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Rule No. 424(b)(4)
Registration No. 33-52177
PROSPECTUS
$134,096,835.87(APPROXIMATE)
[LOGO OF GREENTREE FINANCIAL CORPORATION APPEARS HERE]
SELLER AND SERVICER
CERTIFICATES FOR HOME IMPROVEMENT LOANS
HOME IMPROVEMENT LOAN TRUST 1994-A
7.05% PASS-THROUGH RATE
(PRINCIPAL AND INTEREST PAYABLE ON THE 15TH DAY OF EACH MONTH BEGINNING
APRIL 15, 1994)
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The Certificates for Home Improvement Loans offered hereby (the
"Certificates") will be issued by Home Improvement Loan Trust 1994-A (the
"Trust") and will evidence fractional undivided interests in the Trust. The
Trust will be created by Green Tree Financial Corporation (the "Company")
pursuant to a Pooling and Servicing Agreement, dated as of March 1, 1994 (the
"Agreement"), between the Company and First Trust National Association, as
Trustee (the "Trustee"). The Trust property will consist of a pool of home
improvement retail installment sales contracts and promissory notes (the
"Contracts"), including all rights to receive payments due on such Contracts
on and after March 1, 1994 (the "Cutoff Date") and liens on certain of the
related real estate, amounts held for the Trust in the Collection Account, as
described in "Structure of the Transaction," and the right to receive payments
upon demand from the Cash Collateral Account. Approximately 40.56% of the
Contracts (by principal balance as of the Cutoff Date) are insured by the
Federal Housing Administration ("FHA") to the extent described in "Description
of FHA Insurance." Approximately 14.97% of the Contracts (by principal balance
as of the Cutoff Date) are not secured by any mortgage or other lien on the
related improved real estate. The Trustee will demand payments from a cash
collateral account (the "Cash Collateral Account") to cover certain
delinquencies and certain losses due to defaults on the Contracts. The initial
deposit in the Cash Collateral Account will equal $6,973,036. See "Description
of the Cash Collateral Guaranty."
Principal and interest with respect to the Certificates are distributable on
the fifteenth day of each month or, if such fifteenth day is not a business
day, the first business day thereafter, beginning April 15, 1994. The Initial
Principal Amount of the Certificates represents the aggregate of the principal
payments due on the Contracts on and after the Cutoff Date. The Company will
act as servicer of the Contracts and will have certain other limited
obligations with respect thereto. The final scheduled payment date of the
Certificates is in March 2014. See "Description of the Certificates."
There is currently no secondary market for the Certificates offered hereby,
and there is no assurance that any such market will develop or, if it does
develop, that it will continue. Merrill Lynch, Pierce, Fenner & Smith
Incorporated (the "Underwriter") expects, but is not obligated, to make a
market in the Certificates.
For a discussion of certain factors which should be considered by
prospective purchasers of the Certificates, see "Special Considerations"
herein.
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THE CERTIFICATES REPRESENT INTERESTS IN THE TRUST AND DO NOT REPRESENT INTERESTS
IN OR OBLIGATIONS OF THE COMPANY, EXCEPT TO THE LIMITED EXTENT DESCRIBED HEREIN.
THE CERTIFICATES DO NOT REPRESENT OBLIGATIONS OF, AND WILL NOT BE INSURED OR
GUARANTEED BY, FHA OR ANY OTHER GOVERNMENTAL AGENCY OR INSTRUMENTALITY. 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 REP-RESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
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<TABLE>
<CAPTION>
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT COMPANY(1)(2)
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<S> <C> <C> <C>
Per Certificate................... 99.71875% .5% 99.21875%
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Total............................. $133,719,688.52 $670,484.18 $133,049,204.34
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</TABLE>
(1) Plus accrued interest from and including March 15, 1994.
(2) Before deducting expenses, estimated to be $190,000.
The Certificates are offered subject to prior sale, when, as and if issued
by the Trust and accepted by the Underwriter and subject to its right to
reject orders in whole or in part. It is expected that delivery of the
Certificates will be made in book-entry form only through the Same Day Funds
Settlement system of The Depository Trust Company on or about April 7, 1994.
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MERRILL LYNCH & CO.
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THE DATE OF THIS PROSPECTUS IS MARCH 31, 1994
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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CERTIFICATES
OFFERED HEREBY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
Until June 30, 1994, all dealers effecting transactions in the Certificates,
whether or not participating in this distribution, may be required to deliver
a Prospectus. This delivery requirement is in addition to the obligation of
dealers to deliver a Prospectus when acting as underwriters and with respect
to their unsold allotments or subscriptions.
REPORTS TO CERTIFICATEHOLDERS
The Company, as Servicer, will cause to be provided to the holders of the
Certificates (which so long as the Certificates are held in book-entry form
will be DTC) certain monthly and annual reports concerning such Certificates
and the Trust as further described in this Prospectus under "Description of
the Certificates--Reports to Certificateholders."
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Information concerning the Company 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
regional offices of the Commission located at Suite 1400, 500 West Madison
Street, Chicago, Illinois 60661 and Seven World Trade Center, New York, New
York 10048. Copies of such material can be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates. The Company's Common Stock and associated rights to
purchase preferred shares are listed on the New York Stock Exchange ("NYSE")
and on the Pacific Stock Exchange ("PSE"). Reports and other information
concerning the Company can be inspected at the offices of the New York Stock
Exchange, Inc., 20 Broad Street, New York, New York and the Pacific Stock
Exchange, Inc., 115 Sansome Street, San Francisco, California.
The Company has filed with the Commission on behalf of the Trust a
registration statement (of which this Prospectus forms a part) on Form S-3
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"). This Prospectus does not contain all the information set
forth in the Registration Statement pursuant to the rules and regulations of
the Commission. For further information, reference is hereby made to the
Registration Statement.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the year ended December 31,
1993, which has been filed with the Commission, is hereby incorporated by
reference in this Prospectus.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the offering of the Certificates shall be deemed to be
incorporated by reference into this Prospectus and to be a part thereof from
the respective dates of filing of such documents. Any statement contained
herein or in a document all or any portion of which is incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or
is deemed to be incorporated by reference herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to any person to whom this
Prospectus is delivered, upon the written or oral request of such person, a
copy of any or all of the foregoing documents incorporated herein by reference
(other than certain exhibits to such documents). Requests for such copies
should be directed to Drew S. Backstrand, 1100 Landmark Towers, 345 St. Peter
Street, St. Paul, Minnesota 55102-1639, telephone number (612) 293-3400.
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SUMMARY OF THE TERMS OF THE CERTIFICATES
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus. Capitalized terms used
herein and not otherwise defined herein shall have the respective meanings
assigned them elsewhere in this Prospectus.
Securities Offered...... Certificates for Home Improvement Loans. Each
Certificate represents a fractional undivided
interest in Home Improvement Loan Trust 1994-A (the
"Trust"). The Trust property consists primarily of
the pool of Contracts, having an aggregate principal
balance as of the Cutoff Date of $134,096,835.87
(approximate), and all rights, benefits, obligations
and proceeds arising therefrom or in connection
therewith, including rights under applicable FHA
insurance in the case of FHA-insured Contracts, liens
on the related real estate in the case of Secured
Contracts, amounts held for the Trust in the
Collection Account, the right to receive payments
upon demand from the Cash Collateral Account, and the
Limited Guaranty of the Company. The Trust will also
issue a single Subordinated Certificate, representing
the right to receive the Excess Cashflow (as defined
below) each month, to the Cash Collateral Trustee
(described below).
Initial Principal
Amount.................. $134,096,835.87 (approximate), representing the
aggregate principal payments due on the Contracts on
and after the Cutoff Date.
Trustee................. First Trust National Association, St. Paul,
Minnesota.
Seller and Servicer..... Green Tree Financial Corporation.
Payment Date............ The fifteenth day of each month or, if such day is
not a business day, the next succeeding business day,
commencing April 15, 1994.
Record Date............. The Business Day immediately preceding the related
Payment Date.
Pass-Through Rate....... 7.05% per annum.
Monthly Interest........ Certificateholders will be entitled to receive
monthly on each Payment Date an amount equal to 30
days' interest accrued at the Pass-Through Rate on
the Principal Balance immediately prior to such
Payment Date, computed on the basis of a 360-day year
of twelve 30-day months ("Monthly Interest"), and
will receive Monthly Interest to the extent that
funds available in the Collection Account, including
any funds received from the Cash Collateral Account,
are sufficient therefor. The "Principal Balance" at
any time means the Initial Principal Amount minus all
prior payments of Monthly Principal actually made.
See "Yield and Prepayment Considerations." In the
event the funds available in the Collection Account,
including any funds received from the Cash Collateral
Account, are insufficient to pay Monthly Interest on
any Payment Date, such deficiency will be added to
Monthly Interest distributable on the following
Payment Date and will, to the extent legally
permissible, accrue interest at the Pass-Through
Rate.
Monthly Principal....... To the extent that funds available in the Collection
Account, including any funds received from the Cash
Collateral Account, are sufficient
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therefor, Certificateholders will be entitled to
receive monthly on each Payment Date an amount equal
to the sum of (a) the amount of regular principal
payments on Contracts paid or applied during the
prior calendar month (a "Due Period"); (b) the amount
of full Principal Prepayments received and partial
Principal Prepayments applied during the prior Due
Period; (c) the principal portion of all payments
that were Delinquent Payments as of the end of the
prior Due Period; (d) the unpaid principal balance of
all Contracts that became Liquidated Contracts during
the prior Due Period; (e) the principal portion of
the Repurchase Price paid by the Company to
repurchase Contracts for breach of representations
and warranties during the prior Due Period, as
described in this Summary under "Repurchases by the
Company"; (f) the amount of any reduction in the
principal amount deemed owed on any Contract as a
result of the Obligor's bankruptcy; and (g) any
principal amount specified in clauses (a) through (f)
that was not previously distributed because of an
insufficient amount of funds available in the
Collection Account or the Cash Collateral Account.
See "Yield and Prepayment Considerations."
Registration of
Certificates............ The 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 in minimum
denominations of $1,000 and integral multiples
thereof. Certificates will be issued in definitive
form only under the limited circumstances described
herein. All references herein to the rights of
"holders" or "Certificateholders" shall reflect the
rights of beneficial owners as they may indirectly
exercise such rights through DTC and participating
members thereof, except as otherwise specified
herein. See "Description of the Certificates--
Registration of the Certificates."
The Contracts........... 7,346 conventional and 6,081 FHA-insured home
improvement installment sales agreements and
promissory notes, including any and all rights to
receive payments due thereunder on and after the
Cutoff Date. The obligations of the Obligor under
each Contract are either secured by the related real
estate (each a "Secured Contract") or are unsecured
(each an "Unsecured Contract"). By principal balance
as of the Cutoff Date, approximately 85.03% of the
Contracts are Secured Contracts and approximately
14.97% of the Contracts are Unsecured Contracts. All
of the FHA-insured Contracts are Secured Contracts.
The Contracts arise from loans relating to the
improvement of real estate located in 48 states and
the District of Columbia. The contractual percentage
rate of interest on the Contracts as of the Cutoff
Date ranges from 8.49% to 17.99% with a weighted
average of 12.42%. The Contracts had a weighted
average term to scheduled maturity, as of
origination, of 146 months, and a weighted average
term to scheduled maturity, as of the Cutoff Date, of
142 months. The final scheduled payment date on the
Contract with the latest scheduled maturity is in
February 2014. See "The Contracts."
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FHA Insurance........... Approximately 40.56% of the Contracts, by principal
balance as of the Cutoff Date, are insured by FHA
against Obligor defaults pursuant to Title I of the
National Housing Act ("FHA Insurance"). Following a
default on an FHA-insured Contract, if a claim is
submitted to FHA, FHA will (subject to certain
conditions, including a limitation on the aggregate
insurance coverage available with respect to all FHA
Title I loans then owned and reported for FHA
Insurance by the Company) pay 90% of the sum of (i)
the unpaid principal, (ii) up to nine months' unpaid
interest on the Contract (computed at 7% per annum)
and (iii) certain liquidation expenses. Any losses on
FHA-insured Contracts not covered by FHA Insurance
will be absorbed to the extent of Excess Cashflow
otherwise payable to the Cash Collateral Account (as
described below) or, if funds in the Collection
Account are not sufficient to pay Monthly Interest
and Monthly Principal, such losses will be covered by
funds available in the Cash Collateral Account, and
then by the Limited Guaranty of the Company (subject
to the limit of the Guaranty Amount), and otherwise
will be borne by Certificateholders. See "Description
of FHA Insurance."
Advances................ The Company, as Servicer, is obligated to make
Advances each month of any scheduled payments on the
Contracts that were due but not received during the
prior Due Period. The Servicer will be entitled to
reimbursement of Advances from payments on the
Contracts and from the Cash Collateral Account. The
Servicer will be obligated to make an Advance only to
the extent that it determines that such Advance will
be recoverable from collections on such Contract. If
the Servicer fails to make any Advance required under
the Agreement, the Trustee will be obligated (subject
to certain conditions) to make such Advance. See
"Description of the Certificates--Advances."
Cash Collateral
Account................. The Trust will have the benefit of the right to
demand payments, under certain circumstances
described below, under a cash collateral guaranty
(the "Cash Collateral Guaranty") issued pursuant to
the cash collateral trust agreement described below.
The Cash Collateral Guaranty will be secured by an
account (the "Cash Collateral Account"), which will
be held in the name of First Bank National
Association, Minneapolis, Minnesota, as cash
collateral trustee (the "Cash Collateral Trustee").
Pursuant to the cash collateral trust agreement (the
"Cash Collateral Trust Agreement") among a financial
institution selected by the Company (the "Cash
Collateral Depositor"), the Cash Collateral Trustee
and the Company, as Seller and Servicer, the Cash
Collateral Account will be funded on the date of the
issuance of the Certificates (the "Closing Date") in
the amount of $6,973,036 (the "Initial Cash
Collateral Amount") from the proceeds of a loan to be
made by the Cash Collateral Depositor. The Cash
Collateral Guaranty will not be an obligation of the
Cash Collateral Depositor (beyond the amount included
in the Cash Collateral Account), the Cash Collateral
Trustee, the Company, as Seller and Servicer, or the
beneficiary of the Cash Collateral Trust, and will be
secured solely with amounts, if any, on deposit in
the Cash Collateral Account. The Cash Collateral
Account
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and any amounts therein will not be property of the
Trust, but will be held in accordance with the Cash
Collateral Trust Agreement for the benefit of the
Trustee and the Cash Collateral Depositor, as secured
parties and as provided in the Cash Collateral Trust
Agreement, and for the benefit of the beneficiary of
the Cash Collateral Trust.
On each Payment Date the Trustee will pay all Excess
Cashflow (as defined below) to the Cash Collateral
Trustee, as the holder of the Subordinated
Certificate. On each Payment Date, the amount
available in the Cash Collateral Account (the
"Available Cash Collateral Amount") will equal the
lesser of (i) the amount on deposit in the Cash
Collateral Account (exclusive of investment earnings)
and (ii) the Requisite Amount.
If the Servicer's monthly report as of any
Determination Date indicates that a Shortfall (the
difference, if any, between (a) the sum of (i) the
Collected Amount in the Collection Account, plus (ii)
any Advances required to be deposited in the
Collection Account by the Servicer, plus (iii) the
aggregate of the Repurchase Prices for Contracts to
be repurchased by the Company for breach of
representations and warranties, and (b) the sum of
(i) the Monthly Interest and Monthly Principal to be
paid to Certificateholders on the related Payment
Date, (ii) the Monthly Servicing Fee to be paid to
the Servicer, (iii) any amounts required to reimburse
the Trustee for FHA Insurance premiums paid by the
Trustee, and (iv) any amounts required to reimburse
the Servicer or the Trustee for Uncollectible
Advances) will occur on the related Payment Date,
then the Trustee shall, on the Business Day preceding
such Payment Date, make a demand under the Cash
Collateral Guaranty in the amount of such Shortfall
(or the Available Cash Collateral Amount, if less)
and deposit the funds received therefrom in the
Collection Account. Demands under the Cash Collateral
Guaranty will be funded solely from amounts, if any,
on deposit in the Cash Collateral Account. If the
Available Cash Collateral Amount is reduced to zero,
any losses on Liquidated Contracts will be absorbed
by the Limited Guaranty of the Company (subject to
the limit of the Guaranty Amount). If the Guaranty
Amount is reduced to zero, Certificateholders will
bear all losses on the Contracts, unless Excess
Cashflow is available on future Payment Dates for
deposit in the Cash Collateral Account.. See "Certain
Legal Aspects of the Contracts; Repurchase
Obligations."
On any Payment Date when the Available Cash
Collateral Amount is less than the Requisite Amount
(as defined below), the Cash Collateral Trustee will
deposit all such Excess Cashflow, or the amount
necessary to cause the amount on deposit in the Cash
Collateral Account to equal the Requisite Amount, if
less, in the Cash Collateral Account. On any Payment
Date when the Available Cash Collateral Amount equals
or exceeds the Requisite Amount, any funds paid to
the Cash Collateral Trustee by the Trustee, and any
funds in the Cash Collateral Account in excess of the
Requisite Amount, will be applied by the Cash
Collateral Trustee (a) first to pay interest and
principal on the loan made to the Cash Collateral
Trust by the Cash Collateral Depositor in
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accordance with terms of such loan, and (b)
thereafter will be paid to the beneficiary of the
Cash Collateral Trust. Funds on deposit in the Cash
Collateral Account will be invested in certain
permitted investments. All income on such investments
will be applied as described in the preceding clauses
(a) and (b), and will not be available to cover
Shortfalls. See "Description of the Cash Collateral
Guaranty."
The "Excess Cashflow" on any Payment Date will equal
the excess (if any) of (i) funds in the Collection
Account available for distribution on that Payment
Date over (ii) Monthly Interest and Monthly Principal
paid to Certificateholders on that Payment Date, the
Monthly Servicing Fee to be paid to the Servicer and
certain other items.
Interest and principal on the loan by the Cash
Collateral Depositor to the Cash Collateral Trust
will be payable solely from funds (if any) in the
Cash Collateral Account each month in excess of the
Requisite Amount. In no event will the Company, the
Trust or the Certificateholders be obligated in
respect of any such loan. It is currently expected
that such loan would bear interest at a floating rate
based on the Cash Collateral Depositor's cost of
funds, payable monthly, and that principal on such
loan would be payable commencing in April 1995,
unless such loan is renewed. See "Description of the
Cash Collateral Guaranty."
Requisite Amount........ The Requisite Amount of the Cash Collateral Account
on the initial Payment Date will be $8,314,004. On
each Determination Date, the Company will be required
to calculate the amount of its FHA Insurance
reserves. If the Company's FHA Insurance reserves
available to cover FHA Insurance claims on the
Contracts are below $50,000,000 on any Determination
Date, or if an Event of Termination (defined in
"Description of the Certificates--Events of
Termination") has occurred (either such event, a
"Trigger"), then (i) the Requisite Amount will be
increased to $10,593,651 and (ii) on each Payment
Date thereafter the Cash Collateral Trustee will
deposit the entire Excess Cashflow (or the amount
necessary to cause the amount in the Cash Collateral
Account to equal the Requisite Amount) in the Cash
Collateral Account.
On the Payment Dates occurring in April 1997 and in
each April thereafter, the Requisite Amount may be
reduced to 12.4% of the Principal Balance as of such
Payment Date, subject to certain conditions described
in "Description of the Cash Collateral Guaranty."
