<PAGE>
FILED PURSUANT TO RULE 424(b)(5)
REGISTRATION NO. 33-55853
PROSPECTUS SUPPLEMENT
(To Prospectus dated December 12, 1995)
$132,722,512 (APPROXIMATE)
LOGO
SELLER AND SERVICER
CERTIFICATES FOR HOME IMPROVEMENT LOANS
SERIES 1995-F
<TABLE>
<S> <C>
$22,000,000 (APPROXIMATE) 6.00%
CLASS A-1 $13,300,000 (APPROXIMATE) 6.65% CLASS M-1
$32,000,000 (APPROXIMATE) 5.90%
CLASS A-2 $10,600,000 (APPROXIMATE) 6.95% CLASS M-2
$15,000,000 (APPROXIMATE) 5.90%
CLASS A-3 $ 8,000,000 (APPROXIMATE) 6.75% CLASS B-1
$23,800,000 (APPROXIMATE) 6.15%
CLASS A-4 $ 8,022,512 (APPROXIMATE) 7.10% CLASS B-2
</TABLE>
(PRINCIPAL AND INTEREST PAYABLE ON THE 15TH DAY OF EACH MONTH BEGINNING IN
JANUARY 1996)
---------------
The Certificates for Home Improvement Loans, Series 1995-F offered hereby
(the "Certificates") will be comprised of eight Classes, designated as the
Class A-1, Class A-2, Class A-3, Class A-4, Class M-1, Class M-2, Class B-1
and Class B-2 Certificates, respectively. The Certificates will be issued by,
and evidence beneficial ownership interests in, Home Improvement Loan Trust
1995-F (the "Trust"). The Trust will be created by Green Tree Financial
Corporation (the "Company") pursuant to a Pooling and Servicing Agreement,
dated as of December 1, 1995 (the "Agreement") between the Company and First
Trust National Association, as Trustee (the "Trustee"). The Trust property
will consist primarily of a pool of home improvement contracts and promissory
notes (the
(Continued on next page)
---------------
PROSPECTIVE INVESTORS SHOULD CONSIDER THE INFORMATION SET FORTH UNDER "RISK
FACTORS" ON PAGE S-20 OF THIS PROSPECTUS SUPPLEMENT AND PAGE 9 OF THE
ACCOMPANYING PROSPECTUS.
---------------
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 AND IN THE PROSPECTUS. 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 SUPPLEMENT
OR THE PROSPECTUS. ANY REPRESENTATION 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.
---------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Price to Underwriting Proceeds to
Public(1) Discount Company(1)(2)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Class A-1 Certificate........................ 100% .25% 99.75%
- -------------------------------------------------------------------------------------------------------
Per Class A-2 Certificate........................ 99.96875% .375% 99.59375%
- -------------------------------------------------------------------------------------------------------
Per Class A-3 Certificate........................ 99.859375% .425% 99.434375%
- -------------------------------------------------------------------------------------------------------
Per Class A-4 Certificate........................ 99.90625% .45% 99.45625%
- -------------------------------------------------------------------------------------------------------
Per Class M-1 Certificate........................ 99.8125% .475% 99.3375%
- -------------------------------------------------------------------------------------------------------
Per Class M-2 Certificate........................ 99.640625% .5% 99.140625%
- -------------------------------------------------------------------------------------------------------
Per Class B-1 Certificate........................ 99.984375% .6% 99.384375%
- -------------------------------------------------------------------------------------------------------
Per Class B-2 Certificate........................ 99.890625% .7% 99.190625%
- -------------------------------------------------------------------------------------------------------
Total............................................ $132,596,049.88 $566,182.58 $132,029,867.29
- -------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
(1) Plus accrued interest from and including December 19, 1995.
(2) Before deducting expenses, estimated to be $185,000.
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 December 19,
1995 (the actual such date being hereinafter referred to as the "Closing
Date").
---------------
LEHMAN BROTHERS
December 12, 1995
<PAGE>
(Continued from previous page)
"Contracts"), including the right to receive payments due on the Contracts on
and after December 1, 1995 (or the date of origination thereof, if later) (the
"Cut-off Date"), liens on the related real estate and amounts held for the
Trust in the Certificate Account. Each of the Contracts is secured by a lien
(substantially all of which are subordinate liens) on the related improved real
estate. The rights of the holders of the Class M-1, Class M-2, Class B-1 and
Class B-2 Certificates to receive distributions on each Payment Date will be
subordinated to such rights of the holders of the Class A-1, Class A-2, Class
A-3 and Class A-4 Certificates and, in addition, to such rights of the holders
of the Class M-1 Certificates (in the case of the Class M-2, Class B-1 and
Class B-2 Certificates), of the Class M-2 Certificates (in the case of the
Class B-1 and Class B-2 Certificates) and of the Class B-1 Certificates (in the
case of the Class B-2 Certificates), all to the extent described herein.
The Class B-2 Certificateholders will have the benefit of a limited guaranty
of the Company (the "Class B-2 Limited Guaranty") to protect against losses
that would otherwise be borne by the Class B-2 Certificateholders. To the
extent that funds in the Certificate Account are insufficient to distribute to
the holders of the Class B-2 Certificates the Class B-2 Formula Distribution
Amount or in the event that there is a Class B-2 Principal Liquidation Loss
Amount for any Payment Date (each as described herein), the Company will be
obligated to make a Class B-2 Guaranty Payment in respect thereof (as described
herein). See "Description of the Class B-2 Limited Guaranty" herein.
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 in January 1996. The Company
will act as servicer (in such capacity, the "Servicer") of the Contracts. The
final scheduled Payment Date of the Certificates is in January 2021. See
"Description of the Certificates" herein and in the Prospectus.
An election will be made to treat the Trust as a real estate mortgage
investment conduit ("REMIC") for federal income tax purposes. As described more
fully herein, the Certificates will constitute "regular interests" in the REMIC
and the Class C Certificate, which is not being offered hereby, will constitute
the "residual interest" in the REMIC. See "Certain Federal Income Tax
Consequences" herein and in the Prospectus.
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. Lehman Brothers Inc. (the "Underwriter")
expects, but is not obligated, to make a market in the Certificates.
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 March 11, 1996, 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 Supplement and a Prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions. Upon
receipt of a request by an investor, or his or her representative, within the
period during which there is a Prospectus delivery obligation, the Company or
the Underwriter will transmit or cause to be transmitted promptly, without
charge, and in addition to any such delivery requirements, a paper copy of a
Prospectus Supplement and a Prospectus, or a Prospectus Supplement and a
Prospectus encoded in an electronic format.
The Certificates offered hereby constitute Classes of a Series of
Certificates for Home Improvement Loans being offered by the Company from time
to time pursuant to the Prospectus. This Prospectus Supplement does not contain
complete information about the offering of the Certificates. Additional
information is contained in the Prospectus and purchasers are urged to read
both this Prospectus Supplement and the Prospectus in full. Sales of the
Certificates may not be consummated unless the purchaser has received both this
Prospectus Supplement and the Prospectus. To the extent that any statements in
this Prospectus Supplement conflict with statements contained in the
Prospectus, the statements in this Prospectus Supplement shall control.
S-2
<PAGE>
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 Supplement and in the
accompanying Prospectus. Capitalized terms used herein and not otherwise
defined herein shall have the respective meanings assigned them in the
Prospectus and in Article I of the Agreement, a copy of which is available upon
request made to the Company.
Securities Offered............ Certificates for Home Improvement Loans, Series
1995-F (the "Certificates"), comprised of
eight Classes designated as the Class A-1,
Class A-2, Class A-3, Class A-4, Class M-1,
Class M-2, Class B-1 and Class B-2
Certificates, respectively. The Certificates
will be issued by, and evidence beneficial
ownership interests in, Home Improvement Loan
Trust 1995-F (the "Trust"), the property of
which consists primarily of the Contracts,
having an aggregate principal balance as of
the Cut-off Date (the "Cut-off Date Pool
Principal Balance") of $132,722,512.52, and
all rights, benefits, obligations and proceeds
arising therefrom or in connection therewith,
including liens on the related improved real
estate, and the Class B-2 Limited Guaranty for
the benefit of the Class B-2
Certificateholders.
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 in January 1996.
Cut-off Date.................. December 1, 1995 (or the date of origination of
the Contract, if later).
Record Date................... The Business Day immediately preceding the
related Payment Date.
Original Series 1995-F $132,722,512 (approximate).
Principal Balance............
Original Class A-1
Principal Balance........
$22,000,000 (approximate).
Original Class A-2
Principal Balance........
$32,000,000 (approximate).
Original Class A-3
Principal Balance........
$15,000,000 (approximate).
Original Class A-4
Principal Balance........
$23,800,000 (approximate).
Original Class M-1
Principal Balance........
$13,300,000 (approximate).
S-3
<PAGE>
Original Class M-2
Principal Balance........
$10,600,000 (approximate).
Original Class B-1
Principal Balance........
$8,000,000 (approximate).
Original Class B-2
Principal Balance........
$8,022,512 (approximate).
Class A-1 Pass-Through Rate... 6.00% per annum.
Class A-2 Pass-Through Rate... 5.90% per annum.
Class A-3 Pass-Through Rate... 5.90% per annum.
Class A-4 Pass-Through Rate... 6.15% per annum.
Class M-1 Pass-Through Rate... 6.65% per annum.
Class M-2 Pass-Through Rate... 6.95% per annum.
Class B-1 Pass-Through Rate... 6.75% per annum.
Class B-2 Pass-Through Rate... 7.10% per annum.
Description of Certificates... The Class A-1, Class A-2, Class A-3 and Class
A-4 Certificates (collectively, the "Class A
Certificates") are Senior Certificates and the
Class M-1 and Class M-2 Certificates
(collectively, the "Class M Certificates") and
Class B-1 and Class B-2 Certificates
(collectively, the "Class B Certificates") are
Subordinated Certificates, all as described
herein, and are issued by, and payable solely
from the property of, the Trust. The undivided
percentage interest of the holder of any
Certificate in the distributions to be made to
the related Class (the "Percentage Interest")
will be equal to the percentage obtained by
dividing the denomination specified on such
Certificate by the original principal balance
of such Class.
Distributions................ On each Payment Date, distributions on the Cer-
tificates will be made first to the holders of
the Class A Certificates, then to the holders
of the Class M Certificates, and then to the
holders of the Class B Certificates, in the
manner described below.
Distributions of interest and principal to the
holders of a Class of Class A Certificates will
be made, to the extent that the Amount Avail-
able in the Certificate Account is sufficient
therefor, in an amount equal to the sum of (i)
their respective Percentage Interests of the
amount of interest calculated as described be-
low under "A. Class A Interest" and (ii) their
respective Percentage Interests of the Senior
Percentage of the Formula Principal Distribu-
tion Amount (each as defined below) for the re-
lated Payment Date, in the order of priority
described below under "B. Class A Principal."
Distributions of interest and principal to the
Class M-1 Certificateholders will be made in an
amount equal to their respective Percentage In-
terests multiplied by the Class M-1 Distribu-
tion Amount (as described below). Distributions
of interest and principal to the Class M-2
Certificateholders will be made in an amount
equal
S-4
<PAGE>
to their respective Percentage Interests multi-
plied by the Class M-2 Distribution Amount (as
described below). Distributions of interest and
principal to the Class B-1 Certificateholders
will be made in an amount equal to their re-
spective Percentage Interests multiplied by the
Class B-1 Distribution Amount (as described be-
low). Distributions of interest and principal
to the Class B-2 Certificateholders will be
made in an amount equal to their respective
Percentage Interests of the Class B-2 Distribu-
tion Amount and any Class B-2 Guaranty Payment
(each as described below). The rights of the
Class M and Class B Certificateholders to re-
ceive distributions in respect of the Amount
Available are subordinated to the rights of the
Class A Certificateholders, the rights of the
Class M-2 and Class B Certificateholders to re-
ceive such distributions are subordinated to
the rights of the Class A Certificateholders
and the Class M-1 Certificateholders, the
rights of the Class B Certificateholders to re-
ceive such distributions are subordinated to
the rights of the Class M Certificateholders,
and the rights of the Class B-2 Certificate-
holders to receive such distributions are sub-
ordinated to the rights of the Class B-1
Certificateholders. Distributions will be made
on each Payment Date commencing in January 1996
to holders of record on the related Record
Date, except that the final distribution in re-
spect of the Certificates will only be made
upon presentation and surrender of the Certifi-
cates at the office or agency appointed by the
Trustee for that purpose in Minneapolis or St.
Paul, Minnesota.
The "Class M-1 Distribution Amount" for any Pay-
ment Date is intended to be equal to the "Class
M-1 Formula Distribution Amount," which equals
the sum of (i) the amount of interest calcu-
lated as described under "C. Class M-1 Inter-
est" below and (ii) an amount of principal cal-
culated as described under "D. Class M-1 Prin-
cipal" below. The "Class M-1 Distribution
Amount" for any Payment Date will equal the
lesser of (i) the Class M-1 Formula Distribu-
tion Amount for such Payment Date or (ii) the
Amount Available in the Certificate Account
available for distribution to the Class M-1
Certificateholders (after giving effect to the
distribution made to Class A Certificate-
holders) on such Payment Date (the "Class M-1
Remaining Amount Available").
The "Class M-2 Distribution Amount" for any Pay-
ment Date is intended to be equal to the "Class
M-2 Formula Distribution Amount," which equals
the sum of (i) the amount of interest calcu-
lated as described under "E. Class M-2 Inter-
est" below and (ii) an amount of principal cal-
culated as described under "F. Class M-2 Prin-
cipal" below. The "Class M-2 Distribution
Amount" for any Payment Date will equal the
lesser of (i) the Class M-2 Formula Distribu-
tion Amount for such Payment Date or (ii) the
Amount Available in the Certificate Account
S-5
<PAGE>
available for distribution to the Class M-2
Certificateholders (after giving effect to the
distribution made to Class A and Class M-1
Certificateholders) on such Payment Date (the
"Class M-2 Remaining Amount Available").
The "Class B-1 Distribution Amount" for any Pay-
ment Date is intended to be equal to the "Class
B-1 Formula Distribution Amount," which equals
the sum of (i) the amount of interest calcu-
lated as described under "G. Class B-1 Inter-
est" below and (ii) an amount of principal cal-
culated as described under "H. Class B-1 Prin-
cipal" below. The "Class B-1 Distribution
Amount" for any Payment Date will equal the
lesser of (i) the Class B-1 Formula Distribu-
tion Amount for such Payment Date or (ii) the
Amount Available in the Certificate Account
available for distribution to the Class B-1
Certificateholders (after giving effect to the
distribution made to Class A and Class M
Certificateholders) on such Payment Date (the
"Class B-1 Remaining Amount Available").
The "Class B-2 Distribution Amount" for any Pay-
ment Date is intended to be equal to the "Class
B-2 Formula Distribution Amount," which equals
the sum of (i) the amount of interest calcu-
lated as described under "I. Class B-2 Inter-
est" below and (ii) the amount of principal
calculated as described in the first paragraph
under "J. Class B-2 Principal" below. The
"Class B-2 Distribution Amount" for any Payment
Date will equal the lesser of (i) the Class B-2
Formula Distribution Amount for such Payment
Date or (ii) the Amount Available in the Cer-
tificate Account available for distribution to
the Class B-2 Certificateholders (after giving
effect to the distribution made to Class A,
Class M and Class B-1 Certificateholders) on
such Payment Date (the "Class B-2 Remaining
Amount Available").
See "Description of the Certificates" for a de-
tailed description of the amounts on deposit in
the Certificate Account that will constitute
the Amount Available on each Payment Date. The
Amount Available will include amounts otherwise
payable to the Class M Certificateholders, to
the Class B Certificateholders, to the Servicer
(so long as the Company or any wholly owned
subsidiary of the Company is the Servicer) as
the Monthly Servicing Fee, and to the Class C
Certificateholder. The Class M-1 Remaining
Amount Available will include amounts otherwise
payable to the holders of the Class M-2 Certif-
icates, to the Class B Certificates, to the
Servicer (so long as the Company or any wholly
owned subsidiary of the Company is the
Servicer) as the Monthly Servicing Fee, and to
the Class C Certificateholder. The Class M-2
Remaining Amount Available will include amounts
otherwise payable to the holders of the Class B
Certificates, to the Servicer (so long as the
Company or any wholly owned subsidiary of the
Company is the Servicer) as the Monthly Servic-
ing Fee, and to the Class C
S-6
<PAGE>
Certificateholder. The Class B-1 Remaining
Amount Available will include amounts otherwise
payable to the Class B-2 Certificateholders, to
the Servicer (so long as the Company or any
wholly owned subsidiary of the Company is the
Servicer) as the Monthly Servicing Fee, and to
the Class C Certificateholder. The Class B-2
Remaining Amount Available will include amounts
otherwise payable to the Servicer (so long as
the Company or any wholly owned subsidiary of
the Company is the Servicer) as the Monthly
Servicing Fee, and to the Class C
Certificateholder.
The "Principal Balance" of a Class of Certifi-
cates as of any Payment Date is the Original
Principal Balance of such Class of Certificates
less all amounts previously distributed to such
Class on account of principal. The Class A
Principal Balance as of any Payment Date is the
sum of the Class A-1 Principal Balance, the
Class A-2 Principal Balance, the Class A-3
Principal Balance and the Class A-4 Principal
Balance. The Class M Principal Balance as of
any Payment Date is the sum of the Class M-1
Principal Balance and the Class M-2 Principal
Balance. The Class B Principal Balance as of
any Payment Date is the sum of the Class B-1
Principal Balance and the Class B-2 Principal
Balance.
A. Class A Interest.......... Interest on the outstanding Principal Balance of
each Class of Class A Certificates will accrue
from December 19, 1995, or from the most recent
Payment Date on which interest has been paid,
to but excluding the following Payment Date,
and will be computed on the basis of a 360-day
year of twelve 30-day months.
Interest will be paid concurrently on each Class
of Class A Certificates on each Payment Date,
to the extent of the Amount Available for such
date in the Certificate Account, at the related
Pass-Through Rate on the then outstanding Class
A-1 Principal Balance, Class A-2 Principal Bal-
ance, Class A-3 Principal Balance and Class A-4
Principal Balance.
In the event that, on a particular Payment Date,
the Amount Available in the Certificate Account
is not sufficient to make a full distribution
of interest to the holders of outstanding Class
A Certificates, the amount of interest to be
distributed in respect of the Class A Certifi-
cates will be allocated among each Class
thereof (and within a Class among the Certifi-
cates of such Class) pro rata in accordance
with their respective entitlements to interest,
and the amount of the shortfall will be carried
forward and added to the amount such holders
will be entitled to receive on the next Payment
Date. Any such amount so carried forward will
bear interest at the related Pass-Through Rate,
to the extent legally permissible. See "De-
scription of the Certificates."
B. Class A Principal......... Holders of a Class of Class A Certificates will
be entitled to receive on each Payment Date as
payments of principal, in the
S-7
<PAGE>
order of priority set forth below and to the
extent of the Amount Available in the Certifi-
cate Account after payment of all interest pay-
able on each Class of Class A Certificates, the
Senior Percentage of the sum (such sum being
hereinafter referred to as the "Formula Princi-
pal Distribution Amount") of (i) all scheduled
payments of principal due on each outstanding
Contract during the month preceding the month
in which the Payment Date occurs, (ii) the
Scheduled Principal Balance of each Contract
which, during the month preceding the month of
such Payment Date, was purchased by the Company
pursuant to the Agreement on account of certain
breaches of its representations and warranties,
(iii) all partial Principal Prepayments applied
and all Principal Prepayments in Full received
during such preceding month, (iv) the Scheduled
Principal Balance of each Contract that became
a Liquidated Contract during such preceding
month, and (v) any amount described in clauses
(i) through (iv) above that was not previously
distributed because of an insufficient amount
of funds available in the Certificate Account
if (a) the Payment Date occurs on or after the
Payment Date on which the Class B-2 Principal
Balance has been reduced to zero, or (b) such
amount was not covered by a Class B-2 Guaranty
Payment and corresponding reduction in the
Class B-2 Principal Balance. When the Principal
Balance of a Class of Class A Certificates is
reduced to zero, no further distributions of
principal will be made to the holders of such
Class.
The Senior Percentage for any Payment Date prior
to the Class B Cross-over Date (as described
below), and for any Payment Date on or after
the Class B Cross-over Date (but on or prior to
the Sixth Cross-over Date, as described below)
on which each Class B Principal Distribution
Test (as described below) has not been satis-
fied, will equal 100%. On each Payment Date on
or after the Class B Cross-over Date (but on or
prior to the Sixth Cross-over Date), if each
Class B Principal Distribution Test has been
satisfied on such Payment Date, the Senior Per-
centage will equal a fraction, expressed as a
percentage, the numerator of which is the sum
of the Class A Principal Balance and the Class
M Principal Balance for such Payment Date and
the denominator of which is the Pool Scheduled
Principal Balance for the immediately preceding
Payment Date. On any Payment Date after the
Sixth Cross-over Date, the Senior Percentage
will be zero.
