As filed with the Securities and Exchange Commission on December 30, 1997
Registration No. 333-_____
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
________________
VANDERBILT MORTGAGE AND FINANCE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
________________
TENNESSEE 62-0997810
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
4726 AIRPORT HIGHWAY
LOUISVILLE, TENNESSEE 37777
(423) 970-7200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
________________
KEVIN T. CLAYTON
4726 AIRPORT HIGHWAY
LOUISVILLE, TENNESSEE 37777
(423) 970-7200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF AGENT FOR SERVICE)
CLAYTON HOMES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
________________
DELAWARE 62-1671360
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
623 MARKET STREET
KNOXVILLE, TENNESSEE 37902
(423) 595-4700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
________________
KEVIN T. CLAYTON
623 MARKET STREET
KNOXVILLE, TENNESSEE 37902
(423) 595-4700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF AGENT FOR SERVICE)
COPY TO:
JOHN W. TITUS, ESQ.
BOULT, CUMMINGS, CONNERS & BERRY, PLC
414 UNION STREET, SUITE 1600
NASHVILLE, TENNESSEE 37219
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE
PUBLIC: As soon as practicable after the effective date of this Registration
Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. / /
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. /x/
IF THIS FORM IS FILED TO REGISTER ADDITIONAL SECURITIES FOR AN OFFERING
PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT, PLEASE CHECK THE FOLLOWING
BOX AND LIST THE SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER
EFFECTIVE REGISTRATION STATEMENT FOR THE SAME OFFERING./ /____________
IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE 462(C)
UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT
REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE REGISTRATION STATEMENT
FOR THE SAME OFFERING./ /____________
IF DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO RULE 434,
PLEASE CHECK THE FOLLOWING BOX./ /
_________________________________
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed
Maximum Proposed
Offering Maximum Amount of
Title of Each Class of Amount to be Price Per Aggregate Registration
Securities to Be Registered Registered** Unit* Offering Price* Fee**
<S> <C> <C> <C> <C>
Pass-Through Certificates . . . . . . $1,540,995,000 100% $1,540,995,000 $454,922.73
Limited Guarantee of Clayton Homes, $1,540,995,000 100% $1,540,995,000 N/A
Inc. . . . . . . . . . . . . . . . .
</TABLE>
* Estimated for the purpose of calculating the registration fee.
** $40,995,000 in securities are being carried forward and $12,422.73 of the
filing fee is associated with the securities being carried forward and was
previously paid with the earlier registration statement.
_____________
Pursuant to Rule 429, this Registration Statement also constitutes
Post-Effective Amendment No. 1 to Registration Statement No. 333-14033, which
became effective on October 16, 1996.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
Subject to Completion, dated December 30, 1997
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED ____________, 199_)
$ (APPROXIMATE)
VANDERBILT MORTGAGE AND FINANCE, INC.
MANUFACTURED HOUSING CONTRACT
SENIOR/SUBORDINATE PASS-THROUGH CERTIFICATES, SERIES 199__
$ APPROXIMATE % CLASS A-1
$ APPROXIMATE % CLASS A-2
$ APPROXIMATE % CLASS A-3
$ APPROXIMATE % CLASS B
(PRINCIPAL AND INTEREST PAYABLE ON THE 7TH OF EACH MONTH,
BEGINNING _____, 199__)
The Manufactured Housing Contract Senior/Subordinate Pass-Through
Certificates, Series 199___ (the "Certificates") will represent interests in
a pool (the "Contract Pool") of manufactured housing installment sales
contracts and installment loan agreements (the "Contracts") and certain
related property (the "Trust Fund") conveyed by Vanderbilt Mortgage and
Finance, Inc. (the "Company"). The Company will serve as servicer of the
Contracts (together with any successor servicer, herein referred to as the
"Servicer"). The Contracts were originated or purchased by the Company in
the ordinary course of its business. The term "Approximate," with respect to
the aggregate principal amount of any Certificates, means that the amount is
subject to a permitted variance of plus or minus 5%. Terms used and not
otherwise defined herein have the respective meanings ascribed to such terms
in the Prospectus dated ____________, 199__ attached hereto (the
"Prospectus").
(Continued on next page)
CERTAIN FACTORS SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
CERTIFICATES. SEE "RISK FACTORS" BEGINNING ON PAGE S-18 HEREIN AND PAGE 10
IN THE PROSPECTUS.
THE CERTIFICATES WILL NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE
COMPANY OR ANY OF ITS AFFILIATES. THE CERTIFICATES WILL NOT BE INSURED OR
GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY, OR BY ANY OTHER
PERSON OR ENTITY.
----------------
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT COMPANY(2)
<S> <C> <C> <C>
Class A-1 Certificates . . . . . . % % %
Class A-1 Certificates . . . . . . % % %
Class A-2 Certificates . . . . . . % % %
Class A-3 Certificates . . . . . . % % %
Class B Certificates . . . . . . . % % %
Total . . . . . . . . . . . . . . . $ $ $
</TABLE>
(1) Plus accrued interest, if any, at the applicable rate from ____, 199_.
(2) Before deducting expenses, estimated to be $ .
(The Offered Certificates are being offered by the Underwriters from
time to time in negotiated transactions or otherwise at varying prices to be
determined, in each case, at the time of sale.
The Aggregate proceeds to the Company are expected to be $ ,
plus accrued interest thereon, before deducting expenses, payable by the
Company, estimated to be $ .)
The Offered Certificates are offered subject to prior sale, when, as and
if issued by the Trust and accepted by the Underwriters and subject to its
right to reject orders in whole or in part. It is expected that delivery of
the Offered Certificates will be made in book-entry form only through the
Same Day Funds Settlement system of The Depository Trust Company on or about
, 199_ (the "Closing Date").
--------------
The date of this Prospectus Supplement is , 199_
(Continued from the cover page)
The Certificates will consist of two classes of Senior Certificates (the
"Class A-1 Certificates" and the "Class A-2 Certificates") and three classes
of Subordinated Certificates (the "Class A-3 Certificates," the "Class B
Certificates" and the "Class R Certificates"). Only the Class A-1, Class
A-2, Class A-3 and Class B Certificates (collectively, the "Offered
Certificates") are being offered hereby. The Class A-1 Certificates, Class
A-2 Certificates and Class A-3 Certificates will evidence in the aggregate
approximate initial %, % and % undivided interests, respectively, in the
Contract Pool. The Class B Certificates will evidence in the aggregate an
approximate initial __% undivided interest in the Contract Pool. The Trust
Fund will be created in 199_, pursuant to a Pooling and Servicing Agreement
between the Company, as Seller and Servicer of the Contracts,
___________________ and as trustee (the "Trustee"). The Trust Fund property
will include all rights to receive payments due on each Contract on or after
, 199_ (the "Cut-off Date"), security interests in the
manufactured homes securing the Contracts, any related mortgages or deeds of
trust, all rights under certain hazard insurance policies with respect to the
manufactured homes and rights to amounts in the Certificate Account.
The Pooling and Servicing Agreement provides that additional Contracts
(the "Subsequent Contracts") are intended to be purchased by the Trust Fund
on or before from funds on deposit in the Account.
On the Closing Date, the Depositor will pay to the Trustee $
for deposit in the Pre-Funding Account.
The Class A-1 Certificates and Class A-2 Certificates will have fixed
Remittance Rates of ____% and ____% per annum, respectively. The Remittance
Rate for the Class A-3 Certificates for a Remittance Date will be the lesser
of (i) % per annum and (ii) the Weighted Average Net Contract Rate (as
defined herein) for such Remittance Date. The Remittance Rate for the Class
B Certificates will be . Payments of principal and interest on the
Offered Certificates will be distributed to Certificateholders on the 7th day
of each month (or if the 7th day is not a business day, the next business
day) (each, a "Remittance Date"), beginning in 199 . The rights of the
holders of the Class A 3 Certificates to receive distributions of interest
and principal are subordinated to such rights of the Senior
Certificateholders. The rights of the holders of the Class B Certificates to
receive distributions of amounts collected on the Contracts will be
subordinated to the rights of the Class A Certificateholders to receive the
distributions due thereon. See "Description of the Certificates."
Net losses on the Contracts that would otherwise be absorbed by the
Class B Certificates on account of their subordination to the Class A
Certificates are intended to be covered by funds on deposit in the Reserve
Fund, which may be drawn upon solely for the benefit of the Class B
Certificateholders as described herein.
Except to the limited extent described herein, the Reserve Fund will not
benefit, or result in any payments on, the Class A Certificates. The Reserve
Fund initially will be funded in the amount of $ . The amount available in
the Reserve Fund will be reduced by withdrawals to cover the net losses
referred to above as described herein. On the Remittance Date, if any, on
which the amount on deposit in the Reserve Fund is at least equal to the then
outstanding Class B Principal Balance (after giving effect to the
distributions made on such date), the amount in the Reserve Fund will be
distributed to the Class B Certificateholders to the extent necessary to
reduce the Class B Principal Balance to zero. See "Description of the
Certificates--The Reserve Fund."
An election will be made to treat the Trust Fund as a real estate
mortgage investment conduit (a "REMIC") for federal income tax purposes. See
"Certain Federal Income Tax Consequences" in the Prospectus. The Offered
Certificates will represent "regular interests" in the REMIC and the Class R
Certificates will represent the residual interest in the REMIC.
The obligations of the Servicer (including the Company as initial
Servicer) with respect to the Certificates are limited to its contractual
servicing obligations. The Company, as seller, however, will make certain
representations and warranties relating to the Contracts. In the event of an
uncured breach of any such representation or warranty that materially
adversely affects a Contract, the Company may, under certain circumstances,
be obligated to repurchase such Contract or substitute another contract
therefor, as described herein.
Capitalized terms used herein and not defined shall have the respective
meanings assigned to such terms in the Glossary in the Prospectus.
The interests of the owners of the Offered Certificates (the
"Certificate Owners") will be represented by book-entries on the records of
The Depository Trust Company and participating members thereof. See
"Description of the Certificates--Registration of the Offered Certificates"
herein. ______________ (the "Underwriters") intend to make a secondary
market in the Offered Certificates, but has no obligation to do so. There
can be no assurance that a secondary market for the Offered Certificates will
develop, or if it does develop, that it will continue or provide sufficient
liquidity.
Certain persons participating in this offering may engage in
transactions that stabilize, maintain, or otherwise affect the price of the
Offered Certificates. Such transactions may include stabilizing and the
purchase of Offered Certificates to cover syndicate short positions. For a
description of these activities, see "Underwriting" herein.
This Prospectus Supplement does not contain complete information about
the offering of the Offered Certificates. Additional information is
contained in the Prospectus and purchasers are urged to read both this
Prospectus Supplement and the Prospectus in full. Sales of the Offered
Certificates may not be consummated unless the purchaser has received both
this Prospectus Supplement and the Prospectus.
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS
TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
SUMMARY OF TERMS OF THE OFFERED CERTIFICATES
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and in the
accompanying Prospectus. Capitalized terms used herein and not otherwise
defined herein shall have the respective meanings assigned them elsewhere in
this Prospectus Supplement and in the Prospectus or in the Glossary included
as a part of the Prospectus.
Securities Offered The Class A-1, Class A-2, Class A-3 and Class B
Certificates (the "Offered Certificates") of the
Manufactured Housing Contract Senior/Subordinate
Pass-Through Certificates, Series 199__ (the
"Certificates").
Seller Vanderbilt Mortgage and Finance, Inc. (the
"Company"), an indirect subsidiary of Clayton Homes,
Inc. ("CHI"). See "Risk Factors" herein and in the
Prospectus.
Servicer Vanderbilt Mortgage and Finance, Inc. (in such
capacity referred to herein as the "Servicer").
Trustee
Cut-off Date Pool
Principal Balance $
Original Class A
Principal Balance $ (Approximate, subject to a permitted
variance of plus or minus 5%).
Original Class A-1
Principal Balance $ (Approximate, subject to a permitted
variance of plus or minus 5%).
Original Class A-2
Principal Balance $ (Approximate, subject to a permitted
variance of plus or minus 5%).
Original Class A-3
Principal Balance $ (Approximate, subject to a permitted
variance of plus or minus 5%).
Original Class B
Principal Balance $ (Approximate, subject to a permitted
variance of plus or minus 5%).
Class A-1 Remittance
Rate % per annum, computed on the basis of a
360-day year of twelve 30-day months.
Class A-2 Remittance
Rate % per annum, computed on the basis of a
360-day year of twelve 30-day months.
Class A-3 Remittance
Rate The lesser of (i) % per annum and (ii) the
applicable Weighted Average Net Contract Rate (as
defined under "Description of the
Certificates--Distributions").
Class B Remittance
Rate The lesser of (i) % per annum and (ii) the
applicable Weighted Average Net Contract Rate.
Remittance Date The 7th day of each month (or if such 7th day is not
a business day, the next succeeding business day),
commencing in 199 .
Record Date The last business day of the month preceding the
month of the related Remittance Date.
Cut-off Date , 199 .
Agreement The Pooling and Servicing Agreement dated as of
, 199_ (the "Agreement"), between the Company,
as Seller and Servicer, and the Trustee.
Description of
Certificates The Offered Certificates evidence undivided
interests in the Contract Pool and certain other
property held in trust for the benefit of the
Certificateholders (the "Trust Fund"). The Class
A-1 and Class A-2 Certificates are Senior
Certificates and the Class A-3 and the Class B are
Subordinated Certificates, all as described herein.
The Offered Certificates will be offered in
denominations of $50,000 and integral multiples of
$1,000 in excess thereof. The undivided percentage
interest (the "Percentage Interest") of a Class A-1,
Class A-2, Class A-3 or Class B Certificate in the
distributions on such Certificates (the "Percentage
Interest") will be equal to the percentage obtained
from dividing the denomination of such Certificate
by the Original Class A-1 Principal Balance, the
Original Class A-2 Principal Balance, the Original
Class A-3 Principal Balance or the Original Class B
Principal Balance, as appropriate.
Distributions Distributions of principal and interest to the
holders of a Class of Certificates will be made in
an amount equal to their respective Percentage
Interest multiplied by the aggregate amount
distributed on such Class of Certificates for the
related Remittance Date, commencing in 199 .
Distributions will be made on each Remittance Date
to holders of record on the preceding Record Date,
except that the final distribution in respect of the
Certificates will only be made upon presentation and
surrender of the Certificates at the office or
agency appointed by the Trustee for that purpose in
New York, New York.
Distributions to the Certificateholders of a Class
will be applied first to the payment of interest
and, if any principal is then due, then to the
payment of principal. The funds available in the
Certificate Account for distribution on a Remittance
Date (the "Available Distribution Amount") will be
applied in the amounts and the order of priority set
forth below. See "Description of the
Certificates--Distributions" for a detailed
description of the amounts on deposit in the
Certificate Account that will constitute the
Available Distribution Amount on each Remittance
Date. The aggregate amounts distributed to the
Class A-1, Class A-2, Class A-3 and Class B
Certificateholders from the Available Distribution
Amount in respect of a Remittance Date are the Class
A-1 Distribution Amount, the Class A-2 Distribution
Amount, the Class A-3 Distribution Amount and the
Class B Distribution Amount, respectively.
On each Remittance Date the Available Distribution
Amount will be distributed in the following amounts
in the following order of priority:
(i) one month's interest on the Class A-1 and Class
A-2 Certificates, at their respective Remittance
Rates on the outstanding Class A-1 and Class A-2
Principal Balances, respectively, together with any
previously undistributed shortfalls in interest due
on the Class A-1 and Class A-2 Certificates,
respectively, in respect of prior Remittance Dates;
if the Available Distribution Amount is not
sufficient to distribute the full amount of interest
due on the Class A-1 and Class A-2 Certificates, the
Available Distribution Amount will be distributed on
such Classes of Certificates pro rata on the basis
of the interest due thereon;
(ii) one month's interest on the Class A-3
Principal Balance to the Class A-3
Certificateholders, together with any previously
undistributed shortfalls in interest due on the
Class A-3 Certificates in respect of prior
Remittance Dates;
(iii) one month's interest on the Class B Principal
Balance to the Class B Certificateholders, together
with any previously undistributed shortfalls in
interest due on the Class B Certificates in respect
of prior Remittance Dates;
(iv) The Formula Principal Distribution Amount (as
defined below) in the following order of priority:
(a) to the Class A-1 Certificateholders until
the Class A-1 Principal Balance is reduced to
zero, together with any previously
undistributed shortfalls in Formula Principal
Distribution Amounts in respect of prior
Remittance Dates;
(b) to the Class A-2 Certificateholders until
the Class A-2 Principal Balance is reduced to
zero, together with any previously
undistributed shortfalls in Formula Principal
Distribution Amounts in respect of prior
Remittance Dates;
(c) to the Class A-3 Certificateholders until
the Class A-3 Principal Balance is reduced to
zero, together with any previously
undistributed shortfalls in Formula Principal
Distribution Amounts in respect of prior
Remittance Dates;
(v) the Formula Principal Distribution Amount (less
the portion thereof, if any, distributed pursuant to
clause (iv) above) to the Class B Certificateholders
until the Class B Principal Balance is reduced to
zero; and
(vi) any remainder to the holder of the Class R
Certificates, which will initially be a special
purpose subsidiary of the Company.
The Principal Balance of each Class of Certificates
is its original Principal Balance reduced by all
distributions on such Class in reduction of its
Principal Balance. The Class A Principal Balance is
the sum of the Class A-1, Class A-2 and Class A-3
Principal Balances.
The Formula Principal Distribution Amount in respect
of a Remittance Date equals the sum of (i) all
scheduled payments of principal due on each
outstanding Contract during the Due Period preceding
the month in which the Remittance Date occurs, (ii)
the Scheduled Principal Balance (as defined below)
of each Contract which, during the due Period
preceding the month of such Remittance Date, was
purchased by the Company pursuant to the Agreement
on account of certain breaches of its
representations and warranties, (iii) all Partial
Prepayments (as defined in the Agreement) received
during such preceding Due Period, (iv) the Scheduled
Principal Balance of each contract that was prepaid
in full during such preceding due Period, (v) the
Scheduled Principal Balance of each Contract that
became a Liquidated Contract during such preceding
Due Period and (vi) any previously distributed
shortfalls in the amounts in clauses (i) through (v)
in respect of the prior Remittance Dates. The Due
Period with respect to any Remittance Date is the
period beginning on the 26th day of the second month
preceding the month of such Remittance Date and
ending on the 25th day of the month preceding the
month of such Remittance Date.
The Scheduled Principal Balance of a Contract for
any Due Period is its principal balance after giving
effect to any previous Partial Prepayments and after
giving effect to all previous scheduled principal
payments (whether or not paid) and the scheduled
principal payment, or payments, in the case of
Biweekly Contracts, due on the Due Date (or due
Dates, as applicable) in that due Period, but
without giving effect to any adjustments due to
bankruptcy or similar proceedings.
In general, a Liquidated Contract is a defaulted
Contract as to which all amounts that the Servicer
expects to recover through the date of disposition
of the Manufactured Home and any real property
securing such Contract have been received.
Notwithstanding the prioritization of the
distribution of the Formula Principal Distribution
Amount between the Senior Certificates pursuant to
clause (iv) (a) and (b) above, on and after the
Remittance Date, if any, on which the Deficiency
Event occurs, the Available Distribution Amount
remaining after making the distribution required by
clauses (i) and (ii) above will be applied to
distribute the Formula Principal Distribution Amount
on each Class of Senior Certificates pro rata in
accordance with the outstanding Principal Balance of
the Senior Certificates. The "Deficiency Event"
will occur if the sum of the Principal Balances of
each Class of Senior Certificates becomes equal to
or greater than the Pool Scheduled Principal
Balance. The "Pool Scheduled Principal Balance" as
of a Remittance Date is equal to the Original
Contract Pool Principal Balance less the aggregate
of the Formula Principal Distribution Amounts
(exclusive of the amounts in clause (vi) of the
definition thereof) for all prior Remittance Dates.
In no event will the aggregate distributions of
principal to the Class A-1, Class A-2, Class A-3 or
Class B Certificateholders exceed the Original Class
A-1 Principal Balance, the Original Class A-2
Principal Balance, the Original Class A-3 Principal
Balance or the Original Class B Principal Balance,
respectively.
Effect of Priority
Sequence of
Principal
Distributions All principal amounts described in clauses (iv)(a)
through (iv)(c) above will be distributed, to the
extent of the Available Distribution Amount after
payment of interest on the Class A Certificates and
the Class B Certificates, to the Class A
Certificateholders (but only to the extent of the
outstanding Class A Principal Balance). This
should, unless offset by other cash flow
insufficiencies due to delinquencies and liquidation
losses, have the effect of accelerating the
amortization of the Class A Certificates, and
delaying the amortization of the Class B
Certificates, from what it would be without such
prioritization, thereby increasing the respective
interest in the Trust Fund evidenced by the Class B
Certificates. Increasing the respective interest of
the Class B Certificates relative to that of the
Class A Certificates is intended to preserve the
availability on each Remittance Date of the
subordination provided by the Class B Certificates.
See "Description of the Certificates."
Prepayment
Considerations
and Yield
Considerations In general, the Contracts may be prepaid at any time
without penalty and, accordingly, the rate of
principal payments thereon is likely to vary
considerably from time to time. The Offered
Certificates may be sold at a discount to their
principal amounts. A slower than anticipated rate
of principal payments on the Contracts is likely to
result in a lower than anticipated yield on the
Offered Certificates if they are purchased at a
discount. See "Yield Considerations" and "Maturity
and Prepayment Considerations" in the Prospectus.
Pre-Funding Account During the period (the "Funding Period") from and
including the Closing Date until the earliest of (a)
the Determination Date on which the amount on
deposit in the Pre-Funding Account is equal to $
or less, (b) the occurrence of an Event of
Default under the Agreement, (c) the occurrence of
certain events of insolvency with respect to the
Seller or the Servicer or (d) the Determination Date
with respect to the , 199_ Distribution
Date, the Pre-Funded Amount will be maintained as an
account in the name of the Trustee (the "Pre-Funding
Account"). The Pre-Funded Amount will initially
equal $ , and, during the Funding Period, will be
reduced by the amount thereof used to purchase
Contracts in accordance with the Agreement and the
amount thereof deposited in the Reserve Account in
connection with the purchase of such Contracts.
The Seller expects that the Pre-Funded Amount will
be reduced by $ or less by the , 199_
Distribution Date. Any Pre-Funded Amount
remaining at the end of the Funding Period will be
payable to the Certificateholders as described
above.
Reserve Fund At the time of the initial issuance of the
Certificates, a Reserve Fund in the initial amount
of $ will be established as part of the
Trust Fund for the benefit of the Class B
Certificateholders. Subject to the limitation of
the Maximum Reserve Fund Draw Amount described
below, prior to each Remittance Date a withdrawal
will be made from the Reserve Fund in the amount
(the "Reserve Fund Draw Amount") equal to the
lesser of (i) the amount then on deposit in the
Reserve Fund and (ii) the amount of the Aggregate
Net Liquidation Losses for the preceding Due Period,
as described below. On any Remittance Date the
Reserve Fund Draw Amount will not exceed the amount
(the "Maximum Reserve Fund Draw Amount") equal to
the sum of (i) any shortfall in interest required
to be distributed to Class B Certificateholders on
such Remittance Date, (ii) if such Remittance Date
is on or prior to the date on which the Class A
Principal Balance is reduced to zero, the Class B
Principal Loss Amount, if any, for such Remittance
Date and (iii) if such Remittance Date is after the
date on which the Class A Principal Balance is
reduced to zero, any shortfall in the Formula
Principal Distribution Amount required to be
distributed to Class B Certificateholders out of
the Available Distribution Amount for such
Remittance Date. The "Class B Principal Loss
Amount" is equal to the amount, if any, by which the
Available Distribution Amount (after subtracting
therefrom the interest required to be distributed to
the Class A Certificateholders and Class B
Certificateholders on such date), is less than the
Formula Principal Distribution Amount (exclusive of
the amount in clause (vi) of the definition thereof)
for such Remittance Date. Such Class B Principal
Loss Amount represents future principal payments on
the Contracts that, because of the subordination of
the Class B Certificates and liquidation losses on
Liquidated Contracts, may be distributed to the
Class A Certificateholders rather than the Class B
Certificateholders. See "Description of the
Certificates--Distributions."
With respect to each Remittance Date, the "Aggregate
Net Liquidation Losses" will be the amount, if any,
by which (a) the aggregate of the outstanding
principal balances of those Contracts that became
Liquidated Contracts during the Due Period ending
prior to the month of such Remittance Date plus
accrued and unpaid interest thereon (adjusted to the
Net Contract Rate) exceeds (b) the aggregate Net
Liquidation Proceeds for such Contracts.
Funds in the Reserve Fund will be invested in
Eligible Investments as directed by the holder of
the Residual Interest. The net investment earnings,
if any, in respect of a Remittance Date will be
. The amount available in the Reserve Fund will
be reduced by the Reserve Fund Draw Amounts. All
Eligible Investments on deposit in the Reserve Fund
must mature or be redeemable no later than the
business day preceding each Remittance Date.
On the Remittance Date, if any, on which, after
giving effect to the withdrawal, if any, of the
related Reserve Fund Draw Amount and to any
reduction of the Class B Principal Balance to be
effected on such date, the amount on deposit in the
Reserve Fund is at least equal to the Class B
Principal Balance, the amount on deposit in the
Reserve Fund will be distributed to the Class B
Certificateholders to the extent necessary to
reduce the Class B Principal Balance to zero. No
assurance can be given as to whether or not such
distribution will occur, or, if it does occur, as to
when it will occur. See "Yield and Prepayment
Considerations."
Subordination of
the Class B and
Class R
Certificates The rights of holders of the Class B Certificates
and Class R Certificates to receive distributions
of amounts collected on the Contracts in the Trust
Fund will be subordinated, to the extent described
herein, to such rights of the holders of the Class A
Certificates. This subordination is intended to
enhance the likelihood of receipt by the holders of
the Class A Certificates of the full amount of the
scheduled monthly payments of interest and the
ultimate receipt by such holders of principal equal
to the Original Class A Principal Balance.
The protection afforded to the holders of Class A
Certificates by means of the subordination, to the
extent provided herein, of the Class B and Class R
Certificates will be accomplished (i) by the
application of the Available Distribution Amount in
the order specified under "Distributions" above and
(ii) if the Available Distribution Amount on such
Remittance Date is not sufficient to permit the
Distribution of the entire Formula Principal
Distribution Amount to the Class A
Certificateholders, by the right of the Class A
Certificateholders to receive, until the Class A
Principal Balance is reduced to zero, a portion of
the future Distributions of Available Distribution
Amounts that would otherwise have been payable to
the holders of the Class B and Class R Certificates.
See "Description of the Certificates--Subordination
of Class B and Class R Certificates" herein.
Subordination of
the Class A-3
Certificates The rights of the holders of the Class A-3
Certificates to receive distributions of amounts
collected on the Contracts in the Trust Fund will
also be subordinated to such rights of the holders
of the Senior Certificates.
The protection afforded to the holders of Senior
Certificates by means of the subordination of the
Class A-3 Certificates will be accomplished (i) by
the application of the Available Distribution Amount
in the order specified under "Distributions" above,
and (ii) if the Available Distribution Amount on any
Remittance Date is not sufficient to permit the
distribution of the entire Formula Principal
Distribution Amount to the Senior
Certificateholders, by the right of such
Certificateholders, to receive, until any such
shortfall is distributed, a portion of the future
distributions of Available Distribution Amounts that
would otherwise have been distributable to the
holders of the Class A-3 Certificates or Class B or
Class R Certificates.
See "Description of the Certificates--Subordination
of Class A-3 Certificates" herein.
Losses on
Liquidated
Contracts As described above, the distribution of principal to
the Class A Certificateholders is intended to
include the Scheduled Principal Balance of each
contract that became a Liquidated Contract during
the Due Period immediately preceding the month of
such distribution. If the Liquidation Proceeds, net
of related Liquidation Expenses, from such
Liquidated Contract are less than the Scheduled
Principal Balance of such Liquidated Contract, and
accrued and unpaid interest thereon, then to the
extent such deficiency is not covered by such excess
interest collections, the deficiency may, in effect,
be absorbed by the Class A-3 or Class B
Certificateholders since a portion of future
Available Distribution Amounts funded by future
principal collections on the Contracts, up to the
aggregate amount of such deficiencies, that would
otherwise have been distributable to them may be
paid to the Senior Certificateholders.
If the Available Distribution Amount for any
Remittance Date is not sufficient to cover, in
addition to interest distributable to the Class A
Certificateholders, the entire Formula Principal
Distribution Amount distributable to the Class A
Certificateholders then entitled to such payment on
such Remittance Date, then the amount of the Pool
Scheduled Principal Balance available to the Class B
Certificates (i.e., such Pool Scheduled Principal
Balance less the Class A Principal Balance) on
future Remittance Dates will be reduced. If,
because of liquidation losses, the Pool Scheduled
Principal Balance were to decrease proportionately
faster than distributions to the Class A
Certificateholders reduce the Class A Principal
Balance, the level of protection afforded by the
subordination of the Class B Certificates (i.e., the
percentage of the Pool Scheduled Principal Balance
available to the Class B Certificates) would be
reduced. On each Remittance Date, if any, on or
after the date on which the Class A Principal
Balance equals or becomes greater than the Pool
Scheduled Principal Balance, and so long as the
Class A-3 Certificates are outstanding, the Class
A-3 Certificateholders will receive only their
respective Percentage Interests of Liquidation
Proceeds (net of Liquidation Expenses) realized in
respect of Liquidated Contracts and will therefore
bear all losses on Liquidated Contracts (with no
ability to recover the amount of any liquidation
loss from future principal collections on the
Contracts) and incur a loss on their investment in
the Class A-3 Certificates. On each Remittance
Date, if any, on or after the date on which the sum
of the Principal Balances of the Senior Certificates
equals or becomes greater than the Pool Scheduled
Principal Balance, the Senior Certificateholders
will receive only their respective percentage
interest of Liquidation Proceeds (net of Liquidation
Expenses) realized in respect of Liquidated
Contracts, rather than the Scheduled Principal
Balances thereof, and will therefore bear all losses
on Liquidated Contracts (with no ability to recover
the amount of any liquidation loss from future
principal collections on the Contracts) and incur a
loss on their investment in the Senior Certificates.
S e e " D e s c r i p t i o n o f t h e
Certificates--Subordination of the Class B and Class
R Certificates" and "Subordination of the Class A-3
Certificates," and "Yield and Prepayment
Considerations."
Monthly Advance For each Remittance Date, the Servicer will be
obligated to make advances ("Monthly Advances") in
respect of delinquent scheduled payments on the
Contracts that were due in the preceding Due Period
and would, in the Servicer's judgment, be
recoverable from related late payments, Liquidation
Proceeds or otherwise. Assuming that in the
judgment of the Servicer all delinquent payments on
the Contracts were recoverable, the amount of the
Monthly Advance paid out of the funds of the
Servicer is calculated such that, if it is made, it
will permit a distribution to both the Class A
Certificateholders and Class B Certificateholders
undiminished by such delinquent payments. Monthly
Advances are reimbursable to the Servicer as
described under "Description of Certificates--
Advances."
Optional Repurchase
of the Contracts by
the Servicer The Servicer has the option to purchase, on any
Remittance Date, from the Trust Fund all Contracts
then outstanding and all other property in the Trust
Fund if on the preceding Remittance Date the Pool
Scheduled Principal Balance was less than 10% of the
Original Contract Pool Principal Balance. See
"Description of the Certificates--Optional
Termination" herein.
The Contracts Fixed rate manufactured housing installment sales
contracts and installment loan agreements
(collectively, the "Contracts") secured by security
interests in manufactured homes, as defined herein
(the "Manufactured Homes"), purchased with the
proceeds of the Contracts and, with respect to
certain of the Contracts ("Land-and-Home
Contracts"), secured by liens on the real estate on
which the related Manufactured Homes are located.
The Contract Pool consists of Contracts having an
aggregate unpaid principal balance as of the Cut-off
Date of approximately $ . of the
Contracts, having an aggregate unpaid principal
balance of approximately $ as of the
Cut-off Date, are manufactured housing installment
sales contracts originated or purchased by the
Company, or originated by a manufactured housing
dealer and purchased by the Company from such
dealer.
Certain of these dealers are affiliates of CHI, the
parent of the Company. The Company purchased the
remaining Contracts (the "Acquired Contracts")
having an aggregate unpaid principal balance of
approximately $ as of the Cut-off Date,
from different financial institutions, as described
under "The Contract Pool" herein. The Contracts, as
of origination, were secured by Manufactured Homes
located in states or the District of Columbia
and have been selected by the Company from the
Company's portfolio of manufactured housing
installment sale contracts and installment loans on
the basis of criteria specified in the Agreement.
Substantially all of the Contracts bear interest at
an annual percentage rate ("APR") which is equal to
or higher than any of the Class A-1 Remittance Rate
or the Class A-2 Remittance Rate plus 1.25%.
Monthly or bi-weekly payments of principal and
interest on the Contracts will be due on various
days (each a "Due Date") throughout each Due Period,
as defined herein. Approximately % of the
Contracts by Cut-off Date principal balance have
scheduled level payments of principal and interest
due every two weeks (the "Bi-weekly Contracts") and
the remainder one such payment due each month. The
APRs on the Contracts range from % to
% with a weighted average of approximately %
each as of the Cut-off Date. The Contracts had a
weighted average term to scheduled maturity as of
origination of approximately months and a
weighted average term to scheduled maturity as of
the Cut-off Date of approximately months.
The final scheduled payment date on the Contract
with the latest maturity is in . The
Contracts in the Contract Pool were originated from
through , inclusive. See "The Contract
Pool" herein and "Yield Considerations" in the
Prospectus. The Agreement requires the Servicer to
maintain one or more standard hazard insurance
policies with respect to each Manufactured Home
(other than a Manufactured Home in repossession) in
an amount at least equal to the lesser of its
maximum insurable value or the remaining principal
balance on the related Contract. The standard
hazard insurance policies, at a minimum, are
required to provide fire and extended coverage on
terms and conditions customary in manufactured
housing hazard insurance policies, with customary
deductible amounts. No other insurance policies
will be provided with respect to any Contract or the
Contract Pool. See "Description of the
Certificates--Servicing" in the Prospectus.
Security Interests
and Mortgages on
the Manufactured
Homes; Repurchase
or Substitution
Obligations In connection with the transfer of the Contracts to
the Trustee, the Company will assign the security
interests in the Manufactured Homes or, with respect
to the Land-and-Home Contracts, the liens on the
real property on which the Manufactured Homes are
located to the Trustee. The Servicer, with the
cooperation of the Company, is required to take such
steps as are necessary to perfect and maintain
perfection of the security interest in each
Manufactured Home, but as long as the Company is the
Servicer, the Servicer will not be required to cause
notations to be made on any document of title
relating to any Manufactured Home or to execute any
instrument relating to any Manufactured Home (other
than a notation or a transfer instrument necessary
to show the Company as the lienholder or legal
titleholder). The Company generally will not record
the assignment to the Trustee of the mortgages or
deeds of trust securing the Land-and-Home Contracts
because of the expense and administrative
inconvenience involved. Consequently, the security
interests in the Manufactured Homes in certain
states may not be effectively transferred to the
Trustee or perfected. See "Risk Factors--Security
Interests and Mortgages on the Manufactured Homes"
in the Prospectus.
To the extent such security interest is perfected
and is effectively transferred to the Trustee, the
Trustee will have a prior claim over subsequent
purchasers of the Manufactured Home and holders of
subsequently perfected security interests. Under
the laws of most states, Manufactured Homes
constitute personal property, and perfection of a
security interest in the Manufactured Home is
obtained, depending on applicable state law, either
by noting the security interest on the certificate
of title for the Manufactured Home or by filing a
financing statement under the Uniform Commercial
Code. If the Manufactured Home were relocated to
another state without reperfection of the security
interests, or if the Manufactured Home were to
become attached to its site and a determination were
made that the security interest was subject to real
estate title and recording laws, or as a result of
fraud or negligence, the Trustee could lose its
prior perfected security interest in a Manufactured
Home. Federal and state consumer protection laws
impose requirements upon creditors in connection
with extensions of credit and collections on
installment sales contracts, and certain of these
laws make an assignee of such a contract, such as
the Trust Fund, liable to the obligor thereon for
any violation by the lender. The Company is
obligated, subject to certain conditions described
under "Description of the Certificates--Conveyance
of Contracts," to repurchase or, at its option, to
substitute another contract for, any Contract as to
which it has failed to perfect a security interest
in the Manufactured Home securing such Contract, or
as to which a breach of federal or state laws exists
if such breach materially adversely affects the
Trustee's interest in the Contract, unless such
failure or breach has been cured within 90 days from
notice of such breach. See "Risk Factors--Security
Interests Mortgages on the Manufactured Homes",
"--Consumer Protection Laws and Other Limitations on
Lenders" and "--Priority of Possible Tennessee Tax
Lien" in the Prospectus.
The discussion in the previous paragraph as it
relates to maintaining a security interest in a
Manufactured Home does not apply to any Mortgages
securing Land-and-Home Contracts. See "Risk
Factors--Security Interests and Certain Other
Aspects of the Contracts" herein for a description
of certain considerations relating to the assignment
of liens on the real property securing Land-and-Home
Contracts.
Certain Federal
Income Tax
Consequences For federal income tax purposes, the Trust Fund will
be treated as a real estate mortgage investment
conduit ("REMIC"). The Class A and Class B
Certificates will constitute "regular interests" in
the REMIC and generally will be treated as debt
instruments of the Trust Fund for federal income tax
purposes with payment terms equivalent to the terms
of such Certificates. The Class R Certificates will
be treated as the residual interest for federal
income tax purposes. The Class A and Class B
Certificates may be issued with original issue
discount for federal income tax purposes. For
purposes of determining the amount and the rate of
accrual of original issue discount and market
discount, the Company intends to assume that there
will be prepayments on the Contracts at a rate equal
to ( ) of the Prepayment Model as defined
herein. No representation is made as to whether the
Contracts will prepay at that rate or any other
rate. See "Certain Federal Income Tax Consequences"
in the Prospectus.
ERISA Considerations A fiduciary of an employee benefit plan subject to
the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), or Section 4975 of the
Internal Revenue Code of 1986, as amended (the
"Code"), should carefully review with its legal
advisors whether the purchase or holding of the
Senior Certificates could give rise to a transaction
prohibited or not otherwise permissible under ERISA
or the Code. See "ERISA Considerations" herein and
in the Prospectus.
An employee benefit plan or other plan subject to
ERISA and/or Section 4975 of the Code will not be
permitted to purchase or hold the Class A-3 or Class
B Certificates unless the opinion of counsel
described under "ERISA Considerations" is delivered
to the Trustee. See "ERISA Considerations" herein
and in the Prospectus.
Legal Investment
Considerations The Class A-1 and Class A-2 Certificates will
constitute "mortgage related securities" under the
Secondary Mortgage Market Enhancement Act of 1984
and, as such, will be "legal investments" for
certain types of institutional investors to the
extent provided in that Act.
Since the Class A-3 and Class B Certificates will
not be rated by a nationally recognized rating
agency in one of its two highest rating categories,
the Class A-3 and Class B Certificates will not
constitute "mortgage related securities" under the
Secondary Mortgage Market Enhancement Act of 1984.
No representation is made as to the appropriate
characterization of the Class A-3 or Class B
Certificates under any laws relating to investment
restrictions, as to which investors should consult
their legal advisors. See "Legal Investment
Considerations" herein and in the Prospectus.
Rating It is a condition to the issuance of the Class A-1
and Class A-2 Certificates that they be rated "AAA"
by Standard & Poor's Corporation ("S&P"). It is a
condition to the issuance of the Class A-3
Certificates that they be rated at least "A" by S&P.
It is a condition to the issuance of the Class B
Certificates that they be rated at least "BBB" by
S&P.
The Company has not requested a rating on the
Certificates by any rating agency other than S&P.
However, there can be no assurance as to whether any
other rating agency will rate the Certificates, or
if it does, what rating would be assigned by any
such other rating agency. A rating on any or all of
the Certificates by certain other rating agencies,
if assigned at all, may be lower than the rating
assigned to such Certificates by S&P. A security
rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or
withdrawal at any time. See "Ratings" in the
Prospectus.
Registration of the
Offered Certificates The Offered Certificates initially will be
represented by certificates registered in the name
of Cede & Co. ("Cede") as the nominee of The
Depository Trust Company ("DTC"), and will only be
available in the form of book-entries on the records
of DTC and participating members thereof.
Certificates representing the Offered Certificates
will be issued in definitive form only under the
limited circumstances described herein. All
references herein to "holders" or "holders of the
Offered Certificates" shall reflect the rights of
Owners of the Offered Certificates as they may
indirectly exercise such rights through DTC and
participating members thereof, except as otherwise
specified herein. See "Risk Factors" and
"Description of the Certificates--Registration of
the Offered Certificates" herein and "Description
of the Certificates--Global Certificates" in the
Prospectus.
RISK FACTORS
Prospective investors in the Offered Certificates should consider among
other things, the following risk factors and the risk factors in the
Prospectus in connection with the purchase of the Offered Certificates. See
"Risk Factors" in the Prospectus.
1. General. An investment in the Offered Certificates evidencing
interests in Contracts may be affected by, among other things, a downturn in
regional or local economic conditions. These regional or local economic
conditions are often volatile and historically have affected the delinquency,
loan loss and repossession experience of manufactured housing installment
sales contracts. The geographic location of the Manufactured Homes is set
forth under "The Contract Pool" herein. See "The Trust Fund--The Contract
Pools" in the Prospectus. Moreover, regardless of its location, manufactured
housing generally depreciates in value. Consequently, the market value of
the Manufactured Homes could be or become lower than the principal balances
of the related Contracts. See "The Contract Pool" herein. Such high
delinquencies and liquidation losses on the Contracts will have the effect of
reducing, and could eliminate, the protection against loss afforded by, with
respect to the Class A Certificates, the subordination of the Class B
Certificates and the effect of applying a portion of the Accelerated
Principal Distribution Amount, if any, to reduce the Class A Principal
Balance. If such protection is eliminated, the Class A Certificateholders
will bear the risk of losses on the Contracts and must rely on the value of
the Manufactured Homes for recovery of the outstanding principal of and
unpaid interest on any defaulted Contracts. See "Description of the
Certificates--Subordination of Class B Certificates." (With respect to the
Class B Certificates, sufficiently high delinquencies and liquidation losses
on the Contracts will have the effect of reducing, and could eliminate, the
protection against loss afforded by the amounts otherwise distributable to
the Class R Certificateholders.)
Certain statistical information relating to the losses experienced by
the Company and its affiliates upon the liquidation of certain manufactured
housing contracts is set forth herein under "Vanderbilt Mortgage and Finance,
Inc.--Delinquency and Loan Loss Repossession Experience." Such statistical
information relates only to certain manufactured housing contracts serviced
by the Company during the periods indicated and is included herein only for
illustrative purposes. There is no assurance that the Contracts will have
the characteristics that are similar to the manufactured housing contracts to
which such statistical information relates. In addition, the losses
experienced upon recovery of principal upon the liquidation of manufactured
housing contracts historically has been sharply affected by downturns in
regional or local economic conditions. These regional or local economic
conditions are often volatile, and no predictions can be made regarding
future economic loss upon liquidation. In light of the foregoing, no
assurance can be given that the losses experienced upon the liquidation of
defaulted Contracts will be similar to any statistical information contained
herein under "Vanderbilt Mortgage and Finance, Inc.--Delinquency and Loan
Loss/Repossession Experience." See "The Trust Fund--The Contract Pools" in
the Prospectus.
2. Prepayment Considerations. The prepayment experience on the
Contracts may affect the average life of the Offered Certificates. In the
event a Contract is prepaid in full, interest on such Contract will cease to
accrue on the date of prepayment. If such prepayments and related interest
shortfalls were sufficiently high in a month, the Available Distribution
Amount for the next Remittance Date could be less than the amount of
principal and interest that would be distributable to the Class A and Class B
Certificateholders in the absence of such shortfalls. See "Yield and
Prepayment Considerations" herein and "Maturity and Prepayment
Considerations" in the Prospectus.
3. Limited Obligations. The Certificates will not represent an
interest in or obligation of the Company. The Certificates will not be
insured or guaranteed by any governmental agency or instrumentality, the
Underwriters or any of their affiliates, or the Company or any its affiliates
and will be payable only from amounts collected on the Contracts.
4. Limited Liquidity. There can be no assurance that a secondary
market will develop for any Class of Offered Certificates or, if it does
develop, that it will provide the holders of the Offered Certificates with
liquidity of investment or that it will remain for the term of the Offered
Certificates. Issuance of the Offered Certificates in book-entry form may
reduce the liquidity of such Certificates in the secondary trading market
since investors may be unwilling to purchase Offered Certificates for which
they cannot obtain physical certificates. See "Description of the
Certificates--Registration of the Offered Certificates" herein. The Class
A-3 and Class B Certificates will not constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA"). Accordingly, many institutions with legal authority to
invest in SMMEA securities will not be able to invest in the Class A-3 and
Class B Certificates, limiting the market for such securities.
5. Security Interests and Certain Other Aspects of the Contracts. A
variety of factors may limit the ability of the Certificateholders to realize
upon the Manufactured Homes securing the contracts or may limit the amount
realized to less than the amount due. See "Risk Factors--Security Interests
and Mortgages on the Manufactured Homes" and "--Consumer Protection Laws and
Other Limitations on Lenders" in the Prospectus.
6. Certain Matters Relating to Insolvency. The bankruptcy or
insolvency of the Company could have certain consequences for the holders of
the Offered Certificates. See "Risk Factors--Certain Matters Relating to
Insolvency" in the Prospectus.
7. Priority of Possible Tennessee Tax Lien. See "Risk Factors--
Priority of Possible Tennessee Tax Lien" in the Prospectus.
8. Louisiana Law. See "Risk Factors--Louisiana Law" in the
Prospectus.
9. Limitations on Subordination. See "Risk Factors--Limitations on
Subordination" in the Prospectus.
10. Difficulty in Pledging. Since transactions in the Offered
Certificates can be effected only through The Depository Trust Company
("DTC"), participating organizations, indirect participants and certain
banks, the ability of a Certificate Owner of the Offered Certificates to
pledge an Offered Certificate to persons or entities that do not participate
in the DTC system, or otherwise to take action in respect of such
Certificates, may be limited due to lack of a physical certificate
representing the Offered Certificates. See "Description of the Certificates-
- -Registration of the Offered Certificates" herein.
11. Potential Delays in Receipt of Distributions. Owners of the
Offered Certificates may experience some delay in their receipt of
distributions of interest and principal on the Offered Certificates since
such distributions will be forwarded by the Trustee to DTC and DTC will
credit such distributions to the accounts of its Participants (as defined
herein), which will thereafter credit them to the accounts of Owners of the
Offered Certificates either directly or indirectly through indirect
participants. See "Description of the Certificates--Registration of the
Offered Certificates" herein.
12. Pre-Funding Account. To the extent that amounts on deposit in the
Pre-Funding Account have not been fully applied to the conveyance of
Contracts to the Trust by the end of the Funding Period and such amount
exceeds $_______________, the Certificateholders will receive, on the
Distribution Date on or immediately following the last day of the Funding
Period, a prepayment of principal in an amount equal to the applicable
Pre-Funded Percentage, in respect of a class of the Certificates, of the
Pre-Funded Amount remaining in the Pre-Funding Account following the purchase
of any Contracts on the related Determination Date. If such remaining
Pre-Funded Amount is equal to S or less, the entire amount thereof will be
paid as principal of the Class Certificates up to an amount not to exceed
their outstanding balance, with any remaining amount used to redeem the Class
Certificates. It is anticipated that the principal amount of Contracts sold
to the Trust will not be exactly equal to the amount on deposit in the
Pre-Funding Account and that therefore there will be at least a nominal
amount of principal prepaid to the Class Certificateholders.
THE CONTRACT POOL
All of the Contracts in the Trust Fund (the "Contract Pool") were
purchased or originated by the Company. Each Contract is a manufactured
housing installment sales contract or installment loan agreement
(manufactured housing installment sales contracts and installment loan
agreements being collectively referred to herein as "manufactured housing
contracts" or "contracts").
A description of the Company's general practice with respect to the
origination or purchase, on an individual basis, of manufactured housing
contracts is set forth herein under "Vanderbilt Mortgage and Finance, Inc."
in the Prospectus.
Under the Agreement, the manufactured homes securing the Contracts (the
"Manufactured Homes") are required to comply with the requirements of certain
federal statutes which generally would require the Manufactured Homes to have
a minimum of 400 square feet of living space and a minimum width of 102
inches and to be of a kind customarily used at a fixed location. Such
statutes would also require the Manufactured Homes to be transportable in one
or more sections, built on a permanent chassis and designed to be used as
dwellings, with or without permanent foundations, when connected to the
required utilities. The Manufactured Homes are also required to include the
plumbing, heating, air conditioning, and electrical systems therein.
Management of the Company estimates that in excess of 95% of the Manufactured
Homes are used as primary residences by the Obligors under the Contracts
secured by such Manufactured Homes.
The Agreement requires the Servicer to maintain hazard insurance
policies with respect to each Manufactured Home in the amounts and manner set
forth herein under "Description of the Certificates--Servicing" in the
Prospectus. Generally, no other insurance will be maintained with respect
to the Manufactured Homes, the Contracts or the Contract Pool.
The Company will cause to be conveyed to the Trustee the Contracts and
all rights to receive payments due on the Contracts on or after ,
199 , including payments due on or after , 199 but received prior
to such date. The right to payments that were due prior to , 199
but which are received after such date will be the property of the Company
when collected. The Servicer will retain physical possession of the Contract
documents. See "Description of the Certificates--Conveyance of Contracts."
The Contract Pool will consist of Contracts having an aggregate
principal balance as of the Cutoff Date of approximately $ . Each
Contract was originated on or after . of the Contracts,
having an aggregate unpaid principal balance of approximately $ as of
the Cut-off Date, are manufactured housing installment sale contracts
originated by a manufactured housing dealer and purchased by the Company from
such dealer or originated by the Company. Certain of these dealers are
affiliates of CHI, the parent of the Company. The Company purchased the
remaining Contracts (the "Acquired Contracts"), having an aggregate unpaid
principal balance of approximately $ as of the Cut-off Date, from
____________________.
Based solely upon the Company's review of a sample of the Acquired
Contracts undertaken in connection with its purchase of such Contracts from
such institutions, the Company's management does not believe that the
Acquired Contracts, as a whole, were underwritten in accordance with
underwriting standards that are as strict as those used by the Company in
underwriting contracts that it originates or purchases on an individual
basis. See "Underwriting Policies" in the Prospectus.
Approximately % of the Contracts (the "Bi-weekly Contracts") by
Cut-off Date principal balance have bi-weekly scheduled payments of principal
and interest, and the remainder of the Contracts have monthly scheduled
payments of principal and interest. Under a Bi-weekly Contract the obligor
authorizes the Company to automatically debit the obligor's account for the
payment of each scheduled payment. If the obligor terminates such account or
the authorization of the Company to debit such account, then such Biweekly
Contract is converted to a Contract with scheduled monthly payments.
Approximately % of the Contracts (the "Escalating Principal Payment
Contracts") by principal balance as of the Cut-off Date provide for an annual
increase in monthly payments over the first five years of the term of the
Contract. Under an Escalating Principal Payment Contract, the original term
of the contract is 36 years, providing initially for lower monthly payments
than if the contract were of a shorter term. Each year for a period of five
years, the term of the Escalating Principal Payment Contract automatically
converts to a shorter term, and the monthly payment increases accordingly.
At year six, the monthly payment increases to a level monthly payment which
full amortizes the remaining principal over a twelve year term. There is no
period in which the Escalating Principal Payment Contracts have negative
amortization.
