<PAGE>
Filed pursuant to Rule 424(b)(5)
File No. 333-39649
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED FEBRUARY 24, 1998)
$114,830,000 6.635% CLASS I-A1 CERTIFICATES
$ 0 VARIABLE RATE CLASS I-IO CERTIFICATES
$ 50,059,000 6.545% CLASS II-A1 CERTIFICATES
$ 24,496,000 7.033% CLASS II-A2 CERTIFICATES
$ 0 VARIABLE CLASS II-IO CERTIFICATES
LEHMAN MANUFACTURED HOUSING ASSET-BACKED TRUST 1998-1
MANUFACTURED HOUSING ASSET-BACKED CERTIFICATES,
SERIES 1998-1
------------------------
LEHMAN ABS CORPORATION,
AS DEPOSITOR
------------------------
Each Manufactured Housing Asset-Backed Certificate, Series 1998-1
(collectively, the 'Certificates') will represent interests in the Lehman
Manufactured Housing Asset-Backed Trust 1998-1 (the 'Trust') to be formed
pursuant to a Pooling Agreement among Lehman ABS Corporation, as Depositor,
Lehman Brothers Inc., as Seller and U.S. Bank National Association, as Trustee.
The Certificates will consist of the Series I Certificates ('Class I-A1' and
'Class I-IO') and the Series II Certificates ('Class II-A1', 'Class II-A2' and
'Class II-IO') (the 'Offered Certificates') and the Residual Certificates with
each of the Series I Certificates and the Series II Certificates representing an
interest in a different group of underlying securities, as described below. The
property of the Trust will include certain manufactured housing contract
pass-through certificates (the 'Underlying Securities') representing a portion
of the senior and subordinate interests in ten separate series of manufactured
housing asset-backed certificates (collectively, the 'Underlying Series') of
Green Tree Financial Corporation ('Green Tree'). Each Underlying Series
represents an interest in a pool of manufactured housing installment sale
contracts and installment loan agreements (the 'Underlying Contracts') and
certain related property originated and conveyed by Green Tree.
The aggregate interest in the Trust represented by the Offered Certificates
will consist of two groups of Underlying Securities (the 'Group I Underlying
Securities' and the 'Group II Underlying Securities' and each a 'Group'). The
Group I Underlying Securities include ten senior classes from nine Underlying
Series of Green Tree Manufactured Housing Contract Senior/Subordinate
Pass-Through Certificates: Series 1995-9, Class A-6; Series 1996-2, Class A-5;
Series 1996-3, Class A-6; Series 1996-5, Class A-6; Series 1996-8, Class A-6;
Series 1996-9, Class A-6; Series 1997-2, Class A-7; Series 1997-3, Class A-6 and
Class A-7; and Series 1997-4, Class A-7. The Group II Underlying Securities
include five classes of Class M-1 Certificates from five Underlying Series of
Green Tree Manufactured Housing Contract Senior/Subordinate Pass-Through
Certificates: Series 1995-9; Series 1996-3; Series 1996-5; Series 1996-6; and
Series 1996-8. As of February 17, 1998 (the 'Reference Date'), the Offered
Certificates are 100% of the outstanding principal balances of the respective
classes of the Underlying Securities.
Distributions of principal and interest on the Offered Certificates will be
made on the fifteenth day of each month or, if such date is not a Business Day
(as defined herein), then the first Business Day following such date (a
'Distribution Date'), commencing March 16, 1998. On each Distribution Date,
holders of the Offered Certificates will be entitled to receive, from and to the
limited extent of funds available in each Distribution Account (as defined
herein), distributions with respect to interest and principal calculated as set
forth herein. The Offered Certificates are not guaranteed by the Depositor or
any affiliate thereof. See 'DESCRIPTION OF THE OFFERED CERTIFICATES' herein.
(continued on next page)
THE OFFERED CERTIFICATES REPRESENT INTERESTS IN THE TRUST ONLY AND DO NOT
REPRESENT INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR, THE TRUSTEE OR ANY
AFFILIATE THEREOF, EXCEPT TO THE EXTENT PROVIDED HEREIN. NEITHER THE
OFFERED CERTIFICATES NOR THE UNDERLYING SECURITIES ARE INSURED OR
GUARANTEED BY ANY GOVERNMENTAL AGENCY.
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.
PROSPECTIVE INVESTORS SHOULD CONSIDER THE FACTORS SET FORTH UNDER 'RISK FACTORS'
BEGINNING ON PAGE S-19 OF THIS PROSPECTUS SUPPLEMENT
AND PAGE 11 OF THE PROSPECTUS.
------------------------
The Offered Certificates offered hereby will be purchased by Lehman Brothers
Inc. (the 'UNDERWRITER') from the Depositor and will be offered by the
Underwriter from time to time to the public in negotiated transactions or
otherwise at varying prices to be determined at the time of sale. Proceeds to
the Depositor from the sale of the Offered Certificates will be $198,337,373,
before deducting expenses payable by the Depositor estimated to be $350,000.
------------------------
The Offered Certificates are offered subject to prior sale and subject to
the Underwriter's right to reject orders in whole or in part. It is expected
that delivery of the Offered Certificates will be made in book-entry form only
through the facilities of The Depository Trust Company on or about February 27,
1998. The Offered Certificates will be offered in the United States of America.
------------------------
LEHMAN BROTHERS
February 24, 1998
<PAGE>
(Cover continued from previous page)
The Series I Certificates will have an aggregate principal balance of
$114,830,000, consisting of $114,830,000 Class I-A1 Certificates. The Series
II Certificates will have an aggregate principal balance of $74,555,000,
consisting of $50,059,000 Class II-A1 Certificates and $24,496,000 Class II-
A2 Certificates. Each of the Class I-IO and Class II-IO Certificates will have
no Class Principal Balance and will receive distributions of interest,
calculated as specified herein, on the Class I-IO and Class II-IO Notional
Amounts, respectively.
An election will be made to treat the assets of the Trust as two
"real estate mortgage investment conduits" (the "Master REMIC" and the
"Subsidiary REMIC" and each, a "REMIC") for federal income tax purposes. As
described more fully herein and in the Prospectus, the Offered Certificates
(other than the Class I-IO and Class II-IO Certificates) and each component of
the Class I- IO and Class II-IO Certificates will be "regular interests" in
the Master REMIC and will be treated as debt instruments of the Master REMIC.
The Class R-1 Certificates and the Class R-2 Certificates will constitute the
sole class of "residual interest" in the Subsidiary REMIC and the Master
REMIC, respectively. See "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS" herein
and in the Prospectus.
The Offered Certificates initially will be represented by
certificates registered in the name of Cede & Co., as nominee of DTC. The
interests of beneficial owners of the Offered Certificates will be represented
by book entries on the records of participating members of DTC. Definitive
Certificates will be available for the Offered Certificates only under the
limited circumstances described herein.
The yield to maturity of the Offered Certificates will be sensitive
to the rate and timing of principal payments (including prepayments, defaults
and repurchases) on the Underlying Contracts. The Underlying Contracts
generally may be prepaid in full or in part at any time.
There is currently no market for the Offered Certificates offered
hereby and there can be no assurance that such a market will develop or if it
does develop that it will continue. See "RISK FACTORS" herein.
The Offered Certificates offered hereby constitute part of a separate
series of Asset-Backed Certificates being offered by Lehman ABS Corporation
from time to time pursuant to its Prospectus dated February 24, 1998. This
Prospectus Supplement does not contain complete information about the offering
of the Offered Certificates. Additional information is contained in the
Prospectus and investors are urged to read both this Prospectus Supplement and
the Prospectus in full, as well as the Prospectuses relating to the Underlying
Securities. Sales of the Offered Certificates may not be consummated unless
the purchaser has received both this Prospectus Supplement and the Prospectus.
Until ninety 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 delivery requirement is in addition to the
obligation of dealers acting as underwriters to deliver a Prospectus
Supplement and Prospectus with respect to their unsold allotments or
subscriptions.
S-2
<PAGE>
SUMMARY
The following summary of certain pertinent information is qualified
in its entirety by reference to the detailed information appearing elsewhere
in this Prospectus Supplement, including Appendix I to this Prospectus
Supplement, and the accompanying Prospectus, as well as the Prospectuses
relating to the Underlying Securities. Certain capitalized terms used in the
Summary are defined elsewhere in the Prospectus Supplement, in the Glossary
accompanying Appendix I to the Prospectus Supplement or in the Prospectus.
Reference is made to the Index of Defined Terms herein and the Glossary of
Terms in the Prospectus for the definitions of certain capitalized terms.
<TABLE>
<S> <C>
Trust....................................... Lehman Manufactured Housing Asset-Backed Trust 1998-1 (the "Trust")
will be formed pursuant to a pooling agreement to be dated as of
February 1, 1998 (the "Agreement") among Lehman ABS Corporation, as
depositor (the "Depositor"), Lehman Brothers Inc., as seller (the
"Seller") and U.S. Bank National Association, as Trustee (the
"Trustee"). The property of the Trust will include certain
manufactured housing contract pass-through certificates (the
"Underlying Securities"), representing a portion of the senior and
subordinate interests in ten separate trust funds, the assets of
which include a portion of the amounts due under manufactured
housing installment sale contracts and installment loan agreements
(collectively, the "Underlying Contracts") and certain related
property conveyed by Green Tree Financial Corporation ("Green Tree")
to the trust funds; the collections in respect of the Underlying
Securities received after the Reference Date (as defined herein);
and certain other property, as described more fully herein.
The Trust property will include the unpaid principal balance (the
"Reference Date Balance") of each Underlying Security as of February
17, 1998 (the "Reference Date"). With respect to any date, the "Pool
Balance" will be equal to the aggregate of the Principal Balances
(as defined below) of all Underlying Securities as of such date.
With respect to any date, the "Group I Pool Balance" will be equal
to the aggregate of the Principal Balances of all Group I Underlying
Securities. With respect to any date, the "Group II Pool Balance"
will be equal to the aggregate of the Principal Balances of all
Group II Underlying Securities. The "Principal Balance" of an
Underlying Security on any day is the original balance of such
security minus the aggregate of amounts actually distributed as
principal on such security minus any Principal Write-Downs (as
defined herein). The Principal Balance is reported as such in the
most recent monthly report (the "Monthly Report") received by the
Trustee from the related trustee listed in Appendix I, as trustee
for the holders of the Underlying Securities for each Underlying
Series (the "Underlying Securities Trustee").
</TABLE>
S-3
<PAGE>
<TABLE>
<S> <C>
Trustee..................................... U.S. Bank National Association (the "Trustee") will act as
Trustee on behalf of the Certificateholders.
Distribution Date........................... Distributions of principal and interest on the Offered Certificates
will be made on the fifteenth day of each month or, if such date
is not a Business Day (as defined herein), then the first Business
Day following such date (a "Distribution Date"), commencing
March 16, 1998. On each Distribution Date, holders of the
Offered Certificates will be entitled to receive, from and to the
limited extent of funds available in each Distribution Account
(as defined herein), distributions with respect to interest and
principal calculated as set forth herein.
Record Date................................. The last day preceding a Distribution Date or, if the Offered
Certificates are no longer in book-entry form (the "Book-Entry
Certificates"), the last day of the month preceding a
Distribution Date.
The Offered Certificates.................... The "Series I Certificates" consist of the following classes
with the following Class Principal Balances:
Class Class Principal Balance
Class I-A1 $114,830,000
Class I-IO $ 0
The "Series II Certificates" consist of the following classes with
the following Class Principal Balances:
Class Class Principal Balance
Class II-A1 $50,059,000
Class II-A2 $24,496,000
Class II-IO $ 0
The Class I-A1 Certificates are also referred to herein as the
"Series I Class A Certificates". The Class II-A1 and Class II-A2
Certificates are referred to herein as the "Series II Class A
Certificates". The Series I Class A Certificates and the Series II
Class A Certificates are referred to herein as the "Class A
Certificates". The Series I Certificates and the Series II
Certificates are referred to herein as the "Offered Certificates".
Each Series represents an interest in a different Group of
Underlying Securities, as described below. Each Offered Certificate
represents an undivided interest in the Trust and represents the
right to receive payments of interest at its respective rate
described below (each, a "Pass-Through Rate" or a "Strip Rate"), and
payments of principal (with respect to
</TABLE>
S-4
<PAGE>
<TABLE>
<S> <C>
the Class A Certificates) at such time and to the extent provided
below. The aggregate undivided interest in the Trust represented by
the Series I Offered Certificates as of the Closing Date (as defined
herein) will equal $114,830,000 of principal, which represents 100%
of the aggregate Series I Reference Date Balance. The aggregate
undivided interest in the Trust represented by the Series II Offered
Certificates (as defined herein) as of the Closing Date will equal
$74,555,000 of principal, which represents 100% of the aggregate
Series II Reference Date Balance.
As of any Distribution Date, the "Class Principal Balance" of a
Class of Certificates (other than the Class I-IO and Class II- IO
Certificates) is the original Class Principal Balance thereof on the
Closing Date, reduced by all prior distributions allocable to
principal and with respect to the Series II Class A Certificates,
reduced by any Principal Write-Down (as defined below). The Class
I-IO and Class II-IO will have no Class Principal Balance. The
"Class I-IO Notional Amount" is the Group I Pool Balance (as defined
herein) as of the previous Distribution Date after giving effect to
distributions on such Distribution Date. The "Class II-IO Notional
Amount" is the Group II Pool Balance (as defined herein) as of the
previous Distribution Date after giving effect to distributions on
such Distribution Date. The Class R Certificates will have no Class
Principal Balance. As of any Distribution Date, the "Series I Class
Principal Balance" is the aggregate of the Class Principal Balances
of the Series I Certificates. As of any Distribution Date, the
"Series II Class Principal Balance" is the aggregate of the Class
Principal Balances of the Series II Certificates.
The Underlying Securities................... The Underlying Securities consist of the Green Tree Manufactured
Housing Contract Senior/Subordinate Pass- Through Certificates,
Series 1995-9, Class A-6; Series 1996-2, Class A-5; Series 1996-3,
Class A-6; Series 1996-5, Class A-6; Series 1996-8, Class A-6;
Series 1996-9, Class A-6; Series 1997-2, Class A-7; Series 1997-3,
Class A-6 and Class A-7; and Series 1997-4, Class A-7 (collectively,
the "Group I Underlying Securities"); Series 1995-9, Class M-1;
Series 1996-3, Class M-1; Series 1996-5, Class M-1; Series 1996-6,
Class M-1; and Series 1996-8, Class M-1 (collectively, the
"Group II Underlying Securities" and together with the Group I
Underlying Securities, the "Underlying Securities") (each Series, an
"Underlying Series") that will be transferred to the Trust by the
Depositor. Each Underlying Security represents an interest in the
related Underlying Securities Trust (as defined herein) and was
issued on the date specified below pursuant to a pooling and
servicing agreement (each, an
</TABLE>
S-5
<PAGE>
<TABLE>
<S> <C>
"Underlying Agreement") among Green Tree Financial Corporation, as
Seller and Servicer, and the applicable Underlying Securities
Trustee. Certain information with respect to the Underlying
Securities of each Underlying Series is set forth below:
</TABLE>
<TABLE>
<CAPTION>
Underlying Underlying
Security Pass-Through
Principal Rate as of
Amount the
Issuance Cut-Off Purchased by Reference
Underlying Security Date (1) Date of Issuance the Depositor Date (2)
------------------- -------- ---------------- ------------- --------
<S> <C> <C> <C> <C>
Group I Underlying Securities:
Underlying Series 1997-4, Class A-7 June 1, 1997 June 30, 1997 15,600,000 7.36%
Underlying Series 1997-3, Class A-6 May 1, 1997 May 29, 1997 40,980,000 7.32%
Underlying Series 1997-3, Class A-7 May 1, 1997 May 29, 1997 7,000,000 7.64%
Underlying Series 1997-2, Class A-7 March 1, 1997 March 31, 1997 8,000,000 7.62%
Underlying Series 1996-9, Class A-6 October 1, 1996 November 7, 1996 4,750,000 7.69%
Underlying Series 1996-8, Class A-6 September 1, 1996 September 30, 1996 10,000,000 7.60%
Underlying Series 1996-5, Class A-6 June 1, 1996 June 27, 1996 8,000,000 7.75%
Underlying Series 1996-3, Class A-6 April 1, 1996 April 22, 1996 5,000,000 7.85%
Underlying Series 1996-2, Class A-5 March 1, 1996 March 21, 1996 5,000,000 7.65%
Underlying Series 1995-9, Class A-6 November 1, 1995 November 16, 1995 10,500,000 7.30%
Group II Underlying Securities:
Underlying Series 1996-8, Class M-1 September 1, 1996 September 30, 1996 28,750,000 7.85%
Underlying Series 1996-6, Class M-1 July 1, 1996 July 31, 1996 15,000,000 7.95%
Underlying Series 1996-5, Class M-1 June 1, 1996 June 27, 1996 9,405,000 8.05%
Underlying Series 1996-3, Class M-1 April 1, 1996 April 22, 1996 5,000,000 7.70%
Underlying Series 1995-9, Class M-1 November 1, 1995 November 16, 1995 16,400,000 7.20%
================================================================================================================
</TABLE>
<TABLE>
<S> <C>
(1) "Issuance Cut-Off Date" refers to the cut-off date for the
related Underlying Series.
(2) The "Underlying Pass-Through Rate" for each Underlying Series
of each is determined as follows:
(a) Underlying Series 1997-4, Class A-7: 7.36% per annum,
subject to a maximum rate equal to the weighted average of
the Contract Rates on each Contract in the respective
Contract Pool, computed on the basis of a 360-day year of
twelve 30-day months
</TABLE>
S-6
<PAGE>
<TABLE>
<S> <C>
(b) Underlying Series 1997-3, Class A-6: 7.32% per annum,
computed on the basis of a 360-day year of twelve 30-day
months
(c) Underlying Series 1997-3, Class A-7: 7.64% per annum,
subject to a maximum rate equal to the weighted average of
the Contract Rates on each Contract in the respective
Contract Pool, computed on the basis of a 360-day year of
twelve 30-day months
(d) Underlying Series 1997-2, Class A-7: 7.62% per annum,
subject to a maximum rate equal to the weighted average of
the Contract Rates on each Contract in the respective
Contract Pool, computed on the basis of a 360-day year of
twelve 30-day months
(e) Underlying Series 1996-9, Class A-6: 7.69% per annum,
subject to a maximum rate equal to the weighted average of
the Contract Rates on each Contract in the respective
Contract Pool, computed on the basis of a 360-day year of
twelve 30-day months
(f) Underlying Series 1996-8, Class A-6: 7.60% per annum,
subject to a maximum rate equal to the weighted average of
the Contract Rates on each Contract in the respective
Contract Pool, computed on the basis of a 360-day year of
twelve 30-day months
(g) Underlying Series 1996-5, Class A-6: 7.75% per annum,
computed on the basis of a 360-day year of twelve 30-day
months
(h) Underlying Series 1996-3, Class A-6: 7.85% per annum,
subject to a maximum rate equal to the weighted average of
the Contract Rates on each Contract in the respective
Contract Pool, computed on the basis of a 360-day year of
twelve 30-day months
(i) Underlying Series 1996-2, Class A-5: 7.65% per annum,
subject to a maximum rate equal to the weighted average of
the Contract Rates on each Contract in the respective
Contract Pool, computed on the basis of a 360-day year of
twelve 30-day months
</TABLE>
S-7
<PAGE>
<TABLE>
<S> <C>
(j) Underlying Series 1995-9, Class A-6: 7.30% per annum,
subject to a maximum rate equal to the weighted average of
the Contract Rates on each Contract in the respective
Contract Pool, computed on the basis of a 360-day year of
twelve 30-day months
(k) Underlying Series 1996-8, Class M-1: 7.85% per annum,
subject to a maximum rate equal to the weighted average of
the Contract Rates on each Contract in the respective
Contract Pool, computed on the basis of a 360-day year of
twelve 30-day months
(l) Underlying Series 1996-6, Class M-1: 7.95% per annum,
subject to a maximum rate equal to the weighted average of
the Contract Rates on each Contract in the respective
Contract Pool, computed on the basis of a 360-day year of
twelve 30-day months
(m) Underlying Series 1996-5, Class M-1: 8.05% per annum,
subject to a maximum rate equal to the weighted average of
the Contract Rates on each Contract in the respective
Contract Pool, computed on the basis of a 360-day year of
twelve 30-day months
(n) Underlying Series 1996-3, Class M-1: 7.70% per annum,
subject to a maximum rate equal to the weighted average of
the Contract Rates on each Contract in the respective
Contract Pool, computed on the basis of a 360-day year of
twelve 30-day months
(o) Underlying Series 1995-9, Class M-1: 7.20% per annum,
subject to a maximum rate equal to the weighted average of
the Contract Rates on each Contract in the respective
Contract Pool, computed on the basis of a 360-day year of
twelve 30-day months.
For additional information relating to the calculation of each
Underlying Pass-Through Rate and other additional information
relating to the Underlying Securities, see "SUMMARY OF TERMS
RELATING TO THE UNDERLYING SERIES" in Appendix I.
</TABLE>
S-8
<PAGE>
<TABLE>
<S> <C>
The assets of the trust relating to an Underlying Series (each, an
"Underlying Securities Trust") include the related Underlying
Contracts. For certain information relating to the Underlying
Contracts (as to each Underlying Series, the related "Underlying
Contract Pool") as of the related Issuance Cut-Off Date, see the
related Underlying Prospectus. A related "Underlying Prospectus" is
the Prospectus and related Prospectus Supplement for the applicable
Underlying Series. See Appendix I for a listing of all Underlying
Prospectuses.
Each of the Group I Underlying Securities and the Group II
Underlying Securities are currently rated by two or more of Moody's
Investors Service, Inc. ("Moody's"), Fitch IBCA, Inc. ("Fitch") and
Standard & Poor's Ratings Group, a division of the McGraw-Hill
Companies, Inc. ("S&P") (each, a "Rating Agency" and collectively,
the "Rating Agencies"). The respective rating by each Rating Agency
for each Class of Underlying Securities is listed in "SUMMARY OF
TERMS RELATING TO THE UNDERLYING SERIES" in Appendix I. On or prior
to the Closing Date, the Seller will sell the Underlying Securities
to the Depositor, which in turn will transfer the Underlying
Securities to the Trust pursuant to the Agreement. The Trustee, as
the holder of the Underlying Securities of each Underlying Series,
will be entitled to monthly distributions of interest at the related
Underlying Pass-Through Rate (determined as described above) and
principal to the extent required by the terms of the related
Underlying Agreement on the 15th day of the month or, if such day is
not a Business Day, on the next succeeding Business Day (the
"Underlying Securities Distribution Date").
None of the Group I Underlying Securities are entitled to
distributions in respect of principal until the Principal Balance of
the Related Senior Certificates of the related Underlying Series has
been reduced to zero. In addition, in the event that certain
distribution tests are met, a Group I Underlying Security will share
principal collections with the subordinate certificates of the
related Underlying Series. As to the Underlying Securities of each
Underlying Series, the "Related Senior Certificates" are the Class A
Certificates of the related Underlying Series that have priority in
right of principal distribution to such Underlying Securities. None
of the Group II Underlying Securities are entitled to distributions
in respect of principal until either the Related Senior Certificates
(as defined herein) of the related Underlying Series have been paid
in full or certain distribution tests have been met. If such
distribution tests are met, the applicable Group II Underlying
Security will share in principal collections with the Related Senior
Certificates. The credit enhancement relating to the
</TABLE>
S-9
<PAGE>
<TABLE>
<S> <C>
Underlying Securities of each Underlying Series is described in
"DESCRIPTION OF THE UNDERLYING SECURITIES" in Appendix I. For
additional information relating to the distributions on the
Underlying Securities and the Related Senior Certificates, see
"DESCRIPTION OF THE UNDERLYING SECURITIES-- Interest Distributions
on the Underlying Securities" and "Principal Distributions on the
Underlying Securities" herein and in Appendix I.
The Underlying Securities are subject to early retirement under
certain conditions described herein under "DESCRIPTION OF THE
UNDERLYING SECURITIES -Early Retirement of the Underlying
Securities."
Denominations............................... The Offered Certificates will be offered for purchase in
denominations of $1,000 and integral multiples thereof.
Registration of Offered
Certificates................................ Each Class of the Offered Certificates initially will be
represented by one or more 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 "Certificateholders" shall reflect the rights of
Certificate Owners as they may indirectly exercise such rights
through DTC and participating members thereof, except as
otherwise specified herein. See "DESCRIPTION OF THE
OFFERED CERTIFICATES--Registration of the Offered
Certificates" herein.
Depositor................................... Lehman ABS Corporation, a Delaware corporation (the
"Depositor"). The principal executive offices of the Depositor
are located at Three World Financial Center, New York, New
York 10285 (Telephone: (212) 526-7000). The Depositor is an
affiliate of the Underwriter. See "THE DEPOSITOR" in the
Prospectus.
Collections on the Underlying
Securities; Distributions
on the Offered Certificates................. The Trustee will deposit collections in respect of each Group of
Underlying Securities in accounts established by it under the
Agreement (the "Group I Distribution Account" and the
"Group II Distribution Account" and together, the
"Distribution Accounts"). See "DESCRIPTION OF THE
OFFERED CERTIFICATES--Payments on Underlying
Securities; Deposits to Distribution Accounts." With respect to
</TABLE>
S-10
<PAGE>
<TABLE>
<S> <C>
each Group of Underlying Securities, amounts received on the related
Underlying Securities and (i) allocable to interest ("Interest
Collections") will be applied to make interest distributions on the
related Offered Certificates and (ii) allocable to principal
("Principal Collections") will be applied to make principal
distributions on the related Offered Certificates.
The funds available in the Group I and Group II Distribution
Accounts for distribution on a Distribution Date (the "Group I
Available Distribution Amount" and the "Group II Available
Distribution Amount," respectively) will be applied in the amounts
and order set forth below.
On each Distribution Date, collections in respect of interest on the
Group I Underlying Securities and the Group II Underlying Securities
will be distributed first to the Trustee in an amount up to the
Trustee Fee. The "Trustee Fee" is equal to the sum of the Group I
Trustee Fee (as defined herein) and the Group II Trustee Fee (as
defined herein). See "The Trustee" herein.
Interest.................................... The "Class I-A1 Pass-Through Rate" equals 6.635%. The
"Class II-A1 Pass-Through Rate" equals 6.545%. The "Class
II-A2 Pass Through Rate" equals 7.033%. The Class I-IO
Certificates will accrue interest at the Class I-IO Strip Rate (as
defined herein) and the Class II-IO Certificates will accrue
interest at the Class II-IO Strip Rate (as defined herein). The
Class I-IO Strip Rate and the Class II-IO Strip Rate are each
referred to herein as a "Strip Rate". Each Class of Class A
Certificates will accrue interest during the related Interest Period
on their Class Principal Balance at the related Pass-Through
Rate. The Class I-IO and Class II-IO Certificates will accrue
interest on the related Notional Amount at the related Strip
Rate.
Interest on the Offered Certificates will be distributed monthly on
the fifteenth day of each month or, if such date is not a Business
Day, then the first Business Day following such date (a
"Distribution Date"), commencing on March 16, 1998. A "Business Day"
is any day defined as such in the Underlying Agreements and any day
other than a day on which banking institutions in the State of
Minnesota are required or authorized by law to be closed.
For each of the Series I Offered Certificates and the Series II
Offered Certificates, interest on the related Offered Certificates
in respect of any Distribution Date will accrue from the 15th day of
the month preceding such Distribution Date through the 14th day of
the month of such Distribution Date (each such period, an "Interest
Period") computed on the basis of a 360-
</TABLE>
S-11
<PAGE>
<TABLE>
<S> <C>
day year of twelve 30-day months. The first Distribution Date
will occur on March 16, 1998.
On each Distribution Date and with respect to each Class of Offered
Certificates, after payment of the related Trustee Fee, each such
Class will be entitled to receive an amount (the "Class Interest
Distribution Amount") equal to the sum of (i) interest accrued
thereon during the related Interest Period at the related
Pass-Through Rate or Strip Rate on the related Class Principal
Balance or Notional Amount (as defined herein) of the related Class
and (ii) the sum of the amounts, if any, by which the amount
described in clause (i) above with respect to such Class on each
prior Distribution Date exceeded the amount actually distributed as
interest on such prior Distribution Dates and not subsequently
distributed ("Unpaid Interest Amounts") and interest thereon at the
related Pass-Through Rate or Strip Rate to the extent legally
permissible.
The Series I Certificates: With respect to each Distribution Date,
Group I Interest Collections (as defined herein) on deposit in the
Group I Distribution Account will be distributed in the following
order of priority:
(i) to the Trustee, the Group I Trustee Fee, plus the amount of
any unpaid Group I Trustee Fee;
(ii) to interest on each Class of Group I Certificates, up to
the Class Interest Distribution Amount for each such Class, pro
rata based on their respective interest entitlements; and
(iii) the remainder to the Class R-2 Certificate.
The Series II Certificates: With respect to each Distribution Date,
Group II Interest Collections on deposit in the Group II
Distribution Account will be distributed in the following order of
priority:
(i) to the Trustee, the Group II Trustee Fee, plus the amount
of any unpaid Group I Trustee Fee;
(ii) to interest on each Class of Group II Certificates, up to
the Class Interest Distribution Amount for each such Class, pro
rata based on their respective interest entitlements;
(iii) to the Trustee, accrued and unpaid Group II Trustee Fee
on the aggregate Principal Write-Downs;
</TABLE>
S-12
<PAGE>
<TABLE>
<S> <C>
(iv) to accrued and unpaid interest on the aggregate Principal
Write-Downs on each Class of Group II Certificates, pro rata
based on their respective entitlement thereto; and
(v) the remainder to the Class R-2 Certificates.
See "DESCRIPTION OF THE OFFERED CERTIFICATES- Interest
Distributions."
Principal................................... With respect to each Series of Certificates on each Distribution
Date, a distribution allocable to principal will be made on the
related Offered Certificates up to the maximum amount that will
have been distributed on the related Underlying Securities on
the Underlying Securities Distribution Dates in the month of
such Distribution Date.
At such time as the Underlying Securities of an Underlying Series
are entitled to principal distributions, the maximum amount of
principal which such Underlying Securities are entitled to on any
Underlying Securities Distribution Date is the Formula Principal
Distribution Amount of each Underlying Series, which is generally
equal to the sum of (i) all scheduled payments of principal on each
outstanding Underlying Contract in the related Underlying Series
during the period in which the Distribution Date occurs for the
related Underlying Securities (after adjustments for previous
Partial Principal Prepayments and after any adjustments to an
Underlying Contract's amortization schedule as a result of a
bankruptcy or a similar proceeding involving the related Obligor),
(ii) the Scheduled Principal Balance (as defined in each related
Underlying Prospectus) of each Underlying Contract in the related
Underlying Series which was purchased by Green Tree pursuant to the
related Agreement on account of certain breaches of its
representations and warranties, (iii) all Partial Principal
Prepayments applied and all Principal Prepayments in Full received
during such period relating to each Underlying Contract in the
related Underlying Series, (iv) the Scheduled Principal Balance (as
defined below) of each Underlying Contract in the related Underlying
Series that became a Liquidated Contract (as defined in the related
Underlying Prospectus) for such period, plus the amount of any
reduction in the outstanding principal balance of an Underlying
Contract during such period ordered as the result of a bankruptcy or
similar proceeding involving the related Obligor, and (v) with
respect to all Underlying Series except for Series 1995-9, Series
1996-2 and Series 1996-3, without duplication of the foregoing, all
collections in respect of principal on the Underlying Contracts in
the related Underlying Series received during the
</TABLE>
S-13
<PAGE>
<TABLE>
<S> <C>
related period in which such Distribution Date occurs up to and
including the third business day prior to such Distribution Date
(but in no event later than the 10th day of the month prior to such
Distribution Date), minus (vi) with respect to all Distribution
Dates other than the first Distribution Date for each related
Underlying Series, the amount included in the Formula Principal
Distribution Amount for the preceding Distribution Date by virtue of
clause (v) of the definition of the Formula Principal Distribution
Amount. See "DESCRIPTION OF THE UNDERLYING SECURITIES -- Principal
Distributions on the Underlying Securities."
On each Distribution Date, collections in respect of principal on
the Underlying Securities on the Underlying Securities Distribution
Dates in the month of such Distribution Date will be distributed on
the related Series of Offered Certificates in the order of priority
set forth herein.
Series I Certificates: Each Series I Class A Certificate will be
entitled to receive on each Distribution Date as distributions of
principal in the order set forth below and to the extent of Group I
Principal Collections, an amount equal to:
(i) to the Class I-A1 Certificateholders, the lesser of (a) the
Group I Underlying Certificate Principal Distribution Amount
(as defined below) for such Distribution Date and (b) the Class
Principal Balance of the Class I-A1 Certificates;
(ii) to the Class R-2 Certificateholder, any remaining Group I
Underlying Certificate Principal Distribution Amount.
The "Group I Underlying Certificate Principal Distribution
Amount" for a Distribution Date is the amount of payments of
principal received with respect to the Group I Underlying
Certificates on the related Underlying Distribution Date.
Series II Certificates: Each Series II Class A Certificate will be
entitled to receive on each Distribution Date as distributions of
principal in the order set forth below and to the extent of Group II
Principal Collections, an amount equal to:
(i) to the Class II-A1 Certificateholders, the lesser of (a)
the Group II Underlying Certificate Principal Distribution
Amount for such Distribution Date and (b) the Class Principal
Balance of the Class II-A1 Certificates;
</TABLE>
S-14
<PAGE>
<TABLE>
<S> <C>
(ii) to the Class II-A2 Certificateholders, after the Class II-
A1 Principal Balance has been reduced to zero, the lesser of
(a) the remaining Group II Underlying Certificate Principal
Distribution Amount for such Distribution Date and (b) the
Class Principal Balance of the Class II-A2 Certificates;
(iii) to the Class R-2 Certificateholder, any remaining Group
II Underlying Certificate Principal Distribution Amount.
The "Group II Underlying Certificate Principal Distribution
Amount" for a Distribution Date is the amount of payments of
principal received with respect to the Group II Underlying
Certificates on the related Underlying Distribution Date.
Principal from the Group II Underlying Securities will be used
to pay principal due on the Series II Class A Certificates, in
the order of priority as described herein.
See "DESCRIPTION OF THE OFFERED CERTIFICATES-- Distributions on the
Offered Securities--Principal Distributions."
Principal Write-Downs on the
Series II Class A Certificates.............. With respect to any Group II Underlying Security, the Amount
Available (as defined in the related Prospectus) in the related
Certificate Account for the related Underlying Security
Distribution Date may be insufficient to distribute the full
Formula Principal Distribution Amount for such Underlying
Security Distribution Date to the Trustee, as holder of such
Underlying Security. As a result, the aggregate outstanding
Principal Balance of the Certificates relating to such Underlying
Security Trust will be greater than the Pool Scheduled Principal
Balance (as defined in the related Underlying Prospectus) for
such Underlying Securities Distribution Date. In such event, the
amount of such deficiency will be absorbed by the Class C
Certificates of the Underlying Series, then the Guarantee Fee (if
any) of the Underlying Series otherwise payable to the
Company, then the Monthly Servicing applicable to the
Underlying Series (so long as Green Tree is Servicer), then the
Class B-2 Certificates of the Underlying Series, then the Class
B-1 Certificates of the Underlying Series, and then the Class M-
1 Certificates of the Underlying Series.
If the protection afforded by the Class C Certificates of the
Underlying Series, the Guarantee Fee (if any) of the Underlying
Series otherwise payable to the Company, the Monthly Servicing
applicable to the Underlying Series (so long as Green Tree is
Servicer), the Class B-2 Certificates of the Underlying Series and
the Class B-1 Certificates of the Underlying Series
</TABLE>
S-15
<PAGE>
<TABLE>
<S> <C>
is eliminated, the Group II Underlying Security may be subject to a
liquidation loss. As a result, the Principal Balance of such
Underlying Security will be reduced by such liquidation loss (any
such reduction, a "Principal Write-Down"). When a Group II
Underlying Security is subject to a Principal Write- Down, such
Principal Write-Down must be applied as a reduction of the Class
Principal Balance of the Series II Class A Certificates, pro rata,
to the Class II-A1 and Class II-A2 Certificates.
In the event that the Class Principal Balance of the Class II-A1
Certificates and the Class II-A2 Certificates is subject to a
Principal Write-Down, interest accruing on each such Class
would be calculated on the reduced principal balance of such
Class. Interest will accrue on the Principal Write-Down at the
applicable Security Pass-Through Rate. The interest accruing
on such Principal Write-Down will be distributed after
distribution of the Class Interest Distribution Amount (as
defined herein) for the Class II-A Certificates.
Principal Write-Downs with respect to the Group II Underlying
Securities and Series II Class A Certificates will not be applied
to the Class I-A1 Certificates.
Special Prepayment and
Yield Considerations........................ The rate and timing of principal payments on the Offered
Certificates will depend, among other things, on the rate and
timing of principal payments on the Underlying Securities,
which in turn will be affected by the rate and timing of
principal payments (including prepayments, repurchases, defaults
and liquidations) on the Underlying Contracts, and the amount
and timing of defaults resulting in an Underlying Contract
becoming a liquidated contract.
See "YIELD AND PREPAYMENT CONSIDERATIONS"
herein.
Legal Investment............................ The Offered Certificates offered hereby will constitute
"mortgage related securities" under the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA") and will be
"legal investments" for certain types of institutional investors to
the extent provided in that Act. See "LEGAL INVESTMENT
CONSIDERATIONS" herein and "LEGAL INVESTMENT" in
the Prospectus.
ERISA Considerations........................ The Offered Certificates may not be purchased by, or
transferred to, any employee benefit plan subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or a
plan (including individual retirement accounts)
</TABLE>
S-16
<PAGE>
<TABLE>
<S> <C>
subject to Section 4975 of the Internal Revenue Code of 1986, as
amended (the "Code"), except upon satisfaction of certain
conditions. See "ERISA CONSIDERATIONS" herein and in the Prospectus.
Final Payment of
Principal; Termination...................... The Trust will terminate on the Distribution Date following the
earliest of (i) the Distribution Date on which the Series I Class
Principal Balance, the Series II Class Principal Balance, the
Class I-IO Notional Balance and the Class II-IO Notional
Balance have been reduced to zero, (ii) the final payment or
other liquidation of the last Underlying Security in the Trust,
and (iii) the Distribution Date in July, 2028. See
"DESCRIPTION OF THE OFFERED CERTIFICATES
--Termination; Retirement of the Offered Certificates" herein
and "THE AGREEMENTS--Termination" in the Prospectus.
Certain Federal Tax
Considerations.............................. For federal income tax purposes, the Trust created by the
Pooling Agreement will be treated as two "real estate mortgage
investment conduits" (the "Master REMIC" and the
"Subsidiary REMIC" and each, a "REMIC"). The Offered
Certificates (other than the Class I-IO and Class II-IO
Certificates) and each component of the Class I-IO and Class II-
IO Certificates will be "regular interests" in the Master REMIC
and will be treated as debt instruments of the Master REMIC.
The Class R-1 and the Class R-2 Certificates (the "Residual
Certificates" or the "Class R Certificates") will constitute the
sole class of "residual interests" in the Subsidiary REMIC and
the Master REMIC, respectively.
The holders of the Offered Certificates will be required to
include in income interest on such Certificates in accordance
with the accrual method of accounting. The Class I-IO and
Class II-IO Certificates will and the other Offered Certificates
may, depending on their issue price, be treated as having been
issued with original issue discount for federal income tax
purposes. For further information regarding the federal income
tax consequences of investing in the Offered Certificates, see
"CERTAIN FEDERAL INCOME TAX CONSIDERATIONS"
herein and in the Prospectus.
Rating...................................... It is a condition to the issuance of the Class I-A1 and Class I-IO
Certificates that they be rated not lower than "Aaa" by Moody's
and "AAA" by Fitch, respectively. It is a condition to the
issuance of the Class II-A1, Class II-A2 and Class II-IO
Certificates that they be rated not lower than "Aa3" by Moody's
and "AA-" by Fitch, respectively. A security rating is not a
recommendation to buy, sell or hold securities and may be
</TABLE>
S-17
<PAGE>
<TABLE>
<S> <C>
subject to revision or withdrawal at any time by the rating agency.
See "RATING" herein and "RISK FACTORS--Rating of the Offered
Certificates" in the Prospectus.
</TABLE>
S-18
<PAGE>
RISK FACTORS
Prospective Certificateholders should consider, in addition to the
factors described under "Risk Factors" in the Prospectus, the following
factors in connection with the purchase of the Offered Certificates, as
appropriate:
General. An investment in the Offered 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 pools of manufactured housing installment sale contracts. See
"THE TRUST FUNDS--The Contracts" in the related Underlying Prospectus.
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
Underlying Contracts that they secure. Sufficiently high delinquencies and
liquidation losses on the Underlying Contracts will have the effect of
reducing, and could eliminate the protection against loss afforded to the
Underlying Class A and Class M-1 Certificates by the subordination of the
related underlying Class B and Class C Certificates. If such protection is
eliminated, the Class A Certificateholders and the Class M-1
Certificateholders will bear the risk of losses on the Underlying Contracts.
See "Description of the Certificates--Subordination of Class M-1 Certificates,
Class B Certificates, and Class C Certificates" in the Prospectus related to
each Underlying Series.
Prepayment Considerations. The prepayment experience on the related
Underlying Contracts will affect the average life of each Class of Underlying
Securities, which in turn will affect the average life of each Class of
Offered Certificates. Prepayments on the Underlying 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 an Underlying
Contract is prepaid in full, interest on such Underlying Contract will accrue
only to the date of prepayment. If the Underlying Certificates of any
Underlying 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 Underlying 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. See "YIELD AND PREPAYMENT
CONSIDERATIONS" herein.
Security Interests and Certain Other Aspects of the Underlying
Contracts. Each Underlying Contract is secured by a security interest in a
Manufactured Home (or, in the case of a Land-and-Home Contract, by a mortgage
or deed of trust on the real estate to which the Manufactured Home is
permanently affixed). Perfection of security interests in the Manufactured
Homes and enforcement of rights to realize upon the value of the Manufactured
Homes as collateral for the Underlying Contracts are subject to a number of
federal and state laws, including the Uniform Commercial Code (the "UCC") as
adopted in each state and, in most states, certificate of title statutes, but
generally not state real estate laws. The steps necessary to perfect the
security interest in a Manufactured Home vary from state to state. Because of
the expense and administrative inconvenience involved, Green Tree did not
amend any certificate of title to name the Underlying Trustee as the
lienholder and did not deliver any certificate of title to the Underlying
Trustee or note thereon the Underlying Trustee's interest. Consequently, in
some states in the absence of such an amendment to the certificate of title
the assignment to the Underlying Trustee of the security interest in the
Manufactured Home may not be effective or such security interest
S-19
<PAGE>
may not be perfected and in the absence of such notation or delivery to the
Underlying Trustee the assignment of the security interest in the Manufactured
Home to the Underlying Trustee may not be effective against creditors of Green
Tree or a trustee in bankruptcy of Green Tree. Because of the expense and
administrative inconvenience involved, Green Tree did not record the
assignment to the Underlying Trustee of the mortgage or deed of trust securing
each Land-and-Home Contract. Consequently, in some states in the absence of
such recordation the assignment to the Underlying Trustee of the mortgage or
deed of trust securing a Land-and-Home Contract may not be effective, and in
the absence of such recordation the assignment of the mortgage or deed of
trust to the Underlying Trustee may not be effective against creditors of or
purchasers from Green Tree or a trustee in bankruptcy of Green Tree. In
addition, numerous federal and state consumer protection laws impose
requirements on lenders under installment sales contracts and installment loan
agreements such as the Underlying 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. These laws apply to the various
Underlying Trust Funds as assignees of the Underlying Contracts. From time to
time, Green Tree has been involved in litigation under consumer or debtor
protection laws, some of which have been class actions. Pursuant to the
Underlying Agreements, Green Tree represented and warranted that each
Underlying Contract complied with all requirements of law and provided certain
warranties relating to the validity, perfection and priority of the security
interest in each Manufactured Home securing an Underlying Contract. A breach
by Green Tree of any such warranty that materially adversely affects any
Underlying Contract would require Green Tree to repurchase, or at its option
substitute another manufactured housing contract for, such Underlying Contract
unless such breach is cured within 90 days. If Green Tree does not honor its
repurchase obligation in respect of an Underlying Contract and such Underlying
Contact were to become defaulted, recovery of amounts due on such Underlying
Contract would be dependent on repossession and resale of the Manufactured
Home securing such Underlying Contract. Certain other factors may limit the
ability of the Trust, as holder of the Underlying Securities, to realize upon
the Manufactured Homes or may limit the amount realized to less than the
amount due and consequently, the holders of the Offered Certificates may
experience delays or losses or both. See "CERTAIN LEGAL ASPECTS OF THE
CONTRACTS" in the Prospectus relating to each Underlying Series.
Certain Matters Relating to Insolvency. The sale of the Underlying
Securities from the Seller to the Depositor will be treated as a sale and
according to each Prospectus relating to the Underlying Securities the
transfer of the related Underlying Contracts from Green Tree to the Underlying
Securities Trustee will be treated as a sale of the Underlying Contracts.
However, in the event of an insolvency of Green Tree or the Seller, the
receiver thereof may attempt to re-characterize the sale of the Underlying
Contracts (in the case of Green Tree) and the Underlying Securities (in the
case of the Seller) as a borrowing by Green Tree or the Seller, as the case
may be, secured by a pledge of the applicable assets. If the receiver decided
to challenge such transfers, delays in payments of the Offered Certificates
and possible reductions in the amount thereof could occur. The Depositor will
warrant in the Agreement that the transfer of the Underlying Securities by it
to the Trust is either a valid transfer and assignment of the Underlying
Securities to the Trust or the grant to the Trust of a security interest in
the Underlying Securities.
The case of Octagon Gas Systems, Inc. v. Rimmer, 995 F.2d 948 (10th
Cir. 1993) contains language to the effect that accounts sold by an entity
which subsequently became bankrupt remained property of the debtor's
bankruptcy estate. Although the Underlying 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 Green Tree were to become a
debtor under the federal bankruptcy code and a court
S-20
<PAGE>
were to follow the reasoning of the Tenth Circuit and apply such reasoning to
chattel paper, the Trust, as holder of the Underlying Securities, could
experience a delay or reduction in distributions and consequently, the holders
of the Offered Certificates may experience delays or losses or both.
Certificate Rating. The rating of the Offered Certificates will
depend primarily on an assessment by the Rating Agencies of the Underlying
Securities. The rating by the Rating Agencies of the Offered Certificates is
not a recommendation to purchase, hold or sell the Offered Certificates,
inasmuch as such rating does not comment as to the market price or suitability
for a particular investor. There is no assurance that the ratings will remain
in place for any given period of time or that the ratings will not be lowered
or withdrawn by the Rating Agencies.
GREEN TREE FINANCIAL CORPORATION
General
Green Tree is a Delaware corporation which purchases, pools, sells
and services conditional sales contracts for manufactured housing throughout
the nation. Green Tree is the largest servicer of manufactured housing
government insured or guaranteed contracts and of conventional manufactured
housing contracts in the United States. Green Tree acts as Servicer of the
Underlying Contracts. Servicing functions are performed through Green Tree
Financial Servicing Corporation, a wholly owned subsidiary of Green Tree.
Through its principal offices in Saint Paul, Minnesota and service centers
throughout the United States, Green Tree serves all 50 states. Green Tree's
principal executive offices are located at 1100 Landmark Towers, 345 St. Peter
Street, St. Paul, Minnesota 55102-1639 (telephone (612) 293-3400). Green
Tree's Annual Report on Form 10-K for the year ended December 31, 1996, most
recent Proxy Statement and, when available, subsequent quarterly and annual
reports are available from Green Tree upon written request.
Delinquency, Loan Loss and Repossession Experience
For the delinquency, loan loss and repossession experience of the
portfolio of conventional manufactured housing contracts serviced by Green
Tree, see Appendix II.
Recent Developments
Green Tree recently announced that it has decided to take a
supplemental reserve of $190 million against the valuation of its interest
only securities in the quarter ended December 31, 1997, and that the carrying
value of its interest only securities should be reduced by an additional $200
million in the audited financial statements for 1996, which are being restated
accordingly.
Green Tree has recently received 26 securities law complaints filed
in U.S. District Court. The complaints allege that Green Tree and certain of
its officers omitted or misrepresented material facts about the business and
financial condition of Green Tree in violation of federal securities laws. The
complaints seek class action status. The Prospectus for Green Tree's most
recent issue of manufactured housing pass-through certificates states that
Green Tree has reviewed the complaints and believes the allegations to be
without merit, and that Green Tree plans a vigorous defense against the
lawsuits.
S-21
<PAGE>
DESCRIPTION OF THE UNDERLYING SECURITIES
Each Underlying Security represents a portion of certain senior and
subordinate interests in nine separate pools of Underlying Contracts
originated and sold to the related Underlying Securities Trust by Green Tree.
The Underlying Securities of each Underlying Series were issued pursuant to a
separate pooling and servicing agreement (each, an "Underlying Agreement")
between Green Tree, as Seller and Servicer and the applicable Underlying
Securities Trustee. The description of the Underlying Securities, the Related
Senior Certificates and the Underlying Agreements that follows is a summary of
certain of the terms and provisions relating to each of the Underlying Series
and does not purport to be complete. Such description is subject to and is
qualified in its entirety by reference to Appendix I and to the actual terms
and provisions of the Underlying Agreements, as well as the Prospectuses
relating to the Underlying Securities.
Set forth below is certain information relating to the Underlying
Securities of each Underlying Series as of the date indicated.