The Scheduled Principal Balance of a Contract
with respect to any Payment Date is its princi-
pal balance as of the scheduled payment date
(the "Due Date") in the calendar month preced-
ing such Payment Date (the "Due Period") as
specified in its amortization schedule, after
giving effect to any previous partial Principal
Prepayments and to the scheduled payment due on
such Due Date, but without giving effect to any
delinquency in payment or adjustments due to
bankruptcy or similar proceedings. The Pool
Scheduled Principal Balance, as of
S-8
<PAGE>
any Payment Date, is the aggregate of the
Scheduled Principal Balances of Contracts that
were outstanding during the preceding Due Peri-
od. A Liquidated Contract is a defaulted Con-
tract as to which all amounts that the Servicer
expects to recover on account of such Contract
have been received.
The Senior Percentage of the Formula Principal
Distribution Amount will be distributed, to the
extent of the Amount Available after payment of
interest on each Class of Class A Certificates,
first, to the Class A-1 Certificateholders un-
til the Class A-1 Principal Balance has been
reduced to zero, then to the Class A-2
Certificateholders until the Class A-2 Princi-
pal Balance has been reduced to zero, then to
the Class A-3 Certificates until the Class A-3
Principal Balance has been reduced to zero, and
then to the Class A-4 Certificateholders until
the Class A-4 Principal Balance has been re-
duced to zero.
C. Class M-1 Interest........ Interest on the outstanding Class M-1 Principal
Balance will accrue from December 19, 1995, or
from the most recent Payment Date on which in-
terest has been paid, to but excluding the fol-
lowing Payment Date, and will be computed on
the basis of a 360-day year of twelve 30-day
months.
To the extent of the Class M-1 Remaining Amount
Available, if any, for a Payment Date after
payment of the Class A Distribution Amount for
such date, interest will be paid to the Class
M-1 Certificateholders on such Payment Date at
the Class M-1 Pass-Through Rate on the then
outstanding Class M-1 Principal Balance.
In the event that, on a particular Payment Date,
the Class M-1 Remaining Amount Available, plus
other funds in the Certificate Account avail-
able therefor, are not sufficient to make a
full distribution of interest to the Class M-1
Certificateholders, the amount of interest to
be distributed in respect of the Class M-1 Cer-
tificates will be allocated among the Certifi-
cates of such Class pro rata in accordance with
their respective entitlements to interest, and
the amount of the deficiency will be carried
forward as an amount that the Class M-1
Certificateholders are entitled to receive on
the next Payment Date. Any amount so carried
forward will, to the extent legally permissi-
ble, bear interest at the Class M-1 Pass-
Through Rate. See "Description of the Certifi-
cates--Class M-1 Interest."
D. Class M-1 Principal....... Payments of principal on the Class M-1 Certifi-
cates will not commence until the Class A Prin-
cipal Balance has been reduced to zero. On each
Payment Date on or after the date on which the
Class A Principal Balance has been reduced to
zero, holders of Class M-1 Certificates will be
entitled to receive the Senior Percentage of
the Formula Principal Distribution Amount, un-
til the Class M-1 Principal Balance has been
reduced to zero.
S-9
<PAGE>
E. Class M-2 Interest........ Interest on the outstanding Class M-2 Principal
Balance will accrue from December 19, 1995, or
from the most recent Payment Date on which in-
terest has been paid, to but excluding the fol-
lowing Payment Date, and will be computed on
the basis of a 360-day year of twelve 30-day
months.
To the extent of the Class M-2 Remaining Amount
Available, if any, for a Payment Date after
payment of the Class A Distribution Amount and
the Class M-1 Distribution Amount for such
date, interest will be paid to the Class M-2
Certificateholders on such Payment Date at the
Class M-2 Pass-Through Rate on the then out-
standing Class M-2 Principal Balance.
In the event that, on a particular Payment Date,
the Class M-2 Remaining Amount Available, plus
other funds in the Certificate Account avail-
able therefor, are not sufficient to make a
full distribution of interest to the Class M-2
Certificateholders, the amount of interest to
be distributed in respect of the Class M-2 Cer-
tificates will be allocated among the Certifi-
cates of such Class pro rata in accordance with
their respective entitlements to interest, and
the amount of the deficiency will be carried
forward as an amount that the Class M-2
Certificateholders are entitled to receive on
the next Payment Date. Any amount so carried
forward will, to the extent legally permissi-
ble, bear interest at the Class M-2 Pass-
Through Rate. See "Description of the Certifi-
cates--Class M-2 Interest."
F. Class M-2 Principal....... Payments of principal on the Class M-2 Certifi-
cates will not commence until the Class A Prin-
cipal Balance and the Class M-1 Principal Bal-
ance have been reduced to zero. On each Payment
Date on or after the date on which the Class A
Principal Balance and the Class M-1 Principal
Balance has been reduced to zero, holders of
Class M-2 Certificates will be entitled to re-
ceive the Senior Percentage of the Formula
Principal Distribution Amount, until the Class
M-2 Principal Balance has been reduced to zero.
G. Class B-1 Interest........ Interest on the outstanding Class B-1 Principal
Balance will accrue from December 19, 1995, or
from the most recent Payment Date on which in-
terest has been paid, to but excluding the fol-
lowing Payment Date, and will be computed on
the basis of 360-day year of twelve 30-day
months.
To the extent of the Class B-1 Remaining Amount
Available, if any, for a Payment Date after
payment of the Class A Distribution Amount, the
Class M-1 Distribution Amount and the Class M-2
Distribution Amount for such date, interest
will be paid to the Class B-1
Certificateholders on such Payment Date at the
Class B-1 Pass-Through Rate on the then out-
standing Class B-1 Principal Balance.
In the event that, on a particular Payment Date,
the Class B-1 Remaining Amount Available, plus
other funds in the Certificate Account avail-
able therefor, are not sufficient to make a
full distribution of interest to the Class B-1
Certificateholders,
S-10
<PAGE>
the amount of interest to be distributed in re-
spect of the Class B-1 Certificates will be al-
located among the Certificates of such Class
pro rata in accordance with their respective
entitlements to interest, and the amount of the
deficiency will be carried forward as an amount
that the Class B-1 Certificateholders are enti-
tled to receive on the next Payment Date. Any
amount so carried forward will, to the extent
legally permissible, bear interest at the Class
B-1 Pass-Through Rate. See "Description of the
Certificates--Class B-1 Interest."
H. Class B-1 Principal....... Payments of principal on the Class B-1 Certifi-
cates will not commence until the Class B
Cross-over Date, and will be made on that Pay-
ment Date and each Payment Date thereafter only
if each Class B Principal Distribution Test is
satisfied on such Payment Date (unless the
Class A Principal Balance and the Class M Prin-
cipal Balance have been reduced to zero). The
Class B Cross-over Date will be the earlier of
(A) the Payment Date on which the Class M-2
Principal Balance is reduced to zero (the
"Sixth Cross-over Date") and (B) the first Pay-
ment Date on or after the Payment Date in Janu-
ary 1999 on which the fraction, expressed as a
percentage, the numerator of which is the Class
B Principal Balance as of such Payment Date and
the denominator of which is the Pool Scheduled
Principal Balance as of the immediately preced-
ing Payment Date, is equal to or greater than
24%. The Class B Principal Distribution Tests
on each Payment Date relate to losses and de-
linquencies on the Contracts, and are described
under "Description of the Certificates--Class
B-1 Principal."
On each Payment Date on or after the Class B
Cross-over Date, the Class B Percentage of the
Formula Principal Distribution Amount will be
paid to the Class B-1 Certificateholders to the
extent of the Class B-1 Remaining Amount Avail-
able after payment of interest on the Class B-1
Certificates, until the Class B-1 Principal
Balance has been reduced to zero.
The Class B Percentage for any Payment Date will
be equal to 100% minus the Senior Percentage.
The Class B Percentage for each Payment Date,
if any, after the Class A Principal Balance and
the Class M Principal Balance have been reduced
to zero will be equal to 100%.
I. Class B-2 Interest........ Interest on the outstanding Class B-2 Principal
Balance will accrue from December 19, 1995, or
from the most recent Payment Date on which in-
terest has been paid, to but excluding the fol-
lowing Payment Date, and will be computed on
the basis of a 360-day year of twelve 30-day
months.
To the extent of (i) the Class B-2 Remaining
Amount Available, if any, for a Payment Date
after payment of the Class A Distribution
Amount, the Class M-1 Distribution Amount, the
Class M-2 Distribution Amount and the Class B-1
Distribu-
S-11
<PAGE>
tion Amount for such date, and (ii) the Class
B-2 Guaranty Payment, if any, for such date,
interest will be paid to the Class B-2
Certificateholders on such Payment Date at the
Class B-2 Pass-Through Rate on the then out-
standing Class B-2 Principal Balance.
In the event that, on a particular Payment Date,
the Class B-2 Remaining Amount Available in the
Certificate Account plus any amounts actually
paid under the Class B-2 Limited Guaranty are
not sufficient to make a full distribution of
interest to the Class B-2 Certificateholders,
the amount of interest to be distributed in re-
spect of the Class B-2 Certificates will be al-
located among the Certificates of such Class
pro rata in accordance with their respective
entitlements to interest, and the amount of the
deficiency will be carried forward as an amount
that the Class B-2 Certificateholders are enti-
tled to receive on the next Payment Date. Any
amount so carried forward will, to the extent
legally permissible, bear interest at the Class
B-2 Pass-Through Rate. See "Description of the
Certificates--Class B-2 Interest."
J. Class B-2 Principal....... Except for payments of the Class B-2 Principal
Liquidation Loss Amount (as described below),
payments of principal on the Class B-2 Certifi-
cates will not commence until the Payment Date
on which the Class B-1 Principal Balance has
been reduced to zero (the "Seventh Cross-over
Date"), and will be made on that Payment Date
and each Payment Date thereafter only if each
Class B Principal Distribution Test is satis-
fied on such Payment Date (unless the Class A
Principal Balance and the Class M Principal
Balance have been reduced to zero). On any such
Payment Date, the Class B Percentage of the
Formula Principal Distribution Amount will be
distributed, to the extent of the Class B-2 Re-
maining Amount Available and any amounts actu-
ally paid under the Class B-2 Limited Guaranty
after payment of interest on the Class B-2 Cer-
tificates, to the Class B-2 Certificateholders
until the Class B-2 Principal Balance has been
reduced to zero. See "Description of the Cer-
tificates--Class B-2 Principal."
On each Payment Date, the Class B-2
Certificateholders will be entitled to receive,
pursuant to the Class B-2 Limited Guaranty, the
Class B-2 Principal Liquidation Loss Amount un-
til the Class B-2 Principal Balance has been
reduced to zero. The "Class B-2 Principal Liq-
uidation Loss Amount" for any Payment Date will
equal the amount, if any, by which the sum of
the Class A Principal Balance, the Class M
Principal Balance and the Class B Principal
Balance for such Payment Date exceeds the Pool
Scheduled Principal Balance for such Payment
Date (after giving effect to all distributions
of principal on such Payment Date). The Class
B-2 Principal Liquidation Loss Amount repre-
sents future principal payments on the Con-
tracts that, because of the subordination of
the Class B-2
S-12
<PAGE>
Certificates and liquidation losses on the Con-
tracts, will not be paid to the Class B-2
Certificateholders.
Subordination of Class M and
Class B Certificates........
The rights of the holders of the Class M Certif-
icates and Class B Certificates to receive dis-
tributions with respect to the Contracts in the
Trust will be subordinated, to the extent de-
scribed herein, to such rights of the holders
of the Class A Certificates. This subordination
is intended to enhance the likelihood of regu-
lar receipt by the holders of the Class A Cer-
tificates of the full amount of their scheduled
monthly payments of interest and principal and
to afford such holders protection against
losses on Liquidated Contracts.
The protection afforded to the holders of the
Class A Certificates by means of the subordina-
tion of the Class M and Class B Certificates
will be accomplished by the preferential right
of the Class A Certificateholders to receive,
prior to any distribution being made on a Pay-
ment Date in respect of the Class M and Class B
Certificates, the amounts of interest and prin-
cipal due them on each Payment Date out of the
Amount Available on such date in the Certifi-
cate Account and, if necessary, by the right of
such Class A Certificateholders to receive fu-
ture distributions of Amounts Available that
would otherwise be payable to the holders of
the Class M and Class B Certificates.
In addition, the rights of the holders of the
Class M-2 Certificates and Class B Certificates
to receive distributions with respect to the
Contracts will be subordinated, to the extent
described herein, to such rights of the holders
of the Class M-1 Certificates. This subordina-
tion is intended to enhance the likelihood of
regular receipt by the holders of the Class M-1
Certificates of the full amount of their sched-
uled monthly payments of interest and principal
and to afford such holders protection against
losses on Liquidated Contracts.
The protection afforded to the holders of the
Class M-1 Certificates by means of the subordi-
nation of the Class M-2 and Class B Certifi-
cates will be accomplished by the preferential
right of the Class M-1 Certificateholders to
receive, prior to any distribution being made
on a Payment Date in respect of the Class M-2
and Class B Certificates, the amounts of inter-
est and principal due them on each Payment Date
out of the Class M-1 Remaining Amount Available
on such date in the Certificate Account and, if
necessary, by the right of such Class M-1
Certificateholders to receive future distribu-
tions of Class M-1 Remaining Amounts Available
that would otherwise be payable to the holders
of the Class M-2 and Class B Certificates.
In addition, the rights of the holders of the
Class B Certificates to receive distributions
with respect to the Contracts will be subordi-
nated, to the extent described herein, to such
rights of
S-13
<PAGE>
the holders of the Class M-2 Certificates. This
subordination is intended to enhance the like-
lihood of regular receipt by the holders of the
Class M-2 Certificates of the full amount of
their scheduled monthly payments of interest
and principal and to afford such holders pro-
tection against losses on Liquidated Contracts.
The protection afforded to the holders of the
Class M-2 Certificates by means of the subordi-
nation of the Class B Certificates will be ac-
complished by the preferential right of the
Class M-2 Certificateholders to receive prior
to any distribution being made on a Payment
Date in respect of the Class B Certificates,
the amounts of interest and principal due them
on each Payment Date out of the Class M-2 Re-
maining Amount Available on such date in the
Certificate Account and, if necessary, by the
right of such Class M-2 Certificateholders to
receive future distributions of Class M-2 Re-
maining Amounts Available that would otherwise
be payable to the holders of the Class B Cer-
tificates.
In addition, the rights of the holders of the
Class B-2 Certificates to receive distributions
with respect to the Contracts will be subordi-
nated, to the extent described herein, to such
rights of the holders of the Class B-1 Certifi-
cates. This subordination is intended to en-
hance the likelihood of regular receipt by the
holders of the Class B-1 Certificates of the
full amount of their scheduled monthly payments
of interest and principal and to afford such
holders protection against losses on Liquidated
Contracts.
The protection afforded to the holders of the
Class B-1 Certificates by means of the subordi-
nation of the Class B-2 Certificates will be
accomplished by the preferential right of the
Class B-1 Certificateholders to receive prior
to any distribution being made on a Payment
Date in respect of the Class B-2 Certificates,
the amounts of interest and principal due them
on each Payment Date out of the Class B-1 Re-
maining Amount Available on such date in the
Certificate Account and, if necessary, by the
right of such Class B-1 Certificateholders to
receive future distributions of Class B-1 Re-
maining Amounts Available that would otherwise
be payable to the holders of the Class B-2 Cer-
tificates.
If a Class B-2 Guaranty Payment is required for
any Payment Date and the Company fails to pay
such amount pursuant to the Class B-2 Limited
Guaranty, the Class B-2 Certificateholders may
incur losses on their investment in the Class
B-2 Certificates to the extent such losses are
not made up from future payments on the Con-
tracts. See "Description of the Certificates--
Subordination of Class M Certificates and Class
B Certificates."
S-14
<PAGE>
Losses on Liquidated As described above, the distribution of princi-
Contracts................... pal to the Class A Certificateholders is in-
tended to include the Senior Percentage of the
Scheduled Principal Balance of each Contract
that became a Liquidated Contract during the
preceding Due Period. If the Net Liquidation
Proceeds from such Liquidated Contract are less
than the Scheduled Principal Balance of such
Liquidated Contract plus accrued and unpaid in-
terest thereon, the deficiency will, in effect,
be absorbed by the Class C Certificateholder,
then the Monthly Servicing Fee otherwise pay-
able to the Servicer (so long as the Company or
any wholly owned subsidiary of the Company is
the Servicer), then the Class B-2
Certificateholders, then the Class B-1
Certificateholders, then the Class M-2 Certifi-
cateholders and then the Class M-1
Certificateholders since a portion of the
Amount Available equal to such deficiency and
otherwise distributable to them will be paid to
the Class A Certificateholders. Likewise, to
the extent the Class M-1 Certificateholders or
the Class M-2 Certificateholders are entitled
to receive distributions of principal, similar
deficiencies could result for each Class of
Certificates with a lower payment priority.
If the Amount Available is not sufficient to
cover the entire amount distributable to the
Class A Certificateholders, the Class M-1
Certificateholders or the Class M-2 Certifi-
cateholders on a particular Payment Date, then
the Senior Percentage on future Payment Dates
may be increased and the Class B Percentage on
future Payment Dates may be reduced as a result
of such deficiency.
But for the effect of the subordination of the
Class M-2, Class B and Class C Certificates and
the Monthly Servicing Fee otherwise payable to
the Servicer (so long as the Company or any
wholly owned subsidiary of the Company is the
Servicer), the Class M-1 Certificateholders
will absorb all losses on each Liquidated Con-
tract in the amount by which its Net Liquida-
tion Proceeds are less than its unpaid princi-
pal balance plus accrued and unpaid interest
thereon less the Monthly Servicing Fee. See
"Description of the Certificates--Subordination
of Class M Certificates and Class B Certifi-
cates."
But for the effect of the subordination of the
Class B and Class C Certificates and the
Monthly Servicing Fee otherwise payable to the
Servicer (so long as the Company or any wholly
owned subsidiary of the Company is the
Servicer), the Class M-2 Certificateholders
will absorb all losses on each Liquidated Con-
tract in the amount by which its Net Liquida-
tion Proceeds are less than its unpaid princi-
pal balance plus accrued and unpaid interest
thereon less the Monthly Servicing Fee. See
"Description of the Certificates--Subordination
of Class M Certificates and Class B Certifi-
cates."
But for the effect of the subordination of the
Class B-2 and Class C Certificates and the
Monthly Servicing Fee otherwise pay-
S-15
<PAGE>
able to the Servicer (so long as the Company or
any wholly owned subsidiary of the Company is
the Servicer), the Class B-1 Certificateholders
will absorb all losses on each Liquidated Con-
tract in the amount by which its Net Liquida-
tion Proceeds are less than its unpaid princi-
pal balance plus accrued and unpaid interest
thereon less the related Monthly Servicing Fee.
See "Description of the Certificates--Subordi-
nation of Class M Certificates and Class B Cer-
tificates" and "Yield and Prepayment Considera-
tions."
But for the payments under the Class B-2 Limited
Guaranty described below and the subordination
of the Class C Certificate and the Monthly Ser-
vicing Fee otherwise payable to the Servicer
(so long as the Company or any wholly owned
subsidiary of the Company is the Servicer), the
Class B-2 Certificateholders will absorb all
losses on each Liquidated Contract in the
amount by which its Net Liquidation Proceeds
are less than its unpaid principal balance plus
accrued and unpaid interest thereon less the
related Monthly Servicing Fee. See "Description
of the Certificates--Subordination of Class M
Certificates and Class B Certificates."
Class B-2 Limited Guaranty.... In order to mitigate the effect of the subordi-
nation of the Class B-2 Certificates and liqui-
dation losses and delinquencies on the Con-
tracts, the Class B-2 Certificateholders are
entitled to receive on each Payment Date an
amount equal to the Class B-2 Guaranty Payment,
if any, under the Class B-2 Limited Guaranty of
the Company. Prior to the Seventh Cross-over
Date, and on any Payment Date on or after the
Seventh Cross-over Date on which any Class B
Principal Distribution Test is not satisfied
(unless the Class A Principal Balance and the
Class M Principal Balance have been reduced to
zero), the Class B-2 Guaranty Payment will
equal the amount, if any, by which (a) the sum
of (i) the Class B-2 Formula Distribution
Amount (which will be equal to accrued and un-
paid interest on the Class B-2 Certificates)
for such Payment Date and (ii) the Class B-2
Principal Liquidation Loss Amount, if any, for
such Payment Date, exceeds (b) the Class B-2
Distribution Amount for such Payment Date. On
each Payment Date on or after the Seventh
Cross-over Date on which each Class B Principal
Distribution Test is satisfied (or on which the
Class A Principal Balance and the Class M Prin-
cipal Balance have been reduced to zero), the
Class B-2 Guaranty Payment will equal the
amount, if any, by which (a) the sum of (i) the
Class B-2 Formula Distribution Amount (which
will include both interest and principal) for
such Payment Date and (ii) the Class B-2 Prin-
cipal Liquidation Loss Amount, if any, exceeds
(b) the Class B-2 Distribution Amount for such
Payment Date.
