or
taxing authority of any such state, commonwealth or territory or by any foreign
government, the securities of which state, commonwealth, territory, political
subdivision, taxing authority or foreign government (as the case may be) are
rated at least A by S&P or A by Moody's, (f) securities with maturities of 90
days or less from the date of acquisition backed by standby letters of credit
issued by any commercial bank satisfying the requirements of clause (b) of this
definition or (g) shares of money market mutual
-4-
<PAGE> 10
or similar funds which invest exclusively in assets satisfying the requirements
of clauses (a) through (f) of this definition.
"Certificate Registrar" shall mean the Person who carries on its books
and records the identity of the holder of a Participation Certificate.
"Change of Control" shall mean either (i) any one of the following
three individuals leaves the employ of Hanover Capital Holdings: John Burchett,
Irma Tavares, or Joyce Mizerak, or (ii) there occurs a change of "control" of
either Borrower as such term is defined in the Securities Exchange Act of 1934,
as amended.
"Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
"Collateral" shall have the meaning provided in Section 4.01(b) hereof.
"Collateral Value" shall mean, (a) with respect to each Eligible
Mortgage Loan or Eligible Bond, the Applicable Collateral Percentage of the
lesser of (i) the Market Value of such Eligible Mortgage Loan or Eligible Bond
and (ii) the Purchase Price Percentage of such Eligible Mortgage Loan or
Eligible Bond multiplied by the outstanding principal balance of such Eligible
Mortgage Loan or Eligible Bond; and (b) with respect to each Participation
Certificate, the Applicable Collateral Percentage of the lesser of (i) the
Market Value of the Underlying Mortgage Loans subject to such Participation
Certificate, and (ii) the Purchase Price Percentage of such Participation
Certificate multiplied by the outstanding principal balance of the Underlying
Mortgage Loans subject to such Participation Certificate, and (c) with respect
to the Pledged Stock, the Applicable Collateral Percentage of the Market Value
of the Underlying Eligible Bond(s) owned by the related Eligible Entity;
provided that the following additional limitations on Collateral Value shall
apply:
(i) subject to (vi)(A) below, the aggregate Collateral Value
of all Thirty-Day Delinquent Mortgage Loans may not at any one time
exceed the lesser of (x) $10,000,000 or (y) 5% of the aggregate
outstanding principal balance of all Advances;
(ii) subject to (vi)(A) below, the aggregate Collateral Value
of all Sixty-Day Delinquent Mortgage Loans may not at any one time
exceed the lesser of (x) $6,000,000 or (y) 3% of the aggregate
outstanding principal balance of all Advances;
(iii) the aggregate Collateral Value for all Document
Deficient Assets shall not at any time exceed the lesser of (x)
$20,000,000 or (y) 10% of the aggregate outstanding principal balance
of all Advances; provided, however, that in no event shall Type I
Document Deficient Assets and Type III Document Deficient Assets
(taking into account Underlying Mortgage Loans subject to Participation
-5-
<PAGE> 11
Certificates), taken in the aggregate, at any time exceed the lesser of
(1) $10,000,000 or (2) 5% of the aggregate outstanding principal
balance of all Advances; and
(iv) the Collateral Value shall be zero for each Eligible
Asset, for each Underlying Mortgage Loan securing such Eligible Asset,
or for each Underlying Eligible Bond owned by an Eligible Entity with
respect to which the Pledged Stock has been pledged to the Lender
hereunder, as applicable:
(A) which is an Eligible Mortgage Loan or an
Underlying Mortgage Loan, other than Thirty-Day Delinquent
Mortgage Loans subject to subsection (i) above, which is
thirty (30) days or more delinquent in respect of any
Scheduled Payment as of the date of determination;
(B) which is an Eligible Mortgage Loan or an
Underlying Mortgage Loan which is thirty (30) days or more
delinquent in respect of the first Scheduled Payment;
(C) which is an Eligible Mortgage Loan or an
Underlying Mortgage Loan, other than Sixty-Day Delinquent
Mortgage Loans subject to subsection (ii) above, which is
sixty (60) days or more delinquent in respect of any Scheduled
Payment;
(D) in respect of which the Maximum Pledge Period has
passed;
(E) which is an Eligible Mortgage Loan and which has
been released from the possession of the Mortgage Custodian
under Section 5(a) of the Mortgage Custodial Agreement to any
Person other than the Lender or its bailee for a period in
excess of ten (10) days (or if such tenth day is not a
Business Day, the next succeeding Business Day);
(F) which is an Eligible Mortgage Loan and which has
been released from the possession of the Mortgage Custodian
under Section 5(b) of the Mortgage Custodial Agreement under
any Transmittal Letter in excess of the time period stated in
such Transmittal Letter for release;
(G) which is an Eligible Mortgage Loan or Underlying
Mortgage Loan and in respect of which (1) the related
Mortgaged Property is the subject of a foreclosure proceeding;
(H) which is an Eligible Mortgage Loan or Underlying
Mortgage Loan and as to which (i) the related Mortgage Note or
the related Mortgage is not genuine or is not the legal,
valid, binding and enforceable obligation of the maker
thereof, subject to no right of rescission, set-off,
counterclaim or
-6-
<PAGE> 12
defense, or (ii) such Mortgage, is not a valid, subsisting,
enforceable and perfected first lien on the Mortgaged
Property;
(I) which the Lender determines, in its reasonable
discretion, is not eligible for sale in the secondary market
or for securitization without unreasonable credit enhancement;
(J) which has a Material Exception with respect
thereto which was not otherwise waived by Lender;
(K) which is an Eligible Mortgage Loan or Underlying
Mortgage Loan and in respect of which the related Mortgagor is
the subject of a bankruptcy proceeding;
(L) which is an Eligible Mortgage Loan or Underlying
Mortgage Loan which is ninety (90) days or more delinquent in
respect of any Scheduled Payment;
(M) which is a Type II Document Deficient Asset for
which the Mortgage Custodian or the Bond/PC Custodian, as
applicable, has failed to receive, pursuant to Section 2(I)(e)
of the Mortgage Custodial Agreement, (a) with respect to
intervening assignments, either (i) the related intervening
assignment within 120 days from the date such Mortgage Loan
was pledged to the Lender or (ii) proof that the last
intervening assignment was recorded, which such proof shall be
in the form of (A) the original title policy or a copy of the
same certified by the Borrower as a true, correct, and
complete copy thereof or (B) a certified copy of the last
intervening assignment with evidence of recording indicated
thereon; or, (b) with respect to the title policy, either (i)
the original title policy or a copy of the same certified by
the Borrower as a true, correct and complete copy thereof
within 120 days from the date such Mortgage Loan was pledged
to the Lender, or (ii) any other evidence of such title policy
acceptable to the Lender in its sole discretion, including,
without limitation, any preliminary title report, binder, or
commitment to provide such title policy;
(N) which is an Eligible Bond and in respect to which
there is a breach of any of the representations or warranties
in Schedule 1 hereto; and
(O) which is a Type III Document Deficient Asset for
which the Bond/PC Custodian has failed to receive, an original
Participation Certificate within 21 days from the date such
Participation Certificate was pledged to the Lender.
-7-
<PAGE> 13
(v) the aggregate Collateral Value of all Non-Investment Grade
Bonds shall not at any time exceed $15,000,000;
(vi) the aggregate Collateral Value of all A Conduit
Non-Investment Grade Subordinate Bonds which were not sold to the
Borrowers by the Lender shall not at any time exceed $10,000,000; and
(vii) the aggregate Collateral Value of all A Conduit
Non-Investment Grade Subordinate Bonds rated below B- by S&P or Moody's
or unrated shall not at any time exceed 20% of the Non-Investment Grade
Bond Sublimit.
'Collection Account" shall mean the segregated account established at
the direction of the Borrowers, and maintained in the name of the Lender and
subject to a security interest in favor of the Lender into which all Collections
received by the Master Servicer, a Subservicer, or a Trustee shall be remitted
by such Master Servicer, Subservicer or Trustee. Hanover Capital Holdings shall
have the right to direct that withdrawals from such account be made until such
time as Lender, in its sole discretion, provides notice to the Collection Bank
terminating such right of Hanover Capital Holdings.
"Collection Bank" shall mean Fleet Bank.
"Collections" shall mean, collectively, (i) with respect to Mortgage
Loans which are Assets, all collections and proceeds on or in respect of the
Mortgage Loans which are Assets, excluding collections required to be paid to
the Subservicer or a mortgagor on the Mortgage Loans which are Assets, (ii) with
respect to Eligible Bonds which are Assets, Underlying Eligible Bonds which are
Assets and Participation Certificates which are Assets, all cash dividends or
distributions or any monies distributed on account of such Eligible Bonds which
are Assets, Underlying Eligible Bonds which are Assets or Participation
Certificates which are Assets, as applicable.
"Commitment Fee" shall have the meaning assigned thereto in Section
3.03 hereof.
"Committed Advance" shall have the meaning assigned thereto in Section
2.01(a) hereof.
"Commonly Controlled Entity" shall mean an entity, whether or not
incorporated, which is under common control with the Borrower within the meaning
of Section 4001 of ERISA or is part of a group which includes the Borrower and
which is treated as a single employer under Section 414 of the Code.
"Contractual Obligation" shall mean as to any Person, any provision of
any agreement, instrument or other undertaking to which such Person is a party
or by which it or any of its property is bound or any provision of any security
issued by such Person.
-8-
<PAGE> 14
"Default" shall mean an Event of Default or an event that with notice
or lapse of time or both would become an Event of Default.
"Delinquent Mortgage Loan" shall mean either a Thirty-Day Delinquent
Mortgage Loan or a Sixty-Day Delinquent Mortgage Loan; provided that in no event
shall a Mortgage Loan or Underlying Mortgage Loan that is ninety (90) days or
more delinquent have a Collateral Value in excess of zero.
"Document Deficient Assets" shall be the collective reference to Type I
Document Deficient Assets, Type II Document Deficient Mortgage Loans and Type
III Document Deficient Mortgage Loans.
"Dollars" and "$" shall mean lawful money of the United States of
America.
"Due Diligence Package" shall mean with respect to each Mortgage Loan
or Underlying Mortgage Loan to be pledged to the Lender hereunder (a) all
materials in the possession or under the control of the Borrower, which
materials shall include, without limitation, (i) the Borrower's analysis of the
seller and the Subservicer, (ii) the results of the Borrower's underwriting and
due diligence review of all documents related to such Mortgage Loan or
Underlying Mortgage Loan, and (b) any certificates, remittance reports,
Servicing Agreements, and purchase agreements governing such Mortgage Loans or
Underlying Mortgage Loan.
"Due Diligence Review" shall mean the performance by the Lender of any
or all of the reviews permitted under Section 11.16 hereof with respect to any
or all of the Eligible Assets of the Borrower or related parties, as desired by
the Lender from time to time.
"Effective Date" shall mean the date upon which the conditions
precedent set forth in Section 5.01 shall have been satisfied.
"Eligible Assets" shall mean Eligible Mortgage Loans, Eligible Bonds,
Pledged Stock, and Participation Certificates (or the Underlying Mortgage Loans
related thereto) as to which the representations and warranties set forth on
Schedule 1 hereof are true and correct.
"Eligible Bond" shall mean either an Investment Grade Bond or a
Non-Investment Grade Bond for which (i) the Borrower or one of its Affiliates
was the issuer or was the depositor into a trust which was the issuer, (ii) the
Borrower is the current owner and (iii) either (y) Greenwich Capital Markets,
Inc. was the underwriter or placement agent, or (z) FNMA or FHLMC has guaranteed
the payment of principal and interest on the securities. In addition, the
following securities shall constitute Eligible Bonds for purposes of this
Agreement: Hanover Capital Trust 1998-B, Class 1B and Class 2B. For purposes of
this Agreement, an Eligible Bond shall also include any Equity Certificate and
any A Conduit Non-Investment Grade Subordinate Bond which is acceptable to the
Lender in its sole discretion; provided, however, that if Lender determines that
an Eligible Bond is acceptable to it, such acceptance shall be deemed to
continue for so long as such
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<PAGE> 15
Eligible Bond remains pledged hereunder (or until the end of the term of this
Agreement, whichever is earlier). Lender's agreement to advance funds against an
Eligible Bond shall evidence that such Eligible Bond is acceptable to Lender.
"Eligible Entity" shall mean a corporation which is wholly and directly
owned by the Borrower and which (i) is a Special Purpose Entity and (ii) owns
one or more Underlying Eligible Bonds.
"Eligible Mortgage Loan" shall mean either a Prime Mortgage Loan or a
Scratch and Dent Mortgage Loan which was acquired by the Borrower and which
conforms to the Borrower's Underwriting Guidelines.
"Equity Certificate shall mean any subordinate interest in a
transaction involving the issuance of indebtedness, which subordinate interest
represents an equity interest in the related issuer of such indebtedness and
which is acceptable to the Lender in its sole discretion."
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended from time to time.
"ERISA Affiliate" shall mean any corporation or trade or business that
is a member of any group of organizations (i) described in Section 414(b) or (c)
of the Code of which the Borrower is a member and (ii) solely for purposes of
potential liability under Section 302(c)(11) of ERISA and Section 412(c)(11) of
the Code and the lien created under Section 302(f) of ERISA and Section 412(n)
of the Code, described in Section 414(m) or (o) of the Code of which the
Borrower is a member.
"Event of Default" shall have the meaning provided in Section 8 hereof.
"Exception" shall have the meaning assigned thereto in the Mortgage
Custodial Agreement.
"Exception Report" shall mean the exception report prepared by the
Mortgage Custodian pursuant to the Mortgage Custodial Agreement.
"Federal Funds Rate" shall mean, for any day, the weighted average of
the rates on overnight federal funds transactions with members of the Federal
Reserve System arranged by federal funds brokers, as published on the next
succeeding Business Day by the Federal Reserve Bank of New York, or, if such
rate is not so published for any day which is a Business Day, the average of the
quotations for the day of such transactions received by the Lender from three
federal funds brokers of recognized standing selected by it.
"FHLMC" shall mean the Federal Home Loan Mortgage Corporation or any
successor thereto.
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<PAGE> 16
"FNMA" shall mean the Federal National Mortgage Association or any
successor thereto.
"Funding Date" shall mean the date on which an Advance is made
hereunder.
"GAAP" shall mean generally accepted accounting principles as in effect
from time to time in the United States of America.
"Governing Agreements" shall mean the agreement or agreements which
govern the issuance and the payment of the Eligible Bonds, Underlying Eligible
Bonds or Participation Certificates, as applicable.
"Governmental Authority" shall mean any nation or government, any state
or other political subdivision thereof, any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government and any court or arbitrator having jurisdiction over the Borrower,
any of its Subsidiaries or any of their properties.
"Guarantee Obligation" as to any Person (the "guaranteeing person"),
shall mean any obligation of (a) the guaranteeing person or (b) another Person
(including, without limitation, any bank under any letter of credit) with
respect to which the guaranteeing person has issued a reimbursement,
counterindemnity or similar obligation, in either case guaranteeing or in effect
guaranteeing any Indebtedness, leases, dividends or other obligations (the
"primary obligations") of any other third Person (the "primary obligor") in any
manner, whether directly or indirectly, including, without limitation, any
obligation of such guaranteeing person, whether or not contingent, (i) to
purchase any such primary obligation or any property constituting direct or
indirect security therefor, (ii) to advance or supply funds (1) for the purchase
or payment of any such primary obligation or (2) to maintain working capital or
equity capital of the primary obligor or otherwise to maintain the net worth or
solvency of the primary obligor, (iii) to purchase property, securities or
services primarily for the purpose of assuring the owner of any such primary
obligation of the ability of the primary obligor to make payment of such primary
obligation or (iv) otherwise to assure or hold harmless the owner of any such
primary obligation against loss in respect thereof; provided, however, that the
term Guarantee Obligation shall not include endorsements of instruments for
deposit or collection in the ordinary course of business. The terms "Guarantee"
and "Guaranteed" used as a verb shall have a correlative meaning. The amount of
any Guarantee Obligation of any guaranteeing person shall be deemed to be the
lower of (a) an amount equal to the stated or determinable amount of the primary
obligation in respect of which such Guarantee Obligation is made and (b) the
maximum amount for which such guaranteeing person may be liable pursuant to the
terms of the instrument embodying such Guarantee Obligation, unless such primary
obligation and the maximum amount for which such guaranteeing person may be
liable are not stated or determinable, in which case the amount of such
Guarantee Obligation shall be such guaranteeing person's maximum reasonably
anticipated liability in respect thereof as determined by the Borrower in good
faith.
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<PAGE> 17
"Hedging Agreement" shall mean, with respect to any or all of the
Eligible Assets, any interest rate swap, cap or collar agreement or similar
arrangements providing for protection against fluctuations in interest rates or
other market risks commonly hedged or the exchange of nominal interest
obligations, either generally or under specific contingencies, entered into by a
Borrower and reasonably acceptable to the Lender.
"HUD" shall mean the Department of Housing and Urban Development, or
any federal agency or official thereof which may from time to time succeed to
the functions thereof.
"Indebtedness" shall mean, of any Person at any date, without
duplication, (a) all indebtedness of such Person for borrowed money (whether by
loan or the issuance and sale of debt securities) or for the deferred purchase
price of property or services (other than current trade liabilities incurred in
the ordinary course of business and payable in accordance with customary
practices), (b) any other indebtedness of such Person which is evidenced by a
note, bond, debenture or similar instrument, (c) all obligations of such Person
under financing leases, (d) all obligations of such Person in respect of letters
of credit, acceptances or similar instruments issued or created for the account
of such Person and (e) all liabilities secured by any Lien on any property owned
by such Person even though such Person has not assumed or otherwise become
liable for the payment thereof.
"Indemnified Party" shall have the meaning provided in Section 11.03
hereof.
"Instruction Letter" shall mean a letter agreement from the related
Borrower to each Trustee, Certificate Registrar and/or Subservicer, as
applicable, substantially in the form of Exhibit J attached hereto, in which
such Persons acknowledge the Lender's security interest in the Eligible Assets,
and agrees to remit Collections either directly into the Collection Account or
in any other way the Lender may so direct from time to time, which Instruction
Letter may be delivered by Lender to such Trustee, Certificate Registrar and/or
Subservicer in its sole discretion.
"Interest Period" shall mean, with respect to any Advance, (i)
initially, the period commencing on the Funding Date with respect to such
Advance and ending on the calendar day prior to the Payment Date of the next
succeeding month, and (ii) thereafter, each period commencing on the Payment
Date and ending on the calendar day prior to the Payment Date of the next
succeeding month. Notwithstanding the foregoing, no Interest Period may end
after the Termination Date.
"Investment Company Act" shall mean the Investment Company Act of 1940,
as amended.
"Investment Grade" shall mean a credit rating of BBB- or better, as
determined by Standard & Poor's Ratings Group ("S&P"), or a credit rating of
Baa3 or better, as determined by Moody's Investors Service, Inc. ("Moody's).
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<PAGE> 18
"Investment Grade Bond" shall mean a certificated or uncertificated
subordinate bond with an Investment Grade credit rating as of any date of
determination; provided, that, in the event such bond is downgraded to below an
Investment Grade credit rating, such bond will be treated as a Non-Investment
Grade Bond hereunder and shall be included in calculating whether the
Non-Investment Grade Bond Sublimit has been exceeded.
"Lender" shall have the meaning provided in the heading hereof.
"LIBOR" shall mean for any Advance, with respect to each day during
each Interest Period pertaining to such Advance, the rate per annum equal to the
rate appearing on Bloomberg on the first day of such Interest Period, for the
one-month, three-month, or six-month term, as applicable, corresponding to such
Interest Period, or if such rate shall not be so quoted then the applicable rate
appearing at page 3750 of the Telerate Screen on the first day of such Interest
Period, or if neither such rate shall be so quoted, the rate per annum at which
the Lender is offered Dollar deposits at or about 11:00 a.m., New York City
time, on such date by prime banks in the interbank eurodollar market where the
eurodollar and foreign currency exchange operations in respect of its Advances
are then being conducted for delivery on the first day of such Interest Period
for the number of days comprised therein, and in an amount comparable to the
amount of the Advances to be outstanding on such day.
"Lien" shall mean any mortgage, lien, pledge, charge, security interest
or similar encumbrance.
"Loan Agreement" shall mean this Amended and Restated Master Loan and
Security Agreement, as the same may be amended, supplemented or otherwise
modified from time to time.
"Loan Documents" shall mean, collectively, this Loan Agreement, the
Note, the Mortgage Custodial Agreement, the Bond/PC Custodial Agreement, the
Blocked Account Agreement, and the Instruction Letters.
"Loan-to-Value Ratio" or "LTV" shall mean with respect to any Mortgage
Loan, the ratio of (a) the Par Amount of the Mortgage Loan as of the date of
origination (unless otherwise indicated) to (b) the Appraised Value of the
Mortgaged Property or if the Mortgage Loan was made in connection with the
purchase of the related Mortgaged Property, the lesser of the Appraised Value
and the sales price of such property.
"Lost Instrument Affidavit" shall mean an affidavit, substantially in
the form of Exhibit K-1 or otherwise acceptable to the Lender in its sole
discretion, executed by the Borrower or other Person acceptable to the Lender in
its sole discretion, which Lost Instrument Affidavit shall (i) attach a copy of
the original Participation Certificate certified by the Borrower as a true,
complete, and correct copy thereof, (ii) indemnify the Lender, and (iii) remain
effective for all successors and assigns of the Borrower and the Lender.
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<PAGE> 19
"Lost Note Affidavit" shall mean an affidavit, substantially in the
form of Exhibit K-2 or otherwise acceptable to the Lender in its sole
discretion, executed by the related Borrower or other Person acceptable to the
Lender in its sole discretion, which states that the Mortgage Custodian is not
in possession of the original Mortgage Note, which Lost Note Affidavit shall (i)
attach a copy of the original Mortgage Note certified by the related Borrower as
a true, complete, and correct copy thereof, (ii) indemnify the Lender, and (iii)
remain effective for all successors and assigns of the related Borrower and the
Lender.
"Market Value" shall mean, with respect to (i) any Eligible Asset other
than Pledged Stock, the price at which such Eligible Asset could be sold to a
third-party, as determined by the Lender in its sole discretion (exercised in
good faith), taking into account customary factors, including, but not limited
to: (a) the historical experience for collateral with similar characteristics to
the Eligible Asset, such as prepayment speeds, expected default rates and loss
severity; (b) market factors; (c) the creditworthiness of the issuer thereof, if
applicable, and (d) appropriate discount rates and with respect to (ii) Pledged
Stock, the aggregate price at which all Underlying Eligible Bonds owned by the
related Eligible Entity could be sold to a third-party, as determined by the
Lender in its sole discretion (exercised in good faith), taking into account
customary factors, including, but not limited to: (a) the historical experience
for collateral with similar characteristics to the Underlying Eligible Bonds,
such as prepayment speeds, expected default rates and loss severity; (b) market
factors; (c) the creditworthiness of the issuer thereof, if applicable, and (d)
appropriate discount rates; provided that the Market Value shall be zero (y)
with respect to any Underlying Eligible Bond for which there is a breach of any
of the representations or warranties in Schedule 1 hereto or (z) with respect to
the aggregate Market Value of Eligible Bonds or Underlying Eligible Bonds in
excess of the Non-Investment Grade Bond Sublimit; and provided, further, that in
all events such Market Value for any Eligible Asset may be determined to be zero
in the Lender's sole discretion. The Lender shall have the right to mark to
market the Eligible Assets on a daily basis. The Lender's determination of
Market Value shall be final and binding on the parties. The Borrowers
acknowledge that the Lender's determination of Market Value is for the limited
purpose of determining Collateral Value for lending purposes hereunder without
the ability to perform customary purchaser's due diligence and is not
necessarily equivalent to a determination of the fair market value of the
Eligible Assets achieved by obtaining competing bids in an orderly market in
which the Borrowers are not in default and the bidders have adequate opportunity
to perform customary loan and servicing due diligence.
"Master Servicer" shall mean Hanover Capital Mortgage Holdings, Inc.
"Material Adverse Effect" shall mean a material adverse effect on (a)
the business, assets, property, business, condition (financial or otherwise) or
prospects of a Borrower, (b) the ability of a Borrower to perform its
obligations under any of the Loan Documents to which it is a party, (c) the
validity or enforceability of any of the Loan Documents, (d) the rights and
remedies of the Lender under any of the Loan Documents, (e) the timely payment
of the principal of or interest on the Advances or other amounts payable in
connection therewith or (f) the Collateral.
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<PAGE> 20
"Material Exception" shall mean, (a) (i) with respect to any Mortgage
Loan, any Exception listed on the Exception Report consisting of the absence
from the Mortgage File, or deficiency in respect of, any of the Mortgage Loan
Documents set forth in Section 2(I)(a), 2(I)(c), 2(I)(d), 2(I)(e), or 2(I)(g)
(other than with respect to Document Deficient Assets), or (ii) for which the
information set forth in Section I of Annex 1 to the Mortgage Custodial
Agreement is incomplete, (b) with respect to any Eligible Bond or Underlying
Eligible Bond, any deviation from the document requirements set forth in Section
5.02(g) hereof, and (c) with respect to any Participation Certificate, any
deviation from the document requirements set forth in Section 5.02(f) or the
absence from the Participation Certificate File of any document or information
required therein.
"Maximum Committed Amount" shall mean $25,000,000.
"Maximum Credit" shall mean the sum of the Maximum Committed Amount and
the Maximum Uncommitted Amount, which on the date hereof shall equal
$25,000,000.
"Maximum Uncommitted Amount" shall mean $0, or such greater amount
agreed to in writing by Lender from time to time.
"Maximum Pledge Period" shall mean the first 180 days that an Eligible
Mortgage Loan or Participation Certificate has been pledged to the Lender
hereunder or such other period as determined in accordance with Section 2.11
hereof. With respect to an Equity Certificate, the earlier of (i) March 27,
2001, or (ii) the date of acceleration, if any, of the Borrower's obligations
hereunder.
"Mortgage" shall mean the mortgage, deed of trust or other instrument
securing a Mortgage Note, which creates a first lien on the fee simple in real
property securing the Mortgage Note.
"Mortgage Custodial Agreement" shall mean the Mortgage Custodial
Agreement, dated as of the date hereof, among the Borrowers, the Mortgage
Custodian and the Lender, substantially in the form of Exhibit B hereto, as the
same shall be modified and supplemented and in effect from time to time.
"Mortgage Custodian" shall mean First Chicago National Processing
Corporation, as custodian pursuant to the Mortgage Custodial Agreement for all
Mortgage Loans pledged hereunder, and its successors and permitted assigns
thereunder.
"Mortgage File" shall have the meaning assigned thereto in the Mortgage
Custodial Agreement.
"Mortgage Interest Rate" means the annual rate of interest borne on a
Mortgage Note, which shall be adjusted from time to time with respect to
adjustable rate Mortgage Loans.
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<PAGE> 21
"Mortgage Loan" shall mean a Prime Mortgage Loan or Scratch and Dent
Mortgage Loan which the Mortgage Custodian has been instructed to hold for the
Lender pursuant to the Mortgage Custodial Agreement, and which mortgage loan
includes, without limitation (i) a Mortgage Note and related Mortgage and (ii)
all right, title and interest of the Borrower in and to the Mortgaged Property
covered by such Mortgage.
"Mortgage Loan Schedule" shall mean a schedule of Eligible Mortgage
Loans containing the following information with respect to each Eligible
Mortgage Loan to be delivered by the Borrower to the Lender pursuant to Section
2.03(a) or 7.08 hereof, as applicable: (i) the applicable Borrower's Mortgage
Loan number; (ii) the Mortgagor"s name and the street address; (iii) the current
principal balance as of the date specified therein (which date shall be no
earlier than forty-five (45) days prior to the date such Mortgage Loan Schedule
is required to be delivered to the Lender or such other date mutually agreed
upon by the Borrower and Lender), (iv) the original principal balance as of the
date of origination; (v) the LTV as of the date of origination of the related
Mortgage Loan; (vi) the LTV of the related Mortgage Loan as of the date of
acquisition by the applicable Borrower; (vii) the paid through date; (viii) the
mortgage interest rate; (ix) the final maturity date under the Mortgage Note;
(x) the Scheduled Payment; (xi) the name of the Subservicer; (xii) delinquency
status (reported as current, 30-59, 60-89, 90+, etc.), (xiii) the current FICO
score for such Mortgage Loan, (xiv) the Purchase Price Percentage, (xv) whether
such Mortgage Loan is subject to graduated payments, (xvi) whether it is a fixed
or adjustable rate Mortgage Loan, (xvii) with respect to adjustable rate
Mortgage Loans, the interest rate adjustment date, (xviii) with respect to
adjustable rate Mortgage Loans, the interest rate margin, (xix) a code
indicating whether the Mortgage Loan is a Prime Mortgage Loan or a Scratch and
Dent Mortgage Loan, and (xx) such other information as shall be mutually agreed
upon by the Borrower and Lender.
"Mortgage Loan Tape" shall mean the computer-readable magnetic tape
required to be delivered by the Borrower to the Lender pursuant to Section
2.03(a) hereof (the format of which shall be substantially in the form of
Exhibit G attached hereto) which contains the information, with respect to each
Mortgage Loan, required to be contained in the Mortgage Loan Schedule.
"Mortgage Note" shall mean the original executed promissory note or
other evidence of the indebtedness of a mortgagor/borrower with respect to a
Mortgage Loan.
"Mortgaged Property" shall mean the real property (including all
improvements, buildings, fixtures, building equipment and personal property
thereon and all additions, alterations and replacements made at any time with
respect to the foregoing) and all other collateral securing repayment of the
debt evidenced by a Mortgage Note.
"Mortgagor" shall mean the obligor on a Mortgage Note.
"Multiemployer Plan" shall mean a Plan which is a multiemployer plan as
defined in Section 4001(a)(3) of ERISA.