S-22
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================
Underlying Security
Underlying Security Principal Amount
Underlying Security Balance as of Date of Purchased by Depositor
Date of Principal Amount Issuance and of as a Percentage of
Series and Class Issuance Purchased by Depositor Reference Date Underlying Security
- ---------------- -------- ---------------------- -------------- -------------------
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
1997-4 June 30, 1997
Class A-7 $15,600,000 $105,000,000 14.86%
- --------------------------------------------------------------------------------------------------------------------
1997-3 May 29, 1997
Class A-6 $40,980,000 $105,000,000 39.03%
Class A-7 $7,000,000 $144,000,000 4.86%
- --------------------------------------------------------------------------------------------------------------------
1997-2 March 31, 1997
Class A-7 $8,000,000 $136,617,000 5.86%
- --------------------------------------------------------------------------------------------------------------------
1996-9 Nov. 7, 1996
Class A-6 $4,750,000 $122,750,000 3.87%
- --------------------------------------------------------------------------------------------------------------------
1996-8 Sept. 30, 1996
Class A-6 $10,000,000 $114,000,000 8.77%
Class M-1 $28,750,000 $48,000,000 59.90%
- --------------------------------------------------------------------------------------------------------------------
1996-6 July 31, 1996
Class M-1 $15,000,000 $38,000,000 39.47%
- --------------------------------------------------------------------------------------------------------------------
1996-5 June 27, 1996
Class A-6 $8,000,000 $67,000,000 11.94%
Class M-1 $9,405,000 $41,405,000 22.71%
- --------------------------------------------------------------------------------------------------------------------
1996-3 April 22, 1996
Class A-6 $5,000,000 $73,650,000 6.79%
Class M-1 $5,000,000 $33,470,000 14.94%
- --------------------------------------------------------------------------------------------------------------------
1996-2 March 21, 1996
Class A-5 $5,000,000 $81,860,000 6.11%
- --------------------------------------------------------------------------------------------------------------------
1995-9 Nov. 16, 1995
Class A-6 $10,500,000 $88,000,000 11.93%
Class M-1 $16,400,000 $35,900,000 45.68%
====================================================================================================================
<CAPTION>
==================================================================================================================================
Underlying Security
Principal Amount
Purchased by
Depositor as a
Approximate Percentage of
Approximate Underlying Underlying Contract Underlying Contract Subordinated Underlying Security
Contract Pool Balance as Pool Balance as of Pool as of Amount(1) as of Pass-Through Rate as
Series and Class of Date of Issuance Reference Date Reference Date Reference Date of Reference Date
- ---------------- ------------------- -------------- -------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
1997-4 $520,000,000 $493,767,466.79 $78,000,000
Class A-7 3.16% 7.36%(2)
- ----------------------------------------------------------------------------------------------------------------------------------
1997-3 $800,000,000 $759,852,367.28
Class A-6 5.39% $120,000,000 7.32%
Class A-7 0.92% $120,000,000 7.64%(2)
- ----------------------------------------------------------------------------------------------------------------------------------
1997-2 $550,000,000 $516,924,910.58
Class A-7 1.55% $82,500,000 7.62%(2)
- ----------------------------------------------------------------------------------------------------------------------------------
1996-9 $450,000,000 $400,944,925.62
Class A-6 1.18% $69,750,000 7.69%(2)
- ----------------------------------------------------------------------------------------------------------------------------------
1996-8 $600,051,865 $527,724,305.59
Class A-6 1.89% $93,051,865 7.60%(2)
Class M-1 5.45% $45,051,865 7.85%(2)
- ----------------------------------------------------------------------------------------------------------------------------------
1996-6 $475,000,025 $411,292,598.54
Class M-1 3.65% $35,625,025 7.95%(2)
- ----------------------------------------------------------------------------------------------------------------------------------
1996-5 $517,584,659 $446,763,599.99
Class A-6 1.79% $80,225,659 7.75%
Class M-1 2.11% $38,820,659 8.05%(2)
- ----------------------------------------------------------------------------------------------------------------------------------
1996-3 $371,878,810 $316,913,685.10
Class A-6 1.58% $63,228,810 7.85%(2)
Class M-1 1.58% $29,758,810 7.70%(2)
- ----------------------------------------------------------------------------------------------------------------------------------
1996-2 $465,268,332 $391,858,308.53
Class A-5 1.28% $79,068,332 7.65%(2)
- ----------------------------------------------------------------------------------------------------------------------------------
1995-9 $398,796,644 $318,094,861.73
Class A-6 3.30% $67,796,644 7.30%(2)
Class M-1 5.16% $31,896,644 7.20%(2)
==================================================================================================================================
</TABLE>
(1) With respect to each Group I Underlying Security, the Subordinated
Amount is the principal balance of the Class M-1, Class B-1 and Class
B-2 Certificates from the related Underlying Securities Trust. With
respect to each Group II Underlying Security, the Subordinated Amount
is the principal balance of the Class B-1 and Class B-2 Certificates
from the related Underlying Securities Trust.
(2) The Underlying Series and the Underlying Pass-Through Rate for each
Underlying Security is subject to a maximum rate equal to the
weighted average of the Contract Rates on each Contract in the
respective Contract Pool, computed on the basis of a 360-day year of
twelve 30-day months, as described in "Summary of Terms Relating to
the Underlying Series--Maximum Pass-Through Rates" in Appendix I.
S-23
<PAGE>
Certain information relating to the Underlying Securities filed by or
on behalf of Green Tree Manufactured Housing Contract Senior/Subordinate
Pass-Through Certificates with the United States Securities Exchange
Commission (the "Commission") can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the following regional offices of the
Commission: New York Regional Office, Suite 1300, 7 World Trade Center, New
York, New York 10048; Los Angeles Regional Office, 5670 Wilshire Boulevard,
11th Floor, Los Angeles, California 90036; and Chicago Regional Office, Suite
1400, 500 West Madison Street, Chicago, Illinois 60661. Copies of such
material can be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington D.C. 20549, at prescribed rates. In
addition, the Commission maintains a Website that contains certain information
regarding the Underlying Securities. The address of the Commission's Website
is http://www.sec.gov.
See the Prospectuses relating to the Underlying Securities for a
description of the method by which the Underlying Pass-Through Rate for the
Related Senior Certificates is determined and the amount of principal and
interest to which the Related Senior Certificates is entitled on any
Underlying Securities Distribution Date. As to any Underlying Securities
Distribution Date, the Underlying Securities of an Underlying Series are not
entitled to any distributions of principal or interest until the Related
Senior Certificates have received the maximum amount of principal and interest
to which they are entitled on such Underlying Securities Distribution Date.
Distributions
On each Underlying Securities Distribution Date, the related
Underlying Securities will be entitled to receive, to the extent that the
Amount Available (as defined in the Prospectus relating to each Underlying
Security) in the related Certificate Account is sufficient therefor,
distributions allocable to interest and principal, as further described in the
related Underlying Prospectus.
Interest Distributions on the Underlying Securities
Interest on each Underlying Security will accrue from the most recent
Underlying Securities Distribution Date on which interest has been paid to but
excluding the following Underlying Securities Distribution Date.
With respect to each Group I Underlying Security, interest will be
distributable to each Class of the Related Class A Certificates concurrently.
With respect to a Group I Underlying Security, the "Related Class A
Certificates" are the Class A Certificates issued in addition to the related
Group I Underlying Security. In the event that, on a particular Underlying
Securities Distribution Date, the Amount Available with respect to an
Underlying Securities Trust is not sufficient to make a full distribution of
interest to the related Underlying Security and to the Related Class A
Certificates, the amount of interest to be distributed in respect of such
Certificates will be allocated among such Certificates pro rata in accordance
with their respective entitlements to interest, and the amount of the
shortfall will be carried forward and added to the amount such
Certificateholders will be entitled to receive on the next Underlying
Securities Distribution Date. Any amount carried forward will bear interest at
the applicable Underlying Pass-Through Rate.
With respect to each Group II Underlying Security, interest will be
distributable to each Class of the Related Senior Certificates concurrently.
Then, with respect to all Underlying Series except for Series 1995-9 and
Series 1996-3, interest will be distributable to such Group II Underlying
Security on the Adjusted Balance of such Class. With respect to Series 1995-9
and Series 1996-3, interest is distributable to each Group II Underlying
Security on its Adjusted Balance after the distribution of principal to the
Related Senior Certificates in an amount equal to the applicable Class
Percentage (as defined in the related Underlying Prospectus) of the related
Formula Principal Distribution Amount. The "Adjusted Balance" of a Group II
Underlying Security is the initial balance thereof less amounts previously
distributed on
S-24
<PAGE>
account of principal on such Group II Underlying Security less any liquidation
losses allocated to such Group II Underlying Security. In the event that after
payment of interest on the Related Senior Certificates the remaining Amount
Available is not sufficient to make a full distribution of interest to the
holders of such Group II Underlying Security, the amount of interest to be
distributed in respect of such Class will be allocated among the outstanding
Certificates of such Class pro rata in accordance with their respective
entitlements to interest, and the amount of the shortfall will be carried
forward and added to the amount such Certificateholders will be entitled to
receive on the next Underlying Securities Distribution Date.
Any amount carried forward will bear interest at the applicable
underlying Pass-Through Rate. In the event of the reduction of the Class
Principal Balance of a Group II Underlying Security due to a liquidation loss,
interest will accrue on such liquidation loss at the applicable Underlying
Pass-Through Rate. The interest accruing on such liquidation loss, plus
interest at the applicable Underlying Pass- Through Rate due on a prior
Remittance Date but not paid, would be payable to the Trustee, as holder of
the Group II Underlying Security, from the Amount Available after distribution
of principal on such Underlying Security but prior to any distribution of
principal on a Class subordinate to such Underlying Security.
Principal Distributions on the Underlying Securities
On (i) each Group I Underlying Securities Distribution Date following
the Underlying Securities Distribution Date on which the Principal Balance of
the Related Senior Certificates of the related Underlying Series has been
reduced to zero, the Group I Underlying Securities of an Underlying Series, to
the extent of the related Amount Available after distributions of interest on
such Underlying Securities, and (ii) each Group II Underlying Securities
Distribution Date on which either the Related Senior Certificates of the
related Underlying Series have been paid in full or certain distribution tests
have been met, the Group II Underlying Securities of the Underlying Series, to
the extent of the related Amount Available after distributions of interest and
principal (as applicable) on such Underlying Securities, will be entitled to
receive:
(a) the lesser of (1) the product of (x) the applicable
Underlying Class Percentage and (y) the Formula Principal
Distribution Amount of each Underlying Series, which is generally
equal to the sum of (i) all scheduled payments of principal on each
outstanding Underlying Contract during the period in which the
Distribution Date occurs for the related Underlying Securities (after
adjustments for previous Partial Principal Prepayments and after any
adjustments to an Underlying Contract's amortization schedule as a
result of a bankruptcy or a similar proceeding involving the related
Obligor), (ii) the Scheduled Principal Balance (as defined in each
related Underlying Prospectus) of each Underlying Contract which was
purchased by Green Tree pursuant to the related Agreement on account
of certain breaches of its representations and warranties, (iii) all
Partial Principal Prepayments applied and all Principal Prepayments
in Full received during such period, (iv) the Scheduled Principal
Balance (as defined below) of each Underlying Contract that became a
Liquidated Contract (as defined in the related Underlying Prospectus)
for such period, plus the amount of any reduction in the outstanding
principal balance of an Underlying Contract during such period
ordered as the result of a bankruptcy or similar proceeding involving
the related Obligor; and (v) with respect to all Underlying Series
except for Series 1995-9, Series 1996-2 and Series 1996-3, without
duplication of the foregoing, all collections in respect of principal
on the Underlying Contracts received during the related period in
which such Distribution Date occurs up to and including the third
business day prior to such Distribution Date (but in no event later
than the 10th day of the month prior to such Distribution Date),
minus (vi) with respect to the all Distribution Dates other than the
first Distribution Date for each related Underlying Series, the
amount included in the Formula Principal Distribution Amount for the
preceding Distribution Date by virtue of clause (v) of the definition
of the Formula Principal Distribution Amount; and (2) the Principal
Balance of such Underlying Securities; provided,
S-25
<PAGE>
however, that on the Underlying Securities Distribution Date the
principal balance of the Related Senior Certificates is reduced to
zero, the amounts described in subclause (i) of this clause (a) shall
be reduced by the portion of the amount for such Underlying
Securities Distribution Date that is distributed on the Related
Senior Certificates in respect of principal; and
(b) if distribution of the amount of principal calculated
pursuant to clause (a) above was not made in full on a previous
Underlying Securities Distribution Date, the difference between (i)
the amount of principal which should have been distributed as
principal on the previous Underlying Securities Distribution Date if
there had been sufficient related Amounts Available and (ii) the
amount of principal actually distributed on such previous Underlying
Securities Distribution Date (the "Unpaid Principal Shortfall"), as
applicable.
For any date, the "Principal Balance" of an Underlying
Security is the principal balance reported as such in the most recent
Monthly Report.
Early Retirement of the Underlying Securities
At its option either the Servicer or Green Tree may repurchase from
an Underlying Securities Trust all remaining related Underlying Contracts, and
thereby effect early retirement of the related Underlying Security, on any
Underlying Securities Distribution Date on which the Pool Scheduled Principal
Balance (as defined in the related Underlying Prospectus) of such Underlying
Series is less than 10% of the Cut-off Date Pool Principal Balance of such
Underlying Series (as defined in the related Underlying Prospectus). Proceeds
of such repurchase attributable to an Underlying Security will be payable to
the Trustee, as holder of the Underlying Security, and the Offered
Certificates then entitled to principal will receive such proceeds.
YIELD AND PREPAYMENT CONSIDERATIONS
The rate of payment of principal of the Offered Certificates will be
determined by the rate of payment of principal of the Underlying Securities.
The rate of payment of principal of the Underlying Securities will be
determined by the rate of payment of principal (including prepayments,
repurchases, defaults and liquidations) of the Underlying Contracts. The
weighted average life of a security refers to the average amount of time that
will elapse from the date of issuance of a security to the date of
distribution to the investor of each dollar distributed in reduction of
principal of such security (assuming no losses). The weighted average lives of
the Offered Certificates will be affected by, among other things, the rate at
which principal of the Underlying Contracts is paid, which may be in the form
of scheduled amortization, prepayments or liquidations. See "-Prepayment
Considerations with respect to the Underlying Contracts."
Furthermore, as more fully described in each Underlying Prospectus,
none of the Group I Underlying Securities are entitled to principal
distributions until all Related Senior Certificates have been paid in full. In
addition, in the event that certain distribution tests are met, a Group I
Underlying Security and the Related Class A Certificates will share in
principal collections with the subordinate certificates of the related
Underlying Series. In addition, none of the Group II Underlying Securities are
entitled to distributions in respect of principal until either the Related
Senior Certificates of the related Underlying Series have been paid in full or
certain distribution tests have been met. If such distribution tests are met,
the applicable Group II Underlying Security will share in principal
collections with the Related Senior Certificates.
The yield to an investor who purchases the Offered Certificates in
the secondary market at a price other than par will vary from the anticipated
yield if the rate of prepayment on the Underlying Contracts
S-26
<PAGE>
is actually different than the rate anticipated by such investor at the time
such Offered Certificates were purchased.
The yield to maturity on the Class I-IO and Class II-IO Certificates
will be particularly sensitive to the principal prepayment, repurchase and
default experience of the Underlying Contracts. Investors should carefully
consider the risk that a rapid rate of principal prepayments on the Contracts
or repurchases of Contracts will have an adverse effect on the yield to
investors in the Class I-IO and Class II-IO Certificates and, under certain
scenarios, could result in the failure of such investors to recover their
initial investments.
No assurance can be given as to the level of prepayments that will be
experienced by the Underlying Contracts. See "DESCRIPTION OF THE
SECURITIES--Weighted Average Life of the Securities" in the Prospectus.
The rate of prepayment on the Underlying Contracts cannot be
predicted. The prepayment experience with respect to the Underlying Contracts
may be affected by a wide variety of factors, including general and regional
economic conditions, prevailing interest rate levels, the availability of
alternative financing and homeowner mobility. Natural disasters may also
influence prepayments. In addition, repurchases of Underlying Contracts on
account of certain breaches of representations and warranties, have the effect
of prepaying such Underlying Contracts and therefore would affect the average
lives of the Offered Certificates. The prepayment experience on manufactured
housing contracts varies greatly.
Prepayment Considerations with respect to the Underlying Contracts
The Underlying Contracts generally may be prepaid in full or in part
without penalty. FHA Contracts and VA Contracts may be prepaid at any time
without penalty. A number of factors, including homeowner mobility, general
and regional economic conditions and prevailing interest rates, may influence
prepayments. In addition, repurchases of Underlying Contracts on account of
certain breaches of representations and warranties have the effect of
prepaying such Underlying Contracts and therefore would affect the average
life of the related Underlying Securities. Most of the Underlying Contracts
contain a "due-on-sale clause" that would permit the Servicer to accelerate
the maturity of an Underlying Contract upon the sale of the related
Manufactured Home. In the case of those Underlying Contracts that do contain
due-on-sale clauses, the Servicer will permit assumptions of such Underlying
Contracts if the purchaser of the related Manufactured Home satisfies Green
Tree's then-current underwriting standards.
There is no assurance, however, that prepayment of the Underlying
Contracts will conform to any level of prepayment, and no representation is
made that the Underlying Contracts will prepay at any particular 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. Increased competition among manufactured housing lenders and
recently declining interest rates have had the effect of increasing the
prepayment rates of Green Tree's 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 mortgage loans secured by site-built homes, in general, if prevailing
interest rates fall significantly below the interest rates on such mortgage
loans, the mortgage loans are likely to be subject to higher prepayment rates
than if prevailing interest rates remained at or above the rates borne by such
mortgage loans. Conversely, if prevailing interest rates rise above the
interest rates on such mortgage loans, the rate of prepayment would be
expected to decrease.
Obligors who have entered bankruptcy proceedings and have had their
monthly scheduled payment reduced as a result of an extension of the term of
the related Underlying Contract may not be pursued by
S-27
<PAGE>
Green Tree as delinquent, and accordingly Green Tree uses the reduced monthly
payment in calculating the Formula Principal Distribution Amount for each
Remittance Date thereafter. If, however, the principal amount of the
Underlying Contract were reduced in such bankruptcy proceedings, such
reduction would be recognized as a loss immediately and added to the Formula
Principal Distribution Amount.
Although partial prepayments of principal on Underlying Contracts are
applied on scheduled payment dates for such Underlying Contracts, Obligors are
not required to pay interest on Underlying Contracts after the date of a full
prepayment of principal. As a result, full prepayments on Underlying Contracts
in advance of the scheduled payment dates for such Underlying Contracts in any
Due Period will reduce the amount of interest received from Obligors during
such Due Period. Subject to the availability of the subordination provided by
the Class M-1, Class B and Class C Certificates of an Underlying Series, such
subordination would apply to the net shortfall of interest received on account
of prepayments in full in any Due Period so that the amount of interest paid
on a Class of Class A Certificates of such Series on the following Remittance
Date would not be affected by such shortfall.
DESCRIPTION OF THE OFFERED CERTIFICATES
The Offered Certificates will be issued pursuant to the Agreement.
The form of the Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus Supplement and the Prospectus is a part.
The following summaries describe certain provisions of the Agreement. The
summaries do not purport to be complete and are subject to, and are qualified
in their entirety by reference to, all of the provisions of the Agreement.
Wherever particular sections or defined terms of the Agreement are referred
to, such sections or defined terms are hereby incorporated herein by
reference.
General
The Offered Certificates will be issued in denominations of $1,000
and integral multiples thereof and will evidence specified undivided interests
in the Trust. The property of the Trust will consist of, to the extent
provided in the Agreement: (i) the Underlying Securities; (ii) collections on
the Underlying Securities received after the Reference Date; and (iii) the
Distribution Accounts (excluding net earnings thereon). Definitive
Certificates, if issued, will be transferable and exchangeable at the
corporate trust office of the Trustee, which will initially act as Certificate
Registrar. See "Registration of the Offered Certificates" below. No service
charge will be made for any registration, exchange or transfer of
Certificates, but the Trustee may require payment of a sum sufficient to cover
any tax or other governmental charge.
The aggregate undivided interest in the Trust represented by the
Series I Certificates as of the Closing Date (as defined herein) will equal
$114,830,000 of principal, which represents 100% of the aggregate Reference
Date Balance of the Group I Underlying Securities. The principal amount of the
outstanding Group I Certificates (the "Group I Class Principal Balance") on
any Distribution Date is equal to the original Group I Class Principal Balance
thereof on the Closing Date minus the aggregate of amounts actually
distributed as principal to the holders of the Group I Offered Certificates.
The aggregate undivided interest in the Trust represented by the Series II
Certificates as of the Closing Date (as defined herein) will equal $74,555,000
of principal, which represents 100% of the aggregate Reference Date Balance of
the related Group II Underlying Securities. The principal amount of the
outstanding Group II Certificates (the "Group II Class Principal Balance") on
any Distribution Date is equal to the original Group II Class Principal
Balance thereof on the Closing Date minus the aggregate of amounts actually
distributed as principal to the holders of the Group II Offered Certificates
minus any Principal Write- Downs. See "-Distributions on the Offered
Certificates" below. Each Offered Certificate represents the right to receive
payments of interest at the related Security Pass-Through Rate as described
below and payments of principal with respect to the Class A Certificates as
described below.
S-28
<PAGE>
Each of the Class I-IO and Class II-IO Certificates will have no
Class Principal Balance and will receive distributions of interest on the
Class I-IO Notional Amount and the Class II-IO Notional Amount, respectively,
with respect to any Distribution Date. The "Class I-IO Notional Amount" is the
Group I Pool Balance (as defined above) as of the previous Distribution Date
after giving effect to distributions on such Distribution Date. The "Class
II-IO Notional Amount" is the Group II Pool Balance as of the previous
Distribution Date.
The holder of an Offered Certificate is referred to herein as a
"Certificateholder."
Registration of the Offered Certificates
The Offered Certificates will initially be registered in the name of
Cede & Co., the nominee of DTC. DTC is a limited-purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the New York
Uniform Commercial Code and a "clearing agency" registered pursuant to the
provisions of Section 17A of the 1934 Act. DTC accepts securities for deposit
from its participating organizations ("Participants") and facilitates the
clearance and settlement of securities transactions between Participants in
such securities through electronic book-entry changes in accounts of
Participants, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers, banks and
trust companies and clearing corporations and may include certain other
organizations. Indirect access to the DTC system is also available to others
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("indirect participants"). Certificate Owners who are not
Participants but desire to purchase, sell or otherwise transfer ownership of
the Offered Certificates may do so only through Participants (unless and until
Definitive Certificates, as defined below, are issued). In addition,
Certificate Owners will receive all distributions of principal of, and
interest on, the Offered Certificates from the Trustee through DTC and
Participants. Certificate Owners 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, 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.
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 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, the Rules provide a mechanism by which Certificate Owners will
receive distributions and will be able to transfer their interests.
Upon issuance of Definitive Certificates to Certificate Owners, such
Certificates will be transferable directly (and not exclusively on a
book-entry basis) and registered holders will deal directly with the Trustee
with respect to transfers, notices and distributions.
DTC has advised the Depositor and the Trustee that, unless until
Definitive Certificates are issued, DTC will take any action permitted to be
taken by a Certificateholder under the Agreement only at the direction of one
or more Participants to whose DTC accounts the Offered Certificates are
credited. DTC has advised the Depositor that DTC will take such action with
respect to any Percentage Interests of the
S-29
<PAGE>
Offered Certificates only at the direction of and on behalf of such
Participants with respect to such Percentage Interests of the Offered
Certificates. 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.
Issuance of Offered Certificates in book-entry form rather than as
physical certificates may adversely affect the liquidity of the Offered
Certificates in the secondary market and the ability of Certificate Owners to
pledge them. In addition, since distributions on the Offered Certificates will
be made by the Trustee to DTC and DTC will credit such distributions to the
accounts of its Participants, which will further credit them to the accounts
of indirect Participants or Certificate Owners, Certificate Owners may
experience delays in the receipt of such distributions.
DTC, which is a New York-chartered limited purpose trust company,
performs services for its participants, some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC participant (a
"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, regulations and
procedures governing DTC and DTC participants as in effect from time to time.
DTC has advised the Depositor and 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. 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 Certificates.
Definitive Certificates will be issued in registered form to
Certificateholders, or their nominees, rather than to DTC (such Certificates
being referred herein as "Definitive Certificates"), only if (i) DTC or the
Depositor 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 Offered Certificates and the Depositor or the
Trustee is unable to locate a qualified successor or (ii) the Depositor, at
its sole option, advises the Trustee in writing that it elects to terminate
the book-entry system through DTC.
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 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 has agreed to the foregoing procedures in order to
facilitate transfers of Offered Certificates among participants of DTC it is
under no obligation to perform or continue to perform such procedures and such
procedures may be discontinued at any time.
Assignment of Underlying Securities
The Depositor will acquire the Underlying Securities for deposit into
the Trust from the Seller. At the time of issuance of the Offered
Certificates, the Depositor will cause the beneficial interest in such
Underlying Securities, which will be held in book-entry form through the
facilities of The Depository Trust Company, to be delivered to the Trustee's
participant account at The Depository Trust Company.
S-30
<PAGE>
The Seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Trustee with respect to each Underlying Security (e.g., Reference Date Balance
and the related Underlying Pass-Through Rate). In addition, the Seller will
represent and warrant, on the Closing Date, that, among other things: (i) the
Seller has transferred all of its right, title and interest in each Underlying
Security, free of any lien; and (ii) each Underlying Security is entitled to
the benefits of the related Underlying Agreement. Upon discovery of a breach
of any such representation and warranty which materially and adversely affects
the interests of the Certificateholders in the related Underlying Security,
the Seller will have a period of 60 days after discovery or notice of the
breach to effect a cure. If the breach cannot be cured within the 60-day
period, the Seller will be obligated to repurchase such Underlying Security
from the Trust.
Payments on Underlying Securities; Deposits to Distribution Accounts
The Trustee will establish and maintain two separate accounts (the
"Group I Distribution Account" and the "Group II Distribution Account") into
which will be deposited all amounts received on the Underlying Securities for
distribution to related Certificateholders on any Distribution Date. Amounts
received on the Group I Underlying Securities will be deposited into the Group
I Distribution Account. Amounts received on the Group II Underlying Securities
will be deposited into the Group II Distribution Account. Each Distribution
Account will be an Eligible Account. Amounts on deposit therein will be
invested in Permitted Investments (as defined in the Agreement) maturing on or
before the Business Day prior to the related Distribution Date.
An "Eligible Account" means any account which is (i) an account
maintained with an Eligible Institution (as defined below); (ii) an account or
accounts the deposits in which are fully insured by either the Bank Insurance
Fund or the Savings Association Insurance Fund of the FDIC; (iii) "segregated
trust account" maintained with the corporate trust department of a federal or
state chartered depository institution or trust company with trust powers and
acting in its fiduciary capacity for the benefit of the Trustee, which
depository institution or trust company has capital and surplus (or, if such
depository institution or trust company is a subsidiary of a bank holding
company system, the capital and surplus of the bank holding company) of not
less than $50,000,000 and the securities of such depository institution or
trust company (or, if such depository institution or trust company is a
subsidiary of a bank holding company system and such depository institution's
or trust company's securities are not rated, the securities of the bank
holding company) has a credit rating from each of Moody's, S&P (if rated by
S&P) and Fitch (if rated by Fitch) in one of its generic credit rating
categories which signifies investment grade; or (iv) an account that will not
cause Moody's, S&P and Fitch to downgrade or withdraw its then-current rating
assigned to the Certificates, as confirmed in writing by Moody's, S&P and
Fitch. An "Eligible Institution" means any 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 Bank Insurance Fund
(currently administered by the Federal Deposit Insurance Corporation), whose
short-term deposits have been rated "P-1" by Moody's, A-1+" by S&P and "F-1"
by Fitch (if rated by Fitch), and in one of the two highest rating categories
by Moody's, S&P and Fitch (if rated by Fitch) in the case of unsecured
long-term debt, and which is subject to supervision and examination by federal
or state authorities. The Trustee may invest the funds in the Distribution
Accounts in Permitted Investments that will mature not later than the business
day preceding the applicable monthly Distribution 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; certain repurchase agreements with
eligible institutions; corporate securities assigned at least an "Aa2" ratings
by Moody's, the highest rating by S&P and in one of the two highest rating
categories by Fitch (if rated by Fitch), not in excess of 10% of amounts in
the Certificate Account at the time of such investment; commercial paper
assigned at least an "P-1" rating by Moody's, "A-1" + by S&P and an "F-1+"
rating by Fitch (if rated by Fitch) at the time of such investment; and shares
of a registered investment company, whose shares are registered under the
Securities Act of 1933
S-31
<PAGE>
and which are rated by Moody's, by S&P and by Fitch (if rated by Fitch) in
their respective highest rating category.
Permitted Investments are specified in the Agreement and are limited
to investments which meet the criteria of the Rating Agencies from time to
time as being consistent with their then current ratings of the Offered
Certificates.
Allocations and Collections
With respect to each Group of Underlying Securities, amounts received
on the related Underlying Securities Trust and (i) allocable to interest (the
"Interest Collections") will be applied to make interest distributions on the
related Offered Certificates and (ii) allocable to principal (the "Principal
Collections") will be applied to make principal distributions on the related
Offered Certificates. In the event that either Green Tree or the Servicer
exercises its option to repurchase the Underlying Contracts of the related
Securities Trust, proceeds of such repurchase attributable to an Underlying
Security will be included as Principal Collections.
Distributions on the Offered Certificates
Beginning with the first Distribution Date (which will occur on March
16, 1998), distributions on the Offered Certificates will be made by the
Trustee or the Paying Agent on each Distribution Date to the persons in whose
names such Offered Certificates are registered at the close of business on the
day prior to each Distribution Date or, if the Offered Certificates are no
longer Book-Entry Certificates, at the close of business on the last day of
the month preceding such Distribution, Date (the "Record Date"). The term
"Distribution Date" means the fifteenth day of each month or, if such date is
not a Business Day, then the first Business Day following such date.
Distributions will be made by check mailed (or upon the request of a
Certificateholder owning Certificates having denominations aggregating at
least $5,000,000, by wire transfer pursuant to written instructions delivered
to the Trustee at least ten days prior to such Distribution Date) to the
address appearing on the Certificate Register. However, the final distribution
in respect of the Offered Certificates will be made only upon presentation and
surrender thereof to the Paying Agent for cancellation. For purposes of the
Agreement, a "Business Day" is any day defined as such in the Underlying
Agreements and any day other than a day on which banking institutions in the
State of Minnesota are required or authorized by law to be closed.
The Paying Agent. The Paying Agent shall initially be the Trustee,
(together with any successor thereto in such capacity, the "Paying Agent").
The Paying Agent shall have the revocable power to withdraw funds from the
Distribution Account for the purpose of making distributions to the
Certificateholders.
Interest Distributions. On each Distribution Date, the Trustee or the
Paying Agent will make distributions of interest on the Offered Certificates
from Interest Collections on the Underlying Securities, after payment of the
Trustee Fee, in respect of the Underlying Securities Distribution Date in the
month of such Distribution Date (and with respect to the first Distribution
Date, each Underlying Securities Distribution Date in the month preceding such
Distribution Date). Interest Collections with respect to the Group I
Underlying Securities are referred to herein as "Group I Interest
Collections". Interest Collections with respect to the Group II Underlying
Securities are referred to herein as "Group II Interest Collections".
Each Group I Underlying Security is divided into two components
(each, a "Component") consisting of an interest only strip (the "Group I
Interest-Only Component") and a par rate coupon with principal and interest
(the "Group I Principal Component"). Each Group I Interest-Only Component
bears interest on the related Notional Amount at a rate (the "Class I-IO Strip
Rate") equal to (a) the weighted average of the Underlying Pass-Through Rates
of the Group I Underlying Securities (listed
S-32
<PAGE>
below) minus (b) the Group I Principal Component Pass-Through Rate minus (c)
the Group I Trustee Fee. The "Group I Principal Component Pass-Through Rate"
is equal to the Class I-A1 Pass-Through Rate.
Each Group II Underlying Security is divided into two Components
consisting of an interest only strip (the "Group II Interest-Only Component")
and a par rate coupon with principal and interest (the "Group II Principal
Component"). Each Group II Interest-Only Component bears interest on the
related Notional Amount at a rate (the "Class II-IO Strip Rate") equal to (a)
the weighted average of the Underlying Pass-Through Rates of the Group II
Underlying Securities (listed below) minus (b) the Group II Principal
Component Pass-Through Rate minus (c) the Group II Trustee Fee. The "Group II
Principal Component Pass-Through Rate" is equal to the weighted average of the
Class II-A1 Pass-Through Rate and Class II-A2 Pass-Through Rate.
The Group I Underlying Security Pass-Through Rates are as follows:
Underlying Series 1997-4, Class A-7: 7.36%*
Underlying Series 1997-3, Class A-6: 7.32%
Underlying Series 1997-3, Class A-7: 7.64%*
Underlying Series 1997-2, Class A-7: 7.62%*
Underlying Series 1996-9, Class A-6: 7.69%*
Underlying Series 1996-8, Class A-6: 7.60%*
Underlying Series 1996-5, Class A-6: 7.75%
Underlying Series 1996-3, Class A-6: 7.85%*
Underlying Series 1996-2, Class A-5: 7.65%*
Underlying Series 1995-9, Class A-6: 7.30%*
The Group II Underlying Security Pass-Through Rates are as follows:
Underlying Series 1996-8, Class M-1: 7.85%*
Underlying Series 1996-6, Class M-1: 7.95%*
Underlying Series 1996-5, Class M-1: 8.05%*
Underlying Series 1996-3, Class M-1: 7.70%*
Underlying Series 1995-9, Class M-1: 7.20%*
- -------------
* Subject to the weighted average of the rates on the Underlying
Contracts in the applicable Contract Pool.
All Group I Principal Components will be combined into a single par
coupon tranche (the "Series I Principal Coupon Tranche"), resulting in the
Series I Class A Certificates. All Group II Principal Components will be
combined into a single par coupon tranche (the "Series II Principal Coupon
Tranche") and the Series II Principal Coupon Tranche will be sequentially
tranched by maturity, resulting in the Series II Class A Certificates.
After payment of the applicable Trustee Fee, on each Distribution
Date and with respect to each Class of Offered Certificates, each such Class
will be entitled to receive an amount (the "Class Interest Distribution
Amount") equal to the sum of (i) interest accrued thereon during the related
Interest Period at the related Pass-Through Rate or Strip Rate on the related
Class Principal Balance or Notional Amount of the related Class and (ii) the
sum of the amounts, if any, by which the amount described in clause (i) above
with respect to such Class on each prior Distribution Date exceeded the amount
actually distributed as interest on such prior Distribution Dates and not
subsequently distributed ("Unpaid Interest Amounts") and interest thereon at
the related Pass-Through Rate or Strip Rate to the extent legally permissible.
Distributions in respect of interest on any Class of Certificates will be
applied first in respect of Unpaid Interest Amounts and second in respect of
any interest accrued during the related Interest Period.
The Series I Certificates: With respect to each Distribution Date,
Group I Interest Collections on deposit in the Group I Distribution Account
will be distributed in the following order of priority:
S-33
<PAGE>
(i) to the Trustee, the Group I Trustee Fee, plus the amount
of any unpaid Group I Trustee Fee;
(ii) to interest on each Class of Group I Certificates, up
to the Class Interest Distribution Amount for each such
Class, pro rata based on their respective interest
entitlements; and
(iii) the remainder to the Class R-2 Certificate.
The Series II Certificates: With respect to each Distribution Date,
Group II Interest Collections on deposit in the Group II Distribution Account
will be distributed in the following order of priority:
(i) to the Trustee, the Group II Trustee Fee, plus the
amount of any unpaid Group I Trustee Fee;
(ii) to interest on each Class of Group II Certificates, up
to the Class Interest Distribution Amount for each such
Class, pro rata based on their respective interest
entitlements;
(iii) to the Trustee, accrued and unpaid Group II Trustee
Fee on the aggregate Principal Write-Downs;
(iv) to accrued and unpaid interest on the aggregate
Principal Write-Downs on each Class of Group II
Certificates, pro rata based on their respective entitlement
thereto; and
(v) the remainder to the Class R-2 Certificates.
Principal Distributions. On each Distribution Date, a distribution
allocable to principal will be made on the Series I Offered Certificates up to
the maximum amount that will have been distributed on the related Underlying
Securities on the related Underlying Securities Distribution Dates. On each
Distribution Date, a distribution allocable to principal will be made on the
Series II Offered Certificates up to the maximum amount that will have been
distributed on the related Underlying Securities on the Underlying Securities
Distribution Dates.
Series I Certificates: Each Series I Class A Certificate will be
entitled to receive on each Distribution Date as distributions of principal in
the order set forth below and to the extent of Group I Principal Collections,
an amount equal to:
(i) to the Class I-A1 Certificateholders, the lesser of (a) the
Group I Underlying Certificate Principal Distribution Amount (as defined
below) for such Distribution Date and (b) the Class Principal Balance of the
Class I-A1 Certificates; and
(ii) to the Class R-2 Certificateholder, any remaining Group I
Underlying Certificate Principal Distribution Amount.
The "Group I Underlying Certificate Principal Distribution Amount"
for a Distribution Date is the amount of payments of principal received with
respect to the Group I Underlying Certificates on the related Underlying
Distribution Date. Principal from the Group I Underlying Securities will be
used to pay principal due on the Series I Class A Certificates, in the order
of priority described herein.
Series II Certificates: Each Series II Class A Certificate will be
entitled to receive on each Distribution Date as distributions of principal in
the order set forth below and to the extent of Group II Principal Collections,
an amount equal to:
S-34
<PAGE>
(i) to the Class II-A1 Certificateholders, the lesser of (a) the
Group II Underlying Certificate Principal Distribution Amount for such
Distribution Date and (b) the Class Principal Balance of the Class II-A1
Certificates;
(ii) to the Class II-A2 Certificateholders, after the Class II-A1
Certificate Balance has been reduced to zero, the lesser of (a) the remaining
Group II Underlying Certificate Principal Distribution Amount for such
Distribution Date and (b) the Class Principal Balance of the Class II-A2
Certificates; and
(iii) to the Class R-2 Certificateholder, any remaining Group II
Underlying Certificate Principal Distribution Amount.
The "Group II Underlying Certificate Principal Distribution Amount"
for a Distribution Date is the amount of payments of principal received with
respect to the Group II Underlying Certificates on the related Underlying
Distribution Date. Principal from the Group II Underlying Securities will be
used to pay principal due on the Series II Class A Certificates, in the order
of priority as described herein.
Principal Write-Downs of the Series II Class A Certificates
With respect to any Group II Underlying Security, the Amount
Available (as defined in the related Prospectus) in the related Certificate
Account for the related Underlying Security Distribution Date may be
insufficient to distribute the full Formula Principal Distribution Amount for
such Underlying Security Distribution Date to the Trustee, as holder of such
Underlying Security. As a result, the aggregate outstanding Principal Balance
of the Certificates relating to such Underlying Security Trust will be greater
than the Pool Scheduled Principal Balance (as defined in the related
Underlying Prospectus) for such Underlying Securities Distribution Date. In
such event, the amount of such deficiency will be absorbed by the Class C
Certificates of the Underlying Series, then the Guarantee Fee (if any) of each
Underlying Series otherwise payable to the Company, then the Monthly Servicing
applicable to the Underlying Series (so long as Green Tree is Servicer), then
the Class B-2 Certificates of the Underlying Series, then the Class B-1
Certificates of the Underlying Series, and then the Class M-1 Certificates of
such Underlying Series.
If the protection afforded by the Class C Certificates of the
Underlying Series, the Guarantee Fee (if any) of such Underlying Series
otherwise payable to the Company, the Monthly Servicing applicable to the
Underlying Series (so long as Green Tree is Servicer), the Class B-2
Certificates of the Underlying Series and the Class B-1 Certificates of the
Underlying Series is eliminated, the Group II Underlying Security may be
subject to a liquidation loss. As a result, the Principal Balance of such
Underlying Security will be reduced by such liquidation loss (any such
reduction, a "Principal Write-Down"). When a Group II Underlying Security is
subject to a Principal Write-Down, such Principal Write-Down must be applied
as a reduction of the Class Principal Balance of the Series II Class A
Certificates, pro rata, to the Class II-A1 and Class II-A2 Certificates.
In the event that the Class Principal Balance of the Class II-A1
Certificates and the Class II-A2 Certificates is subject to a Principal
Write-Down, interest accruing on each such Class would be calculated on the
reduced principal balance of such Class. Interest will accrue on the Principal
Write-Down at the applicable Security Pass-Through Rate. The interest accruing
on such Principal Write-Down will be distributed after distribution of the
Class Interest Distribution Amount for the Class II-A Certificates.
Principal Write-Downs with respect to the Group II Underlying
Securities and the Series II Certificates will not be applied to the Class
I-A1 Certificates.
S-35
<PAGE>
Reports to Certificateholders
Concurrently with each distribution to the Certificateholders, the
Trustee will mail to such Certificateholder a statement setting forth the
following information with respect to the Class I-A1, Class I-IO, Class II-A1,
Class II-A2 and Class II-IO Certificates:
(i) the amount being distributed to Certificateholders of
each Series and Class within the Series, separately stated;
(ii) the amount of interest included in such distribution to
each Series and Class within the Series, separately stated, the
related Pass-Through Rate or Strip Rate and the collections in
respect of each Group of Underlying Securities;
(iii) the amount, if any, of overdue accrued interest
included in such distribution (and the amount of interest thereon) to
each Class, separately stated;
(iv) the amount, if any, of the remaining overdue accrued
interest after giving effect to such distribution to each Class,
separately stated;
(v) the amount, if any, of principal included in such
distribution and the collections in respect of the Underlying
Securities (by Group);
(vi) the individual aggregate principal balance of the
Underlying Securities and the Subordinated Amount, separately stated,
as of the close of business on the preceding Distribution Date as
shown on the Monthly Report;
(vii) the related Class Principal Balance or Notional
Amount, as applicable, and the pool factor of the Offered
Certificates after giving effect to such distribution; and
(viii) the aggregate amount of any Principal Write-Down of
the Group II Certificates and the amount of any interest accrued and
unpaid on such Principal Write-Down.
In the case of information furnished pursuant to clauses (i), (ii),
(v) and (vi) above, the amounts shall be expressed as a dollar amount per
Offered Certificate with a $1,000 denomination.
Amendment
The Agreement may be amended from time to time by the Seller, the
Depositor and the Trustee, without the consent of the Certificateholders, to
correct manifest error, to cure any ambiguity, to correct or supplement any
provisions therein which may be inconsistent with any other provisions of the
Agreement, to add to the duties of the Depositor, to comply with any
requirements imposed by the Internal Revenue Code or any regulation
thereunder, or to add or amend any provision of the Agreement as required by
the Rating Agencies in order to maintain or improve any rating of the Offered
Certificates (it being understood that, after obtaining the ratings in effect
on the Closing Date, neither the Depositor nor the Trustee is obligated to
obtain, maintain, or improve any such rating) or to add any other provisions
with respect to matters or questions arising under the Agreement which shall
not be inconsistent with the provisions of the Agreement, provided that such
action will not, as evidenced by an opinion of counsel, materially and
adversely affect the interests of any Certificateholder, provided, that any
such amendment will not be deemed to materially and adversely affect the
Certificateholders and no such opinion will be required to be delivered if the
person requesting such amendment obtains a letter from the Rating Agencies
stating that such amendment would not result in a downgrading of the Offered
Certificates. The
S-36
<PAGE>
Agreement may also be amended from time to time by the Seller, the Depositor
and the Trustee, with the consent of Certificateholders evidencing an
aggregate, undivided interest in the Trust of at least 51 % of the Voting
Rights of each Class of Certificates affected thereby for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of the Agreement or of modifying in any manner the rights of the
Certificateholders, provided that no such amendment will (i) reduce in any
manner the amount of, or delay the timing of, collections of payments on the
Offered Certificates or distributions which are required to be made on any
Offered Certificate without the consent of the holder of such Offered
Certificate, (ii) reduce the aforesaid percentage required to consent to any
such amendment, without the consent of the holders of all Offered Certificates
then outstanding, (iii) adversely affect the interests of any
Certificateholder or (iv) result in the disqualification of either the Master
REMIC or Subsidiary REMIC as a REMIC under the Code.
Termination; Retirement of the Offered Certificates
The Trust will terminate on the Distribution Date following the
earliest of (i) the Distribution Date on which the Series I Class Principal
Balance, the Series II Class Principal Balance, the Class I-IO Notional
Balance and the Class II-IO Notional Balance have been reduced to zero, (ii)
the final payment or other liquidation of the last Underlying Security in the
Trust, and (iii) the Distribution Date in July, 2028. In no event however,
will the Trust created by the Agreement continue after the death of certain
individuals named in the Agreement. Written notice of termination of the
Agreement will be given to each Certificateholder, and the final distribution
will be made only upon surrender, and cancellation of the Offered Certificates
to the Paying Agent. The termination of the Trust will be effected in a manner
consistent with applicable federal income tax regulations and the status of
either the Master REMIC or the Subsidiary REMIC as a REMIC.
Action In Respect of the Underlying Securities
If at any time the Trustee, as the holder of the Underlying
Securities is requested in such capacity to take any action or to give any
consent, approval or waiver, including without limitation in connection with
an amendment of an Underlying Agreement, or if any Event of Default (as
defined in the Underlying Agreements) occurs under the Underlying Agreements,
the Agreement provides that the Trustee, in its capacity as certificateholder
of the Underlying Securities, may take action in connection with the
enforcement of any rights and remedies available to it in such capacity with
respect thereto, will promptly notify all of the holders of the Offered
Certificates and will act only in accordance with the written directions of
holders of the Offered Certificates evidencing at least 51% of the Voting
Rights.
Voting Rights
Voting rights of the Trust in general will be allocated 2% to each of
the Class I-IO and Class II- IO Certificates with the balance allocated among
the classes of Series I Class A Certificates and Series II Class A
Certificates in proportion to their respective Percentage Interests of their
respective Offered Certificates. The "Percentage Interest" represented by an
Offered Certificate will be equal to the percentage derived by dividing the
denomination of such Offered Certificate by the original Class Principal
Balance of the Offered Certificates as of the Closing Date.
The Trustee
The commercial bank or trust company serving as Trustee may have
normal banking relationships with the Depositor and/or their affiliates.
On each Distribution Date, collections in respect of interest on the
Group I Underlying Securities and the Group II Underlying Securities will be
distributed first to the Trustee in an amount up to the amount of the Trustee
Fee. The "Trustee Fee" is equal to the sum of the Group I Trustee Fee and the
S-37
<PAGE>
Group II Trustee Fee. On each Distribution Date, the "Group I Trustee Fee"
will equal an amount not in excess of .01625% per annum of the Group I Pool
Balance and the "Group II Trustee Fee" will equal an amount not in excess of
.01625% per annum of the Group II Pool Balance. In the event of a Principal
Write-Down of the Series II Class A Certificates, the trustee fee will accrue
on the aggregate Principal Write-Down and be paid in the order of priority set
forth above.
The Trustee may resign at any time, in which event the Depositor will
be obligated to appoint a successor Trustee. The Depositor 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. Upon becoming aware of such
circumstances, the Depositor will 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.
No holder of an Offered Certificate will have any right under the
Agreement to institute any proceeding with respect to the Agreement unless
such holder previously has given to the Trustee written notice of default and
unless Certificateholders holding at least 51% of the Voting Rights have made
written requests upon the Trustee to institute such proceeding in its own name
as Trustee thereunder 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 exercise any of the
trusts or powers vested in it by the Agreement or to make any investigation of
matters arising thereunder or to institute, conduct or defend any litigation
thereunder or in relation thereto at the request, order or direction of any of
the Certificateholders, unless such Certificateholders have offered to the
Trustee reasonable security or indemnity against the cost, expenses and
liabilities which may be incurred therein or thereby.
Certain Activities
The Trust will not: (i) borrow money; (ii) make loans; (iii) invest
in securities for the purpose of exercising control; (iv) underwrite
securities; (v) except as provided in the Agreement, engage in the purchase
and sale (or turnover) of investments; (vi) offer securities in exchange for
property (except Certificates for the Underlying Securities); or (vii)
repurchase or otherwise reacquire its securities.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Offered
Certificates will be applied by the Depositor towards the purchase of the
Underlying Securities. The Underlying Securities will have been acquired by
the Depositor from the Seller in privately negotiated transactions.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
An election will be made to treat the Trust as two "real estate
mortgage investment conduits" (the "Master REMIC" and the "Subsidiary REMIC"
and each, a "REMIC") for federal income tax purposes under the Internal
Revenue Code of 1986, as amended (the "Code"). Upon the issuance of the
Offered Certificates, Brown & Wood LLP, counsel to the Depositor and
Underwriter, will deliver its opinion generally to the effect that, assuming
compliance with all provisions of the Agreement and assuming the Underlying
Certificates are properly treated as regular interests in a REMIC, for federal
income tax purposes, the Master REMIC and the Subsidiary REMIC will each
qualify as a REMIC under Sections 860A through 860G of the Code.
For federal income tax purposes, the Class R-1 Certificates and the
Class R-2 Certificates will be designated as the sole class of "residual
interests" in the Subsidiary REMIC and the Master REMIC, respectively. The
Offered Certificates (other than the Class I-IO and Class II-IO Certificates)
and each
S-38
<PAGE>
component of the Class I-IO and Class II-IO will be "regular interests" in the
Master REMIC and will be treated as debt instruments of the Master REMIC.
The Class I-IO and Class II-IO Certificates will, and the other
Offered Certificates may, be treated as having been issued with original issue
discount for federal income tax purposes.
The Offered Certificates will be treated as regular interests in the
Master REMIC under section 860G of the Internal Revenue Code of 1986, as
amended (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)(4)(A) 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.