The Class B-2 Limited Guaranty will be an
unsecured general obligation of the Company
and will not be supported by
S-16
<PAGE>
any letter of credit or other credit
enhancement arrangement.
Registration of Certificates.. The Certificates initially will each 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. Certificates will
otherwise 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" herein.
Contracts..................... The Contracts consist of 7,314 conventional and
1,380 FHA-insured home improvement contracts
and promissory notes (the "Contracts"),
including any and all rights to receive
payments due thereunder on and after the Cut-
off Date. The obligations of the Obligor under
each Contract are secured by the related real
estate and such Contracts constitute "Secured
Contracts" as described in the Prospectus. The
Contracts arise from loans relating to the
improvement of real estate located in 48
states and the District of Columbia. The
contractual annual percentage rate of interest
(the "Contract Rate") on the Contracts as of
the Cut-off Date ranges from 8.99% to 15.75%
with a weighted average of 11.91%. The
Contracts had a weighted average term to
scheduled maturity, as of origination, of 191
months, and a weighted average term to
scheduled maturity, as of the Cut-off Date, of
190 months. The final scheduled payment date
on the Contract with the latest scheduled
maturity is in December 2020. See "The
Contracts" herein.
FHA Insurance................. Approximately 10.28% of the Contracts, by
principal balance as of the Cut-off Date, are
insured by FHA against Obligor defaults
pursuant to Title I of the National Housing
Act ("FHA Insurance"). See "Description of FHA
Insurance" in the Prospectus.
Advances...................... The 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 an Advance
from funds available therefor in the
Certificate Account. The Servicer will be
obligated to make an Advance only to the
extent that it determines that such Advance
will be recoverable from subsequent funds
available therefor in the
S-17
<PAGE>
Certificate Account. 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"
herein and in the Prospectus.
Repurchases by the Company.... The Company has agreed to repurchase any
Contract in which the Trust's or the
Certificateholders' interest 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 of
the day it was or should have been discovered
by the Servicer or the Trustee. See
"Description of the Certificates--Conveyance
of Contracts" herein and in the Prospectus.
Repurchase Option............. The Servicer will have the option to repurchase
all of the outstanding Contracts on any
Payment Date on which the Pool Scheduled
Principal Balance is less than 10% of the Cut-
off Date Pool Principal Balance. See
"Description of the Certificates--Repurchase
Option" herein and in the Prospectus.
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 Pool
Scheduled Principal Balance (the "Monthly
Servicing Fee"). See "Description of the
Certificates--Servicing Compensation and
Payment of Expenses" and "Rights upon an Event
of Termination" herein.
Tax Status.................... In the opinion of counsel to the Company, for
federal income tax purposes, the Trust will be
treated as a real estate mortgage investment
conduit ("REMIC"). The Class A-1, Class A-2,
Class A-3, Class A-4, Class M-1, Class M-2,
Class B-1 and Class B-2 Certificates will
constitute "regular interests" in such REMIC
and generally will be treated as debt
instruments of the Trust for federal income
tax purposes with payment terms equivalent to
the terms of such Certificates. The Class C
Certificate, which is not being offered
hereby, will constitute the "residual
interest" in the REMIC. The holders of
Certificates will be required to include in
income interest on such Certificates
(including any original issue discount) in
accordance with the accrual method of
accounting. See "Certain Federal Income Tax
Consequences" herein and in the Prospectus.
ERISA Considerations.......... Subject to the conditions described herein, the
Class A-1, Class A-2, Class A-3 and Class A-4
Certificates may be purchased by employee
benefit plans that are subject to the Employee
Retirement Income Security Act of 1974, as
amended ("ERISA"). No transfer of any other
Certificates will be permitted to be made to
any employee benefit plan subject to
S-18
<PAGE>
ERISA or to the Internal Revenue Code of 1986,
as amended (the "Code"), unless the opinion of
counsel described under "ERISA Considerations"
herein and in the Prospectus is delivered to
the Trustee. See "ERISA Considerations" herein
and in the Prospectus.
Rating........................ It is a condition precedent to the issuance of
the Certificates that the Class A-1, Class A-
2, Class A-3 and Class A-4 Certificates each
be assigned a rating of not lower than "Aaa"
by Moody's Investors Service, Inc. ("Moody's")
and not lower than "AAA" by Standard & Poor's
("S&P"), the Class M-1 Certificates be
assigned a rating not lower than "Aa2" by
Moody's and not lower than "AA" by S&P, the
Class M-2 Certificates be assigned a rating
not lower than "A2" by Moody's and not lower
than "A+" by S&P, the Class B-1 Certificates
be assigned a rating not lower than "Baa2" by
Moody's and not lower than "BBB+" by S&P and
the Class B-2 Certificates be assigned a
rating not lower than "Baa1" by Moody's and
not lower than "A-" by S&P. The rating of each
Class of Certificates by Moody's addresses the
likelihood of the receipt by
Certificateholders of all distributions to
which such Certificateholders are entitled.
The rating of each Class of Certificates by
S&P addresses the likelihood of timely receipt
of interest and ultimate receipt of principal.
The ratings of the Class B-2 Certificates are
based in part on an assessment of the
Company's ability to make payments under the
Class B-2 Limited Guaranty. Any reduction in
Moody's or S&P's rating of the Company's debt
securities may result in a similar reduction
in the rating of the Class B-2 Certificates. 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"
in the Prospectus.
The Company has not requested a rating of the
Certificates from any rating agencies other
than Moody's and S&P. 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 The Certificates will not constitute "mortgage
Considerations............... related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") because there are a substantial
number of Contracts that are 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. Investors should consult with
their own legal advisors to determine whether
and to what extent the Certificates constitute
legal investments for them.
S-19
<PAGE>
RISK FACTORS
Prospective Certificateholders should consider, in addition to the factors
described under "Risk Factors" in the Prospectus, the following factors in
connection with the purchase of the Certificates:
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" herein may not be indicative of the performance of the
Contracts.
STRUCTURE OF THE TRANSACTION
On or about December 19, 1995 (the "Closing Date"), the Company will
establish the Trust pursuant to a Pooling and Servicing Agreement to be dated
as of December 1, 1995 (the "Agreement"), between the Company, as Seller and
Servicer, and the Trustee.
The Class A-1, Class A-2, Class A-3, Class A-4, Class M-1, Class M-2, Class
B-1 and Class B-2 Certificates will be issued by the Trust, the corpus of which
will consist primarily of the Contracts, including all rights to receive
payments due on such Contracts on and after December 1, 1995 (or the date of
origination thereof, if later) (the "Cut-off Date"), all rights under FHA
Insurance with respect to the FHA-insured Contracts, liens on the related real
estate, amounts held for the Trust in the Certificate Account (as defined
below), and the Class B-2 Limited Guaranty of the Company for the benefit of
the Class B-2 Certificates, as described in "Description of the Class B-2
Limited Guaranty" herein.
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 "Certificate Account"), no later than one
Business Day after receipt. Payments deposited in the Certificate 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 make the distributions to the Certificateholders as
of the immediately preceding Record Date as described under "Description of the
Certificates--Distributions on the Certificates" herein and to pay certain
monthly fees to the Servicer as compensation for its servicing of the Contracts
(the "Monthly Servicing Fee").
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 an Advance from
funds available therefor in the Certificate 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 funds available therefor in the Certificate
Account. If the Servicer fails to make any Advance required under the
Agreement, the Trustee is obligated (subject to certain conditions) to make
such Advance.
Following the transfer of the Contracts from the Company to the Trust, the
obligations of the Company are limited to (a) its obligations as Servicer to
service the Contracts, (b) certain representations and warranties in the
Agreement as described under "Description of the Certificates--Conveyance of
Contracts" herein, (c) certain indemnities, and (d) the Class B-2 Limited
Guaranty. The Company is obligated under the Agreement to repurchase at the
Repurchase Price (as defined herein) any Contract on the first Payment Date
which is more than 90 days after the Company becomes aware, or the Company
receives written notice from the Trustee, of any breach of any such
representation and warranty in the Agreement that materially adversely affects
the Certificateholders' interest in such Contract if such breach has not been
cured prior to such date. 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.
S-20
<PAGE>
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 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 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. Each Contract
is secured by a lien on the related real estate.
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 monthly 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 December 2020, (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 Contract is secured by a lien (which is typically a subordinate lien)
on the related 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" herein and in the Prospectus. Approximately 10.28% of the
Contracts, by principal balance as of the Cut-off Date, are insured by FHA to
the extent described in "Description of FHA Insurance" in the Prospectus. Each
of the Contracts has a Contract Rate of at least 8.99% per annum and not more
than 15.75% and the weighted average of the Contract Rates of the Contracts as
of the Cut-off Date is 11.91%. As of the Cut-off Date, the Contracts had
remaining maturities of at least 22 months but not more than 300 months and
original maturities of at least 24 months but not more than 300 months. The
Contracts had a weighted average term to scheduled maturity, as of origination,
of 191 months, and a weighted average term to scheduled maturity, as of the
Cut-off Date, of 190 months. The average principal balance per Contract as of
the Cut-off Date was $15,265.99 and the principal balances on the Contracts as
of the Cut-off Date ranged from $1,352.51 to $122,791.33. The Contracts arise
from loans relating to real property located in 48 states and the District of
Columbia. By principal balance as of the Cut-off Date, approximately 15.50% of
the Contracts financed improvements to real estate located in California, 8.69%
in New York, 7.01% in Florida, 6.08% in New Jersey and 5.87% in Pennsylvania.
No other state represented 5% or more of the Cut-off Date Pool Principal
Balance. None of the Contracts provide for recourse to the originating
contractor in the event of a default by the Obligor.
S-21
<PAGE>
Set forth below is a description of certain additional characteristics of the
Contracts.
GEOGRAPHICAL DISTRIBUTION OF IMPROVED REAL ESTATE
<TABLE>
<CAPTION>
% OF
% OF CONTRACT POOL BY
CONTRACT POOL BY AGGREGATE PRINCIPAL OUTSTANDING
NUMBER OF NUMBER OF BALANCE PRINCIPAL
CONTRACTS AS OF CONTRACTS AS OUTSTANDING AS OF BALANCE AS OF
CUT-OFF DATE OF CUT-OFF DATE CUT-OFF DATE CUT-OFF DATE
--------------- ---------------- ------------------- ----------------
<S> <C> <C> <C> <C>
Alaska.................. 3 .03 42,685.53 .03
Arizona................. 207 2.38 3,809,613.80 2.87
Arkansas................ 157 1.81 1,929,445.79 1.45
California.............. 873 10.04 20,578,155.28 15.50
Colorado................ 439 5.05 4,741,805.48 3.57
Connecticut............. 179 2.06 2,559,013.99 1.93
Delaware................ 66 .76 938,427.80 .71
District of Columbia.... 12 .14 239,322.67 .18
Florida................. 568 6.53 9,307,710.42 7.01
Georgia................. 148 1.70 2,200,150.87 1.66
Idaho................... 34 .39 433,591.08 .33
Illinois................ 354 4.07 5,515,528.68 4.16
Indiana................. 110 1.27 1,530,921.17 1.15
Iowa.................... 68 .78 725,128.92 .55
Kansas.................. 98 1.13 1,203,806.34 .91
Kentucky................ 32 .37 350,099.68 .26
Louisiana............... 51 .59 863,692.95 .65
Maine................... 98 1.13 1,290,723.45 .97
Maryland................ 211 2.43 3,361,054.01 2.53
Massachusetts........... 93 1.07 1,573,652.69 1.19
Michigan................ 322 3.70 4,606,331.91 3.47
Minnesota............... 98 1.13 1,195,588.37 .90
Mississippi............. 34 .39 376,143.57 .28
Missouri................ 229 2.63 2,997,111.93 2.26
Montana................. 14 .16 196,927.66 .15
Nebraska................ 35 .40 382,113.78 .29
Nevada.................. 144 1.66 2,915,073.38 2.20
New Hampshire........... 54 .62 749,396.56 .56
New Jersey.............. 498 5.73 8,070,985.02 6.08
New Mexico.............. 64 .74 1,024,896.33 .77
New York................ 719 8.27 11,536,734.59 8.69
North Carolina.......... 186 2.14 2,361,591.19 1.77
North Dakota............ 7 .08 74,764.16 .06
Ohio.................... 314 3.61 3,897,750.28 2.94
Oklahoma................ 129 1.48 1,490,353.72 1.12
Oregon.................. 81 .93 1,226,072.74 .92
Pennsylvania............ 576 6.63 7,790,932.62 5.87
Rhode Island............ 41 .47 646,089.06 .49
South Carolina.......... 56 .64 797,362.19 .60
South Dakota............ 10 .12 113,269.71 .09
Tennessee............... 225 2.59 2,560,150.72 1.93
Texas................... 484 5.57 6,487,259.32 4.89
Utah.................... 40 .46 521,840.41 .39
Vermont................. 42 .48 580,448.04 .44
Virginia................ 191 2.20 3,058,121.87 2.30
Washington.............. 176 2.02 2,482,320.48 1.87
West Virginia........... 25 .29 264,482.78 .20
Wisconsin............... 43 .49 558,488.56 .42
Wyoming................. 56 .64 565,380.97 .43
----- ------ --------------- ------
Total............... 8,694 100.00% $132,722,512.52 100.00%
===== ====== =============== ======
</TABLE>
S-22
<PAGE>
YEARS OF ORIGINATION OF CONTRACTS
<TABLE>
<CAPTION>
% OF
NUMBER OF CONTRACT POOL BY
CONTRACTS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
YEAR OF ORIGINATION OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ------------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
1993...................... 1 $ 14,281.48 .01%
1994...................... 4 49,446.23 .04
1995...................... 8,689 132,658,784.81 99.95
----- --------------- ------
Total................. 8,694 $132,722,512.52 100.00%
===== =============== ======
</TABLE>
DISTRIBUTION OF ORIGINAL CONTRACT AMOUNTS
<TABLE>
<CAPTION>
% OF
NUMBER OF CONTRACT POOL BY
CONTRACTS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
ORIGINAL CONTRACT AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
AMOUNT (IN DOLLARS) OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ------------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
Less than $ 10,000........ 2,818 $ 19,409,800.81 14.62%
Between$ 10,000--$ 19,999. 3,764 53,733,366.73 40.48
Between$ 20,000--$ 29,999. 1,451 34,424,901.77 25.94
Between$ 30,000--$ 39,999. 402 13,270,780.28 10.00
Between$ 40,000--$ 49,999. 208 8,711,395.45 6.56
Between$ 50,000--$ 59,999. 30 1,589,491.54 1.20
Between$ 60,000--$ 69,999. 9 584,360.05 .44
Between$ 70,000--$ 79,999. 7 513,740.07 .39
Between$ 80,000--$ 89,999. 2 169,961.68 .13
Between$ 90,000--$ 99,999. 1 90,727.01 .07
Between$100,000--$109,999. 1 101,195.80 .08
Between$110,000--$119,999. 0 .00 .00
Over $120,000......... 1 122,791.33 .09
----- --------------- ------
Total................. 8,694 $132,722,512.52 100.00%
===== =============== ======
</TABLE>
CONTRACT RATES
<TABLE>
<CAPTION>
% OF
NUMBER OF CONTRACT POOL BY
CONTRACTS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
RANGE OF CONTRACTS BY AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
CONTRACT RATE OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
--------------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
From 0.00000%-- 9.00000%. 12 $ 263,337.02 .20%
From 9.00001%--10.00000%. 278 3,138,663.87 2.36
From 10.00001%--11.00000%. 1,825 39,535,497.12 29.79
From 11.00001%--12.00000%. 2,694 41,699,252.24 31.42
From 12.00001%--13.00000%. 3,082 39,648,139.31 29.87
From 13.00001%--14.00000%. 614 7,242,433.99 5.46
From 14.00001%--15.00000%. 164 1,018,237.64 .77
From 15.00001%--16.00000%. 25 176,951.33 .13
----- --------------- ------
Total................. 8,694 $132,722,512.52 100.00%
===== =============== ======
</TABLE>
S-23
<PAGE>
REMAINING MONTHS TO MATURITY
<TABLE>
<CAPTION>
% OF
NUMBER OF CONTRACT POOL BY
MONTHS REMAINING TO CONTRACTS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
SCHEDULED MATURITY AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
AS OF CUT-OFF DATE OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
------------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
Less than 31.............. 35 $ 161,321.81 0.12%
31-60..................... 858 6,163,823.19 4.64
61-90..................... 495 4,046,515.43 3.05
91-120.................... 2,603 30,364,609.87 22.88
121-150................... 135 1,871,508.17 1.41
151-180................... 2,441 40,749,993.14 30.70
181-210................... 11 156,523.82 0.12
211-240................... 1,041 22,130,938.33 16.67
241-270................... 1 7,907.05 0.01
271-300................... 1,074 27,069,371.71 20.40
----- --------------- ------
Total................. 8,694 $132,722,512.52 100.00%
===== =============== ======
</TABLE>
LIEN POSITION OF CONTRACTS
<TABLE>
<CAPTION>
% OF % OF
NUMBER OF CONTRACT POOL BY CONTRACT POOL BY
CONTRACTS NUMBER OF AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
AS OF CUT- CONTRACTS AS OF BALANCE OUTSTANDING BALANCE AS OF
OFF DATE CUT-OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
---------- ---------------- ------------------- ---------------------
<S> <C> <C> <C> <C>
First................... 611 7.03% $ 8,746,312.92 6.59%
Second.................. 6,677 76.80 104,052,479.56 78.40
Third................... 1,389 15.98 19,674,795.04 14.82
Fourth.................. 17 0.19 248,925.00 0.19
----- ------ --------------- ------
Total............... 8,694 100.00% $132,722,512.52 100.00%
===== ====== =============== ======
</TABLE>
DELINQUENCY, LOAN DEFAULT AND LOSS INFORMATION
The following tables set forth the delinquency experience and loan default
and loss experience for the 69-month period ending September 30, 1995 of the
portfolio of FHA-insured and conventional home improvement loans serviced by
the Company.
DELINQUENCY EXPERIENCE
<TABLE>
<CAPTION>
AT AT DECEMBER 31,
SEPTEMBER 30, --------------------------------------
1995 1994 1993 1992 1991 1990
------------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Number of Contracts Outstanding(1)............. 94,686 67,062 36,828 25,803 21,337 10,267
Period of Delinquency(2)(3)
30-59 Days................................... 651 344 279 355 228 87
60-89 Days................................... 231 123 88 98 84 29
90 Days or More.............................. 271 166 169 207 164 52
------ ------ ------ ------ ------ ------
Total Home Improvement Contracts Delinquent(3). 1,153 633 536 660 476 168
Delinquencies as a Percent of Contracts
Outstanding................................... 1.22% .94% 1.46% 2.56% 2.23% 1.64%
</TABLE>
- --------
(1) Excludes defaulted contracts not yet liquidated.
(2) A contract is considered delinquent by the Company if any payment of $25 or
more is past-due 30 days or more.
(3) The period of delinquency is based on the number of days that 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.
S-24
<PAGE>
LOAN DEFAULT AND LOSS EXPERIENCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TWELVE MONTHS
NINE MONTHS ENDED DECEMBER 31,
ENDED SEPTEMBER 30, -----------------------------------------------
1995 1994 1993 1992 1991 1990
------------------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Principal Balance of
Contracts Serviced(1).. $1,036,362 $676,714 $314,300 $207,114 $174,146 $84,812
Contract Defaults(2).... .95% .94% 1.51% 1.86% 1.09% .26%
Net Losses:
Dollars(3)............ $ 1,601 $ 867 $ 261 $ 768 $ 305 $ 1
Percentage(4)......... .21% .13% .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 (annualized for period ending September 30, 1995). The Company
considers a contract defaulted when the Company has submitted a claim to
FHA (in the case of FHA-insured contracts), the Company has commenced
foreclosure or enforcement proceedings, or the contract is 180 days
delinquent.
(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 (annualized for period ending September 30, 1995).
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 significant experience with conventional home improvement
contracts. Based on the Company's experience to date, conventional home
improvement contracts have experienced, and are expected to continue to
experience, greater losses upon default than FHA-insured home improvement
contracts.
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.
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
S-25
<PAGE>
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" herein) 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 each month at a specified constant annual rate. The Certificates were
priced using a prepayment assumption of 15% CPR. 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.
The amount of interest to which the Certificateholders of any Class are
entitled on any Payment Date will be the product of the related Pass-Through
Rate and the Principal Balance of such Class immediately following the
preceding Payment Date, based on a 360-day year consisting of 12 months of 30
days each. Certificateholders will receive payments in respect of principal on
each Payment Date to the extent that funds available in the Certificate Account
are sufficient therefor, in the priority described under "Description of the
Certificates--Distributions on the Certificates." 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 December 2020.
WEIGHTED AVERAGE LIFE OF THE CERTIFICATES
The following information is given solely to illustrate the effect of
prepayments of the Contracts on the weighted average life of each Class of
Certificates under the stated assumptions and is not a prediction of the
prepayment rate that might actually be experienced by the Contracts.