Each Contract has a fixed annual percentage rate of interest (the "APR")
and provides for level payments over the term of such Contract that fully
amortize the principal balance of the Contract. All of the Contracts are
actuarial obligations as follows: The portion of each scheduled payment for
any Contract allocable to principal is equal to the total amount thereof less
the portion allocable to interest. The portion of each scheduled payment due
in a particular month that is allocable to interest is a precomputed amount
equal to one month's interest (or 14 days' interest in the case of a
Bi-weekly Contract) on the principal balance of the Contract, which principal
balance is determined by reducing the initial principal balance by the
principal portion of all scheduled payments that were due in prior months
(whether or not such scheduled payments were timely made) and all prior
partial principal prepayments. Thus, each payment allocated to a scheduled
monthly or bi-weekly payment of a Contract will be applied to interest and to
principal in accordance with such precomputed allocation whether such
scheduled payments are received in advance of or subsequent to their Due
Dates. All payments received on the Contracts (other than payments allocated
to items other than principal and interest or payments sufficient to pay the
outstanding principal balance of and all accrued and unpaid interest on such
Contracts) will be applied when received to current and any previously unpaid
scheduled monthly payments in the order of the Due Dates of such payments and
any payments that exceed the amount necessary to bring the Contract current
are applied to the partial prepayment of principal of the Contract.
Except as otherwise provided herein with respect to certain acquired
Contracts, for each Land-and-Home Contract, the Company financed the purchase
of the Manufactured Home and either took as additional security a Mortgage on
the property on which the Manufactured Home is located or, in certain cases,
the Company took a Mortgage on other property pledged on behalf of the
Obligor, or took a Mortgage on the property on which the Manufactured Home is
located in lieu of a down payment in the form of cash or the value of a
trade-in unit, or as additional security. Approximately % of the Contracts
by outstanding principal balance as of the Cut-off Date are secured by a
Mortgage on the Property on which the Manufactured Home is located in lieu of
a down payment in the form of cash or the value of a trade-in unit. See
"Certain Legal Aspects of the Contracts" in the Prospectus.
% of the Contracts by outstanding principal balance as of the
Cut-off Date are secured by Manufactured Homes which were new at the time the
related Contracts were originated and % of the Contracts by outstanding
principal balance as of the Cut-off Date are secured by Manufactured Homes
which were used at the time the related Contracts were originated. Each
Contract has an APR of at least % and not more than %. The weighted
average APR of the Contracts as of the Cut-off Date is approximately %.
The Contracts have remaining maturities as of the Cut-off Date of at least
___ months but not more than ___ months and original maturities of at least
___ months but not more than ___ months. As of the Cut-off Date, the
Contracts had a weighted average original term to scheduled maturity of
approximately ___ months, and a weighted average remaining term to scheduled
maturity of approximately ___ months. The remaining term to stated maturity
of a Contract is calculated as the number of months from the Cut-off Date to
the original scheduled maturity date of such Contract. The average
outstanding principal balance as of the Cut-off Date was approximately $ .
With the exception of Contracts having an aggregate principal balance as of
the Cut-off Date of approximately $ , no Contract at the time of
origination had a loan-to-value ratio in excess of ___%. The weighted
average loan-to-value ratio at the time of origination of the Contracts was
approximately ___%. "Value" in such calculation is equal to the sum of the
down payment (which includes the value of any trade-in unit), the original
amount financed on the related Contract, which may include sales and other
taxes, and, in the case of a Land-and-Home Contract, the value of the land
securing the Contract as estimated by the dealer. Manufactured Homes, unlike
site-built homes, generally depreciate in value, and it has been the
Company's experience that, upon repossession, the market value of a
Manufactured Home securing a manufactured housing contract is generally lower
than the principal balance of the related manufactured housing contract. The
Contracts are secured by Manufactured Homes and real estate located in ____
states and the District of Columbia. Approximately ___% of the Contracts by
outstanding principal balance as of the Cut-Off Date were secured by
Manufactured Homes or real estate located in North Carolina; ___% in South
Carolina; ___% in Tennessee; and ___% in Texas. No other state represented
more than ___% of the Contracts.
Set forth below is a description of certain additional characteristics
of the Contracts as of the Cut-off Date. Percentages may not add to 100.00%
due to rounding:
GEOGRAPHICAL DISTRIBUTION OF MANUFACTURED HOMES AS OF ORIGINATION
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF
NUMBER OF PRINCIPAL CONTRACT POOL
CONTRACTS BALANCE BY OUTSTANDING
AS OF OUTSTANDING PRINCIPAL BALANCE
STATE CUT-OFF DATE AS OF CUT-OFF DATE AS OF CUT-OFF DATE
<S> <C> <C> <C>
Alabama . . . . . . . . . . . . . . .
Arizona . . . . . . . . . . . . . . .
Arkansas . . . . . . . . . . . . . .
California . . . . . . . . . . . . .
Colorado . . . . . . . . . . . . . .
Connecticut . . . . . . . . . . . . .
Delaware . . . . . . . . . . . . . .
District of Columbia . . . . . . . .
Florida . . . . . . . . . . . . . . .
Georgia . . . . . . . . . . . . . . .
Illinois . . . . . . . . . . . . . .
Indiana . . . . . . . . . . . . . . .
Kansas . . . . . . . . . . . . . . .
Kentucky . . . . . . . . . . . . . .
Louisiana . . . . . . . . . . . . . .
Maryland . . . . . . . . . . . . . .
Michigan . . . . . . . . . . . . . .
Minnesota . . . . . . . . . . . . . .
Mississippi . . . . . . . . . . . . .
Missouri . . . . . . . . . . . . . .
New Jersey . . . . . . . . . . . . .
New Mexico . . . . . . . . . . . . .
New York . . . . . . . . . . . . . .
North Carolina . . . . . . . . . . .
Ohio . . . . . . . . . . . . . . . .
Oklahoma . . . . . . . . . . . . . .
Pennsylvania . . . . . . . . . . . .
Rhode Island . . . . . . . . . . . .
South Carolina . . . . . . . . . . .
Tennessee . . . . . . . . . . . . . .
Texas . . . . . . . . . . . . . . . .
Virginia . . . . . . . . . . . . . .
West Virginia . . . . . . . . . . . .
Total . . . . . . . . . . . . .
</TABLE>
YEARS OF ORIGINATION OF CONTRACTS
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF
NUMBER OF PRINCIPAL CONTRACT POOL
CONTRACTS BALANCE BY OUTSTANDING
AS OF OUTSTANDING PRINCIPAL BALANCE
YEAR OF ORIGINATION CUT-OFF DATE AS OF CUT-OFF DATE AS OF CUT-OFF DATE
<S> <C> <C> <C>
Prior to 1984 . . . . . . . . . . . . $ %
1984 . . . . . . . . . . . . . . . .
1985 . . . . . . . . . . . . . . . .
1986 . . . . . . . . . . . . . . . .
1987 . . . . . . . . . . . . . . . .
1988 . . . . . . . . . . . . . . . .
1989 . . . . . . . . . . . . . . . .
1990 . . . . . . . . . . . . . . . .
1991 . . . . . . . . . . . . . . . .
1992 . . . . . . . . . . . . . . . .
1993 . . . . . . . . . . . . . . . .
1994 . . . . . . . . . . . . . . . .
------------- ------------------- ------------------
Total . . . . . . . . . . . . . $ 100%
============= =================== ==================
</TABLE>
DISTRIBUTION OF ORIGINAL CONTRACT AMOUNTS(1)
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF
NUMBER OF PRINCIPAL CONTRACT POOL
CONTRACTS BALANCE BY OUTSTANDING
ORIGINAL CONTRACT AMOUNT AS OF OUTSTANDING PRINCIPAL BALANCE
(IN DOLLARS) CUT-OFF DATE AS OF CUT-OFF DATE AS OF CUT-OFF DATE
<S> <C> <C> <C>
$0.01 - 5,000 . . . . . . . . . . . . $ %
$ 5,001 - 10,000 . . . . . . . . . .
$10,001 - 15,000 . . . . . . . . . .
$15,002 - 20,000 . . . . . . . . . .
$20,001 - 35,000 . . . . . . . . . .
$25,001 - 30,000 . . . . . . . . . .
$30,001 - 35,000 . . . . . . . . . .
$35,001 - 40,000 . . . . . . . . . .
$40,001 - 45,000 . . . . . . . . . .
$45,001 - 50,000 . . . . . . . . . .
$50,001 - 55,000 . . . . . . . . . .
$55,001 - 60,000 . . . . . . . . . .
$60,001 - 65,000 . . . . . . . . . .
$65,001 - 70,000 . . . . . . . . . .
$70,001 - 75,000 . . . . . . . . . .
$75,001 + . . . . . . . . . . . . . .
------------- -------------------- -------------------
Total . . . . . . . . . . . . . $ 100%
============= ==================== ===================
</TABLE>
(1) The greatest original Contract amount is $ , which represents
% of the aggregate principal balance of the Contracts at
origination.
DISTRIBUTION OF ORIGINAL CONTRACT AMOUNTS(1)
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF
NUMBER OF PRINCIPAL CONTRACT POOL
CONTRACTS BALANCE BY OUTSTANDING
LOAN-TO-VALUE AS OF OUTSTANDING PRINCIPAL BALANCE
RATIO CUT-OFF DATE AS OF CUT-OFF DATE AS OF CUT-OFF DATE
<S> <C> <C> <C>
Less than or equal to 50% . . . . . . $ %
50+% - 60% . . . . . . . . . . . . .
60+% - 70% . . . . . . . . . . . . .
70+% - 80% . . . . . . . . . . . . .
80+% - 90% . . . . . . . . . . . . .
90+% - 93% . . . . . . . . . . . . .
93+% - 95% . . . . . . . . . . . . .
95+% - 96% . . . . . . . . . . . . .
96+% - 99.99% . . . . . . . . . . . .
100% . . . . . . . . . . . . . . . .
------------ ------------------- -------------------
Total . . . . . . . . . . . . . $ 100%
============ =================== ===================
</TABLE>
(1) The definition of "Value" is set forth above. Manufactured Homes,
unlike site-built homes, generally depreciate in value, and it should
generally be expected, especially with Contracts with high loan-to-value
ratios at origination, that any time after the origination of a Contract, the
market value of the Manufactured Home securing such Contract may be lower
than the outstanding principal balance of such Contract.
CONTRACT RATES
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF
NUMBER OF PRINCIPAL CONTRACT POOL
CONTRACTS BALANCE BY OUTSTANDING
RANGES OF CONTRACT BY AS OF OUTSTANDING PRINCIPAL BALANCE
CONTRACT RATE CUT-OFF DATE AS OF CUT-OFF DATE AS OF CUT-OFF DATE
<S> <C> <C> <C>
6.00% - 8.00% . . . . . . . . . . . . $ %
8.001% - 10.000% . . . . . . . . . .
10.001% - 12.000% . . . . . . . . . .
12.001% - 14.000% . . . . . . . . . .
16.001% - 18.000% . . . . . . . . . .
------------ ------------------- -------------------
Total . . . . . . . . . . . . . $ 100%
============ =================== ===================
</TABLE>
REMAINING MONTHS TO MATURITY
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF
NUMBER OF PRINCIPAL CONTRACT POOL
CONTRACTS BALANCE BY OUTSTANDING
MONTHS REMAINING AS OF OUTSTANDING PRINCIPAL BALANCE
AS OF CUT-OFF DATE CUT-OFF DATE AS OF CUT-OFF DATE AS OF CUT-OFF DATE
<S> <C> <C> <C>
$ %
------------ ------------------- ------------------
Total . . . . . . . . . . . . . $ 100%
============ =================== ==================
</TABLE>
VANDERBILT MORTGAGE AND FINANCE, INC.
The following information supplements the information in the Prospectus
under the heading "Vanderbilt Mortgage and Finance, Inc." and "Underwriting
Policies" in the Prospectus.
The volume of manufactured housing contracts originated by the Company
for the periods indicated below and certain other information at the end of
such periods are as follows:
CONTRACT ORIGINATION
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------------------------
SEPT
----
1991 1992 1993 1994 1995 1996 1997 1997/(2)/
---- ---- ---- ---- ---- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Balance of
Contracts Originated
(in thousands). . . . . $156,340 $177,311 $230,733 $292,435 $345,260 $476,467 $646,624 $149,165
Number of Contracts
Originated . . . . . 8,346 9,230 10,880 12,401 13,857 16,910 21,691 4,958
Average Contract
Size(1) . . . . . . . $ 18,732 $ 19,210 $ 21,207 $ 23,582 $24,916 $28,177 $29,811 $30,086
Average Interest
Rate(1) . . . . . . . 13.74% 13.40% 11.61% 10.84% 12.24% 10.72% 11.10% 10.85%
</TABLE>
___________________
(1) As of period end.
(2) For the three month period ended September 30, 1997.
The following table shows the size of the portfolio of manufactured
housing contracts serviced by the Company on the dates indicated:
CONTRACT SERVICING PORTFOLIO
<TABLE>
<CAPTION>
At or for Year Ended June 30,
---------------------------------------------------------------------------
SEPTEMBER
1991 1992 1993 1994 1995 1996 1997 1997/(2)/
---- ---- ---- ---- ---- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Number of
Contracts Being
Serviced(1) . . . . . 41,346 46,623 52,433 60,165 66,960 74,154 85,912 89,116
Originated by the
Company . . . . . . . 31,007 36,335 42,656 47,944 55,923 64,298 75,455 78,543
Acquired from other
institutions . . . . 10,339 10,288 9,777 12,221 11,037 9,856 10,457 10,573
</TABLE>
_____________________
(1) Excludes contracts serviced by the Company on behalf of the Resolution
Trust Corporation trust and other trusts previously serviced by First
Manufactured Housing Credit Corporation.
(2) For the three month period ended September 30, 1997.
DELINQUENCY EXPERIENCE(1)
<TABLE>
<CAPTION>
At or for year Ended June 30,
--------------------------------------------------------------
SEPTEMBER
1991 1992 1993 1994 1995 1996 1997 1997/(8)
---- ---- ---- ---- ---- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Number of Contracts
Outstanding(2)(3)................ 41,346 46,623 52,433 60,165 66,960 74,154 85,912 89,116
Company Originations............. 31,007 36,335 42,656 47,944 55,923 64,298 75,455 78,543
Acquisitions from other
institutions..................... 10,339 10,288 9,777 12,221 11,037 9,856 10,457 10,573
Number of Contracts Delinquent(4):
Total 30 to 59 days
past due......................... 734 680 610 772 819 953 1,159 1,217
Company Originations.......... 415 452 391 353 565 761 982 1,074
Acquisitions from other
institutions.................. 319 228 219 419 254 192 177 143
Total 60 to 89 days past due...... 218 206 136 209 227 285 284 350
Company Originations.......... 122 117 97 109 167 238 236 288
Acquisitions from other
institutions.................. 96 89 39 100 60 47 48 62
Total 90 days or more past due.... 452 569 407 498 625 516 590 665
Company Originations.......... 239 243 213 203 315 341 440 477
Acquisitions from other
institutions.................. 213 326 194 295 310 175 150 188
Total Contracts Delinquent(5)..... 1,404 1,455 1,153 1,479 1,671 1,754 2,033 2,232
Company Originations.......... 776 812 701 665 1,047 1,340 1,658 1,839
Acquisitions from other
institutions.................. 628 643 452 814 624 414 375 393
Total Contracts Delinquent(6)..... 1,134 1,119 857 1,184 1,208 1,511 1,789 1,984
Company Originations.......... 669 713 595 556 873 1,211 1,503 1,691
Acquisitions from other
institutions.................. 465 406 262 628 335 300 286 293
Total Delinquencies as a Percent(7) of
Contracts Outstanding(5)........ 3.40% 3.12% 2.20% 2.46% 2.50% 2.37% 2.37% 2.50%
Company Originations.......... 2.50% 2.23% 1.64% 1.39% 1.87% 2.08% 2.20% 2.34%
Acquisitions from other
institutions.................. 6.07% 6.25% 4.62% 6.66% 5.65% 4.20% 3.59% 3.72%
Total Delinquencies as a Percent(7) of
Contracts Outstanding(6)........ 2.74% 2.40% 1.63% 1.97% 1.80% 2.04% 2.08% 2.23%
Company Originations.......... 2.16% 1.96% 1.39% 1.16% 1.56% 1.88% 1.99% 2.15%
Acquisitions from other
institutions.................. 4.50% 3.95% 2.68% 5.14% 3.04% 3.04% 2.74% 2.77%
</TABLE>
__________________
(1) Includes data on contracts originated by the Company and portfolios
acquired by the Company from other financial institutions, as described
under "Vanderbilt Mortgage and Finance, Inc." in the Prospectus.
(2) Excludes contracts serviced by others for which the Company is
contingently liable.
(3) Excludes contracts serviced by the Company on behalf of the Resolution
Trust Corporation trust and other trusts previously serviced by First
Manufactured Housing Credit Corporation.
(4) Including contracts that were repossessed during the prior 30-day
period, and based on number of days payments are contractually past due
(assuming 30-day months). Consequently, a payment due on the first day
of a month is not 30 days delinquent until the first day of the
following month.
(5) Including contracts that were repossessed during the prior 30-day
period; figures for Acquisitions from other institutions at June 30,
1995 also include all such repossessed contracts on hand.
(6) Excluding contracts that were repossessed during the prior 30-day
period.
(7) By number of contracts.
(8) For the three month period ended September 30, 1997.
The following table sets forth the loan loss/repossession experience of
the Company and its affiliates for the manufactured housing contracts
serviced by the Company.
LOAN LOSS/REPOSSESSION EXPERIENCE(1)
<TABLE>
<CAPTION>
At or for Year Ended June 30,
-------------------------------------------------------------
SEPTEMBER
1991 1992 1993 1994 1995 1996 1997 1997/(8)/
---- ---- ---- ---- ---- ---- ---- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Number of Contracts
Serviced(2)(3)..................... 41,346 46,623 52,433 60,165 66,960 74,154 85,912 89,116
Company Originations........... 31,007 36,335 42,656 47,944 55,923 64,298 75,455 78,543
Acquisitions from other
institutions................... 10,339 10,288 9,777 12,221 11,037 9,856 10,457 10,573
Aggregate Principal Balance of
Contracts Serviced(4).............$622,675 $707,273 $812,430 $1,006,794 $1,200,893 $1,456,103 $1,910,438 $1,991,043
Company Originations..........$479,336 $569,475 $691,052 $852,536 $1,074,302 $1,351,324 $1,749,645 $1,827,744
Acquisitions from other
institutions......................$143,339 $137,798 $121,378 $154,258 $ 126,591 $ 104,779 $160,793 $163,299
Net Losses from Contract
Liquidations(5):
Total Dollars....................$ 5,075 $ 7,248 $ 5,220 $ 2,758 $ 2,262 $ 2,052 $ 715 $ 2,978
Company Originations..........$ 1,361 $ 2,141 $ 1,129 $ 528 $ 362 $ (442) $(1,622) $ 2,683
Acquisitions from other
institutions..................$ 3,714 $ 5,107 $ 4,091 $ 2,230 $ 1,900 $ 2,494 $ 2,337 $ 295
Percentage of Average Principal
Balance(6)....................... 0.89% 1.10% 0.64% 0.30% 0.20% 0.15% 0.04% 0.61%
Company Originations.......... 0.32% 0.41% 0.17% 0.07% 0.04% (0.04)% (0.10)% 0.60%
Acquisitions from other
institutions.................. 2.59% 3.83% 2.96% 1.62% 1.35% 2.16% 1.76% 0.73%
Total Number of Contracts in
Repossession(3)................... 617 652 523 565 540 709 755 1160
Company Originations(7)....... 349 379 333 388 422 635 703 1060
Acquisitions from Other
Institutions.................. 268 273 190 177 118 74 52 100
</TABLE>
___________________
(1) Includes data on contracts originated by the Company and portfolios
acquired by the Company from other financial institutions, as described
under "Vanderbilt Mortgage and Finance, Inc." in the Prospectus.
(2) As of period end. Excludes contracts serviced by others for which the
Company is contingently liable.
(3) Excludes contracts serviced by the Company on behalf of the Resolution
Trust Corporation trust and the other trusts previously serviced by
First Manufactured Housing Credit Corporation.
(4) As of period end. Includes principal balances of contracts serviced by
others for which the Company is contingently liable.
(5) Includes net losses on contracts serviced by others for which the
Company is contingently liable. The calculation of net losses is
determined after all accrued and unpaid interest is written off and does
not include repossession and other liquidation expenses. In general,
data with respect to repossession and other liquidation expenses are not
maintained by dealers on a separately identifiable basis, and,
therefore, this information is not available to the Company. The
Company believes that it would not be unusual for such expenses to be
equal to 15% of the Scheduled Principal Balance of a defaulted Contract.
However, actual expenses may be higher or lower.
(6) As a percentage of the average principal balance of all contracts being
serviced during the period.
(7) Includes repossessions from contracts serviced by others for which the
Company is contingently liable.
(8) For the three month period ended September 30, 1997.
The Company believes that its historical loss experience has been
favorably affected by its capacity to resell repossessed units through
dealers owned by CHI and to make needed repairs on repossessed units through
the facilities of such dealers, rather than paying the rates charged by
unaffiliated parties. If the Company is replaced as Servicer of the
Contracts, the successor Servicer may not have access to the CHI dealer
network and, as a consequence, the loss experience on the Contracts may be
adversely affected.
The data presented in the preceding tables are for illustrative purposes
only, and there is no assurance that the delinquency, loan loss and
repossession experience of Contracts in the Contract Pool will be similar to
that set forth above. The delinquency, loan loss and repossession experience
of manufactured housing contracts historically has been sharply affected by a
downturn in regional or local economic conditions. For instance, such a
downturn and higher levels of delinquency, loan loss and repossession were
experienced in areas dependent on the oil and gas industry. These regional
or local economic conditions are often volatile, and no predictions can be
made regarding future economic loss upon repossession. In addition, an
increased supply of used units in one region may in turn affect the supply in
other regions, thus affecting economic loss upon liquidation in such other
regions. Information regarding the geographic location, at origination, of
the Manufactured Homes securing the Contracts in the Contract Pool is set
forth under "The Contract Pool" herein.
RATIO OF EARNINGS TO FIXED CHARGES FOR CHI
Set forth below are CHI's ratios of earnings to fixed charges for the
past five years. For the purposes of compiling these ratios, earnings
consist of earnings before income taxes plus fixed charges. Fixed charges
consist of interest expense and the interest portion of rent expense.
<TABLE>
<CAPTION>
At or for Year Ended June 30,
----------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges . . . . . . . . 6.12 10.12 21.64 36.00 39.99
</TABLE>
YIELD AND PREPAYMENT CONSIDERATIONS
The Contracts have maturities at origination from to months,
but may be prepaid in full or in part at any time. The prepayment experience
of the contracts (including prepayments due to liquidations of defaulted
contracts) will affect the life of the Certificates. Based on the Company's
experience with the portfolio of conventional manufactured housing contracts
serviced by it, the Company anticipates that a number of Contracts will be
prepaid in full prior to their maturity. A number of factors, including
homeowner mobility, general and regional economic conditions and prevailing
interest rates may influence prepayments. In addition, repurchases of
Contracts on account of certain breaches of representations and warranties as
described below under "Descriptions of the Certificates--Conveyance of
Contracts" will have the effect of prepayment of such Contracts and therefore
will affect the life of the Certificates. Most of the Contracts contain
provisions that prohibit the owner from selling the Manufactured Home without
the prior consent of the holder of the related Contract. Such provisions are
similar to the "due-on-sale" clauses and may not be enforceable in some
states. See "Certain Legal Aspects of the Contracts--Transfers of
Manufactured Homes; Enforceability of 'Due-on-Sale' Clauses" in the
Prospectus. The initial Servicer's policy is to permit most sales of
Manufactured Homes where the proposed buyer meets the initial Servicer's then
current underwriting standards and enters into an assumption agreement. See
"Weighted Average Life of the Offered Certificates" below and "Maturity and
Prepayment Considerations" in the Prospectus.
The allocation of distributions to the Certificateholders in accordance
with the Agreement will have the effect of accelerating the amortization of
the Class A Certificates in the sequence indicated under "Description of the
Certificates--Distributions" from the amortization that would be applicable
if distributions in respect of the Formula Principal Distribution Amount were
made pro rata according to the Class A-1 Principal Balance, the Class A-2
Principal Balance, the Class A-3 Principal Balance and the Class B Principal
Balance. As described under "Description of the Certificates--Subordination
of the Class B and Class R Certificates," to the extent that, on any
Remittance Date, the Available Distribution Amount is not sufficient to
permit a full distribution of the Formula Principal Distribution Amount to
the Class of Class A Certificates entitled to such distribution, the effect
will be to delay the amortization of such Class of Class A Certificates. If
a purchaser of a Class of Class A Certificates purchases them at a discount
and calculates its anticipated yield to maturity based on an assumed rate of
payment of principal on such Class A Certificates that is faster than the
rate actually realized, such purchaser's actual yield to maturity will be
lower than the yield so calculated by such purchaser.
As described herein under "Description of the Certificates--
Subordination of the Class B Certificates," to the extent that, on any
Remittance Date, the Available Distribution Amount is not sufficient to
permit a full distribution of the Formula Principal Distribution Amount to
the Class A Certificateholders, the effect will be to cause the Class A
Certificates to be amortized more slowly than they otherwise would have been
amortized.
Unless the Class B Principal Balance is reduced to a level equal to the
amount on deposit in the Reserve Fund, except for Reserve Fund Draw Amounts
representing Class B Principal Loss Amounts, the Class B Certificateholders
will not receive any distributions of principal until the Class A Principal
Balance is reduced to zero. The rate of principal payments on the Class B
Certificates, the aggregate amount of distributions on the Class B
Certificates and the yield to maturity of the Class B Certificates will be
affected by the rate of Obligor defaults resulting in losses on Liquidated
Contracts, by the severity of those losses and by the timing of those losses.
See "Description of the Certificates--Subordination of the Class B and Class
R Certificates" herein for a description of the manner in which Class B
Principal Loss Amounts are allocated to the Class B Certificateholders. If a
purchaser of Class B Certificates calculates its anticipated yield based on
an assumed rate of default and an assumed amount of losses that are lower
than the default rate and amount of losses actually incurred and such amount
of losses actually incurred is not entirely covered by the Reserve Fund, its
actual yield to maturity will be lower than that so calculated. The timing
of losses on Liquidated Contracts and the timing of Reserve Fund Draw Amounts
will also affect an investor's actual yield to maturity, even if the rate of
defaults and severity of losses are consistent with an investor's
expectations. There can be no assurance that the delinquency or repossession
experience set forth under "Vanderbilt Mortgage and Finance, Inc." will be
representative of the results that may be experienced with respect to the
Contracts. There can be no assurance as to the delinquency, repossession or
loss experience with respect to the Contracts.
The rate of distributions of principal of the Class B Certificates and
the yield to maturity of the Class B Certificates will be directly related to
the rate of payment of principal (including prepayments) of the Contracts.
The rate of principal distributions on the Class B Certificates will be
affected by the amortization schedules of the Contracts and the rate of
principal payments on the Contracts (including prepayments due to
liquidations upon defaults. The Contracts may be prepaid by the Obligors at
any time without payment of any prepayment fee or penalty. If the Class B
Certificates are purchased at discounts from their principal balances and the
purchaser of a Class B Certificate calculates its anticipated yield to
maturity based on an assumed rate of payment of principal that is faster than
that actually realized on the Contracts, its actual yield to maturity will be
lower than that calculated. In addition, the rate of payment of principal
and the yield to maturity of the Class B Certificates will be affected by the
use of the Reserve Fund (when and if the Class B Principal Balance is reduced
to equal the amount on deposit in the Reserve Fund) to make a principal
distribution on the Class B Certificates to the extent necessary to reduce
the Class B Principal Balance to zero. See "Description of the
Certificates-- Distributions" herein.
Since the Reserve Fund may only be drawn on to recover the amount due on
the Contracts upon their liquidation, in the unlikely event that there were a
sufficiently large number of delinquencies on the Contracts in any Due Period
that were not covered by Monthly Advances as described herein under
"Description of the Certificates--Advances," the amounts paid to Class B
Certificateholders could be less than the amount of principal and interest
that would otherwise be payable on the Class B Certificate with respect to
such Due Period. In such event, even if delinquent payments on the Contracts
were eventually recovered upon liquidation (through withdrawals from the
Reserve Fund or otherwise), since the amounts received would not include
interest on delinquent interest payments, the effective yield on the
Contracts would be reduced, and under certain circumstances it is possible
that sufficient amounts might not be available to provide for the ultimate
payment of all principal of the Class B Certificates plus accrued interest
thereon at the Class B Remittance Rate, thus also reducing the effective
yield on the Class B Certificates. Prepayments on Contracts, which have
various APRs, will affect the Class B Remittance Rate because the Class B
Remittance Rate is the lesser of (i) % per annum and (ii) the applicable
Weighted Average Net Contract Rate. While partial prepayments of principal
of the Contracts are applied on Due Dates, Obligors are not required to pay
interest on the Contracts after the date of a full prepayment of principal.
As a result, full prepayments in advance of the related Due Dates for such
Contracts in any Due Period will reduce the amount of interest received from
Obligors during such Due Period to less than one month's interest. On the
other hand, when a Contract is prepaid in full during any Due Period, but
after the Due Date for such Contract in such Due Period, the effect will be
to increase the amount of interest received from the related Obligor during
such Due Period to more than one month's interest. If a sufficient number of
Contracts are prepaid in full in a given Due Period in advance of their
respective Due Dates, interest payable on all of the Contracts during that
Due Period may be less than the interest payable on the Certificates with
respect to such Due Period. As a result, the Trust Fund may not receive
sufficient monies to pay the principal and interest on the Class B
Certificates in the amounts set forth herein under "Description of the
Certificates-- Distributions." Although no assurance can be given in this
matter, the Company does not anticipate that the net shortfall of interest
received because of prepayments in full or the amortization of the Bi-weekly
Contracts in any Due Period would be great enough, in the absence of
delinquencies or liquidation losses, to reduce the Available Distribution
Amount for a Remittance Date below the amount necessary to permit a
distribution to Class B Certificateholders on that Remittance Date of the
amount that would have been required to be distributed in the absence of such
prepayment interest shortfalls. The Reserve Fund would not cover such
reduction, however.
The effective yield to each holder of an Offered Certificate will be
below that otherwise produced by the applicable Remittance Rate and the
purchase price of such holder's Certificate because, while interest will
accrue in respect of each calendar month, the distribution of such interest
to such holders will be made on the 7th day (or, if such day is not a
business day, the next succeeding business day) of the month following the
Due Period in which if accrues.
As described herein under the "Description of the
Certificates--Subordination of the Class A-3 Certificates," on any Remittance
Date on or after the Remittance Date, if any, on which the Class A Principal
Balance is greater than the Pool Scheduled Principal Balance, if the
Available Distribution Amount is not sufficient to permit a full distribution
of the Formula Principal Distribution Amount to the Class of Class A
Certificateholders then entitled to such amount, the Class A-3
Certificateholders will absorb (i) all losses on each Liquidated Contract in
the amount by which its Liquidation Proceeds (net Liquidation Expenses) are
less than its unpaid principal balance plus accrued and unpaid interest and
(ii) delinquent payments on the Contracts. The rate of distributions of
principal and the yield to maturity of the Class A-3 Certificates will also
be affected by the amount and rate of distributions of amounts in respect of
Accelerated Principal Distribution Amounts. See "Description of the
Certificates--Distributions" herein.
The Company and the Servicer (whether or not the Company remains the
Servicer) each has the option to repurchase the Contracts and any other
property constituting the Trust Fund if on any Remittance Date the Pool
Schedule Principal Balance is less than 10% of the Original Contract Pool
Principal Balance. See "Description of the Certificates--Optional
Termination" herein. The exercise of such option would effect the early
retirement of the then outstanding Offered Certificates.
In the unlikely event that there were a sufficiently large number of
delinquencies on the Contracts in any Due Period that were not covered by
Monthly Advances as described herein, the amounts paid to Certificateholders
could be less than the amount of principal and interest that would otherwise
be payable on the Offered Certificates with respect to such Due Period. In
such event, even if delinquent payments on the Contracts were eventually
recovered upon liquidation, since the amounts received would not include
interest on delinquent interest payments, the effective yield on the
Contracts would be reduced, and under certain circumstances it is possible
that sufficient amounts might not be available for the ultimate payment of
all principal of the Offered Certificates plus accrued interest thereon at
the related Remittance Rate, thus also reducing the effective yield on the
Offered Certificates.
Although APRs on the Contracts vary, prepayments on Contracts generally
will not affect the Remittance Rate on any Class A-1 or Class A-2
Certificates because such Remittance Rates are fixed and do not exceed the
APR on any Contract (less % per annum for the Monthly Servicing Fee). The
Class A-3 Remittance Rate will be % per annum, unless the Contracts prepay in
such a manner that the applicable Weighted Average Net Contract Rate is less
than %, in which case the Class A-3 Remittance Rate will equal such Weighted
Average Net Contract Rate.
While partial prepayments of the principal on the Contracts are applied
on Due Dates, Obligors are not required to pay interest on the Contracts
after the date of a full prepayment of principal. As a result, full
prepayments in advance of the related Due Dates for such Contracts in any Due
Period will reduce the amount of interest received from Obligors during such
Due Period to less than one month's interest. On the other hand, when a
Contract (other than a Bi-weekly Contract) is prepaid in full during any
period, but after the Due Date for such Contract in such Due Period, the
effect will be to increase the amount of interest received from the related
Obligor during such Due Period to more than one month's interest. If a
sufficient number of Contracts are prepaid in full in a given Due Period in
advance or their respective Due Dates, interests payable on all of the
Contracts during that Due Period may be less than the interest payable on the
Class A Certificates with respect to such Due Period. In addition, because
the principal balance of the Bi-weekly Contracts is reduced on a bi-weekly
basis, the amount of interest due from Obligors on such Contracts is less
than that which would have accrued if such Contracts were amortized on a
monthly basis. As a result, the Trust Fund may not receive sufficient monies
to pay the interest on the Senior and/or Class A-3 Certificates in the
Amounts set forth herein under "Description of the Certificate--
Distributions" and to make a full distribution to the Senior and/or Class A-3
Certificateholders of the Formula Principal Distribution Amounts. Although
no assurance can be given in this matter, the Company does not anticipate
that the net shortfall of interest received because of prepayments in full or
the amortization of the Bi-weekly Contracts in any Due Period would be great
enough, in the absence of delinquencies of Liquidation Losses, to include the
Available Distribution amount for a Remittance Date below the amount required
to be distributed to Class A Certificateholders on that Remittance Date in
the absence of such prepayment interest shortfalls.
Each scheduled payment on a Bi-weekly Contract in any Due Period will
contain only two weeks of interest, rather than one month's interest. In
addition, the second, and in some Due Periods the third, scheduled payment in
each Due Period will be calculated on a principal balance that is lower than
the principal balance at the beginning of that Due Period. These
characteristics may result in the interest due on a Bi-weekly Contract in a
particular Due Period being less than thirty days' interest on the principal
balance thereof at the beginning of the Due Period.
WEIGHTED AVERAGE LIFE OF THE OFFERED CERTIFICATES
The following information is given solely to illustrate the effect of
prepayments of the Contracts on the weighted average life of the Offered
Certificates under the stated assumptions and is not a prediction of the
prepayment rate that might actually be experienced by the Contracts.
Weighted average life refers to the average amount of time from the date
of issuance of a security until each dollar of principal of such security
will be repaid to the investor. The weighted average life of the Offered
Certificates will be affected by the rate at which principal on the Contracts
is paid. Principal payments on Contracts may be in the form of scheduled
amortization or prepayments (for this purpose, the term "prepayment" includes
repayments and liquidations due to default or other dispositions of
Contracts). Prepayments on contracts may be measured by a prepayment
standard or model. The model used in this Prospectus Supplement ("Prepayment
Model") is based on an assumed rate of prepayment each month of the then
unpaid principal balance of a pool of new Contracts. % of the
Prepayment Model assumes prepayment rates of % per annum of the then unpaid
principal balance of such Contracts in the first month of the life of the
Contracts and an additional % per annum in each month thereafter until the
month. Beginning in the __th month and in each month thereafter during the
life of the Contracts, % of the Prepayment Model assumes a constant
prepayment rate of % per annum.
As used in the following tables " % of the Prepayment Model" assumes no
prepayments on the Contracts; " % of the Prepayment Model" assumes the
Contracts will prepay at rates equal to % of the Prepayment Model assumed
prepayment rates; " % of the Prepayment Model" assumes the Contracts will
prepay at rates equal to % of the Prepayment Model assumed prepayment rates;
" % of the Prepayment Model" assumes the Contracts will prepay at rates equal
to % of the Prepayment Model assumed prepayment rates; and " % of the
Prepayment Model" assumes the Contracts will prepay at rates equal to % of
the Prepayment Model assumed prepayment rates.
There is no assurance, however, that prepayments of the Contracts will
conform to any level of the Prepayment Model, and no representation is made
that the Contracts will prepay at the prepayment rates shown or any other
prepayment rate. The rate of principal payments on pools of manufactured
housing contracts is influenced by a variety of economic, geographic, social
and other factors, including the level of interest rates and the rate at
which manufactured homeowners sell their manufactured homes or default on
their contracts. Other factors affecting prepayment of contracts include
changes in obligors' housing needs, job transfers, unemployment and obligors'
net equity in the manufactured homes. In case of mortgage loans secured by
site-built homes, in general, if prevailing interest rates fall significantly
below the interest rates on such mortgage loans, the mortgage loans are
likely to be subject to higher prepayment rates than if prevailing interest
rates remain at or above the rates borne by such mortgage loans. Conversely,
if prevailing interest rates rise above the interest on such mortgage loans,
the rate of prepayment would be expected to decrease. In the case of
manufactured housing contracts, however, because the outstanding principal
balances are, in general, much smaller than mortgage loan balances and the
original term to maturity of each such contract is generally shorter, the
reduction or increase in the size of the monthly payments on contracts of the
same maturity and principal balance arising from a change in the interest
rate thereon is generally much smaller. Consequently, changes in prevailing
interest rates may not have a similar effect, or may have a similar effect,
but to a smaller degree, on the prepayment rates on manufactured housing
contracts.
The tables set forth below assume that there are no delinquencies on the
Contracts and that, after giving effect to the assumed losses on Liquidated
Contracts, there will be a sufficient Available Distribution Amount to
distribute interest on the Offered Certificates and the Formula Principal
Distribution Amount to the Certificateholders then entitled thereto and to
pay the Monthly Servicing Fee to the Company.
The percentages and weighted average lives in the following tables were
determined assuming that (i) scheduled interest and principal payments on the
Contracts are received in a timely manner and prepayments are made at the
indicated percentages of the Prepayment Model set forth in the tables; (ii)
neither the Servicer nor the Company exercises its right of optional
termination described above; (i) the Contracts will, as of the Cut-off Date,
each be monthly, level payment contracts, that have an original term to
maturity of months, remaining term to maturity of months and an APR of % per
annum; (iv) the Class A-1 Certificates initially represent % of the entire
ownership interest in the Trust Fund and have a Class A-1 Remittance Rate of
% per annum, the Class A-2 Certificates initially represent % of the entire
ownership interest in the Trust Fund and have a Class A-2 Remittance Rate of
% per annum, the Class A-3 Certificates initially represent % of the entire
ownership interest in the Trust Fund and have a Class A-3 Remittance Rate of
% per annum and the Class B Certificates initially represent % of the entire
ownership interest in the Trust Fund and have a Class B Remittance Rate of %
per annum; (v) no interest shortfalls will arise in connection with
prepayment in full of the Contracts; and (vi) a servicing fee of 1.25% per
annum will be paid to the Servicer. No representation is made that the
Contracts will experience delinquencies or losses at the respective rates
assumed above or at any other rates.
Since the tables were prepared on the basis of the assumptions in the
preceding paragraph, there are discrepancies between the characteristics of
the actual Contracts and the characteristics of the Contracts assumed in
preparing the tables. Any such discrepancy may have an effect upon the
percentages of the Original Class A-1 Principal Balance, Original Class A-2
Principal Balance, Original Class A-3 Principal Balance and Original Class B
Principal Balance outstanding and weighted average lives of the Class A-1
Certificates, Class A-2 Certificates, Class A-3 Certificates and Class B
Certificates set forth in the tables. In addition, since the actual
Contracts and the Trust Fund have characteristics which differ from those
assumed in preparing the tables set forth below, the distributions of
principal on the Class A-1 Certificates, Class A-2 Certificates, Class A-3
Certificates and Class B Certificates may be made earlier or later than as
indicated in the tables.
It is not likely that Contracts will repay at any constant percentage of
the Prepayment Model to maturity or that all Contracts will prepay at the
same rate. In addition, the diverse remaining terms to maturity of the
Contracts (which include recently originated Contracts) could produce slower
distributions of principal than as indicated in the tables at the various
percentages of the Prepayment Model specified even if the weighted average
remaining term to maturity of the Contracts is months.
Investors are urged to make their investment decisions on a basis that
includes their determination as to anticipated prepayment rates under a
variety of the assumptions discussed herein.
Based on the foregoing assumptions, the following tables indicate the
resulting weighted average lives of the Class A Certificates and set forth
the percentage of the Original Class A-1 Principal Balance, Original Class
A-2 Principal Balance and Original Class A-3 Principal Balance and Original
Class B Principal Balance that would be outstanding after each of the dates
shown at the indicated percentages of the Prepayment Model.
PERCENT OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS A-1
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE
PREPAYMENT MODEL SET FORTH BELOW:
<TABLE>
<CAPTION> PREPAYMENTS (% OF PREPAYMENT MODEL)
DATE 0% 100% 150% 300% 500%
<S> <C> <C> <C> <C> <C>
Initial Percentage
, 1996 . . . . . . . . . . . . . . . . . . . . . .
, 1997 . . . . . . . . . . . . . . . . . . . . . .
, 1998 . . . . . . . . . . . . . . . . . . . . . .
, 1999 . . . . . . . . . . . . . . . . . . . . . .
, 2000 . . . . . . . . . . . . . . . . . . . . . .
, 2001 . . . . . . . . . . . . . . . . . . . . . .
Weighted Average Life (years)(1) . . . . . . . . . . .
- ------------------------
(1) The weighted average life of the Class A-1 Certificates is determined by (i) multiplying the amount
of each principal distribution by the number of years from the initial date of issuance of the Class A-1 Certificates to the
related Remittance Date, (ii) summing the results and (iii) dividing the sum by the Original Class A-1 Principal Balance.
</TABLE>
PERCENT OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS A-2
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE
PREPAYMENT MODEL SET FORTH BELOW:
<TABLE>
<CAPTION> PREPAYMENTS (% OF PREPAYMENT MODEL)
DATE 0% 100% 150% 300% 500%
<S> <C> <C> <C> <C> <C>
Initial Percentage
, 1996 . . . . . . . . . . . . . . . . . . . . . .
, 1997 . . . . . . . . . . . . . . . . . . . . . .
, 1998 . . . . . . . . . . . . . . . . . . . . . .
, 1999 . . . . . . . . . . . . . . . . . . . . . .
, 2001 . . . . . . . . . . . . . . . . . . . . . .
, 2002 . . . . . . . . . . . . . . . . . . . . . .
, 2003 . . . . . . . . . . . . . . . . . . . . . .
, 2004 . . . . . . . . . . . . . . . . . . . . . .
Weighted Average Life (years)(1) . . . . . . . . . . .
- ----------------------
(1) The weighted average life of the Class A-2 Certificates is determined by
(i) multiplying the amount of each principal distribution by the number of
years from the initial date of issuance of the Class A-2 Certificates to
the related Remittance Date, (ii) summing the results and (iii) dividing the
sum by the Original Class A-2 Principal Balance.
</TABLE>
PERCENT OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS A-3
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE
PREPAYMENT MODEL SET FORTH BELOW:
<TABLE>
<CAPTION> PREPAYMENTS (% OF PREPAYMENT MODEL)
DATE 0% 100% 150% 300% 500%
<S> <C> <C> <C> <C> <C>
Initial Percentage
, 1996 . . . . . . . . . . . . . . . . . . . . . .
, 1997 . . . . . . . . . . . . . . . . . . . . . .
, 1998 . . . . . . . . . . . . . . . . . . . . . .
, 1999 . . . . . . . . . . . . . . . . . . . . . .
, 2001 . . . . . . . . . . . . . . . . . . . . . .
, 2002 . . . . . . . . . . . . . . . . . . . . . .
Weighted Average Life (years)(1) . . . . . . . . . . .
</TABLE>
_____________________
(1) The weighted average life of the Class A-3 Certificates is determined by
(i) multiplying the amount of each principal distribution by the number of
years from the initial date of issuance of the Class A-3 Certificates to the
related Remittance Date, (i) summing the results and (ii) dividing the sum by
the Original Class A-3 Principal Balance.
PERCENT OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS B
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE
PREPAYMENT MODEL SET FORTH BELOW:
<TABLE>
<CAPTION> PREPAYMENTS (% OF PREPAYMENT MODEL)
DATE 0% 100% 150% 300% 500%
<S> <C> <C> <C> <C> <C>
Initial Percentage
, 1996 . . . . . . . . . . . . . . . . . . . . . .
, 1997 . . . . . . . . . . . . . . . . . . . . . .
, 1998 . . . . . . . . . . . . . . . . . . . . . .
, 1999 . . . . . . . . . . . . . . . . . . . . . .
, 2001 . . . . . . . . . . . . . . . . . . . . . .
, 2002 . . . . . . . . . . . . . . . . . . . . . .
Weighted Average Life (years)(1) . . . . . . . . . . .
- ------------------------
(1) The weighted average life of the Class B Certificates is determined by (i) multiplying the amount of each
principal distribution by the number of years from the initial date of issuance of the Class B Certificates to
the related Remittance date, (ii) summing the results and (iii) dividing the sum by the Original Class B
Principal Balance.
</TABLE>
DESCRIPTION OF THE CERTIFICATES
The Certificates will be issued pursuant to the Agreement. A copy of
the execution form of the Agreement will be filed in a Current Report on Form
8-K with the Securities and Exchange Commission after the initial issuance of
the Certificates. The following description supplements the description of
the Agreement and the Certificates under the caption "Description of the
Certificates" in the Prospectus and must be read together therewith. The
following summaries describe certain terms of the Agreement, do not purport
to be complete and are subject to, and are qualified in their entirety by
reference to, the provisions of the executed Agreement. When particular
provisions or terms used in the Agreement are referred to, the actual
provisions (including definitions of terms) are incorporated by reference.
GENERAL
The Certificates will be issued in fully registered form only, in
denominations of $50,000 and integral multiples of $1,000 in excess thereof,
except for a denomination representing the remainder of a Class of
Certificates. The Percentage Interest of a Class A-1, Class A-2, Class A-3
or Class B Certificate is the percentage obtained from dividing its
denomination by the Original Class A-1 Principal Balance, the Original Class
A-2 Principal Balance, the Original Class A-3 Principal Balance and Original
Class B Principal Balance, respectively. Definitive Certificates, if issued,
will be transferable and exchangeable at the corporate trust office of the
Trustee at its Corporate Trust Department in __________. No service charge
will be made for any registration of exchange or transfer, but the Trustee
may require payment of a sum sufficient to cover any tax or other
governmental charge.
The Trust Fund includes (i) the Contract Pool, including all rights to
receive payments on the Contracts due on and after the Cut-off Date, (ii) the
amounts held from time to time in an account (the "Certificate Account")
maintained by the Trustee pursuant to the Agreement, (iii) any property which
initially secured a Contract and which is acquired in the process of
realizing thereon, (iv) the proceeds of all insurance policies described
herein, and (v) the Reserve Fund, which will only benefit the Class B
Certificateholders and will not benefit, or result in any payments to, the
Class A Certificateholders.
The Company will cause the Contracts to be assigned to the Trustee or a
co-trustee. The Company, as Servicer, will service the Contracts pursuant to
the Agreement. The Contract documents will be held for the benefit of the
Trustee by the Servicer.
Distributions of principal and interest on the Certificates will be made
on the 7th day of each month, or, if such day is not a business day, the next
succeeding business day (each, a "Remittance Date") beginning in
199_, to the persons in whose names the Certificates are registered at the
close of business on the last business day of the month preceding the month
in which payment is made (the "Record Date"). If definitive Offered
Certificates are issued, distributions will be made by check mailed to the
address of the person entitled thereto as it appears on the Certificate
Register, except that a holder of an Offered Certificate with original
denominations aggregating at least $5 million may request payment by wire
transfer of funds pursuant to written instructions delivered to the Trustee
at least five business days prior to the Record Date. The final distribution
in retirement of the Certificates will be made only upon presentation and
surrender of the Certificates at the office or agency of the Trustee
specified in the final distribution notice to Certificateholders.
CONVEYANCE OF CONTRACTS
In addition to the representations and warranties described in the
Prospectus under "Description of Certificates--Conveyance of Contracts," the
Company has also made certain warranties with respect to the Contracts in the
aggregate, including that (i) the aggregate principal amount payable by the
Obligors as of the Cut-off Date equals the Cut-off Date Pool Principal
Balance; (ii) approximately % of the Cut-off Date Pool Principal Balance is
attributable to loans to purchase new Manufactured Homes and approximately %
of the Cut-off Date Pool Principal Balance is attributable to loans to
purchase used Manufactured Homes; (iii) no Contract has a remaining maturity
of more than months; (iv) the date of each Contract is on or after ; and (v)
no adverse selection procedures were employed in selecting the Contracts.
PAYMENTS ON CONTRACTS
The Trustee will establish and maintain the Certificate Account (i) at a
depository institution organized under the laws of the United States or any
state, the deposits of which are insured to the full extent permitted by law
by the Federal Deposit Insurance Corporation (the "FDIC") whose commercial
paper or unsecured long-term debt has a rating of A-1+ by Standard and Poor's
("S&P") in the case of commercial paper or the highest rating category by S&P
in the case of unsecured long-term debt, and which is subject to examination
by federal or state authorities or a depository institution otherwise
acceptable to S&P, (ii) in the corporate trust department of the Trustee or
(iii) at an institution otherwise acceptable to S&P (an "Eligible
Institution"). Funds in the Certificate Account will be invested in Eligible
Investments (as defined in the Agreement) that will mature or be subject to
redemption not later than the business day preceding the applicable monthly
Remittance Date. Eligible Investments include, among other investments,
obligations of the United States or of any agency thereof backed by the full
faith and credit of the United States or of any agency thereof backed by the
full faith and credit of the United States; federal funds, certificates of0
deposit, time deposits and bankers' acceptances sold by eligible financial
institutions; commercial paper rated A-1+ (or, solely in the case for
investment of funds held in the Reserve Fund, rated A-1) by S&P; money market
funds rated AAAm or AAAm-G by S&P; and other obligations acceptable to S&P.
All payments in respect of principal and interest on the Contracts
(exclusive of scheduled payments due prior to the Cut-off Date) received by
the Servicer, including Principal Prepayments and Liquidation Proceeds (net
of Liquidation Expenses), will be paid into the Certificate Account no later
than the second business day following receipt thereof. Amounts received as
late payment fees, extension fees, assumption fees or similar fees will be
retained by the Servicer as part of its servicing fees. See "Description of
Certificates--Servicing Compensation and Payment of Expenses" in the
Prospectus. In addition, amounts paid by the Company for Contracts
repurchased as a result of breach of a representation or warranty under the
Agreement and amounts required to be deposited upon substitution of an
Eligible Substitute Contract because of breach of a representation or
warranty, as described under "Conveyance of Contracts" above, will be paid
into the Certificate Account. The Servicer will deposit the Monthly Advance
(described under "Advances" below), if any, in the Certificate Account on or
before each Determination Date.
