Prospectus Supplement
(To Prospectus dated August 18, 1998)
================================================================================
$244,210,000 (Approximate)
Vanderbilt Mortgage and Finance, Inc.
Seller and Servicer
Manufactured Housing Contract
Senior/Subordinate Pass-Through Certificates, Series 1998C
$36,800,000 (Approximate) Class I A-1 $61,502,000 (Approximate) Class II A-1
$38,300,000 (Approximate) Class I A-2 $ 9,572,000 (Approximate) Class II B-1
$21,800,000 (Approximate) Class I A-3 $ 4,277,000 (Approximate) Class II B-2
$15,200,000 (Approximate) Class I A-4 $ 6,110,000 (Approximate) Class II B-3
$20,539,000 (Approximate) Class I A-5
$13,020,000 (Approximate) Class I A-6
$ 3,662,000 (Approximate) Class I M-1
$ 6,104,000 (Approximate) Class I B-1
$ 7,324,000 (Approximate) Class I B-2
(Principal and interest payable on the 7th day of each month, beginning
September, 1998)
The Manufactured Housing Contract Senior/Subordinate Pass-Through
Certificates, Series 1998C (the "Certificates") will represent interests in a
trust fund (the "Trust Fund") consisting of a pool (the "Contract Pool") which
includes two groups (each, a "Group") of manufactured housing installment sales
contracts, installment loan agreements (the "Contracts") and certain related
property 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 August 18, 1998,
attached hereto (the "Prospectus").
(Continued on next page)
----------
CERTAIN FACTORS SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
CERTIFICATES. SEE "RISK FACTORS" HEREIN AND IN THE PROSPECTUS.
THE OFFERED CERTIFICATES WILL NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF
THE COMPANY OR ANY OF ITS AFFILIATES. THE OFFERED CERTIFICATES WILL NOT BE
INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY, THE
UNDERWRITERS OR ANY OF THEIR AFFILIATES OR THE COMPANY OR, EXCEPT FOR THE
LIMITED GUARANTEE APPLICABLE TO THE CLASS I B-2 AND CLASS II B-3 CERTIFICATES,
ANY OF ITS AFFILIATES, AND, EXCEPT FOR PAYMENTS, IF ANY, UNDER THE LIMITED
GUARANTEE OR ALTERNATE CREDIT ENHANCEMENT IN RESPECT OF THE CLASS I B-2 AND
CLASS II B-3 CERTIFICATES, WILL BE PAYABLE ONLY FROM COLLECTIONS ON THE
CONTRACTS AS DESCRIBED HEREIN.
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.
================================================================================
Underwriting Proceeds to
Price to Public Discount Company(2)
- --------------------------------------------------------------------------------
Class I A-1 Certificates ....... 100.00% 0.325% 99.675%
Class I A-2 Certificates(1) .... 100.00% 0.325% 99.675%
Class I A-3 Certificates(1) .... 100.00% 0.325% 99.675%
Class I A-4 Certificates(1) .... 100.00% 0.325% 99.675%
Class I A-5 Certificates(1) .... 100.00% 0.325% 99.675%
Class I A-6 Certificates(1) .... 100.00% 0.325% 99.675%
Class I M-1 Certificates(1) .... 100.00% 0.325% 99.675%
Class I B-1 Certificates(1) .... 100.00% 0.500% 99.500%
Class I B-2 Certificates(1) .... 100.00% 0.500% 99.500%
Class II A-1 Certificates ...... 100.00% 0.325% 99.675%
Class II B-1 Certificates ...... 100.00% 0.325% 99.675%
Class II B-2 Certificates ...... 100.00% 0.500% 99.500%
Class II B-3 Certificates ...... 100.00% 0.500% 99.500%
Total .......................... $244,210,000.00 $835,358.75 $243,374,641.25
================================================================================
(1) Plus accrued interest, if any, at the applicable rate from August 1, 1998.
(2) Before deducting expenses, estimated to be $250,000.
The Offered Certificates will be purchased by the Underwriters from the
Company and will be offered by the Underwriters from time to time to the public
in negotiated transactions or otherwise at varying prices to be determined, in
each case, at the time of sale.
The Offered Certificates are offered subject to receipt and acceptance by
the Underwriters, to prior sale and to the Underwriters' right to reject any
order in whole or in part and to withdraw, cancel or modify the offer without
notice. It is expected that delivery of the Offered Certificates will be made in
book-entry form through the facilities of DTC, Cedel Bank, societe anonyme and
the Euroclear System on or about August 27, 1998, against payment therefor in
immediately available funds.
Prudential Securities Incorporated Credit Suisse First Boston
================================================================================
The date of this Prospectus Supplement is August 18, 1998.
<PAGE>
(Continued from the cover page)
The Certificates will consist of (a) two groups of certificates (each, a
"Group") including the "Group I Certificates" consisting of five classes of
senior certificates (the "Class I A-1 Certificates," the "Class I A-2
Certificates," the "Class I A-3 Certificates", the "Class I A-4 Certificates"
and the "Class I A-5 Certificates"; collectively, the "Group I Senior
Certificates") and four classes of subordinated certificates (the "Class I A-6
Certificates," the "Class I M-1 Certificates," the "Class I B-1 Certificates"
and the "Class I B-2 Certificates") and the "Group II Certificates" consisting
of one class of senior certificates (the "Class II A-1 Certificates") and three
classes of subordinated certificates (the "Class II B-1 Certificates," the
"Class II B-2 Certificates" and the "Class II B-3 Certificates") and (b) one
class of residual certificates (the "Class R Certificate"). The Class I A-1
Certificates, Class I A-2 Certificates, Class I A-3 Certificates, Class I A-4
Certificates and Class I A-5 Certificates will evidence in the aggregate
approximate initial 22.61%, 23.53%, 13.39%, 9.34% and 12.62% undivided
interests, respectively, in the "Group I Contracts" which are fixed rate
contracts. The Class I A-6 Certificates, Class I M-1 Certificates, Class I B-1
Certificates and Class I B-2 Certificates will evidence in the aggregate
approximate initial 8.00%, 2.25%, 3.75% and 4.50% undivided interests,
respectively, in the Group I Contracts. The Class II A-1 Certificates, the Class
II B-1 Certificates, the Class II B-2 Certificates and the Class II B-3
Certificates will evidence in the aggregate approximate initial 75.50%, 11.75%,
5.25% and 7.50% undivided interests, respectively, in the "Group II Contracts"
which are adjustable rate contracts. The Class I A-1, Class I A-2, Class I A-3,
Class I A-4, Class I A-5, ClassI A-6 and Class II A-1 Certificates are referred
to collectively as "Class A Certificates" herein. The Class I B-1, Class I B-2,
Class II B-1, Class II B-2 and Class II B-3 Certificates are referred to
collectively as "Class B Certificates" herein. The Class R Certificate is not
being offered hereby. All of the Certificates, other than the Class R
Certificate, are referred to herein as the "Offered Certificates."
The Trust Fund will be created pursuant to a Pooling and Servicing
Agreement among the Company, as Seller and Servicer of the Contracts, The Chase
Manhattan Bank, as trustee (the "Trustee") and Clayton Homes, Inc. ("CHI") as
provider of the Limited Guarantee. The Trust Fund property will include all
rights to payments received on each Contract on or after July 26, 1998 (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 the amounts
in the Certificate Accounts.
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 September 1998. On each Remittance Date, holders of Group I
Certificates and Group II Certificates will be entitled to receive distributions
of interest and principal calculated as set forth herein.
With respect to the Group I Certificates, the rights of the holders of the
Class I A-6 Certificates to receive distributions of interest and principal are
subordinated to the rights of the holders of the Group I Senior Certificates,
the rights of the holders of the Class I M-1 Certificates to receive
distributions of interest and principal are subordinated to the rights of the
Group I Senior Certificates and Class I A-6 Certificates, the rights of the
holders of the Class I B-1 Certificates to receive distributions of interest and
principal are subordinated to the rights of the Group I Senior Certificates,
Class I A-6 Certificates and Class I M-1 Certificates and the rights of the
holders of the Class I B-2 Certificates to receive distributions of interest and
principal are subordinated to the rights of the Group I Senior Certificates,
Class I A-6 Certificates, Class I M-1 Certificates and
Class I B-1 Certificates, all as described herein. With respect to the
Group II Certificates, the rights of the holders of the Class II B-1
Certificates to receive distributions of interest and principal are subordinated
to the rights of the holders of the Class II A-1 Certificates, the rights of the
holders of the Class II B-2 Certificates to receive distributions of interest
and principal are subordinated to the rights of the Class II A-1 and Class II
B-1 Certificates, and the rights of the holders of the Class II B-3 Certificates
to receive distributions of interest and principal are subordinated to the
rights of the holders of the Class II A-1, Class II B-1 and Class II B-2
Certificates, all as described herein.
The Class I B-2 Certificates and the Class II B-3 Certificates, will
initially have the benefit of a limited guarantee (the "Limited Guarantee") of
CHI to protect against losses that would otherwise be absorbed by such
Certificates. Pursuant to the Limited Guarantee, to the extent that funds in the
Group I or Group II Certificate Accounts, as applicable, are insufficient to
distribute to the holders of the Class I B-2 Certificates the Class I B-2
Formula Distribution Amount (as described herein) or to the holders of the Class
II B-3 Certificates the Class II B-3 Formula Distribution Amount (as described
herein), CHI will be obligated to pay an Enhancement Payment (as defined
herein). See "Description of the Certificates--Limited Guarantee of CHI" herein.
The Limited Guarantee may be replaced by an Alternate Credit Enhancement (as
defined herein).
S-2
<PAGE>
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" herein and in the Prospectus. The Group I and
Group II Certificates will represent "regular interests" in the REMIC, and the
Class R Certificate 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.
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. Prudential
Securities Incorporated and Credit Suisse First Boston Corporation (the
"Underwriters") intend to make a secondary market in the Offered Certificates,
but have 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.
----------
S-3
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY OF TERMS OF THE 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 in the Prospectus or
elsewhere in this Prospectus Supplement.
Securities Offered .......... The Class I A-1, Class I A-2, Class I A-3, Class
I A-4, Class I A-5, Class I A-6, Class I M-1,
Class I B-1, Class I B-2, Class II A-1, Class II
B-1, Class II B-2 and Class II B-3 Certificates
(the "Offered Certificates") of the Manufactured
Housing Contract Senior/Subordinate Pass-Through
Certificates, Series 1998C. The Class R
Certificate is not being offered hereby. The
Class R Certificate and the Offered Certificates
are collectively referred to as the
"Certificates" herein.
Seller ...................... Vanderbilt Mortgage and Finance, Inc. (the
"Company"), an indirect subsidiary of Clayton
Homes, Inc. ("CHI"). Neither CHI nor any of its
affiliates, including the Company, has
guaranteed or is otherwise obligated with
respect to the Certificates, except to the
extent of the Limited Guarantee of CHI or the
Alternate Credit Enhancement with respect to the
Class I B-2 Certificates and the Class II B-3
Certificates. See "Risk Factors" herein and in
the Prospectus.
Servicer .................... Vanderbilt Mortgage and Finance, Inc. (in such
capacity referred to herein as the "Servicer").
The Servicer may perform any of its obligations
under the Agreement through one or more
subservicers. Notwithstanding any such
subservicing arrangement, the Servicer will
remain liable for its servicing duties and
obligations under the Agreement as if the
Servicer alone were servicing the Contracts.
Trustee ..................... The Chase Manhattan Bank, a New York banking
corporation (the "Trustee").
Group I Cut-off Date
Principal Balance ......... As of the Cut-off Date, the aggregate principal
balance of the Group I Contracts will equal
approximately $162,749,801.49 (subject to a
permitted variance of plus or minus 5%) (the
"Group I Cut-off Date Principal Balance").
Group II Cut-off Date
Principal Balance ......... As of the Cut-off Date, the aggregate principal
balance of the Group II Contracts will equal
approximately $81,461,171.12 (subject to a
permitted variance of plus or minus 5%) (the
"Group II Cut-off Date Principal Balance").
Cut-off Date Pool
Principal Balance ......... As of the Cut-off Date, the aggregate principal
balance of the Contracts will equal
approximately $244,210,972.61 (subject to a
permitted variance of plus or minus 5%) (the
"Cut-off Date Pool Principal Balance").
Certificates Offered ........ $244,210,000 Manufactured Housing Contract
Senior/Subordinate Pass-Through Certificates,
Series 1998C, to be issued in the following
Classes (each, a "Class"):
- --------------------------------------------------------------------------------
S-4
<PAGE>
- --------------------------------------------------------------------------------
Original Certificate Remittance
Principal Balance(1) Rate Class
-------------------- ---- -----
$36,800,000 (2)(9) Class I A-1 Certificates
$38,300,000 6.060%(3) Class I A-2 Certificates
$21,800,000 6.160%(3) Class I A-3 Certificates
$15,200,000 6.315%(3) Class I A-4 Certificates
$20,539,000 6.505%(3) Class I A-5 Certificates
$13,020,000 6.750%(3) Class I A-6 Certificates
$ 3,662,000 6.900%(3) Class I M-1 Certificates
$ 6,104,000 6.970%(3) Class I B-1 Certificates
$ 7,324,000 7.725%(3) Class I B-2 Certificates
$61,502,000 (4)(8)(9) Class II A-1 Certificates
$ 9,572,000 (5)(8)(9) Class II B-1 Certificates
$ 4,277,000 (6)(8)(9) Class II B-2 Certificates
$ 6,110,000 (7)(8)(9) Class II B-3 Certificates
(1) Approximate, subject to a permitted
variance of plus or minus 5%.
(2) The Remittance Rate for the Class I A-1
Certificates shall be the lesser of (a)
the sum of (i) the London interbank
offered rate for one-month United States
dollar deposits ("LIBOR") (calculated as
described herein) and (ii) 0.04% and (b)
the Group I Weighted Average Net
Contract Rate (as defined herein) for
such Remittance Date. The "Group I
Weighted Average Net Contract Rate"
shall be equal to (a) the weighted
average of the Group I Contract Rates
applicable to the scheduled payments due
on the outstanding Group I Contracts in
the Due Period preceding such Remittance
Date minus (b) (i) if the Company is the
Servicer, 0.00% or (ii) if the Company
is no longer the Servicer, 1.25% of the
Group I Pool Scheduled Principal Balance
on the first day of the related Due
Period.
(3) Subject to a maximum rate equal to the
Group I Weighted Average Net Contract
Rate for such Remittance Date.
(4) The Class II A-1 Remittance Rate shall
be the lesser of (a) the Class II A-1
Formula Rate (as defined below) and (b)
the Net Funds Cap (as defined below) for
such Remittance Date. The "Class II A-1
Formula Rate" shall be a per annum rate
equal to the sum of (a) LIBOR (as
defined herein) plus (b) (i) with
respect to any Remittance Date which
occurs on or prior to the Call Option
Date (as defined herein), 0.18% or (ii)
with respect to any Remittance Date
which occurs after the Call Option Date,
0.36%. The Net Funds Cap for any
Remittance Date shall equal the per
annum rate equal to a fraction,
expressed as a percentage, the numerator
of which equals the sum of (a) the
aggregate amount of interest due on the
Group II Contracts on the related Due
Date and (b) the Overcollateralization
Reduction Amount, if any, for such
Distribution Date less (c) one-twelfth
of (i) if the Company is the Servicer,
0.00% or (ii) if the Company is no
longer the Servicer, 1.25% of the Group
II Pool Scheduled Principal Balance on
the first day of the Due Period less (d)
one-twelfth of (i) if the actual
Overcollateralization Amount is equal to
or greater than the Required
Overcollateralization Amount for such
Remittance Date, 0.00% or (ii) if the
actual Overcollateralization Amount is
less than the Required
Overcollateralization Amount for such
Remittance Date, 0.75% of the Group II
Pool Scheduled Principal Balance on the
first day of the Due Period and the
denominator of which is equal to the
Certificate Principal Balance of the
Group II Certificates (adjusted to
reflect the actual number of days
elapsed in the Interest Period divided
by 360). The Call Option Date shall be
the day on which the outstanding balance
of the Contracts in the Trust Fund has
declined to 10% or less of the Cut-off
Date Pool Principal Balance.
(5) The Class II B-1 Remittance Rate shall
be the lesser of (a) the Class II B-1
Formula Rate (as defined below) and (b)
the Net Funds Cap for such Remittance
Date. The "Class II B-1 Formula Rate"
shall be a per annum rate equal to the
sum of (a) LIBOR (as defined herein)
plus (b) (i) with respect to any
Remittance Date which occurs on or prior
to the Call Option Date, 0.34% or (ii)
with respect to any Remittance Date
which occurs after the Call Option Date,
0.84%.
- --------------------------------------------------------------------------------
S-5
<PAGE>
- --------------------------------------------------------------------------------
(6) The Class II B-2 Remittance Rate shall
be the lesser of (a) the Class II B-2
Formula Rate (as defined below) and (b)
the Net Funds Cap for such Remittance
Date. The "Class II B-2 Formula Rate"
shall be a per annum rate equal to the
sum of (a) LIBOR (as defined herein)
plus (b) (i) with respect to any
Remittance Date which occurs on or prior
to the Call Option Date, 0.97% or (ii)
with respect to any Remittance Date
which occurs after the Call Option Date,
1.47%.
(7) The Class II B-3 Remittance Rate shall
be the lesser of (a) the Class II B-3
Formula Rate (as defined below) and (b)
the Net Funds Cap for such Remittance
Date. The "Class II B-3 Formula Rate"
shall be a per annum rate equal to the
sum of (a) LIBOR (as defined herein)
plus (b) (i) with respect to any
Remittance Date which occurs on or prior
to the Call Option Date, 1.30% or (ii)
with respect to any Remittance Date
which occurs after the Call Option Date,
1.80%.
(8) If on any Remittance Date, the
Remittance Rate for any of the Group II
Certificates is based on the Net Funds
Cap, Certificateholders of such Class
will be entitled to receive on
subsequent Remittance Dates the
applicable Net Funds Cap Carryover
Amount (as defined herein) to the extent
of funds available therefore as
described herein; provided, however,
additional funds resulting from the
cross-collateralization provisions
described herein shall not be available
to Group II Certificateholders to pay
the Net Funds Cap Carryover Amount. See
"Description of the Certificates --
Distributions."
(9) With respect to the Class I A-1
Certificates and the Group II
Certificates, the Remittance Rates for
the first Remittance Date (the "Initial
Remittance Rates") will not be
determined until two days prior to the
Closing Date. Therefore, the Initial
Remittance Rates have not been
determined as of the date of this
Prospectus Supplement.
Designations
Offered Certificates ....... Class I A-1, Class I A-2, Class I A-3, Class I
A-4, Class I A-5, Class I A-6, Class I M-1,
Class I B-1, Class I B-2, Class II A-1, Class II
B-1, Class II B-2 and Class II B-3.
Group I Certificates ....... Class I A-1, Class I A-2, Class I A-3, Class I
A-4, Class I A-5, Class I A-6, Class I M-1,
Class I B-1 and Class I B-2.
Group II Certificates ...... Class II A-1, Class II B-1, Class II B-2 and
Class II B-3.
Group I Senior
Certificates ............... Class I A-1, Class I A-2, Class I A-3, Class I
A-4 and Class I A-5.
Group II Senior
Certificates ............... Class II A-1.
Senior Certificates ........ Class I A-1, Class I A-2, Class I A-3, Class I
A-4, Class I A-5 and Class II A-1.
Group I Subordinate
Certificates ............... Class I A-6, Class I M-1, Class I B-1 and Class
I B-2.
Group II Subordinate
Certificates ............... Class II B-1, Class II B-2 and Class II B-3.
Subordinate Certificates ... Class I A-6, Class I M-1, Class I B-1, Class I
B-2, Class II B-1, Class II B-2 and Class II
B-3.
Senior Subordinate
Certificates ............... Class I A-6 and Class II B-1.
Group I Junior
Subordinate Certificates ... Class I B-1 and Class I B-2.
- --------------------------------------------------------------------------------
S-6
<PAGE>
- --------------------------------------------------------------------------------
Group II Junior
Subordinate ................ Certificates Class II B-2 and Class II B-3.
Junior Subordinate
Certificates ............... Class I B-1, Class I B-2, Class II B-2 and Class
II B-3.
Fixed Rate Certificates .... Class I A-2, Class I A-3, Class I A-4, Class I
A-5, Class I A-6, Class I M-1, Class I B-1 and
Class I B-2.
Floating Rate
Certificates Class ......... I A-1 and the Group II Certificates.
Limited Guarantee
Certificates ............... Class I B-2 and Class II B-3 Certificates.
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 September 1998.
Record Date ................. With respect to the initial Remittance Date, the
Closing Date. With respect to any Remittance
Date thereafter and the Fixed Rate Certificates,
the last business day of the month preceding the
month of the related Remittance Date. With
respect to any Remittance Date thereafter and
the Floating Rate Certificates, the business day
preceding the related Remittance Date. In the
event that Definitive Certificates are issued
with respect to a Class of Certificates, the
Record Date with respect to such Class will be
the close of business on the last Business Day
of the month preceding the month of the related
Remittance Date.
Cut-off Date ................ July 26, 1998.
Agreement ................... The Pooling and Servicing Agreement, dated as of
July 26, 1998 (the "Agreement"), between the
Company, as Seller and Servicer, CHI, as
provider of the Limited Guarantee with respect
to the Class I B-2 Certificates and the Class II
B-3 Certificates, and the Trustee.
Description of the
Certificates ............... The 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 Group
I Certificates evidence undivided interests in
the Group I Contracts. The Group II Certificates
evidence undivided interests in the Group II
Contracts. 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 each Class of Certificates in the
distributions on such Certificates will be equal
to the percentage obtained from dividing the
denomination of such Certificate by the Original
Certificate Principal Balance of such Class of
Certificates.
Final Scheduled
Payment Dates .............. Based on the assumptions that (i) there are no
defaults, prepayments or delinquencies with
respect to payments due based on the Assumed
Contract Characteristics, (ii) the Repurchase
Option was not exercised by the Servicer, and
(iii) there were no Accelerated Principal
Payments, the Final Scheduled Payment Dates for
each of the Class I A-1, Class I A-2, Class I
A-3, Class I A-4, Class I A-5, Class I B-1,
Class II B-1 and Class II B-2 Certificates are
as set forth below. The Final Scheduled Payment
Dates for each of the Class I A-6, Class I M-1,
Class I B-2, Class II A-1 and Class II B-3
- --------------------------------------------------------------------------------
S-7
<PAGE>
- --------------------------------------------------------------------------------
Certificates are the Remittance Dates in the
months following the dates on which the
Contracts with the latest scheduled maturity in
each Group amortize according to their terms. It
is anticipated that the actual final Payment
Date for each Class may occur earlier than the
Final Scheduled Payment Date. In the event of
large losses and delinquencies on the Contracts,
however, the actual payment on certain of the
subordinated classes of Certificates may occur
later than the Final Scheduled Payment Date and
in certain scenarios, holders of such classes
may incur a loss on their investment. See "Yield
and Prepayment Considerations" herein.
Final Scheduled
Payment Date
---------------
Class I A-1 Certificates: May 7, 2005
Class I A-2 Certificates: June 7, 2010
Class I A-3 Certificates: October 7, 2013
Class I A-4 Certificates: June 7, 2016
Class I A-5 Certificates: September 7, 2021
Class I A-6 Certificates: October 7, 2028
Class I M-1 Certificates: October 7, 2028
Class I B-1 Certificates: February 7, 2015
Class I B-2 Certificates: October 7, 2028
Class II A-1 Certificates: October 7, 2028
Class II B-1 Certificates: January 7, 2014
Class II B-2 Certificates: February 7, 2015
Class II B-3 Certificates: October 7, 2028
Distributions ............... Distributions to the holders of Certificates of
a Class will be made in an amount equal to their
respective Percentage Interests multiplied by
the aggregate amount distributed on such Class
of Certificates for the related Remittance Date,
commencing in September 1998. 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 Group I
and Group II Certificate Account for
distribution on a Remittance Date (the "Group I
Available Distribution Amount" and "Group II
Available Distribution Amount," respectively)
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 Accounts that will constitute the
Group I and Group II Available Distribution
Amount on each Remittance Date. Interest on the
Fixed Rate Certificates will be calculated on
the basis of a 360-day year consisting of twelve
30-day months. Interest on the Floating Rate
Certificates will be calculated on the basis of
the number of actual days elapsed during the Due
Period and a 360-day year.
The aggregate amounts distributed to the holders
of the Certificates from the Group I Available
Distribution Amount or Group II Available
Distribution Amount, as applicable, in respect
of a Remittance Date are the Class I A-1
Distribution Amount, the Class I A-2
Distribution
- --------------------------------------------------------------------------------
S-8
<PAGE>
- --------------------------------------------------------------------------------
Amount, the Class I A-3 Distribution Amount, the
Class I A-4 Distribution Amount, the Class I A-5
Distribution Amount, the Class I A-6
Distribution Amount, the Class I M-1
Distribution Amount, the Class I B-1
Distribution Amount, the Class I B-2
Distribution Amount, the Class II A-1
Distribution Amount, the Class II B-1
Distribution Amount, the Class II B-2
Distribution Amount and the Class II B-3
Distribution Amount, respectively.
A. On each Remittance Date on which the Class I
M-1 and Class I B Principal Distribution Test is
not met, the Group I Available Distribution
Amount will be distributed in the following
amounts in the following order of priority:
(i) interest accrued during the related
Interest Period on the Group I Senior
Certificates, at their respective Remittance
Rates, on the outstanding Principal Balances
of the Group I Senior Certificates, together
with any previously undistributed shortfalls
in interest due on the Group I Senior
Certificates, in respect of prior Remittance
Dates; if the Group I Available Distribution
Amount is not sufficient to distribute the
full amount of interest due on the Group I
Senior Certificates, the Group I Available
Distribution Amount will be distributed on
the Group I Senior Certificates pro rata on
the basis of the interest due thereon;
(ii) the Group I Formula Principal
Distribution Amount in the following order
of priority:
(a) to the Class I A-1 Certificates
until the Class I A-1 Principal Balance
is reduced to zero;
(b) to the Class I A-2 Certificates
until the Class I A-2 Principal Balance
is reduced to zero;
(c) to the Class I A-3 Certificates
until the Class I A-3 Principal Balance
is reduced to zero;
(d) to the Class I A-4 Certificates
until the Class I A-4 Principal Balance
is reduced to zero; and
(e) to the Class I A-5 Certificates
until the Class I A-5 Principal Balance
is reduced to zero;
(iii) interest accrued during the related
Interest Period on the Class I A-6 Principal
Balance to the Class I A-6 Certificates at
the related Remittance Rate, together with
any previously undistributed shortfalls in
interest due on the Class I A-6 Certificates
in respect of prior Remittance Dates;
(iv) the remainder of the Group I Formula
Principal Distribution Amount, if any, to
the Class I A-6 Certificates until the Class
I A-6 Principal Balance is reduced to zero;
(v) interest accrued during the related
Interest Period on the Class I M-1 Principal
Balance to the Class I M-1 Certificates at
the related Remittance Rate, together with
any previously undistributed shortfalls in
interest due on the Class I M-1 Certificates
in respect of prior Remittance Dates;
(vi) the remainder of the Group I Formula
Principal Distribution Amount, if any, to
the Class I M-1 Certificates until the Class
I M-1 Principal Balance is reduced to zero;
- --------------------------------------------------------------------------------
S-9
<PAGE>
- --------------------------------------------------------------------------------
(vii) interest accrued during the related
Interest Period on the Class I B-1 Principal
Balance to the Class I B-1 Certificates at
the related Remittance Rate, together with
any previously undistributed shortfalls in
interest due on the Class I B-1 Certificates
in respect of prior Remittance Dates;
(viii) the remainder of the Group I Formula
Principal Distribution Amount, if any, to
the Class I B-1 Certificates until the Class
I B-1 Principal Balance is reduced to zero;
(ix) interest accrued during the related
Interest Period on the Class I B-2 Principal
Balance to the Class I B-2 Certificates at
the related Remittance Rate, together with
any previously undistributed shortfalls in
interest due on the Class I B-2 Certificates
in respect of prior Remittance Dates;
(x) the remainder of the Group I Formula
Principal Distribution Amount, if any, to
the Class I B-2 Certificates until the Class
I B-2 Principal Balance is reduced to zero;
(xi) any Group I Monthly Excess Spread (as
defined below) to fund any Group II
Available Funds Shortfall;
(xii) any remaining Group I Monthly Excess
Spread to fund any unfunded Accelerated
Principal Payment (as defined below) on the
Group II Certificates after giving effect to
the distribution described in clause C(ix)
or D(ix), as applicable, below;
(xiii) so long as the Company is the
Servicer, any remaining available funds up
to the amount equal to 1/12th of the product
of 1.25% and the Group I Pool Scheduled
Principal Balance for such Remittance Date
(the "Group I Monthly Servicing Fee") to the
Servicer;
(xiv) the amount of any reimbursement to CHI
for Enhancement Payments with respect to the
Class I B-2 Certificates as provided in the
Agreement;
(xv) so long as the Company is the Servicer,
any remaining available funds up to the
amount of the Group II Monthly Servicing Fee
(as defined herein), if any, remaining
unpaid after giving effect to the
distribution described in clause C(xii) or
D(xii), as applicable, below, to the
Servicer;
(xvi) the amount of any reimbursement to CHI
for Enhancement Payments with respect to the
Class II B-3 Certificates as provided in the
Agreement, which remains unpaid after giving
effect to the distribution described in
clause C(xiii) or D(xiii), as applicable,
below; and
(xvii) any remaining available funds to the
holder of the Class R Certificate, which
will initially be a special purpose
subsidiary of the Company.
B. On each Remittance Date on which the Class I
M-1 and Class I B Principal Distribution Test is
met, the Group I Available Distribution Amount
will be distributed in the following amounts in
the following order of priority:
(i) interest accrued during the related
Interest Period on the Group I Senior
Certificates, at their respective Remittance
Rates, on the outstanding Principal Balances
of the Group I Senior Certificates,
- --------------------------------------------------------------------------------
S-10
<PAGE>
- --------------------------------------------------------------------------------
together with any previously undistributed
shortfalls in interest due on the Group I
Senior Certificates, in respect of prior
Remittance Dates; if the Group I Available
Distribution Amount is not sufficient to
distribute the full amount of interest due
on the Group I Senior Certificates, the
Group I Available Distribution Amount will
be distributed on the Group I Senior
Certificates pro rata on the basis of the
interest due thereon;
(ii) the Class I A Percentage of the Group I
Formula Principal Distribution Amount in the
following order of priority:
(a) to the Class I A-1 Certificates
until the Class I A-1 Principal Balance
is reduced to zero;
(b) to the Class I A-2 Certificates
until the Class I A-2 Principal Balance
is reduced to zero;
(c) to the Class I A-3 Certificates
until the Class I A-3 Principal Balance
is reduced to zero;
(d) to the Class I A-4 Certificates
until the Class I A-4 Principal Balance
is reduced to zero; and
(e) to the Class I A-5 Certificates
until the Class I A-5 Principal Balance
is reduced to zero;
(iii) interest accrued during the related
Interest Period on the Class I A-6 Principal
Balance to the Class I A-6 Certificates at
the related Remittance Rate, together with
any previously undistributed shortfalls in
interest due on the Class I A-6 Certificates
in respect of prior Remittance Dates;
(iv) the remainder of the Class I A
Percentage of the Group I Formula Principal
Distribution Amount, if any, to the Class I
A-6 Certificates until the Class I A-6
Principal Balance is reduced to zero;
(v) interest accrued during the related
Interest Period on the Class I M-1 Principal
Balance to the Class I M-1 Certificates at
the related Remittance Rate, together with
any previously undistributed shortfalls in
interest due on the Class I M-1 Certificates
in respect of prior Remittance Dates;
(vi) the Class I M-1 Percentage of the Group
I Formula Principal Distribution Amount to
the Class I M-1 Certificates until the Class
I M-1 Principal Balance is reduced to zero;
(vii) interest accrued during the related
Interest Period on the Class I B-1 Principal
Balance to the Class I B-1 Certificates at
the related Remittance Rate, together with
any previously undistributed shortfalls in
interest due on the Class I B-1 Certificates
in respect of prior Remittance Dates;
(viii) the Class I B Percentage of the Group
I Formula Principal Distribution Amount to
the Class I B-1 Certificates until the Class
I B-1 Principal Balance is reduced to zero;
(ix) interest accrued during the related
Interest Period on the Class I B-2 Principal
Balance to the Class I B-2 Certificates at
the related Remittance Rate, together with
any previously
- --------------------------------------------------------------------------------
S-11
<PAGE>
- --------------------------------------------------------------------------------
undistributed shortfalls in interest due on
the Class I B-2 Certificates in respect of
prior Remittance Dates;
(x) the remainder of the Group I Formula
Principal Distribution Amount, if any, to
the Class I B-2 Certificates until the Class
I B-2 Principal Balance is reduced to zero;
provided, however, if the Class I A and
Class I M-1 Principal Balances have not been
reduced to zero on or before a Remittance
Date, to the extent that allocations in
respect of principal to the Class I B-2
Certificates would reduce the Class I B-2
Principal Balance below the Class I B-2
Floor Amount, then the amount of such excess
principal will instead be distributed, pro
rata, to the Class I A Certificates and the
Class I M-1 Certificates based on the Class
I A Principal Balance and the Class I M-1
Principal Balance prior to distributions
pursuant to clauses B(ii), (iv) and (vi)
above with respect to such Remittance Date.