Weighted average life refers to the average amount of time from the date of
issuance of a security until each dollar of principal of such security will be
repaid to the investor. The weighted average life of the Certificates will be
influenced by the rate at which principal on the Contracts is paid. Principal
payments on Contracts may be in the form of scheduled amortization or
prepayments (for this purpose, the term "prepayment" includes repayments and
liquidations due to default or other dispositions of the Contracts).
Prepayments on Contracts may be measured by a prepayment standard or model. The
model used in this Prospectus Supplement, the Constant Prepayment Rate model,
is described above.
As used in the following tables, "0% CPR" assumes that none of the Contracts
are prepaid before maturity, "15% CPR" assumes the Contracts will prepay at a
CPR of 15%, and so forth.
There is no assurance, however, that prepayment of the Contracts will conform
to any level of the CPR, and no representation is made that the Contracts will
prepay at the prepayment rates shown or any other prepayment rate. The rate of
principal payments on pools of home improvement contracts is influenced by a
variety of economic, geographic, social and other factors, including the level
of interest rates and the rate at which homeowners sell their homes or default
on their contracts. Other factors affecting prepayment of contracts include
changes in obligors' housing needs, job transfers, unemployment and obligors'
net equity in their homes. In the case of home improvement contracts secured by
real estate, in general, if prevailing interest rates fall significantly below
the interest rates on such home improvement contracts, the home improvement
contracts are likely to be subject to higher prepayment rates than if
prevailing interest rates remained at or above the rates borne by such home
improvement contracts. Conversely, if prevailing interest rates rise above the
interest rates on such home improvement contracts, the rate of prepayment would
be expected to decrease.
S-26
<PAGE>
The percentages and weighted average lives in the following tables were
determined assuming that: (i) scheduled interest and principal payments on the
Contracts are received in a timely manner and prepayments are made at the
indicated percentages of the CPR set forth in the table; (ii) the Servicer
exercises its option to repurchase the Contracts, as described under
"Description of the Certificates--Repurchase Option"; (iii) the Contracts
will, as of the Cut-off Date, be grouped into two pools having the additional
characteristics set forth below under "Assumed Contract Characteristics," with
the Contracts comprising Pool 2 commencing monthly payments of principal and
interest in January 1996; (iv) the Class A-1 Certificates have an Original
Class A-1 Principal Balance of $22,000,000 and a Class A-1 Pass-Through Rate
of 6.00%, the Class A-2 Certificates have an Original Class A-2 Principal
Balance of $32,000,000 and a Class A-2 Pass-Through Rate of 5.90%, the Class
A-3 Certificates have an Original Class A-3 Principal Balance of $15,000,000
and a Class A-3 Pass-Through Rate of 5.90%, the Class A-4 Certificates have an
Original Class A-4 Principal Balance of $23,800,000 and a Class A-4 Pass-
Through Rate of 6.15%, the Class M-1 Certificates have an Original Class M-1
Principal Balance of $13,300,000 and a Class M-1 Pass-Through Rate of 6.65%,
the Class M-2 Certificates have an Original Class M-2 Principal Balance of
$10,600,000 and a Class M-2 Pass-Through Rate of 6.95%, the Class B-1
Certificates have an Original Class B-1 Principal Balance of $8,000,000 and a
Class B-1 Pass-Through Rate of 6.75% and the Class B-2 Certificates have an
Original Class B-2 Principal Balance of $8,022,512 and a Class B-2 Pass-
Through Rate of 7.10%; (v) no interest shortfalls will arise in connection
with prepayments in full of the Contracts; (vi) no delinquencies or losses are
experienced on the Contracts; (vii) distributions are made on the Certificates
on the 15th day of each month, commencing in January 1996; and (viii) the
Certificates are issued on December 19, 1995. No representation is made that
the Contracts will not experience delinquencies or losses.
ASSUMED CONTRACT CHARACTERISTICS
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
WEIGHTED AVERAGE AVERAGE
CUT-OFF DATE AVERAGE REMAINING TERM ORIGINAL TERM
POOL PRINCIPAL CONTRACT TO MATURITY TO MATURITY
POOL BALANCE RATE (MONTHS) (MONTHS)
- ---- --------------- -------- -------------- -------------
<S> <C> <C> <C> <C>
1......................... $114,364,472.53 11.90% 191 192
2......................... 18,358,039.99 12.02 187 187
</TABLE>
It is not likely that the Contracts will prepay at any constant percentage
of the CPR to maturity or that all of the Contracts will prepay at the same
rate.
Investors are urged to make their investment decisions on a basis that
includes their determination as to anticipated prepayment rates under a
variety of the assumptions discussed herein.
Based on the foregoing assumptions, the following tables indicate the
projected weighted average lives of each Class of Certificates, and set forth
the percentages of the original Principal Balance of each Class that would be
outstanding after each of the dates shown, at the indicated percentages of the
CPR.
S-27
<PAGE>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS A-1
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE
CPR SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE 11% 13% 15% 17% 19%
- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percentage................................ 100% 100% 100% 100% 100%
December 15, 1996................................. 22 11 0 0 0
December 15, 1997................................. 0 0 0 0 0
Weighted Average Life (1) (years)................. 0.67 0.59 0.52 0.46 0.42
</TABLE>
- --------
(1) The weighted average life of a Class A-1 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class A-1 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class A-1 Certificate.
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS A-2 CERTIFICATES AT
THE RESPECTIVE PERCENTAGES OF THE CPR SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE 11% 13% 15% 17% 19%
- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percentage................................ 100% 100% 100% 100% 100%
December 15, 1996................................. 100 100 99 91 83
December 15, 1997................................. 67 53 40 27 14
December 15, 1998................................. 24 7 0 0 0
December 15, 1999................................. 0 0 0 0 0
Weighted Average Life (1) (years)................. 2.45 2.12 1.87 1.67 1.50
</TABLE>
- --------
(1) The weighted average life of a Class A-2 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class A-2 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class A-2 Certificate.
S-28
<PAGE>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS A-3 CERTIFICATES AT
THE RESPECTIVE PERCENTAGES OF THE CPR SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE 11% 13% 15% 17% 19%
- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percentage................................ 100% 100% 100% 100% 100%
December 15, 1996................................. 100 100 100 100 100
December 15, 1997................................. 100 100 100 100 100
December 15, 1998................................. 100 100 78 43 11
December 15, 1999................................. 71 28 0 0 0
December 15, 2000................................. 2 0 0 0 0
December 15, 2001................................. 0 0 0 0 0
Weighted Average Life (1) (years)................. 4.32 3.77 3.33 2.98 2.68
</TABLE>
- --------
(1) The weighted average life of a Class A-3 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class A-3 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class A-3 Certificate.
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS A-4 CERTIFICATES AT
THE RESPECTIVE PERCENTAGES OF THE CPR SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE 11% 13% 15% 17% 19%
- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percentage................................ 100% 100% 100% 100% 100%
December 15, 1996................................. 100 100 100 100 100
December 15, 1997................................. 100 100 100 100 100
December 15, 1998................................. 100 100 100 100 100
December 15, 1999................................. 100 100 97 79 61
December 15, 2000................................. 100 80 60 42 25
December 15, 2001................................. 71 49 30 12 0
December 15, 2002................................. 43 22 4 0 0
December 15, 2003................................. 19 0 0 0 0
December 15, 2004................................. 0 0 0 0 0
Weighted Average Life (1) (years)................. 6.84 6.06 5.42 4.88 4.39
</TABLE>
- --------
(1) The weighted average life of a Class A-4 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class A-4 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class A-4 Certificate.
S-29
<PAGE>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS M-1
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE
CPR SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE 11% 13% 15% 17% 19%
- ---- ----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percentage............................... 100% 100% 100% 100% 100%
December 15, 1996................................ 100 100 100 100 100
December 15, 1997................................ 100 100 100 100 100
December 15, 1998................................ 100 100 100 100 100
December 15, 1999................................ 100 100 100 100 100
December 15, 2000................................ 100 100 100 100 100
December 15, 2001................................ 100 100 100 100 94
December 15, 2002................................ 100 100 100 79 53
December 15, 2003................................ 100 98 68 43 21
December 15, 2004................................ 95 62 36 14 0
December 15, 2005................................ 60 32 9 0 0
December 15, 2006................................ 29 5 0 0 0
December 15, 2007................................ 2 0 0 0 0
Weighted Average Life (1) (years)................ 10.39 9.48 8.64 7.89 7.19
</TABLE>
- --------
(1) The weighted average life of a Class M-1 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class M-1 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class M-1 Certificate.
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS M-2 CERTIFICATES AT
THE RESPECTIVE PERCENTAGES OF THE CPR SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE 11% 13% 15% 17% 19%
- ---- ----- ----- ----- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percentage............................. 100% 100% 100% 100% 100%
December 15, 1996.............................. 100 100 100 100 100
December 15, 1997.............................. 100 100 100 100 100
December 15, 1998.............................. 100 100 100 100 100
December 15, 1999.............................. 100 100 100 100 100
December 15, 2000.............................. 100 100 100 100 100
December 15, 2001.............................. 100 100 100 100 100
December 15, 2002.............................. 100 100 100 100 100
December 15, 2003.............................. 100 100 100 100 100
December 15, 2004.............................. 100 100 100 100 0
December 15, 2005.............................. 100 100 100 0 0
December 15, 2006.............................. 100 100 0 0 0
December 15, 2007.............................. 100 0 0 0 0
Weighted Average Life (1) (years).............. 12.24 11.40 10.57 9.74 8.98
</TABLE>
- --------
(1) The weighted average life of a Class M-2 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class M-2 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class M-2 Certificate.
S-30
<PAGE>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS B-1
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE
CPR SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE 11% 13% 15% 17% 19%
- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percentage................................ 100% 100% 100% 100% 100%
December 15, 1996................................. 100 100 100 100 100
December 15, 1997................................. 100 100 100 100 100
December 15, 1998................................. 100 100 100 100 100
December 15, 1999................................. 100 100 87 69 56
December 15, 2000................................. 92 72 52 35 21
December 15, 2001................................. 63 42 23 6 0
December 15, 2002................................. 37 17 0 0 0
December 15, 2003................................. 13 0 0 0 0
December 15, 2004................................. 0 0 0 0 0
Weighted Average Life (1) (years)................. 6.58 5.83 5.19 4.63 4.26
</TABLE>
- --------
(1) The weighted average life of a Class B-1 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class B-1 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class B-1 Certificate.
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS B-2
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE
CPR SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE 11% 13% 15% 17% 19%
- ---- ----- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percentage.............................. 100% 100% 100% 100% 100%
December 15, 1996............................... 100 100 100 100 100
December 15, 1997............................... 100 100 100 100 100
December 15, 1998............................... 100 100 100 100 100
December 15, 1999............................... 100 100 100 100 100
December 15, 2000............................... 100 100 100 100 100
December 15, 2001............................... 100 100 100 100 94
December 15, 2002............................... 100 100 99 83 72
December 15, 2003............................... 100 95 78 64 54
December 15, 2004............................... 93 76 61 49 0
December 15, 2005............................... 74 59 47 0 0
December 15, 2006............................... 58 45 0 0 0
December 15, 2007............................... 43 0 0 0 0
Weighted Average Life (1) (years)............... 11.10 10.23 9.38 8.58 7.92
</TABLE>
- --------
(1) The weighted average life of a Class B-2 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class B-2 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class B-2 Certificate.
S-31
<PAGE>
GREEN TREE FINANCIAL CORPORATION
GENERAL
The following information supplements, and to the extent inconsistent
therewith supersedes, the information in the Prospectus under the heading
"Green Tree Financial Corporation."
The Company is a Delaware corporation which, as of December 31, 1994, had
total assets of approximately $1,771,839,000 and stockholders' equity of
approximately $725,891,000. 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. The Company also
purchases, pools and services installment sales contracts for various consumer
products. 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, which
are incorporated by reference in this Prospectus Supplement and in the
Prospectus, are available from the Company upon written request made to the
Company.
DESCRIPTION OF THE CERTIFICATES
The following information supplements, and to the extent inconsistent
therewith supersedes, the information in the Prospectus under "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
in minimum denominations of $1,000. The Certificates initially will be
represented by 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 the Certificates--
Registration of the Certificates" herein. The Trust consists primarily of the
Contracts and the rights, benefits, obligations and proceeds arising therefrom
or in connection therewith, including liens on the related real estate, rights
under applicable FHA Insurance for FHA-insured Contracts, amounts held in the
Certificate Account and the Class B-2 Limited Guaranty of the Company for the
benefit of the Class B-2 Certificateholders.
Distributions on the Certificates will be made by the Paying Agent (which
shall initially be the Trustee) 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 the Certificates--
Registration of the Certificates" herein. The first Payment Date for the
Certificates will be in January 1996. Payments will be made by check mailed to
such Certificateholder at the address appearing on the Certificate Register
(except that a Certificateholder who holds an aggregate Percentage Interest of
at least 5% of a Class of Certificates may request payment in respect of its
Percentage Interest in such Class by wire transfer). Final payments will be
made only upon tender of the Certificates to the Trustee for cancellation.
S-32
<PAGE>
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 such Contracts (other than receipts of principal
and interest due on such Contracts before the Cut-off 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 Rate on each
Contract and the maturity date of each Contract. The 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
Certificate 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. Uniform Commercial Code financing statements
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 P.L.L.P., 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, 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 Cut-off 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 contractor's 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 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
S-33
<PAGE>
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 Cut-off 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 monthly payments over the term of such
Contract; (o) each Contract contains customary and enforceable provisions such
as to render the rights and remedies of the holder thereof adequate for
realization against the collateral; (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 Cut-off Date
Pool Principal Balance equals at least the Original Series 1995-F Principal
Balance, and each Contract has a contractual rate of interest of at least
8.99%; (ii) no Contract had a remaining term to maturity at origination of more
than 300 months; (iii) no more than 5% of the Contracts, by principal balance
as of the Cut-off Date, were secured by properties located in an area with the
same zip code; (iv) no more than 2% of the Contracts, by principal balance as
of the Cut-off Date, were originated by any one contractor; and (v) 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 of the day it
was or should have been discovered by the Servicer or the Trustee. 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," with respect to any Contract to be so repurchased or
with respect to a Liquidated Contract, means the outstanding principal balance
of such Contract (without giving effect to any Advances made by the Servicer or
the Trustee), plus interest at the Pass-Through Rate (which will be the
weighted average of the Class A-1, Class A-2, Class A-3, Class A-4, Class M-1,
Class M-2, Class B-1 and Class B-2 Pass-Through Rates) on such Contract from
the end of the Due Period with respect to which the Obligor last made a
scheduled payment (without giving effect to any Advances made by the Servicer
or the Trustee) through the date of such repurchase or liquidation.
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
The Servicer, on behalf of the Trust, will establish and maintain a
Certificate Account in an "Eligible Account" (as defined below) 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 deposits
have been rated P-1 by Moody's and A-1+ by S&P or whose unsecured long-term
debt has been rated in one of the two highest rating categories by Moody's and
S & P, and which is subject to supervision and examination by federal or state
authorities (an "Eligible Institution"). "Eligible Account" means, at any time,
an account which is any of the following: (i) an account maintained with an
Eligible Institution; (ii) an account or accounts the deposits in which are
fully insured by either the Bank Insurance Fund or the Savings Association
Insurance Fund of the FDIC; (iii) a segregated trust account maintained with
the corporate trust department of a federal or state chartered depository
S-34
<PAGE>
institution or trust company with trust powers and acting in its fiduciary
capacity for the benefit of the Trustee, which depository institution or trust
company has capital and surplus of not less than $50,000,000; or (iv) an
account that will not cause Moody's or S&P to downgrade or withdraw its then-
current rating assigned to the Certificates, as evidenced in writing by Moody's
and S&P. The Servicer may authorize the Trustee to invest the funds in the
Certificate 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;
securities bearing interest or sold at a discount issued by a corporation which
has a credit rating of at least "Aa2" from Moody's and at least "AA" from S&P
not in excess of 10% of amounts in the Certificate Account at the time of such
investment; and commercial paper assigned a rating of at least P-1 by Moody's
and 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 Certificate 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
Certificate 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 Servicer as part of its servicing
fees and are not paid into the Certificate Account. See "Description of the
Certificates--Servicing Compensation and Payment of Expenses" herein. 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," 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 Certificate Account.
On the seventh Business Day of each month (the "Determination Date"), the
Servicer will determine the Amount Available in the Certificate Account and the
amount of funds necessary to make all payments to be made on the next Payment
Date from the Certificate Account. Not later than one Business Day after the
Determination Date, the Company will deposit in the Certificate 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 the Amount Available from the
Certificate Account and make the following payments, in the following order of
priority:
(i) if neither the Company or any wholly owned subsidiary of the Company
is the Servicer, to pay the Monthly Servicing Fee to the Servicer;
(ii) to pay interest and principal on the Certificates, in the manner and
the order of priority described below;
(iii) if the Company or any wholly owned subsidiary of the Company is the
Servicer, to pay the Monthly Servicing Fee to the Servicer;
(iv) 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;
(v) to reimburse the Servicer or the Trustee, as applicable, for any
unreimbursed Advances made in respect of current or prior Payment Dates;
(vi) to reimburse the holder of the Class C Certificate for expenses
incurred by and reimbursable to it with respect to taxes or charges imposed
upon the Trust as a REMIC or otherwise; and
(vii) to pay any remaining amounts to the holder of the Class C
Certificate.
S-35
<PAGE>
DISTRIBUTIONS
On each Payment Date, distributions on the Certificates in respect of the
Amount Available will be made first to the holders of the Class A Certificates,
then to the holders of the Class M-1 Certificates, then to the holders of the
Class M-2 Certificates, then to the holders of the Class B-1 Certificates and
then to the holders of the Class B-2 Certificates, as described below.
Distributions of interest and principal to holders of a Class of Class A
Certificates will be made on each Payment Date, to the extent that the Amount
Available in the Certificate Account is sufficient therefor, in an amount equal
to the sum of (i) their respective Percentage Interests of the amount of
interest calculated as described under "Class A Interest" below and (ii) their
respective Percentage Interests, distributed to each Class of Class A
Certificates in the order of priority described under "Class A Principal"
below, of the Senior Percentage of the Formula Principal Distribution Amount,
calculated as described under "Class A Principal" below. Distributions on the
Class A Certificates will be applied first to the payment of interest and then
to the payment of principal. The Class A Distribution Amount for any Payment
Date is intended to be equal to the sum (referred to as the "Class A Formula
Distribution Amount") of (i) the amount of interest calculated as set forth
under "Class A Interest" below and (ii) the Senior Percentage of the Formula
Principal Distribution Amount, provided that, if the Class A Formula
Distribution Amount exceeds the Amount Available in the Certificate Account on
such Payment Date, then the Class A Distribution Amount shall instead equal the
Amount Available and the amount of such deficiency will be carried forward and
added to the amount the Class A Certificateholders will be entitled to receive
on the next Payment Date.
Distributions of interest and principal to holders of Class M-1 Certificates
will be made on each Payment Date in an amount equal to their respective
Percentage Interests multiplied by the Class M-1 Distribution Amount.
Distributions on the Class M-1 Certificates will be applied first to the
payment of interest and then to the payment of principal. The Class M-1
Distribution Amount for any Payment Date is intended to be equal to the sum
(referred to as the "Class M-1 Formula Distribution Amount") of (i) the amount
of interest calculated as set forth under "Class M-1 Interest" below and (ii)
after the Class A Principal Balance has been reduced to zero, the Senior
Percentage of the Formula Principal Distribution Amount, until the Class M-1
Principal Balance has been reduced to zero. If the Amount Available in the
Certificate Account available for distribution to the Class M-1
Certificateholders (after giving effect to any distribution made to Class A
Certificateholders on such Payment Date) (the "Class M-1 Remaining Amount
Available") is less than the Class M-1 Formula Distribution Amount, then the
Class M-1 Distribution Amount will equal the Class M-1 Remaining Amount
Available and the amount of such deficiency will be carried forward and added
to the amount such holders will be entitled to receive on the next Payment
Date.
Distributions of interest and principal to holders of Class M-2 Certificates
will be made on each Payment Date in an amount equal to their respective
Percentage Interests multiplied by the Class M-2 Distribution Amount.
Distributions on the Class M-2 Certificates will be applied first to the
payment of interest and then to the payment of principal. The Class M-2
Distribution Amount for any Payment Date is intended to be equal to the sum
(referred to as the "Class M-2 Formula Distribution Amount") of (i) the amount
of interest calculated as set forth under "Class M-2 Interest" below and (ii)
after the Class M-1 Principal Balance has been reduced to zero, the Senior
Percentage of the Formula Principal Distribution Amount, until the Class M-2
Principal Balance has been reduced to zero. If the Amount Available in the
Certificate Account available for distribution to the Class M-2
Certificateholders (after giving effect to any distribution made to Class A
Certificateholders and the Class M-1 Certificateholders on such Payment Date)
(the "Class M-2 Remaining Amount Available") is less than the Class M-2 Formula
Distribution Amount, then the Class M-2 Distribution Amount will equal the
Class M-2 Remaining Amount Available and the amount of such deficiency will be
carried forward and added to the amount such holders will be entitled to
receive on the next Payment Date.