Limited Guaranty........ If the Available Cash Collateral Amount is zero and
the Monthly Report as of any Determination Date
indicates a Shortfall, the Company will pay into the
Collection Account not later than one Business Day
after such Determination Date the lesser of (a) such
Shortfall, or (b) the Guaranty Amount. The Guaranty
Amount on the first Payment Date will equal $544,000.
Thereafter, the Guaranty Amount on each subsequent
Payment Date will equal the lesser of (i) $544,000
minus all Limited Guaranty payments made prior to
such Payment Date or (ii) 1% of the Principal Balance
of all FHA-insured Contracts as of such Payment Date.
See "Description of FHA Insurance."
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Repurchases by the
Company................. The Company has agreed to repurchase any Contract
that is materially and adversely affected by a breach
of a representation and warranty with respect to such
Contract made in the Agreement if such breach has not
been cured within 90 days. See "Description of the
Certificates--Conveyance of Contracts."
Repurchase Option....... The Servicer will have the option to repurchase all
of the outstanding Contracts on any Payment Date on
which the Principal Balance is less than 10% of the
Initial Principal Amount of the Certificates. See
"Description of the Certificates--Repurchase Option."
Monthly Servicing Fee... The Servicer will be entitled to monthly compensation
for servicing the Contracts equal to 1/12 of the
product of .75% and the Principal Balance (the
"Monthly Servicing Fee"), payable only after Monthly
Interest and Monthly Principal have been paid to
Certificateholders. See "Description of the
Certificates--Servicing Compensation and Payment of
Expenses," and "Rights upon an Event of Termination."
Tax Status.............. In the opinion of counsel, the Trust will be
classified as a grantor trust for federal income tax
purposes and not as an association which is taxable
as a corporation. Each Certificateholder will be
treated for such purposes as the owner of an
undivided interest in the Contracts. Accordingly,
each such Certificateholder must report on its
federal income tax return its share of the income
from the Contracts and, subject to limitations on
deductions by individuals, estates and trusts, may
deduct its share of the reasonable fees paid by the
Trust, determined in accordance with such
Certificateholder's tax accounting method.
Certificateholders will not be treated as the owners
of the Cash Collateral Account for federal income tax
purposes. See "Certain Federal Income Tax
Consequences."
ERISA Considerations.... The acquisition of Certificates by, on behalf of, or
with assets of, an employee benefit plan subject to
the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), and described in Section
4975(e)(1) of the Code (a "Plan") could result in a
prohibited transaction under ERISA and Section 4975
of the Code, unless such acquisition is subject to a
statutory or administrative exemption. In addition,
if, by virtue of such acquisition, the Trust property
were deemed to be assets of the acquiring Plan, the
Trust or other parties may be considered to be a
fiduciary with respect to any Plan. Therefore, the
acquisition and transfer of the Certificates are
subject to certain restrictions. See "ERISA
Considerations."
Rating.................. It is a condition precedent to the issuance of the
Certificates offered pursuant to this Prospectus that
they be assigned a rating not lower than "A" by
Standard & Poor's Ratings Group, a division of
McGraw-Hill, Inc. ("S&P"). S&P's rating of the
Certificates addresses the likelihood of timely
receipt of Monthly Interest and ultimate receipt of
principal on or before the Payment Date in March
2014. A security rating is not a recommendation to
buy, sell or hold securities and may be subject to
revision or withdrawal at any time by the assigning
rating agency. See "Ratings" herein.
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The Company has not requested a rating of the
Certificates from any rating agency other than S&P.
However, there can be no assurance as to whether any
other rating agency will rate the Certificates, or if
one does, what rating would be assigned by such
rating agency.
Legal Investment
Considerations.......... The Certificates will not constitute "mortgage
related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA")
because there are a substantial number of Contracts
that are either unsecured or secured by liens on real
estate that are not first liens, as required by
SMMEA. Accordingly, many institutions with legal
authority to invest in "mortgage related securities"
may not be legally authorized to invest in the
Certificates.
Glossary of Terms....... Certain terms defined and used in this Prospectus are
also defined in Article I of the Agreement, a copy of
which is available upon request made to the Company.
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SPECIAL CONSIDERATIONS
Prospective Certificateholders should consider, among other things, the
following factors in connection with the purchase of the Certificates:
1. Limitations on Availability of FHA Insurance. Approximately 40.56% of the
Contracts, by principal balance as of the Cutoff Date, are insured by FHA
pursuant to Title I of the National Housing Act ("Title I"). The availability
of FHA Insurance following a default on a Contract is subject to a number of
conditions, including strict compliance by the Company with FHA regulations in
originating and servicing the Contract. Although the Company is an FHA-approved
lender and believes, and represents and warrants in the Agreement, that it has
complied with FHA regulations, such regulations are susceptible to substantial
interpretation. The Company is not required to obtain, and has not obtained,
approval from FHA of its origination and servicing practices. Failure to comply
with FHA regulations may result in a denial of FHA Insurance claims, and there
can be no assurance that FHA's enforcement of its regulations will not become
stricter in the future. From time to time the Company is engaged in disputes
with FHA over the validity of claims submitted and the Company's compliance
with FHA regulations in servicing FHA Title I loans, such as the FHA-insured
Contracts. In addition, any insurance claim paid by FHA will cover only 90% of
the sum of the unpaid principal on the Contract, up to nine months unpaid
interest (computed at 7% per annum) and certain liquidation costs.
The amount of FHA Insurance available to the Trust at any given time is
limited to the balance of a reserve amount determined with respect to all FHA
Title I loans originated and reported for insurance by the Company and not
sold, or sold with recourse, by the Company, including manufactured housing
contracts as well as home improvement loans. Such reserve amount, as of
December 31, 1993, was equal to approximately $134,383,000, but will be reduced
by the amount of all FHA Insurance claims paid and by an annual reduction in
the reserve amount equal to 10% of the reserve amount, and will be increased by
an amount equal to 10% of the unpaid principal balance of FHA Title I loans
subsequently originated and reported for insurance by the Company. Severe
losses on the Company's FHA-insured manufactured housing contracts, or on other
FHA-insured home improvement loans originated by the Company, could reduce or
eliminate the Company's FHA Insurance reserves, in which event FHA Insurance
would not be available to cover losses on FHA-insured Contracts. In the event
the Company were terminated as Servicer due to its bankruptcy or otherwise, it
is anticipated that a proportionate amount of the Company's FHA Insurance
reserves would be transferred to the reserve account of the Trustee or other
successor servicer, but there can be no assurance of the amount, if any, that
would be so transferred. To the extent that losses on FHA-insured Contracts are
not covered by FHA Insurance, such losses will be absorbed to the extent of
Excess Cashflow otherwise payable to the Cash Collateral Account, or, if funds
in the Collection Account are not sufficient to pay Monthly Interest and
Monthly Principal, such losses will be covered by funds available in the Cash
Collateral Account. See "Description of FHA Insurance."
2. Limited Obligations. Payments on the Certificates will be made only from
payments or collections received on the Contracts, Advances by the Servicer,
payments received from the Cash Collateral Account and payments under the
Limited Guaranty. The Certificates will not represent an interest in or
obligation of the Company except to the limited extent described herein. The
Certificates will not be insured or guaranteed by any governmental agency or
instrumentality, the Underwriter or its affiliates, the Servicer or (except as
otherwise specified in this Prospectus) by the Company.
3. Junior Mortgage Liens; Value of Mortgaged Property. Approximately 85.03%
of the Contracts, by principal balance as of the Cutoff Date, are Secured
Contracts. Approximately 89.64% of the Secured Contracts, by principal balance
as of the Cutoff Date, are secured by mortgages or deeds of trust that are
second or third mortgages or deeds of trust which are junior to mortgages or
deeds of trust held by other lenders or institutional investors. The rights of
the Trust (and therefore the Certificateholders), as beneficiary under a
conventional junior deed of trust or as mortgagee under a conventional junior
mortgage, are subordinate to those of the mortgagee or beneficiary under the
senior mortgage or deed of trust, including the prior rights of the senior
mortgagee or beneficiary to cause the property securing the Contract to be sold
upon default of the mortgagor or trustor, thereby extinguishing the junior
mortgagees or junior beneficiary's lien unless the Servicer on behalf of the
Trust asserts its subordinate interest in the property in foreclosure
10
<PAGE>
litigation and, possibly, satisfies the defaulted senior loan or loans. See
"Certain Legal Aspects of the Contracts--Repurchase Obligations."
A substantial portion of the Secured Contracts have loan-to-value ratios of
90% or more, based on the aggregate of the outstanding principal balances of
all senior mortgages or deeds of trust and of the Secured Contract on the one
hand, and the value of the home and an estimate of the value of the financed
improvement, on the other. See "Green Tree Financial Corporation--Contract
Origination." An overall decline in the residential real estate market, the
general condition of a property securing a Contract or other factors could
adversely affect the value of the property securing a conventional (i.e., not
insured by FHA) Contract such that the remaining balance of the conventional
Contract, together with that of any senior liens on the related property, could
equal or exceed the value of the property. While the same economic decline
could effect the value of property securing an FHA-insured Contract, assuming
compliance with other FHA regulations, an FHA claim would still be payable to
the Company, notwithstanding the decline in property value below the aggregate
outstanding principal balances of the Contract and of all senior liens on the
property.
4. Non-recordation of Mortgage Assignments. Because of the expense and
administrative inconvenience involved, the Company has not recorded, and will
not record, the assignment to the Trustee of the mortgage or deed of trust
securing any Secured Contract. In some states, in the absence of such
recordation the assignment to the Trustee of the mortgage or deed of trust
securing a Contract may not be effective against creditors of or purchasers
from the Company or a trustee in bankruptcy of the Company.
5. Unsecured Contracts. Approximately 14.97% of the Contracts, by principal
balance as of the Cutoff Date, are Unsecured Contracts. The obligations of the
Obligor under each such Unsecured Contract are not secured by an interest in
the related real estate or otherwise, and the Trust, as the owner of such
Contracts, is a general unsecured creditor as to such obligations. As a
consequence, in the event of a default under an Unsecured Contract, the Trust
will have recourse only against the Obligors assets generally, along with all
other general unsecured creditors of the Obligor. In a bankruptcy or insolvency
proceeding relating to an Obligor on an Unsecured Contract, the obligations of
the Obligor under such Unsecured Contract may be discharged in their entirety,
notwithstanding the fact that the portion of such Obligors assets made
available to the Trust as a general unsecured creditor to pay amounts due and
owing thereunder are insufficient to pay all such amounts. An Obligor on an
Unsecured Contract may not demonstrate the same degree of concern over
performance of the Obligor's obligations under such Contract as if such
obligations were secured by the real estate owned by such Obligor.
6. Limited Historical Data With Respect to Home Improvement Loans. The
Company began purchasing and servicing FHA-insured home improvement contracts
in April 1989, and conventional home improvement contracts in September 1992,
and thus has limited historical experience with respect to the performance,
including the rate of prepayments of home improvement loans. Accordingly, the
Company's delinquency experience and loan loss and liquidation experience set
forth under "The Contracts" may not be indicative of the performance of the
Contracts held by the Trust.
7. Limited Liquidity. There is currently no market for the Certificates, and
there can be no assurance that a secondary market will develop or, if it does
develop, that it will provide Certificateholders with liquidity of investment
or will continue for the life of the Certificates. The Certificates will not be
listed on any securities exchange. The Certificates are subject to restrictions
on transfer to or for the benefit of employee benefit plans, trusts or accounts
subject to ERISA and described in Section 4975 of the Code, as described under
"ERISA Considerations."
8. Considerations in the Event of Company Insolvency. In the event of the
Company's insolvency, if the transfer of the Contracts from the Company to the
Trust were treated as a pledge to secure borrowings by the Company rather than
a sale, the distribution of proceeds of the Contracts to the Trust might be
subject to the automatic stay provisions of the United States Bankruptcy Code,
which would delay the distribution of such proceeds for an uncertain period of
time. In addition, a bankruptcy trustee would have the power to sell the
Contracts if the proceeds of such sale could satisfy the amount of the debt
deemed owed by the Company, or the bankruptcy trustee could substitute other
collateral in lieu of the Contracts to secure such
11
<PAGE>
debt, or such debt could be subject to adjustment by the bankruptcy trustee if
the Company were to file for reorganization under Chapter 11 of the United
States Bankruptcy Code. See "Description of the Certificates--Conveyance of
Contracts."
In the event of the Company's insolvency, if the Cash Collateral Account were
somehow deemed to be property of the Company's bankruptcy estate, the payment
of funds to the Trust pursuant to the Cash Collateral Guaranty might be subject
to the automatic stay provisions of the United States Bankruptcy Code, or a
bankruptcy trustee might attempt to reduce amounts retained or required to be
deposited into the Cash Collateral Account if those amounts were determined by
the bankruptcy trustee to exceed amounts reasonably necessary or adequate to
cover Shortfalls which might become payable to Certificateholders out of the
Cash Collateral Account.
STRUCTURE OF THE TRANSACTION
On or about April 7, 1994 (the "Closing Date"), the Company will establish
the Trust pursuant to a Pooling and Servicing Agreement to be dated as of March
1, 1994 (the "Agreement"), between the Company, as Seller and Servicer, and the
Trustee.
The Certificates will represent fractional undivided interests in the Trust
("Fractional Interests"), the corpus of which consists of the Contracts,
including all rights to receive payments due on such Contracts on and after
March 1, 1994 (the "Cutoff Date"), all rights under FHA Insurance with respect
to the FHA-insured Contracts, liens on the related real estate (in the case of
Secured Contracts), amounts held for the Trust in the Collection Account (as
defined below), rights to receive payments upon demand from a cash collateral
account (the "Cash Collateral Account") described in "Description of the Cash
Collateral Guaranty," and the Limited Guaranty of the Company described in
"Description of the Limited Guaranty."
Payments and recoveries in respect of principal and interest on the Contracts
will be paid into a separate trust account maintained at an Eligible
Institution (initially First Bank National Association, Minneapolis, Minnesota)
in the name of the Trust (the "Collection Account"), no later than one Business
Day after receipt. Payments deposited in the Collection Account in respect of
each Due Period will be applied on the fifteenth day of the next month (or, if
such day is not a business day, the next succeeding business day) (each a
"Payment Date") to pay Monthly Interest and Monthly Principal (each as defined
below under "Yield and Prepayment Considerations") to Certificateholders as of
the immediately preceding Record Date, to pay certain monthly fees to the
Servicer as compensation for its servicing of the Contracts (the "Monthly
Servicing Fee"), and to pay any remaining amounts in the Collection Account to
the Cash Collateral Trustee for disposition in accordance with the Cash
Collateral Trust Agreement.
The Servicer will be obligated to advance any scheduled payments on the
Contracts that were due but not received during the prior Due Period
("Advances"). The Servicer will be entitled to reimbursement of Advances from
payments on the Contracts and the Cash Collateral Account. The Servicer will
not be required to make any Advance to the extent that it does not expect to
recoup the Advance from subsequent collections on the Contract or from
liquidation proceeds thereof. If the Servicer fails to make any Advance
required under the Agreement, the Trustee is obligated (subject to certain
conditions) to make such Advance.
The Trust will have the benefit of the right to demand payments from the Cash
Collateral Account. Subject to the limit of the amount available in the Cash
Collateral Account, on the Business Day prior to any Payment Date in which a
Shortfall (the difference (if any) between (a) the funds in the Collection
Account available for distribution on such Payment Date (including any
Advances) and (b) the sum of (i) Monthly Principal and Monthly Interest
required to be paid to Certificateholders on such Payment Date, (ii) the
Monthly Servicing Fee to be paid to the Servicer, (iii) any amounts required to
reimburse the Trustee for FHA Insurance premiums paid by the Trustee, and (iv)
any amounts required to reimburse the Servicer or the Trustee for Uncollectible
Advances) occurs the Trustee shall make a demand in the amount of such
Shortfall (or the funds in the Cash Collateral Account, if less) under the Cash
Collateral Guaranty and
12
<PAGE>
deposit the funds received therefrom in the Collection Account. On the Closing
Date the Cash Collateral Depositor will deposit $6,973,036 in cash in the Cash
Collateral Account. On each Payment Date, the Cash Collateral Trustee will
deposit any funds received by it from the Trustee in the Cash Collateral
Account, unless the amount on deposit in the Cash Collateral Account equals the
Requisite Amount (as defined below under "Description of the Cash Collateral
Account").
Following the transfer of the Contracts from the Company to the Trust, the
obligations of the Company are limited to (a) the obligation of the Servicer to
service the Contracts, (b) certain representations and warranties in the
Agreement, (c) certain indemnities, and (d) the Limited Guaranty. The Company
is obligated under the Agreement to repurchase at the Repurchase Price any
Contract on the first Payment Date which is more than 90 days after the Company
becomes aware, or the Company's receipt of written notice from the Trustee, of
breach of any such representation and warranty in the Agreement that materially
adversely affects the Certificateholders' interest in any Contract if such
breach has not been cured prior to such date. Such repurchase obligation is not
covered by the Cash Collateral Guaranty. The Agreement also provides that the
Company has certain obligations to repurchase Contracts and to indemnify the
Trustee and Certificateholders with respect to certain other matters.
USE OF PROCEEDS
The Company will use the net proceeds received from the sale of the
Certificates for working capital and general corporate purposes, including
building a portfolio of home improvement retail installment contracts and
promissory notes, providing warehouse financing for the purchase of contracts
and other costs of maintaining such contracts until they are pooled and sold to
other investors.
THE CONTRACTS
Each Contract is a home improvement retail installment sales contract
originated by a Company-approved home improvement contractor and purchased by
the Company, or a home improvement promissory note originated by the Company
directly. Each Contract finances improvements to a one- to four-family
residential property, an owner-occupied condominium or town house or a
manufactured home which either qualifies as real estate under state law or is
located in a Company-approved park, and is either secured by such real estate
or is unsecured.
The Company will make certain representations and warranties in the
Agreement, including that (a) each Contract is fully amortizing with a fixed
contractual rate of interest and provides for level payments over the term of
such loan, computed on the simple interest method, (b) each Contract has its
last scheduled payment due no later than February 2014, (c) each FHA-insured
Contract was originated in accordance with applicable FHA regulations and is
insured, without set-off, surcharge or defense, by FHA Insurance, and (d) each
Secured Contract is secured by a first, second, or third priority lien on the
improved real estate. The Contracts were originated or acquired by the Company
in the ordinary course of the Company's business. A detailed listing of the
Contracts is appended to the Agreement. See "Description of the Certificates."
By principal balance as of the Cutoff Date, approximately 85.03% of the
Contracts are Secured Contracts and approximately 14.97% of the Contracts are
Unsecured Contracts. Approximately 40.56% of the Contracts, by principal
balance as of the Cutoff Date, are insured by FHA, to the extent described in
"Description of FHA Insurance." All Contracts have a contractual rate of
interest of at least 8.49% per annum and not more than 17.99% and the weighted
average contractual rate of interest of the Contracts as of the Cutoff Date is
12.42%. The Contracts have remaining maturities of at least 10 months but not
more than 240 months and original maturities of at least 24 months but not more
than 240 months. The Contracts had a weighted average term to scheduled
maturity, as of origination, of 146 months, and a weighted average term to
scheduled maturity, as of the Cutoff Date, of 142 months. The average principal
balance per Contract as of the Cutoff Date was $9,987.10 and the principal
balances on the Contracts as of the Cutoff Date ranged from
13
<PAGE>
$185.19 to $140,402.46.The Contracts arise from loans relating to real property
located in 48 states and the District of Columbia. Approximately 11.41% of the
Contracts, by principal balance as of the Cutoff Date, financed improvements to
real estate located in Florida. Approximately 13.02% of the conventional
Contracts (i.e., not insured by FHA) financed improvements to real estate
located in California. Current loan-to-value ratios with respect to the Secured
Contracts are not available. None of the Contracts provide for recourse to the
originating contractor in the event of a default by the Obligor. The Contracts
constitute substantially all of the home improvement loans owned by the Company
as of the Cutoff Date, meeting the criteria stated under "Description of the
Certificates--Conveyance of Contracts."