On the fifth business day prior to each Remittance Date (the
"Determination Date"), the Servicer will determine the Available Distribution
Amount and the amounts to be distributed on the Certificates for the
following Remittance Date. The Available Distribution Amount is the sum of
(a) the Monthly Advance for such Remittance Date and (b) the amount in the
Certificate Account on the close of business on the last day of the
immediately preceding Due Period less the sum of (i) scheduled payments that
are due in a Due Period subsequent to such Due Period; (ii) payments on
Contracts that have been repurchased as a result of a breach of a
representation or warranty and any other payments not required to be
deposited in the Certificate Account; (iii) reimbursements to the Servicer in
the amount of Liquidation Expenses incurred and taxes and insurance premiums
advanced by the Servicer in respect of Manufactured Homes; (iv) the Monthly
Servicing Fee; (v) reimbursements to the Servicer for Nonrecoverable Advances
and Monthly Advances in respect of Liquidated Contracts, to the extent
permitted by the Agreement; and (vi) certain expenses reimbursable to the
Company as provided in the Agreement.
The Trustee or its Paying Agent will withdraw funds from the Certificate
Account (but only to the extent of the related Available Distribution Amount)
to make payments to Certificateholders as specified under "Distributions"
below. From time to time, as provided in the Agreement, the Servicer will
also withdraw funds from the Certificate Account to make payments to it as
permitted by the Agreement and described in clauses (ii), (iii), (iv) and (v)
in the previous paragraph.
DISTRIBUTIONS
Distributions of principal and interest to holders of a Class of
Certificates will be made on each Remittance Date in an amount equal to the
respective Percentage Interests multiplied by the aggregate amount
distributed on such Class of Certificates on such Remittance Date.
Distributions to a Class of Certificateholders will be applied first to the
payment of interest and then to the payment of principal. Interest will be
calculated on the basis of a 360-day year consisting of twelve 30-day months.
Each distribution with respect to a Book-Entry Certificate will be paid
to DTC, which will credit the amount of such distribution to the accounts of
its Participants in accordance with its normal procedures. Each Participant
will be responsible for disbursing such distribution of the Certificate
Owners that it represents and to each indirect participating brokerage firm
(a "brokerage firm" or "indirect participating firm") for which it acts as
agent. Each brokerage firm will be responsible for disbursing funds to the
Certificate Owners that it represents. All such credits and disbursements
with respect to Book-Entry Certificates are to be made by DTC and the
Participants in accordance with DTC's rules.
On each Remittance Date the Available Distribution Amount will be
distributed in the following amounts in the following order of priority:
(i) one month's interest on the Class A-1 and Class A-2 Certificates,
at their respective Remittance Rates on the outstanding Class A-1 and Class
A-2 Principal Balances, respectively, to the holders thereof, together with
any previously undistributed shortfalls in interest due on the Class A-1 and
Class A-2 Certificates, respectively, in respect of prior Remittance
Dates; if the Available Distribution Amount is not sufficient to distribute
the full amount of interest due on the Class A-1 and Class A-2
Certificates, the Available Distribution Amount will be distributed on such
Classes of Certificates pro rata on the basis of the interest due thereon;
(ii) one month's interest on the Class A-3 Principal Balance to the
Class A-3 Certificateholders, together with any previously undistributed
shortfalls in interest due on the Class A-3 Certificates in respect of prior
Remittance Dates;
(iii) one month's interest on the Class B Principal Balance to the
Class B Certificateholders, together with any previously undistributed
shortfalls in interest due on the Class B Certificates in respect of prior
Remittance Dates;
(iv) the Formula Principal Distribution Amount in the following order of
priority:
(a) to the Class A-1 Certificateholders until the Class A-1
Principal Balance is reduced to zero, together with any previously
undistributed shortfalls in Formula Principal Distribution Amounts in
respect of prior Remittance Dates; and
(b) to the Class A-2 Certificateholders until the Class A-2
Principal Balance is reduced to zero, together with any previously
undistributed shortfalls in Formula Principal Distribution Amounts in
respect of prior Remittance Dates;
(c) to the Class A-3 Certificateholders until the Class A-3
Principal Balance is reduced to zero, together with any previously
undistributed shortfalls in Formula Principal Distribution Amounts in
respect of prior Remittance Dates;
(v) the Formula Principal Distribution Amount (less the portion
thereof, if any, distributed pursuant to clause (iv) above) to the Class B
Certificateholders until the Class B Principal Balance is reduced to zero;
and
(vi) any remainder to the holder of the Class R Certificates, which will
initially be a special purpose subsidiary of the Company.
Interest shortfalls will not bear interest.
The Principal Balance of each Class of Certificates is its original
Principal Balance reduced by all distributions on such Class (including, in
case of the Class B Certificates, distributions from the Reserve Fund) in
reduction of its Principal Balance. The Class A Principal Balance is the sum
of the Class A-1, Class A-2 and Class A-3 Principal Balances.
The "Formula Principal Distribution Amount" in respect of a Remittance
-------------------------------------
Date is the sum of (i) all scheduled payments of principal due on each
outstanding Contract during the Due Period preceding the month in which the
Remittance Date occurs, (ii) the Scheduled Principal Balance (at defaulted
below) of each Contract which, during the Due Period preceding the month of
such Remittance Date, was purchased by the Company pursuant to the Agreement
on account of certain breaches of its representation and warranties, (iii)
all Partial Prepayments received during such preceding Due Period, (iv) the
Scheduled Principal Balance of each Contract that was prepaid in full during
such preceding Due Period; (v) the Scheduled Principal Balance of each
Contract that became a Liquidated Contract (as defined below) during such
preceding Due Period and (vi) any previously undistributed shortfalls in the
amounts in clauses (i) through (v) in respect of prior Remittance Dates.
The "Scheduled Principal Balance" of a Contract as of any Remittance
---------------------------
Date is its principal balance (before any adjustment by reason of bankruptcy,
moratorium or similar waiver or grace period) as of the Due Date (or latest
occurring Due Date, in the case of a Bi-weekly Contract) in the Due Period
next preceding such Remittance Date, after giving effect to any previous
Partial Prepayments and after giving effect to all previous scheduled
principal payments and to the scheduled payment of principal due on such Due
Date (whether or not paid and before any adjustment by reason of bankruptcy,
moratorium or similar waiver or grace period).
The "Pool Scheduled Principal Balance" for any Remittance Date is equal
--------------------------------
to the Original Contract Pool Principal Balance less the aggregate of the
Formula Principal Distribution Amounts (exclusive of the amounts in clause
(vi) of the definition thereof) for all prior Remittance Dates.
A "Liquidated Contract" is a defaulted Contract as to which all amounts
-------------------
that the Servicer expects to recover through the date of disposition of the
Manufactured Home have been received.
Distributions on the Class B Certificates in respect to interest
shortfalls due to an insufficient Available Distribution Amount will be made
from the Reserve Fund to the extent described under "Reserve Fund" below. In
addition, on each Remittance Date on or prior to the date of which the Class
A Principal Balance is reduced to zero, the Class B Certificateholders will
be entitled to receive, from amounts on deposit in the Reserve Fund (but only
to the extent of the applicable Reserve Fund Draw Amount described under "The
Reserve Fund" below), the amount (the "Class B Principal Loss Amount"), if
any, by which the Available Distribution Amount (after subtracting therefrom
the interest required to be distributed to the Class A Certificateholders on
such date) is less than the Formula Principal Distribution Amount (exclusive
of the amounts in clause (vi) of the definition thereof) for such Remittance
Date. Such Class B Principal Loss Amount represents future principal
payments on the Contracts that, because of the subordination of the Class B
Certificates and liquidation losses on Liquidated Contracts, may be
distributed to the Class A Certificateholders rather than the Class B
Certificateholders.
In addition, the amount on deposit in the Reserve Fund will also be
applied, as described under "The Reserve Fund" below, to the payment in full
of principal of the Class B Certificates when, if ever, the amount on deposit
therein is at least equal to the Class B Principal Balance.
In no event will the aggregate distributions of principal to the Class
A-1, Class A-2, Class A-3 and Class B Certificateholders exceed the Original
Class A-1 Principal Balance, the Original Class A-2 Principal Balance, the
Original Class A-3 Principal Balance or the Original Class B Principal
Balance, respectively.
Notwithstanding the prioritization of the distribution of the Formula
Principal Distribution Amount between the Senior Certificates pursuant to
clauses (iv) (a) and (b) above, on and after the Remittance Date, if any, on
which the Deficiency Event occurs, the Available Distribution Amount
remaining after making the distribution required by clauses (i), (ii) and
(iii) above will be applied to distribute the Formula Principal Distribution
Amount on each Class of Senior Certificates pro rata in accordance with the
outstanding Principal Balance of such Class. The "Deficiency Event" will
occur if the sum of the Principal Balance of each Class of Senior
Certificates becomes equal to or greater than the Pool Scheduled Principal
Balance.
The Class A-1 Remittance Rate is % per annum and the Class A-2
Remittance Rate is % per annum. The Class A-3 Remittance Rate for a
Remittance Date is the lesser of (i) % per annum and (ii) the Weighted
Average Net Contract Rate for such Remittance Date. The "Weighted Average
Net Contract Rate" for a Remittance Date is equal to (i) the weighted average
of the Contract Rates applicable to the scheduled payments due on the
outstanding Contracts in the Due Period preceding such Remittance Date less
(ii) 1.25%. The Class B Remittance Rate for a Remittance Date is the lesser
of (i) % per annum and (ii) the Weighted Average Net Contract Rate for
such Remittance Date.
PRE-FUNDING ACCOUNT
During the period (the "Funding Period") from and including the Closing
Date until the earliest of (a) the Determination Date on which the amount on
deposit in the Pre-Funding Account is equal to $100,000 or less, (b) the
occurrence of an Event of Default under the Agreement, (c) the occurrence of
certain events of insolvency with respect to the Company or the Servicer or
(d) the Remittance Date with respect to the Distribution Date, the
Pre-Funded Amount will be maintained as an account in the name of the Trustee
(the "Pre-Funding Account"). The Pre-Funded Amount will initially equal
approximately $ , and, during the Funding Period, will be reduced by
the amount thereof used to purchase Contracts in accordance with the
Agreement. Any Pre-Funded Amount remaining at the end of the Funding Period
will be payable to the Certificateholders of the Class then entitled to
receive distributions of principal on the Remittance Date in in
reduction of the principal balance of such Certificates, thus resulting in a
partial principal prepayment of such Class of Certificates. It is expected
that the Subsequent Contracts will be sold to the Trust Fund on or before
. All interest and other investment earnings on amounts on deposit in
the Pre-Funding Account will be deposited in the Capitalized Interest
Account. The Pre-Funding Account will not be an asset of the REMIC. Although
no assurance can be given, it is intended that the principal amount of
Subsequent Contracts sold to the Trust Fund will require application of
substantially all of the original Pre-Funded Amount and it is not intended
that there will be any material amount of principal prepaid to the holders of
Certificates from the Pre-Funding Account. In the event that the Company is
unable to sell Subsequent Contracts to the Trust Fund in an amount equal to
the original Pre-Funded Amount, principal prepayments to the
Certificateholders of the Class then entitled to receive distributions of
principal will occur on the Remittance Date in in an amount equal
to the Pre-Funded Amount remaining at the end of the Funding Period.
RESERVE FUND
At the time of the initial issuance of the Certificates, a Reserve Fund
in the initial amount of $ will be established as part of the Trust Fund.
The Reserve Fund is for the sole benefit of the Class B Certificateholders
and will not benefit in any way or result in any payments to the Class A
Certificateholders. Subject to the limitation of the Maximum Reserve Fund
Draw Amount described below, prior to each Remittance Date a withdrawal will
be made from the Reserve Fund in the amount (the "Reserve Fund Draw Amount")
equal to the lesser of (i) the amount then on deposit in the Reserve Fund and
(i) the amount of the Aggregate Net Liquidation Losses for the preceding Due
Period, as described below. On any Remittance Date the Reserve Fund Draw
Amount will not exceed the amount (the "Maximum Reserve Fund Draw Amount")
equal to the sum of (i) any shortfall in interest required to be distributed
to Class B Certificateholders on such Remittance Date, (ii) if such
Remittance Date is on or prior to the date on which the Class A Principal
Balance is reduced to zero, the Class B Principal Loss Amount, if any, for
such Remittance Date and (iii) if such Remittance Date is after the date on
which the Class A Principal Balance is reduced to zero, any shortfall in the
Formula Principal Distribution Amount distributed to Class B
Certificateholders out of the Available Distribution Amount for such
Remittance Date. The "Class B Principal Loss Amount" for a Remittance Date
is equal to the amount, if any, by which the Available Distribution Amount
(after subtracting therefrom the interest required to be distributed to the
Class A .Certificateholders and Class B Certificateholders on such date), is
less than the Formula Principal Distribution Amount (exclusive of the amounts
in clause (vi) of the definition thereof) for such Remittance Date. Such
Class B Principal Loss Amount represents future principal losses on
Liquidated Contracts, may be distributed to the Class A Certificateholders
rather than the Class B Certificateholders. With respect to each Remittance
Date, the "Aggregate Net Liquidation Losses" will be the amount, if any, by
which (a) the aggregate of the outstanding principal balances of those
Contracts that became Liquidated Contracts during the Due Period ending prior
to the month of such Remittance Date plus accrued and unpaid interest thereon
(adjusted to the Net Contract Rate) exceeds (b) the aggregate Net Liquidation
Proceeds for such Contracts.
Funds in the Reserve Fund will be invested in Eligible Investments as
directed by the Class R Certificateholder. The amount available in the
Reserve Fund will be reduced by the Reserve Fund Draw Amounts. All Eligible
Investments on deposit in the Reserve Fund must mature or be redeemable no
later than the business day preceding each Remittance Date. In directing the
investment of the Reserve Fund, the Class R Certificateholder shall be under
no obligation to maximize the investment return on accounts on deposit
therein. No assurance can be given as to the rate of return, if any, on such
investments.
On the Remittance Date, if any, on which, after giving effect to the
withdrawal, if any, of the related Reserve Fund Draw Amount and to any
reduction of the Class B Principal Balance to be effected on such date, the
amount on deposit in the Reserve Fund is at least equal to the Class B
Principal Balance, the amount on deposit in the Reserve Fund will be
distributed to the Class B Certificateholders to the extent necessary to
reduce the Class B Principal Balance to zero. No assurance can be given as
to whether or not such distribution will occur, or, if it does occur, as to
when it will occur. See "Yield and Prepayment Considerations."
SUBORDINATION OF THE CLASS B AND CLASS R CERTIFICATES
The rights of holders of the Class B and Class R Certificates to receive
distributions of amounts collected on the Contracts will be subordinated, to
the extent described herein, to such rights of the holders of the Class A
Certificates. This subordination is intended to enhance the likelihood of
receipt by the holders of the Class A Certificates of the full amount of
their scheduled monthly payments of interest and the ultimate receipt by such
holders of principal equal to the Original Class A Principal Balance.
The protection afforded to the holders of Class A Certificates by means
of the subordination, to the extent provided herein, of the Class B and Class
R Certificates will be accomplished (i) by the application of the Available
Distribution Amount in the order specified under "Distributions" above and
(ii) if the Available Distribution Amount on such Remittance Date is not
sufficient to permit the distribution of the entire Formula Distribution
Amount to the Class of Class A Certificateholders then entitled to such
distribution, by the right of such Class A Certificateholders to receive,
until the Class A Principal Balance is reduced to zero, a portion of future
Available Distribution Amounts that would otherwise have been payable to the
holders of the Class B Certificates or the Class R Certificates. On each
Remittance Date before the Class A Principal Balance is reduced to zero, the
holders of the Class B Certificates will receive the amount specified under
"Distributions" above. When the Class A Principal Balance is reduced to
zero, the Available Distribution Amount will be applied to pay interest on
the Class B Certificates and then the principal thereof.
SUBORDINATION OF THE CLASS A-3 CERTIFICATES
The rights of the holders of the Class A-3 Certificates to receive
distributions of amounts collected on the Contracts in the Trust Fund will
also be subordinated to such rights of the Senior Certificates.
The protection afforded to the Senior Certificates by means of the
subordination of the Class A-3 Certificates will be accomplished by the
application of the Available Distribution Amount in the order specified under
"--Distributions" above. In addition, if the Available Distribution Amount
on any Remittance Date is not sufficient to permit the distribution of the
entire Formula Principal Distribution Amount to the Senior
Certificateholders, the subordination feature will protect the Senior
Certificateholders, by the right of such Certificateholders to receive, until
any such shortfall is distributed, a portion of the future distributions of
Available Distribution Amounts that would otherwise have been distributable
to the holders of the Class A-3 Certificates or Class B Certificates.
LOSSES ON LIQUIDATED CONTRACTS
As described above, the distribution of principal to the Class A
Certificateholders is intended to include the Scheduled Principal Balance of
each Contract that became a Liquidated Contract during the Due Period
preceding the month of such distribution. If the Liquidation Proceeds, net
of related Liquidation Expenses, from such Liquidated Contract are less than
the principal balance of such Liquidated Contract, then to the extent such
deficiency is not covered by any excess interest collections, the deficiency
will, in effect, be absorbed by the Class A-3 or Class B Certificateholders
since a portion of future Available Distribution Amounts funded by future
principal collections on the Contracts, up to the aggregate amount of such
deficiencies, that would otherwise have been distributed to the Class A-3 or
Class B Certificateholders, will be paid to the Senior Certificateholders.
If the Available Distribution Amount for any Remittance Date is not
sufficient to cover, in addition to interest distributable to the Class A
Certificateholders, the entire Formula Principal Distribution Amount
distributable to the Class of Class A Certificateholders then entitled to
such distribution on such Remittance Date, then the amount of the Pool
Scheduled Principal Balance available to the Class B Certificates (i.e. such
Pool Scheduled Principal Balance less the Class A Principal Balance) on
future Remittance Dates will be reduced. The Pool Scheduled Principal
Balance is the Original Contract Pool Principal Balance less the aggregate of
all prior Formula Principal Distribution Amounts (exclusive of the amounts in
clause (vi) of the definition thereof). If, because of liquidation losses,
the Pool Scheduled Principal Balance were to decrease proportionately faster
than distributions to the Class A Certificateholders reduce the Class A
Principal Balance, the level of protection afforded by the subordination of
the Class B Certificates (i.e., the percentage of the Pool Scheduled
Principal Balance available to the Class B Certificates) would be reduced.
On each Remittance Date, if any, on or after the date on which the Class A
Principal Balance equals or becomes greater than the Pool Scheduled Principal
Balance, and so long as the Class A-3 Certificates are outstanding, the Class
A-3 Certificates will receive only their respective Percentage Interests of
Liquidation Proceeds (net of Liquidation Expenses) realized in respect of
Liquidated Contracts and will therefore bear all losses on Liquidated
Contracts (with no ability to recover the amount of any liquidation loss from
future principal collections on the Contracts) and incur a loss on their
investment in the Class A-3 Certificates. On each Remittance Date, if any,
on or after the date on which the sum of the Principal Balances of the Senior
Certificates equals or becomes greater than the Pool Scheduled Principal
Balance, the Senior Certificateholders will receive only their respective
percentage interests of Liquidation Proceeds (net of Liquidation Expenses)
realized in respect of Liquidated Contracts, rather than the Scheduled
Principal Balances thereof, and will therefore bear all losses on Liquidated
Contracts (with no ability to recover the amount of any liquidation loss from
future principal collections on the Contracts) and incur a loss on their
investment in the Senior Certificates. But for the effect of the application
of the Reserve Fund Draw Amounts, the Class B Certificateholders would absorb
(i) all losses on each Liquidated Contract in the amount by which its
Liquidation Proceeds, net of the related Liquidation Expenses, are less than
its unpaid principal balance plus accrued and unpaid interest thereon at the
Net Contract Rate (the sum of the Class B Remittance Rate and the percentage
rate used to calculate the monthly servicing fee) and (ii) all delinquent
payments on the Contracts. If, on any Remittance Date, the amount on deposit
in the Reserve Fund is reduced to zero and is therefore not available to
absorb the full amount of losses experienced on the Contracts, then the Class
B Certificateholders will receive only their respective Percentage Interests
of Liquidation Proceeds (net of Liquidation Expenses) realized in respect of
Liquidated Contracts, rather than the Scheduled Principal Balances thereof,
and will therefore bear all Net Liquidation Losses and incur a loss on their
investment in the Class B Certificates.
ADVANCES
On or prior to each Determination Date, the Servicer will either (i)
deposit from its own funds the Monthly Advance into the Certificate Account,
(ii) cause appropriate entries to be made in the records of the Certificate
Account that funds in the Certificate Account that are not part of the
Available Distribution amount for the related Remittance Date have been used
to make the Monthly Advance or (iii) make the Monthly Advance through any
combination of clauses (i) and (ii). Any funds held for future distribution
and used in accordance with clause (ii) must be restored by the Servicer from
its own funds or advance payments on the Contracts when they become part of a
future Available Distribution Amount. The Monthly Advance is the sum of
delinquent scheduled payments due in the related Due Period, exclusive of all
Nonrecoverable Advances, except that the Monthly Advance will not exceed the
amount necessary to bring the Available Distribution Amount up to the sum of
the amounts specified in clauses (i), (ii), (iii), (iv) and (v) under
"Distributions" above. A Nonrecoverable Advance is any advance made or
proposed to be made that the Servicer believes is not, or if made would not
be, ultimately recoverable from related Liquidation Proceeds or otherwise.
Monthly Advances are intended to maintain a regular flow of scheduled
interest and principal payments to Certificateholders rather than to
guarantee or insure against losses. The Servicer will reimburse itself for
Monthly Advances out of collections of the late scheduled payments. In
addition, upon the determination that a Nonrecoverable Advance has been made
in respect of a Contract or upon a Contract becoming a Liquidated Contract,
the Servicer will reimburse itself out of funds in the Certificate Account
for the delinquent scheduled payments on such Contract (exclusive of any
scheduled payment (i) for which no advance was made because the Servicer
determined that such an advance would be a Nonrecoverable Advance if an
advance were made or (u) that was recovered out of Net Liquidation Proceeds
for the related Contract).
The Servicer will also be obligated to make advances, to the extent
recoverable out of Liquidation Proceeds or otherwise, in respect of certain
taxes and insurance premiums not paid by an Obligor on a timely basis. Funds
so advanced are reimbursable to the Servicer as provided in the Agreement.
FHA INSURANCE AND VA GUARANTEE
_______% and ______%, respectively (by aggregate principal balance as
of Cut-Off Date) are subject to FHA insurance and VA guarantees. See
"Description of FHA Insurance and VA Guarantees" in the Prospectus.
REPORTS TO CERTIFICATEHOLDERS
The Trustee will include with each distribution to a Certificateholder a
statement as of such Remittance Date setting forth, among other things:
(a) the aggregate amount distributed on the Class A-1 Certificates on
such Remittance Date;
(b) the amount of such distribution which constitutes principal;
(c) the amount of such distribution which constitutes interest;
(d) the remaining Class A-1 Principal Balance;
(e) the aggregate amount distributed on the Class A-2 Certificates on
such Remittance Date;
(f) the amount of such distribution which constitutes principal;
(g) the amount of such distribution which constitutes interest;
(h) the remaining Class A-2 Principal Balance;
(i) the aggregate amount distributed on the Class A-3 Certificates on
such Remittance Date;
(j) the amount of such distribution which constitutes principal;
(k) the amount of such distribution which constitutes interest;
(l) the remaining Class A-3 Principal Balance;
(m) the Class B Distribution Amount and amounts distributed to Class B
Certificateholders from the Reserve Fund;
(n) the amount of such distribution which constitutes principal;
(o) the amount of such distribution which constitutes interest;
(p) the remaining Class B Principal Balance;
(q) the amount, if any, in the Reserve Fund after giving effect to all
withdrawals on such Remittance Date;
(r) the number of and aggregate unpaid principal balance of Contracts
with payments delinquent 31 to 59, 60 to 89 and 90 or more days,
respectively, and
(s) the amount of fees payable out of the Trust Fund.
In addition, within a reasonable period of time after the end of each
calendar year, the Trustee will furnish a report to each Certificateholder of
record at any time during such calendar year as to the aggregate of amounts
reported pursuant to (b) and (c), (f) and (g), (j) and (k), or (n) and (o),
as the case may be, for such calendar year.
MANDATORY REPURCHASE
Cash distributions to the Class Certificateholders will be made, on a
pro rata basis, on the Distribution Date on or immediately following the last
day of the Funding Period in the event that the amount on deposit in the
Pre-Funding Account after giving effect to the purchase of all Contracts,
including any such purchase on such date (a "Mandatory Repurchase") exceeds $
. The aggregate principal amount of the Class Certificates
to be repurchased will be an amount equal to the amount then on deposit in
the Pre-Funding Account.
OPTIONAL TERMINATION
The Agreement provides that on any Remittance Date after the first
Remittance Date on which the Pool Scheduled Principal Balance is less than
10% of the Original Contract Pool Principal Balance, the Company (if it is no
longer the Servicer) and the Servicer will each have the option to
repurchase, upon the Company or the Servicer giving notice mailed no later
than the 1st day of the month next preceding the month of the exercise of
such option, all outstanding Contracts at a price equal to the greater of (a)
the sum of (x) 100% of the outstanding principal balance of each Contract
(other than any Contract as to which the related Manufactured Home has been
acquired in realizing thereon and whose fair market value is included
pursuant to clause (y) below) as of the final Remittance Date, and (y) the
fair market value of such acquired property (as determined by the Company or
the Servicer, as the case may be) and (b) the aggregate fair market value (as
determined by the Company or the Servicer, as the case may be) of all of the
assets of the Trust Fund, plus, in each case, any unpaid interest on the
Certificates due on prior Remittance Dates as well as one month's interest at
the Net Contract Rate on the Scheduled Principal Balance of each Contract
(including any Contract as to which the related Manufactured Homes has been
repossessed and not yet disposed of). Notwithstanding the foregoing, the
option referred to in this paragraph shall not be exercisable unless there
will be distributed to the Certificateholders an amount equal to 100% of the
outstanding principal balance of each Certificate plus one month's interest
thereon at the related Remittance Rate, and any previously undistributed
shortfalls in interest due thereon.
THE TRUSTEE
The Trustee has its corporate trust offices at . The
Company and its affiliates may have commercial transactions with the Trustee
from time to time.
The Trustee may resign at any time, in which event the Company will be
obligated to appoint a successor Trustee. The Company may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Agreement or if the Trustee becomes insolvent. In such circumstances, the
Company will also be obligated to appoint a successor Trustee. Any
resignation or removal of the Trustee and appointment of a successor Trustee
will not become effective until acceptance of the appointment by the
successor Trustee.
REGISTRATION OF THE OFFERED CERTIFICATES
The Offered Certificates will be book-entry Certificates (the
"Book-Entry Certificates"). Persons acquiring beneficial ownership interests
in the Offered Certificates ("Certificate Owners") will hold their Offered
Certificates through the DTC in the United States, or Cedel or Euroclear (in
Europe) if they are participants of such systems, or indirectly through
organizations which are participants in such systems. The Book-Entry
Certificates will be issued in one or more certificates which equal the
aggregate principal balance of the Offered Certificates and will initially be
registered in the name of Cede & Co., the nominee of DTC. Cedel and Euroclear
will hold omnibus positions on behalf of their participants through
customers' securities accounts in Cedel's and Euroclear's names on the books
of their respective depositaries which in turn will hold such positions in
customers' securities accounts in the depositaries' names on the books of
DTC. Citibank will act as depositary for Cedel and The Chase Manhattan Bank
will act as depositary for Euroclear (in such capacities, individually the
"Relevant Depositary" and collectively the "European Depositaries").
Investors may hold such beneficial interests in the Book-Entry Certificates
in minimum denominations of $50,000. Except as described below, no person
acquiring a Book-Entry Certificate (each, a "beneficial owner") will be
entitled to receive a physical certificate representing such Certificate (a
"Definitive Certificate"). Unless and until Definitive Certificates are
issued, it is anticipated that the only "Certificateholder" of the Offered
Certificates will be Cede & Co., as nominee of DTC. Certificate Owners will
not be Certificateholders as that term is used in the Agreement. Certificate
Owners are only permitted to exercise their rights indirectly through
Participants and DTC.
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or
other financial intermediary (each, a "Financial Intermediary") that
maintains the beneficial owner's account for such purpose. In turn, the
Financial Intermediary's ownership of such Book-Entry Certificate will be
recorded on the records of DTC (or of a participating firm that acts as agent
for the Financial Intermediary, whose interest will in turn be recorded on
the records of DTC, if the beneficial owner's Financial Intermediary is not a
DTC participant and on the records of Cedel or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of and
interest on the Offered Certificates from the Trustee through DTC and DTC
participants. While the Offered Certificates are outstanding (except under
the circumstances described below), under the rules, regulations and
procedures creating and affecting DTC and its operations (the "Rules"), DTC
is required to make book-entry transfers among Participants on whose behalf
it acts with respect to the Offered Certificates and is required to receive
and transmit distributions of principal of, and interest on, the Offered
Certificates. Participants and indirect participants with whom Certificate
Owners have accounts with respect to Offered Certificates are similarly
required to make book-entry transfers and receive and transmit such
distributions on behalf of their respective Certificate Owners. Accordingly,
although Certificate Owners will not possess certificates representing their
respective interests in the Offered Certificates, the Rules provide a
mechanism by which Certificate Owners will receive distributions and will be
able to transfer their interest.
Certificateholders will not receive or be entitled to receive
certificates representing their respective interests in the Offered
Certificates, except under the limited circumstances described below. Unless
and until Definitive Certificates are issued, Certificateholders who are not
Participants may transfer ownership of Offered Certificates only through
Participants and indirect participants by instructing such Participants and
indirect participants to transfer Offered Certificates, by book-entry
transfer, through DTC for the account of the purchasers of such Offered
Certificates, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of Offered Certificates will be executed through DTC and the
accounts of the respective Participants at DTC will be debited and credited.
Similarly, the Participants and indirect participants will make debits or
credits, as the case may be, on their records on behalf of the selling and
purchasing Certificateholders.
Because of time zone differences, credits of securities received in
Cedel or Euroclear as a result of a transaction with a Participant will be
made during subsequent securities settlement processing and dated the
business day following the DTC settlement date. Such credits or any
transactions in such securities settled during such processing will be
reported to the relevant Euroclear or Cedel Participants on such business
day. Cash received in Cedel or Euroclear as a result of sales of securities
by or through a Cedel Participant (as defined below) or Euroclear Participant
(as defined below) to a DTC Participant will be received with value on the
DTC settlement date but will be available in the relevant Cedel or Euroclear
cash account only as of the business day following settlement in DTC. For
information with respect to tax documentation procedures relating to the
Certificates, see "Certain Federal Income Tax Consequences--REMIC Series--
Taxation of Certain Foreign Investors" and "--Backup Withholding" in the
Prospectus and "Global Clearance, Settlement and Tax Documentation
Procedures--Certain U.S. Federal Income Tax Documentation Requirements" in
Annex I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Cedel Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
Participants or Euroclear Participants, on the other, will be effected in DTC
in accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in
accordance with its rules and procedures and within its established deadlines
(European time). The relevant European international clearing system will, if
the transaction meets its settlement requirements, deliver instructions to
the Relevant Depositary to take action to effect final settlement on its
behalf by delivering or receiving securities in DTC, and making or receiving
payment in accordance with normal procedures for same day funds settlement
applicable to DTC. Cedel Participants and Euroclear Participants may not
deliver instructions directly to the European Depositaries.
DTC which is a New York-chartered limited purpose trust company,
performs services for its participants, some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC participant in the
Book-Entry Certificates, whether held for its own account or as a nominee for
another person. In general, beneficial ownership of Book-Entry Certificates
will be subject to the Rules, as in effect from time to time.
Cedel Bank, societe anonyme, 67 Bd Grande-Duchesse Charlotte, L-1331
Luxembourg, was incorporated in 1970 as a limited company under Luxembourg
law. Cedel is owned by banks, securities dealers and financial institutions,
and currently has about 100 shareholders, including U.S. financial
institutions or their subsidiaries. No single entity may own more than five
percent of Cedel's stock.
Cedel is registered as a bank in Luxembourg, and as such is subject to
regulation by the Institute Monetaire Luxembourgeois, "IML", the Luxembourg
Monetary Authority, which supervises Luxembourg banks.
Cedel holds securities for its customers ("Cedel Participants") and
facilitates the clearance and settlement of securities transactions by
electronic book-entry transfers between their accounts. Cedel provides
various services, including safekeeping, administration, clearance and
settlement of internationally traded securities and securities lending and
borrowing. Cedel also deals with domestic securities markets in several
countries through established depository and custodial relationships. Cedel
has established an electronic bridge with Morgan Guaranty Trust as the
Euroclear Operator in Brussels to facilitate settlement of trades between
systems. Cedel currently accepts over 70,000 securities issues on its books.
Cedel's customers are world-wide financial institutions including
underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations. Cedel's United States customers are limited to
securities brokers and dealers and banks. Currently, Cedel has approximately
3,000 customers located in over 60 countries, including all major European
countries, Canada, and the United States. Indirect access to Cedel is
available to other institutions which clear through or maintain a custodial
relationship with an account holder of Cedel.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities
and cash. Transactions may be settled in any of 29 currencies, including
United States dollars. Euroclear includes various other services, including
securities lending and borrowing and interfaces with domestic markets in
several countries generally similar to the arrangements for cross-market
transfers with DTC described above. Euroclear is operated by the Brussels,
Belgium office of Morgan Guaranty Trust Company of New York (the "Euroclear
Operator"), under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation (the "Cooperative"). All operations are conducted by
the Euroclear Operator, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Cooperative. The Cooperative establishes policy for Euroclear on behalf of
Euroclear Participants. Euroclear Participants include banks (including
central banks), securities brokers and dealers and other professional
financial intermediaries. Indirect access to Euroclear is also available to
other firms that clear through or maintain a custodial relationship with a
Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear
and the related Operating Procedures of the Euroclear System and applicable
Belgian law (collectively, the "Terms and Conditions"). The Terms and
Conditions govern transfers of securities and cash within Euroclear,
withdrawals of securities and cash from Euroclear, and receipts of payments
with respect to securities in Euroclear. All securities in Euroclear are held
on a fungible basis without attribution of specific certificates to specific
securities clearance accounts. The Euroclear Operator acts under the Terms
and Conditions only on behalf of Euroclear Participants, and has no record of
or relationship with persons holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Remittance Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC
participants in accordance with DTC's normal procedures. Each DTC participant
will be responsible for disbursing such payments to the beneficial owners of
the Book-Entry Certificates that it represents and to each Financial
Intermediary for which it acts as agent. Each such Financial Intermediary
will be responsible for disbursing funds to the beneficial owners of the
Book-Entry Certificates that it represents.
Under a book-entry format, beneficial owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since
such payments will be forwarded by the Trustee to Cede. Distributions with
respect to Certificates held through Cedel or Euroclear will be credited to
the cash accounts of Cedel Participants or Euroclear Participants in
accordance with the relevant system's rules and procedures, to the extent
received by the Relevant Depositary. Such distributions will be subject to
tax reporting in accordance with relevant United States tax laws and
regulations. See "Certain Federal Income Tax Consequences--REMIC Series--
Taxation of Certain Foreign Investors" and "--Backup Withholding" in the
Prospectus. Because DTC can only act on behalf of Financial Intermediaries,
the ability of a beneficial owner to pledge Book-Entry Certificates to
persons or entities that do not participate in the Depository system, or
otherwise take actions in respect of such Book-Entry Certificates, may be
limited due to the lack of physical certificates for such Book-Entry
Certificates. In addition, issuance of the Book-Entry Certificates in
book-entry form may reduce the liquidity of such Certificates in the
secondary market since certain potential investors may be unwilling to
purchase Certificates for which they cannot obtain physical certificates.
Monthly and annual reports on the Trust will be provided to Cede, as
nominee of DTC, and may be made available by Cede to beneficial owners upon
request, in accordance with the rules, regulations and procedures creating
and affecting the Depository, and to the Financial Intermediaries to whose
DTC accounts the Book-Entry Certificates of such beneficial owners are
credited.
DTC has advised the Trustee that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by
the holders of the Book-Entry Certificates under the Agreement only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Certificates are credited, to the extent that such actions are
taken on behalf of Financial Intermediaries whose holdings include such
Book-Entry Certificates. Cedel or the Euroclear Operator, as the case may be,
will take any other action permitted to be taken by a Certificateholder under
the Agreement on behalf of a Cedel Participant or Euroclear Participant only
in accordance with its relevant rules and procedures and subject to the
ability of the Relevant Depositary to effect such actions on its behalf
through DTC. DTC may take actions, at the direction of the related
Participants, with respect to some Offered Certificates which conflict with
actions taken with respect to other Offered Certificates.
Definitive Certificates will be issued to beneficial owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a)
DTC or the Company advises the Trustee in writing that DTC is no longer
willing, qualified or able to discharge properly its responsibilities as
nominee and depository with respect to the Book-Entry Certificates and the
Company or the Trustee is unable to locate a qualified successor, (b) the
Company, at its sole option, with the consent of the Trustee, elects to
terminate a book-entry system through DTC or (c) after the occurrence of an
Event of Default, beneficial owners having Percentage Interests aggregating
not less than 51% of the Book-Entry Certificates advise the Trustee and DTC
through the Financial Intermediaries and the DTC participants in writing that
the continuation of a book-entry system through DTC (or a successor thereto)
is no longer in the best interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and
thereafter the Trustee will recognize the holders of such Definitive
Certificates as Certificateholders under the Agreement.
Although DTC, Cedel and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Offered Certificates among
participants of DTC, Cedel and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time.
Neither the Company, the Servicer nor the Trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Certificates held
by Cede & Co., as nominee for DTC, or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of
the Offered Certificates will be added to the general funds of the Company.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
An election will be made to treat the Trust Fund as a "real estate
mortgage investment conduit" (a "REMIC") for federal income tax purposes.
The Class A and Class B Certificates will constitute "regular interests" in
the REMIC, and the Class R Certificate will constitute the sole class of
"residual interest" in the REMIC.
ORIGINAL ISSUE DISCOUNT
The Offered Certificates may be issued with original issue discount for
federal income tax purposes. For purposes of determining the amount and the
rate of accrual of original issue discount and market discount, the Company
intends to assume that there will be prepayments on the Contracts at a rate
equal to ____% of the Prepayment Model (as defined herein). No
representation is made as to whether the Contracts will prepay at that rate
or any other rate. See "Yield and Prepayment Considerations" herein and
"Certain Federal Income Tax Consequences" in the Prospectus.
A reasonable application of the principles of the OID Regulations to the
Class _____ Certificates generally would be to report all income with respect
to such Certificates as original issue discount for each period, computing
such original issue discount (i) by assuming that the value of the applicable
index with respect to such Certificates will remain constant for purposes of
determining the original yield to maturity of each such Class of Certificates
and projecting future distributions on such Certificates, thereby treating
such Certificates as fixed rate instruments to which the original issue
discount computation rules described in the Prospectus can be applied, and
(ii) by accounting for any positive or negative variation in the actual value
of the applicable index in any period from its assumed value as a current
adjustment to original issue discount with respect to such period. See
"Certain Federal Income Tax Consequences" in the Prospectus.
The Offered Certificates will be treated as regular interests in a REMIC
under section 860G of the Code. Accordingly, the Offered Certificates will
be treated as (i) assets described in section 7701(a)(19)(C) of the Code, and
(ii) "real estate assets" within the meaning of section 856(c)(5)(B) of the
Code, in each case to the extent described in the Prospectus. Interest on
the Offered Certificates will be treated as interest on obligations secured
by mortgages on real property within the meaning of section 856(c)(3)(B) of
the Code to the same extent that the Offered Certificates are treated as real
estate assets. See "Certain Federal Income Tax Consequences" in the
Prospectus.
EFFECT OF LOSSES AND DELINQUENCIES
As described above under "Description of the Certificates," the Class
A-3 and Class B Certificates are subordinated to the Senior Certificates. In
the event there are losses or delinquencies on the Contracts, amounts that
otherwise would be distributed on the Class A-3 and Class B Certificates may
instead be distributed on the Senior Certificates. Holders of the Class A-3
and Class B Certificates nevertheless will be required to report interest
with respect to such Class A-3 and Class B Certificates under an accrual
method without giving effect to delays and reductions in distributions on
such Certificates attributable to losses and delinquencies on the Contracts,
except to the extent it can be established, for tax purposes, that such
amounts are uncollectible. As a result, the amount of income reported by
holders of the Class A-3 and Class B Certificates in any period could
significantly exceed the amount of cash distributed to such holders in that
period. The holders of the Class A-3 and Class B Certificates will
eventually be allowed a loss (or will be allowed to report a lesser amount of
income) to the extent that the aggregate amount of distributions on such
Certificates is reduced as a result of losses and delinquencies on the
Contracts in the Contract Pool. However, the timing and character of such
losses or reductions in income are uncertain. Although not entirely clear,
it appears that holders of the Class A-3 and Class B Certificates that are
corporations should in general be allowed to deduct as an ordinary loss any
loss sustained during the taxable year on account of any such Certificates
becoming wholly or partially worthless, and that, in general, holders of
Certificates that are not corporations should be allowed to deduct as short-
term capital loss any loss sustained during the taxable year on account of
any such Certificates becoming wholly worthless. Although the matter is
unclear, non-corporate holders of Certificates may be allowed a bad debt
deduction at such time that the principal balance of any such Certificate is
reduced to reflect realized losses resulting from any Liquidated Contracts.
The Internal Revenue Service, however, could take the position that non-
corporate holders will be allowed a bad debt deduction to reflect realized
losses only after all Contracts remaining in the related Trust Fund have been
liquidated or the Certificates have been otherwise retired. Potential
investors and Holders of the Certificates are urged to consult their own tax
advisors regarding the appropriate timing, amount and character of any loss
sustained with respect to such Certificates, including any loss resulting
from the failure to recover previously accrued interest or discount income.
Special loss rules are applicable to banks and thrift institutions, including
rules regarding reserves for bad debts. Such taxpayers are advised to
consult their tax advisors regarding the treatment of losses on Certificates.
BACKUP WITHHOLDING
Certain Certificate Owners may be subject to backup withholding at the
rate of 31% with respect to interest paid on the Offered Certificates if the
Certificate Owners, upon issuance, fail to supply the Trustee or their broker
with their taxpayer identification number, furnish an incorrect taxpayer
identification number, fail to report interest, dividends, or other
"reportable payments" (as defined in the Code) properly, or, under certain
circumstances, fail to provide the Trustee or their broker with a certified
statement, under penalty of perjury, that they are not subject to backup
withholding.
The Trustee will be required to report annually to the IRS, and to each
Offered Certificateholder of record, the amount of interest paid (and OID
accrued, if any) on the Offered Certificates (and the amount of interest
withheld for federal income taxes, if any) for each calendar year, except as
to exempt holders (generally, holders that are corporations, certain tax-
exempt organizations or nonresident aliens who provide certification as to
their status as nonresidents). As long as the only "Class A
Certificateholder" of record is Cede, as nominee for DTC, Certificate Owners
and the IRS will receive tax and other information including the amount of
interest paid on such Certificates owned from Participants and indirect
Participants rather than from the Trustee. (The Trustee, however, will
respond to requests for necessary information to enable Participants,
indirect Participants and certain other persons to complete their reports.)
Each non-exempt Certificate Owner will be required to provide, under penalty
of perjury, a certificate on IRS Form W-9 containing his or her name,
address, correct federal taxpayer identification number and a statement that
he or she is not subject to backup withholding. Should a nonexempt
Certificate Owner fail to provide the required certification, the
Participants or indirect Participants (or the Paying Agent) will be required
to withhold 31% of the interest (and principal) otherwise payable to the
holder, and remit the withheld amount to the IRS as a credit against the
holder's federal income tax liability.
Such amounts will be deemed distributed to the affected Certificate
Owner for all purposes of the Certificates and the Agreement.
FEDERAL INCOME TAX CONSEQUENCES TO FOREIGN INVESTORS
The following information describes the United States federal income tax
treatment of holders that are not United States persons ("Foreign
Investors"). The term "Foreign Investors" means any person other than (i) a
citizen or resident of the United States, (ii) a corporation, partnership or
other entity treated as a corporation or partnership for U.S. federal income
tax purposes organized in or under the laws of the United States, any state
thereof or the District of Columbia (unless, in the case of a partnership,
Treasury regulations provide otherwise), (iii) an estate the income of which
is includible in gross income for United States federal income tax purposes,
regardless of its source or (iv) a trust if a court within the United States
is able to exercise primary supervision over the administration of the trust
and one or more United States persons have authority to control all
substantial decisions of the trust. Notwithstanding the preceding sentence,
to the extent provided in Treasury regulations, certain trusts in existence
on August 20, 1996 which were treated as United States persons prior to such
date that elect to continue to be treated as United States persons also will
be a U.S. Holder.
The Code and Treasury regulations generally subject interest paid to a
Foreign Investor to a withholding tax at a rate of 30% (unless such rate were
changed by an applicable treaty). The withholding tax, however, is
eliminated with respect to certain "portfolio debt investments" issued to
Foreign Investors. Portfolio debt investments include debt instruments
issued in registered form for which the United States payor receives a
statement that the beneficial owner of the instrument is a Foreign Investor.
The Offered Certificates will be issued in registered form, therefore if the
information required by the Code is furnished (as described below) and no
other exceptions to the withholding tax exemption are applicable, no
withholding tax will apply to the Offered Certificates.
For the Offered Certificates to constitute portfolio debt investments
exempt from the United States withholding tax, the withholding agent must
receive from the Certificate Owner an executed IRS Form W-8 signed under
penalty of perjury by the Certificate Owner stating that the Certificate
Owner is a Foreign Investor and providing such Certificate Owner's name and
address. The statement must be received by the withholding agent in the
calendar year in which the interest payment is made, or in either of the two
preceding calendar years.
A Certificate Owner that is a nonresident alien or foreign corporation
will not be subject to United States federal income tax on gain realized on
the sale, exchange, or redemption of such Offered Certificate, provided that
(i) such gain is not effectively connected with a trade or business carried
on by the Certificate Owner in the United States, (ii) in the case of a
Certificate Owner that is an individual, such Certificate Owner is not
present in the United States for 183 days or more during the taxable year in
which such sale, exchange or redemption occurs and (iii) in the case of gain
representing accrued interest, the conditions described in the immediately
preceding paragraph are satisfied.
NEW WITHHOLDING REGULATIONS
On October 6, 1997, the Treasury Department issued new regulations (the
"New Regulations") which make certain modifications to the withholding,
backup withholding and information reporting rules described above. The New
Regulations attempt to unify certification requirements and modify reliance
standards. The New Regulations will generally be effective for payments made
after December 31, 1998, subject to certain transition rules. Prospective
investors are urged to consult their own tax advisors regarding the New
Regulations.
For further information regarding the federal income tax consequences of
investing in the Certificates, see "Certain Federal Income Tax Consequences"
in the Prospectus.
STATE TAX CONSIDERATIONS
The Company makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Offered Certificates under the tax
laws of any state. Investors considering an investment in the Offered
Certificates should consult their own tax advisors regarding such tax
consequences.
All investors should consult their own tax advisors regarding the
federal, state, local or foreign income tax consequences of the purchase,
ownership and disposition of the Offered Certificates.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), imposes certain restrictions on employee benefit plans that are
subject to ERISA ("Plans") and on persons who are fiduciaries with respect to
such Plans. See "ERISA Considerations" in the Prospectus.
CLASS A-1 AND CLASS A-2 CERTIFICATES
As discussed in the Prospectus under "ERISA Considerations" and subject
to the limitations discussed thereunder, the Company believes that the
Exemption (as defined in the Prospectus) granted to the Underwriter will
apply to the acquisition and holding by Plans of Senior Certificates sold by
the Underwriters and that all conditions of the Exemption other than those
within the control of the investors have been met. See "ERISA
Considerations" in the Prospectus. In addition, as of the date hereof, no
obligor with respect to Contracts included in the Trust Fund constitutes more
than five percent of the aggregate unamortized principal balance of the
assets of the Trust Fund.
Employee benefit plans that are governmental plans (as defined in
section 3(32) of ERISA) and church plans (as defined in section 3(33) of
ERISA) are not subject to ERISA requirements. Accordingly, assets of such
plans may be invested in the Senior Certificates without regard to the ERISA
restrictions described above, subject to applicable provisions of other
federal and state laws.
Any Plan fiduciary who proposes to cause a Plan to purchase Senior
Certificates should consult with its own counsel with respect to the
potential consequences under ERISA and the Internal Revenue Code of 1986, as
amended (the "Code") of the Plan's acquisition and ownership of Senior
Certificates. Assets of a Plan or individual retirement account should not
be invested in the Senior Certificates unless it is clear that the assets of
the Trust Fund will not be plan assets or unless it is clear that the
Exemption or a prohibited transaction class exemption will apply and exempt
all potential prohibited transactions.
CLASS A-3 AND CLASS B CERTIFICATES
As discussed in the Prospectus, because the Class A-3 and Class B
Certificates are subordinated to the Senior Certificates, the Exemption will
not apply to the Class A-3 and Class B Certificates. See "ERISA Considera-
tions--Subordinated Certificates" in the Prospectus.
As such, no transfer of a Class A-3 and Class B Certificate shall be
registered unless the prospective transferee provides the Trustee and the
Company with (a) a certification to the effect that (1) such transferee is
neither an employee benefit plan subject to section 406 or section 407 of
ERISA, or section 4975 of the Code, the trustee of any such plan nor a person
acting on behalf of any such plan nor a person using the assets of any such
plan and (2) if such transferee is an insurance company, it is purchasing
such certificates with funds contained in an "insurance company general
account" (as such term is defined in section v(e) of the Prohibited
Transaction Class Exemption 95-60 ("PTCE 95-60")) and that the purchase and
holding of such certificates are covered under PTCE 95-60; or (b) an opinion
of counsel (a "benefit plan opinion") satisfactory to the Trustee and the
Company, and upon which the Trustee and the Company shall be entitled to
rely, to the effect that the purchase or holding of a Class A-3 or Class B
Certificate by the prospective transferee will not result in the assets of
the Trust Fund being deemed to be plan assets and subject to the prohibited
transaction provisions of ERISA or the Code and will not subject the Trustee
or the Company to any obligation in addition to those undertaken by such
entities in the agreement, which opinion of counsel shall not be an expense
of the Trustee or the Company. Unless such certification or opinion is
delivered, Certificate Owners of the Class A-3 and Class B Certificates will
be deemed to make the representations in clause (a)(1). See "ERISA
Considerations" in the Prospectus.
LEGAL INVESTMENT CONSIDERATIONS
The Class A-3 and Class B Certificates will not constitute "mortgage
related securities" under the Secondary Mortgage Market Enhancement Act of
1984. The appropriate characterization of the Class A-3 and Class B
Certificates under various legal investment restrictions, and thus the
ability of investors subject to these restrictions to purchase Class A-3 and
Class B Certificates, may be subject to significant interpretive
uncertainties. All investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether,
and to what extent, the Class A-3 and Class B Certificates will constitute
legal investments for them.
The Company makes no representation as to the proper characterization of
the Class A-3 and Class B Certificates for legal investment or financial
institution regulatory purposes, or as to the ability of particular investors
to purchase Class A-3 and Class B Certificates under applicable legal
investment restrictions. The uncertainties described above (and any
unfavorable future determinations concerning legal investment or financial
institution regulatory characteristics of the Class A-3 and Class B
Certificates) may adversely affect the liquidity of the Class A-3 and Class B
Certificates.
UNDERWRITING
Each of the Underwriters have severally agreed, subject to the terms and
conditions of the Underwriting Agreement, to purchase from the Company the
respective principal amounts of the Offered Certificates set forth opposite
their names below.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT PRINCIPAL AMOUNT PRINCIPAL AMOUNT PRINCIPAL AMOUNT
OF OF OF OF
CLASS A-1 CLASS A-2 CLASS A-3 CLASS B
UNDERWRITER CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
<S> <C> <C> <C> <C>
Total. . .