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<PAGE> 22
"Net Worth" shall mean, with respect to any Person, the excess of total
assets of such Person, over total liabilities of such Person, determined in
accordance with GAAP.
"Non-Investment Grade Bond" shall mean a certificated or uncertificated
subordinate bond which is either unrated or has a credit rating below Investment
Grade as of the date of the pledge of such bond to the Lender hereunder or at
any date thereafter.
"Non-Investment Grade Bond Sublimit" shall mean $15,000,000.
"Note" shall mean the promissory note provided for by Section 2.02(a)
hereof for Advances and any promissory note delivered in substitution or
exchange therefor, in each case as the same shall be modified and supplemented
and in effect from time to time.
"Notice of Borrowing and Pledge" shall have the meaning provided in
Section 2.03(a) hereof.
"Ownership Percentage" shall mean the undivided ownership interest of
the holder of each Participation Certificate in each Underlying Mortgage Loan
subject to such Participation Certificate as evidenced by the related
Participation Certificate.
"Par Amount" shall mean, in respect of a Mortgage Loan at any time, the
outstanding principal balance of such Mortgage Loan at such time.
"Participants" shall have the meaning set forth in Section 11.14(b)
hereof.
"Participation Certificate" shall mean a certificate, delivered to the
Lender or its designee on each Funding Date in a form suitable for registration
in the name of the Lender, representing a Borrower"s Ownership Percentage in
certain Eligible Mortgage Loans, which Eligible Mortgage Loans are held by the
Participation Custodian for the benefit of the holder of such Participation
Certificate.
"Participation Certificate File" shall mean, with respect to each
Participation Certificate pledged to the Lender hereunder: (i) the original
certificate or a Lost Instrument Affidavit in lieu thereof, subject to the
sublimit in clauses (iv) and (v)(O) of the definition of Collateral Value and
Section 7.25 hereof, (ii) the related Governing Agreements, (iii) the related
Instruction Letter, (iv) an assignment executed by the registered holder in such
Participation Certificate in blank for the benefit of an assignee and acceptable
to the Lender in form and substance and sufficient to transfer the Participation
Certificates pursuant to the Governing Agreements, (v) the name of the
Certificate Registrar (if any) with contact information and (vi) any other
documents which the Lender may request
"Participation Certificate Schedule" shall mean a schedule of
information related to each Participation Certificate and the related Underlying
Mortgage Loan required to be delivered by
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<PAGE> 23
the Borrower to the Lender pursuant to Section 2.03(a) hereof, which schedule
shall contain the following information: (a) with respect to each Participation
Certificate, (i) the name of the issuer, and (ii) the Ownership Percentage and,
(b) with respect to each Underlying Mortgage Loan, (i) the applicable Borrower's
Mortgage Loan number; (ii) the Underlying Mortgagor's name and the street
address; (iii) the current principal balance as of the date specified therein;
(iv) the original balance as of the date specified therein; (v) the LTV as of
the date of the origination of the related Underlying Mortgage Loan; (vi) the
paid-through date; (vii) the mortgage interest rate; (viii) the final maturity
date under the Underlying Mortgage Note; (ix) the Scheduled Payment; (x) the
name of the servicer; (xi) the delinquency status (reported as current, 30-59,
60-89, 90+, etc.); (xii) the Purchase Price Percentage; (xiii) whether it is a
fixed or adjustable rate Underlying Mortgage Loan;; (xiv) with respect to any
adjustable rate Underlying Mortgage Loans, the interest rate adjustment date;
(xv) with respect to any adjustable rate Underlying Mortgage Loan, the interest
rate margin; and (xvi) such other information as shall be mutually agreed upon
by the Borrower and Lender.
"Participation Certificate Tape" shall mean the computer-readable
magnetic tape required to be delivered by the Borrower to the Lender pursuant to
Section 2.03(a) hereof (the format of which shall be substantially in the form
of the Mortgage Loan Tape with the addition of a field to set forth the related
Borrower's Ownership Percentage) which contains the information, with respect to
each Participation Certificate, required to be contained in the Participation
Certificate Schedule.
"Participation Custodian" shall mean the custodian holding the
Underlying Mortgage Loan and all documents related thereto for the holders of
the related Participation Certificate.
"Participation Servicer" shall mean the servicer of an Underlying
Mortgage Loan subject to a Participation Certificate.
"Payment Date" shall mean the eighth day of each calendar month, or if
such day is not a Business Day, the next succeeding Business Day.
"Payoff" shall mean, with respect to any Mortgage Loan, repayment by
the applicable Mortgagor of all outstanding principal thereunder together with
all interest accrued thereon to the date of such repayment and any penalty or
premium thereon.
"Payoff Proceeds" shall mean, with respect to any Mortgage Loan, all
funds received from the applicable Mortgagor in connection with a Payoff.
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any
entity succeeding to any or all of its functions under ERISA.
"Permitted Exceptions" shall mean the exceptions to lien priority
including but not limited to: (i) the lien of current real property taxes and
assessments not yet due and payable; (ii) covenants, conditions and
restrictions, rights of way, easements and other matters of the public
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<PAGE> 24
record as of the date of recording acceptable to mortgage lending institutions
generally and specifically referred to in the lender's title insurance policy
delivered to the originator of the Mortgage Loan and (A) referred to or to
otherwise considered in the appraisal (if any) made for the originator of the
Mortgage Loan or (B) which do not adversely affect the appraised value of the
Mortgaged Property set forth in such appraisal; and (iii) other matters to which
like properties are commonly subject which do not materially interfere with the
benefits of the security intended to be provided by the Mortgage or the use,
enjoyment, value or marketability of the related Mortgaged Property.
"Person" shall mean any individual, corporation, company, voluntary
association, partnership, joint venture, limited liability company, trust,
unincorporated association, government (or any agency, instrumentality or
political subdivision thereof) or any other entity of whatever nature.
"Plan" shall mean at a particular time, any employee benefit plan which
is covered by ERISA and in respect of which a Borrower or a Commonly Controlled
Entity is (or, if such plan were terminated at such time, would under Section
4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of
ERISA.
"Pledged Stock" shall mean all of the shares of Capital Stock of an
Eligible Entity, together with all stock certificates, options or rights of any
nature whatsoever which may be issued or granted by such Eligible Entity to the
related Borrower while this Loan Agreement is in effect.
"Pledged Stock Summary" shall mean a summary of information related to
the Pledged Stock required to be delivered by the related Borrower to the Lender
pursuant to Section 2.03(a) hereof, which schedule shall contain the following
information with respect to each Pledged Stock certificate, (i) the name of the
Eligible Entity and state of formation/authorization, (ii) the class of stock,
(iii) the certificate number and (iv) the number of shares.
"Post-Default Rate" shall mean, in respect of any principal of any
Advance or any other amount under this Loan Agreement, the Note or any other
Loan Document that is not paid when due to the Lender (whether at stated
maturity, by acceleration, by optional or mandatory prepayment or otherwise), a
rate per annum during the period from and including the due date to but
excluding the date on which such amount is paid in full equal to 2% per annum
plus (a) the interest rate otherwise applicable to such Advance or other amount,
or (b) if no interest rate is otherwise applicable, then LIBOR.
"Prime Mortgage Loan" shall mean an "A" Credit Mortgage Loan (as
defined in the Underwriting Guidelines) secured by a first mortgage lien on a
one to four family residential property as to which the representations and
warranties set forth on Schedule 1 hereof are true and correct.
"Property" shall mean any right or interest in or to property of any
kind whatsoever, whether real, personal or mixed and whether tangible or
intangible.
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<PAGE> 25
"Purchase Price Percentage" shall mean, with respect to any Eligible
Asset or Eligible Bond, as applicable, the dollar price paid by the related
Borrower for such Eligible Asset divided by the outstanding principal balance of
such Eligible Asset or Eligible Bond, as applicable, as of the cut-off date of
acquisition.
"Regulations G, T, U and X" shall mean Regulations G, T, U and X of the
Board of Governors of the Federal Reserve System (or any successor), as the same
may be modified and supplemented and in effect from time to time.
"Relevant System" shall mean (i) The Depository Trust Company in New
York, New York, or (ii) such other clearing organization or book-entry system as
is designated in writing by Lender.
"Reportable Event" shall mean any of the events set forth in Section
4043(b) of ERISA, other than those events as to which the thirty day notice
period is waived under subsections .13, .14, .16, .18, .19 or .20 of PBGC Reg.
Section 2615.
"Requirement of Law" shall mean as to any Person, the certificate of
incorporation and by-laws or other organizational or governing documents of such
Person, and any law, treaty, rule or regulation or determination of an
arbitrator or a court or other Governmental Authority, in each case applicable
to or binding upon such Person or any of its property or to which such Person or
any of its property is subject.
"Responsible Officer" shall mean, as to any Person, the chief executive
officer or, with respect to financial matters, the chief financial officer of
such Person; provided, that in the event any such officer is unavailable at any
time he or she is required to take any action hereunder, Responsible Officer
shall mean any officer authorized to act on such officer"s behalf as
demonstrated to the Lender to its reasonable satisfaction.
"Restricted Payments" shall mean with respect to any Person,
collectively, all dividends or other distributions of any nature (cash,
securities, assets or otherwise), and all payments, by virtue of redemption or
otherwise, on any class of equity securities (including, without limitation,
warrants, options or rights therefor) issued by such Person, whether such
securities are now or may hereafter be authorized or outstanding and any
distribution in respect of any of the foregoing, whether directly or indirectly.
"Scheduled Payment" shall mean, for any Eligible Asset, the scheduled
payment of principal and/or interest due thereunder.
"Scratch and Dent Mortgage Loan" shall mean a Mortgage Loan secured by
a first mortgage lien on a one to four family residential property intended by
the originator to conform with FNMA, FHLMC or other conduit standards but which
was subsequently discovered did not meet the originally intended market
parameters due to errors in relevant documentation or credit deterioration
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of the obligor and as to which the representations and warranties set forth on
Schedule 1 hereof are true and correct.
"Secured Obligations" shall mean the unpaid principal amount of, and
interest on the Advances, and all other obligations and liabilities of the
Borrowers to the Lender, whether direct or indirect, absolute or contingent, due
or to become due, or now existing or hereafter incurred, which may arise under,
out of or in connection with this Loan Agreement, the Note, any other Loan
Document and any other document made, delivered or given in connection herewith
or therewith, whether on account of principal, interest, reimbursement
obligations, fees, indemnities, costs, expenses (including, without limitation,
all fees and disbursements of counsel to the Lender that are required to be paid
by the Borrowers pursuant to the terms hereof or thereof) or otherwise. For
purposes hereof, "interest" shall include, without limitation, interest accruing
after the maturity of the Advances and interest accruing after the filing of any
petition in bankruptcy, or the commencement of any insolvency, reorganization or
like proceeding, relating to the Borrower, whether or not a claim for
post-filing or post-petition interest is allowed in such proceeding.
"Servicing Agreement" shall have the meaning provided in Section
11.15(c) hereof.
"Servicing Records" shall have the meaning provided in Section 11.15(b)
hereof.
"Side Letter" shall mean that certain letter agreement, dated as of the
date hereof, between the Lender and Hanover Capital Holdings.
"Single Employer Plan" shall mean any Plan which is covered by Title IV
of ERISA, but which is not a Multiemployer Plan.
"Sixty-Day Delinquent Mortgage Loan" shall mean a Mortgage Loan or
Underlying Mortgage Loan as to which a Scheduled Payment is more than 59 days,
but less than or equal to 89 days delinquent.
"Special Purpose Entity" shall mean a bankruptcy remote special purpose
entity (i) with respect to which a nationally recognized law firm has delivered
a substantive non-consolidation opinion, acceptable to Lender in its reasonable
discretion, to a rating agency in connection with the issuance of the Underlying
Eligible Bonds and (ii) which has restrictions and limitations in its
organizational documents that are consistent with its bankruptcy remote special
purpose entity status and are reasonably acceptable to Lender.
"Subsidiary" shall mean, with respect to any Person, any other Person
of which at least a majority of the securities or other ownership interests
having by the terms thereof ordinary voting power to elect a majority of the
board of directors or other persons performing similar functions of such
corporation, partnership or other entity (irrespective of whether or not at the
time securities or other ownership interests of any other class or classes of
such corporation, partnership or other entity shall have or might have voting
power by reason of the happening of any contingency)
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is at the time directly or indirectly owned or controlled by such Person or one
or more Subsidiaries of such Person or by such Person and one or more
Subsidiaries of such Person.
"Subservicer" shall have the meaning provided in Section 11.15(c)
hereof.
"Take-Out Commitments" shall be the collective reference to valid,
binding and enforceable commitments in form and substance acceptable to the
Lender to purchase one or more Eligible Assets, in each case as amended,
supplemented or otherwise modified in accordance with the terms thereof and in
effect from time to time.
"Tangible Net Worth" shall mean, with respect to any Person, as of any
date of determination, the consolidated Net Worth of such Person and its
Subsidiaries, less the consolidated net book value of all assets of such Person
and its Subsidiaries (to the extent reflected as an asset in the balance sheet
of such Person or any Subsidiary at such date) which will be treated as
intangibles under GAAP, including, without limitation, such items as deferred
financing expenses, net leasehold improvements, good will, trademarks, trade
names, service marks, copyrights, patents, licenses and unamortized debt
discount and expense.
"Termination Date" shall mean March 28, 2001 or such earlier date on
which this Loan Agreement shall terminate in accordance with the provisions
hereof or by operation of law, as same may be extended in accordance with
Section 2.10 hereof.
"Thirty-Day Delinquent Mortgage Loan" shall mean a Mortgage Loan or
Underlying Mortgage Loan as to which a Scheduled Payment is more than 29 days,
but less than or equal to 59 days delinquent.
"Tranche A Advances" shall mean Advances so long as, and to the extent
that, they are secured by Prime Mortgage Loans, Scratch and Dent Mortgage Loans,
or Participation Certificates.
"Tranche B Advances" shall mean Advances so long as, and to the extent
that, they are secured by (i) Eligible Bonds that are Investment-Grade Bonds; or
(ii) Pledged Stock to the extent the related Eligible Entity owns Underlying
Eligible Bonds that are Investment Grade Bonds.
"Tranche C Advances" shall mean Advances so long as, and to the extent
that, they are secured by (i) Eligible Bonds that are Non-Investment Grade Bonds
or (ii) Pledged Stock to the extent the related Eligible Entity owns Underlying
Eligible Bonds that are Non-Investment Grade Bonds.
"Tranche D Advances" shall mean Advances, so long as, and to the extent
that, they are secured by Equity Certificates."
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"Tranche E Advances" shall mean Advances so long as, and to the extent
that, they are secured by A Conduit Non-Investment Grade Subordinate Bonds.
"Transfer Documents" shall mean all documents required to re-register
the Eligible Bonds, Pledged Stock or Underlying Eligible Bonds in the name of
the Lender or the Bond/PC Custodian, or otherwise to effect a delivery thereof
in accordance with Section 5.02(g)(i) through (iii) hereof, including without
limitation, with respect to certificated securities, the original certificate.
"Transmittal Letter" shall have the meaning assigned to such term in
the Mortgage Custodial Agreement.
"Trustee" shall mean, with respect to Eligible Bonds, Underlying
Eligible Bonds and Participation Certificates, if applicable, the person under
the applicable Governing Agreement responsible for administering such Eligible
Bonds, Underlying Eligible Bonds or Participation Certificates.
"Trust Receipt" shall have the meaning assigned to such term in the
Mortgage Custodial Agreement.
"Type I Document Deficient Asset" shall mean an Eligible Mortgage Loan
for which the Mortgage Custodian has received a Lost Note Affidavit in lieu of
the original Mortgage Note.
"Type II Document Deficient Asset" shall mean an Eligible Mortgage Loan
for which the Mortgage Custodian has failed to receive (i) any intervening
assignment, or (ii) the original title policy or a copy of the same certified by
the Borrower as a true, correct and complete copy thereof.
"Type III Document Deficient Asset" shall mean a Participation
Certificate for which the Bond/PC Custodian has failed to receive an original
Participation Certificate but has received a Lost Instrument Affidavit in lieu
thereof.
"Uncommitted Advance" shall have the meaning assigned thereto in
Section 2.01(b) hereof.
"Underlying Eligible Bond" shall mean either an Investment Grade Bond
or a Non-Investment Grade Bond for which (i) the Borrower or one of its
Affiliates was the issuer, (ii) an Eligible Entity is the current owner and
(iii) Greenwich Capital Markets, Inc. was the underwriter or placement agent.
"Underlying Mortgage Loan" shall mean a Mortgage Loan for which the
Participation Certificate evidences the Lender's ownership interest therein.
"Underlying Mortgagor" shall mean the obligor on an Underlying Mortgage
Note.
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"Underlying Mortgage Note" shall mean the original executed promissory
note or other evidence of the indebtedness of a mortgagor/borrower with respect
to a Underlying Mortgage Loan.
"Underwriting Guidelines" shall mean Hanover Capital Mortgage Holdings,
Inc.'s Credit & Risk Management Policies and Procedures Manual, attached as
Exhibit E hereto, as amended from time to time in accordance with Section 7.14.
"Uniform Commercial Code" shall mean the Uniform Commercial Code as in
effect on the date hereof in the State of New York; provided that if by reason
of mandatory provisions of law, the perfection or the effect of perfection or
non-perfection of the security interest in any Collateral is governed by the
Uniform Commercial Code as in effect in a jurisdiction other than New York,
"Uniform Commercial Code" shall mean the Uniform Commercial Code as in effect in
such other jurisdiction for purposes of the provisions hereof relating to such
perfection or effect of perfection or non-perfection.
1.02 Accounting Terms and Determinations. Except as otherwise expressly
provided herein, all accounting terms used herein shall be interpreted, and all
financial statements and certificates and reports as to financial matters
required to be delivered to the Lender hereunder shall be prepared, in
accordance with GAAP.
SECTION 2 Advances, Note and Prepayments.
2.01 Advances.
(a) Subject to fulfillment of the terms and conditions set forth in
this Loan Agreement, the Lender agrees to make loans (individually, a "Committed
Advance"; collectively, the "Committed Advances") to the Borrowers, from time to
time on any Business Day, from and including the Effective Date to but excluding
the Termination Date, in an aggregate principal amount at any one time
outstanding up to but not exceeding the Maximum Committed Amount; provided,
however, that the Lender shall not be obligated to make any Committed Advance if
the aggregate outstanding principal amount of Advances plus the requested
Advance would exceed the Borrowing Base.
(b) In addition to the foregoing, the Lender may from time to time in
its sole discretion, on the terms and conditions set forth in this Agreement,
make loans (individually, an "Uncommitted Advance" to the Borrowers, from time
to time on any given Business Day from and including the Effective Date to but
excluding the Termination Date, in an aggregate principal amount at any one time
outstanding up to but not exceeding the Maximum Uncommitted Amount; provided,
however, that the Lender shall not be obligated to make any Uncommitted Advance
if the aggregate outstanding principal amount of Advances plus the requested
Advance would exceed the Borrowing Base. Unless otherwise agreed by the parties,
in determining whether Advances outstanding secured by Eligible Assets are
Committed Advances or Uncommitted Advances, such Advances shall first
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be deemed Committed Advances up to the Maximum Committed Amount, and then the
remainder shall be deemed Uncommitted Advances.
(c) Subject to the terms and conditions of this Loan Agreement, during
the term of the Loan Agreement, the Borrowers may borrow, repay and reborrow
hereunder.
(d) In no event shall an Advance be made when any Default or Event of
Default has occurred and is continuing.
(e) Notwithstanding any provision of this Agreement to the contrary,
the Borrowers acknowledge that the Lender shall have no obligation to make an
Advance secured by Equity Certificates or A Conduit Non-Investment Grade
Subordinate Bonds and that any such Advance shall be made at the sole discretion
of the Lender; provided, however, the Lender shall make an Advance pursuant to
the terms of this Agreement with respect to the Equity Certificates issued
pursuant to Hanover Capital Trust, Series 1999-B.
2.02 Notes.
(a) The Advances made by the Lender shall be evidenced by a single
promissory note of the Borrowers substantially in the form of Exhibit A hereto
(the "Note"), dated the date hereof, payable to the Lender in a principal amount
equal to the amount of the Maximum Credit and otherwise duly completed. The
Lender shall have the right to have its Note subdivided, by exchange for
promissory notes of lesser denominations or otherwise.
(b) The date, amount and interest rate of each Advance made by the
Lender to either Borrower, and each payment made on account of the principal and
interest thereof, shall be recorded by the Lender on its books and, prior to any
transfer of the Note, endorsed by the Lender on the schedule attached to the
Note or any continuation thereof; provided that the failure of the Lender to
make any such recordation or endorsement shall not affect the obligations of the
Borrowers to make a payment when due of any amount owing hereunder or under the
Note in respect of the Advances.
2.03 Procedure for Borrowing.
(a) Either Borrower may request a borrowing hereunder, on any Business
Day during the period from and including the Effective Date to and including the
Termination Date, by delivering to (i) the Lender, with a copy to the Mortgage
Custodian, a Mortgage Loan Tape and Mortgage Loan Schedule or (ii) to the
Bond/PC Custodian, a Participation Certificate Tape and Participation
Certificate Schedule, or a Pledged Stock Summary and/or Bond Summary, as
applicable, (the "Applicable Notice Documents"), and an irrevocable written
notice of borrowing and pledge substantially in the form of Exhibit D-1, Exhibit
D-2, Exhibit D-3 or Exhibit D-4 attached hereto, as applicable, (each a "Notice
of Borrowing and Pledge"), appropriately completed, which such Notice of
Borrowing and Pledge and the related Applicable Notice Documents must be
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received by the Lender prior to 10:00 a.m., New York City time, at least three
(3) Business Days prior to the requested Funding Date; provided that the Lender
shall be under no obligation to make an Advance more than once daily. Such
Notice of Borrowing and Pledge shall (i) include the Applicable Notice Documents
in respect of the Eligible Assets that the Borrower proposes to pledge to the
Lender and be included in the Borrowing Base in connection with such Advance,
(ii) contain the amount of the requested Advance, which shall in all events be
at least equal to $3,000,000 or such lesser amount as mutually agreed upon by
the Lender and the related Borrower, to be made on such Funding Date (setting
forth the amount of the Advance allocable to each Eligible Asset or Underlying
Eligible Bond, as applicable, set forth on the attached Mortgage Loan Schedule,
Participation Certificate Schedule or the Bond Summary, as applicable), (iii)
specify the requested Funding Date, which shall be not earlier than the third
Business Day following the date of such Notice of Borrowing and Pledge, (iv)
contain (by attachment) such other information reasonably requested by the
Lender from time to time and (v) the applicable agreement evidencing the
Purchase Price Percentage as reflected in the Mortgage Loan Schedule,
Participation Certificate Schedule or Bond Summary, as applicable.
(b) (i) With respect to Mortgage Loans, the related Borrower shall
deliver (or cause to be delivered) and release to the Mortgage Custodian, no
later than 10:00 a.m. New York City time, three (3) Business Days prior to the
requested Funding Date, a complete Mortgage File pertaining to each Mortgage
Loan to be pledged to the Lender and included in the Borrowing Base on such
requested Funding Date, in accordance with the terms and conditions of the
Mortgage Custodial Agreement, (ii) with respect to Participation Certificates,
such Borrower shall deliver (or cause to be delivered) and release to the
Lender, no later than 10:00 a.m. New York City time, three (3) Business Days
prior to the requested Funding Date, a complete Participation Certificate File
(with a copy of the Participation Certificate in lieu of the original)
pertaining to each Participation Certificate to be pledged to the Lender and
included in the Borrowing Base on such requested Funding Date, (iii) with
respect to Eligible Bonds, such Borrower shall deliver (or cause to be
delivered) and release to the Lender, no later than 10:00 a.m. three days prior
to the requested Funding Date, copies of all documents composing the Bond File
pertaining to each Eligible Bond to be pledged to the Lender and included in the
Borrowing Base on such requested Funding Date and (iv) with respect to the
Pledged Stock to be pledged to the Lender and included in the Borrowing Base on
such requested Funding Date, such Borrower shall deliver (or cause to be
delivered) and release to the Lender, no later than 10:00 a.m. three days prior
to the requested Funding Date, (A) copies of all documents composing the Bond
File pertaining to each Underlying Eligible Bond and (B) the documents to be
delivered pursuant to Section 5.02(h).
(c) In addition to the foregoing, the related Borrower shall deliver
(or cause to be delivered) and release to the Lender no later than 10:00 a.m.
New York City time, three (3) Business Days prior to the requested Funding Date,
a Due Diligence Package for each Mortgage Loan and Underlying Mortgage Loan to
be pledged to the Lender and included in the Borrowing Base on such requested
Funding Date.
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(d) (i) With respect to Eligible Mortgage Loans, pursuant to the
Mortgage Custodial Agreement, the Mortgage Custodian shall deliver to the Lender
and the related Borrower, no later than 11:00 a.m., New York City time, on a
Funding Date, a Trust Receipt in respect of all Eligible Mortgage Loans pledged
to the Lender on such Funding Date and an Exception Report in respect of all
Eligible Mortgage Loans so pledged to the Lender, (ii) with respect to Eligible
Bonds and Participation Certificates, the Borrower shall deliver to the Bond/PC
Custodian, with copies to the Lender, the original Eligible Bonds and related
Bond Files and the original Participation Certificates and Participation
Certificate Files, (iii) with respect to Pledged Stock, the Borrower shall
deliver to the Bond/PC Custodian, with copies to the Lender, the original
Underlying Eligible Bonds and related Bond Files and the original Pledged Stock.
The Bond/PC Custodian shall inform the Lender of its receipt of the documents
referenced in clause (iii) of this subsection (d) in a form and manner
acceptable to the Lender in its sole discretion. Subject to Section 5 hereof,
such Advance will then be made available to the related Borrower by the Lender
transferring, via wire transfer (pursuant to wire transfer instructions provided
by the related Borrower on or prior to such Funding Date) the aggregate amount
of such Advance in immediately available funds; provided, however, to the extent
that any such requested borrowing shall constitute an Uncommitted Advance, the
Lender may, at its sole option, elect not to make an Uncommitted Advance.
2.04 Repayment of Advances; Interest.
(a) The Borrowers hereby promise to repay in full on the Termination
Date the then aggregate outstanding principal amount of the Advances.
(b) The Borrower hereby promise to pay to the Lender interest on the
unpaid principal amount of each Advance for the period from and including the
Funding Date of such Advance to but excluding the date such Advance shall be
paid in full, at a rate per annum equal to LIBOR plus the Applicable Margin.
Notwithstanding the foregoing, the Borrowers hereby promise to pay to the Lender
interest at the applicable Post-Default Rate on any principal of any Advance and
on any other amount payable by the Borrowers hereunder or under the Note that
shall not be paid in full when due (whether at stated maturity, by acceleration
or by mandatory prepayment or otherwise) for the period from and including the
due date thereof to but excluding the date the same is paid in full. Accrued
interest on each Advance as calculated in this Section 2.04(b) shall be payable
monthly in each Payment Date and on the Termination Date, except that interest
payable at the Post-Default Rate shall accrue daily and shall be payable
promptly upon receipt of invoice. Promptly after the determination of any
interest rate provided for herein or any change therein, the Lender shall give
notice thereof to each Borrower.
(c) The Borrowers and the Lender acknowledge that the Proceeds of
Collateral may be held in the Collection Account pursuant to the Blocked Account
Agreement. The Lender agrees that if no Default shall have occurred and be
continuing, including without limitation, any Default under Section 2.04 hereof,
on each Payment Date, the Collection Bank shall be permitted to remit such
amounts then held in such Collection Account at the direction of the Hanover
Capital Holdings until notified to the contrary by the Lender.
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2.05 Limitation on Types of Advances; Illegality. Anything herein to
the contrary notwithstanding, if, on or prior to the determination of any LIBOR:
(a) the Lender determines, which determination shall be conclusive,
that quotations of interest rates for the relevant deposits referred to in the
definition of "LIBOR" in Section 1.01 hereof are not being provided in the
relevant amounts or for the relevant maturities for purposes of determining
rates of interest for Advances as provided herein; or
(b) the Lender determines, which determination shall be conclusive,
that the relevant rate of interest referred to in the definition of "LIBOR" in
Section 1.01 hereof upon the basis of which the rate of interest for Advances is
to be determined is not likely adequately to cover the cost to the Lender of
making or maintaining Advances; or
(c) it becomes unlawful for the Lender to honor its obligation to make
or maintain Advances hereunder using a LIBOR;
then the Lender shall give the Borrowers prompt notice thereof and, so long as
such condition remains in effect, the Lender shall be under no obligation to
make additional Advances, and the Borrowers shall, at their option, either
prepay all such Advances as may be outstanding or pay interest on such Advances
at a rate per annum equal to the Federal Funds Rate plus the Applicable Margin.
2.06 Determination of Borrowing Base; Mandatory Prepayments or Pledge.
(a) If at any time the aggregate outstanding principal amount of all
Advances exceeds the Borrowing Base of Eligible Assets pledged to secure the
Advances (a "Borrowing Base Deficiency"), as determined by the Lender and
notified to the Borrowers on any Business Day, the Borrowers shall no later than
one (1) Business Day after receipt of such notice, at the option of the
Borrowers, either prepay the Advances in part or in whole or pledge additional
Eligible Assets to the Lender (which shall be in all respects acceptable to the
Lender), such that after giving effect to such prepayment or pledge the
aggregate outstanding principal amount of the Advances does not exceed the
Borrowing Base.
(b) On the fifth day of each month (or if such day is not a Business
Day, the next succeeding Business Day), the Lender (or the Borrowers if the
Borrowers and the Lender shall mutually agree) shall calculate and deliver a
Borrowing Base Certificate in the form attached hereto as Exhibit H, such
certificate to be based on the principal balance of the Eligible Assets as of
the last calendar day of the prior month or such other calendar day as
applicable for the related Subservicer or Trustee and acceptable to the Lender.