The allocations in respect of such excess
principal to the Class I A Certificates will
be in the order of priority set forth in
clauses (B)(ii) and (iv) above. With respect
to any Remittance Date, the "Class I B-2
Floor Amount" will equal $3,254,996.03
(which represents approximately 2% of the
Group I Cut-off Date Principal Balance).
(xi) any Group I Monthly Excess Spread to
fund any Group II Available Funds Shortfall;
(xii) any remaining Group I Monthly Excess
Spread to fund any unfunded Accelerated
Principal Payment (as defined below) on the
Group II Certificates after giving effect to
the distribution described in clause C(ix)
or D(ix), as applicable, below;
(xiii) so long as the Company is the
Servicer, any remaining available funds up
to the Group I Monthly Servicing Fee, to the
Servicer;
(xiv) the amount of any reimbursement to CHI
for Enhancement Payments with respect to the
Class I B-2 Certificates as provided in the
Agreement;
(xv) so long as the Company is the Servicer,
any remaining available funds up to the
amount of the Group II Monthly Servicing
Fee, if any, remaining unpaid after giving
effect to the distribution described in
clause C(xii) or D(xii), as applicable,
below, to the Servicer;
(xvi) the amount of any reimbursement to CHI
for Enhancement Payments with respect to the
Class II B-3 Certificates as provided in the
Agreement, which remains unpaid after giving
effect to the distribution described in
clause C(xiii) or D(xiii), as applicable,
below; and
(xvii) any remaining available funds to the
holder of the Class R Certificate.
C. On each Remittance Date on which the Class II
B Principal Distribution Test is not met, the
Group II Available Distribution Amount will be
distributed in the following amounts in the
following order of priority:
(i) interest accrued during the related
Interest Period on the Class II A-1
Principal Balance to the Class II A-1
Certificates at
- --------------------------------------------------------------------------------
S-12
<PAGE>
- --------------------------------------------------------------------------------
the related Remittance Rate, together with
any previously undistributed shortfalls in
interest due on the Class II A-1
Certificates in respect of prior Remittance
Dates;
(ii) the Group II Formula Principal
Distribution Amount, net of any portion of
the Overcollateralization Reduction Amount,
if any, then applicable to such
Certificates, to the Class II A-1
Certificates until the Class II A-1
Principal Balance is reduced to zero;
(iii) interest accrued during the related
Interest Period on the Class II B-1
Principal Balance to the Class II B-1
Certificates at the related Remittance Rate,
together with any previously undistributed
shortfalls in interest due on the Class II
B-1 Certificates in respect of prior
Remittance Dates;
(iv) the remaining Group II Formula
Principal Distribution Amount, if any, to
the Class II B-1 Certificates, net of any
portion of the Overcollateralization
Reduction Amount, if any, then applicable to
such Certificates, until the Class II B-1
Principal Balance is reduced to zero;
(v) interest accrued during the related
Interest Period on the Class II B-2
Principal Balance to the Class II B-2
Certificates at the related Remittance Rate,
together with any previously undistributed
shortfalls in interest due on the Class II
B-2 Certificates in respect of prior
Remittance Dates;
(vi) the remaining Group II Formula
Principal Distribution Amount, if any, to
the Class II B-2 Certificates, net of any
portion of the Overcollateralization
Reduction Amount, if any, then applicable to
such Certificates, until the Class II B-2
Principal Balance is reduced to zero;
(vii) interest accrued during the related
Interest Period on the Class II B-3
Principal Balance to the Class II B-3
Certificates at the related Remittance Rate,
together with any previously undistributed
shortfalls in interest due on the Class II
B-3 Certificates in respect of prior
Remittance Dates;
(viii) the remaining Group II Formula
Principal Distribution Amount, if any, to
the Class II B-3 Certificates, net of any
portion of the Overcollateralization
Reduction Amount, if any, then applicable to
such Certificates, until the Class II B-3
Principal Balance is reduced to zero;
(ix) any remaining Group II Available
Distribution Amount to fund any Accelerated
Principal Payment on the Group II
Certificates;
(x) any Group II Monthly Excess Spread,
together with any Overcollateralization
Reduction Amount, to fund any Group I
Available Funds Shortfall;
(xi) any remaining available funds up to the
Class II A-1 Net Funds Cap Carryover Amount,
Class II B-1 Net Funds Cap Carryover Amount,
Class II B-2 Net Funds Cap Carryover Amount
and Class II B-3 Net Funds Cap Carryover
Amount to the applicable Certificateholder;
if such available funds are not sufficient
to distribute the total Net Funds Cap
Carryover Amount to the applicable Classes
of Certificates, such remaining available
funds will be distributed on such Classes of
Certificates pro rata based on
- --------------------------------------------------------------------------------
S-13
<PAGE>
- --------------------------------------------------------------------------------
the amount of the Net Funds Cap Carryover
Amount owing to each such Class of
Certificates;
(xii) so long as the Company is the
Servicer, any remaining available funds up
to the amount equal to 1/12th of the product
of 1.25% and the Group II Pool Scheduled
Principal Balance for such Remittance Date
(the "Group II Monthly Servicing Fee"), to
the Servicer;
(xiii) the amount of any reimbursement to
CHI for Enhancement Payments with respect to
the Class II B-3 Certificates as provided in
the Agreement;
(xiv) so long as the Company is the
Servicer, any remaining available funds up
to the amount of the Group I Monthly
Servicing Fee, if any, remaining unpaid
after giving effect to the distribution
described in clause A(xiii) or B(xiii), as
applicable, above, to the Servicer;
(xv) the amount of any reimbursement to CHI
for Enhancement Payments with respect to the
Class I B-2 Certificates as provided in the
Agreement, which remains unpaid after giving
effect to the distribution described in
clause A(xiv) or B(xiv), as applicable,
above; and
(xvi) any remaining available funds to the
holder of the Class R Certificate.
D. On each Remittance Date on which the Class II
B Principal Distribution Test is met, the
Available Distribution Amount will be
distributed in the following amounts in the
following order of priority:
(i) interest accrued during the related
Interest Period on the Class II A-1
Principal Balance to the Class II A-1
Certificates at the related Remittance Rate,
together with any previously undistributed
shortfalls in interest due on the Class II
A-1 Certificates, in respect of prior
Remittance Dates;
(ii) the Class II A Percentage of the Group
II Formula Principal Distribution Amount,
net of any portion of the
Overcollateraliza-tion Reduction Amount, if
any, then applicable to such Certificates,
to the Class II A-1 Certificateholders until
the Class II A-1 Principal Balance is
reduced to zero;
(iii) interest accrued during the related
Interest Period on the Class II B-1
Principal Balance to the Class II B-1
Certificates at the related Remittance Rate,
together with any previously undistributed
shortfalls in interest due on the Class II
B-1 Certificates in respect of prior
Remittance Dates;
(iv) the Class II B Percentage of the Group
II Formula Principal Distribution Amount to
the Class II B-1 Certificates, net of any
portion of the Overcollateralization
Reduction Amount, if any, then applicable to
such Certificates, until the Class II B-1
Principal Balance is reduced to zero;
(v) interest accrued during the related
Interest Period on the Class II B-2
Principal Balance to the Class II B-2
Certificates at the related Remittance Rate,
together with any previously undistributed
shortfalls in interest due on the Class II
B-2 Certificates in respect of prior
Remittance Dates;
- --------------------------------------------------------------------------------
S-14
<PAGE>
- --------------------------------------------------------------------------------
(vi) the remainder of the Class II B
Percentage, if any, of the Group II Formula
Principal Distribution Amount to the Class
II B-2 Certificates, net of any portion of
the Overcollateralization Reduction Amount,
if any, then applicable to such
Certificates, until the Class II B-2
Principal Balance is reduced to zero;
(vii) interest accrued during the related
Interest Period on the Class II B-3
Principal Balance to the Class II B-3
Certificates at the related Remittance Rate,
together with any previously undistributed
shortfalls in interest due on the Class II
B-3 Certificates in respect of prior
Remittance Dates;
(viii) the remainder of the Group II Formula
Principal Distribution Amount to the Class
II B-3 Certificates, net of any portion of
the Overcollateralization Reduction Amount,
if any, then applicable to such
Certificates, until the Class II B-3
Principal Balance is reduced to zero;
provided, however, if the Class II A-1
Principal Balance has not been reduced to
zero on or before a Remittance Date, to the
extent that allocations in respect of
principal to the Class II B-3 Certificates
would reduce the sum of the Class II B-3
Principal Balance and the
Overcollateralization Amount below the Group
II Certificate Floor Amount, then the amount
of such excess principal will instead be
distributed to the Class II A-1
Certificates. With respect to any Remittance
Date, the "Group II Certificate Floor
Amount" will equal $1,629,223.42 (which
represents approximately 2% of the Group II
Cut-off Date Principal Balance);
(ix) any remaining Group II Available
Distribution Amount to fund any Accelerated
Principal Payment on the Group II
Certificates;
(x) any Group II Monthly Excess Spread,
together with any Overcollateralization
Reduction Amount, to fund any Group I
Available Funds Shortfall;
(xi) any remaining available funds up to the
Class II A-1 Net Funds Cap Carryover Amount,
Class II B-1 Net Funds Cap Carryover Amount,
Class II B-2 Net Funds Cap Carryover Amount
and Class II B-3 Net Funds Cap Carryover
Amount to the applicable Certificateholder;
if such available funds are not sufficient
to distribute the total Net Funds Cap
Carryover Amount to the applicable Classes
of Certificates, such remaining available
funds will be distributed on such Classes of
Certificates pro rata based on the amount of
the Net Funds Cap Carryover Amount owing to
each such Class of Certificates;
(xii) so long as the Company is the
Servicer, any remaining available funds up
to the Group II Monthly Servicing Fee, to
the Servicer;
(xiii) the amount of any reimbursement to
CHI for Enhancement Payments with respect to
the Class II B-3 Certificates as provided in
the Agreement;
(xiv) so long as the Company is the
Servicer, any remaining available funds up
to the amount of the Group I Monthly
Servicing Fee, if any, remaining unpaid
after giving effect to the distribution
described in clause A(xiii) or B(xiii), as
applicable, above, to the Servicer;
- --------------------------------------------------------------------------------
S-15
<PAGE>
- --------------------------------------------------------------------------------
(xv) the amount of any reimbursement to CHI
for Enhancement Payments with respect to the
Class I B-2 Certificates as provided in the
Agreement, which remains unpaid after giving
effect to the distribution described in
clause A(xiv) or B(xiv), as applicable,
above; and
(xvi) any remaining available funds to the
holder of the Class R Certificate.
The "Formula Principal Distribution Amount" in
respect of a Remittance Date and a Group equals
the sum of (i) all scheduled payments of
principal due on each outstanding Contract in
such Group during the Due Period preceding the
month in which the Remittance Date occurs, (ii)
the Scheduled Principal Balance (as defined
below) of each Contract in such Group 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) of Contracts in such
Group received during such preceding Due Period,
(iv) the Scheduled Principal Balance of each
Contract in such Group that was prepaid in full
during such preceding Due Period, (v) the
Scheduled Principal Balance of each Contract in
such Group that became a Liquidated Contract
during such preceding Due Period and (vi) any
previously undistributed shortfalls in the
amounts in clauses (i) through (v) in respect of
the prior Remittance Dates (other than any such
shortfall with respect to which an Enhancement
Payment has been made to the related
Certificateholders).
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 "Class I M-1 and Class I B Principal
Distribution Test" is met in respect of a
Remittance Date on which each of the following
requirements is satisfied:
(i) such Remittance Date is on or after the
September 2003 Remittance Date;
(ii) the Class I M-1 Percentage plus the
Class I B Percentage for such Remittance
Date is equal to at least 18.376% (which is
1.75 times the sum of the original Class I
M-1 Percentage and the original Class I B
Percentage);
(iii) the Group I Performance Tests are
satisfied; and
(iv) the Class I B-2 Principal Balance is
not less than the Class I B-2 Floor Amount.
The "Class II B Principal Distribution Test" is
met in respect of a Remittance Date on which
each of the following requirements is satisfied:
(i) such Remittance Date is on or after the
September 2003 Remittance Date;
(ii) the Class II B Percentage for such
Remittance Date is equal to at least 50%
(which is the sum of (a) 2 times the
original Class II B Percentage and (b) 1%);
- --------------------------------------------------------------------------------
S-16
<PAGE>
- --------------------------------------------------------------------------------
(iii) the Group II Performance Tests are
satisfied; and
(iv) the sum of the Class II B-3 Certificate
Principal Balance and the
Overcollateralization Amount is not less
than the Group II Certificate Floor Amount.
The "Group I Performance Tests" are satisfied in
respect of a Remittance Date if all of the
following conditions with respect to Group I are
met:
(i) the Average Sixty-Day Delinquency Ratio
(as defined in the Agreement) as of such
Remittance Date does not exceed 5% for the
Group I Contracts;
(ii) the Average Thirty-Day Delinquency
Ratio (as defined in the Agreement) as of
such Remittance Date does not exceed 7% for
the Group I Contracts;
(iii) the Cumulative Realized Losses (as
defined in the Agreement) for the Group I
Contracts as of such Remittance Date do not
exceed a certain specified percentage of the
Group I Cut-off Date Principal Balance,
depending on the year in which such
Remittance Date occurs; and
(iv) the Current Realized Loss Ratio (as
defined in the Agreement) as of such
Remittance Date does not exceed 2.75% for
the Group I Contracts.
The "Group II Performance Tests" are satisfied
in respect of a Remittance Date if all of the
following conditions with respect to the Group
II Contracts are met:
(i) the Average Sixty-Day Delinquency Ratio
as of such Remittance Date does not exceed
5% for the Group II Contracts;
(ii) the Average Thirty-Day Delinquency
Ratio as of such Remittance Date does not
exceed 7% for the Group II Contracts;
(iii) the Cumulative Realized Losses for the
Group II Contracts as of such Remittance
Date do not exceed a certain specified
percentage of the Group II Cut-off Date,
depending on the year in which such
Remittance Date occurs; and
(iv) the Current Realized Loss Ratio (as
defined in the Agreement) as of such
Remittance Date does not exceed 2.75% for
the Group II Contracts.
The Group I Monthly Excess Spread (as defined
herein) with respect to any Remittance Date will
generally be equal to the excess interest
collections on the Group I Contracts for the
related Due Period which remain available after
payment of all required distributions on the
Group I Certificates and certain other required
payments for such Remittance Date as specified
in the Agreement.
The Group II Monthly Excess Spread (as defined
herein) with respect to any Remittance Date will
generally be equal to the excess interest
collections on the Group II Contracts for the
related Due Period (together with interest on
the Overcollateralization Amount to the extent
provided in the Agreement) which remain
available after payment of all required
distributions on the Group II Certificates
(including any Accelerated Principal Payment for
such Remittance
- --------------------------------------------------------------------------------
S-17
<PAGE>
- --------------------------------------------------------------------------------
Date) and certain other required payments for
such Remittance Date as specified in the
Agreement.
The "Group I Available Funds Shortfall", if any,
with respect to any Remittance Date, will be
equal to the amount, if any, by which the Group
I Available Distribution Amount is less than the
amount required to be distributed to the Group I
Certificates on such Remittance Date pursuant to
clauses A(i) through (x) or clauses B(i) through
(x), as the case may be, of the distribution
priorities set forth above.
The "Group II Available Funds Shortfall", if
any, with respect to any Remittance Date, will
be equal to the amount, if any, by which the
Group II Available Distribution Amount is less
than the amount required to be distributed to
the Group II Certificates on such Remittance
Date pursuant to clauses C(i) through (viii) or
clauses D(i) through (viii), as the case may be,
of the distribution priorities set forth above.
The Principal Balance of each Class of
Certificates is its original Principal Balance
reduced by all distributions on such Class in
respect of principal. The Class I A Principal
Balance is the sum of the Class I A-1, Class I
A-2, Class I A-3, Class I A-4, Class I A-5 and
Class I A-6 Principal Balances. The Class I B
Principal Balance is the sum of the Class I B-1
Principal Balance and the Class I B-2 Principal
Balance. The Class II B Principal Balance is the
sum of the Class II B-1 Principal Balance, the
Class II B-2 Principal Balance and the Class II
B-3 Principal Balance.
The Class I A Percentage for a Remittance Date
is the percentage derived from the fraction
(which shall not be greater than 1), the
numerator of which is the aggregate Principal
Balance of the Class I A Certificates
immediately prior to such Remittance Date and
the denominator of which is the Pool Scheduled
Principal Balance for the Group I Contracts. The
Class I M-1 Percentage for a Remittance Date is
the percentage derived from the fraction (which
shall not be greater than 1), the numerator of
which is the aggregate Principal Balance of the
Class I M-1 Certificates immediately prior to
such Remittance Date and the denominator of
which is the Pool Scheduled Principal Balance
for the Group I Contracts. The Class I B
Percentage is equal to 100% less the Class I A
Percentage and Class I M-1 Percentage.
The Class II A Percentage for a Remittance Date
is the percentage derived from the fraction
(which shall not be greater than 1), the
numerator of which is the aggregate Principal
Balance of the Class II A-1 Certificates
immediately prior to such Remittance Date and
the denominator of which is the Pool Scheduled
Principal Balance for the Group II Contracts.
The Class II B Percentage is equal to 100% less
the Class II A Percentage; provided, however,
that on any Remittance Date on which (i) the
Class II B Principal Distribution Test is met
and (ii) the Class II B Percentage is greater
than 50%, the Class II A Percentage shall equal
0% until distribution of principal to the Class
II B Certificateholders on such Remittance Date
shall reduce the Class II B Percentage to a
percentage equal to 50%; provided, further, on
the Remittance Date on which there is a Group II
Formula
- --------------------------------------------------------------------------------
S-18
<PAGE>
- --------------------------------------------------------------------------------
Principal Distribution Amount in excess of the
amount (the "Required Class II B Payment")
required to be distributed to the Class II B
Certificates so as to reduce the Class II B
Percentage to 50%, the Required Class II B
Payment shall be distributed to the Class II B
Certificates and the remaining Group II Formula
Principal Distribution Amount shall be
distributed pro rata to the Class II A
Certificates and the Class II B Certificates.
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 Bi-weekly
Contracts and Semi-Monthly 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 Group I Formula Principal
Distribution Amount among the Group I Senior
Certificates pursuant to clauses A(ii) and B(ii)
above, on each Remittance Date on and after the
Remittance Date, if any, on which a Deficiency
Event occurs, the Group I Available Distribution
Amount remaining after making the distributions
of interest to the Group I Senior Certificates
required by clauses A(i) and B(i) above will be
applied to distribute the Group I Formula
Principal Distribution Amount on each Class of
Group I Senior Certificates pro rata in
accordance with the outstanding Principal
Balance of each such Class of Certificates. A
"Deficiency Event" will occur if the Principal
Balances of the Group I Senior Certificates
becomes equal to or greater than the Pool
Scheduled Principal Balance for Group I
Contracts. The "Pool Scheduled Principal
Balance" for a Group as of a Remittance Date is
equal to (i) the Cut-off Date Pool Principal
Balance for such Group less (ii) the aggregate
of the Formula Principal Distribution Amounts
for such Group (exclusive of the amounts in
clause (vi) of the definition thereof) for all
prior Remittance Dates.
In addition, if an Interest Deficiency Event
occurs on any Remittance Date with respect to
any Class of Subordinate Certificates other than
the Limited Guarantee Certificates, collections
received after the end of the related Due Period
and prior to such Remittance Date will be
applied, up to a limited amount as set forth in
the Agreement, to remedy such deficiency in
order of Class seniority within the related
Group of Certificates. An "Interest Deficiency
Event" means, with respect to a Class of
Subordinate Certificates other than the Limited
Guarantee Certificates and a Remittance Date,
that after distribution of the related Available
Distribution Amount in the order of priority set
forth above, there remains unpaid on such Class
(i) any interest accrued thereon during the
related Interest Period and (ii) any previously
undistributed shortfalls in interest due on such
Class in respect of prior Remittance Dates,
plus, to the extent legally
- --------------------------------------------------------------------------------
S-19
<PAGE>
- --------------------------------------------------------------------------------
permissible, interest accrued on any such amount
during the related accrual period at the then
applicable Remittance Rate.
In no event will the aggregate distributions of
principal to the holders of any Class of
Certificates (including, in the case of the
Class I B-2 Certificates and the Class II B-3
Certificates, any principal amounts included in
any Enhancement Payments) exceed the Original
Class Principal Balance for such Class of
Certificates.
Any undistributed interest shortfalls which are
carried forward will, to the extent legally
permissible, bear interest at the Remittance
Rate applicable to the affected Class or Classes
of Certificates.
Group II Certificates;
Overcollateralization
Provisions ................. The Group II Weighted Average Contract Rate for
the Group II Contracts is expected generally to
be higher than the weighted average of the
Remittance Rates applicable to the Group II
Certificates, thus generating certain excess
interest collections which in the absence of
losses and delinquencies, will not be needed to
fund distributions on the Group II Certificates.
The Agreement provides that in certain instances
further described below this excess interest is
to be applied, to the extent available, to make
accelerated payments of principal to the Class
or Classes of Group II Certificates then
entitled to receive distributions of principal.
Such accelerated payments are expected to cause
the aggregate Principal Balance of the Group II
Certificates to amortize more rapidly than the
principal balance of the Group II Contracts,
resulting in "overcollateralization" (i.e., the
excess of the Group II Pool Scheduled Principal
Balance over the aggregate Principal Balance of
the Group II Certificates). This interest for a
Due Period, together with interest on the
Overcollateralization Amount, remaining after
distributions in clauses C(i) to C(ix) or D(i)
to D(ix) above is the "Group II Monthly Excess
Spread" for the Remittance Date immediately
following the applicable Due Period. On any
Remittance Date, the "Overcollateralization
Amount" will be an amount equal to the excess,
if any, of (x) the Group II Pool Scheduled
Principal Balance as of the end of the
immediately preceding Due Period over (y) the
aggregate Certificate Principal Balance of the
Group II Certificates on such Remittance Date
(after taking into account all other
distributions to be made on such Remittance
Date). On the Closing Date, the
Overcollateralization Amount will be $171.12.
The Group II Monthly Excess Spread will be
applied to make accelerated payments of
principal on each Remittance Date until the
Overcollateralization Amount is equal to the
Initial Required Overcollateralization Amount,
which is expected to be approximately
$3,054,793.92, which represents approximately
3.75% of the initial Group II Contract Pool
Balance. Thereafter, the Group II Monthly Excess
Spread will not be applied to further increase
the Overcollateralization Amount unless, due to
losses, the Overcollateralization Amount is
decreased, in which event such applications will
commence to the extent necessary to increase the
actual Overcollateralization Amount to the
Required Overcollateralization Amount. The level
of the Required Overcollateralization Amount is
equal to, for any Remittance Date, (x) prior to
the date on
- --------------------------------------------------------------------------------
S-20
<PAGE>
- --------------------------------------------------------------------------------
which the Class II B Principal Distribution Test
is satisfied, the Initial Required
Overcollateralization Amount and (y) on and
after the date on which the Class II B Principal
Distribution Test is satisfied, the lesser of
(i) the Initial Required Overcollateralization
Amount and (ii) the greater of (a) 7.50% of the
then current Group II Pool Scheduled Principal
Balance and (b) 0.75% of the Group II Cut-off
Date Pool Principal Balance.
If, on any Remittance Date, the level of
Required Overcollateralization Amount is
permitted to be reduced, the "Excess
Overcollateralization Amount" (the excess of (x)
the actual Overcollateralization Amount on such
Remittance Date (after taking into account all
other distributions on such Remittance Date)
over (y) the Required Overcollateralization
Amount for such Remittance Date) will be
deducted from the Group II Formula Principal
Distribution Amount (but only to the extent of
such Group II Formula Principal Distribution
Amount) otherwise distributable to the holders
of the Group II Certificates on such Remittance
Date (any such amount so deducted, an
"Overcollateralization Reduction Amount") and
will be applied as provided herein under
"Description of the
Certificates--Distributions". The
Overcollateralization Reduction Amount, if any,
on any Remittance Date shall be funded, first,
from that portion of the Group II Formula
Principal Distribution Amount otherwise
distributable to the holders of the most junior
class of Group II Certificates on such
Remittance Date, and, if such amount is
insufficient to fund in full the
Overcollateralization Reduction Amount on such
Remittance Date, then, second, from that portion
of the Group II Formula Principal Distribution
Amount otherwise distributable to the holders of
each succeeding Class of Group II Certificates
in ascending order of seniority, until such
Overcollateralization Reduction Amount is
completely funded. The Agreement provides that
in no event shall an Overcollateralization
Reduction Amount be deducted from the Group II
Formula Principal Distribution Amount if, after
deducting such amount, the sum of the aggregate
Principal Balance of the Class II B-3
Certificates and the Overcollateralization
Amount, taken together, would be less than 2% of
the Group II Cut-off Date Principal Amount.
The amount, if any, actually applied as an
accelerated payment of principal on any
Remittance Date is referred to herein as the
"Accelerated Principal Payment" for such
Remittance Date. The Accelerated Principal
Payment, if any, on any Remittance Date will be
an amount equal to the lesser of (x) the excess
of (i) the Required Overcollateralization Amount
over (ii) the actual Overcollateralization
Amount on such Remittance Date and (y) the sum
of the Group II Monthly Excess Spread, if any,
and the Group I Monthly Excess Spread, if any,
remaining after payment of all then applicable
prior requirements for such Remittance Date. The
Accelerated Principal Payment will be
distributed to the holders of the Class of Group
II Certificates then entitled to receive
distributions in respect of principal on such
date.
Cross Collateralization
Provisions ................. The Agreement provides for cross
collateralization through the application of
excess amounts generated by one Contract Group
to
- --------------------------------------------------------------------------------
S-21
<PAGE>
- --------------------------------------------------------------------------------
fund shortfalls in available funds in the other
Contract Group, subject to certain prior
requirements of such Contract Group. Therefore,
as to any Remittance Date, the amount, if any,
of Group I Monthly Excess Spread remaining after
payment of all then applicable prior
requirements relating to the Group I
Certificates will be used to fund, first, any
Group II Available Funds Shortfall and, second,
to the extent of any remaining Group I Monthly
Excess Spread, any unfunded Accelerated
Principal Payment on the Group II Certificates
for such Remittance Date. Likewise, as to any
Remittance Date, the amount, if any, of Group II
Monthly Excess Spread (together with any
Overcollateralization Reduction Amount)
remaining after payment of all then applicable
prior requirements relating to the Group II
Certificates (including any Accelerated
Principal Payment for such Remittance Date) will
be used to fund any Group I Available Funds
Shortfall for such Remittance Date. See
"Description of Certificates --Distributions"
and "--Group II Certificates;
Overcollateralization Provisions".
Additional funds resulting from the
cross-collateralization provisions described
herein shall not be available to Group II
Certificateholders to pay the Net Funds Cap
Carryover Amount.
Effect of Priority
Sequence of
Principal
Distributions .............. The principal amounts described in clause A(ii)
above will be distributed, if the Class I M-1
and Class I B Principal Distribution Test is not
met, to the extent of the Group I Available
Distribution Amount after payment of interest on
the Group I Senior Certificates, to the Group I
Senior Certificateholders (but only to the
extent of the outstanding principal balance of
the Group I Senior Certificates). The principal
amounts described in clause C(ii) above will be
distributed, if the Class II B Principal
Distribution Test is not met, to the extent of
the Group II Available Distribution Amount after
payment of interest on the Group II Senior
Certificates, to the Group II Senior
Certificateholders (but only to the extent of
the outstanding principal balance of the Group
II Senior Certificates). With respect to each
Group of Certificates, this should, unless
offset by other cash flow insufficiencies due to
delinquencies and liquidation losses, have the
effect of accelerating the amortization of the
Senior Certificates, and delaying the
amortization of the Subordinate Certificates,
from what such amortization would be without
such prioritization, thereby increasing the
interest in the applicable Group of Contracts
evidenced by the Subordinate Certificates. With
respect to each Group of Certificates,
increasing the interest of the Subordinate
Certificates relative to that of the Senior
Certificates is intended to preserve, as
provided herein, the availability on each
Remittance Date of the subordination provided by
the Subordinate Certificates. See "Description
of the Certificates."
Prepayment
Considerations and
Risks ...................... 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
- --------------------------------------------------------------------------------
S-22
<PAGE>
- --------------------------------------------------------------------------------
at a discount. See "Yield Considerations" and
"Maturity and Prepayment Considerations" in the
Prospectus and "Yield and Prepayment
Considerations" herein.
Subordination of the
Senior Subordinate,
Junior Subordinate
and Class R Certificates ... With respect to the Group I Certificates, the
rights of the holders of the Class I A-6
Certificates to receive distributions of
interest and principal are subordinated to the
rights of the holders of the Group I Senior
Certificates, the rights of the holders of the
Class I M-1 Certificates to receive
distributions of interest and principal are
subordinated to the rights of the Group I Senior
Certificates and Class I A-6 Certificates, the
rights of the holders of the Class I B-1
Certificates to receive distributions of
interest and principal are subordinated to the
rights of the Group I Senior Certificates, Class
I A-6 Certificates and Class I M-1 Certificates
and the rights of the holders of the Class I B-2
Certificates to receive distributions of
interest and principal are subordinated to the
rights of the Group I Senior Certificates, Class
I A-6 Certificates, Class I M-1 Certificates and
Class I B-1 Certificates. With respect to the
Group II Certificates, the rights of the holders
of the Class II B-1 Certificates to receive
distributions of interest and principal are
subordinated to the rights of the holders of the
Class II A-1 Certificates, the rights of the
holders of the Class II B-2 Certificates to
receive distributions of interest and principal
are subordinated to the rights of the Class II
A-1 and Class II B-1 Certificates, and the
rights of the holders of the Class II B-3
Certificates to receive distributions of
interest and principal are subordinated to the
rights of the holders of the Class II A-1, Class
II B-1 and Class II B-2 Certificates. The
subordination of any Class of Certificates is
intended to enhance the likelihood of receipt by
the holders of Certificates senior to such Class
of Certificates of the full amount of the
scheduled monthly payments of interest and the
ultimate receipt of principal equal to the
Original Certificate Principal Balance of such
senior Class or Classes.
See "Description of the Certificates--Group I
Certificates and the Senior/Subordinate
Structure" and "--Group II Certificates and the
Senior/Subordinate Structure" herein.
Losses on Liquidated
Contracts .................. As described above, the distribution of
principal to the holders of the Senior
Certificates in each Group is intended to
include the Scheduled Principal Balance of each
Contract in the related Group 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 any
excess interest collections on non-defaulted
Contracts, the deficiency may, in effect, be
absorbed by the Subordinate Certificates 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 holders
of the Senior
- --------------------------------------------------------------------------------
S-23
<PAGE>
- --------------------------------------------------------------------------------
Certificates. If the protection afforded to the
holders of a Class of Subordinate Certificates
by the subordination of one or more Classes of
more junior Subordinate Certificates is
exhausted, the holders of such Class of
Subordinate Certificates will incur a loss on
their investment.
If the Group I or Group II Available
Distribution Amount, as applicable, for any
Remittance Date is not sufficient to cover, in
addition to interest distributable to the
related Senior Certificateholders, the entire
specified portion of the applicable Formula
Principal Distribution Amount distributable to
any such Senior Certificateholders then entitled
to such payment on such Remittance Date, then
the amount of the related Pool Scheduled
Principal Balance available to the Class B
Certificates and, in the case of Group I, the
Class I M-1 Certificates (i.e., such Pool
Scheduled Principal Balance less the Class I A
Principal Balance or the Class II A Principal
Balance, as applicable) on future Remittance
Dates will be reduced. If, because of
liquidation losses, the Pool Scheduled Principal
Balance of a Group of Contracts were to decrease
proportionately faster than distributions to the
related Class of Senior Certificateholders
reduce the related Certificate Principal
Balance, the level of protection afforded by the
subordination of the related Subordinate
Certificates (i.e., the percentage of the Pool
Scheduled Principal Balance available to such
Subordinate Certificates) would be reduced. On
each Remittance Date, if any, on or after the
date on which the Class I A Principal Balance
equals or becomes greater than the Pool
Scheduled Principal Balance, and so long as the
Class I A-6 Certificates are outstanding, the
Class I A-6 Certificateholders will 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 I A-6 Certificates. On each
Remittance Date, if any, on or after the date on
which the Deficiency Event occurs, the Group I
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 Group I Senior Certificates. See
"Description of the Certificates--Group I
Certificates and the Senior/Subordinate
Structure--Subordination of the Group I Junior
Subordinate Certificates and Class R
Certificates", "--Subordination of the Class I
M-1 Certificates" and "--Subordination of the
Class I A-6 Certificates" and "Yield and
Prepayment Considerations."