Effect of Losses and Delinquencies. Because certain of the Underlying
Securities may be subordinated to the Related Senior Certificates, in the
event there are losses or delinquencies on the Underlying Contracts, amounts
that would otherwise be distributed to holders of the Offered Certificates may
instead be distributed to holders of the Related Senior Certificates. Holders
of Offered Certificates nevertheless will be required to report income with
respect to such Offered Certificates under an accrual method without giving
effect to delays and reductions in distributions on such Offered Certificates
attributable to losses and delinquencies on the Underlying Contracts except to
the extent it can be established for tax purposes that such amounts are
uncollectible. As a result, the amount of income reported by a
Certificateholder of an Offered Certificate in any period could significantly
exceed the amount of cash distributed to such Certificateholder in that
period. The holder of an Offered Certificate 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 the Offered Certificates is reduced
as a result of losses and delinquencies on the Underlying Contracts. However,
the timing and character of such losses or reductions in income are uncertain,
and holders of Offered Certificates are urged to consult their own tax
advisors with respect to this issue.
For further information regarding the federal income tax consequences
of investing in the Offered Certificates, see "Certain Federal Income Tax
Considerations" in the Prospectus.
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 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 "Certificateholder" of
record is Cede, as nominee for DTC, Certificate Owners and the IRS will
receive tax and other information including the amount of interest paid on
such Certificates owned from Participants and indirect Participants rather
than from the Trustee. (The Trustee, however, will respond to requests for
necessary information to enable Participants, indirect Participants and
certain other persons to complete their reports.) Each non-exempt Certificate
Owner will be required to provide, under penalty of perjury, a certificate on
IRS Form W-9 containing his or her name, address, correct Federal taxpayer
identification number and a
S-39
<PAGE>
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.
STATE TAX CONSIDERATIONS
The Depositor makes no representations regarding the status of the
Trust or 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.
LEGAL INVESTMENT CONSIDERATIONS
The Offered Certificates 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 the Offered 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 of purchase, hold or invest in Offered Certificates, or require the
sale or other disposition of Offered Certificates, so long as such contractual
commitment was made or such Offered 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 Offered Certificates without limitation as to the percentage of their
assets represented thereby; federal credit unions may invest in Offered
Certificates; and national banks may purchase Offered Certificates for their
own account without regard to the limitations generally applicable to
investment securities set forth in 12 U.S.C. ss.24 (Seventh), subject in each
case of such regulations as the applicable federal regulatory authority may
prescribe.
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 interests,
including securities previously purchased. There may be other restrictions on
the ability of certain investors, including depository institutions, either to
purchase Offered Certificates or to purchase Offered 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
Offered Certificates constitute legal investments for such investors. See
"LEGAL INVESTMENT" in the Prospectus.
S-40
<PAGE>
ERISA CONSIDERATIONS
No Offered Certificate may be purchased by, or transferred to, any
employee benefit plan subject to the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), or a plan (including individual retirement
accounts) subject to Section 4975 of the Internal Revenue Code of 1986, as
amended (the "Code") (collectively, a "Plan"), unless the transferor delivers
to the Trustee (i) a certificate satisfactory to the Trustee to the effect
that such transferee neither is nor is acting on behalf of a Plan subject to
ERISA or Code Section 4975, or (ii) an opinion of counsel satisfactory to the
Trustee to the effect that such transfer will not result in the assets of the
Trust Fund being "plan assets." See "ERISA CONSIDERATIONS" in the Prospectus.
Prospective institutional purchasers of the Offered Certificates should
consult with their counsel regarding ERISA considerations associated with such
a purchase. In particular, purchasers that are insurance companies should
consult with their counsel with respect to the United States Supreme Court
case, John Hancock Mutual Life Insurance Co. v. Harris Bank and Trust, 510
U.S. 86 (1993). In John Hancock, the Supreme Court ruled that the assets held
in an insurance company's general account may be deemed to be "plan assets"
under certain circumstances. Purchasers should analyze whether the decision
may have an impact with respect to purchases of the Offered Certificates.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement, dated February 24, 1998 (the "Underwriting Agreement"), between the
Depositor and Lehman Brothers Inc. (the "Underwriter"), the Depositor has
agreed to sell to the Underwriters and the Underwriter has severally agreed to
purchase from the Depositor all of the Offered Certificates.
Distribution of the Offered Certificates will be made by the
Underwriter from time to time in negotiated transactions or otherwise at
varying prices to be determined at the time of sale. Proceeds to the Depositor
from the sale of the Offered Certificates will be $198,337,373, before
deducting expenses payable by the Depositor expected to be $350,000. In
connection with the purchase and sale of the Offered Certificates, the
Underwriter may be deemed to have received compensation from the Depositor in
the form of underwriting discounts.
The Depositor has been advised by the Underwriter that it presently
intends to make a market in the Offered Certificates offered hereby; however,
it is not obligated to do so, any market-making may be discontinued at any
time, and there can be no assurance that an active public market for the
Offered Certificates will develop.
The Depositor is an affiliate of the Underwriter.
The Underwriting Agreement provides that the Depositor will indemnify
the Underwriter against certain civil liabilities, including liabilities under
the Act.
LEGAL MATTERS
Certain legal matters with respect to the Certificates will be passed
upon for the Depositor and for the Underwriter by Brown & Wood LLP, New York,
New York.
S-41
<PAGE>
RATING
It is a condition to the issuance of the Class I-A1 and Class I-IO
Certificates that they be rated not lower than "Aaa" by Moody's and "AAA" by
Fitch, respectively. It is a condition to the issuance of the Class II-A1,
Class II-A2 and Class II-IO Certificates that they be rated not lower than
"Aa3" by Moody's and "AA-" by Fitch, respectively.
A securities rating addresses the likelihood of the receipt by
holders of the Offered Certificates of distributions on the Underlying
Securities. The rating takes into consideration the characteristics of the
Underlying Securities and the structural, legal and tax aspects associated
with the Offered Certificates. The ratings on the Offered Certificates do not,
however, constitute statements regarding the likelihood or frequency of
prepayments on the Underlying Contracts or the possibility that
Certificateholders might realize a lower than anticipated yield.
A securities 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 organization. Each securities rating should be evaluated
independently of similar ratings on different securities.
S-42
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Adjusted Balance...............................................................................................S-24
Agreement.......................................................................................................S-3
Book-Entry Certificates.........................................................................................S-4
Business Day.............................................................................................S-11, S-32
Cede...........................................................................................................S-10
Certificateholder .............................................................................................S-29
Certificates....................................................................................................S-1
Class A Certificates............................................................................................S-4
Class I-A1......................................................................................................S-1
Class I-A1 Pass-Through Rate...................................................................................S-11
Class I-IO......................................................................................................S-1
Class I-IO Notional Amount................................................................................S-5, S-29
Class I-IO Strip Rate..........................................................................................S-32
Class II-A1.....................................................................................................S-1
Class II-A1 Pass-Through Rate..................................................................................S-11
Class II-A2.....................................................................................................S-1
Class II-A2 Pass Through Rate..................................................................................S-11
Class II-IO.....................................................................................................S-1
Class II-IO Notional Amount...............................................................................S-5, S-29
Class II-IO Strip Rate.........................................................................................S-33
Class Interest Distribution Amount.......................................................................S-12, S-33
Class Principal Balance.........................................................................................S-5
Class R Certificates...........................................................................................S-17
Code.........................................................................................S-17, S-38, S-39, S-41
Commission.....................................................................................................S-24
Component......................................................................................................S-32
Definitive Certificates........................................................................................S-30
Depositor.................................................................................................S-3, S-10
Distribution Accounts..........................................................................................S-10
Distribution Date .............................................................................S-1, S-4, S-11, S-32
DTC.......................................................................................................S-2, S-10
Due-on-sale....................................................................................................S-27
Eligible Account...............................................................................................S-31
Eligible Institution...........................................................................................S-31
ERISA....................................................................................................S-16, S-41
Fitch...........................................................................................................S-9
Green Tree...........................................................................................S-1, S-3, S-22
Group...........................................................................................................S-1
Group I Available Distribution Amount..........................................................................S-11
Group I Class Principal Balance................................................................................S-28
Group I Distribution Account.............................................................................S-10, S-31
Group I Interest Collections...................................................................................S-32
Group I Interest-Only Component................................................................................S-32
Group I Pool Balance............................................................................................S-3
Group I Principal Component....................................................................................S-32
Group I Principal Component Pass-Through Rate..................................................................S-33
Group I Trustee Fee............................................................................................S-37
Group I Underlying Certificate Principal Distribution Amount.............................................S-14, S-34
Group I Underlying Securities..............................................................................S-1, S-5
</TABLE>
S-43
<PAGE>
<TABLE>
<S> <C>
Group II Available Distribution Amount.........................................................................S-11
Group II Class Principal Balance...............................................................................S-28
Group II Distribution Account............................................................................S-10, S-31
Group II Interest Collections..................................................................................S-32
Group II Interest-Only Component...............................................................................S-33
Group II Pool Balance...........................................................................................S-3
Group II Principal Component...................................................................................S-33
Group II Trustee Fee...........................................................................................S-37
Group II Underlying Certificate Principal Distribution Amount............................................S-15, S-35
Group II Underlying Securities.............................................................................S-1, S-5
Interest Collections.....................................................................................S-11, S-32
Interest Period................................................................................................S-11
Issuance Cut-Off Date...........................................................................................S-6
Master REMIC........................................................................................S-3, S-17, S-38
Monthly Report..................................................................................................S-3
Moody's.........................................................................................................S-9
Offered Certificates.......................................................................................S-1, S-4
Offered Security Pass-Through Rate..............................................................................S-4
Participant....................................................................................................S-30
Participants...................................................................................................S-29
Pass Through Rate..............................................................................................S-11
Pass Through Rates.............................................................................................S-11
Paying Agent...................................................................................................S-32
Percentage Interest............................................................................................S-37
Plan...........................................................................................................S-41
Plan assets....................................................................................................S-41
Pool Balance....................................................................................................S-3
Principal Balance.........................................................................................S-3, S-26
Principal Collections....................................................................................S-11, S-32
Principal Write-Down.....................................................................................S-16, S-35
Rating Agencies.................................................................................................S-9
Rating Agency...................................................................................................S-9
Record Date....................................................................................................S-32
Reference Date.............................................................................................S-1, S-3
Reference Date Balance..........................................................................................S-3
Regular interests...............................................................................................S-3
Related Class A Certificate....................................................................................S-24
Related Senior Certificates.....................................................................................S-9
REMIC...............................................................................................S-3, S-17, S-38
Residual Certificates..........................................................................................S-17
Residual interest...............................................................................................S-3
Risk Factors...................................................................................................S-19
Rules..........................................................................................................S-29
S&P.............................................................................................................S-9
Segregated trust account.......................................................................................S-31
Seller....................................................................................................S-3, S-20
Series I Class A Certificates...................................................................................S-4
Series I Class Principal Balance................................................................................S-5
Series I Principal Coupon Tranche..............................................................................S-33
Series II Class A Certificates..................................................................................S-4
Series II Class Principal Balance...............................................................................S-5
Series II Principal Coupon Tranche.............................................................................S-33
SMMEA....................................................................................................S-16, S-40
</TABLE>
S-44
<PAGE>
<TABLE>
<S> <C>
Strip Rate................................................................................................S-4, S-11
Subsidiary REMIC....................................................................................S-3, S-17, S-38
Trust......................................................................................................S-1, S-3
Trustee....................................................................................................S-3, S-4
Trustee Fee..............................................................................................S-11, S-37
UCC............................................................................................................S-19
Underlying Agreement......................................................................................S-6, S-22
Underlying Contract Pool........................................................................................S-9
Underlying Contracts.......................................................................................S-1, S-3
Underlying Pass-Through Rate....................................................................................S-6
Underlying Prospectus...........................................................................................S-9
Underlying Securities.................................................................................S-1, S-3, S-5
Underlying Securities Distribution Date.........................................................................S-9
Underlying Securities Trust.....................................................................................S-9
Underlying Securities Trustee...................................................................................S-3
Underlying Series .........................................................................................S-1, S-5
Underwriter ........................................................................................S-2, S-41
Underwriting Agreement.........................................................................................S-41
Unpaid Interest Amounts..................................................................................S-12, S-33
Unpaid Principal Shortfall.....................................................................................S-26
</TABLE>
S-45
<PAGE>
APPENDIX I
Table of Contents
Appendix Page
- -------- ----
Summary of Terms Relating to the Underlying Series.................. A-2
Description of the Underlying Securities ........................... A-9
A-1
<PAGE>
Summary of Terms Relating to the Underlying Series
-------------
Capitalized terms used in the Appendix have the meanings defined
either within the text of the Appendix or the Glossary at the end of the
Appendix, and such terms are not applicable to any other section of this
Prospectus, unless such terms are defined as such in the Prospectus
Supplement. Complete copies of the related Underlying Prospectuses may be
obtained upon request from the Depositor. In addition, terms used in this
Appendix but not defined shall have the meaning set forth in the related
Underlying Prospectus. The information contained herein is only a summary of
information contained in the related Underlying Prospectuses. Prospective
investors should examine the related Underlying Prospectuses for more detailed
information.
<TABLE>
<S> <C>
Issuer: For each Underlying Series, Green Tree Financial Corporation.
Servicer: For each Underlying Series, Green Tree Financial Corporation.
Underlying Securities Trustee: Underlying Series 1997-4: Firstar Trust Company
Underlying Series 1997-3: Firstar Trust Company
Underlying Series 1997-2: Firstar Trust Company
Underlying Series 1996-9: Firstar Trust Company
Underlying Series 1996-8: Firstar Trust Company
Underlying Series 1996-6: Firstar Trust Company
Underlying Series 1996-5: Firstar Trust Company
Underlying Series 1996-3: Firstar Trust Company
Underlying Series 1996-2: Norwest Bank Minnesota,
National Association
Underlying Series 1995-9: Firstar Trust Company
</TABLE>
A-2
<PAGE>
<TABLE>
<S> <C>
Related Prospectus: (a) Underlying Series 1997-4: The Prospectus Supplement, dated
June 19, 1997, (to the Prospectus dated June 19, 1997) relating
to the offering of the Green Tree Manufactured Housing Contract
Senior/Subordinate Pass- Through Certificates, Series 1997-4.
(b) Underlying Series 1997-3: The Prospectus Supplement, dated
May 8, 1997, (to the Prospectus dated March 13, 1997) relating
to the offering of the Green Tree Manufactured Housing Contract
Senior/Subordinate Pass-Through Certificates, Series 1997-3.
(c) Underlying Series 1997-2: The Prospectus Supplement, dated
March 13, 1997, (to the Prospectus dated March 13, 1997)
relating to the offering of the Green Tree Manufactured Housing
Contract Senior/Subordinate Pass-Through Certificates, Series
1997-2.
(d) Underlying Series 1996-9: The Prospectus Supplement, dated
October 24, 1996 (to the Prospectus dated October 24, 1996),
relating to the offering of the Green Tree Manufactured Housing
Contract Senior/Subordinate Pass-Through Certificates, Series
1996-9.
(e) Underlying Series 1996-8: The Prospectus Supplement, dated
September 18, 1996, (to the Prospectus dated September 18, 1996)
relating to the offering of the Green Tree Manufactured Housing
Contract Senior/Subordinate Pass-Through Certificates, Series
1996-8.
(f) Underlying Series 1996-6: The Prospectus Supplement, dated
July 24, 1996, (to the Prospectus dated July 24, 1996) relating
to the offering of the Green Tree Manufactured Housing Contract
Senior/Subordinate Pass- Through Certificates, Series 1996-6.
(g) Underlying Series 1996-5: The Prospectus Supplement, dated
June 20, 1996, (to the Prospectus dated June 20, 1996) relating
to the offering of
</TABLE>
A-3
<PAGE>
<TABLE>
<S> <C>
the Green Tree Manufactured Housing Contract Senior/Subordinate
Pass- Through Certificates, Series 1996-5.
(h) Underlying Series 1996-3: The Prospectus Supplement, dated
April 15, 1996, (to the Prospectus dated April 15, 1996)
relating to the offering of the Green Tree Manufactured Housing
Contract Senior/Subordinate Pass-Through Certificates, Series
1996-3.
(i) Underlying Series 1996-2: The Prospectus Supplement, dated
March 14, 1996 (to the Prospectus dated March 14, 1996),
relating to the offering of the Green Tree Manufactured Housing
Contract Senior/Subordinate Pass-Through Certificates, Series
1996-2.
(j) Underlying Series 1995-9: The Prospectus Supplement, dated
November 9, 1995, (to the Prospectus dated November 9, 1995)
relating to the offering of the Green Tree Manufactured Housing
Contract Senior/Subordinate Pass-Through Certificates, Series
1995-9.
Underlying Securities
Remittance Date: For each Underlying Series, the 15th day of each month, or if
such day is not a Business Day, then the next succeeding
Business Day.
Underlying Agreement: For each Underlying Series, The Pooling and Servicing Agreement,
dated as of the related Cut-off Date, by and between Green Tree
Financial Corporation and the related Trustee.
Cut-Off Date: (a) Underlying Series 1997-4: June 1, 1997 with respect to all
Contracts that have a scheduled payment date in June 1997, or
July 1, 1997 with respect to all Contracts that have a first
scheduled payment date in July 1997 or thereafter
(b) Underlying Series 1997-3: May 1, 1997 with respect to all
Contracts that have a scheduled payment date in May 1997, or
June 1, 1997 with
</TABLE>
A-4
<PAGE>
<TABLE>
<S> <C>
respect to all Contracts that have a first scheduled payment
date in June 1997
(c) Underlying Series 1997-2: April 1, 1997 with respect to 278
of the Initial Contracts and with respect to each other
Contract, March 1, 1997 (or the date of origination, if later)
(d) Underlying Series 1996-9: October 1, 1996 (or the date of
origination, if later)
(e) Underlying Series 1996-8: September 1, 1996 (or the date of
origination, if later)
(f) Underlying Series 1996-6: July 1, 1996 (or the date of
origination, if later)
(g) Underlying Series 1996-5: June 1, 1996 (or the date of
origination, if later)
(h) Underlying Series 1996-3: April 1, 1996 (or the date of
origination, if later)
(i) Underlying Series 1996-2: March 1, 1996 (or the date of
origination, if later)
(j) Underlying Series 1995-9: November 1, 1995 (or the date of
origination, if later)
Date of Issuance: (a) Underlying Series 1997-4: June 30, 1997
(b) Underlying Series 1997-3: May 29, 1997
(c) Underlying Series 1997-2: March 31, 1997
(d) Underlying Series 1996-9: November 7, 1996
(e) Underlying Series 1996-8: September 30, 1996
(f) Underlying Series 1996-6: July 31, 1996
(g) Underlying Series 1996-5: June 27, 1996
(h) Underlying Series 1996-3: April 22, 1996
(i) Underlying Series 1996-2: March 21, 1996
(j) Underlying Series 1995-9: November 16, 1995
Group I Pass-Through Rates: (a) Underlying Series 1997-4, Class A-7: 7.36%*
</TABLE>
A-5
<PAGE>
<TABLE>
<S> <C>
(b) Underlying Series 1997-3, Class A-6: 7.32%
(c) Underlying Series 1997-3, Class A-7: 7.64%*
(d) Underlying Series 1997-2, Class A-7: 7.62%*
(e) Underlying Series 1996-9, Class A-6: 7.69%*
(f) Underlying Series 1996-8, Class A-6: 7.60%*
(g) Underlying Series 1996-5, Class A-6: 7.75%
(h) Underlying Series 1996-3, Class A-6: 7.85%*
(i) Underlying Series 1996-2, Class A-5: 7.65%*
(j) Underlying Series 1995-9, Class A-6: 7.30%*
Group II Pass-Through Rates: (a) Underlying Series 1996-8, Class M-1: 7.85%*
(b) Underlying Series 1996-6, Class M-1: 7.95%*
(c) Underlying Series 1996-5, Class M-1: 8.05%*
(d) Underlying Series 1996-3, Class M-1: 7.70%*
(e) Underlying Series 1995-9, Class M-1: 7.20%*
* Subject to a Maximum Pass Through Rate (as defined below)
Maximum Pass-Through Rate: (a) Underlying Series 1997-4, Class A-7: The weighted average of
the Contract Rates on each Contract in the respective Contract
Pool, computed on the basis of a 360-day year of twelve 30-day
months
(b) Underlying Series 1997-3, Class A-7: The weighted average of
the Contract Rates on each Contract in the respective Contract
Pool, computed on the basis of a 360-day year of twelve 30-day
months
(c) Underlying Series 1997-2, Class A-7: The weighted average of
the Contract Rates on each Contract in the respective Contract
Pool, computed on the basis of a 360-day year of twelve 30-day
months
(d) Underlying Series 1996-9, Class A-6: The weighted average of
the Contract Rates on each Contract in the respective Contract
Pool, computed on the basis of a 360-day year of twelve 30-day
months
(e) (i) Underlying Series 1996-8, Class A-6: The weighted
average of the Contract Rates on each Contract in the respective
Contract Pool, computed on the basis of a 360-day year of twelve
30-day months
</TABLE>
A-6
<PAGE>
<TABLE>
<S> <C>
(ii) Underlying Series 1996-8, Class M-1: The weighted
average of the Contract Rates on each Contract in the respective
Contract Pool, computed on the basis of a 360-day year of twelve
30-day months (f) Underlying Series 1996-6, Class M-1: The
weighted average of the Contract Rates on each Contract in the
respective Contract Pool, computed on the basis of a 360-day
year of twelve 30-day months (g) Underlying Series 1996-5, Class
M-1: The weighted average of the Contract Rates on each Contract
in the respective Contract Pool, computed on the basis of a
360-day year of twelve 30-day months (h) (i) Underlying Series
1996-3, Class A-6: The weighted average of the Contract Rates on
each Contract in the respective Contract Pool, computed on the
basis of a 360-day year of twelve 30-day months
(ii) Underlying Series 1996-3, Class M-1: The weighted
average of the Contract Rates on each Contract in the respective
Contract Pool, computed on the basis of a 360-day year of twelve
30-day months (i) Underlying Series 1996-2, Class A-5: The
weighted average of the Contract Rates on each Contract in the
respective Contract Pool, computed on the basis of a 360-day
year of twelve 30-day months (j) (i) Underlying Series 1995-9,
Class A-6: The weighted average of the Contract Rates on each
Contract in the respective Contract Pool, computed on the basis
of a 360-day year of twelve 30-day months
(ii) Underlying Series 1995-9, Class M-1: The weighted
average of the Contract Rates on each Contract in the respective
Contract Pool, computed on the basis of a 360-day year of twelve
30-day months
Monthly Servicing Fee: For each Series, for each Due Period (paid on the next
Remittance Date), an amount equal to 1/12th of the product of
.50% and the Pool Scheduled Principal Balance for the
immediately preceding Remittance Date.
</TABLE>
A-7
<PAGE>
Ratings:
Fitch: Moody's: S&P:
Group I:
(a) Underlying Series 1997-4, Class A-7 AAA Aaa AAA
(b) Underlying Series 1997-3, Class A-6 AAA Aaa *
(c) Underlying Series 1997-3, Class A-7 AAA Aaa *
(d) Underlying Series 1997-2, Class A-7 AAA Aaa *
(e) Underlying Series 1996-9, Class A-6 AAA Aaa AAA
(f) Underlying Series 1996-8, Class A-6 AAA Aaa AAA
(g) Underlying Series 1996-5, Class A-6 AAA Aaa AAA
(h) Underlying Series 1996-3, Class A-6 AAA Aaa AAA
(i) Underlying Series 1996-2, Class A-5 AAA Aaa AAA
(j) Underlying Series 1995-9, Class A-6 AAA Aaa AAA
Group II:
(a) Underlying Series 1996-8, Class M-1 AA- Aa3 AA-
(b) Underlying Series 1996-6, Class M-1 AA- Aa3 AA-
(c) Underlying Series 1996-5, Class M-1 AA- Aa3 AA-
(d) Underlying Series 1996-3, Class M-1 AA- Aa3 AA-
(e) Underlying Series 1995-9, Class M-1 AA- Aa3 AA-
* S&P was not requested to provide a rating with respect to such
Class of Certificates.
A-8
<PAGE>
Description of the Underlying Securities
GTFC 1997-4
Description of Securities: Current Balance Pass-Through Rate
- -------------------------- --------------- -----------------
Class A-1; Senior $ 0.00 5.7438%
Class A-2: Senior 69,567,466.78 6.22%
Class A-3; Senior 62,000,000.00 6.45%
Class A-4; Senior 82,000,000.00 6.65%
Class A-5; Senior 43,000,000.00 6.88%
Class A-6; Senior 54,200,000.00 7.03%
Class A-7; Senior 105,000,000.00 7.36%
Class M-1; Mezzanine 39,000,000.00 7.22%
Class B-1; Subordinate 20,800,000.00 7.23%
Class B-2; Subordinate 18,200,000.00 7.73%
Credit Enhancement: The Class A Certificates are supported by the
subordination of the Class M-1 Certificates, the Class B Certificates and the
Class C Certificates, and the Class M-1 Certificates are supported by the
subordination of the Class B Certificates and the Class C Certificates. The
Class B-1 Certificates are supported by the subordination of the Class B- 2
Certificates and Class C Certificates, and the Class B-2 Certificates are
supported by the subordination of the Class C Certificates. The Class B-2
Certificates are entitled to receive on each Remittance Date an amount equal
to the Guarantee Payment, if any, under the Limited Guarantee of Green Tree.
A-9
<PAGE>
GTFC 1997-3
Description of Securities: Current Balance Pass-Through Rate
- -------------------------- --------------- -----------------
Class A-1; Senior $ 0.00 5.88875%
Class A-2: Senior 113,856,367.28 6.49%
Class A-3; Senior 95,000,000.00 6.73%
Class A-4; Senior 125,000,000.00 6.93%
Class A-5; Senior 57,000,000.00 7.14%
Class A-6; Senior 105,000,000.00 7.32%
Class A-7; Senior 144,000,000.00 7.64%
Class M-1; Mezzanine 60,000,000.00 7.53%
Class B-1; Subordinate 32,000,000.00 7.51%
Class B-2; Subordinate 28,000,000.00 8.03%
Credit Enhancement: The Class A Certificates are supported by the
subordination of the Class M-1 Certificates, the Class B Certificates and the
Class C Certificates, and the Class M-1 Certificates are supported by the
subordination of the Class B Certificates and the Class C Certificates. The
Class B-1 Certificates are supported by the subordination of the Class B- 2
Certificates and Class C Certificates, and the Class B-2 Certificates are
supported by the subordination of the Class C Certificates. The Class B-2
Certificateholders are entitled to receive on each Remittance Date an amount
equal to the Guarantee Payment, if any, under the Limited Guarantee of Green
Tree.
A-10
<PAGE>
GTFC 1997-2
Description of Securities: Current Balance Pass-Through Rate
- -------------------------- --------------- -----------------
Class A-1; Senior $ 0.00 5.61755%
Class A-2: Senior 0.00 6.00%
Class A-3; Senior 73,652,910.58 6.42%
Class A-4; Senior 65,972,000.00 6.66%
Class A-5; Senior 90,960,000.00 6.91%
Class A-6; Senior 67,223,000.00 7.24%
Class A-7; Senior 136,617,000.00 7.62%
Class M-1; Mezzanine 41,250,000.00 7.54%
Class B-1; Subordinate 22,000,000.00 7.56%
Class B-2; Subordinate 19,250,000.00 8.05%
Credit Enhancement: The Class A Certificates are supported by the
subordination of the Class M-1 Certificates, the Class B Certificates and the
Class C Certificates, and the Class M-1 Certificates are supported by the
subordination of the Class B Certificates and the Class C Certificates. The
Class B-1 Certificates are supported by the subordination of the Class B- 2
Certificates and Class C Certificates, and the Class B-2 Certificates are
supported by the subordination of the Class C Certificates. The Class B-2
Certificateholders are entitled to receive on each Remittance Date an amount
equal to the Guarantee Payment, if any, under the Limited Guarantee of Green
Tree.
A-11
<PAGE>
GTFC 1996-9
Description of Securities: Current Balance Pass-Through Rate
- -------------------------- --------------- -----------------
Class A-1; Senior $ 5,944,925.82 5.96%
Class A-2: Senior 30,000,000.00 6.25%
Class A-3; Senior 41,000,000.00 6.41%
Class A-4; Senior 83,000,000.00 6.76%
Class A-5; Senior 48,500,000.00 7.20%
Class A-6; Senior 122,750,000.00 7.69%
Class M-1; Mezzanine 36,000,000.00 7.63%
Class B-1; Subordinate 18,000,000.00 7.65%
Class B-2; Subordinate 15,750,000.00 8.11%
Credit Enhancement: The Class A Certificates are supported by the
subordination of the Class M-1 Certificates, the Class B Certificates and the
Class C Certificates, and the Class M-1 Certificates are supported by the
subordination of the Class B Certificates and the Class C Certificates. The
Class B-1 Certificates are supported by the subordination of the Class B- 2
Certificates and Class C Certificates, and the Class B-2 Certificates are
supported by the subordination of the Class C Certificates. The Class B-2
Certificateholders are entitled to receive on each Remittance Date an amount
equal to the Guarantee Payment, if any, under the Limited Guarantee of Green
Tree.
A-12
<PAGE>
GTFC 1996-8
Description of Securities: Current Balance Pass-Through Rate
- -------------------------- --------------- -----------------
Class A-1; Senior $ 0.00 6.25%
Class A-2: Senior 38,922,440.59 6.55%
Class A-3; Senior 62,500,000.00 6.70%
Class A-4; Senior 96,900,000.00 7.00%
Class A-5; Senior 21,200,000.00 7.30%
Class A-6; Senior 114,000,000.00 7.60%
Class A-7; Senior 101,150,000.00 8.05%
Class M-1; Mezzanine 48,000,000.00 7.85%
Class B-1; Subordinate 24,000,000.00 7.95%
Class B-2; Subordinate 21,051,865.00 8.30%
Credit Enhancement: The Class A Certificates are supported by the
subordination of the Class M-1 Certificates, the Class B Certificates and the
Class C Certificates, and the Class M-1 Certificates are supported by the
subordination of the Class B Certificates and the Class C Certificates. The
Class B-1 Certificates are supported by the subordination of the Class B- 2
Certificates and Class C Certificates, and the Class B-2 Certificates are
supported by the subordination of the Class C Certificates. The Class B-2
Certificateholders are entitled to receive on each Remittance Date an amount
equal to the Guarantee Payment, if any, under the Limited Guarantee of Green
Tree.
A-13
<PAGE>
GTFC 1996-6
Description of Securities: Current Balance Pass-Through Rate
- -------------------------- --------------- -----------------
Class A-1; Senior $ 0.00 6.15%
Class A-2; Senior 16,292,573.54 6.55%
Class A-3; Senior 56,000,000.00 6.75%
Class A-4; Senior 67,000,000.00 7.05%
Class A-5; Senior 30,000,000.00 7.35%
Class A-6; Senior 168,375,000.00 7.95%
Class M-1; Mezzanine 38,000,000.00 7.95%
Class B-1; Subordinate 19,000,000.00 8.00%
Class B-2; Subordinate 16,625,025.00 8.35%
Credit Enhancement: The Class A Certificates are supported by the
subordination of the Class M-1 Certificates, the Class B Certificates and the
Class C Certificates, and the Class M-1 Certificates are supported by the
subordination of the Class B Certificates and the Class C Certificates. The
Class B-1 Certificates are supported by the subordination of the Class B- 2
Certificates and Class C Certificates, and the Class B-2 Certificates are
supported by the subordination of the Class C Certificates. The Class B-2
Certificateholders are entitled to receive on each Remittance Date an amount
equal to the Guarantee Payment, if any, under the Limited Guarantee of Green
Tree.
A-14
<PAGE>
GTFC 1996-5
Description of Securities: Current Balance Pass-Through Rate
- -------------------------- --------------- -----------------
Class A-1; Senior $ 0.00 6.05%
Class A-2: Senior 31,178,940.99 6.65%
Class A-3; Senior 44,000,000.00 6.85%
Class A-4; Senior 80,000,000.00 7.15%
Class A-5; Senior 43,000,000.00 7.45%
Class A-6; Senior 67,000,000.00 7.75%
Class A-7; Senior 101,359,000.00 8.25%
Class M-1; Mezzanine 41,405,000.00 8.05%
Class B-1; Subordinate 20,705,000.00 8.10%
Class B-2; Subordinate 18,115,659.00 8.45%
Credit Enhancement: The Class A Certificates are supported by the
subordination of the Class M-1 Certificates, the Class B Certificates and the
Class C Certificates, and the Class M-1 Certificates are supported by the
subordination of the Class B Certificates and the Class C Certificates. The
Class B-1 Certificates are supported by the subordination of the Class B- 2
Certificates and Class C Certificates, and the Class B-2 Certificates are
supported by the subordination of the Class C Certificates. The Class B-2
Certificateholders are entitled to receive on each Remittance Date an amount
equal to the Guarantee Payment, if any, under the Limited Guarantee of Green
Tree.
A-15
<PAGE>
GTFC 1996-3
Description of Securities: Current Balance Pass-Through Rate
- -------------------------- --------------- -----------------
Class A-1; Senior $ 0.00 6.05%
Class A-2: Senior 53,034,875.10 6.45%
Class A-3; Senior 45,000,000.00 6.70%
Class A-4; Senior 35,000,000.00 7.10%
Class A-5; Senior 47,000,000.00 7.35%
Class A-6; Senior 73,650,000.00 7.85%
Class M-1; Mezzanine 33,470,000.00 7.70%
Class B-1; Subordinate 14,875,000.00 7.70%
Class B-2; Subordinate 14,883,810.00 8.05%
Credit Enhancement: The Class A Certificates are supported by the
subordination of the Class M-1 Certificates, the Class B Certificates and the
Class C Certificates, and the Class M-1 Certificates are supported by the
subordination of the Class B Certificates and the Class C Certificates. The
Class B-1 Certificates are supported by the subordination of the Class B- 2
Certificates and Class C Certificates, and the Class B-2 Certificates are
supported by the subordination of the Class C Certificates. The Class B-2
Certificateholders are entitled to receive on each Remittance Date an amount
equal to the Guarantee Payment, if any, under the Limited Guarantee of Green
Tree.
A-16
<PAGE>
GTFC 1996-2
Description of Securities: Current Balance Pass-Through Rate
- -------------------------- --------------- -----------------
Class A-1; Senior $ 70,589,976.53 6.10%
Class A-2: Senior 58,500,000.00 6.45%
Class A-3; Senior 31,600,000.00 6.90%
Class A-4; Senior 70,240,000.00 7.20%
Class A-5; Senior 81,860,000.00 7.65%
Class M-1; Mezzanine 41,850,000.00 7.60%
Class B-1; Subordinate 18,600,000.00 7.55%
Class B-2; Subordinate 18,618,332.00 7.90%
Credit Enhancement: The Class A Certificates are supported by the
subordination of the Class M-1 Certificates, the Class B Certificates and the
Class C Certificates, and the Class M-1 Certificates are supported by the
subordination of the Class B Certificates and the Class C Certificates. The
Class B-1 Certificates are supported by the subordination of the Class B- 2
Certificates and Class C Certificates, and the Class B-2 Certificates are
supported by the subordination of the Class C Certificates. The Class B-2
Certificateholders are entitled to receive on each Remittance Date an amount
equal to the Guarantee Payment, if any, under the Limited Guarantee of Green
Tree.
A-17
<PAGE>
GTFC 1995-9
Description of Securities: Current Balance Pass-Through Rate
- -------------------------- --------------- -----------------
Class A-1; Senior $ 0.00 5.90%
Class A-2: Senior 29,298,217.73 6.00%
Class A-3; Senior 40,000,000.00 6.20%
Class A-4; Senior 34,000,000.00 6.45%
Class A-5; Senior 59,000,000.00 6.80%
Class A-6; Senior 88,000,000.00 7.30%
Class M-1; Mezzanine 35,900,000.00 7.20%
Class B-1; Subordinate 15,948,322.00 7.25%
Class B-2; Subordinate 15,948,322.00 7.55%
Credit Enhancement: The Class A Certificates are supported by the
subordination of the Class M-1 Certificates, the Class B Certificates and the
Class C Certificates, and the Class M-1 Certificates are supported by the
subordination of the Class B Certificates and the Class C Certificates. The
Class B-1 Certificates are supported by the subordination of the Class B- 2
Certificates and Class C Certificates, and the Class B-2 Certificates are
supported by the subordination of the Class C Certificates. The Class B-2
Certificateholders are entitled to receive on each Remittance Date an amount
equal to the Guarantee Payment, if any, under the Limited Guarantee of Green
Tree.
A-18
<PAGE>
APPENDIX II
The data presented in the following tables are for illustrative
purposes only and there is no assurance that the delinquency, loan loss or
repossession experience of the Underlying Contracts 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. These regional or local
economic conditions are often volatile, and no predictions can be made
regarding future economic conditions in any particular area. These downturns
have tended to increase the severity of loss on repossession because of the
increased supply of used units, which in turn may affect the supply in other
regions. References in the following tables to the "Company" mean Green Tree
Financial Corporation.
Delinquency, Loan Loss and Repossession Experience
The following table sets forth the delinquency experience for the
periods indicated of the portfolio of conventional manufactured housing
contracts serviced by the Company (other than contracts already in
repossession). The Company has from time to time subserviced manufactured
housing contracts originated by other lenders. These subserviced contracts are
not reflected in the following table.
Delinquency Experience
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------
1992 1993 1994 1995 1996 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Number of Contracts Outstanding (1) ............... 175,730 237,566 322,495 416,436 503,076 584,814
Number of Contracts Delinquent (2):
30-59 Days ................................ 1,849 2,030 2,8O9 4,404 6,475 6,567
60-89 Days ................................ 603 657 903 1,571 2,121 2,382
90 Days or More ........................... 1,110 1,167 1,440 2,426 3,668 4,016
Total Contracts Delinquent ........................ 3,562 3,854 5,152 8,401 12,264 12,965
Delinquencies as a Percent of Contracts
Outstanding (3) ............................... 2.03% 1.62% 1.60% 2.02% 2.44% 2.22%
</TABLE>
(1) Excludes contracts already in repossession.
(2) The period of delinquency is based on the number of days payments are
contractually past due (assuming 30-day months). Consequently, a
contract due on the first day of a month is not 30 days delinquent
until the first day of the next month. The information for December
31, 1996 and December 31, 1997 does not include as delinquent those
manufactured housing contracts whose obligors have entered bankruptcy
prcceedings and had their scheduled payment changed under a bankruptcy
payment plan, provided that such obligors are current under their
bankruptcy payment plan.
(3) By number of contracts.
The following table sets forth the loan loss and repossession
experience for the periods indicated of the portfolio of conventional
manufactured housing contracts serviced by the Company. The Company has from
time to time subserviced manufactured housing contracts originated by other
lenders. These subserviced contracts are not reflected in the following table.
Loan Loss/Repossession Experience
(Dollars in thousands)
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996 1997
---------- ---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Number of Contracts
Serviced (1) ............... 176,925 238,951 324,141 419,090 507,539 590,327
Principal Balance of
Contracts Serviced (1) ..... $2,996,582 $4,630,659 $7,033,882 $10,182,676 $13,553,080 $17,038,136
Contract Liquidations (2) .... 2.75% 1.77% 1.44% 1.45% 2.01% 2.72%
Net Losses:
Dollars (3) .............. $ 47,817 $ 42,547 $ 42,402 $ 55,162 $ 98,632 $ 180,699
Percentage (4) ........... 1.60% .92% .60% .54%. .73% 1.06%
</TABLE>
(1) As of period end. Includes contracts already in repossession.
(2) As a percentage of the total number of contracts being serviced as of
period end.
(3) The calculation of net loss includes unpaid interest to the date of
repossession and all expenses of repossession and liquidation.
(4) As a percentage of the principal balance of contracts being serviced
as of period end.
A-19
<PAGE>
PROSPECTUS
LEHMAN ABS CORPORATION
ASSET-BACKED CERTIFICATES
ASSET-BACKED NOTES
(ISSUABLE IN SERIES)
Lehman ABS Corporation (the 'Depositor') may offer from time to time under
this Prospectus and related Prospectus Supplements the Asset-Backed Notes (the
'Notes') and the Asset-Backed Certificates (the 'Certificates' and, together
with the Notes, the 'Securities') which may be sold from time to time in one or
more series (each, a 'Series').
As specified in the related Prospectus Supplement, the Certificates of a
Series will evidence undivided interests in certain assets deposited into a
trust (each, a 'Trust Fund') by the Depositor pursuant to a Pooling and
Servicing Agreement or a Trust Agreement, as described herein. As specified in
the related Prospectus Supplement, the Notes of a Series will be issued and
secured pursuant to an Indenture and will represent indebtedness of the related
Trust Fund. The Trust Fund for a Series of Securities will include assets
purchased from the seller or sellers specified in the related Prospectus
Supplement (the 'Seller') composed of (a) Primary Assets, which may include one
or more pools of (i) home improvement installment sales contracts and
installment loan agreements (the 'Home Improvement Contracts') which are either
unsecured or secured by mortgages primarily on one-to-four family residential
properties, unless otherwise specified in the related Prospectus Supplement, or
by purchase money security interests in the home improvements financed thereby
(the 'Home Improvements') and (ii) manufactured housing installment sales
contracts and installment loan agreements (the 'Manufactured Housing Contracts'
and together with the Home Improvement Contracts, the 'Contracts') secured by
either security interests in the Manufactured Homes (as defined herein) or by
mortgages on real estate on which the related Manufactured Homes are located
and/or (iii) Private Securities (as defined herein), (b) all monies due
thereunder net, if and as provided in the related Prospectus Supplement, of
certain amounts payable to the servicer of the Contracts, which servicer may
also be the Seller, specified in the related Prospectus Supplement (the
'Servicer'), and (c) certain funds, Enhancement (as defined herein) and other
assets as described herein and in the related Prospectus Supplement.
Purchases of Private Securities for a Series by the Seller or the Depositor
will be made in secondary market transactions, not from the issuer of such
Private Securities or any affiliate thereof. See 'The Trust Funds--Private
Securities' herein.
Each Series of Securities will be issued in one or more classes (each, a
'Class'). Interest on and principal of the Securities of a Series will be
payable on each Distribution Date specified in the related Prospectus
Supplement, at the times, at the rates, in the amounts and in the order of
priority set forth in the related Prospectus Supplement.
If a Series includes multiple Classes, such Classes may vary with respect to
the amount, percentage and timing of distributions of principal, interest or
both and one or more Classes may be subordinated to other Classes with respect
to distributions of principal, interest or both as described herein and in the
related Prospectus Supplement. If so specified in the related Prospectus
Supplement, the Primary Assets and other assets comprising the Trust Fund may be
divided into one or more Asset Groups and each Class of the related Series will
evidence beneficial ownership of the corresponding Asset Group, as applicable.
The rate of reduction of the aggregate principal balance of each Class of a
Series may depend principally upon the rate of payment (including prepayments)
with respect to the Contracts or Underlying Contracts relating to the Private
Securities, as applicable. A rate of prepayment lower or higher than anticipated
will affect the yield on the Securities of a Series in the manner described
herein and in the related Prospectus Supplement. Under certain limited
circumstances described herein and in the related Prospectus Supplement, a
Series of Securities may be subject to termination or redemption under the
circumstances described herein and in the related Prospectus Supplement.
If specified in the related Prospectus Supplement, an election may be made
to treat certain assets comprising the Trust Fund for a Series as a 'real estate
mortgage investment conduit' (a 'REMIC') for federal income tax purposes. See
'CERTAIN FEDERAL INCOME TAX CONSIDERATIONS' herein.
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN
THE CERTIFICATES, SEE PAGE 11.
NOTES OF A GIVEN SERIES REPRESENT OBLIGATIONS OF, AND CERTIFICATES OF A SERIES
EVIDENCE BENEFICIAL INTERESTS IN THE RELATED TRUST FUND ONLY AND ARE NOT
GUARANTEED BY ANY GOVERNMENTAL AGENCY OR BY THE DEPOSITOR, THE SELLER,
THE TRUSTEE, THE SERVICER OR BY ANY OF THEIR RESPECTIVE AFFILIATES
OR, UNLESS OTHERWISE SPECIFIED IN THE RELATED PROSPECTUS
SUPPLEMENT, BY ANY OTHER PERSON OR ENTITY. THE DEPOSITOR'S
ONLY OBLIGATIONS WITH RESPECT TO ANY SERIES OF SECURITIES
WILL BE PURSUANT TO CERTAIN REPRESENTATIONS AND
WARRANTIES SET FORTH IN THE RELATED AGREEMENT AS
DESCRIBED HEREIN OR IN THE RELATED PROSPECTUS
SUPPLEMENT. SEE 'RISK FACTORS' FOR
CERTAIN FACTORS TO BE CONSIDERED IN
PURCHASING THE SECURITIES.
------------------------
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 OR THE
PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
The Securities offered by this Prospectus and by the related Prospectus
Supplement are offered by Lehman Brothers and the other underwriters set forth
in the related Prospectus Supplement, if any, subject to prior sale, to
withdrawal, cancellation or modification of the offer without notice, to
delivery to and acceptance by Lehman Brothers and the other underwriters, if
any, and certain further conditions. Retain this Prospectus for future
reference. This Prospectus may not be used to consummate sales of the Securities
offered hereby unless accompanied by a Prospectus Supplement.
------------------------
LEHMAN BROTHERS
February 24, 1998
<PAGE>
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a Series of Securities to be offered
hereunder will, among other things, set forth with respect to such Series of
Securities: (i) the aggregate principal amount, interest rate, and authorized
denominations of each Class of such Securities; (ii) certain information
concerning the Primary Assets, the Seller and any Servicer; (iii) the terms of
any Enhancement with respect to such Series; (iv) the terms of any insurance
related to the Primary Assets; (v) information concerning any other assets in
the related Trust Fund, including any Reserve Fund; (vi) the Final Scheduled
Distribution Date of each Class of such Securities; (vii) the method to be used
to calculate the amount of principal required to be applied to the Securities of
each Class of such Series on each Distribution Date, the timing of the
application of principal and the order of priority of the application of such
principal to the respective Classes and the allocation of principal to be so
applied; (viii) the Distribution Dates and any Assumed Reinvestment Rate (as
defined herein); (ix) additional information with respect to the plan of
distribution of such Securities; and (x) whether a REMIC election will be made
with respect to some or all of the Trust Fund for such Series. To the extent
that the terms of this Prospectus conflict or are otherwise inconsistent with
the terms of any Prospectus Supplement, the terms of such Prospectus Supplement
shall govern.
AVAILABLE INFORMATION
The Depositor is subject to the informational requirements of the
Securities Exchange Act of 1934 and in accordance therewith files reports and
other information with the Securities and Exchange Commission (the
'Commission'). Such reports and other information can be inspected and copied at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at its Regional Offices located as
follows: Midwest Regional Office, Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661; and Northeast Regional Office, 7 World
Trade Center, Suite 1300, New York, New York 10048. Copies of such material can
also be obtained from the Public Reference Section of the Commission, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In
addition, the Securities And Exchange Commission (the 'Commission') maintains a
Web site at http://www.sec.gov containing reports, proxy and information
statements and other information regarding registrants, including the Depositor,
that file electonically with the Commission.
REPORTS TO HOLDERS
Periodic and annual reports concerning the related Trust Fund for a Series
of Securities are required under the related Agreement to be forwarded to
Holders. Unless otherwise specified in the related Prospectus Supplement, such
reports will not be examined and reported on by an independent public
accountant. See 'THE AGREEMENTS--Reports to Holders' herein.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed with respect to each Trust pursuant to Sections 13(a),
13(c), 14 and 15(d) of the Securities Exchange Act of 1934, as amended,
subsequent to the date of any Prospectus Supplement and prior to the termination
of any offering of Securities shall be deemed to be incorporated by reference
into such Prospectus Supplement and this Prospectus. Any statement contained in
a document incorporated or deemed to be incorporated or deemed to be
incorporated by reference in any Prospectus Supplement or in this Prospectus
shall be deemed to be modified or superseded for purposes of such Prospectus
Supplement and this Prospectus to the extent that a statement contained in any
Prospectus Supplement or in this Prospectus modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute part of any Prospectus Supplement.
2
<PAGE>
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to each Series of Securities contained in the
Prospectus Supplement to be prepared and delivered in connection with the
offering of Securities of such Series. Capitalized terms used and not otherwise
defined herein or in the related Prospectus Supplement shall have the meanings
set forth in the 'GLOSSARY OF TERMS' herein.
<TABLE>
<S> <C>
SECURITIES OFFERED................. Asset-Backed Certificates (the 'Certificates') and Asset-Backed Notes
(the 'Notes'). Certificates are issuable from time to time in Series
pursuant to a Pooling and Servicing Agreement or Trust Agreement.
Each Certificate of a Series will evidence an interest in the Trust
Fund for such Series, or in an Asset Group specified in the related
Prospectus Supplement. Notes are issuable from time to time in
Series pursuant to an Indenture. Each Series of Securities will
consist of one or more Classes, one or more of which may be Classes
of Compound Interest Securities, Planned Amortization Class ('PAC')
Securities, Variable Interest Securities, Zero Coupon Securities,
Principal Only Securities, Interest Only Securities, Participating
Securities, Senior Securities or Subordinate Securities. Each Class
may differ in, among other things, the amounts allocated to and the
priority of principal and interest payments, Final Scheduled
Distribution Dates, Distribution Dates and interest rates. The
Securities of each Class will be issued in fully registered form in
the denominations specified in the related Prospectus Supplement. If
so specified in the related Prospectus Supplement, the Securities or
certain Classes of such Securities offered thereby may be available
in book-entry form only.