In the event that such Borrowing Base Certificate indicates that a Borrowing
Base Deficiency exists, the Borrowers shall on the immediately following Payment
Date either prepay the Advances in part or in whole or pledge additional
Eligible Assets to the Lender (which shall be in all respects acceptable to the
Lender), such that after giving effect to such
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prepayment or pledge the aggregate outstanding principal amount of the Advances
does not exceed the Borrowing Base.
2.07 Optional Prepayments. (a) The Advances are prepayable without
premium or penalty, in whole or in part on each Payment Date or after providing
not less than two (2) Business Days prior notice. The Advances are prepayable at
any other time, in whole or in part, in accordance herewith and subject to
clause (b) below. Any amounts prepaid shall be applied to repay the outstanding
principal amount of any Advances (together with interest thereon) until paid in
full. Amounts repaid may be reborrowed in accordance with the terms of this Loan
Agreement. If the Borrowers intend to prepay an Advance in whole or in part from
any source, the Borrowers shall give two (2) Business Days' prior written notice
thereof to the Lender. If such notice is given, the amount specified in such
notice shall be due and payable on the date specified therein, together with
accrued interest to such date on the amount prepaid. Partial prepayments shall
be in an aggregate principal amount of at least $100,000.
(b) If the Borrowers make a prepayment of the Advances other than as
provided in Section 2.07(a) above, the Borrowers shall indemnify the Lender and
hold the Lender harmless from any actual loss or expense which the Lender may
sustain or incur arising from (a) the deployment of funds obtained by the Lender
to maintain the Advances hereunder or from (b) fees payable to terminate the
deposits from which such funds were obtained, in either case, which actual loss
or expense shall be equal to an amount equal to the excess, as reasonably
determined by the Lender, of (i) its cost of obtaining funds for such Advances
for the period from the date of such payment through the earlier of (x) the
second Business Day following receipt of such payment or (y) the following
Payment Date over (ii) the amount of interest likely to be realized by such
Lender in redeploying the funds not utilized by reason of such payment for such
period. This Section 2.07 shall survive termination of this Agreement and
payment of the Note.
2.08 Requirements of Law.
(a) If any Requirement of Law (other than with respect to any amendment
made to the Lender's certificate of incorporation and by-laws or other
organizational or governing documents) or any change in the interpretation or
application thereof or compliance by the Lender with any request or directive
(whether or not having the force of law) from any central bank or other
Governmental Authority made subsequent to the date hereof:
(i) shall subject the Lender to any tax of any kind whatsoever
with respect to this Loan Agreement, the Note or any Advance made by it
(excluding net income taxes) or change the basis of taxation of
payments to the Lender in respect thereof;
(ii) shall impose, modify or hold applicable any reserve,
special deposit, compulsory Advance or similar requirement against
assets held by, deposits or other liabilities in or for the account of,
Advances or other extensions of credit by, or any
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other acquisition of funds by, any office of the Lender which is not otherwise
included in the determination of the LIBOR hereunder;
(iii) shall impose on the Lender any other condition;
and the result of any of the foregoing is to increase the cost to the Lender, by
an amount which the Lender deems to be material, of making, continuing or
maintaining any Advance or to reduce any amount receivable hereunder in respect
thereof, then, in any such case, the Borrowers shall (i) promptly pay the Lender
such additional amount or amounts as will compensate the Lender for such
increased cost or reduced amount receivable; provided that, notwithstanding the
foregoing, within 30 days following receipt of notice from the Lender that any
amount or amounts are due pursuant to this Section 2.08, the Borrowers shall
have the option to pay in full all Secured Obligations (including, without
limitation, any additional payments required pursuant to this Section 2.08) and
terminate this Loan Agreement.
(b) If the Lender shall have determined that the adoption of or any
change in any Requirement of Law (other than with respect to any amendment made
to the Lender's certificate of incorporation and by-laws or other organizational
or governing documents) regarding capital adequacy or in the interpretation or
application thereof or compliance by the Lender or any corporation controlling
the Lender with any request or directive regarding capital adequacy (whether or
not having the force of law) from any Governmental Authority made subsequent to
the date hereof shall have the effect of reducing the rate of return on the
Lender's or such corporation's capital as a consequence of its obligations
hereunder to a level below that which the Lender or such corporation (taking
into consideration the Lender's or such corporation's policies with respect to
capital adequacy) by an amount deemed by the Lender to be material, then from
time to time, the Borrower shall promptly pay to the Lender such additional
amount or amounts as will compensate the Lender for such reduction.
(c) If the Lender becomes entitled to claim any additional amounts
pursuant to this subsection, it shall promptly notify the Borrower of the event
by reason of which it has become so entitled. A certificate as to any additional
amounts payable pursuant to this subsection submitted by the Lender to the
Borrowers shall be conclusive in the absence of manifest error.
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2.09 Purpose of Advances. Each Advance shall be used to finance the
acquisition of Eligible Assets identified to the Lender in writing on each
Mortgage Loan Schedule, Participation Certificate Schedule, or Pledged Stock
Summary and/or Bond Summary, as applicable, as such Mortgage Loan Schedule,
Participation Certificate Schedule, or Pledged Stock Summary and/or Bond
Summary, may be amended from time to time.
2.10 Extension of Termination Date. At the request of the Borrowers,
which request must be made at least thirty (30) days prior to the then current
Termination Date, the Lender may in its sole discretion extend the Termination
Date for a period of 364 days by giving written notice of such extension to the
Borrowers no later than twenty (20) days, but in no event earlier than thirty
(30) days, prior to the then current Termination Date.
2.11 Extension of Maximum Pledge Period. At the request of the
Borrowers, which request must be made at least thirty (30) days prior to the
expiration of the Maximum Pledge Period, the Lender may in its sole discretion
extend such Maximum Pledge Period for any longer time period as determined by
the Lender in its sole discretion.
SECTION 3 Payments; Computations; Etc.; Commitment Fee.
3.01 Payments.
(a) Except to the extent otherwise provided herein, all payments of
principal, interest and other amounts to be made by the Borrowers under this
Loan Agreement and the Note, shall be made in Dollars, in immediately available
funds, without deduction, set-off or counterclaim, to the Lender at the
following account maintained by the Lender: Chase Manhattan Bank, N.A., Account
# 140095961, ABA # 021000021, for the A/C of Greenwich Capital Financial
Products, Inc. (Hanover), Attn: Brett Kibbe, not later than 3:00 p.m., New York
City time, on the date on which such payment shall become due (and each such
payment made after such time on such due date shall be deemed to have been made
on the next succeeding Business Day). Each Borrower acknowledges that it has no
rights of withdrawal from the foregoing account.
(b) Except to the extent otherwise expressly provided herein, if the
due date of any payment under this Loan Agreement or the Note would otherwise
fall on a day that is not a Business Day, such date shall be extended to the
next succeeding Business Day, and interest shall be payable for any principal so
extended for the period of such extension.
3.02 Computations. Interest on the Advances shall be computed on the
basis of a 360-day year for the actual days elapsed (including the first day but
excluding the last day) occurring in the period for which payable.
3.03 Commitment Fee. The Borrowers agree to pay to the Lender a
commitment fee equal to (a) 12.5 basis points (0.125%) multiplied by (b) the
Maximum Committed Amount (the "Commitment Fee"). The Commitment Fee shall be
payable in four equal installments of $7,812.50
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on June 30, 2000, September 30, 2000, December 30, 2000 and March 27, 2001
(each, a "Commitment Fee Payment Date"), which payment shall be made in Dollars,
in immediately available funds, without deduction, set-off or counterclaim, to
the Lender. The Lender may, in its sole discretion, net any such installment of
the Commitment Fee from the proceeds of any Advance made to a Borrower.
3.04 Selection of Interest Period. The Borrowers' selection of the
duration of Interest Period shall be irrevocable and shall be effective only if
noted on the applicable Notice of Borrowing and Pledge. Prior to the termination
of the Interest Period selected pursuant to this Section 3.04, the Borrowers may
elect an Interest Period by delivering written notice, substantially in the form
of Annex L attached hereto, to the Lender indicating the desired Interest
Period, which such notice must be received no later than two (2) Business Day(s)
prior to the date on which the then current Interest Period is scheduled to end.
In the event no such written notice is received by the Lender, the applicable
Interest Rate shall be one month.
3.05 Non-usage Fee. The Borrowers agree to pay to the Lender, on each
Commitment Fee Payment Date, in addition to any Commitment Fee then payable, a
non-usage fee equal to (a) 12.5 basis points (0.125%) multiplied by (b)(i) the
number of days from and including March 27, 2000 or the previous Commitment Fee
Payment Date up to but not including the related Commitment Fee Payment Date or
the Termination Date, as applicable, during which the unused portion of the
Maximum Committed Amount exceeded $12,500,000, divided by (ii) 360, multiplied
by (c) the average daily amount of the entire unused portion of the Maximum
Committed Amount for the applicable days on which the unused portion of the
Maximum Committed Amount exceeded $12,500,000, such payment to be made in
Dollars, in immediately available funds, without deduction, set-off, or
counterclaim. The Lender may, in its sole discretion, net such non-usage fee
from the proceeds of any Advance made to a Borrower hereunder.
3.06 Facility Fee. Upon the execution of this Loan Agreement, the
Borrowers shall pay to the Lender a facility fee equal to $125,000 (the
"Facility Fee"). The Facility Fee shall be credited against the total amount of
any underwriting fees earned by the Lender during the period from March 28, 2000
through March 27, 2001, in connection with the securitization of any Eligible
Assets.
SECTION 4 Collateral Security.
4.01 Collateral; Security Interest.
(a) With respect to Eligible Mortgage Loans, the Mortgage Custodian
shall, pursuant to the Mortgage Custodial Agreement: (i) hold the related
Mortgage Loan Documents as exclusive bailee and agent for the Lender and (ii)
deliver Trust Receipts to the Lender each to the effect that it has reviewed the
related Mortgage Loan Documents in the manner and to the extent required by the
Mortgage Custodial Agreement and identifying any Exceptions in such Mortgage
Loan Documents as so reviewed in the Exception Reports. With respect to Eligible
Bonds or
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Pledged Stock, the Bond/PC Custodian shall, pursuant to the Bond/PC Custodial
Agreement, hold such Eligible Bonds or Pledged Stock and the related Bond Files,
either directly or through the facilities of a Relevant System, as "securities
intermediary" (as defined in Section 8-102(a)(14) of the UCC and 31 C.F.R.
Section 357.2) and credit them to the "securities account" of the Lender. With
respect to Participation Certificates, the Bond/PC Custodian shall, pursuant to
the Bond/PC Custodial Agreement, hold such Participation Certificates and the
related Participation Certificate Files as exclusive bailee and agent for the
Lender and (ii) shall review such Participation Certificate File in the manner
and to the extent required by the Bond/PC Custodial Agreement.
(b) Each of the following items of property is hereinafter referred to
as the "Collateral":
(i) all Mortgage Loans, Eligible Bonds, Pledged Stock, and
Participation Certificates (or the Underlying Mortgage Loans related
thereto) identified on a Notice of Borrowing and Pledge delivered by
the related Borrower to the Lender and the Bond/PC Custodian or the
Mortgage Custodian, as applicable, from time to time (the "Assets");
(ii) all Asset Documents, including without limitation all
promissory notes, and all Servicing Records, Servicing Agreements,
servicing rights, all Transfer Documents, all Governing Agreements and
all original certificates evidencing Assets, together with all files,
documents, instruments, surveys, certificates, correspondence,
appraisals, computer storage media, accounting records and other books
and records relating thereto;
(iii) all mortgage guaranties and insurance relating to Assets
(issued by governmental agencies or otherwise) and any mortgage
insurance certificate or other document evidencing such mortgage
guaranties or insurance relating to Assets and all claims and payments
thereunder;
(iv) all other insurance policies and insurance proceeds
relating to any Assets;
(v) all purchase or Take-Out Commitments relating to or
constituting any or all of the foregoing;
(vi) all of the related Borrower's rights in the Pledged Stock
of each Eligible Entity the Pledged Stock of which is an Asset, and all
of the related Borrower's rights as a shareholder in such Eligible
Entity the Pledged Stock of which is an Asset;
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(vii) all warrants, options and other rights to acquire stock
in each Eligible Entity and all of the related Borrower's rights, if
any, to participate in the management of such Eligible Entity the
Pledged Stock of which is an Asset;
(viii) all rights, privileges, authority and powers of the
related Borrower as owner or holder of its equity interest in each
Eligible Entity the Pledged Stock of which is an Asset, including, but
not limited to, all general intangible and contract rights related
thereto;
(ix) all documents and certificates representing or evidencing
the related Borrower's equity interest in each Eligible Entity the
Pledged Stock of which is an Asset;
(x) all of the related Borrower's right as shareholder of each
Eligible Entity the Pledged Stock of which is an Asset to receive
dividends and redemptions on account of the Pledged Stock or to receive
distributions of each such Eligible Entity's respective assets, upon
complete or partial liquidation or otherwise;
(xi) all distributions, cash, Property, and instruments from
time to time received, receivable or otherwise distributed in respect
of, or in exchange for the related Borrower's interest in each Eligible
Entity related to any Pledged Stock which is an Asset and delivered or
transferred to the Lender or the related Borrower or in the case of
securities deposited in any securities account controlled by the Lender
or the related Borrower and not controlled by any other party;
(xii) any other rights, title, interest, privilege, authority
and power of the Borrower in or relating to each Eligible Entity
related to any Pledged Stock which is an Asset, all whether now
existing or hereafter arising, and whether arising at law or in equity
and any and all proceeds of and distribution in any of the foregoing
and all books and records of the related Borrower pertaining to the
foregoing;
(xiii) all Hedging Agreements relating to such Assets;
(xiv) the Collection Account and the balance from time to time
standing to the credit of the Collection Account and all rights with
respect thereto;
(xv) all purchase agreements relating to such Assets;
(xvi) all collateral, however defined, under any other
agreement between the Borrowers or any of their Affiliates on the one
hand and the Lender or any of its Affiliates on the other hand;
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(xvii) all "accounts", "chattel paper", "general intangibles"
and "securities accounts" as defined in the Uniform Commercial Code
constituting any and all of the foregoing; and
(xviii) any and all replacements, substitutions, distributions
on or proceeds of any and all of the foregoing.
(c) Each Borrower hereby pledges to the Lender, and grants a security
interest in favor of the Lender in, all of the Borrower's right, title and
interest in, to and under the Collateral, whether now owned or hereafter
acquired, now existing or hereafter created and wherever located, to secure the
Secured Obligations. Each Borrower agrees to mark its computer records and tapes
to evidence the interests granted to the Lender hereunder.
(d) Re-Registration; Rights of Lender. The Lender shall have the right
to register or cause to be registered in the name of the Lender or the Bond/PC
Custodian or other designee, all Eligible Bonds, Pledged Stock, Underlying
Eligible Bonds or Participation Certificates pledged to the Lender hereunder and
the Lender or its other designee shall have all rights of conversions, exchange,
subscription and any other rights, privileges and options pertaining to such
Eligible Bonds, Pledged Stock, Underlying Eligible Bonds or Participation
Certificates as if it were the owner thereof, and in connection therewith, the
right to deposit and deliver any and all of the Eligible Bonds, Pledged Stock,
Underlying Eligible Bonds or Participation Certificates with any committee,
depositary transfer, agent, register or other designated agency upon such terms
and conditions as the Lender may determine.
(e) Cash Dividends. The Lender, as "entitlement holder" (as defined in
Section 8-102(a) of the UCC) with respect to the Eligible Bonds, Underlying
Eligible Bonds and Pledged Stock, shall be entitled to receive all cash
dividends and distributions paid in respect thereof. Any such dividends or
distributions received by either Borrower shall be promptly remitted to the
Collection Account. The Borrowers shall direct that all payments and
distributions with respect to the Equity Certificates be paid directly to the
Lender.
(f) Stock Powers; Voting Rights. Concurrently with the delivery to the
Lender of each certificate representing one or more shares of the Pledged Stock,
the related Borrower shall deliver an undated stock power covering such
certificate, duly executed in blank with, if the Lender so requests, signature
guaranteed. With respect to the Pledged Stock, the related Borrower shall be
permitted to exercise all voting and corporate rights with respect to the
Pledged Stock unless an Event of Default shall have occurred and be continuing;
provided, however, that no vote shall be cast or corporate right exercised or
other action taken which would impair the Collateral or which would be
inconsistent with or result in any violation of any provision of the Note, this
Loan Agreement or the other Loan Documents. Without the prior written consent of
the Lender, the related Borrower will not (i) vote to enable, or take any other
action to permit, (A) the Eligible Entity to issue any stock or other equity
securities of any nature or to issue any other securities convertible into or
granting the right to purchase or exchange for any stock or other equity
securities of any of the
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Eligible Entity, (B) the Eligible Entity to sell, assign, transfer, exchange or
otherwise dispose of, or grant any option with respect to any Property owned by
the Eligible Entity or (C) the Eligible Entity to dividend or otherwise make any
distribution to its shareholders or (ii) sell, assign, transfer, exchange or
otherwise dispose of, or grant any option with respect to, the Collateral, or
(iii) create, incur or permit to exist any Lien or option in favor of, or any
claim of any Person with respect to, any of the Collateral, or any interest
therein, except for the Lien provided for by this Pledge Agreement, or (iv)
enter into any agreement or undertaking restricting the right or ability of such
Borrower or the Lender to sell, assign or transfer any of the Collateral.
4.02 Further Documentation. At any time and from time to time, upon the
written request of the Lender, and at the sole expense of the related Borrower,
such Borrower will promptly and duly execute and deliver, or will promptly cause
to be executed and delivered, such further instruments and documents and take
such further action as the Lender may reasonably request for the purpose of
obtaining or preserving the full benefits of this Loan Agreement and of the
rights and powers herein granted, including, without limitation, the filing of
any financing or continuation statements under the Uniform Commercial Code in
effect in any jurisdiction with respect to the Liens created hereby. Each
Borrower also hereby authorizes the Lender to file any such financing or
continuation statement without the signature of such Borrower to the extent
permitted by applicable law. A carbon, photographic or other reproduction of
this Loan Agreement shall be sufficient as a financing statement for filing in
any jurisdiction.
4.03 Changes in Locations, Name, etc. Neither Borrower shall (i) change
the location of its chief executive office/chief place of business from that
specified in Section 6 hereof or (ii) change its name, identity or corporate
structure (or the equivalent) or change the location where it maintains its
records with respect to the Collateral unless it shall have given the Lender at
least 30 days prior written notice thereof and shall have delivered to the
Lender all Uniform Commercial Code financing statements and amendments thereto
as the Lender shall request and taken all other actions deemed necessary by the
Lender to continue its perfected status in the Collateral with the same or
better priority.
4.04 Lender's Appointment as Attorney-in-Fact.
(a) Each Borrower hereby irrevocably constitutes and appoints the
Lender and any officer or agent thereof, with full power of substitution, as its
true and lawful attorney-in-fact with full irrevocable power and authority in
the place and stead of such Borrower and in the name of such Borrower or in its
own name, from time to time in the Lender's discretion, for the purpose of
carrying out the terms of this Loan Agreement, to take any and all appropriate
action and to execute any and all documents and instruments which may be
necessary or desirable to accomplish the purposes of this Loan Agreement, and,
without limiting the generality of the foregoing, each Borrower hereby gives the
Lender the power and right, on behalf of the Borrower, without assent by, but
with notice to, the Borrower, if an Event of Default shall have occurred and be
continuing, to do the following:
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(i) in the name of the Borrower or its own name, or otherwise,
to take possession of and endorse and collect any checks, drafts,
notes, acceptances or other instruments for the payment of moneys due
under any mortgage insurance or with respect to any other Collateral
and to file any claim or to take any other action or proceeding in any
court of law or equity or otherwise deemed appropriate by the Lender
for the purpose of collecting any and all such monies due under any
such mortgage insurance or with respect to any other Collateral
whenever payable;
(ii) to pay or discharge taxes and Liens levied or placed on
or threatened against the Collateral; and
(iii) (A) to direct any party liable for any payment under any
Collateral to make payment of any and all moneys due or to become due
thereunder directly to the Lender or as the Lender shall direct; (B) to
ask or demand for, collect, receive payment of and receipt for, any and
all moneys, claims and other amounts due or to become due at any time
in respect of or arising out of any Collateral; (C) to sign and endorse
any invoices, assignments, verifications, notices and other documents
in connection with any of the Collateral; (D) to commence and prosecute
any suits, actions or proceedings at law or in equity in any court of
competent jurisdiction to collect the Collateral or any thereof and to
enforce any other right in respect of any Collateral; (E) to defend any
suit, action or proceeding brought against the Borrower with respect to
any Collateral; (F) to settle, compromise or adjust any suit, action or
proceeding described in clause (E) above and, in connection therewith,
to give such discharges or releases as the Lender may deem appropriate;
and (G) generally, to sell, transfer, pledge and make any agreement
with respect to or otherwise deal with any of the Collateral as fully
and completely as though the Lender were the absolute owner thereof for
all purposes, and to do, at the Lender's option and the Borrower's
expense, at any time, and from time to time, all acts and things which
the Lender deems necessary to protect, preserve or realize upon the
Collateral and the Lender's Liens thereon and to effect the intent of
this Loan Agreement, all as fully and effectively as the Borrower might
do.
Each Borrower hereby ratifies all that said attorneys shall lawfully do or cause
to be done by virtue hereof. This power of attorney is a power coupled with an
interest and shall be irrevocable.
(b) Each Borrower also authorizes the Lender, at any time and from time
to time, to execute, in connection with any sale provided for in Section 4.07
hereof, any endorsements, assignments or other instruments of conveyance or
transfer with respect to the Collateral.
(c) The powers conferred on the Lender are solely to protect the
Lender's interests in the Collateral and shall not impose any duty upon the
Lender to exercise any such powers. The Lender shall be accountable only for
amounts that it actually receives as a result of the exercise of such powers,
and neither the Lender nor any of its officers, directors, or employees shall be
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responsible to the Borrowers for any act or failure to act hereunder, except for
its own gross negligence or willful misconduct.
4.05 Performance by Lender of Borrower's Obligations. If a Borrower
fails to perform or comply with any of agreements contained in the Loan
Documents and the Lender itself performs or complies, or otherwise causes
performance or compliance, with such agreement, the expenses of the Lender
incurred in connection with such performance or compliance, together with
interest thereon at a rate per annum equal to the Post-Default Rate, shall be
payable by such Borrower to the Lender on demand and shall constitute Secured
Obligations.
4.06 Proceeds. If an Event of Default shall occur and be continuing,
(a) all proceeds of Collateral received by a Borrower consisting of cash, checks
and other near-cash items shall be held by the Borrower in trust for the Lender,
segregated from other funds of the Borrower, and shall forthwith upon receipt by
the Borrower be turned over to the Lender in the exact form received by the
Borrower (duly endorsed by the Borrower to the Lender, if required) and (b) any
and all such proceeds received by the Lender (whether from the Borrower or
otherwise) may, in the sole discretion of the Lender, be held by the Lender as
collateral security for, and/or then or at any time thereafter may be applied by
the Lender against, the Secured Obligations (whether matured or unmatured), such
application to be in such order as the Lender shall elect. Any balance of such
proceeds remaining after the Secured Obligations shall have been paid in full
and this Loan Agreement shall have been terminated shall be paid over to the
related Borrower or to whomsoever may be lawfully entitled to receive the same.
For purposes hereof, proceeds shall include, but not be limited to, all
principal and interest payments, all prepayments and payoffs, insurance claims,
condemnation awards, sale proceeds, real estate owned rents and any other income
and all other amounts received with respect to the Collateral.
4.07 Remedies. If an Event of Default shall occur and be continuing,
the Lender may exercise, in addition to all other rights and remedies granted to
it in this Loan Agreement and in any other instrument or agreement securing,
evidencing or relating to the Secured Obligations, all rights and remedies of a
secured party under the Uniform Commercial Code. Without limiting the generality
of the foregoing, the Lender without demand of performance or other demand,
presentment, protest, advertisement or notice of any kind (except any notice
required by law referred to below) to or upon the Borrowers or any other Person
(each and all of which demands, presentments, protests, advertisements and
notices are hereby waived), may in such circumstances forthwith collect,
receive, appropriate and realize upon the Collateral, or any part thereof,
and/or may forthwith sell (on a servicing released basis with respect to
Collateral serviced by either Borrower or an Affiliate of either Borrower, at
the Lender's option), lease, assign, give option or options to purchase, or
otherwise dispose of and deliver the Collateral or any part thereof (or contract
to do any of the foregoing), in one or more parcels or as an entirety at public
or private sale or sales, at any exchange, broker's board or office of the
Lender or elsewhere upon such terms and conditions as it may deem advisable and
at such prices as it may deem best, for cash or on credit or for future delivery
without assumption of any credit risk. The Lender shall have the right upon any
such public sale or sales, and, to the extent permitted by law, upon any such
private sale or sales, to purchase the
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whole or any part of the Collateral so sold, free of any right or equity of
redemption in either Borrower, which right or equity is hereby waived or
released. Each Borrower further agrees, at the Lender's request, to assemble the
Collateral and make it available to the Lender at places which the Lender shall
reasonably select, whether at the Borrower's premises or elsewhere. The Lender
shall apply the net proceeds of any such collection, recovery, receipt,
appropriation, realization or sale, after deducting all reasonable costs and
expenses of every kind incurred therein or incidental to the care or safekeeping
of any of the Collateral or in any way relating to the Collateral or the rights
of the Lender hereunder, including without limitation reasonable attorneys' fees
and disbursements, to the payment in whole or in part of the Secured
Obligations, in such order as the Lender may elect, and only after such
application and after the payment by the Lender of any other amount required or
permitted by any provision of law, including without limitation Section
9-504(1)(c) of the Uniform Commercial Code, need the Lender account for the
surplus, if any, to the related Borrower. To the extent permitted by applicable
law, each Borrower waives all claims, damages and demands it may acquire against
the Lender arising out of the exercise by the Lender of any of its rights
hereunder, other than those claims, damages and demands arising from the gross
negligence or willful misconduct of the Lender. If any notice of a proposed sale
or other disposition of Collateral shall be required by law, such notice shall
be deemed reasonable and proper if given at least 10 days before such sale or
other disposition. The Borrowers shall remain liable for any deficiency (plus
accrued interest thereon as contemplated pursuant to Section 2.04(b) hereof) if
the proceeds of any sale or other disposition of the Collateral are insufficient
to pay the Secured Obligations and the fees and disbursements of any attorneys
employed by the Lender to collect such deficiency. Because the Borrowers
recognize that it may not be possible to purchase or sell all of the Collateral
on a particular Business Day, or in a transaction with the same purchaser, or in
the same manner because the market for such Collateral may not be liquid, the
Borrowers agree that liquidation of the Collateral does not require a public
purchase or sale and that a good faith private purchase or sale shall be deemed
to have been made in a commercially reasonable manner. Accordingly, the Lender
may elect, in its sole discretion, the time and manner of liquidating any
Collateral and nothing contained herein shall (A) obligate the Lender to
liquidate any Collateral on the occurrence of an Event of Default or to
liquidate all Collateral in the same manner or on the same Business Day or (B)
constitute a waiver of any of the Lender's rights or remedies. With respect to
any Pledged Stock, prior to the Lender taking title to any Pledged Stock or as a
condition to the sale of any Pledged Stock as permitted hereunder, the Lender
shall obtain (i) an opinion of counsel acceptable to the rating agencies which
rated the Underlying Eligible Bonds held by the related Eligible Entity (or, if
such Underlying Eligible Bonds are unrated, acceptable to the rating agencies
which rated any rated Underlying Eligible Bonds issued in conjunction with such
unrated Underlying Eligible Bonds) that such Eligible Entity will not be
consolidated into any bankruptcy of the purchaser of such Pledged Stock
(including the Lender if the Lender shall acquire the Pledged Stock hereunder)
and (ii) a written covenant from such purchaser (including the Lender if the
Lender shall acquire the Pledged Stock hereunder) that it agrees not to (x) file
or consent to the filing of any bankruptcy, insolvency or reorganization case or
proceeding with respect to the related Special Purpose Entity; institute any
proceedings under any applicable insolvency law or under any laws relating to
the relief from debts or the protection of debtors generally with respect to the
related Special Purpose Entity; (y) seek or consent to the appointment of a
receiver, liquidator, assignee, trustee, sequestrator, custodian or any
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similar official for the related Special Purchase Entity or a substantial
portion of the related Special Purpose Entity's Properties; or (z) make any
assignment for the benefit of the related Special Purpose Entity's creditors.
4.08 Limitation on Duties Regarding Presentation of Collateral. The
Lender's duty with respect to the custody, safekeeping and physical preservation
of the Collateral in its possession, under Section 9-207 of the Uniform
Commercial Code or otherwise, shall be to deal with it in the same manner as the
Lender deals with similar property for its own account. Neither the Lender nor
any of its directors, officers or employees shall be liable for failure to
demand, collect or realize upon all or any part of the Collateral or for any
delay in doing so or shall be under any obligation to sell or otherwise dispose
of any Collateral upon the request of the Borrowers or otherwise.
4.09 Powers Coupled with an Interest. All authorizations and agencies
herein contained with respect to the Collateral are irrevocable and powers
coupled with an interest.