Distributions of interest and principal to holders of Class B-1 Certificates
will be made on each Payment Date in an amount equal to their respective
Percentage Interests multiplied by the Class B-1 Distribution
S-36
<PAGE>
Amount. Distributions on the Class B-1 Certificates will be applied first to
the payment of interest and then to the payment of principal. The Class B-1
Distribution Amount for any Payment Date is intended to be equal to the sum
(referred to as the "Class B-1 Formula Distribution Amount") of (a) the amount
of interest calculated as set forth under "Class B-1 Interest" below and (b) an
amount of principal equal to the Class B Percentage of the Formula Principal
Distribution Amount, until the Class B-1 Principal Balance has been reduced to
zero. If the Amount Available in the Certificate Account available for
distribution to the Class B-1 Certificateholders (after giving effect to any
distribution made to Class A Certificateholders, Class M-1 Certificateholders
and Class M-2 Certificateholders on such Payment Date) (the "Class B-1
Remaining Amount Available") is less than the Class B-1 Formula Distribution
Amount, then the Class B-1 Distribution Amount will equal the Class B-1
Remaining Amount Available and the amount of such deficiency will be carried
forward and added to the amount such holders will be entitled to receive on the
next Payment Date.
Distributions of interest and principal to holders of the Class B-2
Certificates will be made on each Payment Date in an amount equal to their
respective Percentage Interests of the Class B-2 Distribution Amount and any
Class B-2 Guaranty Payment. The Class B-2 Distribution Amount for any Payment
Date is intended to be equal to the sum (referred to as the "Class B-2 Formula
Distribution Amount") of (a) the amount of interest calculated as set forth
under "Class B-2 Interest" below and (b) after the Class B-1 Principal Balance
has been reduced to zero, the Class B Percentage of the Formula Principal
Distribution Amount, until the Class B-2 Principal Balance has been reduced to
zero. Distributions on the Class B-2 Certificates will be applied first to the
payment of interest and then to the payment of principal. If the Amount
Available in the Certificate Account available for distribution to the Class B-
2 Certificateholders (after giving effect to distributions made to Class A
Certificateholders, Class M Certificateholders and Class B-1 Certificateholders
on such Payment Date) (the "Class B-2 Remaining Amount Available") is not
sufficient to make a full distribution of the Class B-2 Formula Distribution
Amount to the Class B-2 Certificateholders, then the Class B-2 Distribution
Amount will equal the Class B-2 Remaining Amount Available and the Company will
be obligated to make a Class B-2 Guaranty Payment into the Certificate Account
in respect thereof pursuant to the Class B-2 Limited Guaranty.
On each Payment Date the Amount Available will be distributed to Class A
Certificateholders, then Class M Certificateholders and then Class B
Certificateholders in the amounts and order of priority set forth below:
CLASS A INTEREST
One month's interest (computed on the basis of a 360-day year of twelve 30-
day months) will be paid concurrently to the holders of each Class of Class A
Certificates on each Payment Date, to the extent of the Amount Available in the
Certificate Account on such date, at the related Pass-Through Rate on the then
outstanding Principal Balance of each Class of Class A Certificates. Interest
on each Class of Class A Certificates will accrue from December 19, 1995, or
from the most recent Payment Date on which interest has been paid, to but
excluding the following Payment Date.
The Pass-Through Rates for the Class A-1, Class A-2, Class A-3 and Class A-4
Certificates are set forth on the cover of this Prospectus Supplement, and in
each case will be computed on the basis of a 360-day year of twelve 30-day
months.
The Principal Balance of any Class of Class A Certificates as of any Payment
Date is the Original Principal Balance of such Class less all amounts
previously distributed to holders of such Class on account of principal. The
Class A Principal Balance as of any Payment Date is the sum of the Class A-1
Principal Balance, the Class A-2 Principal Balance, the Class A-3 Principal
Balance and the Class A-4 Principal Balance.
In the event that, on a particular Payment Date, the Amount Available in the
Certificate Account is not sufficient to make a full distribution of interest
to the holders of each Class of Class A Certificates, the amount
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of interest to be distributed in respect of the Class A Certificates will be
allocated among each Class thereof (and within a Class among the Certificates
of such Class) pro rata in accordance with their respective entitlements to
interest, and the amount of the shortfall will be carried forward and added to
the amount such holders will be entitled to receive on the next Payment Date.
Such a shortfall could occur, for example, if delinquencies or losses realized
on the Contracts were exceptionally high and were concentrated in a particular
month. Any such amount so carried forward will bear interest at the applicable
Pass-Through Rate for each Class of Class A Certificates, to the extent
permitted by law.
CLASS A PRINCIPAL
Holders of a Class of Class A Certificates will be entitled to receive on
each Payment Date as payments of principal, in the order of priority set forth
below and to the extent of the Amount Available in the Certificate Account on
such date after payment of interest on each Class of Class A Certificates, the
Senior Percentage of the sum (such sum being referred to hereinafter as the
"Formula Principal Distribution Amount") of (i) all scheduled payments of
principal due on each outstanding Contract during the month preceding the month
in which the Payment Date occurs, (ii) the Scheduled Principal Balance of each
Contract which, during the month preceding the month of such Payment Date, was
purchased by the Company pursuant to the Agreement on account of certain
breaches of its representations and warranties, (iii) all partial Principal
Prepayments applied and all Principal Prepayments in Full received during such
preceding month, (iv) the Scheduled Principal Balance of each Contract that
became a Liquidated Contract during such preceding month, and (v) any amount
described in clauses (i) through (iv) above that was not previously distributed
because of an insufficient amount of funds available in the Certificate Account
if (a) the Payment Date occurs on or after the Payment Date on which the Class
B-2 Principal Balance has been reduced to zero, or (b) such amount was not
covered by a Class B-2 Guaranty Payment and corresponding reduction in the
Class B-2 Principal Balance. When the Principal Balance of a Class of Class A
Certificates is reduced to zero, no further distributions of principal will be
made to the holders of such Class.
The Senior Percentage for any Payment Date prior to the Class B Cross-over
Date, and for any Payment Date on or after the Class B Cross-over Date on which
any Class B Principal Distribution Test is not satisfied (each as described
under "Class B-1 Principal" below), will be 100%, and for any Payment Date on
or after the Class B Cross-over Date on which each Class B Principal
Distribution Test is satisfied will equal a fraction, expressed as a
percentage, the numerator of which is the sum of the Class A Principal Balance
and the Class M Principal Balance as of such Payment Date and the denominator
of which is the Pool Scheduled Principal Balance as of the immediately
preceding Payment Date. The Scheduled Principal Balance of a Contract with
respect to any Payment Date is its principal balance as of the scheduled
payment date (the "Due Date") in the calendar month preceding such Payment Date
(the "Due Period") as specified in its amortization schedule, after giving
effect to any previous partial Principal Prepayments and to the scheduled
payment due on such Due Date, but without giving effect to any delinquency in
payment or adjustments due to bankruptcy or similar proceedings. The Pool
Scheduled Principal Balance, as of any Payment Date, is the aggregate of the
Scheduled Principal Balances of Contracts that were outstanding during the
preceding Due Period. A Liquidated Contract is a defaulted Contract as to which
all amounts that the Servicer expects to recover on account of such Contract
have been received.
The Senior Percentage of the Formula Principal Distribution Amount will be
distributed, to the extent of the Amount Available after payment of interest on
each Class of Class A Certificates, first to the Class A-1 Certificateholders
until the Class A-1 Principal Balance has been reduced to zero, then to the
Class A-2 Certificateholders until the Class A-2 Principal Balance has been
reduced to zero, then to the Class A-3 Certificateholders until the Class A-3
Principal Balance has been reduced to zero and then to the Class A-4
Certificateholders until the Class A-4 Principal Balance has been reduced to
zero.
As hereinafter described, all losses on Liquidated Contracts will be absorbed
first by the Class C Certificate, then by the Monthly Servicing Fee otherwise
payable to the Servicer (so long as the Company or
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any wholly owned subsidiary of the Company is the Servicer), then by the Class
B-2 Certificates, then by the Class B-1 Certificates, then by the Class M-2
Certificates and then by the Class M-1 Certificates. If the Amount Available
on any Payment Date is less than the Class A Distribution Amount, the Amount
Available will be applied first to the payment of interest on the Class A
Certificates and then to the payment of principal to the Class of Class A
Certificates then entitled thereto.
CLASS M-1 INTEREST
Interest will be paid to the Class M-1 Certificateholders on each Payment
Date, to the extent of the Class M-1 Remaining Amount Available, if any.
Interest on the outstanding Class M-1 Principal Balance will accrue from
December 19, 1995, or from the most recent Payment Date on which interest has
been paid, to but excluding the following Payment Date, and will be computed
on the basis of a 360-day year of twelve 30-day months. The Class M-1
Principal Balance is the Original Class M-1 Principal Balance less the sum of
all amounts previously distributed to Class M-1 Certificateholders on account
of principal. In the event that, on a particular Payment Date, the Class M-1
Remaining Amount Available, plus other funds in the Certificate Account
available therefor, is not sufficient to make a full distribution of interest
to the Class M-1 Certificateholders, the amount of interest to be distributed
in respect of the Class M-1 Certificates will be allocated among the
Certificates of such Class pro rata in accordance with their respective
entitlements to interest, and any remaining deficiency will be carried forward
and added to the amount such holders will be entitled to receive on the next
Payment Date. Any such amount so carried forward will bear interest at the
Class M-1 Pass-Through Rate, to the extent permitted by law.
The Class M-1 Pass-Through Rate is set forth on the cover of this Prospectus
Supplement, and will be computed on the basis of a 360-day year of twelve 30-
day months.
CLASS M-1 PRINCIPAL
On each Payment Date after the Class A Principal Balance has been reduced to
zero, Class M-1 Certificateholders will be entitled to receive, as payments of
principal, the Senior Percentage (as described under "Class A Principal"
above) of the Formula Principal Distribution Amount to the extent of the Class
M-1 Remaining Amount Available in the Certificate Account on such date, after
payment of all interest payable on the Class M-1 Certificates, until the Class
M-1 Principal Balance has been reduced to zero. On each Payment Date on or
after the Class B Cross-over Date on which each Class B Principal Distribution
Test is satisfied, payments of principal will be made to Class B-1 or Class B-
2 Certificateholders, even if Class M-1 Certificateholders are not yet
entitled to receive payments of principal because the Class A Principal
Balance has not been reduced to zero.
CLASS M-2 INTEREST
Interest will be paid to the Class M-2 Certificateholders on each Payment
Date, to the extent of the Class M-2 Remaining Amount Available, if any.
Interest on the outstanding Class M-2 Principal Balance will accrue from
December 19, 1995, or from the most recent Payment Date on which interest has
been paid, to but excluding the following Payment Date, and will be computed
on the basis of a 360-day year of twelve 30-day months. The Class M-2
Principal Balance is the Original Class M-2 Principal Balance less the sum of
all amounts previously distributed to Class M-2 Certificateholders on account
of principal. In the event that, on a particular Payment Date, the Class M-2
Remaining Amount Available, plus other funds in the Certificate Account
available therefor, is not sufficient to make a full distribution of interest
to the Class M-2 Certificateholders, the amount of interest to be distributed
in respect to the Class M-2 Certificates will be allocated among the
Certificates of such Class pro rata in accordance with their respective
entitlements to interest, and any remaining deficiency will be carried forward
and added to the amount such holders will be entitled to receive on the next
Payment Date. Any such amount so carried forward will bear interest at the
Class M-2 Pass-Through Rate, to the extent permitted by law.
The Class M-2 Pass-Through Rate is set forth on the cover of this Prospectus
Supplement, and will be computed on the basis of a 360-day year of twelve 30-
day months.
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CLASS M-2 PRINCIPAL
On each Payment Date after the Class A Principal Balance and the Class M-1
Principal Balance have been reduced to zero, Class M-2 Certificateholders will
be entitled to receive, as payments of principal, the Senior Percentage (as
described under "Class A Principal" above) of the Formula Principal
Distribution Amount to the extent of the Class M-2 Remaining Amount Available
in the Certificate Account on such date, after payment of all interest payable
on the Class M-2 Certificates, until the Class M-2 Principal Balance has been
reduced to zero. On each Payment Date on or after the Class B Cross-over Date
on which each Class B Principal Distribution Test is satisfied, payments of
principal will be made to Class B-1 or Class B-2 Certificateholders, even if
Class M-2 Certificateholders are not yet entitled to receive payments of
principal because the Class A Principal Balance and Class M-1 Principal
Balance have not been reduced to zero.
CLASS B-1 INTEREST
Interest will be paid to the Class B-1 Certificateholders on each Payment
Date, to the extent of the Class B-1 Remaining Amount Available, if any.
Interest on the outstanding Class B-1 Principal Balance will accrue from
December 19, 1995, or from the most recent Payment Date on which interest has
been paid, to but excluding the following Payment Date, and will be computed
on the basis of a 360-day year of twelve 30-day months. The Class B-1
Principal Balance is the Original Class B-1 Principal Balance less the sum of
all amounts previously distributed to Class B-1 Certificateholders on account
of principal. In the event that, on a particular Payment Date, the Class B-1
Remaining Amount Available, plus other funds in the Certificate Account
available therefor, is not sufficient to make a full distribution of interest
to the Class B-1 Certificateholders, the amount of interest to be distributed
in respect of the Class B-1 Certificates will be allocated among the
Certificates of such Class pro rata in accordance with their respective
entitlements to interest, and any remaining deficiency will be carried forward
and added to the amount such holders will be entitled to receive on the next
Payment Date. Any such amount so carried forward will bear interest at the
Class B-1 Pass-Through Rate, to the extent permitted by law.
The Class B-1 Pass-Through Rate is set forth on the cover of this Prospectus
Supplement, and will be computed on the basis of a 360-day year of twelve 30-
day months.
CLASS B-1 PRINCIPAL
Prior to the Class B Cross-over Date, there will be no distributions of
principal on the Class B-1 Certificates. The Class B Cross-over Date will be
the earlier of (A) the Payment Date on which the Class M-2 Principal Balance
is reduced to zero (the "Sixth Cross-over Date"), and (B) the first Payment
Date on or after the Payment Date in January 1999 on which the fraction,
expressed as a percentage, the numerator of which is the Class B Principal
Balance as of such Payment Date and the denominator of which is the Pool
Scheduled Principal Balance as of the immediately preceding Payment Date, is
equal to or greater than 24%.
On each Payment Date on or after the Class B Cross-over Date and prior to
the Payment Date on which the Class A Principal Balance and the Class M
Principal Balance have been reduced to zero, holders of Class B Certificates
will be entitled to distributions of principal only if each of the following
tests (each a "Class B Principal Distribution Test") is satisfied on such
Payment Date: (i) the Average Sixty-Day Delinquency Ratio (as defined in the
Agreement) as of such Payment Date must not exceed 2.5%; (ii) the Average
Thirty-Day Delinquency Ratio (as defined in the Agreement) as of such Payment
Date must not exceed 5%; (iii) the Cumulative Realized Losses (as defined in
the Agreement) as of such Payment Date must not exceed a certain specified
percentage of the Cut-off Date Pool Principal Balance, depending on the year
in which such Payment Date occurs; (iv) the Current Realized Loss Ratio (as
defined in the Agreement) as of such Payment Date must not exceed 2.5%; and
(v) the Class B Principal Balance divided by the Pool Scheduled Principal
Balance as of the immediately preceding Payment Date must be equal to or
greater than 24%.
On each Payment Date on or after the Class B Cross-over Date, if each Class
B Principal Distribution Test is satisfied on such Payment Date, Class B-1
Certificateholders will be entitled to receive, as payments
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of principal, the Class B Percentage of the Formula Principal Distribution
Amount to the extent of the Class B-1 Remaining Amount Available in the
Certificate Account on such date after payment of all interest payable on the
Class B-1 Certificates, until the Class B-1 Principal Balance has been reduced
to zero. The Class B-2 Certificateholders will not be entitled to any
distributions of principal from the Class B-1 Remaining Amount Available until
the Class B-1 Principal Balance has been reduced to zero. The Class B
Percentage for any Payment Date will be equal to 100% minus the Senior
Percentage. The Class B Percentage for each Payment Date, if any, after the
Class A Principal Balance and the Class M Principal Balance have been reduced
to zero will be equal to 100%.
CLASS B-2 INTEREST
Interest will be paid to the Class B-2 Certificateholders on each Payment
Date, to the extent of (i) the Class B-2 Remaining Amount Available, if any and
(ii) the amount, if any, paid pursuant to the Class B-2 Limited Guarantee.
Interest on the outstanding Class B-2 Principal Balance will accrue from
December 19, 1995, or from the most recent Payment Date on which interest has
been paid, to but excluding the following Payment Date, and will be computed on
the basis of a 360-day year of twelve 30-day months. The Class B-2 Principal
Balance is the Original Class B-2 Principal Balance less the sum of all amounts
previously distributed to Class B-2 Certificateholders on account of principal.
In the event that, on a particular Payment Date, the Class B-2 Remaining Amount
Available in the Certificate Account is not sufficient to make a full
distribution of interest to the Class B-2 Certificateholders and the Company
fails to pay such amount under the Class B-2 Limited Guaranty, the amount of
interest to be distributed in respect of the Class B-2 Certificates will be
allocated among the Certificates of such Class pro rata in accordance with
their respective entitlements to interest, and the amount of such deficiency
will be carried forward and added to the amount such holders will be entitled
to receive on the next Payment Date. Any such amount so carried forward will
bear interest at the Class B-2 Pass-Through Rate, to the extent permitted by
law.
The Class B-2 Pass-Through Rate is set forth on the cover of this Prospectus
Supplement, and will be computed on the basis of a 360-day year of twelve 30-
day months.
CLASS B-2 PRINCIPAL
Except for distributions of any amounts representing a Class B-2 Principal
Liquidation Loss Amount (as described below), payments of principal on the
Class B-2 Certificates will not commence until the Payment Date on which the
Class B-1 Principal Balance has been reduced to zero (the "Seventh Cross-over
Date"), and will be made on that Payment Date and each Payment Date thereafter
only if each Class B Principal Distribution Test is satisfied on such Payment
Date (unless the Class A Principal Balance and the Class M Principal Balance
have been reduced to zero). On any such Payment Date, the Class B Percentage of
the Formula Principal Distribution Amount will be distributed, to the extent of
the Class B-2 Remaining Amount Available and any amounts actually paid under
the Class B-2 Limited Guaranty after payment of interest on the Class B-2
Certificates, to the Class B-2 Certificateholders until the Class B-2 Principal
Balance has been reduced to zero.
On each Payment Date, the Class B-2 Certificateholders will be entitled to
receive pursuant to the Class B-2 Limited Guaranty the amount (the "Class B-2
Principal Liquidation Loss Amount"), if any, by which the sum of the Class A
Principal Balance, the Class M Principal Balance and the Class B Principal
Balance for such Payment Date exceeds the Pool Scheduled Principal Balance for
such Payment Date (after giving effect to all distributions of principal on
such Payment Date). The Class B-2 Principal Liquidation Loss Amount represents
future principal payments on the Contracts that, because of the subordination
of the Class B-2 Certificates and Liquidation Losses on Liquidated Contracts,
will not be paid to the Class B-2 Certificateholders.
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SUBORDINATION OF CLASS M CERTIFICATES AND CLASS B CERTIFICATES
The rights of the holders of the Class M Certificates and the Class B
Certificates to receive distributions with respect to the Contracts will be
subordinated to such rights of the Class A Certificateholders. This
subordination is intended to enhance the likelihood of regular receipt by the
holders of the Class A Certificates of the full amount of their scheduled
monthly payments of principal and interest and to afford such holders
protection against losses on Liquidated Contracts. The protection afforded to
the Class A Certificateholders by means of the subordination feature will be
accomplished by the preferential right of the Class A Certificateholders to
receive, prior to any distribution being made on a Payment Date in respect of
the Class M Certificates and the Class B Certificates, the amount of principal
and interest due them on each Payment Date out of the Amount Available on
deposit on such date in the Certificate Account and by the right of the Class A
Certificateholders to receive future distributions on the Contracts that would
otherwise be payable to the holders of Class M Certificates and Class B
Certificates. On each Payment Date the Class M-1 Certificateholders will be
entitled to receive only amounts described above under "Class M-1 Interest" and
"Class M-1 Principal," the Class M-2 Certificateholders will be entitled to
receive only amounts described under "Class M-2 Interest" and "Class M-2
Principal," the Class B-1 Certificateholders will be entitled to receive only
amounts described above under "Class B-1 Interest" and "Class B-1 Principal,"
and the Class B-2 Certificateholders will be entitled to receive only amounts
described above under "Class B-2 Interest" and "Class B-2 Principal."