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase all of the Offered
Certificates offered hereby if any Offered Certificates are purchased. In
the event of default by an Underwriter, the Underwriting Agreement provides
that, in certain circumstances, the Underwriting Agreement may be terminated.
The Company has been advised by the Underwriters that they propose
initially to offer the Offered Certificates to the public at the respective
offering prices set forth on the cover page hereof and to certain dealers at
such prices less concessions not to exceed ____% of the Class ___ Certificate
Principal Balance and ____% of the Class ___ Certificate Principal Balance.
With respect to the Class ___ Certificates, the Underwriters may allow
and such dealers may reallow, a concession not to exceed ____% of such
Certificate Principal Balance. With respect to the Class ___ Certificates,
the Underwriters may allow and such dealers may reallow, a concession not to
exceed ____% of Certificate Principal Balance.
Until the distribution of the Offered Certificates is completed, rules
of the Commission may limit the ability of the Underwriters and certain
selling group members to bid for and purchase the Offered Certificates. As
an exception to these rules, the Underwriters are permitted to engage in
certain transactions that stabilize the price of the Offered Certificates.
Such transactions consist of bids or purchases for the purpose of pegging,
fixing or maintaining the price of the Offered Certificates.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases.
Neither the Company nor any of the Underwriters makes any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above may have on the prices of the Offered
Certificates. In addition, neither the Company nor any of the Underwriters
makes any representation that the Underwriters will engage in such
transactions or that such transactions, once commenced, will not be
discontinued without notice.
After the initial public offering of the Offered Certificates, the
public offering price and such concessions may be changed.
Pursuant to the Underwriting Agreement, the Company has agreed to
indemnify the Underwriters against certain liabilities, including civil
liabilities under the Securities Act, or contribute to payments which the
Underwriters may require to make in respect thereof.
The Company has agreed that for a period of 30 days from the date of
this Prospectus Supplement it will not offer or sell publicly any other
manufactured housing contract pass-through certificates without the
Underwriters' consent.
LEGAL MATTERS
The validity of the Offered Certificates will be passed upon for the
Company by Boult, Cummings, Conners & Berry, PLC, Nashville, Tennessee.
Certain legal matters will be passed upon for the Underwriters by Brown &
Wood LLP, New York, New York. The material federal income tax consequences
of the Offered Certificates will be passed upon for the Company by Brown &
Wood LLP.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there by any sale of these
securities in any state in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such state.
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered
Manufactured Housing Contract Senior/Subordinate Pass-Through Certificates,
Series _____ (the "Global Securities") will be available only in book-entry
form. Investors in the Global Securities may hold such Global Securities
through any of The Depository Trust Company ("DTC"), Cedel or Euroclear. The
Global Securities will be tradeable as home market instruments in both the
European and U.S. domestic markets. Initial settlement and all secondary
trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Cedel and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures
applicable to U.S. corporate debt obligations.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Certificates will be effected on a
delivery-against-payment basis through the respective Depositaries of Cedel
and Euroclear (in such capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain
requirements and deliver appropriate U.S. tax documents to the securities
clearing organizations or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name
of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, Cedel and
Euroclear will hold positions on behalf of their participants through their
respective Depositaries, which in turn will hold such positions in accounts
as DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to conventional eurobonds, except
that there will be no temporary global security and no "lock-up" or
restricted period. Investor securities custody accounts will be credited
with their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global
security and no 'lock-up' or restricted period. Global Securities will be
credited to the securities custody accounts on the settlement date against
payment in same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired
value date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior
manufactured housing contract pass-through certificates issues in same-day
funds.
Trading between Cedel and/or Euroclear Participants. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC seller and Cedel or Euroclear purchaser. When
Global Securities are to be transferred from the account of a DTC Participant
to the account of a Cedel Participant or a Euroclear Participant, the
purchaser will send instructions to Cedel or Euroclear through a Cedel
Participant or Euroclear Participant at least one business day prior to
settlement. Cedel or Euroclear will instruct the respective Depositary, as
the case may be, to receive the Global Securities against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment date to and excluding the settlement date, on the basis
of the actual number of days in such accrual period and a year assumed to
consist of 360 days. For transactions settling on the 31st of the month,
payment will include interest accrued to and excluding the first day of the
following month. Payment will then be made by the respective Depositary of
the DTC Participant's account against delivery of the Global Securities.
After settlement has been completed, the Global Securities will be system and
by the clearing system, in accordance with its usual procedures, to the Cedel
Participant's or Euroclear Participant's account. The securities credit will
appear the next day (European time) and the cash debt will be back-valued to,
and the interest on the Global Securities will accrue from, the value date
(which would be the preceding day when settlement occurred in New York). If
settlement is not completed on the intended value date (i.e., the trade
fails), the Cedel or Euroclear cash debt will be valued instead as of the
actual settlement date.
Cedel Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to
preposition funds for settlement, either from cash on hand or existing lines
of credit, as they would for any settlement occurring within Cedel or
Euroclear. Under this approach, they may take on credit exposure to Cedel or
Euroclear until the Global Securities are credited to their accounts one day
later.
As an alternative, if Cedel or Euroclear has extended a line of credit
to them, Cedel Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Cedel Participants or Euroclear
Participants purchasing Global Securities would incur overdraft charges for
one day, assuming they cleared the overdraft when the Global Securities were
credited to their accounts. However, interest on the Global Securities would
accrue from the value date. Therefore, in many cases the investment income on
the Global Securities earned during that one-day period may substantially
reduce or offset the amount of such overdraft charges, although this result
will depend on each Cedel Participant's or Euroclear Participant's particular
cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities
to the respective European Depositary for the benefit of Cedel Participants
or Euroclear Participants. The sale proceeds will be available to the DTC
seller on the settlement date. Thus, to the DTC Participants a cross-market
transaction will settle no differently than a trade between two DTC
Participants.
Trading between Cedel or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, Cedel Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to Cedel or Euroclear through a Cedel Participant or Euroclear
Participant at least one business day prior to settlement. In these cases
Cedel or Euroclear will instruct the respective Depositary, as appropriate,
to deliver the Global Securities to the DTC Participant's account against
payment. Payment will include interest accrued on the Global Securities from
and including the last coupon payment to and excluding the settlement date on
the basis of the actual number of days in such accrual period and a year
assumed to consist of 360 days. For transactions settling on the 31st of the
month, payment will include interest accrued to and excluding the first day
of the following month. The payment will then be reflected in the account of
the Cedel Participant or Euroclear Participant the following day, and receipt
of the cash proceeds in the Cedel Participant's or Euroclear Participant's
account would be back-valued to the value date (which would be the preceding
day, when settlement occurred in New York). Should the Cedel Participant or
Euroclear Participant have a line of credit with its respective clearing
system and elect to be in debt in anticipation of receipt of the sale
proceeds in its account, the back-valuation will extinguish any overdraft
incurred over that one-day period. If settlement is not completed on the
intended value date (i.e., the trade fails), receipt of the cash proceeds in
the Cedel Participant's or Euroclear Participant's account would instead be
valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Cedel Participants or
Euroclear Participants should note that these trades would automatically fail
on the sale side unless affirmative action were taken. At least three
techniques should be readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until the
purchase side of the day trade is reflected in their Cedel or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC
Participant no later than one day prior to settlement, which would give
the Global Securities sufficient time to be reflected in their Cedel or
Euroclear account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the
trade so that the value date for the purchase from the DTC Participant
is at least one day prior to the value date for the sale to the Cedel
Participant or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through Cedel
or Euroclear (or through DTC if the holder has an address outside the U.S.)
will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons, unless (i) each clearing system, bank or other
financial institution that holds customers' securities in the ordinary course
of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (ii) such beneficial owner takes
one of the following steps to obtain an exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status).
If the information shown on Form W-8 changes, a new Form W-8 must be filed
within 30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a
U.S. branch, for which the interest income is effectively connected with its
conduct of a trade or business in the United States, can obtain an exemption
from the withholding tax by filing Form 4224 (Exemption from Withholding of
Tax on Income Effectively Connected with the Conduct of a Trade or Business
in the United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons that are Certificate Owners residing
in a country that has a tax treaty with the United States can obtain an
exemption or reduced tax rate (depending on the treaty terms) by filing Form
1001 (Ownership, Exemption or Reduced Rate Certificate). If the treaty
provides only for a reduced rate, withholding tax will be imposed at that
rate unless the filer alternatively files Form W-8. Form 1001 may be filed by
the Certificate Owners or his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's
Request for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his
agent, files by submitting the appropriate form to the person through whom it
holds (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity treated as a
corporation or partnership for U.S. federal income tax purposes organized in
or under the laws of the United States, any state thereof or the District of
Columbia (unless, in the case of a partnership, Treasury regulations provide
otherwise) (iii) an estate or trust the income of which is includible in
gross income for United States tax purposes, regardless of its source, or a
trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United
States persons have authority to control all substantial decisions of the
trust. Notwithstanding the preceding sentence, to the extent provided in
regulations, certain trusts in existence on August 20, 1996 and treated as
United States persons prior to such date that elect to continue to be treated
as United States persons shall be considered U.S. persons as well.
This summary does not deal with all aspects of U.S. federal income tax
withholding that may be relevant to foreign holders of the Global Securities.
Investors are advised to consult their own tax advisors for specific tax
advice concerning their holding and disposing of the Global Securities.
<PAGE>
PROSPECTUS
- ----------
VANDERBILT MORTGAGE AND FINANCE, INC.,
SELLER AND SERVICER
MANUFACTURED HOUSING CONTRACT PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
Manufactured Housing Contract Pass-Through Certificates ("Certificates")
of one or more series (each, a "Series") may be offered and sold from time to
time under this Prospectus and a Prospectus Supplement for each such Series.
The Certificates of each Series may be issued in one or more classes or
subclasses (each, a "Class"), as further described herein. If the
Certificates of a Series are issued in more than one Class, all or less than
all of such Classes may be offered and sold under this Prospectus, and there
may be separate Prospectus Supplements for one or more of such Classes so
offered and sold (the "Offered Certificates"). Any reference herein to the
Prospectus Supplement relating to a Series comprised of more than one Class
should be understood to refer to each of the Prospectus Supplements relating
to the Classes sold hereunder.
The Certificates evidence specified interests in separate pools of
manufactured housing installment sales contracts, installment loan agreements
and mortgage loans (the "Contracts"), as more particularly described herein,
and in certain other property conveyed by Vanderbilt Mortgage and Finance,
Inc. (the "Company"). The Contracts included in any Contract Pool will be
described in the related Prospectus Supplement. The Contracts will have been
originated or purchased in the ordinary course of business by the Company.
Specific information, to the extent available, regarding the size and
composition of the pool of Contracts relating to each Series of Certificates
will be set forth in the related Prospectus Supplement. In addition, if so
specified in the related Prospectus Supplement, the property of the Trust
Fund will include monies on deposit in a trust account (the "Pre-Funding
Account") to be established with the Trustee, which will be used to purchase
additional manufactured housing installment sales contracts, installment loan
agreements and mortgage loans (the "Subsequent Contracts") from the Company
from time to time during the Funding Period specified in the related
Prospectus Supplement. A pool insurance policy, letter of credit, limited
guarantee of Clayton Homes, Inc., surety bond, cash reserve fund, or other
form of credit enhancement, or any combination thereof, may be provided with
respect to a Series of Certificates, or one or more Classes of such Series,
evidencing interests in the Contracts. The Company will act as Servicer (in
such capacity referred to herein as the "Servicer") of the Contracts.
Each Series of Certificates will consist of one or more Classes of
Certificates, which may include one or more senior classes of Certificates
(the "Senior Certificates") and one or more Classes or sub-classes
representing interests in specified percentages (which may be 0%) of
principal or interest, or both, in distributions on the pool of Contracts
relating to such Series, as specified in the related Prospectus Supplement.
Each Prospectus Supplement will describe the Series and Class or Classes of
Certificates offered hereby.
The Prospectus Supplement will set forth the Remittance Rate that will
be paid to Certificateholders of each Class or sub-class of such Series.
Such Remittance Rate may be fixed, variable or adjustable, as specified in
the related Prospectus Supplement.
The related Prospectus Supplement will describe the limited
representations and warranties of the Company in the Pooling and Servicing
Agreement applicable to each class or series of Certificates. Except for
certain representations and warranties relating to the Contracts and certain
other exceptions, the Servicer's obligations with respect to the Certificates
evidencing interests in a pool of Contracts are limited to its contractual
servicing obligations. If so specified in the related Prospectus Supplement,
the Servicer may be obligated, under certain terms and conditions, to advance
the amount of any delinquent payments of principal and interest during the
immediately preceding Due Period (as defined herein), but only to the extent
the Servicer determines such advances are recoverable from future payments
and collections on the Contracts or otherwise. See "Description of the
Certificates -- Advances" and "-- Distributions on Certificates."
There will have been no public market for any Certificates sold
hereunder prior to the offering thereof and there is no assurance that any
such market will develop. The Underwriters named in the Prospectus
Supplement relating to a Series may from time to time buy and sell
Certificates of such Series, but there can be no assurance that an active
secondary market therefor will develop, and there is no assurance that any
such market, if established, will continue.
The Company may elect to cause the Trust Fund relating to a Series of
Certificates to be treated as a "Real Estate Mortgage Investment Conduit" (a
"REMIC") for federal income tax purposes. See "Certain Federal Income Tax
Consequences" herein.
Capitalized terms used herein and not defined shall have the respective
meanings assigned to such terms in the Glossary.
CERTAIN FACTORS SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
CERTIFICATES. SEE "RISK FACTORS" HEREIN AND IN THE RELATED PROSPECTUS
SUPPLEMENT.
THE CERTIFICATES WILL NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE
COMPANY OR, UNLESS OTHERWISE SPECIFIED IN THE RELATED PROSPECTUS SUPPLEMENT,
ANY OF ITS AFFILIATES. THE CERTIFICATES WILL NOT BE INSURED OR GUARANTEED BY
ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF A SERIES OF
CERTIFICATES, UNLESS ACCOMPANIED BY A PROSPECTUS SUPPLEMENT.
_______________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
_______________
The date of this Prospectus is December___, 1997.
<PAGE>
REPORTS TO CERTIFICATEHOLDERS
The Company will cause to be provided to the holders of the Certificates
of each Class or Series certain monthly and annual reports concerning such
Certificates and the related Trust Funds as further described in the related
Prospectus Supplement under "Description of the Certificates -- Reports to
Certificateholders."
AVAILABLE INFORMATION
This Prospectus contains, and the Prospectus Supplement for each Class
or Series of Certificates will contain, a summary of certain material terms
of certain of the documents referred to herein and therein, but neither
contains nor will contain all of the information set forth in the
Registration Statement of which this Prospectus is a part (the "Registration
Statement"). For further information, reference is made to such Registration
Statement and the exhibits thereto which the Company has filed with the
Securities and Exchange Commission (the "Commission"), under the Securities
Act of 1933, as amended. Statements contained in this Prospectus and any
Prospectus Supplement describing a provision of any contract or other
document referred to are summaries, and if this Prospectus or such Prospectus
Supplement indicates that such contract or other document has been filed as
an exhibit to the Registration Statement, reference is made to the copy of
the contract or other document filed as an exhibit, each such statement being
qualified in all respects by reference to the actual provision being
described. Copies of the Registration Statement can be inspected and, upon
payment of the Commission's prescribed charges, copied at the public
reference facilities maintained by the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 and at certain of its Regional
Offices located as follows: Northeast Regional Office, 7 World Trade Center,
Suite 1300, New York, New York 10048, and Midwest Regional Office, Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
In addition, the Commission maintains a Web site at http://www.sec.gov
containing reports, proxy and information statements and other information
regarding registrants, including the Company, that file electronically with
the Commission.
CHI has securities (other than the Certificates) listed on the New York
Stock Exchange and reports and other information concerning CHI can be
inspected at such exchange.
INCORPORATION OF CERTAIN DOCUMENTS OF THE COMPANY BY REFERENCE
All documents filed by the Company pursuant to Section 13(a), 13(c), 14
or 15(d) of the Securities Exchange Act of 1934, as amended, subsequent to
the date of this Prospectus and prior to the termination of the offering of
the Certificates shall be deemed to be incorporated by reference into this
Prospectus and the Prospectus Supplement and to be a part thereof from the
respective dates of filing of such documents, except that reports relating to
the operation of a specific Trust Fund shall not be incorporated by reference
herein or made part hereof. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent
that a statement contained herein or in any other subsequently filed document
which also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any statement so modified or superseded shall not
be deemed, except as so modified or superseded, to constitute a part of this
Prospectus. The Company is subject to informational requirements of the
Securities Exchange Act of 1934 Act, as amended, and in accordance therewith
files reports and other information with the Commission.
The Company will provide without charge to any person to whom this
Prospectus is delivered, upon the written or oral request of such person, a
copy of any or all of the foregoing documents incorporated herein by
reference (other than certain exhibits to such documents). Requests for such
copies should be directed to David Jordan, Controller, 4726 Airport Highway,
Louisville, Tennessee 37777, telephone number (423) 970-7200, the above
mailing address and telephone number being that of the Company's principal
executive office.
INCORPORATION OF CERTAIN DOCUMENTS OF CHI BY REFERENCE
With respect to any Class of Offered Certificates that is supported by a
guarantee of CHI, CHI's Annual Report on Form 10-K for the year ended June
30, 1997, and CHI's Quarterly Report for the quarterly period ended September
30, 1997, which have been filed with the Commission, are hereby incorporated
by reference in this Prospectus and the related Prospectus Supplement. CHI
is subject to informational requirements of the Securities Exchange Act of
1934, as amended, and in accordance therewith files reports and other
information with the Commission.
With respect to any Class of Offered Certificates that is supported by a
guarantee of CHI, all documents filed by CHI pursuant to Section 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended,
subsequent to the date of this Prospectus and prior to the termination of the
offering of the Certificates shall be deemed to be incorporated by reference
into this Prospectus and the related Prospectus Supplement and to be a part
thereof from the respective dates of filing of such documents. Any statement
contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any
other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
CHI will provide without charge to any person to whom this Prospectus is
delivered, upon the written or oral request of such person, a copy of any or
all of the foregoing documents incorporated herein by reference (other than
certain exhibits to such documents). Requests for such copies should be
directed to Kevin T. Clayton, President, 1105 North Market Street, Suite
1300, Wilmington, Delaware 19899, telephone number (423) 595-4700, the above
mailing address and telephone number being that of CHI's principal executive
office.
<PAGE>
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the accompanying
Prospectus Supplement. Capitalized terms used herein shall have the
respective meanings assigned them in the "Glossary."
Securities Manufactured Housing Contract Pass-Through
Certificates evidencing interests in a pool or pools
of Contracts (defined below) issuable in series
pursuant to separate Pooling and Servicing
Agreements (each, an "Agreement") among Vanderbilt
Mortgage and Finance, Inc. (the "Company"), as
servicer (in such capacity, together with any
successor servicer, the "Servicer") and the Trustee
(the "Trustee") specified in the related Prospectus
Supplement for such Series of Certificates (the
"Certificates").
Seller Vanderbilt Mortgage and Finance, Inc. (in such
capacity referred to herein as the "Company"), an
indirect subsidiary of Clayton Homes, Inc. ("CHI").
Servicer Vanderbilt Mortgage and Finance, Inc. (in such
capacity referred to herein as the "Servicer").
Risk Factors Certain factors are particularly relevant to a
decision to invest in any Certificates sold
hereunder. See "Risk Factors" herein.
The Contracts The Contracts evidenced by a Series of Certificates
(the "Contract Pool") will be fixed and/or variable
rate Contracts. Such Contracts, as specified in the
related Prospectus Supplement, will consist
primarily of manufactured housing installment sales
contracts and installment loan agreements and may
include modular home installment sales contracts and
installment loan agreements (the "Manufactured
Housing Contracts"). The Contracts will be
conventional contracts or contracts insured by the
Federal Housing Administration ("FHA") or partially
guaranteed by the Veterans Administration ("VA").
Each Manufactured Housing Contract will be secured
by a new or used Manufactured Home (as defined
herein) or Modular Home (as defined herein) or, in
certain instances, by a mortgage or deed of trust on
the real estate on which the manufactured home is
deemed to be permanently affixed (a "Land-and-Home
Contract"). Each Contract secured by a Modular Home
and some of the Contracts secured by a Manufactured
Home may be further secured by a mortgage or deed of
trust on real estate.
If so specified in the Prospectus Supplement, the
Contract Pool may include mortgages or deeds of
trust (the "Mortgage Loans") secured by a mortgage
or deed of trust on one- to four-family residential
properties (the "Mortgaged Properties"). The term
"Contracts" as used herein includes Mortgage Loans,
unless the context otherwise requires.
The Prospectus Supplement for each Series will
provide information with respect to (i) the
aggregate principal balance of the Contracts
comprising the Contract Pool, as of the date
specified in the Prospectus Supplement (the "Cut-off
Date"); (ii) the weighted average contractual rate
of interest (the "Contract Rate") on the Contracts;
(iii) the weighted average term to scheduled
maturity as of origination; (iv) the weighted
average term to scheduled maturity as of the Cut-off
Date and the range of terms to maturity; (v) the
percentage amount of Contracts secured by new or
used Manufactured Homes; (vi) the average
outstanding principal balance of the Contracts as of
the Cut-off Date; (vii) the range of Loan-to-Value
Ratios; and (viii) the geographic location of
Manufactured Homes securing the Contracts.
The Contracts will have been originated or purchased
by the Company in the ordinary course of its
business.
Description of
Certificates Each Class of Certificates within a Series will
evidence the interest specified in the related
Prospectus Supplement in the Contract Pool and
certain other property held in trust for the benefit
of the Certificateholders (the "Trust Fund").
Each Series of Certificates may consist of one or
more Classes, one or more of which may be Senior
Certificates ("Senior Certificates") and one or more
of which may be Subordinated Certificates
("Subordinated Certificates"). A Class of
Certificates of a Series may be divided into two or
more sub-classes, as and on the terms specified in
the related Prospectus Supplement. Each Class or
sub-class of a Series may evidence the right to
receive a specified portion (which may be 0%) of
each distribution of principal or interest or both,
on the Contracts. Each Class or sub-class of a
Series may be assigned a principal balance (the
"Stated Balance") based on the cash flow from the
assets in the Trust Fund, and a fixed, variable or
adjustable stated annual interest rate, and may be
entitled to receive distributions in reduction of
Stated Balance to the extent available therefor in
the manner, priority and amounts specified in the
related Prospectus Supplement. A Class or sub-class
of Certificates may be Compound Interest
Certificates on which interest will accrue, but not
be paid for the period set forth in the related
Prospectus Supplement. The Certificates will be
issuable in fully registered form in the authorized
denominations specified in the related Prospectus
Supplement. See "Description of the Certificates."
The Subordinated Certificates of a Series will be
subordinated in certain respects to the Senior
Certificates of the same Series. If a Series of
Certificates contains more than one Class of
Subordinated Certificates, distributions and losses
will be allocated among such Classes in the manner
specified in the related Prospectus Supplement. The
Certificates will not be guaranteed or insured by
any government agency or instrumentality.
Subordinated Certificates
and Reserve Fund One or more Classes of any Series may be
Subordinated Certificates, as specified in the
related Prospectus Supplement. The rights of the
Subordinated Certificateholders to receive any or a
specified portion of distributions with respect to
the Contracts will be subordinated to the rights of
Senior Certificateholders to the extent and in the
manner specified in the related Prospectus
Supplement. If a Series of Certificates contains
more than one Class of Subordinated Certificates,
distributions and losses will be allocated among
such classes in the manner specified in the related
Prospectus Supplement. The rights of the
Subordinated Certificateholders, to the extent not
subordinated, may be on a parity with those Senior
Certificateholders. This subordination is intended
to enhance the likelihood of regular receipt by
Senior Certificateholders of the full amount of
scheduled monthly payments of principal and interest
due them and to protect the Senior Certificate-
holders against losses.
The protection afforded to the Senior
Certificateholders by the subordination feature
described above may be effected both by the
preferential right of the Senior Certificateholders
to receive current distributions from the Contract
Pool and, to the extent specified in the related
Prospectus Supplement, by the establishment of a
reserve fund (the "Reserve Fund"). The Reserve Fund
may be funded, to the extent specified in the
related Prospectus Supplement, by one or more of an
initial cash deposit, the retention of specified
periodic distributions of principal or interest or
both otherwise payable to Subordinated
Certificateholders, or the provision of a letter of
credit, limited guarantee of CHI, insurance policy
or other form of credit enhancement or any
combination thereof. Unless otherwise specified in
the related Prospectus Supplement, the Reserve Fund
will be part of the Trust Fund.
The subordination features and the Reserve Fund
described above are intended to enhance the
likelihood of timely payment of principal and
interest and to protect the Senior
Certificateholders and, to the extent specified in
the related Prospectus Supplement, Subordinated
Certificateholders against loss. However, in
certain circumstances the Reserve Fund could be
depleted and shortfalls could result. If, on a
particular date when a distribution is due such
Certificateholders, the aggregate amount of payments
received from the obligors on the Contracts and
Advances by the Servicer (as described below), if
any, and from the Reserve Fund of a Series, if any,
do not provide sufficient funds to make full
distributions to such Certificateholders of a
Series, the amount of the shortfall may be added to
the amount such Certificateholders are entitled to
receive on the next Remittance Date. In the event
the Reserve Fund, if any, is depleted, such Senior
Certificateholders and, to the extent specified in
the related Prospectus Supplement, Subordinated
Certificateholders nevertheless will have a
preferential right to receive current distributions
from the Contract Pool. Such Certificateholders
will bear their proportionate share of losses
realized on Contracts to the extent such Reserve
Fund and subordination feature are exhausted.
Credit Enhancement As an alternative, or in addition, to the credit
enhancement afforded by subordination of the
Subordinated Certificates, credit enhancement with
respect to a Series of Certificates may be provided
by pool insurance, letters of credit, surety bonds,
a limited guarantee of CHI, cash reserve funds or
other forms of enhancement acceptable to each
nationally recognized rating agency rating a Series
of Certificates, in each case as described in the
related Prospectus Supplement.
Advances If the amount eligible for distribution to the
Certificateholders of a Series of Certificates (or
to Senior Certificateholders only if so specified in
the case of a Series of Certificates having a Class
of Subordinated Certificates) on any Remittance Date
is less than the amount which is due such
Certificateholders on such Remittance Date, the
related Agreement will provide that the Servicer is
obligated to make advances of cash (the "Advances")
to such Certificateholders subject to the
limitations described in the applicable Prospectus
Supplement, to the extent that such deficiency is
due to delinquent payments of principal and interest
during the immediately preceding Due Period (as
defined herein) and only to the extent the Servicer
determines such Advances are recoverable from future
payments and collections on the Contracts or
otherwise. See "Description of the Certificates."
Interest Interest on the Certificates will be paid on the
dates specified in the related Prospectus Supplement
(each a "Remittance Date"), commencing on the date
specified in the related Prospectus Supplement. The
related Prospectus Supplement will set forth for
each Class or sub-class of Certificates the interest
rate, if any, for each such Class or sub-class or
the method of determining such interest rate. See
"Yield Considerations" and "Description of the
Certificates." As specified in the related
Prospectus Supplement, Classes of a Series of
Certificates or sub-classes within a Class may be
entitled to receive no interest or interest which is
not proportionate to the principal allocable to such
Certificates.
Principal (Including
Prepayments) Principal collected on each Contract, including any
principal prepayments, will be passed through on
each Remittance Date, unless such principal has
previously been passed through. See "Maturity and
Prepayment Considerations" and "Description of the
Certificates." With respect to a Class or sub-class
of a Series having a Stated Balance, such
distributions may be made in the reduction of the
Stated Balance, or in an amount equal to the
Certificate Remittance Amount or such other amounts
as are specified in the related Prospectus
Supplement. See "Maturity and Prepayment
Considerations" and "Description of the Certificates
-- Distributions on Certificates" and "-- Payments
on Contracts."
Optional Termination The Company or the Servicer may at its option
repurchase all Contracts relating to a series of
Certificates remaining outstanding at such time and
under the circumstances specified in such Prospectus
Supplement. See "Description of the Certificates --
Termination of the Agreement."
Global Certificates If so specified in the related Prospectus
Supplement, the Certificates of a Series, or of one
or more Classes within a Series, will be issuable in
the form of one or more global certificates (each, a
"Global Certificate") to be held by a depositary
(each, a "Depositary") on behalf of the beneficial
owner of the Certificates, as described herein under
"Description of the Certificates -- Global Certifi-
cates." The description of the Certificates in this
Prospectus assumes that the Certificates of a Series
will not be issued in the form of Global
Certificates. If some or all of the Certificates of
a Series are issued in the form of one or more
Global Certificates, the term "Global Certificate-
holder," as used herein, will refer to such
beneficial owners of such Certificates, and the
rights of such Certificateholders will be limited as
described herein under "Description of the
Certificates -- Global Certificates."
Representations and Warranties
of the Company As a condition to the Company's conveyance of any
Contract Pool to the Trust Fund, the Company will be
required to make certain representations and
warranties in the related Agreement regarding the
Contracts. Under the terms of the Agreement, if the
Company becomes aware of a breach of any such
representation or warranty that materially adversely
affects the Trust Fund's interest in any Contract or
receives written notice of such a breach from the
Trustee or the Servicer, then the Company will be
obligated either to cure such breach or to
repurchase or substitute for the affected Contract,
in each case under the conditions further described
herein. See "Description of the Certificates --
Conveyance of Contracts" herein.
Federal Income Tax
Considerations If an election (a "REMIC Election") is made to the
Trust Fund represented by a series of Certificates
or a segregated portion thereof as a "real estate
mortgage investment conduit" (a "REMIC") under the
Internal Revenue code of 1986, as amended (the
"Code"), each class of Certificates which are
offered hereby may constitute "regular interests" or
"residual interests" in such REMIC under the Code,
with the tax consequences under the Code described
herein and in such Prospectus Supplement.
Generally, holders of Certificates that are REMIC
regular interests will be treated as if they hold a
debt obligation for federal income tax purposes.
A Class of Certificates offered hereby may represent
interests in a tiered REMIC, but all interests in
each tier of the REMIC will be created under the
same Agreement. See "Certain Federal Income Tax
Consequences -- REMIC Series."
If a REMIC Election is not made with respect to a
Series of Certificates, the Trust Fund represented
by such Certificates will be treated as a grantor
trust for federal income tax purposes and will not
be classified as an association taxable as a
corporation. In such event, each Certificateholder
will be treated as the owner of an undivided pro
rata interest in income and corpus attributable to
the related Contract Pool and any other assets held
by the Trust Fund and will be considered the
equitable owner of an undivided interest in the
Contracts included in such Contract Pool. See
"Certain Federal Income Tax Consequences -- Non-
REMIC Series."
ERISA Considerations A fiduciary of any employee benefit plan subject to
the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), or the Code, should review
carefully with its legal advisors whether the
purchase or holding of Certificates could give rise
to a transaction prohibited or otherwise
impermissible under ERISA or the Code. See "ERISA
Considerations" herein.
Legal Investment Unless otherwise indicated in the applicable
Prospectus Supplement, any Certificates offered
hereby that are rated by at least one nationally
recognized statistical rating organization in one of
its two highest rating categories will constitute
"mortgage related securities" under the Secondary
Mortgage Market Enhancement Act of 1984, as amended,
and as such (unless otherwise indicated in the
applicable Prospectus Supplement) will be "legal
investments" for certain types of institutional
investors to the extent provided in that Act,
subject, in any case, to any other regulations that
may govern investments by such institutional
investors. See "Legal Investment Considerations"
herein.
Ratings It is a condition precedent to the issuance of any
Class of Certificates sold under this Prospectus
that they be rated in one of the four highest rating
categories (within which there may be sub-categories
or gradations indicating relative standing) of at
least one nationally recognized statistical rating
organization. A security rating is not a
recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time
by the assigning rating agency.
Ratings of the Certificates address the likelihood
of the receipt of all distributions on the contracts
by the related certificateholders under the
agreements pursuant to which such certificates are
issued. The ratings take into consideration the
credit quality of the related contract pool,
including any credit support providers, structural
and legal aspects associated with such certificates,
and the extent to which payment stream on such
contract pool is adequate to make payments required
by such certificates. The ratings on such
certificates do not, however, constitute a statement
regarding frequency of prepayments on the related
contracts. See "Ratings" herein.
RISK FACTORS
Prospective investors in the Certificates should consider, among other
things, the following risk factors in connection with the purchase of the
Certificates:
1. General. An investment in the Certificates may be affected by, among
other things, a downturn in regional or local economic conditions. These
regional or local economic conditions are often volatile, and historically
have affected the delinquency, loan loss and repossession experience of the
Contracts. Moreover, regardless of its location, manufactured housing
generally depreciates in value. Consequently, the market value of certain
Manufactured Homes could be or become lower than the outstanding principal
balances of the Contracts that they secure. To the extent that losses on the
Contracts are not covered by the subordination of other Classes of
Certificates, if any, or by any other form of credit enhancement, holders of
the Certificates of a Series evidencing interests in such Contracts will bear
all risk of loss resulting from default by obligors and will have to look
primarily to the value of the Manufactured Homes for recovery of the
outstanding principal and unpaid interest on the defaulted Contracts. See
"The Trust Fund -- The Contract Pools."
2. Prepayment Considerations. The prepayment experience on the
Contracts will affect the average life of each Class of Certificates.
Prepayments on the Contracts (which include both voluntary prepayments and
liquidations following default) may be influenced by a variety of economic,
geographic, social and other factors, including repossessions, aging,
seasonality, market interest rates, changes in housing needs, job transfers
and unemployment. In the event a Contract is prepaid in full, interest on
such Contract will accrue only to the date of prepayment. If the
Certificates of any Series are purchased at a discount and the purchaser
calculates its anticipated yield to maturity based on an assumed rate of
payment of principal on such Certificates that is faster than the rate
actually realized, such purchaser's actual yield to maturity will be lower
than the yield so calculated by such purchaser.
3. Limited Obligations. The Certificates will not represent an interest
in or obligation of the Company. The Certificates will not be insured or
guaranteed by any governmental agency or instrumentality, the Underwriter or
any of its affiliates, or by the Company or (except as otherwise specified in
the related Prospectus Supplement) any of its affiliates, and will be payable
only from amounts collected on the Contracts.
4. Limited Liquidity. There can be no assurance that a secondary market
will develop for the Certificates of any Series, or, if it does develop, that
it will provide the holders of any of the Certificates with liquidity of
investment or that it will remain for the term of any Series of Certificates.
Liquidity of investment in the Certificates would be adversely affected by,
among other factors, the failure of a Trust Fund that has made a REMIC
election to continue to qualify as a REMIC and may be adversely affected by,
among other things, the absence of Certificates in physical form.
5. Security Interests and Mortgages on the Manufactured Homes. Each
Contract (other than a Land-and-Home Contract or a Mortgage Loan) is secured
by a separately evidenced security interest in a Manufactured Home. Perfection
of such security interests in the Manufactured Homes and enforcement of rights
to realize upon the value of the Manufactured Homes as collateral for the
Contracts are subject to a number of federal and state laws, including the
Uniform Commercial Code (the "UCC") as adopted in each state and each state's
certificate of title statutes, but generally not its real estate laws. The
steps necessary to perfect the security interest in a Manufactured Home will
vary from state to state. Because of the expense and administrative incon-
venience involved, the Company will not amend any certificates of title to
change the lienholder specified therein from the Company (or the applicable
originator in the case of an Acquired Contract) to the Trustee or file any
UCC-3 assignments and will not deliver any certificate of title to the
Trustee or note thereon the Trustee's interest. Consequently, in some
states, in the absence of such an amendment, the assignment to the Trustee of
the security interest in the Manufactured Home may not be effective or such
security interest may not be perfected and, in the absence of such notation
or delivery to the Trustee, the assignment of the security interest in the
Manufactured Home may not be effective against creditors of the Company (or
the applicable originator in the case of an Acquired Contract) or a trustee
in bankruptcy of the Company (or the applicable originator in the case of an
Acquired Contract).
Certain Manufactured Housing Contracts (as specified herein and in the
related Prospectus Supplement) may be secured by a mortgage or deed of trust
on the property on which a Manufactured Home or Modular Home is placed.
Because of the expense and administrative inconvenience involved, the Company
generally will not record the assignment to the Trustee of the mortgage or
deed of trust (each, a "Mortgage") securing each Land-and-Home Contract.
In some states in the absence of the recordation of such an assignment
to the Trustee of the Mortgage securing a Land-and-Home Contract, the
assignment of the Mortgage to the Trustee may not be effective against
creditors of or purchasers from the Company (or the applicable originator in
the case of an Acquired Contract) or a trustee in bankruptcy of the Company
(or the applicable originator in the case of an Acquired Contract).
6. Consumer Protection Laws and Other Limitations on Lenders. Numerous
federal and state consumer protection laws impose requirements on lending
under installment sales contracts and installment loan agreements such as the
Contracts, and the failure by the lender or seller of goods to comply with
such requirements could give rise to liabilities of assignees for amounts due
under such agreements and the right of set-off against claims by such
assignees. From time to time the Company is involved in litigation under
consumer protection laws. These laws would apply to the Trust Fund as
assignee of the Contracts. Pursuant to the Agreement, the Company will
represent and warrant that each Contract complies with all requirements of
law and will provide certain warranties relating to the validity, perfection
and priority of the security interest in each Manufactured Home securing a
Contract. A breach of any such warranty that materially adversely affects
any Contract may, subject to certain conditions described under "Description
of Certificates -- Conveyance of Contracts," create an obligation by the
Company to repurchase, or at its option substitute another contract for, such
Contract unless such breach is cured within 90 days after notice thereof. If
the Company does not honor its repurchase obligation in respect of a Contract
and such Contract were to become defaulted, recovery of amounts due on such
Contract would be dependent on repossession and resale of the Manufactured
Home securing such Contract. Certain other factors, such as the bankruptcy
of an obligor or the application of equitable principles by a court, may
limit the ability of the Certificateholders to receive payments on the
Contracts or to realize upon the Manufactured Homes or may limit the amount
realized to less than the amount due. See "Certain Legal Aspects of the
Contracts" herein.
7. Certain Matters Relating to Insolvency. The Company intends that
each transfer of Contracts to the related Trust Fund constitutes a sale,
rather than a pledge of the Contracts to secure indebtedness of the Company.
However, if the Company were to become a debtor under the federal bankruptcy
code, it is possible that a creditor or trustee in bankruptcy of the Company
or the Company as debtor-in-possession may argue that the sale of the
Contracts by the Company was a pledge of the Contracts rather than a sale.
This position, if presented to or accepted by a court, could result in a
delay in or reduction of distributions to the Certificateholders.
In Octagon Gas Systems, Inc. v. Rimmer, 995 F.2d 948 (10th Cir. 1993),
-----------------------------------
the court's decision included language to the effect that accounts sold by an
entity which subsequently became bankrupt remained property of the debtor's
bankruptcy estate. Although the Contracts constitute chattel paper rather
than accounts under the UCC, sales of chattel paper, like sales of accounts,
are governed by Article 9 of the UCC. If the Company (or the dealer that
sold the related Manufactured Home) were to become a debtor under the federal
bankruptcy code and a court were to follow the reasoning of the Tenth Circuit
and apply such reasoning to chattel paper, Certificateholders could
experience a delay in or reduction of distributions (in the case of the
dealer, only with respect to the Contracts in respect of which it sold the
related Manufactured Home).
8. Priority of Possible Tennessee Tax Lien. Under Tennessee law, a tax
is due in connection with the public recordation of instruments evidencing
indebtedness. The Company will treat the transfers of the Contracts to the
Trustee as sales rather than secured financings, and therefore will not pay
any tax in respect of the recordation of instruments evidencing such
transfers. See "Certain Legal Aspects of the Contracts -- Certain Matters
Relating to Insolvency". Nonpayment or underpayment of the Tennessee
indebtedness tax does not affect or impair the effectiveness, validity,
priority or enforceability of the security interest created or evidenced by
the instrument, but (a) subjects the holder of the indebtedness to a penalty,
in addition to the tax, in the amount of the greater of $250 or double the
unpaid tax due, (b) results in the imposition of a tax lien in favor of the
Tennessee Department of Revenue, in the amount of any tax and penalties
unpaid and owing that attaches to the collateral until the lien or security
interest is released and thereafter attaches to the proceeds, and
(c) precludes the holder of the indebtedness from maintaining an action on
the indebtedness (other than an action limited to the enforcement of the
security interests or lien) against the debtor until the nonpayment is cured.
In such event, and in addition to the statutory disability described above,
collections on the Contracts could be applied to pay such tax and penalty
prior to being applied to make distributions to Certificateholders and the
Tennessee Department of Revenue would have a lien on the Contracts prior to
the security interests and liens of the Trustee.
9. Louisiana Law. Any Contract secured by a Manufactured Home located
in the State of Louisiana will be governed by Louisiana law in addition to
Article 9 of the UCC. Louisiana law provides special mechanisms for the
enforcement of security interests in manufactured housing used as collateral
for an installment sales contract or installment loan agreement. Under
Louisiana law, so long as a manufactured home remains subject to the
Louisiana motor vehicle laws, repossession can be accomplished by voluntary
consent of the obligor, executory process (repossession proceedings which
must be initiated through the courts but which involve minimal court
supervision) or a civil suit for possession. In connection with a voluntary
surrender, the obligor must be given a full release from liability for all
amounts due under the contract. In executory process repossessions, a
sheriff's sale (with court supervision) is permitted, unless the owner brings
suit to enjoin the sale, and the lender is prohibited from seeking a
deficiency judgment against the obligor unless the lender obtained an
appraisal of the manufactured home prior to the sale and the property was
sold for at least two-thirds of its appraised value.
10. Limitations on Subordination. With respect to Certificates of a
Series having a Class or Classes of Subordinated Certificates, while the
subordination feature is intended to enhance the likelihood of timely payment
of principal and interest to the Senior Certificateholders, the protection
afforded to Senior Certificateholders may be depleted due to certain losses
on the Contracts, as specified in the Prospectus Supplement, and the Reserve
Fund, if any, could be depleted in certain circumstances. In either case,
shortfalls could result for both the Senior Certificates and the Subordinated
Certificates. Prospective purchasers of a Class of Certificates should
carefully review the credit risks to be absorbed by such Class of
Certificates on account of its subordination or the timing of the
distributions intended to be made on such Class of Certificates.
11. Limited Guarantee of CHI. If the related Prospectus Supplement so
specifies, a Class or Classes of the Certificates may be entitled to the
benefits of a limited guarantee of CHI which would be an unsecured general
obligation of CHI and would not be supported by any letter of credit or other
enhancement arrangement.
THE TRUST FUND
GENERAL
Each Trust Fund will include (i) a Contract Pool (which may consist of
sub-pools), (ii) the amounts held from time to time in trust accounts (each,
a "Certificate Account") maintained by the Trustee pursuant to the Agreement,
and (iii) proceeds from certain hazard insurance policies on individual
Manufactured Homes or Mortgaged Properties, if any, and Manufactured Homes
acquired by repossession, (iv) any letter of credit, limited guarantee of
CHI, surety bond, insurance policy, cash reserve fund or other credit
enhancement security payment of all or part of a series of Certificates, and
(v) such other property as may be specified in the related Prospectus
Supplement. If so specified in the related prospectus supplement, a limited
guarantee of CHI may exist and may not be a part of the Trust Fund.
Each Certificate will evidence the interest specified in the related
Prospectus Supplement in one Trust Fund, containing one Contract Pool (which
may consist of sub-pools) comprised of Contracts having the aggregate
principal balance as of the specified day of the month of the creation of the
pool (the "Cut-off Date") specified in the related Prospectus Supplement.
Holders of Certificates of a Series will have interests only in such Contract
Pool and will have no interest in the Contract Pool created with respect to
any other Series of Certificates.
All of the Contracts will have been purchased by the Company or an
affiliate of the Company in the open market or in privately negotiated
transactions, including transactions with affiliates of the Company. The
following is a brief description of the Contracts expected to be included in
the Trust Fund. Specific information respecting the Contracts will be
provided in the Prospectus Supplement or in a report on Form 8-K to be filed
with the Securities and Exchange Commission after the initial issuance of
such Certificates. A copy of the Agreement with respect to each Series of
Certificates will be attached to the Form 8-K and will be available for
inspection at the corporate trust office of the Trustee specified in the
related Prospectus Supplement. A schedule of the Contracts relating to such
Series will be attached to the Agreement delivered to the Trustee upon
delivery of the Certificates.
Whenever in this Prospectus terms such as "Contract Pool," "Trust Fund,"
"Agreement" or "Remittance Rate" are used, those terms respectively apply,
unless the context otherwise indicates, to one specific Contract Pool, Trust
Fund, each Agreement and the Remittance Rate applicable to the related Series
of Certificates.
THE CONTRACT POOLS
Each pool of Contracts with respect to a Series of Certificates (the
"Contract Pool") will consist primarily of manufactured housing installment
sales contracts and installment loan agreements and may include modular home
installment sales contracts and installment loan agreements (collectively,
the "Manufactured Housing Contracts") originated by either the Company, a
manufactured housing dealer or a lender in the ordinary course of business
and purchased by the Company. The Contracts will be conventional
manufactured housing contracts or contracts insured by the FHA or partially
guaranteed by the VA. Each Manufactured Housing Contract will be secured by
a new or used Manufactured Home or Modular Home or, in the case of each Land-
and-Home Contract, by a mortgage or deed of trust on real estate to which the
Manufactured Home is permanently affixed. Each Contract secured by a Modular
Home and some of the Contracts secured by a Manufactured Home may be further
secured by a mortgage or deed of trust on real estate. Except as otherwise
specified in the related Prospectus Supplement, the Contracts will be fully
amortizing and will bear interest at a fixed or variable annual percentage
rate (the "Contract Rate") or at a Contract Rate which steps up on a
particular date (a "step-up rate").
If so specified in the Prospectus Supplement, the Contract Pool will
include mortgages or deeds of trust (the "Mortgage Loans") secured by a
mortgage or deed of trust on one- to -four family residential properties (the
"Mortgaged Properties"). The Mortgage Loans were originated or acquired by
the Company in the ordinary course of business.
The Company, as seller of the Contracts, will represent that the
Manufactured Homes securing the Contracts consist of manufactured homes
within the meaning of 42 United States Code, Section 5402(6), which defines a
"manufactured home" as "a structure, transportable in one or more sections,
which, in the traveling mode, is eight body feet or more in width or forty
body feet or more in length, or, when erected on site, is three hundred
twenty or more square feet, and which is built on a permanent chassis and
designed to be used as a dwelling with or without a permanent foundation when
connected to the required utilities, and includes the plumbing, heating, air-
conditioning, and electrical systems contained therein; except that such term
shall include any structure which meets all the requirements of (this)
paragraph except the size requirements and with respect to which the
manufacturer voluntarily files a certification required by the Secretary (of
Housing and Urban Development) and complies with the standards established
under (this) chapter."
For each Series of Certificates, the Company will assign the Contracts
constituting the Contract Pool to the trustee named in the related Prospectus
Supplement (the "Trustee"). The Company, as Servicer (in such capacity
referred to herein as the "Servicer"), will service the Contracts pursuant to
the Agreement. See "Description of the Certificates -- Servicing." Unless
otherwise specified in the related Prospectus Supplement, the contract
documents relating to Manufactured Housing Contracts will be held for the
benefit of the Trustee by the Servicer and the principal documents relating
to Mortgage Loans and certain Land-and-Home Contracts will be delivered to
the Trustee or a custodian for the benefit of the Trustee.
Each Contract Pool will be composed of Contracts bearing interest at the
annual fixed and/or variable Contract Rates and/or step-up rates specified in
the Prospectus Supplement. The Monthly Payments for Contracts bearing
interest at a step-up rate (sometimes referred to herein as "step-up rate
Contracts") will increase on the dates on which the Contract Rates are
stepped up. Each registered holder of a Certificate will be entitled to
receive periodic distributions, which will typically be monthly, of all or a
portion of principal on the underlying Contracts or interest on the principal
balance of such Certificate at the Remittance Rate, or both.
The related Prospectus Supplement will disclose in summary form for the
Contracts contained in the related Contract Pool, among other things, the
year of origination of the contracts; the range of Contract Rates on the
Contracts; the range of Loan-to-Value Ratios; the minimum and maximum out-
standing principal balances as of the Cut-off Date and the average
outstanding principal balance; the range of outstanding principal balances of
the Contracts included in the Contract Pool; and the original maturities of
the Contracts and the last maturity date of any Contract. The Trust Fund may
include a Pre-Funding Account which would be used to purchase additional
Contracts ("Subsequent Contracts") from the Company during the Funding Period
specified in the related Prospectus Supplement. The related Prospectus
Supplement will specify the conditions that must be satisfied prior to any
transfer of Subsequent Contracts, including the requisite characteristics of
the Subsequent Contracts.
The Company will make representations and warranties as to the types and
geographical distribution of the Contracts included in a Contract Pool and as
to the accuracy in all material respects of certain information furnished to
the Trustee in respect of each such Contract. Upon a breach of any
representation that materially and adversely affects the interests of the
Certificateholders in a Contract, the Company will be obligated either to
cure the breach in all material respects, to purchase the Contract or to
substitute another Contract as described below. This repurchase or
substitution obligation constitutes the sole remedy available to the
Certificateholders or the Trustee for a breach of representation by the
Company. See "Description of the Certificates -- Conveyance of Contracts."
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of
each Series of Certificates will be used by the Company for general corporate
purposes, including the purchase of the Contracts, cost of carrying the
Contracts until sale of the related Certificates and to pay other expenses
connected with pooling the Contracts and issuing the Certificates.
VANDERBILT MORTGAGE AND FINANCE, INC.
Vanderbilt Mortgage and Finance, Inc. (the "Company") was incorporated
in 1977 in the State of Tennessee. As of September 30, 1997, the Company had
total assets of approximately $552 million and stockholder's equity of
approximately $211 million. The Company, an indirect subsidiary of Clayton
Homes, Inc. ("CHI"), is engaged in the business of, among other things,
purchasing, originating, selling and servicing installment sales contracts
and installment loan agreements for manufactured housing and modular housing.
CHI manufactures and sells manufactured homes and modular homes, and owns,
manages and markets manufactured housing communities. The Company's
principal office is located at 4726 Airport Highway, Louisville,
Tennessee 37777 (telephone 423-970-7200). An affiliate of CHI acts as an
insurance broker for certain types of insurance, including hazard and credit
life insurance policies, some of which may cover certain of the Contracts.
Other affiliates of CHI reinsure hazard and credit life insurance policies,
including policies that may cover certain of the Contracts. Two separate
indirect subsidiaries of CHI, Vanderbilt Life and Casualty Insurance Co.,
Ltd. and Vanderbilt Property and Casualty Insurance Co., Ltd. may act as
reinsurer of insurance coverage relating to the Contracts.
The Company purchases and originates manufactured housing contracts on
an individual basis from its principal office. The Company arranges to
purchase manufactured housing installment sales contracts originated by
manufactured housing dealers located in approximately 29 states, primarily
southern and midwestern. Most of these purchases are from dealers indirectly
owned by CHI. Dealers which are not owned by CHI must make an application to
the Company for dealer approval. Upon satisfactory results of the Company's
investigation of the dealer's creditworthiness and general business
reputation, the Company and the dealer enter into a dealer agreement.
In addition to purchasing manufactured housing contracts from dealers on
an individual basis, the Company makes bulk purchases of manufactured housing
contracts and services on behalf of other owners manufactured housing
contracts that were not originally purchased or originated by the Company.