4.10 Release of Security Interest. Upon termination of this Loan
Agreement and repayment to the Lender of all Secured Obligations and the
performance of all obligations under the Loan Documents, the Lender shall
release its security interest in any remaining Collateral; provided that, if any
payment, or any part thereof, of any of the Secured Obligations is rescinded or
must otherwise be restored or returned by the Lender upon the insolvency,
bankruptcy, dissolution, liquidation or reorganization of a Borrower, or upon or
as a result of the appointment of a receiver, intervenor or conservator of, or a
trustee or similar officer for, a Borrower or any substantial part of its
Property, or otherwise, this Loan Agreement, all rights hereunder and the Liens
created hereby shall continue to be effective, or be reinstated, as though such
payments had not been made.
4.11 Establishment of the Collection Account.
(a) The Borrowers shall establish and maintain the Collection Account
at Fleet Bank Providence, Rhode Island, which shall be entitled "Greenwich
Capital Financial Products, Inc." The Borrowers shall not change the name of the
account without the prior written consent of the Lender. Such Collection Account
shall be subject to a Blocked Account Agreement.
(b) The Borrower shall cause each Subservicer and Trustee to deposit
all Collections in the Collection Account in accordance with the applicable
Servicing Agreement or Governing Agreement.
SECTION 5 Conditions Precedent.
5.01 Initial Advance. The agreement of the Lender to make the initial
Advance requested to be made by it hereunder is subject to the satisfaction,
immediately prior to or concurrently with the making of such Advance, of the
following conditions precedent:
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(a) Loan Agreement. The Lender shall have received this Loan Agreement,
executed and delivered by a duly authorized officer of each Borrower.
(b) Note. The Lender shall have received the Note, conforming to the
requirements hereof and executed by a duly authorized officer of each Borrower.
(c) Mortgage Custodial Agreement. The Lender shall have received the
Mortgage Custodial Agreement, conforming to the requirements hereof and executed
by a duly authorized officer of each Borrower and the Mortgage Custodian.
(d) Blocked Account Agreement. The Lender shall have received a Blocked
Account Agreement substantially in the form of Exhibit F hereof executed by duly
authorized officers of each Borrower and the Collection Bank.
(e) Establishment of Collection Account. The Borrowers shall have
established the Collection Account as defined herein.
(f) Filings, Registrations, Recordings. Any documents (including,
without limitation, financing statements) required to be filed, registered or
recorded in order to create, in favor of the Lender, a perfected, first-priority
security interest in the Collateral, subject to no Liens other than those
created hereunder, shall have been properly prepared and executed for filing
(including the applicable county(ies) if the Lender determines such filings are
necessary in its sole discretion), registration or recording in each office in
each jurisdiction in which such filings, registrations and recordations are
required to perfect such first-priority security interest.
(g) Corporate Proceedings. The Lender shall have received a certificate
of the Secretary or Assistant Secretary of each Borrower, dated as of the date
hereof, and certifying (A) that attached thereto is a true, complete and correct
copy of (i) the articles of incorporation of such Borrower, (ii) the by-laws of
such Borrower, and (iii) resolutions duly adopted by the Board of Directors of
such Borrower authorizing the execution, delivery and performance of this Loan
Agreement, the Notes and the other Loan Documents to which it is a party, and
the borrowings contemplated hereunder, and that such resolutions have not been
amended, modified, revoked or rescinded, and (B) as to the incumbency and
specimen signature of each officer executing any Loan Documents on behalf of
such Borrower and authorized to execute any Notice of Borrowing, and such
certificate and the resolutions attached thereto shall be in form and substance
satisfactory to the Lender.
(h) Good Standing Certificates. The Lender shall have received copies
of certificates evidencing the good standing of each Borrower, dated as of a
recent date, from the Secretary of State (or other appropriate authority) of the
State of Maryland or the State of New York, as the case may be, and of each
other jurisdiction where the ownership, lease or operation of property, or the
conduct of business, requires such Borrower to qualify as a foreign corporation,
except where the failure to qualify would not have a Material Adverse Effect.
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(i) Legal Opinions. The Lender shall have received the executed legal
opinions of Piper & Marbury and Sidley & Austin, special counsel to Hanover
Capital Holdings, addressing the matters set forth in items 1 through 6 in the
form attached hereto as Exhibit C, dated the initial Funding Date and otherwise
in form and substance acceptable to the Lender and covering such other matters
incident to the transactions contemplated by this Loan Agreement as the Lender
shall reasonably request.
(j) Fees and Expenses. The Lender shall have received all fees and
expenses required to be paid by the Borrower on or prior to the initial Funding
Date pursuant to Section 11.03(b) or the Lender may net such payments out of any
Advance hereunder.
(k) Financial Statements. The Lender shall have received the financial
statements referenced in Section 6.01(a).
(l) Underwriting Guidelines. The Lender and the Borrowers shall have
agreed upon the Borrowers' current Underwriting Guidelines for Mortgage Loans
and the Lender shall have received a certified copy thereof.
(m) Consents, Licenses, Approvals, etc. The Lender shall have received
copies certified by the Borrowers of all consents, licenses and approvals, if
any, required in connection with the execution, delivery and performance by the
Borrowers of, and the validity and enforceability of, the Loan Documents, which
consents, licenses and approvals shall be in full force and effect.
(n) Insurance. The Lender shall have received evidence in form and
substance satisfactory to the Lender showing compliance by the Borrowers as of
such initial Funding Date with Section 7.03 hereof.
(o) Side Letter. The Lender shall have received the Side Letter, duly
executed and delivered by Hanover Capital Holdings.
(p) Guaranty. The Lender shall have received a Guaranty, duly executed
and delivered by Hanover Capital Mortgage Holdings, Inc.; and
(q) Other Documents. The Lender shall have received such other
documents as the Lender or its counsel may reasonably request.
5.02 Initial and Subsequent Advances. The making of each Advance to a
Borrower (including the initial Advance) on any Business Day is subject to the
satisfaction of the following further conditions precedent, both immediately
prior to the making of such Advance and also after giving effect thereto and to
the intended use thereof:
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(a) No Default. No Default or Event of Default shall have occurred and
be continuing.
(b) Representations and Warranties. Each representation and warranty
made by a Borrower in Section 6 hereof and elsewhere in each of the Loan
Documents, shall be true and correct on and as of the date of the making of such
Advance (in the case of the representations and warranties in Schedule 1, solely
with respect to Eligible Assets, included in the Borrowing Base on such date)
with the same force and effect as if made on and as of such date (or, if any
such representation or warranty is expressly stated to have been made as of a
specific date, as of such specific date). Each Borrower shall also be in
compliance with all governmental licenses and authorizations and qualified to do
business and in good standing in all required jurisdictions where the failure to
be so qualified should reasonably be expected to have a Material Adverse Effect.
(c) Borrowing Base. The aggregate outstanding principal amount of the
Advances shall not exceed the Borrowing Base.
(d) Notice of Borrowing and Pledge. The Lender shall have received a
Notice of Borrowing and Pledge and the related Applicable Notice Documents (with
any certificates attached thereto), in accordance with Section 2.03(a) hereof,
appropriately completed.
(e) Trust Receipt; Exception Report. The Lender shall have received (i)
from the Mortgage Custodian, with respect to Eligible Mortgage Loans, a Trust
Receipt in respect of all Mortgage Loans to be pledged hereunder on such
Business Day and a corresponding Exception Report, with Exceptions (as defined
in the Mortgage Custodial Agreement) in respect of such Mortgage Loans and (ii)
from the Bond/PC Custodian, with respect to Participation Certificates, Eligible
Bonds and Underlying Eligible Bonds, the appropriate documentation as required
pursuant to Section 5.02(f) or (g), as applicable; provided, that in all cases
the documentation required pursuant to clauses (i) and (ii) above shall be
acceptable to the Lender in its sole discretion.
(f) Delivery of Participation Certificates. With respect to each
Participation Certificate being pledged to the Lender: (i) such Participation
Certificate shall have been delivered to the Lender or its designee, shall be in
suitable form for registration in the name of the Lender, shall conform to the
requirements hereof and shall otherwise be in form and substance satisfactory to
the Lender, (ii) the related Borrower shall have executed and delivered an
Instruction Letter as defined herein and (iii) the Participation Custodian shall
have acknowledged the Lender's interest in the Underlying Mortgage Loans.
(g) Delivery of Eligible Bonds or Underlying Eligible Bonds.
(i) With respect to Eligible Bonds or Underlying Eligible
Bonds that shall be delivered or held in definitive, certificated form,
the related Borrower shall deliver to the Bond/PC Custodian the
original of the relevant certificate in form suitable for transfer,
with accompanying, duly executed instruments of transfer or appropriate
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instruments of assignment executed in blank or in the name of the
Lender or, the Bond/PC Custodian, transfer tax stamps, and any other
documents or instruments necessary in the reasonable opinion of the
Lender to effect and perfect a legally valid delivery of such security
or other item of investment property to the Lender, the Bond/PC
Custodian. Unless otherwise instructed by Lender, any delivery of a
security or other item of investment property in definitive,
certificated form shall be made to The Chase Manhattan Bank, 4 New York
Plaza, New York, New York 10004, Attention: Outsourcing Department,
Jennifer John.
(ii) With respect to Eligible Bonds or Underlying Eligible
Bonds that shall be delivered or held in uncertificated form and the
ownership of which is registered on books maintained by the issuer
thereof or its transfer agent, the related Borrower shall cause the
registration of such security or other item of investment property in
the name of Lender, the Bond/PC Custodian and at the request of the
Lender, shall take such other and further steps, and shall execute and
deliver such documents or instruments necessary in the opinion of the
Lender, to effect and perfect a legally valid delivery of the relevant
interest granted therein to Lender hereunder.
(iii) With respect to Eligible Bonds or Underlying Eligible
Bonds that shall be delivered through a Relevant System in book-entry
form and credited to or otherwise held in an account, the related
Borrower shall cause the giving of written instructions to the relevant
financial institution or other entity, and shall provide a copy thereof
to the Lender, sufficient if complied with to effect and perfect a
legally valid delivery of the relevant interest granted therein to
Lender hereunder. In connection with any account to which the Eligible
Bonds or Underlying Eligible Bonds are credited or otherwise held, the
related Borrower shall execute and deliver such other and further
documents or instruments necessary, in the reasonable opinion of the
Lender, to effect and perfect a legally valid delivery of the relevant
interest granted therein to Lender hereunder. Any account to which the
Eligible Bonds or Underlying Eligible Bonds are credited or otherwise
shall be designated "Greenwich Capital Financial Products, Inc.
Account" or such variation thereon as the Lender may direct.
(iv) Any delivery of an Eligible Bond in accordance with
clauses (i) through (iii) above, or any other method acceptable to the
Lender, shall be sufficient to cause the Lender to have a perfected,
first priority security interest in, and to be the "entitlement holder"
(as defined in Section 8-102(a)(7) of the Uniform Commercial Code of
the State of the New York (the "UCC")) with respect to the Eligible
Bonds.
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(v) No Eligible Bonds or Underlying Eligible Bonds, whether
certificated or uncertificated, shall remain in the possession of, or
(a) with respect to Eligible Bonds, at the Lender's discretion, in the
name of, the related Borrower or any of its agents, or in any account
in the name of the related Borrower or any of its agents, or (b) with
respect to Underlying Eligible Bonds at the Lender's discretion
following an Event of Default, in the name of, the related Borrower or
any of its agents, or in any account in the name of the related
Borrower or any of its agents.
(vi) In addition to the foregoing, and as a condition to the
Lender's performance on each Funding Date, the related Borrower shall
(a) deliver to the Lender no later than 10:00 a.m. three (3) days prior
to the requested Funding Date, copies of the documents listed below,
and (b) deliver the originals (unless copies are specified) of such
documents no later than 11:00 a.m. on such Funding Date. The documents
to be delivered as a condition to the Lender's performance include
without limitation (collectively, the "Bond File"): (A) a copy of the
executed Governing Agreements governing the Eligible Bonds and/or
Underlying Eligible Bonds and/or any supplements thereto, and the
offering documents related to the Eligible Bonds and/or Underlying
Eligible Bonds, each certified by the Borrower or the Bond/PC Custodian
as a true, correct and complete copy of the original, and all ancillary
documents required to be delivered to the certificateholders under the
Governing Agreements, (B) an officer's certificate as may be requested
by Lender, (C) opinions of counsel in form and substance satisfactory
to the Lender, (D) the Eligible Bonds and/or Underlying Eligible Bonds
in accordance with this Section 5.02(g), (E) an Instruction Letter
executed by the related Borrower, (F) for all Eligible Bonds and/or
Underlying Eligible Bonds in uncertificated form, evidence that such
Eligible Bonds and/or Underlying Eligible Bonds have been registered in
the name of the Bond/PC Custodian or the Lender on the books of the
issuer itself or its transfer agent, (G) all Transfer Documents, (H)
copies of distribution statements delivered to the Bond/PC Custodian
for two months prior to the month in which the related Funding Date
occurs, if any, certified by the applicable Trustee as true and
correct, (I) any other documents or instruments necessary in the
reasonable opinion of the Lender to effect and perfect a legally valid
transfer of the relevant interest granted therein to the Lender under
the Loan Documents, (J) any other documents required under this Section
5.02(g). Nothing set forth herein shall be deemed a waiver of any of
either Borrower's obligations hereunder.
(vii) With respect to any Underlying Eligible Bonds delivered
hereunder, the Lender shall take possession of such Underlying Eligible
Bonds solely to prevent misappropriation of the Underlying Eligible
Bonds and the consequent diminution in value of the Pledged Stock, and
the Lender affirmatively disclaims any security interest in the
Underlying Eligible Bonds.
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(h) Delivery of Pledged Stock. With respect to the Pledged Stock that
shall be delivered or held in definitive, certificated form, the related
Borrower shall deliver to the Bond/PC Custodian the original of the relevant
certificate in form suitable for transfer, with accompanying, duly executed
instruments of transfer or appropriate instruments of assignment executed in
blank or in the name of the Lender or the Bond/PC Custodian, transfer tax
stamps, and any other documents or instruments necessary in the reasonable
opinion of the Lender to effect and perfect a legally valid delivery of such
security or other item of investment property to the Lender or the Bond/PC
Custodian. Unless otherwise instructed by Lender, any delivery of a security or
other item of investment property in definitive, certificated form shall be made
to The Chase Manhattan Bank, 4 New York Plaza, New York, New York 10004,
Attention: Outsourcing Department, Jennifer John.
(i) Additional Matters. All corporate and other proceedings, and all
documents, instruments and other legal matters in connection with the
transactions contemplated by this Loan Agreement and the other Loan Documents
shall be reasonably satisfactory in form and substance to the Lender, and the
Lender shall have received such other documents and legal opinions in respect of
any aspect or consequence of the transactions contemplated hereby or thereby as
it shall reasonably request.
(j) No Material Adverse Effect. There shall not have occurred one or
more events that, in the reasonable judgment of the Lender, constitutes or
should reasonably be expected to constitute a Material Adverse Effect.
(k) Due Diligence Package. The Lender shall have received a Due
Diligence Package with respect to each Mortgage Loan or Underlying Mortgage Loan
at least three (3) Business Days prior to the related Funding Date.
(l) Due Diligence Review. Subject to the Lender's right to perform one
or more Due Diligence Reviews pursuant to Section 11.16 hereof, the Lender shall
have completed its due diligence review of the Asset Documents and Bond File,
and the Due Diligence Package for each Advance and such other documents,
records, agreements, instruments, mortgaged properties or information relating
to such Advances as the Lender in its sole discretion deems appropriate to
review and such review shall be satisfactory to the Lender in its sole
discretion.
(m) Servicing Agreement(s); Instruction Letters. With respect to
Eligible Assets pledged to the Lender and Underlying Eligible Bonds, the Lender
shall have received, no later than 10:00 a.m. three (3) days prior to the
requested Funding Date, an Instruction Letter executed by the related Borrower,
with the related Servicing Agreement or Governing Agreement attached thereto,
which such Servicing Agreement or Governing Agreement shall be in form and
substance acceptable to Lender. With respect to the Master Servicer or a
Subservicer of a Borrower which is an Affiliate of a Borrower and which is
servicing Mortgage Loans or Participation Certificates, such Subservicer or
Master Servicer consents to terminate the related Servicing Agreement upon
notification by the Lender of an occurrence of an Event of Default.
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SECTION 6 Representations and Warranties. As of the Effective Date and
each Funding Date, each Borrower represents and warrants to the Lender that:
6.01 Financial Condition.
(a) The unaudited consolidated balance sheet of Hanover Capital
Holdings and its consolidated Subsidiaries as of December 31, 1999, reported
thereon by Deloitte & Touche, a copy of which has heretofore been furnished to
the Lender, is complete and correct and presents fairly the consolidated
financial condition of Hanover Capital Holdings and its consolidated
Subsidiaries as at such dates and the consolidated results of their operations
and their consolidated cash flows for the fiscal year then ended.
(b) Such financial statement, including the related schedules and notes
thereto, has been prepared in accordance with GAAP applied consistently
throughout the periods involved (except as approved by such accountants or
Responsible Officer, as the case may be, and as disclosed therein).
(c) Neither of the Borrowers nor any of their consolidated Subsidiaries
had, at the date of the financial statement referred to above, any material
Guarantee Obligation, contingent liability or liability for taxes, or any
long-term lease or unusual forward or long-term commitment, including, without
limitation, any interest rate or foreign currency swap or exchange transaction,
or other financial derivative, which is not reflected in the foregoing
statements or in the notes thereto.
6.02 No Change. Since February 29, 2000, there has been no development
or event nor any prospective development or event which has had or should
reasonably be expected to have a Material Adverse Effect.
6.03 Corporate Existence; Compliance with Law. Each Borrower (a) is (i)
in the case of Hanover Capital Holdings, a corporation duly organized, validly
existing and in good standing under the laws of the State of Maryland and (ii)
in the case of Hanover Capital Partners, a corporation duly organized, validly
existing and in good standing under the laws of the State of New York, (b) has
the corporate power and authority, and has all governmental licenses,
authorizations, consents and approvals necessary, to own and operate its
property, to lease the property it operates as lessee and to carry on its
business as now being or as proposed to be conducted, (c) is duly qualified to
do business and is in good standing under the laws of each jurisdiction in which
the nature of the business conducted by it makes such qualification necessary
and where failure so to qualify should be reasonably expected (either
individually or in the aggregate) to have a Material Adverse Effect, and (d) is
in compliance in all material respects with all Requirements of Law.
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6.04 Corporate Power; Authorization; Enforceable Obligations.
(a) Each Borrower has the corporate power and authority, and the legal
right, to make, deliver and perform this Loan Agreement, the Note, and each
other Loan Document, and to borrow and to grant Liens hereunder, and has taken
all necessary corporate action to authorize the borrowings and the granting of
Liens on the terms and conditions of this Loan Agreement, the Note, and each
other Loan Document to which it is a party, and the execution, delivery and
performance of this Loan Agreement, the Note, and each other Loan Document.
(b) No consent or authorization of, approval by, notice to, filing with
or other act by or in respect of, any Governmental Authority or any other Person
is required or necessary in connection with the borrowings hereunder or with the
execution, delivery, performance, validity or enforceability of this Loan
Agreement or the Note or any other Loan Document, except (i) for filings and
recordings in respect of the Liens created pursuant to this Loan Agreement, and
(ii) as previously obtained and currently in full force and effect.
(c) Each Loan Document has been duly and validly executed and delivered
by the Borrowers and constitutes, a legal, valid and binding obligation of each
Borrower, enforceable against such Borrower in accordance with their terms,
except as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors" rights generally and by general equitable principles (whether
enforcement is sought by proceedings in equity or at law).
6.05 No Legal Bar. The execution, delivery and performance of this Loan
Agreement and the Note, the borrowings hereunder and the use of the proceeds
thereof will not violate any Requirement of Law or Contractual Obligation of
either Borrower or of any of their Subsidiaries and will not result in, or
require, the creation or imposition of any Lien (other than the Liens created
hereunder) on any of its or their respective properties or revenues pursuant to
any such Requirement of Law or Contractual Obligation.
6.06 No Material Litigation. There are no actions, suits, arbitrations,
investigations or proceedings of or before any arbitrator or Governmental
Authority pending or, to the knowledge of either Borrower, threatened against
such Borrower or any of its Subsidiaries or against any of its or their
respective properties or revenues, other than those actions, suits,
arbitrations, investigations or proceedings described on Schedule 4 hereto, none
of which should reasonably be expected to have a Material Adverse Effect.
6.07 No Default. Neither Borrower nor any of their Subsidiaries is in
default under or with respect to any of its Contractual Obligations in any
respect which should reasonably be expected to have a Material Adverse Effect.
No Default or Event of Default has occurred and is continuing.
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6.08 Collateral; Collateral Security.
(a) No Borrower has assigned, pledged, or otherwise conveyed or
encumbered any of the Collateral to any Person other than the Lender, and
immediately prior to the pledge of such Collateral, the applicable Borrower was
the sole owner of the Collateral and had good and marketable title thereto, free
and clear of all Liens, in each case except for Liens that have been released or
are to be released simultaneously with the Liens granted in favor of the Lender
hereunder. No Eligible Asset was acquired by the applicable Borrower from an
Affiliate of such Borrower.
(b) The provisions of this Loan Agreement are effective to create in
favor of the Lender a valid security interest in all right, title and interest
of the related Borrower in, to and under the Collateral.
(c) Upon (i) receipt by the Mortgage Custodian of each Mortgage Note,
(ii) the delivery to the Bond/PC Custodian of (a) the Eligible Bonds in
accordance with Section 5.02 hereof together with the Transfer Documents and (b)
the Pledged Stock, (iii) receipt by the Bond/PC Custodian of the Participation
Certificates and (iv) the filing (to the extent such interest can be perfected
by filing under the Uniform Commercial Code) of financing statements on Form
UCC-1 naming the Lender as "Secured Party" and the Borrower as a "Debtor", and
describing the Collateral, in the jurisdictions and recording offices listed on
Schedule 2 attached hereto, in both instances, the security interests granted
hereunder in the Collateral will constitute fully perfected first-priority
security interests under the Uniform Commercial Code in all right, title and
interest of the related Borrower in, to and under such Collateral, and without
limitation on the foregoing, the Lender, as entitlement holder, shall have a
"security entitlement" to the Eligible Bonds.
6.09 Chief Executive Office. Each Borrower's chief executive office on
the Effective Date is located at 90 West Street, Suite 1508, New York, New York
10006.
6.10 Location of Books and Records. The location where each Borrower
keeps its books and records, including all computer tapes and records relating
to the Collateral is its chief operating office, which, on the effective date,
is located at 100 Metroplex Drive, Suite 301, Edison, New Jersey 08817.
6.11 No Burdensome Restrictions. No Requirement of Law or Contractual
Obligation of either Borrower or any of its Subsidiaries has a Material Adverse
Effect.
6.12 Taxes. Each Borrower and its Subsidiaries have filed all Federal
and state income tax returns and all other material tax returns that are
required to be filed by them and have paid all taxes due pursuant to such
returns or pursuant to any assessment received by any of them, except for any
such taxes or assessments, if any, that are being appropriately contested in
good faith by appropriate proceedings diligently conducted and with respect to
which adequate reserves in conformity with GAAP have been provided. No tax Lien
has been filed, and, to the knowledge of the Borrowers, no claim is being
asserted, with respect to any such tax or assessment.
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6.13 Margin Regulations. No part of the proceeds of any Advances will
be used for "purchasing" or "carrying" any "margin stock" within the respective
meanings of each of the quoted terms under, or for any other purpose which
violates or would be inconsistent with the provisions of, Regulation G, T, U or
X.
6.14 Investment Company Act; Other Regulations. Neither Borrower is an
"investment company", or a company "controlled" by an "investment company",
within the meaning of the Investment Company Act of 1940, as amended. Neither
Borrower is subject to regulation under any Federal or state statute or
regulation which limits its ability to incur Indebtedness.
6.15 Subsidiaries. All of the Subsidiaries of the Borrowers at the date
hereof are listed on Schedule 3 to this Loan Agreement.
6.16 Acquisition of Mortgage Loans. The Mortgage Loans were acquired by
the related Borrower, and the origination and collection practices used by the
originator of the Mortgage Loans have been, in all respects legal, proper,
prudent and customary in the residential mortgage loan servicing business, and
in accordance with the Underwriting Guidelines. All such Mortgage Loans are in
conformity with the Underwriting Guidelines.
6.17 No Adverse Selection. The Borrowers have used no selection
procedures that identified the Eligible Assets as being less desirable or
valuable than other comparable Eligible Assets owned by the Borrowers.
6.18 Borrowers Solvent; Fraudulent Conveyance. As of the date hereof
and immediately after giving effect to each Advance, the fair value of the
assets of each Borrower is greater than the fair value of the liabilities
(including, without limitation, contingent liabilities if and to the extent
required to be recorded as a liability on the financial statements of such
Borrower in accordance with GAAP) of such Borrower and each Borrower is and will
be solvent, is and will be able to pay its debts as they mature and does not and
will not have an unreasonably small capital to engage in the business in which
it is engaged and proposes to engage. Neither Borrower intends to incur, nor
believes that it has incurred, debts beyond its ability to pay such debts as
they mature. Neither Borrower is contemplating the commencement of insolvency,
bankruptcy, liquidation or consolidation proceedings or the appointment of a
receiver, liquidator, conservator, trustee or similar official in respect of
such Borrower or any of its assets. Neither Borrower is transferring any
Eligible Assets with any intent to hinder, delay or defraud any of its
creditors.
6.19 ERISA. Each Plan to which either Borrower or its Subsidiaries make
direct contributions, and, to the knowledge of the Borrowers, each other Plan
and each Multiemployer Plan, is in compliance in all material respects with, and
has been administered in all material respects in compliance with, the
applicable provisions of ERISA, the Code and any other Federal or state law.
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6.20 True and Complete Disclosure. The information, reports, financial
statements, exhibits and schedules furnished in writing by or on behalf of the
Borrowers to the Lender in connection with the negotiation, preparation or
delivery of this Loan Agreement and the other Loan Documents or included herein
or therein or delivered pursuant hereto or thereto, do not contain any untrue
statement of material fact or omit to state any material fact necessary to make
the statements herein or therein not misleading. All written information
furnished after the date hereof by or on behalf of the Borrowers to the Lender
in connection with this Loan Agreement and the other Loan Documents and the
transactions contemplated hereby and thereby will be true, correct and accurate
in every material respect, or (in the case of projections) based on reasonable
estimates, on the date as of which such information is stated or certified.
There is no fact known to a Responsible Officer of the Borrowers that, after due
inquiry, should reasonably be expected to have a Material Adverse Effect that
has not been disclosed herein, in the other Loan Documents or in a report,
financial statement, exhibit, schedule, disclosure letter or other writing
furnished to the Lender for use in connection with the transactions contemplated
hereby or thereby.
6.21 True Sales. Any Eligible Asset acquired by an Affiliate of either
Borrower has been conveyed to the related Borrower pursuant to a legal sale, and
if so requested by the Lender, is covered by an opinion of counsel to that
effect in form and substance acceptable to the Lender.
6.22 Participation Certificates. The Borrowers represent and warrant to
the Lender with respect to each Participation Certificate that the
representations and warranties set forth on Schedule 1, Part III hereof are true
and correct and that (a) such Participation Certificate is owned by the related
Borrower free from all Liens, (b) such Participation Certificate shall have been
delivered to the Lender or its designee in a form suitable for registration in
the name of the Lender, (c) such Participation Certificate represents an
Ownership Percentage in the Underlying Mortgage Loans referenced therein, (d)
the Eligible Assets referenced in such Participation Certificate are being held
by a Participation Custodian for the benefit of the holder of such Participation
Certificate, and (e) the Participation Custodian is not an Affiliate of either
Borrower under the Governing Agreement for the related Participation
Certificate.
SECTION 7 Covenants of the Borrower. Each of the Borrowers covenants
and agrees with the Lender that, so long as any Advance is outstanding and until
the later to occur of the payment in full of all Secured Obligations and the
termination of this Loan Agreement:
7.01 Financial Statements. Hanover Capital Holdings shall deliver to
the Lender:
(a) if available, as soon as available and in any event within
forty-five (45) days after the end of each of the first three quarterly fiscal
periods of each fiscal year of Hanover Capital Holdings, the consolidated and
consolidating balance sheets of Hanover Capital Holdings and its consolidated
Subsidiaries as at the end of such period and the related unaudited consolidated
and consolidating statements of income and of cash flows for Hanover Capital
Holdings and its consolidated Subsidiaries for such period and the portion of
the fiscal year through the end of such period, setting forth in each case in
comparative form the figures for the previous year, accompanied
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by a certificate of a Responsible Officer of Hanover Capital Holdings, which
certificate shall state that said consolidated financial statements fairly
present the consolidated and consolidating financial condition and results of
operations of Hanover Capital Holdings and its Subsidiaries in accordance with
GAAP, consistently applied, as at the end of, and for, such period (subject to
normal year-end audit adjustments);
(b) as soon as available and in any event within ninety (90) days after
the end of each fiscal year of Hanover Capital Holdings, the audited
consolidated and consolidating balance sheets of Hanover Capital Holdings and
its consolidated Subsidiaries as at the end of such fiscal year and the related
consolidated and consolidating statements of income and retained earnings and of
cash flows for Hanover Capital Holdings and its consolidated Subsidiaries for
such year, setting forth in each case in comparative form the figures for the
previous year, accompanied by an opinion thereon of independent certified public
accountants of recognized national standing, which opinion shall not be
qualified as to scope of audit or going concern and shall state that said
consolidated and consolidating financial statements fairly present the
consolidated and consolidating financial condition and results of operations of
Hanover Capital Holdings and its consolidated Subsidiaries as at the end of, and
for, such fiscal year in accordance with GAAP; and
(c) from time to time such other information regarding the financial
condition, operations, or business of the Borrowers and their Subsidiaries as
the Lender may reasonably request.