DEPOSITOR.......................... Lehman ABS Corporation (the 'Depositor') was incorporated in the State
of Delaware on January 29, 1988, and is a wholly-owned, special
purpose subsidiary of Lehman Commercial Paper Inc. ('LCPI'), which
itself is a wholly-owned subsidiary of Lehman Brothers Inc. ('Lehman
Brothers'), which is a wholly-owned subsidiary of Lehman Brothers
Holdings Inc. ('Holdings'). None of Lehman Brothers, LCPI, Holdings
nor any other affiliate of the Depositor, the Servicer, the Trustee
or the Seller has guaranteed or is otherwise obligated with respect
to the Securities of any Series. See 'THE DEPOSITOR.'
INTEREST PAYMENTS.................. Interest payments on the Securities of a Series entitled by their
terms to receive interest will be made on each Distribution Date, to
the extent set forth in, and at the applicable rate specified in (or
determined in the manner set forth in), the related Prospectus
Supplement. The interest rate on Securities of a Series may be
variable or change with changes in the rates of interest on the
related Contracts or Underlying Contracts relating to the Private
Securities, as applicable and/or as prepayments occur with respect
to such Contracts or Underlying Contracts, as applicable. Interest
Only Securities may be assigned a 'Notional Amount' set forth in the
related Prospectus Supplement which is used solely for convenience
in expressing the calculation of interest and for certain other
purposes and does not represent the right to receive any
distributions allocable to principal. Principal Only Securities may
not be entitled to receive any interest payments or may be entitled
to receive only nominal interest payments. Interest payable on the
Securities of a Series on a Distribution Date will include all
interest accrued during the period specified in the related
Prospectus Supplement. See 'DESCRIPTION OF THE SECURITIES-- Payments
of Interest.'
PRINCIPAL PAYMENTS................. All payments of principal of a Series of Securities will be made in an
aggregate amount determined as set forth in the related Prospectus
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
Supplement and will be paid at the times and will be allocated among
the Classes of such Series in the order and amounts, and will be
applied either on a pro rata or a random lot basis among all
Securities of any such Class, all as specified in the related
Prospectus Supplement.
FINAL SCHEDULED
DISTRIBUTION DATE
OF THE SECURITIES................ The Final Scheduled Distribution Date with respect to each Class of
Notes is the date no later than which principal thereof will be
fully paid and with respect to each Class of Certificates is the
date after which no Certificates of such Class are expected to
remain outstanding, in each case calculated on the basis of the
assumptions applicable to such Series described in the related
Prospectus Supplement. The Final Scheduled Distribution Date of a
Class may equal the maturity date of the Primary Asset in the
related Trust Fund which has the latest stated maturity or will be
determined as described herein and in the related Prospectus
Supplement.
The actual final Distribution Date of the Securities of a Series will
depend primarily upon the rate of payment (including prepayments,
liquidations due to default, the receipt of proceeds from casualty
insurance policies and repurchases) of the Contracts or Underlying
Contracts relating to the Private Securities, as applicable, in the
related Trust Fund. Unless otherwise specified in the related
Prospectus Supplement, the actual final Distribution Date of any
Security is likely to occur earlier and may occur substantially
earlier or may occur later than its Final Scheduled Distribution
Date as a result of the application of prepayments to the reduction
of the principal balances of the Securities and as a result of
defaults on the Primary Assets. The rate of payments on the
Contracts or Underlying Contracts relating to the Private
Securities, as applicable, in the Trust Fund for a Series will
depend on a variety of factors, including certain characteristics of
such Contracts or Underlying Contracts, as applicable, and the
prevailing level of interest rates from time to time, as well as on
a variety of economic, demographic, tax, legal, social and other
factors. No assurance can be given as to the actual prepayment
experience with respect to a Series. See 'RISK FACTORS--Prepayment
and Yield Considerations' and 'DESCRIPTION OF THE SECURITIES--
Weighted Average Life of the Securities' herein.
OPTIONAL TERMINATION............... One or more Classes of Securities of any Series may be redeemed or
repurchased in whole or in part, at the Depositor's or the
Servicer's option, at such time and under the circumstances
specified in the related Prospectus Supplement, at the price set
forth therein. If so specified in the related Prospectus Supplement
for a Series of Securities, the Depositor, the Servicer, or such
other entity that is specified in the related Prospectus Supplement,
may, at its option, cause an early termination of the related Trust
Fund by repurchasing all of the Primary Assets remaining in the
Trust Fund on or after a specified date, or on or after such time as
the aggregate principal balance of the Securities of the Series or
the Primary Assets relating to such Series, as specified in the
related Prospectus Supplement, is less than the amount or percentage
specified in the related Prospectus Supplement. See 'DESCRIPTION OF
THE SECURITIES--Optional Redemption, Purchase or Termination.'
In addition, the Prospectus Supplement may provide other circumstances
under which Holders of Securities of a Series could be fully paid
significantly earlier than would otherwise be the case if payments
or
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
distributions were solely based on the activity of the related
Primary Assets.
THE TRUST FUND..................... The Trust Fund for a Series of Securities will consist of one or more
of the assets described below, as described in the related Prospectus
Supplement.
A. PRIMARY ASSETS............. The Primary Assets for a Series may consist of any combination of the
following assets, to the extent and as specified in the related
Prospectus Supplement. The Primary Assets will be purchased from the
Seller or may be purchased by the Depositor in secondary market
transactions, not from the issuer of such Private Securities or an
affiliate thereof, or, in the case of the Loans, in privately
negotiated transactions, including transactions with entities
affiliated with the Depositor.
(1) CONTRACTS............ Primary Assets for a Series will consist, in whole or in part, of
Contracts. Some Contracts may be delinquent or non-performing as
specified in the related Prospectus Supplement. Contracts may be
originated by or acquired from an affiliate of the Depositor and an
affiliate of the Depositor may be an obligor with respect to any
such Contracts. The Contracts will be conventional contracts or
contracts incurred by the Federal Housing Administration ('FHA') or
partially guaranteed by the Veterans Administration ('VA'). To the
extent provided in the related Prospectus Supplement, additional
Contracts may be periodically added to the Trust Fund, or may be
removed from time to time if certain asset value tests are met, as
described in the related Prospectus Supplement.
The 'Contracts' for a Series will consist of (i) home improvement
installment sales contracts and installment loan agreements (the
'Home Improvement Contracts') and (ii) manufactured housing
installment sales contracts and installment loan agreements (the
'Manufactured Housing Contracts' and together with the Home
Improvement Contracts, the 'Contracts'). Contracts may, as specified
in the related Prospectus Supplement, have various payment
characteristics, including balloon or other irregular payment
features, and may accrue interest at a fixed rate or an adjustable
rate.
As specified in the related Prospectus Supplement, the Contracts may
be secured by mortgages or deeds of trust or other similar security
instruments creating a lien on a residential property (each, a
'Mortgaged Property'), which may be subordinated to one or more
senior liens on the Mortgaged Property, as described in the related
Prospectus Supplement. As specified in the related Prospectus
Supplement, Contracts may be unsecured or secured by purchase money
security interests in the Home Improvements financed thereby and the
Manufactured Housing Contracts may be secured by security interests
in Manufactured Homes. The Mortgaged Properties, the Home
Improvements and the Manufactured Homes are collectively referred to
herein as the 'Properties.'
The related Prospectus Supplement will describe certain
characteristics of the Contracts for a Series, including, without
limitation, and to the extent relevant: (a) the aggregate unpaid
principal balance of the Contracts (or the aggregate unpaid
principal balance included in the Trust Fund for the related Series)
and the average outstanding principal balance of the Contracts; (b)
the weighted average Loan Rate on the Contracts as of the Cut-off
Date; (c) the Combined Loan-to-Value Ratios or Loan-to-Value Ratios,
as applicable, of the Contracts, computed in the manner described in
the related Prospectus Supplement; (d) the percentage (by principal
balance as of the Cut-off
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
Date) of Contracts that accrue interest at adjustable or fixed
interest rates; (e) any enhancement relating to the Contracts; (f)
the percentage (by principal balance as of the Cut-off Date) of
Contracts that are secured by Mortgaged Properties, Home
Improvements, Manufactured Homes, the real estate on which the
Manufactured Homes are located or are unsecured; (g) the geographic
distribution of the Properties securing the Contracts; (h) the use
and type of each Property securing the Contracts; (i) the lien
priority of the Contracts and (j) the delinquency status and year of
origination of the Contracts.
(2) PRIVATE SECURITIES... Primary Assets for a Series may consist, in whole or in part, of
Private Securities which include (a) pass-through certificates
representing beneficial interests in loans of the type that would
otherwise be eligible to be Contracts (the 'Underlying Contracts')
or (b) collateralized obligations secured by Underlying Contracts.
Such pass-through certificates or collateralized obligations will
have previously been (a) offered and distributed to the public
pursuant to an effective registration statement or (b) purchased in
a transaction not involving any public offering from a person who is
not an affiliate of the issuer of such securities at the time of
sale (nor an affiliate thereof at any time during the three
preceding months); provided a period of three years has elapsed
since the later of the date the securities were acquired from the
issuer or an affiliate thereof. Although individual Underlying
Contracts may be insured or guaranteed by the United States or an
agency or instrumentality thereof, they need not be, and the Private
Securities themselves will not be so insured or guaranteed. See 'THE
TRUST FUNDS--Private Securities.' Unless otherwise specified in the
Prospectus Supplement relating to a Series of Securities, payments
on the Private Securities will be distributed directly to the
Trustee as registered owner of such Private Securities.
The related Prospectus Supplement for a Series will specify (such
disclosure may be on an approximate basis, as described above and
will be as of the date specified in the related Prospectus
Supplement) to the extent relevant and to the extent such
information is reasonably available to the Depositor and the
Depositor reasonably believes such information to be reliable: (i)
the aggregate approximate principal amount and type of any Private
Securities to be included in the Trust Fund for such Series; (ii)
certain characteristics of the Underlying Contracts including (A)
the payment features of such Underlying Contracts (i.e., whether
they are fixed rate or adjustable rate and whether they provide for
fixed level payments, negative amortization or other payment
features), (B) the approximate aggregate principal amount of such
Underlying Contracts which are insured or guaranteed by a
governmental entity, (C) the servicing fee or range of servicing
fees with respect to such Underlying Contracts, (D) the minimum and
maximum stated maturities of such Underlying Contracts at
origination, (E) the lien priority and the credit utilization rates,
if any, of such Underlying Contracts, and (F) the delinquency status
and year of origination of such Underlying Contracts; (iii) the
maximum original term-to-stated maturity of the Private Securities;
(iv) the weighted average term-to-stated maturity of the Private
Securities; (v) the pass-through or certificate rate or ranges
thereof for the Private Securities; (vi) the sponsor or depositor of
the Private Securities (the 'PS Sponsor'), the servicer of the
Private Securities (the 'PS Servicer') and the trustee of the
Private Securities (the 'PS Trustee'); (vii) certain characteristics
of enhancement, if any, such as reserve funds, insurance policies,
letters of credit or guarantees, relating to the Contracts
underlying the Private Securities, or to such
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
Private Securities themselves; (viii) the terms on which the
Underlying Contracts may, or are required to, be repurchased prior
to stated maturity; and (ix) the terms on which substitute
Underlying Contracts may be delivered to replace those initially
deposited with the PS Trustee. See 'THE TRUST FUNDS--Additional
Information' herein.
B. COLLECTION AND
DISTRIBUTION
ACCOUNTS................. Unless otherwise provided in the related Prospectus Supplement, all
payments on or with respect to the Primary Assets for a Series will
be remitted directly to an account (the 'Collection Account') to be
established for such Series with the Trustee or the Servicer, in the
name of the Trustee. Unless otherwise provided in the related
Prospectus Supplement, the Trustee shall be required to apply a
portion of the amount in the Collection Account, together with
reinvestment earnings from eligible investments specified in the
related Prospectus Supplement, to the payment of certain amounts
payable to the Servicer under the related Agreement and any other
person specified in the Prospectus Supplement, and to deposit a
portion of the amount in the Collection Account into a separate
account (the 'Distribution Account') to be established for such
Series, each in the manner and at the times established in the
related Prospectus Supplement. All amounts deposited in such
Distribution Account will be available, unless otherwise specified
in the related Prospectus Supplement, for (i) application to the
payment of principal of and interest on such Series of Securities on
the next Distribution Date, (ii) the making of adequate provision
for future payments on certain Classes of Securities and (iii) any
other purpose specified in the related Prospectus Supplement. After
applying the funds in the Collection Account as described above, any
funds remaining in the Collection Account may be paid over to the
Servicer, the Depositor, any provider of Enhancement with respect to
such Series (an 'Enhancer') or any other person entitled thereto in
the manner and at the times established in the related Prospectus
Supplement.
ENHANCEMENT........................ If stated in the Prospectus Supplement relating to a Series, the
Depositor will obtain an irrevocable letter of credit, surety bond,
certificate insurance policy, insurance policy or other form of
credit support (collectively, 'Enhancement') in favor of the Trustee
on behalf of the Holders of such Series and any other person
specified in such Prospectus Supplement from an institution
acceptable to the rating agency or agencies identified in the
related Prospectus Supplement as rating such Series of Securities
(collectively, the 'Rating Agency') for the purposes specified in
such Prospectus Supplement. The Enhancement will support the
payments on the Securities and may be used for other purposes, to
the extent and under the conditions specified in such Prospectus
Supplement. See 'ENHANCEMENT.'
Enhancement for a Series may include one or more of the following
types of Enhancement, or such other type of Enhancement specified in
the related Prospectus Supplement.
A. SUBORDINATE
SECURITIES............... If stated in the related Prospectus Supplement, Enhancement for a
Series may consist of one or more Classes of Subordinate Securities.
The rights of Holders of such Subordinate Securities to receive
distributions on any Distribution Date will be subordinate in right
and priority to the rights of holders of Senior Securities of the
Series, but only to the extent described in the related Prospectus
Supplement.
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
B. INSURANCE.................. If stated in the related Prospectus Supplement, Enhancement for a
Series may consist of special hazard insurance policies, bankruptcy
bonds and other types of insurance supporting payments on the
Securities.
C. RESERVE FUNDS.............. If stated in the Prospectus Supplement, the Depositor may deposit
cash, a letter or letters of credit, short-term investments, or other
instruments acceptable to the Rating Agency in one or more reserve
funds to be established in the name of the Trustee (each, a 'Reserve
Fund'), which will be used, as specified in such Prospectus
Supplement, by the Trustee to make required payments of principal of
or interest on the Securities of such Series, to make adequate
provision for future payments on such Securities or for any other
purpose specified in the Agreement, with respect to such Series, to
the extent that funds are not otherwise available. In the
alternative or in addition to such deposit, a Reserve Fund for a
Series may be funded through application of all or a portion of the
excess cash flow from the Primary Assets for such Series, to the
extent described in the related Prospectus Supplement.
D. MINIMUM PRINCIPAL
PAYMENT AGREEMENT........ If stated in the Prospectus Supplement relating to a Series of
Securities, the Depositor will enter into a minimum principal payment
agreement (the 'Minimum Principal Payment Agreement') with an entity
meeting the criteria of the Rating Agency, pursuant to which such
entity will provide funds in the event that aggregate principal
payments on the Primary Assets for such Series are not sufficient to
make certain payments, as provided in the related Prospectus
Supplement. See 'ENHANCEMENT--Minimum Principal Payment Agreement.'
E. DEPOSIT
AGREEMENT................ If stated in the Prospectus Supplement, the Depositor and the Trustee
will enter into a guaranteed investment contract or an investment
agreement (the 'Deposit Agreement') pursuant to which all or a
portion of amounts held in the Collection Account, the Distribution
Account or in any Reserve Fund will be invested with the entity
specified in such Prospectus Supplement. The Trustee will be
entitled to withdraw amounts so invested, plus interest at a rate
equal to the Assumed Reinvestment Rate, in the manner specified in
the Prospectus Supplement. See 'ENHANCEMENT--Deposit Agreement.'
SERVICING.......................... The Servicer will be responsible for servicing, managing and making
collections on the Contracts for a Series. In addition, the
Servicer, if so specified in the related Prospectus Supplement, will
act as custodian and will be responsible for maintaining custody of
the Contracts and related documentation on behalf of the Trustee.
Advances with respect to delinquent payments of principal or
interest on a Contract will be made by the Servicer only to the
extent described in the related Prospectus Supplement. Such advances
will be intended to provide liquidity only and, unless otherwise
specified in the related Prospectus Supplement, reimbursable to the
Servicer from scheduled payments of principal and interest, late
collections, or from the proceeds of liquidation of the related
Contracts or from other recoveries relating to such Contracts
(including any insurance proceeds or payments from other credit
support). In performing these functions, the Servicer will exercise
the same degree of skill and care that it customarily exercises with
respect to similar receivables or Contracts owned or serviced by it.
Under certain limited circumstances, the Servicer may resign or be
removed, in which event either the Trustee or a third-party servicer
will be appointed as successor servicer. The Servicer will receive a
periodic fee as servicing compensation (the 'Servicing Fee') and
may, as specified herein and in the related Prospectus Supplement,
receive certain additional compensation. See 'SERVICING OF
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
CONTRACTS--Servicing Compensation and Payment of Expenses' herein.
FEDERAL INCOME
TAX CONSIDERATIONS
A. DEBT SECURITIES AND
REMIC RESIDUAL
SECURITIES............... If (i) an election is made to treat all or a portion of a Trust Fund
for a Series as a 'real estate mortgage investment conduit' (a
'REMIC') or (ii) so provided in the related Prospectus Supplement, a
Series of Securities will include one or more Classes of taxable
debt obligations under the Internal Revenue Code of 1986, as amended
(the 'Code'). Stated interest with respect to such Classes of
Securities will be reported by a Holder in accordance with the
Holder's method of accounting except that, in the case of Securities
constituting 'regular interests' in a REMIC ('Regular Interests'),
such interest will be required to be reported on the accrual method
regardless of a Holder's usual method of accounting. Securities that
are Compound Interest Securities, Zero Coupon Securities or Interest
Only Securities will, and certain other Classes of Securities may,
be issued with original issue discount that is not de minimis. In
such cases, the Holder will be required to include original issue
discount in gross income as it accrues, which may be prior to the
receipt of cash attributable to such income. If a Security is issued
at a premium, the holder may be entitled to make an election to
amortize such premium on a constant yield method.
In the case of a REMIC election, a Class of Securities may be treated
as REMIC 'residual interests' ('Residual Interests'). A holder of a
Residual Interest will be required to include in its income its pro
rata share of the taxable income of the REMIC. In certain
circumstances, the holder of a Residual Interest may have REMIC
taxable income or tax liability attributable to REMIC taxable income
for a particular period in excess of cash distributions for such
period or have an after-tax return that is less than the after-tax
return on comparable debt instruments. In addition, a portion (or,
in some cases, all) of the income from a Residual Interest (i)
except in certain circumstances with respect to a Holder classified
as a thrift institution under the Code, may not be subject to offset
by losses from other activities, (ii) for a Holder that is subject
to tax under the Code on unrelated business taxable income, may be
treated as unrelated business taxable income and (iii) for a foreign
holder, may not qualify for exemption from or reduction of
withholding. In addition, (i) Residual Interests are subject to
transfer restrictions and (ii) certain transfers of Residual
Interests will not be recognized for federal income tax purposes.
Further, individual holders are subject to limitations on the
deductibility of expenses of the REMIC. See 'CERTAIN FEDERAL INCOME
TAX CONSIDERATIONS.'
B. NON-REMIC
PASS-THROUGH
SECURITIES............... If so specified in the related Prospectus Supplement, the Trust Fund
for a Series will be treated as a grantor trust and will not be
classified as an association taxable as a corporation for federal
income tax purposes and Holders of Securities of such Series
('Pass-Through Securities') will be treated as owning directly
rights to receive certain payments of interest or principal, or
both, on the Primary Assets held in the Trust Fund for such Series.
All income with respect to a Stripped Security (as defined herein)
will be accounted for as original issue discount and, unless
otherwise specified in the related Prospectus Supplement, will
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
be reported by the Trustee on an accrual basis, which may be prior
to the receipt of cash associated with such income.
The holder of a Pass-Through Security must include in income its share
of all income of the Trust Fund to the extent such income is
allocable to it and may, subject to certain limitations for
individual Holders, deduct its share of all expenses of the Trust
Fund. See 'CERTAIN FEDERAL INCOME TAX CONSIDERATIONS.'
C. OWNER TRUST
SECURITIES............... If so specified in the Prospectus Supplement, the Trust Fund will be
treated as a partnership for purposes of federal and state income
tax. Each Noteholder, by the acceptance of a Note of a given series,
will agree to treat such Note as indebtedness, and each
Certificateholder, by the acceptance of a Certificate of a given
series, will agree to treat the related Trust as a partnership in
which such Certificateholder is a partner for federal income and
state tax purposes. Alternative characterizations of such Trust and
such Certificates are possible, but would not result in materially
adverse tax consequences to Certificateholders. See 'CERTAIN FEDERAL
INCOME TAX CONSIDERATIONS.'
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 carefully review with its own legal advisors whether the
purchase or holding of Securities could give rise to a transaction
prohibited or otherwise impermissible under ERISA or the Code. See
'ERISA CONSIDERATIONS.'
LEGAL INVESTMENT................... Unless otherwise specified in the related Prospectus Supplement,
Securities of each Series offered by this Prospectus and the related
Prospectus Supplement will not constitute 'mortgage related
securities' under the Secondary Mortgage Market Enhancement Act of
1984 ('SMMEA'). Investors whose investment authority is subject to
legal restrictions should consult their own legal advisors to
determine whether and to what extent the Securities constitute legal
investments for them. See 'LEGAL INVESTMENT.'
USE OF PROCEEDS.................... The Depositor will use the net proceeds from the sale of each Series
for one or more of the following purposes: (i) to purchase the related
Primary Assets, (ii) to repay indebtedness which has been incurred
to obtain funds to acquire such Primary Assets, (iii) to establish
any Reserve Funds described in the related Prospectus Supplement and
(iv) to pay costs of structuring and issuing such Securities,
including the costs of obtaining Enhancement, if any. If so
specified in the related Prospectus Supplement, the purchase of the
Primary Assets for a Series may be effected by an exchange of
Securities with the Seller of such Primary Assets. See 'USE OF
PROCEEDS.'
RATINGS............................ It will be a requirement for issuance of any Series that the
Securities offered by this Prospectus and the related Prospectus
Supplement be rated by at least one Rating Agency in one of its four
highest applicable rating categories. The rating or ratings
applicable to Securities of each Series offered hereby and by the
related Prospectus Supplement will be as set forth in the related
Prospectus Supplement. A securities rating should be evaluated
independently of similar ratings on different types of securities. A
securities rating does not address the effect that the rate of
prepayments on Contracts or Underlying Contracts relating to Private
Securities, as applicable, for a Series may have on the yield to
investors in the Securities of such Series. See 'RISK
FACTORS--Rating of Securities.'
</TABLE>
10
<PAGE>
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Securities.
Limited Liquidity. There will be no market for the Securities of any
Series prior to the issuance thereof, and there can be no assurance that a
secondary market will develop or, if it does develop, that it will provide
Holders with liquidity of investment or will continue for the life of the
Securities of such Series. Lehman Brothers, through one or more of its
affiliates, and the other underwriters, if any, specified in the related
Prospectus Supplement, presently expect to make a secondary market in the
Securities, but have no obligation to do so.
Limited Assets. The Depositor does not have, nor is it expected to have,
any significant assets. The Securities of a Series will be payable solely from
the assets of the Trust Fund for such Securities. There will be no recourse to
the Depositor or any other person for any default on the Notes or any failure to
receive distributions on the Certificates. Further, unless otherwise stated in
the related Prospectus Supplement, at the times set forth in the related
Prospectus Supplement, certain Primary Assets and/or any balance remaining in
the Collection Account or Distribution Account immediately after making all
payments due on the Securities of such Series and other payments specified in
the related Prospectus Supplement, may be promptly released or remitted to the
Depositor, the Servicer, the Enhancer or any other person entitled thereto and
will no longer be available for making payments to Holders. Consequently,
holders of Securities of each Series must rely solely upon payments with respect
to the Primary Assets and the other assets constituting the Trust Fund for a
Series of Securities, including, if applicable, any amounts available pursuant
to any Enhancement for such Series, for the payment of principal of and interest
on the Securities of such Series.
Holders of Notes will be required under the Indenture to proceed only
against the Primary Assets and other assets constituting the related Trust Fund
in the case of a default with respect to such Notes and may not proceed against
any assets of the Depositor. If payments with respect to the Primary Assets and
such other assets securing a Series of Notes, including any Enhancement, were to
become insufficient to make payments on such Notes, no other assets would be
available for payment of the deficiency.
The only obligations, if any, of the Depositor with respect to the
Securities of any Series will be pursuant to certain representations and
warranties. See 'THE AGREEMENTS--Assignment of Primary Assets' herein. The
Depositor does not have, and is not expected in the future to have, any
significant assets with which to meet any obligation to repurchase Primary
Assets with respect to which there has been a breach of any representation or
warranty. If, for example, the Depositor were required to repurchase a Primary
Asset, its only sources of funds to make such repurchase would be from funds
obtained from the enforcement of a corresponding obligation, if any, on the part
of the originator of the Primary Assets, the Servicer or the Seller, as the case
may be, or from a Reserve Fund established to provide funds for such
repurchases.
Enhancement. Although such Enhancement is intended to reduce the risk of
delinquent payments or losses to holders of Securities entitled to the benefit
thereof, the amount of such Enhancement will be limited, as set forth in the
related Prospectus Supplement, and will decline and could be depleted under
certain circumstances prior to the payment in full of the related Series of
Securities, and as a result Holders may suffer losses. See 'ENHANCEMENT.'
Prepayment and Yield Considerations. The yield to maturity experienced by
a holder of Securities may be affected by the rate of payment of principal of
the Contracts or Underlying Contracts relating to the Private Securities, as
applicable. The timing of principal payments of the Securities of a Series will
be affected by a number of factors, including the following: (i) the extent of
prepayments of the Contracts or Underlying Contracts relating to the Private
Securities, as applicable, which prepayments may be influenced by a variety of
factors, (ii) the manner of allocating principal payments among the Classes of
Securities of a Series as specified in the related Prospectus Supplement and
(iii) the exercise by the party entitled thereto of any right of optional
termination. See 'DESCRIPTION OF THE SECURITIES--Weighted Average Life of
Securities.' Prepayments may also result from repurchases of Contracts or
Underlying Contracts, as applicable, due to material breaches of the Seller's or
the Depositor's warranties.
11
<PAGE>
Interest payable on the Securities of a Series on a Distribution Date will
include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues during the calendar month
prior to a Distribution Date, the effective yield to Holders will be reduced
from the yield that would otherwise be obtainable if interest payable on the
Security were to accrue through the day immediately preceding each Distribution
Date, and the effective yield (at par) to Holders will be less than the
indicated coupon rate. See 'DESCRIPTION OF THE SECURITIES--Payments of
Interest.'
Nature of Mortgages; Properties. Since the Mortgages are primarily junior
liens subordinate to the rights of the mortgagee under the related senior
mortgage or mortgages, the proceeds from any liquidation, insurance or
condemnation proceedings will be available to satisfy the outstanding balance of
such junior mortgage only to the extent that the claims of such senior
mortgagees have been satisfied in full, including any related foreclosure costs.
In addition, a junior mortgagee may not foreclose on the Mortgaged Property
securing a junior mortgage unless it forecloses subject to the senior mortgages,
in which case it must either pay the entire amount due on the senior mortgages
to the senior mortgagees at or prior to the foreclosure sale or undertake the
obligation to make payments on the senior mortgages in the event the mortgagor
is in default thereunder. The Trust Fund will not have any source of funds to
satisfy the senior mortgages or make payments due to the senior mortgagees.
There are several factors that could adversely affect the value of
Properties such that the outstanding balance of the related Contract, together
with any senior financing on the related Mortgaged Property, if applicable,
would equal or exceed the value of the Properties. Among the factors that could
adversely affect the value of the Properties are an overall decline in the
residential real estate market in the areas in which the Properties are located
or a decline in the general condition of the Properties as a result of failure
of borrowers to maintain adequately the Properties or of natural disasters that
are not necessarily covered by insurance, such as earthquakes and floods. Any
such decline could extinguish the value of a junior interest in Property before
having any effect on the related senior interest therein. If such a decline
occurs, the actual rates of delinquencies, foreclosure and losses on the junior
Contracts could be higher than those currently experienced in the mortgage
lending industry in general.
Environmental Risks. Real property pledged as security to a lender may be
subject to certain environmental risks. Under the laws of certain states,
contamination of a property may give rise to a lien on the property to assure
the costs of clean-up. In several states, such a lien has priority over the lien
of an existing mortgage or owner's interest against such property. In addition,
under the laws of some states and under the federal Comprehensive Environmental
Response, Compensation, and Liability Act of 1980 ('CERCLA'), a lender may be
liable, as an 'owner' or 'operator,' for costs of addressing releases or
threatened releases of hazardous substances that require remedy at a property,
if agents or employees of the lender have become sufficiently involved in the
operations of the borrower, regardless of whether or not the environmental
damage or threat was caused by a prior owner. A lender also risks such liability
on foreclosure of a Mortgaged Property.
Certain Other Legal Considerations Regarding the Contracts. Applicable
state laws generally regulate interest rates and other charges and require
certain disclosures. In addition, other state laws, public policy and general
principles of equity relating to the protection of consumers, unfair and
deceptive practices and debt collection practices may apply to the origination,
servicing and collection of the Contracts. Depending on the provisions of the
applicable law and the specific facts and circumstances involved, violations of
these laws, policies and principles may limit the ability of the Servicer to
collect all or part of the principal of or interest on the Contracts, may
entitle the borrower to a refund of amounts previously paid and, in addition,
could subject the owner of the Contract to damages and administrative
enforcement.
The Contracts are also subject to Federal laws, including:
(i) the Federal Truth in Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding
the terms of the Contracts;
(ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color,
sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit
Protection Act, in the extension of credit; and
12
<PAGE>
(iii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience.
Violations of certain provisions of these Federal laws may limit the
ability of the Servicer to collect all or part of the principal of or interest
on the Loans and in addition could subject the Trust to damages and
administrative enforcement. The Loans may be subject to the Home Ownership and
Equity Protection Act of 1994 (the 'Act') which amended the Truth in Lending Act
as it applies to mortgages subject to the Act. The Act requires certain
additional disclosures, specifies the timing of such disclosures and limits or
prohibits inclusion of certain provisions in mortgages subject to the Act. The
Act also provides that any purchaser or assignee of a mortgage covered by the
Act is subject to all of the claims and defenses which the borrower could assert
against the original lender. The maximum damages that may be recovered under the
Act from an assignee is the remaining amount of indebtedness plus the total
amount paid by the borrower in connection with the Loan. If the Trust Fund
includes Loans subject to the Act, it will be subject to all of the claims and
defenses which the borrower could assert against the Seller. Any violation of
the Act which would result in such liability would be a breach of the Seller's
representations and warranties, and the Seller would be obligated to cure,
repurchase or, if permitted by the Agreement, substitute for the Loan in
question. See 'CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS' herein.
The Contracts are also subject to the Preservation of Consumers' Claims and
Defenses regulations of the Federal Trade Commission and other similar federal
and state statutes and regulations (collectively, the 'Holder in Due Course
Rules'), which protect the homeowner from defective craftsmanship or incomplete
work by a contractor. These laws permit the obligor to withhold payment if the
work does not meet the quality and durability standards agreed to by the
homeowner and the contractor. The Holder in Due Course Rules have the effect of
subjecting any assignee of the seller in a consumer credit transaction to all
claims and defenses which the obligor in the credit sale transaction could
assert against the seller of the goods.
Rating of the Securities. It will be a condition to the issuance of a
Series of Securities that they be rated in one of the four highest rating
categories by the Rating Agency identified in the related Prospectus Supplement.
Any such rating would be based on, among other things, the adequacy of the value
of the Primary Assets and any Enhancement with respect to such Series. Such
rating should not be deemed a recommendation to purchase, hold or sell
Securities, inasmuch as it does not address market price or suitability for a
particular investor. There is also no assurance that any such rating will remain
in effect for any given period of time or may not be lowered or withdrawn
entirely by the Rating Agency if in its judgment circumstances in the future so
warrant. In addition to being lowered or withdrawn due to any erosion in the
adequacy of the value of the Primary Assets, such rating might also be lowered
or withdrawn, among other reasons, because of an adverse change in the financial
or other condition of an Enhancer or a change in the rating of such Enhancer's
long term debt.
Other Considerations. There is no assurance that the market value of the
Primary Assets or any other assets for a Series will at any time be equal to or
greater than the aggregate principal amount of the Securities of such Series
then outstanding, plus accrued interest thereon. Moreover, upon an event of
default under the Indenture for a Series of Notes and a sale of the assets in
the Trust Fund or upon a sale of the assets of a Trust Fund for a Series of
Certificates, the Trustee, the Servicer, if any, the Enhancer and any other
service provider specified in the related Prospectus Supplement generally will
be entitled to receive the proceeds of any such sale to the extent of unpaid
fees and other amounts owing to such persons under the related Agreement prior
to distributions to holders of Securities. Upon any such sale, the proceeds
thereof may be insufficient to pay in full the principal of and interest on the
Securities of such Series.
Liquidation expenses with respect to defaulted loans do not vary directly
with the outstanding principal balance of the loan at the time of default.
Therefore, assuming that a servicer took the same steps in realizing upon a
defaulted loan having a small remaining principal balance as it would in the
case of a defaulted loan having a larger principal balance, the amount realized
after expenses of liquidation would be smaller as a percentage of the
outstanding principal balance of the smaller loan than would be the case with a
larger loan. Because the average outstanding principal balances of the Loans are
small relative to the size of the loans in a typical pool of first mortgages,
realizations net of liquidation expenses on defaulted Loans may also be smaller
as a percentage of the principal amount of the Loans than would such net
realizations in the case of a typical pool of first mortgage loans.
13
<PAGE>
DESCRIPTION OF THE SECURITIES
GENERAL
Each Series of Notes will be issued pursuant to an indenture (the
'Indenture') between the related Trust Fund and the entity named in the related
Prospectus Supplement as trustee (the 'Trustee') with respect to such Series. A
form of Indenture has been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part. The Certificates will also be issued in
Series pursuant to separate agreements (each, a 'Pooling and Servicing
Agreement' or a 'Trust Agreement') among the Depositor, the Servicer, if the
Series relates to Loans, and the Trustee. A form of Pooling and Servicing
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus forms a part. A Series may consist of both Notes and
Certificates.
The Seller may agree to reimburse the Depositor for certain fees and
expenses of the Depositor incurred in connection with the offering of the
Securities.
The following summaries describe certain provisions in the Agreements
common to each Series of Securities. The summaries do not purport to be complete
and are subject to, and are qualified in their entirety by reference to, the
provisions of the Agreements and the Prospectus Supplement relating to each
Series of Securities. Where particular provisions or terms used in the
Agreements are referred to, the actual provisions (including definitions of
terms) are incorporated herein by reference as part of such summaries.
Each Series of Securities will consist of one or more Classes of
Securities, one or more of which may be Compound Interest Securities, Variable
Interest Securities, PAC Securities, Zero Coupon Securities, Principal Only
Securities, Interest Only Securities or Participating Securities. A Series may
also include one or more Classes of Subordinate Securities. The Securities of
each Series will be issued only in fully registered form, without coupons, in
the authorized denominations for each Class specified in the related Prospectus
Supplement. Upon satisfaction of the conditions, if any, applicable to a Class
of a Series, as described in the related Prospectus Supplement, the transfer of
the Securities may be registered and the Securities may be exchanged at the
office of the Trustee specified in the Prospectus Supplement without the payment
of any service charge other than any tax or governmental charge payable in
connection with such registration of transfer or exchange. If specified in the
related Prospectus Supplement, one or more Classes of a Series may be available
in book-entry form only.
Unless otherwise provided in the related Prospectus Supplement, payments of
principal of and interest on a Series of Securities will be made on the
Distribution Dates specified in the Prospectus Supplement relating to such
Series by check mailed to Holders of such Series, registered as such at the
close of business on the record date specified in the related Prospectus
Supplement applicable to such Distribution Dates at their addresses appearing on
the security register, except that (a) payments may be made by wire transfer (at
the expense of the Holder requesting payment by wire transfer) in certain
circumstances described in the related Prospectus Supplement and (b) final
payments of principal in retirement of each Security will be made only upon
presentation and surrender of such Security at the office of the Trustee
specified in the Prospectus Supplement. Notice of the final payment on a
Security will be mailed to the holder of such Security before the Distribution
Date on which the final principal payment on any Security is expected to be made
to the holder of such Security.
Payments of principal of and interest on the Securities will be made by the
Trustee, or a paying agent on behalf of the Trustee, as specified in the related
Prospectus Supplement. Unless otherwise provided in the related Prospectus
Supplement, all payments with respect to the Primary Assets for a Series,
together with reinvestment income thereon, amounts withdrawn from any Reserve
Fund, and amounts available pursuant to any other Enhancement will be deposited
directly into the Collection Account and, net, if and as provided in the related
Prospectus Supplement, of certain amounts payable to the related Servicer and
any other person specified in the Prospectus Supplement, will thereafter be
deposited into the Distribution Account and will be available to make payments
on Securities of such Series on the next Distribution Date, as the case may be.
See 'THE TRUST FUNDS--Collection and Distribution Accounts.'
14
<PAGE>
VALUATION OF THE PRIMARY ASSETS
If specified in the related Prospectus Supplement for a Series of Notes,
each Primary Asset included in the related Trust Fund for a Series will be
assigned an initial 'Asset Value.' Unless otherwise specified in the related
Prospectus Supplement, at any time the Asset Value of the Primary Assets will be
equal to the product of the Asset Value Percentage as set forth in the Indenture
and the lesser of (a) the stream of remaining regularly scheduled payments on
the Primary Assets, net, unless otherwise provided in the related Prospectus
Supplement, of certain amounts payable as expenses, together with income earned
on each such scheduled payment received through the day preceding the next
Distribution Date at the Assumed Reinvestment Rate, if any, discounted to
present value at the highest interest rate on the Notes of such Series over
periods equal to the interval between payments on the Notes, and (b) the then
principal balance of the Primary Assets. Unless otherwise specified in the
related Prospectus Supplement, the initial Asset Value of the Primary Assets
will be at least equal to the principal amount of the Notes of the related
Series at the date of issuance thereof.
The 'Assumed Reinvestment Rate', if any, for a Series will be the highest
rate permitted by the Rating Agency or a rate insured by means of a surety bond,
guaranteed investment contract, Deposit Agreement or other arrangement
satisfactory to the Rating Agency. If the Assumed Reinvestment Rate is so
insured, the related Prospectus Supplement will set forth the terms of such
arrangement.
PAYMENTS OF INTEREST
The Securities of each Class by their terms entitled to receive interest
will bear interest (calculated, unless otherwise specified in the related
Prospectus Supplement, on the basis of a 360-day year of twelve 30-day months)
from the date and at the rate per annum specified, or calculated in the method
described, in the related Prospectus Supplement. Interest on such Securities of
a Series will be payable on the Distribution Date specified in the related
Prospectus Supplement. The rate of interest on Securities of a Series may be
variable or may change with changes in the annual percentage rates of the
Contracts or Underlying Contracts relating to the Private Securities, as
applicable included in the related Trust Fund and/or as prepayments occur with
respect to such Contracts or Underlying Contracts, as applicable. Principal Only
Securities may not be entitled to receive any interest distributions or may be
entitled to receive only nominal interest distributions. Any interest on Zero
Coupon Securities that is not paid on the related Distribution Date will accrue
and be added to the principal thereof on such Distribution Date.
Interest payable on the Securities on a Distribution Date will include all
interest accrued during the period specified in the related Prospectus
Supplement. In the event interest accrues during the calendar month preceding a
Distribution Date, the effective yield to Holders will be reduced from the yield
that would otherwise be obtainable if interest payable on the Securities were to
accrue through the day immediately preceding such Distribution Date.
PAYMENTS OF PRINCIPAL
On each Distribution Date for a Series, principal payments will be made to
the holders of the Securities of such Series on which principal is then payable,
to the extent set forth in the related Prospectus Supplement. Such payments will
be made in an aggregate amount determined as specified in the related Prospectus
Supplement and will be allocated among the respective Classes of a Series in the
manner, at the times and in the priority (which may, in certain cases, include
allocation by random lot) set forth in the related Prospectus Supplement.
FINAL SCHEDULED DISTRIBUTION DATE
The Final Scheduled Distribution Date with respect to each Class of Notes
is the date no later than which principal thereof will be fully paid and with
respect to each Class of a Series of Certificates will be the date on which the
entire aggregate principal balance of such Class is expected to be reduced to
zero, in each case calculated on the basis of the assumptions applicable to such
Series described in the related Prospectus Supplement. The Final Scheduled
Distribution Date for each Class of a Series will be specified in the related
Prospectus Supplement. Since payments on the Primary Assets will be used to make
distributions in reduction of the outstanding principal amount of the
Securities, it is likely that the actual final Distribution Date of any such
Class will occur earlier, and may occur substantially earlier, than its Final
Scheduled Distribution Date.
15
<PAGE>
Furthermore, with respect to a Series of Certificates, unless otherwise
specified in the related Prospectus Supplement, as a result of delinquencies,
defaults and liquidations of the Primary Assets in the Trust Fund, the actual
final Distribution Date of any Certificate may occur later than its Final
Scheduled Distribution Date. No assurance can be given as to the actual
prepayment experience with respect to a Series. See 'Weighted Average Life of
the Securities' below.
SPECIAL REDEMPTION
If so specified in the Prospectus Supplement relating to a Series of
Securities having other than monthly Distribution Dates, one or more Classes of
Securities of such Series may be subject to special redemption, in whole or in
part, on the day specified in the related Prospectus Supplement (a 'Special
Redemption Date') if, as a consequence of prepayments on the Contracts or
Underlying Contracts, as applicable, relating to such Securities or low yields
then available for reinvestment, the entity specified in the related Prospectus
Supplement determines, based on assumptions specified in the applicable
Agreement, that the amount available for the payment of interest that will have
accrued on such Securities (the 'Available Interest Amount') through the
designated interest accrual date specified in the related Prospectus Supplement
is less than the amount of interest that will have accrued on such Securities to
such date. In such event and as further described in the related Prospectus
Supplement, the Trustee will redeem a principal amount of outstanding Securities
of such Series as will cause the Available Interest Amount to equal the amount
of interest that will have accrued through such designated interest accrual date
for such Series of Securities outstanding immediately after such redemption.
OPTIONAL REDEMPTION, PURCHASE OR TERMINATION
The Depositor or the Servicer may, at its option, redeem, in whole or in
part, one or more Classes of Notes or purchase one or more Classes of
Certificates of any Series, on any Distribution Date under the circumstances, if
any, specified in the Prospectus Supplement relating to such Series.
Alternatively, if so specified in the related Prospectus Supplement for a Series
of Certificates, the Depositor, the Servicer, or another entity designated in
the related Prospectus Supplement may, at its option, cause an early termination
of a Trust Fund by repurchasing all of the Primary Assets from such Trust Fund
on or after a date specified in the related Prospectus Supplement, or on or
after such time as the aggregate outstanding principal amount of the
Certificates or Primary Assets, as specified in the related Prospectus
Supplement, is less than the amount or percentage specified in the related
Prospectus Supplement. Notice of such redemption, purchase or termination must
be given by the Depositor or the Trustee prior to the related date. The
redemption, purchase or repurchase price will be set forth in the related
Prospectus Supplement. If specified in the related Prospectus Supplement, in the
event that a REMIC election has been made, the Trustee shall receive a
satisfactory opinion of counsel that the optional redemption, purchase or
termination will be conducted so as to constitute a 'qualified liquidation'
under Section 860F of the Code.
In addition, the Prospectus Supplement may provide other circumstances
under which Holders of Securities of a Series could be fully paid significantly
earlier than would otherwise be the case if payments or distributions were
solely based on the activity of the related Primary Assets.
WEIGHTED AVERAGE LIFE OF THE SECURITIES
Weighted average life refers to the average amount of time that will elapse
from the date of issue of a security until each dollar of principal of such
security will be repaid to the investor. Unless otherwise specified in the
related Prospectus Supplement, the weighted average life of the Securities of a
Class will be influenced by the rate at which the amount financed under the
Contracts or Underlying Contracts relating to the Private Securities, as
applicable, included in the Trust Fund for a Series is paid, which may be in the
form of scheduled amortization or prepayments.
Prepayments on loans and other receivables can be measured relative to a
prepayment standard or model. The Prospectus Supplement for a Series of
Securities will describe the prepayment standard or model, if any, used and may
contain tables setting forth the projected weighted average life of each Class
of Securities of such Series and the percentage of the original principal amount
of each Class of Securities of such Series that would be outstanding on
specified Distribution Dates for such Series based on the assumptions stated in
such Prospectus Supplement, including assumptions that prepayments on the
Contracts or Underlying Contracts relating to the
16
<PAGE>
Private Securities, as applicable, included in the related Trust Fund are made
at rates corresponding to various percentages of the prepayment standard or
model specified in such Prospectus Supplement.
There is, however, no assurance that prepayment of the Contracts or
Underlying Contracts relating to the Private Securities, as applicable, included
in the related Trust Fund will conform to any level of any prepayment standard
or model specified in the related Prospectus Supplement. The rate of principal
prepayments on pools of loans is influenced by a variety of economic,
demographic, geographic, legal, tax, social and other factors.
The rate of prepayments of conventional housing loans and other receivables
has fluctuated significantly in recent years. In general, however, if prevailing
interest rates fall significantly below the interest rates on the Contracts or
Underlying Contracts relating to the Private Securities, as applicable, for a
Series, such contracts are likely to prepay at rates higher than if prevailing
interest rates remain at or above the interest rates borne by such loans. In
this regard, it should be noted that the Contracts or Underlying Contracts, as
applicable, for a Series may have different interest rates. In addition, the
weighted average life of the Securities may be affected by the varying
maturities of the Contracts or Underlying Contracts relating to the Private
Securities, as applicable. If any Contracts or Underlying Contracts relating to
the Private Securities, as applicable, for a Series have actual terms-to-stated
maturity of less than those assumed in calculating the Final Scheduled
Distribution Date of the related Securities, one or more Classes of the Series
may be fully paid prior to their respective Final Scheduled Distribution Dates,
even in the absence of prepayments and a reinvestment return higher than the
Assumed Reinvestment Rate.
THE TRUST FUNDS
GENERAL
The Notes of each Series will be secured by the pledge of the assets of the
related Trust Fund, and the Certificates of each Series will represent interests
in the assets of the related Trust Fund. The Trust Fund of each Series will
include assets purchased from the Seller composed of (i) the Primary Assets,
(ii) amounts available from the reinvestment of payments on such Primary Assets
at the Assumed Reinvestment Rate, if any, specified in the related Prospectus
Supplement, (iii) any Enhancement, (iv) any Property that secured a Contract but
which is acquired by foreclosure or deed in lieu of foreclosure or repossession
and (v) the amount, if any, initially deposited in the Collection Account or
Distribution Account for a Series as specified in the related Prospectus
Supplement.
The Securities will be non-recourse obligations of the related Trust Fund.
The assets of the Trust Fund specified in the related Prospectus Supplement for
a Series of Securities, unless otherwise specified in the related Prospectus
Supplement will serve as collateral only for that Series of Securities. Holders
of a Series of Notes may only proceed against such collateral securing such
Series of Notes in the case of a default with respect to such Series of Notes
and may not proceed against any assets of the Depositor or the related Trust
Fund not pledged to secure such Notes.
The Primary Assets for a Series will be sold by the Seller to the Depositor
or purchased by the Depositor in secondary market transactions, not from the
issuer of such Private Securities or an affiliate thereof, or, in the case of
the Loans, in privately negotiated transactions, which may include transactions
with affiliates and will be transferred by the Depositor to the Trust Fund.
Contracts relating to a Series will be serviced by the Servicer, which may be
the Seller, specified in the related Prospectus Supplement, pursuant to a
Pooling and Servicing Agreement, with respect to a Series of Certificates or a
servicing agreement (each, a 'Servicing Agreement') between the Trust Fund and
Servicer, with respect to a Series of Notes.
As used herein, 'Agreement' means, with respect to a Series of
Certificates, the Pooling and Servicing Agreement or Trust Agreement, and with
respect to a Series of Notes, the Indenture and the Servicing Agreement, as the
context requires.
If so specified in the related Prospectus Supplement, a Trust Fund relating
to a Series of Securities may be a business trust formed under the laws of the
state specified in the related Prospectus Supplement pursuant to a trust
agreement (each, a 'Trust Agreement') between the Depositor and the trustee of
such Trust Fund specified in the related Prospectus Supplement.
17
<PAGE>
With respect to each Trust Fund, prior to the initial offering of the
related Series of Securities, the Trust Fund will have no assets or liabilities.
No Trust Fund is expected to engage in any activities other than acquiring,
managing and holding the related Primary Assets and other assets contemplated
herein and in the related Prospectus Supplement and the proceeds thereof,
issuing Securities and making payments and distributions thereon and certain
related activities. No Trust Fund is expected to have any source of capital
other than its assets and any related Enhancement.
Primary Assets included in the Trust Fund for a Series may consist of any
combination of Contracts and Private Securities, to the extent and as specified
in the related Prospectus Supplement.
THE CONTRACTS
Contracts. The Primary Assets for a Series may consist, in whole or part,
of (i) conventional manufactured housing installment sales contracts and
installment loan agreements (the 'Manufactured Housing Contracts'), originated
by a manufactured housing dealer in the ordinary course of business and (ii)
home improvement installment sales contracts and installment loan agreements
(the 'Home Improvement Contracts' and together with Manufactured Housing
Contracts, the 'Contracts') originated by a home improvement contractor in the
ordinary course of business. As specified in the related Prospectus Supplement,
the Manufactured Housing Contracts will be secured by either Manufactured Homes
(as defined below), located in any of the fifty states or the District of
Columbia or by Mortgages on the real estate on which the Manufactured Homes are
located. As specified in the related Prospectus Supplement, the Home Improvement
Contracts will either be unsecured or secured by Mortgages primarily on Single
Family Properties which are generally subordinate to other mortgages on the same
Mortgaged Property or by purchase money security interest in the Home
Improvements financed thereby. The Contracts will be conventional contracts or
contracts insured by the Federal Housing Administration ('FHA') or partially
guaranteed by the Veterans Administration ('VA'). Unless otherwise specified in
the applicable Prospectus Supplement, the Contracts will be fully amortizing and
may have fixed interest rates or adjustable interest rates and may provide for
other payment characteristics as described below and in the related Prospectus
Supplement.