The following table sets forth certain statistical information regarding the
FHA-insured Contracts, the conventional Contracts and all Contracts in the
Trust as of the Cutoff Date.
CERTAIN CONTRACT CHARACTERISTICS
<TABLE>
<CAPTION>
CONVENTIONAL
------------------------------
FHA-INSURED SECURED UNSECURED TOTAL POOL
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Principal Balance....... $54,386,169.25 $59,631,880.18 $20,078,786.44 $134,096,835.87
Number of Contracts..... 6,081 3,989 3,357 13,427
Percentage of Principal
Balance................ 40.56% 44.47% 14.97% 100.00%
Weighted Average
Contract Rate.......... 12.95% 11.14% 14.81% 12.42%
--Highest Contract
Rate................. 15.99% 15.50% 17.99% 17.99%
--Lowest Contract
Rate................. 8.99% 8.49% 9.95% 8.49%
Weighted Average Remain-
ing
Term to Scheduled Matu-
rity (Months)......... 132 168 91 142
--Maximum Remaining
Term to Scheduled Ma-
turity............... 239 240 233 240
--Minimum Remaining
Term to Scheduled Ma-
turity............... 16 18 10 10
Weighted Average Origi-
nal Term to Scheduled
Maturity (Months)...... 136 172 95 146
--Maximum Original
Term to Scheduled Ma-
turity............... 240 240 240 240
--Minimum Original
Term to Scheduled Ma-
turity............... 24 24 24 24
Average Principal Bal-
ance................... $ 8,943.62 $ 14,949.08 $ 5,981.17 $ 9,987.10
--Highest Principal
Balance.............. $ 24,908.45 $ 140,402.46 $ 14,942.06 $ 140,402.46
-- Lowest Principal
Balance.............. $ 812.43 $ 1,383.43 $ 185.19 $ 185.19
</TABLE>
Set forth below is a description of certain additional characteristics of the
Contracts.
14
<PAGE>
GEOGRAPHICAL DISTRIBUTION OF IMPROVED REAL ESTATE
<TABLE>
<CAPTION>
% OF CONTRACT
POOL BY
NUMBER OF % OF CONTRACT AGGREGATE PRINCIPAL OUTSTANDING
CONTRACTS POOL BY NUMBER BALANCE PRINCIPAL
AS OF CUT- OF CONTRACTS AS OUTSTANDING AS OF BALANCE AS OF
OFF DATE OF CUT-OFF DATE CUT-OFF DATE CUT-OFF DATE
---------- --------------- ------------------- -------------
<S> <C> <C> <C> <C>
Alabama................. 8 .06% $ 66,209.69 .05%
Arizona................. 325 2.42 4,228,851.78 3.15
Arkansas................ 302 2.25 2,253,789.99 1.68
California.............. 717 5.34 11,637,494.51 8.68
Colorado................ 379 2.82 3,388,628.40 2.53
Connecticut............. 224 1.67 1,990,965.91 1.48
Delaware................ 111 .83 1,045,343.42 .78
District of Columbia.... 22 .16 168,246.95 .13
Florida................. 1,218 9.07 15,302,764.21 11.41
Georgia................. 337 2.51 3,251,594.83 2.43
Idaho................... 41 .31 473,628.91 .35
Illinois................ 445 3.31 4,168,957.37 3.11
Indiana................. 100 .75 805,280.97 .60
Iowa.................... 79 .59 699,629.46 .52
Kansas.................. 151 1.13 1,401,452.44 1.05
Kentucky................ 72 .54 551,076.60 .41
Louisiana............... 108 .80 840,410.97 .63
Maine................... 176 1.31 1,624,378.44 1.21
Maryland................ 234 1.74 2,592,160.40 1.93
Massachusetts........... 298 2.22 2,416,783.49 1.80
Michigan................ 390 2.90 3,217,380.70 2.40
Minnesota............... 194 1.45 1,822,421.27 1.36
Mississippi............. 279 2.08 2,492,866.09 1.86
Missouri................ 212 1.58 1,815,446.70 1.35
Montana................. 50 .37 390,597.93 .29
Nebraska................ 33 .25 286,529.76 .21
Nevada.................. 98 .73 1,467,050.89 1.09
New Hampshire........... 110 .82 1,017,850.06 .76
New Jersey.............. 683 5.09 7,295,581.64 5.44
New Mexico.............. 66 .49 721,511.15 .54
New York................ 640 4.77 6,917,132.93 5.16
North Carolina.......... 687 5.12 5,873,628.66 4.38
North Dakota............ 1 .01 14,474.27 .01
Ohio.................... 525 3.91 4,765,887.87 3.55
Oklahoma................ 203 1.51 1,528,378.33 1.14
Oregon.................. 156 1.16 1,863,857.54 1.39
Pennsylvania............ 1,020 7.60 9,135,641.78 6.81
Rhode Island............ 74 .55 668,812.23 .50
South Carolina.......... 221 1.65 1,698,101.70 1.27
South Dakota............ 10 .07 97,537.62 .07
Tennessee............... 399 2.97 3,359,779.59 2.51
Texas................... 1,100 8.19 10,962,082.97 8.17
Utah.................... 105 .78 1,106,898.03 .83
Vermont................. 50 .37 323,261.34 .24
Virginia................ 85 .63 587,094.67 .44
Washington.............. 411 3.06 3,577,877.93 2.67
West Virginia........... 93 .69 583,144.43 .44
Wisconsin............... 73 .54 614,732.33 .46
Wyoming................. 112 .83 983,626.72 .73
------ ------ --------------- ------
Total................... 13,427 100.00% $134,096,835.87 100.00%
====== ====== =============== ======
</TABLE>
15
<PAGE>
YEARS OF ORIGINATION OF CONTRACTS
<TABLE>
<CAPTION>
% OF CONTRACT POOL BY
AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
NUMBER OF CONTRACTS BALANCE OUTSTANDING BALANCE AS OF
YEAR OF ORIGINATION AS OF CUT-OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ------------------- ------------------- ------------------- ---------------------
<S> <C> <C> <C>
1990.................... 1 $ 4,345.23 .00%
1991.................... 0 .00 .00
1992.................... 87 573,082.62 .43
1993.................... 12,691 126,894,011.26 94.63
1994.................... 648 6,625,396.76 4.94
------ --------------- ------
13,427 $134,096,835.87 100.00%
====== =============== ======
</TABLE>
DISTRIBUTION OF ORIGINAL CONTRACT AMOUNTS
<TABLE>
<CAPTION>
% OF CONTRACT POOL BY
AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
ORIGINAL CONTRACT NUMBER OF CONTRACTS BALANCE OUTSTANDING BALANCE AS OF
AMOUNT (IN DOLLARS)(1) AS OF CUT-OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ---------------------- ------------------- ------------------- ---------------------
<S> <C> <C> <C>
Less than $10,000....... 7,830 $ 47,550,981.63 35.46%
$ 10,000--$ 19,999.99... 4,769 64,533,289.62 48.12
$ 20,000--$ 29,999.99... 656 15,427,560.03 11.51
$ 30,000--$ 39,999.99... 124 3,939,813.22 2.94
$ 40,000--$ 49,999.99... 26 1,158,820.38 .86
$ 50,000--$ 59,999.99... 11 568,040.03 .42
$ 60,000--$ 69,999.99... 4 247,745.69 .19
$ 70,000--$ 79,999.99... 2 146,467.09 .11
$ 80,000--$ 89,999.99... 3 252,707.00 .19
$ 90,000--$ 99,999.99... 0 .00 .00
$100,000--$109,999.99... 0 .00 .00
$110,000--$119,999.99... 0 .00 .00
$120,000--
$129,999.99(1)......... 0 .00 .00
$130,000--$139,999.99... 1 131,008.72 .10
$140,000--$149,999.99... 1 140,402.46 .10
------ --------------- ------
Total............... 13,427 $134,096,835.87 100.00%
====== =============== ======
</TABLE>
- --------
(1) The largest original contract amount may not exceed $125,000 under the
Company's 75% loan-to-value program, unless a higher amount financed is
approved by senior management.
16
<PAGE>
CONTRACT RATES
<TABLE>
<CAPTION>
% OF CONTRACT POOL BY
AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
RANGE OF CONTRACTS BY NUMBER OF CONTRACTS BALANCE OUTSTANDING BALANCE AS OF
CONTRACT RATE AS OF CUT-OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- --------------------- ------------------- ------------------- ---------------------
<S> <C> <C> <C>
8.01%-9.00%............. 47 $ 1,744,274.41 1.30%
9.01%-10.00%............ 579 9,431,004.31 7.03
10.01%-11.00%........... 1,667 29,621,408.22 22.09
11.01%-12.00%........... 1,595 16,877,673.44 12.59
12.01%-13.00%........... 4,464 40,221,716.97 30.00
13.01%-14.00%........... 2,691 22,278,902.73 16.61
14.01%-15.00%........... 1,529 8,947,689.05 6.67
15.01%-16.00%........... 737 4,341,844.27 3.24
16.01%-17.00%........... 92 519,468.79 0.39
17.01%-18.00%........... 26 112,853.68 0.08
------ --------------- ------
Total............... 13,427 $134,096,835.87 100.00%
====== =============== ======
</TABLE>
REMAINING MONTHS TO MATURITY
<TABLE>
<CAPTION>
MONTHS REMAINING TO % OF CONTRACT POOL BY
SCHEDULED MATURITY AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
AS OF CUT- NUMBER OF CONTRACTS BALANCE OUTSTANDING BALANCE AS OF
OFF DATE AS OF CUT-OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ------------------- ------------------- ------------------- ---------------------
<S> <C> <C> <C>
Less than 31............ 347 $ 1,040,081.70 0.78%
31-60................... 2,536 12,446,424.17 9.28
61-90................... 1,667 11,422,910.35 8.52
91-120.................. 4,232 39,550,984.36 29.49
121-150................. 178 1,879,101.22 1.40
151-180................. 3,895 55,435,559.28 41.34
181-210................. 2 40,534.66 0.03
211-240................. 570 12,281,240.13 9.16
------ --------------- ------
Total............... 13,427 $134,096,835.87 100.00%
====== =============== ======
</TABLE>
17
<PAGE>
DELINQUENCY, LOAN DEFAULT AND LOSS INFORMATION
The following tables set forth the delinquency experience and loan default
and loss experience for the past 48 months of the portfolio of FHA-insured and
conventional home improvement loans serviced by the Company.
DELINQUENCY EXPERIENCE
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------
1993 1992 1991 1990
------ ------ ------ ------
<S> <C> <C> <C> <C>
Number of Contracts Outstanding(1)............. 36,828 25,803 21,337 10,267
Period of Delinquency(2):
30-59 Days................................... 279 355 228 87
60-89 Days................................... 88 98 84 29
90 Days or More.............................. 169 207 164 52
------ ------ ------ ------
Total Home Improvement Contracts Delinquent.... 536 660 476 168
====== ====== ====== ======
Delinquencies as a Percent of Contracts Out-
standing...................................... 1.46% 2.56% 2.23% 1.64%
</TABLE>
- --------
(1) Excludes defaulted contracts not yet liquidated.
(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.
LOAN DEFAULT AND LOSS EXPERIENCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED DECEMBER 31,
---------------------------------
1993 1992 1991 1990
------- ------- ------- ------
<S> <C> <C> <C> <C>
Principal Balance of Contracts Serviced(1)... 314,300 207,114 174,146 84,812
Contract Defaults(2)......................... 1.51% 1.86% 1.09% .26%
Net Losses:
Dollars(3)................................. 261 768 305 1
Percentage(4).............................. .08% .37% .18% .00%
</TABLE>
- --------
(1) As of period end. Includes defaulted contracts not yet liquidated.
(2) As a percentage of the total number of contracts being serviced as of
period end.
(3) Does not include any estimated losses for defaulted contracts not yet
liquidated. The calculation of net loss on FHA-insured Contracts includes
unpaid interest to the date of FHA claim submission and all expenses of
liquidation, and reflects proceeds of FHA Insurance claims paid.
(4) As a percentage of the principal amount of contracts being serviced as of
period end.
The Company's management is not aware of any trends or anomalies which have
adversely affected the delinquency, loan default and loss experience of its
portfolio of home improvement contracts.
The data presented in the foregoing tables are for illustrative purposes
only and there is no assurance that the delinquency, loan loss or liquidation
experience of the Contracts will be similar to that set forth above. Moreover,
since the Company began originating and purchasing FHA-insured home
improvement contracts in April 1989, and secured and unsecured conventional
home improvement contracts in September 1992, it is likely that the Company's
portfolio is not yet sufficiently seasoned to show the delinquencies and
losses that would be experienced if such data were collected over a longer
period of time. Because the Company began originating and purchasing
conventional home improvement contracts in September 1992, the data presented
in the foregoing tables do not reflect any significant experience with
conventional home improvement contracts. Moreover, such data have not been
presented separately for conventional home
18
<PAGE>
improvement contracts based upon the Company's determination that such data is
not statistically meaningful.
YIELD AND PREPAYMENT CONSIDERATIONS
The yield on any Certificate will depend on the price paid by the
Certificateholder, the timing of principal payments, and the timing and amount
of any liquidation losses on the Contracts.
The "Initial Principal Amount" of the Certificates ($134,096,835.87) equals
the aggregate of principal payments due on the Contracts as of the Cutoff Date.
The "Monthly Principal" distributable to Certificateholders on any Payment Date
will be, subject to the limit of available funds in the Collection Account
(including funds received from the Cash Collateral Account) after taking into
account the distribution of Monthly Interest, the sum of (a) the amount of
regular principal payments on Contracts paid or applied in respect of the prior
Due Period; (b) the amount of full Principal Prepayments received and partial
Principal Prepayments applied during the prior Due Period; (c) the principal
portion of all payments that were Delinquent Payments as of the end of the
prior Due Period; (d) the unpaid principal balance of all Contracts that became
Liquidated Contracts during the prior Due Period; (e) the principal portion of
the Repurchase Price paid by the Company to repurchase Contracts for breach of
representations and warranties, as described under "Description of the
Certificates--Conveyance of Contracts"; (f) the amount of any reduction in the
principal amount deemed owed on a Contract as a result of the Obligors
bankruptcy; and (g) any principal amount specified in clauses (a) through (f)
that was not previously distributed because of an insufficient amount of funds
available in the Collection Account. A "Liquidated Contract" is a defaulted
Contract as to which the Servicer has received all amounts which the Servicer
reasonably and in good faith expects to recover from or on account of such
Contract, or, in the case of an FHA-insured Contract, either FHA has paid the
claim or the Servicer has determined in good faith that FHA will not pay the
claim. The "Principal Balance" at any time means the Initial Principal Amount
minus all prior payments of Monthly Principal actually made.
Higher than expected "Principal Prepayments" (payments received from
Obligors, other than regular payments of principal, which are applied upon
receipt or, in the case of partial prepayments, upon the next scheduled payment
date for such Contract, to reduce the outstanding principal balance on the
Contracts) will increase the yield on Certificates purchased at a price less
than the undivided ownership interest in the aggregate principal balance of the
Contracts represented by such Certificates and will decrease the yield on
Certificates purchased at a price greater than the undivided ownership interest
in the aggregate principal balance of the Contracts represented by such
Certificates. The Company has no significant experience with respect to the
rate of Principal Prepayments on home improvement contracts. Because the
Contracts have scheduled due dates throughout the calendar month, and because
all Principal Prepayments are passed through to Certificateholders on the
Payment Date following the Due Period in which such Principal Prepayment
occurred, prepayments on the Contracts would affect the amount of funds
available to make distributions on the Certificates on any Payment Date only if
a substantial portion of the Contracts prepaid prior to their respective due
dates in a particular month (thus paying less than 30 days' interest for that
Due Period) while very few Contracts prepaid after their respective due dates
in that month. In addition, liquidations of Defaulted Contracts or the
Servicer's exercise of its option to repurchase the entire remaining pool of
Contracts (see "Description of the Certificates--Repurchase Option") will
affect the timing of principal distributions on the Certificates. Prepayments
on mortgage loans and other consumer installment obligations are commonly
measured relative to a prepayment standard or model. The Constant Prepayment
Rate ("CPR") model assumes that the outstanding principal balance of a pool of
loans prepays at a specified constant annual rate. The Certificates were priced
using a prepayment assumption of 16% CPR, or an assumption that 16% of the
outstanding principal balance of the pool of Contracts will be prepaid over the
course of a year. There can be no assurance that the Contracts will prepay at
such rate, and it is unlikely that prepayments or liquidations of the Contracts
will occur at any constant rate.
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The amount of "Monthly Interest" to which the Certificateholders are entitled
on any Payment Date will be the product of the Pass-Through Rate and the
Principal Balance immediately following the preceding Payment Date, based on a
360-day year consisting of 12 months of 30 days each. Certificateholders will
receive Monthly Interest on each Payment Date to the extent that funds
available in the Collection Account, including any funds received from the Cash
Collateral Account, are sufficient therefor. As required by applicable state
laws, interest paid by Obligors on the Contracts is computed according to the
simple interest method. Principal and interest payable on the Certificates will
be computed according to the actuarial method.
The final scheduled payment date on the Contract with the latest maturity is
in February 2014.
GREEN TREE FINANCIAL CORPORATION
GENERAL
The Company is a Minnesota corporation which, as of December 31, 1993, had
total assets of approximately $1,739,502,000 and stockholders' equity of
approximately $549,429,000. The Company purchases, pools, sells and services
conditional sales contracts for manufactured homes and other consumer
installment sales contracts. The Company is currently the largest servicer of
government-insured manufactured housing contracts, and is one of the largest
servicers of conventional manufactured housing contracts, in the United States.
The Company began financing FHA-insured home improvement loans in April 1989
and conventional home improvement loans in September 1992. Currently, the
Company also purchases, pools and services installment sales contracts for
motorcycles and continues to service recreational vehicle installment sales
contracts previously originated. It also finances certain recreational sports
vehicles manufactured by Polaris Industries, L.P., Limited Partnership, and
horse trailers produced by other manufacturers. The Company's principal
executive offices are located at 1100 Landmark Towers, 345 St. Peter Street,
St. Paul, Minnesota 55102-1639 (telephone (612) 293-3400). The Company's
quarterly and annual reports are available from the Company upon written
request made to the Company.