Enhancement Payments
to the Limited
Guaranteed Certificates
under the Limited
Guarantee of CHI ........... In order to mitigate the effect of the
subordination of the Class I B-2 and Class II
B-3 Certificates and liquidation losses and
delinquencies on the Contracts, CHI will
initially provide a Limited Guarantee. Such
Limited Guarantee may be replaced by an
Alternate Credit Enhancement. See "--Alternate
Credit Enhancement" below and "Description of
the Certificates--Alternate Credit Enhancement"
herein. Pursuant
- --------------------------------------------------------------------------------
S-24
<PAGE>
- --------------------------------------------------------------------------------
to the Limited Guarantee, the holders of the
Limited Guaranteed Certificates are entitled to
receive on each Remittance Date the amount equal
to the Enhancement Payment, if any. Prior to the
Remittance Date (the "Initial Class I B-2
Principal Remittance Date") on which the Class I
B-1 Principal Balance is reduced to zero, the
Enhancement Payment will equal the amount, if
any, by which (a) the sum of (i) the Class I B-2
Formula Distribution Amount (which will be equal
to one month's interest on the Class I B-2
Principal Balance) for such Remittance Date and
(ii) the Class I B-2 Principal Liquidation Loss
Amount, if any, exceeds (b) the amount (other
than the Enhancement Payment) that will
otherwise be distributed on the Class I B-2
Certificates on such Remittance Date (the "Class
I B-2 Distribution Amount"). On each Remittance
Date on or after the Initial Class I B-2
Principal Remittance Date, the Enhancement
Payment will equal the amount, if any, by which
the Class I B-2 Formula Distribution Amount
(which will include both interest and principal)
exceeds the Class I B-2 Distribution Amount for
such Remittance Date. Prior to the Remittance
Date (the "Initial Class II B-3 Principal
Remittance Date") on which the Class II B-2
Principal Balance is reduced to zero, the
Enhancement Payment will equal the amount, if
any, by which (a) the sum of (i) the Class II
B-3 Formula Distribution Amount (which will be
equal to one month's interest on the Class II
B-3 Principal Balance) for such Remittance Date
and (ii) the Class II B-3 Principal Liquidation
Loss Amount, if any, exceeds (b) the amount
(other than the Enhancement Payment) that will
otherwise be distributed on the Class II B-3
Certificates on such Remittance Date (the "Class
II B-3 Distribution Amount"). On each Remittance
Date on or after the Initial Class II B-3
Principal Remittance Date, the Enhancement
Payment will equal the amount, if any, by which
the Class II B-3 Formula Distribution Amount
(which will include both interest and principal)
exceeds the Class II B-3 Distribution Amount for
such Remittance Date; provided, however, that
the Enhancement Payment with respect to the
Class II B-3 Certificates will not include
amounts in respect of the Class II B-3 Net Funds
Cap Carryover Amount.
The "Class I B-2 Principal Liquidation Loss
Amount" for any Remittance Date will equal the
amount, if any, by which (a) the Group I Formula
Principal Distribution Amount (exclusive of the
portion thereof specified in clause (a)(vi) of
the definition of Formula Principal Distribution
Amount) for such Remittance Date exceeds (b) the
amount (exclusive of the Enhancement Payment)
distributed on the Group I Certificates on
account of principal on such Remittance Date.
The Class I B-2 Principal Liquidation Loss
Amount represents future principal payments on
the Contracts that, because of the subordination
of the Class I B-2 Certificates and liquidation
losses on the Contracts, will not be paid to the
Class I B-2 Certificateholders from the assets
of the Trust Fund but may be paid to the Class I
B-2 Certificateholders in the form of an
Enhancement Payment.
The "Class II B-3 Principal Liquidation Loss
Amount" for any Remittance Date will equal the
amount, if any, by which (a) the Group II
Formula Principal Distribution Amount (exclusive
of the portion thereof specified in clause
(a)(vi) of the definition of Formula Principal
Distribution Amount) for such Remittance Date
exceeds (b)
- --------------------------------------------------------------------------------
S-25
<PAGE>
- --------------------------------------------------------------------------------
the amount (exclusive of the Enhancement
Payment) distributed on the Group II
Certificates on account of principal on such
Remittance Date. The Class II B-3 Principal
Liquidation Loss Amount represents future
principal payments on the Contracts that,
because of the subordination of the Class II B-3
Certificates and liquidation losses on the
Contracts, will not be paid to the Class II B-3
Certificateholders from the assets of the Trust
Fund but may be paid to the Class II B-3
Certificateholders in the form of an Enhancement
Payment.
The Limited Guarantee, if applicable, will be an
unsecured general obligation of CHI and will not
be supported by any letter of credit or other
enhancement arrangement.
In the event that, on a particular Remittance
Date, the Class I B-2 Distribution Amount or the
Class II B-3 Distribution Amount, as applicable,
in the applicable Certificate Account plus any
amounts actually paid under the Limited
Guarantee or Alternate Credit Enhancement are
not sufficient to make a full distribution of
interest to the Class I B-2 Certificateholder or
Class II B-3 Certificateholder, as applicable,
the amount of the deficiency will be carried
forward as an amount that the Class I B-2 or
Class II B-3 Certificateholders are entitled to
receive on the next Remittance Date.
Alternate
Credit Enhancement ......... In the event that, at CHI's option, Alternate
Credit Enhancement (as defined herein) is
provided and, upon prior written notice to the
Rating Agencies (as defined herein), the Rating
Agencies shall have notified CHI, the Company,
the Servicer and the Trustee in writing that
substitution of such Alternate Credit
Enhancement for the Limited Guarantee will not
result in the downgrade or withdrawal of the
then current rating of any class of the
Certificates, and upon the delivery by CHI to
the Trustee of an opinion of counsel, acceptable
to the Trustee, that such action would not cause
the Trust to fail to qualify as a REMIC, the
Limited Guarantee shall be released and shall
terminate. The Alternate Credit Enhancement may
consist of cash or securities deposited by CHI
or any other person in a segregated escrow,
trust or collateral account or a letter of
credit, certificate insurance policy or surety
bond provided by a third party (an "Alternate
Credit Enhancement"). On each Remittance Date
after delivery of the Alternate Credit
Enhancement, an amount, equal to the lesser of
the amount which would have been payable under
the Limited Guarantee and the amount available
under such Alternate Credit Enhancement, shall
be transferred from such account to the
applicable Certificate Account to make payments
to the Class I B-2 or Class II B-3 Certificates,
as applicable (an "Enhancement Payment"). CHI
shall have no obligation to replace such
enhancement once it has been exhausted.
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
- --------------------------------------------------------------------------------
S-26
<PAGE>
- --------------------------------------------------------------------------------
a distribution to both the Senior
Certificateholders and Subordinate
Certificateholders undiminished by such
delinquent payments. Monthly Advances are
reimbursable to the Servicer as described under
"Description of the Certificates--Advances."
Optional Repurchase
of the Contracts
by the Servicer ............ The Company (if it is no longer the Servicer)
and the Servicer will each have the option to
purchase (the "Repurchase Option"), 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 aggregate Pool Scheduled
Principal Balance of both Groups was less than
10% of the Cut-off Date Pool Principal Balance.
See "Description of the Certificates--Optional
Termination" herein.
The Contracts ............... Fixed rate and variable rate manufactured
housing installment sales contracts, 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 (the "Land-and-Home Contracts"),
secured by liens on the real estate on which the
related Manufactured Homes are located. The
Contract Pool conveyed to the Trust Fund on the
Closing Date (the "Contract Pool") will consist
of 7,041 Contracts which will have an aggregate
principal balance as of the Cut-off Date of
approximately $244,210,972.61. 5,702 of the
Group I and Group II Contracts, having an
aggregate unpaid principal balance of
approximately $187,657,053.62 as of the Cut-off
Date, are manufactured housing installment sales
contracts originated by manufactured housing
dealers and purchased by the Company from such
dealers or originated by the Company. Certain of
these dealers are affiliates of CHI, the
indirect parent of the Company. The Company
purchased the remaining 1,339 Contracts (the
"Acquired Contracts") having an aggregate unpaid
principal balance of approximately
$56,553,918.99 as of the Cut-off Date, from
different financing companies and financial
institutions (the "Other Lenders"), as described
under "The Contract Pool" herein. Approximately
1,281 of the Acquired Contracts having an
aggregate unpaid principal balance of
approximately $55,605,833.42 as of the Cut-off
Date (such Acquired Contracts, the "21st Century
Contracts") were originated or acquired by 21st
Century Mortgage Corporation. The Contracts, as
of origination, were secured by Manufactured
Homes located in 44 states and 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. Monthly,
semi-monthly and 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
30.82% 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"). Approximately 0.35%
of the Contracts (the "Semi-Monthly Contracts")
by principal balance as of the Cut-off Date have
semi-monthly scheduled payments of principal and
interest. The remainder have one such payment
due each month.
- --------------------------------------------------------------------------------
S-27
<PAGE>
- --------------------------------------------------------------------------------
Group I Contracts ........... The Group I Contracts will consist of
approximately 4,725 fixed rate Contracts having
an aggregate unpaid principal balance of
$162,749,801.49. The APRs on the Group I
Contracts range from 7.990% to 18.400% with a
weighted average of approximately 10.631% each
as of the Cut-off Date. The Group I Contracts
had a weighted average term to scheduled
maturity as of origination of approximately 232
months and a weighted average term to scheduled
maturity as of the Cut-off Date of approximately
231 months. The final scheduled payment date on
the Group I Contract with the latest maturity is
September 1, 2028. The Group I Contracts were
originated from April 23, 1990 through July 23,
1998, inclusive.
Group II Contracts .......... This Prospectus Supplement contains information
regarding 2,316 Group II Contracts with an
aggregate unpaid principal balance of
$81,461,171.12 (the "Group II Contracts").
56.84% and 43.16% of the Group II Contracts by
aggregate unpaid principal balance as of the
Cut-off Date have periodic caps of 2% and 1%,
respectively. 23.82% and 76.18% of the Group II
Contracts by aggregate unpaid principal balance
as of the Cut-off Date have a lifetime cap of
5.0% and 6.0%, respectively, plus, in each case,
the related initial APR. 100% of the Group II
Contracts are variable rate Contracts that
adjust annually initially at the date set forth
in the related Contract and at regular intervals
thereafter (each such date, a "Change Date") to
equal the sum of (i) the monthly average yield
on U.S. Treasury securities adjusted to a
constant maturity of five years as made
available by the Federal Reserve Board (the
"Index") on a "lookback date" (a date specified
in each Contract which occurs up to a specified
number of days before the applicable Change
Date) and (ii) the number of basis points set
forth in such Contract (the "Gross Margin"),
subject to rounding and to the effects of the
Periodic Cap, the applicable Lifetime Cap and
the applicable Lifetime Floor. The "Periodic
Cap" limits changes in the APR for each Group II
Contract on each Change Date. The "Lifetime Cap"
is the maximum APR that may be borne by a Group
II Contract over its life. The "Lifetime Floor"
is the minimum APR that may be borne by a Group
II Contract over its life and is equal to the
Gross Margin for such Group II Contract. The
Group II Contracts do not provide for negative
amortization.
As of the Cut-Off Date, the average Contract
Balance of the Group II Contracts was
$35,173.22. As of the Cut-Off Date, the initial
APRs on the Group II Contracts ranged from
7.990% to 16.000% with a weighted average of
approximately 10.274%. The weighted average
maximum APR of the Group II Contracts was
16.036%. The maximum APR of the Group II
Contracts ranged from 12.990% to 22.000%. The
weighted average minimum APR of the Group II
Contracts was 4.685%. The minimum APRs of the
Group II Contracts ranged from 2.370% to
10.390%. The weighted average Gross Margin of
the Group II Contracts was 4.685%. The minimum
Gross Margin of the Group II Contracts was
2.370% and the maximum Gross Margin of the Group
II Contracts was 10.390%.
The Group II Contracts had a weighted average
term to scheduled maturity as of origination of
approximately 214 months and a weighted average
term to scheduled maturity as of the Cut-off
Date of approximately 213 months. The final
scheduled payment date on the
- --------------------------------------------------------------------------------
S-28
<PAGE>
- --------------------------------------------------------------------------------
Group II Contract with the latest maturity is
September 1, 2028. The Group II Contracts were
originated from January 27, 1998 through July
22, 1998, 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,
or a separate trustee, as applicable. 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).
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, holders of subsequently perfected security
interests and creditors of the Company. 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
re-perfection 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,
- --------------------------------------------------------------------------------
S-29
<PAGE>
- --------------------------------------------------------------------------------
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 and Mortgages
on the Manufactured Homes," "--Consumer
Protection Laws and Other Limitations on
Lenders" and "--Priority of Possible Tennessee
Tax Lien" in the Prospectus.
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. 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 Group I and
Group II 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 Certificate will be
treated as the residual interest for federal
income tax purposes. 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
200% of the Prepayment Model (as defined herein)
for the Group I Contracts and 225% of the
Prepayment Model for the Group II Contracts. No
representation is made as to whether the
Contracts will prepay at that rate or any other
rate. See "Certain Federal Income Tax
Consequences" herein and 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
Subordinate Certificates unless the
certification or opinion of counsel described
under "ERISA Considerations" is delivered to the
Trustee. See "ERISA Considerations" herein and
in the Prospectus.
- --------------------------------------------------------------------------------
S-30
<PAGE>
- --------------------------------------------------------------------------------
Legal Investment
Considerations ............. The Group I Senior Certificates, Class I A-6
Certificates, Class II A-1 Certificates and
Class II B-1 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 the Act.
The Class I M-1, Class I B-1, Class I B-2, Class
II B-2 and Class II B-3 Certificates will not
constitute "mortgage related securities" under
the Secondary Mortgage Market Enhancement Act of
1984. Accordingly, many institutions with legal
authority to invest in comparably rated
securities which are "mortgage related
securities" may not be legally authorized to
invest in such Classes of Certificates.
See "Legal Investment Considerations" herein and
in the Prospectus.
Rating ...................... It is a condition to the issuance of the Senior
Certificates that they be rated "AAA" by both
Standard & Poor's, a Division of the McGraw Hill
Companies, Inc. ("S&P"), and Fitch IBCA, Inc.
("Fitch" and, together with S&P, the "Rating
Agencies"). It is a condition to the issuance of
the Senior Subordinate Certificates that they be
rated at least "AA-" by both S&P and Fitch. It
is a condition to the issuance of the Class I
M-1 Certificates that they be rated at least "A"
by both S&P and Fitch. It is a condition to the
issuance of the Junior Subordinate Certificates
that they be rated at least "BBB" by both S&P
and Fitch. The Company has not requested a
rating on the Certificates by any rating agency
other than S&P or Fitch. 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 Offered Certificates by certain other rating
agencies, if assigned at all, may be lower than
the ratings assigned to such Certificates by the
Rating Agencies. A security rating is not a
recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at
any time. The rating of the Limited Guarantee
Certificates is based in part on an assessment
of CHI's ability to make payments under the
Limited Guarantee. Any change in S&P's or
Fitch's assessment of CHI's ability to make
payments under the Limited Guarantee may result
in a reduction of the rating of the Limited
Guarantee Certificates. 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 in the United States, or
Cedel Bank, societe anonyme ("Cedel") or the
Euroclear System ("Euroclear"), in Europe, 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.
- --------------------------------------------------------------------------------
S-31
<PAGE>
RISK FACTORS
Prospective investors in the Offered Certificates should consider among
other things, the following special considerations and the special
considerations 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. As set forth under "The Contract Pool," approximately 25.14%,
9.41%, 8.50%, 7.26%, 6.27% and 5.18% of the Group I Contracts by outstanding
principal balance are located in Texas, Tennessee, North Carolina, Florida,
South Carolina and Virginia, respectively. As set forth under "The Contract
Pool," approximately 18.91%, 18.70%, 18.02%, 11.62%, 9.05% and 5.47% of the
Group II Contracts by outstanding principal balance are located in North
Carolina, Tennessee, Texas, South Carolina, Kentucky and Florida, respectively.
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.
With respect to each Group of Certificates, high delinquencies and
liquidation losses on the Contracts related to such Group will have the effect
of reducing, and could eliminate, the protection against loss afforded by, with
respect to (i) the Group I Senior Certificates, the subordination of the Group I
Subordinate Certificates and the Class R Certificates, (ii) the Class I A-6
Certificates, the subordination of the Class I M-1, Class I B and Class R
Certificates, (iii) the Class I M-1 Certificates, the subordination of the Class
I B and Class R Certificates, (iv) the Class I B-1 Certificates, the
subordination of the Class I B-2 and Class R Certificates, (v) the Class I B-2
Certificates, the suboridination of the Class R Certificates, (vi) the Class II
A-1 Certificates, the subordination of the Class II B and Class R Certificates,
(vii) the Class II B-1 Certificates, the subordination of the Class II b-2,
Class II B-3 and Class R Certificates, (viii) the Class II B-2 Certificates, the
subordination of the Class II B-3 and Class R Certificates and (ix) the Class II
B-3 Certificates, the subordination of the Class R Certificates. If any such
protection is eliminated and with respect to the Group II Certificates, the
amount of overcollateralization, if any, has been reduced to zero, the related
Certificateholders will bear the risk of losses on the Contracts and must rely
on the value of the Manufactured Homes to recover the outstanding principal of
and unpaid interest on any defaulted Contracts. See "Description of the
Certificates--Group I Certificates and the Senior/Subordinate Structure" and
"--Group II Certificates and the Senior/Subordinate Structure" herein.
With respect to the Limited Guarantee 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
collections of interest, if any, on the Contracts in excess of the aggregate
amount of interest due to be distributed on the Offered Certificates, which
excess interest amount, if any, would otherwise be distributable on the Class R
Certificate. If such protection is eliminated and CHI fails to make payments as
required under the Limited Guarantee or the Alternate Credit Enhancement is less
than the Class I B-2 or Class II B-3 Formula Distribution Amount, as applicable,
the Class I B-2 or Class II B-3 Certificateholders, as applicable, will bear the
risk of losses on the Contracts.
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." 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 have 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." 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 Group
S-32
<PAGE>
I or Group II Available Distribution Amount, as applicable, for the next
Remittance Date could be less than the amount of principal and interest that
would be distributable to the Group I or Group II Certificateholders, as
applicable, in the absence of such shortfalls. See "Yield and Prepayment
Considerations" herein and "Maturity and Prepayment Considerations" in the
Prospectus.
3. Limited Obligations. The Offered Certificates will not represent an
interest in or obligation of the Company or any Servicer. The Offered
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 of its affiliates (except to the extent of the Limited Guarantee of CHI in
respect of the Limited Guarantee Certificates) and will be payable only from
amounts held in the Trust Fund.
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 I M-1, Class I B-1, Class I B-2, Class II B-2
and Class II B-3 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 such 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"), Cedel,
Euroclear, participating organizations, indirect participants and certain banks,
the ability of an Owner of the Offered Certificates to pledge an Offered
Certificate to persons or entities that do not participate in the DTC, Cedel or
Euroclear 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. Limited Guarantee of CHI. The Limited Guarantee, if applicable, will
be an unsecured general obligation of CHI and will not be supported by any
letter of credit or other enhancement arrangement. See "Incorporation of Certain
Documents of CHI by Reference" in the Prospectus.
13. Alternate Credit Enhancement. If CHI has replaced the Limited
Guarantee with an Alternate Credit Enhancement and such Alternate Credit
Enhancement is exhausted, CHI has no obligation to replace such enhancement.
Consequently, the Limited Guarantee Certificates may bear a greater risk of loss
on the Contracts than if the Limited Guarantee was in place and CHI was able to
make payments pursuant to the Limited Guarantee.
S-33
<PAGE>
14. Basis Risk. All Group II Contracts accrue interest at variable rates
based on changes in the monthly average yield on United States treasury
securities adjusted to a constant maturity of five years (the "CMT Rate") as
described herein and such interest rate is adjusted annually. The Group II
Certificates, however, accrue interest at variable rates based on changes in
LIBOR or the Net Funds Cap in certain instances and the interest rate of the
Group II Certificates is adjusted monthly. As a result, there may be periods
during which the weighted average rate at which the Group II Contracts are
accruing interest may not reflect the then current spread between the CMT Rate
(assuming the interest rate on all Group II Contracts is adjusted monthly) and
LIBOR. Accordingly, the amount of collections with respect to interest on the
Group II Contracts available to pay the interest requirement on the Group II
Certificates (which may have increased) and other amounts due on the Group II
Certificates during such period may be less than would be the case if the
interest rate on the Group II Contracts were adjusted monthly.
THE CONTRACT POOL
All of the Contracts in the Trust Fund (the "Contract Pool") will be
purchased or originated by the Company. Each Contract will be a manufactured
housing installment sales contract or installment loan agreement. The
statistical information presented in this Prospectus Supplement concerning the
Contract Pool is based on the Contract Pool of Contracts as of the Cut-off Date.
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 under "Underwriting Policies" 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 on the Contracts that have not been received prior to
July 26, 1998, including any such payments that were due prior to such date but
were not received prior to such date. Payments due on or after July 26, 1998,
that have been received by the Company prior to July 26, 1998 will be the
property of the Company and will not be part of the Trust Fund. The Servicer
will retain physical possession of the Contract documents (other than certain
documents related to the Land-and-Home Contracts which will be held by a
custodian on behalf of the Trustee). See "Description of the
Certificates--Conveyance of Contracts" herein.
The Contract Pool will have an aggregate principal balance as of the
Cut-off Date of approximately $244,210,972.61 consisting of 7,041 Contracts.
Each Contract was originated on or after April 23, 1990. 5,702 of the Contracts,
having an aggregate unpaid principal balance of approximately $187,657,053.62 as
of the Cut-off Date, are manufactured housing installment sale contracts
originated by manufactured housing dealers and purchased by the Company from
such dealers or originated by the Company. Certain of these dealers are
affiliates of CHI, the parent of the Company. The Company purchased the
remaining 1,339 Contracts (the "Acquired Contracts") from Other Lenders.
Approximately 1,281 of the Acquired Contracts (the "21st Century
Contracts") having an aggregate unpaid principal balance of approximately
$55,605,833.42 as of the Cut-off Date were originated or acquired by 21st
Century Mortgage Corporation, a Delaware corporation ("21st Century"). The 21st
Century Contracts constitute approximately 22.77% of the Contract Pool by
aggregate unpaid principal balance as of the Cut-off Date. 21st Century was
founded in 1995 for the origination, acquisition and servicing of manufactured
housing contracts like
S-34
<PAGE>
the Contracts. Certain of the officers of 21st Century were previously officers
of the Company and the President of the Company is on the Board of Directors of
21st Century. CHI is a minority stockholder of 21st Century. 21st Century will
act as subservicer for the 21st Century Contracts. The Servicer, however, will
remain primarily liable for the servicing of the 21st Century Contracts. The
underwriting standards employed by 21st Century are similar to the standards
used by the Company.
Approximately 17.19% of the Contracts by principal balance as of the
Cut-off-Date having an aggregate unpaid principal balance of approximately
$41,974,947.03 are re-financed contracts originated by the Company. Of such
Contracts, approximately $20,631,942.35 by aggregate unpaid principal balance as
of the Cut-off Date are cash-out refinancings.
Approximately 11.72% of the Contracts by Cut-off Date Pool Principal
Balance having an aggregate unpaid principal balance of $28,610,115.95 are
Land-and-Home Contracts.
Approximately 30.82% of the Contracts (the "Bi-weekly Contracts") by
principal balance as of the Cut-off Date have bi-weekly scheduled payments of
principal and interest. Approximately 0.35% of the Contracts (the "Semi-Monthly
Contracts") by principal balance as of the Cut-off Date have semi-monthly
scheduled payments of principal and interest. 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 Bi-weekly Contract is converted to a Contract with scheduled monthly
payments.
Approximately 0.26% of the 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 with an original Contract term of 36
years, and approximately 0.05% of the 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 with an original Contract term of 21
years, in each case providing initially for lower monthly payments than if the
contract were of a shorter term (collectively, the "Escalating Principal Payment
Contracts"). The Escalating Principal Payment Contracts automatically convert 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 twelve year term with respect to the 36-year original
term or seven years with respect to the 21-year term. There is no period in
which the Escalating Principal Payment Contracts have negative amortization.
Each Contract in Group I has a fixed annual percentage rate of interest
(the "APR") and, except for the Escalating Principal Payment Contracts,
generally provides for level payments over the term of such Contract. Each
Contract in Group II has an adjustable APR, as further described herein. Each
Contract fully amortizes the principal balance of the Contract over the term of
the Contract. All of the Contracts are actuarial obligations. 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 and one-half of one month's interest in the case of
a Semi-Monthly 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,
bi-weekly or semi-monthly 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.
In certain instances, the Company finances the purchase of the
Manufactured Home and takes as additional security a mortgage on the property on
which the Manufactured Home is located or, in certain cases, a mortgage on other
property pledged on behalf of the Obligor. The Company may also take 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 12.18% of the Contracts by outstanding principal balance
as of the Cut-off
S-35
<PAGE>
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.
Group I Contracts
65.00% of the Group I Contracts by aggregate unpaid principal balance as
of the Cut-off Date are secured by Manufactured Homes which were new at the time
the related Group I Contracts were originated and 35.00% of the Group I
Contracts by aggregate unpaid principal balance as of the Cut-off Date are
secured by Manufactured Homes which were used at the time the related Group I
Contracts were originated. Each Group I Contract has an APR of at least 7.990%
and not more than 18.400%. The weighted average APR of the Group I Contracts as
of the Cut-off Date is approximately 10.631%. The Group I Contracts have
remaining maturities as of the Cut-off Date of at least 34 months but not more
than 360 months and original maturities of at least 36 months but not more than
360 months. As of the Cut-off Date, the Group I Contracts had a weighted average
original term to scheduled maturity of approximately 232 months, and a weighted
average remaining term to scheduled maturity of approximately 231 months. The
remaining term to stated maturity of a Group I Contract is as of the Cut-off
Date. The average outstanding principal balance of the Group I Contracts as of
the Cut-off Date was approximately $34,444.40. The weighted average
loan-to-value ratio at the time of origination of the Group I Contracts was
approximately 84.53%. Generally, "value" in such calculation is equal to the sum
of the down payment (which includes the value allocated to any trade-in unit or
land pledged as additional security or in lieu of a down payment), 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 Group I Contracts are
secured by Manufactured Homes and real estate located in 44 states.
Approximately 25.14%, 9.41%, 8.50%, 7.26%, 6.27% and 5.18% of the Group I
Contracts by aggregate unpaid principal balance were secured by Manufactured
Homes or real estate located in Texas, Tennessee, North Carolina, Florida, South
Carolina and Virginia, respectively. No other state represented more than 4.58%
of the Group I Contracts by aggregate unpaid principal balance as of the Cut-off
Date.
S-36
<PAGE>
GROUP I STATISTICS
Set forth below is a description of certain additional characteristics of
the Group I Contracts as of the Cut-off Date. Percentages may not add to 100.00%
due to rounding. Totals may not add to aggregate balances due to rounding.
Geographical Distribution of Manufactured Homes
as of Origination - Group I Contracts
Aggregate
Principal Percentage of
Number of Balance Group I Contracts
Contracts Outstanding by Outstanding
As of As of Principal Balance
State Cut-off Date Cut-off Date As of Cut-off Date
- --------- ------------ ------------ ------------------
Alabama ..................... 104 $ 3,923,447 2.41%
Arizona ..................... 40 1,136,618 0.70
Arkansas .................... 44 1,523,900 0.94
California .................. 12 483,213 0.30
Colorado .................... 60 2,235,041 1.37
Connecticut ................. 4 102,583 0.06
Delaware .................... 21 910,587 0.56
Florida ..................... 350 11,820,984 7.26
Georgia ..................... 103 3,010,783 1.85
Idaho ....................... 2 99,395 0.06
Iowa ........................ 8 243,853 0.15
Illinois .................... 16 360,035 0.22
Indiana ..................... 36 779,659 0.48
Kansas ...................... 5 202,629 0.12
Kentucky .................... 154 4,399,462 2.70
Louisiana ................... 118 4,786,611 2.94
Maryland .................... 5 187,716 0.12
Michigan .................... 180 6,519,741 4.01
Minnesota ................... 9 256,392 0.16
Mississippi ................. 30 1,050,844 0.65
Missouri .................... 235 7,449,517 4.58
Montana ..................... 68 2,510,652 1.54
North Carolina .............. 419 13,839,995 8.50
North Dakota ................ 3 125,975 0.08
New Hampshire ............... 1 8,284 0.01
New Jersey .................. 3 118,633 0.07
New Mexico .................. 97 3,999,730 2.46
New York .................... 47 1,338,197 0.82
Nevada ...................... 8 307,370 0.19
Ohio ........................ 146 4,741,120 2.91
Oklahoma .................... 72 2,947,274 1.81
Oregon ...................... 5 148,518 0.09
Pennsylvania ................ 82 2,309,962 1.42
South Carolina .............. 321 10,208,431 6.27
South Dakota ................ 1 29,547 0.02
Tennessee ................... 485 15,308,512 9.41
Texas ....................... 1,037 40,912,955 25.14
Utah ........................ 2 97,498 0.06
Vermont ..................... 1 26,506 0.02
Virginia .................... 262 8,422,407 5.18
Washington .................. 4 120,292 0.07
West Virginia ............... 118 3,564,647 2.19
Wisconsin ................... 4 79,345 0.05
Wyoming ..................... 3 100,942 0.06
----- ------------ ------
Total ................... 4,725 $162,749,801 100.00%
===== ============ ======
S-37
<PAGE>
Years of Origination of Contracts - Group I Contracts
Aggregate
Principal Percentage of
Number of Balance Group I Contracts
Contracts Outstanding by Outstanding
As of As of Principal Balance
Year of Origination Cut-off Date Cut-off Date As of Cut-off Date
- ------------------- ------------ ------------ ------------------
1990 ........................ 2 $ 96,168 0.06%
1995 ........................ 1 22,222 0.01
1997 ........................ 13 490,063 0.30
1998 ........................ 4,709 162,141,348 99.63
----- ------------ ------
Total ..................... 4,725 $162,749,801 100.00%
===== ============ ======
Distribution of Original Contract Amounts - Group I Contracts
Aggregate
Principal Percentage of
Number of Balance Group I Contracts
Contracts Outstanding by Outstanding
As of As of Principal Balance
Original Contract Amount Cut-off Date Cut-off Date As of Cut-off Date
- ------------------------ ------------ ------------ ------------------
$ 0.01 - $ 5,000.00 ..... 7 $ 31,706 0.02%
5,000.01 - 10,000.00 ..... 131 1,067,522 0.66
10,000.01 - 15,000.00 ..... 346 4,350,615 2.67
15,000.01 - 20,000.00 ..... 479 8,439,851 5.19
20,000.01 - 25,000.00 ..... 597 13,402,329 8.23
25,000.01 - 30,000.00 ..... 624 17,078,763 10.49
30,000.01 - 35,000.00 ..... 597 19,305,968 11.86
35,000.01 - 40,000.00 ..... 476 17,756,087 10.91
40,000.01 - 45,000.00 ..... 379 16,039,193 9.86
45,000.01 - 50,000.00 ..... 285 13,499,117 8.29
50,000.01 - 55,000.00 ..... 243 12,728,583 7.82
55,000.01 - 60,000.00 ..... 151 8,648,766 5.31
60,000.01 - 65,000.00 ..... 120 7,461,001 4.58
65,000.01 - 70,000.00 ..... 86 5,770,213 3.55
70,000.01 - 75,000.00 ..... 55 3,978,737 2.44
75,000.01 - 80,000.00 ..... 43 3,320,226 2.04
80,000.01 - 85,000.00 ..... 26 2,145,693 1.32
85,000.01 - 90,000.00 ..... 27 2,361,047 1.45
90,000.01 - 95,000.00 ..... 18 1,653,467 1.02
95,000.01 - 100,000.00 ..... 14 1,351,522 0.83
100,000.01 - 105,000.00 ..... 6 617,779 0.38
105,000.01 - 110,000.00 ..... 5 540,019 0.33
110,000.01 - 115,000.00 ..... 2 224,080 0.14
115,000.01 - 120,000.00 ..... 3 346,664 0.21
120,000.01 - 125,000.00 ..... 2 241,135 0.15
125,000.01 - 130,000.00 ..... 2 253,542 0.16
135,000.01 - 140,000.00 ..... 1 136,177 0.08
----- ------------ ------
Total ....................... 4,725 $162,749,801 100.00%
===== ============ ======
S-38
<PAGE>
Distribution of Original Loan-to-Value Ratios(1) - Group I Contracts
Aggregate
Principal Percentage of
Number of Balance Group I Contracts
Contracts Outstanding by Outstanding
Original As of As of Principal Balance
Loan-to-Value Ratio Cut-off Date Cut-off Date As of Cut-off Date
- ------------------- ------------ ------------ ------------------
Less than 61.000% ............ 379 $ 9,065,747 5.57%
From 61.000% - 65.999% ..... 199 5,924,247 3.64
From 66.000 - 70.999 ...... 249 8,017,670 4.93
From 71.000 - 75.999 ...... 316 10,104,108 6.21
From 76.000 - 80.999 ...... 463 15,669,705 9.63
From 81.000 - 85.999 ...... 576 19,327,150 11.88
From 86.000 - 90.999 ...... 1,157 41,853,478 25.72
From 91.000 - 100.000 ...... 1,386 52,787,695 32.43
----- ------------ ------
Total ...................... 4,725 $162,749,801 100.00%
===== ============ ======
- ----------
(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.