These purchases may be from, and these servicing arrangements may be made
with respect to, the portfolios of other lenders or finance companies, the
portfolios of governmental agencies or instrumentalities or the portfolios of
other entities that purchase and hold manufactured housing contracts.
The Company is actively seeking arrangements by which it would service
manufactured housing contracts originated by other lenders. The Company's
management currently anticipates it will only seek servicing responsibilities
which relate to manufactured housing contracts.
UNDERWRITING POLICIES
GENERAL
Customers desiring to obtain financing from the Company complete a
credit application form. In the case of those dealers owned by CHI, the
manager initially evaluates the application and then forwards it to the
Company for consideration. In the case of dealers that are not owned by CHI,
the application is transmitted to the Company for consideration.
Credit applications are then evaluated by the Company's credit officers.
With respect to those customers determined to be creditworthy, the Company
requires a down payment in the form of cash, the trade-in value of a
previously owned manufactured home, and/or the estimated value of equity in
real property pledged as additional collateral. For previously owned homes,
the trade-in allowance accepted by the dealer must be consistent with the
value of such home determined by the Company in light of current market
conditions. The value of real property pledged as additional collateral is
estimated by personnel of the dealer, who are not appraisers but are familiar
with the area in which the property is located. The minimum amount of the
down payment is typically 5% of the purchase price. The purchase price
includes the stated cash sale price of the manufactured home, sales or other
taxes and certain fees and set-up costs. The balance of the purchase price
and certain insurance premiums (including up to five years of premiums on
required hazard insurance) are financed by an installment sales contract
providing for a purchase money security interest in the manufactured home and
a mortgage on real property, if any, pledged as additional collateral.
Normally, the contracts originated by the Company provide for equal monthly
payments, generally over a period of five to twenty years at fixed rates of
interest. The Company believes the typical manufactured home purchaser is
primarily sensitive to the amount of the monthly payment, and not to the
interest rate.
The Company's underwriting guidelines generally require that each
applicant's credit history, residence history, employment history and income
to debt payment ratios be examined. There are no requirements on the basis
of which, if met, credit is routinely approved; or if they are not met,
credit is routinely denied. If in the judgment of the Company's credit
manager an applicant does not meet minimum underwriting criteria, there
generally must be compensating higher ratings with respect to other criteria
in order for an applicant to be approved. Credit managers must confirm that
the credit investigation gave a complete and up-to-date accounting of the
applicant's creditworthiness. Credit managers are encouraged to obtain
second opinions on loans for relatively larger dollar amounts or those which,
in their judgment, tend to rank lower in terms of underwriting criteria.
Generally, the sum of the monthly obligation for installment obligations,
including the manufactured home loan payment and monthly site costs, should
not exceed 50% of the applicant's gross monthly income. Since January 1989
the Company has, in addition to the above considerations, used a credit
scoring system to evaluate credit applicants. The credit score of an
applicant is used as a further guide in determining whether to extend credit
to the applicant. All of the Mortgage Loans originated or acquired by the
Company were underwritten or reunderwritten by the Company in a manner
generally consistent with the foregoing guidelines.
In the case of a Contract Pool containing Contracts originated by other
originators and acquired by the Company ("Acquired Contracts"), the related
Prospectus Supplement will describe such Contracts.
BULK TRANSACTIONS
In fiscal 1990, the Company purchased a portfolio of manufactured home
contracts originated by an unaffiliated entity. This portfolio, originally
consisting of approximately 4,000 installment sales contracts, was purchased
at a discount from its outstanding principal balance. The Company services
the contracts acquired. The Company intends to consider, from time to time,
the selective acquisition of additional portfolios of installment sales
contracts consistent with the Company's views of appropriate pricing in
return for certain portfolios and servicing capacity.
In fiscal 1991, the Company became the servicer for approximately
$100 million of installment sales contracts for manufactured homes acquired
by a REMIC trust. The trust issued approximately $70 million of senior
certificates which received the highest rating from both Standard & Poor's
Corporation and Moody's Investors Service, Inc. and are guaranteed as to
principal and interest by a financial guarantee policy issued by Financial
Security Assurance, Inc. ("FSA"). CHI purchased the junior certificates
representing the residual interest in the REMIC by establishing a
$12.5 million reserve fund for the senior certificates and by agreeing to pay
the premium on the FSA policy. Most of the homes financed by these contracts
are located in Texas and were originated by savings institutions which were
subsequently placed into receivership.
In fiscal 1992, the Company became the servicer for 15,409 installment
sales contracts for manufactured homes with an approximate current principal
balance of $148 million acquired by a REMIC trust from the Resolution Trust
Corporation. The Company did not acquire these contracts and is acting
solely as servicer with respect to these contracts.
In fiscal 1994, the Company acquired a portfolio of manufactured home
contracts originated by an unaffiliated entity. This portfolio originally
consisted of approximately 3,300 installment sales contracts and was
purchased at a discount from its outstanding principal balance of
approximately $56 million. Also in fiscal 1994, the Company became servicer
for approximately 16,500 contracts for manufactured homes with an approximate
aggregate principal balance of $222 million owned by three REMIC trusts. The
Company is acting solely as servicer with respect to these contracts.
In fiscal 1997, the Company purchased a portfolio of manufactured home
contracts originated by an unaffiliated entity. This portfolio consisted of
approximately 1,385 installment sales contracts and was purchased at a
discount from its outstanding principal balance of approximately $57 million.
VARIOUS FINANCING TERMS
The Company has developed financing options such as contracts with a
7 year term (compared to the industry norm of 15 to 20 years), which provides
financing to its customers at a relatively low cost. In January 1990, the
Company introduced a bi-weekly payment contract which provides for
26 payments a year, which are made by electronically drafting the purchaser's
checking account. In 1996, the Company introduced contracts (the "Escalating
Principal Payment Contracts") which provide for an annual increase in monthly
payments over the first five years of the term of the Contract. An
Escalating Principal Payment Contract provides initially for lower monthly
payments than if the contract were of a shorter term. Each year for a period
of five years, the term of the Escalating Principal Payment Contract
automatically converts to a shorter term, and the monthly payment increases
accordingly. At year six, the monthly payment increases to a level monthly
payment which fully amortizes the remaining principal over a specified term
which is lower than the original term of the Contract. There is no period in
which the Escalating Principal Payment Contracts have negative amortization.
In 1989, the Company began originating variable rate Contracts. Its variable
rate program ranged from the origination of very few variable rate Contracts
from 1992 to 1994 to a high of 7,300 variable rate Contracts with an
aggregate dollar amount of approximately $233 million in fiscal 1997.
During the last six fiscal years, the Company has become the most
important source of financing for purchasers of CHI's homes. In fiscal 1988,
the Company originated 5,692 contracts, in fiscal 1993, the Company
originated 10,880 contracts, in fiscal 1994, the Company originated 12,401
contracts, in fiscal 1995, the Company originated 13,857 contracts and in
fiscal year 1996, the Company originated 16,910 contracts. For fiscal year
1997, the Company originated 21,691 contracts. At June 30, 1997, the Company
was servicing approximately 102,000 contracts and an aggregate dollar amount
of $2,044 million, of which the Company purchased from dealers or acquired
from other institutions approximately 85,912 contracts with an aggregate
dollar amount of approximately $1,910 million. The Company expects it will
continue to originate a significant portion of the financing for purchasers
of homes sold by CHI owned retail centers, consistent with the overall level
of CHI's retail sales.
YIELD CONSIDERATIONS
The Remittance Rates and the weighted average Contract Rate of the
Contracts relating to each Series of Certificates will be set forth in the
related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, each
monthly accrual of interest on a Contract is calculated at one-twelfth of the
product of the Contract Rate and the principal balance outstanding on the
scheduled payment date for such Contract in the preceding month. Unless
otherwise specified in the related Prospectus Supplement, the Remittance Rate
with respect to each Certificate will be calculated similarly.
The Prospectus Supplement for each Series will indicate that a lower
rate of principal prepayments than anticipated would negatively affect the
total return to investors of any Class or such sub-class of Certificates that
is offered at a discount to its principal amount, and a higher rate of
principal prepayments than anticipated would negatively affect the total
return to investors of any such Class or sub-class of Certificates that is
offered at a premium to its principal amount or without any principal amount.
If a Series of Certificates contains Classes or sub-classes of
Certificates entitled to receive distributions of principal or interest or
both, in a specified order other than as a specified percentage of each
distribution of principal or interest or both, the Prospectus Supplement will
set forth information, measured relative to a prepayment standard or model
specified in such Prospectus Supplement, with respect to the projected
weighted average life of each such Class or sub-class and the percentage of
the original Stated Balance of each such Class or sub-class that would be
outstanding on specified Remittance Dates for such Series based on the
assumptions stated in such Prospectus Supplement, including assumptions that
prepayments on the Contracts in the related Trust Fund are made at rates
corresponding to the various percentage of such prepayment standard or model.
MATURITY AND PREPAYMENT CONSIDERATIONS
MATURITY
Unless otherwise specified in the related Prospectus Supplement, the
Contracts will have maturities at origination of not more than 30 years.
PREPAYMENT CONSIDERATIONS
Contracts generally may be prepaid in full or in part without penalty.
Based on the Company's experience with the portfolio of manufactured housing
contracts serviced by it, the Company anticipates that a number of the
contracts will be prepaid prior to their maturity. A number of factors,
including homeowner mobility, general and regional economic conditions,
competition among manufactured housing lenders and prevailing interest rates,
may influence prepayments. The refinancing of any Contract will result in a
prepayment in full of such Contract. Declining interest rates and certain
other factors may result in an increased number of refinancings which would
affect the average life of the Certificates. In addition, the repurchase of
Contracts on account of certain breaches of representations and warranties
have the effect of prepaying such Contracts. Most of the Contracts contain a
"due-on-sale" clause that would permit the Servicer to accelerate the
maturity of a Contract upon the sale of the related Manufactured Home. In
the case of those Contracts that do contain due-on-sale clauses, the Servicer
will permit assumptions of such Contracts if the purchaser of the related
Manufactured Home satisfies the Company's then-current underwriting
standards.
Information regarding the Prepayment Model or any other rate of assumed
prepayment, as applicable, will be set forth in the Prospectus Supplement
with respect to a Series of Certificates.
See "Description of the Certificates -- Termination of the Agreement"
for a description of the Company's or Servicer's option to repurchase the
Contracts comprising part of a Trust Fund when the aggregate outstanding
principal balance of such Contracts is less than a specified percentage of
the initial aggregate outstanding principal balance of such Contracts as of
the related Cut-off Date. See also "The Trust Fund -- The Contract Pools"
for a description of the obligations of the Company to repurchase a Contract
in case of a breach of a representation or warranty relative to such
Contract.
DESCRIPTION OF THE CERTIFICATES
Each Series of Certificates will be issued pursuant to a separate
pooling and servicing agreement (each, an "Agreement") to be entered into
among the Company, as Seller and Servicer, and the trustee named in the
related Prospectus Supplement (the "Trustee"), and such other parties, if
any, as are described in the applicable Prospectus Supplement. The following
summaries describe certain provisions expected to be common to each Agreement
and the related Certificates, but do not purport to be complete and are
subject to, and are qualified in their entirety by reference to, the
provisions of the related Agreement and the description set forth in the
related Prospectus Supplement. Section references, if any, contained herein
refer to sections of the form of Agreement filed as an exhibit to the
Registration Statement of which this Prospectus is a part (the "Registration
Statement"). The portions of such sections described herein may be contained
in different numbered sections in the actual Agreement pursuant to which any
Series of Certificates is issued. The provisions of the form of Agreement
filed as an exhibit to the Registration Statement that are not described
herein may differ from the provisions of any actual Agreement. The material
differences will be described in the related Prospectus Supplement.
Capitalized terms used herein and not otherwise defined herein shall have the
meanings assigned to them in the form of Agreement filed as an exhibit to the
Registration Statement.
GENERAL
The Certificates may be issued in one or more Classes or sub-classes
(each referred to in this Prospectus as a "Class"). If the Certificates of a
Series are issued in more than one Class, the Certificates of all or less
than all of such Classes may be sold pursuant to this Prospectus, and there
may be separate Prospectus Supplements relating to one or more of such
Classes so sold. Any reference herein to the Prospectus Supplement relating
to a Series comprised of more than one Class should be understood as a
reference to each of the Prospectus Supplements relating to the Classes sold
hereunder. Any reference herein to the Certificates of a Class should be
understood to refer to the Certificates of a Class within a Series, the
Certificates of a sub-class within a Series or all of the Certificates of a
single-Class Series, as the context may require.
The Certificates of each Series will be issued in fully registered form
only and will represent the interest specified in the related Prospectus
Supplement in a separate trust fund (the "Trust Fund") created pursuant to
the related Agreement. The Trust Fund will be held by the Trustee for the
benefit of the Certificateholders. Each Trust Fund will generally include
(i) Contracts (the "Contract Pool") which are subject to the Agreement from
time to time, (ii) the amounts held in the Certificate Account from time to
time and (iii) proceeds from certain hazard insurance on individual
Manufactured Homes, Modular Homes or Mortgaged Properties (or the related
real estate, in the case of Land-and-Home Contracts) acquired by re-
possession, and may include a letter of credit, a limited guarantee of CHI,
surety bond, insurance policy, cash reserve fund or other credit enhancement
security payment of all or part of a Series of Certificates or other
property. Except as otherwise specified in the related Prospectus
Supplement, the Certificates will be freely transferable and exchangeable at
the corporate trust office of the Trustee at the address set forth in the
related Prospectus Supplement. No service charge will be made for any
registration of exchange or transfer of Certificates, but the Trustee may
require payment of a sum sufficient to cover any tax or other governmental
charge.
Ownership of each Contract Pool may be evidenced by one or more classes
of Certificates, each representing the interest in the Contract Pool
specified in the related Prospectus Supplement. One or more Classes of
Certificates evidencing interests in Contracts may be Subordinated
Certificates, evidencing the right of the holders thereof to receive any or a
portion of distributions of principal or interest or both on the Contracts
subordinate to the rights of the holders of other Classes of Certificates
("Senior Certificates") as provided in the related Prospectus Supplement. If
a Series of Certificates contains more than one Class of Subordinated
Certificates, losses will be allocated among such Classes in the manner
described in the Prospectus Supplement.
A Series of Certificates may consist of Classes of Certificates
evidencing the right to receive distributions of principal or interest or
both in the order specified in the related Prospectus Supplement. A Class of
Certificates of a Series may be divided into two or more sub-classes. The
related Prospectus Supplement will specify whether a Class has been so
divided and the terms of each sub-class. The holders of each sub-class of a
Class of Certificates will be entitled to the percentages (which may be 0%)
of principal or interest payments or both on the related Contracts as
specified in the related Prospectus Supplement. The related Prospectus
Supplement will specify the minimum denomination or initial principal amount
of Contracts evidenced by a single Certificate of each Class of Certificates
of a Series (a "Single Certificate").
Distributions of principal and interest on the Certificates will be made
on the payment dates set forth in the related Prospectus Supplement (each, a
"Remittance Date") to the persons in whose names the Certificates are
registered at the close of business on the related record date specified in
the related Prospectus Supplement (the "Record Date"). Distributions will be
made by check mailed to the address of the person entitled thereto as it
appears on the Certificate Register, or, to the extent described in the
related Agreement, by wire transfer, except that the final distribution in
retirement of Certificates will be made only upon presentation and surrender
of the Certificates at the office or agency of the Trustee specified in the
final distribution notice to Certificateholders.
GLOBAL CERTIFICATES
The Certificates of a Class may be issued in whole or in part in the
form of one or more global certificates (each, a "Global Certificate") that
will be deposited with, or on behalf of, and registered in the name of a
nominee for, a depositary (the "Depositary") identified in the related
Prospectus Supplement. The description of the Certificates contained in this
Prospectus assumes that the Certificates will be issued in definitive form.
If the Certificates of a Class are issued in the form of one or more Global
Certificates, the term "Certificateholder" should be understood to refer to
the beneficial owners of the Global Certificates, and the rights of such
Certificateholders will be limited as described under this subheading.
Global Certificates will be issued in registered form. Unless and until
it is exchanged in whole or in part for Certificates in definitive form, a
Global Certificate may not be transferred except as a whole by the Depositary
for such Global Certificate to a nominee of such Depositary or by a nominee
of such Depositary to such Depositary or another nominee of such Depositary
or by such Depositary or any such nominee to a successor of such Depositary
or a nominee of such successor.
The specific terms of the depositary arrangement with respect to any
Certificates of a Class will be described in the related Prospectus
Supplement. It is anticipated that the following provisions will apply to
all depositary arrangements:
Upon the issuance of a Global Certificate, the Depositary for such
Global Certificate will credit, on its book-entry registration and transfer
system, the respective denominations of the Certificates represented by such
Global Certificate to the accounts of institutions that have accounts with
such Depositary ("participants"). Ownership of beneficial interests in a
Global Certificate will be limited to participants or persons that may hold
interests through participants. Ownership of beneficial interests in such
Global Certificate will be shown on, and the transfer of that ownership will
be effected only through, records maintained by the Depositary for such
Global Certificate or by participants or persons that hold through
participants. The laws of some states require that certain purchasers of
securities take physical delivery of such securities in definitive form.
Such limits and such laws may impair the ability to transfer beneficial
interests in a Global Certificate.
So long as the Depositary for a Global Certificate, or its nominee, is
the owner of such Global Certificate, such Depositary or such nominee, as the
case may be, will be considered the sole owner or holder of the Certificates
represented by such Global Certificate for all purposes under the Agreement
relating to such Certificates. Except as set forth below, owners of
beneficial interests in a Global Certificate will not be entitled to have
Certificates of the Series represented by such Global Certificate registered
in their names, will not receive or be entitled to receive physical delivery
of Certificates of such Series in definitive form and will not be considered
the owners or holders thereof under the Agreement governing such
Certificates.
Distributions or payments on Certificates registered in the name of or
held by a Depositary or its nominee will be made to the Depositary or its
nominee, as the case may be, as the registered owner for the holder of the
Global Certificate representing such Certificates. In addition, all reports
required under the applicable Agreement to be made to Certificateholders (as
described below under "Reports to Certificateholders") will be delivered to
the Depositary or its nominee, as the case may be. None of the Company,
Servicer, Trustee, or any agent thereof (including any applicable Certificate
Registrar or Paying Agent), will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interest in a Global Certificate or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests or for
providing reports to the related beneficial owners.
The Company expects that the Depositary for Certificates of a Class,
upon receipt of any distribution or payment in respect of a Global
Certificate, will credit immediately participants' accounts with payments in
amounts proportionate to their respective beneficial interest in such Global
Certificate as shown on the records of such Depositary. The Company also
expects that payments by participants to owners of beneficial interests in
such Global Certificate held through such participants will be governed by
standing instructions and customary practices, as is now the case with
securities held for the accounts of customers registered in "street name,"
and will be the responsibility of such participants.
If a Depositary for Certificates of a Class is at any time unwilling or
unable to continue as Depositary and a successor depositary is not appointed
by or on behalf of the Company within the time period specified in the
Agreement, the Company will cause to be issued Certificates of such Class in
definitive form in exchange for the related Global Certificate or
Certificates. In addition, the Company may at any time and in its sole
discretion determine not to have any Certificates of a Class represented by
one or more Global Certificates and, in such event, will cause to be issued
Certificates of such Class in definitive form in exchange for the related
Global Certificate or Certificates. Further, if the Company so specifies
with respect to the Certificates of a Class, an owner of a beneficial
interest in a Global Certificate representing Certificates of such Class may,
on terms acceptable to the Company and the Depositary for such Global
Certificate, receive Certificates of such Class in definitive form. In any
such instance, an owner of a beneficial interest in a Global Certificate will
be entitled to physical delivery in definitive form of Certificates of the
Class represented by such Global Certificate equal in denominations to such
beneficial interest and to have such Certificates registered in its name.
CONVEYANCE OF CONTRACTS
The Company will transfer, assign, set over and otherwise convey to the
Trustee all right, title and interest of the Company in the Contracts,
including all security interests created thereby and any related mortgages or
deeds of trust, all principal and interest received on or with respect to the
Contracts (other than receipts of principal and interest due on the Contracts
before the Cut-off Date), all rights under certain hazard insurance policies
on the related Manufactured Homes, Modular Homes or Mortgaged Properties, if
any, all documents contained in the Contract Files or Land-and-Home Contract
Files, as applicable, and all proceeds derived from any of the foregoing. On
behalf of the Trust Fund, as the issuer of the related Series of
Certificates, the Trustee, concurrently with such conveyance, will execute
and deliver the Certificates to the order of the Company. The Contracts will
be as described on a list attached to the Agreement. Such list will include
the current amount of monthly payments due on each Contract as of the date of
issuance of the Certificates and the Contract Rate on each Contract. Such
list will be available for inspection by any Certificateholder at the
principal executive office of the Servicer. Prior to the conveyance of the
Contracts to the Trustee, the Company's operations department will complete a
review of all of the Contract files, including the certificates of title to,
or other evidence of a perfected security interest in, the Manufactured
Homes, confirming the accuracy of the list of Contracts delivered to the
Trustee. Any Contract discovered not to agree with such list in a manner
that is materially adverse to the interests of the Certificateholders will be
repurchased by the Company or replaced with another Contract, or, if the
discrepancy relates to the unpaid principal balance of a Contract, the
Company may deposit cash in the separate account maintained at an Eligible
Institution in the name of the Trustee (the "Certificate Account") in an
amount sufficient to offset such discrepancy.
The Agreement will designate the Servicer as custodian to maintain
possession, as the Trustee's agent, of the Contracts and any other documents
related to the Manufactured Homes or Modular Homes (other than the principal
documents relating to Land-and-Home Contracts and Mortgage Loans). To
facilitate servicing and save administrative costs, the documents will not be
physically segregated from other similar documents that are in the Company's
possession. In order to give notice of the right, title and interest of the
Certificateholders to the Contracts, the Company will cause a UCC-1 financing
statement to be executed and filed by the Company identifying the Company as
the seller and the Trustee as the buyer of the Contracts, and the Company's
accounting records and computer systems will also reflect such sale and
assignment. In addition, within one week after the initial delivery of the
Certificates, the Contracts will be stamped to reflect their assignment to
the Trustee. However, if through fraud, negligence or otherwise, a
subsequent purchaser were able to take physical possession of the Contracts
without knowledge of the assignment, the Trustee's interest in the Contracts
could be defeated. See "Risk Factors-- Security Interests and Mortgages on
the Manufactured Homes" and "-- Consumer Protection Laws and Other
Limitations on Lenders." Unless otherwise specified in the Prospectus
Supplement, the Agreement will designate the Trustee or another independent
custodian, as the Trustee's agent, to maintain possession of the principal
documents relating to all Land-and-Home Contracts and Mortgage Loans.
In general, and except as otherwise specified in the related Prospectus
Supplement, the Company will make certain warranties in the Agreement with
respect to each Contract as of the Closing Date, including that: (a) as of
the Cut-off Date, or the date of origination, if later, the most recent
scheduled payment was made or was not delinquent more than 59 days (or such
other number of days specified in the related Prospectus Supplement); (b) no
provision of a Contract has been waived, altered or modified in any respect,
except by instruments or documents contained in the Contract file or the
Land-and-Home Contract file; (c) each Contract is a legal, valid and binding
obligation of the Obligor and is enforceable in accordance with its terms
(except as may be limited by laws affecting creditors' rights generally);
(d) no Contract is subject to any right of rescission, set-off, counterclaim
or defense; (e) each Contract is covered by hazard insurance described under
"-- Servicing -- Hazard Insurance"; (f) each Contract has been originated by
a manufactured housing dealer or the Company in the ordinary course of such
dealer's or the Company's business and, if originated by a manufactured
housing dealer, was purchased by the Company in the ordinary course of
business; (g) no Contract was originated in or is subject to the laws of any
jurisdiction whose laws would make the transfer of the Contract or an
interest therein to the Trustee pursuant to the Agreement or pursuant to the
Certificates unlawful; (h) each Contract complies with all requirements of
law; (i) no Contract has been satisfied, subordinated in whole or in part or
rescinded and the Manufactured Home securing the Contract has not been
released from the lien of the Contract in whole or in part; (j) each
Manufactured Housing Contract creates a valid and enforceable first priority
security interest in favor of the Company in the Manufactured Home covered
thereby and, with respect to each Land-and-Home Contract and each Mortgage
Loan, the lien created thereby has been recorded or will be recorded within
six months, and such security interest or lien has been assigned by the
Company to the Trustee; (k) all parties to each Contract had capacity to
execute such Contract; (l) no Contract has been sold, assigned or pledged to
any other person and prior to the transfer of the Contracts by the Company to
the Trustee, the Company had good and marketable title to each Contract free
and clear of any encumbrance, equity, loan, pledge, charge, claim or security
interest, and was the sole owner and had full right to transfer such Contract
to the Trustee; (m) as of the Closing Date there was no default, breach,
violation or event permitting acceleration under any Contract (except for
payment delinquencies permitted by clause (a) above), no event which with
notice and the expiration of any grace or cure period would constitute a
default, breach, violation or event permitting acceleration under such
Contract, and the Company has not waived any of the foregoing; (n) as of the
Closing Date there were, to the best of the Company's knowledge, no liens or
claims which have been filed for work, labor or materials affecting a
Manufactured Home or any related Mortgaged Property securing a Contract,
which are or may be liens prior or equal to the lien of the Contract;
(o) each Contract other than a step-up rate Contract and an Escalating
Payment Contract is (i) a fully-amortizing loan with a fixed Contract Rate
and provides for level payments over the term of such Contract or (ii) a loan
with a variable interest rate; (p) each Contract contains customary and
enforceable provisions such as to render the rights and remedies of the
holder thereof adequate for realization against the collateral of the
benefits of the security; (q) the description of each Contract set forth in
the list delivered to the Trustee is true and correct; (r) there is only one
original of each Contract; (s) none of the Contracts had a Loan-to-Value
Ratio at origination greater than 100% (or such other percentage amount
specified in the related Prospectus Supplement); (t) at the time of
origination of each Contract or for the percentage of Contracts set forth in
the Prospectus Supplement, the Obligor was the primary resident of the
related Manufactured Home; (u) other than the Land-and-Home Contracts, the
related Manufactured Home is not considered or classified as part of the real
estate on which it is located under the laws of the jurisdiction in which it
is located as would render unperfected or impair the priority of the security
interest in such Manufactured Home, and as of the Closing Date such
Manufactured Home was, to the best of the Company's knowledge, free of damage
and in good repair; (v) the related Manufactured Home is a "manufactured
home" within the meaning of 42 United States Code, Section 5402(6); and
(w) each Contract is a "qualified mortgage" under Section 860G(a)(3) of the
Code and each Manufactured Home is "manufactured housing" within the meaning
of Section 25(e)(10) of the Code.
Under the terms of the Agreement, and subject to the conditions
specified in the preceding paragraph and to the Company's option to effect a
substitution as described in the next paragraph, the Company will be
obligated to repurchase for the Repurchase Price (as defined below) any
Contract on the first business day after the first Determination Date which
is more than 90 days after the Company becomes aware, or should have become
aware, or the Company's receipt of written notice from the Trustee or the
Servicer, of a breach of any representation or warranty of the Company in the
Agreement that materially adversely affects the Trust Fund's interest in any
Contract if such breach has not been cured. The Repurchase Price for any
Contract will be the remaining principal amount outstanding on such Contract
on the date of repurchase plus accrued and unpaid interest thereon at its
Contract Rate to the date of such repurchase. This repurchase obligation
constitutes the sole remedy available to the Trust Fund and the
Certificateholders for a breach of a warranty under the Agreement with
respect to the Contracts (but not with respect to any other breach by the
Company of its obligations under the Agreement). If a prohibited transaction
tax under the REMIC provisions of the Code is incurred in connection with
such repurchase, distributions otherwise payable to Residual
Certificateholders will be applied to pay such tax. The Company will be
required to pay the amount of such tax that is not funded out of such
distributions.
In lieu of purchasing a Contract as specified in the preceding
paragraph, during the two-year period following the Closing Date, the Company
may, at its option, substitute an Eligible Substitute Contract (as defined
below) for the Contract that it is otherwise obligated to repurchase
(referred to herein as the "Replaced Contract"). An Eligible Substitute
Contract is a Contract that satisfies, as of the date of its substitution,
the representations and warranties specified the Agreement, has a Scheduled
Principal Balance that is not greater than the Scheduled Principal Balance of
the Replaced Contract, has a Contract Rate that is at least equal to the
Contract Rate of the Replaced Contract, and has a remaining term to scheduled
maturity that is not greater than the remaining term to scheduled maturity of
the Replaced Contract. In the event that more than one Contract is
substituted, the above requirements with respect to Scheduled Principal
Balance, APR and remaining term to scheduled maturity may be satisfied on an
aggregate or weighted average basis, as applicable. The Company will be
required to deposit in the Certificate Account cash in the amount, if any, by
which the Scheduled Principal Balance of the Replaced Contract exceeds the
Scheduled Principal Balance of the Contract being substituted. Such deposit
will be deemed to be a Partial Principal Prepayment.
PAYMENTS ON CONTRACTS
Unless otherwise specified in the related Prospectus Supplement, each
Certificate Account will be a trust account established by the Servicer as to
each Series of Certificates or a Group of Certificates within a Series in the
name of the Trustee (i) with a depository institution, the long-term
unsecured debt obligations of which at the time of any deposit therein are
rated within the two highest rating categories or such other rating category
as will not adversely affect the rating assigned to the Certificates by each
rating agency rating the Certificates of such Series, (ii) with the trust
department of a depositary institution, (iii) in an account or accounts the
deposits in which are fully insured by the Federal Deposit Insurance
Corporation ("FDIC"), (iv) in an account or accounts the deposits in which
are insured by the FDIC (to the limits established by the FDIC), the
uninsured deposits in which are otherwise secured such that, as evidenced by
an opinion of counsel, the Certificateholders have a claim with respect to
the funds in the Certificate Account or a perfected first priority security
interest against any collateral securing such funds that is superior to the
claims of any other depositors or general creditors of the depository
institution with which the Certificate Account is maintained or (v) otherwise
acceptable to the rating agency without reduction or withdrawal of the rating
assigned to the relevant Certificates. The collateral eligible to secure
amounts in the Certificate Account is limited to United States government
securities and other high-quality investments ("Eligible Investments"). A
Certificate Account may be maintained as an interest bearing account, or the
funds held therein may be invested pending each succeeding Remittance Date in
Eligible Investments.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will deposit in the Certificate Account the following payments and
collections received or made by it subsequent to the Cut-off Date:
(i) all Obligor payments on account of principal, including principal
prepayments, on the Contracts;
(ii) all Obligor payments on account of interest on the Contracts;
(iii) all amounts received and retained in connection with the
liquidation of defaulted Contracts, net of liquidation expenses ("Net
Liquidation Proceeds");
(iv) all proceeds received under any hazard or other insurance policy
covering any Contract, other than proceeds to be applied to the restoration
or repair of the Manufactured Home or released to Obligor;
(v) any Advances made as described under "Advances" and certain other
amounts required under the Agreement to be deposited in the Certificate
Account;
(vi) all amounts received from any credit enhancement provided with
respect to a Series of Certificates;
(vii) all proceeds of any Contract or property acquired in respect
thereof repurchased by the Servicer, or the Company, or otherwise as
described above or under "Termination" below; and
(viii) all amounts, if any, required to be transferred to the
Certificate Account from a Reserve Fund pursuant to the Agreement.
DISTRIBUTIONS ON CERTIFICATES
Except as otherwise provided in the related Prospectus Supplement, on
each Remittance Date, the Trustee will withdraw from the applicable
Certificate Account and distribute to the Certificateholders of each Class
(other than a Series having a Class of Subordinated Certificates, as
described below), either the specified interest of such Class in the Contract
Pool times the aggregate of all amounts on deposit in the Certificate Account
as of the fifth Business Day preceding the Remittance Date or such other date
as may be specified in the related Prospectus Supplement (the "Determination
Date"), or, in the case of a Series of Certificates comprised of Classes
which have been assigned a Stated Balance, payments of interest and payments
in reduction of the Stated Balance from all amounts on deposit in the
Certificate Account as of the end of the Due Period immediately prior to such
Remittance Date or such other, in the priority and calculated in the manner
set forth in the related Prospectus Supplement, except, in each case: (i) all
payments or collections due after the Due Period preceding the month in which
the Remittance Date occurs; (ii) all scheduled payments of principal and
interest due on a date or dates subsequent to the Due Period preceding the
Determination Date; (iii) amounts representing reimbursement for Advances,
such reimbursement being limited, as described in the related Prospectus
Supplement, to amounts received on particular Contracts as late collections
of principal or interest as to which the Servicer has made an unreimbursed
Advance; and (iv) amounts representing reimbursement for any unpaid Servicing
Fee and expenses from Liquidation Proceeds, condemnation proceeds and pro-
ceeds of insurance policies with respect to the related Contracts. The
amount of principal and interest specified in the related Prospectus
Supplement to be distributed to Certificateholders is referred to herein as
the "Certificate Distribution Amount." The amounts on deposit in the
Certificate Account on a Determination Date, less the amounts specified in
(i) through (iv) above, with respect to a Series of Certificates having a
Class of Subordinated Certificates, are referred to herein as the "Available
Distribution Amount."
On each Remittance Date, the Trustee will withdraw the Available
Distribution Amount from the applicable Certificate Account and distribute
such amount to the Certificateholders of each Class or other specified
persons in the amounts and order of priority specified in the related
Prospectus Supplement.
Within the time specified in the Agreement and described in the related
Prospectus Supplement, the Servicer will furnish a statement to the Trustee
setting forth the amount to be distributed on the related Remittance Date on
account of principal and interest, stated separately, and a statement setting
forth certain information with respect to the Contracts.
If there are not sufficient funds in the Certificate Account to make the
full distribution to Certificateholders described above on any Remittance
Date, the Servicer will distribute the funds available for distribution to
the Certificateholders of each Class in accordance with the respective
interests therein, except that Subordinated Certificateholders, if any, will
not, subject to the limitations described in the related Prospectus
Supplement, receive any distributions until Senior Certificateholders receive
the Senior Distribution Amount plus, to the extent not paid, the aggregate of
amounts by which the Senior Distribution Amount for any Distribution Date
exceeded the amount actually paid on such Remittance Date plus interest at
the related Remittance Rate. Unless otherwise provided in the related
Prospectus Supplement, the difference between the amount which the
Certificateholders would have received if there had been sufficient eligible
funds in the Certificate Account and the amount actually distributed, will be
added to the amount which the Certificateholders are entitled to receive on
the next Remittance Date.
Special Distributions. To the extent specified in the Prospectus
Supplement relating to a Series of Certificates, one or more Classes or
subclasses of which have been assigned a Stated Balance and having less
frequent than monthly Remittance Dates, such Classes or sub-classes may
receive Special Distributions in reduction of Stated Balance ("Special
Distributions") in any month, other than a month in which a Remittance Date
occurs, if, as a result of principal prepayments on the Contracts in the
related Contract Pool or low reinvestment yields, the Trustee determines,
based on assumptions specified in the related Agreement, that the amount of
cash anticipated to be on deposit in the Certificate Account on the next
Remittance Date for such Series and available to be distributed to the
Holders of the Certificates of such Classes or sub-classes may be less than
the sum of (i) the interest scheduled to be distributed to holders of the
Certificates of such Classes or sub-classes and (ii) the amount to be
distributed in reduction of Stated Balance of such Certificates on such
Remittance Date. Any such Special Distributions will be made in the same
priority and manner as distributions in reduction of Stated Balance would be
made on the next Remittance Date.
Subordinated Certificates. The rights of a Class of Certificateholders
of a Series to receive any or a specified portion of distributions of
principal or interest or both with respect to the Contracts, to the extent
specified in the related Agreement and described in the related Prospectus
Supplement, may be subordinated to such rights of other Certificateholders.
The Prospectus Supplement with respect to a Series of Certificates having a
Class of Subordinated Certificates will set forth, among other things, the
extent to which such Class is subordinated (which may include a formula for
determining the subordinated amount or for determining the allocation of the
Available Distribution Amount among Senior Certificates and Subordinated
Certificates), the allocation of losses among the Classes of Subordinated
Certificates (which may include a reduction of the principal balance of the
Classes of Subordinated Certificates in the event of such losses), the period
or periods of such subordination, the minimum subordinated amount, if any,
and any distributions or payments which will not be affected by such
subordination. The protection afforded to the Senior Certificateholders from
the subordination feature described above will be effected by the
preferential right of such Certificateholders to receive current
distributions from the Contract Pool.
ADVANCES
To the extent provided in the related Prospectus Supplement, the
Servicer is obligated to make periodic Advances of cash from its own funds or
from excess funds in the Certificate Account not then required to be
distributed to Certificateholders, for distribution to the Certificateholders
(other than Subordinated Certificateholders) in an amount equal to the
difference between the amount due to them and the amount in the Certificate
Account, eligible for distribution to them pursuant to the Agreement, but
only to the extent such difference is due to delinquent payments of principal
and interest for the preceding Due Period and only to the extent the Servicer
determines such advances are recoverable from future payments and collections
on the Contracts. The Servicer's obligation to make Advances, if any, may,
be limited in amount and the Servicer may not be obligated to make Advances
until all or a specified portion of the Reserve Fund, if any, is depleted.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to the Senior Certificateholders, not to guarantee or
insure against losses. Accordingly, any funds so advanced are recoverable by
the Servicer out of amounts received on particular Contracts which represent
late recoveries of principal or interest respecting which any such Advances
was made or from other funds in the Certificate Account.
EXAMPLE OF DISTRIBUTIONS
The following chart sets forth an example of the flow of funds as it
would relate to a hypothetical series of Certificates with a Cut-off Date of
September 26, 1997 for the Remittance Date occurring in November, 1997.
September 26, 1997. . . . (A) Cut-off Date.
September 26 to October 25. . . (B) Due Period. Servicer receives
scheduled payments on the Contracts
and any Principal Prepayments made by
Obligors and applicable interest
thereon.
October 31 (C) Record Date.
November 2 (D) Determination Date. Distribution
amounts determined.
November 7 (E) Remittance Date. (Each Remittance
Date is the 7th day of each month or,
if the 7th day is not a business day,
the next business day.)
Succeeding months generally follow the pattern of (B) through (E), but with
respect to any Remittance Date (other than the first Remittance Date) is the
period beginning on the 26th day of the second month preceding the month of
such Remittance Date and ending on the 25th day of the month preceding the
month of such Remittance Date.
(A) The Original Contract Pool Principal Balance will be the aggregate
Scheduled Principal Balance of the Contracts on September 25, 1997 after
deducting principal payments received before such date. Principal
payments received before September 25, and the accompanying interest
payments, are not part of the Trust Fund and will not be passed through
to Certificateholders.
(B) Scheduled payments, Principal Prepayments and Net Liquidation Proceeds
may be received at any time during this period and will be distributed
to Certificateholders on November 7. When a Contract is prepaid in
full, interest on the amount prepaid is collected from the Obligor only
to the date of payment. The Available Distribution Amount for the
distribution on November 7 is described under "/___/ Payments on
Contracts" and "/___/ Distributions on the Certificates" above.
(C) Distributions on November 7 will be made to Certificateholders of record
at the close of business on October 31.
(D) On November 2 (three business days prior to the Remittance Date), the
Servicer will determine the amounts of principal and interest which will
be passed through on November 7 to Certificateholders.
(E) On November 7, the amounts determined on November 2 will be distributed
to Certificateholders. If a payment due in the Due Period ending
October 25 is received in the Due Period ending in November, such late
payment will be taken into account in determining the Available
Distribution Amount for December 7.
The flow of funds with respect to any Series of Certificates may differ
from the above example, as specified in the related Prospectus Supplement.
INDEMNIFICATION
The Agreement requires the Servicer to defend and indemnify the Trust
Fund, the Trustee (including any agent of the Trustee) and the
Certificateholders (which indemnification will survive any removal of the
Servicer as servicer of the Contracts) against any and all costs, expenses,
losses, damages, claims and liabilities, including reasonable fees and
expenses of counsel and expenses of litigation (a) arising from third party
claims or actions in respect of any action taken or failed to be taken by the
Servicer or a prior owner of Acquired Contracts or servicer on behalf of such
owner with respect to any Contract or Manufactured Home, (b) any failure by
the Servicer to perform its obligations in compliance with the standard of
care set forth in the Agreement, and (c) for any taxes which may at any time
be asserted with respect to, and as of the date of, the conveyance of the
Contracts to the Trust Fund (but not including any income or franchise taxes
or any federal, state or other tax arising out of the creation of the Trust
Fund and the issuance of the Certificates or distributions with respect
thereto).
The Agreement also requires the Servicer, in connection with its duties
as servicer of the Contracts, to defend and indemnify the Trust Fund, the
Trustee and the Certificateholders (which indemnification will survive any
removal of the Servicer as servicer of the Contracts) against any and all
costs, expenses, losses, damages, claims and liabilities, including
reasonable fees and expenses of counsel and expenses of litigation, in
respect of any action taken by the Servicer with respect to any Contract
while it was the Servicer.
SERVICING
Pursuant to the Agreement, the Servicer will service and administer the
Contracts assigned to the Trustee as more fully set forth below. The
Servicer will perform diligently all services and duties specified in each
Agreement, in the same manner as prudent lending institutions of manufactured
housing installment sales contracts of the same type as the contracts in
those jurisdictions where the related Manufactured Homes are located or as
otherwise specified in the Agreement. The duties to be performed by the
Servicer will include collection and remittance of principal and interest
payments, collection of insurance claims and, if necessary, repossession.
The Agreement provides that the Servicer may delegate its duties under that
agreement to one or more entities (each a "Subservicer") that agrees to
conduct such duties in accordance with the Agreement. Notwithstanding any
such delegation, the Servicer will continue to be liable for all of its
obligations under the Agreement.
The Servicer will make reasonable efforts to collect all payments called
for under the Contracts and, consistent with the Agreement and any FHA
insurance and VA guaranty, will follow such collection procedures as it
follows with respect to mortgage loans or contracts serviced by it that are
comparable to the Contracts.
Hazard Insurance. The terms of the Agreement will generally require the
Servicer to cause to be maintained with respect to each Contract one or more
Hazard Insurance Policies which provide, at a minimum, the same coverage as a
standard form fire and extended coverage insurance policy that is customary
for manufactured housing or one- to-four family residential properties, as
applicable, issued by a company authorized to issue such policies in the
state in which the Manufactured Home, Modular Home or Mortgaged Property is
located, and in an amount which is not less than the maximum insurable value
of such Manufactured Home, Modular Home or Mortgaged Property or the
principal balance due from the Obligor on the related Contract, whichever is
less; provided, however, that the amount of coverage provided by each Hazard
Insurance Policy shall be sufficient to avoid the application of any
coinsurance clause contained therein. When a Manufactured Home or Modular
Home's location was, at the time of origination of the related Contract,
within a federally-designated special flood hazard area, the Servicer shall
also cause such flood insurance to be maintained, which coverage shall be at
least equal to the minimum amount specified in the preceding sentence or such
lesser amount as may be available under the federal flood insurance program.
Each Hazard Insurance Policy caused to be maintained by the Servicer shall
contain a standard loss payee clause in favor of the Servicer and its
successors and assigns. If any Obligor is in default in the payment of
premiums on its Hazard Insurance Policy or Policies, the Servicer shall pay
such premiums out of its own funds, and may add separately such premium to
the Obligor's obligation as provided by the Contract, but may not add such
premium to the remaining principal balance of the Contract.
The Servicer may maintain, in lieu of causing individual Hazard
Insurance Policies to be maintained with respect to each Manufactured Home,
Modular Home or Mortgaged Property, and shall maintain, to the extent that
the related Contract does not require the Obligor to maintain a Hazard
Insurance Policy with respect to the related Manufactured Home, Modular Home
or Mortgaged Property, one or more blanket insurance policies covering losses
on the Obligor's interest in the Contracts resulting from the absence or
insufficiency of individual Hazard Insurance Policies. Any such blanket
policy shall be substantially in the form and in the amount carried by the
Servicer as of the date of this Agreement. The Servicer shall pay the
premium for such policy on the basis described therein and shall pay any
deductible amount with respect to claims under such policy relating to the
Contracts. If the insurer thereunder shall cease to be acceptable to the
Servicer, the Servicer shall exercise its best reasonable efforts to obtain
from another insurer a placement policy comparable to such policy.
If the Servicer shall have repossessed a Manufactured Home on behalf of
the Trustee, the Servicer shall either (i) maintain, at its expense, hazard
insurance with respect to such Manufactured Home, or (ii) indemnify the
Trustee against any damage to such Manufactured Home prior to resale or other
disposition.
Evidence as to Compliance. Each Agreement will require the Servicer to
deliver to the Trustee a monthly report prior to each Remittance Date,
setting forth certain information regarding the Contract Pool and
Certificates of such Series as is specified in the related Prospectus
Supplement. Each such report to the Trustee will be accompanied by a
statement from an appropriate officer of the Servicer certifying the accuracy
of such report and stating that the Servicer has not defaulted in the
performance of its obligations under the Agreement. The Servicer will
deliver to the Trustee an annual report of a nationally recognized accounting
firm stating that such firm has examined certain documents and records
relating to the servicing of manufactured housing contracts serviced by the
Servicer under pooling and servicing agreements similar to the Agreement and
stating that, on the basis of such procedures, such servicing has been
conducted in compliance with the Agreement, except for any exceptions set
forth in such report.
Certain Matters Regarding the Servicer. The Servicer may not resign
from its obligations and duties under an Agreement except upon a
determination that its duties thereunder are no longer permissible under
applicable law. No such resignation will become effective until the Trustee
or a successor servicer has assumed the Servicer's obligations and duties
under such Agreement. The Servicer can only be removed as servicer pursuant
to an Event of Termination as discussed below. Any person with which the
Servicer is merged or consolidated, or any corporation resulting from any
merger, conversion or consolidation to which the Servicer is a party, or any
person succeeding to the business of the Servicer, will be the successor to
the Servicer under the Agreement so long as such successor services at least
$100 million of manufactured housing contracts.
Each Agreement will also generally provide that neither the Servicer,
nor any director, officer, employee or agent of the Servicer, will be under
any liability to the Trust Fund or the Certificateholders for any action
taken or for restraining from the taking of any action in good faith pursuant
to the Agreement, or for errors in judgment; provided, however, that neither
the Servicer nor any such person will be protected against any liability
which would otherwise be imposed by reason of the failure to perform its
obligations in strict compliance with the standards of care set forth in the
Agreement. The Servicer may, in its discretion, undertake any such action
which it may deem necessary or desirable with respect to the Agreement and
the rights and duties of the parties thereto and the interests of the
Certificateholders thereunder. In such event, the legal expenses and costs
of such action and any liability resulting therefrom will be expenses, costs
and liabilities of the Trust Fund and the Servicer will be entitled to be
reimbursed therefor out of the Certificate Account.
The Servicer shall keep in force throughout the term of this Agreement
(i) a policy or policies of insurance covering errors and omissions for
failure to maintain insurance as required by this Agreement, and (ii) a
fidelity bond. Such policy or policies and such fidelity bond shall be in
such form and amount as is generally customary among persons which service a
portfolio of manufactured housing contracts having an aggregate principal
amount of $100 million or more and which are generally regarded as servicers
acceptable to institutional investors.
The Servicer, to the extent practicable, shall cause the Obligors to pay
all taxes and similar governmental charges when and as due. To the extent
that nonpayment of any taxes or charges would result in the creation of a
lien upon any Manufactured Home having a priority equal or senior to the lien
of the related Contract, the Servicer shall advance any such delinquent tax
or charge.
Servicing Compensation and Payment of Expenses. For its servicing of
the Contracts, the Servicer will receive servicing fees ("Servicing Fees")
which include a Monthly Servicing Fee (which the Servicer may assign) for
each Due Period (paid on the next succeeding Remittance Date) which, unless
otherwise stated in the related Prospectus Supplement, will be equal to
1/12th of the product of 1.25% and the Pool Scheduled Principal Balance for
such Remittance Date.
The Monthly Servicing Fee provides compensation for customary
manufactured housing contract third-party servicing activities to be
performed by the Servicer for the Trust Fund and for additional admin-
istrative services performed by the Servicer on behalf of the Trust Fund.
Customary servicing activities include collecting and recording payments,
communicating with obligors, investigating payment delinquencies, providing
billing and tax records to obligors and maintaining internal records with
respect to each Contract. Administrative services performed by the Servicer
on behalf of the Trust Fund include calculating distributions of
Certificateholders and providing related data processing and reporting
services for Certificateholders and on behalf of the Trustee. Expenses
incurred in connection with the servicing of the Contracts and paid by the
Servicer from its Servicing Fees include, without limitation, payment of fees
and expenses of accountants, payments of all fees and expenses incurred in
connection with the enforcement of Contracts (except Liquidation Expenses)
and payment of expenses incurred in connection with distributions and reports
to Certificateholders. The Servicer will be reimbursed out of the
Liquidation Proceeds of a Liquidated Contract for all ordinary and necessary
Liquidation Expenses incurred by it in realization upon the related
Manufactured Home.
So long as the Company is the Servicer, the Servicer, in its sole
discretion, may, but is not obligated to, liquidate a defaulted Contract by
depositing into the Certificate Account an amount equal to (i) the
outstanding principal balance of such Contract plus accrued and unpaid
interest thereon to the Due Date in the Due Period in which such deposit is
made less (ii) $2,000. The Company will not be reimbursed for any
Liquidation Expenses incurred in connection with any such Contract and will
retain any liquidation proceeds in respect thereof. The Company has such
option to liquidate defaulted Contracts in that manner because such manner of
liquidation is more compatible with its record keeping systems.
As part of its Servicing Fees the Servicer will also be entitled to
retain, as compensation for the additional services provided in connection
therewith, any fees for late payments made by Obligors, extension fees paid
by Obligors for the extension of scheduled payments and assumption fees for
permitted assumptions of Contracts by purchasers of the related Manufactured
Homes.
Any person with which the Servicer is merged or consolidated, or any
corporation resulting from any merger, conversion or consolidation to which
the Servicer is a party, or any person succeeding to the business of the
Servicer, will be the successor to the Servicer under the Agreement so long
as such successor has a net worth of at least $10 million and has serviced at
least $100 million of manufactured housing contracts for at least one year.
The Servicer may assign its rights and delegate its duties under the
Agreement (with the prior written consent of the Company if the Company is
not the Servicer), provided that any rating of the Certificates then in
effect will not be reduced because of such assignment and delegation. Upon
any such assignment and delegation, the assigning Servicer will not be liable
for obligations of the Servicer after such assignment.
Events of Termination. Events of Termination under each Agreement will
include (i) any failure by the Servicer to distribute to the
Certificateholders any required payment which continues unremedied for 5 days
(or such other period specified in the related Prospectus Supplement) after
the giving of written notice; (ii) any failure by the Servicer duly to
observe or perform in any material respect any other of its covenants or
agreements in the Agreement that materially and adversely affects the
interests of Certificateholders, which, in either case, continues unremedied
for 30 days after the giving of written notice of such failure of breach; and
(iii) certain events of insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings regarding the Servicer. Notice
as used herein shall mean notice to the Servicer by the Trustee or the
Company, or to the Company, the Servicer, if any, and the Trustee by the
Holders of Certificates representing interests aggregating not less than 25%
of the Trust Fund.