CONTRACT ORIGINATION
Through its centralized loan processing operations, the Company arranges to
purchase certain contracts from home improvement contractors located throughout
the United States. The Company's business development managers contact home
improvement contractors and explain the Company's available financing plans,
terms, prevailing rates and credit and financing policies. If the contractor
wishes to utilize the Company's available customer financing, the contractor
must make an application for contractor approval. The Company has a contractor
approval process pursuant to which the financial condition, business experience
and qualifications of the contractor are reviewed prior to his or her approval
to sell Contracts to the Company. In addition, the Company has a centralized
compliance group which reviews and updates contractor financial condition and
reviews contractors on an annual basis to determine whether such contractor's
approval will be continued. The Company also reviews monthly contractor trend
reports which show the default and delinquency trends of the particular
contractor with respect to contracts sold to the Company. The Company
occasionally will originate directly a home improvement promissory note
involving a home improvement transaction.
All contracts that the Company originates are written on forms provided by
the Company and are purchased on an individually approved basis in accordance
with the Company's guidelines. The contractor submits the customer's credit
application and construction contract to the Company's office where an analysis
of the creditworthiness of the customer is made. The analysis includes a review
of the customer's paying habits, length and likelihood of continued employment
and certain other procedures, including the percentage of the customer's
monthly payments on long term debts to gross monthly income, which may not
exceed 45%. Senior management may approve deviations from the Company's
guidelines on a case-by-case basis.
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The original principal amount of a single-family FHA-insured home improvement
contract currently may not exceed $25,000 without specific FHA approval, with a
maximum term of 20 years. FHA will insure loans of up to $17,500 for
manufactured homes which qualify as real estate under applicable state law and
loans of up to $12,000 per unit or a $48,000 limit for four units of owner-
occupied multiple-family homes. The original principal amount of a conventional
secured home improvement loan may not exceed $30,000 for the Company's secured
"no equity" program, and $100,000 for the Company's secured lien program,
unless a higher amount financed is approved by senior management. The original
principal amount of a conventional unsecured home improvement loan may not
exceed $10,000. The Company requires that any secured home improvement contract
be secured by a recorded lien (which may be a first, second or (with respect to
FHA-insured contracts or conventional contracts of $15,000 or less) third lien)
on the improved real estate. Certain other criteria for home improvement
contracts eligible for FHA Insurance are described under the caption
"Description of FHA Insurance." If the Company determines that the application
meets the Company's underwriting guidelines and applicable FHA regulations (for
FHA-insured contracts) and the credit is approved, the Company purchases the
contract from the contractor when the customer verifies satisfactory completion
of the work, or, in the case of staged funding, the Company follows up with the
customer for the completion certificate 60 days after funding.
The Company began financing conventional home improvement loans in September
1992. Conventional home improvement loans are not insured by FHA. Many of the
conventional Contracts in the Trust are either secured 90% loan-to-value
Contracts or secured 80% loan-to-value Contracts. The Company also has a
special secured program for certain types of larger remodeling projects. The
secured lien program generally allows a maximum loan amount of up to $100,000
on an owner-occupied one- to four-family residence, with a first, second or
third lien on the real estate. The value of the home is determined by an
appraisal as described below, with an additional 70% of the loan amount added
to the appraisal to reflect the value of the improvement financed for loans up
to $50,000. An appraisal is required for all secured contracts; for loan
amounts over $30,000, a full Uniform Residential Appraisal Report is required.
Title insurance is required on all loan amounts of $30,000 or more.
The "no equity" program allows an amount financed from $5,000 to $30,000, or
higher with senior management approval. Eligible property includes an owner-
occupied single family home, with a first or second lien on the real estate,
and only certain types of improvements may be financed.
The unsecured conventional program allows for an amount financed from $2,500
to $10,000. The allowable term of unsecured contracts is 24 to 120 months.
Eligible property includes an owner-occupied single family home, up to a four
unit multiple-family dwelling or owner-occupied condominiums and town houses
and owner-occupied manufactured homes located in Company-approved parks or
attached to the real estate.
DESCRIPTION OF THE CERTIFICATES
The Certificates will be issued pursuant to the Agreement between the
Company, as Seller and Servicer, and the Trustee. A copy of the execution form
of the Agreement will be filed in a Current Report on Form 8-K with the
Securities and Exchange Commission after the initial issuance of the
Certificates. The following summary describes the material provisions of the
Agreement, reference to which is hereby made for a complete recital of its
terms.
GENERAL
The Certificates will be issued in fully registered, certificated form only
and will represent fractional undivided interests in the Trust. The
Certificates will be issued in denominations of $1,000 and any integral
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multiple thereof, except for one Certificate with a denomination representing
the remainder of the Initial Principal Amount. The Certificates (other than the
single Certificate referred to in the preceding sentence) initially will be
represented by one or more certificates registered in the name of Cede as the
nominee of DTC, and will only be available in the form of book-entries on the
records of DTC and participating members thereof. See "Description of
Certificates--Registration of the Certificates." The Trust consists of the
Contracts and the rights, benefits, obligations and proceeds arising therefrom
or in connection therewith, including, with respect to the Secured Contracts,
liens on the related real estate, rights under applicable FHA Insurance for
FHA-insured Contracts, amounts held for the Trust in the Collection Account,
the right to receive payments upon demand from the Cash Collateral Account and
the Limited Guaranty of the Company.
Distributions of Monthly Principal and Monthly Interest on the Certificates
will be made by the Paying Agent on each Payment Date to persons in whose names
the Certificates are registered as of the Business Day immediately preceding
such Payment Date (the "Record Date"). See "Description of Certificates--
Registration of the Certificates." The first Payment Date for the Certificates
will be April 15, 1994. Payments of Monthly Principal and Monthly Interest will
be made by check mailed to such Certificateholder at the address appearing on
the Certificate Register (except that a Certificateholder may request payment
by wire transfer). Final payments of Monthly Principal and Monthly Interest
will be made only upon tender of the Certificates to the Trustee for
cancellation.
CONVEYANCE OF CONTRACTS
On the Closing Date, the Company will establish the Trust and transfer,
assign, set over and otherwise convey to the Trust all right, title and
interest of the Company in the Contracts, including all principal and interest
received on or with respect to the Contracts (other than receipts of principal
and interest due on the Contracts before the Cutoff Date). On behalf of the
Trust, as the issuer of the Certificates offered hereby, the Trustee,
concurrently with such conveyance, will execute and deliver the Certificates to
or upon the order of the Company. The Contracts are described on a list
delivered to the Trustee and certified by a duly authorized officer of the
Company. Such list includes the amount of monthly payments due on each Contract
as of the date of issuance of the Certificates, the Contract Interest Rate on
each Contract and the maturity date of each Contract. Such list will be
attached as an exhibit to the Agreement and will be available for inspection by
any Certificateholder at the principal office of the Company. Prior to the
conveyance of the Contracts to the Trust, the Company's internal audit
department will have completed a review of all the Contract files, confirming
the accuracy of each item on the list of Contracts delivered to the Trustee.
Any Contract discovered not to agree with such list in a manner that is
materially adverse to the interests of the Certificateholders will be
repurchased by the Company, or, if the discrepancy relates to the unpaid
principal balance of a Contract, the Company may deposit cash in the Collection
Account in an amount sufficient to offset such discrepancy.
The Trustee will maintain possession of the Contracts and any other documents
contained in the Contract files. A Uniform Commercial Code financing statement
will be filed in Minnesota, reflecting the conveyance and assignment of the
Contracts to the Trustee, and the Company's accounting records and computer
systems will also reflect such conveyance and assignment.
Dorsey & Whitney, counsel to the Company, will render an opinion to the
Trustee that the transfer of the Contracts from the Company to the Trust would,
in the event the Company became a debtor under the United States Bankruptcy
Code, be treated as a true sale and not as a pledge to secure borrowings. If,
however, the transfer of the Contracts from the Company to the Trust were
treated as a pledge to secure borrowings by the Company, the distribution of
proceeds of the Contracts to the Trust might be subject to the automatic stay
provisions of the United States Bankruptcy Code, which would delay the
distribution of such proceeds for an uncertain period of time. In addition, a
bankruptcy trustee would have the power to sell the Contracts if the proceeds
of such sale could satisfy the amount of the debt deemed owed by the Company,
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or the bankruptcy trustee could substitute other collateral in lieu of the
Contracts to secure such debt, or such debt could be subject to adjustment by
the bankruptcy trustee if the Company were to file for reorganization under
Chapter 11 of the United States Bankruptcy Code.
The Company will make certain representations and warranties in the Agreement
with respect to each Contract, including that: (a) as of the Cutoff Date the
most recent scheduled payment was made or was not delinquent more than 59 days;
(b) no provision of a Contract has been waived, altered or modified in any
respect, except by instruments or documents included in the Contract file and
reflected on the list of Contracts delivered to the Trustee; (c) each Contract
is a legal, valid and binding obligation of the Obligor and is enforceable in
accordance with its terms (except as may be limited by laws affecting creditors
rights generally); (d) no Contract is subject to any right of rescission, set-
off, counterclaim or defense; (e) each Contract (if an FHA-insured Contract)
was originated in accordance with applicable FHA regulations and is insured,
without set-off, surcharge or defense, by FHA Insurance; (f) each Contract was
originated by a home improvement contractor in the ordinary course of such
contractors business or was originated by the Company directly; (g) no Contract
was originated in or is subject to the laws of any jurisdiction whose laws
would make the transfer of the Contract or an interest therein pursuant to the
Agreement or the Certificates unlawful; (h) each Contract complies with all
requirements of law; (i) no Contract has been satisfied, subordinated to a
lower lien ranking than its original position (if any) or rescinded; (j) each
Secured Contract creates a valid and perfected lien on the related improved
real estate; (k) all parties to each Contract had full legal capacity to
execute such Contract; (l) no Contract has been sold, conveyed and assigned or
pledged to any other person and the Company has good and marketable title to
each Contract free and clear of any encumbrance, equity, loan, pledge, charge,
claim or security interest, and is the sole owner and has full right to
transfer such Contract to the Trustee; (m) as of the Cutoff Date there was no
default, breach, violation or event permitting acceleration under any Contract
(except for payment delinquencies permitted by clause (a) above), no event that
with notice and the expiration of any grace or cure period would constitute a
default, breach, violation or event permitting acceleration under such
Contract, and the Company has not waived any of the foregoing; (n) each
Contract is a fully-amortizing loan with a fixed rate of interest and provides
for level payments over the term of such Contract; (o) each Secured Contract
contains customary and enforceable provisions such as to render the rights and
remedies of the holder thereof adequate for realization against the collateral;
(p) the description of each Contract set forth in the list delivered to the
Trustee is true and correct; (q) there is only one original of each Contract;
and (r) each Contract was originated or purchased in accordance with the
Company's then-current underwriting guidelines. The Company will also make
certain representations and warranties with respect to the Contracts in the
aggregate, including that (i) the aggregate principal amount payable by the
Obligors as of the Cutoff Date equals the Initial Principal Amount of the
Certificates, and each Contract has a contractual rate of interest of at least
8.49%; (ii) no Contract has a remaining maturity of more than 240 months; (iii)
no more than 5% of the Contracts, by principal balance as of the Cutoff Date,
were secured by properties located in an area with the same zip code; and (iv)
no adverse selection procedures were employed in selecting the Contracts from
the Company's portfolio.
Under the terms of the Agreement, the Company has agreed to repurchase, at
the Repurchase Price, any Contract that is materially and adversely affected by
a breach of a representation and warranty with respect to such Contract made in
the Agreement if such breach has not been cured within 90 days. This repurchase
obligation constitutes the sole remedy available to the Trust and the
Certificateholders for a breach of a representation or warranty under the
Agreement with respect to the Contracts (but not with respect to any other
breach by the Company of its obligations under the Agreement).
The "Repurchase Price" of a Contract at any time means the outstanding
principal amount of such Contract (without giving effect to any Advances made
by the Servicer or the Trustee), plus interest at the Pass-Through Rate on such
Contract from the end of the Due Period with respect to which the Obligor last
made a payment (without giving effect to any Advances made by the Servicer or
the Trustee) through the end of the immediately preceding Due Period.
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Pursuant to the Agreement, the Servicer will service and administer the
Contracts conveyed and assigned to the Trustee as more fully set forth below.
PAYMENTS ON CONTRACTS; DISTRIBUTIONS ON CERTIFICATES
The Servicer, on behalf of the Trust, will establish and maintain the
Collection Account at a depository institution (initially First Bank National
Association, Minneapolis, Minnesota) with trust powers organized under the laws
of the United States or any state, the deposits of which are insured to the
full extent permitted by law by the Federal Deposit Insurance Corporation (the
"FDIC "), whose short-term debt (or, in the case of the principal bank in a
bank holding company system, the short-term debt of such bank or the bank
holding company) has a rating of A-1 or higher from S&P, and which is subject
to examination by federal or state authorities (an "Eligible Institution"). The
Servicer may authorize the Trustee to invest the funds in the Collection
Account in Eligible Investments (as defined in the Agreement) that will mature
not later than the business day preceding the applicable monthly Payment Date.
Such 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 commercial banks; any other demand or time
deposit or certificate of deposit fully insured by the FDIC; investments in
certain money-market funds; certain repurchase agreements of United States
government securities with eligible commercial banks; corporate securities
assigned the highest rating by S&P not in excess of 10% of amounts in the
Collection Account at the time of such investment or pledge as security; and
commercial paper assigned a rating of at least A-1 by S&P. Any losses on such
investments will be deducted from other investment earnings or from other funds
in the Collection Account.
All receipts by the Servicer of payments with respect to the Contracts,
including Principal Prepayments and advance payments by Obligors not
constituting Principal Prepayments ("Advance Payments"), shall be paid into the
Collection Account no later than one business day following receipt thereof,
except amounts received as extension fees not allocated to regular installments
due on Contracts, which are retained by the Company as part of its servicing
fees and are not paid into the Collection Account. See "Description of the
Certificates--Servicing Compensation and Payment of Expenses." In addition, all
payments under FHA Insurance received by the Servicer, any Advances by the
Servicer or the Trustee as described under "Description of the Certificates--
Advances," amounts received by the Trustee from the Cash Collateral Account as
described under "Description of the Cash Collateral Guaranty," and amounts paid
by the Company for Contracts repurchased as a result of breach of warranties
under the Agreement as described under "Description of the Certificates--
Conveyance of Contracts," shall be paid into the Collection Account.
On the seventh Business Day of each month (the "Determination Date"), the
Servicer will determine the amount of funds in the Collection Account (other
than amounts attributable to Advance Payments and regular payments received
subsequent to the end of the immediately preceding Due Period) (the "Collected
Amount") and the amount of funds necessary to make all payments to be made on
the next Payment Date from the Collection Account. Not later than one Business
Day after the Determination Date, the Company will deposit in the Collection
Account the Repurchase Price of any Contracts required to be repurchased on
such Payment Date as a result of a breach of representations and warranties.
On each Payment Date the Trustee will withdraw such funds from the Collection
Account as are necessary to make the following payments, in the following order
of priority:
(a) to pay Monthly Interest;
(b) to pay Monthly Principal;
(c) to pay the Monthly Servicing Fee to the Servicer;
(d) to reimburse the Trustee or any successor Servicer for any payments
of FHA Insurance premiums not paid by the Company, as Servicer, and for
which the Trustee or such successor Servicer has not been reimbursed by the
Company;
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(e) to reimburse the Servicer or the Trustee, as applicable, for
Uncollectible Advances and prior Advances that have been recovered;
(f) to pay the remainder, if any, of the Available Funds (the "Excess
Cashflow") to the Cash Collateral Trustee, as the holder of the
Subordinated Certificate, for disposition in accordance with the Cash
Collateral Trust Agreement.
ADVANCES
To the extent that collections on a Contract in any Due Period are less than
the scheduled payment due thereon, the Servicer will be obligated to make an
advance of the uncollected portion of such scheduled payment. The Servicer will
be obligated to advance a delinquent payment on a Contract only to the extent
that the Servicer, in its sole discretion, expects to recoup such Advance from
subsequent collections on the Contract or from liquidation proceeds thereof.
The Servicer will deposit any Advances in the Collection Account no later than
one Business Day before the following Payment Date. The Servicer will be
entitled to recoup its advances on a Contract from subsequent payments by or on
behalf of the Obligor and from liquidation proceeds (including FHA Insurance
payments, if applicable, or foreclosure resale proceeds) of the Contract, and
will release its right to reimbursements in conjunction with the purchase of
the Contract by the Company for breach of representations and warranties. If
the Servicer determines in good faith that an amount previously advanced will
not ultimately be recoverable from payments by or on behalf of the Obligor or
from liquidation proceeds (including FHA Insurance payments or foreclosure
resale proceeds) of the Contract (an "Uncollectible Advance"), the Servicer
will be entitled to reimbursement from payments on other Contracts or from the
Cash Collateral Account.
If the Servicer fails to make an Advance required under the Agreement, the
Trustee will be obligated to deposit the amount of such Advance in the
Collection Account on the Payment Date. The Trustee will not, however, be
obligated to deposit any such amount if (i) the Trustee does not expect to
recoup such Advance, or (ii) the Trustee determines that it is not legally able
to make such Advance.
REPORTS TO CERTIFICATEHOLDERS
The Servicer will include with each distribution to a Certificateholder a
statement as of such Payment Date setting forth:
(a) the amount of such distribution which constitutes Monthly Principal,
specifying the amounts constituting scheduled payments by Obligors,
Principal Prepayments on the Contracts, and other payments with respect to
the Contracts;
(b) the amount of such distribution which constitutes Monthly Interest;
(c) the remaining Principal Balance represented by such
Certificateholder's interest;
(d) the Company's FHA Insurance reserve amount;
(e) the Average Sixty-Day Delinquency Ratio, the Cumulative Realized Loss
Ratio, the Requisite Amount, the amount deposited in the Cash Collateral
Account (if any) and the Available Cash Collateral Amount;
(f) the amount of fees payable out of the Trust;
(g) the Pool Factor (a percentage derived from a fraction the numerator
of which is the remaining Principal Balance of the Certificates and the
denominator of which is the Initial Principal Amount of the Certificates)
immediately before and immediately after such Payment Date;
(h) the number and aggregate principal balance of Contracts delinquent
(i) 31-59 days, (ii) 60-89 and (iii) 90 or more days;
(i) the number of Contracts liquidated during the Due Period ending
immediately before such Payment Date;
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(j) such customary factual information as is necessary to enable
Certificateholders to prepare their tax returns; and
(k) such other customary factual information available to the Servicer
without unreasonable expense as is necessary to enable Certificateholders
to comply with regulatory requirements.
REPURCHASE OPTION
The Agreement provides that on any Payment Date on which the Principal
Balance is less than 10% of the Initial Principal Amount of the Certificates,
the Servicer will have the option to repurchase, on 20 days prior written
notice to the Trustee, all outstanding Contracts at a price equal to the
principal balance of the Contracts on the prior Payment Date plus accrued
interest thereon, plus the fair market value (as determined by the Servicer) of
any acquired properties. Such price will be paid on the Payment Date to the
Certificateholders of record on the last Business Day of the immediately
preceding Due Period in immediately available funds against the Trustee's
delivery of the Contracts to the Servicer.
COLLECTION AND OTHER SERVICING PROCEDURES
The Servicer will manage, administer, service and make collections on the
Contracts, exercising the degree of skill and care required by FHA and
otherwise consistent with the highest degree of skill and care that the
Servicer exercises with respect to similar contracts (including manufactured
housing contracts) serviced by the Servicer. The Servicer will not be required
to cause to be maintained, or otherwise monitor the maintenance of, hazard
insurance on the improved properties, but is required under FHA regulations to
monitor and ensure the maintenance of flood insurance on properties securing
FHA-insured Contracts located in federally designated special flood hazard
areas. The Company does, however, as a matter of its own policy, monitor proof
of hazard insurance coverage (other than flood insurance) and require that it
be named as an additional loss payee on all first lien secured contracts and
all junior lien secured contracts with amounts financed of over $20,000.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Servicer will receive a Monthly Servicing Fee for each Due Period (paid
on the next succeeding Payment Date) equal to one-twelfth of the product of
.75% and the remaining Principal Balance.