7.02 Existence, Etc. Each Borrower and its Subsidiaries will:
(a) preserve and maintain its legal existence;
(b) preserve and maintain all of its material rights, privileges,
licenses and franchises;
(c) comply with the requirements of all applicable Requirements of Law
(including, without limitation, the Truth in Lending Act, the Real Estate
Settlement Procedures Act and all environmental laws) if failure to comply with
such requirements should reasonably be expected (either individually or in the
aggregate) to have a Material Adverse Effect; and
(d) keep adequate records and books of account, in which complete
entries will be made in accordance with GAAP consistently applied.
7.03 Maintenance of Property; Insurance. Each Borrower shall keep all
property useful and necessary in its business in good working order and
condition. Each Borrower shall maintain errors and omissions insurance and/or
mortgage impairment insurance and blanket bond coverage in such amounts as are
in effect on the Effective Date (as disclosed to Lender in writing) and shall
not reduce such coverage without the written consent of the Lender, and shall
also maintain such other insurance with financially sound and reputable
insurance companies, and with respect to property and risks of a character
usually maintained by entities engaged in the same or similar
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business similarly situated, against loss, damage and liability of the kinds and
in the amounts customarily maintained by such entities.
7.04 Notices.
(a) Each Borrower shall give notice to the Lender promptly:
(i) upon such Borrower becoming aware of, and in any event
within one (1) Business Day after, the occurrence of any Default or
Event of Default or any Event of Default or Default under any other
material agreement of such Borrower;
(ii) upon, and in any event within three (3) Business Days
after, service of process on such Borrower or any of its Subsidiaries,
or any agent thereof for service of process, in respect of any legal or
arbitrable proceedings affecting such Borrower, or any of its
Subsidiaries (a) that questions or challenges the validity or
enforceability of any of the Loan Documents or (b) in which the amount
in controversy exceeds $300,000;
(iii) upon such Borrower becoming aware of any default related
to any Collateral, any Material Adverse Effect and any event or change
in circumstances which should reasonably be expected to have a Material
Adverse Effect;
(iv) upon such Borrower becoming aware that the Mortgaged
Property in respect of any Mortgage Loan has been damaged by waste,
fire, earthquake or earth movement, windstorm, flood, tornado or other
casualty, or otherwise damaged so as to materially and adversely affect
the Collateral Value of such Mortgage Loan;
(v) upon entry of a judgment or decree in an amount in excess
of $200,000.
Each notice pursuant to this Section 7.04(a) (other than 7.04(a)(v)) shall be
accompanied by a statement of a Responsible Officer of the related Borrower
setting forth details of the occurrence referred to therein and stating what
action the related Borrower has taken or proposes to take with respect thereto.
7.05 Other Information. Each Borrower shall furnish to the Lender, as
soon as available, copies of any and all proxy statements, financial statements
and reports which such Borrower sends to its stockholders, and copies of all
regular, periodic and special reports, and all registration statements filed
with the Securities and Exchange Commission, any Governmental Authority which
supervises the issuance of securities by such Borrower.
7.06 Further Identification of Collateral. Each Borrower will furnish
to the Lender from time to time statements and schedules further identifying and
describing the Collateral and such
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other reports in connection with the Collateral as the Lender or any Lender may
reasonably request, all in reasonable detail.
7.07 Eligible Asset Determined to be Defective. Upon discovery by the
Borrower or the Lender of any breach of any representation or warranty listed on
Schedule 1 hereto applicable to any Eligible Asset, the party discovering such
breach shall promptly give notice of such discovery to the other.
7.08 Monthly Reporting. The Borrowers shall deliver or cause to be
delivered to the Lender, no later than five (5) days after the last day of each
calendar month, the following documents, as applicable: (a) with respect to
Eligible Mortgage Loans, a monthly servicing report and a Mortgage Loan Schedule
and a Mortgage Loan Tape in a computer-readable format reasonably acceptable to
the Lender which shall list and set forth such information as the Lender may
reasonably request, including, without limitation, (i) the outstanding principal
balance and delinquency status of each such Mortgage Loan as of the last day of
the prior calendar month (reported as current, 30-59, 60-89, 90+, etc., in each
case as of a date specified therein), (ii) any Mortgagor that is in bankruptcy,
and (iii) a servicer exception report as defined in the Underwriting Guidelines,
(b) with respect to Eligible Bonds and Underlying Eligible Bonds, a Bond Summary
which shall list and set forth such information as the Lender may reasonably
request, and (c) with respect to Participation Certificates, a Participation
Certificate Schedule and Participation Certificate Tape in a computer-readable
format reasonably acceptable to the Lender which shall list and set forth such
information as the Lender may reasonably request, and (d) with respect to all
Eligible Assets, (i) a Remittance Report in the form attached hereto as Exhibit
I together with a statement of reconciliation with respect to the Collection
Account, (ii) if the Borrowers and the Lender shall mutually agree (in
accordance with Section 2.06 (b) hereof), a Borrowing Base Certificate in the
form attached hereto as Exhibit H, and (iii) any other information as the Lender
shall reasonably request. Each monthly servicing report described above shall
separately identify each pool of Eligible Assets pledged to the Lender to secure
the related Advance.
7.09 Financial Condition Covenants.
(a) Maintenance of Tangible Net Worth. Hanover Capital Holdings shall
at all times maintain Tangible Net Worth of not less than $45,000,000.
(b) Maintenance of Ratio of Indebtedness to Tangible Net Worth. With
respect to Hanover Capital Holdings or its Subsidiaries, the ratio of
Indebtedness to Tangible Net Worth shall not at any time be greater than 10:1.
(c) Maintenance of Liquidity. Hanover Capital Holdings shall ensure
that, as of the end of each calendar month, it has Cash Equivalents in an amount
of not less than $2,500,000.
7.10 Borrowing Base Deficiency. If at any time there exists a Borrowing
Base Deficiency the Borrowers shall cure same in accordance with Section 2.06
hereof.
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7.11 Prohibition of Fundamental Changes. Neither Borrower nor any of
its Subsidiaries shall enter into any transaction of merger or consolidation or
amalgamation, or liquidate, wind up or dissolve itself (or suffer any
liquidation, winding up or dissolution) or sell all or substantially all of its
assets, without the prior written consent of the Lender.
7.12 Limitation on Liens on Collateral. Each Borrower will defend the
Collateral against, and will take such other action as is necessary to remove,
any Lien, security interest or claim on or to the Collateral, other than the
security interests created under this Loan Agreement, and each Borrower will
defend the right, title and interest of the Lender in and to any of the
Collateral against the claims and demands of all persons whomsoever.
7.13 Limitation on Transactions with Affiliates. Neither Borrower nor
any of its Subsidiaries shall enter into any transaction, including, without
limitation, any purchase, sale, lease or exchange of property or the rendering
of any service, with any Affiliate unless such transaction is (a) not otherwise
prohibited under this Loan Agreement, (b) in the ordinary course of such
Borrower's business and (c) upon fair and reasonable terms no less favorable to
such Borrower, as the case may be, than it would obtain in a comparable arm's
length transaction with a Person which is not an Affiliate.
7.14 Underwriting Guidelines. Without prior written consent of the
Lender, the Borrowers shall not amend or otherwise modify the Underwriting
Guidelines.
7.15 Limitations on Modifications, Waivers and Extensions of Eligible
Assets. The Borrowers will not, nor will they permit or allow others to, amend,
modify, terminate or waive any provision of any Eligible Asset to which either
Borrower is a party in any manner which should reasonably be expected to
materially and adversely affect the value of such Eligible Asset as Collateral.
7.16 Servicing. The Borrowers shall not permit any Person other than
the Master Servicer to service Eligible Mortgage Loans and shall not liquidate
the Collateral on a servicing released basis without the prior written consent
of the Lender.
7.17 Limitation on Distributions. After the occurrence and during the
continuation of any Event of Default, the Borrowers shall not make any payment
on account of, or set apart assets for, a sinking or other analogous fund for
the purchase, redemption, defeasance, retirement or other acquisition of any
equity or partnership interest of either Borrower, whether now or hereafter
outstanding, or make any other distribution in respect thereof, either directly
or indirectly, whether in cash or property or in obligations of either Borrower.
7.18 Use of Proceeds. The Borrowers will use the proceeds of the
Advances solely to acquire, fund, manage and service the Eligible Assets.
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7.19 Restricted Payments. The Borrowers shall not make any Restricted
Payments.
7.20 Reports. With respect to Eligible Bonds, Underlying Eligible Bonds
or Participation Certificates, the Borrowers shall promptly deliver to the
Lender (i) any report received by or required to be delivered (a) by any Person
pursuant to the Governing Agreements at the same time as required thereunder, or
(b) to any holder of any securities issued pursuant to the Governing Agreements;
(ii) any notice of transfer of servicing; and (iii) any other such document or
information as the Lender may reasonably request from time to time.
7.21 Inspection. The Borrowers shall permit the Lender, during normal
business hours and upon reasonable prior notice but in any event within two (2)
Business Days, to inspect their books and records relating to the Collateral and
other matters relating to the transactions contemplated hereby; provided,
however, that in the event a Default shall have occurred the Lender shall not be
required to give any prior notice.
7.22 Further Proceeds. If either Borrower shall become entitled to
receive or shall receive any rights, whether in addition to, in substitution of,
as a conversion of, or in exchange for the Eligible Bonds or Pledged Stock, or
otherwise in respect thereof, such Borrower shall accept the same as the
Lender's agent, hold the same in trust for the Lender and deliver the same
forthwith to the Lender in the exact form received, duly endorsed by such
Borrower to the Lender, if required, together with an undated bond power
covering such certificate duly executed in blank and with, if the Lender so
requests, signature guaranteed, to be held by the Lender hereunder as additional
collateral security for the Secured Obligations. If any sums of money or
property so paid or distributed in respect of the Eligible Bonds or Pledged
Stock shall be received by a Borrower, such Borrower shall, until such money or
property is paid or delivered to the Lender as required hereunder, hold such
money or property in trust for the Lender, segregated from other Advances of
such Borrower, as additional collateral security for the Secured Obligations.
7.23 Further Documentation. At any time and from time to time, upon the
written request of the Lender, and at the sole expense of the Borrowers, the
Borrowers will promptly and duly execute and deliver such further instruments
and documents and take such further actions as the Lender may reasonably request
for the purposes of obtaining or preserving the full benefits of this Loan
Agreement and of the rights and powers herein granted. If any amount payable
under or in connection with any of the Collateral shall be or become evidenced
by any instrument (including any certificated security or promissory note) or
chattel paper (in each case as defined in the UCC), such instrument or chattel
paper shall be immediately delivered to the Mortgage Custodian or the Bond/PC
Custodian, as applicable, on behalf of Lender, duly endorsed in a manner
satisfactory to Lender, to be held as Collateral pursuant to this Loan
Agreement. Prior to such delivery, the Borrowers shall hold all such instruments
or chattel paper in trust of the Lender, and shall not commingle any of the
foregoing with any assets of the Borrowers.
7.24 Taxes. Each Borrower shall pay, and hold the Lender harmless from,
any and all liabilities with respect to, or resulting from and delay in paying,
any and all stamp, excise, sales
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or other similar taxes which may be payable or determined to be payable with
except to any of the Collateral or in connection with any of the transactions
contemplated by this Loan Agreement.
7.25 Lost Note Affidavits; Lost Instrument Affidavits. Each Lost Note
Affidavit or Lost Instrument Affidavit, as applicable, delivered to the Lender
hereunder shall (i) attach a copy of the original Mortgage Note or, if
available, a copy of the original Participation Certificate, as applicable,
certified by applicable Borrower as a true, correct, and complete copy thereof,
(ii) indemnify the Lender, and (iii) remain effective for all the Borrowers' and
Lenders' successors and assigns.
7.26 Underlying Eligible Bonds. Each Borrower covenants and agrees
that: (i) it will not sell, transfer or otherwise dispose, or permit any
Eligible Entity to sell, assign or transfer or otherwise dispose of any
Underlying Eligible Bonds, without the written consent of the Lender and (ii) it
will not create or suffer to exist, or permit any Eligible Entity to create or
suffer to exist, any Lien upon the Underlying Eligible Bonds, or pledge, option
or otherwise encumber, or permit any Eligible Entity to pledge, option or
otherwise encumber the Underlying Eligible Bonds, whether now owned or hereafter
acquired.
SECTION 8 Events of Default. Each of the following events shall
constitute an event of default (an "Event of Default") hereunder:
(a) Borrower Default in the Payment of any Advance. Either Borrower
shall default in the payment of any principal of or interest on any Advance when
due (whether at stated maturity, upon acceleration or at mandatory payment) or
on the payment of any fee due under Section 3.03, 3.05 or 3.06; or
(b) Borrower Default in the Payment of Other Amount. Either Borrower
shall default in the payment of any other amount payable by it hereunder or
under any other Loan Document, and such default shall have continued unremedied
for three (3) Business Days; or
(c) Failure of Representation or Warranty. Any representation, warranty
or certification made or deemed made by either Borrower herein (other than those
in Schedule 1 hereto) or by either Borrower in any other Loan Document or any
certificate furnished to the Lender pursuant to the provisions thereof, shall
prove to have been false or misleading in any material respect as of the time
made or furnished; or
(d) Default of Covenant. Either Borrower shall:
(i) fail to comply with the requirements of Section 7 hereof
(other than Sections 7.01 (to the extent applicable to such Borrower),
7.02(b), 7.02(d), 7.03, or 7.08),
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(ii) fail to comply with the requirements of Sections 7.01 (to
the extent applicable to such Borrower), 7.02(b), 7.02(d), 7.03, 7.08
or 7.16 and such default shall continue unremedied for a period of five
(5) Business Days, or
(iii) fail to observe or perform any other covenant, condition
or agreement contained in this Loan Agreement or any other Loan
Document and such failure to observe or perform shall continue
unremedied for a period of seven (7) Business Days; or
(e) Cross Default. Either Borrower or any of its Subsidiaries shall:
(i) default in any payment of principal of or interest on any
Indebtedness (other than the Advances) or in the payment of any
Guarantee Obligation, beyond the period of grace (not to exceed 30
days), if any, provided in the instrument or agreement under which such
Indebtedness or Guarantee Obligation was created, if the aggregate
amount of the Indebtedness and/or Guarantee Obligations in respect of
which such default or defaults shall have occurred is $250,000 or more;
or
(ii) default in the observance or performance of any other
agreement or condition relating to any Indebtedness (other than the
Advances) or Guarantee Obligation or contained in any instrument or
agreement evidencing, securing or relating thereto, in each case beyond
the period of grace (not to exceed 30 days), if any, provided in the
instrument or agreement under which such Indebtedness or Guarantee
Obligation was created; or
(iii) permit any other event to occur or condition exist; or
(iv) default with respect to any other agreement between such
Borrower, on the one hand, and Lender or any of its Affiliates on the
other hand, which has not been waived by the Lender,
the effect of which default or other event or condition is to cause, or give the
holder or holders of such Indebtedness or the beneficiary or beneficiaries of
such Guarantee Obligation (or a trustee or agent on behalf of such holder or
holders or beneficiary or beneficiaries) the immediate right to cause, with the
giving of notice if required, such Indebtedness to become due prior to its
stated maturity or such Guarantee Obligation to become payable; or
(f) Unsatisfied Judgment. One or more judgments or decrees shall be
entered against either Borrower or against either Borrower in the aggregate or
any of its Subsidiaries involving in the aggregate a liability (not paid or
fully covered by insurance) of $1,000,000 or more, and all such judgments or
decrees shall not have been vacated, discharged, stayed or bonded pending appeal
within 60 days from the entry thereof; or
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(g) Inability to Pay Debts. Either Borrower shall admit in writing its
inability to pay its debts as such debts become due; or
(h) Voluntary Bankruptcy Event. Either Borrower or any of its
Subsidiaries shall (i) apply for or consent to the appointment of, or the taking
of possession by, a receiver, custodian, trustee, examiner or liquidator of
itself or of all or a substantial part of its property, (ii) make a general
assignment for the benefit of its creditors, (iii) commence a voluntary case
under the Bankruptcy Code, (iv) file a petition seeking to take advantage of any
other law relating to bankruptcy, insolvency, reorganization, liquidation,
dissolution, arrangement or winding-up, or composition or readjustment of debts,
(v) fail to controvert in a timely and appropriate manner, or acquiesce in
writing to, any petition filed against it in an involuntary case under the
Bankruptcy Code or (vi) take any corporate or other action for the purpose of
effecting any of the foregoing; or
(i) Involuntary Bankruptcy Event. A proceeding or case shall be
commenced, without the application or consent of the related Borrower or any of
its Subsidiaries, in any court of competent jurisdiction, seeking (i) its
reorganization, liquidation, dissolution, arrangement or winding-up, or the
composition or readjustment of its debts, (ii) the appointment of a receiver,
custodian, trustee, examiner, liquidator or the like of the related Borrower or
any such Subsidiary or of all or any substantial part of its property, or (iii)
similar relief in respect of the related Borrower or any such Subsidiary under
any law relating to bankruptcy, insolvency, reorganization, winding-up, or
composition or adjustment of debts, and such proceeding or case shall continue
undismissed, or an order, judgment or decree approving or ordering any of the
foregoing shall be entered and continue unstayed and in effect, for a period of
60 or more days; or an order for relief against the related Borrower or any such
Subsidiary shall be entered in an involuntary case under the Bankruptcy Code; or
(j) Termination of Loan Documents. The Mortgage Custodial Agreement,
the Bond/PC Custodial Agreement, or any other Loan Document, shall for whatever
reason be terminated or cease to be in full force and effect, or the
enforceability thereof shall be contested by any party thereto; or
(k) ERISA Default. (i) any Person shall engage in any "prohibited
transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code)
involving any Plan, (ii) any "accumulated funding deficiency" (as defined in
Section 302 of ERISA), whether or not waived, shall exist with respect to any
Plan or any Lien in favor of the PBGC or a Plan shall arise on the assets of a
Borrower or any Commonly Controlled Entity, (iii) a Reportable Event shall occur
with respect to, or proceedings shall commence to have a trustee appointed, or a
trustee shall be appointed, to administer or to terminate, any Single Employer
Plan, which Reportable Event or commencement of proceedings or appointment of a
trustee is, in the reasonable opinion of the Lender, likely to result in the
termination of such Plan for purposes of Title IV of ERISA, (iv) any Single
Employer Plan shall terminate for purposes of Title IV of ERISA, (v) either
Borrower or any Commonly Controlled Entity shall, or in the reasonable opinion
of the Lenders is likely to, incur any liability in connection with a withdrawal
from, or the insolvency or reorganization of, a Multiemployer Plan or (vi) any
other event or condition shall occur or exist with respect to a Plan;
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and in each case in clauses (i) through (vi) above, such event or condition,
together with all other such events or conditions, if any, could reasonably be
expected to have a Material Adverse Effect; or
(l) Material Adverse Effect. Any other event shall occur which, in the
sole good faith discretion of the Lender, may have a Material Adverse Effect; or
(m) Change of Control. Any Change of Control of either Borrower shall
have occurred; or
(n) Pre-Existing Condition. The discovery by the Lender during its
continuing due diligence of the Borrowers of a condition or event and which the
Lender, in its sole reasonable discretion, determines materially and adversely
affects: (i) the condition (financial or otherwise) of either Borrower, its
Subsidiaries or Affiliates; or (ii) the ability of the Borrower or the Lender to
fulfill their respective obligations under this Agreement; or
(o) Other Liens. Either Borrower shall grant, or suffer to exist, any
Lien on any Collateral except the Liens contemplated hereby; or the Liens
contemplated hereby shall cease to be first priority perfected Liens on the
Collateral in favor of the Lender or shall be Liens in favor of any Person other
than the Lender; or
(p) Failure to Answer. The Lender shall reasonably request, specifying
the reasons for such request, information, and/or written responses to such
requests, regarding the financial well-being of either Borrower and such
information and/or responses shall not have been provided within three Business
Days of such request.
SECTION 9 Remedies Upon Default.
(a) Upon the occurrence of one or more Events of Default other than
those referred to in Sections 8(h) or (i), and in addition to the remedies
provided in Section 4.07 hereof and otherwise provided in this Loan Agreement,
the Lender may immediately declare the principal amount of the Advances then
outstanding under the Note to be immediately due and payable, together with all
interest thereon and fees and expenses accruing under this Loan Agreement. Upon
the occurrence of an Event of Default referred to in Sections 8(h) or (i), and
in addition to the remedies provided in Section 4.07 hereof and otherwise
provided in this Loan Agreement, such amounts shall immediately and
automatically become due and payable without any further action by any Person.
Upon such declaration or such automatic acceleration, the balance then
outstanding on the Note shall become immediately due and payable, without
presentment, demand, protest or other formalities of any kind, all of which are
hereby expressly waived by the Borrowers and the Lender may thereupon exercise
any remedies available to it at law and pursuant to the Loan Agreement.
(b) Upon the occurrence of one or more Events of Default, and in
addition to the remedies provided in Section 4.07 hereof and otherwise provided
in this Loan Agreement, the
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Lender shall have the right to obtain physical possession of the Servicing
Records and all other files of the Borrowers relating to the Collateral and all
documents relating to the Collateral which are then or may thereafter come in to
the possession of the Borrowers or any third party acting for a Borrower and the
Borrowers shall deliver to the Lender such assignments as the Lender shall
request. The Borrowers shall be responsible for paying any fees of any
Subservicer resulting from the termination of a Subservicer which is an
Affiliate of a Borrower due to an Event of Default. The Lender shall be entitled
to specific performance of all agreements of the Borrowers contained in this
Loan Agreement.
SECTION 10 No Duty of Lender. The powers conferred on the Lender
hereunder are solely to protect the Lender's interests in the Collateral and
shall not impose any duty upon it to exercise any such powers. The Lender shall
be accountable only for amounts that it actually receives as a result of the
exercise of such powers, and neither it nor any of its officers, directors,
employees or agents shall be responsible to the Borrowers for any act or failure
to act hereunder, except for its or their own gross negligence or willful
misconduct.
SECTION 11 Miscellaneous.
11.01 Waiver. No failure on the part of the Lender to exercise and no
delay in exercising, and no course of dealing with respect to, any right, power
or privilege under any Loan Document shall operate as a waiver thereof, nor
shall any single or partial exercise of any right, power or privilege under any
Loan Document preclude any other or further exercise thereof or the exercise of
any other right, power or privilege. The remedies provided herein are cumulative
and not exclusive of any remedies provided by law.
11.02 Notices. Except as otherwise expressly permitted by this Loan
Agreement, all notices, requests and other communications provided for herein
and under the Mortgage Custodial Agreement (including without limitation any
modifications of, or waivers, requests or consents under, this Loan Agreement)
shall be given or made in writing (including without limitation by telex or
telecopy) delivered to the intended recipient at the "Address for Notices"
specified below its name on the signature pages hereof or thereof); or, as to
any party, at such other address as shall be designated by such party in a
written notice to each other party. Except as otherwise provided in this Loan
Agreement and except for notices given under Section 2 (which shall be effective
only on receipt), all such communications shall be deemed to have been duly
given when transmitted by telex or telecopy or personally delivered or, in the
case of a mailed notice, upon receipt, in each case given or addressed as
aforesaid.
11.03 Indemnification and Expenses.
(a) The Borrowers agrees to hold the Lender and each of its officers,
directors, agents and employees (each, an "Indemnified Party") harmless from and
indemnify each Indemnified Party against all liabilities, losses, damages,
judgments, costs and expenses of any kind which may be imposed on, incurred by
or asserted against such Indemnified Party in any suit, action, claim or
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proceeding relating to or arising out of this Loan Agreement, the Note, any
other Loan Document or any transaction contemplated hereby or thereby, or any
amendment, supplement or modification of, or any waiver or consent under or in
respect of, this Loan Agreement, the Note, any other Loan Document or any
transaction contemplated hereby or thereby, except, in each case, to the extent
arising from such Indemnified Party's gross negligence or willful misconduct. In
any suit, proceeding or action brought by the Lender in connection with any
Eligible Asset for any sum owing thereunder, or to enforce any provisions of any
such Eligible Asset, the Borrowers will save, indemnify and hold the Lender
harmless from and against all expense, loss or damage suffered by reason of any
defense, set-off, counterclaim, recoupment or reduction or liability whatsoever
of the account debtor or obligor thereunder, arising out of a breach by a
Borrower of any obligation thereunder or arising out of any other agreement,
indebtedness or liability at any time owing to or in favor of such account
debtor or obligor or its successors from a Borrower. The Borrowers also agree to
reimburse the Lender as and when billed by the Lender for all the Lender's costs
and expenses incurred in connection with the enforcement or the preservation of
the Lender's rights under this Loan Agreement, the Note, any other Loan Document
or any transaction contemplated hereby or thereby, including without limitation
the fees and disbursements of its counsel (including all fees and disbursements
incurred in any action or proceeding between a Borrower and an Indemnified Party
or between an Indemnified Party and any third party relating hereto). The
Borrowers hereby acknowledges that, notwithstanding the fact that the Note is
secured by the Collateral, the obligations of the Borrowers under the Note are
recourse obligations of the Borrowers.
(b) The Borrowers agree to pay as and when billed by the Lender all of
the out-of-pocket costs and expenses incurred by the Lender in connection with
the development, preparation and execution of, and any amendment, supplement or
modification to, this Loan Agreement, the Note, any other Loan Document or any
other documents prepared in connection herewith or therewith, and the
consummation and administration of the transactions contemplated hereby and
thereby, including without limitation (i) all the reasonable fees, disbursements
and expenses of counsel to the Lender not to exceed $30,000 (provided that such
cap shall not include amendments to the initial Master Loan and Security
Agreement dated as of March 30, 1998 between the Lender and Hanover Capital
Holdings or any amended and restated version of such agreement), (ii) all the
due diligence, inspection, testing and review costs and expenses incurred by the
Lender with respect to Collateral under this Loan Agreement as set forth in
Section 11.16 hereof and (iii) initial and ongoing fees and expenses incurred by
the custodian and any trustee with respect to the Collateral under this
Agreement. All of the foregoing amounts shall be paid promptly by the Borrowers
or may be netted out of any Advances made by Lender hereunder.
11.04 Amendments. Except as otherwise expressly provided in this Loan
Agreement, any provision of this Loan Agreement may be modified or supplemented
only by an instrument in writing signed by the Borrowers and the Lender and any
provision of this Loan Agreement may be waived by the Lender.
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11.05 Successors and Assigns. This Loan Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and permitted assigns.
11.06 Survival. The obligations of the Borrowers under Section 11.03
hereof shall survive the repayment of the Advances and the termination of this
Loan Agreement. In addition, each representation and warranty made or deemed to
be made by a request for a borrowing herein or pursuant hereto shall survive the
making of such representation and warranty, and the Lender shall not be deemed
to have waived, by reason of making any Advance, any Default that may arise
because any such representation or warranty shall have proved to be false or
misleading, notwithstanding that the Lender may have had notice or knowledge or
reason to believe that such representation or warranty was false or misleading
at the time such Advance was made.
11.07 Captions. The table of contents and captions and section headings
appearing herein are included solely for convenience of reference and are not
intended to affect the interpretation of any provision of this Loan Agreement.
11.08 Counterparts. This Loan Agreement may be executed in any number
of counterparts, all of which taken together shall constitute one and the same
instrument, and any of the parties hereto may execute this Loan Agreement by
signing any such counterpart.
11.09 GOVERNING LAW; ETC. THIS LOAN AGREEMENT SHALL BE GOVERNED BY THE
LAW OF THE STATE OF NEW YORK WITHOUT REFERENCE TO CHOICE OF LAW DOCTRINE (BUT
WITH REFERENCE TO SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW, WHICH
BY ITS TERMS APPLIES TO THIS LOAN AGREEMENT), AND SHALL CONSTITUTE A SECURITY
AGREEMENT WITHIN THE MEANING OF THE UNIFORM COMMERCIAL CODE.
11.10 SUBMISSION TO JURISDICTION; WAIVERS. EACH BORROWER HEREBY
IRREVOCABLY AND UNCONDITIONALLY:
(A) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL
ACTION OR PROCEEDING RELATING TO THIS LOAN AGREEMENT, THE NOTE
AND THE OTHER LOAN DOCUMENTS, OR FOR RECOGNITION AND
ENFORCEMENT OF ANY JUDGMENT IN RESPECT THEREOF, TO THE
NON-EXCLUSIVE GENERAL JURISDICTION OF THE COURTS OF THE STATE
OF NEW YORK, THE FEDERAL COURTS OF THE UNITED STATES OF
AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND APPELLATE
COURTS FROM ANY THEREOF;
(B) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY
BE BROUGHT IN SUCH COURTS AND, TO THE EXTENT PERMITTED BY LAW,
WAIVES ANY OBJECTION THAT IT MAY NOW
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OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR
PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR PROCEEDING
WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD
OR CLAIM THE SAME;
(C) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION
OR PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY
REGISTERED OR CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR
FORM OF MAIL), POSTAGE PREPAID, TO ITS ADDRESS SET FORTH UNDER
ITS SIGNATURE BELOW OR AT SUCH OTHER ADDRESS OF WHICH THE
LENDER SHALL HAVE BEEN NOTIFIED; AND
(D) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT
TO EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY
LAW OR SHALL LIMIT THE RIGHT TO SUE IN ANY OTHER JURISDICTION.
11.11 WAIVER OF JURY TRIAL. EACH OF THE BORROWERS AND THE LENDER HEREBY
IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND
ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO
THIS LOAN AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY OR THEREBY.
11.12 Acknowledgments. Each Borrower hereby acknowledges that:
(a) it has been advised by counsel in the negotiation, execution and
delivery of this Loan Agreement, the Note and the other Loan Documents;
(b) the Lender has no fiduciary relationship to the Borrower, and the
relationship between the Borrower and the Lender is solely that of debtor and
creditor; and
(c) no joint venture exists between the Lender and the Borrower.