Unless otherwise specified in the related Prospectus Supplement, the home
improvements (the 'Home Improvements') securing the Home Improvement Contracts
include, but are not limited to, replacement windows, house siding, new roofs,
swimming pools, satellite dishes, kitchen and bathroom remodeling goods and
solar heating panels.
Unless otherwise specified in the related Prospectus Supplement, the
manufactured homes (the 'Manufactured Homes') securing the Manufactured Housing
Contracts will 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.'
Manufactured Homes, unlike Mortgaged Properties, and Home Improvements,
generally depreciate in value. Consequently, at any time after origination it is
possible, especially in the case of Contracts with high Loan-to-Value Ratios at
origination, that the market value of a Manufactured Home or Home Improvement
may be lower than the principal amount outstanding under the related Contract.
The Mortgaged Properties will include primarily Single Family Property
(i.e., one- to four-family residential housing, including Condominium Units and
Cooperative Dwellings). The Mortgaged Properties may consist of detached
individual dwellings, individual condominiums, townhouses, duplexes, row houses,
individual units in planned unit developments and other attached dwelling units.
Each Single Family Property will be located on land owned in fee simple by the
borrower or on land leased by the borrower for a term at least ten years (unless
otherwise provided in the related Prospectus Supplement) greater than the term
of the related Contract. Attached
18
<PAGE>
dwellings may include owner-occupied structures where each borrower owns the
land upon which the unit is built, with the remaining adjacent land owned in
common or dwelling units subject to a proprietary lease or occupancy agreement
in a cooperatively owned apartment building.
Unless otherwise specified in the related Prospectus Supplement, Mortgages
on Cooperative Dwellings consist of a lien on the shares issued by such
Cooperative Dwelling and the proprietary lease or occupancy agreement relating
to such Cooperative Dwelling.
The aggregate principal balance of Contracts secured by Properties that are
owner-occupied will be disclosed in the related Prospectus Supplement. Unless
otherwise specified in the Prospectus Supplement, the sole basis for a
representation that a given percentage of the Contracts are secured by Single
Family Property that is owner-occupied will be either (i) the making of a
representation by the Mortgagor at origination of the Contract either that the
underlying Mortgaged Property will be used by the Mortgagor for a period of at
least six months every year or that the Mortgagor intends to use the Mortgaged
Property as a primary residence, or (ii) a finding that the address of the
underlying Mortgaged Property is the Mortgagor's mailing address as reflected in
the Servicer's records. To the extent specified in the related Prospectus
Supplement, the Mortgaged Properties may include non-owner occupied investment
properties and vacation and second homes.
Unless otherwise specified in the related Prospectus Supplement, the
initial Loan-to-Value Ratio of a Home Improvement Contract is computed in the
manner described in the related Prospectus Supplement.
Additional Information. The selection criteria which shall apply with
respect to the Contracts, including, but not limited to, the Combined
Loan-to-Value Ratios or Loan-to-Value Ratios, as applicable, original terms to
maturity and delinquency information, will be specified in the related
Prospectus Supplement.
The Contracts for a Series may include Contracts that do not amortize their
entire principal balance by their stated maturity in accordance with their terms
and require a balloon payment of the remaining principal balance at maturity, as
specified in the related Prospectus Supplement. As further described in the
related Prospectus Supplement, the Contracts for a Series may include Contracts
that do not have a specified stated maturity.
The related Prospectus Supplement for each Series will provide information
with respect to the Contracts that are Primary Assets as of the Cut-off Date,
including, among other things, and to the extent relevant (a) the aggregate
unpaid principal balance of the Contracts (or the aggregate unpaid principal
balance included in the Trust Fund for the related Series); (b) the range and
weighted average Loan Rate on the Contracts, and, in the case of adjustable rate
Contracts, the range and weighted average of the current Loan Rates and the
Lifetime Rate Caps, if any; (c) the range and average outstanding principal
balance of the Contracts; (d) the weighted average original and remaining
term-to-stated maturity of the Contracts and the range of original and remaining
terms-to-stated maturity, if applicable; (e) the range and weighted average of
Combined Loan-to-Value Ratios or Loan-to-Value Ratios for the Contracts, as
applicable; (f) the percentage (by outstanding principal balance as of the Cut-
off Date) of Contracts that accrue interest at adjustable or fixed interest
rates; (g) any special hazard insurance policy or bankruptcy bond or other
enhancement relating to the Contracts; (h) the percentage (by principal balance
as of the Cut-off Date) of Contracts that are secured by Mortgaged Properties,
Home Improvements, Manufactured Homes, the real estate on which the Manufactured
Homes are located or are unsecured; (i) the geographic distribution of any
Mortgaged Properties securing the Contracts; (j) the percentage of Contracts (by
principal balance as of the Cut-off Date) that are secured by Single Family
Properties, shares relating to Cooperative Dwellings, Condominium Units,
investment property and vacation or second homes; (k) the lien priority of the
Contracts; and (l) the delinquency status and year of origination of the
Contracts. The related Prospectus Supplement will also specify any other
limitations on the types or characteristics of Contracts for a Series.
If information of the nature described above respecting the Contracts is
not known to the Depositor at the time the Securities are initially offered,
approximate or more general information of the nature described above will be
provided in the Prospectus Supplement and additional information will be set
forth in a Current Report on Form 8-K to be available to investors on the date
of issuance of the related Series and to be filed with the Commission within 15
days after the initial issuance of such Securities.
19
<PAGE>
PRIVATE SECURITIES
General. Primary Assets for a Series may consist, in whole or in part, of
Private Securities which include pass-through certificates representing
beneficial interests in loans of the type that would otherwise be eligible to be
Contracts (the 'Underlying Contracts') or (b) collateralized obligations secured
by Underlying Contracts. Such pass-through certificates or collateralized
obligations will have previously been (a) offered and distributed to the public
pursuant to an effective registration statement or (b) purchased in a
transaction not involving any public offering from a person who is not an
affiliate of the issuer of such securities at the time of sale (nor an affiliate
thereof at any time during the three preceding months); provided a period of
three years has elapsed since the later of the date the securities were acquired
from the issuer or an affiliate thereof. Although individual Underlying
Contracts may be insured or guaranteed by the United States or an agency or
instrumentality thereof, they need not be, and Private Securities themselves
will not be so insured or guaranteed.
All purchases of Private Securities for a Series by the Seller or the
Depositor will be made in secondary market transactions, not from the issuer of
such Private Securities or any affiliate thereof. As a result, no such purchases
of Private Securities offered and distributed to the public pursuant to an
effective registration statement will be made by the Seller or Depositor for at
least ninety days after the initial issuance of such Private Securities.
Private Securities will have been issued pursuant to a pooling and
servicing agreement, a trust agreement or similar agreement (a 'PS Agreement').
The seller/servicer of the Underlying Contracts will have entered into the PS
Agreement with the trustee under such PS Agreement (the 'PS Trustee'). The PS
Trustee or its agent, or a custodian, will possess the Underlying Contracts.
Underlying Contracts will be serviced by a servicer (the 'PS Servicer') directly
or by one or more sub-servicers who may be subject to the supervision of the PS
Servicer.
The sponsor of the Private Securities (the 'PS Sponsor') will be a
financial institution or other entity engaged generally in the business of
lending; a public agency or instrumentality of a state, local or federal
government; or a limited purpose corporation organized for the purpose of, among
other things, establishing trusts and acquiring and selling loans to such
trusts, and selling beneficial interests in such trusts. If so specified in the
Prospectus Supplement, the PS Sponsor may be an affiliate of the Depositor. The
obligations of the PS Sponsor will generally be limited to certain
representations and warranties with respect to the assets conveyed by it to the
related trust. Unless otherwise specified in the related Prospectus Supplement,
the PS Sponsor will not have guaranteed any of the assets conveyed to the
related trust or any of the Private Securities issued under the PS Agreement.
Distributions of principal and interest will be made on the Private
Securities on the dates specified in the related Prospectus Supplement. The
Private Securities may be entitled to receive nominal or no principal
distributions or nominal or no interest distributions. Principal and interest
distributions will be made on the Private Securities by the PS Trustee or the PS
Servicer. The PS Sponsor or the PS Servicer may have the right to repurchase the
Underlying Contracts after a certain date or under other circumstances specified
in the related Prospectus Supplement.
The Underlying Contracts may be fixed rate, level payment, fully amortizing
loans or adjustable rate loans or loans having balloon or other irregular
payment features. As further described in the related Prospectus Supplement,
such Underlying Contracts will generally be secured by Mortgages on Mortgaged
Properties, purchase money security interests in Home Improvements, security
interests in Manufactured Homes, Mortgages on the real estate on which the
Manufactured Homes are located or unsecured.
Credit Support Relating to Private Securities. Credit support in the form
of Reserve Funds, subordination of other private securities issued under the PS
Agreement, guarantees, letters of credit, cash collateral accounts, insurance
policies or other types of credit support may be provided with respect to the
Underlying Contracts or with respect to the Private Securities themselves. The
type, characteristics and amount of credit support will be a function of certain
characteristics of the Underlying Contracts and other factors and will have been
established for the Private Securities on the basis of requirements of the
nationally recognized statistical rating organization that rated the Private
Securities.
Additional Information. The Prospectus Supplement for a Series for which
the Primary Assets includes Private Securities will specify (such disclosure may
be on an approximate basis and will be as of the date specified in the related
Prospectus Supplement), to the extent relevant and to the extent such
information is
20
<PAGE>
reasonably available to the Depositor and the Depositor reasonably believes such
information to be reliable, (i) the aggregate approximate principal amount and
type of the Private Securities to be included in the Trust Fund for such Series;
(ii) certain characteristics of the Underlying Contracts including (A) the
payment features of such Underlying Contracts (i.e., whether they are fixed rate
or adjustable rate and whether they provide for fixed level payments or other
payment features), (B) the approximate aggregate principal balance, if known, of
such Underlying Contracts insured or guaranteed by a governmental entity, (C)
the servicing fee or range of servicing fees with respect to the Underlying
Contracts and (D) the minimum and maximum stated maturities of such Underlying
Contracts at origination; (iii) the maximum original term-to-stated maturity of
the Private Securities; (iv) the weighted average term-to-stated maturity of the
Private Securities; (v) the pass-through or certificate rate or ranges thereof
for the Private Securities; (vi) the PS Sponsor, the PS Servicer (if other than
the PS Sponsor) and the PS Trustee for such Private Securities; (vii) certain
characteristics of credit support, if any, such as Reserve Funds, insurance
policies, letters of credit or guarantees relating to such Contracts underlying
the Private Securities or to such Private Securities themselves; (viii) the
terms on which Underlying Contracts may, or are required to, be purchased prior
to their stated maturity or the stated maturity of the Private Securities and
(ix) the terms on which Underlying Contracts may be substituted for those
originally underlying the Private Securities.
If information of the nature described above representing the Private
Securities is not known to the Depositor at the time the Securities are
initially offered, approximate or more general information of the nature
described above will be provided in the Prospectus Supplement and the additional
information, if available, will be set forth in a Current Report on Form 8-K to
be available to investors on the date of issuance of the related Series and to
be filed with the Commission within 15 days the initial issuance of such
Securities.
COLLECTION AND DISTRIBUTION ACCOUNTS
A separate Collection Account will be established by the Trustee or the
Servicer, in the name of the Trustee, for each Series of Securities for receipt
of the amount of cash, if any, specified in the related Prospectus Supplement to
be initially deposited therein by the Depositor, all amounts received on or with
respect to the Primary Assets and, unless otherwise specified in the related
Prospectus Supplement, income earned thereon. Certain amounts on deposit in such
Collection Account and certain amounts available pursuant to any Enhancement, as
provided in the related Prospectus Supplement, will be deposited in a related
Distribution Account, which will also be established by the Trustee for each
such Series of Securities, for distribution to the related Holders. Unless
otherwise specified in the related Prospectus Supplement, the Trustee will
invest the funds in the Collection and Distribution Accounts in Eligible
Investments maturing, with certain exceptions, not later, in the case of funds
in the Collection Account, than the day preceding the date such funds are due to
be deposited in the Distribution Account or otherwise distributed and, in the
case of funds in the Distribution Account, than the day preceding the next
Distribution Date for the related Series of Securities. Eligible Investments
include, among other investments, obligations of the United States and certain
agencies thereof, federal funds, certificates of deposit, commercial paper,
demand and time deposits and banker's acceptances, certain repurchase agreements
of United States government securities and certain guaranteed investment
contracts, in each case, acceptable to the Rating Agency.
Notwithstanding any of the foregoing, amounts may be deposited and
withdrawn pursuant to any Deposit Agreement or Minimum Principal Payment
Agreement as specified in the related Prospectus Supplement.
21
<PAGE>
ENHANCEMENT
If stated in the Prospectus Supplement relating to a Series of Securities,
simultaneously with the Depositor's assignment of the Primary Assets to the
Trustee, the Depositor will obtain an irrevocable letter of credit, surety bond
or insurance policy, issue Subordinate Securities or obtain any other form of
enhancement or combination thereof (collectively, 'Enhancement') in favor of the
Trustee on behalf of the holders of the related Series or designated Classes of
such Series from an institution or by other means acceptable to the Rating
Agency. The Enhancement will support the payment of principal and interest on
the Securities, and may be applied for certain other purposes to the extent and
under the conditions set forth in such Prospectus Supplement. Enhancement for a
Series may include one or more of the following forms, or such other form as may
be specified in the related Prospectus Supplement. If so specified in the
related Prospectus Supplement, any of such Enhancement may be structured so as
to protect against losses relating to more than one Trust Fund, in the manner
described therein.
SUBORDINATE SECURITIES
If specified in the related Prospectus Supplement, Enhancement for a Series
may consist of one or more Classes of Subordinate Securities. The rights of
holders of such Subordinate Securities to receive distributions on any
Distribution Date will be subordinate in right and priority to the rights of
holders of Senior Securities of the Series, but only to the extent described in
the related Prospectus Supplement.
INSURANCE
If stated in the related Prospectus Supplement, Enhancement for a Series
may consist of special hazard insurance policies, bankruptcy bonds and other
types of insurance relating to the Primary Assets, as described below and in the
related Prospectus Supplement.
Pool Insurance Policy. If so specified in the Prospectus Supplement
relating to a Series of Securities, the Depositor will obtain a pool insurance
policy for the Contracts in the related Trust Fund. The pool insurance policy
will cover any loss (subject to the limitations described in a related
Prospectus Supplement) by reason of default, but will not cover the portion of
the principal balance of any Contract that is required to be covered by any
primary mortgage insurance policy. The amount and terms of any such coverage
will be set forth in the related Prospectus Supplement.
Special Hazard Insurance Policy. Although the terms of such policies vary
to some degree, a special hazard insurance policy typically provides that, where
there has been damage to Property securing a defaulted or foreclosed Contract
(title to which has been acquired by the insured) and to the extent such damage
is not covered by the standard hazard insurance policy or any flood insurance
policy, if applicable, required to be maintained with respect to such Property,
or in connection with partial loss resulting from the application of the
coinsurance clause in a standard hazard insurance policy, the special hazard
insurer will pay the lesser of (i) the cost of repair or replacement of such
Property or (ii) upon transfer of such Property to the special hazard insurer,
the unpaid principal balance of such Contract at the time of acquisition of such
Property by foreclosure or deed in lieu of foreclosure, plus accrued interest to
the date of claim settlement and certain expenses incurred by the Servicer with
respect to such Property. If the unpaid principal balance plus accrued interest
and certain expenses is paid by the special hazard insurer, the amount of
further coverage under the special hazard insurance policy will be reduced by
such amount less any net proceeds from the sale of such Property. Any amount
paid as the cost of repair of such Property will reduce coverage by such amount.
Special hazard insurance policies typically do not cover losses occasioned by
war, civil insurrection, certain governmental actions, errors in design, faulty
workmanship or materials (except under certain circumstances), nuclear reaction,
flood (if the mortgaged property is in a federally designated flood area),
chemical contamination and certain other risks.
Restoration of the Property with the proceeds described under (i) above is
expected to satisfy the condition under any pool insurance policy that such
Property be restored before a claim under such pool insurance policy may be
validly presented with respect to the defaulted Contract secured by such
Property. The payment described under (ii) above will render unnecessary
presentation of a claim in respect of such Contract under any pool insurance
policy. Therefore, so long as such pool insurance policy remains in effect, the
payment by the special hazard insurer of the cost of repair or of the unpaid
principal balance of the related Contract plus accrued interest
22
<PAGE>
and certain expenses will not affect the total insurance proceeds paid to
holders of the Securities, but will affect the relative amounts of coverage
remaining under the special hazard insurance policy and pool insurance policy.
Bankruptcy Bond. In the event of a bankruptcy of a borrower, the
bankruptcy court may establish the value of the Property securing the related
Contract at an amount less than the then outstanding principal balance of such
Contract. The amount of the secured debt could be reduced to such value, and the
holder of such Contract thus would become an unsecured creditor to the extent
the outstanding principal balance of such Contract exceeds the value so assigned
to the Property by the bankruptcy court. In addition, certain other
modifications of the terms of a Contract can result from a bankruptcy
proceeding. See 'CERTAIN LEGAL ASPECTS OF THE CONTRACTS.' If so provided in the
related Prospectus Supplement, the Depositor or other entity specified in the
related Prospectus Supplement will obtain a bankruptcy bond or similar insurance
contract (the 'bankruptcy bond') covering losses resulting from proceedings with
respect to borrowers under the Bankruptcy Code. The bankruptcy bond will cover
certain losses resulting from a reduction by a bankruptcy court of scheduled
payments of principal of and interest on a Contract or a reduction by such court
of the principal amount of a Contract and will cover certain unpaid interest on
the amount of such a principal reduction from the date of the filing of a
bankruptcy petition.
The bankruptcy bond will provide coverage in the aggregate amount specified
in the related Prospectus Supplement for all Contracts in the Trust Fund for
such Series. Such amount will be reduced by payments made under such bankruptcy
bond in respect of such Contracts, unless otherwise specified in the related
Prospectus Supplement, and will not be restored.
RESERVE FUNDS
If so specified in the Prospectus Supplement relating to a Series of
Securities, the Depositor will deposit into one or more funds to be established
with the Trustee as part of the Trust Fund for such Series or for the benefit of
any Enhancer with respect to such Series (the 'Reserve Funds') cash, a letter or
letters of credit, cash collateral accounts, Eligible Investments, or other
instruments meeting the criteria of the Rating Agency rating any Series of the
Securities in the amount specified in such Prospectus Supplement. In the
alternative or in addition to such deposit, a Reserve Fund for a Series may be
funded over time through application of all or a portion of the excess cash flow
from the Primary Assets for such Series, to the extent described in the related
Prospectus Supplement. If applicable, the initial amount of the Reserve Fund and
the Reserve Fund maintenance requirements for a Series of Securities will be
described in the related Prospectus Supplement.
Amounts withdrawn from any Reserve Fund will be applied by the Trustee to
make payments on the Securities of a Series, to pay expenses, to reimburse any
Enhancer or for any other purpose, in the manner and to the extent specified in
the related Prospectus Supplement.
Amounts deposited in a Reserve Fund will be invested by the Trustee, in
Eligible Investments maturing no later than the day specified in the related
Prospectus Supplement.
MINIMUM PRINCIPAL PAYMENT AGREEMENT
If stated in the Prospectus Supplement relating to a Series of Securities,
the Depositor will enter into a Minimum Principal Payment Agreement with an
entity meeting the criteria of the Rating Agency pursuant to which such entity
will provide certain payments on the Securities of such Series in the event that
aggregate scheduled principal payments and/or prepayments on the Primary Assets
for such Series are not sufficient to make certain payments on the Securities of
such Series, as provided in the Prospectus Supplement.
DEPOSIT AGREEMENT
If specified in a Prospectus Supplement, the Depositor and the Trustee for
such Series of Securities will enter into a Deposit Agreement with the entity
specified in such Prospectus Supplement on or before the sale of such Series of
Securities. The purpose of a Deposit Agreement would be to accumulate available
cash for investment so that such cash, together with income thereon, can be
applied to future distributions on one or more Classes of Securities. The
Prospectus Supplement for a Series of Securities pursuant to which a Deposit
Agreement is used will contain a description of the terms of such Deposit
Agreement.
23
<PAGE>
SERVICING OF CONTRACTS
GENERAL
Customary servicing functions with respect to Contracts comprising the
Primary Assets in the Trust Fund will be provided by the Servicer directly
pursuant to the related Servicing Agreement or Pooling and Servicing Agreement,
as the case may be, with respect to a Series of Securities.
COLLECTION PROCEDURES; ESCROW ACCOUNTS
The Servicer will make reasonable efforts to collect all payments required
to be made under the Contracts and will, consistent with the terms of the
related Agreement for a Series and any applicable Enhancement, follow such
collection procedures as it follows with respect to comparable loans held in its
own portfolio. Consistent with the above, the Servicer may, in its discretion,
(i) waive any assumption fee, late payment charge, or other charge in connection
with a Contract and (ii) to the extent provided in the related Agreement,
arrange with an obligor a schedule for the liquidation of delinquencies by
extending the Due Dates for Scheduled Payments on such Contract.
If specified in the related Prospectus Supplement, the Servicer, to the
extent permitted by law, will establish and maintain escrow or impound accounts
('Escrow Accounts') with respect to Contracts in which payments by obligors to
pay taxes, assessments, mortgage and hazard insurance premiums, and other
comparable items will be deposited. Contracts may not require such payments
under the loan related documents, in which case the Servicer would not be
required to establish any Escrow Account with respect to such Contracts.
Withdrawals from the Escrow Accounts are to be made to effect timely payment of
taxes, assessments and mortgage and hazard insurance, to refund to obligors
amounts determined to be overages, to pay interest to obligors on balances in
the Escrow Account to the extent required by law, to repair or otherwise protect
the property securing the related Contract and to clear and terminate such
Escrow Account. The Servicer will be responsible for the administration of the
Escrow Accounts and generally will make advances to such account when a
deficiency exists therein.
DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT
Unless otherwise specified in the related Prospectus Supplement, the
Trustee or the Servicer will establish a separate account (the 'Collection
Account') in the name of the Trustee. Unless otherwise indicated in the related
Prospectus Supplement, the Collection Account will be an account maintained (i)
at a depository institution, the long-term unsecured debt obligations of which
at the time of any deposit therein are rated by each Rating Agency rating the
Securities of such Series at levels satisfactory to each Rating Agency or (ii)
in an account or accounts the deposits in which are insured to the maximum
extent available by the FDIC or which are secured in a manner meeting
requirements established by each Rating Agency.
Unless otherwise specified in the related Prospectus Supplement, the funds
held in the Collection Account may be invested, pending remittance to the
Trustee, in Eligible Investments. If so specified in the related Prospectus
Supplement, the Servicer will be entitled to receive as additional compensation
any interest or other income earned on funds in the Collection Account.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer, the Depositor, the Trustee or the Seller, as appropriate, will deposit
into the Collection Account for each Series on the Business Day following the
Closing Date any amounts representing Scheduled Payments due after the related
Cut-off Date but received by the Servicer on or before the Closing Date, and
thereafter, within two business days after the date of receipt thereof, the
following payments and collections received or made by it (other than, unless
otherwise provided in the related Prospectus Supplement, in respect of principal
of and interest on the related Primary Assets due on or before such Cut-off
Date):
(i) All payments on account of principal, including prepayments, on
such Primary Assets;
(ii) All payments on account of interest on such Primary Assets after
deducting therefrom, at the discretion of the Servicer but only to the
extent of the amount permitted to be withdrawn or withheld from the
Collection Account in accordance with the related Agreement, the Servicing
Fee in respect of such Primary Assets;
24
<PAGE>
(iii) All amounts received by the Servicer in connection with the
liquidation of Primary Assets or property acquired in respect thereof,
whether through foreclosure sale, repossession or otherwise, including
payments in connection with such Primary Assets received from the obligor,
other than amounts required to be paid or refunded to the obligor pursuant
to the terms of the applicable loan documents or otherwise pursuant to law
('Liquidation Proceeds'), exclusive of, in the discretion of the Servicer,
but only to the extent of the amount permitted to be withdrawn from the
Collection Account in accordance with the related Agreement, the Servicing
Fee, if any, in respect of the related Primary Asset;
(iv) All proceeds under any title insurance, hazard insurance or other
insurance policy covering any such Primary Asset, other than proceeds to be
applied to the restoration or repair of the related Property or released to
the obligor in accordance with the related Agreement;
(v) All amounts required to be deposited therein from any applicable
Reserve Fund for such Series pursuant to the related Agreement;
(vi) All Advances made by the Servicer required pursuant to the
related Agreement; and
(vii) All repurchase prices of any such Primary Assets repurchased by
the Depositor, the Servicer or the Seller pursuant to the related
Agreement.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer is permitted, from time to time, to make withdrawals from the
Collection Account for each Series for the following purposes:
(i) to reimburse itself for Advances for such Series made by it
pursuant to the related Agreement; the Servicer's right to reimburse itself
is limited to amounts received on or in respect of particular Contracts
(including, for this purpose, Liquidation Proceeds and amounts representing
proceeds of insurance policies covering the related Property) which
represent late recoveries of Scheduled Payments respecting which any such
Advance was made;
(ii) to the extent provided in the related Agreement, to reimburse
itself for any Advances for such Series that the Servicer determines in
good faith it will be unable to recover from amounts representing late
recoveries of Scheduled Payments respecting which such Advance was made or
from Liquidation Proceeds or the proceeds of insurance policies;
(iii) to reimburse itself from Liquidation Proceeds for liquidation
expenses and for amounts expended by it in good faith in connection with
the restoration of damaged Property and, in the event deposited in the
Collection Account and not previously withheld, and to the extent that
Liquidation Proceeds after such reimbursement exceed the outstanding
principal balance of the related Contract, together with accrued and unpaid
interest thereon to the Due Date for such Contract next succeeding the date
of its receipt of such Liquidation Proceeds, to pay to itself out of such
excess the amount of any unpaid Servicing Fee and any assumption fees, late
payment charges, or other charges on the related Contract;
(iv) in the event it has elected not to pay itself the Servicing Fee
out of the interest component of any Scheduled Payment, late payment or
other recovery with respect to a particular Contract prior to the deposit
of such Scheduled Payment, late payment or recovery into the Collection
Account, to pay to itself the Servicing Fee, as adjusted pursuant to the
related Agreement, from any such Scheduled Payment, late payment or such
other recovery, to the extent permitted by the related Agreement;
(v) to reimburse itself for expenses incurred by and recoverable by or
reimbursable to it pursuant to the related Agreement;
(vi) to pay to the applicable person with respect to each Primary
Asset or REO Property acquired in respect thereof that has been repurchased
or removed from the Trust Fund by the Depositor, the Servicer or the Seller
pursuant to the related Agreement, all amounts received thereon and not
distributed as of the date on which the related repurchase price was
determined;
(vii) to make payments to the Trustee of such Series for deposit into
the Distribution Account, if any, or for remittance to the Holders of such
Series in the amounts and in the manner provided for in the related
Agreement; and
25
<PAGE>
(viii) to clear and terminate the Collection Account pursuant to the
related Agreement.
In addition, if the Servicer deposits in the Collection Account for a
Series any amount not required to be deposited therein, it may, at any time,
withdraw such amount from such Collection Account.
ADVANCES AND LIMITATIONS THEREON
The related Prospectus Supplement will describe the circumstances, if any,
under which the Servicer will make Advances with respect to delinquent payments
on Contracts. If specified in the related Prospectus Supplement, the Servicer
will be obligated to make Advances, and such obligations may be limited in
amount, or may not be activated until a certain portion of a specified Reserve
Fund is depleted. Advances are intended to provide liquidity and, except to the
extent specified in the related Prospectus Supplement, not to guarantee or
insure against losses. Accordingly, any funds advanced are recoverable by the
Servicer out of amounts received on particular Contracts which represent late
recoveries of principal or interest, proceeds of insurance policies or
Liquidation Proceeds respecting which any such Advance was made. If an Advance
is made and subsequently determined to be nonrecoverable from late collections,
proceeds of insurance policies, or Liquidation Proceeds from the related
Contract, the Servicer may be entitled to reimbursement from other funds in the
Collection Account or Distribution Account, as the case may be, or from a
specified Reserve Fund as applicable, to the extent specified in the related
Prospectus Supplement.
MAINTENANCE OF INSURANCE POLICIES AND OTHER SERVICING PROCEDURES
Standard Hazard Insurance; Flood Insurance. Except as otherwise specified
in the related Prospectus Supplement, the Servicer will be required to maintain
or to cause the obligor on each Contract to maintain a standard hazard insurance
policy providing coverage of the standard form of fire insurance with extended
coverage for certain other hazards as is customary in the state in which the
related Property is located. The standard hazard insurance policies will provide
for coverage at least equal to the applicable state standard form of fire
insurance policy with extended coverage for property of the type securing the
related Contracts. In general, the standard form of fire and extended coverage
policy will cover physical damage to or destruction of, the related Property
caused by fire, lightning, explosion, smoke, windstorm, hail, riot, strike and
civil commotion, subject to the conditions and exclusions particularized in each
policy. Because the standard hazard insurance policies relating to the Contracts
will be underwritten by different hazard insurers and will cover Properties
located in various states, such policies will not contain identical terms and
conditions. The basic terms, however, generally will be determined by state law
and generally will be similar. Most such policies typically will not cover any
physical damage resulting from war, revolution, governmental actions, floods and
other water-related causes, earth movement (including earthquakes, landslides,
and mudflows), nuclear reaction, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases, vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all inclusive. Uninsured risks not covered by a special hazard insurance policy
or other form of Enhancement will adversely affect distributions to Holders.
When a Mortgaged Property securing a Contract is located in a flood area
identified by HUD pursuant to the Flood Disaster Protection Act of 1973, as
amended, the Servicer will be required to cause flood insurance to be maintained
with respect to such Property, to the extent available.
The standard hazard insurance policies covering Properties securing
Contracts typically will contain a 'coinsurance' clause which, in effect, will
require the insured at all times to carry hazard insurance of a specified
percentage (generally 80% to 90%) of the full replacement value of the Property,
including the improvements on any Property, in order to recover the full amount
of any partial loss. If the insured's coverage falls below this specified
percentage, such clause will provide that the hazard insurer's liability in the
event of partial loss will not exceed the greater of (i) the actual cash value
(the replacement cost less physical depreciation) of the Property, including the
improvements, if any, damaged or destroyed or (ii) such proportion of the loss,
without deduction for depreciation, as the amount of insurance carried bears to
the specified percentage of the full replacement cost of such Property and
improvements. Since the amount of hazard insurance to be maintained on the
improvements securing the Contracts declines as the principal balances owing
thereon decrease, and since the value of the Properties will fluctuate in value
over time, the effect of this requirement in the event of partial loss may be
that hazard insurance proceeds will be insufficient to restore fully the damage
to the affected Property.
26
<PAGE>
Unless otherwise specified in the related Prospectus Supplement, coverage
will be in an amount at least equal to the greater of (i) the amount necessary
to avoid the enforcement of any co-insurance clause contained in the policy or
(ii) the outstanding principal balance of the related Contract. Unless otherwise
specified in the related Prospectus Supplement, the Servicer will also maintain
on REO Property that secured a defaulted Contract and that has been acquired
upon foreclosure, deed in lieu of foreclosure, or repossession, a standard
hazard insurance policy in an amount that is at least equal to the maximum
insurable value of such REO Property. No earthquake or other additional
insurance will be required of any obligor or will be maintained on REO Property
acquired in respect of a defaulted Contract, other than pursuant to such
applicable laws and regulations as shall at any time be in force and shall
require such additional insurance.
Any amounts collected by the Servicer under any such policies of insurance
(other than amounts to be applied to the restoration or repair of the Property,
released to the obligor in accordance with normal servicing procedures or used
to reimburse the Servicer for amounts to which it is entitled to reimbursement)
will be deposited in the Collection Account. In the event that the Servicer
obtains and maintains a blanket policy insuring against hazard losses on all of
the Contracts, written by an insurer then acceptable to each Rating Agency which
assigns a rating to such Series, it will conclusively be deemed to have
satisfied its obligations to cause to be maintained a standard hazard insurance
policy for each Contract or related REO Property. This blanket policy may
contain a deductible clause, in which case the Servicer will, in the event that
there has been a loss that would have been covered by such policy absent such
deductible clause, deposit in the Collection Account the amount not otherwise
payable under the blanket policy because of the application of such deductible
clause.
REALIZATION UPON DEFAULTED LOANS
The Servicer will use its reasonable best efforts to foreclose upon,
repossess or otherwise comparably convert the ownership of the Properties
securing the related Contracts as come into and continue in default and as to
which no satisfactory arrangements can be made for collection of delinquent
payments. In connection with such foreclosure or other conversion, the Servicer
will follow such practices and procedures as it deems necessary or advisable and
as are normal and usual in its servicing activities with respect to comparable
loans serviced by it. However, the Servicer will not be required to expend its
own funds in connection with any foreclosure or towards the restoration of the
Property unless it determines that: (i) such restoration or foreclosure will
increase the Liquidation Proceeds in respect of the related Contract available
to the Holders after reimbursement to itself for such expenses and (ii) such
expenses will be recoverable by it either through Liquidation Proceeds or the
proceeds of insurance. Notwithstanding anything to the contrary herein, in the
case of a Trust Fund for which a REMIC election has been made, the Servicer
shall liquidate any Property acquired through foreclosure within two years after
the acquisition of the beneficial ownership of such Property. While the holder
of a Property acquired through foreclosure can often maximize its recovery by
providing financing to a new purchaser, the Trust Fund, if applicable, will have
no ability to do so and neither the Servicer nor the Depositor will be required
to do so.
The Servicer may arrange with the obligor on a defaulted Contract, a
modification of such Contract (a 'Modification') to the extent provided in the
related Prospectus Supplement. Such Modifications may only be entered into if
they meet the underwriting policies and procedures employed by the Servicer in
servicing receivables for its own account and meet the other conditions set
forth in the related Prospectus Supplement.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
Unless otherwise specified in the related Prospectus Supplement for a
Series, when any Property is about to be conveyed by the obligor, the Servicer
will, to the extent it has knowledge of such prospective conveyance and prior to
the time of the consummation of such conveyance, exercise its rights to
accelerate the maturity of the related Contract under the applicable
'due-on-sale' clause, if any, unless it reasonably believes that such clause is
not enforceable under applicable law or if the enforcement of such clause would
result in loss of coverage under any primary mortgage insurance policy. In such
event, the Servicer is authorized to accept from or enter into an assumption
agreement with the person to whom such property has been or is about to be
conveyed, pursuant to which such person becomes liable under the Contract and
pursuant to which the original obligor is released from liability and such
person is substituted as the obligor and becomes liable under the Contract. Any
27
<PAGE>
fee collected in connection with an assumption will be retained by the Servicer
as additional servicing compensation. The terms of a Contract may not be changed
in connection with an assumption.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Except as otherwise provided in the related Prospectus Supplement, the
Servicer will be entitled to a periodic fee as servicing compensation (the
'Servicing Fee') in an amount to be determined as specified in the related
Prospectus Supplement. The Servicing Fee may be fixed or variable, as specified
in the related Prospectus Supplement. In addition, unless otherwise specified in
the related Prospectus Supplement, the Servicer will be entitled to servicing
compensation in the form of assumption fees, late payment charges and similar
items, or excess proceeds following disposition of property in connection with
defaulted Contracts.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will pay certain expenses incurred in connection with the servicing of
the Contracts, including, without limitation, the payment of the fees and
expenses of the Trustee and independent accountants, payment of insurance policy
premiums and the cost of credit support, if any, and payment of expenses
incurred in preparation of reports to Holders.
When an obligor makes a principal prepayment in full between Due Dates on
the related Contract, the obligor will generally be required to pay interest on
the amount prepaid only to the date of prepayment. If and to the extent provided
in the related Prospectus Supplement, in order that one or more Classes of the
Holders of a Series will not be adversely affected by any resulting shortfall in
interest, the amount of the Servicing Fee may be reduced to the extent necessary
to include in the Servicer's remittance to the Trustee for deposit into the
Distribution Account an amount equal to one month's interest on the related
Contract (less the Servicing Fee). If the aggregate amount of such shortfalls in
a month exceeds the Servicing Fee for such month, a shortfall to Holders may
occur.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will be entitled to reimbursement for certain expenses incurred by it
in connection with the liquidation of defaulted Contracts. The related Holders
will suffer no loss by reason of such expenses to the extent expenses are
covered under related insurance policies or from excess Liquidation Proceeds. If
claims are either not made or paid under the applicable insurance policies or if
coverage thereunder has been exhausted, the related Holders will suffer a loss
to the extent that Liquidation Proceeds, after reimbursement of the Servicer's
expenses, are less than the outstanding principal balance of and unpaid interest
on the related Contract which would be distributable to Holders. In addition,
the Servicer will be entitled to reimbursement of expenditures incurred by it in
connection with the restoration of property securing a defaulted Contract, such
right of reimbursement being prior to the rights of the Holders to receive any
related proceeds of insurance policies, Liquidation Proceeds or amounts derived
from other Enhancement. The Servicer is generally also entitled to reimbursement
from the Collection Account for Advances.
Unless otherwise specified in the related Prospectus Supplement, the rights
of the Servicer to receive funds from the Collection Account for a Series,
whether as the Servicing Fee or other compensation, or for the reimbursement of
Advances, expenses or otherwise, are not subordinate to the rights of Holders of
such Series.
EVIDENCE AS TO COMPLIANCE
If so specified in the related Prospectus Supplement, the applicable
Agreement for each Series will provide that each year, a firm of independent
public accountants will furnish a statement to the Trustee to the effect that
such firm has examined certain documents and records relating to the servicing
of the Contracts by the Servicer and that, on the basis of such examination,
such firm is of the opinion that the servicing has been conducted in compliance
with such Agreement, except for (i) such exceptions as such firm believes to be
immaterial and (ii) such other exceptions as are set forth in such statement.
If so specified in the related Prospectus Supplement, the applicable
Agreement for each Series will also provide for delivery to the Trustee for such
Series of an annual statement signed by an officer of the Servicer to the effect
that the Servicer has fulfilled its obligations under such Agreement, throughout
the preceding calendar year.
28
<PAGE>
CERTAIN MATTERS REGARDING THE SERVICER
The Servicer for each Series will be identified in the related Prospectus
Supplement. The Servicer may be an affiliate of the Depositor and may have other
business relationships with the Depositor and its affiliates.
In the event of an Event of Default under either a Servicing Agreement or a
Pooling and Servicing Agreement, the Servicer may be replaced by the Trustee or
a successor Servicer. Unless otherwise specified in the related Prospectus
Supplement, such Events of Default and the rights of the Trustee upon such a
default under the Agreement for the related Series will be substantially similar
to those described under 'THE AGREEMENTS--Events of Default; Rights Upon Events
of Default--Pooling and Servicing Agreement; Servicing Agreement' herein.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer does not have the right to assign its rights and delegate its duties
and obligations under the related Agreement for each Series unless the successor
Servicer accepting such assignment or delegation (i) services similar loans in
the ordinary course of its business, (ii) is reasonably satisfactory to the
Trustee for the related Series, (iii) has a net worth of not less than the
amount specified in the related Prospectus Supplement, (iv) would not cause any
Rating Agency's rating of the Securities for such Series in effect immediately
prior to such assignment, sale or transfer to be qualified, downgraded or
withdrawn as a result of such assignment, sale or transfer and (v) executes and
delivers to the Trustee an agreement, in form and substance reasonably
satisfactory to the Trustee, which contains an assumption by such Servicer of
the due and punctual performance and observance of each covenant and condition
to be performed or observed by the servicer under the related Agreement from and
after the date of such agreement. No such assignment will become effective until
the Trustee or a successor Servicer has assumed the servicer's obligations and
duties under the related Agreement. To the extent that the Servicer transfers
its obligations to a wholly-owned subsidiary or affiliate, such subsidiary or
affiliate need not satisfy the criteria set forth above; however, in such
instance, the assigning Servicer will remain liable for the servicing
obligations under the related Agreement. Any entity into which the Servicer is
merged or consolidated or any successor corporation resulting from any merger,
conversion or consolidation will succeed to the Servicer's obligations under the
related Agreement, provided that such successor or surviving entity meets the
requirements for a successor Servicer set forth above.
Except to the extent otherwise provided therein, each Agreement will
provide that neither the Servicer, nor any director, officer, employee or agent
of the Servicer, will be under any liability to the related Trust Fund, the
Depositor or the Holders for any action taken or for failing to take any action
in good faith pursuant to the related Agreement, or for errors in judgment;
provided, however, that neither the Servicer nor any such person will be
protected against any breach of warranty or representations made under such
Agreement, or the failure to perform its obligations in compliance with any
standard of care set forth in such Agreement, or liability which would otherwise
be imposed by reason of willful misfeasance, bad faith or negligence in the
performance of their duties or by reason of reckless disregard of their
obligations and duties thereunder. Each Agreement will further provide that the
Servicer and any director, officer, employee or agent of the Servicer is
entitled to indemnification from the related Trust Fund and will be held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the Agreement or the Securities, other than any loss,
liability or expense incurred by reason of willful misfeasance, bad faith or
negligence in the performance of duties thereunder or by reason of reckless
disregard of obligations and duties thereunder. In addition, the related
Agreement will provide that the Servicer is not under any obligation to appear
in, prosecute or defend any legal action which is not incidental to its
servicing responsibilities under such Agreement which, in its opinion, may
involve it in any expense or liability. The Servicer may, in its discretion,
undertake any such action which it may deem necessary or desirable with respect
to the related Agreement and the rights and duties of the parties thereto and
the interests of the Holders thereunder. In such event, the legal expenses and
costs of such action and any liability resulting therefrom may be expenses,
costs, and liabilities of the Trust Fund and the Servicer may be entitled to be
reimbursed therefor out of the Collection Account.
29
<PAGE>
THE AGREEMENTS
The following summaries describe certain provisions of the Agreements. The
summaries do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the provisions of the Agreements. Where
particular provisions or terms used in the Agreements are referred to, such
provisions or terms are as specified in the related Agreements.
ASSIGNMENT OF PRIMARY ASSETS
General. At the time of issuance of the Securities of a Series, the
Depositor will transfer, convey and assign to the Trust Fund all right, title
and interest of the Depositor in the Primary Assets and other property to be
transferred to the Trust Fund for a Series. Such assignment will include all
principal and interest due on or with respect to the Primary Assets after the
Cut-off Date specified in the related Prospectus Supplement (except for any
Retained Interests). The Trustee will, concurrently with such assignment,
execute and deliver the Securities.
Assignment of Contracts. Unless otherwise specified in the related
Prospectus Supplement, the Depositor will as to each Contract, deliver or cause
to be delivered to the Trustee (or the Custodian) the original Contract and
copies of documents and instruments related to each Contract and, other than in
the case of unsecured Contracts, the security interest in the property securing
such Contract. In order to give notice of the right, title and interest of
Securityholders to the Contracts, the Depositor will cause a UCC-1 financing
statement to be executed by the Depositor or the Seller identifying the Trustee
as the secured party and identifying all Contracts as collateral. Unless
otherwise specified in the related Prospectus Supplement, the Contracts will not
be stamped or otherwise marked to reflect their assignment to the Trust.
Therefore, if, through negligence, fraud or otherwise, a subsequent purchaser
were able to take physical possession of the Contracts without notice of such
assignment, the interest of Securityholders in the Contracts could be defeated.
See 'CERTAIN LEGAL ASPECTS OF THE CONTRACTS--The Contracts.'
With respect to Contracts secured by Mortgages, if so specified in the
related Prospectus Supplement, the Depositor will, at the time of issuance of
the Securities, cause assignments to the Trustee of the Mortgages relating to
the Contracts for a Series to be recorded in the appropriate public office for
real property records, except in states where, in the opinion of counsel
acceptable to the Trustee, such recording is not required to protect the
Trustee's interest in the related Contracts. If specified in the related
Prospectus Supplement, the Depositor will cause such assignments to be so
recorded within the time after issuance of the Securities as is specified in the
related Prospectus Supplement, in which event, the Agreement may, as specified
in the related Prospectus Supplement, require the Depositor to repurchase from
the Trustee any Contract the related Mortgage of which is not recorded within
such time, at the price described below with respect to repurchases by reason of
defective documentation. Unless otherwise provided in the related Prospectus
Supplement, the enforcement of the repurchase obligation would constitute the
sole remedy available to the Holders or the Trustee for the failure of a
Mortgage to be recorded.
Each Contract will be identified in a schedule appearing as an exhibit to
the related Agreement (the 'Contract Schedule'). Such Contract Schedule will
specify with respect to each Contract: the original principal amount and unpaid
principal balance as of the Cut-off Date; the current interest rate; the current
Scheduled Payment of principal and interest; the maturity date, if any, of the
related Mortgage Note; if the Contract is an adjustable rate Contract, the
Lifetime Rate Cap, if any, and the current index.
Assignment of Private Securities. The Depositor will cause Private
Securities to be registered in the name of the Trustee (or its nominee or
correspondent). The Trustee (or its nominee or correspondent) will have
possession of any certificated Private Securities. Unless otherwise specified in
the related Prospectus Supplement, the Trustee will not be in possession of or
be assignee of record of any underlying assets for a Private Security. See 'THE
TRUST FUNDS--Private Securities' herein. Each Private Security will be
identified in a schedule appearing as an exhibit to the related Agreement (the
'Certificate Schedule'), which will specify the original principal amount,
outstanding principal balance as of the Cut-off Date, annual pass-through rate
or interest rate and maturity date for each Private Security conveyed to the
Trust Fund. In the Agreement, the Depositor will represent and warrant to the
Trustee regarding the Private Securities: (i) that the information contained in
the Certificate Schedule is true and correct in all material respects; (ii)
that, immediately prior to the conveyance of the Private Securities, the
Depostior had good title thereto, and was the sole owner thereof (subject
30
<PAGE>
to any Retained Interest); (iii) that there has been no other sale by it of such
Private Securities; and (iv) that there is no existing lien, charge, security
interest or other encumbrance (other than any Retained Interest) on such Private
Securities.
Repurchase and Substitution of Non-Conforming Primary Assets. Unless
otherwise provided in the related Prospectus Supplement, if any document in the
file relating to the Primary Assets delivered by the Depositor to the Trustee
(or Custodian) is found by the Trustee within 90 days of the execution of the
related Agreement (or promptly after the Trustee's receipt of any document
permitted to be delivered after the Closing Date) to be defective in any
material respect and the Depositor or Seller does not cure such defect within 90
days, or within such other period specified in the related Prospectus
Supplement, the Depositor or Seller will, not later than 90 days or within such
other period specified in the related Prospectus Supplement, after the Trustee's
notice to the Depositor or the Seller, as the case may be, of the defect,
repurchase the related Primary Asset or any property acquired in respect thereof
from the Trustee at a price equal to, unless otherwise specified in the related
Prospectus Supplement, (a) the lesser of (i) the outstanding principal balance
of such Primary Asset and (ii) the Trust Fund's federal income tax basis in the
Primary Asset and (b) accrued and unpaid interest to the date of the next
scheduled payment on such Primary Asset at the rate set forth in the related
Agreement (less any unreimbursed Advances respecting such Primary Asset),
provided, however, the purchase price shall not be limited in (i) above to the
Trust Fund's federal income tax basis if the repurchase at a price equal to the
outstanding principal balance of such Primary Asset will not result in any
prohibited transaction tax under Section 860F(a) of the Code.
If provided in the related Prospectus Supplement, the Depositor or Seller,
as the case may be, may, rather than repurchase the Primary Asset as described
above, remove such Primary Asset from the Trust Fund (the 'Deleted Primary
Asset') and substitute in its place one or more other Primary Assets (each, a
'Qualifying Substitute Primary Asset') provided, however, that (i) with respect
to a Trust Fund for which no REMIC election is made, such substitution must be
effected within 120 days of the date of initial issuance of the Securities and
(ii) with respect to a Trust Fund for which a REMIC election is made, after a
specified time period, the Trustee must have received a satisfactory opinion of
counsel that such substitution will not cause the Trust Fund to lose its status
as a REMIC or otherwise subject the Trust Fund to a prohibited transaction tax.
Unless otherwise specified in the related Prospectus Supplement, any
Qualifying Substitute Primary Asset will have, on the date of substitution, (i)
an outstanding principal balance, after deduction of all Scheduled Payments due
in the month of substitution, not in excess of the outstanding principal balance
of the Deleted Primary Asset (the amount of any shortfall to be deposited to the
Certificate Account in the month of substitution for distribution to Holders),
(ii) an interest rate not less than (and not more than 2% greater than) the
interest rate of the Deleted Primary Asset, (iii) a remaining term-to-stated
maturity not greater than (and not more than two years less than) that of the
Deleted Primary Asset, and will comply with all of the representations and
warranties set forth in the applicable agreement as of the date of substitution.
Unless otherwise provided in the related Prospectus Supplement, the
above-described cure, repurchase or substitution obligations constitute the sole
remedies available to the Holders or the Trustee for a material defect in a
document for a Primary Asset.