The Monthly Servicing Fee provides compensation for customary third-party
servicing activities to be performed by the Servicer for the Trust, for
additional administrative services performed by the Servicer on behalf of the
Trust and for expenses paid by the Servicer on behalf of the Trust.
Customary servicing activities include collecting and recording payments,
communicating with Obligors, investigating payment delinquencies, providing
billing and tax records to Obligors and maintaining internal records with
respect to each Contract. Administrative services performed by the Servicer on
behalf of the Trust include selecting and packaging the Contracts, calculating
distributions to Certificateholders and providing related data processing and
reporting services for Certificateholders and on behalf of the Trustee.
Expenses incurred in connection with servicing of the Contracts and paid by the
Company from its servicing fees include payment of FHA Insurance premiums,
payment of fees and expenses of accountants, payments of all fees and expenses
incurred in connection with the enforcement of Contracts or (in the case of
Secured Contracts) foreclosure on collateral relating thereto (including
submission of FHA Insurance claims, if applicable), payment of Trustees fees,
and payment of expenses incurred in connection with distributions and reports
to Certificateholders.
EVIDENCE AS TO COMPLIANCE
The Agreement provides for delivery to the Trustee of a monthly report by the
Servicer no later than one Business Day following each Determination Date,
setting forth the information described under
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"--Reports to Certificateholders." Each report to the Trustee will be
accompanied by a statement from an appropriate officer of the Servicer
certifying the accuracy of such report and stating that the Servicer has not
defaulted in the performance of its obligations under the Agreement. On or
before May 1 of each year, beginning in 1995, the Servicer will deliver to the
Trustee a report of KPMG Peat Marwick, or another nationally recognized
accounting firm, stating that such firm has examined the Servicer's servicing
records with respect to home improvement contracts serviced by the Servicer and
stating that, on the basis of such examination, such servicing has been
conducted in compliance with the Agreement, except for any exceptions set forth
in such report.
The Agreement provides that the Servicer shall furnish to the Trustee such
reasonably pertinent underlying data as can be generated by the Company's
existing data processing system without undue modification or expense.
The Agreement provides that a Certificateholder holding Certificates
evidencing at least 5% of the interests in the Trust will have the same rights
of inspection as the Trustee and may upon written request to the Servicer
receive copies of all reports provided to the Trustee.
TRANSFERABILITY
The certificates are subject to certain restrictions on transfer to or for
the benefit of employee benefit plans, trusts or accounts subject to ERISA and
described in Section 4975 of the Code. See "ERISA Considerations."
CERTAIN MATTERS RELATING TO THE COMPANY
The Agreement provides that the Company may not resign from its obligations
and duties as Servicer thereunder, except upon a determination that the
Company's performance of such duties is no longer permissible under the
Agreement or applicable law, and prohibits the Company from extending credit to
any Certificateholder for the purchase of a Certificate, purchasing
Certificates in any agency or trustee capacity or lending money to the Trust.
The Company can be removed as Servicer only pursuant to an Event of Termination
as discussed below.
EVENTS OF TERMINATION
An Event of Termination under the Agreement will occur if (a) the Servicer
fails to make any payment or deposit required under the Agreement (including an
Advance) and such failure continues for four business days; (b) the Servicer
fails to observe or perform in any material respect any other covenant or
agreement in the Agreement which continues unremedied for thirty days; (c) the
Servicer conveys, assigns or delegates its duties or rights under the
Agreement, except as specifically permitted under the Agreement, or attempts to
make such a conveyance, assignment or delegation; (d) a court having
jurisdiction in the premises enters a decree or order for relief in respect of
the Servicer in an involuntary case under any applicable bankruptcy, insolvency
or other similar law now or hereafter in effect, or appoints a receiver,
liquidator, assignee, custodian, trustee, or sequestrator (or similar official)
of the Servicer, as the case may be, or enters a decree or order for any
substantial liquidation of its affairs; (e) the Servicer commences a voluntary
case under any applicable bankruptcy, insolvency or similar law, or consents to
the entry of an order for relief in an involuntary case under any such law, or
consents to the appointment of or taking possession by a receiver, liquidator,
assignee, trustee, custodian or its creditors, or fails to, or admits in
writing its inability to, pay its debts as they become due, or takes any
corporate action in furtherance of the foregoing; (f) the Servicer fails to be
an Eligible Servicer; or (g) the Servicer's seller-servicer contract with GNMA
is terminated. The Servicer will be required under the Agreement to give the
Trustee and the Certificateholders notice of an Event of Termination promptly
upon the occurrence of such Event.
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RIGHTS UPON AN EVENT OF TERMINATION
If an Event of Termination has occurred and is continuing, either the Trustee
or holders of Certificates evidencing 25% or more of the Trust may terminate
all of the Servicer's management, administrative, servicing and collection
functions under the Agreement. Upon such termination, the Trustee or its
designee will succeed to all the responsibilities, duties and liabilities of
the Company as Servicer under the Agreement and will be entitled to similar
compensation arrangements; provided, however, that neither the Trustee nor any
successor Servicer will assume any accrued obligation of the Company or any
obligation to repurchase Contracts for breach of representations and
warranties, and the Trustee will not be liable for any acts or omissions of the
Company occurring prior to a transfer of the Company's servicing and related
functions or for any breach by the Company of any of its representations and
warranties contained in the Agreement or any related document or agreement. In
addition, the Trustee will notify FHA of the Company's termination as Servicer
of the Contracts and will request that the portion of the Company's FHA
Insurance reserves allocable to the FHA-insured Contracts be transferred to the
Trustee or a successor Servicer. See "Description of FHA Insurance."
Notwithstanding such termination, the Company shall be entitled to payment of
certain amounts payable to it prior to such termination, for services rendered
prior to such termination. No such termination will affect in any manner the
Company's obligation to repurchase certain Contracts for breaches of warranties
under the Agreement. In the event that the Trustee is unwilling or unable so to
act, it may appoint, or petition a court of competent jurisdiction for the
appointment of, an Eligible Servicer to act as successor to the Company in its
capacity as servicer under the Agreement. The Trustee and such successor may
agree upon the servicing compensation to be paid (after receiving comparable
bids from other Eligible Servicers), which may not be greater than the Monthly
Servicing Fee payable to the Company under the Agreement.
TERMINATION OF THE AGREEMENT
The Agreement will terminate (after distribution of all Monthly Principal and
Monthly Interest then due to Certificateholders) on the earlier of (a) the
Payment Date on which the Principal Balance is reduced to zero; or (b) the
Payment Date on which the Company repurchases the Contracts as described under
"Description of the Certificates--Repurchase Option." However, the Company's
representations, warranties and indemnities will survive any termination of the
Agreement.
AMENDMENT; WAIVER
The Agreement may be amended by agreement of the Trustee and the Company at
any time without the consent of the Certificateholders to cure any ambiguity,
to correct or supplement any provision which may be inconsistent with any other
provision or to add other provisions not inconsistent with the Agreement, upon
receipt of an opinion of counsel to the Company that such amendment will not
adversely affect in any material respect the interests of any
Certificateholder.
The Agreement may also be amended by agreement of the Trustee and the Company
at any time without the consent of the Certificateholders to effect the
transfer of FHA Insurance reserves to another entity in compliance with
revisions to FHA regulations, or to change the provisions of the Agreement
relating to the Cash Collateral Guaranty, provided that prior to any such
amendment S&P shall have confirmed that the rating of the Certificates will not
be lowered or withdrawn following such amendment.
The Agreement may also be amended from time to time by the Trustee and the
Company with the consent of holders of Certificates evidencing 66 2/3% or more
of the Trust, and holders of Certificates representing 66 2/3% of the Trust may
vote to waive any Event of Termination, provided that no such amendment or
waiver shall (a) reduce in any manner the amount of, or delay the timing of,
collections of payments on Contracts or distributions which are required to be
made on any Certificate, or (b) reduce the aggregate amount of Certificates
required for any amendment of the Agreement, without unanimous consent of the
Certificateholders.
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The Trustee is required under the Agreement to furnish Certificateholders
with notice promptly upon execution of any amendment to the Agreement.
INDEMNIFICATION
The Agreement provides that the Company will defend and indemnify the Trust,
the Trustee (including any agent of the Trustee) and the Certificateholders
against any and all costs, expenses, losses, damages, claims and liabilities,
including reasonable fees and expenses of counsel and expenses of litigation
(a) arising out of or resulting from the use or ownership by the Company or any
affiliate thereof of any real estate securing a Contract, (b) for any taxes
which may at any time be asserted with respect to, and as of the date of, the
conveyance of the Contracts to the Trust (but not including any federal, state
or other tax arising out of the creation of the Trust and the issuance of the
Certificates), and (c) with respect to certain other tax matters.
The Agreement also provides that the Company, in connection with its duties
as servicer of the Contracts, will defend and indemnify the Trust, the Trustee
and the Certificateholders (which indemnification will survive any removal of
the Company as servicer of the Contracts) against any and all costs, expenses,
losses, damages, claims and liabilities, including reasonable fees and expenses
of counsel and expenses of litigation, in respect of any action taken by the
Company as Servicer with respect to any Contract.
DUTIES AND IMMUNITIES OF THE TRUSTEE
The Trustee will make no representations as to the validity or sufficiency of
the Agreement, the Certificates or of any Contract, Contract file or related
documents, and will not be accountable for the use or application by the
Company of any funds paid to the Company in consideration of the conveyance of
the Contracts, or deposited into the Collection Account by the Company. If no
Event of Termination has occurred, the Trustee will be required to perform only
those duties specifically required of it under the Agreement. However, upon
receipt of the various certificates, reports or other instruments required to
be furnished to it, the Trustee will be required to examine them to determine
whether they conform as to form to the requirements of the Agreement.
Under the Agreement the Servicer will agree (a) to pay to the Trustee from
time to time reasonable compensation for all services rendered by it thereunder
(which compensation shall not be limited by any provision of law in regard to
the compensation of a trustee of an express trust); (b) to reimburse the
Trustee upon its request for all reasonable expenses, disbursements and
advances incurred or made by the Trustee in accordance with any provision of
the Agreement (including FHA Insurance premiums not paid by the Servicer and
reasonable compensation and the expenses and disbursements of its agents and
counsel), except any such expense, disbursement or advance as may be
attributable to its negligence or bad faith; and (c) to indemnify the Trustee
for, and to hold it harmless against, any loss, liability or expense incurred
without negligence or bad faith on its part, arising out of or in connection
with the acceptance or administration of the Trust and its duties thereunder,
including the costs and expenses of defending itself against any claim or
liability in connection with the exercise or performance of any of its powers
or duties thereunder.
The Trustee is not obligated to expend or risk its own funds or otherwise
incur financial liability in the performance of its duties under the Agreement
if there is a reasonable ground for believing that the repayment of such funds
or adequate indemnity against such risk or liability is not reasonably assured.
The Agreement also provides that the Trustee will maintain at its expense in
Minneapolis or St. Paul, Minnesota, an office or agency where Certificates may
be surrendered for registration of transfer or exchange and where notices and
demands to or upon the Trustee and the certificate registrar and transfer agent
in respect of the Certificates pursuant to the Agreement may be served. On the
date hereof the Trustees office for such purposes is located at 180 East Fifth
Street, St. Paul, Minnesota 55101. The Trustee will promptly give written
notice to the Company and the Certificateholders of any change thereof.
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THE TRUSTEE
First Trust National Association has its corporate trust offices at 180 East
Fifth Street, St. Paul, Minnesota 55101.
The Trustee may resign at any time, in which event the Servicer will be
obligated to appoint a successor Trustee. The Servicer may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Agreement or if the Trustee becomes insolvent. In such circumstances, the
Servicer will also be obligated to appoint a successor Trustee. Any resignation
or removal of the Trustee and appointment of a successor Trustee will not
become effective until acceptance of the appointment by the successor Trustee.
Any successor Trustee must be an FHA Title I approved lender.
REGISTRATION OF THE CERTIFICATES
The Certificates initially will be registered in the name of Cede & Co., the
nominee of DTC. The Certificates may be held by investors only through the
book-entry facilities of DTC in minimum denominations of $1,000 and integral
multiples thereof. 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").
The beneficial owners of Certificates ("Certificate Owners") who are not
Participants but desire to purchase, sell or otherwise transfer ownership of
the 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 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 Certificates, except under the limited
circumstances described below.
Unless and until Definitive Certificates (as defined below) are issued, it is
anticipated that the only "Certificateholder" of the Certificates will be Cede
& Co., as nominee of DTC. Certificate Owners will not be recognized by the
Trustee as Certificateholders as that term is used in the Trust Agreement.
Certificate Owners are only permitted to exercise the rights of
Certificateholders indirectly through Participants and DTC.
While 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 Certificates and
is required to receive and transmit distributions of principal of, and interest
on, the Certificates. Participants with whom Certificate Owners have accounts
with respect to 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.
Certificates will be issued in registered form to Certificate Owners, or
their nominees, rather than to DTC (such Certificates being referred to herein
as "Definitive Certificates"), only if (i) DTC or the Company advise the
Trustee in writing that DTC is no longer willing or able to discharge properly
its responsibilities
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as nominee and depository with respect to the Certificates and the Company or
the Trustee is unable to locate a qualified successor or (ii) the Company at
its sole option advises the Trustee in writing that it elects to terminate the
book-entry system through DTC. 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 Company that, unless and until Definitive Certificates
are issued, DTC will take any action permitted to be taken by a
Certificateholder under the Pooling and Servicing Agreement only at the
direction of one or more Participants to whose DTC accounts the Certificates
are credited. DTC has advised the Company that DTC will take such action with
respect to any fractional interest of the Certificates only at the direction of
and on behalf of such Participants beneficially owning a corresponding
fractional interest of the Certificates. DTC may take actions, at the direction
of the related Participants, with respect to some Certificates which conflict
with actions taken with respect to other Certificates.
Issuance of Certificates in book-entry form rather than as physical
certificates may adversely affect the liquidity of the Certificates in the
secondary market and the ability of Certificate Owners to pledge them. In
addition, since distributions on the Certificates will be made by the Trustee
to DTC and DTC will credit such distributions to the accounts of its
Participants, with the Participants further crediting such distributions to the
accounts of indirect participants or Certificate Owners, Certificate Owners may
experience delays in the receipt of such distributions.
DESCRIPTION OF FHA INSURANCE
Approximately 40.56% of the Contracts, by principal balance as of the Cutoff
Date, are insured by FHA under Title I of the National Housing Act, which
authorizes FHA to insure loans made for the alteration, repair or improvement
of residential single-family and multiple-family real estate and manufactured
homes which qualify as real estate under applicable state law, and loans for
the purchase of a manufactured home.
The insurance available to the Trust is subject to the limit of a reserve
amount equal to 10% of the principal balance of all Title I insured loans
originated or purchased and reported for FHA Insurance by the Company, which
amount will be reduced by all FHA Insurance claims paid to the Company and by
an annual reduction in the reserve amount of 10% of the reserve amount, and
which will be increased by an amount equal to 10% of the lesser of the
principal balance or the purchase price of insured loans subsequently
originated or purchased of record by the Company. The Company's reserve amount
may also be reduced by 10% of the principal balance of any loans reported to
FHA as sold without recourse by the Company. The Company will pay all FHA
Insurance premiums required by FHA Regulations. If the Company fails to pay any
such premium, the Trustee or the successor Servicer (if any) is obligated to
pay such premium and is entitled to be reimbursed by the Company and from
collections on the Contracts.
As of December 31, 1993, the Company's FHA Insurance reserve amount was equal
to approximately $134,383,000. These insurance reserves were available to cover
losses on approximately $1,783,263,000 of FHA-insured manufactured housing
contracts and approximately $237,800,000 of FHA-insured home improvement loans,
including the FHA-insured Contracts owned by the Trust. If an Event of
Termination (as defined under "Description of the Certificates--Events of
Termination") occurs, the Trustee will notify FHA of the Company's termination
as Servicer of the FHA-insured Contracts and will request that the portion of
the Company's FHA Insurance reserves allocable to the FHA-insured Contracts be
transferred to the Trustee or a successor Servicer. Although the Trustee will
request such a transfer of reserves, FHA is not obligated to comply with such a
request, and may determine that it is not in FHAs interest to permit such
transfer of reserves. In addition, FHA has not specified how insurance reserves
might be allocated in such event, and there can be no assurance that any
reserve amount, if transferred to the Trustee or a successor Servicer, would
not be substantially less than 10% of the outstanding principal amount of the
FHA-insured
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Contracts. It is likely that the Trustee or any successor Servicer would be
the lender of record on other FHA Title I loans, so that any reserves that are
so permitted to be transferred would become commingled with reserves available
for other FHA Title I loans. FHA also reserves the right to transfer reserves
with "earmarking" (segregating such reserves so that they will not be
commingled with the reserves of the transferee) if it is in FHA's interest to
do so.
In general, FHA will insure property improvement loans up to $25,000 for a
single-family property, with a maximum term of 20 years. FHA will insure loans
of up to $17,500 for manufactured homes which qualify as real estate under
applicable state law and loans of up to $12,000 per unit for a $48,000 limit
for four units for owner-occupied multiple-family homes. If the loan amount is
$15,000 or more, FHA requires a drive-by appraisal, the current tax assessment
value, or a full Uniform Residential Appraisal Report dated within 12 months
of the closing to verify the property's value. The maximum loan amount on
transactions requiring an appraisal is the amount of equity in the property
shown by the market value determination of the property. The loan proceeds
must be used for the purposes described in the loan application, and those
improvements must substantially protect or improve the basic livability or
utility of the property. The Secretary of HUD from time to time publishes a
list of ineligible items and activities which may not be financed with the
proceeds of an FHA-insured home improvement loan.
Following a default on an FHA-insured Contract the Servicer may, subject to
certain conditions, either commence foreclosure proceedings against the
improved property securing the loan or submit a claim to FHA, but may submit a
claim to FHA after proceeding against the improved property only with the
prior approval of the Secretary of HUD. The availability of FHA Insurance
following a default on an FHA-insured Contract is subject to a number of
conditions, including strict compliance by the Company with FHA regulations in
originating and servicing the Contract. Failure to comply with FHA regulations
may result in a denial of or surcharge on the FHA Insurance claim. Prior to
declaring an FHA-insured Contract in default and submitting a claim to FHA,
the Servicer must take certain steps to attempt to cure the default, including
personal contact with the borrower either by telephone or in a meeting and
providing the borrower with 30 day's written notice prior to declaration of
default. FHA may deny insurance coverage if the borrower's nonpayment is
related to a valid objection to faulty contractor performance. In such event,
the Company will seek to obtain payment by or a judgment against the borrower,
and may resubmit the claim to FHA following such a judgment. As described
under "Green Tree Financial Corporation--Contract Origination," the Company
does not purchase a Contract until the customer verifies satisfactory
completion of the work.