Cut-off Date Contract Rates - Group I Contracts
Aggregate
Principal Percentage of
Number of Balance Group I Contracts
Contracts Outstanding by Outstanding
As of As of Principal Balance
Contract Rate Cut-off Date Cut-off Date As of Cut-off Date
- ------------------- ------------ ------------ ------------------
7.001% - 8.000% ........ 4 $ 149,118 0.09%
8.001 - 9.000 ......... 528 25,527,085 15.68
9.001 - 10.000 ......... 978 38,262,881 23.51
10.001 - 11.000 ......... 1,514 50,570,294 31.07
11.001 - 12.000 ......... 766 24,771,395 15.22
12.001 - 13.000 ......... 595 16,269,045 10.00
13.001 - 14.000 ......... 204 4,822,084 2.96
14.001 - 15.000 ......... 71 1,372,636 0.84
15.001 - 16.000 ......... 18 262,630 0.16
16.001 - 17.000 ......... 8 118,607 0.07
17.001 - 18.000 ......... 34 545,134 0.33
18.001 - 19.000 ......... 5 78,891 0.05
----- ------------ ------
Total .................. 4,725 $162,749,801 100.00%
===== ============ ======
Remaining Months to Maturity - Group I Contracts
Aggregate
Principal Percentage of
Number of Balance Group I Contracts
Contracts Outstanding by Outstanding
Months Remaining As of As of Principal Balance
As of Cut-off Date Cut-off Date Cut-off Date As of Cut-off Date
- ------------------- ------------ ------------ ------------------
12 - 72 .............. 206 $ 2,443,196 1.50%
73 - 84 .............. 222 3,300,732 2.03
85 - 120 .............. 540 11,209,212 6.89
121 - 156 .............. 502 12,692,269 7.80
157 - 180 .............. 775 22,559,043 13.86
181 - 240 .............. 1,346 51,030,874 31.36
241 - 300 .............. 680 32,867,374 20.20
301 - 360 .............. 454 26,647,102 16.37
----- ------------ ------
Total ................ 4,725 $162,749,801 100.00%
===== ============ ======
S-39
<PAGE>
Group II Contracts
As of the Closing Date, the Group II Contracts will have an aggregate
unpaid principal balance as of the Cut-off Date of approximately 81,461,171.12.
77.24% of the Group II Contracts by outstanding principal balance as of the
Cut-off Date are secured by Manufactured Homes which were new at the time the
related Group II Contracts were originated and 22.76% of the Group II Contracts
by outstanding principal balance as of the Cut-off Date are secured by
Manufactured Homes which were used at the time the related Group II Contracts
were originated. Each Group II Contract has an APR of at least 7.990% and not
more than 16.000%. The weighted average APR of the Group II Contracts as of the
Cut-off Date is approximately 10.274%. The Group II Contracts have remaining
maturities as of the Cut-off Date of at least 48 months but not more than 360
months and original maturities of at least 48 months but not more than 360
months. As of the Cut-off Date, the Group II Contracts had a weighted average
original term to scheduled maturity of approximately 214 months, and a weighted
average remaining term to scheduled maturity of approximately 213 months. The
remaining term to stated maturity of a Group II Contract is as of the Cut-off
Date. The average outstanding principal balance of the Group II Contracts as of
the Cut-off Date was approximately $35,173.22. The weighted average
loan-to-value ratio at the time of origination of the Group II Contracts was
approximately 87.15%. The calculation of the loan-to-value for the Group II
Contracts is as set forth under the "The Contract Pool--Group I Contracts".
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 Group II Contracts are secured by Manufactured Homes and real estate located
in 30 states and the District of Columbia. Approximately 18.91%, 18.70%, 18.02%,
11.62%, 9.05% and 5.47% of the Group II Contracts by aggregate unpaid principal
balance as of the Cut-off Date were secured by Manufactured Homes or real estate
located in North Carolina, Tennessee, Texas, South Carolina, Kentucky and
Florida, respectively. No other state represented more than 4.56% of the Group
II Contracts by aggregate unpaid principal balance as of the Cut-off Date.
The Periodic Cap for the Group II Contracts ranged from 1% to 2% with a
weighted average of approximately 1.568%. The Months to Interest Roll for the
Group II Contracts as of the Cut-off Date ranged from 7 to 14 months with a
weighted average of approximately 11.395 months. The Payment Roll Frequency for
all Group II Contracts was 12 months.
S-40
<PAGE>
GROUP II STATISTICS
Set forth below is a description of certain additional characteristics of
the Group II Contracts as of the Cut-off Date. Percentages may not add to
100.00% due to rounding. Totals may not add to aggregate balances due to
rounding.
Geographical Distribution of Manufactured Homes
as of Origination - Group II Contracts
Aggregate
Principal Percentage of
Number of Balance Group II Contracts
Contracts Outstanding by Outstanding
As of As of Principal Balance
State Cut-off Date Cut-off Date As of Cut-off Date
- ----- ------------ ------------ ------------------
Alabama ..................... 11 $ 318,798 0.39%
Arizona ..................... 18 837,993 1.03
Arkansas .................... 15 541,402 0.66
Colorado .................... 9 414,292 0.51
Connecticut ................. 1 43,180 0.05
Delaware .................... 1 39,351 0.05
District of Columbia ........ 1 46,412 0.06
Florida ..................... 141 4,458,283 5.47
Georgia ..................... 54 1,743,742 2.14
Illinois .................... 1 51,853 0.06
Iowa ........................ 1 28,844 0.04
Indiana ..................... 8 325,088 0.40
Kentucky .................... 226 7,369,653 9.05
Louisiana ................... 85 2,745,341 3.37
Maryland .................... 2 68,507 0.08
Michigan .................... 2 103,755 0.13
Mississippi ................. 33 1,017,395 1.25
Missouri .................... 25 853,935 1.05
North Carolina .............. 391 15,405,778 18.91
New Jersey .................. 4 168,228 0.21
New Mexico .................. 12 407,989 0.50
New York .................... 1 15,170 0.02
Ohio ........................ 18 590,456 0.72
Oklahoma .................... 10 372,896 0.46
Pennsylvania ................ 1 42,211 0.05
South Carolina .............. 248 9,465,486 11.62
Tennessee ................... 445 15,235,082 18.70
Texas ....................... 454 14,679,991 18.02
Virginia .................... 88 3,710,996 4.56
West Virginia ............... 9 313,900 0.39
Wyoming ..................... 1 45,165 0.06
----- ----------- ------
Total ....................... 2,316 $81,461,171 100.00%
===== =========== ======
Years of Origination of Contracts - Group II Contracts
Aggregate
Principal Percentage of
Number of Balance Group II Contracts
Contracts Outstanding by Outstanding
As of As of Principal Balance
Year of Origination Cut-off Date Cut-off Date As of Cut-off Date
- ------------------- ------------ ------------ ------------------
1998 ....................... 2,316 $81,461,171 100.00%
----- ----------- ------
Total .................... 2,316 $81,461,171 100.00%
===== =========== ======
S-41
<PAGE>
Distribution of Original Contract Amounts - Group II Contracts
Aggregate
Principal Percentage of
Number of Balance Group II Contracts
Contracts Outstanding by Outstanding
As of As of Principal Balance
Original Contract Amount Cut-off Date Cut-off Date As of Cut-off Date
- ------------------------ ------------ ------------ ------------------
$ 5,000.01 - $ 10,000.00 .... 36 $ 292,880 0.36%
10,000.01 - 15,000.00 .... 106 1,362,604 1.67
15,000.01 - 20,000.00 .... 178 3,167,573 3.89
20,000.01 - 25,000.00 .... 273 6,192,116 7.60
25,000.01 - 30,000.00 .... 353 9,738,734 11.96
30,000.01 - 35,000.00 .... 397 12,865,508 15.79
35,000.01 - 40,000.00 .... 269 9,997,128 12.27
40,000.01 - 45,000.00 .... 194 8,237,769 10.11
45,000.01 - 50,000.00 .... 142 6,705,957 8.23
50,000.01 - 55,000.00 .... 102 5,339,461 6.55
55,000.01 - 60,000.00 .... 85 4,876,976 5.99
60,000.01 - 65,000.00 .... 64 3,981,082 4.89
65,000.01 - 70,000.00 .... 47 3,136,113 3.85
70,000.01 - 75,000.00 .... 33 2,388,987 2.93
75,000.01 - 80,000.00 .... 11 843,396 1.04
80,000.01 - 85,000.00 .... 10 826,637 1.01
85,000.01 - 90,000.00 .... 6 519,484 0.64
90,000.01 - 95,000.00 .... 4 374,053 0.46
95,000.01 - 100,000.00 .... 2 197,096 0.24
100,000.01 - 105,000.00 .... 3 310,108 0.38
105,000.01 - 110,000.00 .... 1 107,510 0.13
----- ----------- ------
Total ...................... 2,316 $81,461,171 100.00%
===== =========== ======
Distribution of Original Loan-to-Value Ratios(1) - Group II Contracts
Aggregate
Principal Percentage of
Number of Balance Group II Contracts
Contracts Outstanding by Outstanding
Original As of As of Principal Balance
Loan-to-Value Ratio Cut-off Date Cut-off Date As of Cut-off Date
------------------- ------------ ------------ ------------------
Less than 61.000% ........ 72 $ 1,748,218 2.15%
61.000% - 65.999% ......... 37 1,188,061 1.46
66.000 - 70.999 .......... 59 2,036,348 2.50
71.000 - 75.999 .......... 106 3,913,304 4.80
76.000 - 80.999 .......... 214 8,197,312 10.06
81.000 - 85.999 .......... 303 10,790,427 13.25
86.000 - 90.999 .......... 630 22,779,671 27.96
91.000 - 100.000 .......... 895 30,807,831 37.82
----- ----------- ------
Total ..................... 2,316 $81,461,171 100.00%
===== =========== ======
- ----------
(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.
S-42
<PAGE>
Cut-off Date Contract Rates - Group II Contracts
Aggregate
Principal Percentage of
Number of Balance Group II Contracts
Contracts Outstanding by Outstanding
Contract Rate As of As of Principal Balance
As of Cut-off Date Cut-off Date Cut-off Date As of Cut-off Date
------------------- ------------ ------------ ------------------
7.001% - 8.000% .......... 8 $ 398,054 0.49%
8.001 - 9.000 ........... 315 12,730,573 15.63
9.001 - 10.000 ........... 754 29,026,112 35.63
10.001 - 11.000 ........... 565 19,790,046 24.29
11.001 - 12.000 ........... 482 14,500,692 17.80
12.001 - 13.000 ........... 134 3,664,809 4.50
13.001 - 14.000 ........... 48 1,161,808 1.43
14.001 - 15.000 ........... 8 156,334 0.19
15.001 - 16.000 ........... 2 32,743 0.04
----- ----------- ------
Total ..................... 2,316 $81,461,171 100.00%
===== =========== ======
Remaining Months to Maturity - Group II Contracts
Aggregate
Principal Percentage of
Number of Balance Group II Contracts
Contracts Outstanding by Outstanding
Months Remaining As of As of Principal Balance
As of Cut-off Date Cut-off Date Cut-off Date As of Cut-off Date
------------------- ------------ ------------ ------------------
12 - 72 .................. 51 $ 601,237 0.74%
73 - 84 .................. 94 1,582,391 1.94
85 - 120 .................. 190 4,025,329 4.94
121 - 156 .................. 314 8,590,576 10.55
157 - 180 .................. 404 12,517,619 15.37
181 - 240 .................. 847 32,117,622 39.43
241 - 300 .................. 368 19,099,158 23.45
301 - 360 .................. 48 2,927,239 3.59
----- ----------- ------
Total .................... 2,316 $81,461,171 100.00%
===== =========== ======
S-43
<PAGE>
Distribution of Lifetime Cap - Group II Contracts
Aggregate
Principal Percentage of
Number of Balance Group II Contracts
Contracts Outstanding by Outstanding
As of As of Principal Balance
Lifetime Cap Cut-off Date Cut-off Date As of Cut-off Date
------------ ------------ ------------ ------------------
12.501% - 13.000% ........... 1 $ 32,174 0.04%
13.001 - 13.500 ............ 11 418,822 0.51
13.501 - 14.000 ............ 60 2,130,328 2.62
14.001 - 14.500 ............ 178 7,020,100 8.62
14.501 - 15.000 ............ 241 9,211,111 11.31
15.001 - 15.500 ............ 427 16,943,053 20.80
15.501 - 16.000 ............ 313 11,603,284 14.24
16.001 - 16.500 ............ 172 5,617,183 6.90
16.501 - 17.000 ............ 390 13,500,388 16.57
17.001 - 17.500 ............ 277 8,323,907 10.22
17.501 - 18.000 ............ 97 2,821,097 3.46
18.001 - 18.500 ............ 34 948,670 1.16
18.501 - 19.000 ............ 76 2,052,290 2.52
19.001 - 19.500 ............ 19 407,589 0.50
19.501 - 20.000 ............ 12 308,963 0.38
20.001 - 20.500 ............ 5 64,273 0.08
20.501 - 21.000 ............ 2 38,791 0.05
21.501 - 22.000 ............ 1 19,147 0.02
----- ----------- ------
Total ..................... 2,316 $81,461,171 100.00%
===== =========== ======
Distribution of Gross Margins - Group II Contracts
Aggregate
Principal Percentage of
Number of Balance Group II Contracts
Contracts Outstanding by Outstanding
As of As of Principal Balance
Gross Margin Cut-off Date Cut-off Date As of Cut-off Date
------------ ------------ ------------ ------------------
2.001% - 2.500% ........... 5 $ 224,798 0.28%
2.501 - 3.000 ............ 87 3,829,018 4.70
3.001 - 3.500 ............ 214 8,443,412 10.36
3.501 - 4.000 ............ 452 17,377,091 21.33
4.001 - 4.500 ............ 280 10,835,560 13.30
4.501 - 5.000 ............ 121 4,339,941 5.33
5.001 - 5.500 ............ 458 16,063,518 19.72
5.501 - 6.000 ............ 368 11,235,781 13.79
6.001 - 6.500 ............ 130 3,871,780 4.75
6.501 - 7.000 ............ 38 991,660 1.22
7.001 - 7.500 ............ 101 2,804,544 3.44
7.501 - 8.000 ............ 36 887,156 1.09
8.001 - 8.500 ............ 16 367,837 0.45
8.501 - 9.000 ............ 5 78,342 0.10
9.001 - 9.500 ............ 3 77,992 0.10
9.501 - 10.000 ............ 1 13,595 0.02
10.001 - 10.500 ............ 1 19,147 0.02
----- ----------- ------
Total ..................... 2,316 $81,461,171 100.00%
===== =========== ======
S-44
<PAGE>
Distribution of Next Contract Rate Change - Group II Contracts
Aggregate
Principal Percentage of
Number of Balance Group II Contracts
Contracts Outstanding by Outstanding
Month of Next As of As of Principal Balance
Contract Rate Change Cut-off Date Cut-off Date As of Cut-off Date
- -------------------- ------------ ------------ ------------------
February 1, 1999 ............ 1 $ 9,244 0.01%
March 1, 1999 ............... 3 93,344 0.11
April 1, 1999 ............... 49 1,542,501 1.89
May 1, 1999 ................. 521 18,000,637 22.10
June 1, 1999 ................ 691 23,559,644 28.92
July 1, 1999 ................ 706 25,611,681 31.44
August 1, 1999 .............. 272 9,964,065 12.23
September 1, 1999 ........... 73 2,680,054 3.29
----- ----------- ------
Total ..................... 2,316 $81,461,171 100.00%
===== =========== ======
Distribution of Periodic Cap - Group II Contracts
Aggregate
Principal Percentage of
Number of Balance Group II Contracts
Contracts Outstanding by Outstanding
As of As of Principal Balance
Periodic Cap Cut-off Date Cut-off Date As of Cut-off Date
- ------------ ------------ ------------ ------------------
1.000% ....................... 1,003 $35,159,429 43.16%
2.000 ........................ 1,313 46,301,742 56.84
----- ----------- ------
Total ...................... 2,316 $81,461,171 100.00%
===== =========== ======
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,
--------------------------------------------------------------------------------
1992 1993 1994 1995 1996 1997 1998
------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Principal Balance of Contracts
Originated (in thousands) ........ $177,311 $230,733 $292,435 $345,260 $476,467 $646,624 $801,865
Number of Contracts Originated .... 9,230 10,880 12,401 13,857 16,910 21,691 24,304
Average Contract Size(1) .......... $ 19,210 $ 21,207 $ 23,582 $ 24,916 $ 28,177 $ 29,811 $ 32,993
Average Interest Rate(1) .......... 13.40% 11.61% 10.84% 12.24% 10.72% 11.10% 10.51%
</TABLE>
- --------
(1) As of period end.
S-45
<PAGE>
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 June 30,
----------------------------------------------------------------------
1992 1993 1994 1995 1996 1997 1998(2)
-------- -------- -------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Total Number of Contracts
Being Serviced(1) ................... 46,623 52,433 60,165 66,960 74,154 85,912 108,045
Originated by the Company ........... 36,335 42,656 47,944 55,923 64,298 75,455 86,245
Acquired from other institutions .... 10,288 9,777 12,221 11,037 9,856 10,457 21,800
</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) Includes Access Financial Contracts. See "--Recent Developments" below.
Delinquency Experience(1)
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------------------
1992 1993 1994 1995 1996 1997 1998(8) 1998(9)
------- ------- ------- ------ ------ ------ -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Number of Contracts
Outstanding(2)(3) ...................... 46,623 52,433 60,165 66,960 74,154 85,912 99,819 108,045
Company Originations ................... 36,335 42,656 47,944 55,923 64,298 75,455 86,245 86,245
Acquisitions from other institutions ... 10,288 9,777 12,221 11,037 9,856 10,457 13,574 21,800
Number of Contracts Delinquent(4):
Total 30 to 59 days past due ........... 680 610 772 819 953 1,159 1,287 2,045
Company Originations ................... 452 391 353 565 761 982 1,048 1,048
Acquisitions from other institutions ... 228 219 419 254 192 177 239 997
Total 60 to 89 days past due ............. 206 136 209 227 285 284 326 568
Company Originations ................... 117 97 109 167 238 236 268 268
Acquisitions from other institutions ... 89 39 100 60 47 48 58 300
Total 90 days or more past due ........... 569 407 498 625 516 590 787 1,486
Company Originations ................... 243 213 203 315 341 440 547 547
Acquisitions from other institutions ... 326 194 295 310 175 150 240 939
Total Contracts Delinquent(5) ............ 1,455 1,153 1,479 1,671 1,754 2,033 2,400 4,099
Company Originations ................... 812 701 665 1,047 1,340 1,658 1,863 1,863
Acquisitions from other institutions ... 643 452 814 624 414 375 537 2,236
Total Contracts Delinquent(6) ............ 1,119 857 1,184 1,208 1,511 1,789 2,153 3,603
Company Originations ................... 713 595 556 873 1,211 1,503 1,711 1,711
Acquisitions from other institutions ... 406 262 628 335 300 286 442 1,892
Total Delinquencies as a Percent(7) of
Contracts Outstanding(5) ............... 3.12% 2.20% 2.46% 2.50% 2.37% 2.37% 2.40% 3.79%
Company Originations ................... 2.23% 1.64% 1.39% 1.87% 2.08% 2.20% 2.16% 2.16%
Acquisitions from other institutions ... 6.25% 4.62% 6.66% 5.65% 4.20% 3.59% 3.96% 10.26%
Total Delinquencies as a Percent(7)
of Contracts Outstanding(6) ............ 2.40% 1.63% 1.97% 1.80% 2.04% 2.08% 2.16% 3.34%
Company Originations ................... 1.96% 1.39% 1.16% 1.56% 1.88% 1.99% 1.98% 1.98%
Acquisitions from other institutions ... 3.95% 2.68% 5.14% 3.04% 3.04% 2.74% 3.26% 8.68%
</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) Excludes Access Financial Contracts. See "--Recent Developments" below.
(9) Includes Access Financial Contracts. See "--Recent Developments" below.
S-46
<PAGE>
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 the Year Ended June 30,
-----------------------------------------------------------------------------------------
1992 1993 1994 1995 1996 1997 1998(9)
------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Total Number of Contracts
Serviced(2)(3) .................. 46,623 52,433 60,165 66,960 74,154 85,912 99,819
Company Originations ............ 36,335 42,656 47,944 55,923 64,298 75,455 86,245
Acquisitions from other .........
institutions .................. 10,288 9,777 12,221 11,037 9,856 10,457 13,574
Aggregate Principal Balance of
Contracts Serviced(4) ........... $707,273 $812,430 $1,006,794 $1,200,893 $1,456,103 $1,910,438 $2,354,831
Company Originations ............ $569,475 $691,052 $ 852,536 $1,074,302 $1,351,324 $1,749,645 $2,190,183
Acquisitions from other
institutions .................. $137,798 $121,378 $ 154,258 $ 126,591 $ 104,779 $ 160,793 $ 164,648
Net Losses from Contract
Liquidations(5):
Total Dollars(6) ................ $ 7,248 $ 5,220 $ 2,758 $ 2,262 $ 2,052 $ 715 $2,132,635
Company Originations(6) ......... $ 2,141 $ 1,129 $ 528 $ 362 $ (442) $ (1,622) $1,969,914
Acquisitions from other
institutions .................. $ 5,107 $ 4,091 $ 2,230 $ 1,900 $ 2,494 $ 2,337 $ 162,721
Percentage of Average Principal
Balance(7) ...................... 1.10% 0.64% 0.30% 0.20% 0.15% 0.04% 0.84%
Company Originations ............ 0.41% 0.17% 0.07% 0.04% (0.04) % (0.10)% 0.77%
Acquisitions from other
institutions .................. 3.83% 2.96% 1.62% 1.35% 2.16% 1.76% 1.70%
Total Number of Contracts in
Repossession(3) ................. 652 523 565 540 709 937 1,682(10)
Company Originations(8) ......... 379 333 388 422 635 885 1,229
Acquisitions from Other
Institutions .................. 273 190 177 118 74 52 453
</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 Access, the
Resolution Trust Corporation and 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.
(6) For all periods through June 30, 1997, the calculation of net losses has
been determined after all accrued and unpaid interest was written off and
does not include repossession and other liquidation expenses. For these
periods, data with respect to repossession and other liquidation expenses
generally was not maintained by dealers on a separately identifiable basis,
and, therefore, this information was not available to the Company. The
Company believes that it would not be unusual for such expenses to have
been equal to 15% of the Scheduled Principal Balance of a defaulted
Contract. However, actual expenses may have been higher or lower. For the
period ended June 30, 1998, data with respect to repossession and other
liquidation expenses has been maintained by dealers and made available to
the Company. The Company has, therefore, included dealer repossession and
liquidation expense data in the numbers calculated for the period ended
June 30, 1998. Because of the different computational method used, amounts
shown for the period ended June 30, 1998 are not comparable to prior
periods.
(7) As a percentage of the average principal balance of all contracts being
serviced during the period. Percentages have been annualized.
(8) Includes repossessions from contracts serviced by others for which the
Company is contingently liable.
(9) Except as set forth in (10) below, excludes Access Financial Contracts. See
"--Recent Developments" below.
(10) Includes Access Financial Contracts. See "--Recent Developments" below.
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.
S-47
<PAGE>
Recent Developments
On May 28, 1998, the Company purchased approximately $245 million of
manufactured housing installment sales contracts (the "Access Financial
Contracts") from Access Financial Lending Corp. ("Access"). Additionally, on
June 1, 1998, the Company entered into an agreement to service approximately
$267 million of securitized manufactured housing installment sales contracts
that had been serviced by Access. The Company has recently hired additional
servicing personnel due to the increase in the number of contracts serviced by
the Company. None of the Access Financial Contracts are included in the Contract
Pool.
In addition, during May 1998, the Company relocated its principal office
to 500 Alcoa Trail, Maryville, Tennessee 37804.
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.
For Year Ended June 30,
-----------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Ratio of Earnings to Fixed
Charges ........................ 10.12 21.64 36.00 39.99 41.24
YIELD AND PREPAYMENT CONSIDERATIONS
The Contracts have maturities at origination ranging from 36 to 360
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 average life of the Certificates. The
weighted average life of, and, if purchased at other than par, the yield to
maturity on, Offered Certificates will relate to the rate of payment of
principal in the Contracts in the related Contract Group, including, for this
purpose, prepayments, liquidations due to defaults, casualties and
condemnations. 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.
As with fixed rate obligations generally, the rate of prepayment on a pool
of Contracts with fixed rates (such as the Group I Contracts) is affected by
prevailing market rates for Contracts of a comparable term and risk level. When
the market interest rate is below the contract APR, Obligors may have an
increased incentive to refinance their contracts. Depending on prevailing market
rates, the future outlook for market rates and economic conditions generally,
some Obligors may sell or refinance their contracts in order to realize their
equity in the manufactured house, to meet cash flow needs or to make other
investments.
As is the case with conventional fixed rate obligations, adjustable rate
obligations (such as the Group II Contracts) may also be subject to a greater
rate of principal prepayments in a declining interest rate environment. For
example, if prevailing interest rates fall significantly, adjustable rate
contracts could be subject to higher prepayment rates than if prevailing
interest rates remain constant because the availability of fixed-rate contracts
at competitive interest rates may encourage Obligors to refinance their
adjustable rate contract to "lock in" a lower fixed interest rate. However, no
assurance can be given as to the level of prepayments that the Group II
Contracts will experience.
S-48
<PAGE>
The allocation of distributions to the Certificateholders in accordance
with the Agreement will have the effect of accelerating the amortization of the
Senior Certificates in the sequence indicated under "Description of the
Certificates--Distributions" from the amortization that would be applicable if
distributions in respect of the applicable Formula Principal Distribution Amount
were made pro rata according to the respective Principal Balances of each Class
of Certificates. As described under "Description of the Certificates--Group I
Certificates and the Senior/Subordinate Structure" and "--Group II Certificates
and the Senior/Subordinate Structure" herein, to the extent that, on any
Remittance Date, the Group I or Group II Available Distribution Amount, as
applicable, is not sufficient to permit a full distribution of the applicable
Formula Principal Distribution Amount or the portion thereof due on such
Remittance Date to the Class of Offered Certificates entitled to such
distribution, the effect will be to delay the amortization of such Class of
Offered Certificates. If a purchaser of a Class of Offered Certificates
purchases them at a discount and calculates its anticipated yield to maturity
based on an assumed rate of payment of principal on such Offered 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.
In addition to the foregoing factors affecting the weighted average life
of the Senior Certificates, the overcollateralization provisions of the Trust
result in a limited acceleration of the Group II Certificates relative to the
amortization of the Group II Contracts in early months of the transaction. The
accelerated amortization is achieved by the application of certain excess
interest to the payment of the Group II Certificate Principal Balance. This
acceleration feature creates overcollateralization which results from the excess
of the Group II Contract Balance over the Group II Certificate Principal
Balance. Once the required level of overcollateralization is reached, the
acceleration feature will cease, unless necessary to maintain the required level
of overcollateralization.
The effective yield to each holder of a Group I Certificate (other than a
Class I A-1 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 it accrues.
The rate of distributions of principal of the Offered Certificates and the
yield to maturity of the Offered Certificates also will be directly related to
the rate of payment of principal (including prepayments) of the Contracts. The
rate of principal distributions on the Offered 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 default). The
Contracts may be prepaid by the Obligors at any time without payment of any
prepayment fee or penalty.
The Class I M-1 Certificateholders will not receive any distributions of
principal until the Class I M-1 and Class I B Principal Distribution Test is met
or the Class I A Principal Balance is reduced to zero. The rate of principal
payments on the Class I M-1 Certificates, the aggregate amount of distributions
on the Class I M-1 Certificates and the yield to maturity of the Class I M-1
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. If a purchaser of Class I M-1 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 subordination of the Class I B Certificates, its actual yield to maturity
will be lower than that so calculated. The timing of losses on Liquidated
Contracts 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. If the protection afforded to the Class I M-1 Certificateholders
by the subordination of the Class I B Certificates is exhausted, the Class I M-1
Certificateholders will bear all losses and delinquencies on the Contracts and
will incur a loss on their investment.
The Class I B-1 Certificateholders will not receive any distributions of
principal until the Class I M-1 and Class I B Principal Distribution Test is met
or the Class I A Principal Balance and the Class I M-1 Principal Balance is
reduced to zero. The rate of principal payments on the Class I B-1 Certificates,
the aggregate amount of distributions on the Class I B-1 Certificates and the
yield to maturity of the Class I B-1 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. If a purchaser of Class I B-1
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
S-49
<PAGE>
amount of losses actually incurred is not entirely covered by the subordination
of the Class I B-2 Certificates, its actual yield to maturity will be lower than
that so calculated. The timing of losses on Liquidated Contracts 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. If the
protection afforded to the Class I B-1 Certificateholders by the subordination
of the Class I B-2 Certificates is exhausted, the Class I B-1 Certificateholders
will bear all losses and delinquencies on the Contracts and will incur a loss on
their investment.
The Class II B Certificateholders will not receive any distributions of
principal until the Class II B Principal Distribution Test is met or the Class
II A-1 Principal Balance is reduced to zero. Once the Class II B Principal
Distribution Test is met, however, there is a likelihood that the Class II A
Certificates will not receive distributions of principal for a period of time.
The rate of principal payments on the Class II B-1 Certificates, the aggregate
amount of distributions on the Class II B-1 Certificates and the yield to
maturity of the Class II B-1 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. If a purchaser of Class II B-1
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 subordination of the Class II B-2 Certificates
and the Class II B-3 Certificates, its actual yield to maturity will be lower
than that so calculated. The timing of losses on Liquidated Contracts 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. If the
protection afforded to the Class II B-1 Certificateholders by the subordination
of the Class II B-2 Certificates and the Class II B-3 Certificates is exhausted,
the Class II B-1 Certificateholders will bear all losses and delinquencies on
the Contracts and will incur a loss on their investment. The rate of principal
payments on the Class II B-2 Certificates, the aggregate amount of distributions
on the Class II B-2 Certificates and the yield to maturity of the Class II B-2
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. If a purchaser of Class II B-2 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 subordination of the Class II B-3 Certificates, its actual yield to maturity
will be lower than that so calculated. The timing of losses on Liquidated
Contracts 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. If the protection afforded to the Class II B-2 Certificateholders
by the subordination of the Class II B-3 Certificates is exhausted, the Class II
B-2 Certificateholders will bear all losses and delinquencies on the Contracts
and will incur a loss on their investment. There can be no assurance that the
delinquency or repossession experience set forth under "Vanderbilt Mortgage and
Finance, Inc." in the Prospectus 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.
As described herein under the "Description of the Certificates--Group I
Certificates and the Senior/Subordinate Structure--Subordination of the Group I
Senior/Subordinate Certificates," on any Remittance Date on or after the
Remittance Date, if any, on which the Class I 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 I A Certificateholders then entitled
to such amount, the Class I A-6 Certificateholders will absorb (i) all losses on
each Liquidated Contract in the amount by which its Liquidation Proceeds (net of
Liquidation Expenses and applicable Advances) are less than its unpaid principal
balance plus accrued and unpaid interest thereon at the weighted average
Remittance Rate and the percentage rate used to calculate the monthly servicing
fee and (ii) other shortfalls in the Available Distribution Amount and will
incur a loss on their investments. See "Description of the
Certificates--Distributions" herein.