Rights Upon Event of Termination. So long as an Event of Termination
remains unremedied, the Trustee may, and at the written direction of the
Certificateholders of a Series evidencing interests aggregating 25% or more
of the related Trust Fund, shall terminate all of the rights and obligations
of the Servicer under the related Agreement and in and to the Contracts, and
the proceeds thereof, whereupon (subject to applicable law regarding the
Trustee's ability to make advances) the Trustee or a successor Servicer under
the Agreement will succeed to all the responsibilities, duties and
liabilities of the Servicer under the Agreement and will be entitled to
similar compensation arrangements; provided, however, that neither the
Trustee nor any successor servicer will assume any obligation of the Company
to repurchase Contracts for breaches of representations or warranties, and
the Trustee will not be liable for any acts or omissions of the Servicer
occurring prior to a transfer of the Servicer's servicing and related
functions or for any breach by the Servicer of any of its obligations
contained in the Agreement. Notwithstanding such termination, the Servicer
shall be entitled to payment of certain amounts payable to it prior to such
termination, for services rendered prior to such termination. No such
termination will affect in any manner the Company's obligation to repurchase
certain Contracts for breaches of representations or warranties under the
Agreement. In the event that the Trustee would be obligated to succeed the
Servicer but is unwilling or unable so to act, it may appoint, or petition to
a court of competent jurisdiction for the appointment of a Servicer. Pending
such appointment, the Trustee is obligated to act in such capacity. The
Trustee and such successor may agree upon the servicing compensation to be
paid, which in no event may be greater than the compensation to the Servicer
under the Agreement. If the trustee in bankruptcy or similar official is
appointed for the Servicer, and no Event of Termination other than the
Servicer's insolvency has occurred, such trustee or other official may have
the power to prevent the Trustee from effecting a transfer of servicing.
No Certificateholder will have any right under an Agreement to institute
any proceeding with respect to such Agreement unless such Holder previously
has given to the Trustee written notice of default and unless the Holders of
Certificates evidencing interests aggregating not less than 25% of the
related Trust Fund requested the Trustee in writing to institute such
proceeding in its own name as Trustee and have offered to the Trustee
reasonable indemnity and the Trustee for 60 days has neglected or refused to
institute any such proceeding. The Trustee will be under no obligation to
take any action or institute, conduct or defend any litigation under the
Agreement at the request, order or direction of any of the Holders of
Certificates, unless such Certificateholders have offered to the Trustee
reasonable security or indemnity against the costs, expenses and liabilities
which the Trustee may incur.
REPORTS TO CERTIFICATEHOLDERS
The Servicer or the Trustee, as applicable, will forward to each
Certificateholder on each Remittance Date, or as soon thereafter as is
practicable, as specified in the related Prospectus Supplement, a statement
setting forth, among other things:
(i) the amount of such distribution allocable to principal on the
Certificates;
(ii) the amount of such distribution allocable to interest on the
Certificates;
(iii) if the distribution to the Certificateholders is less than
the full amount that would be distributable to such Certificateholders
if there were sufficient eligible funds in the Certificate Account, the
difference between the aggregate amounts of principal and interest which
Certificateholders would have received if there were sufficient eligible
funds in the Certificate Account and the amounts actually distributed;
(iv) the aggregate amount of Advances, if any, by the Servicer
included in the amounts actually distributed to the Certificateholders;
(v) the outstanding principal balance of the Contracts; and
(vi) the approximate weighted average Remittance Rate of the
Contracts during the Due Period immediately preceding such Remittance
Date.
In addition, not more than 90 days after the end of each calendar year,
the Servicer will furnish a report to each Certificateholder of record at any
time during such calendar year (a) as to the aggregate of amounts reported
pursuant to (i) and (ii) above for such calendar year or, in the event such
person was a Certificateholder of record during a portion of such calendar
year, for the applicable portion of such year, and (b) such information as
the Servicer deems necessary or desirable for Certificateholders to prepare
their tax returns. Information in the monthly and annual reports provided to
the Certificateholders will not have been examined and reported upon by an
independent public accountant. However, the Servicer will provide to the
Trustee annually a report by independent public accountants with respect to
the servicing of the Contracts as described under "Evidence as to Compliance"
above.
AMENDMENT
The Agreement may be amended by the Company and the Trustee without the
consent of the Certificateholders, (i) to cure any ambiguity, (ii) to correct
or supplement any provision therein that may be inconsistent with any other
provision therein, (iii) if an election has been made with respect to a
particular Series of Certificates to treat the Trust Fund as a real estate
mortgage investment conduit ("REMIC") within the meaning of Section 860D(a)
of the Internal Revenue Code of 1986, as amended, to maintain the REMIC
status of the Trust Fund and to avoid the imposition of certain taxes on the
REMIC or (iv) to make any other provisions with respect to matters or
questions arising under such Agreement that are not inconsistent with the
provisions thereof, provided that such action will not adversely affect in
any material respect the interests of the Certificateholders of the related
Series. The Agreement may also be amended by the Company, the Servicer and
the Trustee with the consent of the Certificateholders (other than holders of
Residual Certificates) evidencing interests aggregating not less than 51% of
the Trust Fund for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of such Agreement or of modifying
in any manner the rights of the Certificateholders; provided, however, that
no such amendment that reduces in any manner the amount of, or delay the
timing of, any payment received on or with respect to Contracts which are
required to be distributed on any Certificate may be effective without the
consent of the holders of each such Certificate.
TERMINATION OF THE AGREEMENT
The obligations created by each Agreement will terminate upon the date
calculated as specified in the Agreement, generally upon (i) the later of the
final payment or other liquidation of the last Contracts subject thereto and
the disposition of all property acquired upon foreclosure of any Land-and-
Home Contract or Mortgage Loan or repossession of any Manufactured Home and
(ii) the payment to the Certificateholders of all amounts held by the
Servicer or the Trustee and required to be paid to it pursuant to the Agree-
ment. In addition, the Company or the Servicer may at its option with
respect to any Series of Certificates, repurchase all Certificates or
Contracts remaining outstanding at such time as the aggregate unpaid prin-
cipal balance of such Contracts is less than the percentage of the aggregate
unpaid principal balance of the Contracts on the Cut-off Date specified with
respect to such Series in the related Prospectus Supplement. Unless
otherwise provided in the related Prospectus Supplement, the repurchase price
will equal the principal amount of such Contracts plus accrued interest from
the first day of the month of repurchase to the first day of the next
succeeding month at the Contract Rates borne by such Contracts.
THE TRUSTEE
The Prospectus Supplement for a Series of Certificates will specify the
Trustee under the related Agreement. The Trustee may have normal banking
relationships with the Company or its affiliates and the Servicer or its
affiliates.
The Trustee may resign at any time, in which event the Company will be
obligated to appoint a successor Trustee. The Company may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Agreement or if the Trustee becomes insolvent. The Trustee may also be
removed at any time by the holders of Certificates evidencing interests
aggregating over 50% of the related Trust Fund as specified in the Agreement.
Any resignation or removal of the Trustee and appointment of a successor
Trustee will not become effective until acceptance of the appointment by the
successor Trustee.
The Trustee will make no representation as to the validity or
sufficiency of the Agreement, the Certificates, any Contract, Contract file
or related documents, and will not be accountable for the use or application
by the Company of any funds paid to the Company, as Seller, in consideration
of the conveyance of the Contracts, or deposited into or withdrawn from the
Certificate Account by the Company, as Servicer. If no Event of Termination
has occurred, the Trustee will be required to perform only those duties
specifically required of it under the Agreement. However, upon receipt of
the various certificates, reports or other instruments required to be
furnished to it, the Trustee will be required to examine them to determine
whether they conform as to form to the requirements of the Agreement.
Whether or not an Event of Termination has occurred, the Trustee is not
required to expend or risk its own funds or otherwise incur any financial
liability in the performance of its duties or the exercise of its powers if
it has reasonable grounds to believe that repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it.
Under the Agreement, the Company, as Servicer, agrees to pay to the
Trustee on each Remittance Date (a) reasonable compensation for all services
rendered by it hereunder (which compensation shall not be limited by any
provision of law in regard to the compensation of a trustee of any express
trust) and (b) reimbursement for all reasonable expenses, disbursements and
advances incurred or made by the Trustee in accordance with any provision of
the Agreement (including the reasonable compensation and the expenses and
disbursements of its agents and counsel), except any such expense,
disbursement or advance as may be attributable to the Trustee's negligence or
bad faith. The Company has agreed to indemnify the Trustee for, and to hold
it harmless against, any loss, liability or expense incurred without negli-
gence or bad faith on its part, arising out of or in connection with the
acceptance or administration of the Trust Fund and the Trustee's duties
thereunder, including the costs and expenses of defending itself against any
claim or liability in connection with the exercise or performance of any of
the Trustee's powers or duties thereunder.
DESCRIPTION OF FHA INSURANCE AND VA GUARANTEES
Certain of the Contracts, may be FHA-insured or VA-guaranteed, the
payments upon which, subject to the following discussion, are insured by the
FHA under Title I of the National Housing Act or partially guaranteed by the
VA.
The regulations governing FHA manufactured home insurance provide that
insurance benefits are payable upon the repossession and resale of the
collateral and assignment of the contract to the United States Department of
Housing and Urban Development ("HUD"). With respect to a defaulted FHA
contract, the servicer must follow applicable regulations before initiating
repossession procedures. These regulations include requirements that the
lender arrange a face-to-face meeting with the borrower, initiate a
modification or repayment plan, if feasible, and give the borrower 30 days'
notice of default prior to any repossession. The insurance claim is paid in
cash by HUD. For manufactured housing contracts, the amount of insurance
benefits generally paid by FHA is equal to 90% of the sum of (i) the unpaid
principal amount of the Contract at the date of default and uncollected
interest earned to the date of default computed at the Contract Rate, after
deducting the best price obtainable for the collateral (based in part on a
HUD-approved appraisal) and all amounts retained or collected by the lender
from other sources with respect to the Contract, (ii) accrued and unpaid
interest on the unpaid amount of the Contract from the date of default to the
date of submission of the claim plus 15 calendar days (but in no event more
than nine months) computed at a rate of 7% annum, (iii) costs paid to a
dealer or other third party to repossess and preserve the Manufactured Home,
(iv) the amount of any sales commission paid to a dealer or other third party
for the resale of the property, (v) with respect to a Land-and-Home Contract,
property taxes, special assessments and other similar charges and hazard
insurance premiums, prorated to the date of disposition of the property,
(vi) uncollected court costs, (vii) legal fees, not to exceed $500, and
(viii) expenses for recording the assignment of the lien on the collateral to
the United States.
The insurance available to a lender under FHA Title I insurance is
subject to the limit of a reserve amount equal to ten percent of the original
principal balance of all Title I insured loans originated by the lender,
which amount is reduced by all claims paid to the lender and by an annual
reduction in the reserve amount of ten percent of the reserve amount, and
which is increased by an amount equal to ten percent of the original
principal balance of insured loans subsequently originated by the lender. As
of June 30, 1997, the Company's Title I reserve amount was approximately
$21,311,068, which amount was available to pay claims in respect of
approximately $225,317,488 of FHA-insured manufactured housing contracts
serviced by the Company. If the Company were replaced as Servicer of the
Contracts under the Agreement, it is not clear from the FHA regulations what
portion of this reserve amount would be available for claims in respect of
the FHA-insured Contracts. The obligation to pay insurance premiums to FHA
is the obligation of the Company, as servicer of the FHA-insured Contracts.
The maximum guarantee that may be issued by the VA for a VA-guaranteed
contract is the lesser of (a) the lesser of $20,000 and 40% of the principal
amount of the contract and (b) the maximum amount of guaranty entitlement
available to the obligor veteran (which may range from $20,000 to zero). The
amount payable under the guarantee will be a percentage of the VA contract
originally guaranteed applied to indebtedness outstanding as of the
applicable date of computation specified in the VA regulations, interest
accrued on the unpaid balance of the loan to the appropriate date of
computation and limited expenses of the contract holder, but in each case
only to the extent that such amounts have not been recovered through resale
of the manufactured home. The amount payable under the guarantee may in no
event exceed the original guarantee.
CERTAIN LEGAL ASPECTS OF THE CONTRACTS
The following discussion contains summaries of certain legal aspects of
Manufactured Housing Contracts, Land-and-Home Contracts and Mortgage Loans,
which are general in nature. Because such legal aspects are governed by
applicable state law (which laws may differ substantially), the summaries do
not purport to be complete nor reflect the laws of any particular state, nor
to encompass the laws of all states in which the security for the
Manufactured Housing Contracts, Land-and-Home Contracts or Mortgage Loans is
situated. The summaries are qualified in their entirety by reference to the
applicable federal and state laws governing the Manufactured Housing
Contracts, Land-and-Home Contracts or Mortgage Loans.
THE MANUFACTURED HOUSING CONTRACTS
General. As a result of the assignment of the Contracts to the Trustee,
the Trust Fund will succeed collectively to all of the rights (including the
right to receive payment on the Contacts) and will assume the obligations of
the obligee under the Contracts. Each Manufactured Housing Contract
evidences both (a) the obligation of the Obligor to repay the loan evidenced
thereby, and (b) the grant of a security interest in the Manufactured Home to
secure repayment of such loan. Certain aspects of both features of the
Manufactured Housing Contracts are described more fully below.
The Manufactured Housing Contracts generally are "chattel paper" as
defined in the Uniform Commercial Code (the "UCC") in effect in the states in
which the Manufactured Homes initially were registered. Pursuant to the UCC,
the sale of chattel paper is treated in a manner similar to perfection of a
security interest in chattel paper. Under the Agreement, the Company will
retain possession of the Manufactured Housing Contracts as custodian for the
Trustee, and will make an appropriate filing of a UCC-1 financing statement
in Tennessee to give notice of the Trustee's ownership of the Manufactured
Housing Contracts. The Manufactured Housing Contracts will be stamped to
reflect their assignment from the Company to the Trustee. However, if
through negligence, fraud, or otherwise, a subsequent purchaser were able to
take physical possession of the Manufactured Housing Contracts without notice
of such assignment, the Trustee's interest in such Contracts could be
defeated.
Security Interests in the Manufactured Homes. The Manufactured Homes
securing the Manufactured Housing Contracts may be located in all 50 states
and the District of Columbia and Puerto Rico. Security interests in
manufactured homes may be perfected either by notation of the secured party's
lien on the certificate of title or by delivery of the required documents and
payment of a fee to the state motor vehicle authority, depending on state
law. In some nontitle states, perfection pursuant to the provisions of the
UCC is required. The Company effects such notation or delivery of the
required documents and fees, and obtains possession of the certificate of
title, as appropriate under the laws of the state in which a Manufactured
Home is registered. In the event the Company fails, due to clerical errors,
to effect such notation or delivery, or files the security interest under the
wrong law (for example, under a motor vehicle title statute rather than under
the UCC, in a few states), the Certificateholders may not have a first
priority security interest in the Manufactured Home securing a Manufactured
Housing Contract. As manufactured homes have become larger and have been
attached to their sites without any apparent intention to move them, courts
in many states have held that manufactured homes, under certain
circumstances, may become subject to real estate title and recording laws.
As a result, a security interest in a manufactured home could be rendered
subordinate to the interests of other parties claiming an interest in the
home under applicable state real estate law. In order to perfect a security
interest in a manufactured home under real estate laws, the holder of the
security interest must file either a "fixture filing" under the provision of
the UCC or a real estate mortgage under the real estate laws of the state
where the home is located. See "Land-and-Home Contracts and Mortgage Loans"
below. These filings must be made in the real estate records office of the
county where the home is located. Substantially all of the Manufactured
Housing Contracts contain provisions prohibiting the borrower from attaching
the Manufactured Home to its site. So long as the borrower does not violate
this agreement, a security interest in the Manufactured Home will be governed
by the certificate of title laws or the UCC, and the notation of the security
interest on the certificate of title or the filing of the UCC financing
statement will be effective to maintain the priority of the security interest
in the Manufactured Home. If, however, a Manufactured Home becomes attached
to its site, other parties could obtain an interest in the Manufactured Home
which is prior to the security interest originally retained by the seller of
the Manufactured Housing Contracts and transferred to the Company. The
Company will represent that at the date of the initial issuance of the
related Certificates it has obtained a perfected first priority security
interest by proper notation or delivery of the required documents and fees
with respect to substantially all of the Manufactured Homes securing the
Manufactured Housing Contracts.
The Company will assign the security interest in the Manufactured Homes
to the Trustee on behalf of the Certificateholders. Neither the Company nor
the Trustee will amend the certificates of title to identify the Trustee as
the new secured party, and neither the Company nor the Servicer will deliver
the certificates of title to the Trustee or note thereon the interest of the
Trustee. Accordingly, the Company, or such other originator of the
Manufactured Housing Contracts as provided herein, will continue to be named
as the secured party on the certificates of title relating to the
Manufactured Homes. In some states, such assignment is an effective
conveyance of such security interest without amendment of any lien noted on
the related certificate of title and the new secured party succeeds to the
Company's rights as the secured party. However, in some states in the
absence of an amendment to the certificate of title, such assignment of the
security interest in the Manufactured Home may not be held effective or such
security interests may not be perfected and in the absence of such notation
or delivery to the Trustee, the assignment of the security interest in the
Manufactured Home may not be effective against creditors of the Company or a
trustee in bankruptcy of the Company.
In the absence of fraud, forgery or affixation of the Manufactured Home
to its site by the Manufactured Home owner, or administrative error by state
recording officials, the notation of the lien of the Company on the
certificate of title or delivery of the required documents and fees will be
sufficient to protect the Certificateholders against the rights of subsequent
purchasers of a Manufactured Home or subsequent lenders who take a security
interest in the Manufactured Home. If there are any Manufactured Homes as to
which the Company's security interest is not perfected, such security
interest would be subordinate to, among others, subsequent purchasers for
value of the Manufactured Homes and holders of perfected security interests.
There also exists a risk in not identifying the Trustee as the new secured
party on the certificate of title that, through fraud or negligence, the
security interest of the Trustee could be released.
In the event that the owner of a Manufactured Home moves it to a state
other than the state in which such Manufactured Home initially is registered,
under the laws of most states the perfected security interest in the
Manufactured Home would continue for four months after such relocation and
thereafter only if and after the owner re-registers the Manufactured Home in
such state. If the owner were to relocate a Manufactured Home to another
state and not re-register the Manufactured Home in such state, and if steps
were not taken to re-perfect the Trustee's security interest in such state,
the security interest in the Manufactured Home would cease to be perfected.
A majority of states generally require surrender of a certificate of title to
re-register a Manufactured Home; accordingly, the Company must surrender
possession if it holds certificate of title to such Manufactured Home or, in
the case of Manufactured Homes registered in states which provide for
notation of lien, the Company would receive notice of surrender if the
security interest in the Manufactured Home is noted on the certificate of
title. Accordingly, the Company would have the opportunity to re-perfect its
security interest in the Manufactured Home in the state of relocation. In
states which do not require a certificate of title for registration of a
Manufactured Home, re-registration could defeat perfection. In the ordinary
course of servicing the manufactured housing conditional sales contracts, the
Company takes steps to effect such re-perfection upon receipt of notice of
re-registration or information from the obligor as to relocation. Similarly
when an Obligor under a Contract sells a Manufactured Home, the Company must
surrender possession of the certificate of title or will receive notice as a
result of its lien noted thereon and accordingly will have an opportunity to
require satisfaction of the related manufactured housing conditional sales
contract before release of the lien. Under the Agreement, the Company is
obligated to take such steps, at the Company's expense, as are necessary to
maintain perfection of security interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home and liens for personal property taxes take priority over
perfected security interests. The Company will represent in the Agreement
that it has no knowledge of any such liens with respect to any Manufactured
Home securing payment on any Contract. However, such liens could arise at
any time during the term of the Contract. No notice will be given to the
Trustee or Certificateholders in the event such a lien arises.
Enforcement of Security Interests in Manufactured Homes. The Servicer
on behalf of the Trustee, to the extent required by the related Agreement,
may take action to enforce the Trustee's security interest with respect to
Contracts in default by repossession and resale of the Manufactured Homes
securing such Defaulted Contracts. So long as the Manufactured Home has not
become subject to real estate laws, a creditor can repossess a Manufactured
Home securing a Contract by voluntary surrender, by "self-help" repossession
that is "peaceful" (i.e., without breach of the peace) or, in the absence of
voluntary surrender and the ability to repossess without breach of the peace,
by judicial process. The holder of a Contract must give the debtor a number
of days' notice, which varies from 10 to 30 days depending on the state,
prior to commencement of any repossession. The UCC and consumer protection
laws in most states place restrictions on repossession sales, including
requiring prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that the debtor
be given notice of any sale prior to resale of the unit so that the debtor
may redeem at or before such resale. In the event of such repossession and
resale of a Manufactured Home, the Trustee would be entitled to be paid out
of the sale proceeds before such proceeds could be applied to the payment of
the claims of unsecured creditors or the holders of subsequently perfected
security interests or, thereafter, to the debtor.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the manufactured home securing such a debtor's loan. However,
some states impose prohibitions or limitations on definitions or limitations
on deficiency judgments, and in many cases the defaulting borrower would have
no assets with which to pay a judgment.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the ability of a lender to repossess and resell collateral or enforce a
deficiency judgment.
Under the terms of the federal Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Relief Act"), an Obligor who enters military
service after the origination of such Obligor's Contract (including an
Obligor who is a member of the National Guard or is in reserve status at the
time of the origination of the Contract and is later called to active duty)
may not be charged interest above an annual rate of 6% during the period of
such Obligor's active duty status, unless a court orders otherwise upon
application of the lender. It is possible that such action could have an
effect, for an indeterminate period of time, on the ability of the Servicer
to collect full amounts of interest on certain of the Contracts. Any
shortfall in interest collections resulting from the application of the
Relief Act, to the extent not covered by the subordination of a Class of
Subordinated Certificates, could result in losses to the holders of a Series
of Certificates. In addition, the Relief Act imposes limitations which would
impair the ability of the Servicer to foreclose on an affected Contract
during the Obligor's period of active duty status. Thus, in the event that
such a Contract goes into default, there may be delays and losses occasioned
by the inability to realize upon the Manufactured Home in a timely fashion.
LAND-AND-HOME CONTRACTS AND MORTGAGE LOANS
General. The Land-and-Home Contracts and Mortgage Loans will be secured
by either first mortgages or deeds of trust, depending upon the prevailing
practice in the state in which the underlying property is located. A
mortgage creates a lien upon the real property described in the mortgage.
There are two parties to a mortgage: the mortgagor, who is the borrower, and
the mortgagee, who is the lender. In a mortgage state, the mortgagor
delivers to the mortgagee a note or bond evidencing the loan and the
mortgage. Although a deed of trust is similar to a mortgage, a deed of trust
has three parties: the borrower, a lender as beneficiary, and a third-party
grantee called the trustee. Under the deed of trust, the borrower grants the
property, irrevocably until the debt is paid, in trust, generally with a
power of sale, to the trustee to secure payment of the loan. The trustee's
authority under a deed of trust and the mortgagee's authority under a
mortgage are governed by the express provisions of the deed of trust or
mortgage, applicable law, and, in some cases, with respect to the deed of
trust, the directions of the beneficiary.
Foreclosure. Foreclosure of a mortgage is generally accomplished by
judicial action. Generally, the action is initiated by service of legal
pleadings upon all parties having an interest of record in the real property.
Delays in completion of the foreclosure occasionally may result from
difficulties in locating necessary parties. When the mortgagee's right to
foreclosure is contested, the legal proceedings necessary to resolve the
issue can be time-consuming and expensive. After the completion of a
judicial foreclosure proceeding, the court may issue a judgment of
foreclosure and appoint a receiver or other officer to conduct the sale of
the property. In some states, mortgages may also be foreclosed by
advertisement, pursuant to a power of sale provided in the mortgage.
Foreclosure of mortgage by advertisement is essentially similar to
foreclosure of a deed of trust by non-judicial power of sale.
Foreclosure of a deed of trust is generally accomplished by a non-
judicial trustee's sale under a specific provision in the deed of trust that
authorizes the trustee to sell the property to a third party upon any default
by the borrower under the terms of the note or deed of trust. In certain
states, such foreclosure also may be accomplished by judicial action in the
manner provided for by foreclosure of mortgages. In some states the trustee
must record a notice of default and send a copy to the borrower-trustor and
to any person who has recorded a request for a copy of a notice of sale. In
addition, the trustee must provide notice in some states to any other
individual having an interest of record in the real property, including any
junior lienholders. If the deed of trust is not reinstated within any
applicable cure period, a notice of sale must be posted in a public place
and, in most states, published for a specified period of time in one or more
newspapers. In addition, some state laws require that a copy of the notice
of sale be posted on the property and sent to all parties having an interest
in the property.
In some states, the borrower-trustor has the right to reinstate the loan
at any time following default until shortly before the trustee's sale. In
general, the borrower, or any other person having a junior encumbrance on the
real estate, may, during a reinstatement period cure the default by paying
the entire amount in arrears plus the costs and expenses incurred in
enforcing the obligation. Certain state laws control the amount of
foreclosure expenses and costs, including attorneys' fees, that may be
recovered by a lender.
In the case of foreclosure under either a mortgage or a deed of trust,
the sale by the receiver or other designated officer, or by the trustee, is a
public sale. However, because of the difficulty a potential buyer at the
sale would have in determining the exact status of title and because the
physical condition of the property may have deteriorated during the
foreclosure proceedings, it is not common for a third party to purchase the
property at the foreclosure sale. Rather, the lender generally purchases the
property from the trustee or receiver for an amount equal to the unpaid
principal amount of the note, accrued and unpaid interest and the expenses of
foreclosure. Thereafter, subject to the right of the borrower in some states
to remain in possession during the redemption period, the lender will assume
the burden of ownership, including obtaining hazard insurance and making such
repairs at its own expense as are necessary to render the property suitable
for sale. The lender commonly will obtain the services of a real estate
broker and pay the broker a commission in connection with the sale of the
property. Depending upon market conditions, the ultimate proceeds of the
sale of the property may not equal the lender's investment in the property.
Rights of Redemption. In some states, after the sale pursuant to a deed
of trust or foreclosure of a mortgage, the borrower and certain foreclosed
junior lienors are given a statutory period in which to redeem the property
from the foreclosure sale. In certain other states, this right of redemption
applies only to sale following judicial foreclosure, and not sale pursuant to
a non-judicial power of sale. In most states where the right of redemption
is available, statutory redemption may occur upon payment of the foreclosure
purchase price, accrued interest and taxes. In some states the right to
redeem is an equitable right. The effect of a right of redemption is to
diminish the ability of the lender to sell the foreclosed property. The
exercise of a right of redemption would defeat the title of any purchaser at
a foreclosure sale, or of any purchaser from the lender subsequent to
judicial foreclosure or sale under a deed of trust. Consequently, the
practical effect of the redemption right is to force the lender to maintain
property and pay the expenses of ownership until the redemption period has
run.
Anti-Deficiency Legislation and Other Limitations on Lenders. Certain
states have imposed statutory restrictions that limit the remedies of a
beneficiary under a deed of trust or a mortgagee under a mortgage relating to
a single family residence. In some states, statutes limit the right of the
beneficiary or mortgagee to obtain a deficiency judgment against the borrower
following foreclosure or sale under a deed of trust. A deficiency judgment
is a personal judgment against the borrower equal in most cases to the
difference between the amount due to the lender and the net amount realized
upon the foreclosure sale.
Some state statutes may require the beneficiary or mortgagee to exhaust
the security afforded under a deed of trust or mortgage by foreclosure in an
attempt to satisfy the full debt before bringing a personal action against
the borrower. In certain other states, the lender has the option of bringing
a personal action against the borrower on the debt without first exhausting
such security; however, in some of these states, the lender, following
judgment on such personal action, may be deemed to have elected a remedy and
may be precluded from exercising remedies with respect to the security.
Consequently, the practical effect of the election requirement, when
applicable, is that lenders will usually proceed first against the security
rather than bringing a personal action against the borrower.
Other statutory provisions may limit any deficiency judgment against a
former borrower following a foreclosure sale to the excess of the outstanding
debt over the fair market value of the property at the time of such sale.
The purpose of these statutes is to prevent a beneficiary or a mortgagee from
obtaining a large deficiency judgment against the former borrower as a result
of low or no bids at the foreclosure sale.
In some states, exceptions to the anti-deficiency statutes are provided
for in certain instances where the value of the lender's security has been
impaired by acts or omissions of the borrower, for example, in the event of
waste of the property.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy
laws, the federal Soldier's and Sailor's Civil Relief Act of 1940 and state
laws affording relief to debtors, may interfere with or affect the ability of
a secured mortgage lender to realize upon its security. For example, with
respect to a Land-and-Home Contract or a Mortgage Loan, in a Chapter 13
proceeding under the federal bankruptcy code, when a court determines that
the value of a home is less than the principal balance of the loan, the court
may prevent a lender from foreclosing on the home, and, as part of the
rehabilitation plan, reduce the amount of the secured indebtedness to the
value of the home as it exists at the time of the proceeding, leaving the
lender as a general unsecured creditor for the difference between that value
and the amount of outstanding indebtedness. A bankruptcy court may grant the
debtor a reasonable time to cure a payment default, and in the case of a
mortgage loan not secured by the debtor's principal residence, also may
reduce the monthly payments due under such mortgage loan, change the rate of
interest and alter the mortgage loan repayment schedule. Certain court
decisions have applied such relief to claims secured by the debtor's
principal residence.
The Code provides priority to certain tax liens over the lien of the
mortgage or the deed of trust. The laws of some states provide priority to
certain tax liens over the lien of the mortgage or the deed of trust.
Numerous federal and state consumer protection laws impose substantive
requirements upon mortgage lenders in connection with the origination,
servicing and the enforcement of mortgage loans. These laws include the
federal Truth in Lending Act, Real Estate Settlement Procedures Act, Equal
Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act,
and related statutes and regulations. These federal laws and state laws
impose specific statutory liabilities upon lenders who originate or service
mortgage loans and who fail to comply with the provisions of the law. In
some cases, this liability may affect assignees of the Contracts.
CERTAIN MATTERS RELATING TO INSOLVENCY
The Company intends that each transfer of the Contracts to a Trust Fund
will constitute a sale rather than a pledge of the Contracts to secure
indebtedness of the Company. However, if the Company (or one of its
affiliates) were to become a debtor under the federal bankruptcy code, it is
possible that a creditor, receiver, conservator or trustee in bankruptcy of
the Company (or one of its affiliates) or the Company as a debtor-in-
possession may argue the sale of the Contracts by the Company (or one of its
affiliates) was a pledge of the Contracts rather than a sale. This position,
if argued or accepted by a court, could result in a delay or reduction of
distributions to the related Certificateholders.
CONSUMER PROTECTION LAWS
The so-called "Holder-in-Due-Course" rule of the Federal Trade
Commission is intended to defeat the ability of the transferor of a consumer
credit contract which is the seller of goods which gave rise to the
transaction (and certain related lenders and assignees) to transfer such
contract free of notice of claims by the debtor thereunder. The effect of
this rule is to subject the assignee of such a Contract (such as the Trust
Fund) to all claims and defenses which the Obligor could assert against the
seller of the Manufactured Home. Liability under this rule is limited to
amounts paid under a Contract; however, the Obligor also may be able to
assert the rule to set off remaining amounts due as a defense against a claim
brought by the Trust Fund against the Obligor. Numerous other federal and
state consumer protection laws impose requirements applicable to the
origination and lending pursuant to the Contracts, including the Truth in
Lending Act, the Federal Trade Commission Act, the Fair Credit Billing Act,
the Fair Credit Reporting Act, the Equal Credit Opportunity Act, the Fair
Debt Collection Practices Act and the Uniform Consumer Credit Code. In the
case of some of these laws, the failure to comply with their provisions may
affect the enforceability of the related Contract.
TRANSFERS OF MANUFACTURED HOMES; ENFORCEABILITY OF "DUE-ON-SALE" CLAUSES
The Contracts, in general, prohibit the sale or transfer of the related
Manufactured Homes or Modular Homes without the consent of the Servicer and
permit the acceleration of the maturity of the Contracts by the Servicer upon
any such sale or transfer that is not consented to. The Servicer expects
that it will permit most transfers and not accelerate the maturity of the
related Contracts. In certain cases, the transfer may be made by a
delinquent Obligor in order to avoid a repossession, foreclosure proceeding
or trustee's sale.
In the case of a transfer of a Manufactured Home or Modular Home after
which the Servicer desires to accelerate the maturity of the related
Contract, the Servicer's ability to do so will depend on the enforceability
under state law of the "due-on-sale" clause. The Garn-St. Germain Depository
Institutions Act of 1982 preempts, subject to certain exceptions and
conditions, state laws prohibiting enforcement of "due-on-sale" clauses
applicable to the Manufactured Homes or Modular Homes. Consequently, in some
states the Servicer may be prohibited from enforcing a "due-on-sale" clause
in respect of certain Manufactured Homes or Modular Homes.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, as amended ("Title V"), provides that, subject to the following
conditions, state usury limitations shall not apply to any loan which is
secured by a first lien on certain kinds of manufactured housing. The
Contracts would be covered if they satisfy certain conditions, among other
things, governing the terms of any prepayments, late charges and deferral
fees and requiring a 30-day notice period prior to instituting any action
leading to repossession of or foreclosure with respect to the related unit.
Title V authorized any state to reimpose limitations on interest rates
and finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen
states adopted such a law prior to the April 1, 1983 deadline. In addition,
even where the Title V was not so rejected, any state is authorized by law to
adopt a provision limiting discount points or other charges on loans covered
by Title V. The Company will represent in the applicable Agreement that all
of the Contracts comply with applicable usury laws.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA") imposes certain requirements on employee benefit plans subject to
ERISA ("Plans") and on persons who are fiduciaries with respect to such
Plans. Generally, ERISA applies to investments made by such Plans. Among
other requirements, ERISA mandates that the assets of Plans be held in trust
and that the trustee, or other duly authorized fiduciary, have exclusive
authority and discretion to manage and control the assets of such Plans.
ERISA also imposes certain duties on persons who are fiduciaries of such
Plans. Under ERISA, any person who exercises any authority or control with
respect to the management or disposition of the assets of a Plan is
considered to be a fiduciary of such Plan, subject to the standards of
fiduciary conduct under ERISA. These standards include the requirements that
the assets of Plans be invested and managed for the exclusive benefit of Plan
participants and beneficiaries, a determination by the Plan fiduciary that
any such investment is permitted under the governing Plan instruments and is
prudent and appropriate for the Plan in view of its overall investment policy
and the composition and diversification of its portfolio. Certain employee
benefit plans, such as governmental plans (as defined in ERISA Section 3(32))
and church plans (as defined in ERISA Section 3(33)), are not subject to
ERISA. Accordingly, assets of such plans may be invested in Certificates
without regard to the ERISA considerations described above and below, subject
to the provisions of applicable state law. Any such plan which is qualified
and exempt from taxation under Sections 401(a) and 501(a) of the Internal
Revenue Code of 1986, as amended (the "Code"), however, is subject to the
prohibited transaction rules set forth in Section 4975 of the Code.
Any Plan fiduciary considering the purchase of a Certificate should
consult with its counsel with respect to the potential applicability of ERISA
and the Code to such investment. Moreover, each Plan fiduciary should
determine whether, under the general fiduciary standards of investment
prudence and diversification, an investment in the Certificates is
appropriate for the Plan, taking into account the overall investment policy
of the Plan and composition of the Plan's investment portfolio.
In addition to the imposition of general fiduciary standards of
investment prudence and diversification, ERISA, and the corresponding
provisions of the Code, prohibit a broad range of transactions involving Plan
assets and persons having certain specified relationships to a Plan ("parties
in interest" and "disqualified persons"). Such transactions are treated as
"prohibited transactions" under Sections 406 and 407 of ERISA and excise
taxes are imposed upon such persons by Section 4975 of the Code. An
investment in the Certificates by a Plan might constitute prohibited
transactions under the foregoing provisions unless an administrative
exemption applies. In addition, if any investing Plan's assets were deemed
to include an interest in the assets of the Contract Pool and not merely an
interest in the Certificates, transactions occurring in the operation of the
Contract Pool might constitute prohibited transactions unless an
administrative exemption applies. Certain such exemptions which may be
applicable to the acquisition and holding of the Certificates or to the
servicing and operation of the Contract Pool are noted below.
The Department of Labor ("DOL") has issued a regulation (29 C.F.R.
Section 2510.3-101) (the "Regulation") concerning the definition of what
constitutes the assets of a Plan. This regulation provides that, as a
general rule, the underlying assets and properties of corporations,
partnerships, trusts and certain other entities in which a Plan makes an
"equity" investment will be deemed for purposes of ERISA to be assets of the
investing plan unless certain exceptions apply. However, the Regulation
provides that, generally, the assets of a corporation or partnership in which
a Plan invests will not be deemed for purposes of ERISA to be assets of such
Plan if the equity interest acquired by the investing Plan is a publicly-
offered security. A publicly-offered security, as defined under the
Regulation, is a security that is widely held, freely transferable, and
either is (i) part of a class of securities registered under Section 12(b) or
12(g) of the Securities Exchange Act of 1934, or (ii) sold to the Plan as
part of a securities offering to the public pursuant to an effective
registration statement under the Securities Act of 1933, and the class of
securities of which such security is a part is registered under the
Securities Exchange Act of 1934 within 120 days (or such later time as may be
allowed by the Securities and Exchange Commission) after the end of the
fiscal year of the issuer during which the offering of such securities to the
public occurred. The Certificates are not expected to be publicly-offered
securities under the terms of the Regulation.
Unless some administrative exemption under ERISA applies to the purchase
of Certificates offered hereby, and, as a result, an investing Plan's assets
could be considered to include an undivided interest in the Contracts and any
other assets held in the Contract Pool. In the event that assets of a
Contract Pool are considered assets of an investing Plan, the Company, the
Servicer, the Trustee and other persons, in providing services with respect
to the Contracts, may be considered fiduciaries to such Plan and subject to
the fiduciary responsibility provisions of Title I of ERISA and the
prohibited transaction provisions of Section 4975 of the Code with respect to
transactions involving such assets unless a statutory or administrative
exemption applies.
The U.S. Department of Labor has granted to the lead Underwriter named
in the Prospectus Supplement an exemption (the "Exemption") from certain of
the prohibited transaction rules of ERISA with respect to the initial
purchase, the holding and the subsequent resale by Plans of certificates
representing interests in asset-backed pass-through trusts that consist of
certain receivables, loans and other obligations that meet the conditions and
requirements of the Exemption. The receivables covered by the Exemption
include manufactured housing installment sales contracts and installment loan
agreements such as the Contracts. The Exemption will apply to the
acquisition, holding and resale of the Senior Certificates by a Plan,
provided that certain conditions (certain of which are described below) are
met.
Among the conditions which must be satisfied for the Exemption to apply
to the Senior Certificates are the following:
(1) The acquisition of the Senior Certificates by a Plan is on
terms (including the price for the Senior Certificates) that are at
least as favorable to the Plan as they would be in an arm's length
transaction with an unrelated party;
(2) The rights and interests evidenced by the Senior Certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other certificates of the Trust Fund;
(3) The Senior Certificates acquired by the Plan have received a
rating at the time of such acquisition that is in one of the three
highest generic rating categories from either Standard & Poor's
Corporation, Moody's Investors Service, Inc., Duff & Phelps Inc. or
Fitch I.B.C.A. Inc.;
(4) The Trustee is not an affiliate of any other member of the
Restricted Group (as defined below);
(5) The sum of all payments made to the Underwriter in connection
with the distribution of the Senior Certificates represents not more
than reasonable compensation for underwriting the Senior Certificates;
the sum of all payments made to and retained by the Company pursuant to
the sale of the Contracts to the Trust Fund represents not more than the
fair market value of such Contracts; and the sum of all payments made to
and retained by the Servicer represents not more than reasonable
compensation for the Servicer's services under the Agreement and
reimbursement of the Servicer's reasonable expenses in connection
therewith; and
(6) The Plan investing in the Senior Certificates is an
"accredited investor" as defined in Rule 501 (a)(1) of Regulation D of
the Securities and Exchange Commission under the Securities Act of 1933.
Moreover, the Exemption would provide relief from certain self-
dealing/conflict of interest or prohibited transactions only if, among other
requirements, (i) in the case of the acquisition of Senior Certificates in
connection with the initial issuance, at least fifty (50) percent of the
Senior Certificates are acquired by persons independent of the Restricted
Group (as defined below), (ii) the Plan's investment in Senior Certificates
does not exceed twenty-five (25) percent of all of the Senior Certificates
outstanding at the time of the acquisition, and (iii) immediately after the
acquisition, no more than twenty-five (25) percent of the assets of the Plan
are invested in certificates representing an interest in one or more trusts
containing assets sold or serviced by the same entity. The Exemption does
not apply to Plans sponsored by the Company, any Underwriter, the Trustee,
the Servicer, any obligor with respect to Contracts included in the Trust
Fund constituting more than five percent of the aggregate unamortized
principal balance of the assets in the Trust Fund, or any affiliate of such
parties (the "Restricted Group").
The Company believes that the Exemption will apply to the acquisition
and holding by Plans of Senior Certificates sold by the Underwriter or
Underwriters named in the Prospectus Supplement and that all conditions of
the Exemption other than those within the control of the investors have been
met. In addition, as of the date hereof, no obligor with respect to
Contracts included in the Trust Fund constitutes more than five percent of
the aggregate unamortized principal balance of the assets of the Trust Fund.
Employee benefit plans that are governmental plans (as defined in
section 3(32) of ERISA) and church plans (as defined in section 3(33) of
ERISA) are not subject to ERISA requirements. Accordingly, unless otherwise
specified in the Prospectus Supplement, assets of such plans may be invested
in the Senior Certificates without regard to the ERISA restrictions described
above, subject to applicable provisions of other federal and state laws.
Any Plan fiduciary who proposes to cause a Plan to purchase Senior
Certificates should consult with its own counsel with respect to the
potential consequences under ERISA and the Code of the Plan's acquisition and
ownership of Senior Certificates. Assets of a Plan or individual retirement
account should not be invested in the Senior Certificates unless it is clear
that the assets of the Trust Fund will not be plan assets or unless it is
clear that the Exemption or a prohibited transaction class exemption will
apply and exempt all potential prohibited transactions.
SUBORDINATED CERTIFICATES
Because the Subordinated Certificates are subordinated to the Senior
Certificates, the Exemption will not apply to the acquisition, holding and
resale of the Subordinated Certificates by a Plan.
Any Plan fiduciary considering whether to purchase any Subordinated
Certificates on behalf of a Plan should consult with its counsel regarding
the applicability of the fiduciary responsibility and prohibited transaction
provisions of ERISA and the Code to such investment. Among other things,
before purchasing any Subordinated Certificates, a fiduciary of a Plan
subject to the fiduciary responsibility provisions of ERISA or an employee
benefit plan subject to the prohibited transaction provisions of the Code
should analyze whether any prohibited transaction exemptions are available.
In particular, there are three class exemptions issued by DOL that could
apply with respect to certain transactions involving the Certificates: PTCE
84-14 (Class Exemption for Plan Asset Transaction Determined by Independent
Qualified Professional Asset Managers), PTCE 91-38 (Class Exemption for
Certain Transactions Involving Bank Collective Investment Funds) and PTCE
90-1 (Class Exemption for Certain Transactions Involving Insurance Company
Pooled Separate Accounts). There is no assurance that these exemptions, even
if all of the conditions specified therein are satisfied, will apply to all
transactions involving the Trust Funds assets.
In light of the foregoing, unless otherwise specified in the Prospectus
Supplement, no transfer of a Subordinated Certificate will be permitted to be
made to a Plan unless such Plan, at its expense, delivers to the Trustee and
the Company an opinion of counsel to the effect that the purchase or holding
of a Subordinated Certificate by such Plan will not result in the assets of
the Trust Fund being deemed to be "plan assets" and subject to the prohibited
transaction provisions of ERISA and the Code and will not subject the
Trustee, the Company or the Servicer to any obligation in addition to those
undertaken in the Agreement. Unless such opinion is delivered, each person
acquiring a Subordinated Certificate will be deemed to represent to the
Trustee, the Company and the Servicer that such person is not a Plan subject
to ERISA or Section 4975 of the Code.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of certain federal income tax
consequences relating to the purchase, ownership, and disposition of the
Certificates and is based on advice of Brown & Wood LLP, special tax counsel
to the Company. The discussion is also based upon laws, regulations,
rulings, and decisions now in effect, including Treasury Regulations issued
on December 23, 1992, and generally effective for REMICs with startup days on
or after November 12, 1991 (the "REMIC Regulations"), all of which are
subject to change or possibly differing interpretations. The discussion
below addresses all material federal income tax consequences generally
applicable to investors. However, the discussion does not purport to deal
with federal income tax consequences applicable to all categories of
investors, some of which may be subject to special rules. Investors should
consult their own tax advisors to determine the federal, state, local, and
any other tax consequences of the purchase, ownership, and disposition of the
Certificates.
Many aspects of the federal tax treatment of the purchase, ownership,
and disposition of the Certificates will depend upon whether an election is
made to treat the Trust Fund or a segregated portion thereof evidenced by a
particular series or sub-series of Certificates as a REMIC within the meaning
of Section 860D(a) of the Code. The Prospectus Supplement for each series
will indicate whether or not an election to be treated as a REMIC has been or
will be made with respect thereto. The following discussion deals first with
Series with respect to which a REMIC Election is made and then with Series
with respect to which a REMIC Election is not made.
REMIC SERIES
With respect to each Series of Certificates for which a REMIC Election
is made, Brown & Wood LLP, special tax counsel to the Company, will have
advised the Company that in its opinion, assuming (i) the making of that
election in accordance with the requirements of the Code and (ii) ongoing
compliance with the applicable Agreement, at the initial issuance of the
Certificates in such series the Trust Fund will qualify as a REMIC and the
Certificates in such a Series ("REMIC Certificates") will be treated either
as regular interests in the REMIC within the meaning of Section 860G(a)(1) of
the Code ("Regular Certificates") or as a residual interests in the REMIC
within the meaning of Section 860G(a)(2) of the Code ("Residual
Certificates").
Qualification as a REMIC. Qualification as a REMIC involves ongoing
compliance with certain requirements and the following discussion assumes
that such requirements will be satisfied by the Trust Fund so long as there
are any REMIC Certificates outstanding. Substantially all of the assets of
the REMIC must consist of "qualified mortgages" and "permitted investments"
as of the close of the third month beginning after the day on which the REMIC
issues all of its regular and residual interests (the "Startup Day") and at
all times thereafter. The term "qualified mortgage" means any obligation
(including a participation or certificate of beneficial ownership in such
obligation) which is principally secured by an interest in real property that
is transferred to the REMIC on the Startup Day in exchange for regular or
residual interests in the REMIC or is purchased by the REMIC within the
three-month period beginning on the Startup Day if such purchase is pursuant
to a fixed price contract in effect on the Startup Day. The REMIC
Regulations provide that a Contract is principally secured by an interest in
real property if the fair market value of the real property securing the
Contract is at least equal to either (i) 80% of the issue price (generally,
the principal balance) of the Contract at the time it was originated or
(ii) 80% of the adjusted issue price (the then-outstanding principal balance,
with certain adjustments) of the Contract at the time it is contributed to a
REMIC. The fair market value of the underlying real property is to be
determined after taking into account other liens encumbering that real
property. Alternatively, a Contract is principally secured by an interest in
real property if substantially all of the proceeds of the Contract were used
to acquire or to improve or protect an interest in real property that, at the
origination date, is the only security for the Contract (other than the
personal liability of the obligor). The REMIC Regulations provide that
obligations secured by manufactured housing or mobile homes (not including
recreational vehicles, campers or similar vehicles) which are "single family
residences" under Section 25(e)(10) of the Code will qualify as obligations
secured by real property without regard to state law classifications. See
the discussion below under "REMIC Series -- Status of Manufactured Housing
Contracts." A qualified mortgage also includes a qualified replacement
mortgage that is used to replace any qualified mortgage within three months
of the Startup Day or to replace a defective mortgage within two years of the
Startup Day.
"Permitted investments" consist of (a) temporary investments of cash
received under qualified mortgages before distribution to holders of
interests in the REMIC ("cash-flow investments"), (b) amounts, such as a
Reserve Fund, if any, reasonably required to provide for full payment of
expenses of the REMIC, the principal and interest due on regular or residual
interests in the event of defaults on qualified mortgages, lower than
expected returns on cash-flow investments, prepayment interest shortfalls or
certain other contingencies ("qualified reserve assets"), and (c) certain
property acquired as a result of foreclosure of defaulted qualified mortgages
("foreclosure property"). A reserve fund will not be qualified if more than
30% of the gross income from the assets in the reserve fund is derived from
the sale or other disposition of property held for three months or less,
unless such sale is necessary to prevent a default in payment of principal or
interest on Regular Certificates. In accordance with Section 860G(a)(7) of
the Code, a reserve fund must be "promptly and appropriately" reduced as pay-
ments on contracts are received. Foreclosure property will be a permitted
investment only to the extent that such property is not held for more than
two years. For taxable years beginning after August 5, 1997, the Taxpayer
Relief Act of 1997 ("Tax Act") extends the period in which foreclosure
property will be considered a permitted investment to three years.
The Code requires that in order to qualify as a REMIC an entity must
make reasonable arrangements designed to ensure that certain specified
entities, generally including governmental entities or other entities that
are exempt from United States tax, including the tax on unrelated business
income ("Disqualified Organizations"), not hold residual interest in the
REMIC. Consequently, it is expected that in the case of any Trust Fund for
which a REMIC Election is made the transfer, sale, or other disposition of a
Residual Certificate to a Disqualified Organization will be prohibited and
the ability of a Residual Certificate to be transferred will be conditioned
on the Trustee's receipt of a certificate or other document representing that
the proposed transferee is not a Disqualified Organization. The transferor
of a Residual Certificate must not, as of the time of the transfer, have
actual knowledge that such representation is false. The Code further
requires that reasonable arrangements must be made to enable a REMIC to
provide the Internal Revenue Service (the "Service") and certain other
parties, including transferors of residual interests in a REMIC, with the
information needed to compute the tax imposed by Section 860E(e)(1) of the
Code if, in spite of the steps taken to prevent Disqualified Organizations
from holding residual interests, such an organization does, in fact, acquire
a residual interest. See "REMIC Series -- Restrictions on Transfer of
Residual Certificates" below.
If the Trust Fund fails to comply with one or more of the ongoing
requirements for qualification as a REMIC, the Trust Fund will not be treated
as REMIC for the year during which such failure occurs and thereafter unless
the Service determines, in its discretion, that such failure was inadvertent
(in which case, the Service may require any adjustments which it deems
appropriate). If the ownership interests in the assets of the Trust Fund
consist of multiple classes, failure to treat the Trust Fund as a REMIC may
cause the Trust Fund to be treated as an association taxable as a
corporation. Such treatment could result in income of the Trust Fund being
subject to corporate tax in the hands of the Trust Fund and in a reduced
amount being available for distribution to Certificateholders as a result of
the payment of such taxes.
Status of Manufactured Housing Contracts. The REMIC Regulations as well
as a Notice issued by the Service provide that obligations secured by
interests in manufactured housing, which qualify as "single family
residences" within the meaning of Section 25(e)(10) of the Code, are to be
treated as "qualified mortgages" for a REMIC. Under Section 25(e)(10) of the
Code, the term "single family residence" includes any manufactured home which
as a minimum of 400 square feet of living space and a minimum width in excess
of 102 inches and which is of a kind customarily used at a fixed location.
The Company will represent and warrant that each of the manufactured homes
securing the Contracts which are a part of a Trust Fund meets this definition
of a "single family residence." See the discussion above under "REMIC Series
- -- Qualification as a REMIC."
Tiered REMIC Structures. For certain series of Certificates, two or
more separate elections may be made to treat segregated portions of the
assets of a single Trust Fund as REMICs for federal income tax purposes
(respectively, the "Subsidiary REMIC" or "Subsidiary REMICs" and the "Master
REMIC"). Upon the issuance of any such series of Certificates, Brown & Wood
LLP, special tax counsel to the Company, will have advised the Company, as
described above, that at the initial issuance of the Certificates, the
Subsidiary REMICs and the Master REMIC will each qualify as a REMIC for
federal income tax purposes, and that the Certificates in such a series will
be treated either as Regular Certificates or Residual Certificates of the
appropriate REMIC. Only REMIC Certificates issued by the Master REMIC will
be offered hereunder. Solely for the purpose of determining whether such
Regular Certificates will constitute qualifying real estate or real property
assets for certain categories of financial institutions or real estate
investment trusts as described below, each REMIC in a tiered REMIC structure
will be treated as one. See the discussion below under "REMIC Series --
Taxation of Regular Interests."