Upon submission of a claim to FHA, the Trust must assign its entire interest
in the Contract to the United States. In general, the claim payment will equal
90% of the sum of (i) the unpaid principal amount of the Contract at the date
of default and uncollected interest computed at the Contract rate earned to
the date of default, (ii) accrued and unpaid interest on the unpaid amount of
the Contract from the date of default to the date of submission of the claim
plus 15 calendar days (but in no event more than nine months) computed at a
rate of 7% per annum, (iii) uncollected court costs, (iv) legal fees, not to
exceed $500, and (v) expenses for recording the assignment of the lien on the
improved property to the United States. Any losses on FHA-insured Contracts
not covered by FHA Insurance will be absorbed to the extent of Excess Cashflow
otherwise payable to the Cash Collateral Account or, if funds in the
Collection Account are not sufficient to pay Monthly Interest and Monthly
Principal, such losses will be covered by funds available in the Cash
Collateral Account, and then by the Limited Guaranty of the Company (subject
to the limit of the Guaranty Amount) and otherwise will be borne by
Certificateholders.
DESCRIPTION OF THE CASH COLLATERAL GUARANTY
On the Closing Date, the Cash Collateral Guaranty will be issued pursuant to
the Cash Collateral Trust Agreement among the Cash Collateral Depositor, the
Cash Collateral Trustee and the Company, as Seller and Servicer. The Cash
Collateral Guaranty will be secured by the Cash Collateral Account, which will
be
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established pursuant to the Cash Collateral Trust Agreement, and the Cash
Collateral Account will be funded on the Closing Date in the amount of
$6,973,036 (the "Initial Cash Collateral Amount") from the proceeds of a loan
to be made by the Cash Collateral Depositor to the Cash Collateral Trust. The
Cash Collateral Guaranty will be strictly an obligation to make payments from
amounts deposited in the Cash Collateral Account in accordance with the terms
of the Agreement and the Cash Collateral Trust Agreement, will be secured
solely with the amounts on deposit in the Cash Collateral Account, if any, and
will not be a personal obligation of the Cash Collateral Trustee. The Cash
Collateral Guaranty will not be an obligation of the Cash Collateral Depositor
(beyond the Initial Cash Collateral Amount), the Cash Collateral Trustee, the
Company, as Seller and Servicer, or the Cash Collateral Beneficiary (as
defined below). The Cash Collateral Account will be maintained with the Cash
Collateral Trustee or its designee at an Eligible Institution (initially First
Bank National Association, Minneapolis, Minnesota). The Cash Collateral
Account and any amount therein is not and will not under any circumstances be
deemed to be property of the Trust, but will be held in accordance with the
Cash Collateral Trust Agreement for the benefit of the Trustee and the Cash
Collateral Depositor, as secured parties and as provided in the Cash
Collateral Trust Agreement, and Green Tree Finance Corp. -- Two, as
beneficiary of the Cash Collateral Trust (the "Cash Collateral Beneficiary").
Any amounts remaining in the Cash Collateral Trust upon its termination will
be paid to the Cash Collateral Beneficiary.
In the event of the Company's insolvency, if the Cash Collateral Account
were somehow deemed to be property of the Company's bankruptcy estate,
payments under the Cash Collateral Guaranty might be subject to the automatic
stay provisions of the United States Bankruptcy Code or, a bankruptcy trustee
might attempt to reduce amounts retained or required to be deposited by the
Trustee into the Cash Collateral Account if those amounts were determined by
the bankruptcy trustee to exceed amounts reasonably necessary or adequate to
cover Shortfalls which might become payable to Certificateholders out of the
Cash Collateral Account.
On each Payment Date the Cash Collateral Trustee, as the holder of the
Subordinated Certificate, will receive all Excess Cashflow, if any (as
described under "Description of the Certificates--Payments on Contracts;
Distributions on Certificates"). On each Payment Date on which the amount held
in the Cash Collateral Account is less than the Requisite Amount (as defined
below), the Cash Collateral Trustee will deposit all funds paid to it by the
Trustee or the amount necessary to cause the amount on deposit in the Cash
Collateral Account to equal the Requisite Amount, if less, in the Cash
Collateral Account. On any Payment Date when the amount held in the Cash
Collateral Account equals or exceeds the Requisite Amount, any funds paid to
the Cash Collateral Trustee by the Trustee, and any funds in the Cash
Collateral Account in excess of the Requisite Amount, will be applied by the
Trustee (i) first to pay interest and principal on the loan made to the Cash
Collateral Trust by the Cash Collateral Depositor in accordance with the terms
of such loan, and (ii) thereafter will be paid to the Cash Collateral
Beneficiary.
If the Servicer's monthly report as of any Determination Date indicates that
a Shortfall (the difference, if any, between (a) the sum of (i) the Collected
Amount in the Collection Account, plus (ii) any Advances required to be
deposited in the Collection Account by the Servicer, plus (iii) the aggregate
of the Repurchase Prices for Contracts to be repurchased by the Company for
breach of representations and warranties, and (b) the sum of (i) the Monthly
Interest and Monthly Principal to be paid to Certificateholders on the related
Payment Date, (ii) the Monthly Servicing Fee to be paid to the Servicer, (iii)
any amounts required to reimburse the Trustee for FHA Insurance premiums paid
by the Trustee, and (iv) any amounts required to reimburse the Servicer or the
Trustee for Uncollectible Advances) will occur on the related Payment Date,
then the Trustee shall, on the Business Day preceding such Payment Date, make
a demand under the Cash Collateral Guaranty in the amount of such Shortfall
(or the Available Cash Collateral Amount, if less) and deposit such funds in
the Collection Account.
The "Requisite Amount" initially equals $8,314,004 and may be increased or
decreased from time to time as described below.
On each Determination Date the Servicer will be obligated to determine the
amount of the Company's FHA Insurance reserve. If on any Determination Date
the Company's FHA Insurance reserve amount is
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less than $50,000,000, or if an Event of Termination has occurred (either such
event, a "Trigger"), then (i) the Requisite Amount will be increased to
$10,593,651 and (ii) on each Payment Date thereafter the Trustee will deposit
the entire Excess Cashflow (to the extent necessary to cause the amount in the
Cash Collateral Account to equal the Requisite Amount) into the Cash Collateral
Account.
On the Payment Dates occurring in April 1997 and each April thereafter, the
Requisite Amount may be reduced to 12.4% of the Principal Balance as of such
Payment Date, but in no event less than $421,208, but only if no Trigger has
ever occurred, and only if either (i) the Cumulative Realized Loss Ratio (as
defined below) as of such Payment Date is less than 1.5% and the Average Sixty-
Day Delinquency Ratio (as defined below) as of such Payment Date is less than
3.5%, or (ii) the Cumulative Realized Loss Ratio as of such Payment Date is
less than 4.0% and the Average Sixty-Day Delinquency Ratio as of such Payment
Date is less than 2.5%.
The "Average Sixty-Day Delinquency Ratio" for any Payment Date is the
arithmetic average of the Delinquency Ratios for such Payment Date and for the
two immediately preceding Payment Dates. The "Delinquency Ratio" for any
Payment Date is a percentage, equal to the aggregate outstanding principal
balance of all Contracts that were delinquent 60 days or more as of the end of
the immediately preceding Due Period (including Defaulted Contracts that have
not yet been liquidated, but excluding Contracts that are current with respect
to rescheduled payments following the Obligor's bankruptcy) divided by the
Principal Balance immediately following such Payment Date.
The "Cumulative Realized Loss Ratio" for any Payment Date is a fraction,
expressed as a percentage, the numerator of which is the aggregate Realized
Losses for that Payment Date and all prior Payment Dates, and the denominator
of which is the Initial Principal Amount. The "Realized Losses" for any Payment
Date means the aggregate net liquidation losses for all Contracts that became
Liquidated Contracts during the immediately preceding Due Period.
Interest and principal on the loan by the Cash Collateral Depositor to the
Cash Collateral Trust will be payable solely from funds (if any) in the Cash
Collateral Account each month in excess of the Requisite Amount. In no event
will the Company, the Trust or the Certificateholders be obligated in respect
of any such loan. It is currently expected that such loan would bear interest
at a floating rate based on the Cash Collateral Depositor's cost of funds,
payable monthly, and that principal on such loan would be payable commencing in
April 1995, unless such loan is renewed. It is expected that the Cash
Collateral Depositor will have a security interest in the Cash Collateral
Account, subordinate in all respects to the security interest of the Trustee
securing the right of the Trustee to demand payments under the Cash Collateral
Guaranty.
Funds on deposit in the Cash Collateral Account will be invested in Eligible
Investments (as described herein under "Description of the Certificates--
Payments on Contracts; Distributions on Certificates"). All income on such
investments will be applied to repay the loan made by the Cash Collateral
Depositor or paid to the Cash Collateral Beneficiary, and will not be available
to cover any Shortfalls. Any losses on such investments will be deducted from
other investment earnings or from other funds in the Cash Collateral Account.
All such income or loss will be allocable to the Cash Collateral Beneficiary
for tax purposes.
At any time after the first Payment Date on which the funds in the Cash
Collateral Account equal or exceed the Requisite Amount, the Cash Collateral
Beneficiary may obtain the release to the Cash Collateral Depositor or itself
of all or a portion of the cash on deposit in the Cash Collateral Account, by
delivering to the Cash Collateral Trustee (i) a Letter of Credit that satisfies
the conditions set forth in the Cash Collateral Trust Agreement or (ii) any
other form of credit enhancement that satisfies the conditions set forth in the
Cash Collateral Trust Agreement. The cost of obtaining and maintaining any
initial or replacement Letter of Credit shall be borne solely by the Cash
Collateral Beneficiary. If the Cash Collateral Trustee receives notice that the
institution issuing such Letter of Credit is no longer a Qualified Bank and its
short-term debt is rated below A-1 by Standard & Poor's, the Cash Collateral
Trustee shall immediately notify the Cash Collateral Beneficiary. On the 30th
day following such notice (or the next business day thereafter, if such day is
not a
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Business Day), the Cash Collateral Trustee shall draw under the Letter of
Credit the full amount available under such Letter of Credit and deposit the
proceeds thereof in the Cash Collateral Account, unless prior to such date the
Cash Collateral Beneficiary shall have delivered to the Cash Collateral
Trustee a replacement or confirming Letter of Credit issued by a Qualified
Bank.
DESCRIPTION OF THE LIMITED GUARANTY
FHA's regulations provide that, in order for the FHA insurance reserve
amount allocable to the Contracts to remain in the Company's aggregate
insurance reserve amount, the transfer of the Contracts to the Trust must be
"with recourse." Accordingly, the Company will provide a Limited Guaranty to
the Trust. Under the terms of the Limited Guaranty if the amount held in the
Cash Collateral Account equals zero and the Monthly Report as of any
Determination Date indicates a Shortfall, the Company is obligated, subject to
the limit of the Guaranty Amount, to pay into the Collection Account not later
than one Business Day after such Determination Date the lesser of such
Shortfall or the Guaranty Amount. The Guaranty Amount prior to the first
Payment Date will equal $544,000. Thereafter, the Guaranty Amount on each
subsequent Payment Date will equal the lesser of (i) $544,000 minus all
Limited Guaranty payments made prior to such Payment Date or (ii) 1% of the
principal balance of the FHA-insured Contracts as of such Payment Date. The
Limited Guaranty will be an unfunded general obligation of the Company.
CERTAIN LEGAL ASPECTS OF THE CONTRACTS; REPURCHASE OBLIGATIONS
As a result of the Company's conveyance and assignment of the Contracts to
the Trust, the Certificateholders, as the beneficial owners of the Trust, will
succeed collectively to all of the rights thereunder (including the right to
receive payment on the Contracts). Approximately 85.03% of the Contracts by
principal balance as of the Cutoff Date evidence both the obligation of the
Obligor to repay the loan evidenced thereby, and the grant of a lien on the
improved property to secure repayment of such loan (the "Secured Contracts").
The remaining Contracts evidence only the obligation of the Obligor to repay
the loan evidenced thereby (the "Unsecured Contracts"). With respect to the
Secured Contracts, the borrower also executes a separate mortgage, deed of
trust or security deed upon the real estate. Certain aspects of both features
of the Contracts are more fully described below.
The following discussion contains summaries of certain legal aspects of home
improvement contracts which are general in nature. These legal aspects are in
addition to the requirements of FHA regulations described in "Description of
FHA Insurance" with respect to the FHA-insured Contracts. Because such legal
aspects are governed by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the real estate securing the Secured Contracts is situated. The summaries are
qualified in their entirety by reference to the applicable federal and state
laws governing the Contracts. Much of the following discussion relates to home
improvement contracts which are secured by a lien on the improved property
and, as a consequence, while of significance to the Secured Contracts, will
have little applicability to the Unsecured Contracts.
MORTGAGES AND DEEDS OF TRUST
The Secured Contracts are secured by either mortgages or deeds of trust,
depending upon the prevailing practice in the state in which the underlying
property is located, and may have first, second or third priority. A mortgage
creates a lien upon the real property described in the mortgage or deed of
trust. There are two parties to a mortgage: the mortgagor, who is the
borrower, and the mortgagee, who is the lender. In a mortgage state, the
mortgagor delivers to the mortgagee a note or retail installment contract
evidencing the
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loan and the mortgage. Although a deed of trust is similar to a mortgage, a
deed of trust has three parties: the borrower, or trustor, the lender as
beneficiary, and a third-party grantee called the trustee. Under a deed of
trust, the borrower grants the property, irrevocably until the debt is paid, in
trust, generally with a power of sale, to the trustee to secure repayment of
the loan. The trustees authority under a deed of trust and the mortgagee's
authority under a mortgage are governed by law, the express provisions of the
deed of trust or mortgage, and, in some cases, the directions of the
beneficiary. Some states use a security deed or deed to secure debt which is
similar to a deed of trust except that it has only two parties: a grantor
(similar to a mortgagor) and a grantee (similar to a mortgagee). Mortgages,
deeds of trust and deeds to secure debt are not prior to liens for real estate
taxes and assessments and other charges imposed under governmental police
powers. Priority between mortgages, deeds of trust and deeds to secure debt and
other encumbrances depends on their terms in some cases and generally on the
order of recordation of the mortgage, deed of trust or the deed to secure debt
in the appropriate recording office.
SUBORDINATE MORTGAGES; RIGHTS OF SENIOR MORTGAGEES OR BENEFICIARIES
A substantial number of the mortgages and deeds of trust securing the Secured
Contracts are second or third mortgages or deeds of trust which are junior to
mortgages or deeds of trust held by other lenders or institutional investors.
The rights of the Trust (and therefore the Certificateholders), as beneficiary
under a junior deed of trust or as mortgagee under a junior mortgage, are
subordinate to those of the mortgagee or beneficiary under the senior mortgage
or deed of trust, including the prior rights of the senior mortgagee or
beneficiary to receive hazard insurance and condemnation proceeds and to cause
the property securing the Secured Contract to be sold upon default of the
mortgagor or trustor, thereby extinguishing the junior mortgagee's or junior
beneficiary's lien unless the Servicer on behalf of the Trust asserts its
subordinate interest in the property in foreclosure litigation and, possibly,
satisfies the defaulted senior loan or loans. As discussed more fully below, a
junior mortgagee or beneficiary may satisfy a defaulted senior loan in full, or
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.
Although the Company generally does not cure defaults under a senior mortgage
or deed of trust, it is the Company's standard practice to protect its interest
by attending any foreclosure sale and bidding for property only if it is in the
Company's best interests to do so.
The standard form of the mortgage or deed of trust used by most institutional
lenders, like that of the Company, confers on the mortgagee or beneficiary the
right both to receive all proceeds collected under any hazard insurance policy
and all awards made in connection with any condemnation proceedings, and to
apply such proceeds and awards to any indebtedness secured by the mortgage or
deed of trust, in such order as the mortgagee or beneficiary 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 the underlying first mortgage or deed of
trust 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 first
mortgage or deed of trust. Proceeds in excess of the amount of first mortgage
indebtedness, in most cases, may be applied to the indebtedness of a junior
mortgage or deed of trust.
The form of mortgage or deed of trust used by institutional lenders may
contain a "future advance" clause, which provides, in essence, that additional
amounts advanced to or on behalf of the mortgagor or trustor by the mortgagee
or beneficiary are to be secured by the mortgage or deed of trust. The priority
of any advance made under the clause depends, in some states, on whether the
advance was an "obligatory" or "optional" advance. If the mortgagee or
beneficiary is obligated to advance the additional amounts, the advance is
entitled to receive the same priority as amounts initially advanced under the
mortgage or deed of trust, notwithstanding the fact that there may be junior
mortgages or deeds of trust and other liens which intervene between the date of
recording of the mortgage or deed of trust and the date of the future advance,
and, in some states, notwithstanding that the senior mortgagee or beneficiary
had actual knowledge of such
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intervening junior mortgages or deeds of trust and other liens at the time of
the advance. Where the mortgagee or beneficiary is not obligated to advance
additional amounts or, in some states, has actual knowledge of the intervening
junior mortgages or deeds of trust and other liens, the advance will be
subordinate to such intervening junior mortgages or deeds of trust and other
liens. Priority of advances under the clause rests, in some states, on state
statutes giving priority to all advances made under the loan agreement to a
"credit limit" amount stated in the recorded mortgage.
Another provision typically found in the form of the mortgage or deed of
trust used by most institutional lenders obligates the mortgagor or trustor 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 or beneficiary under the
mortgage or deed of trust. Upon a failure of the mortgagor or trustor to
perform any of these obligations, the mortgagee or beneficiary is given the
right under the mortgage or deed of trust to perform the obligation itself, at
its election, with the mortgagor or trustor agreeing to reimburse the mortgagee
or beneficiary for any sums expended by the mortgagee or beneficiary on behalf
of the mortgagor or trustor. All sums so expended by a senior mortgagee or
beneficiary become part of the indebtedness secured by the senior mortgage or
deed of trust.
FORECLOSURE
Foreclosure is a legal procedure that allows the mortgagor to recover its
mortgage debt by enforcing its rights and available remedies under the
mortgage, deed of trust, or security deed. 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
mortgagees right to foreclosure is contested, the legal proceedings necessary
to resolve the issue can be time-consuming. After the completion of a judicial
foreclosure proceeding, the court may issue a judgment of foreclosure and
appoint a referee 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 or a deed to secure debt is generally
accomplished by a non-judicial trustees sale under a specific provision in the
deed of trust that authorizes the trustee to sell the property to a third party
upon any default by the borrower under the terms of the note, deed of trust, or
deed to secure debt. 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 must
provide notice in some states to any other individual having an interest of
record in the real property, including any junior lienholders. If the deed of
trust is not reinstated within any applicable cure period, a notice of sale
must be posted in a public place and, in most states, published for a specified
period of time in one or more newspapers. In addition, some state laws require
that a copy of the notice of sale be posted on the property and sent to all
parties having an interest of record in the property.
In some states, the borrower trustor has the right to reinstate the loan at
any time following default until shortly before the trustees sale. In general,
the borrower, or any other person having a junior encumbrance on the real
estate, may, during a reinstatement period, cure the default by paying the
entire amount in arrears plus the costs and expenses incurred in enforcing the
obligation. Certain state laws control the amount of foreclosure expenses and
costs, including attorneys fees, which may be recovered by a lender.