11.13 Hypothecation and Pledge of Collateral. The Lender shall have
free and unrestricted use of all Collateral and nothing in this Loan Agreement
or in Section 9-207(2)(e) of the UCC shall preclude the Lender from engaging in
repurchase transactions with the Collateral or otherwise pledging, repledging,
transferring, hypothecating, or rehypothecating the Collateral, provided that,
the Lender shall return the Collateral in accordance with this Agreement if the
Borrowers comply with the terms of this Agreement. Nothing contained in this
Loan Agreement shall obligate the Lender to segregate, or cause the Mortgage
Custodian or the Bond/PC Custodian to segregate, any
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Collateral delivered to the Lender, the Bond/PC Custodian, or the Mortgage
Custodian by the Borrowers.
11.14 Assignments; Participations.
(a) The Borrowers may assign any of its rights or obligations hereunder
or under the Note with the prior written consent of the Lender. The Lender may
assign or transfer to any bank or other financial institution that makes or
invests in loans or any Affiliate of the Lender all or any of its rights or
obligations under this Loan Agreement and the other Loan Documents.
(b) The Lender may, in accordance with applicable law, at any time sell
to one or more lenders or other entities ("Participants") participating
interests in any Advance, the Note, its commitment to make Advances, or any
other interest of the Lender hereunder and under the other Loan Documents. In
the event of any such sale by the Lender of participating interests to a
Participant, the Lender's obligations under this Loan Agreement to the Borrowers
shall remain unchanged, the Lender shall remain solely responsible for the
performance thereof, the Lender shall remain the holder of the Note for all
purposes under this Loan Agreement and the other Loan Documents, and the
Borrowers and the Lender shall continue to deal solely and directly with the
Lender in connection with the Lender's rights and obligations under this Loan
Agreement and the other Loan Documents. The Borrowers agree that if amounts
outstanding under this Loan Agreement and the Note are due or unpaid, or shall
have been declared or shall have become due and payable upon the occurrence of
an Event of Default, each Participant shall be deemed to have the right of
set-off in respect of its participating interest in amounts owing under this
Loan Agreement and the Note to the same extent as if the amount of its
participating interest were owing directly to it as a Lender under this Loan
Agreement or the Note; provided, that such Participant shall only be entitled to
such right of set-off if it shall have agreed in the agreement pursuant to which
it shall have acquired its participating interest to share with the Lender the
proceeds thereof. The Lender also agrees that each Participant shall be entitled
to the benefits of Sections 2.08 and 11.03 with respect to its participation in
the Advances outstanding from time to time; provided, that the Lender and all
Participants shall be entitled to receive no greater amount in the aggregate
pursuant to such Sections than the Lender would have been entitled to receive
had no such transfer occurred.
(c) The Lender may furnish any information concerning the Borrowers or
any of their Subsidiaries in the possession of such Lender from time to time to
assignees and participants (including prospective assignees and participants).
(d) Each Borrower agrees to cooperate with the Lender in connection
with any such assignment and/or participation, to execute and deliver such
replacement notes, and to enter into such restatements of, and amendments,
supplements and other modifications to, this Loan Agreement and the other Loan
Documents in order to give effect to such assignment and/or participation.
11.15 Servicing. With respect to Eligible Assets which are Mortgage
Loans:
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(a) Each Borrower covenants to maintain or cause the servicing of the
Mortgage Loans to be maintained in conformity with accepted customary and
prudent servicing practices in the industry for the same type of mortgage loans
as the Mortgage Loans and in a manner at least equal in quality to the servicing
the Borrowers or the Borrowers' designee provides for Mortgage Loans which they
own ("Accepted Servicing Practices"). In the event that the preceding language
is interpreted as constituting one or more servicing contracts, each such
servicing contract shall terminate automatically upon the earlier of (i) an
Event of Default, or (ii) the Termination Date.
(b) If the Mortgage Loans are serviced by either Borrower, such
Borrower agrees that the Lender is the collateral assignee of all servicing
records, including but not limited to any and all servicing agreements, files,
documents, records, data bases, computer tapes, copies of computer tapes, proof
of insurance coverage, insurance policies, appraisals, other closing
documentation, payment history records, and any other records relating to or
evidencing the servicing of Mortgage Loans (the "Servicing Records"), and (ii)
such Borrower grants the Lender a security interest in all of such Borrower's
rights relating to the Mortgage Loans and all Servicing Records to secure the
obligation of such Borrower or its designee to service in conformity with this
Section and any other obligation of such Borrower to the Lender. The Borrowers
covenant to safeguard such Servicing Records and to deliver them promptly to the
Lender or its designee (including the Mortgage Custodian) at the Lender's
request.
(c) If the Mortgage Loans or Underlying Mortgage Loans are serviced by
a third party servicer, (such third party servicer, the "Subservicer"), the
Borrowers shall provide a copy of the servicing agreement to the Lender at least
three (3) Business Days prior to the applicable Funding Date, which shall be in
form and substance acceptable to the Lender (the "Servicing Agreement").
(d) Each Borrower shall provide to the Lender a letter from such
Borrower or any Subservicer which is an Affiliate of such Borrower (which may be
part of the Instruction Letter), as the case may be, to the effect that upon the
occurrence of an Event of Default, the Lender may terminate any Servicing
Agreement and transfer servicing to its designee, at no cost or expense to the
Lender, it being agreed that the Borrowers will pay any and all fees required to
terminate the Servicing Agreement and to effectuate the transfer of servicing to
the designee of the Lender.
(e) After the Funding Date, until the pledge of any Mortgage Loan is
relinquished by the Mortgage Custodian, the Borrowers will have no right to
modify or alter the terms of such Mortgage Loan except with the prior written
consent of the Lender, and the Borrowers will have no obligation or right to
repossess such Mortgage Loan or substitute another Mortgage Loan, except as
provided in the Mortgage Custodial Agreement; provided, that the Borrowers may
enter into forbearance agreements or plans with Mortgagors consistent with its
collection activities as servicer of the Mortgage Loans and in conformity with
Accepted Servicing Practices.
(f) The Borrowers shall permit the Lender to inspect the servicing
facilities of the Borrowers, their Affiliates, or any Subservicer which is its
Affiliate of a Borrower as the case may
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be, for the purpose of satisfying the Lender that the Borrowers, an Affiliate,
or such Subservicer, as the case may be, has the ability to service the Mortgage
Loans as provided in this Loan Agreement. With respect to any Subservicer which
is not an Affiliate, the Borrowers shall use their best efforts to enable the
Lender to inspect the servicing facilities of such Subservicer.
11.16 Periodic Due Diligence Review. Each Borrower acknowledges that
the Lender has the right to perform continuing due diligence reviews with
respect to the Eligible Assets, for purposes of verifying compliance with the
representations, warranties and specifications made hereunder, or otherwise, and
each Borrower agrees that upon reasonable (but no less than one (1) Business
Day's) prior notice to such Borrower (which prior notice shall not be required
after the occurrence and during the continuation of a Default), the Lender or
its authorized representatives will be permitted during normal business hours to
examine, inspect, and make copies and extracts of, the Asset Files and any and
all documents, records, agreements, instruments or information relating to such
Eligible Assets in the possession or under the control of such Borrower, the
Master Servicer, any Subservicer, and/or the Mortgage Custodian. Each Borrower
also shall make available to the Lender a knowledgeable financial or accounting
officer for the purpose of answering questions respecting the Asset Files and
the Eligible Assets. Without limiting the generality of the foregoing, each
Borrower acknowledges that the Lender may make Advances to the Borrower based
solely upon the information provided by such Borrower to the Lender and the
representations, warranties and covenants contained herein, and that the Lender,
at its option, has the right at any time to conduct a partial or complete due
diligence review on some or all of the Eligible Assets securing such Advance,
including without limitation ordering new credit reports and, with respect to
Eligible Assets which are Mortgage Loans, new appraisals on the related
Mortgaged Properties and otherwise re-generating the information used to
originate such Mortgage Loan. The Lender may underwrite such Eligible Assets
itself or engage a mutually agreed upon third party underwriter to perform such
underwriting. Each Borrower agrees to cooperate with the Lender and any third
party underwriter in connection with such underwriting, including, but not
limited to, providing the Lender and any third party underwriter with access to
any and all documents, records, agreements, instruments or information relating
to such Eligible Assets in the possession, or under the control, of such
Borrower, the Master Servicer, any Subservicer. In addition, the Lender has the
right to perform continuing Due Diligence Reviews of the Borrowers, the Master
Servicer, any Subservicer, and their Affiliates, directors, officers, employees
and significant shareholders. The Borrowers and Lender further agree that all
out-of-pocket costs and expenses incurred by the Lender in connection with the
Lender's activities pursuant to this Section 11.16 shall be paid for by the
Borrowers.
11.17 Set-Off. In addition to any rights and remedies of the Lender
provided by this Loan Agreement and by law, the Lender shall have the right,
without prior notice to the Borrowers, any such notice being expressly waived by
the Borrowers to the extent permitted by applicable law, upon any amount
becoming due and payable by the Borrowers hereunder (whether at the stated
maturity, by acceleration or otherwise) to set-off and appropriate and apply
against such amount any and all property and deposits (general or special, time
or demand, provisional or final), in any currency, and any other credits,
indebtedness or claims, in any currency, in each case whether direct or
indirect, absolute or contingent, matured or unmatured, at any time held or
owing by the Lender or any
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Affiliate thereof to or for the credit or the account of either Borrower. The
Lender agrees promptly to notify the related Borrower after any such set-off and
application made by the Lender; provided that the failure to give such notice
shall not affect the validity of such set-off and application.
11.18 Joint and Several Liability. The Borrowers hereby acknowledge and
agree that they will be jointly and severally liable to the Lender for all
representations, warranties, covenants, obligations and liabilities of the
Borrowers hereunder.
11.19 Entire Agreement. This Loan Agreement embodies the entire
agreement and understanding of the parties hereto and supersedes any and all
prior agreements, arrangements and understandings relating to the matters
provided for herein. No alteration, waiver, amendments, or change or supplement
hereto shall be binding or effective unless the same is set forth in writing by
a duly authorized representative of each party hereto.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have caused this Loan Agreement
to be duly executed and delivered as of the day and year first above written.
BORROWER
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
By: __________________________________
Title:
Address for Notices:
90 West Street, Suite 2210
New York, New York 10006
Attention: Chief Financial Officer
Telecopier No.: (212) 732-4728
Telephone No.: (212) 732-5086
BORROWER
HANOVER CAPITAL PARTNERS, LTD.
By: __________________________________
Title:
Address for Notices:
90 West Street, Suite 2210
New York, New York 10006
Attention: Chief Financial Officer
Telecopier No.: (212) 732-4728
Telephone No.: (212) 732-5086
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LENDER
GREENWICH CAPITAL FINANCIAL PRODUCTS, INC.
By: __________________________________
Title: Vice President
Address for Notices:
600 Steamboat Road
Greenwich, Connecticut 06830
Attention: Anthony Palmisano
Telecopier No.: (203) 618-2341
Telephone No.: (203) 618-2135
With a copy to:
Attention: General Counsel
Telecopier No.: (203) 629-5718
Telephone No.: (203) 625-2700
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SCHEDULE 1
REPRESENTATIONS AND WARRANTIES RE: ELIGIBLE ASSETS
Part I. Eligible Mortgage Loans and Underlying Mortgage Loans
As to each Mortgage Loan included in the Borrowing Base on a Funding
Date (and the related Mortgaged Property) and the Underlying Mortgage Loan
represented by each Participation Certificate included in the Borrowing Base on
a Funding Date, the Borrowers shall be deemed to make the following
representations and warranties to the Lender on and as of such Funding Date and
at all times thereafter while such Mortgage Loan or Underlying Mortgage Loan is
included in the Borrowing Base (with respect to any representations and
warranties made to the best of the Borrower's knowledge, in the event that it is
discovered that the circumstances with respect to the related Mortgage Loan are
not accurately reflected in such representation and warranty notwithstanding the
knowledge or lack of knowledge of the Borrowers, then, notwithstanding that such
representation and warranty is made to the best of the Borrowers' knowledge,
such Mortgage Loan shall be assigned a Collateral Value in accordance with the
definition thereof in the Loan Agreement). For purposes of this Part I of
Schedule 1 only, all references to Mortgage Loan, Mortgage Note, Mortgagor,
Mortgaged Property, or other similar terms shall be deemed to include the
Underlying Mortgage Loan, Underlying Mortgage Note, Underlying Mortgagor, the
property securing the Underlying Mortgage Loan, or other related terms.
(a) Mortgage Loans as Described. The information set forth in the
Mortgage Loan Schedule accompanying the related Notice of Borrowing and Pledge
is true and correct;
(b) Payments Current. On the applicable Funding Date, and all other
times:
(i) such Mortgage Loan is not thirty (30) days or more past
due in respect of the first Scheduled Payment;
(ii) other than Delinquent Mortgage Loans subject to
subsections (i) and (ii) of the definition of Collateral Value herein,
such Mortgage Loan is not thirty (30) days or more past due in respect
of any Scheduled Payment;
(iii) no Delinquent Mortgage Loan is ninety (90) days or more
past due in respect of any Scheduled Payment.
(c) No Outstanding Charges. There are no defaults in complying with the
terms of the Mortgage, and all taxes, governmental assessments, insurance
premiums, water, sewer and municipal charges, leasehold payments or ground rents
which previously became due and owing have been paid, or an escrow of funds has
been established in an amount sufficient to pay for every such item which
remains unpaid and which has been assessed but is not yet due and payable. The
Borrower has not advanced funds, or induced, solicited or knowingly received any
advance of funds by a party other than the Mortgagor, directly or indirectly,
for the payment of any amount required
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under the Mortgage Loan, except for interest accruing from the date of the
Mortgage Note or date of disbursement of the Mortgage Loan proceeds, whichever
is more recent, to the day which precedes by one month the Due Date of the first
installment of principal and interest;
(d) Original Terms Unmodified. The terms of the Mortgage Note and
Mortgage have not been impaired, waived, altered or modified in any respect,
except by a written instrument which has been recorded, if necessary to protect
the interests of the Lender and which has been delivered to the Mortgage
Custodian. The substance of any such waiver, alteration or modification has been
approved by the title insurer, to the extent required by the policy. No
Mortgagor has been released, in whole or in part, except in connection with an
assumption agreement approved by the title insurer, to the extent required by
the policy, and which assumption agreement is part of the Asset File delivered
to the Mortgage Custodian and the terms of which are reflected in the Mortgage
Loan Schedule;
(e) No Defenses. The Mortgage Loan is not subject to any right of
rescission, set-off, counterclaim or defense, including without limitation 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, and no such
right of rescission, set-off, counterclaim or defense has been asserted with
respect thereto; and no Mortgagor was a debtor in any state or federal
bankruptcy or insolvency proceeding at the time the Mortgage Loan was
originated;
(f) Hazard Insurance. Pursuant to the terms of the Mortgage, all
buildings or other improvements upon the Mortgaged Property are insured by an
insurer who meets Fannie Mae and/or Freddie Mac guidelines against loss by fire,
hazards of extended coverage and such other hazards as are customary in the area
where the Mortgaged Property is located pursuant to insurance policies
conforming to the requirements of the Underwriting Guidelines. If upon
origination of the Mortgage Loan, the Mortgaged Property was in an area
identified in the Federal Register by the Federal Emergency Management Agency as
having special flood hazards (and such flood insurance was required by federal
regulation and such flood insurance has been made available) a flood insurance
policy meeting the requirements of the current guidelines of the Federal
Insurance Administration is in effect. All individual insurance policies contain
a standard mortgagee clause naming the loan originator or the Borrower and its
respective successors and assigns as mortgagee, and all premiums thereon have
been paid. The Mortgage obligates the Mortgagor thereunder to maintain the
hazard insurance policy at the Mortgagor's cost and expense, and on the
Mortgagor's failure to do so, authorizes the holder of the Mortgage to obtain
and maintain such insurance at such Mortgagor's cost and expense, and to seek
reimbursement therefor from the Mortgagor. Where required by state law or
regulation, the Mortgagor has been given an opportunity to choose the carrier of
the required hazard insurance, provided the policy is not a "master" or
"blanket" hazard insurance policy covering a condominium, or any hazard
insurance policy covering the common facilities of a planned unit development.
The hazard insurance policy is the valid and binding obligation of the insurer,
is in full force and effect, and will be in full force and effect and inure to
the benefit of the Lender upon the consummation of the transactions contemplated
by this Loan Agreement. The Borrower has not engaged in, and has no knowledge of
the Mortgagor's having engaged in, any act or omission which
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would impair the coverage of any such policy, the benefits of the endorsement
provided for herein, or the validity and binding effect of either including,
without limitation, no unlawful fee, commission, kickback or other unlawful
compensation or value of any kind has been or will be received, retained or
realized by an attorney, firm or other person or entity and no such unlawful
items have been received, retained or realized by the related Borrower;
(g) Compliance with Applicable Laws. Any and all requirements of any
federal, state or local law including, without limitation, usury,
truth-in-lending, real estate settlement procedures, consumer credit protection,
equal credit opportunity or disclosure laws applicable to the Mortgage Loan have
been complied with in all material respects, the consummation by the related
Borrower of the transactions contemplated hereby will not involve the violation
of any such laws or regulations, and the Borrowers shall maintain in its
possession, available for the Lender's inspection, to the extent required by
law, and shall deliver to the Lender upon demand, evidence of compliance with
all such requirements;
(h) No Satisfaction of Mortgage. The Mortgage has not been satisfied,
canceled, subordinated or rescinded, in whole or in part, and the Mortgaged
Property has not been released from the lien of the Mortgage, in whole or in
part, nor has any instrument been executed that would effect any such release,
cancellation, subordination or rescission. The Borrowers have not waived the
performance by the Mortgagor of any action, if the Mortgagor's failure to
perform such action would cause the Mortgage Loan to be in default, nor have the
Borrowers waived any default resulting from any acting or inaction by the
Mortgagor;
(i) Location and Type of Mortgaged Property. The Mortgaged Property is
located in the state identified in the Mortgage Loan Schedule and consists of a
parcel of real property with a detached single family residence erected thereon,
or a two- to four-family dwelling, or an individual condominium unit in a
low-rise condominium project, or an individual unit in a planned unit
development or a de minimis planned unit development, provided, however, that no
residence or dwelling is a mobile home or a manufactured dwelling. No portion of
the Mortgaged Property is used for commercial purposes;
(j) Valid First Lien. The Mortgage is a valid, subsisting, enforceable,
and perfected first lien on the Mortgaged Property, including all buildings on
the Mortgaged Property and all installations and mechanical, electrical,
plumbing, heating and air conditioning systems located in or annexed to such
buildings, and all additions, alterations and replacements made at any time with
respect to the foregoing. The lien of the Mortgage is subject only to: (i) the
lien of current real property taxes and assessments not yet due and payable;
(ii) covenants, conditions and restrictions, rights of way, easements and other
matters of the public record as of the date of recording acceptable to mortgage
lending institutions generally and specifically referred to in the lender's
title insurance policy delivered to the originator of the Mortgage Loan and (A)
referred to or to otherwise considered in the appraisal (if any) made for the
originator of the Mortgage Loan or (B) which do not adversely affect the
appraised value of the Mortgaged Property set forth in such appraisal; and (iii)
other matters to which like properties are commonly subject which do not
materially interfere with the benefits of the security intended to be provided
by the Mortgage or the
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use, enjoyment, value or marketability of the related Mortgaged Property. Any
security agreement, chattel mortgage or equivalent document related to and
delivered in connection with the Mortgage Loan establishes and creates a valid,
subsisting and enforceable first lien and first priority security interest on
the property described therein and the related Borrower has full right to sell
and assign the same to the Lender. The Mortgaged Property was not, as of the
date of origination of the Mortgage Loan, subject to a mortgage, deed of trust,
deed to secure debt or other security instrument creating a lien subordinate to
the lien of the Mortgage;
(k) Validity of Mortgage Documents. The Mortgage Note, the Mortgage and
any other agreement executed and delivered by a Mortgagor in connection with a
Mortgage Loan are genuine, and each is the legal, valid and binding obligation
of the maker thereof enforceable in accordance with its terms. All parties to
the Mortgage Note, the Mortgage and any other related agreement had legal
capacity to enter into the Mortgage Loan and to execute and deliver the Mortgage
Note, the Mortgage and any such agreement, and the Mortgage Note, the Mortgage,
and any other such related agreement have been duly and properly executed by
such parties. The Borrower has reviewed all of the documents constituting the
Asset File and have made such inquiries as they deem necessary to make and
confirm the accuracy of the representations set forth herein;
(l) Full Disbursement of Proceeds. The proceeds of the Mortgage Loan
have been fully disbursed and there is no requirement for future advances
thereunder (except in the case of a Mortgage Loan a portion of the proceeds of
which has been disbursed to an escrow account in connection with improvements to
be made to the related Mortgaged Property where (i) the Mortgage Loan bears
interest on the entire principal amount thereof as if it had been fully
disbursed, (ii) any proceeds of such Mortgage Loan have not been held in such an
escrow account for more than sixty (60) days, and (iii) the deposit of funds
into such an escrow account has been effected in accordance with the
Underwriting Guidelines) and any and all requirements as to completion of any
on-site or off-site improvement and as to disbursements of any escrow funds
therefor have been complied with. All costs, fees and expenses incurred in
making or closing the Mortgage Loan and the recording of the Mortgage were paid,
and the Mortgagor is not entitled to any refund of any amounts paid or due under
the Mortgage Note or Mortgage;
(m) Ownership. The related Borrower is the sole owner of record and
holder of the Mortgage Loan; the Mortgage Loan is not assigned or pledged (other
than as contemplated under the Loan Agreement), and the related Borrower has
good indefeasible and marketable title thereto, and has full right to transfer
and pledge the Mortgage Loan therein to the Lender free and clear of any
encumbrance, equity, participation interest, lien, pledge, charge, claim or
security interest, and has full right and authority subject to no interest or
participation of, or agreement with, any other party, to pledge and assign each
Mortgage Loan pursuant to this Loan Agreement;
(n) Doing Business. All parties which have had any interest in the
Mortgage Loan, whether as mortgagee, assignee, pledgee or otherwise, are (or,
during the period in which they held and disposed of such interest, were) (i) in
compliance with any and all applicable licensing requirements of the laws of the
state wherein the Mortgaged Property is located, and (ii) (A) organized under
the laws of such state, or (B) qualified to do business in such state, or (C) a
federal
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savings and loan association, savings bank or a national bank having its
principal office in such state, or (D) not doing business in such state;
(o) LTV. As of the date of origination of the Mortgage Loan, the LTV is
as identified in the applicable Mortgage Loan Schedule, and the Borrowers have
no actual knowledge that such LTV has increased to higher than the level
permitted under the Underwriting Guidelines. All provisions of such primary
mortgage insurance policy have been and are being complied with, such policy is
in full force and effect, and all premiums due thereunder have been paid. Any
Mortgage subject to any such primary mortgage insurance policy obligates the
Mortgagor thereunder to maintain such insurance and to pay all premiums and
charges in connection therewith;
(p) Title Insurance. The Mortgage Loan is covered by a limited
liability lender's title insurance policy or such other form of policy of
insurance acceptable to Fannie Mae or Freddie Mac for loans similar to the
Mortgage Loans issued by a title insurer qualified to do business in the
jurisdiction where the Mortgaged Property is located, insuring the related
Borrower, its successors and assigns, as to the priority of its lien of the
Mortgage in the original principal amount of the Mortgage Loan, and subject only
to the exceptions contained in clauses (1), (2), and (3) of paragraph (j) above.
Where required by state law or regulation, the Mortgagor has been given the
opportunity to choose the carrier of the required mortgage title insurance.
Immediately prior to the sale of the Mortgage Loan to the Lender under the terms
of this Loan Agreement, the related Borrower, its successors and assigns were
the sole insureds of such lender's title insurance policy. Such lender's title
insurance policy is in full force and effect and will be in force and effect
upon the consummation of the transactions contemplated by this Loan Agreement.
No claims have been made under such lender's title insurance policy, and no
prior holder of the Mortgage, including the related Borrower, has done, by act
or omission, anything which should reasonably be expected to impair the coverage
of such lender's title insurance policy. In connection with the issuance of such
lender's title insurance policy, no unlawful fee, commission, kickback or other
unlawful compensation or value of any kind has been or will be received,
retained or realized by any attorney, firm or other persons or entity, and no
such unlawful items have been received, retained or realized by the Company;
(q) No Defaults; Right to Cure; No Failure to Cure. Other than
Delinquent Mortgage Loans, there is no default, breach, violation or event of
acceleration existing under the Mortgage or the Mortgage Note and no event
which, with the passage of time or with notice and the expiration of any grace
or cure period, would constitute a default, breach, violation or event of
acceleration (other than those payment delinquencies permitted by paragraph (a)
of this Schedule 1), and neither the related Borrower nor its predecessors have
waived any default, breach, violation or event of acceleration;
(r) No Mechanics' Liens There are no mechanics' or similar liens or
claims which have been filed for work, labor or material (and no rights are
outstanding that under the law could give rise to such liens) affecting the
related Mortgaged Property which are or may be liens prior to, or equal or
coordinate with, the lien of the related Mortgage;
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(s) Location of Improvements; No Encroachments. All improvements which
were considered in determining the Appraised Value of the Mortgaged Property lay
wholly within the boundaries and building restriction lines of the Mortgaged
Property and no improvements on adjoining properties encroach upon the Mortgaged
Property. No improvement located on or being part of the Mortgaged Property is
in violation of any applicable zoning law or regulation;
(t) Origination: Payment Terms. The Mortgage Loan was originated by or
in conjunction with a mortgagee approved by the Secretary of Housing and Urban
Development pursuant to Section 203 and 211 of the National Housing Act or a
savings and loan association, a savings bank, a commercial bank credit union,
insurance company or similar banking institution which is supervised and
examined by a federal or state authority. Principal payments on the Mortgage
Loan commenced no more than sixty (60) days after funds were disbursed in
connection with the Mortgage Loan. The documents, instruments and agreements
submitted for loan underwriting were not falsified and contain no untrue
statement of material fact or omit to state a material fact required to be
stated therein. The Mortgage Note has the terms identified in the applicable
Mortgage Loan Schedule;
(u) Customary Provisions. The Mortgage Note has a stated maturity. The
Mortgage contains customary and enforceable provisions such as to render the
rights and remedies of the holder thereof adequate for the realization against
the Mortgaged Property of the benefits of the security provided thereby,
including, (i) in the case of a Mortgage designated as a deed of trust, by
trustee's sale, and (ii) otherwise by judicial foreclosure. Upon default by a
Mortgagor on a Mortgage Loan and foreclosure on, or trustee's sale of, the
Mortgaged Property pursuant to the proper procedures, the holder of the Mortgage
Loan will be able to deliver good and marketable title to the Mortgaged
Property. There is no homestead or other exemption available to a Mortgagor
which would interfere with the right to sell the Mortgaged Property at a
trustee's sale or the right to foreclose the Mortgage;
(v) Conformance with Underwriting Guidelines and Agency Standards. The
Mortgage Loan was underwritten in accordance with, and the Mortgage Loan and
Mortgaged Property conform to, the Borrowers' applicable Underwriting
Guidelines. The Mortgage Note and Mortgage are on forms acceptable to FHLMC or
FNMA;
(w) Occupancy of the Mortgaged Property. The Mortgaged Property is
lawfully occupied under applicable law. 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. The Mortgaged Property is owner occupied except as set forth on the
Mortgage Loan Tape;
(x) No Additional Collateral. The Mortgage Note is not and has not been
secured by any collateral except the lien of the corresponding Mortgage and the
security interest of any applicable security agreement or chattel mortgage
referred to in (j) above;
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(y) Deeds of Trust. In the event the Mortgage constitutes a deed of
trust, a trustee, duly qualified under applicable law to serve as such, has been
properly designated and currently so serves and is named in the Mortgage, and no
fees or expenses are or will become payable by the Lender to the trustee under
the deed of trust, except in connection with a trustee's sale after default by
the Mortgagor;
(z) Take-Out Commitments. To the extent that a Mortgage Loan is covered
by a Take-Out Commitment, such Take-Out Commitment is a valid, binding and
subsisting obligation enforceable in accordance with its terms.
(aa) Acceptable Investment. No specific circumstances or conditions
exist with respect to the Mortgage, the Mortgaged Property, the Mortgagor or the
Mortgagor's credit standing that should reasonably be expected to (i) cause
private institutional investors which invest in Mortgage Loans similar to the
Mortgage Loan to regard the Mortgage Loan as an unacceptable investment, (ii)
cause the Mortgage Loan to be more likely to become past due in comparison to
similar Mortgage Loans, or (iii) adversely affect the value or marketability of
the Mortgage Loan in comparison to similar Mortgage Loans;
(bb) Delivery of Mortgage Documents. The Mortgage Note, the Mortgage,
the Assignment of Mortgage and any other documents required to be delivered for
the Mortgage Loan by the Borrower under the Mortgage Custodial Agreement have
been delivered to the Mortgage Custodian at or prior to the time specified for
delivery in the Mortgage Custodial Agreement.