The Depositor or another entity will make representations and warranties
with respect to Primary Assets for a Series. If the Depositor or such entity
cannot cure a breach of any such representations and warranties in all material
respects within the time period specified in the related Prospectus Supplement
after notification by the Trustee of such breach, and if such breach is of a
nature that materially and adversely affects the value of such Primary Asset,
the Depositor or such entity is obligated to repurchase the affected Primary
Asset or, if provided in the related Prospectus Supplement, provide a Qualifying
Substitute Primary Asset therefor, subject to the same conditions and
limitations on purchases and substitutions as described above.
The Depositor's only source of funds to effect any cure, repurchase or
substitution will be through the enforcement of the corresponding obligations of
the responsible originator or Seller of such Primary Assets. See 'RISK
FACTORS--Limited Assets.'
No Holder of Securities of a Series, solely by virtue of such Holder's
status as a Holder, will have any right under the applicable Agreement for such
Series to institute any proceeding with respect to such Agreement,
31
<PAGE>
unless such Holder previously has given to the Trustee for such Series written
notice of default and unless the Holders of Securities evidencing not less than
51% of the aggregate voting rights of the Securities for such Series have made
written request upon the Trustee to institute such proceeding in its own name as
Trustee thereunder and have offered to the Trustee reasonable indemnity, and the
Trustee for 60 days has neglected or refused to institute any such proceeding.
REPORTS TO HOLDERS
The Trustee or other entity specified in the related Prospectus Supplement
will prepare and forward to each Holder on each Distribution Date, or as soon
thereafter as is practicable, a statement setting forth, to the extent
applicable to any Series, among other things:
(i) the amount of principal distributed to holders of the related
Securities and the outstanding principal balance of such Securities
following such distribution;
(ii) the amount of interest distributed to holders of the related
Securities and the current interest on such Securities;
(iii) the amounts of (a) any overdue accrued interest included in such
distribution, (b) any remaining overdue accrued interest with respect to
such Securities or (c) any current shortfall in amounts to be distributed
as accrued interest to holders of such Securities;
(iv) the amounts of (a) any overdue payments of scheduled principal
included in such distribution, (b) any remaining overdue principal amounts
with respect to such Securities, (c) any current shortfall in receipt of
scheduled principal payments on the related Primary Assets or (d) any
realized losses or Liquidation Proceeds to be allocated as reductions in
the outstanding principal balances of such Securities;
(v) the amount received under any related Enhancement, and the
remaining amount available under such Enhancement;
(vi) the amount of any delinquencies with respect to payments on the
related Primary Assets;
(vii) the book value of any REO Property acquired by the related Trust
Fund; and
(viii) such other information as specified in the related Agreement.
In addition, within a reasonable period of time after the end of each
calendar year the Trustee, unless otherwise specified in the related Prospectus
Supplement, will furnish to each Holder of record at any time during such
calendar year: (a) the aggregate of amounts reported pursuant to (i), (ii), and
(iv)(d) above for such calendar year and (b) such information specified in the
related Agreement to enable Holders to prepare their tax returns including,
without limitation, the amount of original issue discount accrued on the
Securities, if applicable. Information in the Distribution Date and annual
statements provided to the Holders will not have been examined and reported upon
by an independent public accountant. However, the Servicer will provide to the
Trustee a report by independent public accountants with respect to the
Servicer's servicing of the Contracts. See 'SERVICING OF CONTRACTS--Evidence as
to Compliance' herein.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
Pooling and Servicing Agreement; Servicing Agreement. Unless otherwise
specified in the related Prospectus Supplement, Events of Default under the
Pooling and Servicing Agreement for each Series of Certificates relating to
Contracts include (i) any failure by the Servicer to deposit amounts in the
Collection Account and Distribution Account to enable the Trustee to distribute
to Holders of such Series any required payment, which failure continues
unremedied for the number of days specified in the related Prospectus Supplement
after the giving of written notice of such failure to the Servicer by the
Trustee for such Series, or to the Servicer and the Trustee by the Holders of
such Series evidencing not less than 25% of the aggregate voting rights of the
Holders for such Series, (ii) any failure by the Servicer duly to observe or
perform in any material respect any other of its covenants or agreements in the
applicable Agreement which continues unremedied for the number of days specified
in the related Prospectus Supplement after the giving of written notice of such
failure to the Servicer by the Trustee, or to the Servicer and the Trustee by
the Holders of such Series evidencing not less
32
<PAGE>
than 25% of the aggregate voting rights of the Holders and (iii) certain events
of insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings and certain actions by the Servicer indicating its
insolvency, reorganization or inability to pay its obligations.
So long as an Event of Default remains unremedied under the applicable
Agreement for a Series of Securities relating to the servicing of Contracts,
unless otherwise specified in the related Prospectus Supplement, the Trustee for
such Series or Holders of Securities of such Series evidencing not less than 51%
of the aggregate voting rights of the Securities for such Series may terminate
all of the rights and obligations of the Servicer as servicer under the
applicable Agreement (other than its right to recovery of other expenses and
amounts advanced pursuant to the terms of such Agreement which rights the
Servicer will retain under all circumstances), whereupon the Trustee will
succeed to all the responsibilities, duties and liabilities of the Servicer
under such Agreement and will be entitled to reasonable servicing compensation
not to exceed the applicable servicing fee, together with other servicing
compensation in the form of assumption fees, late payment charges or otherwise
as provided in such Agreement.
In the event that the Trustee is unwilling or unable so to act, it may
select, or petition a court of competent jurisdiction to appoint, a finance
institution, bank or loan servicing institution with a net worth specified in
the related Prospectus Supplement to act as successor Servicer under the
provisions of the applicable Agreement. The successor Servicer would be entitled
to reasonable servicing compensation in an amount not to exceed the Servicing
Fee as set forth in the related Prospectus Supplement, together with the other
servicing compensation in the form of assumption fees, late payment charges or
otherwise, as provided in such Agreement.
During the continuance of any Event of Default of a Servicer under an
Agreement for a Series of Securities, the Trustee for such Series will have the
right to take action to enforce its rights and remedies and to protect and
enforce the rights and remedies of the Holders of such Series, and, unless
otherwise specified in the related Prospectus Supplement, Holders of Securities
evidencing not less than 51% of the aggregate voting rights of the Securities
for such Series may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred upon that Trustee. However, the Trustee will not be under any
obligation to pursue any such remedy or to exercise any of such trusts or powers
unless such Holders have offered the Trustee reasonable security or indemnity
against the cost, expenses and liabilities which may be incurred by the Trustee
therein or thereby. Also, the Trustee may decline to follow any such direction
if the Trustee determines that the action or proceeding so directed may not
lawfully be taken or would involve it in personal liability or be unjustly
prejudicial to the nonassenting Holders.
Indenture. Unless otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes
include: (i) a default for thirty (30) days or more in the payment of any
principal of or interest on any Note of such Series; (ii) failure to perform any
other covenant of the Depositor or the Trust Fund in the Indenture which
continues for a period of sixty (60) days after notice thereof is given in
accordance with the procedures described in the related Prospectus Supplement;
(iii) any representation or warranty made by the Depositor or the Trust Fund in
the Indenture or in any certificate or other writing delivered pursuant thereto
or in connection therewith with respect to or affecting such Series having been
incorrect in a material respect as of the time made, and such breach is not
cured within sixty (60) days after notice thereof is given in accordance with
the procedures described in the related Prospectus Supplement; (iv) certain
events of bankruptcy, insolvency, receivership or liquidation of the Depositor
or the Trust Fund; or (v) any other Event of Default provided with respect to
Notes of that Series.
If an Event of Default with respect to the Notes of any Series at the time
outstanding occurs and is continuing, either the Trustee or the holders of a
majority of the then aggregate outstanding amount of the Notes of such Series
may declare the principal amount (or, if the Notes of that Series are Zero
Coupon Securities, such portion of the principal amount as may be specified in
the terms of that Series, as provided in the related Prospectus Supplement) of
all the Notes of such Series to be due and payable immediately. Such declaration
may, under certain circumstances, be rescinded and annulled by the holders of a
majority in aggregate outstanding amount of the Notes of such Series.
If, following an Event of Default with respect to any Series of Notes, the
Notes of such Series have been declared to be due and payable, the Trustee may,
in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes of such Series and to continue
to apply distributions on
33
<PAGE>
such collateral as if there had been no declaration of acceleration if such
collateral continues to provide sufficient funds for the payment of principal of
and interest on the Notes of such Series as they would have become due if
there had not been such a declaration. In addition, the Trustee may not sell or
otherwise liquidate the collateral securing the Notes of a Series following an
Event of Default, other than a default in the payment of any principal or
interest on any Note of such Series for thirty (30) days or more, unless (a) the
holders of 100% of the then aggregate outstanding amount of the Notes of such
Series consent to such sale, (b) the proceeds of such sale or liquidation are
sufficient to pay in full the principal of and accrued interest, due and unpaid,
on the outstanding Notes of such Series at the date of such sale or (c) the
Trustee determines that such collateral would not be sufficient on an ongoing
basis to make all payments on such Notes as such payments would have become due
if such Notes had not been declared due and payable, and the Trustee obtains the
consent of the holders of 66 2/3% of the then aggregate outstanding amount of
the Notes of such Series.
In the event that the Trustee liquidates the collateral in connection with
an Event of Default involving a default for thirty (30) days or more in the
payment of principal of or interest on the Notes of a Series, the Indenture
provides that the Trustee will have a prior lien on the proceeds of any such
liquidation for unpaid fees and expenses. As a result, upon the occurrence of
such an Event of Default, the amount available for distribution to the
Noteholders would be less than would otherwise be the case. However, the Trustee
may not institute a proceeding for the enforcement of its lien except in
connection with a proceeding for the enforcement of the lien of the Indenture
for the benefit of the Noteholders after the occurrence of such an Event of
Default.
Unless otherwise specified in the related Prospectus Supplement, in the
event the principal of the Notes of a Series is declared due and payable, as
described above, the holders of any such Notes issued at a discount from par may
be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing with respect
to a Series of Notes, the Trustee shall be under no obligation to exercise any
of the rights or powers under the Indenture at the request or direction of any
of the holders of Notes of such Series, unless such holders offered to the
Trustee security or indemnity satisfactory to it against the costs, expenses and
liabilities which might be incurred by it in complying with such request or
direction. Subject to such provisions for indemnification and certain
limitations contained in the Indenture, the holders of a majority of the then
aggregate outstanding amount of the Notes of such Series shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee with respect to the Notes of such Series, and the holders of a majority
of the then aggregate outstanding amount of the Notes of such Series may, in
certain cases, waive any default with respect thereto, except a default in the
payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or consent
of all the holders of the outstanding Notes of such Series affected thereby.
THE TRUSTEE
The identity of the commercial bank, savings and loan association or trust
company named as the Trustee for each Series of Securities will be set forth in
the related Prospectus Supplement. The entity serving as Trustee may have normal
banking relationships with the Depositor or the Servicer. In addition, for the
purpose of meeting the legal requirements of certain local jurisdictions, the
Trustee will have the power to appoint co-trustees or separate trustees of all
or any part of the Trust Fund relating to a Series of Securities. In the event
of such appointment, all rights, powers, duties and obligations conferred or
imposed upon the Trustee by the Agreement relating to such Series will be
conferred or imposed upon the Trustee and each such separate trustee or
co-trustee jointly, or, in any jurisdiction in which the Trustee shall be
incompetent or unqualified to perform certain acts, singly upon such separate
trustee or co-trustee who shall exercise and perform such rights, powers, duties
and obligations solely at the direction of the Trustee. The Trustee may also
appoint agents to perform any of the responsibilities of the Trustee, which
agents shall have any or all of the rights, powers, duties and obligations of
the Trustee conferred on them by such appointment; provided that the Trustee
shall continue to be responsible for its duties and obligations under the
Agreement.
34
<PAGE>
DUTIES OF THE TRUSTEE
The Trustee makes no representations as to the validity or sufficiency of
the Agreement, the Securities or of any Primary Asset or related documents. If
no Event of Default (as defined in the related Agreement) has occurred, the
Trustee is required to perform only those duties specifically required of it
under the Agreement. Upon receipt of the various certificates, statements,
reports or other instruments required to be furnished to it, the Trustee is
required to examine them to determine whether they are in the form required by
the related Agreement; however, the Trustee will not be responsible for the
accuracy or content of any such documents furnished by it or the Holders to the
Servicer under the Agreement.
The Trustee may be held liable for its own negligent action or failure to
act, or for its own misconduct; provided, however, that the Trustee will not be
personally liable with respect to any action taken, suffered or omitted to be
taken by it in good faith in accordance with the direction of the Holders in an
Event of Default. The Trustee is not required to expend or risk its own funds or
otherwise incur any financial liability in the performance of any of its duties
under the Agreement, or in the exercise of any of its rights or powers, if it
has reasonable grounds for believing that repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it.
RESIGNATION OF TRUSTEE
The Trustee may, upon written notice to the Depositor, resign at any time,
in which event the Depositor will be obligated to use its best efforts to
appoint a successor Trustee. If no successor Trustee has been appointed and has
accepted the appointment within 30 days after giving such notice of resignation,
the resigning Trustee may petition any court of competent jurisdiction for
appointment of a successor Trustee. The Trustee may also be removed at any time
(i) if the Trustee ceases to be eligible to continue as such under the
Agreement, (ii) if the Trustee becomes insolvent or (iii) by the Holders of
Securities evidencing over 50% of the aggregate voting rights of the Securities
in the Trust Fund upon written notice to the Trustee and to the Depositor. 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.
AMENDMENT OF AGREEMENT
Unless otherwise specified in the Prospectus Supplement, the Agreement for
each Series of Securities may be amended by the Depositor, the Servicer (with
respect to a Series relating to Contracts), and the Trustee with respect to such
Series, without notice to or consent of the Holders (i) to cure any ambiguity,
(ii) to correct any defective provisions or to correct or supplement any
provision therein, (iii) to add to the duties of the Depositor, the Trust Fund
or Servicer, (iv) to add any other provisions with respect to matters or
questions arising under such Agreement or related Enhancement, (v) to add or
amend any provisions of such Agreement as required by a Rating Agency in order
to maintain or improve the rating of the Securities, or (vi) to comply with any
requirements imposed by the Code; provided that any such amendment except
pursuant to clause (vi) above will not adversely affect in any material respect
the interests of any Holders of such Series, as evidenced by an opinion of
counsel. Any such amendment except pursuant to clause (vi) of the preceding
sentence shall be deemed not to adversely affect in any material respect the
interests of any Holder if the Trustee receives written confirmation from each
Rating Agency rating such Securities that such amendment will not cause such
Rating Agency to reduce the then current rating thereof. Unless otherwise
specified in the Prospectus Supplement, the Agreement for each Series may also
be amended by the Trustee, the Servicer, if applicable, and the Depositor with
respect to such Series with the consent of the Holders possessing not less than
66 2/3% of the aggregate outstanding principal amount of the Securities of such
Series or, if only certain Classes of such Series are afffected by such
amendment, 66 2/3% of the aggregate outstanding principal amount of the
Securities of each Class of such Series affected thereby, for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of such Agreement or modifying in any manner the rights of Holders of
such Series; provided, however, that no such amendment may (a) reduce the amount
or delay the timing of payments on any Security without the consent of the
Holder of such Security; or (b) reduce the aforesaid percentage of the aggregate
outstanding principal amount of Securities of each Class, the Holders of which
are required to consent to any such amendment without the consent of the Holders
of 100% of the aggregate outstanding principal amount of each Class of
Securities affected thereby.
35
<PAGE>
VOTING RIGHTS
The related Prospectus Supplement will set forth the method of determining
allocation of voting rights with respect to a Series.
LIST OF HOLDERS
Upon written request of three or more Holders of record of a Series for
purposes of communicating with other Holders with respect to their rights under
the Agreement, which request is accompanied by a copy of the communication which
such Holders propose to transmit, the Trustee will afford such Holders access
during business hours to the most recent list of Holders of that Series held by
the Trustee.
No Agreement will provide for the holding of any annual or other meeting of
Holders.
REMIC ADMINISTRATOR
For any Series with respect to which a REMIC election is made, preparation
of certain reports and certain other administrative duties with respect to the
Trust Fund may be performed by a REMIC administrator, who may be an affiliate of
the Depositor.
TERMINATION
Pooling and Servicing Agreement; Trust Agreement. The obligations created
by the Pooling and Servicing Agreement or Trust Agreement for a Series will
terminate upon the distribution to Holders of all amounts distributable to them
pursuant to such Agreement after the earlier of (i) the later of (a) the final
payment or other liquidation of the last Primary Asset remaining in the Trust
Fund for such Series and (b) the disposition of all property acquired upon
foreclosure or deed in lieu of foreclosure or repossession in respect of any
Primary Asset or (ii) the repurchase, as described below, by the Servicer or
other entity specified in the related Prospectus Supplement from the Trustee for
such Series of all Primary Assets and other property at that time subject to
such Agreement. The Agreement for each Series permits, but does not require, the
Servicer or other entity specified in the related Prospectus Supplement to
purchase from the Trust Fund for such Series all remaining Primary Assets at a
price equal to, unless otherwise specified in the related Prospectus Supplement,
100% of the aggregate Principal Balance of such Primary Assets plus, with
respect to any property acquired in respect of a Primary Asset, if any, the
outstanding Principal Balance of the related Primary Asset at the time of
foreclosure, less, in either case, related unreimbursed Advances (in the case of
the Primary Assets, only to the extent not already reflected in the computation
of the aggregate Principal Balance of such Primary Assets) and unreimbursed
expenses (that are reimbursable pursuant to the terms of the Pooling and
Servicing Agreement) plus, in either case, accrued interest thereon at the
weighted average rate on the related Primary Assets through the last day of the
Due Period in which such repurchase occurs; provided, however, that if an
election is made for treatment as a REMIC under the Code, the repurchase price
may equal the greater of (a) 100% of the aggregate Principal Balance of such
Primary Assets, plus accrued interest thereon at the applicable net rates on the
Primary Assets through the last day of the month of such repurchase and (b) the
aggregate fair market value of such Primary Assets plus the fair market value of
any property acquired in respect of a Primary Asset and remaining in the Trust
Fund. The exercise of such right will effect early retirement of the Securities
of such Series, but such entity's right to so purchase is subject to the
aggregate Principal Balance of the Primary Assets at the time of repurchase
being less than a fixed percentage, to be set forth in the related Prospectus
Supplement, of the aggregate Principal Balance of the Primary Assets as of the
Cut-off Date. In no event, however, will the trust created by the Agreement
continue beyond the expiration of 21 years from the death of the last survivor
of certain persons identified therein. For each Series, the Servicer or the
Trustee, as applicable, will give written notice of termination of the Agreement
to each Holder, and the final distribution will be made only upon surrender and
cancellation of the Securities at an office or agency specified in the notice of
termination. If so provided in the related Prospectus Supplement for a Series,
the Depositor or another entity may effect an optional termination of the Trust
Fund under the circumstances described in such Prospectus Supplement. See
'DESCRIPTION OF THE SECURITIES--Optional Redemption, Purchase or Termination'
herein.
Indenture. The Indenture will be discharged with respect to a Series of
Notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the Trustee for cancellation of all the
36
<PAGE>
Notes of such Series or, with certain limitations, upon deposit with the Trustee
of funds sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the Indenture will
provide that, if so specified with respect to the Notes of any Series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of such Series (except for certain obligations relating to temporary
Notes and exchange of Notes, to register the transfer of or exchange Notes of
such Series, to replace stolen, lost or mutilated Notes of such Series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the Trustee, in trust, of money and/or direct obligations of or
obligations guaranteed by the United States of America which through the payment
of interest and principal in respect thereof in accordance with their terms will
provide money in an amount sufficient to pay the principal of and each
installment of interest on the Notes of such Series on the Last Scheduled
Distribution Date for such Notes and any installment of interest on such Notes
in accordance with the terms of the Indenture and the Notes of such Series. In
the event of any such defeasance and discharge of Notes of such Series, holders
of Notes of such Series would be able to look only to such money and/or direct
obligations for payment of principal and interest, if any, on their Notes until
maturity.
CERTAIN LEGAL ASPECTS OF THE CONTRACTS
The following discussion contains summaries of certain legal aspects of
manufactured housing and home improvement installment sales contracts and
installment loan agreements which are general in nature. Because certain of 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 encompass the laws of all states in which the
properties securing the Contracts are situated. The summaries are qualified in
their entirety by reference to the applicable federal and state laws governing
the Contracts.
CONTRACTS SECURED BY MORTGAGES
Mortgages
Certain Contracts for a Series may be secured by either mortgages or deeds
of trust or deeds to secure debt (such Contracts are hereinafter referred to in
this section as 'mortgage loans'), depending upon the prevailing practice in the
state in which the property subject to a mortgage loan is located. The filing of
a mortgage, deed of trust or deed to secure debt creates a lien or title
interest upon the real property covered by such instrument and represents the
security for the repayment of an obligation that is customarily evidenced by a
promissory note. It is not prior to the lien for real estate taxes and
assessments or other charges imposed under governmental police powers and may
also be subject to other liens pursuant to the laws of the jurisdiction in which
the Mortgaged Property is located. Priority with respect to such instruments
depends on their terms, the knowledge of the parties to the mortgage and
generally on the order of recording with the applicable state, county or
municipal office. There are two parties to a mortgage, the mortgagor, who is the
borrower/property owner or the land trustee (as described below), and the
mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. In the case of a land
trust, there are three parties because title to the property is held by a land
trustee under a land trust agreement of which the borrower/property owner is the
beneficiary; at origination of a mortgage loan, the borrower executes a separate
undertaking to make payments on the mortgage note. A deed of trust transaction
normally has three parties, the trustor, who is the borrower/property owner; the
beneficiary, who is the lender, and the trustee, a third-party grantee. Under a
deed of trust, the trustor 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 obligation. The mortgagee's authority under a mortgage and the trustee's
authority under a deed of trust are governed by the law of the state in which
the real property is located, the express provisions of the mortgage or deed of
trust, and, in some cases, in deed of trust transactions, the directions of the
beneficiary.
37
<PAGE>
Foreclosure on Mortgages
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the 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 defendant. 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 a 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 which authorizes
the trustee to sell the property 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 foreclosure of
mortgages. In some states, the trustee must record a notice of default and send
a copy to the borrower-trustor and to any person who has recorded a request for
a copy of a notice of default and notice of sale. In addition, the trustee in
some states must provide notice to any other individual having an interest 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 of record in the property. The trustor, borrower, or any 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. Generally, state law controls the
amount of foreclosure expenses and costs, including attorney's fees, which may
be recovered by a lender. If the deed of trust is not reinstated, 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, recorded
and sent to all parties having an interest in the real property.
An action to foreclose a mortgage is an action to recover the mortgage debt
by enforcing the mortgagee's rights under the mortgage. It is regulated by
statutes and rules and subject throughout to the court's equitable powers.
Generally, a mortgagor is bound by the terms of the related mortgage note and
the mortgage as made and cannot be relieved from his default if the mortgagee
has exercised his rights in a commercially reasonable manner. However, since a
foreclosure action historically was equitable in nature, the court may exercise
equitable powers to relieve a mortgagor of a default and deny the mortgagee
foreclosure on proof that either the mortgagor's default was neither willful nor
in bad faith or the mortgagee's action established a waiver, fraud, bad faith,
or oppressive or unconscionable conduct such as to warrant a court of equity to
refuse affirmative relief to the mortgagee. Under certain circumstances a court
of equity may relieve the mortgagor from an entirely technical default where
such default was not willful.
A foreclosure action is subject to most of the delays and expenses of other
lawsuits if defenses or counter-claims are interposed, sometimes requiring up to
several years to complete. Moreover, a non-collusive, regularly conducted
foreclosure sale may be challenged as a fraudulent conveyance, regardless of the
parties' intent, if a court determines that the sale was for less than fair
consideration and such sale occurred while the mortgagor was insolvent and
within one year (or within the state statute of limitations if the trustee in
bankruptcy elects to proceed under state fraudulent conveyance law) of the
filing of bankruptcy. Similarly, a suit against the debtor on the related
mortgage note may take several years and, generally, is a remedy alternative to
foreclosure, the mortgagee being precluded from pursuing both at the same time.
In the case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is a public
sale. However, because of the difficulty potential third party purchasers at the
sale 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 uncommon for a third party to purchase the property at a
foreclosure sale. Rather, it is common for the lender to purchase the property
from the trustee or referee for an amount which may be equal to the unpaid
principal amount of the mortgage note secured by the
38
<PAGE>
mortgage or deed of trust plus accrued and unpaid interest and the expenses of
foreclosure, in which event the mortgagor's debt will be extinguished or the
lender may purchase for a lesser amount in order to preserve its right against a
borrower to seek a deficiency judgment in states where such a judgment is
available. Thereafter, subject to the right of the borrower in some states to
remain in possession during the redemption period, the lender will assume the
burdens of ownership, including obtaining hazard insurance, paying taxes and
making such repairs at its own expense as are necessary to render the property
suitable for sale. The lender will commonly obtain the services of a real estate
broker and pay the broker's 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. Any loss may
be reduced by the receipt of any mortgage guaranty insurance proceeds.
Rights of Redemption
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the trustor or mortgagor and foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. The
right of redemption should be distinguished from the equity of redemption, which
is a non-statutory right that must be exercised prior to the foreclosure sale.
In some states, redemption may occur only upon payment of the entire principal
balance of the loan, accrued interest and expenses of foreclosure. In other
states, redemption may be authorized if the former borrower pays only a portion
of the sums due. The effect of a statutory 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 foreclosure or sale
under a deed of trust. Consequently the practical effect of a right of
redemption is to force the lender to retain the property and pay the expenses of
ownership until the redemption period has run. In some states, there is no right
to redeem property after a trustee's sale under a deed of trust.
Junior Mortgages; Rights of Senior Mortgages
The mortgage loans comprising or underlying the Primary Assets included in
the Trust Fund for a Series will be secured by mortgages or deeds of trust which
may be second or more junior mortgages to other mortgages held by other lenders
or institutional investors. The rights of the Trust Fund (and therefore the
Holders), as mortgagee under a junior mortgage, are subordinate to those of the
mortgagee under the senior mortgage, including the prior rights of the senior
mortgagee to receive hazard insurance and condemnation proceeds and to cause the
property securing the mortgage loan to be sold upon default of the mortgagor,
thereby extinguishing the junior mortgagee's lien unless the junior mortgagee
asserts its subordinate interest in the property in foreclosure litigation and,
possibly, satisfies the defaulted senior mortgage. A junior mortgagee may
satisfy a defaulted senior loan in full and, in some states, may cure such
default and bring the senior loan current, in either event adding the amounts
expended to the balance due on the junior loan. In most states, absent a
provision in the mortgage or deed of trust, no notice of default is required to
be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage, in such order as the mortgagee may determine. Thus, in the
event improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property is taken by condemnation, the mortgagee
or beneficiary under underlying senior mortgages will have the prior right to
collect any insurance proceeds payable under a hazard insurance policy and any
award of damages in connection with the condemnation and to apply the
same to the indebtedness secured by the senior mortgages. Proceeds in excess of
the amount of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed of
trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee under the mortgage. Upon a
failure of the mortgagor to perform any of these obligations, the mortgagee is
given the right under certain mortgages to perform the obligation itself, at its
election, with the
39
<PAGE>
mortgagor agreeing to reimburse the mortgagee for any sums expended by the
mortgagee on behalf of the mortgagor. All sums so expended by the mortgagee
become part of the indebtedness secured by the mortgage.
The form of credit line trust deed or mortgage used by most institutional
lenders which make revolving home equity loans typically contains a 'future
advance' clause, which provides, in essence, that additional amounts advanced to
or on behalf of the borrower by the beneficiary or lender are to be secured by
the deed of trust or mortgage. The priority of the lien securing any advance
made under the clause may depend in most states on whether the deed of trust or
mortgage is called and recorded as a credit line deed of trust or mortgage. If
the beneficiary or lender advances additional amounts, the advance is entitled
to receive the same priority as amounts initially advanced under the trust deed
or mortgage, notwithstanding the fact that there may be junior trust deeds or
mortgages and other liens which intervene between the date of recording of the
trust deed or mortgage and the date of the future advance, and notwithstanding
that the beneficiary or lender had actual knowledge of such intervening junior
trust deeds or mortgages and other liens at the time of the advance. In most
states, the trust deed or mortgage lien securing mortgage loans of the type
which includes revolving home equity credit lines applies retroactively to the
date of the original recording of the trust deed or mortgage, provided that the
total amount of advances under the home equity credit line does not exceed the
maximum specified principal amount of the recorded trust deed or mortgage,
except as to advances made after receipt by the lender of a written notice of
lien from a judgment lien creditor of the trustor.
Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory prohibitions which limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. 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 former
borrower equal in most cases to the difference between the net amount realized
upon the public sale of the real property and the amount due to the lender.
Other statutes 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. Finally, other statutory provisions limit any
deficiency judgment against the 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 the public sale. The purpose of these statutes is generally 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 addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws, the Federal
Soldiers' and Sailors' Relief Act, and state laws affording relief to debtors,
may interfere with or affect the ability of the secured lender to realize upon
collateral and/or enforce a deficiency judgment. For example, with respect to
federal bankruptcy law, the filing of a petition acts as a stay against the
enforcement of remedies for collection of a debt. Moreover, a court with federal
bankruptcy jurisdiction may permit a debtor through a Chapter 13 Bankruptcy Code
rehabilitative plan to cure a monetary default with respect to a loan on a
debtor's residence by paying arrearages within a reasonable time period and
reinstating the original loan payment schedule even though the lender
accelerated the loan and the lender has taken all steps to realize upon his
security (provided no sale of the property has yet occurred) prior to the filing
of the debtor's Chapter 13 petition. Some courts with federal bankruptcy
jurisdiction have approved plans, based on the particular facts of the
reorganization case, that effected the curing of a loan default by permitting
the obligor to pay arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan may be modified if the borrower has filed a petition
under Chapter 13. These courts have suggested that such modifications may
include reducing the amount of each monthly payment, changing the rate of
interest, altering the repayment schedule and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding
40
<PAGE>
balance of the loan. Federal bankruptcy law and limited case law indicate that
the foregoing modifications could not be applied to the terms of a loan secured
by property that is the principal residence of the debtor. In all cases, the
secured creditor is entitled to the value of its security plus post-petition
interest, attorney's fees and costs to the extent the value of the security
exceeds the debt.
In a Chapter 11 case under the Bankruptcy Code, the lender is precluded
from foreclosing without authorization from the bankruptcy court. The lender's
lien may be transferred to other collateral and/or be limited in amount to the
value of the lender's interest in the collateral as of the date of the
bankruptcy. The loan term may be extended, the interest rate may be adjusted to
market rates and the priority of the loan may be subordinated to bankruptcy
court-approved financing. The bankruptcy court can, in effect, invalidate
due-on-sale clauses through confirmed Chapter 11 plans of reorganization.
The Bankruptcy Code provides priority to certain tax liens over the
lender's security. This may delay or interfere with the enforcement of rights in
respect of a defaulted mortgage loan. In addition, substantive requirements are
imposed upon lenders in connection with the organization and the servicing of
mortgage loans by numerous federal and some state consumer protection laws. The
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 impose
specific statutory liabilities upon lenders who originate loans and who fail to
comply with the provisions of the law. In some cases, this liability may affect
assignees of the loans.
Due-on-Sale Clauses
Due-on-sale clauses permit the lender to accelerate the maturity of the
loan if the borrower sells or transfers, whether voluntarily or involuntarily,
all or part of the real property securing the loan without the lender's prior
written consent. The enforceability of these clauses has been the subject of
legislation or litigation in many states, and in some cases, typically involving
single family residential mortgage transactions, their enforceability has been
limited or denied. In any event, the Garn-St. Germain Depository Institutions
Act of 1982 (the 'Garn-St. Germain Act') preempts state constitutional,
statutory and case law that prohibits the enforcement of due-on-sale clauses and
permits lenders to enforce these clauses in accordance with their terms, subject
to certain exceptions. As a result, due-on-sale clauses have become generally
enforceable except in those states whose legislatures exercised their authority
to regulate the enforceability of such clauses with respect to mortgage loans
that were (i) originated or assumed during the 'window period' under the
Garn-St. Germain Act which ended in all cases not later than October 15, 1982,
and (ii) originated by lenders other than national banks, federal savings
institutions and federal credit unions. FHLMC has taken the position in its
published mortgage servicing standards that, out of a total of eleven 'window
period states,' five states (Arizona, Michigan, Minnesota, New Mexico and Utah)
have enacted statutes extending, on various terms and for varying periods, the
prohibition on enforcement of due-on-sale clauses with respect to certain
categories of window period loans. Also, the Garn-St. Germain Act does
'encourage' lenders to permit assumption of loans at the original rate of
interest or at some other rate less than the average of the original rate and
the market rate.
In addition, under federal bankruptcy law, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and may, under certain circumstances, be
eliminated in any modified mortgage resulting from such bankruptcy proceeding.
Enforceability of Prepayment and Late Payment Fees
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon the late charges which a lender may
collect from a borrower for delinquent payments. Certain states also limit the
amounts that a lender may collect from a borrower as an additional charge if the
loan is prepaid. Late charges and prepayment fees are typically retained by
servicers as additional servicing compensation.
41
<PAGE>
Equitable Limitations on Remedies
In connection with lenders' attempts to realize upon their security, courts
have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of his defaults
under the loan documents. Examples of judicial remedies that have been fathomed
include judicial requirements that the lender undertake affirmative and
expensive actions to determine the causes of the borrower's default and the
likelihood that the borrower will be able to reinstate the loan. In some cases,
courts have substituted their judgment for the lender's judgment and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disability. In
other cases, courts have limited the right of a lender to realize upon his
security if the default under the security agreement is not monetary, such as
the borrower's failure to adequately maintain the property or the borrower's
execution of secondary financing affecting the property. Finally, some courts
have been faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under security agreements receive notices in addition to the
statutorily-prescribed minimums. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that, in cases involving the
sale by a trustee under a deed of trust or by a mortgagee under a mortgage
having a power of sale, there is insufficient state action to afford
constitutional protections to the borrower.
Most conventional single-family mortgage loans may be prepaid in full or in
part without penalty. The regulations of the Federal Home Loan Bank Board
prohibit the imposition of a prepayment penalty or equivalent fee for or in
connection with the acceleration of a loan by exercise of a due-on-sale clause.
A mortgagee to whom a prepayment in full has been tendered may be compelled to
give either a release of the mortgage or an instrument assigning the existing
mortgage. The absence of a restraint on prepayment, particularly with respect to
mortgage loans having higher mortgage rates, may increase the likelihood of
refinancing or other early retirements of such mortgage loans.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ('Title V'), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. Similar federal statutes
were in effect with respect to mortgage loans made during the first three months
of 1980. The Federal Home Loan Bank Board is authorized to issue rules and
regulations and to publish interpretations governing implementation of Title V.
Title V authorizes any state to reimpose interest rate limits by adopting,
before April 1, 1983, a state law, or by certifying that the voters of such
state have voted in favor of any provision, constitutional or otherwise, which
expressly rejects an application of the federal law. Fifteen states adopted such
a law prior to the April 1, 1983 deadline. In addition, even where Title V is
not so rejected, any state is authorized by the law to adopt a provision
limiting discount points or other charges on mortgage loans covered by Title V.
CONTRACTS NOT SECURED BY MORTGAGES
General
The Contracts, other than those Contracts that are unsecured or secured by
mortgages on real estate (such Contracts are hereinafter referred to in this
section as 'contracts') generally are 'chattel paper' or constitute 'purchase
money security interests' each as defined in the Uniform Commercial Code (the
'UCC'). 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 related
Agreement, the Depositor will transfer physical possession of the contracts to
the Trustee or a designated custodian or may retain possession of the contracts
as custodian for the Trustee. In addition, the Depositor will make an
appropriate filing of a UCC-1 financing statement in the appropriate states to
give notice of the Trustee's ownership of the contracts. Unless otherwise
specified in the related Prospectus Supplement, the contracts will not be
stamped or otherwise marked to reflect their assignment from the Depositor to
the Trustee. Therefore, if through negligence, fraud or otherwise, a subsequent
purchaser were able to take physical possession of the contracts without notice
of such assignment, the Trustee's interest in the contracts could be defeated.
42
<PAGE>
Security Interests in Home Improvements
The contracts that are secured by the home improvements financed thereby
grant to the originator of such contracts a purchase money security interest in
such home improvements to secure all or part of the purchase price of such home
improvements and related services. A financing statement generally is not
required to be filed to perfect a purchase money security interest in consumer
goods. Such purchase money security interests are assignable. In general, a
purchase money security interest grants to the holder a security interest that
has priority over a conflicting security interest in the same collateral and the
proceeds of such collateral. However, to the extent that the collateral subject
to a purchase money security interest becomes a fixture, in order for the
related purchase money security interest to take priority over a conflicting
interest in the fixture, the holder's interest in such Home Improvement must
generally be perfected by a timely fixture filing. In general, under the UCC, a
security interest does not exist under the UCC in ordinary building material
incorporated into an improvement on land. Home Improvement Contracts that
finance lumber, bricks, other types of ordinary building material or other goods
that are deemed to lose such characterization, upon incorporation of such
materials into the related property, will not be secured by a purchase money
security interest in the Home Improvement being financed.
Security Interests in the Manufactured Homes
The Manufactured Homes securing the manufactured housing contracts may be
located in all 50 states. 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. As manufactured
homes have become larger and often 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 manufactured home under applicable state
real estate law. In order to perfect a security interest in a manufactured home
under real estate laws, the secured party must file either a 'fixture filing'
under the provisions of the UCC or a real estate mortgage under the real estate
laws of the state where the home is located. These filings must be made in the
real estate records office of the county where the manufactured home is located.
If so specified in the related Prospectus Supplement, the manufactured housing
contracts may contain provisions prohibiting the borrower from permanently
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 a UCC financing
statement will be effective to maintain the priority of the security interest in
the Manufactured Home. If, however, a Manufactured Home is permanently attached
to its site, the related lender may be required to perfect a security interest
in the Manufactured Home under applicable real estate laws.
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 Manufactered Home in such state, and if steps are not
taken to re-perfect a 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 secured party must surrender possession if
it holds the certificate of title to such Manufactured Home or, in the case of
Manufactured Homes registered in states which provide for notation of lien on
the certificate of title, notice of surrender would be given to the secured
party noted on the certificate of title. In states which do not require a
certificate of title for registration of a manufactured home, re-registration
could defeat perfection.
Under the laws of most states, liens for repairs performed on a
Manufactured Home and liens for personal property taxes take priority over a
perfected security interest in the Manufactured Home.
43
<PAGE>
Enforcement of Security Interest in Manufactured Homes and Home Improvements
So long as the Manufactured Home or Home Improvement has not become subject
to the real estate law, a creditor can repossess a Manufactured Home or Home
Improvement securing a contract by voluntary surrender, by 'self-help'
repossession that is 'peaceful' (i.e., without breach of the peace) or, in the
absence of voluntary surrender and the ability to repossess without breach of
the peace, by judicial process. The holder of a contract must give the debtor a
number of days' notice, which varies from 10 to 30 days depending on the state,
prior to commencement of any repossession. The UCC and consumer protection laws
in most states place restrictions on repossession sales, including requiring
prior notice to the debtor and commercial reasonableness in effecting such a
sale. The law in most states also requires that the debtor be given notice of
any sale prior to resale of the unit that the debtor may redeem it at or before
such resale.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgement from a debtor for any deficiency on repossession and
resale of the property securing the debtor's loan. However, some states impose
prohibitions or limitations on deficiency judgements, and in many cases the
defaulting borrower would have no assets with which to pay a judgement.
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.
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 to all claims and defenses which the debtor could
assert against the seller of goods. 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 Trustee against such 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.
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 contract which is
secured by a first lien on certain kinds of consumer goods. 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 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
Title V was not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
INSTALLMENT SALES CONTRACTS
The Contracts may also consist of installment sales contracts. Under
certain types of installment sales contracts ('Installment Sales Contracts') the
seller (hereinafter referred to in this section as the 'lender') retains legal
title to the property and enters into an agreement with the purchaser
(hereinafter referred to in this section as the 'borrower') for the payment of
the purchase price, plus interest, over the term of such contract. Only after
full performance by the borrower of the contract is the lender obligated to
convey title to the property
44
<PAGE>
to the purchaser. As with mortgage or deed of trust financing, during the
effective period of the Installment Sales Contract, the borrower is generally
responsible for maintaining the property in good condition and for paying real
estate taxes, assessments and hazard insurance premiums associated with the
property.
The method of enforcing the rights of the lender under an Installment Sales
Contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to the terms. The terms of Installment Sales
Contracts generally provide that upon a default by the borrower, the borrower
loses his or her right to occupy the property, the entire indebtedness is
accelerated, and the buyer's equitable interest in the property is forfeited.
The lender in such a situation does not have to foreclose in order to obtain
title to the property, although in some cases a quiet title action is in order
if the borrower has filed the Installment Sales Contract in local land records
and an ejectment action may be necessary to recover possession. In a few states,
particularly in cases of borrower default during the early years of an
Installment Sales Contract, the courts will permit ejectment of the buyer and a
forfeiture of his or her interest in the property. However, most state
legislatures have enacted provisions by analogy to mortgage law protecting
borrowers under Installment Sales Contracts from the harsh consequences of
forfeiture. Under such statutes, a judicial or nonjudicial foreclosure may be
required, the lender may be required to give notice of default and the borrower
may be granted some grace period during which the Installment Sales Contract may
be reinstated upon full payment of the default amount and the borrower may have
a post-foreclosure statutory redemption right. In other states, courts in equity
may permit a borrower with significant investment in the property under an
Installment Sales Contract for the sale of real estate to share in the proceeds
of sale of the property after the indebtedness is repaid or may otherwise refuse
to enforce the forfeiture clause. Nevertheless, generally speaking, the lender's
procedures for obtaining possession and clear title under an Installment Sales
Contract in a given state are simpler and less time-consuming and costly than
are the procedures for foreclosing and obtaining clear title to a property
subject to one or more liens.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of all
branches of the military on active duty, including draftees and reservists in
military service, (i) are entitled to have interest rates reduced and capped at
6% per annum, on obligations (including Contracts) incurred prior to the
commencement of military service for the duration of military service, (ii) may
be entitled to a stay of proceedings on any kind of foreclosure or repossession
action in the case of defaults on such obligations entered into prior to
military service for the duration of military service and (iii) may have the
maturity of such obligations incurred prior to military service extended, the
payments lowered and the payment schedule readjusted for a period of time after
the completion of military service. However, the benefits of (i), (ii), or (iii)
above are subject to challenge by creditors and if, in the opinion of the court,
the ability of a person to comply with such obligations is not materially
impaired by military service, the court may apply equitable principles
accordingly. If a borrower's obligation to repay amounts otherwise due on a
Contract included in a Trust Fund for a Series is relieved pursuant to the
Soldiers' and Sailors' Civil Relief Act of 1940, none of the Trust Fund, the
Servicer, the Depositor nor the Trustee will be required to advance such
amounts, and any loss in respect thereof may reduce the amounts available to be
paid to the holders of the Certificates of such Series. Unless otherwise
specified in the related Prospectus Supplement, any shortfalls in interest
collections on Contracts or Underlying Contracts relating to the Private
Securities, as applicable, included in a Trust Fund for a Series resulting from
application of the Soldiers' and Sailors' Civil Relief Act of 1940 will be
allocated to each Class of Securities of such Series that is entitled to receive
interest in respect of such Contracts or Underlying Contracts in proportion to
the interest that each such Class of Securities would have otherwise been
entitled to receive in respect of such Contracts or Underlying Contracts had
such interest shortfall not occurred.
45
<PAGE>
THE DEPOSITOR
GENERAL
The Depositor was incorporated in the State of Delaware on January 29,
1988, and is a wholly-owned subsidiary of LCPI, which is a wholly-owned
subsidiary of Lehman Brothers, a wholly-owned subsidiary of Holdings. The
Depositor's principal executive offices are located at Three World Financial
Center, New York, New York 10285. Its telephone number is (212) 298-2000.
The Depositor will not engage in any activities other than to authorize,
issue, sell, deliver, purchase and invest in (and enter into agreements in
connection with), and/or to engage in the establishment of one or more trusts
which will issue and sell, bonds, notes, debt or equity securities, obligations
and other securities and instruments ('Depositor Securities') collateralized or
otherwise secured or backed by, or otherwise representing an interest in, among
other things, receivables or pass through certificates, or participations or
certificates of participation or beneficial ownership in one or more pools of
receivables, and the proceeds of the foregoing, that arise in connection with
(i) the sale or lease of automobiles, trucks or other motor vehicles, equipment,
merchandise and other personal property, (ii) credit card purchases or cash
advances, (iii) the sale, licensing or other commercial provision of services,
rights, intellectual properties and other intangibles, (iv) trade financings,
(v) loans secured by certain first or junior mortgages on real estate, (vi)
loans to employee stock ownership plans and (vii) any and all other commercial
transactions and commercial, sovereign, student or consumer loans or
indebtedness and, in connection therewith or otherwise, purchasing, acquiring,
owning, holding, transferring, conveying, servicing, selling, pledging,
assigning, financing and otherwise dealing with such receivables, pass-through
certificates, or participations or certificates of participation or beneficial
ownership. Article Third of the Depositor's Certificate of Incorporation limits
the Depositor's activities to the above activities and certain related
activities, such as credit enhancement with respect to such Depositor
Securities, and to any activities incidental to and necessary or convenient for
the accomplishment of such purposes. The Certificate of Incorporation of the
Depositor provides that any Depositor Securities, except for subordinated
Depositor Securities, must be rated in one of the four highest categories by a
nationally recognized rating agency.
USE OF PROCEEDS
The Depositor will apply all or substantially all of the net proceeds from
the sale of each Series of Securities for one or more of the following purposes:
(i) to purchase the related Primary Assets, (ii) to repay indebtedness which has
been incurred to obtain funds to acquire such Primary Assets, (iii) to establish
any Reserve Funds described in the related Prospectus Supplement and (iv) to pay
costs of structuring and issuing such Securities, including the costs of
obtaining Enhancement, if any. If so specified in the related Prospectus
Supplement, the purchase of the Primary Assets for a Series may be effected by
an exchange of Securities with the Seller of such Primary Assets.
46
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a summary of certain anticipated federal income tax
consequences of the purchase, ownership, and disposition of the Securities and
is based on advice of Brown & Wood LLP, special counsel to the Depositor. The
summary is based upon the provisions of the Code, the regulations promulgated
thereunder, including, where applicable, proposed regulations, and the judicial
and administrative rulings and decisions now in effect, all of which are subject
to change or possible differing interpretations. The statutory provisions,
regulations, and interpretations on which this interpretation is based are
subject to change, and such a change could apply retroactively.
The summary does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances, nor with certain types of investors subject to special treatment
under the federal income tax laws. This summary focuses primarily upon investors
who will hold Securities as 'capital assets' (generally, property held for
investment) within the meaning of Section 1221 of the Code, but much of the
discussion is applicable to other investors as well. Prospective Investors are
advised to consult their own tax advisers concerning the federal, state, local
and any other tax consequences to them of the purchase, ownership and
disposition of the Securities.
The federal income tax consequences to Holders will vary depending on
whether (i) the Securities of a Series are classified as indebtedness; (ii) an
election is made to treat the Trust Fund relating to a particular Series of
Securities as REMIC under the Code; (iii) the Securities represent an ownership
interest in some or all of the assets included in the Trust Fund for a Series or
(iv) an election is made to treat the Trust Fund relating to a particular Series
of Certificates as a partnership. The Prospectus Supplement for each Series of
Securities will specify how the Securities will be treated for federal income
tax purposes and will discuss whether a REMIC election, if any, will be made
with respect to such Series.
As used herein, the term 'U.S. Person' means a citizen or resident of the
United States, a corporation, partnership or other entity created or organized
in or under the laws of the United States or any political subdivision thereof
(other than a partnership that is not treated as a United States person under
any applicable Treasury regulations), an estate whose income is subject to U.S.
federal income tax regardless of its source of income, or 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 regulations, certain trusts in
existence on August 20, 1996 and treated as United States persons prior to such
date that elect to continue to be treated as United States persons shall be
considered U.S. persons as well.
TAXATION OF DEBT SECURITIES
Status as Real Property Contracts. Except to the extent provided otherwise
in a Supplement as to each Series of Securities Brown & Wood LLP will have
advised the Depositor that: (i) Securities held by a domestic building and loan
association will constitute 'loans . . . secured by an interest in real
property' within the meaning of Code section 7701(a)(19)(C)(v); (ii) Securities
held by a real estate investment trust will constitute 'real estate assets'
within the meaning of Code section 856(c)(4)(A) and interest on Securities will
be considered 'interest on obligations secured by mortgages on real property or
on interests in real property' within the meaning of Code section 856(c)(3)(B)
and (iii) Securities representing interests in obligations secured by
manufactured housing treated as single family residences under Code Section
25(e)(10) will be considered interests in 'qualified mortgages' as defined in
Code Section 860G(a)(3).
Interest and Acquisition Discount. Securities representing regular
interests in a REMIC ('Regular Interest Securities') are generally taxable to
holders in the same manner as evidences of indebtedness issued by the REMIC.
Stated interest on the Regular Interest Securities will be taxable as ordinary
income and taken into account using the accrual method of accounting, regardless
of the Holder's normal accounting method. Interest (other than original issue
discount) on Securities (other than Regular Interest Securities) that are
characterized as indebtedness for federal income tax purposes will be includible
in income by holders thereof in accordance with
47
<PAGE>
their usual methods of accounting. Securities characterized as debt for federal
income tax purposes and Regular Interest Securities will be referred to
hereinafter collectively as 'Debt Securities.'
Debt Securities that are Compound Interest Securities will, and certain of
the other Debt Securities may, be issued with 'original issue discount' ('OID').