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 a potential buyer at the sale would
have in determining the exact status of title and because the physical
condition of the property
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may have deteriorated during the foreclosure proceedings, it is not common for
a third party to purchase the property at the foreclosure sale. In some states,
potential buyers may further be unwilling to purchase a property at a
foreclosure sale as a result of the 1980 decision of the United States Court of
Appeals for the Fifth Circuit in Durrett v. Washington National Insurance
Company. The court in Durrett held that even a non-collusive, regularly
conducted foreclosure sale was a fraudulent transfer under section 67d of the
former Bankruptcy Act (section 548 of the current United States Bankruptcy
Code) and, therefore, could be rescinded in favor of the bankrupts estate, if
(i) the foreclosure sale was held while the debtor was insolvent and not more
than one year prior to the filing of the bankruptcy petition, and (ii) the
price paid for the foreclosed property did not represent "fair consideration"
("reasonably equivalent value" under the United States Bankruptcy Code).
Therefore, the lender generally purchases the property from the trustee or
referee for an amount equal to the unpaid principal amount of the note, accrued
and unpaid interest and the expenses of foreclosure. Thereafter, subject to the
right of the borrower in some states to remain in possession during the
redemption period, the lender will assume the burdens of ownership, including
obtaining hazard insurance and making such repairs at its own expense as are
necessary to render the property suitable for sale. The lender commonly will
obtain the services of a real estate broker and pay the broker a commission in
connection with the sale of the property. Depending upon market conditions, the
ultimate proceeds of the sale of the property may not equal the lenders
investment in the property.
A second or third mortgagee (junior mortgagee) may not foreclose on the
property securing a second or first mortgage (senior mortgages) unless it
forecloses subject to the senior mortgages, in which case it must either pay
the entire amount due on the senior mortgages or make payments on the senior
mortgages in the event the mortgagor is in default thereunder, in either event
adding the amounts expended to the balance due on the junior loan, and may be
subrogated to the rights of the senior mortgagees. In addition, in the event
that the foreclosure by a junior mortgagee triggers the enforcement of a "due-
on-sale" clause in a senior mortgage, the junior mortgagee may be required to
pay the full amount of the senior mortgages to the senior mortgagees.
Accordingly, with respect to those Contracts which are second or third mortgage
loans, if the lender purchases the property, the lenders title will be subject
to all senior liens and claims and certain governmental liens.
The proceeds received by the referee or trustee from the sale are applied
first to the costs, fees, and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage or deed of trust under which the sale was
conducted. Any remaining proceeds are generally payable to the holders of
junior mortgages or deeds of trust and other liens and claims in order of their
priority, whether or not the borrower is in default. Any additional proceeds
are generally payable to the mortgagor or trustor. The payment of the proceeds
to the holders of junior mortgages may occur in the foreclosure action of the
senior mortgagee or may require the institution of separate legal proceeding.
Some states impose prohibitions or limitations on remedies available to the
mortgagee, including the right to recover the debt from the mortgagor. See "--
Anti-Deficiency Legislation and Other Limitations on Lenders" herein.
In certain jurisdictions, real property transfer or recording taxes or fees
may be imposed on the Trust with respect to its acquisition (by foreclosure or
otherwise) and disposition of real property securing a Contract, and any such
taxes or fees imposed may reduce liquidation proceeds with respect to such
property, as well as distributions payable to the Certificateholders.
SECOND OR THIRD MORTGAGES
The Secured Contracts may be secured by second or third mortgages or deeds of
trust, which are junior to first or second mortgages or deeds of trust held by
other lenders. The rights of the Certificateholders as the holders of a junior
deed of trust, junior mortgage, or junior security deed are subordinate in lien
and in payment to those of the holder of the senior mortgage, deed of trust, or
security deed including the prior rights of the senior mortgagee or beneficiary
to receive and apply hazard insurance and condemnation
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proceeds and, upon default of the mortgagor, to cause a foreclosure on the
property. Upon completion of the foreclosure proceedings by the holder of the
senior mortgage or the sale pursuant to the senior deed of trust, the junior
mortgagees or junior beneficiary's lien will be extinguished unless the junior
lienholder satisfies the defaulted senior loan or asserts its subordinate
interest in a property in foreclosure proceedings. Such extinguishment will
eliminate access to the collateral for the Secured Contract. See "--
Foreclosure" herein.
Furthermore, the terms of the junior mortgage, deed of trust, or security
deed are subordinate to the terms of the first mortgage, deed of trust, or
security deed. In the event of a conflict between the terms of the first
mortgage, deed of trust, or security deed and the junior mortgage, deed of
trust, or security deed, the terms of the first mortgage, deed of trust, or
security deed will govern generally. Upon a failure of the mortgagor or trustor
to perform any of its obligations, the senior mortgagee or beneficiary, subject
to the terms of the senior mortgage or deed of trust, may have the right to
perform the obligation itself. Generally, all sums so expended by the mortgagee
or beneficiary become part of the indebtedness secured by the mortgage or deed
of trust. To the extent a first mortgagee expends such sums, such sums will
generally have priority over all sums due under a junior mortgage, deed of
trust or security deed.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and certain foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. In
certain other states, this right of redemption applies only to sale following
judicial foreclosure, and not to sale pursuant to a non-judicial power of sale.
In most states where the right of redemption is available, statutory redemption
may occur upon payment of the foreclosure purchase price, accrued interest and
taxes. In some states, the right to redeem is an equitable right. The effect of
a right of redemption is to diminish the ability of the lender to sell the
foreclosed property. The exercise of a right of redemption would defeat the
title of any purchaser at a foreclosure sale, or of any purchaser from the
lender subsequent to judicial foreclosure or sale under a deed of trust.
Consequently, the practical effect of the redemption right is to force the
lender to maintain the property and pay the expenses of ownership until the
redemption period has run.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory restrictions that limit the remedies of
a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the
borrower equal in most cases to the difference between the amount due to the
lender and the net amount realized upon the foreclosure sale.
Some state statutes may require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an
attempt to satisfy the full debt before bringing a personal action against the
borrower. In certain other states, the lender has the option of bringing a
personal action against the borrower on the debt without first exhausting such
security; however, in some of these states, the lender, following judgment on
such personal action, may be deemed to have elected a remedy and may be
precluded from exercising remedies with respect to the security. Consequently,
the practical effect of the election requirement, when applicable, is that
lenders will usually proceed first against the security rather than bringing a
personal action against the borrower.
Other statutory provisions may limit any deficiency judgment against 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 such sale. The
purpose of these statutes is to prevent a beneficiary or a mortgagee from
obtaining a large deficiency judgment against the former borrower as a result
of low or no bids at the foreclosure sale.
In some states, exceptions to the anti-deficiency statutes are provided for
in certain instances where the value of the lender's security has been impaired
by acts or omissions of the borrower, for example, in the event of waste of the
property.
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In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws
affording relief to debtors, may interfere with or affect the ability of a
secured mortgage lender to realize upon its security. For example, in a Chapter
13 proceeding, the holder may not be able to obtain a lift of the automatic
stay to foreclose if the borrower has equity and the home is necessary to the
bankruptcy reorganization. A bankruptcy court may also grant the debtor a
reasonable time to cure a payment default, and in the case of a mortgage loan
not secured by the debtor's principal residence, may also reduce the monthly
payments due under such mortgage loan, change the rate of interest and alter
the mortgage loan repayment schedule.
The Internal Revenue Code of 1986, as amended, provides priority to certain
federal tax liens over the lien of the mortgage or deed of trust. The laws of
some states provide priority to certain state tax liens over the lien of the
mortgage or deed of trust. Numerous federal and some state consumer protection
laws impose substantive requirements upon mortgage lenders in connection with
the origination, servicing and the enforcement of mortgage loans. These laws
include the federal Truth in Lending Act, Real Estate Settlement Procedures
Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit
Reporting Act, state licensing requirements, and related statutes and
regulations. These federal laws and state laws impose specific statutory
liabilities upon lenders who originate or service mortgage loans and who fail
to comply with the provisions of the law. In some cases, this liability may
affect assignees of the mortgage loans.
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 a Contract to all claims and defenses which the debtor could assert
against the home improvement contractor. Liability under this rule is limited
to amounts paid under a Contract; however, the Obligor also may be able to
assert the rule to set off remaining amounts due as a defense against a claim
brought by the Trust against such Obligor.
The obligations of the Obligor under each Unsecured Contract are not secured
by an interest in the related real estate or otherwise, and the Trust, as the
owner of each Unsecured Contract, is a general unsecured creditor as to such
obligations. As a consequence, in the event of a default under an Unsecured
Contract, the Trust will have recourse only against the Obligor's assets
generally, along with all other general unsecured creditors of the Obligor. In
a bankruptcy or insolvency proceeding relating to an Obligor on an Unsecured
Contract, the obligations of the Obligor under such Unsecured Contract may be
discharged in their entirety, notwithstanding the fact that the portion of such
Obligor's assets made available to the Trust as a general unsecured creditor to
pay amounts due and owing thereunder are insufficient to pay all such amounts.
ENFORCEABILITY OF CERTAIN PROVISIONS
The standard forms of note, mortgage and deed of trust generally contain
provisions obligating the borrower to pay a late charge if payments are not
timely made. In addition to limitations imposed by FHA regulations with respect
to FHA-insured Contracts, in certain states there are or may be specific
limitations upon late charges which a lender may collect from a borrower for
delinquent payments. Under the Agreement, late charges (to the extent permitted
by law and not waived by the Company) will be retained by the Company as
additional servicing compensation.
Courts have imposed general equitable principles upon foreclosure. These
equitable principles are generally designed to relieve the borrower from the
legal effect of defaults under the loan documents. Examples of judicial
remedies that may be fashioned include judicial requirements that the lender
undertake affirmative actions to determine the causes for the borrower's
default and the likelihood that the borrower will be able to reinstate the
loan. In some cases, courts have required lenders to reinstate loans or recast
payment schedules to accommodate borrowers who are suffering from temporary
financial disability. In some
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cases, courts have limited the right of lenders to foreclose if the default
under the mortgage instrument is not monetary, such as the borrower failing to
adequately maintain the property or the borrower executing a junior mortgage or
deed of trust affecting the property. In other cases, some courts have been
faced with the issue whether federal or state constitutional provisions
reflecting due process concerns for adequate notice require that borrowers
under mortgages or the deeds of trust receive notices in addition to
statutorily-prescribed minimum requirements. For the most part, these cases
have upheld the notice provisions as being reasonable or have found that the
sale by a trustee under a deed of trust or under a mortgage having a power of
sale does not involve sufficient state action to afford constitutional
protection to the borrower.
It is the Company's practice with some of the Contracts to defer the first
payment thereon for up to 90 days, and to charge the home improvement
contractor points to cover the lost interest due to collecting only 30 days
interest on the first payment on these deferred payment contracts.
"DUE-ON-SALE" CLAUSES
All of the Secured Contract documents contain due-on-sale clauses. These
clauses permit the Servicer to accelerate the maturity of the loan on notice,
which is usually thirty days, if the borrower sells, transfers or conveys the
property. In recent years, court decisions and legislative actions placed
substantial restrictions on the right of lenders to enforce such clauses in
many states. However, effective October 15, 1982, Congress enacted the Garn-St
Germain Depository Institutions Act of 1982 (the "Act"), which, after a 3-year
grace period, preempts state laws which prohibit the enforcement of due-on-sale
clauses by providing, among other matters, that "due-on-sale" clauses in
certain loans (including the Secured Contracts) made after the effective date
of the Act are enforceable within certain limitations as set forth in the Act
and the regulations promulgated thereunder.
By virtue of the Act, the Servicer generally may be permitted to accelerate
any Secured Contract which contains a "due-on-sale" clause upon transfer of an
interest in the mortgaged property. This ability to accelerate will not apply
to certain types of transfers, including (i) the granting of a leasehold
interest which has a term of three years or less and which does not contain an
option to purchase, (ii) a transfer to a relative resulting from the death of a
mortgagor or trustor, or a transfer where the spouse or child(ren) becomes an
owner of the mortgaged property in each case where the transferee(s) will
occupy the mortgaged property, (iii) a transfer resulting from a decree of
dissolution of marriage, legal separation agreement or from an incidental
property settlement agreement by which the spouse becomes an owner of the
mortgaged property, (iv) the creation of a lien or other encumbrance
subordinate to the lenders security instrument which does not relate to a
transfer of rights of occupancy in the mortgaged property (provided that such
lien or encumbrance is not created pursuant to a contract for deed), (v) a
transfer by devise, descent or operation of law on the death of a joint tenant
or tenant by the entirety, and (vi) other transfers as set forth in the Act and
the regulations thereunder. As a result, a lesser number of Secured Contracts
which contain "due-on-sale" clauses may extend to full maturity than earlier
experience would indicate with respect to single-family mortgage loans. The
extent of the effect of the Act on the average lives and delinquency rates of
the Secured Contracts, however, cannot be predicted.
The inability to enforce a due-on-sale clause may result in Secured Contracts
bearing an interest rate below the current market rate being assumed by a new
home buyer rather than being paid off, which may have an impact upon the
average life of the Secured Contracts and the number of Secured Contracts which
may be outstanding until maturity.
Although Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, as amended ("Title V"), provides that, subject to certain
conditions, state usury limitations shall not apply to FHA-insured loans and to
first mortgage secured conventional contracts if the contract is defined as a
"federally related mortgage loan," a number of states have adopted legislation
overriding Title V's exemptions, as permitted by Title V. The Company has
represented and warranted in the Agreement that all Contracts comply with any
applicable usury limitations.
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ENVIRONMENTAL LEGISLATION
Certain states impose a statutory lien for associated costs on property that
is the subject of a cleanup action by the state on account of hazardous wastes
or hazardous substances released or disposed of on the property. Such a lien
will generally have priority over all subsequent liens on the property and, in
certain of these states, will have priority over prior recorded liens,
including the lien of a mortgage. In addition, under federal environmental
legislation and possibly under state law in a number of states, a secured party
which takes a deed in lieu of foreclosure or acquires a mortgaged property at a
foreclosure sale may be liable for the costs of cleaning up a contaminated
site. Although such costs could be substantial, it is unclear whether they
would be imposed on a lender secured by residential property (such as the
Trust). In the event that title to a property securing a Secured Contract was
acquired by the Trust and cleanup costs were incurred in respect of the
mortgaged property, the holders of the Certificates might incur a loss if such
costs were required to be paid by the Trust.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Application of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), would adversely affect, for an indeterminate period
of time, the ability of the Servicer to collect full amounts of interest on
certain of the Contracts. Any shortfall in interest collections resulting from
the application of the Relief Act or similar legislation, which would not be
recoverable from the related Contracts, would result in a reduction of the
amounts distributable to the Certificateholders. In addition, the Relief Act
imposes limitations that would impair the ability of the Servicer to foreclose
on an affected mortgage, deed of trust or security deed during the mortgagor's
period of active duty status, and, under certain circumstances, during an
additional three month period thereafter. Thus, in the event that the Relief
Act or similar legislation applies to any Contract which goes into default,
there may be delays in payment on the Certificates in connection therewith. Any
other interest shortfalls, deferrals or forgiveness of payments on the
Contracts resulting from similar legislation or regulations may result in
delays in payments or losses to Certificateholders.
REPURCHASE OBLIGATIONS
Under the Agreement, the Company will represent and warrant that each FHA-
insured Contract was originated in compliance with FHA regulations and is
covered by FHA Insurance. In the event FHA were to deny insurance coverage on
an FHA-insured Contract due to a violation of FHA regulations in originating or
servicing such Contracts, such violation would constitute a breach of a
representation and warranty under the Agreement and would create an obligation
of the Company to repurchase such Contract unless the breach is cured. See
"Description of the Certificates--Conveyance of Contracts."
In addition, the Company will also represent and warrant under the Agreement
that each Contract complies with all requirements of law. Accordingly, if any
Obligor has a claim against the Trust for violation of any law and such claim
materially adversely affects the Trust's interest in a Contract, such violation
would constitute a breach of a representation and warranty under the Agreement
and would create an obligation to repurchase such Contract unless the breach is
cured. See "Description of the Certificates--Conveyance of Contracts."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the anticipated federal income tax
consequences of the purchase, ownership and disposition of the Certificates,
based upon laws, regulations, rulings and decisions now in effect, all of which
are subject to change or possibly differing interpretations. The discussion
below does not purport to deal with federal income tax consequences applicable
to all categories of investors, some of which may be subject to special rules
or elections. Investors should consult their own tax advisors in determining
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the federal, state, local and any other tax consequences to them of the
purchase, ownership and disposition of the Certificates.
TAX STATUS OF THE TRUST
Dorsey & Whitney, counsel to the Company, have advised the Company that, in
their opinion, the Trust will be classified as a grantor trust for federal
income tax purposes and not as an association which is taxable as a
corporation. The Trust will be classified as a trust despite the fact that the
Cash Collateral Beneficiary will be considered to retain an interest in a
second class of beneficial interest in the Trust. While Treasury Regulations
Section 301.7701-4(c) generally provides that an investment trust with more
than one class of ownership interest will be classified as an association
taxable as a corporation or a partnership, that regulation would treat the
Trust as a grantor trust because there will be no power under the Agreement to
vary the investment of the Certificateholders, the purpose of the Trust will be
to facilitate direct investment in the Contracts, and the existence of multiple
classes of ownership interests in the Trust will be incidental to that purpose.
CHARACTERIZATION OF INVESTMENTS IN CERTIFICATES
Certificates held by financial institutions, thrift institutions taxed as
domestic building and loan associations and real estate investment trusts will
not represent in their entirety interests in "qualifying real property loans,"
"loans secured by an interest in real property" or "real estate assets" for
purposes of Sections 593(d), 7701(a)(19)(C) or 856(c)(5) of the Code,
respectively. Furthermore, interest paid with respect to Certificates held by a
real estate investment trust will not be considered in its entirety to be
"interest on obligations secured by mortgages on real property or on interests
in real property" for purposes of Section 856(c)(3) of the Code.
TAX TREATMENT OF CERTIFICATEHOLDERS
Because the Trust will be classified as a grantor trust, each
Certificateholder will be treated for federal income tax purposes as the owner
of an undivided interest in the Contracts and other Trust property.
Accordingly, subject to the discussion below of certain limitations on
deductions and the "stripped bond" rules of the Code, each Certificateholder
must report on its federal income tax return its pro rata share of the entire
income from the Contracts and other Trust property, and may deduct its pro rata
share of the fees paid by the Trust, at the same time as such items would be
reported under the Certificateholders tax accounting method if it held directly
a pro rata interest in the assets of the Trust and received and paid directly
the amounts received and paid by the Trust. Although it is not entirely clear,
it appears that in transactions in which multiple classes of certificates are
issued, including interests in the Trust, fees paid by the Trust should be
allocated among the classes of interests therein using a method that recognizes
that each such class of interests benefits from the related services. In the
absence of statutory or administrative clarification as to the method to be
used, it is intended that information returns and reports both to
Certificateholders and the Internal Revenue Service will be based on a method
which allocates such fees, and other expenses if any, among classes of
interests in the Trust with respect to each period based on the distribution of
interest made to each such class during that period.