Taxation of Regular Interests. Regular Certificates will be treated as
new debt instruments issued by the REMIC on the Startup Day. If a Regular
Certificate represents an interest in a REMIC that consists of a specified
portion of the interest payments on the REMIC's qualified mortgages, the
stated principal amount with respect to that Regular Certificate may be zero.
Such a specified portion may consist of a fixed number of basis points, a
fixed percentage of interest or a qualified variable rate on some or all of
the qualified mortgages. Stated interest on a Regular Certificate will be
taxable as ordinary income. Holders of Regular Certificates that would
otherwise report income under a cash method of accounting will be required to
report income with respect to such Regular Certificates under the accrual
method. Under Temporary Treasury Regulations, if a Trust Fund, with respect
to which a REMIC Election is made, is considered to be a "single-class
REMIC," a portion of the REMIC's servicing fees, administrative and other
non-interest expenses, including assumption fees and late payment charges
retained by the Company, will be allocated as a separate item to those
Regular Certificateholders that are "pass-through interest holders."
Generally, a single-class REMIC is defined as a REMIC that would be treated
as a fixed investment trust under applicable law but for its qualification as
a REMIC, or a REMIC that is substantially similar to an investment trust but
is structured with the principal purpose of avoiding this allocation
requirement imposed by the Temporary Treasury Regulations. Generally, a
pass-through interest holder refers to individuals, entities taxed as
individuals, such as certain trusts and estates, and regulated investment
companies. An individual, an estate, or a trust that holds a Regular
Certificate in such a REMIC will be allowed to deduct the foregoing expenses
under Section 212 of the Code only to the extent that, in the aggregate and
combined with certain other itemized deductions, they exceed 2% of the
adjusted gross income of the holder. In addition, Section 68 of the Code
provides that the amount of itemized deductions (including those provided for
in Section 212 of the Code) otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds a threshold amount specified
in the Code ($100,000 in the case of a joint return) will be reduced by the
lesser of (i) 3% of the excess of adjusted gross income over the specified
threshold amount or (ii) 80% of the amount of itemized deductions otherwise
allowable, for such taxable year. As a result of the foregoing limitations,
certain holders of Regular Certificates in "single-class REMICs" may not be
entitled to deduct all or any part of the foregoing expenses.
Tax Status of REMIC Certificates. In general, (i) Regular Certificates
held by a thrift institution taxed as a "domestic building and loan
association" within the meaning of Section 7701(a)(19) of the Code will
constitute "a regular . . . interest in a REMIC" within the meaning of
Section 7701(a)(19)(C)(xi) of the Code; and (ii) Regular Certificates held by
a real estate investment trust will constitute "real estate assets" within
the meaning of Section 856(c)(5)(A) of the Code and interest thereon will be
considered "interest on obligations secured by mortgages on real property"
within the meaning of Section 856(c)(3)(B) of the Code, in each such case as
long as the portion of the assets of the Trust Fund qualifying for the
corresponding status is at least 95% of the assets of the REMIC. If less
than 95% of the average adjusted basis of the assets comprising the REMIC are
assets qualifying under any of the foregoing Sections of the Code (including
assets described in Section 7701(a)(19)(C) of the Code), then the Regular
Certificates will be qualifying assets only to the extent that the assets
comprising the REMIC are qualifying assets. Treasury Regulations promulgated
pursuant to Section 593 of the Code define "qualifying real property loans"
to include a loan secured by a mobile home unit "permanently fixed to real
property" except during a brief period in which the unit is transported to
its site. Section 7701(a)(19)(C)(v) of the Code provides that "loans secured
by an interest in real property" includes loans secured by mobile homes not
used on a transient basis. Treasury Regulations promulgated pursuant to
Section 856 of the Code state that local law definitions are not controlling
in determining the meaning of the term "Real Property" for purposes of that
section, and the Service has ruled that obligations secured by permanently
installed mobile home units qualify as "real estate assets" under this
provision. Entities affected by the foregoing provisions of the Code that
are considering the purchase of Certificates should consult their own tax
advisors regarding these provisions. Furthermore, interest paid with respect
to Certificates held by a real estate investment trust will be considered
"interest on obligations secured by mortgages on real property or on interest
in real property" within the meaning of Section 856(c)(3)(B) of the Code to
the same extent that the Certificates themselves are treated as real estate
assets. Regular Certificates held by a regulated investment company or a
real estate investment trust will not constitute "Government securities"
within the meaning of Sections 851(b)(4)(A)(i) and 856(c)(5)(A) of the Code,
respectively. In addition, the REMIC Regulations provide that payments on
Contracts qualifying for the corresponding status that are held and
reinvested pending distribution to Certificateholders will be considered to
be "real estate assets" within the meaning of Section 856(c)(5)(A) of the
Code.
Original Issue Discount. Regular Certificates may be issued with
"original issue discount." Rules governing original issue discount are set
forth in Sections 1271-1273 and 1275 of the Code and the Treasury Regulations
issued thereunder in January 1994 and in June 1996 (the "OID Regulations").
The discussion herein is based in part on the OID Regulations, which
generally apply to debt instruments issued on or after April 4, 1994, but
which generally may be relied upon for debt instruments issued after
December 21, 1992. The June 1996 Regulations apply to debt instruments
issued after August 13, 1996. Moreover, although the rules relating to
original issue discount contained in the Code were modified by the Tax Reform
Act of 1986 specifically to address the tax treatment of securities, such as
the Regular Certificates, on which principal is required to be prepaid based
on prepayments of the underlying assets, regulations under that legislation
have not yet been finalized. Certificateholders also should be aware that
the OID Regulations do not address certain issues relevant to prepayable
securities such as the Regular Certificates.
In general, in the hands of the original holder of a Regular
Certificate, original issue discount, if any, is the difference between the
"stated redemption price at maturity" of the Regular Certificate and its
"issue price." The original issue discount with respect to a Regular
Certificate will be considered to be zero if it is less than .25% of the
Regular Certificate's stated redemption price at maturity multiplied by the
number of complete years from the date of issue of such Regular Certificate
to its maturity date. The OID Regulations, however, provide a special de
minimis rule to apply to obligations such as the Regular Certificates that
have more than one principal payment or that have interest payments that are
not qualified stated interest as defined in the OID Regulations, payable
before maturity ("installment obligations"). Under the special rule,
original issue discount on an installment obligation is generally considered
to be zero if it is less than .25% of the principal amount of the obligation
multiplied by the weighted average maturity of the obligation as defined in
the OID Regulations. Because of the possibility of prepayments, it is not
clear whether or how the de minimis rules will apply to the Regular
Certificates. It is possible that the anticipated rate of prepayments
assumed in pricing the debt instrument (the "Prepayment Assumption") will be
required to be used in determining the weighted average maturity of the
Regular Certificates. In the absence of authority to the contrary, the
Company expects to apply the de minimis rule applicable to installment
obligations by using the Prepayment Assumption. The OID Regulations provide
a further special de minimis rule applicable to any Regular Certificates that
are "self-amortizing installment obligations," i.e., Regular Certificates
that provide for equal payments composed of principal and qualified stated
interest payable unconditionally at least annually during its entire term,
with no significant additional payment required at maturity. Under this
special rule, original issue discount on a self-amortizing installment
obligation is generally considered to be zero if it is less than .167% of the
principal amount of the obligation multiplied by the number of complete years
from the date of issue of such a Regular Certificate to its maturity date.
Generally, the original holder of a Regular Certificate that includes a
de minimis amount of original issue discount includes that original issue
discount in income as principal payments are made. The amount included in
income with respect to each principal payment equals a pro rata portion of
the entire amount of de minimis original issue discount with respect to that
Regular Certificate. Any de minimis amount of original issue discount
included in income by a holder of a Regular Certificate is generally treated
as a capital gain if the Regular Certificate is a capital asset in the hands
of the holder thereof. Pursuant to the OID Regulations, a holder of a
Regular Certificate that uses the accrual method of tax accounting or that
acquired such Regular Certificate on or after April 4, 1994, may, however,
elect to include in gross income all interest that accrues on a Regular
Certificate, including any de minimis original issue discount and market
discount, by using the constant yield method described below with respect to
original issue discount.
The stated redemption price at maturity of a Regular Certificate
generally will be equal to the sum of all payments, whether denominated as
principal or interest, to be made with respect thereto other than "qualified
stated interest." Pursuant to the OID Regulation, qualified stated interest
is stated interest that is unconditionally payable at least annually at a
single fixed rate of interest (or, under certain circumstances, a variable
rate tied to an objective index) during the entire term of the Regular
Certificate (including short periods). It is possible that the IRS could
assert that the stated rate of interest on the Certificates is not
unconditionally payable or otherwise does not qualify as qualified stated
interest. Such position, if successful, would require all holders of
Certificates to accrue all income on the Certificates under the OID
Regulations. The Company, however, intends to treat all stated interest on
the Certificates as qualified stated interest. Under the OID Regulations,
certain variable interest rates payable on Regular Certificates, including
rates based upon the weighted average interest rate of a Pool of Contracts,
may not be treated as qualified stated interest. In such case, the OID
Regulations would treat interest under such rates as contingent interest
which generally must be included in income by the Regular Certificateholder
when the interest becomes fixed, as opposed to when it accrues. Until
further guidance is issued concerning the treatment of such interest payable
on Regular Certificates, the REMIC will treat such interest as being payable
at a variable rate tied to a single objective index of market rates.
Prospective investors should consult their tax advisors regarding the
treatment of such interest under the OID Regulations. In the absence of
authority to the contrary and if otherwise appropriate, the Company expects
to determine the stated redemption price at maturity of a Regular Certificate
by assuming that the anticipated rate of prepayment for all Contracts will
occur in such a manner that the initial Remittance Rate for a Certificate
will not change. Accordingly, interest at the initial Remittance Rate will
constitute qualified stated interest payments for purposes of applying the
original issue discount provisions of the Code. In general, the issue price
of a Regular Certificate is the first price at which a substantial amount of
the Regular Certificates of such class are sold for money to the public
(excluding bond houses, brokers or similar persons or organizations acting in
the capacity of underwriters, placement agents or wholesalers). If a portion
of the initial offering price of a Regular Certificate is allocable to
interest that has accrued prior to its date of issue, the issue price of such
a Regular Certificate includes that pre-issuance accrued interest.
If the Regular Certificates are determined to be issued with original
issue discount, a holder of a Regular Certificate must generally include the
original issue discount in ordinary gross income for federal income tax
purposes as it accrues in advance of the receipt of any cash attributable to
such income. The amount of original issue discount, if any, required to be
included in a Regular Certificateholder's ordinary gross income for federal
income tax purposes in any taxable year will be computed in accordance with
Section 1272(a) of the Code and the OID Regulations. Under such Section and
the OID Regulations, original issue discount accrues on a daily basis under a
constant yield method that takes into account the compounding of interest.
The amount of original issue discount to be included in income by a holder of
a debt instrument, such as a Regular Certificate, under which principal
payments may be subject to acceleration because of prepayments of other debt
obligations securing such instruments, is computed by taking into account the
Prepayment Assumption. The Prospectus Supplement for each series of Regular
Certificates will specify the Prepayment Assumption to be used for the
purposes of determining the amount and rate of accrual of OID. No
representation is made that the Regular Certificates will prepay at the
Prepayment Assumption or at any other rate.
The amount of original issue discount included in income by a holder of
a Regular Certificate is the sum of the "daily portions" of the original
issue discount for each day during the taxable year on which the holder held
the Regular Certificate. The daily portions of original issue discount are
determined by allocating to each day in any "accrual period" a pro rata
portion of the excess, if any, of the same of (i) the present value of all
remaining payments to be made on the Regular Certificate as of the close of
the "accrual period" and (ii) the payments during the "accrual period" of
amounts included in the stated redemption price of the Regular Certificate
over the "adjusted issue price" of the Regular Certificate at the beginning
of the "accrual period." Generally, the "accrual period" for the Regular
Certificates corresponds to the intervals at which amounts are paid or
compounded with respect to such Regular Certificate, beginning with their
date of issuance and ending with the maturity date. The "adjusted issue
price" of a Regular Certificate at the beginning of any accrual period is the
sum of the issue price and accrued original issue discount for each prior
accrual period reduced by the amount of payments other than payments of
qualified stated interest made during each prior accrual period. The Code
requires the present value of the remaining payments to be determined on the
bases of (a) the original yield to maturity (determined on the basis of
compounding at the close of each accrual period and properly adjusted for the
length of the accrual period), (b) events, including actual prepayments,
which have occurred before the close of the accrual period, and (c) the
assumption that the remaining payments will be made in accordance with the
original Prepayment Assumption. The effect of this method is to increase the
portions of original issue discount that a Regular Certificateholder must
include in income to take into account prepayments with respect to the
Contracts held by the Trust Fund that occur at a rate that exceeds the
Prepayment Assumption and to decrease (but not below zero for any period) the
portions of original issue discount that a Regular Certificateholder must
include in income to take into account prepayments with respect to the
Contracts that occur at a rate that is slower than the Prepayment Assumption.
Although original issue discount will be reported to Regular
Certificateholders based on the Prepayment Assumption, no representation is
made to Regular Certificateholders that the Contracts will be prepaid at that
rate or at any other rate.
A subsequent purchaser of a Regular Certificate will also be required to
include in such purchaser's ordinary gross income for federal income tax
purposes the original issue discount, if any, accruing with respect to such
Regular Certificate, unless the price paid equals or exceeds the Regular
Certificate's outstanding principal amount. If the price paid exceeds the
sum of the Regular Certificate's issue price plus the aggregate amount of
original issue discount accrued with respect to the Regular Certificate, but
does not equal or exceed the outstanding principal amount of the Regular
Certificate, the amount of original issue discount to be accrued will be
reduced in accordance with a formula set forth in Section 1272(a)(7)(B) of
the Code.
The Company believes, upon the advice of Brown & Wood LLP, special tax
counsel to the Company, that the holder of a Regular Certificate determined
to be issued with non-de minimis original issue discount will be required to
include the original issue discount in ordinary gross income for federal
income tax purposes computed in the manner described above. However, the OID
Regulations either do not address or are subject to varying interpretations
with respect to several issues concerning the computation of original issue
discount for obligations such as the Regular Certificates.
Variable Rate Regular Certificates. Regular Certificates may bear
interest at a variable rate. Under the OID Regulations, if a variable rate
Regular Certificate provides for qualified stated interest payments computed
on the basis of certain qualified floating rates or objective rates, then any
original issue discount on such a Regular Certificate is computed and accrued
under the same methodology that applies to Regular Certificates paying
qualified stated interest at a fixed rate. See the discussion above under
"REMIC Series -- Original Issue Discount." Accordingly, if the issue price of
such a Regular Certificate is equal to its stated redemption price at
maturity, the Regular Certificate will not have any original issue discount.
For purposes of applying the original issue discount provisions of the
Code, all or a portion of the interest payable with respect to a variable
rate Regular Certificate may not be treated as qualified stated interest in
certain circumstances, including the following: (i) if the variable rate of
interest is subject to one or more minimum or maximum rate floors or ceilings
which are not fixed throughout the term of the Regular Certificate and which
are reasonably expected as of the issue date to cause the rate in certain
accrual periods to be significantly higher or lower than the overall expected
return on the Regular Certificate determined without such floor or ceiling;
or (ii) if it is reasonably expected that the average value of the variable
rate during the first half of the term of the Regular Certificate will be
either significantly less than or significantly greater than the average
value of the rate during the final half of the term of the Regular
Certificate. In these situations, as well as others, it is unclear under the
OID Regulations whether such interest payments constitute qualified stated
interest payments, or must be treated either as part of a Regular
Certificate's stated redemption price at maturity resulting in original issue
discount, or represent contingent payments. The amended OID Regulations
issued on June 11, 1996 generally require the accrual of original issue
discount on contingent payment debt instruments based on the comparable yield
of fixed rate debt instruments with similar terms and conditions, followed by
adjustments to reflect the differences between the payments so projected and
the actual contingent payments. Although the new rules technically do not
adequately address certain issues relevant to, or applicable to, prepayable
securities such as REMIC regular interests, in the absence of other
authority, the Servicer intends to be guided by certain principles of the OID
Regulations applicable to variable rate debt instruments in determining
whether such Certificates should be treated as issued with original issue
discount and in adapting the provisions of Section 1272(a)(6) of the Code to
such Certificates for the purpose of preparing reports furnished to
Certificateholders and the IRS. Investors acquiring Regular Certificates
whose rates are subject to the variations outlined above should consult their
tax advisors concerning their appropriate tax treatment.
If a variable rate Regular Certificate is deemed to have been issued
with original issue discount, as described above, the amount of original
issue discount accrues on a daily basis under a constant yield method that
takes into account the compounding of interest; provided, however, that the
interest associated with such a Regular Certificate generally is assumed to
remain constant throughout the term of the Regular Certificate at a rate
that, in the case of a qualified floating rate, equals the value of such
qualified floating rate as of the issue date of the Regular Certificate, or,
in the case of an objective rate, at a fixed rate that reflects the yield
that is reasonably expected for the Regular Certificate. A holder of such a
Regular Certificate would then recognize original issue discount during each
accrual period which is calculated based upon such Regular Certificate's
assumed yield to maturity, adjusted to reflect the difference between the
assumed and actual interest rate.
The OID Regulations either do not address or are subject to varying
interpretations with respect to several issues concerning the computation of
original issue discount with respect to the Regular Certificates, including
variable rate Regular Certificates. Additional information regarding the
manner of reporting original issue discount to the Service and to holders of
variable rate Regular Certificates will be set forth in the Prospectus
Supplement relating to the issuance of such Regular Certificates.
Market Discount. Regular Certificates, whether or not issued with
original issue discount, will be subject to the market discount rules of the
Code. A purchaser of a Regular Certificate who purchases the Regular
Certificate at a market discount (i.e., a discount from its original issue
price plus any accrued original issue discount, if any, as described above)
will be required to recognize accrued market discount as ordinary income as
payments of principal are received on such Regular Certificate or upon the
sale or exchange of the Regular Certificate. In general, the holder of a
Regular Certificate may elect to treat market discount as accruing either
(i) under a constant yield method that is similar to the method for the
accrual of original issue discount or (ii) in proportion to accruals of
original issue discount (or, if there is no original issue discount, in
proportion to accruals of stated interest), in each case computed taking into
account the Prepayment Assumption.
The Code provides that the market discount in respect of a Regular
Certificate will be considered to be zero if the amount allocable to the
Regular Certificate is less than 0.25% of the Regular Certificate's stated
redemption price at maturity multiplied by the number of complete years
remaining to its maturity after the holder acquired the obligation. If
market discount is treated as de minimis under this rule, the actual discount
would be allocated among a portion of each scheduled distribution
representing the stated redemption price of such Regular Certificate and that
portion of the discount allocable to such distribution would be reported as
income when such distribution occurs or is due.
The Code further provides that any principal payment with respect to a
Regular Certificate acquired with market discount or any gain on disposition
of such a Regular Certificate shall be treated as ordinary income to the
extent it does not exceed the accrued market discount at the time of such
payment. The amount of accrued market discount for purposes of determining
the amount of ordinary income to be recognized with respect to subsequent
payments on such a Regular Certificate is to be reduced by the amount
previously treated as ordinary income.
The Code grants authority to the Treasury Department to issue
regulations providing for the computation of accrued market discount on debt
instruments such as the Regular Certificates. Until such time as regulations
are issued, rules described in the legislative history for these provisions
of the Code will apply. Under those rules, as described above, the holder of
a Regular Certificate with market discount may elect to accrue market
discount either on the basis of a constant interest rate or according to
certain other methods. Certificateholders who acquire a Regular Certificate
at a market discount should consult their tax advisors concerning various
methods which are available for accruing that market discount.
In general, limitations imposed by the Code that are intended to match
deductions with the taxation of income may require a holder of a Regular
Certificate having market discount to defer a portion of the interest
deductions attributable to any indebtedness incurred or continued to purchase
or carry such Regular Certificate. Alternatively, a holder of a Regular
Certificate may elect to include market discount in gross income as it
accrues and, if he makes such an election, is exempt from this rule. The
adjusted basis of a Regular Certificate subject to such election will be
increased to reflect market discount included in gross income, thereby
reducing any gain or increasing any loss on a sale or taxable disposition.
Amortizable Premium. A holder of a Regular Certificate who holds the
Regular Certificate as a capital asset and who purchased the Regular
Certificate at a cost greater than its outstanding principal amount will be
considered to have purchased the Regular Certificate at a premium. In
general, the Regular Certificateholder may elect to deduct the amortizable
bond premium as it accrues under a constant yield method. A Regular
Certificateholder's tax basis in the Regular Certificate will be reduced by
the amount of the amortizable bond premium deducted. In addition, it appears
that the same methods which apply to the accrual of market discount on
installment obligations are intended to apply in computing the amortizable
bond premium deduction with respect to a Regular Certificate. It is not
clear, however, (i) whether the alternatives to the constant-yield method
which may be available for the accrual of market discount are available for
amortizing premium on Regular Certificates and (ii) whether the Prepayment
Assumption should be taken into account in determining the term of a Regular
Certificate for this purpose. Certificateholders who pay a premium for a
Regular Certificate should consult their tax advisors concerning such an
election and rules for determining the method for amortizing bond premium.
On June 27, 1996 the IRS issued proposed regulations ("the Amortizable
Bond Premium Regulations") dealing with amortizable bond premium. These
regulations specifically do not apply to prepayable debt instruments subject
to Code Section 1272(a)(6) such as the Regular Certificates. Absent further
guidance from the IRS, the Trustee intends to account for amortizable bond
premium in the manner described above. Prospective purchasers of the
Certificates should consult their tax advisors regarding the possible
application of the Amortizable Bond Premium Regulations.
Gain or Loss on Disposition. If a Regular Certificate is sold, the
seller will recognize gain or loss equal to the difference between the amount
realized from the sale and the seller's adjusted basis in such Regular
Certificate. The adjusted basis generally will equal the cost of such
Regular Certificate to the seller, increased by any original issue discount
included in the seller's ordinary gross income with respect to such Regular
Certificate and reduced (but not below zero) by any payments on the Regular
Certificate previously received or accrued by the seller (other than
qualified stated interest payment) and any amortizable premium. Similarly, a
Regular Certificateholder who receives a principal payment with respect to a
Regular Certificate will recognize gain or loss equal to the difference
between the amount of the payment and the holder's allocable portion of his
or her adjusted basis in the Regular Certificate. Except as discussed below
or with respect to market discount, any gain or loss recognized upon a sale,
exchange, retirement, or other disposition of a Regular Certificate will be
capital gain if the Regular Certificate is held as a capital asset.
Gain from the disposition of a Regular Certificate that might otherwise
be capital gain, including any gain attributable to de minimis original issue
discount, will be treated as ordinary income to the extent of the excess, if
any, of (i) the amount that would have been included in the holder's income
if the yield on such Regular Certificate had equaled 110% of the applicable
federal rate determined as of the beginning of such holder's holding period,
over (ii) the amount of ordinary income actually recognized by the holder
with respect to such Regular Certificate.
If the Company is determined to have intended on the date of issue of
the Regular Certificates to call all or any portion of the Regular
Certificates prior to their stated maturity within the meaning of Section
1271(a)(2)(A) of the Code, any gain realized upon a sale, exchange,
retirement, or other disposition of a Regular Certificate would be considered
ordinary income to the extent it does not exceed the unrecognized portion of
the original issue discount, if any, with respect to the Regular Certificate.
The OID Regulations provide that the intention to call rule will not be
applied to mortgage-backed securities such as the Regular Certificates. In
addition, under the OID Regulations, a mandatory sinking fund or call option
is not evidence of an intention to call.
Taxation of Residual Interests. Generally, the "daily portions" of the
taxable income or net loss of a REMIC will be included as ordinary income or
loss in determining the taxable income of holders of Residual Certificates
("Residual Holders"), and will not be taxed separately to the REMIC. The
daily portions are determined by allocating the REMIC's taxable income or net
loss for each calendar quarter ratably to each day in such quarter and by
allocating such daily portion among the Residual Holders in proportion to
their respective holdings of Residual Certificates in the REMIC on such day.
REMIC taxable income is generally determined in the same manner as the
taxable income of an individual using the accrual method of accounting except
that (i) the limitation on deductibility of investment interest expense and
expenses for the production of income do not apply, (ii) all bad loans will
be deductible as business bad debts, and (iii) the limitation on the
deductibility of interest and expenses related to tax-exempt income will
apply. REMIC taxable income generally means a REMIC's gross income,
including interest, original issue discount income, and market discount
income, if any, on the Contracts, plus income on reinvestment of cash flows
and reserve assets, minus deductions, including interest and original issue
discount expense on the Regular Certificates, servicing fees on the
Contracts, other administrative expenses of a REMIC, and amortization of
premium, if any, with respect to the Contracts.
The taxable income recognized by a Residual Holder in any taxable year
will be affected by, among other factors, the relationship between the timing
of interest, original issue discount or market discount income, or
amortization of premium with respect to the Contracts, on the one hand, and
the timing of deductions for interest (including original issue discount) on
the Regular Certificates, on the other hand. In the event that an interest
in the Contracts is acquired by a REMIC at a discount, and one or more of
such Contracts is prepaid, the Residual Holder may recognize taxable income
without being entitled to receive a corresponding cash distribution because
(i) the prepayment may be used in whole or in part to make distributions on
Regular Certificates, and (ii) the discount on the Contracts which is
included in a REMIC's income may exceed its deduction with respect to the
distributions on those Regular Certificates. When there is more than one
class of Regular Certificates that receive payments sequentially (i.e., a
fast-pay, slow-pay structure), this mismatching of income and deductions is
particularly likely to occur in the early years following issuance of the
Regular Certificates, when distributions are being made in respect of earlier
classes of Regular Certificates to the extent that such classes are not
issued with substantial discount. If taxable income attributable to such a
mismatching is realized, in general, losses would be allowed in later years
as distributions on the later classes of Regular Certificates are made.
Taxable income may also be greater in earlier years than in later years as a
result of the fact that interest expense deductions, expressed as a
percentage of the outstanding principal amount of Regular Certificates, may
increase over time as distributions are made on the lower yielding classes of
Regular Certificates, whereas interest income with respect to any given
Contract will remain constant over time as a percentage of the outstanding
principal amount of that loan (assuming it bears interest at a fixed rate).
Consequently, Residual Holders must have sufficient other sources of cash to
pay any federal, state, or local income taxes due as a result of such
mismatching, or such holders must have unrelated deductions against which to
offset such income, subject to the discussion of "excess inclusions" below
under "REMIC Series -- Limitations on Offset or Exemption of REMIC Income."
The mismatching of income and deductions described in this paragraph, if
present with respect to a series of Certificates, may have a significant
adverse effect upon the Residual Holder's after-tax rate of return.
The amount of any net loss of a REMIC that may be taken into account by
the Residual Holder is limited to the adjusted basis of the Residual
Certificate as of the close of the quarter (or time of disposition of the
Residual Certificate if earlier), determined without taking into account the
net loss for the quarter. The initial adjusted basis of a purchaser of a
Residual Certificate is the amount paid for such Residual Certificate. Such
adjusted basis will be increased by the amount of taxable income of the REMIC
reportable by the Residual Holder and decreased by the amount of loss of the
REMIC reportable by the Residual Holder. A cash distribution from the REMIC
also will reduce such adjusted basis (but not below zero). Any loss that is
disallowed on account of this limitation may be carried over indefinitely by
the Residual Holder for whom such loss was disallowed and may be used by such
Residual Holder only to offset any income generated by the same REMIC.
If a Residual Certificate has a negative value, it is not clear whether
its issue price would be considered to be zero or such negative amount for
purposes of determining the REMIC's basis in its assets. The REMIC
Regulations imply that residual interest cannot have a negative basis or a
negative issue price. However, the preamble to the REMIC Regulations
indicates that, while existing tax rules do not accommodate such concepts,
the Service is considering the tax treatment of these types of residual
interest, including the proper tax treatment of a payment made by the
transferor of such a residual interest to induce the transferee to acquire
that interest. Absent regulations or administrative guidance to the
contrary, the Company does not intend to treat a class of Residual
Certificates as having a value of less than zero for purposes of determining
the basis of the related REMIC in its assets.
Further, to the extent that the initial adjusted basis of a Residual
Holder(other than an original holder) in the Residual Certificate is greater
than the corresponding portion of the REMIC's basis in the Contracts, the
Residual Holder will not recover a portion of such basis until termination of
the REMIC unless Treasury Regulations yet to be issued provide for periodic
adjustments to the REMIC income otherwise reportable by such holder.
Treatment of Certain Items of REMIC Income and Expense. Generally, a
REMIC's deductions for original issue discount will be determined in the same
manner as original issue discount income on Regular Certificates as described
above under "REMIC Series -- Original Issue Discount" and "--- Variable Rate
Regular Certificates," without regard to the de minimis rule described
therein.
The REMIC will have market discount income in respect of the Contracts
if, in general, the basis of the REMIC in such Contracts is exceeded by their
unpaid principal balances. The REMIC's basis in such Contracts is generally
the fair market value of the Contracts immediately after the transfer thereof
to the REMIC (which may equal a proportionate part of the aggregate fair
market value of the REMIC Certificates). In respect of the Contracts that
have market discount to which Code Section 1276 applies, the Market discount
income generally should accrue in the manner described above under "REMIC
Series -- Market Discount."
Generally, if the basis of a REMIC in the Contracts exceeds the unpaid
principal balances thereof, the REMIC will be considered to have acquired
such Contracts at a premium equal to the amount of such excess. As stated
above, the REMIC's basis in the Contracts is the fair market value of the
Contracts immediately after the transfer thereof to the REMIC. Generally, a
person that holds a Contract as a capital asset may elect to amortize premium
on the Contracts under a constant interest method. See the discussion under
"REMIC Series -- Amortizable Premium."
Limitations on Offset or Exemption of REMIC Income. If the aggregate
value of the Residual Certificates relative to the aggregate value of the
Regular Certificates and Residual Certificates is considered to be
"significant," as described below, then a portion (but not all) of the REMIC
taxable income included in determining the federal income tax liability of a
Residual Holder will be subject to special treatment. That portion, referred
to as the "excess inclusion," is equal to the excess of REMIC taxable income
for the calendar quarter allocable to a Residual Certificate over the daily
accruals for such quarterly period of (i) 120% of the long-term applicable
Federal rate that would have applied to the Residual Certificate (if it were
a debt instrument) on the Startup Day under Section 1274(d) of the Code,
multiplied by (ii) the adjusted issue price of such Residual Certificate at
the beginning of such quarterly period. For this purpose, the adjusted issue
price of a Residual Certificate at the beginning of a quarter is the issue
price of the Residual Certificate, plus the amount of such daily accruals of
REMIC income described in this paragraph for all prior quarters decreased by
any distributions made with respect to such Residual Certificate prior to the
beginning of such quarterly period. The value of the Residual Certificates
would be significant in cases where the aggregate issue price of the Residual
Certificates is at least 2% of the aggregate issue price of the Regular
Certificates and Residual Certificates, and the anticipated weighted average
life of the Residual Certificates is at least 20% of the anticipated weighted
average life of the REMIC.
The portion of a Residual Holder's REMIC taxable income consisting of
the excess inclusions generally may not be offset by other deductions on such
Residual Holder's tax return, including net operating loss carry forwards.
Further, if the Residual Holder is an organization subject to the tax on
unrelated business income imposed by Section 511 of the Code, the Residual
Holder's excess inclusions will be treated an unrelated business taxable
income of such Residual Holder for purposes of Section 511. Finally, if a
real estate investment trust or regulated investment company owns a Residual
Certificate, a portion (allocated under Treasury Regulations yet to be
issued) of dividends paid by such real estate investment trust or regulated
investment company could not be offset by net operating losses of its share-
holders, would constitute unrelated business taxable income for tax-exempt
shareholders, and would be ineligible for reduction of withholding to certain
persons who are not U.S. persons.
The Small Business Job Protection Act of 1996 has eliminated the special
rule permitting Section 593 institutions ("thrift institutions") to use net
operating losses and other allowable deductions to offset their excess
inclusion income from REMIC residual certificates that have "significant
value" within the meaning of the REMIC Regulations, effective for taxable
years beginning after December 31, 1995, except with respect to residual
certificates continuously held by a thrift institution since November 1,
1995.
In addition, the Small Business Job Protection Act of 1996 provides
three rules for determining the effect on excess inclusions on the
alternative minimum taxable income of a residual holder. First, alternative
minimum taxable income for such residual holder is determined without regard
to the special rule that taxable income cannot be less than excess
inclusions. Second, a residual holder's alternative minimum taxable income
for a tax year cannot be less than the excess inclusions for the year.
Third, the amount of any alternative minimum tax net operating loss
deductions must be computed without regard to any excess inclusions. These
rules are effective for tax years beginning after December 31, 1986, unless a
residual holder elects to have such rules apply only to tax years beginning
after August 20, 1996.
Restrictions on Transfer of Residual Certificates. As described above
under "REMIC Series -- Qualification as a REMIC," an interest in a Residual
Certificate may not be transferred to a Disqualified Organization. If any
legal or beneficial interest in a Residual Certificate is, nonetheless,
transferred to a Disqualified Organization, a tax would be imposed in an
amount equal to the product of (i) the present value of the total anticipated
excess inclusions with respect to such Residual Certificate for periods after
the transfer, and (ii) the highest marginal federal income tax rate
applicable to corporations. The anticipated excess inclusions are based on
actual prepayment experience to the date of the transfer and projected
payments based on the Prepayment Assumption. The present value rate equals
the applicable federal rate under Section 1274(d) of the Code as of the date
of the transfer for a term ending on the close of the last quarter in which
excess inclusions are expected to accrue. Such rate is applied to the
anticipated excess inclusions from the end of the remaining calendar quarters
in which they arise to the date of the transfer. Such a tax generally would
be imposed on the transferor of the Residual Certificate, except that where
such transfer is through an agent (including a broker, nominee, or other
middleman) for a Disqualified Organization, the tax would instead by imposed
on such agent. However, a transferor of a Residual Certificate would in no
event be liable for such tax with respect to a transfer if the transferee
furnishes to the transferor an affidavit, under penalties of perjury, that
the transferee is not a Disqualified Organization and, as of the time of the
transfer, the transferor does not have the actual knowledge that such
affidavit is false. The tax also may be waived by the Treasury Department if
the Disqualified Organization promptly disposes of the residual interest and
the transferor pays such amount of tax as the Treasury Department may require
(presumably, a corporate tax on the excess inclusion for the period the
residual interest is actually held by the Disqualified Organization).
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Certificate during a taxable year
and a Disqualified Organization is the record holder of an equity interest in
such entity, then a tax is imposed on such entity equal to the product of
(i) the amount of excess inclusions on the Residual Certificate that are
allocable to the interest in the Pass-Through Entity during the period such
interest is held by such Disqualified Organization, and (ii) the highest
marginal federal income tax rate imposed on corporations. Such tax would be
deductible from the ordinary gross income of the Pass-Through Entity during
the period such interest is held by such Disqualified Organization, and
(iii) the highest marginal federal income tax rate imposed on corporations.
Such tax would be deductible from the ordinary gross income of the Pass-
Through Entity for the taxable year. The Pass-Through Entity would not be
liable for such tax if it has received an affidavit from such record holder
that it is not a Disqualified Organization and, during the period such person
is the record holder of the Residual Certificate, the Pass-Through Entity
would not be liable for such tax if it has received an affidavit from such
record holder that it is not a Disqualified Organization and, during the
period such person is the record holder of the Residual Certificate, the
Pass-Through Entity does not have actual knowledge that such affidavit is
false.
For these purposes, a "Pass-Through Entity" means any regulated
investment company, real estate investment trust, common trust fund,
partnership, trust or estate and certain corporations operating on a
cooperative basis. Except as may be provided in Treasury Regulations, any
person holding an interest in a Pass-Through Entity as a nominee for another
will, with respect to such interest, be treated as a Pass-Through Entity.
Noneconomic Residual Interests. The REMIC Regulations would disregard
certain transfers of Residual Certificates, in which case the transferor
would continue to be treated as the owner of the Residual Certificates and
thus would continue to be subject to tax on its allocable portion of the net
income of the REMIC. Under the REMIC Regulations, a transfer of a
"noneconomic residual interest" (as defined below) to a Residual Holder is
disregarded for all federal income tax purposed if a significant purpose of
the transfer is to enable the transferor to impede the assessment or
collection of tax. A residual interest in a REMIC (including a residual
interest with a positive value at issuance) is a "noneconomic residual
interest" unless, at the time of transfer, (i) the present value of the
expected future distributions on the residual interest at least equals the
product of the present value of the anticipated excess inclusions and the
highest corporate income tax rate in effect for the year in which the
transfer occurs, and (ii) the transferor reasonably expects that the
transferee will receive distributions from the REMIC at or after the time at
which taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes. The anticipated excess inclusions
and the present value rate are determined in the same manner as set forth
above. The REMIC Regulations explain that a significant purpose to impede
the assessment or collection of tax exists if the transferor, at the time of
the transfer, either knew or should have known that the transferee would be
unwilling or unable to pay taxes due on its share of the taxable income of
the REMIC. A safe harbor is provided if (i) the transferor conducted, at the
time of the transfer, a reasonable investigation of the financial condition
of the transferee and found at the time of the transferor that it understands
that, as the holder of a non-economic residual transferee represents to the
transferor that it understands that, as the holder of a non-economic residual
interest, the transferee may incur tax liabilities in excess of any cash
flows generated by the interest and that the transferee intends to pay taxes
associated with holding the residual interest as they become due. The Pool-
ing and Servicing Agreement with respect to each series of REMIC Certificates
will require the transferee of a Residual Certificate to certify to the
statements in clause (ii) of the preceding sentence as part of the affidavit
described above under "Restrictions on Transfer of Residual Certificates."
Mark-to-Market Rules. On December 23, 1996, the Service finalized
regulations (the "Mark-to-Market Regulations") relating to the requirement
that a securities dealer mark to market securities held for sale to
customers. This mark-to-market requirement applies to all securities owned
by a dealer, except to the extent that the dealer has specifically identified
a security as held for investment. The regulations provide that a REMIC
residual interest acquired on or after January 4, 1995, will not be
considered a security for purposes of the Mark-to-Market Regulations, and
thus, such interests may not be marked to market.
Sale or Exchange of a Residual Certificate. Upon the sale or exchange
of a Residual Certificate, the Residual Holder will recognize gain or loss
equal to the excess, if any, of the amount realized over the adjusted basis
as described above of such Residual Holder in such Residual Certificate at
the time of the sale or exchange. In addition to reporting the taxable
income of the REMIC, a Residual Holder will have taxable income to the extent
that any cash distribution to him from the REMIC exceeds such adjusted basis
on that Distribution Date. Such income will be treated as gain from the sale
or exchange of the Residual Certificate. It is possible that the termination
of the REMIC may be treated as a sale or exchange of a Residual Holder's
Residual Certificate, in which case, if the Residual Holder has and adjusted
basis in his Residual Certificate remaining when his interest in the REMIC
terminates, and if he holds such Residual Certificate as a capital asset,
then he will recognize a capital loss at that time in the amount of such
remaining adjusted basis.
The Conference Committee Report to the Tax Reform Act of 1986 provides
that, except as provided in Treasury Regulations, the wash sale rules of Code
Section 1091 will apply to dispositions of Residual Certificates where the
seller of the Residual Certificate, during the period beginning six months
before the sale or disposition of the Residual Certificate and ending six
months after such sale or disposition, acquires (or enters into any other
transaction that results in the application of Code Section 1091) any
residual interest in any REMIC or any interest in a "taxable mortgage pool"
(such as a non-REMIC owner trust) that is economically comparable to a
Residual Certificate.
Certain Other Taxes on the REMIC. The REMIC provisions of the Code
impose a 100% tax on any net income derived by a REMIC from certain
prohibited transactions, and prohibits deducting any loss with respect to
such transactions. Such transactions are: (i) any disposition of a qualified
mortgage, other than pursuant to the substitution of a qualified replacement
mortgage for a qualified mortgage (or the repurchase in lieu of substitution
of a defective obligation), a disposition incident to the foreclosure,
default, or imminent default of a mortgage, the bankruptcy or insolvency of
the REMIC, or a qualified liquidation of the REMIC; (ii) the receipt of
income from assets other than qualified mortgages and permitted investments;
(iii) the receipt of compensation for services; and (iv) the receipt of gain
from the dispositions of cash flow investments. The REMIC Regulations
provide that the modification of the terms of a Contract occasioned by
default or a reasonably foreseeable default of the Contract, the assumption
of the Contract, the waiver of a due-on-sale clause or the conversion of an
interest rate by an Obligor pursuant to the terms of a convertible
adjustable-rate Contract will not be treated as a disposition of the
Contract. In the event that a REMIC holds Convertible ARM Loans which are
convertible at the option of the Obligor into fixed-rate, fully amortizing,
level payment Contracts, a sale of such Contracts by the REMIC pursuant to a
purchase agreement or other contract with the Company or other party, if and
when the Obligor elects to so convert the terms of the Contract, is not
expected to result in a prohibited transaction for the REMIC. The Code also
imposes a 100% tax on contributions to a REMIC made after the Startup Day,
unless such contributions are payments made to facilitate a cleanup call or a
qualified liquidation of the REMIC, payments in the nature of a guaranty,
contributions during the three-month period beginning on the Startup Day or
contributions to a qualified reserve fund of the REMIC by a holder of a
residual interest in the foreclosure property that the REMIC derives at the
highest corporate rate on certain net income from foreclosure property that
the REMIC derives from the management, sale, or disposition of any real
property, or any personal property incident thereto, acquired by the REMIC in
connection with the default or imminent default of a loan. Generally, it is
not anticipated that a REMIC will generate a significant amount of such
income.
Liquidation of the REMIC. A REMIC may liquidate without the imposition
of entity-level tax only in a "qualified liquidation." A liquidation is
considered qualified if a REMIC adopts a plan of complete liquidation (which
may be accomplished by designating in the REMIC's final tax return a date on
which such adoption is deemed to occur) and sells all of its assets (other
than cash) within the ninety-day period beginning on the date of the adoption
of the plan of liquidation, provided that it distributes to holders of
Regular or Residual Certificates, on or before the last day of the ninety-day
liquidation period, all the proceeds of the liquidation (including all cash),
less amounts retained to meet claims.
Taxation of Certain Foreign Investors. For purposes of this discussion,
a "Foreign Holder" is a Certificateholder who holds a Regular Certificate and
who is not (i) a citizen or resident of the United States, (ii) a
corporation, partnership or other entity treated as a corporation or
partnership for United States federal income tax purposes, organized in or
under the laws of the United States, any state thereof or the District of
Columbia (unless, in the case of a partnership, Treasury regulations provide
otherwise), (iii) an estate, the income of which is included in gross income
for United States tax purposes regardless of its source, or (iv) a trust if a
court within the United States is able to exercise primary supervision of the
administration of the trust and one or more United States persons have the
authority to control all substantial decisions of the trust. Notwithstanding
the preceding sentence, to the extent provided in Treasury regulations,
certain trusts in existence on August 20, 1996 and treated as United States
holders prior to such date that elect to continue to be treated as United
States holders shall be considered United States holders as well. Unless the
interest on a Regular Certificate is effectively connected with the conduct
by the Foreign Holder of a trade or business within the United States, the
Foreign Holder is not subject to federal income or withholding tax on
interest (or original issue discount, if any) on a Regular Certificate
(subject to possible backup withholding of tax, discussed below), provided
the Foreign Holder is not a controlled foreign corporation related to the
Company and does not own actually or constructively 10% or more of the voting
stock of the Company. To qualify for this tax exemption, the Foreign Holder
will be required to provide periodically a statement signed under penalties
of perjury certifying that the Foreign Holder meets the requirements for
treatment as a Foreign Holder and providing the Foreign Holder's name and
address. The statement, which may be made on a Form W-8 or substantially
similar substitute form, generally must be provided in the year a payment
occurs or it either of the two preceding years. The intermediaries, to the
person that otherwise would withhold tax. This exemption may not apply to a
Foreign Holder that owns both Regular Certificates and Residual Certificates.
If the interest on a Regular Certificate is effectively connected with the
conduct by a Foreign Holder of a trade or business within the United States,
then the Foreign Holder will be subject to tax at regular graduated rates.
Foreign Holders should consult their own advisors regarding the specific tax
consequences of their owning a Regular Certificate.
New Withholding Regulations. On October 6, 1997, the Treasury
Department issued new regulations (the "New Regulations") which make certain
modifications to the withholding, backup withholding and information
reporting rules described above. The New Regulations attempt to unify
certification requirements and modify reliance standards. The New
Regulations will generally be effective for payments made after December 31,
1998, subject to certain transition rules. Prospective investors are urged
to consult their own tax advisors regarding the New Regulations.
Any gain recognized by a Foreign Holder upon a sale, retirement or other
taxable disposition of a Regular Certificate generally will not be subject to
United States federal income tax unless either (i) the Foreign Holder is a
non-resident alien individual who holds the Regular Certificate as a capital
asset and who is present in the United States for 183 days or more in the
taxable year of the disposition and either the gain is attributable to an
office or other fixed place of business maintained in the U.S. by the
individual or the individual has a "tax home" in the United States, or (ii)
the gain is effectively connected with the conduct by the Foreign Holder of a
trade or business within the United States.
A Regular Certificate will not be included in the estate of a Foreign
Holder who does not own actually or constructively 10% or more of the voting
stock of the Company.
Backup Withholding. Under certain circumstances, a REMIC
Certificateholder may be subject to "backup withholding" at a 31% rate.
Backup withholding may apply to a REMIC Certificateholder who is a United
States person if the holder, among other circumstances, fails to furnish his
Social Security number or other taxpayer identification number to the
Trustee. Backup withholding may apply, under certain circumstances, to a
REMIC Certificateholder who is a foreign person if the REMIC
Certificateholder fails to provide the Trustee or the REMIC
Certificateholder's securities broker with the statement necessary to
establish the exemption from federal income and withholding tax on interest
on the REMIC Certificates. Backup withholding, however, does not apply to
payments on a Certificate made to certain exempt recipients, such as
corporations and tax-exempt organizations, and to certain foreign persons.
REMIC Certificateholders should consult their tax advisors for additional
information concerning the potential application of backup withholding to
payments received by them with respect to a Certificate.
Reporting Requirements and Tax Administration. The Company will report
annually to the Service, holders of record of the Regular Certificates that
are not excepted from the reporting requirements and, to the extent required
by the Code, other interested parties, information with respect to the
interest paid or accrued on the Regular Certificates, original issue
discount, if any, accruing on the Regular Certificates and information
necessary to compute the accrual of any market discount or the amortization
of any premium on the Regular Certificates.
The Treasury Department has issued temporary regulations concerning
certain aspects of REMIC tax administration. Under those regulations, a
Residual Certificateholder must be designated as the REMICs "tax matters
person." The tax matters person, generally, has responsibility for overseeing
and providing notice to the other Residual Certificateholders of certain
administrative and judicial proceedings regarding the REMIC's tax affairs.
The Company will be designated as tax matters person for each REMIC, and in
conjunction with the Trustee will act as the agent of the Residual
Certificateholders in the preparation and filing of the REMIC's federal and
state income tax and other information returns.
NON-REMIC SERIES
Tax Status of the Trust Fund. In the case of a Trust Fund evidenced by a
series or sub-series of Certificates, or a segregated portion thereof, with
respect to which a REMIC Election is not made ("Non-REMIC Certificates"),
Brown & Wood LLP, special tax counsel to the Company, will have advised the
Company that, in their opinion, each Contract Pool and the arrangement to be
administered by the Company under which the Trustee will hold and the Company
will be obligated to service the Contracts and pursuant to which Non-REMIC
Certificates will be issued to Non-REMIC Certificateholders will not be
classified as an association taxable as a corporation or a "taxable mortgage
pool," within the meaning of Code Section 7701(i), but rather will be
classified as a grantor trust under Subpart E, Part I of Subchapter J of
Chapter 1 of Subtitle A of the Code. Each Non-REMIC Certificateholder will
be treated as the owner of a pro rata undivided interest in the ordinary
income and corpus portions of the trust attributable to the Contract Pool in
which its Certificate evidences an ownership interest and will be considered
the equitable owner of a pro rata undivided interest in each of the Contracts
included therein.
Tax Status of Non-REMIC Certificates. In general, (i) Certificates held
by a "domestic building and loan association" within the meaning of Section
7701(a)(19) of the Code may be considered to represent "qualifying real
property loans" within the meaning of Section 7701(a)(19)(C)(v) of the Code;
and (ii) Certificates held by a real estate investment trust may constitute
"real estate assets" within the meaning of Section 856(c)(5)(A) of the Code
and interest thereon may be considered "interest on obligations secured by
mortgages on real property" within the meaning of Section 856(c)(3)(B) of the
Code. See the discussions of such Code provisions above under "REMIC Series
Tax Status of REMIC Certificates." Investors should review the related
Prospectus Supplement for a discussion of the treatment of Non-REMIC
Certificates and Contracts under these Code sections and should, in addition,
consult with their own tax advisors with respect to these matters.
Tax Treatment of Non-REMIC Certificates. Non-REMIC Certificateholders
will be required to report on their federal income tax returns, and in a
manner consistent with their respective methods of accounting, their pro rata
share of the entire income arising from the Contracts comprising such
Contract Pool, including interest, original issue discount, if any,
prepayment fees, assumption fees, and late payments charges received by the
Company, and any gain upon disposition of such Contracts. (For purposes of
this discussion, the term "disposition," when used with respect to the
Contracts, includes scheduled or prepaid collections with respect to the
Contracts, as well as the sale or exchange of a Non-REMIC Certificate.) Non-
REMIC Certificateholders will be entitled under Section 162 or 212 of the
Code to deduct their pro rata share of related servicing fees, administrative
and other non-interest expenses, including assumption fees and late payment
charges retained by the Company. An individual, an estate, or a trust that
holds a Non-REMIC Certificate either directly or through a pass-through
entity will be allowed to deduct such expenses under Section 212 of the Code
only to the extent that, in the Aggregate and combined with certain other
itemized deductions, they exceed 2% of the adjusted gross income of the
holder. In addition, Section 68 of the Code provides that the amount of
itemized deductions (including those provided for in Section 212 of the Code)
otherwise allowable for the taxable year for an individual whose adjusted
gross income exceeds a threshold amount specified in the Code ($100,000 in
the case of a joint return) will be reduced by the lesser of (i) 3% of the
excess of adjusted gross income over the specified threshold amount or
(ii) 80% of the amount of itemized deductions otherwise allowable for such
taxable year. To the extent that a Non-REMIC Certificateholder is not
permitted to deduct servicing fees allocable to a Non-REMIC Certificate, the
taxable income of the Non-REMIC Certificateholder attributable to that Non-
REMIC Certificate will exceed the net cash distributions related to such
income. Non-REMIC Certificateholders may deduct any loss on disposition of
the Contracts to the extent permitted under the Code.
Under current Service interpretations of applicable Treasury Regulations
the Company would be able to sell or otherwise dispose of any subordinated
Non-REMIC Certificates. Accordingly, the Company expects to offer
subordinated Non-REMIC Certificates for sale to investors. In general, such
subordination should not affect the federal income tax treatment of either
the subordinated or senior Certificates. Holders of subordinated classes of
Certificates should be able to recognize any losses allocated to such class
when and if losses are realized.