(cc) Assignment of Mortgage. The Assignment of Mortgage is in
recordable form and is acceptable for recording under the laws of the
jurisdiction in which the Mortgaged Property is located;
(dd) Due on Sale. The Mortgage contains an enforceable provision for
the acceleration of the payment of the unpaid principal balance of the Mortgage
Loan in the event that the Mortgaged Property is sold or transferred without the
prior written consent of the mortgagee thereunder;
(ee) No Buydown Provisions: No Graduated Payments or Contingent
Interests. Except as noted in the Mortgage Loan Tape and Mortgage Loan Schedule
or the Participation Certificate Schedule and Participation Certificate Tape,
the Mortgage Loan does not contain provisions pursuant to which Scheduled
Payments are paid or partially paid with funds deposited in any separate account
established by a Borrower, the Mortgagor or anyone on behalf of the Mortgagor,
or paid by any source other than the Mortgagor nor does it contain any other
similar provisions currently in effect which may constitute a "buydown"
provision. Except as noted in the Mortgage Loan Tape and Mortgage Loan Schedule
or the Participation Certificate Schedule and Participation Certificate Tape,
the Mortgage Loan is not a graduated payment Mortgage Loan and the Mortgage Loan
does not have a shared appreciation or other contingent interest feature;
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(ff) Consolidation of Future Advances. Any future advances made after
origination of the Mortgage Loan have been consolidated with the outstanding
principal amount secured by the Mortgage, and the secured principal amount, as
consolidated, bears a single interest rate and single repayment term. The lien
of the Mortgage securing the consolidated principal amount is expressly insured
as having a first lien priority by a title insurance policy, an endorsement to
the policy insuring the mortgagee's consolidated interest or by other title
evidence satisfying paragraph (p) above. The consolidated principal amount does
not exceed the original principal amount of the Mortgage Loan;
(gg) Mortgaged Property Undamaged: Condemnation. The Mortgaged Property
is undamaged by waste, fire, earthquake or earth movement, windstorm, flood,
tornado or other casualty so as to adversely affect the value of the Mortgaged
Property as security for the Mortgage Loan or the use for which the premises
were intended and each Mortgaged Property is in good repair. There have not been
any condemnation proceedings with respect to the Mortgaged Property and the
Borrower has no knowledge of any such proceedings in the future;
(hh) Collection Practices; Escrow Deposits. The origination and
collection practices used with respect to the Mortgage Loan have been in all
respects in compliance with Accepted Servicing Practices, applicable laws and
regulations, and have been in all respects legal, proper, and consistent with
industry standards for mortgage loans of the same type as the Mortgage Loan.
With respect to escrow deposits and Escrow Payments, if any, all such payments
are in the possession of, or under control of, a Borrower and there exist no
deficiencies in connection therewith for which customary arrangements for
repayment thereof have not been made. All Escrow Payments, if any, have been
collected in full compliance with state and federal law. An escrow of funds is
not prohibited by applicable law and any escrow that has been established is in
an amount sufficient to pay for every item that remains unpaid and has been
assessed but is not yet due and payable. No escrow deposits or Escrow Payments
or other charges or payments due the Borrower has been capitalized under the
Mortgage or the Mortgage Note. Any interest required to be paid pursuant to
state and local law has been properly paid and credited;
(ii) Appraisal. The file held by the Master Servicer or the Subservicer
contains an appraisal of the related Mortgaged Property signed prior to the
approval of the Mortgage Loan application by a qualified appraiser, duly
appointed by the related Borrower, who had no interest, direct or indirect in
the Mortgaged Property or in any loan made on the security thereof, and whose
compensation is not affected by the approval or disapproval of the Mortgage
Loan, and the appraisal and appraiser both satisfy the requirements of Title XI
of the Federal Institutions Reform, Recovery and Enforcement Act of 1989, as
amended, and the regulations promulgated thereunder, as such statute and
regulations were in effect on the date the Mortgage Loan was originated;
(jj) Soldiers' and Sailors' Relief Act. The Mortgagor has not notified
the Borrower, and the Borrower has no knowledge of any relief requested or
allowed to the Mortgagor under the Soldiers' and Sailors' Civil Relief Act of
1940;
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(kk) Environmental Matters. To the Borrowers' actual knowledge, the
Mortgaged Property is free from any and all toxic or hazardous substances and
there exists no violation of any local, state or federal environmental law, rule
or regulation;
(ll) Construction or Rehabilitation of Mortgaged Property. No Mortgage
Loan was made in connection with the construction or rehabilitation of a
Mortgaged Property or facilitating the trade-in or exchange of a Mortgaged
Property;
(mm) Ground Leases. With respect to each ground lease to which the
Mortgaged Property is subject (a "Ground Lease"): (i) the Mortgagor is the owner
of a valid and subsisting interest as tenant under the Ground Lease; (ii) the
Ground Lease is in full force and effect, unmodified and not supplemented by any
writing or otherwise; (iii) all rent, additional rent and other charges reserved
therein have been paid to the extent they are payable to the date hereof; (iv)
the Mortgagor enjoys the quiet and peaceful possession of the estate demised
thereby, subject to any sublease; (v) the Mortgagor is not in default under any
of the terms thereof and there are no circumstances which, with the passage of
time or the giving of notice or both, would constitute an event of default
thereunder; (vii) the lessor under the Ground Lease is not in default under any
of the terms or provisions thereof on the part of the lessor to be observed or
performed; (vii) the lessor under the Ground Lease has satisfied all of its
repair or construction obligations, if any, to date pursuant to the terms of the
Ground Lease; and (ix) the execution, delivery and performance of the Mortgage
do not require the consent (other than those consents which have been obtained
and are in full force and effect) under, and will not contravene any provision
of or cause a default under, the Ground Lease.
(nn) No Defense to Insurance Coverage. No action has been taken or
failed to be taken, no event has occurred and no state of facts exists or has
existed (whether or not known to the Borrowers on or prior to such date) which
has resulted or will result in an exclusion from, denial of, or defense to
coverage under any applicable pool policy, special hazard insurance policy, or
bankruptcy bond (including, without limitation, any exclusions, denials or
defenses which would limit or reduce the availability of the timely payment of
the full amount of the loss otherwise due thereunder to the insured), whether
arising out of actions, representations, errors, omissions, negligence, or fraud
of the Borrower, the related Mortgagor or any party involved in the application
for such insurance or coverage, including the appraisal, plans and
specifications and other exhibits or documents submitted therewith to the
insurer or under any such insurance policy, or for any other mason under such
coverage, but not including the failure of the insurer to pay by reason of the
insurer's breach of the insurance policy or the insurer's financial inability to
pay. In connection with the placement of any insurance or coverage, no
commission, fee or other compensation has been or will be received by any
Borrower or by any officer, director, or employee of such Borrower or any
designee of such Borrower or any corporation in which such Borrower or any
officer, director or employee had a financial interest at the time of placement
of such insurance;
(oo) Value of Mortgage Property. The Borrowers have no knowledge of any
circumstances existing that should reasonably be expected to adversely affect
the value or the marketability of the Mortgaged Property or the Mortgage Loan or
to cause the Mortgage Loan to
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prepay during any period materially faster or slower than the Mortgage Loans
acquired by the Borrowers generally; and
(pp) Section 32 Mortgages; Overages. The related Borrower has provided
the related Mortgagor with all disclosure materials required by Section 226.32
of the Federal Reserve Board Regulation Z with respect to any Mortgage Loans
subject to such Section of the Federal Reserve Board Regulation Z. The related
Borrower has not made or caused to be made any payment in the nature of an
"overage" or "yield spread premium" to a mortgage broker or like Person which
has not been fully disclosed to the Mortgagor.
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Part II. Eligible Bonds; Underlying Eligible Bonds
(I) As to each Eligible Bond included in the Borrowing Base on a
Funding Date or each Underlying Eligible Bond, the Borrowers shall be deemed to
make the following representations and warranties to the Lender on and as of
such Funding Date and at all times thereafter while such Eligible Bond or the
Pledged Stock of the Eligible Entity which owns such Underlying Eligible Bonds
is included in the Borrowing Base:
(a) Compliance with Applicable Laws. All of the Eligible Bonds or
Underlying Eligible Bonds have been validly issued, and are fully paid and
non-assessable, and the Eligible Bonds or Underlying Eligible Bonds have been
offered, issued and sold in compliance with all applicable laws;
(b) No Encumbrances. There are (i) no outstanding rights, options,
warrants or agreements for a purchase, sale or issuance, in connection with the
Eligible Bonds or Underlying Eligible Bonds, (ii) no agreements on the part of
the Borrower to issue, sell or distribute the Eligible Bonds or Underlying
Eligible Bonds, and (iii) no obligations on the part of the Borrowers
(contingent or otherwise) to purchase, redeem or otherwise acquire any
securities or any interest therein or to pay any dividend or make any
distribution in respect of the Eligible Bonds or Underlying Eligible Bonds;
(c) Ownership. A Borrower is, or will be upon issuance of the Eligible
Bonds or Underlying Eligible Bonds, the record and beneficial owner of, and has,
or will have upon issuance, good title to, the Eligible Bonds or Underlying
Eligible Bonds, free of any and all liens or options in favor of, or claims of,
any other Person, except the security interest created by this Loan Agreement;
(d) Unencumbered Assets. The Eligible Bonds or Underlying Eligible
Bonds shall be unencumbered;
(e) Proper Form. The Eligible Bonds or Underlying Eligible Bonds are
certificated securities in registered form, or are in uncertificated form and
(i) held through the facilities of a Relevant System, or (ii) registered on the
books of the issuer thereof;
(f) Chief Executive Office. The chief executive office of each Borrower
is, and for the four months immediately preceding the date of this Loan
Agreement has been, located at the address set forth for it on the signature
page hereof; and
(g) Take-Out Commitments. To the extent that an Eligible Bond or
Underlying Eligible Bond is covered by a Take-Out Commitment, such Take-Out
Commitment is a valid, binding and subsisting obligation enforceable in
accordance with its terms.
(II) As to each Eligible Bond included in the Borrowing Base on a
Funding Date, the Borrowers shall be deemed to make the following
representations and warranties to the Lender
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on and as of such Funding Date and at all times thereafter while such Eligible
Bond is included in the Borrowing Base:
(a) First Priority Security Interest; Security Entitlement. The
Eligible Bonds, when pledged as Collateral hereunder, shall be unencumbered, and
this Loan Agreement, together with delivery to the Lender or the Bond/PC
Custodian of the Eligible Bonds and the filing of a financing statement naming
the related Borrower as "debtor" and the Lender as "secured party" and
describing such Collateral as the "collateral", will create a valid first
priority perfected security interest in such Collateral in favor of the Lender
in accordance with its terms against all credits of such Borrower and any
Persons purporting to purchase such Collateral from such Borrower, and without
limitation the Lender shall have a "security entitlement" thereto. The related
Borrower has obtained from any and all concerned creditors, any waivers,
amendments, releases or acknowledgments necessary to create and perfect in favor
of the Lender the first priority security interests provided herein.
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Part III. Participation Certificates
As to each Participation Certificate and the related Governing
Agreement, the following eligibility criteria shall be met as of the applicable
Funding Date and as of each date Collateral Value is determined:
(a) Validity of Governing Agreement. The Governing Agreement and
any other agreement executed and delivered in connection with
Participation Certificate are genuine, and each is the legal,
valid and binding obligation of the maker thereof enforceable
in accordance with its terms. The related Borrower and the
Trustee had legal capacity to enter into the Governing
Agreement and the Trustee had the legal capacity to execute
and deliver the Governing Agreement and any such agreement,
and the Governing Agreement and any such other related
agreement to which the related Borrower or the Trustee are
parties have been duly and properly executed by the related
Borrower and the Trustee, as applicable. The Governing
Agreement to which the Trustee is a party constitutes a legal,
valid, binding and enforceable obligation of the Trustee. The
Governing Agreement is in full force and effect, and the
enforceability of the Governing Agreement has not been
contested by the Trustee.
(b) Original Terms Unmodified. The terms of the Governing
Agreement and the related Participation Certificate have not
been impaired, altered or modified in any respect.
(c) No Waiver. The related Borrower has not waived the performance
by the Trustee of any action, if the Trustee's failure to
perform such action would cause the Governing Agreement to be
in default, nor has the related Borrower waived any default
resulting from any action or inaction by the Trustee.
(d) No Defaults. There is no default, breach, violation or event
of acceleration existing under the Governing Agreement and no
event has occurred which, with the passage of time or giving
of notice or both and the expiration of any grace or cure
period, would constitute a default, breach, violation or event
of acceleration thereunder, and neither the related Borrower
nor its predecessors in interest have waived any such default,
breach, violation or event of acceleration.
(e) Delivery of Governing Agreement. The Governing Agreements for
the related Participation Certificate has been or shall be
delivered three (3) days prior to each Funding Date.
(f) Participation Certificate Assignable. Each Participation
Certificate is assignable to the Lender. The Governing
Agreement permits the related
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Borrower to sell, assign, pledge, transfer or rehypothecate
the Eligible Mortgage Loan related to such Participation
Certificate.
(g) Take-Out Commitments. To the extent that a Participation
Certificate is covered by a Take-Out Commitment, such Take-Out
Commitment is a valid, binding and subsisting obligation
enforceable in accordance with its terms.
(h) Underlying Mortgage Loans. With respect to each Underlying
Mortgage Loan, the representations and warranties set forth in
Part I of this Schedule 1 are true and correct.
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Part IV. Pledged Stock
As to the Pledged Stock, the Borrowers shall be deemed to make the
following representations and warranties to the Lender on and as of such Funding
Date and at all times thereafter while the Pledged Stock is included in the
Borrowing Base:
(a) The shares of Pledged Stock listed on the Pledged Stock Summary
constitute all the issued and outstanding shares of all classes of the Capital
Stock of the Eligible Entity and are represented by the certificates listed
thereon.
(b) All the shares of the Pledged Stock have been duly and validly
issued and are fully paid and nonassessable.
(c) The related Borrower is the record and beneficial owner of, and has
title to, the Pledged Stock, free of any and all Liens or options in favor of,
or claims of, any other Person, except the Lien created by this Loan Agreement.
(d) Upon delivery to the Lender of the stock certificates evidencing
the Pledged Stock (and assuming the continuing possession by the Lender of such
stock certificate in accordance with the requirements of applicable law), the
Lien granted pursuant to this Loan Agreement will constitute a valid, perfected
first priority Lien on the Pledged Stock in favor of the Lender enforceable as
such against all creditors of the related Borrower and any Persons purporting to
purchase any Pledged Stock from the related Borrower.
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Part V. Defined Terms
In addition to terms defined elsewhere in the Loan Agreement, the
following terms shall have the following meanings when used in this Schedule 1:
"Appraised Value" shall mean the value set forth in an appraisal made
in connection with the origination of the related Mortgage Loan as the value of
the Mortgaged Property.
"Assignment of Mortgage" shall mean an assignment of the Mortgage,
notice of transfer or equivalent instrument in recordable form, sufficient under
the laws of the jurisdiction wherein the related Mortgaged Property is located
to reflect the transfer of the Mortgage.
"Due Date" means the day of the month on which the Scheduled Payment is
due on a Mortgage Loan, exclusive of any days of grace.
"Escrow Payments" shall mean with respect to any Mortgage Loan, the
amounts constituting ground rents, taxes, assessments, water rates, sewer rents,
municipal charges, fire and hazard insurance premiums, condominium charges, and
any other payments required to be escrowed by the Mortgagor with the mortgagee
pursuant to the Mortgage or any other related document.
"Loan-to-Value Ratio" or "LTV" shall mean with respect to any Mortgage
Loan, the ratio of (a) the Par Amount of the Mortgage Loan as of the date of
origination (unless otherwise indicated) to (b) the Appraised Value of the
Mortgaged Property or if the Mortgage Loan was made in connection with the
purchase of the related Mortgaged Property, the lesser of the Appraised Value
and the sales price of such property.
"Stated Principal Balance" shall mean as to each Mortgage Loan, the
principal balance of the Mortgage Loan at the date of determination.
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SCHEDULE 2
FILING JURISDICTIONS AND OFFICES
Secretary of State of the State of New York
Secretary of County of New York County
Secretary of State of the State of New Jersey
Secretary of State of the State of Maryland
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SCHEDULE 3
SUBSIDIARIES
[TO BE PROVIDED BY COUNSEL TO BORROWERS]
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SCHEDULE 4
LITIGATION
[TO BE PROVIDED BY COUNSEL TO BORROWERS]
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<PAGE> 95
EXHIBIT A
[FORM OF PROMISSORY NOTE]
$[__________] Dated March __, 2000
New York, New York
FOR VALUE RECEIVED, HANOVER CAPITAL MORTGAGE HOLDINGS, INC., a Maryland
corporation and HANOVER CAPITAL PARTNERS, LTD., a New York corporation (the
"Borrowers"), hereby promise to pay to the order of GREENWICH CAPITAL FINANCIAL
PRODUCTS, INC. a Delaware corporation (the "Lender"), at the principal office of
the Lender at 600 Steamboat Road, Greenwich, Connecticut 06830, in lawful money
of the United States, and in immediately available funds, the principal sum of
[________ DOLLARS] ($[_________]) (or such lesser amount as shall equal the
aggregate unpaid principal amount of the Advances made by the Lender to the
Borrowers under the Loan Agreement as defined below), on the dates and in the
principal amounts provided in the Loan Agreement, and to pay interest on the
unpaid principal amount of each such Advance, at such office, in like money and
funds, for the period commencing on the date of such Advance until such Advance
shall be paid in full, at the rates per annum and on the dates provided in the
Loan Agreement.
The date, amount and interest rate of each Advance made by the Lender
to the Borrowers, and each payment made on account of the principal and interest
thereof, shall be recorded by the Lender on its books and, prior to any transfer
of this Note, endorsed by the Lender on the schedule attached hereto or any
continuation thereof; provided, that the failure of the Lender to make any such
recordation or endorsement shall not affect the obligations of the Borrowers to
make a payment when due of any amount owing under the Loan Agreement or
hereunder in respect of the Advances made by the Lender.
* This Note is the Note referred to in the Amended and Restated Master
Loan and Security Agreement dated as of March 27, 2000 (as amended, supplemented
or otherwise modified and in effect from time to time, the "Loan Agreement")
between the Borrowers and the Lender, and evidences Advances made by the Lender
thereunder. Terms used but not defined in this Note have the respective meanings
assigned to them in the Loan Agreement.
The Borrowers agree to pay all the Lender's costs of collection and
enforcement (including attorneys' fees and disbursements of Lender's counsel) in
respect of this Note when incurred, including, without limitation, attorneys'
fees through appellate proceedings.
Notwithstanding the pledge of the Collateral, the Borrowers hereby
acknowledge, admit and agree that the Borrowers' obligations under this Note are
recourse obligations of the Borrowers to which the Borrowers pledge their full
faith and credit.
The Borrowers, and any indorsers hereof, (a) severally waive diligence,
presentment, protest and demand and also notice of protest, demand, dishonor and
nonpayments of this Note, (b) expressly agree that this Note, or any payment
hereunder, may be extended from time to time, and consent to the acceptance of
further Collateral, the release of any Collateral for this Note, the release of
any party primarily or secondarily liable hereon, and (c) expressly agree that
it will not be
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necessary for the Lender, in order to enforce payment of this Note, to first
institute or exhaust the Lender's remedies against the Borrowers or any other
party liable hereon or against any Collateral for this Note. No extension of
time for the payment of this Note, or any installment hereof, made by agreement
by the Lender with any person now or hereafter liable for the payment of this
Note, shall affect the liability under this Note of the Borrowers, even if the
Borrowers are not a party to such agreement; provided, however, that the Lender
and the Borrowers, by written agreement between them, may affect the liability
of the Borrowers.
Any reference herein to the Lender shall be deemed to include and apply
to every subsequent holder of this Note. Reference is made to the Loan Agreement
for provisions concerning optional and mandatory prepayments, Collateral,
acceleration and other material terms affecting this Note.
The Borrowers hereby acknowledge and agree that they will each be
jointly and severally liable to the Lender for all representations, warranties,
covenants and liabilities of the Borrowers hereunder.
Any enforcement action relating to this Note may be brought by motion
for summary judgment in lieu of a complaint pursuant to Section 3213 of the New
York Civil Practice Law and Rules.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED UNDER THE LAWS OF THE
STATE OF NEW YORK (WITHOUT REFERENCE TO CHOICE OF LAW DOCTRINE BUT WITH
REFERENCE TO SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW, WHICH BY
ITS TERMS APPLIES TO THIS NOTE) WHOSE LAWS THE BORROWERS EXPRESSLY ELECT TO
APPLY TO THIS NOTE. THE BORROWERS AGREE THAT ANY ACTION OR PROCEEDING BROUGHT TO
ENFORCE OR ARISING OUT OF THIS NOTE MAY BE COMMENCED IN THE SUPREME COURT OF THE
STATE OF NEW YORK, BOROUGH OF MANHATTAN, OR IN THE DISTRICT COURT OF THE UNITED
STATES FOR THE SOUTHERN DISTRICT OF NEW YORK. THE BORROWERS HEREBY SUBMIT TO NEW
YORK JURISDICTION WITH RESPECT TO ANY ACTION BROUGHT WITH RESPECT TO THIS NOTE
AND WAIVES ANY RIGHT WITH RESPECT TO THE DOCTRINE OF FORUM NON CONVENIENS WITH
RESPECT TO SUCH TRANSACTIONS.
HANOVER CAPITAL MORTGAGE
HOLDINGS, INC.
By:
---------------------------
Name:
Title:
HANOVER CAPITAL PARTNERS, LTD.
By:
---------------------------
Name:
Title:
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SCHEDULE OF ADVANCES
This Note evidences Advances made under the within-described Loan
Agreement to the Borrowers, on the dates, in the principal amounts and bearing
interest at the rates set forth below, and subject to the payments and
prepayments of principal set forth below:
<TABLE>
<CAPTION>
PRINCIPAL UNPAID
AMOUNT OF INTEREST AMOUNT PAID PRINCIPAL NOTATION
DATE MADE ADVANCE RATE OR PREPAID AMOUNT MADE BY
--------- --------- -------- ----------- --------- --------
<S> <C> <C> <C> <C> <C>
</TABLE>
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EXHIBIT B
[FORM OF MORTGAGE CUSTODIAL AGREEMENT]
[STORED AS A SEPARATE DOCUMENT]
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EXHIBIT C
[FORM OF OPINION OF COUNSEL TO BORROWER]
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EXHIBIT D-1
FORM OF NOTICE OF BORROWING AND PLEDGE-ELIGIBLE MORTGAGE LOANS
[insert date]
Greenwich Capital Financial Products, Inc.
600 Steamboat Road
Greenwich, Connecticut 06830
Attention: David Katze
Notice of Borrowing and Pledge No. : _____________________
Name of Subservicer : _____________________
Interest Period : _____________________
Ladies/Gentlemen:
Reference is made to the Amended and Restated Master Loan and Security
Agreement, dated as of March 27, 2000 (the "Loan Agreement"; capitalized terms
used but not otherwise defined herein shall have the meaning given them in the
Loan Agreement), between Hanover Capital Mortgage Holdings, Inc. and Hanover
Capital Partners, Ltd. (the "Borrowers") and Greenwich Capital Financial
Products, Inc. (the "Lender").
In accordance with Section 2.03(a) of the Loan Agreement, the
undersigned Borrower hereby requests that you, the Lender, make Advances to us
in an aggregate principal amount of $_________________ [insert requested Advance
amount] (such amount representing [insert number of Mortgage Loans] loans on
____________________ [insert requested Funding Date, which must be at least
three (3) Business Days following the date of the request], in connection with
which we shall pledge to you as Collateral the Mortgage Loans set forth on the
Mortgage Loan Schedule attached hereto.
The Borrower hereby certifies, as of such Funding Date, that:
(a) no Default or Event of Default has occurred and is
continuing on the date hereof nor will occur after giving effect to
such Advance as a result of such Advance;
(b) each of the representations and warranties made by the
Borrower in or pursuant to the Loan Documents is true and correct in
all material respects on and as of such date (in the case of the
representations and warranties in respect of Eligible Mortgage Loans,
solely with respect to Eligible Mortgage Loans being included the
Borrowing Base on the Funding Date) as if made on and as of the date
hereof (or, if any such representation or warranty is expressly stated
to have been made as of a specific date, as of such specific date); and
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<PAGE> 101
(c) the Borrower is in compliance with all governmental
licenses and authorizations and is qualified to do business and is in
good standing in all required jurisdictions.
Very truly yours,
[BORROWER]
By:
--------------------------
Name:
Title:
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<PAGE> 102
Schedule I
to Notice of Borrowing and Pledge
ELIGIBLE MORTGAGE LOANS PROPOSED TO BE PLEDGED
TO LENDER ON FUNDING DATE
[ATTACH MORTGAGE LOAN SCHEDULE]
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<PAGE> 103
EXHIBIT D-2
FORM OF NOTICE OF BORROWING AND PLEDGE - PLEDGED STOCK
[INSERT DATE]
Greenwich Capital Financial Products, Inc.
600 Steamboat Road
Greenwich, Connecticut 06830
Attention: David Katze
Notice of Borrowing and Pledge No. : _____________________
Name of Trustee : _____________________
Interest Period : _____________________
Ladies/Gentlemen:
Reference is made to the Amended and Restated Master Loan and
Security Agreement, dated as of March 27, 2000 (the "Loan Agreement";
capitalized terms used but not otherwise defined herein shall have the
meaning given them in the Loan Agreement), between Hanover Capital
Mortgage Holdings, Inc. and Hanover Capital Partners, Ltd. (the
"Borrowers") and Greenwich Capital Financial Products, Inc. (the
"Lender").
In accordance with Section 2.03(a) of the Loan Agreement, the
undersigned Borrower hereby requests that you, the Lender, make
Advances to us in an aggregate principal amount of $_________________
[insert requested Advance amount] (such amount representing [insert
number of Underlying Eligible Bonds] bonds on ____________________
[insert requested Funding Date, which must be at least three (3)
Business Days following the date of the request], in connection with
which we shall pledge to you as Collateral the Pledged Stock set forth
on Schedule I attached hereto.
The Borrower hereby certifies, as of such Funding Date, that:
(a) no Default or Event of Default has occurred and is
continuing on the date hereof nor will occur after giving effect to
such Advance as a result of such Advance;
(b) each of the representations and warranties made by the
Borrower in or pursuant to the Loan Documents is true and correct in
all material respects on and as of such date (in the case of the
representations and warranties in respect of the Pledged Securities,
solely with respect to the Pledged Securities being included the
Borrowing Base on the
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<PAGE> 104
Funding Date) as if made on and as of the date hereof (or, if any such
representation or warranty is expressly stated to have been made as of
a specific date, as of such specific date); and
(c) the Borrower is in compliance with all governmental
licenses and authorizations and is qualified to do business and is in
good standing in all required jurisdictions.
Very truly yours,
[BORROWER]
By:
------------------------
Name:
Title:
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<PAGE> 105
Schedule I
to Notice of Borrowing and Pledge
[PLEDGED STOCK PROPOSED TO BE PLEDGED
TO LENDER ON FUNDING DATE]
[ATTACH PLEDGED STOCK SUMMARY AND
BOND SUMMARY WITH RESPECT TO THE UNDERLYING ELIGIBLE BONDS]
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<PAGE> 106
EXHIBIT D-3
FORM OF NOTICE OF BORROWING AND PLEDGE - PARTICIPATION CERTIFICATES
[INSERT DATE]
Greenwich Capital Financial Products, Inc.
600 Steamboat Road
Greenwich, Connecticut 06830
Attention: David Katze
Notice of Borrowing and Pledge No. : _____________________
Name of Trustee : _____________________
Interest Period : _____________________
Ownership Percentage : _____________________
Ladies/Gentlemen:
Reference is made to the Amended and Restated Master Loan and
Security Agreement, dated as of March 27, 2000 (the "Loan Agreement";
capitalized terms used but not otherwise defined herein shall have the
meaning given them in the Loan Agreement), between Hanover Capital
Mortgage Holdings, Inc. and Hanover Capital Partners, Ltd. (the
"Borrowers") and Greenwich Capital Financial Products, Inc. (the
"Lender").
In accordance with Section 2.03(a) of the Loan Agreement, the
undersigned Borrower hereby requests that you, the Lender, make
Advances to us in an aggregate principal amount of $_________________
[insert requested Advance amount] (such amount representing [insert
number of Participation Certificates] on ____________________ [insert
requested Funding Date, which must be at least three (3) Business Days
following the date of the request], in connection with which we shall
pledge to you as Collateral the Participation Certificates set forth in
the Participation Certificate Summary attached hereto.
The Borrower hereby certifies, as of such Funding Date, that:
(a) no Default or Event of Default has occurred and is
continuing on the date hereof nor will occur after giving effect to
such Advance as a result of such Advance;
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<PAGE> 107
(b) each of the representations and warranties made by the
Borrower in or pursuant to the Loan Documents is true and correct in
all material respects on and as of such date (in the case of the
representations and warranties in respect of Participation
Certificates, solely with respect to Participation Certificates being
included the Borrowing Base on the Funding Date) as if made on and as
of the date hereof (or, if any such representation or warranty is
expressly stated to have been made as of a specific date, as of such
specific date); and
(c) the Borrower is in compliance with all governmental
licenses and authorizations and is qualified to do business and is in
good standing in all required jurisdictions.
Very truly yours,
[BORROWER]
By:
------------------------
Name:
Title:
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<PAGE> 108
Schedule I
to Notice of Borrowing and Pledge
[ELIGIBLE PARTICIPATION CERTIFICATES PROPOSED TO BE PLEDGED
TO LENDER ON FUNDING DATE]
[ATTACH PARTICIPATION CERTIFICATE TAPE]
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<PAGE> 109
EXHIBIT D-4
FORM OF NOTICE OF BORROWING AND PLEDGE - ELIGIBLE BONDS
[INSERT DATE]
Greenwich Capital Financial Products, Inc.
600 Steamboat Road
Greenwich, Connecticut 06830
Attention: David Katze
Notice of Borrowing and Pledge No. : _____________________
Name of Trustee : _____________________
Interest Period : _____________________
Ladies/Gentlemen:
Reference is made to the Master Loan and Security Agreement, dated as
of March 27, 2000 (the "Loan Agreement"; capitalized terms used but not
otherwise defined herein shall have the meaning given them in the Loan
Agreement), between Hanover Capital Mortgage Holdings, Inc. and Hanover Capital
Partners, Ltd. (the "Borrowers") and Greenwich Capital Financial Products, Inc.