On any Remittance Date on or after the Remittance Date, if any, on which
the Principal Balance of the Senior Certificates of a particular Group is
greater than the Pool Scheduled Principal Balance for such Group, if the related
Available Distribution Amount is not sufficient to permit a full distribution of
the related Formula Principal Distribution Amount to such Senior
Certificateholders, such Senior Certificateholders will absorb (i) all losses on
each Liquidated Contract in such Group in the amount by which its Liquidation
Proceeds (net of Liquidation Expenses and applicable Advances) are less than its
unpaid principal balance plus accrued and unpaid interest thereon at the
weighted average Remittance Rate and the percentage rate used to calculate the
monthly servicing fee and (ii) other shortfalls in the related Available
Distribution Amount and will incur a loss on their investments. See "Description
of the Certificates--Distributions" herein.
S-50
<PAGE>
The Company (if it is no longer the Servicer) and the Servicer (whether or
not the Company remains the Servicer) each has the option to repurchase the
Contracts with respect to a Group and any other property constituting the Trust
Fund if on any Remittance Date the Pool Scheduled Principal Balance is less than
10% of the Cut-off Date Pool Principal Balance, as applicable. 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 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.
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 or a Semi-Monthly 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 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 related Classes of
Certificates with respect to such Due Period. In addition, because the principal
balance of the Bi-weekly Contracts are reduced on a bi-weekly basis and the
principal balance of the Semi-Monthly Contracts on a semi-monthly 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
such Certificates in the amounts set forth herein under "Description of the
Certificates--Distributions" and to make a full distribution to the related
Certificateholders of the related Formula Principal Distribution Amounts
respectively allocable to them. 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 or the Semi-Monthly Contracts in any Due Period would be great enough,
in the absence of delinquencies and Liquidation Losses, to reduce the related
Available Distribution Amount for a Remittance Date below the amount required to
be distributed to the related 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, and each scheduled payment on a Semi-Monthly
Contract in any Due Period will contain only one-half of one month's interest
rather than one month's interest. In addition, the second, and in some Due
Periods the third, (in the case of a Bi-weekly Contract) 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 or a Semi-Monthly 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. 100%
S-51
<PAGE>
of the Prepayment Model assumes prepayment rates of 3.7% per annum of the then
unpaid principal balance of such Contracts in the first month of the life of the
Contracts and an additional 0.1% per annum in each month thereafter until the
24th month. Beginning in the 24th month and in each month thereafter during the
life of the Contracts, 100% of the Prepayment Model assumes a constant
prepayment rate of 6.00% per annum.
As used in the following tables "0% of the Prepayment Model" assumes no
prepayments on the Contracts; "100% of the Prepayment Model" assumes the
Contracts will prepay at rates equal to 100% of the Prepayment Model assumed
prepayment rates; "200% of the Prepayment Model" assumes the Contracts will
prepay at rates equal to 200% of the Prepayment Model assumed prepayment rates;
and "225% of the Prepayment Model" assumes the Contracts will prepay at rates
equal to 225% 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 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.
Group I Assumptions
The tables set forth below assume that there are no delinquencies on the
Group I Contracts and that there will be a sufficient Group I Available
Distribution Amount to distribute interest on the Group I Certificates and the
Group I Formula Principal Distribution Amount to the Certificateholders then
entitled thereto.
The percentages and weighted average lives in the following tables were
determined assuming that (i) scheduled interest and principal payments on the
Group I 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)
the Servicer or the Company exercises its right of optional termination
described above; (iii) the Group I Contracts will, as of the Cut-off Date, be
grouped into nine pools having the additional characteristics set forth below
under "Assumed Contract Characteristics for Group I"; (iv) one-month LIBOR is
5.64844%; (v) the Original Certificate Principal Balance and the Remittance Rate
of each Class of Group I Certificates is as set forth under
"Summary--Certificates Offered"; (vi) no interest shortfalls will arise in
connection with prepayment in full of the Contracts; (vii) there will be no
losses on the Group I Contracts; (viii) the Group I Performance Tests are
satisfied; (ix) the Group II Contracts prepay at 225% of the Prepayment Model
except in the case of the 0% of the Prepayment Model scenario in which the Group
II Contracts prepay at 0% of the Prepayment Model; and (x) the Group I
Certificates are purchased on August 27, 1998. No representation is made that
the Contracts will experience delinquencies or losses at the respective rates
assumed above or at any other rates.
S-52
<PAGE>
Assumed Contract Characteristics for Group I
Remaining Original
Term to Term to
Current Maturity Maturity
Pool Principal Balance APR (Months) (Months)
---- ----------------- --- -------- --------
1 ............. $ 5,722,895.48 11.605% 73 74
2 ............. 11,107,209.16 11.259 114 115
3 ............. 15,242,656.89 11.247 145 146
4 ............. 19,918,655.83 10.926 178 179
5 ............. 22,872,444.15 10.715 206 206
6 ............. 28,371,464.35 10.887 238 239
7 ............. 16,282,820.52 9.628 259 260
8 ............. 16,584,553.46 10.329 299 300
9 ............. 26,647,101.65 10.045 357 358
---------------
Total ..... $162,749,801.49
===============
Since the t ables were prepared on the basis of the assumptions in the
preceding paragraph, there are discrepancies between the characteristics of the
actual Group I Con tracts and the characteristics of the Group I Contracts
assumed in preparing the tables. Any such discrepancy may have an effect upon
the percentages of the Original Class I A-1 Principal Balance, Original Class I
A-2 Principal B alance, Original Class I A-3 Principal Balance, Original Class I
A-4 Principal B alance, Original Class I A-5 Principal Balance, Original Class I
A-6 Principal B alance, Original Class I M-1 Principal Balance, Original Class I
B-1 Principal Balance and Original Class I B-2 Principal Balance outstanding and
weighted average lives of the Class I A-1 Certificates, Class I A-2
Certificates, Class I A-Certificates, Class I A-4 Certificates, Class I A-5
Certificates, Class I A-6 Certificates, Class I M-1 Certificates, Class I B-1
Certificates and Class I B-2 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 I A-1 Certificates, Class I A-2 Certificates, Class I A-3
Certificates, Class I A-4 Certificates, Class I A-5 Certificates, Class I A-6
Certificates, Class I M-1 Certificates, Class I B-1 Certificates and Class I B-2
Certificates may be made earlier or later than as indicated in the tables.
It is not likely that Contracts will prepay 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 the same as the weighted average remaining term to
maturity of the Assumed Contract Characteristics.
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 Offered Certificates and set forth the
percentage of the Original Class I A-1 Principal Balance, Original Class I A-2
Principal Balance, Original Class I A-3 Principal Balance, Original Class I A-4
Principal Balance, Original Class I A-5 Principal Balance, Original Class I A-6
Principal Balance, Original Class I M-1 Principal Balance, Original Class I B-1
Principal Balance and Original Class I B-2 Principal Balance that would be
outstanding after each of the dates shown at the indicated percentages of the
Prepayment Model.
S-53
<PAGE>
Percent of the Original Principal Balance of the Class I A-1
Certificates at the Respective Percentages of the
Prepayment Model Set Forth Below:
Prepayments (% of Prepayment Model)
-----------------------------------
0% 150% 175% 200% 250% 275%
-- ---- ---- ---- ---------
Initial Percentage ......................... 100 100 100 100 100 100
August 7, 1999 ............................. 89 61 56 52 42 38
August 7, 2000 ............................. 77 17 8 0 0 0
August 7, 2001 ............................. 63 0 0 0 0 0
August 7, 2002 ............................. 48 0 0 0 0 0
August 7, 2003 ............................. 31 0 0 0 0 0
August 7, 2004 ............................. 12 0 0 0 0 0
August 7, 2005 ............................. 0 0 0 0 0 0
August 7, 2006 ............................. 0 0 0 0 0 0
August 7, 2007 ............................. 0 0 0 0 0 0
August 7, 2008 ............................. 0 0 0 0 0 0
August 7, 2009 ............................. 0 0 0 0 0 0
August 7, 2010 ............................. 0 0 0 0 0 0
August 7, 2011 ............................. 0 0 0 0 0 0
August 7, 2012 ............................. 0 0 0 0 0 0
August 7, 2013 ............................. 0 0 0 0 0 0
August 7, 2014 ............................. 0 0 0 0 0 0
August 7, 2015 ............................. 0 0 0 0 0 0
August 7, 2016 ............................. 0 0 0 0 0 0
August 7, 2017 ............................. 0 0 0 0 0 0
August 7, 2018 ............................. 0 0 0 0 0 0
August 7, 2019 ............................. 0 0 0 0 0 0
August 7, 2020 ............................. 0 0 0 0 0 0
August 7, 2021 ............................. 0 0 0 0 0 0
August 7, 2022 ............................. 0 0 0 0 0 0
August 7, 2023 ............................. 0 0 0 0 0 0
August 7, 2024 ............................. 0 0 0 0 0 0
August 7, 2025 ............................. 0 0 0 0 0 0
August 7, 2026 ............................. 0 0 0 0 0 0
August 7, 2027 ............................. 0 0 0 0 0 0
August 7, 2028 ............................. 0 0 0 0 0 0
Weighted Average Life (years)(1) ........... 3.7 1.2 1.1 1.0 0.8 0.8
- -------------
(1) The weighted average life of the Class I 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 I A-1 Certificates to
the related Remittance Date, (ii) summing the results and (iii) dividing
the sum by the Original Class I A-1 Principal Balance.
S-54
<PAGE>
Percent of the Original Principal Balance of the Class I A-2
Certificates at the Respective Percentages of the
Prepayment Model Set Forth Below:
Prepayments (% of Prepayment Model)
-------------------------------------------
0% 150% 175% 200% 250% 275%
-- ---- ---- ---- ---- ----
Initial Percentage ............. 100 100 100 100 100 100
August 7, 1999 ................. 100 100 100 100 100 100
August 7, 2000 ................. 100 100 100 98 80 72
August 7, 2001 ................. 100 75 62 50 26 14
August 7, 2002 ................. 100 37 22 7 0 0
August 7, 2003 ................. 100 3 0 0 0 0
August 7, 2004 ................. 100 0 0 0 0 0
August 7, 2005 ................. 94 0 0 0 0 0
August 7, 2006 ................. 76 0 0 0 0 0
August 7, 2007 ................. 55 0 0 0 0 0
August 7, 2008 ................. 34 0 0 0 0 0
August 7, 2009 ................. 14 0 0 0 0 0
August 7, 2010 ................. 0 0 0 0 0 0
August 7, 2011 ................. 0 0 0 0 0 0
August 7, 2012 ................. 0 0 0 0 0 0
August 7, 2013 ................. 0 0 0 0 0 0
August 7, 2014 ................. 0 0 0 0 0 0
August 7, 2015 ................. 0 0 0 0 0 0
August 7, 2016 ................. 0 0 0 0 0 0
August 7, 2017 ................. 0 0 0 0 0 0
August 7, 2018 ................. 0 0 0 0 0 0
August 7, 2019 ................. 0 0 0 0 0 0
August 7, 2020 ................. 0 0 0 0 0 0
August 7, 2021 ................. 0 0 0 0 0 0
August 7, 2022 ................. 0 0 0 0 0 0
August 7, 2023 ................. 0 0 0 0 0 0
August 7, 2024 ................. 0 0 0 0 0 0
August 7, 2025 ................. 0 0 0 0 0 0
August 7, 2026 ................. 0 0 0 0 0 0
August 7, 2027 ................. 0 0 0 0 0 0
August 7, 2028 ................. 0 0 0 0 0 0
Weighted Average Life (years)(1) 9.2 3.7 3.3 3.0 2.5 2.4
- --------------
(1) The weighted average life of the Class I 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 I A-2 Certificates to
the related Remittance Date, (ii) summing the results and (iii) dividing
the sum by the Original Class I A-2 Principal Balance.
S-55
<PAGE>
Percent of the Original Principal Balance of the Class I A-3
Certificates at the Respective Percentages of the
Prepayment Model Set Forth Below:
Prepayments (% of Prepayment Model)
-------------------------------------------
0 150% 175% 200% 250% 275%
- ---- ---- ---- ---- ----
Initial Percentage ............. 100 100 100 100 100 100
August 7, 1999 ................. 100 100 100 100 100 100
August 7, 2000 ................. 100 100 100 100 100 100
August 7, 2001 ................. 100 100 100 100 100 100
August 7, 2002 ................. 100 100 100 100 64 41
August 7, 2003 ................. 100 100 75 47 0 0
August 7, 2004 ................. 100 60 30 2 0 0
August 7, 2005 ................. 100 22 0 0 0 0
August 7, 2006 ................. 100 0 0 0 0 0
August 7, 2007 ................. 100 0 0 0 0 0
August 7, 2008 ................. 100 0 0 0 0 0
August 7, 2009 ................. 100 0 0 0 0 0
August 7, 2010 ................. 92 0 0 0 0 0
August 7, 2011 ................. 64 0 0 0 0 0
August 7, 2012 ................. 34 0 0 0 0 0
August 7, 2013 ................. 3 0 0 0 0 0
August 7, 2014 ................. 0 0 0 0 0 0
August 7, 2015 ................. 0 0 0 0 0 0
August 7, 2016 ................. 0 0 0 0 0 0
August 7, 2017 ................. 0 0 0 0 0 0
August 7, 2018 ................. 0 0 0 0 0 0
August 7, 2019 ................. 0 0 0 0 0 0
August 7, 2020 ................. 0 0 0 0 0 0
August 7, 2021 ................. 0 0 0 0 0 0
August 7, 2022 ................. 0 0 0 0 0 0
August 7, 2023 ................. 0 0 0 0 0 0
August 7, 2024 ................. 0 0 0 0 0 0
August 7, 2025 ................. 0 0 0 0 0 0
August 7, 2026 ................. 0 0 0 0 0 0
August 7, 2027 ................. 0 0 0 0 0 0
August 7, 2028 ................. 0 0 0 0 0 0
Weighted Average Life 13.4 6.3 5.6 5.0 4.2 3.9
- --------------
(1) The weighted average life of the Class I 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 I A-3 Certificates to
the related Remittance Date, (ii) summing the results and (iii) dividing
the sum by the Original Class I A-3 Principal Balance.
S-56
<PAGE>
Percent of the Original Principal Balance of the Class I A-4
Certificates at the Respective Percentages of the
Prepayment Model Set Forth Below:
Prepayments (% of Prepayment Model)
-------------------------------------------
0% 150% 175% 200% 250% 275%
-- ---- ---- ---- ---- ----
Initial Percentage ............. 100 100 100 100 100 100
August 7, 1999 ................. 100 100 100 100 100 100
August 7, 2000 ................. 100 100 100 100 100 100
August 7, 2001 ................. 100 100 100 100 100 100
August 7, 2002 ................. 100 100 100 100 100 100
August 7, 2003 ................. 100 100 100 100 93 60
August 7, 2004 ................. 100 100 100 100 32 1
August 7, 2005 ................. 100 100 88 50 0 0
August 7, 2006 ................. 100 81 40 4 0 0
August 7, 2007 ................. 100 35 0 0 0 0
August 7, 2008 ................. 100 0 0 0 0 0
August 7, 2009 ................. 100 0 0 0 0 0
August 7, 2010 ................. 100 0 0 0 0 0
August 7, 2011 ................. 100 0 0 0 0 0
August 7, 2012 ................. 100 0 0 0 0 0
August 7, 2013 ................. 100 0 0 0 0 0
August 7, 2014 ................. 67 0 0 0 0 0
August 7, 2015 ................. 25 0 0 0 0 0
August 7, 2016 ................. 0 0 0 0 0 0
August 7, 2017 ................. 0 0 0 0 0 0
August 7, 2018 ................. 0 0 0 0 0 0
August 7, 2019 ................. 0 0 0 0 0 0
August 7, 2020 ................. 0 0 0 0 0 0
August 7, 2021 ................. 0 0 0 0 0 0
August 7, 2022 ................. 0 0 0 0 0 0
August 7, 2023 ................. 0 0 0 0 0 0
August 7, 2024 ................. 0 0 0 0 0 0
August 7, 2025 ................. 0 0 0 0 0 0
August 7, 2026 ................. 0 0 0 0 0 0
August 7, 2027 ................. 0 0 0 0 0 0
August 7, 2028 ................. 0 0 0 0 0 0
Weighted Average Life (years)(1) 16.4 8.7 7.8 7.0 5.7 5.2
- ---------------
(1) The weighted average life of the Class I A-4 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 I A-4 Certificates to
the related Remittance Date, (ii) summing the results and (iii) dividing
the sum by the Original Class I A-4 Principal Balance.
S-57
<PAGE>
Percent of the Original Principal Balance of the Class I A-5
Certificates at the Respective Percentages of the
Prepayment Model Set Forth Below:
Prepayments (% of Prepayment Model)
-------------------------------------------
0% 150% 175% 200% 250% 275%
-- ---- ---- ---- ---- ----
Initial Percentage ............. 100 100 100 100 100 100
August 7, 1999 ................. 100 100 100 100 100 100
August 7, 2000 ................. 100 100 100 100 100 100
August 7, 2001 ................. 100 100 100 100 100 100
August 7, 2002 ................. 100 100 100 100 100 100
August 7, 2003 ................. 100 100 100 100 100 100
August 7, 2004 ................. 100 100 100 100 100 100
August 7, 2005 ................. 100 100 100 100 88 67
August 7, 2006 ................. 100 100 100 100 58 39
August 7, 2007 ................. 100 100 98 73 33 16
August 7, 2008 ................. 100 96 70 48 12 0
August 7, 2009 ................. 100 71 47 27 0
August 7, 2010 ................. 100 47 26 9 0 0
August 7, 2011 ................. 100 29 9 0 0 0
August 7, 2012 ................. 100 0 0 0 0 0
August 7, 2013 ................. 100 0 0 0 0
August 7, 2014 ................. 100 0 0 0 0 0
August 7, 2015 ................. 100 0 0 0 0 0
August 7, 2016 ................. 94 0 0 0 0 0
August 7, 2017 ................. 70 0 0 0 0 0
August 7, 2018 ................. 45 0 0 0 0 0
August 7, 2019 ................. 0 0 0 0 0 0
August 7, 2020 ................. 0 0 0 0 0 0
August 7, 2021 ................. 0 0 0 0 0 0
August 7, 2022 ................. 0 0 0 0 0 0
August 7, 2023 ................. 0 0 0 0 0 0
August 7, 2024 ................. 0 0 0 0 0 0
August 7, 2025 ................. 0 0 0 0 0 0
August 7, 2026 ................. 0 0 0 0 0 0
August 7, 2027 ................. 0 0 0 0 0 0
August 7, 2028 ................. 0 0 0 0 0 0
Weighted Average Life (years)(1) 19.6 12.0 11.0 10.0 8.4 7.7
- ---------------
(1) The weighted average life of the Class I A-5 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 I A-5 Certificates to
the related Remittance Date, (ii) summing the results and (iii) dividing
the sum by the Original Class I A-5 Principal Balance.
S-58
<PAGE>
Percent of the Original Principal Balance of the Class I A-6
Certificates at the Respective Percentages of the
Prepayment Model Set Forth Below:
Prepayments (% of Prepayment Model)
-------------------------------------------
0% 150% 175% 200% 250% 275%
-- ---- ---- ---- ---- ----
Initial Percentage ............. 100 100 100 100 100 100
August 7, 1999 ................. 100 100 100 100 100 100
August 7, 2000 ................. 100 100 100 100 100 100
August 7, 2001 ................. 100 100 100 100 100 100
August 7, 2002 ................. 100 100 100 100 100 100
August 7, 2003 ................. 100 100 100 100 100 100
August 7, 2004 ................. 100 100 100 100 100 100
August 7, 2005 ................. 100 100 100 100 100 100
August 7, 2006 ................. 100 100 100 100 100 100
August 7, 2007 ................. 100 100 100 100 100 100
August 7, 2008 ................. 100 100 100 100 100 98
August 7, 2009 ................. 100 100 100 100 94 0
August 7, 2010 ................. 100 100 100 100 0 0
August 7, 2011 ................. 100 100 100 0 0 0
August 7, 2012 ................. 100 0 0 0 0 0
August 7, 2013 ................. 100 0 0 0 0 0
August 7, 2014 ................. 100 0 0 0 0 0
August 7, 2015 ................. 100 0 0 0 0 0
August 7, 2016 ................. 100 0 0 0 0 0
August 7, 2017 ................. 100 0 0 0 0 0
August 7, 2018 ................. 100 0 0 0 0 0
August 7, 2019 ................. 0 0 0 0 0 0
August 7, 2020 ................. 0 0 0 0 0 0
August 7, 2021 ................. 0 0 0 0 0 0
August 7, 2022 ................. 0 0 0 0 0 0
August 7, 2023 ................. 0 0 0 0 0 0
August 7, 2024 ................. 0 0 0 0 0 0
August 7, 2025 ................. 0 0 0 0 0 0
August 7, 2026 ................. 0 0 0 0 0 0
August 7, 2027 ................. 0 0 0 0 0 0
August 7, 2028 ................. 0 0 0 0 0 0
Weighted Average Life (years)(1) 20.7 13.8 13.1 12.4 11.3 10.8
- -----------------
(1) The weighted average life of the Class I A-6 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 I A-6 Certificates to
the related Remittance Date, (ii) summing the results and (iii) dividing
the sum by the Original Class I A-6 Principal Balance.
S-59
<PAGE>
Percent of the Original Principal Balance of the Class I M-1
Certificates at the Respective Percentages of the
Prepayment Model Set Forth Below:
Prepayments (% of Prepayment Model)
-------------------------------------------
0% 150% 175% 200% 250% 275%
-- ---- ---- ---- ---- ----
Initial Percentage ............. 100 100 100 100 100 100
August 7, 1999 ................. 100 100 100 100 100 100
August 7, 2000 ................. 100 100 100 100 100 100
August 7, 2001 ................. 100 100 100 100 100 100
August 7, 2002 ................. 100 100 100 100 100 100
August 7, 2003 ................. 100 100 100 100 100 100
August 7, 2004 ................. 100 86 85 84 81 79
August 7, 2005 ................. 100 75 72 70 65 63
August 7, 2006 ................. 100 64 61 58 52 49
August 7, 2007 ................. 100 54 51 47 41 38
August 7, 2008 ................. 100 46 42 39 33 30
August 7, 2009 ................. 100 38 35 31 26 0
August 7, 2010 ................. 91 32 28 25 0 0
August 7, 2011 ................. 83 26 23 0 0 0
August 7, 2012 ................. 75 0 0 0 0 0
August 7, 2013 ................. 66 0 0 0 0 0
August 7, 2014 ................. 58 0 0 0 0 0
August 7, 2015 ................. 50 0 0 0 0 0
August 7, 2016 ................. 43 0 0 0 0 0
August 7, 2017 ................. 36 0 0 0 0 0
August 7, 2018 ................. 29 0 0 0 0 0
August 7, 2019 ................. 0 0 0 0 0 0
August 7, 2020 ................. 0 0 0 0 0 0
August 7, 2021 ................. 0 0 0 0 0 0
August 7, 2022 ................. 0 0 0 0 0 0
August 7, 2023 ................. 0 0 0 0 0 0
August 7, 2024 ................. 0 0 0 0 0 0
August 7, 2025 ................. 0 0 0 0 0 0
August 7, 2026 ................. 0 0 0 0 0 0
August 7, 2027 ................. 0 0 0 0 0 0
August 7, 2028 ................. 0 0 0 0 0 0
Weighted Average Life (years)(1) 16.9 9.8 9.4 9.0 8.4 8.2
- --------------
(1) The weighted average life of the Class I M-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 I M-1 Certificates to
the related Remittance Date, (ii) summing the results and (iii) dividing
the sum by the Original Class I M-1 Principal Balance.
S-60
<PAGE>
Percent of the Original Principal Balance of the Class I B-1
Certificates at the Respective Percentages of the
Prepayment Model Set Forth Below:
Prepayments (% of Prepayment Model)
-------------------------------------------
0% 150% 175% 200% 250% 275%
-- ---- ---- ---- ---- ----
Initial Percentage ............. 100 100 100 100 100 100
August 7, 1999 ................. 100 100 100 100 100 100
August 7, 2000 ................. 100 100 100 100 100 100
August 7, 2001 ................. 100 100 100 100 100 100
August 7, 2002 ................. 100 100 100 100 100 100
August 7, 2003 ................. 100 100 100 100 100 100
August 7, 2004 ................. 100 70 67 64 58 54
August 7, 2005 ................. 100 44 39 34 23 18
August 7, 2006 ................. 100 21 14 7 0 0
August 7, 2007 ................. 100 0 0 0 0 0
August 7, 2008 ................. 100 0 0 0 0 0
August 7, 2009 ................. 100 0 0 0 0 0
August 7, 2010 ................. 81 0 0 0 0 0
August 7, 2011 ................. 63 0 0 0 0 0
August 7, 2012 ................. 44 0 0 0 0 0
August 7, 2013 ................. 24 0 0 0 0 0
August 7, 2014 ................. 8 0 0 0 0 0
August 7, 2015 ................. 0 0 0 0 0 0
August 7, 2016 ................. 0 0 0 0 0 0
August 7, 2017 ................. 0 0 0 0 0 0
August 7, 2018 ................. 0 0 0 0 0 0
August 7, 2019 ................. 0 0 0 0 0 0
August 7, 2020 ................. 0 0 0 0 0 0
August 7, 2021 ................. 0 0 0 0 0 0
August 7, 2022 ................. 0 0 0 0 0 0
August 7, 2023 ................. 0 0 0 0 0 0
August 7, 2024 ................. 0 0 0 0 0 0
August 7, 2025 ................. 0 0 0 0 0 0
August 7, 2026 ................. 0 0 0 0 0 0
August 7, 2027 ................. 0 0 0 0 0 0
August 7, 2028 ................. 0 0 0 0 0 0
Weighted Average Life (years)(1) 13.7 6.8 6.6 6.5 6.3 6.2
- ----------------
(1) The weighted average life of the Class I B-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 I B-1 Certificates to
the related Remittance Date, (ii) summing the results and (iii) dividing
the sum by the Original Class I B-1 Principal Balance.
S-61
<PAGE>
Percent of the Original Principal Balance of the Class I B-2
Certificates at the Respective Percentages of the
Prepayment Model Set Forth Below:
Prepayments (% of Prepayment Model)
-------------------------------------------
0% 150% 175% 200% 250% 275%
-- ---- ---- ---- ---- ----
Initial Percentage ............. 100 100 100 100 100 100
August 7, 1999 ................. 100 100 100 100 100 100
August 7, 2000 ................. 100 100 100 100 100 100
August 7, 2001 ................. 100 100 100 100 100 100
August 7, 2002 ................. 100 100 100 100 100 100
August 7, 2003 ................. 100 100 100 100 100 100
August 7, 2004 ................. 100 100 100 100 100 100
August 7, 2005 ................. 100 100 100 100 100 100
August 7, 2006 ................. 100 100 100 100 96 91
August 7, 2007 ................. 100 100 93 87 76 71
August 7, 2008 ................. 100 84 77 71 60 55
August 7, 2009 ................. 100 71 64 58 47 0
August 7, 2010 ................. 100 58 52 46 0 0
August 7, 2011 ................. 100 48 44 0 0 0
August 7, 2012 ................. 100 0 0 0 0 0
August 7, 2013 ................. 100 0 0 0 0 0
August 7, 2014 ................. 100 0 0 0 0 0
August 7, 2015 ................. 91 0 0 0 0 0
August 7, 2016 ................. 79 0 0 0 0 0
August 7, 2017 ................. 67 0 0 0 0 0
August 7, 2018 ................. 54 0 0 0 0 0
August 7, 2019 ................. 0 0 0 0 0 0
August 7, 2020 ................. 0 0 0 0 0 0
August 7, 2021 ................. 0 0 0 0 0 0
August 7, 2022 ................. 0 0 0 0 0 0
August 7, 2023 ................. 0 0 0 0 0 0
August 7, 2024 ................. 0 0 0 0 0 0
August 7, 2025 ................. 0 0 0 0 0 0
August 7, 2026 ................. 0 0 0 0 0 0
August 7, 2027 ................. 0 0 0 0 0 0
August 7, 2028 ................. 0 0 0 0 0 0
Weighted Average Life (years)(1) 19.5 12.2 11.6 11.1 10.2 9.9
- --------------
(1) The weighted average life of the Class I B-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 I B-2 Certificates to
the related Remittance Date, (ii) summing the results and (iii) dividing
the sum by the Original Class I B-2 Principal Balance.
S-62
<PAGE>
Group II Assumptions
The tables set forth below assume that there are no delinquencies on the
Group II Contracts and that there will be a sufficient Group II Available
Distribution Amount to distribute interest on the Group II Certificates and the
Group II Formula Principal Distribution Amount to the Certificateholders then
entitled thereto.
The percentages and weighted average lives in the following tables were
determined assuming that (i) scheduled interest and principal payments on the
Group II 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)
the Servicer or the Company exercises its right of optional termination
described above; (iii) the Group II Contracts will, as of the Cut-off Date, be
grouped into six pools having the additional characteristics set forth below
under "Assumed Contract Characteristics for Group II"; (iv) one-month LIBOR is
5.64844% and five year CMT is 5.36%; (v) the Original Certificate Principal
Balance and the Remittance Rate of each Class of Group II Certificates is as set
forth under "Summary--Certificates Offered"; (vi) no interest shortfalls will
arise in connection with prepayment in full of the Group II Contracts; (vii)
there will be no losses on the Group II Contracts; (viii) the Group II
Performance Tests are satisfied; (ix) the Group I Contracts prepay at 200% of
the Prepayment Model except in the case of the 0% of the Prepayment Model
scenario in which the Group I Contracts prepay at 0% of the Prepayment Model;
and (x) the Group II Certificates are purchased on August 27, 1998. No
representation is made that the Contracts will experience delinquencies or
losses at the respective rates assumed above or at any other rates.
Assumed Contract Characteristics for Group II
Remaining Original
Current Term to Term to
Principal Current Maturity Maturity
Pool Balance APR (Months) (Months)
- ---------------- ------- --- -------- --------
1 .............. $ 1,645,089.22 10.288% 208 210
2 .............. 18,000,637.41 10.229 213 21
3 .............. 23,559,643.92 10.268 212 212
4 .............. 25,611,681.28 10.208 214 214
5 .............. 9,964,065.41 10.419 212 212
6 .............. 2,680,053.88 10.698 218 218
--------------
Total ....... $81,461,171.12
==============
First
Lifetime Periodic Adjustment Adjustment
Rate Rate Date Frequency
Pool Margin Cap Cap (Months) (Months) Index
---- ------ --- --- -------- -------- -----
Interes Payment Interest Payment
--------------- -------- -------
1 .... 4.800% 16.154% 1.632% 8 9 12 12 CMT-5 Year
2 .... 4.688 16.008 1.604 9 10 12 12 CMT-5 Year
3 .... 4.671 16.035 1.607 10 11 12 12 CMT-5 Year
4 .... 4.605 15.970 1.566 11 12 12 12 CMT-5 Year
5 .... 4.804 16.146 1.445 12 13 12 12 CMT-5 Year
6 .... 5.077 16.366 1.437 13 14 12 12 CMT-5 Year
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 II A-1 Principal Balance, Original Class II B-1 Principal
Balance, Original Class II B-2 Principal Balance and Original Class II B-3
Principal Balance outstanding and weighted average lives of the Class II A-1
Certificates, Class II B-1 Certificates, Class II B-2 Certificates and Class II
B-3 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 II A-1 Certificates, Class II B-1 Certificates, Class II B-2
Certificates and Class II B-3 Certificates may be made earlier or later than as
indicated in the tables.
S-63
<PAGE>
It is not likely that Contracts will prepay 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 the same as the weighted average remaining term to
maturity of the Assumed Contract Characteristics.
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 Offered Certificates and set forth the
percentage of the Original Class II A-1 Principal Balance, Original Class II B-1
Principal Balance, Original Class II B-2 Principal Balance and Original Class II
B-3 Principal Balance that would be outstanding after each of the dates shown at
the indicated percentages of the Prepayment Model.