In addition, the rights of the holders of the Class M-2 Certificates and
Class B Certificates to receive distributions with respect to the Contracts
will be subordinate to such rights of the Class M-1 Certificateholders. This
subordination is intended to enhance the likelihood of regular receipt by the
holders of the Class M-1 Certificates of the full amount of their scheduled
monthly payments of principal and interest and to afford such holders
protection against losses on Liquidated Contracts. The protection afforded to
the Class M-1 Certificateholders by means of the subordination feature will be
accomplished by the preferential right of the Class M-1 Certificateholders to
receive, prior to any distribution being made on a Payment Date in respect of
the Class M-2 Certificates and the Class B Certificates, the amount of
principal and interest due them on each Payment Date out of the Class M-1
Remaining Amount Available on deposit on such date in the Certificate Account
and by the right of the Class M-1 Certificateholders to receive future
distributions on the Contracts that would otherwise be payable to the holders
of Class M-2 Certificates and Class B Certificates.
In addition, the rights of the holders of the Class B-1 Certificates and the
Class B-2 Certificates to receive distributions with respect to the Contracts
will be subordinate to such rights of the Class M-2 Certificateholders. This
subordination is intended to enhance the likelihood of regular receipt by the
holders of the Class M-2 Certificates of the full amount of their scheduled
monthly payments of principal and interest and to afford such holders
protection against losses on Liquidated Contracts. The protection afforded to
the Class M-2 Certificateholders by means of the subordination feature will be
accomplished by the preferential right of the Class M-2 Certificateholders to
receive, prior to any distribution being made on a Payment Date in respect of
the Class B Certificates, the amount of principal and interest due them on each
Payment Date out of the Class M-2 Remaining Amount Available on deposit on such
date in the Certificate Account and by the right of the Class M-2
Certificateholders to receive future distributions of the Contracts that would
otherwise be payable to the holders of Class B Certificates.
In addition, the rights of the holders of the Class B-2 Certificates to
receive distributions with respect to the Contracts will be subordinate to such
rights of the Class B-1 Certificateholders. This subordination is intended to
enhance the likelihood of regular receipt by the holders of the Class B-1
Certificates of the full amount of their scheduled monthly payments of
principal and interest and to afford such holders protection against losses on
Liquidated Contracts. The protection afforded to the Class B-1
Certificateholders by means of the subordination feature will be accomplished
by the preferential right of the Class B-1 Certificateholders to receive, prior
to any distribution being made on a Payment Date in respect of the Class B-2
Certificates, the amount of principal and interest due them on each Payment
Date out of the Class B-1 Remaining Amount
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Available on deposit on such date in the Certificate Account and by the right
of the Class B-1 Certificateholders to receive future distributions on the
Contracts that would otherwise be payable to the holders of Class B-2
Certificates.
As described above, prior to the time that the Class A Principal Balance is
reduced to zero, the distribution of principal to the Class A
Certificateholders is intended to include the Senior Percentage of the
Scheduled Principal Balance of each Contract that became a Liquidated Contract
during the preceding Due Period. If the Liquidation Proceeds, net of related
Liquidation Expenses, from such Liquidated Contract are less than its Scheduled
Principal Balance plus accrued and unpaid interest thereon, the deficiency
will, in effect, be absorbed by the Class M, the Class B and the Class C
Certificateholders and the Company, since a portion of the Amount Available
equal to such deficiency and otherwise distributable to them will be paid to
the Class A or Class M Certificateholders. Likewise, to the extent the Class M-
1 Certificateholders or the Class M-2 Certificateholders are entitled to
receive distributions of principal, similar deficiencies could result for each
Class of Certificates with a lower payment priority. If the Amount Available is
not sufficient to cover the amounts distributable to the Class A or Class M
Certificateholders on a particular Payment Date, then the Senior Percentage on
future Payment Dates may be increased and the Class B Percentage on future
Payment Dates may be reduced as a result of such deficiency. But for the effect
of the relative subordination of the Monthly Servicing Fee payable to the
Servicer (so long as the Company or any wholly owned subsidiary of the Company
is the Servicer) and amounts otherwise distributable to the Class M-2, Class B
and Class C Certificateholders, the Class M-1 Certificateholders will absorb
all losses on each Liquidated Contract in the amount by which its Liquidation
Proceeds, net of the related Liquidation Expenses, are less than its unpaid
principal balance plus accrued and unpaid interest thereon less the Monthly
Servicing Fee. But for the effect of the relative subordination of the Monthly
Servicing Fee payable to the Servicer (so long as the Company or any wholly
owned subsidiary of the Company is the Servicer) and amounts otherwise
distributable to the Class B and Class C Certificateholders on each Payment
Date, the Class M-2 Certificateholders will absorb all losses on each
Liquidated Contract in the amount by which its Liquidation Proceeds, net of the
related Liquidation Expenses, are less than its unpaid principal balance plus
accrued and unpaid interest thereon less the Monthly Servicing Fee. But for the
effect of the relative subordination of the Monthly Servicing Fee payable to
the Servicer (so long as the Company or any wholly owned subsidiary of the
Company is the Servicer) and amounts otherwise distributable to the Class B-2
and Class C Certificateholders, the Class B-1 Certificateholders will absorb
all losses on each Liquidated Contract in the amount by which its Liquidation
Proceeds, net of the related Liquidation Expenses, are less than its unpaid
principal balance plus accrued and unpaid interest thereon less the Monthly
Servicing Fee. But for the effect of the relative subordination of the Monthly
Servicing Fee payable to the Servicer (so long as the Company or any wholly
owned subsidiary of the Company is the Servicer) and amounts otherwise
distributable to the Class C Certificateholder on each Payment Date, and
amounts paid under the Class B-2 Limited Guaranty as described below, the Class
B-2 Certificateholders will absorb all losses on each Liquidated Contract in
the amount by which its Liquidation Proceeds, net of the related Liquidation
Expenses, are less than its unpaid principal balance plus accrued and unpaid
interest thereon less the Monthly Servicing Fee. Class B-2 Certificateholders,
however, will be entitled to receive Class B-2 Guaranty Payments. If the
Company fails to make a payment required under the Class B-2 Limited Guaranty,
the Class B-2 Certificateholders will incur a loss on their investment in the
Class B-2 Certificates.
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 funds available therefor in the Certificate 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
Certificate Account on the Payment Date. The Trustee will not,
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however, be obligated to deposit any such amount if (i) the Trustee does not
expect to recoup such Advance from subsequent funds available therefor in the
Certificate Account, or (ii) the Trustee determines that it is not legally
able to make such Advance.
REPORTS TO CERTIFICATEHOLDERS
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class A Certificateholder, a statement in respect of
the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of each Class of Class A
Certificates allocable to interest (separately identifying any Unpaid
Interest Shortfall included);
(b) the amount of such distribution to holders of each Class of Class A
Certificates allocable to principal (separately identifying the aggregate
amount of any Principal Prepayments included);
(c) the amount, if any, by which the Class A Formula Distribution Amount
exceeds the Class A Distribution Amount for such Payment Date;
(d) the Principal Balance of each Class of Class A Certificates after
giving effect to the distribution of principal on such Payment Date;
(e) the Senior Percentage for the current Payment Date;
(f) the Pool Scheduled Principal Balance of the Contracts for the
following Payment Date;
(g) the Pool Factor (a percentage derived from a fraction the numerator
of which is the sum of the Class A Principal Balance, the Class M Principal
Balance and the Class B Principal Balance and the denominator of which is
the Cut-off Date Pool Principal Balance); and
(h) the number and aggregate principal balance of Contracts delinquent
(i) 30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (d) will be expressed
as dollar amounts for a Class A Certificate with a 1% Percentage Interest or
per $1,000 denomination of Class A Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class A
Certificateholder of record at any time during such calendar year as to the
aggregate of amounts reported pursuant to (a) and (b) above for such calendar
year.
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class M-1 Certificateholder, a statement in respect of
the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of the Class M-1
Certificates allocable to interest (separately identifying any Unpaid
Interest Shortfall included);
(b) the amount of such distribution to holders of the Class M-1
Certificates allocable to principal (separately identifying the aggregate
amount of any Principal Prepayments included);
(c) the amount, if any, by which the Class M-1 Formula Distribution
Amount exceeds the Class M-1 Remaining Amount Available for such Payment
Date;
(d) the Principal Balance of the Class M-1 Certificates after giving
effect to the distribution of principal on such Payment Date;
(e) the Senior Percentage for the current Payment Date;
(f) the Pool Scheduled Principal Balance of the Contracts for the
following Payment Date;
(g) the Pool Factor; and
(h) the number and aggregate principal balance of Contracts delinquent
(i) 30-59 days and (ii) 60 or more days.
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Information furnished pursuant to clauses (a) through (d) will be expressed as
dollar amounts for a Class M-1 Certificate with a 1% Percentage Interest or per
$1,000 denomination of Class M-1 Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class M-1
Certificateholder of record at any time during such calendar year as to the
aggregate of amounts reported pursuant to (a) and (b) above for such calendar
year.
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class M-2 Certificateholder, a statement in respect of
the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of the Class M-2
Certificates allocable to interest (separately identifying any Unpaid
Interest Shortfall included);
(b) the amount of such distribution to holders of the Class M-2
Certificates allocable to principal (separately identifying the aggregate
amount of any Principal Prepayments included);
(c) the amount, if any, by which the Class M-2 Formula Distribution
Amount exceeds the Class M-2 Remaining Amount Available for such Payment
Date;
(d) the Principal Balance of the Class M-2 Certificates after giving
effect to the distribution of principal on such Payment Date;
(e) the Senior Percentage for the current Payment Date;
(f) the Pool Scheduled Principal Balance of the Contracts for the
following Payment Date;
(g) the Pool Factor; and
(h) the number and aggregate principal balance of Contracts delinquent
(i) 30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (d) will be expressed as
dollar amounts for a Class M-2 Certificate with a 1% Percentage Interest or per
$1,000 denomination of Class M-1 Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class M-2
Certificateholder of record at any time during such calendar year as to the
aggregate of amounts reported pursuant to (a) and (b) above for such calendar
year.
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class B-1 Certificateholder, a statement in respect of
the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of the Class B-1
Certificates allocable to interest (separately identifying any Unpaid
Interest Shortfall included);
(b) the amount of such distribution to holders of the Class B-1
Certificates allocable to principal (separately identifying the aggregate
amount of any Principal Prepayments included);
(c) the amount, if any, by which the Class B-1 Formula Distribution
Amount exceeds the Class B-1 Remaining Amount Available for such Payment
Date;
(d) the Principal Balance of the Class B-1 Certificates after giving
effect to the distribution of principal on such Payment Date;
(e) the Class B Percentage for the current Payment Date;
(f) the Pool Scheduled Principal Balance of the Contracts for the
following Payment Date;
(g) the Pool Factor; and
(h) the number and aggregate principal balance of Contracts delinquent
(i) 30-59 days and (ii) 60 or more days.
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Information furnished pursuant to clauses (a) through (d) will be expressed as
dollar amounts for a Class B-1 Certificate with a 1% Percentage Interest or per
$1,000 denomination of Class B-1 Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class B-1
Certificateholder of record at any time during such calendar year as to the
aggregate of amounts reported pursuant to (a) and (b) above for such calendar
year.
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class B-2 Certificateholder, a statement in respect of
the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of Class B-2 Certificates
allocable to interest;
(b) the amount of such distribution to holders of Class B-2 Certificates
allocable to principal (separately identifying the aggregate amount of any
Principal Prepayments included);
(c) the amount, if any, by which the Class B-2 Formula Distribution
Amount exceeds the Class B-2 Remaining Amount Available for such Payment
Date;
(d) the Class B-2 Liquidation Loss Amount, if any, for such Payment Date;
(e) the Class B-2 Guarantee Payment, if any, for such Payment Date;
(f) the Class B-2 Principal Balance after giving effect to the
distribution of principal on such Payment Date;
(g) the Class B Percentage for the current Payment Date;
(h) the Pool Scheduled Principal Balance of the Contracts for the
following Payment Date;
(i) the Pool Factor; and
(j) the number and aggregate principal balance of Contracts delinquent
(i) 30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (c) will be expressed as
dollar amounts for a Class B-2 Certificate with a 1% Percentage Interest or per
$1,000 denomination of Class B-2 Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class B-2
Certificateholder of record at any time during such calendar year as to the
aggregate amounts reported pursuant to (a) and (b) above for such calendar
year.
REPURCHASE OPTION
The Agreement provides that at any time that the Pool Scheduled Principal
Balance is less than 10% of the Cut-off Date Pool Principal Balance, the
Servicer will have the option to repurchase, on 30 days' prior written notice
to the Trustee, all outstanding Contracts (other than any Contract as to which
title to the underlying property has been assigned) at a price sufficient to
pay the Aggregate Certificate Principal Balance plus the Monthly Interest due
on all Certificates on the Payment Date occurring in the month following the
date of repurchase. Such price will be distributed on such Payment Date.
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
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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 on all junior lien secured contracts with
amounts financed of over $30,000.
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 Pool Scheduled Principal Balance of the Contracts.
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 foreclosure on
collateral relating thereto (including submission of FHA Insurance claims, if
applicable), payment of Trustee's 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 the Determination Date,
setting forth the information described under "Description of the
Certificates--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 1996, the Servicer will deliver to the
Trustee a report of KPMG Peat Marwick LLP, or another nationally recognized
accounting firm, stating that such firm has examined certain documents and
records relating to the servicing of 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 Servicer's
existing data processing system without undue modification or expense.
The Agreement provides that a Certificateholder holding Certificates
representing at least 5% of the Aggregate Certificate Principal Balance 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" herein and in
the Prospectus.
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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.
RIGHTS UPON AN EVENT OF TERMINATION
If an Event of Termination has occurred and is continuing, either the Trustee
or holders of Certificates representing 25% or more of the Aggregate
Certificate Principal Balance 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 prior servicer or any obligation of the Company to
repurchase Contracts for breach of representations and warranties, and the
Trustee will not be liable for any acts or omissions of the Servicer occurring
prior to a transfer of the Servicer's servicing and related functions or for
any breach by the Servicer of any of its representations and warranties
contained in the Agreement or any related document or agreement. In addition,
the Trustee will notify FHA of the Servicer's termination as Servicer of the
FHA-insured Contracts and will request that the portion of the Servicer's FHA
Insurance reserves allocable to the FHA-insured Contracts be transferred to the
Trustee or a successor Servicer. See "Description of FHA Insurance" in the
Prospectus. Notwithstanding such termination, the Servicer shall be entitled to
payment of certain amounts payable to it prior to such termination, for
services rendered prior to such termination. No such termination will affect in
any manner the Company's obligation to repurchase certain Contracts for
breaches of 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 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 as Servicer under the Agreement.
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TERMINATION OF THE AGREEMENT
The Agreement will terminate (after distribution of all principal and
interest then due to Certificateholders) on the earlier of (a) the Payment Date
on which the Pool Scheduled Principal Balance is reduced to zero; or (b) the
Payment Date occurring in the month following the Servicer's repurchase of 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, the Servicer 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 Servicer 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, the Servicer
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, provided that prior to any such amendment
Moody's shall have confirmed that the ratings 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, the
Servicer and the Company with the consent of holders of Certificates
representing 66 2/3% or more of the Aggregate Certificate Principal Balance,
and holders of Certificates representing 51% or more of the Aggregate
Certificate Principal Balance 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.
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 Servicer will defend and indemnify the
Trust, the Trustee and the Certificateholders (which indemnification will
survive any removal of the Servicer) 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 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
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Contracts, or deposited into the Certificate Account by the Servicer. If no
Event of Termination has occurred, the Trustee will be required to perform only
those duties specifically required of it under the Agreement. However, upon
receipt of the various certificates, reports or other instruments required to
be furnished to it, the Trustee will be required to examine them to determine
whether they conform as to form to the requirements of the Agreement.
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 Trustee's 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, the Servicer and the Certificateholders of any change
thereof.
THE TRUSTEE
First Trust National Association has its corporate trust offices at 180 East
Fifth Street, St. Paul, Minnesota 55101.
The Trustee may resign from its duties under the Agreement 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. 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 Exchange 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
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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 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 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 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 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 THE CLASS B-2 LIMITED GUARANTY
In order to mitigate the effect of the subordination of the Class B-2
Certificates and liquidation losses and delinquencies on the Contracts, the
Company will provide a guaranty (the "Class B-2 Limited Guaranty") against
losses that would otherwise be borne by the Class B-2 Certificates. Each
payment required
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to be made under the Class B-2 Limited Guaranty is referred to as a "Class B-2
Guaranty Payment." Prior to the Seventh Cross-over Date, and on any Payment
Date on or after the Seventh Cross-over Date on which a Class B Principal
Distribution Test is not satisfied, the Class B-2 Guaranty Payment will equal
the amount, if any, by which (i) the sum of (a) the Class B-2 Formula
Distribution Amount for such Payment Date (which will be equal to accrued and
unpaid interest on the Class B-2 Certificates) and (b) the Class B-2 Principal
Liquidation Loss Amount, if any, for such Payment Date exceeds (ii) the Class
B-2 Distribution Amount for such Payment Date. The Class B-2 Principal
Liquidation Loss Amount for any Payment Date equals the amount, if any, by
which the sum of the Class A Principal Balance, the Class M Principal Balance
and the Class B Principal Balance for such Payment Date exceeds the Pool
Scheduled Principal Balance for such Payment Date. The Class B-2 Principal
Liquidation Loss Amount is, in substance, the amount of delinquencies and
losses experienced on the Contracts during the related Due Period that was not
absorbed by the Class C Certificate and the Monthly Servicing Fee otherwise
payable to the Company (so long as the Company or any wholly owned subsidiary
of the Company is the Servicer). On each Payment Date on or after the Seventh
Cross-over Date, if each Class B Principal Distribution Test is satisfied on
such Payment Date (or the Class A Principal Balance and the Class M Principal
Balance have been reduced to zero), the Class B-2 Guaranty Payment will equal
the amount, if any, by which (a) the sum of (i) the Class B-2 Formula
Distribution Amount for such Payment Date (which will include both interest
and principal) and (ii) the Class B-2 Principal Liquidation Loss Amount, if
any, for such Payment Date exceeds (b) the Class B-2 Distribution Amount for
such Payment Date.
The Class B-2 Limited Guaranty will be an unsecured general obligation of
the Company and will not be supported by any letter of credit or other credit
enhancement arrangement. The Class B-2 Limited Guaranty will not benefit in
any way, or result in any payment to, the Class A-1, Class A-2, Class A-3,
Class A-4, Class M-1, Class M-2 or Class B-1 Certificateholders.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Dorsey & Whitney P.L.L.P., counsel to the Company, will deliver its opinion
that, assuming ongoing compliance with the terms of the Agreement, upon the
issuance of the Certificates, the Trust will qualify as a REMIC for federal
income tax purposes. The Class A-1, Class A-2, Class A-3, Class A-4, Class M-
1, Class M-2, Class B-1 and Class B-2 Certificates will constitute "regular
interests" in the REMIC. The Class C Certificate, which is not being offered
hereunder, will constitute the sole class of "residual interests" in the
REMIC.
It is not anticipated that any of the Certificates will be issued with
original issue discount for federal income tax purposes. The prepayment
assumption that will be used to determine the rate of accrual of market
discount and premium, if any, will be based on the assumption that the
Contracts will prepay at a rate equal to 15% CPR.
Certificates held by financial institutions, thrift institutions taxed as
domestic building and loan associations and real estate investment trusts will
represent interests in "qualifying real property loans," "loans secured by an
interest in real property" and "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 be considered 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.
For further information regarding federal income tax consequences of
investing in the Certificates, see "Certain Federal Income Tax Consequences--
REMIC Series" in the Prospectus.
ERISA CONSIDERATIONS
The following information supplements, and to the extent inconsistent
therewith supersedes, the information in the Prospectus under "ERISA
Considerations."
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The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain restrictions on employee benefit plans that are subject to
ERISA ("Plans") and on persons who are fiduciaries with respect to such Plans.
Employee benefit plans that are governmental plans (as defined in section 3(32)
of ERISA) and certain church plans (as defined in Section 3(33) of ERISA) are
not subject to ERISA requirements. Accordingly, assets of such plans may be
invested in the Class A-1, Class A-2 and Class A-3
Certificates without regard to the ERISA restrictions described above, subject
to applicable provisions of other federal and state laws. However, any such
governmental or church plan which is qualified under section 401(a) of the Code
and exempt from taxation under section 501(a) of the Code is subject to the
prohibited transaction rules set forth in section 503 of the Code.
The U.S. Department of Labor ("DOL") has granted an administrative exemption
to Lehman Brothers Inc. (Prohibited Transaction Exemption 91-14; Exemption
Application No. D-7958, 56 Fed. Reg. 7413 (1991)) (the "Exemption") from
certain of the prohibited transaction rules of ERISA and the Code with respect
to the initial purchase, the holding and the subsequent resale by Plans of
certificates representing interests in asset-backed pass-through trusts that
consist of certain receivables, loans and other obligations that meet the
conditions and requirements of the Exemption. The receivables covered by the
Exemption include home improvement contracts such as the Contracts. The
Exemption will apply to the acquisition, holding, and resale of the Class A-1,
Class A-2, Class A-3 and Class A-4 Certificates by a Plan, provided that
specified conditions (certain of which are described below) are met.