To the extent that any of the Contracts comprising a Contract Pool were
originated on or after March 2, 1984 and under circumstances giving rise to
original issue discount, Certificateholders will be required to report
annually an amount of additional interest income attributable to such
discount in such Contracts prior to receipt of cash related to such discount.
See the discussion above under "REMIC Series -- Original Issue Discount."
Similarly, Code provisions concerning market discount and amortizable premium
will apply to the Contracts comprising a Contract Pool to the extent that the
loans were originated after July 18, 1984 and September 27, 1985,
respectively. See the discussions above under "REMIC Series -- Market
Discount" and "REMIC Series -- Amortizable Premium."
It is not clear whether a reasonable prepayment assumption should be
used in computing amortization of premium allowable under Code Section 171 or
in computing the accrual of market discount for non-REMIC Certificates.
However, recent legislation expands the required use of a Prepayment
Assumption for purposes of calculating OID for tax years beginning after
August 5, 1997, to pools of receivables the yield on which may be affected by
reason of prepayments. Previous legislative history states that Congress
intends that if a Prepayment Assumption would be used to calculate OID then
it should also be used to accrue market discount and amortize bond premium.
Because regulations have not yet been issued, it is impossible to predict
what effect those regulations might have on the tax treatment of a
Certificate purchased at a discount or premium in the secondary market.
Prospective investors are urged to consult their own tax advisors concerning
the tax treatment of a Certificate purchased at a discount or a premium.
If premium is not subject to amortization using a reasonable Prepayment
Assumption, the holder of a Certificate acquired as a premium should
recognize a loss, if a Contract repays in full, equal to the difference
between the portion of the prepaid principal amount of such Contract that is
allocable to the Certificate and the portion of the adjusted basis of the
Certificate that is allocable to the Contract. If a reasonable Prepayment
Assumption is used to amortize such premium, it appears that such a loss
would be available, if at all, only if prepayments have occurred at a rate
faster than the reasonable assumed prepayment rate. It is not clear whether
any other adjustments would be required to reflect the differences between an
assumed prepayment rate and the actual rate of prepayments. In addition,
under recent legislation, amounts received on the redemption of an obligation
issued by a natural person are considered received in exchange of such
obligation if the debt obligation is purchased or issued after June 8, 1997
(i.e., treated the same as obligations issued by corporations). This change
could affect the character of any such loss (e.g., cause the loss to be
treated as capital if such assets are held as capital assets by the
taxpayer).
Stripped Non-REMIC Certificates. Certain classes of Non-REMIC
Certificates may be subject to the stripped bond rules of Section 1286 of the
Code and for purposes of this discussion will be referred to as "Stripped
Certificates." In general, a Stripped Certificate will be subject to the
stripped bond rules where there has been a separation of ownership of the
right to receive some or all of the principal payments on a Contract from
ownership of the right to receive some or all of the related interest
payments. Non-REMIC Certificates will constitute Stripped Certificates and
will be subject to these rules under various circumstances, including the
following: (i) if any servicing compensation is deemed to exceed a reasonable
amount; (ii) if the Company or any other party retains a Retained Yield with
respect to the Contracts comprising a Contract Pool; (iii) if two or more
classes of Non-REMIC Certificates are issued representing the right to non-
pro rata percentages of the interest or principal payments on the Contracts;
or (iv) if Non-REMIC Certificates are issued which represent the right to
interest only payments or principal only payments.
Although not entirely clear, each Stripped Certificate should be
considered to be a single debt instrument issued on the day it is purchased
for purposes of calculating any original issue discount. Original issue
discount with respect to a Stripped Certificate, if any, must be included in
ordinary gross income for federal income tax purposes as it accrues in
accordance with the constant-yield method that takes into account the
compounding of interest and such accrual of income may be in advance of the
receipt of any cash attributable to such income. See "REMIC Series --
Original Issue Discount" above. For purposes of applying the original issue
discount provisions of the Code, the issue price of a Stripped Certificate
will be the purchase price paid by each holder thereof and the stated
redemption price at maturity may include the aggregate amount of all payments
to be made with respect to the Stripped Certificate whether or not
denominated as interest. The amount of original issue discount with respect
to a Stripped Certificate may be treated as zero under the original issue
discount de minimis rules described above. A purchaser of a Stripped
Certificate will be required to account for any discount on the certificate
as market discount rather than original issue discount if either (i) the
amount of original issue discount with respect to the certificate was treated
as zero under the original issue discount de minimis rule when the
certificate was stripped or (ii) no more than 100 basis points (including any
amount of servicing in excess of reasonable servicing) is stripped off of the
Contracts. See "REMIC Series -- Market Discount" above.
When an investor purchases more than one class of Stripped Certificates
it is currently unclear whether for federal income tax purposes such classes
of Stripped Certificates should be treated separately or aggregated for
purposes of applying the original issue discount rules described above.
It is possible that the Service may take a contrary position with
respect to some or all of the foregoing tax consequences. For example, a
holder of a Stripped Certificate may be treated as the owner of (i) as many
stripped bonds or stripped coupons as there are scheduled payments of
principal and/or interest on each Contract or (ii) a separate installment
obligation for each Contract representing the Stripped Certificate's pro rata
share of price; and/or interest payments to be made with respect thereto. As
a result of these possible alternative characterizations, investors should
consult their own tax advisors regarding the proper treatment of Stripped
Certificates for federal income tax purposes.
It is unclear under what circumstance, if any, the prepayment of
Contracts will give rise to a loss to the holder of a Stripped Bond
Certificate purchased at a premium or a Stripped Coupon Certificate. If such
Certificate is treated as a single instrument (rather than an interest in
discrete contracts) and the effect of prepayments is taken into account in
computing yield with respect to such Certificate, it appears that no loss
will be available as a result of any particular prepayment unless prepayments
occur at a rate faster than the assumed prepayment rate. However, if such
Certificate is treated as an interest in discrete Contracts, or if no
prepayment assumption is used, then when a Contract is prepaid, the holder of
such Certificate should be able to recognize a loss equal to the portion of
the unrecovered premium of such Certificate that is allocable to such
Contract. In addition, amounts received in redemption for debt instruments
issued by natural persons purchased or issued after June 8, 1997 are treated
as received in exchange there of (i.e., treated the same as obligations
issued by corporations). This change could affect the character of any loss.
Holders of Stripped Bond Certificates and Stripped Coupon Certificates are
urged to consult with their own tax advisors regarding the proper treatment
of these Certificates for federal income tax purposes.
Gain or Loss on Disposition. Upon sale or exchange of a Non-REMIC
Certificate, a Non-REMIC Certificateholder will recognize gain or loss equal
to the difference between the amount realized in the sale and its aggregate
adjusted basis in the Contracts represented by the Non-REMIC Certificate.
Generally, the aggregate adjusted basis will equal the Non-REMIC
Certificateholder's cost for the Non-REMIC Certificate increased by the
amount of any previously reported gain with respect to the Non-REMIC
Certificate and decreased by the amount of any losses previously reported
with respect to the Non-REMIC Certificate and the amount of any distributions
received thereon. Except as provided above with respect to the original
issue discount and market discount rules, any such gain or loss would be
capital gain or loss if the Non-REMIC Certificate was held as a capital
asset.
Recharacterization of Servicing Fees. The servicing compensation to be
received by the Servicer may be questioned by the Service with respect to
certain Certificates or Contracts as exceeding a reasonable fee for the
services being performed in exchange therefor, and a portion of such
servicing compensation could be recharacterized as an ownership interest
retained by the Servicer or other party in a portion of the interest payments
to be made pursuant to the Contracts. In this event, a Certificate might be
treated as a Stripped Certificate subject to the stripped bond rules of
Section 1286 of the Code and the original issue discount provisions rather
than to the market discount and premium rules. See the discussion above
under "Non-REMIC Series -- Stripped Non-REMIC Certificates."
Tax Treatment of Certain Foreign Investors. Generally, interest or
original issue discount paid to or accruing for the benefit of a Non-REMIC
Certificateholder who is a Foreign Holder (as defined in "REMIC Series --
Taxation of Certain Foreign Investors") will be treated as "portfolio
interest" and therefore will be exempt from the 30% withholding tax. Such
Non-REMIC Certificateholder will be entitled to receive interest payments and
original issue discount on the Non-REMIC Certificates free of United States
federal income tax, but only to the extent the Contracts were originated
after July 18, 1984 and provided that such Non-REMIC Certificateholder
periodically provides the Trustee (or other person who would otherwise be
required to withhold tax) with a statement certifying under penalty of
perjury that such Non-REMIC Certificateholder is not a United States person
and providing the name and address of such Non-REMIC Certificateholder. For
additional information concerning interest or original issue discount paid by
the Company to a Foreign Holder and the treatment of a sale or exchange of a
Non-REMIC Certificate by a Foreign Holder, which will generally have the same
tax consequences as the sale of a Regular Certificate, see the discussion
above under "REMIC Series -- Taxation of Certain Foreign Investors". In
addition, payments of interest or original issue discount made to a Foreign
Investor after December 31, 1998 will generally be subject to the New
Regulations. See discussion above under "REMIC Series--New Withholding
Regulations."
Tax Administration and Reporting. The Company will furnish to each Non-
REMIC Certificateholder with each distribution a statement setting forth the
amount of such distribution allocable to principal and to interest. In
addition, the Company will furnish, within a reasonable time after the end of
each calendar year, to each Non-REMIC Certificateholder who was a
Certificateholder at any time during such year, information regarding the
amount of servicing compensation received by the Company and any sub-servicer
and such other customary factual information as the Company deems necessary
or desirable to enable Certificateholders to prepare their tax returns.
Reports will be made annually to the Service and to holders of record that
are not expected from the reporting requirements regarding information as may
be required with respect to interest and original issue discount, if any,
with respect to the Non-REMIC Certificates.
FASIT SECURITIES
General. The FASIT provisions of the Code were enacted by the Small
Business Job Protection Act of 1996 and create a new elective statutory
vehicle for the issuance of mortgage-backed and asset-backed securities.
Although the FASIT provisions of the Code became effective on September 1,
1997, no Treasury regulations or other administrative guidance has been
issued with respect to those provisions. Accordingly, definitive guidance
cannot be provided with respect to many aspects of the tax treatment of FASIT
Securityholders. Investors also should note that the FASIT discussion
contained herein constitutes only a summary of the federal income tax
consequences to holders of FASIT Securities. With respect to each Series of
FASIT Securities, the related Prospectus Supplement will provide a detailed
discussion regarding the federal income tax consequences associated with the
particular transaction.
FASIT Securities will be classified as either FASIT Regular Securities,
which generally will be treated as debt for federal income tax purposes, or
FASIT Ownership Securities, which generally are not treated as debt for such
purposes, but rather as representing rights and responsibilities with respect
to the taxable income or loss of the related Series FASIT. The Prospectus
Supplement for each Series of Securities will indicate whether one or more
FASIT elections will be made for that Series and which Securities of such
Series will be designated as Regular Securities, and which, if any, will be
designated as Ownership Securities.
Qualification as a FASIT. The Trust Fund underlying a Series (or one or
more designated pools of assets held in the Trust Fund) will qualify under
the Code as a FASIT in which the FASIT Regular Securities and the FASIT
Ownership Securities will constitute the "regular interests" and the
"ownership interests," respectively, if (i) a FASIT election is in effect,
(ii) certain tests concerning (A) the composition of the FASIT's assets and
(B) the nature of the Securityholders' interests in the FASIT are met on a
continuing basis, and (iii) the Trust Fund is not a regulated investment
company as defined in Section 851(a) of the Code.
Asset Composition. In order for a Trust Fund (or one or more designated
pools of assets held by a Trust Fund) to be eligible for FASIT status,
substantially all of the assets of the Trust Fund (or the designated pool)
must consist of "permitted assets" as of the close of the third month
beginning after the closing date and at all times thereafter (the "FASIT
Qualification Test"). Permitted assets include (i) cash or cash equivalents,
(ii) debt instruments with fixed terms that would qualify as REMIC regular
interests if issued by a REMIC (generally, instruments that provide for
interest at a fixed rate, a qualifying variable rate, or a qualifying
interest-only ("IO") type rate, (iii) foreclosure property, (iv) certain
hedging instruments (generally, interest and currency rate swaps and credit
enhancement contracts) that are reasonably required to guarantee or hedge
against the FASIT's risks associated with being the obligor on FASIT
interests, (v) contract rights to acquire qualifying debt instruments or
qualifying hedging instruments, (vi) FASIT regular interests, and (vii) REMIC
regular interests. Permitted assets do not include any debt instruments
issued by the holder of the FASIT's ownership interest or by any person
related to such holder.
Interests in a FASIT. In addition to the foregoing asset qualification
requirements, the interests in a FASIT also must meet certain requirements.
All of the interests in a FASIT must belong to either of the following: (i)
one or more classes of regular interests or (ii) a single class of ownership
interest that is held by a fully taxable domestic C corporation. In the case
of Series that include FASIT Ownership Securities, the ownership interest
will be represented by the FASIT Ownership Securities.
A FASIT interest generally qualifies as a regular interest if (i) it is
designated as a regular interest, (ii) it has a stated maturity no greater
than thirty years, (iii) it entitles its holder to a specified principal
amount, (iv) the issue price of the interest does not exceed 125% of its
stated principal amount, (v) the yield to maturity of the interest is less
than the applicable Treasury rate published by the Service plus 5%, and (vi)
if it pays interest, such interest is payable at either (a) a fixed rate with
respect to the principal amount of the regular interest or (b) a permissible
variable rate with respect to such principal amount. Permissible variable
rates for FASIT regular interests are the same as those for REMIC regular
interests (i.e., certain qualified floating rates and weighted average
rates). See "Certain Federal Income Tax Consequences -- REMIC Series --
Original Issue Discount" and "-- Variable Rate Regular Certificates" herein.
If a FASIT Security fails to meet one or more of the requirements set
out in clauses (iii), (iv), or (v), but otherwise meets the above
requirements, it may still qualify as a type of regular interest known as a
"High-Yield Interest." In addition, if a FASIT Security fails to meet the
requirement of clause (vi), but the interest payable on the Security consists
of a specified portion of the interest payments on permitted assets and that
portion does not vary over the life of the Security, the Security also will
qualify as a High-Yield Interest. A High-Yield Interest may be held only by
domestic C corporations that are fully subject to corporate income tax
("Eligible Corporations"), other FASITs, and dealers in securities who
acquire such interests as inventory, rather than for investment. In
addition, holders of High-Yield Interests are subject to limitations on
offset of income derived from such interest. See "Certain Federal Income Tax
Consequences -- FASIT Securities -- Tax Treatment of FASIT Regular Securities
- -- Treatment of High-Yield Interests."
Consequences of Disqualification. If a Series FASIT fails to comply
with one or more of the Code's ongoing requirements for FASIT status during
any taxable year, the Code provides that its FASIT status may be lost for
that year and thereafter. If FASIT status is lost, the treatment of the
former FASIT and the interests therein for federal income tax purposes is
uncertain. The former FASIT might be treated as a grantor trust, as a
separate association taxable as a corporation, or as a partnership. The
FASIT Regular Securities could be treated as debt instruments for federal
income tax purposes or as equity interests. Although the Code authorizes the
Treasury to issue regulations that address situations where a failure to meet
the requirements for FASIT status occurs inadvertently and in good faith,
such regulations have not yet been issued. It is possible that
disqualification relief might be accompanied by sanctions, such as the
imposition of a corporate tax on all or a portion of the FASIT's income for
the period of time in which the requirements for FASIT status are not
satisfied.
Tax Treatment of FASIT Regular Securities. Payments received by holders
of FASIT Regular Securities generally should be accorded the same tax
treatment under the Code as payments received on other taxable corporate debt
instruments and on REMIC Regular Securities. As in the case of holders of
REMIC Regular Securities, holders of FASIT Regular Securities must report
income from such Securities under an accrual method of accounting, even if
they otherwise would have used the cash receipts and disbursements method.
Except in the case of FASIT Regular Securities issued with original issue
discount or acquired with market discount or premium, interest paid or
accrued on a FASIT Regular Security generally will be treated as ordinary
income to the Securityholder and a principal payment on such Security will be
treated as a return of capital to the extent that the Securityholder's basis
is allocable to that payment. FASIT Regular Securities issued with original
issue discount or acquired with market discount or premium generally will
treat interest and principal payments on such Securities in the same manner
described for REMIC Regular Securities. See "Certain Federal Income Tax
Consequences -- REMIC Series -- Original Issue Discount," "-- Market
Discount," and "-- Amortizable Premium" above. High-Yield Securities may be
held only by fully taxable domestic C corporations, other FASITs, and certain
securities dealers. Holders of High-Yield Securities are subject to
limitations on their ability to use current losses or net operating loss
carryforwards or carrybacks to offset any income derived from those
Securities.
If a FASIT Regular Security is sold, the Securityholder generally will
recognize gain or loss upon the sale in the manner described above for REMIC
Regular Securities. See "Certain Federal Income Tax Consequences -- REMIC
Series -- Gain or Loss on Disposition."
FASIT Regular Securities held by a REIT will qualify as "real estate
assets" within the meaning of section 856(c)(5) of the Code, and interest on
such Securities will be considered Qualifying REIT Interest to the same
extent that REMIC Securities would be so considered. See "Certain Federal
Income Tax Consequences -- REMIC Series -- Tax Status of REMIC Certificates"
herein. FASIT Regular Securities held by a Thrift Institution taxed as a
"domestic building and loan association" will represent qualifying assets for
purposes of the qualification requirements set forth in Code Section
7701(a)(19) to the same extent that REMIC Securities would be so considered.
See "Certain Federal Income Tax Consequences -- REMIC -- Series Tax Status of
REMIC Certificates." In addition, FASIT Regular Securities held by a
financial institution to which Section 585 of the Code applies will be
treated as evidences of indebtedness for purposes of Section 582(c)(1) of the
Code. FASIT Securities will not qualify as "Government securities" for
either REIT or RIC qualification purposes.
Treatment of High-Yield Interests. High-Yield Interests are subject to
special rules regarding the eligibility of holders of such interests, and the
ability of such holders to offset income derived from their FASIT Security
with losses. High-Yield Interests may be held only by Eligible Corporations,
other FASITs, and dealers in securities who acquire such interests as
inventory. If a securities dealer (other than an Eligible Corporation)
initially acquires a High-Yield Interest as inventory, but later begins to
hold it for investment, the dealer will be subject to an excise tax equal to
the income from the High-Yield Interest multiplied by the highest corporate
income tax rate. In addition, transfers of High-Yield Interests to
disqualified holders will be disregarded for federal income tax purposes, and
the transferor still will be treated as the holder of the High-Yield
Interest.
The holder of a High-Yield Interest may not use non-FASIT current losses
or net operating loss carryforwards or carrybacks to offset any income
derived from the High-Yield Interest, for either regular federal income tax
purposes or for alternative minimum tax purposes. In addition, the FASIT
provisions contain an anti-abuse rule that imposes corporate income tax on
income derived from a FASIT Regular Security that is held by a pass-through
entity (other than another FASIT) that issues debt or equity securities
backed by the FASIT Regular Security and that have the same features as High-
Yield Interests.
Tax Treatment of FASIT Ownership Securities. A FASIT Ownership Security
represents the residual equity interest in a FASIT. As such, the holder of a
FASIT Ownership Security determines its taxable income by taking into account
all assets, liabilities, and items of income, gain, deduction, loss, and
credit of a FASIT. In general, the character of the income to the holder of
a FASIT Ownership Interest will be the same as the character of such income
to the FASIT, except that any tax-exempt interest income taken into account
by the holder of a FASIT Ownership Interest is treated as ordinary income.
In determining that taxable income, the holder of a FASIT Ownership Security
must determine the amount of interest, original issue discount, market
discount, and premium recognized with respect to the FASIT's assets and the
FASIT Regular Securities issued by the FASIT according to a constant yield
methodology and under an accrual method of accounting. In addition, holders
of FASIT Ownership Securities are subject to the same limitations on their
ability to use losses to offset income from Ownership Securities are subject
to the same limitations on their ability to use losses to offset income from
their FASIT Security as are the holders of High-Yield Interests. See
"Certain Federal Income Tax Consequences -- FASIT Securities -- Tax Treatment
of FASIT Regular Securities -- Treatment of High-Yield Interests."
Rules similar to the wash sale rules applicable to REMIC Residual
Securities also will apply to FASIT Ownership Securities. Accordingly,
losses on dispositions of a FASIT Ownership Security generally will be
disallowed where, within six months before or after the disposition, the
seller of such Security acquires any other FASIT Ownership Security or, in
the case of a FASIT holding mortgage assets, any interest in a Taxable
Mortgage Pool, that is economically comparable to a FASIT Ownership Security.
In addition, if any security that is sold or contributed to a FASIT by the
holder of the related FASIT Ownership Security was required to be marked-to-
market under Code section 475 by such holder, then section 475 will continue
to apply to such securities, except that the amount realized under the mark-
to-market rules will be the greater of the securities' value under present
law or the securities' value after applying special valuation rules contained
in the FASIT provisions. Those special valuation rules generally require
that the value of debt instruments that are not traded on an established
securities market be determined by calculating the present value of the
reasonably expected payments under the instrument using a discount rate of
120% of the applicable Federal rate, compounded semiannually.
The holder of a FASIT Ownership Security will be subject to a tax equal
to 100% of the net income derived by the FASIT from any "prohibited
transactions." Prohibited transactions include (i) the receipt of income
derived from assets that are not permitted assets, (ii) certain dispositions
of permitted assets, (iii) the receipt of any income derived from any loan
originated by a FASIT, and (iv) in certain cases, the receipt of income
representing a servicing fee or other compensation. Any Series for which a
FASIT election is made generally will be structured in order to avoid
application of the prohibited transaction tax.
Withholding, Backup Withholding, Reporting and Tax Administration to
Withholding and Backup Withholding. Holders of FASIT Securities will be
subject to withholding and backup withholding to the same extent holders of
REMIC Securities would be subject. See "Certain Federal Income Tax
Consequences -- REMIC Series -- Backup Withholding" and "Certain Federal
Income Tax Consequences -- REMIC Series -- New Withholding Regulations." For
purposes of reporting and tax administration, holders of record of FASIT
Securities generally will be treated in the same manner as holders of REMIC
Securities. See "Certain Federal Income Tax Consequences -- REMIC Series --
Reporting Requirements and Tax Administration" above. Prospective investors
should be aware than on October 6, 1997, the Treasury Department issued new
regulations regarding withholding, backup withholding, and information
reporting. Such regulations are further discussed at "Certain Federal Income
Tax Consequences -- REMIC Series -- New Withholding Regulations."
STATE AND LOCAL TAX CONSIDERATIONS
No advice has been received as to local income, franchise, personal
property, or other taxation in any state or locality, or as to the tax effect
of ownership of Certificates in any state or locality. Certificateholders
are advised to consult their own tax advisors with respect to any state or
local income, franchise, personal property, or other tax consequences arising
out of their ownership of Certificates.
LEGAL INVESTMENT CONSIDERATIONS
Unless otherwise specified in the applicable Prospectus Supplement, any
Certificates offered hereby that are rated in one of the two highest rating
categories by at least one nationally recognized statistical rating
organization will constitute "mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") and, as such,
will be legal investments for persons, trusts, corporations, partnerships,
associations, business trusts and business entities (including depository
institutions, life insurance companies and pension funds) created pursuant to
or existing under the laws of the United States or of any state whose
authorized investments are subject to state regulation to the same extent as,
under applicable law, obligations issued by or guaranteed as to principal and
interest by the United States or any such entities. Under SMMEA, certain
states have created legislation specifically limiting the legal investment
authority of any such entities with respect to "mortgage related securities,"
in which case such Certificates will constitute legal investments for
entities subject to such legislation only to the extent provided therein.
SMMEA provides, however, that in no event will the enactment of any such
legislation affect the validity of any contractual commitment to purchase,
hold or invest in Certificates, or require the sale or other disposition of
Certificates, so long as such contractual commitment was made or such
Certificates were acquired prior to the enactment of such legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in Certificates
without limitation as to the percentage of their assets represented thereby;
federal credit unions may invest in Certificates; and national banks may
purchase Certificates for their own account without regard to the limitations
generally applicable to investment securities set forth in 12 U.S.C. 24
(Seventh), subject in each case to such regulations as the applicable federal
regulatory authority may prescribe.
Some Classes of Certificates offered hereby may not be rated in one of
the two highest rating categories, or may not otherwise satisfy the
requirements of SMMEA, and thus would not constitute "mortgage related
securities" for purposes of SMMEA.
The Federal Financial Institutions Examination Council, The Federal
Deposit Insurance Corporation, the Office of Thrift Supervision, the Office
of the Comptroller of the Currency and the National Credit Union
Administration have proposed or adopted guidelines regarding investment in
various types of mortgage-backed securities. In addition, certain state
regulators have taken positions that may prohibit regulated institutions
subject to their jurisdiction from holding securities representing residual
interest, including securities previously purchased. There may be other
restrictions on the ability of certain investors, including depository
institutions, either to purchase Certificates or to purchase Certificates
representing more than a specified percentage of the investor's assets.
Investors should consult their own legal advisors in determining whether and
to what extent the Certificates constitute legal investments for such
investors.
RATINGS
It is a condition precedent to the issuance of any Class of Certificates
sold under this Prospectus that they be rated by at least one nationally
recognized statistical rating organization in one of its four highest rating
categories (within which there may be sub-categories or gradations indicating
relative standing). A security rating is not a recommendation to buy, sell
or hold securities and may be subject to revision or withdrawal at any time
by the assigning rating agency. The security rating of any Series of
Certificates should be evaluated independently of similar security ratings
assigned to other kinds of securities.
Ratings of the Certificates address the likelihood of the ultimate
receipt of all distributions on the contracts by the related
certificateholders under the agreements pursuant to which such certificates
are issued. The ratings take into consideration the credit quality of the
related contract pool, including any credit support providers, structural and
legal aspects associated with such certificates, and the extent to which
payment stream on such contract pool is adequate to make payments required by
such certificates. The ratings on such certificates do not, however,
constitute a statement regarding frequency of prepayments on the related
contracts.
UNDERWRITING
The Company may sell Certificates of each Series to or through
underwriters (the "Underwriters") by a negotiated firm commitment
underwriting and public reoffering by the Underwriters, and also may sell and
place Certificates directly to other purchasers or through agents. The
Company intends that Certificates will be offered through such various
methods from time to time and that offerings may be made concurrently through
more than one of these methods or that an offering of a particular Series of
Certificates may be made through a combination of such methods.
The distribution of the Certificates may be effected from time to time
in one or more transactions at a fixed price or prices, which may be changed,
or at market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices.
In connection with the sale of the Certificates, Underwriters may
receive compensation from the Company or from purchasers of Certificates for
whom they may act as agents in the form of discounts, concessions or
commissions. Underwriters may sell the Certificates of a Series to or
through dealers and such dealers may receive compensation in the form of
discounts, concessions or commissions from the Underwriters and/or
commissions from the purchasers for whom they may act as agents.
Underwriters, dealers and agents that participate in the distribution of the
Certificates of a Series may be deemed to be Underwriters, and any discounts
or commissions received by them from the Company and any profit on the resale
of the Certificates by them may be deemed to be underwriting discounts and
commissions, under the Securities Act of 1933, as amended (the "Act"). Any
such Underwriters or agents will be identified, and any such compensation
received from the Company will be described, in the Prospectus Supplement.
Under agreements which may be entered into by the Company, Underwriters
and agents who participate in the distribution of the Certificates may be
entitled to indemnification by the Company against certain liabilities,
concluding liabilities under the Act.
The Company may authorize Underwriters or other persons acting as the
Company's agents to solicit offers by certain institutions to purchase the
Certificates from the Company pursuant to contracts providing for payment and
delivery on a future date. Institutions with which such contracts may be
made include commercial and savings banks, insurance companies, pension
funds, investment companies, educational charitable institutions and others,
but in all cases such institutions must be approved by the Company. The
obligation of any purchaser under any such contract will be subject to the
condition that the purchaser of the offered Certificates shall not at the
time of delivery be prohibited under the laws of the jurisdiction to which
such purchaser is subject from purchasing such Certificates. The
Underwriters and such other agents will not have responsibility in respect of
the validity or performance of such contracts.
The Underwriters may, from time to time, buy and sell Certificates, but
there can be no assurance that an active secondary market will develop and
there is no assurance that any such market, if established, will continue.
Certain of the Underwriters and their associates may engage in
transactions with and perform services for the Company in the ordinary course
of business.
LEGAL MATTERS
The validity of the Certificates will be passed upon for the Company by
Boult, Cummings, Conners & Berry, PLC. The material federal income tax
consequences of the Certificates will be passed upon for the Company by Brown
& Wood LLP, New York, New York.
EXPERTS
The consolidated financial statements of CHI as of June 30, 1996 and
1997 and for each of the three years in the period ended June 30, 1997,
incorporated by reference herein, have been incorporated herein in reliance
on the report of Coopers & Lybrand, L.L.P., independent accountants, given on
the authority of that firm as experts in accounting and auditing.
GLOSSARY
There follows abbreviated definitions of certain capitalized terms used
in this Prospectus and the Prospectus Supplement. The Agreement may contain
a more complete definition of certain of the terms defined herein and
reference should be made to the Agreement for a more complete definition of
all such terms.
"Advances" means the advances made by a Servicer (including from
advances made by a Sub-servicer) on any Remittance Date pursuant to an
Agreement.
"Agreement" means each Pooling and Servicing Agreement by and among the
Company, the Trustee, the Servicer and any other party specified in the
related Prospectus Supplement.
"APR" means, with respect to any Contract and any time, the per annum
rate of interest then being borne by such Contract, as set forth on the face
thereof.
"Available Distribution Amount" means, with respect to each Series of
Certificates, certain amounts on deposit in the Certificate Account on a
Determination Date.
"Certificate Account" means the account maintained by the Servicer or
the Trustee, as specified in the related Prospectus Supplement.
"Certificate Distribution Amount" means with respect to a Series of
Certificates evidencing an interest in a Contract Pool the amount of interest
(calculated as specified in such Prospectus Supplement) and the amount of
Principal (calculated as specified in such Prospectus Supplement) to be
distributed to Certificateholders on each Remittance Date.
"Certificates" means the Manufactured Housing Contract Pass-Through
Certificates issued pursuant to an Agreement.
"CHI" means Clayton Homes, Inc.
"Code" means the Internal Revenue Code of 1986, as amended, and any
regulations promulgated thereunder.
"Company" means Vanderbilt Mortgage and Finance, Inc.
"Compound Interest Certificates" means Certificates on which interest
may accrue but not be paid for the period described in the related Prospectus
Supplement.
"Contract Pool" means, with respect to each Series of Certificate, the
pool of manufactured housing conditional sales contracts and installment loan
agreements transferred by the Company to the Trustee.
"Contract Rate" means, with respect to each Contract, the interest rate
specified in the Contract.
"Contracts" means manufactured housing installment sales contracts and
installment loan agreements, including any an all rights to receive payments
due thereunder on and after the Cut-off Date and security interest in
Manufactured Homes purchased with the proceeds of such contracts.
"Cut-off Date" means the date specified in the related Prospectus
Supplement as the date from which principal and interest payments on the
Contracts are included in the Trust Fund.
"Determination Date" means, unless otherwise specified in the related
Prospectus Supplement, the third Business Day immediately preceding the
related Remittance Date.
"Due Period" means, unless otherwise provided in a related Prospectus
Supplement, with respect to any Remittance Date, the period beginning on the
26th day of the second month preceding the month of the Remittance Date and
ending on the 25th day of the month preceding the month of the Remittance
Date.
"Eligible Investments" means one or more of the investments specified in
the Agreement in which moneys in the Certificate Account and certain other
accounts are permitted to be invested.
"FDIC" means the Federal Deposit Insurance Corporation.
"FHA" means the Federal Housing Administration.
"Final Scheduled Remittance Date" means, with respect to a Series of
Certificates providing for sequential distributions in reduction of the
Stated Balance of the Classes of each Series, the date, based on the
assumptions set forth in the related Prospectus Supplement, on which the
Stated Balance of all Certificates of each Class shall have been reduced to
zero.
"HUD" means the United States Department of Housing and Urban
Development.
"Interest Rate" means, with respect to a Series of Certificates
providing for sequential distributions in reduction of the Stated Balance of
the Classes of such Series, the interest payable on the Principal Balance
outstanding of each such Class.
"Liquidation Proceeds" means cash (including insurance proceeds)
received in connection with the repossession of a Manufactured Home.
"Loan-to-Value Ratio" means the loan-to-value ratio at the time of
origination of the Contract.
"Manufactured Home" means a unit of manufactured housing, including all
accessions thereto, securing the indebtedness of the Obligor under the
related Contract.
"Modular Home" means a unit of manufactured housing that does not meet
the requirements of a "manufactured home" under 42 United States Code,
Section 5402(6), and which is further defined in a related Prospectus
Supplement.
"Monthly Payment" means the scheduled monthly payment of principal and
interest on a Contract.
"Obligor" means each person who is indebted under a Contract or who has
acquired a Manufactured Home subject to a Contract.
"Record Date" means the date specified in the related Prospectus
Supplement for the list of Certificateholders entitled to distributions on
the Certificates.
"REMIC" means a "real estate mortgage investment conduit" as defined in
the Code.
"Remittance Date" means the date specified in the related Prospectus
Supplement for payments on the Certificates.
"Remittance Rate" means, as to a Certificate, the rate or rates of
interest thereon specified in the related Prospectus Supplement.
"Seller" means, with respect to a Series of Certificates evidencing
interest in Contracts, the Seller specified in the Prospectus Supplement.
"Senior Certificates" means, with respect to each Series of
Certificates, the Class or Classes which have rights senior to another Class
or Classes in such Series.
"Servicer" means, with respect to each Series of Certificates evidencing
interests in Contacts, the Servicer specified in the related Prospectus
Supplement.
"Servicing Fee" means the amount of the annual fee paid to the Servicer
or the Trustee as specified in the related Prospectus Supplement.
"Single Certificate" means, for each Class of Certificates of any
Series, the initial principal amount of Contracts evidenced by a single
Certificate of such Class.
"Stated Balance" means, with respect to a Series of Certificates
providing for sequential distributions in reduction of Stated Balance of the
Classes of such Series, the maximum specified dollars amount (exclusive of
interest at the related Interest Rate) to which the Holder thereof is
entitled from the cash flow of the Trust Fund.
"Subordinated Certificates" means, with respect to each Series of
Certificates, the Class or Classes with rights subordinate to another Class
or Classes of such Series.
"Trust Fund" means, with respect to each Series of Certificates, the
corpus of the trust created by the related Agreement, to the extent described
in such Agreement, consisting of, among other things, Contracts, such assets
as shall from time to time be identified as deposited in the Certificate
Account, the Manufactured Home which secured a Contract, insurance, a reserve
fund and other forms of credit enhancement, if any.
"Trustee" means the Trustee for a Series of Certificates specified in
the related Prospectus Supplement.
"VA" means the Veterans' Administration.
"Variable Rate Regular Certificates" means Certificates which evidence
the right to receive distributions of income at a variable Remittance Rate.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
(TO BE REVISED)
SEC registration fee $442,500
Blue Sky fees and expenses $ 10,000
Accountant's fee and expenses $ 90,000
Attorneys' fees and expenses $208,000
Trustee's fees and expenses $ 45,000
Printing and engraving expenses $120,000
Rating Agency fee $138,000
Miscellaneous $ 20,000
--------
Total $1,073,500
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
With respect to Vanderbilt Mortgage and Finance, Inc., the Tennessee
Business Corporation Act ("TBCA") provides that a corporation may indemnify
any of its directors and officers against liability incurred in connection
with a proceeding if (i) the director or officer acted in good faith; (ii) in
the case of conduct in his or her official capacity with the corporation, the
director or officer reasonably believed such conduct was in the corporation's
best interests, (iii) in all other cases, the director or officer reasonably
believed that his or her conduct was not opposed to the best interests of the
corporation, and (iv) in connection with any criminal proceeding, the
director or officer had no reasonable cause to believe that his or her
conduct was unlawful. In actions brought by or in the right of the
corporation, however, the TBCA provides that no indemnification may be made
if the director or officer was adjudged to be liable to the corporation. In
cases where the director or officer is wholly successful, on the merits or
otherwise, in the defense of any proceeding instigated because of his or her
status as an officer or director of a corporation, the TBCA mandates that the
corporation indemnify the director or officer against reasonable expenses
incurred in the proceeding. The TBCA also provides that in connection with
any proceeding charging impersonal benefit to an officer or director, no
indemnification may be made if such officer or director is adjudged liable on
the basis that personal benefit was improperly received. Notwithstanding the
foregoing, the TBCA provides that a court of competent jurisdiction, upon
application, may order that an officer or director be indemnified for
reasonable expenses if, in consideration of all relevant circumstances, the
court determines that such individual is fairly and reasonably entitled to
indemnification, whether or not he met the standard of conduct set forth
above.
Pursuant to the form of Underwriting Agreement, a copy of which is
included as Exhibit 1.1 hereto, the Underwriters will agree, subject to
certain conditions, to indemnify the Company, its directors, certain of its
officers and persons who control the Company within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"), against certain
liabilities.
With respect to Clayton Homes, Inc. Section 145 of the Delaware General
Corporation Law provides, in substance, that Delaware corporations shall
have the power, under specified circumstances, to indemnify their
directors, officers, employees and agents in connection with actions,
suits or proceedings brought against them by a third party or in the right
of the corporation, by reason of the fact that they were or are such
directors, officers, employees or agents, against expenses incurred in
any such action, suit or proceeding. The Delaware General Corporation
Law also provides that the Registrant may purchase insurance on behalf
of any such director, officer, employee or agent.
ITEM 16. EXHIBITS
1.1 Form of Underwriting Agreement
3.1 Articles of Incorporation of Vanderbilt Mortgage and Finance, Inc.*
3.2 By-Laws of Vanderbilt Mortgage and Finance, Inc.*
4.1 Form of Pooling and Servicing Agreement, including Form of
Certificates*
4.2 Form of Limited Guarantee (included as Section 6.05 of Exhibit
4.1)*
5.1 Opinion of Boult, Cummings, Conners & Berry, PLC as to validity of
Certificates
8.1 Opinion of Brown & Wood LLP as to certain federal income tax
matters
12 Computation of Ratio of Earnings to Fixed Charges
23.1 Consent of Boult, Cummings, Conners & Berry, PLC (included as part
of Exhibit 5.1)
23.2 Consent of Brown & Wood LLP (included as part of Exhibit 8.1)
23.3 Consent of Coopers & Lybrand L.L.P.
24.1 Power of attorney from officers and directors of the Registrant
(included on page II-4)
24.2 Power of attorney from officers and directors of CHI (included on
page II-5)
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that, in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as a part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be a part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registrant statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to the registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
- -----------------------
* Previously filed as an Exhibit to Registration Statement 33-88238 and
incorporated by reference herein.
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change to such information in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than 20% change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in the effective
registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or
any material change in the information set forth in the registration
statement;
Provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if
the registration statement is on Form S-3, Form S-8 or Form F-3, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Knoxville, State of Tennessee, on
December 22, 1997.
VANDERBILT MORTGAGE AND FINANCE, INC.
By: /s/ Kevin T. Clayton
-----------------------------------------
KEVIN T. CLAYTON,
PRESIDENT
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature below
constitutes and appoints each of Kevin T. Clayton and David Jordan, or any of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and his name, place and stead, in
any and all capacities, to sign any or all amendments (including
post-effective amendments) to the Registration Statement, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be
done in and about the premises, as fully to all intents and purposes as might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ Kevin T. Clayton President (Principal December 22, 1997
Executive Officer)
and Director
- ----------------------------
KEVIN T. CLAYTON
/s/ John J. Kalec Chief Financial December 22, 1997
Officer and Director
- ----------------------------
JOHN J. KALEC
/s/ David Jordan Vice President and December 22, 1997
Controller (Principal
Accounting Officer)
- ----------------------------
DAVID JORDAN
/s/ Paul Nichols Executive Vice President December 22, 1997
- ----------------------------
PAUL NICHOLS
/s/ James L. Clayton Director & CEO December 22, 1997
- ----------------------------
JAMES L. CLAYTON
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Knoxville, State of Tennessee, on
December 22, 1997.
CLAYTON HOMES, INC.
By /s/ Kevin T. Clayton
------------------------------------------
KEVIN T. CLAYTON
PRESIDENT AND CHIEF OPERATING OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature below
constitutes and appoints each of Kevin T. Clayton and John J. Kalec, or any
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and his name, place and stead, in
any and all capacities, to sign any or all amendments (including
post-effective amendments) to the Registration Statement, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be
done in and about the premises, as fully to all intents and purposes as might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ Kevin T. Clayton President December 22, 1997
- ---------------------------
KEVIN T. CLAYTON
/s/ John J. Kalec Vice President December 22, 1997
and Chief Financial
- --------------------------- Officer (Principal
JOHN J. KALEC Accounting Officer)
/s/ James L. Clayton Chief Executive December 22, 1997
Officer and Director
- ----------------------------
JAMES L. CLAYTON
/s/ Paul Boyd Treasurer December 22, 1997
- ----------------------------
PAUL BOYD
/s/ Joseph H. Stegmayer Vice Chairman and December 22, 1997
Director
- ----------------------------
JOSEPH H. STEGMAYER
/s/ B. Joe Clayton Director December 22, 1997
- ----------------------------
B. JOE CLAYTON
/s/ Dan W. Evins Director December 22, 1997
- ----------------------------
DAN W. EVINS
/s/ C. Warren Neel Director December 22, 1997
- ----------------------------
C. WARREN NEEL
INDEX TO EXHIBITS
Page
----
1.1* Form of Underwriting Agreement
3.1* Articles of Incorporation of Vanderbilt Mortgage and
Finance, Inc.
3.2* By-Laws of Vanderbilt Mortgage and Finance, Inc.
4.1* Form of Pooling and Servicing Agreement, including
Form of Certificates
4.2* Form of Limited Guarantee (included as Section 6.05 of
Exhibit 4.1)
5.1 Opinion of Boult, Cummings, Conners & Berry, PLC as to
validity of Certificates
8.1 Opinion of Brown & Wood LLP as to certain federal income
tax matters
12 Computation of Ratio of Earnings to Fixed Charges
23.1 Consent of Boult, Cummings, Conners & Berry, PLC
(included as part of Exhibit 5.1)
23.2 Consent of Brown & Wood LLP (included as part of Exhibit
8.1)
23.3 Consent of Coopers & Lybrand L.L.P.
24.1 Power of attorney from officers and directors of the
Registrant (included on page II-4)
24.2 Power of attorney from officers and directors of CHI
(included on page II-5)
- -------------------
* Previously filed as an exhibit to Registration Statement Number 33-
88238.
Exhibit 5.1
(BOULT, CUMMINGS, CONNERS & BERRY, PLC)
December 30, 1997
Vanderbilt Mortgage and Finance, Inc.
4726 Airport Highway
Louisville, Tennessee 37777
Clayton Homes, Inc.
623 Market Street
Knoxville, Tennessee 37902
Re: Registration Statement on Form S-3
$1,500,000,000 Vanderbilt Mortgage and Finance, Inc.
Manufactured Housing Contract Pass-Through Certificates
and Clayton Homes, Inc. Limited Guarantee
Ladies and Gentlemen:
We have acted as counsel for Vanderbilt Mortgage and Finance, Inc.
("VMF") and Clayton Homes, Inc. ("CHI") in connection with the Registration
Statement on Form S-3 filed on December 30, 1997 (the "Registration
Statement"), with the Securities and Exchange Commission (the "Commission")
under the Securities Act of 1933, as amended (the "Act"), for the
registration under the Act of $1,500,000,000 Vanderbilt Mortgage and Finance,
Inc. Manufactured Housing Contract Pass-Through Certificates (the
"Certificates") and the Clayton Homes, Inc. Limited Guarantee (the "Limited
Guarantee"). Pursuant to Rule 429 under the Act, the Registration Statement
also constitutes Post-Effective Amendment No. 1 to Registration Statement No.
333-14033 previously filed with the Commission by VMF and CHI which became
effective on October 16, 1996, for the registration under the Act of
Vanderbilt Mortgage and Finance, Inc. Manufactured Housing Contract
Pass-Through Certificates and the Clayton Homes, Inc. Limited Guarantee.
Each series of such Certificates is proposed to be issued pursuant to a
separate pooling and servicing agreement (the "Pooling and Servicing
Agreement") between VMF, as seller and servicer, and a trustee (the
"Trustee") to be identified in a prospectus supplement ("Prospectus
Supplement") prepared and filed in connection with such series of
Certificates.
The Limited Guarantee may apply to certain of the Certificates, if so
provided in the Prospectus Supplement for such class or series of
Certificates.
We have examined the Registration Statement and such other documents,
agreements and instruments, and have reviewed such questions of law, as we
have considered necessary and appropriate for purposes of rendering this
opinion.
Based on the foregoing, we are of the opinion that:
1. When each Pooling and Servicing Agreement has been duly authorized
by all necessary action on the part of VMF and has been duly executed and
delivered by each party thereto, it will constitute a valid and binding
obligation of VMF, enforceable against VMF in accordance with its terms,
subject to applicable bankruptcy, reorganization, insolvency and similar laws
affecting creditors' rights generally and to general principles of equity
(regardless of whether enforcement is sought in a proceeding in equity or at
law).
2. When the issuance, execution and delivery of the Certificates have
been duly authorized by all necessary action on the part of VMF and CHI, and
when such Certificates have been duly executed, delivered and authenticated
and sold in accordance with the terms of a specific Pooling and Servicing
Agreement and as described in the Registration Statement, such Certificates
will be legally and validly issued, fully-paid and nonassessable and the
holders of such Certificates will be entitled to the benefits provided by the
Pooling and Servicing Agreement pursuant to which such Certificates were
issued.
3. When the Limited Guarantee has been duly authorized by all
necessary action on the part of CHI and has been duly executed and
delivered, it will constitute a valid and binding obligation of CHI,
enforceable in accordance with its terms, subject to applicable bankruptcy,
reorganization, insolvency and similar laws affecting creditors' rights
generally and to general principles of equity (regardless of whether
enforcement is sought in a proceeding in equity or at law).
In rendering our opinion, we have assumed that, at the time of the
execution and delivery of the applicable Pooling and Servicing Agreement and
the Limited Guarantee and the execution, delivery and authentication of the
related class or series of Certificates, (i) there will not have occurred any
change in the law affecting the authorization, issuance, validity or
enforceability of the Pooling and Servicing Agreement, the Limited Guarantee
or the Certificates, (ii) the Registration Statement will have been declared
effective by the Commission and will continue to be effective, and the
issuance of such securities will be in compliance with all applicable state
securities laws; (iii) the Certificates will be issued and sold as described
in the applicable Prospectus Supplement; (iv) none of the particular terms of
a class or series of Certificates will violate any applicable law, and (v)
neither the issuance and sale of the Certificates and the Limited Guarantee
nor the compliance by VMF or CHI with the terms thereof will result in a
violation of any agreement or instrument then binding upon VMF or CHI or any
order of any court or governmental body having jurisdiction over VMF or CHI.
This opinion is applicable only to the authorization, execution and delivery
of Pooling and Servicing Agreements and the Limited Guarantee and the
issuance of Certificates with respect to which we have participated as
counsel.
Further, we have assumed the accuracy and completeness of all
certifications, documents and other proceedings examined by us that have been
executed or certified by officials of VMF and CHI acting within the scope of
their official capacities and have not verified the accuracy or truthfulness
thereof. We have also assumed the genuineness of the signatures appearing
upon such public records, certifications, documents and proceedings. In
addition, we have assumed that each such Pooling and Servicing Agreement and
Limited Guarantee and the related Certificates will be executed and delivered
in substantially the form filed as exhibits to the Registration Statement
(including such exhibits incorporated therein which were previously filed
with the Commission), and that such Certificates will be sold as described in
the Prospectus Supplement described in the Registration Statement.
We express no opinion as to the laws of any jurisdiction, other than the
federal laws of the United States of America and the laws of the State of
Tennessee.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and the reference to this firm under the heading
"Legal Matters" in the Prospectus forming a part of the Registration
Statement, without implying or admitting that we are "experts" within the
meaning of the Act or the rules and regulations of the Securities and
Exchange Commission issued thereunder, with respect to any part of the
Registration Statement, including this exhibit.
Sincerely,
/s/ BOULT, CUMMINGS, CONNERS & BERRY, PLC
Exhibit 8.1
(Brown & Wood LLP)
December 30, 1997
Vanderbilt Mortgage and Finance, Inc.
4726 Airport Highway
Louisville, Tennessee 37777
Clayton Homes, Inc.
623 Market Street
Knoxville, Tennessee 37902
Re: Vanderbilt Mortgage and Finance, Inc.
Manufactured Housing Contract
Pass-Through Certificates
Registration Statement on Form S-3
--------------------------------------
Ladies and Gentlemen:
We have acted as special federal income tax counsel to Vanderbilt
Mortgage and Finance, Inc., a Tennessee corporation (the "Registrant"), in
connection with the issuance and sale of its Manufactured Housing Contract
Pass-Through Certificates that evidence interests in certain pools of
manufactured housing installment sales contracts (the "Certificates"). Each
series of Certificates will be issued pursuant to a Pooling and Servicing
Agreement among the Registrant and a trustee to be specified in the
prospectus supplement for such series of Certificates. We have advised the
Registrant with respect to certain federal income tax consequences of the
proposed issuance of the Certificates. This advice is summarized under the
headings "Summary of Terms -- Federal Income Tax Considerations" and "Certain
Federal Income Tax Consequences" in the form of prospectus and "Summary of
Terms of the Offered Certificates -- Certain Federal Income Tax
Considerations" and "Certain Federal Income Tax Consequences" in the form of
prospectus supplement, all as part of the Registration Statement on Form S-3
(the "Registration Statement"), filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the "Act"), on the
date hereof for the registration of such Certificates under the Act. Such
description does not purport to discuss all possible federal income tax
ramifications of the proposed issuance, but with respect to those tax
consequences which are discussed, in our opinion, the description is accurate
in all material respects.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and to a reference to this firm (as special federal
income tax counsel to the Registrant) under the headings "Certain Federal
Income Tax Consequences" and "Legal Matters" in the Prospectus forming a part
of the Registration Statement, without implying or admitting that we are
"experts" within the meaning of the Act or the rules and regulations of the
Commission issued thereunder, with respect to any part of the Registration
Statement, including this exhibit.
Very truly yours,
/s/ Brown & Wood LLP
EXHIBIT 12
CLAYTON HOMES, INC. AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1996 1997
Income from operation
before taxes on state of
income. $60,143 $83,356 $108,285 $135,800 $172,300 $192,700
Add
Interest on Indebtedness 20,241 15,232 11,160 5,823 4,016 3,912
Portion of rents 621 1,033 720 757 906 1,031
representatives of the
interest factor
Income as adjusted 81,005 99,621 120,185 142,380 177,222 197,643
Fixed charges
Interest on Indebtedness 20,241 15,232 11,160 5,823 4,016 3,912
portion of rents 621 1,033 720 757 906 1,031
representative of
interest factor
Fixed charges 20,862 16,265 11,880 6,580 4,922 4,943
Ratio of earnings to 3.88 6.12 1 21.64 36.00 39.99
fixed charges
</TABLE>
Exhibit 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We consent to the incorporation by reference in the Registration Statement on
Form S-3 of Vanderbilt Mortgage and Finance, Inc. and Clayton Homes, Inc. of
our report dated August 12, 1997, on our audits of the consolidated financial
statements of Clayton Homes, Inc. as of June 30, 1997 and 1996, and for each
of the three years in the period ended June 30, 1997. We also consent to the
reference to our Firm under the caption "Experts".
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Knoxville, Tennessee
December 22, 1997