S-64
<PAGE>
Percent of the Original Principal Balance of the Class II A-1
Certificates at the Respective Percentages of the
Prepayment Model Set Forth Below:
Prepayments (% of Prepayment Model)
-----------------------------------
0% 150% 175% 225% 250% 275%
-- ---- ---- ---- ---- ----
Initial Percentage ........................ 100 100 100 100 100 100
August 7, 1999 ............................ 92 84 82 80 78 77
August 7, 2000 ............................ 89 71 68 63 60 57
August 7, 2001 ............................ 86 59 55 47 43 39
August 7, 2002 ............................ 82 47 42 33 29 25
August 7, 2003 ............................ 78 37 31 21 17 13
August 7, 2004 ............................ 73 32 30 21 17 13
August 7, 2005 ............................ 68 28 25 20 17 13
August 7, 2006 ............................ 62 24 21 16 14 13
August 7, 2007 ............................ 56 21 18 13 11 10
August 7, 2008 ............................ 49 17 15 11 9 8
August 7, 2009 ............................ 41 14 12 8 7 6
August 7, 2010 ............................ 35 12 10 6 5 0
August 7, 2011 ............................ 30 9 7 0 0 0
August 7, 2012 ............................ 25 0 0 0 0 0
August 7, 2013 ............................ 19 0 0 0 0 0
August 7, 2014 ............................ 13 0 0 0 0 0
August 7, 2015 ............................ 6 0 0 0 0 0
August 7, 2016 ............................ 0 0 0 0 0 0
August 7, 2017 ............................ 0 0 0 0 0 0
August 7, 2018 ............................ 0 0 0 0 0 0
August 7, 2019 ............................ 0 0 0 0 0 0
August 7, 2020 ............................ 0 0 0 0 0 0
August 7, 2021 ............................ 0 0 0 0 0 0
August 7, 2022 ............................ 0 0 0 0 0 0
August 7, 2023 ............................ 0 0 0 0 0 0
August 7, 2024 ............................ 0 0 0 0 0 0
August 7, 2025 ............................ 0 0 0 0 0 0
August 7, 2026 ............................ 0 0 0 0 0 0
August 7, 2027 ............................ 0 0 0 0 0 0
August 7, 2028 ............................ 0 0 0 0 0 0
Weighted Average Life (years)(1) .......... 9.5 5.0 4.6 3.9 3.5 3.2
- ---------------
(1) The weighted average life of the Class II 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 II A-1
Certificates to the related Remittance Date, (ii) summing the results and
(iii) dividing the sum by the Original Class II A-1 Principal Balance.
S-65
<PAGE>
Percent of the Original Principal Balance of the Class II B-1
Certificates at the Respective Percentages of the
Prepayment Model Set Forth Below:
Prepayments (% of Prepayment Model)
--------------------------------------------
0% 150% 175% 225% 250% 275%
-- ---- ---- ---- ---- ----
Initial Percentage ............. 100 100 100 100 100 100
August 7, 1999 ................. 100 100 100 100 100 100
August 7, 2000 ................. 100 100 100 100 100 100
August 7, 2001 ................. 100 100 100 100 100 100
August 7, 2002 ................. 100 100 100 100 100 100
August 7, 2003 ................. 100 100 100 100 100 100
August 7, 2004 ................. 100 69 53 44 46 48
August 7, 2005 ................. 100 45 29 2 0 0
August 7, 2006 ................. 100 24 8 0 0 0
August 7, 2007 ................. 100 4 0 0 0 0
August 7, 2008 ................. 100 0 0 0 0 0
August 7, 2009 ................. 100 0 0 0 0 0
August 7, 2010 ................. 84 0 0 0 0 0
August 7, 2011 ................. 56 0 0 0 0 0
August 7, 2112 ................. 28 0 0 0 0 0
August 7, 2013 ................. 0 0 0 0 0 0
August 7, 2014 ................. 0 0 0 0 0 0
August 7, 2015 ................. 0 0 0 0 0 0
August 7, 2016 ................. 0 0 0 0 0 0
August 7, 2017 ................. 0 0 0 0 0 0
August 7, 2018 ................. 0 0 0 0 0 0
August 7, 2019 ................. 0 0 0 0 0 0
August 7, 2020 ................. 0 0 0 0 0 0
August 7, 2021 ................. 0 0 0 0 0 0
August 7, 2022 ................. 0 0 0 0 0 0
August 7, 2023 ................. 0 0 0 0 0 0
August 7, 2024 ................. 0 0 0 0 0 0
August 7, 2025 ................. 0 0 0 0 0 0
August 7, 2026 ................. 0 0 0 0 0 0
August 7, 2027 ................. 0 0 0 0 0 0
August 7, 2028 ................. 0 0 0 0 0 0
Weighted Average Life (years)(1) 13.2 6.9 6.3 5.9 5.9 6.0
- --------------
(1) The weighted average life of the Class II B-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 II B-1
Certificates to the related Remittance Date, (ii) summing the results and
(iii) dividing the sum by the Original Class II B-1 Principal Balance.
S-66
<PAGE>
Percent of the Original Principal Balance of the Class II B-2
Certificates at the Respective Percentages of the
Prepayment Model Set Forth Below:
Prepayments (% of Prepayment Model)
--------------------------------------------
0% 150% 175% 225% 250% 275%
-- ---- ---- ---- ---- ----
Initial Percentage ............. 100 100 100 100 100 100
August 7, 1999 ................. 100 100 100 100 100 100
August 7, 2000 ................. 100 100 100 100 100 100
August 7, 2001 ................. 100 100 100 100 100 100
August 7, 2002 ................. 100 100 100 100 100 100
August 7, 2003 ................. 100 100 100 100 100 100
August 7, 2004 ................. 100 100 100 100 100 100
August 7, 2005 ................. 100 100 100 100 91 100
August 7, 2006 ................. 100 100 100 59 33 11
August 7, 2007 ................. 100 100 76 20 0 0
August 7, 2008 ................. 100 69 38 0 0 0
August 7, 2009 ................. 100 33 5 0 0 0
August 7, 2010 ................. 100 0 0 0 0 0
August 7, 2011 ................. 100 0 0 0 0 0
August 7, 2012 ................. 100 0 0 0 0 0
August 7, 2013 ................. 91 0 0 0 0 0
August 7, 2014 ................. 13 0 0 0 0 0
August 7, 2015 ................. 0 0 0 0 0 0
August 7, 2016 ................. 0 0 0 0 0 0
August 7, 2017 ................. 0 0 0 0 0 0
August 7, 2018 ................. 0 0 0 0 0 0
August 7, 2019 ................. 0 0 0 0 0 0
August 7, 2020 ................. 0 0 0 0 0 0
August 7, 2021 ................. 0 0 0 0 0 0
August 7, 2022 ................. 0 0 0 0 0 0
August 7, 2023 ................. 0 0 0 0 0 0
August 7, 2024 ................. 0 0 0 0 0 0
August 7, 2025 ................. 0 0 0 0 0 0
August 7, 2026 ................. 0 0 0 0 0 0
August 7, 2027 ................. 0 0 0 0 0 0
August 7, 2028 ................. 0 0 0 0 0 0
Weighted Average Life (years)(1) 15.5 10.5 9.7 8.2 7.7 7.5
- -----------------
(1) The weighted average life of the Class II B-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 II B-2
Certificates to the related Remittance Date, (ii) summing the results and
(iii) dividing the sum by the Original Class II B-2 Principal Balance.
S-67
<PAGE>
Percent of the Original Principal Balance of the Class II B-3
Certificates at the Respective Percentages of the
Prepayment Model Set Forth Below:
Prepayments (% of Prepayment Model)
--------------------------------------------
0% 150% 175% 225% 250% 275%
-- ---- ---- ---- ---- ----
Initial Percentage ............. 100 100 100 100 100 100
August 7, 1999 ................. 100 100 100 100 100 100
August 7, 2000 ................. 100 100 100 100 100 100
August 7, 2001 ................. 100 100 100 100 100 100
August 7, 2002 ................. 100 100 100 100 100 100
August 7, 2003 ................. 100 100 100 100 100 100
August 7, 2004 ................. 100 100 100 100 100 100
August 7, 2005 ................. 100 100 100 100 100 100
August 7, 2006 ................. 100 100 100 100 100 100
August 7, 2007 ................. 100 100 100 100 98 84
August 7, 2008 ................. 100 100 100 91 77 65
August 7, 2009 ................. 100 100 100 72 60 48
August 7, 2010 ................. 100 100 82 55 43 0
August 7, 2011 ................. 100 78 64 0 0 0
August 7, 2012 ................. 100 0 0 0 0 0
August 7, 2013 ................. 100 0 0 0 0 0
August 7, 2014 ................. 100 0 0 0 0 0
August 7, 2015 ................. 48 0 0 0 0 0
August 7, 2016 ................. 0 0 0 0 0 0
August 7, 2017 ................. 0 0 0 0 0 0
August 7, 2018 ................. 0 0 0 0 0 0
August 7, 2019 ................. 0 0 0 0 0 0
August 7, 2020 ................. 0 0 0 0 0 0
August 7, 2021 ................. 0 0 0 0 0 0
August 7, 2022 ................. 0 0 0 0 0 0
August 7, 2023 ................. 0 0 0 0 0 0
August 7, 2024 ................. 0 0 0 0 0 0
August 7, 2025 ................. 0 0 0 0 0 0
August 7, 2026 ................. 0 0 0 0 0 0
August 7, 2027 ................. 0 0 0 0 0 0
August 7, 2028 ................ 0 0 0 0 0 0
Weighted Average Life (years)(1) 16.9 13.2 12.7 11.7 11.1 10.6
- --------------
(1) The weighted average life of the Class II B-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 II B-3
Certificates to the related Remittance Date, (ii) summing the results and
(iii) dividing the sum by the Original Class II B-3 Principal Balance.
S-68
<PAGE>
DESCRIPTION OF THE CERTIFICATES
The Certificates will be issued pursuant to the Agreement. A copy of a
general form of a Pooling and Servicing Agreement has been filed with the
Securities and Exchange Commission. A copy of the execution form of the
Agreement (without certain exhibits) will be filed 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
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 Offered 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 undivided percentage interest (the "Percentage Interest") of each Class of
Certificates in the distributions on such Certificates will be equal to the
percentage obtained from dividing the denomination of such Certificate by the
Original Certificate Principal Balance of such Class of Certificates. Definitive
Certificates, if issued, will be transferable and exchangeable at the corporate
trust office of the Trustee. 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 received on or after the Cut-off Date, (ii)
the amounts held from time to time in trust accounts (with respect to the Group
I Certificates, the "Group I Certificate Account" and with respect to the Group
II Certificates, the "Group II 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 and (iv) the proceeds
of all insurance policies described herein.
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 (other than certain documents related to the Land-and-Home
Contracts which will be held by a custodian on behalf of the Trustee).
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 September 1998,
to the persons in whose names the Certificates are registered at the close of
business on the related 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 Offered Certificates 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) (a) approximately 65.00% of the Group I Cut-off Date Principal Balance is
attributable to loans to purchase new Manufactured Homes and approximately
35.00% of the Group I Cut-off Date Principal Balance is attributable to loans to
purchase used Manufactured Homes and (b) approximately 77.24% of the Group II
Cut-off Date Principal Balance is attributable to loans to purchase new
Manufactured Homes and approximately 22.76% of the Group II Cut-off Date
Principal Balance is attributable to loans to purchase used Manufactured Homes;
(iii) no Contract has a remaining maturity of more than 360 months; (iv) the
date of each Contract is on or after April 23, 1990; and (v) no adverse
selection procedures were employed in selecting the Contracts.
S-69
<PAGE>
Payments on Contracts
The Trustee will establish and maintain the Certificate Accounts (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 short-term debt has a rating of A-1 by S&P and F1+ by Fitch, and which
is subject to examination by federal or state authorities or a depository
institution otherwise acceptable to S&P and Fitch, (ii) in the corporate trust
department of the Trustee or (iii) at an institution otherwise acceptable to S&P
and Fitch (an "Eligible Institution"). Funds in each 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; federal funds, certificates of
deposit, time deposits and bankers' acceptances sold by eligible financial
institutions; commercial paper rated A-1+ by S&P and F1+ by Fitch; money market
funds acceptable to the Rating Agencies; and other obligations acceptable to the
Rating Agencies.
All payments in respect of principal and interest on the Contracts
received by the Servicer, including Principal Prepayments and Liquidation
Proceeds (net of Liquidation Expenses), will be paid into the applicable
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
applicable Certificate Account. The Servicer will deposit the Monthly Advance
(described under "Advances" below), if any, in the applicable 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 for a Group is the sum of (a) the
Monthly Advance relating to the Contracts in such Group for such Remittance Date
and (b) the amount in the related Certificate Account on the close of business
on the last day of the immediately preceding Due Period less the sum of (i)
scheduled payments for Contracts in such Group that are due in a Due Period
subsequent to such Due Period; (ii) payments on Contracts in such Group 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 related 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 Contracts in such Group; (iv) if the Company is no longer the
Servicer, the related Monthly Servicing Fee equal to 1/12th of the product of
1.25% and the Pool Scheduled Principal Balance for such Group for the
immediately preceding Remittance Date; (v) reimbursements to the Servicer for
Nonrecoverable Advances and Monthly Advances relating to the Contracts in such
Group in respect of Liquidated Contracts, to the extent permitted by the
Agreement; (vi) the Interest Deficiency Amount with respect to such Group or
portion thereof, if any, paid from collections on the preceding Remittance Date;
and (vii) certain expenses reimbursable to the Company as provided in the
Agreement.
The Trustee or its Paying Agent will withdraw funds from the applicable
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),
(v), (vi) and (vii) 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.
S-70
<PAGE>
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 to 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.
Interest Distributions:
With respect to each Remittance Date, the Fixed Rate Certificates will
accrue interest in respect of each calendar month preceding such Remittance
Date. With respect to each Remittance Date (other than the first Remittance
Date), the Floating Rate Certificates will accrue interest from the Remittance
Date in the preceding calendar month through the day preceding the Remittance
Date in the current calendar month. With respect to the first Remittance Date,
the Floating Rate Certificates will accrue no interest. Distributions to a Class
of Certificateholders will be applied first to the payment of interest and, if
any payment is then due, then to the payment of principal. Interest on the Fixed
Rate Certificates will be calculated on the basis of a 360-day year consisting
of twelve 30-day months. Interest on the Floating Rate Certificates will be
calculated on the basis of the number of actual days elapsed during the Due
Period and a 360-day year.
With respect to the Floating Rate Certificates and any Remittance Date,
the "Interest Period" shall be the period from the Remittance Date preceding
such Remittance Date (or in the case of the first Remittance Date, from the
Closing Date) through the day preceding such Remittance Date. With respect to
each Class of Fixed Rate Certificates and any Remittance Date, the "Interest
Period" shall be the period from the first day of the calendar month preceding
the month of such Remittance Date through the last day of such calendar month on
the basis of a 360-day year consisting of twelve 30-day months.
On each Remittance Date, holders of each Class of Certificates will be
entitled to receive, to the extent of the Group I Available Distribution Amount
or Group II Available Distribution Amount, as applicable, (i) interest accrued
on such Class during the related Interest Period at the then applicable
Remittance Rate on the Principal Balance of such Class immediately prior to that
Remittance Date (the "Interest Distribution Amount" for such Class and
Remittance Date), plus (ii) any amounts distributable under clause (i) above or
this clause (ii) on such Class on the previous Remittance Date but not
previously distributed, plus, to the extent legally permissible, interest
accrued on any such amount during the related Interest Period at the then
applicable Remittance Rate (the "Carryover Interest Distribution Amount" for
such Class and Remittance Date).
If an Interest Deficiency Event occurs on any Remittance Date with respect
to any Class of Subordinate Certificates other than the Limited Guarantee
Certificates, collections received after the end of the related Due Period and
prior to such Remittance Date will be applied, up to a limited amount as set
forth in the Agreement, to remedy such deficiency in order of Class seniority
within the related Group of Certificates. An "Interest Deficiency Event" means,
with respect to a Class of Subordinate Certificates other than the Limited
Guarantee Certificates and a Remittance Date, that after distribution of the
related Available Distribution Amount in the order of priority set forth below,
there remains unpaid any of the Interest Distribution Amount and Carryover
Interest Distribution Amount for such Class and Remittance Date (collectively,
the "Interest Deficiency Amount").
Priority of Distributions:
A. On each Remittance Date on which the Class I M-1 and Class I B
Principal Distribution Test is not met, the Group I Available Distribution
Amount will be distributed in the following amounts in the following order of
priority:
(i) interest accrued during the related Interest Period on the Class
I A-1, Class I A-2, Class I A-3, Class I A-4 and Class I A-5 Certificates,
at their respective Remittance Rates on the outstanding Class I A-1, Class
I A-2, Class I A-3, Class I A-4 and Class I A-5 Principal Balances,
respectively, together with any previously undistributed shortfalls in
interest due on the Class I A-1, Class I A-2, Class I A-3, Class I A-4 and
Class I A-5 Certificates, respectively, in respect of prior Remittance
Dates; if the Group I Available Distribution Amount is not sufficient to
distribute the full amount of interest due on the Class I A-1, Class I
A-2, Class I A-3, Class
S-71
<PAGE>
I A-4 and Class I A-5 Certificates, the Group I Available Distribution
Amount will be distributed on such Classes of Certificates pro rata on the
basis of the interest due thereon;
(ii) the Group I Formula Principal Distribution Amount in the
following order of priority:
(a) to the Class I A-1 Certificates until the Class I A-1
Principal Balance is reduced to zero;
(b) to the Class I A-2 Certificates until the Class I A-2
Principal Balance is reduced to zero;
(c) to the Class I A-3 Certificates until the Class I A-3
Principal Balance is reduced to zero;
(d) to the Class I A-4 Certificates until the Class I A-4
Principal Balance is reduced to zero; and
(e) to the Class I A-5 Certificates until the Class I A-5
Principal Balance is reduced to zero;
(iii) interest accrued during the related Interest Period on the
Class I A-6 Principal Balance to the Class I A-6 Certificates at the
related Remittance Rate, together with any previously undistributed
shortfalls in interest due on the Class I A-6 Certificates in respect of
prior Remittance Dates;
(iv) the remainder of the Group I Formula Principal Distribution
Amount, if any, to the Class I A-6 Certificates until the Class I A-6
Principal Balance is reduced to zero;
(v) interest accrued during the related Interest Period on the Class
I M-1 Principal Balance to the Class I M-1 Certificates at the related
Remittance Rate, together with any previously undistributed shortfalls in
interest due on the Class I M-1 Certificates in respect of prior
Remittance Dates;
(vi) the remainder of the Group I Formula Principal Distribution
Amount, if any, to the Class I M-1 Certificates until the Class I M-1
Principal Balance is reduced to zero;
(vii) interest accrued during the related Interest Period on the
Class I B-1 Principal Balance to the Class I B-1 Certificates at the
related Remittance Rate, together with any previously undistributed
shortfalls in interest due on the Class I B-1 Certificates in respect of
prior Remittance Dates;
(viii) the remainder of the Group I Formula Principal Distribution
Amount, if any, to the Class I B-1 Certificates until the Class I B-1
Principal Balance is reduced to zero;
(ix) interest accrued during the related Interest Period on the
Class I B-2 Principal Balance to the Class I B-2 Certificates at the
related Remittance Rate, together with any previously undistributed
shortfalls in interest due on the Class I B-2 Certificates in respect of
prior Remittance Dates;
(x) the remainder of the Group I Formula Principal Distribution
Amount, if any, to the Class I B-2 Certificates until the Class I B-2
Principal Balance is reduced to zero;
(xi) any Group I Monthly Excess Spread (as defined below) to fund
any Group II Available Funds Shortfall;
(xii) any remaining Group I Monthly Excess Spread to fund any
unfunded Accelerated Principal Payment (as defined below) on the Group II
Certificates after giving effect to the distribution described in clause
C(ix) or D(ix), as applicable, below;
(xiii) so long as the Company is the Servicer, any remaining
available funds up to the amount equal to 1/12th of the product of 1.25%
and the Group I Pool Scheduled Principal Balance for such Remittance Date
(the "Group I Monthly Servicing Fee"), to the Servicer;
(xiv) the amount of any reimbursement to CHI for Enhancement
Payments with respect to the Class I B-2 Certificates as provided in the
Agreement;
(xv) so long as the Company is the Servicer, any remaining available
funds up to the amount of the Group II Monthly Servicing Fee (as defined
herein), if any, remaining unpaid after giving effect to the distribution
described in clause C(xii) or D(xii), as applicable, below, to the
Servicer;
(xvi) the amount of any reimbursement to CHI for Enhancement
Payments with respect to the Class II B-3 Certificates as provided in the
Agreement, which remains unpaid after giving effect to the distribution
described in clause C(xiii) or D(xiii), as applicable, below; and
S-72
<PAGE>
(xvii) any remaining available funds to the holder of the Class R
Certificate, which will initially be a special purpose subsidiary of the
Company.
B. On each Remittance Date on which the Class I B Principal Distribution
Test is met, the Group I Available Distribution Amount will be distributed in
the following amounts in the following order of priority:
(i) interest accrued during the related Interest Period on the Class
I A-1, Class I A-2, Class I A-3, Class I A-4 and Class I A-5 Certificates,
at their respective Remittance Rates on the outstanding Class I A-1, Class
I A-2, Class I A-3, Class I A-4 and Class I A-5 Principal Balances,
respectively, together with any previously undistributed shortfalls in
interest due on the Class I A-1, Class I A-2, Class I A-3, Class I A-4 and
Class I A-5 Certificates, respectively, in respect of prior Remittance
Dates; if the Group I Available Distribution Amount is not sufficient to
distribute the full amount of interest due on the Class I A-1, Class I
A-2, Class I A-3, Class I A-4 and Class I A-5 Certificates, the Group I
Available Distribution Amount will be distributed on such Classes of
Certificates pro rata on the basis of the interest due thereon;
(ii) the Class I A Percentage of the Group I Formula Principal
Distribution Amount in the following order of priority:
(a) to the Class I A-1 Certificates until the Class I A-1
Principal Balance is reduced to zero;
(b) to the Class I A-2 Certificates until the Class I A-2
Principal Balance is reduced to zero;
(c) to the Class I A-3 Certificates until the Class I A-3
Principal Balance is reduced to zero;
(d) to the Class I A-4 Certificates until the Class I A-4
Principal Balance is reduced to zero; and
(e) to the Class I A-5 Certificates until the Class I A-5
Principal Balance is reduced to zero;
(iii) interest accrued during the related Interest Period on the
Class I A-6 Principal Balance to the Class I A-6 Certificates at the
related Remittance Rate, together with any previously undistributed
shortfalls in interest due on the Class I A-6 Certificates in respect of
prior Remittance Dates;
(iv) the remainder of the Class I A Percentage of the Group I
Formula Principal Distribution Amount, if any, to the Class I A-6
Certificates until the Class I A-6 Principal Balance is reduced to zero;
(v) interest accrued during the related Interest Period on the Class
I M-1 Principal Balance to the Class I M-1 Certificates at the related
Remittance Rate, together with any previously undistributed shortfalls in
interest due on the Class I M-1 Certificates in respect of prior
Remittance Dates;
(vi) the Class I M-1 Percentage of the Group I Formula Principal
Distribution Amount to the Class I M-1 Certificates until the Class I M-1
Principal Balance is reduced to zero;
(vii) interest accrued during the related Interest Period on the
Class I B-1 Principal Balance to the Class I B-1 Certificates at the
related Remittance Rate, together with any previously undistributed
shortfalls in interest due on the Class I B-1 Certificates in respect of
prior Remittance Dates;
(viii) the Class I B Percentage of the Group I Formula Principal
Distribution Amount to the Class I B-1 Certificates until the Class I B-1
Principal Balance is reduced to zero;
(ix) interest accrued during the related Interest Period on the
Class I B-2 Principal Balance to the Class I B-2 Certificates at the
related Remittance Rate, together with any previously undistributed
shortfalls in interest due on the Class I B-2 Certificates in respect of
prior Remittance Dates;
(x) the remainder of the Group I Formula Principal Distribution
Amount to the Class I B-2 Certificates until the Class I B-2 Principal
Balance is reduced to zero; provided, however, if the Class I A and Class
I M-1 Principal Balances have not been reduced to zero on or before a
Remittance Date, to the extent that allocations in respect of principal to
the Class I B-2 Certificates would reduce the Class I B-2 Principal
Balance below the Class I B-2 Floor Amount, then the amount of such excess
principal will instead be distributed, pro rata, to the Class I A
Certificates and the Class I M-1 Certificates based on the Class I A
Principal Balance and the Class I M-1 Principal Balance prior to
distributions pursuant to clauses B(ii), (iv) and (vi) above with respect
to such Remittance Date. The allocations in respect of such excess
principal to the Class I A Certificates will be in the order of priority
set forth in clauses (B)(ii) and (iv) above. With respect to any
Remittance Date, the "Class I B-2 Floor Amount" will equal $3,254,996.03;
S-73
<PAGE>
(xi) any Group I Monthly Excess Spread to fund any Group II
Available Funds Shortfall;
(xii) any remaining Group I Monthly Excess Spread to fund any
unfunded Accelerated Principal Payment (as defined below) on the Group II
Certificates after giving effect to the distribution described in clause
C(ix) or D(ix), as applicable, below;
(xiii) so long as the Company is the Servicer, any remaining
available funds up to the Group I Monthly Servicing Fee, to the Servicer;
(xiv) the amount of any reimbursement to CHI for Enhancement
Payments with respect to the Class I B-2 Certificates as provided in the
Agreement;
(xv) so long as the Company is the Servicer, any remaining available
funds up to the amount of the Group II Monthly Servicing Fee, if any,
remaining unpaid after giving effect to the distribution described in
clause C(xii) or D(xii), as applicable, below, to the Servicer;
(xvi) the amount of any reimbursement to CHI for Enhancement
Payments with respect to the Class II B-3 Certificates as provided in the
Agreement, which remains unpaid after giving effect to the
distribution described in clause C(xiii) or D(xiii), as applicable, below;
and (xvii) any remaining available funds to the holder of the Class R
Certificate.
C. On each Remittance Date on which the Class II B Principal Distribution
Test is not met, the Group II Available Distribution Amount will be distributed
in the following amounts in the following order of priority:
(i) interest accrued during the related Interest Period on the Class
II A-1 Principal Balance to the Class II A-1 Certificates at the related
Remittance Rate, together with any previously undistributed shortfalls in
interest due on the Class II A-1 Certificates in respect of prior
Remittance Dates;
(ii) the Group II Formula Principal Distribution Amount, net of any
portion of the Overcollateralization Reduction Amount, if any, then
applicable to such Certificates, to the Class II A-1 Certificates until
the Class II A-1 Principal Balance is reduced to zero;
(iii) interest accrued during the related Interest Period on the
Class II B-1 Principal Balance to the Class II B-1 Certificates at the
related Remittance Rate, together with any previously undistributed
shortfalls in interest due on the Class II B-1 Certificates in respect of
prior Remittance Dates;
(iv) the remaining Group II Formula Principal Distribution Amount,
if any, to the Class II B-1 Certificates, net of any portion of the
Overcollateralization Reduction Amount, if any, then applicable to such
Certificates, until the Class II B-1 Principal Balance is reduced to zero;
(v) interest accrued during the related Interest Period on the Class
II B-2 Principal Balance to the Class II B-2 Certificates at the related
Remittance Rate, together with any previously undistributed shortfalls in
interest due on the Class II B-2 Certificates in respect of prior
Remittance Dates;
(vi) the remaining Group II Formula Principal Distribution Amount,
if any, to the Class II B-2 Certificates, net of any portion of the
Overcollateralization Reduction Amount, if any, then applicable to such
Certificates, until the Class II B-2 Principal Balance is reduced to zero;
(vii) interest accrued during the related Interest Period on the
Class II B-3 Principal Balance to the Class II B-3 Certificates at the
related Remittance Rate, together with any previously undistributed
shortfalls in interest due on the Class II B-3 Certificates in respect of
prior Remittance Dates;
(viii) the remainder of the Group II Formula Principal Distribution
Amount, if any, to the Class II B-3 Certificates, net of any portion of
the Overcollateralization Reduction Amount, if any, then applicable to
such Certificates, until the Class II B-3 Principal Balance is reduced to
zero;
(ix) any remaining Group II Available Distribution Amount to fund
any Accelerated Principal Payment on the Group II Certificates;
(x) any Group II Monthly Excess Spread, together with any
Overcollateralization Reduction Amount, to fund any Group I Available
Funds Shortfall;
S-74
<PAGE>
(xi) any remaining available funds up to the Class II A-1 Net Funds
Cap Carryover Amount, Class II B-1 Net Funds Cap Carryover Amount, Class
II B-2 Net Funds Cap Carryover Amount and Class II B-3 Net Funds Cap
Carryover Amount to the applicable Certificateholder; if such available
funds are not sufficient to distribute the total Net Funds Cap Carryover
Amount to the applicable Classes of Certificates, such remaining available
funds will be distributed on such Classes of Certificates pro rata based
on the amount of the Net Funds Cap Carryover Amount owing to each such
Class of Certificates;
(xii) so long as the Company is the Servicer, any remaining
available funds up to the amount equal to 1/12th of the product of 1.25%
and the Group II Pool Scheduled Principal Balance for such Remittance Date
(the "Group II Monthly Servicing Fee") to the Servicer;
(xiii) the amount of any reimbursement to CHI for Enhancement
Payments with respect to the Class II B-3 Certificates as provided in the
Agreement;
(xiv) so long as the Company is the Servicer, any remaining
available funds up to the amount of the Group I Monthly Servicing Fee, if
any, remaining unpaid after giving effect to the distribution described in
clause A(xiii) or B(xiii), as applicable, above, to the Servicer;
(xv) the amount of any reimbursement to CHI for Enhancement Payments
with respect to the Class I B-2 Certificates as provided in the Agreement,
which remains unpaid after giving effect to the distribution described in
clause A(xiv) or B(xiv), as applicable, above; and
(xvi) any remaining available funds to the holder of the Class R
Certificate.
D. On each Remittance Date on which the Class II B Principal Distribution
Test is met, the Available Distribution Amount will be distributed in the
following amounts in the following order of priority:
(i) interest accrued during the related Interest Period on the Class
II A-1 Principal Balance to the Class II A-1 Certificates at the related
Remittance Rate, together with any previously undistributed shortfalls in
interest due on the Class II A-1 Certificates, in respect of prior
Remittance Dates;
(ii) the Class II A Percentage of the Group II Formula Principal
Distribution Amount, net of any portion of the Overcollateralization
Reduction Amount, if any, then applicable to such Certificates, to the
Class II A-1 Certificateholders until the Class II A-1 Principal Balance
is reduced to zero;
(iii) interest accrued during the related Interest Period on the
Class II B-1 Principal Balance to the Class II B-1 Certificates at the
related Remittance Rate, together with any previously undistributed
shortfalls in interest due on the Class II B-1 Certificates in respect of
prior Remittance Dates;
(iv) the Class II B Percentage of the Group II Formula Principal
Distribution Amount to the Class II B-1 Certificates, net of any portion
of the Overcollateralization Reduction Amount, if any, then applicable to
such Certificates, until the Class II B-1 Principal Balance is reduced to
zero;
(v) interest accrued during the related Interest Period on the Class
II B-2 Principal Balance to the Class II B-2 Certificates at the related
Remittance Rate, together with any previously undistributed shortfalls in
interest due on the Class II B-2 Certificates in respect of prior
Remittance Dates;
(vi) the remainder of the Class II B Percentage, if any, of the
Group II Formula Principal Distribution Amount to the Class II B-2
Certificates, net of any portion of the Overcollateralization Reduction
Amount, if any, then applicable to such Certificates, until the Class II
B-2 Principal Balance is reduced to zero;
(vii) interest accrued during the related Interest Period on the
Class II B-3 Principal Balance to the Class II B-3 Certificates at the
related Remittance Rate, together with any previously undistributed
shortfalls in interest due on the Class II B-3 Certificates in respect of
prior Remittance Dates;
(viii) the remainder of the Group II Formula Principal Distribution
Amount to the Class II B-3 Certificates, net of any portion of the
Overcollateralization Reduction Amount, if any, then applicable to such
Certificates, until the Class II B-3 Principal Balance is reduced to zero;
provided, however, if the Class II A-1 Principal Balance has not been
reduced to zero on or before a Remittance Date, to the extent that
allocations in respect of principal to the Class II B-3 Certificates would
reduce the sum of the Class II B-3 Principal Balance and the
Overcollateralization Amount below the Group II Certificate Floor Amount,
then the amount
S-75
<PAGE>
of such excess principal will instead be distributed to the Class II A-1
Certificates. With respect to any Remittance Date, the "Group II
Certificate Floor Amount" will equal $1,629,223.42.
(ix) any remaining Group II Available Distribution Amount to fund
any Accelerated Principal Payment on the Group II Certificates;
(x) any Group II Monthly Excess Spread, together with any
Overcollateralization Reduction Amount, to fund any Group I Available
Funds Shortfall;
(xi) any remaining available funds up to the Class II A-1 Net Funds
Cap Carryover Amount, Class II B-1 Net Funds Cap Carryover Amount, Class
II B-2 Net Funds Cap Carryover Amount and Class II B-3 Net Funds Cap
Carryover Amount to the applicable Certificateholder; if such available
funds are not sufficient to distribute the total Net Funds Cap Carryover
Amount to the applicable Classes of Certificates, such remaining available
funds will be distributed on such Classes of Certificates pro rata based
on the amount of the Net Funds Cap Carryover Amount owing to each such
Class of Certificates;
(xii) so long as the Company is the Servicer, any remaining
available funds up to the Group II Monthly Servicing Fee, to the Servicer;
(xiii) the amount of any reimbursement to CHI for Enhancement
Payments with respect to the Class II B-3 Certificates as provided in the
Agreement;
(xiv) so long as the Company is the Servicer, any remaining
available funds up to the amount of the Group I Monthly Servicing Fee, if
any, remaining unpaid after giving effect to the distribution described in
clause A(xiii) or B(xiii), as applicable, above, to the Servicer;
(xv) the amount of any reimbursement to CHI for Enhancement Payments
with respect to the Class I B-2 Certificates as provided in the Agreement,
which remains unpaid after giving effect to the distribution described in
clause A(xiv) or B(xiv), as applicable, above; and
(xvi) any remaining available funds to the holder of the Class R
Certificate.