Among the conditions which must be satisfied for the Exemption to apply to
the Class A-1, Class A-2, Class A-3 and Class A-4 Certificates are the
following:
(1) The acquisition of the Class A-1, Class A-2, Class A-3 or Class A-4
Certificates by a Plan is on terms (including the price for the Class A-1,
Class A-2, Class A-3 or Class A-4 Certificates) that are at least as
favorable to the Plan as they would be in an arm's-length transaction with
an unrelated party;
(2) The rights and interests evidenced by the Class A-1, Class A-2, Class
A-3 or Class A-4 Certificates acquired by the Plan are not subordinated to
the rights and interests evidenced by other certificates of the Trust;
(3) The Class A-1, Class A-2, Class A-3 or Class A-4 Certificates
acquired by the Plan have received a rating at the time of such acquisition
that is in one of the three highest generic rating categories from either
S&P, Moody's, Duff & Phelps Credit Rating Co. or Fitch Investors Service,
Inc.;
(4) The Trustee is not an affiliate of any member of the Restricted Group
(as defined below);
(5) The sum of all payments made to the Underwriter in connection with
the distribution of the Class A-1, Class A-2, Class A-3 or Class A-4
Certificates represents not more than reasonable compensation for
underwriting the Class A-1, Class A-2, Class A-3 or Class A-4 Certificates,
as applicable. The sum of all payments made to and retained by the Company
pursuant to the sale of the Contracts to the Trust represents not more than
the fair market value of such Contracts. The sum of all payments made to
and retained by the Servicer represents not more than reasonable
compensation for the Servicer's services under the Agreement and
reimbursement of the Servicer's reasonable expenses in connection
therewith; and
(6) The Plan investing in the Class A-1, Class A-2, Class A-3 or Class A-
4 Certificates is an "accredited investor" as defined in Rule 501(a)(1) of
Regulation D of the Securities and Exchange Commission under the Securities
Act of 1933.
Moreover, the Exemption would provide relief from certain self-
dealing/conflict of interest prohibited transactions only if, among other
requirements, (i) in the case of the acquisition of Class A-1, Class A-2, Class
A-3 or Class A-4 Certificates in connection with the initial issuance, at least
fifty percent (50%) of the Class A-1, Class A-2, Class A-3 or Class A-4
Certificates, as applicable, are acquired by persons independent of the
Restricted Group, (ii) the Plan's investment in Class A-1, Class A-2, Class A-3
or Class A-4 Certificates does not exceed twenty-five percent (25%) of all of
the Class A-1, Class A-2, Class A-3 or Class A-4
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<PAGE>
Certificates, as applicable, outstanding at the time of the acquisition and
(iii) immediately after the acquisition, no more than twenty-five percent (25%)
of the assets of the Plan are invested in certificates representing an interest
in one or more trusts containing assets sold or serviced by the same entity.
The Exemption does not apply to Plans sponsored by the Company, the
Underwriter, the Trustee, the Servicer, any obligor with respect to Contracts
included in the Trust constituting more than five percent (5%) of the aggregate
unamortized principal balance of the assets in the Trust or any affiliate of
such parties (the "Restricted Group").
The Company believes that the Exemption will apply to the acquisition and
holding of Class A-1, Class A-2, Class A-3 and Class A-4 Certificates sold by
the Underwriter and by Plans and that all conditions of the Exemption other
than those within the control of the investors have been met. In addition, as
of the date hereof, no obligor with respect to Contracts included in the Trust
constitutes more than five percent (5%) of the aggregate unamortized principal
balance of the assets of the Trust. Any Plan fiduciary who proposes to cause a
Plan to purchase Class A-1, Class A-2, Class A-3 or Class A-4 Certificates
should consult with its own counsel with respect to the potential consequences
under ERISA and the Code of the Plan's acquisition and ownership of the Class
A-1, Class A-2, Class A-3 or Class A-4 Certificates. Assets of a Plan or
individual retirement account should not be invested in the Class A-1, Class A-
2, Class A-3 or Class A-4 Certificates unless it is clear that the assets of
the Trust will not be plan assets or unless it is clear that the Exemption or a
prohibited transaction class exemption will apply and exempt all potential
prohibited transactions. See "ERISA Considerations" in the Prospectus.
No transfer of any other Class of Certificates will be permitted to be made
to a Plan unless such Plan, at its expense, delivers to the Trustee and the
Company an opinion of counsel (in form satisfactory to the Trustee and the
Company) to the effect that the purchase or holding of any other Class of
Certificates by such Plan 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 Company or the
Servicer to any obligation or liability in addition to those undertaken in the
Agreement. Unless such opinion is delivered, each person acquiring such 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,
subject to ERISA or to Section 4975 of the Code.
UNDERWRITING
The Underwriter has agreed, subject to the terms and conditions of the
Underwriting Agreement, to purchase the Certificates at the prices set forth on
the cover page of this Prospectus Supplement.
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 such 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 prices set forth on the cover page of
this Prospectus Supplement and in part to certain securities dealers at such
prices less concessions not to exceed .15% of the Original Class A-1 Principal
Balance, .25% of the Original Class A-2 Principal Balance, .30% of the Original
Class A-3 Principal Balance, .325% of the Original Class A-4 Principal Balance,
.35% of the Original Class M-1 Principal Balance, .375% of the Original Class
M-2 Principal Balance, .45% of the Original Class B-1 Principal Balance, or
.55% of the Original Class B-2 Principal Balance, as applicable. The
Underwriter may allow, and such dealers may reallow, concessions not to exceed
.125% of Original Class A-1 Principal Balance, .125% of the Original Class A-2
Principal Balance, .15% of Original Class A-3 Principal Balance, .15% of the
Original Class A-4 Principal Balance, .2% of the Original Class M-1 Principal
Balance, .2% of the Original Class M-2 Principal Balance, .2% of the Original
Class B-1 Principal Balance, or .2% of the Original Class B-2 Principal
Balance,
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<PAGE>
as applicable, 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, as amended, 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 Supplement it will not offer or sell publicly any other home
improvement 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 P.L.L.P.
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 P.L.L.P.
S-55
<PAGE>
GREEN TREE FINANCIAL CORPORATION, SELLER AND SERVICER
CERTIFICATES FOR HOME IMPROVEMENT LOANS
(ISSUABLE IN SERIES)
Certificates for Home Improvement Loans ("Certificates") of one or more
series (each, a "Series") may be sold from time to time under this Prospectus
and a Prospectus Supplement for each such Series. The Certificates of each
Series may be issued in one or more classes or subclasses (each, a "Class"),
as further described herein. If the Certificates of a Series are issued in
more than one Class, all or less than all of such Classes may be sold under
this Prospectus, and there may be separate Prospectus Supplements for one or
more of such Classes so sold. Any reference herein to the Prospectus
Supplement relating to a Series comprised of more than one Class should be
understood to refer to each of the Prospectus Supplements relating to the
Classes sold hereunder.
The Certificates evidence specified interests in separate pools of home
improvement contracts and promissory notes (the "Contracts"), as more
particularly described herein, and, in the case of the Secured Contracts,
liens on certain of the related real estate. Except as otherwise specified in
the related Prospectus Supplement, the Contracts will have been originated in
the ordinary course of business by Green Tree Financial Corporation (the
"Company"). Specific information, to the extent available, regarding the size
and composition of the pool of Contracts relating to each Series of
Certificates will be set forth in the related Prospectus Supplement. If
specified in the related Prospectus Supplement, a pool insurance policy,
letter of credit, surety bond, guarantee of the Company, cash reserve fund, or
other form of credit enhancement, or any combination thereof, may be provided
with respect to a Series of Certificates, or one or more Classes of such
Series, evidencing interests in the Contracts. The Company will act as
Servicer (in such capacity referred to herein as the "Servicer") of the
Contracts.
Each Series of Certificates may include one or more senior Classes of
Certificates (the "Senior Certificates") and one or more subordinate Classes
of Certificates (the "Subordinated Certificates"). A Series of
Senior/Subordinated Certificates may include one or more Classes ("Mezzanine
Certificates") which are subordinated to one or more Classes of Certificates
and are senior to one or more Classes of Certificates. Certificates of a
Series may be divided into two or more Classes which (i) represent interests
in specified percentages (which may be 0%) of principal or interest, or both,
in distributions on the pool of Contracts relating to such Series, as
specified in the related Prospectus Supplement, and/or (ii) are entitled to
receive distributions in respect of principal before or after specified
principal distributions have been made on one or more other Classes within
such Series, or on a planned or targeted amortization schedule or upon the
occurrence of other specified events. Each Prospectus Supplement will describe
the Series and Class or Classes of Certificates offered thereby.
The Prospectus Supplement will set forth the Pass-Through Rate that will be
paid to Certificateholders of each Class of a given Series. Such Pass-Through
Rate may be fixed, variable or adjustable, as specified in the related
Prospectus Supplement.
Except as otherwise specified in the related Prospectus Supplement, the only
obligations of the Company with respect to a Series of Certificates will be
pursuant to certain limited representations and warranties. Except as
otherwise specified in the related Prospectus Supplement, the Servicer's
obligations with respect to the Certificates evidencing interests in a pool of
Contracts are limited to its contractual servicing obligations. If so
specified in the related Prospectus Supplement, the Servicer may be obligated,
under certain terms and conditions, to advance the amount of any delinquent
payments of principal and interest during the immediately preceding Due Period
(as defined herein), but only to the extent the Servicer determines such
advances are recoverable from future payments and collections on the
delinquent Contracts. See "Description of the Certificates--Advances" and "--
Distributions on Certificates."
There will have been no public market for any Certificates sold hereunder
prior to the offering thereof and there is no assurance that any such market
will develop. The Underwriters named in the Prospectus Supplement relating to
a Series may from time to time buy and sell Certificates of such Series, but
there can be no assurance that an active secondary market therefor will
develop, and there is no assurance that any such market, if established, will
continue.
The Company may elect to cause the Trust Fund relating to a Series of
Certificates to be treated as a "Real Estate Mortgage Investment Conduit" (a
"REMIC") for federal income tax purposes. See "Certain Federal Income Tax
Consequences" herein.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE 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.
This Prospectus may not be used to consummate sales of all or a portion of
any Series of Certificates unless accompanied by a Prospectus Supplement
relating to those particular Classes of Certificates.
The date of this Prospectus is December 12, 1995.
<PAGE>
REPORTS TO CERTIFICATEHOLDERS
The Company will cause to be provided to the holders of the Certificates of
each Series certain monthly and annual reports concerning such Certificates and
the related Trust Fund as further described in the related Prospectus
Supplement 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 Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the regional offices of the Commission located at 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511 and Seven World Trade Center,
13th Floor, 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
rights to purchase preferred shares are listed on the New York Stock Exchange
("NYSE") and on the Pacific Stock Exchange ("PSE"). The Company's Senior
Subordinated Debentures are also listed on the NYSE and the PSE. The Company's
Senior Subordinated Notes are listed on the NYSE. 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., 310 Pine Street, San Francisco, California.
ADDITIONAL INFORMATION
This Prospectus contains, and the Prospectus Supplement for each Series of
Certificates will contain, a summary of certain material terms of certain of
the documents referred to herein and therein, but neither contains nor will
contain all of the information set forth in the Registration Statement of which
this Prospectus is a part (the "Registration Statement"). For further
information, reference is made to such Registration Statement and the exhibits
thereto which the Company has filed with the Commission under the Securities
Act of 1933, as amended. Statements contained in this Prospectus and any
Prospectus Supplement describing a provision of any contract or other document
referred to are summaries, and if this Prospectus or such Prospectus Supplement
indicates that such contract or other document has been filed as an exhibit to
the Registration Statement, reference is made to the copy of the contract or
other document filed as an exhibit, each such statement being qualified in all
respects by reference to the actual provision being described. Copies of the
Registration Statement can be inspected and, upon payment of the Commission's
prescribed charges, copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
and at certain of its Regional Offices located as follows: New York Regional
Office, Seven World Trade Center, 13th Floor, New York, New York 10048, and
Chicago Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
With respect to any Class of Certificates that is supported by a guarantee of
the Company, the Company's Annual Report on Form 10-K for the year ended
December 31, 1994, and the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995, all of which have been filed with the Commission,
are hereby incorporated by reference in this Prospectus and the related
Prospectus Supplement.
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
2
<PAGE>
be deemed to be incorporated by reference into this Prospectus and the
Prospectus Supplement relating to a Class of Certificates that is supported by
a guarantee of the Company, 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 Joel H. Gottesman, 1100 Landmark Towers, 345 St. Peter Street, St.
Paul, Minnesota 55102-1639, telephone number (612) 293-3400.
3
<PAGE>
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the accompanying
Prospectus Supplement.
Title of Securities.......... Certificates for Home Improvement Loans (Issua-
ble in Series) (the "Certificates").
Seller....................... Green Tree Financial Corporation (in such capac-
ity referred to herein as the "Company").
Servicer..................... Green Tree Financial Corporation (in such capac-
ity referred to herein as the "Servicer," which
term shall include any successor to Green Tree
Financial Corporation in such capacity under
the applicable Agreement (as defined herein)).
Risk Factors................. Certain special considerations are particularly
relevant to a decision to invest in any Certif-
icates sold hereunder. See "Risk Factors" here-
in.
Securities Offered........... Certificates evidencing interests in pools of
Contracts (as defined herein) may be issued
from time to time in one or more series (each a
"Series") pursuant to separate Pooling and Ser-
vicing Agreements (each, an "Agreement") be-
tween the Company, as Seller and Servicer, and
the Trustee specified in the related Prospectus
Supplement for such Series of Certificates (the
"Trustee").
The Contracts................ The Contracts underlying a Series of Certifi-
cates (the "Contract Pool") will be fixed or
variable rate Contracts. Such Contracts, as
specified in the related Prospectus Supplement,
will consist of home improvement contracts and
promissory notes and will be either conven-
tional contracts or contracts insured by the
Federal Housing Administration ("FHA") pursuant
to Title I of the National Housing Act ("Title
I"). Contracts may either be secured by the re-
lated real estate (each, a "Secured Contract")
or unsecured (each, an "Unsecured Contract").
The Prospectus Supplement for each Series will
provide information with respect to (i) the ag-
gregate principal balance of the Contracts com-
prising the Contract Pool, as of the date spec-
ified in the Prospectus Supplement (the "Cut-
off Date"); (ii) the weighted average and range
of contractual rates of interest (each, a "Con-
tract Rate") on the Contracts; (iii) the
weighted average and ranges of terms to sched-
uled maturity of the Contracts as of origina-
tion and as of the Cut-off Date; (iv) the per-
centage of Contracts that are FHA-insured, and
the percentage of Contracts that are Secured
Contracts and Unsecured Contracts; (v) the av-
erage outstanding principal balance of the Con-
tracts as of the Cut-off Date; (vi) the range
of Loan-to-Value Ratios; and (vii) the geo-
graphic location of improved real estate under-
lying the Contracts. In addition, if so speci-
fied in the related Prospectus Supplement, ad-
ditional Contracts may be purchased from the
Company during the
4
<PAGE>
Pre-Funding Period specified in the related
Prospectus Supplement, from funds on deposit in
a Pre-Funding Account.
Except as otherwise specified in the related
Prospectus Sup-plement, the Contracts will have
been originated by the Company on an individual
basis in the ordinary course of its business.
Description of Certificates.. The Certificates of each Series may be issued in
one or more Classes or subclasses as and on the
terms specified in the related Prospectus Sup-
plement, each of which will evidence the inter-
est specified in the related Prospectus Supple-
ment in the Contract Pool and certain other
property held in trust for the benefit of the
Certificateholders (the "Trust Fund"). For con-
venience of description, any reference in this
Prospectus to a "Class" of Certificates in-
cludes a reference to any subclasses of such
Class. If so specified in a Prospectus Supple-
ment, a Series of Certificates may include one
or more Classes which (i) are entitled to re-
ceive distributions only in respect of princi-
pal ("Principal Only Certificates"), interest
("Interest Only Certificates") or any combina-
tion thereof, or in specified proportions in
respect of such payments, and/or (ii) are enti-
tled to receive distributions in respect of
principal before or after specified principal
distributions have been made on one or more
other Classes within such Series ("Fast
Pay/Slow Pay Certificates"), or on a planned
amortization schedule ("PAC Certificates") or
targeted amortization schedule ("TAC Certifi-
cates") or upon the occurrence of other speci-
fied events. See "Description of Certificates"
herein. The Prospectus Supplement will set
forth the rate at which interest will be paid
to Certificateholders of each Class of a given
Series (the "Pass-Through Rate"). Such Pass-
Through Rate may be fixed, variable or adjust-
able, as specified in the related Prospectus
Supplement.
Each Series of Certificates may include one or
more Classes ("Subordinated Certificates")
which are subordinated in right of distribution
to one or more other Classes ("Senior Certifi-
cates"). Certificates of a Series which in-
cludes Senior and Subordinated Certificates are
referred to herein collectively as
"Senior/Subordinated Certificates." A Series of
Senior/Subordinated Certificates may include
one or more Classes ("Mezzanine Certificates")
which are subordinated to one or more Classes
of Certificates and are senior to one or more
Classes of Certificates.
The Certificates will be issuable in fully reg-
istered form in the authorized denominations
specified in the related Prospectus Supplement.
See "Description of the Certificates." The Cer-
tificates will not be guaranteed or insured by
any government agency or, unless otherwise
specified in the related Prospectus Supplement,
other insurer and, except as described below
and
5
<PAGE>
in the related Prospectus Supplement, the Con-
tracts will not be guaranteed or insured by any
government agency or other insurer.
Subordinated Certificates.... One or more Classes of any Series may be Subor-
dinated Certificates, as specified in the re-
lated Prospectus Supplement. The rights of the
Subordinated Certificateholders to receive any
or a specified portion of distributions with
respect to the Contracts will be subordinated
to the rights of Senior Certificateholders to
the extent and in the manner specified in the
related Prospectus Supplement. If a Series of
Certificates contains more than one Class of
Subordinated Certificates, distributions and
losses will be allocated among such classes in
the manner specified in the related Prospectus
Supplement. The rights of the Subordinated
Certificateholders, to the extent not subordi-
nated, may be on a parity with those of the Se-
nior Certificateholders. This subordination is
intended to enhance the likelihood of regular
receipt by Senior Certificateholders of the
full amount of scheduled monthly payments of
principal and interest due them and to protect
the Senior Certificateholders against losses.
If so specified in the applicable Prospectus
Supplement, Mezzanine Certificates or other
Classes of Subordinated Certificates may be en-
titled to the benefits of other forms of credit
enhancement and may, if rated in one of the
four highest rating categories by a nationally
recognized statistical rating organization, be
offered pursuant to this Prospectus and such
Prospectus Supplement.
Credit Enhancement........... As an alternative, or in addition, to the credit
enhancement afforded by subordination of the
Subordinated Certificates, credit enhancement
with respect to a Series of Certificates may be
provided by pool insurance, letters of credit,
surety bonds, a guarantee of the Company, cash
reserve funds or other forms of enhancement ac-
ceptable to each nationally recognized rating
agency rating a Series of Certificates, in each
case as described in the related Prospectus
Supplement.
Interest..................... Except as otherwise set forth in the related
Prospectus Supplement, interest on the Certifi-
cates will be paid on the dates specified in
the related Prospectus Supplement (each, a
"Payment Date"). The related Prospectus Supple-
ment will set forth for each Class of Certifi-
cates the Pass-Through Rate, if any, for each
such Class or the method of determining such
Pass-Through Rate. See "Yield Considerations"
and "Description of the Certificates." As spec-
ified in the related Prospectus Supplement,
Classes of a Series of Certificates may be en-
titled to receive no interest or interest which
is not proportionate to the principal allocable
to such Certificates.
Principal (Including Except as otherwise set forth in the related
Prepayments)................ Prospectus Supple-ment, principal on each Con-
tract, including any principal prepayments,
will be passed through on each Payment Date.
See
6
<PAGE>
"Maturity and Prepayment Considerations" and
"Description of the Certificates."
Optional Termination......... Unless otherwise specified in the related Pro-
spectus Supplement, each of the Company or the
Servicer may at its option repurchase all Con-
tracts relating to a Series of Certificates re-
maining outstanding at such time under the cir-
cumstances specified in such Prospectus Supple-
ment. Unless otherwise provided in the related
Prospectus Supplement, the repurchase price
will equal the principal amount of such Con-
tracts plus accrued and unpaid interest there-
on. See "Description of the Certificates--Ter-
mination of the Agreement."
Global Certificates.......... If so specified in the related Prospectus Sup-
plement, the Certificates of a Series, or of
one or more Classes within a Series, will be
issuable in the form of one or more global cer-
tificates (each, a "Global Certificate") to be
held by a depositary (each, a "Depositary") on
behalf of the beneficial owners of the Certifi-
cates, as described herein under "Description
of the Certificates--Global Certificates." The
description of the Certificates in this Pro-
spectus assumes that the Certificates of a Se-
ries will not be issued in the form of Global
Certificates. If some or all of the Certifi-
cates of a Series are issued in the form of one
or more Global Certificates, the term "Global
Certificateholder," as used herein, will refer
to such beneficial owners of such Certificates,
and the rights of such Certificateholders will
be limited as described herein under "Descrip-
tion of the Certificates--Global Certificates."