The following discussion is based in part on the rules governing OID which are
set forth in Sections 1271-1273 and 1275 of the Code and the Treasury
regulations issued thereunder on January 27, 1994, as amended on June 11, 1996
(the 'OID Regulations'). A Holder should be aware, however, that the OID
Regulations do not adequately address certain issues relevant to prepayable
securities, such as the Debt Securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt Security and its issue price. A holder of
a Debt Security must include such OID in gross income as ordinary interest
income as it accrues under a method taking into account an economic accrual of
the discount. In general, OID must be included in income in advance of the
receipt of the cash representing that income. The amount of OID on a Debt
Security will be considered to be zero if it is less than a de minimis amount
determined under the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular class of Debt Securities is sold for cash on
or prior to the Closing Date, the issue price for such class will be treated as
the fair market value of such class on the Closing Date. The issue price of a
Debt Security also includes the amount paid by an initial Debt Security holder
for accrued interest that relates to a period prior to the issue date of the
Debt Security. The stated redemption price at maturity of a Debt Security
includes the original principal amount of the Debt Security, but generally will
not include distributions of interest if such distributions constitute
'qualified stated interest.'
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as described
below) provided that such interest payments are unconditionally payable at
intervals of one year or less during the entire term of the Debt Security. The
OID Regulations state that interest payments are unconditionally payable only if
a late payment or nonpayment is expected to be penalized or reasonable remedies
exist to compel payment. Certain Debt Securities may provide for default
remedies in the event of late payment or nonpayment of interest. The interest on
such Debt Securities will be unconditionally payable and constitute qualified
stated interest, not OID. However, absent clarification of the OID Regulations,
where Debt Securities do not provide for default remedies, the interest payments
will be included in the Debt Security's stated redemption price at maturity and
taxed as OID. Interest is payable at a single fixed rate only if the rate
appropriately takes into account the length of the interval between payments.
Distributions of interest on Debt Securities with respect to which deferred
interest will accrue will not constitute qualified stated interest payments, in
which case the stated redemption price at maturity of such Debt Securities
includes all distributions of interest as well as principal thereon. Where the
interval between the issue date and the first Distribution Date on a Debt
Security is either longer or shorter than the interval between subsequent
Distribution Dates, all or part of the interest foregone, in the case of the
longer interval, and all of the additional interest, in the case of the shorter
interval, will be included in the stated redemption price at maturity and tested
under the de minimis rule described below. In the case of a Debt Security with a
long first period which has non-de minimis OID, all stated interest in excess of
interest payable at the effective interest rate for the long first period will
be included in the stated redemption price at maturity and the Debt Security
will generally have OID. Holders of Debt Securities should consult their own tax
advisors to determine the issue price and stated redemption price at maturity of
a Debt Security.
Under the de minimis rule, OID on a Debt Security will be considered to be
zero if such OID is less than 0.25% of the stated redemption price at maturity
of the Debt Security multiplied by the weighted average maturity of the Debt
Security. For this purpose, the weighted average maturity of the Debt Security
is computed as the sum of the amounts determined by multiplying the number of
full years (i.e., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled to
be made by a fraction, the numerator of which is the amount of each distribution
included in the stated redemption price at maturity of the Debt Security and the
denominator of which is the stated redemption price at maturity of the Debt
Security. Holders generally must report de minimis OID pro rata as principal
payments are received, and
48
<PAGE>
such income will be capital gain if the Debt Security is held as a capital
asset. However, accrual method holders may elect to accrue all de minimis OID as
well as market discount under a constant interest method.
Debt Securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is treated as payable at a qualified
variable rate and not as contingent interest if, generally, (i) such interest is
unconditionally payable at least annually, (ii) the issue price of the debt
instrument does not exceed the total noncontingent principal payments and (iii)
interest is based on a 'qualified floating rate,' an 'objective rate,' or a
combination of 'qualified floating rates' that do not operate in a manner that
significantly accelerates or defers interest payments on such Debt Security. In
the case of Compound Interest Securities, certain Interest Weighted Securities,
and certain of the other Debt Securities, none of the payments under the
instrument will be considered qualified stated interest, and thus the aggregate
amount of all payments will be included in the stated redemption price.
The holder of a Debt Security issued with OID must include in gross income,
for all days during its taxable year on which it holds such Debt Security, the
sum of the 'daily portions' of such original issue discount. The amount of OID
includible in income by a holder will be computed by allocating to each day
during a taxable year a pro rata portion of the original issue discount that
accrued during the relevant accrual period. In the case of a Debt Security that
is not a Regular Interest Security and the principal payments on which are not
subject to acceleration resulting from prepayments on the Contracts, the amount
of OID includible in income of a Holder for an accrual period (generally the
period over which interest accrues on the debt instrument) will equal the
product of the yield to maturity of the Debt Security and the adjusted issue
price of the Debt Security, reduced by any payments of qualified stated
interest. The adjusted issue price is the sum of its issue price plus prior
accruals or OID, reduced by the total payments made with respect to such Debt
Security in all prior periods, other than qualified stated interest payments.
The amount of OID to be included in income by a holder of a debt
instrument, such as certain Classes of the Debt Securities, that is subject to
acceleration due to prepayments on other debt obligations securing such
instruments (a 'Pay-Through Security'), is computed by taking into account the
anticipated rate of prepayments assumed in pricing the debt instrument (the
'Prepayment Assumption'). The amount of OID that will accrue during an accrual
period on a Pay-Through Security is the excess (if any) of the sum of (a) the
present value of all payments remaining to be made on the Pay-Through Security
as of the close of the accrual period and (b) the payments during the accrual
period of amounts included in the stated redemption price of the Pay-Through
Security, over the adjusted issue price of the Pay-Through Security at the
beginning of the accrual period. The present value of the remaining payments is
to be determined on the basis of three factors: (i) the original yield to
maturity of the Pay-Through Security (determined on the basis of compounding at
the end of each accrual period and properly adjusted for the length of the
accrual period), (ii) events which have occurred before the end of the accrual
period and (iii) 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 OID required to be included in income by a Holder to
take into account prepayments with respect to the Contracts at a rate that
exceeds the Prepayment Assumption, and to decrease (but not below zero for any
period) the portions of original issue discount required to be included in
income by a Holder of a Pay-Through Security to take into account prepayments
with respect to the Contracts at a rate that is slower than the Prepayment
Assumption. Although original issue discount will be reported to Holders of
Pay-Through Securities based on the Prepayment Assumption, no representation is
made to Holders that Contracts will be prepaid at that rate or at any other
rate.
The Depositor may adjust the accrual of OID on a Class of Regular Interest
Securities (or other regular interests in a REMIC) in a manner that it believes
to be appropriate, to take account of realized losses on the Contracts, although
the OID Regulations do not provide for such adjustments. If the Internal Revenue
Service were to require that OID be accrued without such adjustments, the rate
of accrual of OID for a Class of Regular Interest Securities could increase.
Certain classes of Regular Interest Securities may represent more than one
class of REMIC regular interests. Unless the applicable Prospectus Supplement
specifies otherwise, the Trustee intends, based on the OID Regulations, to
calculate OID on such Securities as if, solely for the purposes of computing
OID, the separate regular interests were a single debt instrument.
49
<PAGE>
A subsequent holder of a Debt Security will also be required to include OID
in gross income, but such a holder who purchases such Debt Security for an
amount that exceeds its adjusted issue price will be entitled (as will an
initial holder who pays more than a Debt Security's issue price) to offset such
OID by comparable economic accruals of portions of such excess.
Effects of Defaults and Delinquencies. Holders will be required to report
income with respect to the related Securities under an accrual method without
giving effect to delays and reductions in distributions attributable to a
default or delinquency on the Contracts, except possibly to the extent that it
can be established that such amounts are uncollectible. As a result, the amount
of income (including OID) reported by a holder of such a Security in any period
could significantly exceed the amount of cash distributed to such holder in that
period. The holder 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 the Securities is reduced as a result of a Contract default.
However, the timing and character of such losses or reductions in income are
uncertain and, accordingly, holders of Securities should consult their own tax
advisors on this point.
Interest Weighted Securities. It is not clear how income should be accrued
with respect to Regular Interest Securities or Stripped Securities (as defined
under '--Tax Status as a Grantor Trust; General' herein) the payments on which
consist solely or primarily of a specified portion of the interest payments on
qualified mortgages held by the REMIC or on Contracts, underlying Pass-Through
Securities ('Interest Weighted Securities'). The Issuer intends to take the
position that all of the income derived from an Interest Weighted Security
should be treated as OID and that the amount and rate of accrual of such OID
should be calculated by treating the Interest Weighted Security as a Compound
Interest Security. However, in the case of Interest Weighted Securities that are
entitled to some payments of principal and that are Regular Interest Securities
the Internal Revenue Service could assert that income derived from an Interest
Weighted Security should be calculated as if the Security were a security
purchased at a premium equal to the excess of the price paid by such holder for
such Security over its stated principal amount, if any. Under this approach, a
holder would be entitled to amortize such premium only if it has in effect an
election under Section 171 of the Code with respect to all taxable debt
instruments held by such holder, as described below. Alternatively, the Internal
Revenue Service could assert that an Interest Weighted Security should be
taxable under the rules governing bonds issued with contingent payments. Such
treatment may be more likely in the case of Interest Weighted Securities that
are Stripped Securities as described below. See '--Tax Status as a Grantor
Trust--Discount or Premium on Pass-Through Securities.'
Variable Rate Debt Securities. In the case of Debt Securities bearing
interest at a rate that varies directly, according to a fixed formula, with an
objective index, it appears that (i) the yield to maturity of such Debt
Securities and (ii) in the case of Pay-Through Securities, the present value of
all payments remaining to be made on such Debt Securities, should be calculated
as if the interest index remained at its value as of the issue date of such
Securities. Because the proper method of adjusting accruals of OID on a variable
rate Debt Security is uncertain, holders of variable rate Debt Securities should
consult their own tax advisers regarding the appropriate treatment of such
Securities for federal income tax purposes.
Market Discount. A purchaser of a Security may be subject to the market
discount rules of Sections 1276-1278 of the Code. A Holder that acquires a Debt
Security with more than a prescribed de minimis amount of 'market discount'
(generally, the excess of the principal amount of the Debt Security over the
purchaser's purchase price) will be required to include accrued market discount
in income as ordinary income in each month, but limited to an amount not
exceeding the principal payments on the Debt Security received in that month
and, if the Securities are sold, the gain realized. Such market discount would
accrue in a manner to be provided in Treasury regulations but, until such
regulations are issued, such market discount would in general accrue either (i)
on the basis of a constant yield (in the case of a Pay-Through Security, taking
into account a prepayment assumption) or (ii) in the ratio of (a) in the case of
Securities (or in the case of a Pass-Through Security, as set forth below, the
Contracts underlying such Security) not originally issued with original issue
discount, stated interest payable in the relevant period to total stated
interest remaining to be paid at the beginning of the period or (b) in the case
of Securities (or, in the case of a Pass-Through Security, as described below,
the Contracts underlying such Security) originally issued at a discount, OID in
the relevant period to total OID remaining to be paid.
50
<PAGE>
Section 1277 of the Code provides that, regardless of the origination date
of the Debt Security (or, in the case of a Pass-Through Security, the
Contracts), the excess of interest paid or accrued to purchase or carry a
Security (or, in the case of a Pass-Through Security, as described below, the
Underlying Contracts) with market discount over interest received on such
Security is allowed as a current deduction only to the extent such excess is
greater than the market discount that accrued during the taxable year in which
such interest expense was incurred. In general, the deferred portion of any
interest expense will be deductible when such market discount is included in
income, including upon the sale, disposition, or repayment of the Security (or
in the case of a Pass-Through Security, an Underlying Contract). A holder may
elect to include market discount in income currently as it accrues, on all
market discount obligations acquired by such holder during the taxable year such
election is made and thereafter, in which case the interest deferral rule will
not apply.
Premium. A holder that purchases a Debt Security for an amount in excess
of its stated principal amount (or with respect to a Debt Security issued with
OID, its stated redemption price at maturity) may elect to treat such excess as
'amortizable bond premium', in which case the amount required to be included in
the holder's income each year with respect to interest on the Debt Security will
be reduced by an amount not to exceed the amount of amortizable bond premium
allocable (based on the Debt Security's yield to maturity) to such year. This
amortizable bond premium must be amortized using a constant yield method over
the remaining term of the Debt Security. Treasury regulations under Code section
171 were issued on December 30, 1997 ('Bond Premium Amortization Regulations')
which generally provide that amortizable bond premium is amortized over the term
of a Debt Security by offsetting the qualified stated interest allocable to an
accrual period with the amortizable bond premium allocable to such period using
a specified constant yield method. To the extent that the amortizable bond
premium allocated to an accrual period exceeds the qualified stated interest
allocable to such period, the excess is deductible under Code section 171 to the
extent such excess does not exceed the difference between (i) prior interest
inclusions over (ii) prior amortizable bond premium deductions on the bond
('Bond Premium Amortization Limit'), with the excess over Bond Premium
Amortization Limit carried forward to the next accrual period and treated as
amortizable bond premium allocable to that period. Special rules are provided in
the Bond Premium Amortization Regulations for determining and amortizing bond
premium on Notes that are subject to certain contingencies, and for determining
and amortizing bond premium on Floating Rate Notes or Indexed Notes that qualify
as 'variable rate debt instruments' or 'inflation-indexed debt instruments'
under applicable Treasury regulations. The Bond Premium Amortization Regulations
are effective for Debt Securities acquired on or after March 2, 1998. However,
if a holder makes the election to amortize bond premium for the taxable year
containing March 2, 1998, or any subsequent taxable year, the Treasury
regulations would apply to debt instruments held on or after the first day of
the taxable year in which the election is made.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a holder of a Debt Security to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium in
income as interest, based on a constant yield method for Debt Securities
acquired on or after April 4, 1994. If such an election were to be made with
respect to a Debt Security with market discount, the holder of the Debt Security
would be deemed to have made an election to include in income currently market
discount with respect to all other debt instruments having market discount that
such holder of the Debt Security acquires during the year of the election or
thereafter. Similarly, a holder of a Debt Security that makes this election for
a Debt Security that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such holder owns or acquires. The election to
accrue interest, discount and premium on a constant yield method with respect to
a Debt Security is irrevocable.
TAXATION OF THE REMIC AND ITS HOLDERS
General. In the opinion of Brown & Wood, special counsel to the Depositor,
if a REMIC election is made with respect to a Series of Securities, then the
arrangement by which the Securities of that Series are issued will be treated as
a REMIC as long as all of the provisions of the applicable Agreement are
complied with and the statutory and regulatory requirements are satisfied.
Securities will be designated as 'Regular Interests' or 'Residual Interests' in
a REMIC, as specified in the related Prospectus Supplement.
Except to the extent specified otherwise in a Prospectus Supplement, if a
REMIC election is made with respect to a Series of Securities, (i) Securities
held by a domestic building and loan association will constitute 'a
51
<PAGE>
regular or a residual interest in a REMIC' within the meaning of Code Section
7701(a)(19)(C)(xi) (assuming that at least 95% of the REMIC's assets consist of
cash, government securities, 'loans secured by an interest in real property,'
and other types of assets described in Code Section 7701(a)(19)(C)); and (ii)
Securities held by a real estate investment trust will constitute 'real estate
assets' within the meaning of Code Section 856(c)(4)(A), and income with respect
to the Securities will be considered 'interest on obligations secured by
mortgages on real property or on interests in real property' within the meaning
of Code Section 856(c)(3)(B) (assuming, for both purposes, that at least 95% of
the REMIC's assets are qualifying assets). If less than 95% of the REMIC's
assets consist of assets described in (i), (ii) or (iii) above, then a Security
will qualify for the tax treatment described in (i), (ii) or (iii) in the
proportion that such REMIC assets are qualifying assets.
Status of Manufactured Housing Contracts. The REMIC Regulations provide
that obligations secured by interests in manufactured housing that qualify as
'single family residences' within the meaning of Code Section 25(e)(10) may be
treated as 'qualified mortgages' of the REMIC.
Under Section 25(e)(10), 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.
REMIC EXPENSES; SINGLE CLASS REMIC'S
As a general rule, all of the expenses of a REMIC will be taken into
account by holders of the Residual Interest Securities. In the case of a 'single
class REMIC,' however, the expenses will be allocated, under Treasury
regulations, among the holders of the Regular Interest Securities and the
holders of the Residual Interest Securities on a daily basis in proportion to
the relative amounts of income accruing to each Holder on that day. In the case
of a holder of a Regular Interest Security who is an individual or a
'pass-through interest holder' (including certain pass-through entities but not
including real estate investment trusts), such expenses will be deductible only
to the extent that such expenses, plus other 'miscellaneous itemized deductions'
of the Holder, exceed 2% of such Holder's adjusted gross income. In addition,
for taxable years beginning after December 31, 1990, the amount of itemized
deductions otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds the applicable amount (which amount will be
adjusted for inflation for taxable years beginning after 1990) will be reduced
by the lesser of (i) 3% of the excess of adjusted gross income over the
applicable amount, or (ii) 80% of the amount of itemized deductions otherwise
allowable for such taxable year. The reduction or disallowance of this deduction
may have a significant impact on the yield of the Regular Interest Security to
such a Holder. In general terms, a single class REMIC is one that either (i)
would qualify, under existing Treasury regulations, as a grantor trust if it
were not a REMIC (treating all interests as ownership interests, even if they
would be classified as debt for federal income tax purposes) or (ii) is similar
to such a trust and which is structured with the principal purpose of avoiding
the single class REMIC rules. Unless otherwise stated in the applicable
Prospectus Supplement, the expenses of the REMIC will be allocated to holders of
the related residual interest securities.
TAXATION OF THE REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC is not generally subject to entity-level tax. Rather, the
taxable income or net loss of a REMIC is taken into account by the holders of
residual interests. As described above, the regular interests are generally
taxable as debt of the REMIC.
Tiered REMIC Structures. For certain series of REMIC Certificates, two or
more separate elections may be held to treat designated portions of the related
Trust Fund as REMICs ('Tiered REMICs') for federal income tax purposes. Upon the
issuance of any such series of REMIC Certificates, special counsel to the
Depositor will deliver its opinion generally to the effect that, assuming
compliance with all provisions of the related Pooling and Servicing Agreement,
the Tiered REMICs will each qualify as a REMIC and the REMIC Certificates issued
by the Tiered REMICs, respectively, will be considered to evidence ownership of
Regular Certificates or Residual Certificates in the related REMIC within the
meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Certificates will be
'real estate assets' within the meaning of Section 856(c)(4)(A) of the Code, and
'loans secured by an interest in real property' under Section
52
<PAGE>
7701(a)(19)(C) of the Code, and whether the income on such Certificates is
interest described in Section 856(c)(3)(B) of the Code, the Tiered REMICs will
be treated as one REMIC.
Calculation of REMIC Income. The taxable income or net loss of a REMIC is
determined under an accrual method of accounting and in the same manner as in
the case of an individual, with certain adjustments. In general, the taxable
income or net loss will be the difference between (i) the gross income produced
by the REMIC's assets, including stated interest and any original issue discount
or market discount on loans and other assets, and (ii) deductions, including
stated interest and original issue discount accrued on Regular Interest
Securities, amortization of any premium with respect to Contracts, and servicing
fees and other expenses of the REMIC. A holder of a Residual Interest Security
that is an individual or a 'pass-through interest holder' (including certain
pass-through entities, but not including real estate investment trusts) will be
unable to deduct servicing fees payable on the loans or other administrative
expenses of the REMIC for a given taxable year, to the extent that such
expenses, when aggregated with such holder's other miscellaneous itemized
deductions for that year, do not exceed two percent of such holder's adjusted
gross income.
For purposes of computing its taxable income or net loss, the REMIC should
have an initial aggregate tax basis in its assets equal to the aggregate fair
market value of the regular interests and the residual interests on the Startup
Day (generally, the day that the interests are issued). That aggregate basis
will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Code apply to loans of individuals originated on
or after March 2, 1984, and the market discount provisions apply to loans
originated after July 18, 1984. Subject to possible application of the de
minimis rules, the method of accrual by the REMIC of OID income on such loans
will be equivalent to the method under which holders of Pay-Through Securities
accrue original issue discount (i.e., under the constant yield method taking
into account the Prepayment Assumption). The REMIC will deduct OID on the
Regular Interest Securities in the same manner that the holders of the Regular
Interest Securities include such discount in income, but without regard to the
de minimis rules. See 'Taxation of Debt Securities' above. However, a REMIC that
acquires loans at a market discount must include such market discount in income
currently, as it accrues, on a constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (taking into account the Prepayment Assumption) on a constant yield
method. Although the law is somewhat unclear regarding recovery of premium
attributable to loans originated on or before such date, it is possible that
such premium may be recovered in proportion to payments of loan principal.
Prohibited Transactions and Contributions Tax. The REMIC will be subject
to a 100% tax on any net income derived from a 'prohibited transaction.' For
this purpose, net income will be calculated without taking into account any
losses from prohibited transactions or any deductions attributable to any
prohibited transaction that resulted in a loss. In general, prohibited
transactions include: (i) subject to limited exceptions, the sale or other
disposition of any qualified mortgage transferred to the REMIC; (ii) subject to
a limited exception, the sale or other disposition of a cash flow investment;
(iii) the receipt of any income from assets not permitted to be held by the
REMIC pursuant to the Code; or (iv) the receipt of any fees or other
compensation for services rendered by the REMIC. It is anticipated that a REMIC
will not engage in any prohibited transactions in which it would recognize a
material amount of net income. In addition, subject to a number of exceptions, a
tax is imposed at the rate of 100% on amounts contributed to a REMIC after the
close of the three-month period beginning on the Startup Day. The holders of
Residual Interest Securities will generally be responsible for the payment of
any such taxes imposed on the REMIC. To the extent not paid by such holders or
otherwise, however, such taxes will be paid out of the Trust Fund and will be
allocated pro rata to all outstanding Classes of Securities of such REMIC.
TAXATION OF HOLDERS OF RESIDUAL INTEREST SECURITIES
The holder of a Certificate representing a residual interest (a 'Residual
Interest Security') will take into account the 'daily portion' of the taxable
income or net loss of the REMIC for each day during the taxable year on which
such holder held the Residual Interest Security. The daily portion is determined
by allocating to each day in any calendar quarter its ratable portion of the
taxable income or net loss of the REMIC for such quarter,
53
<PAGE>
and by allocating that amount among the holders (on such day) of the Residual
Interest Securities in proportion to their respective holdings on such day.
The holder of a Residual Interest Security must report its proportionate
share of the taxable income of the REMIC whether or not it receives cash
distributions from the REMIC attributable to such income or loss. The reporting
of taxable income without corresponding distributions could occur, for example,
in certain REMIC issues in which the loans held by the REMIC were issued or
acquired at a discount, since mortgage prepayments cause recognition of discount
income, while the corresponding portion of the prepayment could be used in whole
or in part to make principal payments on REMIC Regular Interests issued without
any discount or at an insubstantial discount. (If this occurs, it is likely that
cash distributions will exceed taxable income in later years.) Taxable income
may also be greater in earlier years of certain REMIC issues as a result of the
fact that interest expense deductions, as a percentage of outstanding principal
on REMIC Regular Interest Securities, will typically increase over time as lower
yielding Securities are paid, whereas interest income with respect to loans will
generally remain constant over time as a percentage of loan principal.
In any event, because the holder of a residual interest is taxed on the net
income of the REMIC, the taxable income derived from a Residual Interest
Security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of such a bond or
instrument.
Limitation on Losses. The amount of the REMIC's net loss that a holder may
take into account currently is limited to the holder's adjusted basis at the end
of the calendar quarter in which such loss arises. A holder's basis in a
Residual Interest Security will initially equal such holder's purchase price,
and will subsequently be increased by the amount of the REMIC's taxable income
allocated to the holder, and decreased (but not below zero) by the amount of
distributions made and the amount of the REMIC's net loss allocated to the
holder. Any disallowed loss may be carried forward indefinitely, but may be used
only to offset income of the REMIC generated by the same REMIC. The ability of
holders of Residual Interest Securities to deduct net losses may be subject to
additional limitations under the Code, as to which such holders should consult
their tax advisers.
Distributions. Distributions on a Residual Interest Security (whether at
their scheduled times or as a result of prepayments) will generally not result
in any additional taxable income or loss to a holder of a Residual Interest
Security. If the amount of such payment exceeds a holder's adjusted basis in the
Residual Interest Security, however, the holder will recognize gain (treated as
gain from the sale of the Residual Interest Security) to the extent of such
excess.
Sale or Exchange. A holder of a Residual Interest Security will recognize
gain or loss on the sale or exchange of a Residual Interest Security equal to
the difference, if any, between the amount realized and such holder's adjusted
basis in the Residual Interest Security at the time of such sale or exchange.
Except to the extent provided in regulations, which have not yet been issued,
any loss upon disposition of a Residual Interest Security will be disallowed if
the selling holder acquires any residual interest in a REMIC or similar mortgage
pool within six months before or after such disposition.
Excess Inclusions. The portion of the REMIC taxable income of a holder of
a Residual Interest Security consisting of 'excess inclusion' income may not be
offset by other deductions or losses, including net operating losses, on such
holder's federal income tax return. Further, if the holder of a Residual
Interest Security is an organization subject to the tax on unrelated business
income imposed by Code Section 511, such holder's excess inclusion income will
be treated as unrelated business taxable income of such holder. In addition,
under Treasury regulations yet to be issued, if a real estate investment trust,
a regulated investment company, a common trust fund, or certain cooperatives
were to own a Residual Interest Security, a portion of dividends (or other
distributions) paid by the real estate investment trust (or other entity) would
be treated as excess inclusion income. If a Residual Security is owned by a
foreign person excess inclusion income is subject to tax at a rate of 30% which
may not be reduced by treaty, is not eligible for treatment as 'portfolio
interest' and is subject to certain additional limitations. See 'Tax Treatment
of Foreign Investors.'
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
54
<PAGE>
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.
Furthermore, the Small Business Job Protection Act of 1996, as part of the
repeal of the bad debt reserve method for thrift savings associations, repealed
the application of Code section 593(d) to any taxable year beginning after
December 31, 1995.
The excess inclusion portion of a REMIC's income is generally equal to the
excess, if any, of REMIC taxable income for the quarterly period allocable to a
Residual Interest Security, over the daily accruals for such quarterly period of
(i) 120% of the long term applicable federal rate on the Startup Date multiplied
by (ii) the adjusted issue price of such Residual Interest Security at the
beginning of such quarterly period. The adjusted issue price of a Residual
Interest at the beginning of each calendar quarter will equal its issue price
(calculated in a manner analogous to the determination of the issue price of a
Regular Interest), increased by the aggregate of the daily accruals for prior
calendar quarters, and decreased (but not below zero) by the amount of loss
allocated to a holder and the amount of distributions made on the Residual
Interest Security before the beginning of the quarter. The long-term federal
rate, which is announced monthly by the Treasury Department, is an interest rate
that is based on the average market yield of outstanding marketable obligations
of the United States government having remaining maturities in excess of nine
years.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Securities may be disregarded. See '--Restrictions on Ownership and
Transfer of Residual Interest Securities' and '--Tax Treatment of Foreign
Investors' below.
Restrictions on Ownership and Transfer of Residual Interest Securities.
As a condition to qualification as a REMIC, reasonable arrangements must be
made to prevent the ownership of a REMIC residual interest by any 'Disqualified
Organization.' Disqualified Organizations include the United States, any State
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of any of the foregoing, a rural
electric or telephone cooperative described in Section 1381(a)(2)(C) of the
Code, or any entity exempt from the tax imposed by Sections 1-1399 of the Code,
if such entity is not subject to tax on its unrelated business income.
Accordingly, the applicable Pooling and Servicing Agreement will prohibit
Disqualified Organizations from owning a Residual Interest Security. In
addition, no transfer of a Residual Interest Security will be permitted unless
the proposed transferee shall have furnished to the Trustee an affidavit
representing and warranting that it is neither a Disqualified Organization nor
an agent or nominee acting on behalf of a Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization after March 31, 1988 (in violation of the restrictions set forth
above), a substantial tax will be imposed on the transferor of such Residual
Interest Security at the time of the transfer. In addition, if a Disqualified
Organization holds an interest in a pass-through entity after March 31, 1988
(including, among others, a partnership, trust, real estate investment trust,
regulated investment company, or any person holding as nominee), that owns a
Residual Interest Security, the pass-through entity will be required to pay an
annual tax on its allocable share of the excess inclusion income of the REMIC.
Under the REMIC Regulations, if a Residual Interest Security is a
'noneconomic residual interest,' as described below, a transfer of a Residual
Interest Security to a United States person will be disregarded for all Federal
tax purposes unless no significant purpose of the transfer was to impede the
assessment or collection of tax. A Residual Interest Security is a 'noneconomic
residual interest' unless, at the time of the transfer (i) the
55
<PAGE>
present value of the expected future distributions on the Residual Interest
Security at least equals the product of the present value of the anticipated
excess inclusions and the highest rate of tax 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 the taxes
accrue on the anticipated excess inclusions in an amount sufficient to satisfy
the accrued taxes. If a transfer of a Residual Interest is disregarded, the
transferor would be liable for any Federal income tax imposed upon taxable
income derived by the transferee from the REMIC. The REMIC Regulations provide
no guidance as to how to determine if a significant purpose of a transfer is to
impede the assessment or collection of tax. A similar type of limitation exists
with respect to certain transfers of residual interests by foreign persons to
United States persons. See '--Tax Treatment of Foreign Investors.'
Mark to Market Rules. Prospective purchasers of a REMIC Residual Interest
Security should be aware that the Internal Revenue Service recently finalized
regulations which provide that a Residential Interest acquired after January 3,
1995 cannot be marked-to-market.
ADMINISTRATIVE MATTERS
The REMIC's books must be maintained on a calendar year basis and the REMIC
must file an annual federal income tax return. The REMIC will also be subject to
the procedural and administrative rules of the Code applicable to partnerships,
including the determination of any adjustments to, among other things, items of
REMIC income, gain, loss, deduction, or credit, by the Internal Revenue Service
in a unified administrative proceeding.
TAX STATUS AS A GRANTOR TRUST
General. As specified in the related Prospectus Supplement if a REMIC or
partnership election is not made, in the opinion of Brown & Wood LLP, special
counsel to the Depositor, the Trust Fund relating to a Series of Securities will
be classified for federal income tax purposes as a grantor trust under Subpart
E, Part 1 of Subchapter J of the Code and not as an association taxable as a
corporation (the Securities of such Series, 'Pass-Through Securities'). In some
Series there will be no separation of the principal and interest payments on the
Contracts. In such circumstances, a Holder will be considered to have purchased
a pro rata undivided interest in each of the Contracts. In other cases
('Stripped Securities'), sale of the Securities will produce a separation in the
ownership of all or a portion of the principal payments from all or a portion of
the interest payments on the Contracts.
Each Holder must report on its federal income tax return its share of the
gross income derived from the Contracts (not reduced by the amount payable as
fees to the Trustee and the Servicer and similar fees (collectively, the
'Servicing Fee')), at the same time and in the same manner as such items would
have been reported under the Holder's tax accounting method had it held its
interest in the Contracts directly, received directly its share of the amounts
received with respect to the Contracts, and paid directly its share of the
Servicing Fees. In the case of Pass-Through Securities other than Stripped
Securities, such income will consist of a pro rata share of all of the income
derived from all of the Contracts and, in the case of Stripped Securities, such
income will consist of a pro rata share of the income derived from each stripped
bond or stripped coupon in which the Holder owns an interest. The holder of a
Security will generally be entitled to deduct such Servicing Fees under Section
162 or Section 212 of the Code to the extent that such Servicing Fees represent
'reasonable' compensation for the services rendered by the Trustee and the
Servicer (or third parties that are compensated for the performance of
services). In the case of a noncorporate holder, however, Servicing Fees (to the
extent not otherwise disallowed, e.g., because they exceed reasonable
compensation) will be deductible in computing such holder's regular tax
liability only to the extent that such fees, when added to other miscellaneous
itemized deductions, exceed 2% of adjusted gross income and may not be
deductible to any extent in computing such holder's alternative minimum tax
liability. In addition, for taxable years beginning after December 31, 1990, the
amount of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds the applicable amount (which
amount will be adjusted for inflation in taxable years beginning after 1990)
will be reduced by the lesser of (i) 3% of the excess of adjusted gross income
over the applicable amount or (ii) 80% of the amount of itemized deductions
otherwise allowable for such taxable year.
56
<PAGE>
Discount or Premium on Pass-Through Securities. The holder's purchase
price of a Pass-Through Security is to be allocated among the Contracts in
proportion to their fair market values, determined as of the time of purchase of
the Securities. In the typical case, the Trustee (to the extent necessary to
fulfill its reporting obligations) will treat each Contract as having a fair
market value proportional to the share of the aggregate principal balances of
all of the Contracts that it represents, since the Securities, unless otherwise
specified in the applicable Prospectus Supplement, will have a relatively
uniform interest rate and other common characteristics. To the extent that the
portion of the purchase price of a Pass-Through Security allocated to a Contract
(other than to a right to receive any accrued interest thereon and any
undistributed principal payments) is less than or greater than the portion of
the principal balance of the Contract allocable to the Security, the interest in
the Contract allocable to the Pass-Through Security will be deemed to have been
acquired at a discount or premium, respectively.
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a Contract with OID in excess
of a prescribed de minimis amount or a Stripped Security, a holder of a Security
will be required to report as interest income in each taxable year its share of
the amount of OID that accrues during that year in the manner described above.
OID with respect to a Contract could arise, for example, by virtue of the
financing of points by the originator of the Loan, or by virtue of the charging
of points by the originator of the Contract in an amount greater than a
statutory de minimis exception, in circumstances under which the points are not
currently deductible pursuant to applicable Code provisions. Any market discount
or premium on a Contract will be includible in income, generally in the manner
described above, except that in the case of Pass-Through Securities, market
discount is calculated with respect to the Contracts underlying the Certificate,
rather than with respect to the Security. A Holder that acquires an interest in
a Contract originated after July 18, 1984 with more than a de minimis amount of
market discount (generally, the excess of the principal amount of the Contract
over the purchaser's allocable purchase price) will be required to include
accrued market discount in income in the manner set forth above. See '--Taxation
of Debt Securities; Market Discount' and '--Premium' above.
In the case of market discount on a Pass-Through Security attributable to
Contracts originated on or before July 18, 1984, the holder generally will be
required to allocate the portion of such discount that is allocable to a loan
among the principal payments on the Contract and to include the discount
allocable to each principal payment in ordinary income at the time such
principal payment is made. Such treatment would generally result in discount
being included in income at a slower rate than discount would be required to be
included in income using the method described in the preceding paragraph.
Stripped Securities. A Stripped Security may represent a right to receive
only a portion of the interest payments on the Contracts, a right to receive
only principal payments on the Contracts, or a right to receive certain payments
of both interest and principal. Certain Stripped Securities ('Ratio Strip
Securities') may represent a right to receive differing percentages of both the
interest and principal on each Contract. Pursuant to Section 1286 of the Code,
the separation of ownership of the right to receive some or all of the interest
payments on an obligation from ownership of the right to receive some or all of
the principal payments results in the creation of 'stripped bonds' with respect
to principal payments and 'stripped coupons' with respect to interest payments.
Section 1286 of the Code applies the OID rules to stripped bonds and stripped
coupons. For purposes of computing original issue discount, a stripped bond or a
stripped coupon is treated as a debt instrument issued on the date that such
stripped interest is purchased with an issue price equal to its purchase price
or, if more than one stripped interest is purchased, the ratable share of the
purchase price allocable to such stripped interest.
Servicing fees in excess of reasonable servicing fees ('excess servicing')
will be treated under the stripped bond rules. If the excess servicing fee is
less than 100 basis points (i.e. 1% interest on the Contract principal balance)
or the Securities are initially sold with a de minimis discount (assuming no
prepayment assumption is required), any non-de minimis discount arising from a
subsequent transfer of the Securities should be treated as market discount. The
IRS appears to require that reasonable servicing fees be calculated on a
Contract by Contract basis, which could result in some Contracts being treated
as having more than 100 basis points of interest stripped off.
The Code, OID Regulations and judicial decisions provide no direct guidance
as to how the interest and original issue discount rules are to apply to
Stripped Securities and other Pass-Through Securities. Under the
57
<PAGE>
method described above for Pay-Through Securities (the 'Cash Flow Bond Method'),
a prepayment assumption is used and periodic recalculations are made which take
into account with respect to each accrual period the effect of prepayments
during such period. However, the 1986 Act does not, absent Treasury regulations,
appear specifically to cover instruments such as the Stripped Securities which
technically represent ownership interests in the Underlying Contracts, rather
than being debt instruments 'secured by' those loans. Nevertheless, it is
believed that the Cash Flow Bond Method is a reasonable method of reporting
income for such Securities, and it is expected that OID will be reported on that
basis unless otherwise specified in the related Prospectus Supplement. In
applying the calculation to Pass-Through Securities, the Trustee will treat all
payments to be received by a holder with respect to the underlying Contracts as
payments on a single installment obligation. The Internal Revenue Service could,
however, assert that original issue discount must be calculated separately for
each Contract underlying a Security.
Under certain circumstances, if the Contracts prepay at a rate faster than
the Prepayment Assumption, the use of the Cash Flow Bond Method may accelerate a
Holder's recognition of income. If, however, the Contracts prepay at a rate
slower than the Prepayment Assumption, in some circumstances the use of this
method may decelerate a Holder's recognition of income.
In the case of a Stripped Security that is an Interest Weighted Security,
the Trustee intends, absent contrary authority, to report income to Security
holders as OID, in the manner described above for Interest Weighted Securities.
Possible Alternative Characterizations. The characterizations of the
Stripped Securities described above are not the only possible interpretations of
the applicable Code provisions. Among other possibilities, the Internal Revenue
Service could contend that (i) in certain Series, each non-Interest Weighted
Security is composed of an unstripped undivided ownership interest in Contracts
and an installment obligation consisting of stripped principal payments; (ii)
the non-Interest Weighted Securities are subject to the contingent payment
provisions of the Proposed Regulations; or (iii) each Interest Weighted Stripped
Security is composed of an unstripped undivided ownership interest in Contracts
and an installment obligation consisting of stripped interest payments.
Given the variety of alternatives for treatment of the Stripped Securities
and the different federal income tax consequences that result from each
alternative, potential purchasers are urged to consult their own tax advisers
regarding the proper treatment of the Securities for federal income tax
purposes.
Character as Qualifying Contracts. In the case of Stripped Securities
there is no specific legal authority existing regarding whether the character of
the Securities, for federal income tax purposes, will be the same as the
Contracts. The IRS could take the position that the Contracts' character is not
carried over to the Securities in such circumstances. Pass-Through Securities
will be, and, although the matter is not free from doubt, Stripped Securities
should be considered to represent 'real estate assets' within the meaning of
Section 856(4)(A) of the Code, and 'loans secured by an interest in real
property' within the meaning of Section 7701(a)(19)(C)(v) of the Code; and
interest income attributable to the Securities should be considered to represent
'interest on obligations secured by mortgages on real property or on interests
in real property' with the meaning of Section 856(c)(3)(B) of the Code. Reserves
or funds underlying the Securities may cause a proportionate reduction in the
above-described qualifying status categories of Securities.
SALE OR EXCHANGE
Subject to the discussion below with respect to Trust Funds as to which a
partnership election is made, a Holder's tax basis in its Security is the price
such holder pays for a Security, plus amounts of original issue or market
discount included in income and reduced by any payments received (other than
qualified stated interest payments) and any amortized premium. Gain or loss
recognized on a sale, exchange, or redemption of a Security, measured by the
difference between the amount realized and the Security's basis as so adjusted,
will generally be capital gain or loss, assuming that the Security is held as a
capital asset. In the case of a Security held by a bank, thrift, or similar
institution described in Section 582 of the Code, however, gain or loss realized
on the sale or exchange of a Regular Interest Security will be taxable as
ordinary income or loss. In addition, gain from the disposition of a Regular
Interest Security that might otherwise be capital gain will be treated as
ordinary income to the extent of the excess, if any, of (i) the amount that
would have been includible in the holder's income if the yield on such Regular
Interest Security had equaled 110% of the applicable federal rate as of the
beginning of
58
<PAGE>
such holder's holding period, over the amount of ordinary income actually
recognized by the holder with respect to such Regular Interest Security. 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.
MISCELLANEOUS TAX ASPECTS
Backup Withholding. Subject to the discussion below with respect to Trust
Funds as to which a partnership election is made, a Holder, other than a holder
of a REMIC Residual Security, may, under certain circumstances, be subject to
'backup withholding' at a rate of 31% with respect to distributions or the
proceeds of a sale of certificates to or through brokers that represent interest
or original issue discount on the Securities. This withholding generally applies
if the holder of a Security (i) fails to furnish the Trustee with its taxpayer
identification number ('TIN'); (ii) furnishes the Trustee an incorrect TIN;
(iii) fails to report properly interest, dividends or other 'reportable
payments' as defined in the Code; or (iv) under certain circumstances, fails to
provide the Trustee or such holder's securities broker with a certified
statement, signed under penalty of perjury, that the TIN provided is its correct
number and that the holder is not subject to backup withholding. Backup
withholding will not apply, however, with respect to certain payments made to
Holders, including payments to certain exempt recipients (such as exempt
organizations) and to certain Nonresidents (as defined below). On October 6,
1997, the Treasury Department issued new regulations (the 'New Regulations')
which make certain modifications to the backup withholding and information
reporting rules described above. The New Regulations will generally be effective
for payments made after December 31, 1998, subject to certain transition rules.
Holders should consult their tax advisers as to their current qualification for
exemption from backup withholding and the procedure for obtaining the exemption,
as well as any future changes as a result of the New Regulations.
The Trustee will report to the Holders and to the Servicer for each
calendar year the amount of any 'reportable payments' during such year and the
amount of tax withheld, if any, with respect to payments on the Securities.
TAX TREATMENT OF FOREIGN INVESTORS
Subject to the discussion below with respect to Trust Funds as to which a
partnership election is made, under the Code, unless interest (including OID)
paid on a Security (other than a Residual Interest Security) is considered to be
'effectively connected' with a trade or business conducted in the United States
by a nonresident alien individual, foreign partnership or foreign corporation
('Nonresidents'), such interest will normally qualify as portfolio interest
(except where (i) the recipient is a holder, directly or by attribution, of 10%
or more of the capital or profits interest in the issuer, or (ii) the recipient
is a controlled foreign corporation to which the issuer is a related person) and
will be exempt from federal income tax. Upon receipt of appropriate ownership
statements, the issuer normally will be relieved of obligations to withhold tax
from such interest payments. These provisions supersede the generally applicable
provisions of United States law that would otherwise require the issuer to
withhold at a 30% rate (unless such rate were reduced or eliminated by an
applicable tax treaty) on, among other things, interest and other fixed or
determinable, annual or periodic income paid to Nonresidents. Holders of
Pass-Through Securities and Stripped Securities, including Ratio Strip
Securities, however, may be subject to withholding to the extent that the
Contracts were originated on or before July 18, 1984.
Interest and OID of Holders who are foreign persons are not subject to
withholding if they are effectively connected with a United States business
conducted by the Holder. They will, however, generally be subject to the regular
United States income tax.
Payments to holders of Residual Interest Securities who are foreign persons
will generally be treated as interest for purposes of the 30% (or lower treaty
rate) United States withholding tax. Holders should assume that such income does
not qualify for exemption from United States withholding tax as 'portfolio
interest.' It is clear that, to the extent that a payment represents a portion
of REMIC taxable income that constitutes excess inclusion income, a holder of a
Residual Interest Security will not be entitled to an exemption from or
reduction of the 30%
59
<PAGE>
(or lower treaty rate) withholding tax rule. If the payments are subject to
United States withholding tax, they generally will be taken into account for
withholding tax purposes only when paid or distributed (or when the Residual
Interest Security is disposed of). The Treasury has statutory authority,
however, to promulgate regulations which would require such amounts to be taken
into account at an earlier time in order to prevent the avoidance of tax. Such
regulations could, for example, require withholding prior to the distribution of
cash in the case of Residual Interest Securities that do not have significant
value. Under the REMIC Regulations, if a Residual Interest Security has tax
avoidance potential, a transfer of a Residual Interest Security to a Nonresident
will be disregarded for all Federal tax purposes. A Residual Interest Security
has tax avoidance potential unless, at the time of the transfer the transferor
reasonably expects that the REMIC will distribute to the transferee residual
interest holder amounts that will equal at least 30% of each excess inclusion,
and that such amounts will be distributed at or after the time at which the
excess inclusions accrue and not later than the calendar year following the
calendar year of accrual. If a Nonresident transfers a Residual Interest
Security to a United States person, and if the transfer has the effect of
allowing the transferor to avoid tax on accrued excess inclusions, then the
transfer is disregarded and the transferor continues to be treated as the owner
of the Residual Interest Security for purposes of the withholding tax provisions
of the Code. See '--Excess Inclusions.'
TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP
Brown & Wood LLP, special counsel to the Depositor, will deliver its
opinion that a Trust Fund for which a partnership election is made will not be
an association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion will be based on the assumption that
the terms of the Trust Agreement and related documents will be complied with,
and on counsel's conclusions that (1) the Trust Fund will not have certain
characteristics necessary for a business trust to be classified as an
association taxable as a corporation and (2) the nature of the income of the
Trust Fund will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations or the issuance of the Certificates has
been structured as a private placement under an IRS safe harbor, so that the
Trust Fund will not be characterized as a publicly traded partnership taxable as
a corporation.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, the Trust Fund would be subject to corporate income tax on its taxable
income. The Trust Fund's taxable income would include all its income, possibly
reduced by its interest expense on the Notes. Any such corporate income tax
could materially reduce cash available to make payments on the Notes and
distributions on the Certificates, and Certificateholders could be liable for
any such tax that is unpaid by the Trust Fund.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. The Trust Fund will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. Special counsel to the Depositor will, except
as otherwise provided in the related Prospectus Supplement, advise the Depositor
that the Notes will be classified as debt for federal income tax purposes. The
discussion below assumes this characterization of the Notes is correct.
OID, Indexed Securities, etc. The discussion below assumes that all
payments on the Notes are denominated in U.S. dollars, and that the Notes are
not Indexed Securities or Strip Notes. Moreover, the discussion assumes that the
interest formula for the Notes meets the requirements for 'qualified stated
interest' under the OID regulations, and that any OID on the Notes (i.e., any
excess of the principal amount of the Notes over their issue price) does not
exceed a de minimis amount (i.e., 0.25% of their principal amount multiplied by
the number of full years included in their term), all within the meaning of the
OID regulations. If these conditions are not satisfied with respect to any given
series of Notes, additional tax considerations with respect to such Notes will
be disclosed in the applicable Prospectus Supplement.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, the Notes will not be considered issued
with OID. The stated interest thereon will be taxable to a Noteholder as
ordinary interest income when received or accrued in accordance with such
Noteholder's method of tax accounting. Under the OID regulations, a holder of a
Note issued with a de minimis amount of OID must include such OID in income, on
a pro rata basis, as principal payments are made on the Note. It is believed
that
60
<PAGE>
any prepayment premium paid as a result of a mandatory redemption will be
taxable as contingent interest when it becomes fixed and unconditionally
payable. A purchaser who buys a Note for more or less than its principal amount
will generally be subject, respectively, to the premium amortization or market
discount rules of the Code.
A holder of a Note that has a fixed maturity date of not more than one year
from the issue date of such Note (a 'Short-Term Note') may be subject to special
rules. An accrual basis holder of a Short-Term Note (and certain cash method
holders, including regulated investment companies, as set forth in Section 1281
of the Code) generally would be required to report interest income as interest
accrues on a straight-line basis over the term of each interest period. Other
cash basis holders of a Short-Term Note would, in general, be required to report
interest income as interest is paid (or, if earlier, upon the taxable
disposition of the Short-Term Note). However, a cash basis holder of a
Short-Term Note reporting interest income as it is paid may be required to defer
a portion of any interest expense otherwise deductible on indebtedness incurred
to purchase or carry the Short-Term Note until the taxable disposition of the
Short-Term Note. A cash basis taxpayer may elect under Section 1281 of the Code
to accrue interest income on all nongovernment debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
Short-Term Note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
Sale or Other Disposition. If a Noteholder sells a Note, the holder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the holder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder will equal the holder's
cost for the Note, increased by any market discount, acquisition discount, OID
and gain previously included by such Noteholder in income with respect to the
Note and decreased by the amount of bond premium (if any) previously amortized
and by the amount of principal payments previously received by such Noteholder
with respect to such Note. Any such gain or loss will be capital gain or loss if
the Note was held as a capital asset, except for gain representing accrued
interest and accrued market discount not previously included in income. Capital
losses generally may be used only to offset capital gains.
Foreign Holders. Interest payments made (or accrued) to a Noteholder who
is a nonresident alien, foreign corporation or other non-United States person (a
'foreign person') generally will be considered 'portfolio interest', and
generally will not be subject to United States federal income tax and
withholding tax, if the interest is not effectively connected with the conduct
of a trade or business within the United States by the foreign person and the
foreign person (i) is not actually or constructively a '10 percent shareholder'
of the Trust or the Seller (including a holder of 10% of the outstanding
Certificates) or a 'controlled foreign corporation' with respect to which the
Trust or the Seller is a 'related person' within the meaning of the Code and
(ii) provides the Owner Trustee or other person who is otherwise required to
withhold U.S. tax with respect to the Notes with an appropriate statement (on
Form W-8 or a similar form), signed under penalties of perjury, certifying that
the beneficial owner of the Note is a foreign person and providing the foreign
person's name and address. If a Note is held through a securities clearing
organization or certain other financial institutions, the organization or
institution may provide the relevant signed statement to the withholding agent;
in that case, however, the signed statement must be accompanied by a Form W-8 or
substitute form provided by the foreign person that owns the Note. If such
interest is not portfolio interest, then it will be subject to United States
federal income and withholding tax at a rate of 30 percent, unless reduced or
eliminated pursuant to an applicable tax treaty. On October 6, 1997, the
Treasury Department issued new regulations (the 'New Regulations') which make
certain modifications to the withholding and information reporting rules
described above. The New Regulations will generally be effective for payments
made after December 31, 1998, subject to certain transition rules. Prospective
investors are urged to consult their own tax advisors regarding the New
Regulations.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
Backup Withholding. Each holder of a Note (other than an exempt holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien
61
<PAGE>
who provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate containing the holder's name,
address, correct federal taxpayer identification number and a statement that the
holder is not subject to backup withholding. Should a nonexempt Noteholder fail
to provide the required certification, the Trust Fund will be required to
withhold 31 percent of the amount otherwise payable to the holder, and remit the
withheld amount to the IRS as a credit against the holder's federal income tax
liability.