(the "Lender").
In accordance with Section 2.03(a) of the Loan Agreement, the
undersigned Borrower hereby requests that you, the Lender, make Advances to us
in an aggregate principal amount of $_________________ [insert requested Advance
amount] (such amount representing [insert number of Eligible Bonds] bonds on
____________________ [insert requested Funding Date, which must be at least
three (3) Business Days following the date of the request], in connection with
which we shall pledge to you as Collateral the Eligible Bonds set forth in the
Bond Summary attached hereto.
The Borrower hereby certifies, as of such Funding Date, that:
(a) no Default or Event of Default has occurred and is
continuing on the date hereof nor will occur after giving effect to
such Advance as a result of such Advance;
(b) each of the representations and warranties made by the
Borrower in or pursuant to the Loan Documents is true and correct in
all material respects on and as of such date (in the case of the
representations and warranties in respect of Eligible Bonds, solely
with respect to Eligible Bonds being included the Borrowing Base on the
Funding Date) as
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<PAGE> 110
if made on and as of the date hereof (or, if any such representation or
warranty is expressly stated to have been made as of a specific date,
as of such specific date); and
(c) the Borrower is in compliance with all governmental
licenses and authorizations and is qualified to do business and is in
good standing in all required jurisdictions.
Very truly yours,
[BORROWER]
By:
------------------------------------
Name:
Title:
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<PAGE> 111
Schedule I
to Notice of Borrowing and Pledge
[ELIGIBLE BONDS PROPOSED TO BE PLEDGED
TO LENDER ON FUNDING DATE]
[ATTACH BOND SUMMARY WITH RESPECT TO THE ELIGIBLE BONDS]
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<PAGE> 112
EXHIBIT E
UNDERWRITING GUIDELINES
[TO BE PROVIDED BY BORROWERS]
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<PAGE> 113
EXHIBIT F
FORM OF BLOCKED ACCOUNT AGREEMENT
_______________, 199_
Fleet Bank
___________________________
___________________________
Attn:______________________
Re: Account Established by Greenwich Capital Financial Products,
Inc. ("Lender"), pursuant to that certain Amended and Restated
Master Loan and Security Agreement (as amended, supplemented
or otherwise modified from time to time, the "Loan
Agreement"), dated as of March 27, 2000, by and among the
Lender, Fleet Bank (the "Collection Bank"), Hanover Capital
Mortgage Holdings, Inc. and Hanover Capital Partners Inc.
("Borrower")
Ladies and Gentlemen:
We refer to the collection account established by the Borrowers
pursuant to the Loan Agreement, at the Collection Bank, Providence, Rhode
Island, Account No. [ACCOUNT #], ABA# [ABA #], [sub]account identified with
respect to Eligible Assets pledged to the Lender (the "Collection Account"),
which the Borrowers maintain in accordance with the Loan Agreement.
From time to time, certain third-party servicers (each a "Subservicer")
and trustees (each a "Trustee") will deposit funds received in accordance with a
related servicing agreement or governing agreement into the Collection Account.
Greenwich Capital Financial Products, Inc. (the "Lender") has established a
secured loan arrangement with the Borrowers. By its execution of this letter,
the Collection Bank and the undersigned Borrower acknowledges that the Borrowers
have granted a security interest in all of the Borrowers' right, title and
interest in and to the Collection Account and any funds from time to time on
deposit therein with respect to such Eligible Assets, that such funds are
received by the Collection Bank in trust for the benefit of Lender and, except
as provided below, are for application against the Borrower's liabilities to
Lender.
By the Collection Bank's and the undersigned Borrower's execution of
this letter, each party agrees: (a) that all funds from time to time hereafter
in the Collection Account are the property of the Borrower held in trust for the
benefit of, and subject to a security interest in favor of, the Lender; (b) that
neither the Collection Bank nor the Borrowers will exercise any right of
set-off, banker's lien or any similar right in connection with such funds
provided, that in the event any check is returned to the Collection Bank or the
Borrowers because of insufficient funds (or is otherwise unpaid) such party
shall be entitled to set off the amount of any such returned check; (c) that
following such time as the Lender shall provide notice to the Collection Bank in
writing, in its sole discretion, revoking Borrowers' ability to make withdrawals
from the Collection Account, the Borrower will not withdraw, nor shall the
Collection Bank permit the Borrowers or any other person
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<PAGE> 114
or entity to withdraw or transfer funds from the Collection Account; and (d)
that if the Lender shall notify the Collection Bank that an event of default has
occurred and is continuing under the Lender's secured lending arrangement with
the Borrower, the Collection Bank shall cause or permit withdrawals from the
Collection Account in any other manner as the Lender may instruct.
All bank statements in respect to the Blocked Account shall be sent to
the Borrower with copies to:
Greenwich Capital Financial Products,
Inc.
600 Steamboat Road
Greenwich, Connecticut 06830
Attention: David Katze
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<PAGE> 115
Kindly acknowledge your agreement with the terms of this agreement by
signing the enclosed copy of this letter and returning it to the undersigned.
Very truly yours,
GREENWICH CAPITAL FINANCIAL
PRODUCTS, INC.
By:
Name:
Title:
Agreed and acknowledged:
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
By:
Name:
Title:
Agreed and acknowledged:
HANOVER CAPITAL PARTNERS, LTD.
By:
Name:
Agreed and acknowledged:
FLEET BANK
By:
Name:
Title:
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<PAGE> 116
EXHIBIT G
FORM OF MORTGAGE LOAN TAPE
[TO BE PROVIDED BY LENDER]
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<PAGE> 117
EXHIBIT H
FORM OF BORROWING BASE CERTIFICATE
[TO BE PROVIDED BY LENDER]
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<PAGE> 118
EXHIBIT I
FORM OF REMITTANCE REPORT
______, 19__
Greenwich Capital Financial Products, Inc.
600 Steamboat Road
Greenwich, Connecticut 06830
Attention: David Katze
Ladies and Gentlemen:
The undersigned, [HANOVER CAPITAL MORTGAGE HOLDINGS, INC.], refers to the
Amended and Restated Master Loan and Security Agreement, dated as of March 27,
2000 (as amended, supplemented or otherwise modified from time to time, the
"Loan Agreement") between Hanover Capital Mortgage Holdings, Inc., Hanover
Capital Partners, Ltd. and Greenwich Capital Financial Products, Inc.
Capitalized terms used herein but not defined herein shall have the meaning
assigned to such terms in the Loan Agreement.
The undersigned hereby delivers this Remittance Report to you pursuant
to Section 7.08 of the Loan Agreement and hereby certifies to you as follows as
of _______, 1998.(1)
I. Summary of Collection Account Cash Flow
(a) Total Collections remitted for the calendar month:
$_______.
(b) Borrowing Base Deficiency due to you on Remittance
Date: $_______.
(c) Interest due and payable to you on the Remittance
Date (for the period from and including the previous
Remittance Date to and including the day preceding
the current Remittance Date): $_______.
(d) Commitment Fee due and owing (payable on Payment
Dates occurring in [April, July, October, January],
and on the Termination Date.)
(e) Total cash due to you on the Remittance Date:
$_______.
(f) Cash flow in connection with any other act which
during the month:
(i) Principal received: $_______.
(ii) Accrued interest received: $________.
- --------
(1) Date should be the last day of the immediately preceding calendar month.
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<PAGE> 119
(iii) Amounts swept from the Lender's Collection
Account to the securitization or whole loan
buyer: $________.
(g) Balance to the undersigned $________.
LIBOR reset for the following month as of ________, 1998 ______%.
II. Breakout of Daily Remittances to the Collection Account
<TABLE>
<CAPTION>
Collection Dates Wire Date Cash Amount Total Amount
-------------------------- ----------- ------------
<S> <C> <C> <C>
Totals [attach Bank Statement]
</TABLE>
[HANOVER CAPITAL MORTGAGE HOLDINGS, INC.,]
By:
---------------------------------------
Name:
Title:
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<PAGE> 120
EXHIBIT J
FORM OF INSTRUCTION LETTER
__________ __, 1998
____________________, as [Trustee] [Subservicer]
____________________
____________________
Attention: _______________
Re: Loan and Security Agreement, dated as of March 27,
2000, by and between Greenwich Capital Financial
Products, Inc., ("Lender"), and Hanover Capital
Mortgage Holdings, Inc., and Hanover Capital
Partners, Ltd. ("Borrowers")
Ladies and Gentlemen:
Pursuant to the Amended and Restated Master Loan and Security
Agreement, dated as of March 27, 2000 (the "Loan and Security Agreement"),
between the Lender and the Borrowers, you are hereby notified that: (i) the
undersigned Borrower has pledged to the Lender the assets described on Schedule
1 hereto (the "Eligible Assets"), (ii) each of the Eligible Assets is subject to
a security interest in favor of the Lender, (iii) the Eligible Assets include
all of the capital stock of a special purpose entity which owns the bonds listed
on Schedule 2 hereto (the "Underlying Eligible Bonds"), (iv) the [Trustee]
[Servicer] [Certificate Registrar] shall promptly send to the Lender a copy of
the [Governing Agreement] [Servicing Agreement] related to the Eligible Assets
or Underlying Eligible Bonds, (v) unless otherwise notified by the Lender in
writing, any payments or distributions made with respect to such Eligible Assets
or Underlying Eligible Bonds should be remitted immediately by the [Trustee]
[Servicer] [Certificate Registrar] directly to the Collection Account
established at Fleet Bank (the "Collection Bank"), in accordance with the
following wire instructions and (vi) if notified by the Lender in writing, the
[Servicer] [Trustee] [Certificate Registrar] shall send such payments or
distributions in accordance with the Lender's written instructions:
Account No.: [____________________]
ABA No.: [____________________]
[____________________]
Reference: [____________________]
The Subservicer also acknowledges its consent to terminate
such Servicing Agreement upon notification by the Lender of an occurrence of an
Event of Default.
Please acknowledge receipt of this instruction letter by
signing in the signature block below and forwarding an executed copy to the
Lender promptly upon receipt. Any notices to the Lender should be delivered to
the following address: 600 Steamboat Road, Greenwich, Connecticut 06830,
Attention: Joe Bartolotta, Telephone: (203) 625-6675, Facsimile: (203) 625-4751.
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<PAGE> 121
Very truly yours,
[BORROWER]
By:
------------------------
Name:
Title:
ACKNOWLEDGED:
_______________________________, as [Trustee] [Servicer] [Certificate Registrar]
By:..................................................
Name:
Title:
Telephone:
Facsimile:
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<PAGE> 122
EXHIBIT K-1
FORM OF LOST INSTRUMENT AFFIDAVIT
I, as ___________________________ (title) (hereinafter called
"Deponent") of _______________________ (the "Bond/PC Custodian"), am authorized
to make this Lost Instrument Affidavit (this "Affidavit") on behalf of the
Bond/PC Custodian. In connection with the administration of the Participation
Certificates held by the Bond/PC Custodian on behalf of Greenwich Capital
Financial Products, Inc. (the "Lender"), Deponent being duly sworn, deposes and
says that:
1. Bond/PC Custodian's address is:
[BOND/PC CUSTODIAN'S Address]
2. Bond/PC Custodian previously delivered to the Lender a
Participation Certificate Schedule with respect to that certain Participation
Certificate made by ___ in an original principal balance of $___, which did not
indicate such Participation Certificate is missing;
3. Such Participation Certificate was assigned or sold to the
Lender by ___________ pursuant to the terms and provisions of an Amended and
Restated Master Loan and Security Agreement dated and effective as of March 27,
2000;
5. Aforesaid Participation Certificate (hereinafter called the
"Original") has been lost;
6. Deponent has made or has caused to be made diligent search
for the Original and has been unable to find or recover same;
7. The Bond/PC Custodian was the Bond/PC Custodian of the
Original at the time of loss; and
8. Deponent agrees that, if said Original should ever come
into Bond/PC Custodian's possession, custody or power, Bond/PC Custodian will
immediately and without consideration surrender the Original to the Lender.
9. Attached hereto is a true and correct copy of the
Participation Certificate.
10. Deponent hereby agrees that the Bond/PC Custodian (a)
shall indemnify and hold harmless the Lender, its successors, and assigns,
against any loss, liability or damage, including reasonable attorney's fees,
resulting from the unavailability of any Originals, including but not limited to
any loss, liability or damage arising from (i) any false statement contained in
this Affidavit, (ii) any claim of any party that it has already purchased a
participation certificate evidenced by the Originals or any interest in such
participation certificate, (iii) the issuance of new instrument in lieu thereof
and (iv) any claim whether or not based upon or arising from honoring or
refusing to honor the Original when presented by anyone (items (i) through (iv)
above are hereinafter referred to as the "Losses").
11. This Affidavit is intended to be relied on by the Lender,
its successors, and assigns and Greenwich Capital Financial Products, Inc.
represents and warrants that it has the authority to perform its obligations
under this Affidavit.
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<PAGE> 123
EXECUTED THIS ____ day of _______, 199_, on
behalf of the Bond/PC Custodian by:
Signature
Typed Name
On this _________ day of _______________________, 199_, before
me appeared ____________________________________________, to me personally know,
who being duly sworn did say that she/he is the ______________________________
of ______________________, and that said Lost Instrument Affidavit was signed
and sealed on behalf of such corporation and said _____________________________
acknowledged this instrument to be the free act and deed of said corporation.
Notary Public in and for the
State of .
My Commission expires: .
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<PAGE> 124
EXHIBIT K-2
FORM OF LOST NOTE AFFIDAVIT
I, as ___________________________ (title) (hereinafter called
"Deponent") of _______________________ (the "Mortgage Custodian"), am authorized
to make this Lost Note Affidavit (this "Affidavit") on behalf of the Mortgage
Custodian. In connection with the administration of the Mortgage Loans held by
the Mortgage Custodian on behalf of Greenwich Capital Financial Products, Inc.
(the "Lender"), Deponent being duly sworn, deposes and says that:
1. Mortgage Custodian's address is:
[MORTGAGE CUSTODIAN'S Address]
2. Mortgage Custodian previously delivered to the Lender a
Mortgage Loan Schedule and an Exception Report with respect to that certain
Mortgage Note made by ___ in an original principal balance of $___, secured by a
Mortgage on a property located at ____, which did not indicate such Mortgage
Note is missing;
3. Such Mortgage Note was assigned or sold to the Lender by
___________ pursuant to the terms and provisions of an Amended and Restated
Master Loan and Security Agreement dated and effective as of March 27, 2000;
4. Such Mortgage Note is not outstanding pursuant to a Request
for Release of Documents;
5. Aforesaid Mortgage Note (hereinafter called the "Original")
has been lost;
6. Deponent has made or has caused to be made diligent search
for the Original and has been unable to find or recover same;
7. The Mortgage Custodian was the Mortgage Custodian of the
Original at the time of loss; and
8. Deponent agrees that, if said Original should ever come
into Mortgage Custodian's possession, custody or power, Mortgage Custodian will
immediately and without consideration surrender the Original to the Lender.
9. Attached hereto is a true and correct copy of (i) the
Mortgage Note, endorsed in blank by the Mortgagee, as provided by [Hanover
Capital Mortgage Holdings, Inc.] [Hanover Capital Partners, Ltd.] or its
designee and (ii) the Mortgage which secures the Mortgage Note, which Mortgage
is recorded at ___________________.
10. Deponent hereby agrees that the Mortgage Custodian (a)
shall indemnify and hold harmless the Lender, its successors, and assigns,
against any loss, liability or damage, including reasonable attorney's fees,
resulting from the unavailability of any Originals, including but not limited to
any loss, liability or damage arising from (i) any false statement contained in
this Affidavit, (ii) any claim of any party
-7-
<PAGE> 125
that it has already purchased a mortgage loan evidenced by the Originals or any
interest in such mortgage loan, (iii) any claim of any borrower with respect to
the existence of terms of a Mortgage Loan evidenced by the Originals, (iv) the
issuance of new instrument in lieu thereof and (v) any claim whether or not
based upon or arising from honoring or refusing to honor the Original when
presented by anyone (items (i) through (iv) above are hereinafter referred to as
the "Losses").
11. This Affidavit is intended to be relied on by the Lender,
its successors, and assigns and Greenwich Capital Financial Products, Inc.
represents and warrants that it has the authority to perform its obligations
under this Affidavit.
EXECUTED THIS ____ day of _______, 199_, on
behalf of the Mortgage Custodian by:
Signature
Typed Name
On this _________ day of _______________________, 199_, before
me appeared ____________________________________________, to me personally know,
who being duly sworn did say that she/he is the ______________________________
of ______________________, and that said Lost Note Affidavit was signed and
sealed on behalf of such corporation and said _____________________________
acknowledged this instrument to be the free act and deed of said corporation.
Notary Public in and for the
State of .
My Commission expires: .
-8-
<PAGE> 126
EXHIBIT L
FORM OF NOTICE OF EXTENSION OF INTEREST PERIOD
[insert date]
Greenwich Capital Financial Products, Inc.
600 Steamboat Road
Greenwich, Connecticut 06830
Attention: David Katze
Notice of Borrowing and Pledge No. : _____________________
Current Interest Period : [One Month][Two Month][Three Month]
[Six Month]
Termination Date of Current
Interest Period : _____________________
Ladies/Gentlemen:
Reference is made to the Amended and Restated Master Loan and Security
Agreement, dated as of March 27, 2000 (the "Loan Agreement"; capitalized terms
used but not otherwise defined herein shall have the meaning given them in the
Loan Agreement), between Hanover Capital Mortgage Holdings, Inc. and Hanover
Capital Partners, Ltd. (the "Borrowers") and Greenwich Capital Financial
Products, Inc. (the "Lender").
In accordance with Section 3.04 of the Loan Agreement, the undersigned
Borrower hereby requests that the Lender extend the current Interest Period of
[One Month] [Two Month][Three Month][Six Month] beginning immediately following
the termination of the existing Interest Period which is scheduled to terminate
on [INSERT LAST DAY OF EXISTING INTEREST PERIOD].
Very truly yours,
[BORROWER]
By:
-----------------------------------
Name:
Title:
-9-
<PAGE> 1
Exhibit 10.32.1
THIRD AMENDMENT TO
WAREHOUSING CREDIT AND SECURITY AGREEMENT
This Third Amendment to Warehousing Credit and Security Agreement (this
"Amendment"), is entered into as of the 28th day of March, 2000, by and between
HANOVER CAPITAL MORTGAGE HOLDINGS, INC., a Maryland corporation ("Company"),
HANOVER CAPITAL PARTNERS, LTD., a New York corporation ("HCP")(the Company and
HCP herein collectively called "Original Borrowers"), and HANOVER QRS-1 98-B,
INC., a Delaware corporation ("QRS-1"), HANOVER QRS-2 98-B, INC., a Delaware
corporation ("QRS-2"), HANOVER SPC-A, INC., a Delaware corporation ("SPC"), and
HANOVER CAPITAL REPO CORP., a Delaware corporation ("Repo")(QRS-1, QRS-2, SPC,
and Repo herein collectively referred to as the "New Borrowers", and Original
Borrowers and New Borrowers herein collectively referred to as the "Borrowers");
and BANK UNITED, a federal savings bank ("Lender"). Capitalized terms used but
not defined herein have the meanings assigned to them in that certain
Warehousing Credit and Security Agreement (Single-Family Mortgage Loans) (the
"Credit Agreement") dated effective as of April 30, 1999, by and between
Original Borrowers and Lender, as the same has been or may be amended or
supplemented from time to time.
Section 1. RECITALS. The Borrowers and Lender desire to amend the Credit
Agreement, subject to the terms and conditions of this Amendment. Therefore, The
Company and Lender hereby agree as follows, intending to be legally bound:
Section 2. AMENDMENTS. The Credit Agreement is hereby amended and
supplemented as follows:
(a) Section 1.1 of the Credit Agreement is hereby amended by the amendment
or addition of the following definitions:
"TERMINATION DATE" shall mean May 31, 2000, or such earlier date upon
which Lender's obligation to fund shall be terminated pursuant to the
terms of this Agreement.
(b) Section 2.5(a) of the Credit Agreement is deleted in its entirety, and
the following is substituted therefor:
"(a) The outstanding unpaid principal amount of all advances
shall be payable in full upon May 31, 2000."
(c) The promissory note ("Credit Note") dated as of March 28, 2000, in the
original principal amount of $50,000,000, executed by the Borrowers and payable
to the order of Lender, is given to Lender in replacement of the promissory note
dated May 12, 1999, in the original principal amount of $50,000,000, executed by
the Borrowers and payable to the order of Lender (the "5/99 Note"), which 5/99
Note was given to Lender in replacement of the promissory note dated April 30,
1999, in the original principal amount of $50,000,000, executed by the Original
Borrowers and payable to the order of Lender (the "Original Note"), and not in
novation or discharge thereof. The
<PAGE> 2
definition of the term "Note" in the Credit Agreement is hereby amended to mean
the Credit Note and all renewals, extensions, modifications, increases,
rearrangements, and replacements thereof.
Section 3. EXTENSION FEE. In consideration for Lender's agreement to extend
the term of the Credit Agreement, and as a condition precedent to Lender's
agreement to enter into this Third Amendment, Borrowers agree to pay to Lender
an extension fee equal to 0.25% of the Commitment, prorated for two months
($20,833.33).
Section 4. REPRESENTATIONS. The Borrowers represent and warrant that all of
the representations and warranties contained in the Credit Agreement and all
instruments and documents executed pursuant thereto or contemplated thereby are
true and correct in all material respects on and as of this date.
Section 5. CONTINUED FORCE AND EFFECT. Except as specifically amended
herein, all of the terms and conditions of the Credit Agreement and all other
Loan Documents are and remain in full force and effect in accordance with their
respective terms. All of the terms used herein have the same meanings as set out
in the Credit Agreement, unless amended hereby or unless the context clearly
requires otherwise. References in the Credit Agreement to the "Agreement," the
"Loan Agreement," "hereof," "herein" and words of similar import shall be deemed
to be references to the Credit Agreement as amended hereby. Any reference in the
other Loan Documents to the "Agreement," the "Line of Credit Agreement,"
"Warehouse Agreement," or the "Loan Agreement" shall be deemed to be references
to the Credit Agreement as amended through the date hereof. Any references in
the Credit Agreement or any of the Loan Documents to the Note, or the Credit
Note shall be deemed to be references to the Credit Note.
Section 6. REPRESENTATIONS AND RELEASE OF CLAIMS. Except as otherwise
specified herein, the terms and provisions hereof shall in no manner impair,
limit, restrict or otherwise affect the obligations of the Borrowers or any
third party to Lender, as evidenced by the Loan Documents. The Borrowers hereby
acknowledge, agree, and represent that (i) the Borrowers are indebted to Lender
pursuant to the terms of the Credit Note; (ii) the liens, security interests and
assignments created and evidenced by the Loan Documents are, respectively,
first, prior, valid and subsisting liens, security interests and assignments
against the Collateral and secure all indebtedness and obligations of the
Borrowers to Lender under the Credit Note, the Credit Agreement, all other Loan
Documents, as modified herein; (iii) there are no claims or offsets against, or
defenses or counterclaims to, the terms or provisions of the Loan Documents, and
the other obligations created or evidenced by the Loan Documents; (iv) the
Borrowers have no claims, offsets, defenses or counterclaims arising from any of
the Lender's acts or omissions with respect to the Loan Documents, or the
Lender's performance under the Loan Documents; (v) the representations and
warranties contained in the Loan Documents are true and correct representations
and warranties of the Borrowers, as of the date hereof; (vi) the Borrowers
promise to pay to the order of Lender the indebtedness evidenced by the Credit
Note according to the terms thereof; and (vii) the Borrowers are not in default
and no event has occurred which, with the passage of time, giving of notice, or
both, would constitute a default by the any of the Borrowers of such Borrower's
obligations under the terms and provisions of the Loan
2
<PAGE> 3
Documents. In consideration of the modification of certain provisions of the
Loan Documents, all as herein provided, and the other benefits received by the
Borrowers hereunder, the Borrowers hereby RELEASE, RELINQUISH and forever
DISCHARGE Lender, its predecessors, successors, assigns, shareholders,
principals, parents, subsidiaries, agents, officers, directors, employees,
attorneys and representatives (collectively, the "Lender Released Parties"), of
and from any and all claims, demands, actions and causes of action of any and
every kind or character, whether known or unknown, present or future, which the
Borrowers have, or may have against Lender Released Parties, arising out of or
with respect to any and all transactions relating to the Credit Agreement, the
Original Note, the Credit Note, and the other Loan Documents occurring prior to
the date hereof, including any other loss, expense and/or detriment, of any kind
or character, growing out of or in any way connected with or in any way
resulting from the acts, actions or omissions of the Lender Released Parties,
and including any loss, cost or damage in connection with any breach of
fiduciary duty, breach of any duty of fair dealing, breach of competence, breach
of funding commitment, undue influence, duress, economic coercion, conflict of
interest, negligence, bad faith, malpractice, violations of the Racketeer
Influence and Corrupt Organizations Act, intentional or negligent infliction of
emotional or mental distress, tortious interference with corporate governments
or prospective business advantage, tortious interference with contractual
relations, breach of contract, deceptive trade practices, libel, slander,
conspiracy, the charging, contracting for, taking, reserving, collecting or
receiving of interest in excess of the highest lawful rate applicable to the
Loan Documents (i.e., usury), any violations of federal or state law, any
violations of federal or state banking rules, laws or regulations, including,
but not limited to, any violations of Regulation B, Equal Credit Opportunity,
bank tying act claims, any violation of the Texas Free Enterprise Antitrust Act
or any violation of federal antitrust acts.
Section 7. SEVERABILITY. In the event any one or more provisions contained
in the Credit Agreement, this Amendment, or any of the Loan Documents should be
held to be invalid, illegal or unenforceable in any respect, the validity,
enforceability and legality of the remaining provisions contained herein and
therein shall not be affected in any way or impaired thereby and shall be
enforceable in accordance with their respective terms.
Section 8. EXPENSES. The Borrowers agree to pay all out-of-pocket costs and
expenses (including reasonable fees and expenses of legal counsel) of Lender in
connection with the preparation, operation, administration and enforcement of
this Amendment.
Section 9. ACKNOWLEDGMENT. Except as amended hereby, the Borrowers ratify
and confirm that the Loan Documents are and remain in full force and effect in
accordance with their respective terms and that all Collateral is unimpaired by
this Amendment and secures the payment and performance of all indebtedness and
obligations of the Borrowers under the Credit Note, the Credit Agreement, and
all other Loan Documents, as modified hereby. Each of the undersigned officers
of the Borrowers represent and warrant that his or her execution and delivery of
this Amendment has been duly authorized, and that the resolutions and affidavits
previously delivered to Lender, in connection with the execution and delivery of
the Credit Agreement and the First
3
<PAGE> 4
Amendment thereto, are and remain in full force and effect and have not been
altered, amended or repealed in anywise.
Section 10. NO WAIVER. The Borrowers agree that no Event of Default and no
Default has been waived or remedied by the execution of this Amendment by
Lender, and any such Default or Event of Default heretofore arising and
currently continuing shall continue after the execution and delivery hereof.
Section 11. GOVERNING LAW. This Amendment shall be governed by and
construed in accordance with the laws of the State of Texas and, to the extent
applicable, by federal law.
Section 12. COUNTERPARTS. This Amendment may be executed in any number of
counterparts and all of such counterparts taken together shall be deemed to
constitute one and the same instrument.
SECTION 13. NO ORAL AGREEMENTS. THIS WRITTEN AMENDMENT, THE CREDIT
AGREEMENT, THE CREDIT NOTE, AND THE OTHER LOAN DOCUMENTS, ALL AS MODIFIED
HEREBY, REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR ORAL AGREEMENTS OF THE
PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
[SIGNATURES ON FOLLOWING PAGE]
4
<PAGE> 5
EXECUTED and effective as of the dates first written above.
BORROWERS: HANOVER SPC-A, INC., a Delaware
corporation
HANOVER CAPITAL MORTGAGE By: ___________________________________
HOLDINGS, INC., Name:__________________________________
a Maryland corporation Title:_________________________________
By:________________________________ HANOVER CAPITAL SPC, INC., a Delaware
Name:______________________________ corporation
Title:_____________________________
By:____________________________________
Name:__________________________________
Title:_________________________________
HANOVER CAPITAL PARTNERS, LTD.,
a New York corporation HANOVER REPO CORP., a Delaware
corporation
By:________________________________
Name:______________________________ By:____________________________________
Title:_____________________________ Name:__________________________________
Title:_________________________________
HANOVER QRS-1 98-B, INC., a Delaware
corporation
By:________________________________
Name:______________________________
Title:_____________________________ LENDER:
HANOVER QRS-2 98-B, INC., a Delaware BANK UNITED,
corporation a federal savings bank
By:________________________________ By:____________________________________
Name:______________________________ Name:__________________________________
Title:_____________________________ Title:_________________________________
5
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE HANOVER
CAPITAL MORTGAGE HOLDINGS, INC'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD
FROM JANUARY 1, 2000 TO MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,118
<SECURITIES> 317,855
<RECEIVABLES> 2,815
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 334,689
<CURRENT-LIABILITIES> 41,748<F1>
<BONDS> 242,158
0
0
<COMMON> 58
<OTHER-SE> 50,725<F2>
<TOTAL-LIABILITY-AND-EQUITY> 334,689
<SALES> 6,674
<TOTAL-REVENUES> 1,580
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 980
<LOSS-PROVISION> 103
<INTEREST-EXPENSE> 5,190
<INCOME-PRETAX> 690
<INCOME-TAX> 0
<INCOME-CONTINUING> 690
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 690
<EPS-BASIC> 0.12
<EPS-DILUTED> 0.12
<FN>
<F1>As a Real Estate Investment Trust our balance sheet is not classified.
<F2>Includes Retained Earnings and Paid In Capital.
</FN>
</TABLE>