Section 67(a) of the Code limits the deductibility of expenses incurred for
the production of income by individuals, estates and trusts under Section 212
of the Code. Such expenses will be deductible only to the extent that, in the
aggregate and combined with certain other itemized deductions, they exceed 2%
of adjusted gross income. In addition, Section 68 of the Code provides that the
amount of itemized deductions (including those provided for in Section 212 of
the Code) otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds a threshold amount specified in the Code
($111,800 in 1994, in the case of a joint return) will be reduced by the lesser
of (i) 3% of the excess of adjusted gross income over the specified threshold
amount or (ii) 80% of the amount of itemized deductions otherwise allowable for
such taxable year. Further, Certificateholders (other than corporations)
subject to the alternative
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minimum tax may not deduct miscellaneous itemized deductions in determining
such holders' alternative minimum taxable income. These limitations will apply
to deductions derived either directly or indirectly through certain pass-
through entities (including grantor trusts such as the Trust) and may have the
effect of limiting the extent to which Servicing Fees can be deducted by
Certificateholders which are individuals, trusts or estates. To the extent that
a Certificateholder is not permitted to deduct the portion of Servicing Fees
allocable to a Certificate, the taxable income of the Certificateholder
attributable to that Certificate will exceed the net cash distributions related
to such income. These provisions of the Code will not affect the deductibility
of Servicing Fees allocable to a Certificate held by a corporation.
A purchaser of a Certificate will be treated as purchasing an interest in
each Contract in the Trust at a price determined by allocating the purchase
price paid for the Certificate among all Contracts in proportion to their fair
market values at the time of purchase of the Certificate. To the extent that
the portion of the purchase price of a Certificate allocated to a Contract is
greater than or less than the portion of the principal balance of the Contract
allocable to the Certificate, that interest in the Contract will be deemed to
have been acquired with premium or discount, respectively.
AMORTIZABLE PREMIUM
With respect to premium, under the rules of Section 171 of the Code, a
Certificateholder who holds a Certificate as a capital asset may elect to
deduct any "amortizable bond premium" attributable to a taxable year. The
amount of amortizable bond premium, if any, attributable to a taxable year will
be computed under a constant yield method. Generally, a Certificateholder
electing under Section 171 to deduct amortizable bond premium in respect of the
Contracts must use the constant yield method in respect of all obligations to
which the special rules of Section 171 may apply. Under the Code, amortizable
bond premium in respect of a Contract will be treated as an offset to interest
income in respect of such Contract and, accordingly, a Certificateholder's
deduction for amortizable bond premium in respect of a Contract will be limited
in each taxable year to the amount of interest income derived by that
Certificateholder in respect of that Contract for that taxable year.
Amortizable bond premium in respect of a Contract will not be treated as a
separate item of interest deduction subject to the tax rules and limitations
governing interest deductions. Absent such an election to deduct currently any
premium, the premium will be deductible as a short-term or long-term capital
loss only upon a disposition of the Certificate or payment of the underlying
Contract (assuming the Certificate is a capital asset); provided, however, that
such premium may be deductible as an ordinary loss upon a retirement of a
Certificate or payment of the underlying Contract.
STRIPPED BOND CERTIFICATES
The Cash Collateral Beneficiary will be treated as having retained an
ownership interest in the Trust represented by a portion of the interest
payments to be made pursuant to the Contracts. In such event, the Contracts are
expected to be treated as "stripped bonds" within the meaning of Section 1286
of the Code, and Certificates that represent an interest in "stripped bonds"
purchased at a discount ("Stripped Bond Certificates") are expected to be
subject to the original issue discount rules of the Code.
Original issue discount generally must be included in ordinary gross income
as it accrues in accordance with the constant yield method that takes into
account the compounding of interest, regardless of the overall method of
accounting of a Certificateholder. Such accrual of income may accrue in advance
of the receipt of cash attributable to such income. Accordingly, if
Certificates are determined to be issued with original issue discount, the
amount of original issue discount required to be included in a
Certificateholder's ordinary gross income for federal income tax purposes in
any taxable year will be computed in accordance with Section 1272(a) of the
Code and certain Treasury Regulations promulgated thereunder. In particular,
Section 1272(a)(6) of the Code requires (i) the use of a reasonable prepayment
assumption in accruing original issue discount and (ii) adjustments in the
accrual of original issue discount when prepayments do not conform to the
prepayment assumption. It is unclear whether the foregoing is applicable to the
Certificates, or whether use of a prepayment assumption may be required or
permitted in the absence of applicable regulations. It is
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also uncertain, if a prepayment assumption is used, whether the assumed
prepayment rate is to be determined based on conditions at the time of the
first sale of Certificates or, with respect to any subsequent holder, at the
time of purchase of a Certificate by the holder. In the case of a Certificate
acquired at a price equal to the principal amount of the Contracts allocable to
such Certificate, the use of a prepayment assumption is not expected to have
any significant effect on the yield used in calculating accruals of interest
income in accordance with the original issue discount provisions of the Code.
It is expected that information returns and reports to the Internal Revenue
Service and Certificateholders will be based on a prepayment assumption as
disclosed herein and on a constant yield computed using the initial offering
price to the public at which a substantial amount of Certificates are sold.
Certificateholders are advised to consult their tax advisors concerning the
application of the original issue discount rules to Stripped Bond Certificates.
GAIN OR LOSS ON DISPOSITION
If a Certificate is sold, gain or loss will be recognized equal to the
difference between the amount realized on the sale and the Certificateholders
adjusted tax basis in the Certificate. Such tax basis will equal the
Certificateholders cost for the Certificate, increased by any discount
previously included in income, and decreased by any deduction previously
allowed for premium and by the amount of principal payments previously received
on the Certificate. Any such gain or loss will be capital gain or loss if the
Certificate was held as a capital asset, except that gain may be treated in
whole or in part as ordinary interest income under the market discount or
original issue discount rules of the Code. Under the Code, long-term capital
gains (gains on capital assets held for more than one year) are currently taxed
at a rate which for some taxpayers is less than the rates applicable to
ordinary income.
Gain or loss from the sale of a Certificate may be partially or wholly
ordinary and not capital in certain circumstances. Gain attributable to accrued
and unrecognized market discount will be treated as ordinary income, as will
gain or loss recognized by banks and other financial institutions subject to
Section 582(c) of the Code. Furthermore, a portion of any gain that might
otherwise be capital gain may be treated as ordinary income to the extent that
the Certificate is held as part of a "conversion transaction" within the
meaning of Section 1258 of the Code. A conversation transaction generally is
one in which the taxpayer has taken two or more positions in Certificates or
similar property that reduce or eliminate market risk, if substantially all of
the taxpayers return is attributable to the time value of the taxpayers net
investment in such transaction. The amount of gain realized in a conversion
transaction that is recharacterized as ordinary income generally will not
exceed the amount of interest that would have accrued on the taxpayers net
investment at 120% of the appropriate "applicable federal rate" (which rate is
computed and published monthly by the Internal Revenue Service) at the time the
taxpayer enters into the conversion transaction, subject to appropriate
reduction for prior inclusion of interest and other ordinary income items from
the transaction. Finally, a taxpayer may elect to have net capital gain taxed
at ordinary income rates rather than capital gains rates in order to include
such net capital gain in total net investment income for that taxable year, for
purposes of the net investment income limitation on the deduction of interest
on indebtedness incurred to purchase or carry property held for investment.
TAX TREATMENT OF CERTAIN FOREIGN INVESTORS
Generally, interest paid to a Certificateholder who is a nonresident alien
individual or a foreign corporation and who does not hold a Certificate in
connection with a United States trade or business will be treated as "portfolio
interest" and therefore will be exempt from the 30% withholding tax. Such a
Certificateholder will be entitled to receive interest payments on Certificates
free of United States federal income tax, provided that such Certificateholder
periodically provides the Trustee (or other person who would otherwise be
required to withhold tax) with a statement certifying under penalty of perjury
that such Certificateholder is not a United States person and providing the
name and address of such Certificateholder.
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TAX ADMINISTRATION AND REPORTING
The Trustee will furnish to each Certificateholder with each distribution a
statement setting forth the amount of such distribution allocable to principal
and to interest. In addition, the Trustee will furnish, within a reasonable
time after the end of each calendar year, to each Certificateholder who was a
Certificateholder at any time during such year, information regarding the
amount of servicing compensation received by the Servicer and such other
factual information as the Seller deems necessary to enable Certificateholders
to prepare their tax returns. Reports will be made annually to the Internal
Revenue Service and to holders of record that are not excepted from the
reporting requirements regarding information as may be required with respect to
interest and original issue discount, if any, with respect to the Certificates.
Because the rules for accruing discount and amortizing premium with respect to
the Certificates are uncertain in various respects, there is no assurance that
the Internal Revenue Service will agree with such information reports.
Moreover, such information reports, even if otherwise accepted as accurate by
the Internal Revenue Service, will in any event be accurate only as to the
initial Certificateholders who bought their Certificates at the initial
offering price used in preparing such reports.
BACKUP WITHHOLDING
Under certain circumstances, a Certificateholder may be subject to "backup
withholding" at a 31% rate. Backup withholding may apply to a Certificateholder
who is a United States person if the holder, among other circumstances, fails
to furnish his Social Security number or other taxpayer identification number
to the Trustee. Backup withholding may apply, under certain circumstances, to a
Certificateholder who is a foreign person if the Certificateholder fails to
provide the Trustee or the Certificateholders securities broker with the
statement necessary to establish the exemption from federal income and
withholding tax on interest on the Certificate. Backup withholding, however,
does not apply to payments on a Certificate made to certain exempt recipients,
such as corporations and tax-exempt organizations, and to certain foreign
persons. Certificateholders should consult their tax advisors for additional
information concerning the potential application of backup withholding to
payments received by them with respect to a Certificate.
OTHER TAX CONSEQUENCES
No advice has been given as to local income, franchise, personal property or
other taxation in any state or locality, or as to the tax effect of ownership
of Certificates in any state or locality. Certificateholders are advised to
consult their own tax advisors with respect to any state or local income,
franchise, personal property or other tax consequences arising out of their
ownership of Certificates.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain fiduciary and prohibited transaction restrictions on employee
pension and welfare benefit plans subject to ERISA ("ERISA Plans"). Section
4975 of the Code imposes similar prohibited transaction restrictions on tax-
qualified retirement plans described in Section 401(a) of the Code ("Qualified
Retirement Plans") and on Individual Retirement Accounts ("IRAs") described in
Section 408 of the Code (collectively, "Tax-Favored Plans").
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA), are not subject to the ERISA requirements discussed
herein. Accordingly, assets of such plans may be invested in Certificates
without regard to the ERISA considerations described below, subject to the
provisions of applicable federal and state law. Any such plan that is a
Qualified Retirement Plan and exempt from taxation under Sections 401(a) and
501(a) of the Code, however, is subject to the prohibited transaction rules set
forth in Section 503 of the Code.
In addition to imposing general fiduciary requirements, including those of
investment prudence and diversification and the requirement that a Plan's
investment be made in accordance with the documents governing the Plan, Section
406 of ERISA and Section 4975 of the Code prohibited a broad range of
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transactions involving "plan assets" of ERISA Plans and Tax-Favored Plans
(collectively, "Plans") and persons ("Parties in Interest" under ERISA or
"Disqualified Persons" under the Code) who have certain specified relationships
to the Plans, unless a statutory or administrative exemption is available.
Certain Parties in Interest (or Disqualified Persons) that participate in a
prohibited transaction may be subject to a penalty (or an excise tax) imposed
pursuant to Section 502(i) of ERISA or Section 4975 of the Code, unless a
statutory or administrative exemption is available.
PLAN ASSET REGULATIONS
An investment of Plan Assets (as defined below) in Certificates may cause the
underlying assets included in the Trust to be deemed "plan assets" of such
Plan. The U.S. Department of Labor (the "DOL") has promulgated regulations at
29 C.F.R. section 2510.3-101 (the "DOL Regulations") concerning whether or not
a Plan's assets would be deemed to include an interest in the underlying assets
of an entity (such as the Trust), for purposes of applying the general
fiduciary responsibility provisions of ERISA and the prohibited transaction
provisions of ERISA and the Code, when a Plan acquires an "equity interest"
(such as a Certificate) in such entity. Because of the factual nature of
certain of the rules set forth in the DOL Regulations, Plan Assets either may
be deemed to include an interest in the assets of the Trust or may be deemed
merely to include its interest in the Certificates. Therefore, neither Plans
nor such entities should acquire or hold Certificates in reliance upon the
availability of any exception under the DOL Regulations. For purposes of this
Section "ERISA Considerations," the term "Plan Assets" or assets of a Plan has
the meaning specified in the DOL Regulations and includes an undivided interest
in the underlying assets of certain entities in which a Plan invests. The
prohibited transaction provisions of Section 406 of ERISA and Section 4975 of
the Code may apply to the Trust and cause the Company, the Trust, the Trustee,
any successor, or certain affiliates thereof, to be considered or become
Parties in Interest or Disqualified Persons with respect to an investing Plan
(or of a Plan holding an interest in such an entity). If so, the acquisition or
holding of Certificates by or on behalf of the investing Plan could also give
rise to a prohibited transaction under ERISA and the Code, unless some
statutory or administrative exemption is available. Certificates acquired by a
Plan would be assets of that Plan. Under the DOL Regulations, the Trust,
including the assets held in the Trust, may also be deemed to be assets of each
Plan that acquires Certificates. Special caution should be exercised before
Plan Assets are used to acquire a Certificate in such circumstances, especially
if, with respect to such assets, the Company, the Trust, the Trustee, any
successor or an affiliate thereof either (i) has investment discretion with
respect to the investment of Plan assets; or (ii) has authority or
responsibility to give (or regularly gives) investment advice with respect to
Plan assets for a fee pursuant to an agreement or understanding that such
advice will serve as a primary basis for investment decisions with respect to
such assets.
Any person who has discretionary authority or control respecting the
management or disposition of Plan Assets and any person who provides investment
advice with respect to such assets for a fee (in the manner described above),
is a fiduciary of the investing Plan. If the assets of the Trust were to
constitute Plan Assets then any party exercising management or discretionary
control regarding those assets may be deemed to be a Plan "fiduciary," and thus
subject to the fiduciary requirements of ERISA and the prohibited transaction
provisions of ERISA and Section 4975 of the Code with respect to any investing
Plan. In addition, if the assets of the Trust were to constitute Plan Assets,
then the acquisition or holding of Certificates by, on behalf of or with Plan
Assets, as well as the operation of the Trust, may constitute or involve a
prohibited transaction under ERISA and the Code.
No purchases of Certificates by, on behalf of or with Plan Assets of any Plan
will be registered unless the transferee, at its expense, delivers to the
Trustee, the Servicer and the Company an opinion of counsel (satisfactory to
the Trustee, the Servicer and the Company) that the purchase and holding of a
Certificate by, on behalf of, or with Plan Assets of such Plan is permissible
under applicable law, will not result in the assets of the Trust being deemed
to be Plan Assets and subject to the prohibited transaction provisions of ERISA
and the Code and will not subject the Trustee, the Trust, the Company or the
Servicer to any obligation or
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liability in addition to those undertaken in the Agreement. Unless such opinion
is delivered, each person acquiring a Certificate will be deemed to represent
to the Trustee, the Company and the Servicer that such person is neither a
Plan, nor acting on behalf of a Plan, nor purchasing with Plan Assets of any
Plan.
CONSULTATION WITH COUNSEL
Any fiduciary or other Plan investor that purposes to acquire or hold
Certificates on behalf of or with Plan Assets of any Plan should consult with
its counsel with respect to the potential applicability of the fiduciary
responsibility provisions of ERISA and the prohibited transaction provisions of
ERISA and the Code to the proposed investment and the availability of any
prohibited transaction exemption.
RATINGS
It is a condition precedent to the issuance of any Certificates offered
hereby that they be rated not lower than "A" by Standard & Poor's Ratings
Group, a division of McGraw-Hill, Inc. ("S&P"). S&P's rating of the
Certificates addresses the likelihood of timely receipt of Monthly Interest and
ultimate receipt of principal on or before the Payment Date in March 2014.
S&P's ratings take into consideration the credit quality of the pool of
contracts, including any credit support providers, structural and legal aspects
associated with the certificates and the extent to which the payment stream of
the pool of contracts is adequate to make payments required under the
certificates. S&P's rating on the Certificates does not, however, constitute a
statement regarding frequency of prepayments on the Contracts, nor does it
address the possibility that investors may suffer a lower than anticipated
yield.
The Depositor has not requested a rating of the Certificates from any rating
agency other than S&P. However, there can be no assurance as to whether any
other rating agency will rate the Certificates, or if one does, what rating
would be assigned by such rating agency. A security is not a recommendation to
buy, sell or hold securities and may be subject to revision or withdrawal at
any time by the assigning rating agency.
UNDERWRITING
The Underwriter has agreed, subject to the terms and conditions of the
Underwriting Agreement, to purchase from the Company the principal amount of
the Certificates.
In the Underwriting Agreement, the Underwriter has agreed, subject to the
terms and conditions set forth therein, to purchase all of the Certificates
offered hereby if any Certificates are purchased. In the event of a default by
the Underwriter, the Underwriting Agreement provides that, in certain
circumstances, the Underwriting Agreement may be terminated.
The Underwriter proposes to offer the Certificates in part directly to
purchasers at the initial public offering price set forth on the cover page of
this Prospectus and in part to certain securities dealers at such price less
concessions not to exceed .375% of the Initial Principal Amount. The
Underwriter may allow, and such dealers may reallow, concessions not to exceed
.25% of the Initial Principal Amount to certain brokers and dealers. After the
Certificates are released for sale to the public, the offering price and other
selling terms may be varied by the Underwriter.
The Underwriting Agreement provides that the Company will indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, or contribute to payments the Underwriter may be
required to make in respect thereof.
The Company has agreed that for a period of 30 days from the date of this
Prospectus it will not offer or sell publicly any other home improvement loan
contract pass-through certificates without the consent of the Underwriter.
LEGAL MATTERS
Certain legal matters relating to the issuance of the Certificates will be
passed upon for the Company and the Trust by Dorsey & Whitney (a partnership
including professional associations), Minneapolis, Minnesota, and for the
Underwriter by Thacher Proffitt & Wood, New York, New York. The material
federal income tax consequences of the Certificates will be passed upon for the
Company by Dorsey & Whitney.
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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED BY THE COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTI-
TUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE CERTIFICATES
IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN
AFFAIRS OF THE TRUST SINCE THE DATE HEREOF.
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TABLE OF CONTENTS
PROSPECTUS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Reports to Certificateholders.............................................. 2
Available Information...................................................... 2
Incorporation of Certain Documents by Reference............................ 2
Summary of the Terms of the Certificates................................... 3
Special Considerations..................................................... 10
Structure of the Transaction............................................... 12
Use of Proceeds............................................................ 13
The Contracts.............................................................. 13
Yield and Prepayment Considerations........................................ 19
Green Tree Financial Corporation........................................... 20
Description of the Certificates............................................ 21
Description of FHA Insurance............................................... 31
Description of the Cash Collateral Guaranty................................ 32
Description of the Limited Guaranty........................................ 35
Certain Legal Aspects of the Contracts; Repurchase Obligations............. 35
Certain Federal Income Tax Consequences.................................... 42
ERISA Considerations....................................................... 46
Ratings.................................................................... 48
Underwriting............................................................... 48
Legal Matters.............................................................. 48
</TABLE>
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$134,096,835.87(APPROXIMATE)
[LOGO OF GREENTREE FINANCIAL CORPORATION APPEARS HERE]
SELLER AND SERVICER
CERTIFICATES FOR HOME IMPROVEMENT LOANS
HOME IMPROVEMENT LOAN TRUST 1994-A
7.05% PASS-THROUGH RATE
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PROSPECTUS
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MERRILL LYNCH & CO.
MARCH 31, 1994
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