The New Regulations described above also make certain modifications to the
backup withholding and information reporting rules. The New Regulations will
generally be effective for payments made after December 31, 1998, subject to
certain transition rules. Prospective investors are urged to consult their own
tax advisors regarding the New Regulations.
Possible Alternative Treatments of the Notes. If, contrary to the opinion
of special counsel to the Company, the IRS successfully asserted that one or
more of the Notes did not represent debt for federal income tax purposes, the
Notes might be treated as equity interests in the Trust Fund. If so treated, the
Trust Fund might be taxable as a corporation with the adverse consequences
described above (and the taxable corporation would not be able to reduce its
taxable income by deductions for interest expense on Notes recharacterized as
equity). Alternatively, and most likely in the view of special counsel to the
Depositor, the Trust Fund might be treated as a publicly traded partnership that
would not be taxable as a corporation because it would meet certain qualifying
income tests. Nonetheless, treatment of the Notes as equity interests in such a
publicly traded partnership could have adverse tax consequences to certain
holders. For example, income to certain tax-exempt entities (including pension
funds) would be 'unrelated business taxable income', income to foreign holders
generally would be subject to U.S. tax and U.S. tax return filing and
withholding requirements, and individual holders might be subject to certain
limitations on their ability to deduct their share of the Trust Fund's expenses.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
Treatment of the Trust Fund as a Partnership. The Trust Fund and the
Servicer will agree, and the Certificateholders will agree by their purchase of
Certificates, to treat the Trust Fund as a partnership for purposes of federal
and state income tax, franchise tax and any other tax measured in whole or in
part by income, with the assets of the partnership being the assets held by the
Trust Fund, the partners of the partnership being the Certificateholders, and
the Notes being debt of the partnership. However, the proper characterization of
the arrangement involving the Trust Fund, the Certificates, the Notes, the Trust
Fund and the Servicer is not clear because there is no authority on transactions
closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all
payments on the Certificates are denominated in U.S. dollars, none of the
Certificates are Indexed Securities or Strip Certificates, and that a Series of
Securities includes a single class of Certificates. If these conditions are not
satisfied with respect to any given Series of Certificates, additional tax
considerations with respect to such Certificates will be disclosed in the
applicable Prospectus Supplement.
Partnership Taxation. As a partnership, the Trust Fund will not be subject
to federal income tax. Rather, each Certificateholder will be required to
separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust Fund. The Trust Fund's income will
consist primarily of interest and finance charges earned on the Contracts
(including appropriate adjustments for market discount, OID and bond premium)
and any gain upon collection or disposition of Contracts. The Trust Fund's
deductions will consist primarily of interest accruing with respect to the
Notes, servicing and other fees, and losses or deductions upon collection or
disposition of Contracts.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). The Trust Agreement will provide, in
general, that the Certificateholders will be allocated taxable income of the
Trust Fund
62
<PAGE>
for each month equal to the sum of (i) the interest that accrues on the
Certificates in accordance with their terms for such month, including interest
accruing at the Pass Through Rate for such month and interest on amounts
previously due on the Certificates but not yet distributed; (ii) any Trust Fund
income attributable to discount on the Contracts that corresponds to any excess
of the principal amount of the Certificates over their initial issue price;
(iii) prepayment premium payable to the Certificateholders for such month; and
(iv) any other amounts of income payable to the Certificateholders for such
month. Such allocation will be reduced by any amortization by the Trust Fund of
premium on Contracts that corresponds to any excess of the issue price of
Certificates over their principal amount. All remaining taxable income of the
Trust Fund will be allocated to the Company. Based on the economic arrangement
of the parties, this approach for allocating Trust Fund income should be
permissible under applicable Treasury regulations, although no assurance can be
given that the IRS would not require a greater amount of income to be allocated
to Certificateholders. Moreover, even under the foregoing method of allocation,
Certificateholders may be allocated income equal to the entire Pass Through Rate
plus the other items described above even though the Trust Fund might not have
sufficient cash to make current cash distributions of such amount. Thus, cash
basis holders will in effect be required to report income from the Certificates
on the accrual basis and Certificateholders may become liable for taxes on Trust
Fund income even if they have not received cash from the Trust Fund to pay such
taxes. In addition, because tax allocations and tax reporting will be done on a
uniform basis for all Certificateholders but Certificateholders may be
purchasing Certificates at different times and at different prices,
Certificateholders may be required to report on their tax returns taxable income
that is greater or less than the amount reported to them by the Trust Fund.
All of the taxable income allocated to a Certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) will constitute 'unrelated business
taxable income' generally taxable to such a holder under the Code.
An individual taxpayer's share of expenses of the Trust Fund (including
fees to the Servicer but not interest expense) would be miscellaneous itemized
deductions. Such deductions might be disallowed to the individual in whole or in
part and might result in such holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to such holder over the life of
the Trust Fund.
The Trust Fund intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Contract, the Trust
Fund might be required to incur additional expense but it is believed that there
would not be a material adverse effect on Certificateholders.
Discount and Premium. It is believed that the Contracts were not issued
with OID, and, therefore, the Trust should not have OID income. However, the
purchase price paid by the Trust Fund for the Contracts may be greater or less
than the remaining principal balance of the Contracts at the time of purchase.
If so, the Contract will have been acquired at a premium or discount, as the
case may be. (As indicated above, the Trust Fund will make this calculation on
an aggregate basis, but might be required to recompute it on a Contract by
Contract basis.)
If the Trust Fund acquires the Contracts at a market discount or premium,
the Trust Fund will elect to include any such discount in income currently as it
accrues over the life of the Contracts or to offset any such premium against
interest income on the Contracts. As indicated above, a portion of such market
discount income or premium deduction may be allocated to Certificateholders.
Section 708 Termination. Pursuant to final Treasury regulations issued May
9, 1997 under Section 708 of the Code, a sale or exchange of 50 percent or more
of the capital and profits in the Trust Fund within a 12-month period would
cause a deemed contribution of assets of the Trust Fund (the 'old partnership')
to a new partnership (the 'new partnership') in exchange for interests in the
new partnership. Such interests would be deemed distributed to the partners of
the old partnership in liquidation thereof, which would not constitute a sale or
exchange.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
A Certificateholder's tax basis in a Certificate will generally equal the
holder's cost increased by the holder's share of Trust Fund income (includible
in income) and decreased by any distributions received with respect to such
63
<PAGE>
Certificate. In addition, both the tax basis in the Certificates and the amount
realized on a sale of a Certificate would include the holder's share of the
Notes and other liabilities of the Trust Fund. A holder acquiring Certificates
at different prices may be required to maintain a single aggregate adjusted tax
basis in such Certificates, and, upon sale or other disposition of some of the
Certificates, allocate a portion of such aggregate tax basis to the Certificates
sold (rather than maintaining a separate tax basis in each Certificate for
purposes of computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's share of
unrecognized accrued market discount on the Receivables would generally be
treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The Trust Fund does not expect to have any other assets
that would give rise to such special reporting requirements. Thus, to avoid
those special reporting requirements, the Trust Fund will elect to include
market discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the Certificateholders
in proportion to the principal amount of Certificates owned by them as of the
close of the last day of such month. As a result, a holder purchasing
Certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust Fund might be reallocated among the Certificateholders. The Trust
Fund's method of allocation between transferors and transferees may be revised
to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder had.
The tax basis of the Trust Fund's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust Fund were to file an election under
Section 754 of the Code. In order to avoid the administrative complexities that
would be involved in keeping accurate accounting records, as well as potentially
onerous information reporting requirements, the Trust Fund will not make such
election. As a result, Certificateholders might be allocated a greater or lesser
amount of Trust Fund income than would be appropriate based on their own
purchase price for Certificates.
Administrative Matters. The Owner Trustee is required to keep or have kept
complete and accurate books of the Trust Fund. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the Trust will be the calendar year. The Trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
Trust Fund and will report each Certificateholder's allocable share of items of
Trust Fund income and expense to holders and the IRS on Schedule K-1. The Trust
Fund will provide the Schedule K-1 information to nominees that fail to provide
the Trust Fund with the information statement described below and such nominees
will be required to forward such information to the beneficial owners of the
Certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the Trust Fund or be subject to penalties unless
the holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust Fund
with a statement containing certain information on the nominee, the beneficial
owners and the Certificates so held. Such information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (x) the name, address and identification number of such person,
(y) whether such person is a United States person, a tax-exempt entity or a
foreign government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are
64
<PAGE>
required to furnish directly to the Trust Fund information as to themselves and
their ownership of Certificates. A clearing agency registered under Section 17A
of the Exchange Act is not required to furnish any such information statement to
the Trust Fund. The information referred to above for any calendar year must be
furnished to the Trust Fund on or before the following January 31. Nominees,
brokers and financial institutions that fail to provide the Trust Fund with the
information described above may be subject to penalties.
The Company will be designated as the tax matters partner in the related
Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust Fund by the appropriate taxing authorities
could result in an adjustment of the returns of the Certificateholders, and,
under certain circumstances, a Certificateholder may be precluded from
separately litigating a proposed adjustment to the items of the Trust Fund. An
adjustment could also result in an audit of a Certificateholder's returns and
adjustments of items not related to the income and losses of the Trust Fund.
Tax Consequences to Foreign Certificateholders. It is not clear whether
the Trust Fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to non-U.S.
persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the Trust Fund would be engaged in a trade or business in the United States
for such purposes, the Trust Fund will withhold as if it were so engaged in
order to protect the Trust Fund from possible adverse consequences of a failure
to withhold. The Trust Fund expects to withhold on the portion of its taxable
income that is allocable to foreign Certificateholders pursuant to Section 1446
of the Code, as if such income were effectively connected to a U.S. trade or
business, at a rate of 35% for foreign holders that are taxable as corporations
and 39.6% for all other foreign holders. Subsequent adoption of Treasury
regulations or the issuance of other administrative pronouncements may require
the Trust to change its withholding procedures. In determining a holder's
withholding status, the Trust Fund may rely on IRS Form W-8, IRS Form W-9 or the
holder's certification of nonforeign status signed under penalties of perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the branch
profits tax) on its share of the Trust Fund's income. Each foreign holder must
obtain a taxpayer identification number from the IRS and submit that number to
the Trust on Form W-8 in order to assure appropriate crediting of the taxes
withheld. A foreign holder generally would be entitled to file with the IRS a
claim for refund with respect to taxes withheld by the Trust Fund taking the
position that no taxes were due because the Trust Fund was not engaged in a U.S.
trade or business. However, interest payments made (or accrued) to a
Certificateholder who is a foreign person generally will be considered
guaranteed payments to the extent such payments are determined without regard to
the income of the Trust Fund. If these interest payments are properly
characterized as guaranteed payments, then the interest will not be considered
'portfolio interest.' As a result, Certificateholders will be subject to United
States federal income tax and withholding tax at a rate of 30 percent, unless
reduced or eliminated pursuant to an applicable treaty. In such case, a foreign
holder would only be entitled to claim a refund for that portion of the taxes in
excess of the taxes that should be withheld with respect to the guaranteed
payments. On October 6, 1997, the Treasury Department issued new regulations
(the 'New Regulations') which make certain modifications to the withholding and
information reporting rules described above. The New Regulations will generally
be effective for payments made after December 31, 1998, subject to certain
transition rules. Prospective investors are urged to consult their own tax
advisors regarding the New Regulations.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a 'backup' withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code. The New Regulations described above also make
certain modifications to the backup withholding and information reporting rules.
The New Regulations will generally be effective for payments made after December
3, 1998, subject to certain transition rules. Prospective investors are urged to
consult their own tax advisors regarding the New Regulations.
65
<PAGE>
FASIT SECURITIES
General
The FASIT provisions of the Code were enacted by the Small Business Job
Protection Act of 1996 and create a new elective statutory vehicle for the
issuance of mortgage-backed and asset-backed securities. Although the FASIT
provisions of the Code became effective on September 1, 1997, no Treasury
regulations or other administrative guidance has been issued with respect to
those provisions. Accordingly, definitive guidance cannot be provided with
respect to many aspects of the tax treatment of FASIT Securityholders. Investors
also should note that the FASIT discussion contained herein constitutes only a
summary of the federal income tax consequences to holders of FASIT Securities.
With respect to each Series of FASIT Securities, the related Prospectus
Supplement will provide a detailed discussion regarding the federal income tax
consequences associated with the particular transaction.
FASIT Securities will be classified as either FASIT Regular Securities,
which generally will be treated as debt for federal income tax purposes, or
FASIT Ownership Securities, which generally are not treated as debt for such
purposes, but rather as representing rights and responsibilities with respect to
the taxable income or loss of the related Series FASIT. The Prospectus
Supplement for each Series of Securities will indicate whether one or more FASIT
elections will be made for that Series and which Securities of such Series will
be designated as Regular Securities, and which, if any, will be designated as
Ownership Securities.
Qualification as a FASIT
The Trust Fund underlying a Series (or one or more designated pools of
assets held in the Trust Fund) will qualify under the Code as a FASIT in which
the FASIT Regular Securities and the FASIT Ownership Securities will constitute
the 'regular interests' and the 'ownership interests,' respectively, if (i) a
FASIT election is in effect, (ii) certain tests concerning (A) the composition
of the FASIT's assets and (B) the nature of the Securityholders' interests in
the FASIT are met on a continuing basis, and (iii) the Trust Fund is not a
regulated investment company as defined in Section 851(a) of the Code.
Asset Composition
In order for a Trust Fund (or one or more designated pools of assets held
by a Trust Fund) to be eligible for FASIT status, substantially all of the
assets of the Trust Fund (or the designated pool) must consist of 'permitted
assets' as of the close of the third month beginning after the closing date and
at all times thereafter (the 'FASIT Qualification Test'). Permitted assets
include (i) cash or cash equivalents, (ii) debt instruments with fixed terms
that would qualify as REMIC regular interests if issued by a REMIC (generally,
instruments that provide for interest at a fixed rate, a qualifying variable
rate, or a qualifying interest-only ('IO') type rate, (iii) foreclosure
property, (iv) certain hedging instruments (generally, interest and currency
rate swaps and credit enhancement contracts) that are reasonably required to
guarantee or hedge against the FASIT's risks associated with being the obligor
on FASIT interests, (v) contract rights to acquire qualifying debt instruments
or qualifying hedging instruments, (vi) FASIT regular interests, and (vii) REMIC
regular interests. Permitted assets do not include any debt instruments issued
by the holder of the FASIT's ownership interest or by any person related to such
holder.
Interests in a FASIT
In addition to the foregoing asset qualification requirements, the
interests in a FASIT also must meet certain requirements. All of the interests
in a FASIT must belong to either of the following: (i) one or more classes of
regular interests or (ii) a single class of ownership interest that is held by a
fully taxable domestic C corporation. In the case of Series that include FASIT
Ownership Securities, the ownership interest will be represented by the FASIT
Ownership Securities.
A FASIT interest generally qualifies as a regular interest if (i) it is
designated as a regular interest, (ii) it has a stated maturity no greater than
thirty years, (iii) it entitles its holder to a specified principal amount, (iv)
the issue price of the interest does not exceed 125% of its stated principal
amount, (v) the yield to maturity of the interest is less than the applicable
Treasury rate published by the Service plus 5%, and (vi) if it pays interest,
such interest is payable at either (a) a fixed rate with respect to the
principal amount of the regular interest or (b) a
66
<PAGE>
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--Taxation of Debt
Securities--Variable Rate Debt Securities.'
If a FASIT Security fails to meet one or more of the requirements set out
in clauses (iii), (iv), or (v), but otherwise meets the above requirements, it
may still qualify as a type of regular interest known as a 'High-Yield
Interest.' In addition, if a FASIT Security fails to meet the requirement of
clause (vi), but the interest payable on the Security consists of a specified
portion of the interest payments on permitted assets and that portion does not
vary over the life of the Security, the Security also will qualify as a
High-Yield Interest. A High-Yield Interest may be held only by domestic C
corporations that are fully subject to corporate income tax ('Eligible
Corporations'), other FASITs, and dealers in securities who acquire such
interests as inventory, rather than for investment. In addition, holders of
High-Yield Interests are subject to limitations on offset of income derived from
such interest. See 'Federal Income Tax Consequences--FASIT Securities--Tax
Treatment of FASIT Regular Securities--Treatment of High-Yield Interests.'
Consequences of Disqualification
If a Series FASIT fails to comply with one or more of the Code's ongoing
requirements for FASIT status during any taxable year, the Code provides that
its FASIT status may be lost for that year and thereafter. If FASIT status is
lost, the treatment of the former FASIT and the interests therein for federal
income tax purposes is uncertain. The former FASIT might be treated as a grantor
trust, as a separate association taxation 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
General. 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 'Federal Income Tax
Consequences--Taxation of Debt Securities,' '--Market Discount,' and '--Premium'
above. High-Yield Securities may be held only by fully taxable domestic C
corporations, other FASITs, and certain securities dealers. Holders of
High-Yield Securities are subject to limitations on their ability to use current
losses or net operating loss carryforwards or carrybacks to offset any income
derived from those Securities.
If a FASIT Regular Security is sold or exchanged, 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--Sale or Exchange.' In addition, if a FASIT Regular Security
becomes wholly or partially worthless as a result of Default and Delinquencies
on the underlying Assets, the holder of such Security should be allowed to
deduct the loss sustained (or alternatively be able to report a lesser amount of
income). However, the timing and character of such losses in income are
uncertain. See 'Federal Income Tax Consequences-- Taxation of Debt
Instruments--Effects of Default and Delinquencies.'
67
<PAGE>
FASIT Regular Securities held by a REIT will qualify as 'real estate
assets' within the meaning of section 856(c)(5) of the Code, and interest on
such Securities will be considered Qualifying REIT Interest to the same extent
that REMIC Securities would be so considered. 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--Taxation of Debt
Securities--Status as Real Property Loans.' In addition, FASIT Regular
Securities held by a financial institution to which Section 585 of the Code
applies will be treated as evidences of indebtedness for purposes of Section
582(c)(1) of the Code. FASIT Securities will not qualify as 'Government
securities' for either REIT or RIC qualification purposes.
Treatment of High-Yield Interests
High-Yield Interests are subject to special rules regarding the eligibility
of holders of such interests, and the ability of such holders to offset income
derived from their FASIT Security with losses. High-Yield Interests may be held
only by Eligible Corporations, other FASITs, and dealers in securities who
acquire such interests as inventory. If a securities dealer (other than an
Eligible Corporation) initially acquires a High-Yield Interest as inventory, but
later begins to hold it for investment, the dealer will be subject to an excise
tax equal to the income from the High-Yield Interest multiplied by the highest
corporate income tax rate. In addition, transfers of High-Yield Interests to
disqualified holders will be disregarded for federal income tax purposes, and
the transferor still will be treated as the holder of the High-Yield Interest.
The holder of a High-Yield Interest may not use non-FASIT current losses or
net operating loss carryforwards or carrybacks to offset any income derived from
the High-Yield Interest, for either regular federal income tax purposes or for
alternative minimum tax purposes. In addition, the FASIT provisions contain an
anti-abuse rule that imposes corporate income tax on income derived from a FASIT
Regular Security that is held by a pass-through entity (other than another
FASIT) that issues debt or equity securities backed by the FASIT Regular
Security and that have the same features as High-Yield Interests.
Tax Treatment of FASIT Ownership Securities
A FASIT Ownership Security represents the residual equity interest in a
FASIT. As such, the holder of a FASIT Ownership Security determines its taxable
income by taking into account all assets, liabilities, and items of income,
gain, deduction, loss, and credit of a FASIT. In general, the character of the
income to the holder of a FASIT Ownership Interest will be the same as the
character of such income to the FASIT, except that any tax-exempt interest
income taken into account by the holder of a FASIT Ownership Interest is treated
as ordinary income. In determining that taxable income, the holder of a FASIT
Ownership Security must determine the amount of interest, original issue
discount, market discount, and premium recognized with respect to the FASIT's
assets and the FASIT Regular Securities issued by the FASIT according to a
constant yield methodology and under an accrual method of accounting. In
addition, holders of FASIT Ownership Securities are subject to the same
limitations on their ability to use losses to offset income from their FASIT
Security as are the holders of High-Yield Interests. See 'Federal Income Tax
Consequences--FASIT Securities--Tax Treatment of FASIT Regular
Securities--Treatment of High-Yield Interests.'
Rules similar to the wash sale rules applicable to REMIC Residual
Securities also will apply to FASIT Ownership Securities. Accordingly, losses on
dispositions of a FASIT Ownership Security generally will be disallowed where,
within six months before or after the disposition, the seller of such Security
acquires any other FASIT Ownership Security or, in the case of a FASIT holding
mortgage assets, any interest in a Taxable Mortgage Pool, that is economically
comparable to a FASIT Ownership Security. In addition, if any security that is
sold or contributed to a FASIT by the holder of the related FASIT Ownership
Security was required to be marked-to-market under Code section 475 by such
holder, then section 475 will continue to apply to such securities, except that
the amount realized under the mark-to-market rules will be the greater of the
securities' value under present law or the securities' value after applying
special valuation rules contained in the FASIT provisions. Those special
valuation rules generally require that the value of debt instruments that are
not traded on an established securities market be determined by calculating the
present value of the reasonably expected payments under the instrument using a
discount rate of 120% of the applicable Federal rate, compounded semiannually.
68
<PAGE>
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.
Backup Withholding, Reporting and Tax Administration
Holders of FASIT Securities will be subject to backup withholding to the
same extent holders of REMIC Securities would be subject. See 'Certain Federal
Income Tax Consequences--Miscellaneous Tax Aspects-- Backup Withholding.' 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.
DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO
SECURITYHOLDERS AND THE CONSIDERABLE UNCERTAINTY THAT EXISTS WITH RESPECT TO
MANY ASPECTS OF THOSE RULES, POTENTIAL INVESTORS SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE TAX TREATMENT OF THE ACQUISITION, OWNERSHIP, AND
DISPOSITION OF THE SECURITIES.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in 'Certain
Federal Income Tax Considerations,' potential investors should consider the
state and local income tax consequences of the acquisition, ownership, and
disposition of the Securities. State and local income tax law may differ
substantially from the corresponding federal law, and this discussion does not
purport to describe any aspect of the income tax laws of any state or locality.
Therefore, potential investors should consult their own tax advisors with
respect to the various state and local tax consequences of an investment in the
Securities.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ('ERISA')
and the Code impose certain restrictions on employee benefit plans subject to
ERISA and on plans and other arrangements subject to Section 4975 of the Code
('Plans'), and on persons who are parties in interest or disqualified persons
('parties in interest') with respect to such Plans. Certain employee benefit
plans, such as governmental plans and church plans (if no election has been made
under Section 410(d) of the Code), are not subject to the restrictions of ERISA,
and assets of such plans may be invested in the Securities without regard to the
ERISA considerations described below, subject to other applicable federal and
state law. However, any such governmental or church plan which is qualified
under Section 401(a) of the Code and exempt from taxation under Section 501(a)
of the Code is subject to the prohibited transaction rules set forth in Section
503 of the Code.
Investments by Plans are subject to ERISA's general fiduciary requirements,
including the requirement of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan.
Section 406 of ERISA prohibits parties in interest with respect to a Plan
from engaging in certain transactions ('prohibited transactions') involving a
Plan and its assets unless a statutory or administrative exemption applies to
the transaction. Section 4975 of the Code imposes certain excise taxes (or, in
some cases, a civil penalty may be assessed pursuant to Section 502(i) of ERISA)
on parties in interest which engage in non-exempt prohibited transactions.
The United States Department of Labor ('DOL') has issued a final regulation
(29 C.F.R. Section 2510.3-101) containing rules for determining 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 investment in an 'equity
interest' will be deemed for purposes of ERISA to be assets of the Plan unless
certain exceptions apply.
69
<PAGE>
Under the terms of the regulation, the Trust Fund may be deemed to hold
plan assets by reason of a Plan's investment in a Security; such plan assets
would include an undivided interest in the Primary Assets and any other assets
held by the Trust Fund. In such an event, persons providing services with
respect to the assets of the Trust Fund, may be parties in interest, subject to
the fiduciary responsibility provisions of Title I of ERISA, including the
prohibited transaction provisions of Section 406 of ERISA (and of Section 4975
of the Code), with respect to transactions involving such assets unless such
transactions are subject to a statutory or administrative exemption.
One such exception applies if the interest described is treated as
indebtedness under applicable local law and which has no substantial equity
features. Generally, a profits interest in a partnership, an undivided ownership
interest in property and a beneficial ownership interest in a trust are deemed
to be 'equity interests' under the final regulation. If Notes of a particular
Series were deemed to be indebtedness under applicable local law without any
substantial equity features, an investing Plan's assets would include such
Notes, but not, by reason of such purchase, the underlying assets of the Trust
Fund.
Another such exception applies if the class of equity interests in question
is: (i) 'widely held' (held by 100 or more investors who are independent of the
Depositor and each other); (ii) freely transferable; and (iii) sold as part of
an offering pursuant to (A) an effective registration statement under the
Securities Act of 1933, and then subsequently registered under the Securities
Exchange Act of 1934 or (B) an effective registration statement under Section
12(b) or 12(g) of the Securities Exchange Act of 1934 ('Publicly Offered
Securities'). In addition, the regulation provides that if at all times more
than 75% of the value of all classes of equity interests in the Depositor or the
Trust Fund are held by investors other than benefit plan investors (which is
defined as including plans subject to ERISA, government plans and individual
retirement accounts), the investing Plan's assets will not include any of the
underlying assets of the Depositor or the Trust Fund.
An additional exemption may also be available. On February 22, 1991, the
DOL granted to Lehman Brothers an administrative exemption, Prohibited
Transaction Exemption 91-14 (Application No. D-7958, 56 Fed. Reg. 7414) (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 securities 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. These securities should include
the Certificates, and depending upon the particular characteristics of a Series,
may include the Notes. The obligations covered by the Exemption include
obligations such as the Primary Assets (other than Private Securities which are
not insured or guaranteed by the United States or an agency or instrumentality
thereof, or Home Improvement Contracts that are unsecured). The Exemption will
apply to the acquisition, holding and resale of the Securities 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 are
the following:
(i) The acquisition of the Securities by a Plan is on terms (including
the price for the Securities) that are at least as favorable to the Plan as
they would be in an arm's-length transaction with an unrelated party;
(ii) The rights and interests evidenced by the Securities acquired by
the Plan are not subordinated to the rights and interests evidenced by
other securities of the trust;
(iii) The Securities 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 Ratings Group ('Standard &
Poor's'), Moody's Investors Service, Inc. ('Moody's'), Duff & Phelps Inc.
('D&P') or Fitch Investors Service, Inc. ('Fitch');
(iv) The sum of all payments made to the underwriter in connection
with the distribution of the Securities represents not more than reasonable
compensation for underwriting the Securities. The sum of all payments made
to and retained by the seller pursuant to the sale of the obligations to
the trust represents not more than the fair market value of such
obligations. 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 related servicing agreement and reimbursement of the
servicer's reasonable expenses in connection therewith;
70
<PAGE>
(v) The Trustee must not be an affiliate of any other member of the
Restricted Group (as defined below); and
(vi) The Plan investing in the Securities 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.
The trust also must meet the following requirements:
(i) the corpus of the trust must consist solely of assets of the type
which have been included in other investment pools;
(ii) securities in such other investment pools must have been rated in
one of the three highest rating categories of Standard & Poor's, Moody's,
D&P or Fitch for at least one year prior to the Plan's acquisition of
securities; and
(iii) securities evidencing interests in such other investment pools
must have been purchased by investors other than Plans for at least one
year prior to any Plan's acquisition of Securities.
Moreover, the Exemption provides relief from certain self-dealing/conflict
of interest prohibited transactions that may occur when the Plan fiduciary
causes a Plan to acquire securities in a trust in which the fiduciary (or its
affiliate) is an obligor on the receivables held in the trust provided that,
among other requirements: (i) in the case of an acquisition in connection with
the initial issuance of Securities, at least fifty (50) percent of each Class of
Securities in which Plans have invested is acquired by persons independent of
the Restricted Group and at least fifty (50) percent of the aggregate interest
in the trust is acquired by persons independent of the Restricted Group; (ii)
such fiduciary (or its affiliate) is an obligor with respect to five (5) percent
or less of the fair market value of the obligations contained in the trust;
(iii) the Plan's investment in Securities does not exceed twenty-five (25)
percent of all of the Securities outstanding after the acquisition; and (iv) no
more than twenty-five (25) percent of the assets of the Plan are invested in
securities 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, the underwriters of the Securities, the Trustee, the Servicer,
any obligor with respect to obligations included in a Trust Fund constituting
more than five (5) percent of the aggregate unamortized principal balance of the
assets in a Trust Fund, or any affiliate of such parties (the 'Restricted
Group').
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the potential application of the
Exemption to the purchase and holding of the Securities and the potential
consequences to their specific circumstances, prior to making an investment in
the Securities. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment procedure and diversification an
investment in the Securities is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
LEGAL INVESTMENT
Unless otherwise specified in the related Prospectus Supplement, the
Securities will not constitute 'mortgage-related securities' within the meaning
of SMMEA. Accordingly, investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether and to
what extent the Securities constitute legal investments for them.
PLAN OF DISTRIBUTION
The Depositor may offer each Series of Securities through Lehman Brothers
Inc. ('Lehman Brothers') or one or more other firms that may be designated at
the time of each offering of such Securities. The participation of Lehman
Brothers in any offering will comply with Schedule E to the By-Laws of the
National Association of Securities Dealers, Inc. The Prospectus Supplement
relating to each Series of Securities will set forth the specific terms of the
offering of such Series of Securities and of each Class within such Series, the
names of the underwriters, the purchase price of the Securities, the proceeds to
the Depositor from such sale, any securities exchange on which the Securities
may be listed, and, if applicable, the initial public offering prices, the
discounts and commissions to the underwriters and any discounts and concessions
allowed or reallowed to certain dealers.
71
<PAGE>
The place and time of delivery of each Series of Securities will also be set
forth in the Prospectus Supplement relating to such Series. Lehman Brothers is
an affiliate of the Depositor.
LEGAL MATTERS
Unless otherwise specified in the related Prospectus Supplement, certain
legal matters in connection with the Securities will be passed upon for the
Depositor by Brown & Wood LLP, New York, New York.
ADDITIONAL INFORMATION
Copies of the Registration Statement of which this Prospectus forms a part
and the exhibits thereto are on file at the offices of the Securities and
Exchange Commission in Washington, D.C. Copies may be obtained at rates
prescribed by the Commission upon request to the Commission, and may be
inspected, without charge, at the offices of the Commission, 450 Fifth Street,
N.W., Washington, D.C. See 'Available Information.'
72
<PAGE>
GLOSSARY OF TERMS
The following are abbreviated definitions of certain capitalized terms used
in this Prospectus. Unless otherwise provided in a 'Supplemental Glossary' in
the Prospectus Supplement for a Series, such definitions shall apply to
capitalized terms used in such Prospectus Supplement. The definitions may vary
from those in the related Agreement for a Series and the related Agreement for a
Series generally provides a more complete definition of certain of the terms.
Reference should be made to the related Agreement for a Series for a more
compete definition of such terms.
'Accrual Termination Date' means, with respect to a Class of Compound
Interest Securities, the Distribution Date specified in the related Prospectus
Supplement.
'Advance' means cash advanced by the Servicer in respect of delinquent
payments of principal of and interest on a Contract and for any other purposes
specified in the related Prospectus Supplement.
'Agreement' means, with respect to a Series of Certificates, the Pooling
and Servicing Agreement or Trust Agreement, and, with respect to a Series of
Notes, the Indenture and the Servicing Agreement, as the context requires.
'Appraised Value' means, with respect to property securing a Contract, the
lesser of the appraised value determined in an appraisal obtained at origination
of the Contract or sales price of such mortgaged property at such time.
'Asset Group' means, with respect to the Primary Assets and other assets
comprising the Trust Fund of a Series, a group of such Primary Assets and other
assets having the characteristics described in the related Prospectus
Supplement.
'Assumed Reinvestment Rate' means, with respect to a Series, the per annum
rate or rates specified in the related Prospectus Supplement for a particular
period or periods as the 'Assumed Reinvestment Rate' for funds held in any fund
or account for the Series.
'Available Distribution Amount' means the amount in the Distribution
Account (including amounts deposited therein from any reserve fund or other fund
or account) eligible for distribution to Holders on a Distribution Date.
'Bankruptcy Code' means the federal bankruptcy code, 11 United States Code
101 et seq., and related rules and regulations promulgated thereunder.
'Business Day' means a day that, in the City of New York or in the city or
cities in which the corporate trust office of the Trustee are located, is
neither a legal holiday nor a day on which banking institutions are authorized
or obligated by law, regulations or executive order to be closed.
'Certificate' means the Asset-Backed Certificates.
'Class' means a Class of Securities of a Series.
'Closing Date' means, with respect to a Series, the date specified in the
related Prospectus Supplement as the date on which Securities of such Series are
first issued.
'Code' means the Internal Revenue Code of 1986, as amended, and regulations
(including proposed regulations) or other pronouncements of the Internal Revenue
Service promulgated thereunder.
'Collection Account' means, with respect to a Series, the account
established in the name of the Servicer for the deposit by the Servicer of
payments received from the Primary Assets.
'Combined Loan-to-Value Ratio' means, with respect to a Contract, the ratio
determined as set forth in the related Prospectus Supplement taking into account
the amounts of any related senior mortgage loans on the related Mortgaged
Property.
'Commission' means the Securities and Exchange Commission.
'Compound Interest Security' means any Security of a Series on which all or
a portion of the interest accrued thereon is added to the principal balance of
such Security on each Distribution Date, through the Accrual
73
<PAGE>
Termination Date, and with respect to which no interest shall be payable until
such Accrual Termination Date, after which interest payments will be made on the
Compound Value thereof.
'Compound Value' means, with respect to a Class of Compound Interest
Securities, the original principal balance of such Class, plus all accrued and
unpaid interest, if any, previously added to the principal balance thereof and
reduced by any payments of principal previously made on such Class of Compound
Interest Securities.
'Condominium' means a form of ownership of real property wherein each owner
is entitled to the exclusive ownership and possession of his or her individual
Condominium Unit and also owns a proportionate undivided interest in all parts
of the Condominium Building (other than the individual Condominium Units) and
all areas or facilities, if any, for the common use of the Condominium Units.
'Condominium Association' means the person(s) appointed or elected by the
Condominium Unit owners to govern the affairs of the Condominium.
'Condominium Building' means a multi-unit building or buildings, or a group
of buildings whether or not attached to each other, located on property subject
to Condominium ownership.
'Condominium Unit' means an individual housing unit in a Condominium
Building.
'Contracts' means Home Improvement Contracts and Manufactured Housing
Contracts, collectively.
'Cooperative' means a corporation owned by tenant-stockholders who, through
the ownership of stock, shares or membership securities in the corporation,
receive proprietary leases or occupancy agreements which confer exclusive rights
to occupy specific units and which is described in Section 216 of the Code.
'Cooperative Dwelling' means an individual housing unit in a building owned
by a Cooperative.
'Cut-off Date' means the date designated as such in the related Prospectus
Supplement for a Series.
'Debt Securities' means Securities characterized as indebtedness for
federal income tax purposes, and Regular Interest Securities.
'Deferred Interest' means the excess of the interest accrued on the
outstanding principal balance of a Contract during a specified period over the
amount of interest required to be paid by an obligor on such Contract on the
related Due Date.
'Deposit Agreement' means a guaranteed investment contract or reinvestment
agreement providing for the investment of funds held in a fund or account,
guaranteeing a minimum or a fixed rate of return on the investment of moneys
deposited therein.
'Depositor' means Lehman ABS Corporation.
'Disqualified Organization' means the United States, any State or political
subdivision thereof, any possession of the United States, any foreign
government, any international organization, or any agency or instrumentality of
any of the foregoing, a rural electric or telephone cooperative described in
section 1381(a)(2)(C) of the Code, or any entity exempt from the tax imposed by
sections 1-1399 of the Code, if such entity is not subject to tax on its
unrelated business income.
'Distribution Account' means, with respect to a Series, the account
established in the name of the Trustee for the deposit of remittances received
from the Servicer with respect to the Primary Assets.
'Distribution Date' means, with respect to a Series or Class of Securities,
each date specified as a distribution date for such Series or Class in the
related Prospectus Supplement.
'Due Date' means each date, as specified in the related Prospectus
Supplement for a Series, on which any payment of principal or interest is due
and payable by the obligor on any Primary Asset pursuant to the terms thereof.
'Eligible Investments' means any one or more of the obligations or
securities described as such in the related Agreement.
74
<PAGE>
'Enhancement' means the enhancement for a Series, if any, specified in the
related Prospectus Supplement.
'Enhancer' means the provider of the Enhancement for a Series specified in
the related Prospectus Supplement.
'ERISA' means the Employee Retirement Income Security Act of 1974, as
amended.
'Escrow Account' means an account, established and maintained by the
Servicer for a Contract, into which payments by borrowers to pay taxes,
assessments, mortgage and hazard insurance premiums and other comparable items
required to be paid to the mortgagee are deposited.
'FHLMC' means the Federal Home Loan Mortgage Corporation.
'Final Scheduled Distribution Date' means, with respect to a Class of Notes
of a Series, the date no later than which principal thereof will be fully paid
and with respect to a Class of Certificates of a Series, the date after which no
Certificates of such Class will remain outstanding, in each case based on the
assumptions set forth in the related Prospectus Supplement.
'FNMA' means the Federal National Mortgage Association.
'Holder' means the person or entity in whose name a Security is registered.
'Home Improvements' means the home improvements financed by a Home
Improvement Contract.
'Home Improvement Contract' means any home improvement installment sales
contract or installment loan agreement which may be unsecured or secured by
purchase money security interests in the Home Improvement financed thereby or by
a mortgage on the related Mortgaged Property.
'HUD' means the United States Department of Housing and Urban Development.
'Indenture' means the indenture relating to a Series of Notes between the
Trust Fund and the Trustee.
'Index' means the index applicable to any adjustments in the Loan Rates of
any adjustable rate Contracts.
'Insurance Policies' means certain mortgage insurance, hazard insurance and
other insurance policies required to be maintained with respect to Contracts.
'Insurance Proceeds' means amounts paid by the insurer under any of the
Insurance Policies covering any Contract or Mortgaged Property.
'Interest Only Securities' means a Class of Securities entitled solely or
primarily to distributions of interest and which is identified as such in the
related Prospectus Supplement.
'IRS' means the Internal Revenue Service.
'LCPI' means Lehman Commercial Paper Inc.
'Lehman Brothers' means Lehman Brothers Inc.
'Lifetime Rate Cap' means the lifetime limit, if any, on the Loan Rate
during the life of each adjustable rate Contract.
'Liquidation Proceeds' means amounts received by the Servicer in connection
with the liquidation of a Contract, net of liquidation expenses.
'Loan Rate' means, unless otherwise indicated herein or in the Prospectus
Supplement, the interest rate borne by a Contract.
'Loan-to-Value Ratio' means, with respect to a Contract, the ratio
determined as set forth in the related Prospectus Supplement.
'Manufactured Housing Contract' means any conventional manufactured housing
installment sales contract or installment loan agreement originated by a
manufactured housing dealer in the ordinary course of
75
<PAGE>
business secured either by the related Manufactured Home or by a Mortgage on the
real estate on which the Manufactured Home is located.
'Minimum Rate' means the lifetime minimum Loan Rate during the life of each
adjustable rate Contract.
'Minimum Principal Payment Agreement' means a minimum principal payment
agreement with an entity meeting the criteria of the Rating Agencies.
'Modification' means a change in any term of a Contract.
'Mortgage' means the mortgage, deed of trust or other similar security
instrument securing a Mortgage Note.
'Mortgage Note' means the note or other evidence of indebtedness of a
Mortgagor under the Contract.
'Mortgagor' means the obligor on a Mortgage Note.
'1986 Act' means the Tax Reform Act of 1986.
'Notes' means the Asset-Backed Notes.
'Notional Amount' means the amount set forth in the related Prospectus
Supplement for a Class of Interest Only Securities.
'PAC' ('Planned Amortization Class Securities') means a Class of Securities
of a Series on which payments of principal are made in accordance with a
schedule specified in the related Prospectus Supplement, based on certain
assumptions stated therein.
'Participating Securities' means Securities entitled to receive payments of
principal and interest and an additional return on investment as described in
the related Prospectus Supplement.
'Pass-Through Security' means a security representing an undivided
beneficial interest in a pool of assets, including the right to receive a
portion of all principal and interest payments relating to those assets.
'Pay Through Security' means Regular Interest Securities and certain Debt
Securities that are subject to acceleration due to prepayments on the underlying
Primary Assets.
'Person' means any individual, corporation, partnership, joint venture,
association, joint stock company, trust (including any beneficiary thereof),
unincorporated organization, or government or any agency or political
subdivision thereof.
'Pooling and Servicing Agreement' means the pooling and servicing agreement
relating to a Series of Certificates among the Depositor, the Servicer (if such
Series relates to Contracts) and the Trustee.
'Primary Assets' means the Private Securities and/or Contracts, as the case
may be, which are included in the Trust Fund for such Series. A Primary Asset
refers to a specific Private Security or Contract, as the case may be.
'Principal Balance' means, with respect to a Primary Asset and as of a Due
Date, the original principal amount of the Primary Asset, plus the amount of any
Deferred Interest added to such principal amount, reduced by all payments, both
scheduled or otherwise, received on such Primary Asset prior to such Due Date
and applied to principal in accordance with the terms of the Primary Asset.
'Principal Only Securities' means a Class of Securities entitled solely or
primarily to distributions of principal and identified as such in the Prospectus
Supplement.
'Private Security' means a participation or pass-through certificate
representing a fractional, undivided interest in Underlying Contracts or
collateralized obligations secured by Underlying Contracts.
'Property' means either a Home Improvement, a Manufactured Home or a
Mortgaged Property securing a Contract, as the context requires.
'PS Agreement' means the pooling and servicing agreement, indenture, trust
agreement or similar agreement pursuant to which a Private Security is issued.
76
<PAGE>
'PS Servicer' means the servicer of the Underlying Contracts.
'PS Sponsor' means, with respect to Private Securities, the sponsor or
depositor under a PS Agreement.
'PS Trustee' means the trustee designated under a PS Agreement.
'Qualified Insurer' means a mortgage guarantee or insurance company duly
qualified as such under the laws of the states in which the Mortgaged Properties
are located duly authorized and licensed in such states to transact the
applicable insurance business and to write the insurance provided.
'Rating Agency' means the nationally recognized statistical rating
organization (or organizations) which was (or were) requested by the Depositor
to rate the Securities upon the original issuance thereof.
'Regular Interest' means a regular interest in a REMIC.
'REMIC' means a real estate mortgage investment conduit.
'REMIC Administrator' means the Person, if any, specified in the related
Prospectus Supplement for a Series for which a REMIC election is made, to serve
as administrator of the Series.
'REMIC Provisions' means the provisions of the federal income tax law
relating to real estate mortgage investment conduits, which appear at sections
860A through 860G of Subchapter M of Chapter 1 of the Code, and related
provisions, and regulations, including proposed regulations and rulings, and
administrative pronouncements promulgated thereunder, as the foregoing may be in
effect from time to time.
'REO Property' means real property which secured a defaulted Contract,
beneficial ownership of which has been acquired upon foreclosure, deed in lieu
of foreclosure, repossession or otherwise.
'Reserve Fund' means, with respect to a Series, any Reserve Fund
established pursuant to the related Agreement.
'Residual Interest' means a residual interest in a REMIC.
'Retained Interest' means, with respect to a Primary Asset, the amount or
percentaged specified in the related Prospectus Supplement which is not included
in the Trust Fund for the related Series.
'Scheduled Payments' means the scheduled payments of principal and interest
to be made by the borrower on a Primary Asset.
'Securities' means the Notes or the Certificates.
'Seller' means the seller of the Primary Assets to the Depositor identified
in the related Prospectus Supplement for a Series.
'Senior Securityholder' means a holder of a Senior Security.
'Senior Securities' means a Class of Securities as to which the holders'
rights to receive distributions of principal and interest are senior to the
rights of holders of Subordinate Securities, to the extent specified in the
related Prospectus Supplement.
'Series' means a separate series of Securities sold pursuant to this
Prospectus and the related Prospectus Supplement.
'Servicer' means, with respect to a Series relating to Contracts, the
Person if any, designated in the related Prospectus Supplement to service
Contracts for that Series, or the successors or assigns of such Person.
'Single Family Property' means property securing a Contract consisting of
one- to four-family attached or detached residential housing, including
Cooperative Dwellings.
'Stripped Securities' means Pass-Through Securities representing interests
in Primary Assets with respect to which all or a portion of the principal
payments have been separated from all or a portion of the interest payments.
'Subordinate Securityholder' means a Holder of a Subordinate Security.
77
<PAGE>
'Subordinated Securities' means a Class of Securities as to which the
rights of holders to receive distributions of principal, interest or both is
subordinated to the rights of holders of Senior Securities, and may be allocated
losses and shortfalls prior to the allocation thereof to other Classes of
Securities, to the extent and under the circumstances specified in the related
Prospectus Supplement.
'Trustee' means the trustee under the applicable Agreement and its
successors.
'Trust Fund' means, with respect to any Series of Securities, the trust
holding all money, instruments, securities and other property, including all
proceeds thereof, which are, with respect to a Series of Certificates, held for
the benefit of the Holders by the Trustee under the Pooling and Servicing
Agreement or Trust Agreement, or, with respect to a Series of Notes, pledged to
the Trustee under the Indenture as a security for such Notes, including, without
limitation, the Primary Assets (except any Retained Interests), all amounts in
the Distribution Account, Collection Account or Reserve Funds, distributions on
the Primary Assets (net of servicing fees), and reinvestment earnings on such
net distributions and any Enhancement and all other property and interests held
by or pledged to the Trustee pursuant to the related Agreement for such Series.
'UCC' means the Uniform Commercial Code.
'Underlying Contracts' means loans of the type eligible to be Contracts
underlying or securing Private Securities.
'Variable Interest Security' means a Security on which interest accrues at
a rate that is adjusted, based upon a predetermined index, at fixed periodic
intervals, all as set forth in the related Prospectus Supplement.
'Zero Coupon Security' means a Security entitled to receive payments of
principal only.
78
<PAGE>
------------------------------------------------------------
------------------------------------------------------------
No dealer, salesman or other person has been authorized to give any
information or to make any representation not contained in this Prospectus
Supplement or the Prospectus and, if given or made, such information or
representation must not be relied upon as having been authorized by the
Depositor or Lehman Brothers. This Prospectus Supplement and the Prospectus do
not constitute an offer of any securities other than those to which they relate
or an offer to sell, or a solicitation of an offer to buy, to any person in any
jurisdiction where such an offer or solicitation would be unlawful. Neither the
delivery of this Prospectus Supplement and the Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that the
information contained here is correct as of any time subsequent to their
respective dates.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
PROSPECTUS SUPPLEMENT
Summary............................................. S-3
Risk Factors........................................ S-19
Green Tree Financial Corporation.................... S-21
Description of the Underlying Securities............ S-22
Yield and Prepayment Considerations................. S-26
Description of the Offered Certificates............. S-28
Use of Proceeds..................................... S-38
Certain Federal Income Tax Considerations........... S-38
State Tax Considerations............................ S-40
Legal Investment Considerations..................... S-40
ERISA Considerations................................ S-41
Underwriting........................................ S-41
Legal Matters....................................... S-41
Rating.............................................. S-42
Index of Defined Terms.............................. S-43
Appendix I.......................................... A-1
Appendix II......................................... A-19
PROSPECTUS
Prospectus Supplement............................... 2
Available Information............................... 2
Reports to Holders.................................. 2
Incorporation of Certain Documents by Reference..... 2
Summary of Terms.................................... 3
Risk Factors........................................ 11
Description of the Securities....................... 14
The Trust Funds..................................... 17
Enhancement......................................... 22
Servicing of Contracts.............................. 24
The Agreements...................................... 30
Certain Legal Aspects of the Contracts.............. 37
The Depositor....................................... 46
Use of Proceeds..................................... 46
Certain Federal Income Tax Considerations........... 47
State Tax Considerations............................ 69
ERISA Considerations................................ 69
Legal Investment.................................... 71
Plan of Distribution................................ 71
Legal Matters....................................... 72
Additional Information.............................. 72
Glossary of Terms................................... 73
</TABLE>
------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
LEHMAN MANUFACTURED
HOUSING ASSET-BACKED TRUST 1998-1
$114,830,000 6.635% Class I-A1 Certificates
$ 0 Variable Rate Class I-IO Certificates
$50,059,000 6.545% Class II-A1 Certificates
$24,496,000 7.033% Class II-A2 Certificates
$ 0 Variable Rate Class II-IO Certificates
MANUFACTURED HOUSING
ASSET-BACKED CERTIFICATES
SERIES 1998-1
LEHMAN ABS CORPORATION,
AS DEPOSITOR
-----------------------------------------------
PROSPECTUS SUPPLEMENT
FEBRUARY 24, 1998
-----------------------------------------------
LEHMAN BROTHERS
------------------------------------------------------------
------------------------------------------------------------