The "Class I M-1 and Class I B Principal Distribution Test" is met in
respect of a Remittance Date on which each of the following requirements is
satisfied:
(i) such Remittance Date is on or after the September 2003
Remittance Date;
(ii) the Class I M-1 Percentage plus the Class I B Percentage for
such Remittance Date is equal to at least 18.376% (which is 1.75 times the
sum of the original Class I M-1 Percentage and the original Class I B
Percentage);
(iii) the Group I Performance Tests are satisfied; and
(iv) the Class I B-2 Principal Balance is not less than the Class I
B-2 Floor Amount.
The "Class II B Principal Distribution Test" is met in respect of a
Remittance Date on which each of the following requirements is satisfied:
(i) such Remittance Date is on or after the September 2003
Remittance Date;
(ii) the Class II B Percentage for such Remittance Date is equal to
at least 50% (which is the sum of (a) 2 times the original Class II B
Percentage and (b) 1%);
(iii) the Group II Performance Tests are satisfied; and
(iv) the sum of the Class II B-3 Principal Balance and the
Overcollateralization Amount is not less than the Group II Certificate
Floor Amount.
The "Group I Performance Tests" are satisfied in respect of a Remittance
Date if all of the following conditions with respect to Group I are met:
(i) the Average Sixty-Day Delinquency Ratio (as defined in the
Agreement) as of such Remittance Date does not exceed 5% for the Group I
Contracts;
S-76
<PAGE>
(ii) the Average Thirty-Day Delinquency Ratio (as defined in the
Agreement) as of such Remittance Date does not exceed 7% for the Group I
Contracts;
(iii) the Cumulative Realized Losses (as defined in the Agreement)
for the Group I Contracts as of such Remittance Date do not exceed a
certain specified percentage of the Group I Cut-off Date Principal
Balance, depending on the year in which such Remittance Date occurs; and
(iv) the Current Realized Loss Ratio (as defined in the Agreement)
as of such Remittance Date does not exceed 2.75% for Group I Contracts.
The "Group II Performance Tests" are satisfied in respect of a Remittance
Date if all of the following conditions with respect to the Group II Contracts
are met:
(i) the Average Sixty-Day Delinquency Ratio (as defined in the
Agreement) as of such Remittance Date does not exceed 5% for the Group II
Contracts;
(ii) the Average Thirty-Day Delinquency Ratio (as defined in the
Agreement) as of such Remittance Date does not exceed 7% for the Group II
Contracts;
(iii) the Cumulative Realized Losses (as defined in the Agreement)
for the Group II Contracts as of such Remittance Date do not exceed a
certain specified percentage of the Group II Cut-off Date, depending on
the year in which such Remittance Date occurs; and
(iv) the Current Realized Loss Ratio (as defined in the Agreement)
as of such Remittance Date does not exceed 2.75% for the Group II
Contracts.
The Principal Balance of each Class of Certificates is its original
Principal Balance reduced by all distributions on such Class in respect of
principal. The Class I A Principal Balance is the sum of the Class I A-1, Class
I A-2,
Class I A-3, Class I A-4, Class I A-5 and Class I A-6 Principal Balances.
The Class I B Principal Balance is the sum of the Class I B-1 Principal Balance
and the Class I B-2 Principal Balance. The Class II B Principal Balance is the
sum of the Class II B-1 Principal Balance, the Class II B-2 Principal Balance
and the Class II B-3 Principal Balance.
The Class I A Percentage for a Remittance Date is the percentage derived
from the fraction (which shall not be greater than 1), the numerator of which is
the aggregate Principal Balance of the Class I A Certificates immediately prior
to such Remittance Date and the denominator of which is the Pool Scheduled
Principal Balance for Group I Contracts. The Class I M-1 Percentage for a
Remittance Date is the percentage derived from the fraction (which shall not be
greater than 1), the numerator of which is the aggregate Principal Balance of
the Class I M-1 Certificates immediately prior to such Remittance Date and the
denominator of which is the Pool Scheduled Principal Balance for the Group I
Contracts. The Class I B Percentage is 100% less the Class I A Percentage and
Class I M-1 Percentage.
The Class II A Percentage for a Remittance Date is the percentage derived
from the fraction (which shall not be greater than 1), the numerator of which is
the aggregate Principal Balance of the Class II A-1 Certificates immediately
prior to such Remittance Date and the denominator of which is the Pool Scheduled
Principal Balance for Group II Contracts. The Class II B Percentage is 100% less
the Class II A Percentage; provided, however, that on any Remittance Date on
which (i) the Class II B Principal Distribution Test is met and (ii) the Class
II B Percentage is greater than 50%, the Class II A Percentage shall equal 0%
until distribution of principal to the
Class II B Certificateholders on such Remittance Date shall reduce the
Class II B Percentage to a percentage equal to 50%; provided, further, on the
Remittance Date on which there is a Group II Formula Principal Distribution
Amount in excess of the amount (the "Required Class II B Payment") required to
be distributed to the Class II B Certificates so as to reduce the Class II B
Percentage to 50%, the Required Class II B Payment shall be distributed to the
Class II B Certificates and the remaining Group II Formula Principal
Distribution Amount shall be distributed pro rata to the Class II A Certificates
and the Class II B Certificates.
The Average Sixty-Day Delinquency Ratio and the Average Thirty-Day
Delinquency Ratio are, in general, the ratios of the average of the aggregate
principal balances of Contracts in the applicable Group delinquent 60 days or
more and 30 days or more, respectively, for the preceding three Due Periods
(determined as of the last day of each such Due Period) to the average Pool
Scheduled Principal Balance for such periods. Cumulative Realized Losses are, in
general, the aggregate net liquidation losses (calculated as specified in the
Agreement) in respect of
S-77
<PAGE>
Liquidated Contracts since the Cut-off Date. The Current Realized Loss Ratio is,
in general, the ratio of the aggregate net liquidation losses in respect of
Liquidated Contracts for the periods specified in the Agreement to an average
Pool Scheduled Principal Balance specified in the Agreement.
The "Formula Principal Distribution Amount" in respect of a Remittance
Date and a Group equals the sum of (i) all scheduled payments of principal due
on each outstanding Contract in such Group during the Due Period preceding the
month in which the Remittance Date occurs, (ii) the Scheduled Principal Balance
(as defined below) of each Contract in such Group 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) of
Contracts in such Group received during such preceding Due Period, (iv) the
Scheduled Principal Balance of each Contract in such Group that was prepaid in
full during such preceding Due Period, (v) the Scheduled Principal Balance of
each Contract in such Group that became a Liquidated Contract during such
preceding Due Period and (vi) any previously undistributed shortfalls in the
amounts in clauses (i) through (v) in respect of the prior Remittance Dates
(other than any such shortfall with respect to which an Enhancement Payment has
been made to the related Certificateholders).
The "Class II A-1 Net Funds Cap Carryover Amount" means, on any Remittance
Date, the sum of (A) if on such Remittance Date, the Remittance Rate for the
Class II A-1 Certificates is based upon the Net Funds Cap, the excess of (i) the
lesser of (a) the product of (i) the Weighted Average Lifetime Cap (as defined
herein) and (ii) the Class II A-1 Certificate Principal Balance and (b) the
amount of interest the Class II A-1 Certificates would otherwise be entitled to
receive on such Remittance Date had such rate been calculated at the Class II
A-1 Formula Rate for such Remittance Date over (ii) the amount of interest
payable on the Class II A-1 Certificates at the Net Funds Cap for such
Remittance Date and (B) the Class II A-1 Net Funds Cap Carryover Amount,
together with accrued interest thereon, for all previous Remittance Dates not
previously paid pursuant to clause C(xi) or D(xi) above. The "Weighted Average
Lifetime Cap" with respect to any Remittance Date shall equal, on such
Remittance Date, the weighted average of the Lifetime Caps of the Group II
Contracts multiplied by a fraction the numerator of which is the actual number
of days elapsed in the related Interest Period and the denominator of which is
360.
The "Class II B-1 Net Funds Cap Carryover Amount" means, on any Remittance
Date, the sum of (A) if on such Remittance Date, the Remittance Rate for the
Class II B-1 Certificates is based upon the Net Funds Cap, the excess of (i) the
lesser of (a) the product of (i) the Weighted Average Lifetime Cap and (ii) the
Class II B-1 Certificate Principal Balance and (b) the amount of interest the
Class II B-1 Certificates would otherwise be entitled to receive on such
Remittance Date had such rate been calculated at the Class II B-1 Formula Rate
for such Remittance Date over (ii) the amount of interest payable on the Class
II B-1 Certificates at the Net Funds Cap for such Remittance Date and (B) the
Class II B-1 Net Funds Cap Carryover Amount, together with accrued interest
thereon, for all previous Remittance Dates not previously paid pursuant to
clause C(xi) or D(xi) above.
The "Class II B-2 Net Funds Cap Carryover Amount" means, on any Remittance
Date, the sum of (A) if on such Remittance Date, the Remittance Rate for the
Class II B-2 Certificates is based upon the Net Funds Cap, the excess of (i) the
lesser of (a) the product of (i) the Weighted Average Lifetime Cap and (ii) the
Class II B-2 Certificate Principal Balance and (b) the amount of interest the
Class II B-2 Certificates would otherwise be entitled to receive on such
Remittance Date had such rate been calculated at the Class II B-2 Formula Rate
for such Remittance Date over (ii) the amount of interest payable on the Class
II B-2 Certificates at the Net Funds Cap for such Remittance Date and (B) the
Class II B-2 Net Funds Cap Carryover Amount, together with accrued interest
thereon, for all previous Remittance Dates not previously paid pursuant to
clause C(xi) or D(xi) above.
The "Class II B-3 Net Funds Cap Carryover Amount" means, on any Remittance
Date, the sum of (A) if on such Remittance Date, the Remittance Rate for the
Class II B-3 Certificates is based upon the Net Funds Cap, the excess of (i) the
lesser of (a) the product of (i) the Weighted Average Lifetime Cap and (ii) the
Class II B-3 Certificate Principal Balance and (b) the amount of interest the
Class II B-3 Certificates would otherwise be entitled to receive on such
Remittance Date had such rate been calculated at the Class II B-3 Formula Rate
for such Remittance Date over (ii) the amount of interest payable on the Class
II B-3 Certificates at the Net Funds Cap for such Remittance Date and (B) the
Class II B-3 Net Funds Cap Carryover Amount, together with accrued interest
thereon, for all previous Remittance Dates not previously paid pursuant to
clause C(xi) or D(xi) above.
The "Net Funds Cap Carryover Amount" with respect to each Class of Group
II Certificates shall equal each of the Class II A-1 Net Funds Cap Carryover
Amount, Class II B-1 Net Funds Cap Carryover Amount, Class II B-2 Net Funds Cap
Carryover Amount and Class II B-3 Net Funds Cap Carryover Amount, as applicable.
S-78
<PAGE>
The "Net Funds Cap Carryover Amount" with respect to all Classes of Group II
Certificates shall equal the sum of the Class II A-1 Net Funds Cap Carryover
Amount, the Class II B-1 Net Funds Cap Carryover Amount, the Class II B-2 Net
Funds Cap Carryover Amount and the Class II B-3 Net Funds Cap Carryover Amount.
The Class II B-3 Net Funds Cap Carryover Amount shall not have the benefit of
the Limited Guarantee or the Alternate Credit Enhancement.
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 or a Semi-Monthly
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 a Group for any Remittance Date
is equal to (i) the Cut-off Date Pool Principal Balance for such Group less (ii)
the aggregate of the Formula Principal Distribution Amounts for such Group
(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 and any real property securing such Contract have been
received.
In no event will the aggregate distributions of principal to any Class of
Certificates (including, in the case of the Limited Guarantee Certificates, any
principal amounts included in any Enhancement Payments) exceed the Original
Principal Balance of such Class of Certificates.
Notwithstanding the prioritization of the distribution of the Group I
Formula Principal Distribution Amount among the Group I Senior Certificates
pursuant to clauses A(ii) and B(ii) above, on each Remittance Date on and after
the Remittance Date, if any, on which the Deficiency Event occurs, the Group I
Available Distribution Amount remaining after making the distributions of
interest to the Group I Senior Certificates required by clauses A(i) and B(i)
above will be applied to distribute the Group I Formula Principal Distribution
Amount on each Class of Group I 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 Balances of the Group I Senior Certificates
becomes equal to or greater than the Pool Scheduled Principal Balance for Group
I.
The Class I A-1 Remittance Rate for a Remittance Date will equal the
lesser of (a) the sum of (i) the London Interbank offered rate for one-month
United States dollar deposits ("LIBOR") appearing on the Telerate Screen Page
3750 as of the second LIBOR Business Day prior to the first day of such Interest
Period (or as of two LIBOR Business Days of the Closing Date in the case of the
first Interest Period) and (ii) 0.04% and (b) the Group I Weighted Average Net
Contract Rate for Group I, computed on the basis of the actual number of days
elapsed and a 360-day year. The Class I A-2 Remittance Rate for a Remittance
Date is the lesser of (i) 6.060% per annum, computed on the basis of a 360-day
year of twelve 30-day months, or (ii) the Group I Weighted Average Net Contract
Rate for such Remittance Date for Group I. The Class I A-3 Remittance Rate for a
Remittance Date is the lesser of (i) 6.160% per annum, computed on the basis of
a 360-day year of twelve 30-day months, or (ii) the Group I Weighted Average Net
Contract Rate for such Remittance Date for Group I. The Class I A-4 Remittance
Rate for a Remittance Date is the lesser of (i) 6.315% per annum, computed on
the basis of a 360-day year of twelve 30-day months, or (ii) the Group I
Weighted Average Net Contract Rate for such Remittance Date for Group I. The
Class I A-5 Remittance Rate for a Remittance Date is the lesser of (i) 6.505%
per annum, computed on the basis of a 360-day year of twelve 30-day months, or
(ii) the Group I Weighted Average Net Contract Rate for such Remittance Date for
Group I. The Class I A-6 Remittance Rate for a Remittance Date is the lesser of
(i) 6.750% per annum, computed on the basis of a 360-day year of twelve 30-day
months, or (ii) the Group I Weighted Average Net Contract Rate for such
Remittance Date for Group I. The Class I M-1 Remittance Rate for a Remittance
Date is the lesser of (i) 6.900 per annum, computed on the basis of a 360-day
year of twelve 30-day months, or (ii) the Group I Weighted Average Net Contract
Rate for such Remittance Date for Group I. The Class I B-1 Remittance Rate for a
Remittance Date is the lesser of (i) 6.970% per annum, computed on the basis of
a 360-day year of twelve 30-day months, or (ii) the Group I Weighted Average Net
Contract Rate for such Remittance Date for Group I. The Class I B-2 Remittance
Rate for a Remittance Date is the lesser of (i) 7.725% per annum, computed on
the basis of a 360-day year of twelve 30-day months, or (ii) the Group I
Weighted Average Net Contract Rate for such Remittance Date for Group I. The
"Group I Weighted Average Net Contract Rate" for a Group for a Remittance Date
is equal to (i) the weighted average of the Contract Rates applicable to the
scheduled payments due on the outstanding Group I Contracts in the
S-79
<PAGE>
Due Period preceding such Remittance Date less (ii) (a) if the Company is the
Servicer, 0.00% or (b) if the Company is no longer the Servicer, 1.25% of the
Group I Pool Scheduled Principal Balance on the first day of the Due Period. Any
undistributed interest shortfalls which are carried forward will, to the extent
legally permissible, bear interest at the Remittance Rate applicable to the
affected Class or Classes of Certificates.
"LIBOR Business Day" means a day on which banks are open for dealing in
foreign currency and exchange in London and New York City; "Telerate 3750" means
the display page currently so designated on the Dow Jones Telerate Service (or
such other page as may replace that page on that service for the purpose of
displaying comparable rates or prices).
The Class II A-1 Remittance Rate shall be the lesser of (a) the Class II
A-1 Formula Rate (as defined below) and (b) the Net Funds Cap (as defined below)
for such Remittance Date. The Class II A-1 Formula Rate shall be a per annum
rate equal to the sum of (a) LIBOR (as defined herein) plus (b) (i) with respect
to any Remittance Date which occurs on or prior to the Call Option Date (as
defined herein), 0.18% or (ii) with respect to any Remittance Date which occurs
after the Call Option Date, 0.36%. The Class II B-1 Remittance Rate shall be the
lesser of (a) the Class II B-1 Formula Rate (as defined below) and (b) the Net
Funds Cap for such Remittance Date. The "Class II B-1 Formula Rate" shall be a
per annum rate equal to the sum of (a) LIBOR (as defined herein) plus (b) (i)
with respect to any Remittance Date which occurs on or prior to the Call Option
Date, 0.34% or (ii) with respect to any Remittance Date which occurs after the
Call Option Date, 0.84%. The Class II B-2 Remittance Rate shall be the lesser of
(a) the Class II B-2 Formula Rate (as defined below) and (b) the Net Funds Cap
for such Remittance Date. The "Class II B-2 Formula Rate" shall be a per annum
rate equal to the sum of (a) LIBOR (as defined herein) plus (b) (i) with respect
to any Remittance Date which occurs on or prior to the Call Option Date, 0.97%
or (ii) with respect to any Remittance Date which occurs after the Call Option
Date, 1.47%. The Class II B-3 Remittance Rate shall be the lesser of (a) the
Class II B-3 Formula Rate (as defined below) and (b) the Net Funds Cap for such
Remittance Date. The Class II B-3 Formula Rate shall be a per annum rate equal
to the sum of (a) LIBOR (as defined herein) plus (b) (i) with respect to any
Remittance Date which occurs on or prior to the Call Option Date, 1.30% or (ii)
with respect to any Remittance Date which occurs after the Call Option Date,
1.80%.
The Net Funds Cap for any Remittance Date shall equal the per annum rate
equal to a fraction, expressed as a percentage, the numerator of which equals
the sum of (a) the aggregate amount of interest due on the Group II Contracts on
the related Due Date and (b) the Overcollateralization Reduction Amount, if any,
for such Distribution Date less (c) one-twelfth of (i) if the Company is the
Servicer, 0.00% or (ii) if the Company is no longer the Servicer, 1.25% of the
Group II Pool Scheduled Principal Balance on the first day of the Due Period
less (d) one-twelfth of (i) if the actual Overcollateralization Amount is equal
to or greater than the Required Overcollateralization Amount for such Remittance
Date, 0.00% or (ii) if the actual Overcollateralization Amount is less than the
Required Overcollateralization Amount for such Remittance Date, 0.75% of the
Group II Pool Scheduled Principal Balance on the first day of the Due Period and
the denominator of which is equal to the Certificate Principal Balance of the
Group II Certificates (adjusted to reflect the actual number of days elapsed in
the Interest Period divided by 360). The "Call Option Date" shall be the day on
which the outstanding balance of the Contracts in the Trust Fund has declined to
10% or less of the Cut-off Date Pool Principal Balance.
Group II Certificates; Overcollateralization Provisions
The Group II Weighted Average Contract Rate for the Group II Contracts is
expected generally to be higher than the weighted average of the Remittance
Rates applicable to the Group II Certificates, thus generating certain excess
interest collections which in the absence of losses and delinquencies, will not
be needed to fund distributions on the Group II Certificates. The Agreement
provides that this excess interest is to be applied, to the extent available, to
make accelerated payments of principal to the Class or Classes of Group II
Certificates then entitled to receive distributions of principal. Such
accelerated payments are expected to cause the aggregate Principal Balance of
the Group II Certificates to amortize more rapidly than the principal balance of
the Group II Contracts, resulting in "overcollateralization" (i.e., the excess
of the Group II Pool Scheduled Principal Balance over the aggregate Principal
Balance of the Group II Certificates). This interest for a Due Period, together
with interest on the Overcollateralization Amount itself, remaining after
distributions in clauses C(i) to C(ix) or D(i) to D(ix) above is the "Group II
Monthly Excess Spread" for the Remittance Date immediately following the
applicable Due Period. On any Remittance Date, the "Overcollateralization
Amount" will be an amount equal to the excess, if any, of (x)
S-80
<PAGE>
the Group II Pool Scheduled Principal Balance as of the end of the immediately
preceding Due Period over (y) the aggregate Certificate Principal Balance of the
Group II Certificates on such Remittance Date (after taking into account all
other distributions to be made on such Remittance Date).
The Group II Monthly Excess Spread will be applied to make accelerated
payments of principal on each Remittance Date until the Overcollateralization
Amount is equal to the Initial Required Overcollateralization Amount, which is
expected to equal approximately $3,054,793.92, which represents approximately
3.75% of the initial Group II Contract Pool Balance. Thereafter, the Group II
Monthly Excess Spread will not be applied to further increase the
Overcollateralization Amount unless, due to losses, the Overcollateralization
Amount is decreased, in which event such applications will commence to the
extent necessary to increase the actual Overcollateralization Amount to the
Required Overcollateralization Amount. The level of the Required
Overcollateralization Amount is equal to, for any Remittance Date, (x) prior to
the date on which the Class II B Principal Distribution Test is satisfied, the
Initial Required Overcollateralization Amount and (y) on and after the date on
which the Class II B Principal Distribution Test is satisfied, the lesser of (i)
the Initial Required Overcollateralization Amount and (ii) the greater of (a)
7.50% of the then current Group II Pool Scheduled Principal Balance and (b)
0.75% of the Group II Cut-off Date Pool Principal Balance.
If, on any Remittance Date, the level of Required Overcollateralization
Amount is permitted to be reduced, the "Excess Overcollateralization Amount"
(the excess of (x) the actual Overcollateralization Amount on such Remittance
Date (after taking into account all other distributions on such Remittance Date)
over (y) the Required Overcollateralization Amount for such Remittance Date)
will be deducted from the Group II Formula Principal Distribution Amount (but
only to the extent of such Group II Formula Principal Distribution Amount)
otherwise distributable to the holders of the Group II Certificates on such
Remittance Date (any such amount so deducted, an "Overcollateralization
Reduction Amount") and will be applied as provided herein under "Description of
the Certificates--Distributions". The Overcollateralization Reduction Amount, if
any, on any Remittance Date shall be funded, first, from that portion of the
Group II Formula Principal Distribution Amount otherwise distributable to the
holders of the most junior class of Group II Certificates on such Remittance
Date, and, if such amount is insufficient to fund in full the
Overcollateralization Reduction Amount on such Remittance Date, then, second,
from that portion of the Group II Formula Principal Distribution Amount
otherwise distributable to the holders of each succeeding class of Group II
Certificates in ascending order of seniority, until such Overcollateralization
Reduction Amount is completely funded. The Agreement provides that in no event
shall an Overcollateralization Reduction Amount be deducted from the Group II
Formula Principal Distribution Amount if, after deducting such amount, the sum
of the aggregate Principal Balance of the Class II B-3 Certificates and the
Overcollateralization Amount, taken together, would be less than 2.0% of the
Group II Cut-off Date Principal Balance.
The amount, if any, actually applied as an accelerated payment of
principal on any Remittance Date is referred to herein as the "Accelerated
Principal Payment" for such Remittance Date. The Accelerated Principal Payment,
if any, on any Remittance Date will be an amount equal to the lesser of (x) the
excess of (i) the Required Overcollateralization Amount over (ii) the actual
Overcollateralization Amount on such Remittance Date and (y) the sum of the
Group II Monthly Excess Spread, if any, and the Group I Monthly Excess Spread,
if any, remaining after payment of all then applicable prior requirements for
such Remittance Date. The Accelerated Principal Payment will be distributed to
the holders of the Class of Group II Certificates then entitled to receive
distributions in respect of principal on such date.
Cross Collateralization Provisions
The Agreement provides for cross collateralization through the application
of excess amounts generated by one Contract Group to fund shortfalls in
available funds in the other Contract Group, subject to certain prior
requirements of such Contract Group. Therefore, as to any Remittance Date, the
amount, if any, of Group I Monthly Excess Spread remaining after payment of all
then applicable prior requirements relating to the Group I Certificates will be
used to fund, first, any Group II Available Funds Shortfall and, second, to the
extent of any remaining Group I Monthly Excess Spread, any unfunded Accelerated
Principal Payment on the Group II Certificates for such Remittance Date.
Likewise, as to any Remittance Date, the amount, if any, of Group II Monthly
Excess Spread (together with any Overcollateralization Reduction Amount)
remaining after payment of all then applicable prior requirements relating to
the Group II Certificates (including any Accelerated Principal Payment for such
Remittance Date) will be used to
S-81
<PAGE>
fund any Group I Available Funds Shortfall for such Remittance Date. The payment
of any amounts in respect of cross collateralization will be applied in the
order specified above under "--Distributions." See "Description of
Certificates--Distributions" and "--Group II Certificates; Overcollateralization
Provisions" herein.
Additional funds resulting from the cross-collateralization provisions
described herein shall not be available to Group II Certificateholders to pay
the Net Funds Cap Carryover Amount.
Group I Certificates and the Senior/Subordinate Structure
Subordination of the Class I A-6 Certificates
The rights of the holders of the Class I A-6 Certificates to receive
distributions of amounts collected on the Group I Contracts will be
subordinated, to the extent described herein, to such rights of the Group I
Senior Certificates. This subordination is intended to enhance the likelihood of
receipt by the holders of the Group I Senior Certificates of the full amount of
their scheduled monthly payments of interest and the ultimate receipt by such
holders of principal equal to the applicable Original Certificate Principal
Balance of the Group I Senior Certificates.
The protection afforded to the Group I Senior Certificates by means of the
subordination of the Class I A-6 Certificates will be accomplished by the
application of the Group I Available Distribution Amount in the order specified
under "--Distributions" above. In addition, if the Group I Available
Distribution Amount on any Remittance Date is not sufficient to permit the
distribution of the entire specified portion of the Group I Formula Principal
Distribution Amount, as applicable, to the Group I Senior Certificateholders,
the subordination feature will protect the Group I Senior Certificateholders, by
the right of such Certificateholders to receive, until, if ever, any such
shortfall is distributed, a portion of the future distributions of Group I
Available Distribution Amounts that would otherwise have been distributable to
the holders of the Class I A-6 Certificates.
Subordination of the Class I M-1 Certificates
The rights of holders of the Class I M-1 Certificates to receive
distributions of amounts collected on the Group I Contracts will be
subordinated, to the extent described herein, to such rights of the holders of
the Group I Senior Certificates and Class I A-6 Certificates. This subordination
is intended to enhance the likelihood of receipt by the holders of the Group I
Senior Certificates and Class I A-6 Certificates of the full amount of their
scheduled monthly payments of interest and the ultimate receipt by such holders
of principal equal to the applicable Original Certificate Principal Balance of
the Group I Senior Certificates and Class I A-6 Certificates.
The protection afforded to the holders of the Group I Senior Certificates
and Class I A-6 Certificates by means of the subordination, to the extent
provided herein, of the Class I M-1 Certificates will be accomplished (i) by the
application of the Group I Available Distribution Amount in the order specified
under "--Distributions" above and (ii) if the Group I Available Distribution
Amount on such Remittance Date is not sufficient to permit the distribution of
the entire specified portion of the Group I Formula Principal Distribution
Amount, as applicable, to the Class of Group I Senior Certificateholders and
Class I A-6 Certificateholder then entitled to such distribution, by the right
of such Group I Senior and Class I A-6 Certificateholders to receive, until, if
ever, any such shortfall is distributed, a portion of future Available
Distribution Amounts that would otherwise have been payable to the holders of
the Class I M-1 Certificates. On each Remittance Date before the Class I A
Principal Balance is reduced to zero, the holders of the Class I M-1
Certificates will receive the amounts specified under "--Distributions" above.
Subordination of the Group I Junior Subordinate Certificates and Class R
Certificates
The rights of holders of the Group I Junior Subordinate Certificates and
Class R Certificates to receive distributions of amounts collected on the Group
I Contracts will be subordinated, to the extent described herein, to such rights
of the holders of the Class I M-1 Certificates. This subordination is intended
to enhance the likelihood of receipt by the holders of the Class I M-1
Certificates of the full amount of their scheduled monthly payments of interest
and the ultimate receipt by such holders of principal equal to the applicable
Original Certificate Principal Balance.
The protection afforded to the holders of the Class I M-1 Certificates by
means of the subordination, to the extent provided herein, of the Group I Junior
Subordinate Certificates and Class R Certificates will be accomplished (i) by
the application of the Group I Available Distribution Amount in the order
specified under "--Distributions"
S-82
<PAGE>
above and (ii) if the Group I Available Distribution Amount on such Remittance
Date is not sufficient to permit the distribution of the entire specified
portion of the Group I Formula Principal Distribution Amount, as applicable, to
the Class I M-1 Certificateholder then entitled to such distribution, by the
right of such Class I M-1 Certificateholders to receive, until, if ever, any
such shortfall is distributed, a portion of future Available Distribution
Amounts that would otherwise have been payable to the holders of the Group I
Junior Subordinate Certificates or the Class R Certificate. On each Remittance
Date before the Class I A Principal Balance is reduced to zero, the holders of
the Class I B Certificates will receive the amounts specified under
"--Distributions" above.
Subordination of the Class I B-2 Certificates
The rights of the holders of the Class I B-2 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 Class I B-1
Certificates. This subordination is intended to enhance the likelihood of
receipt by the holders of the Class I A, Class I M-1 and Class I B-1
Certificates of the full amount of their scheduled monthly payments of interest
and the ultimate receipt by such holders of principal equal to the applicable
Original Certificate Principal Balance.
The protection afforded to the Class I B-1 Certificates by means of the
subordination of the Class I B-2 Certificates will be accomplished by the
application of the applicable Available Distribution Amount in the order
specified under "--Distributions" above. In addition, if the applicable
Available Distribution Amount on any Remittance Date is not sufficient to permit
the distribution of the entire specified portion of the related Formula
Principal Distribution Amount, as applicable, to the Class I B-1
Certificateholders and the subordination provided by the Class I B-2
Certificates has not been exhausted, the subordination feature will protect the
Class I B-1 Certificateholders by the right of the Class I B-1
Certificateholders to receive, until, if ever, 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
I B-2 Certificates or the Class R Certificate.
However, the Class I B-2 Certificates will have the benefit of the Limited
Guarantee from CHI or the Alternate Credit Enhancement. Neither the Limited
Guarantee nor the Alternate Credit Enhancement will benefit or result in any
payments on any other Offered Certificates (other than the Class II B-3
Certificates to the limited extent described below).
Group II Certificates and the Senior/Subordinate Structure
Subordination of the Class II B-1 Certificates
The rights of the holders of the Class II B-1 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 Class II A-1
Certificates. This subordination is intended to enhance the likelihood of
receipt by the holders of the Class II A-1 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 II A-1 Certificate Principal
Balance.
The protection afforded to the Class II A-1 Certificates by means of the
subordination of the Class II B-1 Certificates will be accomplished by the
application of the applicable Available Distribution Amount in the order
specified under "--Distributions" above. In addition, if the applicable
Available Distribution Amount on any Remittance Date is not sufficient to permit
the distribution of the entire specified portion of the Group II Formula
Principal Distribution Amount, as applicable, to the Class II A-1
Certificateholders, the subordination feature will protect the Class II A-1
Certificateholders, by the right of such Certificateholders to receive, until,
if ever, any such shortfall is distributed, a portion of the future
distributions of Available Distribution Amounts that would otherwise have been
distributable to the Class II B-1 Certificates.
Subordination of the Group II Junior Subordinate and Class R Certificates
The rights of holders of the Group II Junior Subordinate 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 II A-1 and Class II B-1 Certificates. This subordination is
intended to enhance the likelihood of receipt by the holders of Class II A-1 and
Class II B-1 Certificates of the full amount of their scheduled monthly payments
of interest and the ultimate receipt by such holders of principal equal to the
applicable Original Certificate Principal Balance.
S-83
<PAGE>
The protection afforded to the holders of the Class II A-1 and Class II
B-1 Certificates by means of the subordination, to the extent provided herein,
of the Group II Junior Subordinate and Class R Certificates will be accomplished
(i) by the application of the applicable Available Distribution Amount in the
order specified under "--Distributions" above and (ii) if the applicable
Available Distribution Amount on such Remittance Date is not sufficient to
permit the distribution of the entire specified portion of the Formula Principal
Distribution Amount, as applicable, to the Class of Class II A-1
Certificateholders then entitled to such distribution, by the right of such
Class II A-1 Certificateholders to receive, until, if ever, any such shortfall
is distributed, a portion of future Available Distribution Amounts that would
otherwise have been payable to the holders of the Class II B Certificates or the
Class R Certificate. On each Remittance Date before the Class II A Principal
Balance is reduced to zero, the holders of the Class II B Certificates will
receive the amounts specified under "--Distributions" above.
Subordination of the Class II B-2 and Class II B-3 Certificates
The rights of the holders of the Class II B-2 and the Class II B-3
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 Class II B-1 Certificates. This subordination is intended to
enhance the likelihood of receipt by the holders of the Class II A-1 and Class
II B-1 Certificates of the full amount of their scheduled monthly payments of
interest and the ultimate receipt by such holders of principal equal to the
applicable Original Certificate Principal Balance.
The protection afforded to the Class II B-1 Certificates by means of the
subordination of the Class II B-2 and the Class II B-3 Certificates will be
accomplished by the application of the applicable Available Distribution Amount
in the order specified under "--Distributions" above. In addition, if the
applicable Available Distribution Amount on any Remittance Date is not
sufficient to permit the distribution of the entire specified portion of the
applicable Formula Principal Distribution Amount, as applicable, to the Class II
B-1 Certificateholders and the subordination provided by the Class II B-2 and
the Class II B-3 Certificates has not been exhausted, the subordination feature
will protect the Class II B-1 Certificateholders by the right of the Class II
B-1 Certificateholders to receive, until, if ever, 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
II B-2, the Class II B-3 Certificates or the Class R Certificate.
In addition, the protection afforded to the Class II B-2 Certificates by
means of the subordination of the Class II B-3 Certificates will be accomplished
by the application of the applicable Available Distribution Amount in the order
specified under "--Distributions" above. In addition, if the applicable
Available Distribution Amount on any Remittance Date is not sufficient to permit
the distribution of the entire specified portion of the applicable Formula
Principal Distribution Amount, as applicable, to the Class II B-2
Certificateholders and the subordination provided by the Class II B-3
Certificates has not been exhausted, the subordination feature will protect the
Class II B-2 Certificateholders by the right of the Class II B-2
Certificateholders to receive, until, if ever, 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
II B-3 or the Class R Certificate.
However, the Class II B-3 Certificates will have the benefit of the
Limited Guarantee from CHI or the Alternate Credit Enhancement. Neither the
Limited Guarantee nor the Alternate Credit Enhancement will benefit or result in
any payments on any other Offered Certificates (other than the Class I B-2
Certificates to the limited extent described above).
Losses on Liquidated Contracts
As described above, the distribution of principal to the holders of the
Senior Certificates in each Group is intended to include the Scheduled Principal
Balance of each Contract in the related Group 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 any excess interest collections on
non-defaulted Contracts, the deficiency may, in effect, be absorbed by the
Subordinate Certificates 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 holders of the Senior Certificates. If
the protection afforded to the holders of a Class of Subordinate Certificates by
the subordination of one or more Classes of more junior Subordinate Certificates
is exhausted, the holders of such Class of Subordinate Certificates will incur a
loss on their investment.
S-84
<PAGE>
If the Group I or Group II Available Distribution Amount, as applicable,
for any Remittance Date is not sufficient to cover, in addition to interest
distributable to the Senior Certificateholders, the entire specified portion of
the applicable Formula Principal Distribution Amount distributable to the Senior
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. With respect to
each Group of Certificates, if, because of liquidation losses, the Pool
Scheduled Principal Balance for such Group were to decrease proportionately
faster than distributions to the related Senior Certificateholders and Senior
Subordinate Certificateholders reduce the Principal Balance of such
Certificates, the level of protection afforded by the subordination of the
Subordinate Certificates (i.e., the percentage of the Pool Scheduled Principal
Balance for the applicable Group available to the Certificates) would be
reduced. On each Remittance Date, if any, on or after the date on which the
Senior Certificate Principal Balance equals or becomes greater than the Pool
Scheduled Principal Balance for such Group and so long as the Senior Subordinate
Certificates are outstanding, the Senior Subordinate Certificates will 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 Subordinate Certificates. On each
Remittance Date, if any, on or after the date on which the Deficiency Event
occurs, the Group I or Group II Senior Certificateholders, as applicable, 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 Group I or Group II Senior Certificates, as
applicable. See "Description of the Certificates--Group I Certificates and the
Senior/Subordinate Structure, and "-- Group II Certificates and the
Senior/Subordinate Structure" and "Yield and Prepayment Considerations."
On each Remittance Date, if any, on or after the date on which the sum of
the Principal Balances of the Senior Certificates in either Group equals or
becomes greater than the Pool Scheduled Principal Balance for such Group, the
related Senior Certificateholders will receive only their respective percentage
interests of Liquidation Proceeds (net of Liquidation Expenses) realized in
respect of Liquidated Contracts in such Group, 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 such Certificates.
But for the subordination of the Class I B-2 Certificates, the Class I B-1
Certificateholders would absorb (i) all losses on each Liquidated Contract in
Group I (to the extent such loss is not covered by excess interest collections)
and (ii) other shortfalls in the applicable Available Distribution Amount. If,
on any Remittance Date, the sum of the Class I A Principal Balance and the Class
I B-1 Principal Balance becomes equal to or greater than the Pool Scheduled
Principal Balance for Group I, then the Class I B-1 Certificateholders will bear
all losses on Liquidated Contracts in Group I (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 I B-1 Certificates.
But for the subordination of the Class II B-3 Certificates, the Class II
B-2 Certificateholders would absorb (i) all losses on each Liquidated Contract
in Group II (to the extent such loss is not covered by excess interest
collections or the Overcollateralization Amount) and (ii) other shortfalls in
the applicable Available Distribution Amount. If, on any Remittance Date, the
sum of the Class II A Principal Balance, the Class II B-1 Principal Balance and
the Class II B-2 Principal Balance becomes equal to or greater than the Pool
Scheduled Principal Balance for Group II, then the Class II B-2
Certificateholders will bear all losses on Liquidated Contracts in Group II
(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 II B-2 Certificates.
Limited Guarantee of CHI
In order to mitigate the effect of the subordination of the Class I B-2
Certificates or the Class II B-3 Certificates, as applicable, and liquidation
losses and delinquencies on the Contracts in the related Group borne by the
Class I B-2 Certificates or the Class II B-3 Certificates, as applicable, CHI
will initially provide a guarantee (the "Limited Guarantee") against losses that
would otherwise be absorbed by the Class I B-2 Certificates or the Class II B-3
Certificates, as applicable. Such Limited Guarantee may be replaced by an
Alternate Credit Enhancement. See "--Alternate Credit Enhancement" below. Each
payment required to be made under the Limited Guarantee is referred to as an
"Enhancement Payment." Prior to the Remittance Date with respect to the Class I
B-2 Certificates (the
S-85
<PAGE>
"Initial Class I B-2 Principal Remittance Date") on which the Class I B-1
Principal Balance is reduced to zero, the Enhancement Payment will equal the
amount, if any, by which (a) the sum of (i) the Class I B-2 Formula Distribution
Amount (which will be equal to interest accrued during the related Interest
Period on the Class I B-2 Principal Balance and an amount of principal described
in the Agreement) for such Remittance Date and (ii) the Class I B-2 Principal
Liquidation Loss Amount, if any, exceeds (b) the amount (other than the
Enhancement Payment) that will otherwise be distributed on the Class I B-2
Certificates on such Remittance Date (the "Class I B-2 Distribution Amount"). On
each Remittance Date on or after the Initial Class I B-2 Principal Remittance
Date, the Enhancement Payment will equal the amount, if any, by which the Class
I B-2 Formula Distribution Amount (which will include both interest and
principal) exceeds the Class I B-2 Distribution Amount for such Remittance Date.
Prior to the Remittance Date with respect to the Class II B-3 Certificates (the
"Initial Class II B-3 Principal Remittance Date") on which the Class II B-2
Principal Balance is reduced to zero, the Enhancement Payment will equal the
amount, if any, by which (a) the sum of (i) the Class II B-3 Formula
Distribution Amount (which will be equal to interest accrued during the related
Interest Period on the Class II B-3 Principal Balance and an amount of principal
described in the Agreement) for such Remittance Date and (ii) the Class II B-3
Principal Liquidation Loss Amount, if any, exceeds (b) the amount (other than
the Enhancement Payment) that will otherwise be distributed on the Class II B-3
Certificates on such Remittance Date (the "Class II B-3 Distribution Amount").
On each Remittance Date on or after the Initial Class II B-3 Principal
Remittance Date, the Enhancement Payment will equal the amount, if any, by which
the Class II B-3 Formula Distribution Amount (which will include both interest
and principal) exceeds the Class II B-3 Distribution Amount for such Remittance
Date; provided, however, that the Enhancement Payment with respect to the Class
II B-3 Certificates will not include amounts in respect of the Class II B-3 Net
Funds Cap Carryover Amount.
The "Class I B-2 Principal Liquidation Loss Amount" for any Remittance
Date will equal the amount, if any, by which (a) the Formula Principal
Distribution Amount (exclusive of the portion thereof specified in clause (vi)
of the definition of Formula Principal Distribution Amount) for such Remittance
Date exceeds (b) the amount (exclusive of the Guarantee Payment) distributed on
the Group I Certificates on account of principal on such Remittance Date. The
Class I B-2 Principal Liquidation Loss Amount represents future principal
payments on the Contracts that, because of the subordination of the Class I B-2
Certificates and liquidation losses on the Contracts, will not be paid to the
Class I B-2 Certificateholders from the assets of the Trust Fund but may be paid
in the form of an Enhancement Payment.
The "Class II B-3 Principal Liquidation Loss Amount" for any Remittance
Date will equal the amount, if any, by which (a) the Group II Formula Principal
Distribution Amount (exclusive of the portion thereof specified in clause (vi)
of the definition of Formula Principal Distribution Amount) for such Remittance
Date exceeds (b) the amount (exclusive of the Enhancement Payment) distributed
on the Group II Certificates on account of principal on such Remittance Date.
The Class II B-3 Principal Liquidation Loss Amount represents future principal
payments on the Contracts that, because of the subordination of the Class II B-3
Certificates and liquidation losses on the Contracts, will not be paid to the
Class II B-3 Certificateholders from the assets of the Trust Fund but may be
paid to the Class II B-3 Certificateholders in the form of an Enhancement
Payment.
In the event that, on a particular Remittance Date, the Class I B-2
Distribution Amount or the Class II B-3 Distribution Amount, as applicable, in
the applicable Certificate Account plus any amounts actually paid under the
Limited Guarantee are not sufficient to make a full distribution of interest to
the Class I B-2 Certificateholder or the Class II B-3 Certificateholders, as
applicable, the amount of the deficiency will be carried forward as an amount
that the Class I B-2 Certificateholders or the Class II B-3 Certificateholder,
as applicable, are entitled to receive on the next Remittance Date.
The Limited Guarantee will be an unsecured general obligation of CHI and
will not be supported by any letter of credit or other enhancement arrangement.
The Limited Guarantee is for the benefit of the Class I B-2 Certificates
and Class II B-3 Certificates only and will not result in any payments on the
other Offered Certificates.
As reimbursement to CHI for Enhancement Payments made by CHI pursuant to
the Limited Guarantee, CHI will be entitled to receive on each Remittance Date
an amount equal to the lesser of (a) the Available Distribution Amount, less the
portion of the Available Distribution Amount distributed on the Certificates
(other than the Class R Certificate), and (b) the aggregate amount of
Enhancement Payments outstanding which remain unreimbursed as of such Remittance
Date.
S-86
<PAGE>
Alternate Credit Enhancement
In the event that, at CHI's option, Alternate Credit Enhancement (as
defined herein) is provided and, upon prior written notice to the Rating
Agencies, the Rating Agencies shall have notified CHI, the Company, the Servicer
and the Trustee in writing that substitution of such Alternate Credit
Enhancement for the Limited Guarantee will not result in the downgrade or
withdrawal of the then current rating of any class of the Certificates, and upon
the delivery by CHI to the Trustee of an opinion of counsel, acceptable to the
Trustee, that such action would not cause the Trust to fail to qualify as a
REMIC, the Limited Guarantee shall be released and shall terminate. The
Alternate Credit Enhancement may consist of cash or securities deposited by CHI
or any other person in a segregated escrow, trust or collateral account or a
letter of credit, certificate insurance policy or surety bond provided by a
third party (an "Alternate Credit Enhancement"). On each Remittance Date after
delivery of the Alternate Credit Enhancement, an amount, equal to the lesser of
the amount which would have been payable under the Limited Guarantee and the
amount available under such Alternate Credit Enhancement, shall be transferred
from such account to the applicable Certificate Account to make payments to the
Class I B-2 and Class II B-3 Certificateholders, as applicable (the "Enhancement
Payment"). CHI shall have no obligation to replace such enhancement once it has
been exhausted.
Advances
On or prior to each Determination Date, the Servicer will either (i)
deposit from its own funds the Monthly Advance into the applicable Certificate
Account, (ii) cause appropriate entries to be made in the records of the
applicable Certificate Account that funds in the applicable Certificate Account
that are not part of the applicable 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 A(i)-(x), B(i)-(x),
C(i)-(viii) or D(i)-(viii), as the case may be, 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 applicable 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
(ii) 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.
Reports to Certificateholders
The Trustee will include with each distribution to each Certificateholder
a statement as of such Remittance Date setting forth, among other things:
(a) the aggregate amount distributed on the Class I 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 I A-1 Principal Balance;
(e) the aggregate amount distributed on the Class I A-2 Certificates on
such Remittance Date;
S-87
<PAGE>
(f) the amount of such distribution which constitutes principal;
(g) the amount of such distribution which constitutes interest;
(h) the remaining Class I A-2 Principal Balance;
(i) the aggregate amount distributed on the Class I 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 I A-3 Principal Balance;
(m) the aggregate amount distributed on the Class I A-4 Certificates on
such Remittance Date;
(n) the amount of such distribution which constitutes principal;
(o) the amount of such distribution which constitutes interest;
(p) the remaining Class I A-4 Principal Balance;
(q) the aggregate amount distributed on the Class I A-5 Certificates on
such Remittance Date;
(r) the amount of such distribution which constitutes principal;
(s) the amount of such distribution which constitutes interest;
(t) the remaining Class I A-5 Principal Balance;
(u) the aggregate amount distributed on the Class I A-6 Certificates on
such Remittance Date;
(v) the amount of such distribution which constitutes principal;
(w) the amount of such distribution which constitutes interest;
(x) the remaining Class I A-6 Principal Balance;
(y) the aggregate amount distributed on the Class I M-1 Certificates on
such Remittance Date;
(z) the amount of such distribution which constitutes principal;
(aa) the amount of such distribution which constitutes interest;
(bb) the remaining Class I M-1 Principal Balance;
(cc) the aggregate amount distributed on the Class I B-1 Certificates on
such Remittance Date;
(dd) the amount of such distribution which constitutes principal;
(ee) the amount of such distribution which constitutes interest;
(ff) the remaining Class I B-1 Principal Balance;
(gg) the aggregate amount distributed on the Class I B-2 Certificates on
such Remittance Date;
(hh) the amount of such distribution which constitutes principal;
(ii) the amount of such distribution which constitutes interest;
(jj) the amount, if any, by which the Class I B-2 Formula Distribution
Amount exceeds the Class I B-2 Remaining Amount Available for such
Remittance Date;
(kk) the Class I B-2 Liquidation Loss Amount, if any, for such Remittance
Date;
(ll) the Enhancement Payment, if any, for such Remittance Date;
(mm) the remaining Class I B-2 Principal Balance;
(nn) the aggregate amount distributed on the Class II A-1 Certificates on
such Remittance Date;
S-88
<PAGE>
(oo) the amount of such distribution which constitutes principal;
(pp) the amount of such distribution which constitutes interest;
(qq) the remaining Class II B-1 Principal Balance;
(rr) the aggregate amount distributed on the Class II B-1 Certificates on
such Remittance Date;
(ss) the amount of such distribution which constitutes principal;
(tt) the amount of such distribution which constitutes interest;
(uu) the remaining Class II B-2 Principal Balance;
(vv) the aggregate amount distributed on the Class II B-3 Certificates on
such Remittance Date;
(ww) the amount of such distribution which constitutes principal;
(xx) the amount of such distribution which constitutes interest;
(yy) the amount, if any, by which the Class II B-3 Formula Distribution
Amount exceeds the Class II B-3 Remaining Amount Available for such
Remittance Date;
(zz) the Class II B-3 Liquidation Loss Amount, if any, for such
Remittance Date;
(aaa) the Enhancement Payment, if any, for such Remittance Date;
(bbb) the Interest Deficiency Amount, if any, for each Class of
Subordinate Certificates other than the Limited Guarantee
Certificates with respect to such Remittance Date and the amount, if
any, of collections received after the end of the related Due Period
and prior to such Remittance Date applied to reduce such Interest
Deficiency Amount;
(ccc) the number of and aggregate unpaid principal balance of Group I and
Group II Contracts with payments delinquent 31 to 59, 60 to 89 and
90 or more days, respectively; and
(ddd) 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 certain aggregate of amounts
for such calendar year.
Optional Termination
The Agreement provides that on any Remittance Date after the first
Remittance Date on which the aggregate Pool Scheduled Principal Balance of both
Groups is less than 10% of the Cut-off Date 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 first 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 rate specified in the Agreement 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 Chase Manhattan Bank, has its corporate trust offices at 450 West 33rd
Street, 15th Floor, New York, New York 10001. The Company and its affiliates may
have commercial transactions with the Trustee from time to time.
S-89
<PAGE>
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.
S-90
<PAGE>
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 is a New York-chartered limited purpose trust company that 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.
S-91
<PAGE>
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
S-92
<PAGE>
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
Senior and Subordinate 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
200% of the Prepayment Model (as defined herein) for the Group I Contracts and
225% of the Prepayment Model for the Group II Contracts. 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
Floating Rate 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.
S-93
<PAGE>
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," with respect
to each Group of Certificates, the Subordinate Certificates are subordinated to
the Senior Certificates. In the event there are losses or delinquencies on the
Contracts in a certain Group, amounts that otherwise would be distributed on the
Subordinate Certificates of such Group may instead be distributed on the Senior
Certificates of such Group. Holders of the Subordinate Certificates nevertheless
will be required to report interest with respect to such Subordinate
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 in such Contract Group, 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 Subordinate Certificates
in any period could significantly exceed the amount of cash distributed to such
holders in that period. The holders of the Subordinate 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 Subordinate 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
S-94
<PAGE>
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 United States federal income tax
purposes organized in or under the laws of the United States or any state
thereof or the District of Columbia (other than a partnership that is not
treated as a United States person under any applicable Treasury regulations),
(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 will not be considered a Foreign Investor.
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 is
reduced 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, there will be no withholding
tax on interest paid to a Foreign Investor.
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.
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,
1999, 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.
S-95
<PAGE>
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.
Senior 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 Prudential Securities Incorporated,
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.
Subordinate Certificates
As discussed in the Prospectus, because the Subordinate Certificates are
subordinated to the Senior Certificates, the Exemption will not apply to the
Subordinate Certificates. See "ERISA Considerations--Subordinated Certificates"
in the Prospectus.
Consequently, no transfer of a Subordinate 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 to section 4975
of the Code; the trustee of any such plan; a person acting on behalf of any such
plan; nor a person using the assets of any such plan; or (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 Sections I
and III of 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 and holding
of such Subordinate 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 Subordinate Certificates will be deemed to make the
representations in clause (a)(1). See "ERISA Considerations" in the Prospectus.
S-96
<PAGE>
LEGAL INVESTMENT CONSIDERATIONS
The Group I Senior Certificates, the Class I A-6 Certificates, the Class
II A-1 Certificates and the Class II B-1 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 the Act.
The Class I M-1, Class I B-1, Class I B-2, Class II B-2 and Class II B-3
Certificates (the "Non-SMMEA Certificates") will not constitute "mortgage
related securities" under the Secondary Mortgage Market Enhancement Act of 1984.
The appropriate characterization of the Non-SMMEA Certificates under various
legal investment restrictions, and thus the ability of investors subject to
these restrictions to purchase Non-SMMEA 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 Non-SMMEA Certificates will
constitute legal investments for them.
The Company makes no representations as to the proper characterization of
the Non-SMMEA Certificates for legal investment or financial institution
regulatory purposes, or as to the ability of particular investors to purchase
Non-SMMEA 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 Non-SMMEA Certificates) may adversely affect the liquidity of the
Non-SMMEA Certificates. See "Legal Investment Considerations" in the Prospectus.
UNDERWRITING
Each of the Underwriters has 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 its
name below.
<TABLE>
<CAPTION>
Principal Principal Principal Principal Principal Principal
Amount of Amount of Amount of Amount of Amount of Amount of
Class I A-1 Class I A-2 Class I A-3 Class I A-4 Class I A-5 Class I A-6
Underwriter Certificates Certificates Certificates Certificates Certificates Certificates
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Prudential Securities
Incorporated .................... $18,400,000 $19,150,000 $10,900,000 $ 7,600,000 $10,270,000 $ 6,510,000
Credit Suisse First Boston
Corporation ..................... $18,400,000 $19,150,000 $10,900,000 $ 7,600,000 $10,269,000 $ 6,510,000
----------- ----------- ----------- ----------- ----------- -----------
Total ........................... $36,800,000 $38,300,000 $21,800,000 $15,200,000 $20,539,000 $13,020,000
<CAPTION>
Principal Principal Principal Principal Principal Principal Principal
Amount of Amount of Amount of Amount of Amount of Amount of Amount of
Class I M-1 Class I B-1 Class I B-2 Class II A-1 Class II B-1 Class II B-2 Class II B-3
Underwriter Certificates Certificates Certificates Certificates Certificates Certificates Certificates
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Prudential Securities
Incorporated .......... $1,831,000 $3,052,000 $3,662,000 $30,751,000 $4,786,000 $2,138,000 $3,055,000
Credit Suisse First
Boston Corporation .... $1,831,000 $3,052,000 $3,662,000 $30,751,000 $4,786,000 $2,139,000 $3,055,000
---------- ---------- ---------- ----------- ---------- ---------- ----------
Total ................. $3,662,000 $6,104,000 $7,324,000 $61,502,000 $9,572,000 $4,277,000 $6,110,000
</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 0.195% of the aggregate of the
Certificate Principal Balances of the Class I A Certificates, Class I M-1
Certificates, Class II A-1 Certificates and Class II B-1 Certificates and 0.300%
of the aggregate of the Certificate Principal Balances of the Class I B-1
Certificates, Class I B-2 Certificates, Class II B-2 Certificates and Class II
B-3 Certificates.
S-97
<PAGE>
With respect to the Class I A Certificates, Class I M-1 Certificates,
Class II A-1 Certificates and Class II B-1 Certificates, the Underwriters may
allow, and such dealers may reallow, a concession not to exceed 0.130% of the
aggregate of such Certificate Principal Balances. With respect to the Class I
B-1 Certificates, Class I B-2 Certificates, Class II B-2 Certificates and Class
II B-3 Certificates, the Underwriters may allow, and such dealers may reallow, a
concession not to exceed 0.200% of the aggregate of such Certificate Principal
Balances.
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.
S-98
<PAGE>
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 1998C
(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
I-1
<PAGE>
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;
I-2
<PAGE>
(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 United States federal income tax purposes organized in or
under the laws of the United States or any state thereof or the District of
Columbia or (iii) an estate the income of which is includible 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 over the
administration of the trust and one or more United States persons have authority
to control all substantial decisions of the trust. 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.
I-3
<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. Each
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 August 18, 1998.
<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, 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, 500 Alcoa Trail, Maryville, Tennessee
37804, telephone number (423) 380-3515, 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 periods ended September 30,
1997, December 31, 1997 and March 31, 1998, 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.
2
<PAGE>
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) 380-3000, the above mailing address and
telephone number being that of CHI's principal executive office.
3
<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 mortgage loans
(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
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
5
<PAGE>
- --------------------------------------------------------------------------------
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 Certificateholders 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
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
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
Certificates." 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 Certificateholder," 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."
- --------------------------------------------------------------------------------
7
<PAGE>
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
8
<PAGE>
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
9
<PAGE>
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 inconvenience
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).
The Land-and-Home Contracts are 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
10
<PAGE>
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.
11
<PAGE>
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 originated or 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.
12
<PAGE>
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 outstanding 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.
13
<PAGE>
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 June 30, 1998, the Company had total
assets of approximately $936 million and stockholder's equity of approximately
$257 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
500 Alcoa Trail, Maryville, Tennessee 37804, telephone number (423) 380-3515. 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 of 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.
14
<PAGE>
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.
15
<PAGE>
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, in fiscal 1996, the
Company originated 16,910 contracts and in fiscal 1997, the Company originated
21,691 contracts. For fiscal year 1998, the Company originated 24,304 contracts.
At June 30, 1998, the Company was servicing approximately 126,000 contracts and
an aggregate dollar amount of $2,925 million, of which the Company purchased
from dealers or acquired from other institutions approximately 108,000 contracts
with an aggregate dollar amount of approximately $2,593 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
16
<PAGE>
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 in the Agreement 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.
17
<PAGE>
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 repossession, 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
18
<PAGE>
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
19
<PAGE>
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, Land-and-Home Contract files or Mortgage Loan
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,
Land-and-Home Contract files and Mortgage Loan files, as applicable, 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, the Land-and-Home
Contract file or the Mortgage Loan file, as applicable; (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
20
<PAGE>
therein to the Trustee or a separate 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 or the Mortgage Loans, if any, 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 in 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
21
<PAGE>
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
22
<PAGE>
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 proceeds 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.
23
<PAGE>
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 with respect to 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.
24
<PAGE>
(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
25
<PAGE>
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.
26
<PAGE>
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 administrative 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 or 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
27
<PAGE>
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.
28
<PAGE>
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 Agreement. 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 principal 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, Land-and-Home
Contract file, Mortgage Loan 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.
29
<PAGE>
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 negligence 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% per 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.
30
<PAGE>
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.
31
<PAGE>
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
32
<PAGE>
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 Soldier's and Sailor's 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
33
<PAGE>
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.
34
<PAGE>
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.
35
<PAGE>
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 503 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 assets of Plans
(including for these purposes individual retirement accounts and keough plans)
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 a prohibited transaction 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,
36
<PAGE>
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, and it is not anticipated that any other exemption will
apply.
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,
regulatory 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 IBCA, 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
37
<PAGE>
(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 prohibited transactions that may occur if a
Plan fiduciary causes a Plan to acquire interests in a trust that includes
obligations on which the fiduciary (or an affiliate) is obligor 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 any Plan with respect to
which such person is a fiduciary 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.
Consequently, no transfer of a Subordinate 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 to section 4975
of the Code; the trustee of any such plan; a person acting on behalf of any such
plan; nor a person using the assets of any such plan; or (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 Sections I
and III of 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 and holding
of such Subordinate 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 Subordinate Certificates will be deemed to make the
representations in clause (a)(1).
38
<PAGE>
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 interest 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.
39
<PAGE>
"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 payments 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"), do 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 has 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 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
40
<PAGE>
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)(B)
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)(3)(A)(i) and 856(c)(4)(A) of the Code, respectively. In
addition, the REMIC Regulations
41
<PAGE>
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)(B)
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 may 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 generally
means 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
42
<PAGE>
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 purpose 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.
43
<PAGE>
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.
44
<PAGE>
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 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 December 30, 1997 the IRS issued final 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
45
<PAGE>
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.
The Taxpayer Relief Act of 1997 reduces the maximum rates on long-term
capital gains recognized on capital assets held by individual taxpayers for more
than eighteen months as of the date of disposition (and would further reduce the
maximum rates on such gains in the year 2001 and thereafter for certain
individual taxpayers who meet specified conditions). Prospective investors
should consult their own tax advisors concerning these tax law changes.
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
46
<PAGE>
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 interests, including the proper tax
treatment of a payment made by the transferor of such 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."
47
<PAGE>
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 shareholders, 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
48
<PAGE>
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 purposes 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 that the
transferee had historically paid its debts as they came due and found no
significant evidence to indicate that the transferee will not continue to pay
its debts as they come due in the future; and (ii) the 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
Pooling 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."
49
<PAGE>
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 an 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
50
<PAGE>
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 persons prior to such date that elect to continue
to be treated as United States persons will not be considered Foreign Holders.
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 in either of the two preceding years.
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, 1999, 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, 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
Holder 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.
51
<PAGE>
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 REMIC's "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)(B) 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 the treatment of Non-REMIC Certificates and Contracts, if any, 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 payment 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
52
<PAGE>
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
53
<PAGE>
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 thereof (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. See "REMIC Series -- Gain or
Loss on Disposition" above.
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 --
54
<PAGE>
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 provides 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, 1999 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 have 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 of FASIT Securities. 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
55
<PAGE>
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 offseting 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 of FASIT Securities 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
56
<PAGE>
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)(4) 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 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 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
57
<PAGE>
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.
58
<PAGE>
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
59
<PAGE>
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
PricewaterhouseCoopers, LLP, 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.
60
<PAGE>
"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 and 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.
61
<PAGE>
"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 Contracts, 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.
62
<PAGE>
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus Supplement or the
Prospectus and, if given or made, such information or representations must not
be relied upon. This Prospectus Supplement and the Prospectus do not constitute
an offer to sell or a solicitation of an offer to buy any securities other than
the Offered Certificates offered hereby, nor an offer of the Offered
Certificates in any state or jurisdiction in which, or to any person to whom,
such offer would be unlawful. The delivery of this Prospectus Supplement or any
Prospectus at any time does not imply that information herein or therein is
correct as of any time subsequent to its date; however, if any material change
occurs while this Prospectus Supplement or the Prospectus is required by law to
be delivered, this Prospectus Supplement or the Prospectus will be amended or
supplemented accordingly.
Table of Contents
Prospectus Supplement
Page
----
Summary of Terms of the Certificates ..................................... S-4
Risk Factors ............................................................. S-32
The Contract Pool ........................................................ S-34
Vanderbilt Mortgage and Finance, Inc. .................................... S-45
Ratio of Earnings to Fixed Charges for CHI ............................... S-48
Yield and Prepayment Considerations ...................................... S-48
Description of the Certificates .......................................... S-69
Use of Proceeds .......................................................... S-93
Certain Federal Income Tax
Consequences ............................................................ S-93
State Tax Considerations ................................................. S-96
ERISA Considerations ..................................................... S-96
Legal Investment Considerations .......................................... S-97
Underwriting ............................................................. S-97
Legal Matters ............................................................ S-98
Annex I .................................................................. I-1
Prospectus
Reports to Certificateholders ............................................ 2
Available Information .................................................... 2
Incorporation of Certain Documents
of the Company by Reference ............................................. 2
Incorporation of Certain Documents
of CHI by Reference ..................................................... 2
Summary of Terms ......................................................... 4
Risk Factors ............................................................. 10
The Trust Fund ........................................................... 12
Use of Proceeds .......................................................... 14
Vanderbilt Mortgage and Finance, Inc. .................................... 14
Underwriting Policies .................................................... 14
Yield Considerations ..................................................... 16
Maturity and Prepayment
Considerations ......................................................... 17
Description of the Certificates .......................................... 17
Description of FHA Insurance and VA
Guarantees .............................................................. 30
Certain Legal Aspects of the
Contracts ............................................................... 31
ERISA Considerations ..................................................... 36
Certain Federal Income Tax
Consequences ............................................................ 39
State and Local Tax Considerations ....................................... 58
Legal Investment Considerations .......................................... 58
Ratings .................................................................. 59
Underwriting ............................................................. 59
Legal Matters ............................................................ 60
Experts .................................................................. 60
Glossary ................................................................. 60
$244,210,000
(Approximate)
Vanderbilt Mortgage
and Finance, Inc.
Seller and Servicer
Manufactured Housing Contract
Senior / Subordinate
Pass-Through Certificates,
Series 1998C
$36,800,000 (Approximate) Class I A-1
$38,300,000 (Approximate) Class I A-2
$21,800,000 (Approximate) Class I A-3
$15,200,000 (Approximate) Class I A-4
$20,539,000 (Approximate) Class I A-5
$13,020,000 (Approximate) Class I A-6
$ 3,662,000 (Approximate) Class I M-1
$ 6,104,000 (Approximate) Class I B-1
$ 7,324,000 (Approximate) Class I B-2
$61,502,000 (Approximate) Class II A-1
$ 9,572,000 (Approximate) Class II B-1
$ 4,277,000 (Approximate) Class II B-2
$ 6,110,000 (Approximate) Class II B-3
Prudential Securities Incorporated
Credit Suisse First Boston
Prospectus Supplement
Dated August 18, 1998