Representations and
Warranties of the Company...
As a condition to the Company's conveyance of
any Contract Pool to the Trust Fund, the Com-
pany will be required to make certain represen-
tations and warranties in the related Agreement
regarding the Contracts. Under the terms of the
Agreement, if the Company becomes aware of a
breach of any such representation or warranty
that materially adversely affects the Trust
Fund's interest in any Contract or receives
written notice of such a breach from the
Trustee or the Servicer, then the Company will
be obligated either to cure such breach or to
repurchase or, if so provided in the related
Prospectus Supplement, substitute for the af-
fected Contract, in each case under the condi-
tions further described herein and in the Pro-
spectus Supplement. See "Description of the
Certificates--Conveyance of Contracts."
Federal Income Tax If an election (a "REMIC Election") is made to
Consideration............... treat the Trust Fund represented by a Series of
Certificates or a segregated portion thereof as
a "real estate mortgage investment conduit" (a
"REMIC") under the Internal Revenue Code of
1986, as amended (the "Code"), the Classes of
Certificates which are offered hereby may con-
stitute "regular interests" or "residual inter-
ests" in such REMIC under the Code, with the
tax consequences under the Code described
herein and in such Pro-
7
<PAGE>
spectus Supplement. If so specified in the ap-
plicable Prospectus Supplement, a Class of Cer-
tificates offered hereby may represent inter-
ests in a "two-tier" REMIC, but all interests
in the first and second tier REMIC will be cre-
ated under the same Agreement. See "Certain
Federal Income Tax Consequences--REMIC Series."
If a REMIC Election is not made with respect to
a Series of Certificates, the Trust Fund repre-
sented by such Certificates may be treated as a
grantor trust for federal income tax purposes
and not as an association taxable as a corpora-
tion. In such event, each Certificateholder
will be treated as the owner of an undivided
pro rata interest in income and corpus attrib-
utable to the related Contract Pool and any
other assets held by the Trust Fund and will be
considered the equitable owner of an undivided
interest in the Contracts included in such Con-
tract Pool. If a REMIC Election is not made
with respect to a Series of Certificates and
the Trust Fund represented by such Certificates
will not be treated as a grantor trust, the
federal income tax consequences of ownership of
such Certificates will be described in the re-
lated Prospectus Supplement. See "Certain Fed-
eral Income Tax Consequences--Non-REMIC Se-
ries."
ERISA Considerations......... A fiduciary of any employee benefit plan subject
to the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), or the Code,
should review carefully with its legal advisors
whether the purchase or holding of Certificates
could give rise to a transaction prohibited or
otherwise impermissible under ERISA or the
Code. See "ERISA Considerations."
Legal Investment............. Unless otherwise indicated in the applicable
Prospectus Supplement, the Certificates will
not constitute "mortgage related securities"
under the Secondary Mortgage Market Enhancement
Act of 1984, as amended. See "Legal Invest-
ment."
Ratings...................... It is a condition precedent to the issuance of
any Class of Certificates sold under this Pro-
spectus that they be rated in one of the four
highest rating categories (within which there
may be sub-categories or gradations indicating
relative standing) of at least one nationally
recognized statistical rating organization. A
security rating is not a recommendation to buy,
sell or hold securities and may be subject to
revision or withdrawal at any time by the as-
signing rating agency. See "Ratings."
8
<PAGE>
RISK FACTORS
Prospective investors in Certificates should consider, among other things,
the following factors in connection with the purchase of the Certificates:
1. Limitations on Availability of FHA Insurance. The related Prospectus
Supplement will specify the number and percentage of the Contracts included
in the Contract Pool that are insured by FHA pursuant to Title I of the
National Housing Act ("Title I"). 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. Although the Company is an FHA-
approved lender and believes, and will represent and warrant 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 loans insured by FHA, 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
thereon (computed at 7% per annum) and certain liquidation costs.
The amount of FHA Insurance available with respect to a Series of
Certificates at any given time with respect to the FHA-insured Contracts
included in a Contract Pool 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 September 30, 1995, was equal
to approximately $105,845,000, 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. See
"Description of FHA Insurance."
2. Limited Obligations. Except as otherwise specified in the related
Prospectus Supplement, the Certificates of a Series will not represent an
interest in or obligation of the Company. The Certificates of any Series
will not be insured or guaranteed by any governmental agency or
instrumentality, any Underwriter or its affiliates, the Servicer or (except
as otherwise specified in the related Prospectus Supplement) any other
party.
3. Junior Mortgage Liens; Value of Mortgaged Property. The related
Prospectus Supplement will specify the number and percentage of Contracts
included in the Contract Pool that are secured by a lien on the improved
real estate. The Company expects that a substantial number of such liens
will be junior to other liens on such real estate. The rights of the Trust
Fund (and therefore the Certificateholders of such Series), 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 mortgagee's or junior beneficiary's lien
unless the Servicer on behalf of the Trust Fund asserts its subordinate
interest in the property in foreclosure litigation and, possibly, satisfies
the defaulted senior loan or loans. See "Certain Legal Aspects of the
Contracts--Repurchase Obligations."
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A substantial portion of the Secured Contracts included in a Contract
Pool are expected to 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 affect 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. Limited Liquidity. There can be no assurance that a secondary market
will develop for the Certificates of any Series, or, if it does develop,
that it will provide the holders of any of the Certificates with liquidity
of investment or that if such a secondary market develops that it will
continue to exist for the term of any Series of Certificates.
5. Non-recordation of Mortgage Assignments. Because of the expense and
administrative inconvenience involved, the Company 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 related Trustee of the mortgage or deed of trust securing
a Secured Contract may not be effective against creditors of or purchasers
from the Company or a trustee in bankruptcy of the Company.
6. Unsecured Contracts. The obligations of the Obligor under any
Unsecured Contract included in a Contract Pool will not be secured by an
interest in the related real estate or otherwise, and the related Trust
Fund, as the owner of such Contract, will be a general unsecured creditor
as to such obligations. As a consequence, in the event of a default under
an Unsecured Contract, the related Trust Fund 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 related Trust Fund 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.
7. Certain Matters Relating to Insolvency. The Company intends that each
transfer of Contracts to the related Trust Fund constitute a sale, rather
than a pledge of the Contracts to secure indebtedness of the Company.
However, if the Company were to become a debtor under the federal
bankruptcy code, it is possible that a creditor or trustee in bankruptcy of
the Company or the Company as debtor-in-possession may argue that the sale
of the Contracts by the Company was a pledge of the Contracts rather than a
sale. This position, if presented to or accepted by a court, could result
in a delay in or reduction of distributions to the Certificateholders.
THE TRUST FUND
GENERAL
Each Trust Fund will include (i) a Contract Pool, (ii) the amounts held from
time to time in a trust account (the "Certificate Account") maintained by the
Trustee pursuant to the Agreement, (iii) proceeds from FHA Insurance (with
respect to any FHA-insured Contract included in the Contract Pool), (iv) any
letter of credit, guarantee, surety bond, insurance policy, cash reserve fund
or other credit enhancement securing
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payment of all or part of a Series of Certificates, and (v) such other property
as may be specified in the related Prospectus Supplement.
Each Certificate will evidence the interest specified in the related
Prospectus Supplement in one Trust Fund, containing one Contract Pool comprised
of Contracts having the aggregate principal balance as of the specified day of
the month of the creation of the pool (the "Cut-off Date") specified in the
related Prospectus Supplement. Holders of Certificates of a Series will have
interests only in such Contract Pool and will have no interest in the Contract
Pool created with respect to any other Series of Certificates. If so specified
in the related Prospectus Supplement, the Trust Fund may include a Pre-Funding
Account which would be used to purchase additional Contracts ("Subsequent
Contracts") from the Company during the Pre-Funding Period specified in the
related Prospectus Supplement. The related Prospectus Supplement will specify
the conditions that must be satisfied prior to any transfer of Subsequent
Contracts, including the requisite characteristics of the Subsequent Contracts.
Except as otherwise specified in the related Prospectus Supplement, all of
the Contracts will have been originated by the Company in the ordinary course
of its business. Specific information respecting the Contracts included in each
Trust Fund will be provided in the related Prospectus Supplement and, to the
extent not contained in the related Prospectus Supplement, in a report on Form
8-K to be filed with the Commission within fifteen days after the initial
issuance of the Certificates. A copy of the Agreement with respect to each
Series of Certificates will be attached to the Form 8-K and will be available
for inspection at the corporate trust office of the Trustee specified in the
related Prospectus Supplement. A schedule of the Contracts relating to such
Series will be attached to the Agreement delivered to the Trustee upon delivery
of the Certificates.
Whenever in this Prospectus terms such as "Contract Pool," "Trust Fund,"
"Agreement" or "Pass-Through Rate" are used, those terms respectively apply,
unless the context otherwise indicates, to one specific Contract Pool and Trust
Fund, each Agreement and each Pass-Through Rate applicable to the related Class
of Certificates.
THE CONTRACT POOLS
Except as otherwise specified in the related Prospectus Supplement, the
Contract Pool will consist of home improvement contracts and promissory notes
(collectively, the "Contracts") originated by the Company on an individual
basis in the ordinary course of business. The Contracts may be conventional
home improvement contracts or contracts insured by the FHA. Conventional
contracts may either be Secured Contracts or Unsecured Contracts. FHA-insured
Contracts may either be Secured Contracts or Unsecured Contracts. Except as
otherwise specified in the related Prospectus Supplement, the Contracts will be
fully amortizing and will bear interest at a fixed or variable annual
percentage rate (the "Contract Rate").
For each Series of Certificates, the Company will assign the Contracts
constituting the Contract Pool to the trustee named in the related Prospectus
Supplement (the "Trustee"). The Company, as Servicer (in such capacity referred
to herein as the "Servicer", which term shall include any successor to the
Company in such capacity under the applicable Agreement), will service the
Contracts pursuant to the Agreement. See "Description of the Certificates--
Servicing." Unless otherwise specified in the related Prospectus Supplement,
the Contract documents will be held by the Trustee or a custodian on its
behalf.
Each Contract Pool will be composed of Contracts bearing interest at the
Contract Rates specified in the Prospectus Supplement. Unless otherwise stated
in the related Prospectus Supplement, each registered holder of a Certificate
will be entitled to receive periodic distributions, which will be monthly
unless otherwise specified in the related Prospectus Supplement, of all or a
portion of principal on the underlying Contracts or interest on the principal
balance of such Certificate (or on some other principal balance unrelated to
that of such Certificate) at the Pass-Through Rate, or both.
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The related Prospectus Supplement will specify for the Contracts contained in
the related Contract Pool, among other things, the range of the dates of
origination of the Contracts; the range of the Contract Rates and the weighted
average Contract Rate; the minimum and maximum outstanding principal balances
and the average outstanding principal balance as of the Cut-off Date; the
aggregate principal balance of the Contracts included in the Contract Pool as
of the Cut-off Date; the weighted average and range of scheduled terms to
maturity as of origination and as of the Cut-off Date; the range of original
maturities of the Contracts and the last maturity date of any Contract; and the
geographic location of improved real estate securing the Secured Contracts. If
the Trust Fund includes a Pre-Funding Account, the related Prospectus
Supplement will specify the conditions that must be satisfied prior to any
transfer of Subsequent Contracts, including the requisite characteristics of
the Subsequent Contracts.
The Company will make representations and warranties as to the types and
geographical distribution of the Contracts included in a Contract Pool and as
to the accuracy in all material respects of certain information furnished to
the Trustee in respect of each such Contract. Upon a breach of any
representation or warranty that materially and adversely affects the interests
of the Certificateholders in a Contract, the Company will be obligated to cure
the breach in all material respects, or to repurchase or substitute for the
Contract as described below. This repurchase obligation constitutes the sole
remedy available to the Certificateholders or the Trustee for a breach of
representation or warranty by the Company. See "Description of the
Certificates--Conveyance of Contracts."
USE OF PROCEEDS
Unless otherwise specified in an applicable Prospectus Supplement,
substantially all of the net proceeds to be received from the sale of each
Series of Certificates will be used by the Company for general corporate
purposes, including the origination or acquisition of additional home
improvement loan contracts, costs of carrying such contracts until sale of the
related certificates and to pay other expenses connected with pooling the
Contracts and issuing the Certificates.
GREEN TREE FINANCIAL CORPORATION
GENERAL
The Company is a Delaware corporation which, as of December 31, 1994, had
total assets of approximately $1,771,839,000 and stockholders' equity of
approximately $725,891,000. 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.
Servicing functions are performed through a wholly owned subsidiary of the
Company, Green Tree Financial Servicing Corporation, a Delaware corporation.
The Company began financing FHA-insured home improvement loans in April 1989
and conventional home improvement loans in September 1992. The Company also
purchases, pools and services installment sales contracts for various consumer
products. 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
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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 or
approved 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 using
a proprietary credit scoring system that was implemented by the Company in
June 1993. The scoring process includes, among other things, an analysis of
the customer's paying habits, length and likelihood of continued employment
and certain other factors, including the percentage of the customer's monthly
payments on long term debts to gross monthly income, which may not exceed 45%.
Management may approve deviations from the Company's guidelines on a case-by-
case basis.
The types of home improvements financed by the Company include (i) exterior
renovations, including windows, siding and roofing, (ii) pools and spas, (iii)
kitchen and bath remodeling, and (iv) room additions and garages. The Company
may also, under certain limited conditions, extend additional credit beyond
the purchase price of the home improvement for the purpose of debt
consolidation.
The original principal amount of a single 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 $40,000 for the
Company's secured "no equity" lien program, and $100,000 for the Company's
secured equity lien program, unless a higher amount financed is approved by
senior management. The original principal amount of a conventional home
improvement loan may not exceed $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 $15,000 (except in Massachusetts where loan limit may be
$20,000). 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 and some conventional contracts of $30,000 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 90 days
after funding.
The Company began financing conventional home improvement loans in September
1992. Conventional home improvement loans are not insured by FHA. 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 or second 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. A full Uniform Residential Appraisal Report is required for all
secured contracts with loan amounts over $40,000. 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 $40,000, or
higher with senior management approval. Eligible property includes an owner-
occupied single family home, with a first, second or third lien on the real
estate, and only certain types of improvements may be financed.
The Company's underwriting guidelines and credit scoring process weight
significantly the applicant's creditworthiness and place less weight on the
available equity in the related real estate being improved. While it is the
Company's policy not to exceed 100% in loan-to-value ratio on any Contract, a
substantial portion of
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the Contracts are expected to have loan-to-value ratios of 90% or more when
considering the estimated value of the real estate, other liens senior to that
of the Contract, and the improvements being financed. Because the Company does
not require appraisals on most Contracts with loan amounts of less than $40,000
(which Contracts are expected to comprise a substantial portion of any Contract
Pool), and given the many other factors that can affect the value of property
securing a conventional Contract, the related Prospectus Supplement will not
provide detailed disclosure of loan-to-value ratios on the Contracts.
The unsecured conventional program allows for an amount financed from $2,500
to $15,000 (except in Massachusetts where the loan limit may be $20,000). The
allowable term of unsecured contracts is 24 to 120 months. The Company's
underwriting standards with respect to unsecured home improvement contracts
are, in general, more stringent than its underwriting standards with respect to
secured home improvement contracts with similar terms. Eligible property
includes an owner-occupied single family home, up to four unit multiple-family
dwelling, owner-occupied condominium or town houses, or an owner-occupied
manufactured home located in a Company-approved park or attached to the real
estate.
YIELD CONSIDERATIONS
The Pass-Through Rates and the weighted average Contract Rate of the
Contracts (as of the related Cut-off Date) relating to each Series of
Certificates will be set forth in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, each monthly
accrual of interest on a Contract will be calculated according to the simple
interest method, as required by state law. Unless otherwise specified in the
related Prospectus Supplement, the interest payable with respect to each
Certificate will be the product of the applicable Pass-Through Rate and the
principal balance immediately following the preceding Payment Date, based on a
360-day year of 12 months of 30 days each.
The Prospectus Supplement for each Series will indicate that a lower rate of
principal prepayments than anticipated would negatively affect the total return
to investors of any Class of Certificates that is offered at a discount to its
principal amount, and a higher rate of principal prepayments than anticipated
would negatively affect the total return to investors of any such Class of
Certificates that is offered at a premium to its principal amount or without
any principal amount.
The yield on some types of Certificates which may be offered hereby, such as
Interest Only Certificates, Principal Only Certificates, and Fast Pay/Slow Pay
Certificates, may be particularly sensitive to prepayment rates, and to changes
in prepayment rates, on the underlying Contracts. If so stated in the related
Prospectus Supplement, the yield on some types of Certificates which may be
offered hereby could change and may be negative under certain prepayment rate
scenarios. Accordingly, some types of Certificates may not be legal or
appropriate investments for certain financial institutions, pension funds or
others. See "ERISA Considerations" and "Legal Investment Considerations." In
addition, the timing of changes in the rate of prepayment on the Contracts
included in a Contract Pool may significantly affect an investor's actual yield
to maturity, even if the average prepayment rate over time is consistent with
the investor's expectations. In general, the earlier that prepayments on
Contracts occur, the greater the effect on the investor's yield to maturity.
MATURITY AND PREPAYMENT CONSIDERATIONS
MATURITY
Unless otherwise described in an applicable Prospectus Supplement, all of the
Contracts will have maturities at origination of not more than 10 years.
PREPAYMENT CONSIDERATIONS
Contracts generally may be prepaid in full or in part without penalty. FHA-
insured Contracts may be prepaid at any time without penalty. 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 (unless otherwise specified in the
related Prospectus Supplement) all principal prepayments will be passed through
to Certificateholders of the related Series on
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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 or the Company'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
of a Series.
Information regarding the prepayment standard or model or any other rate of
assumed prepayment, as applicable, will be set forth in the Prospectus
Supplement with respect to a Series of Certificates. Although the related
Prospectus Supplement will specify the prepayment assumptions used to price any
Series of Certificates, 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.
See "Description of the Certificates--Repurchase Option" for a description of
the Company's or Servicer's option to repurchase the Contracts comprising part
of a Trust Fund when the aggregate outstanding principal balance of such
Contracts is less than a specified percentage of the initial aggregate
outstanding principal balance of such Contracts as of the related Cut-off Date.
See also "The Trust Fund--The Contract Pools" for a description of the
obligations of the Company to repurchase a Contract in case of a breach of a
representation or warranty relative to such Contract.
DESCRIPTION OF THE CERTIFICATES
Each Series of Certificates will be issued pursuant to a separate pooling and
servicing agreement (each, an "Agreement") to be entered into among the
Company, as seller and Servicer, and the trustee named in the related
Prospectus Supplement (the "Trustee"), and such other parties, if any, as are
described in the applicable Prospectus Supplement. The following summaries
describe certain provisions expected to be common to each Agreement and the
related Certificates, but do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, the provisions of the related
Agreement and the description set forth in the related Prospectus Supplement.
The provisions of the form of Agreement filed as an exhibit to the Registration
Statement of which this Prospectus is a part (the "Registration Statement")
that are not described herein may differ from the provisions of any actual
Agreement. The material differences will be described in the related Prospectus
Supplement. Capitalized terms used herein and not otherwise defined herein
shall have the meanings assigned to them in the form of Agreement filed as an
exhibit to the Registration Statement.
Each Series of Certificates will have been rated in the rating category by
the rating agency or agencies specified in the related Prospectus Supplement.
GENERAL
The Certificates may be issued in one or more Classes. If the Certificates of
a Series are issued in more than one Class, the Certificates of all or less
than all of such Classes may be sold pursuant to this Prospectus, and there may
be separate Prospectus Supplements relating to one or more of such Classes so
sold. Any reference herein to the Prospectus Supplement relating to a Series
comprised of more than one Class should be understood as a reference to each of
the Prospectus Supplements relating to the Classes sold hereunder. Any
reference herein to the Certificates of a Class should be understood to refer
to the Certificates of a Class within a Series or all of the Certificates of a
single-Class Series, as the context may require. For convenience of
description, any reference in this Prospectus to a "Class" of Certificates
includes a reference to any subclasses of such Class.
The Certificates of each Series will be issued in fully registered form only
and will represent the interests specified in the related Prospectus Supplement
in a separate trust fund (the "Trust Fund") created pursuant to the related
Agreement. The Trust Fund will be held by the Trustee for the benefit of the
Certificateholders. Each Trust Fund, to the extent specified in the related
Prospectus Supplement, will include (i) Contracts (the
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"Contract Pool") which are subject to the Agreement from time to time, (ii) the
amounts held in the Certificate Account from time to time, (iii) proceeds from
certain hazard insurance on the related real estate, (iv) any letter of credit,
guarantee, surety bond, insurance policy, cash reserve fund or other credit
enhancement securing payment of all or part of a Series of Certificates and (v)
such other property as may be specified in the related Prospectus Supplement.
Except as otherwise specified in the related Prospectus Supplement, the
Certificates will be freely transferable and exchangeable at the corporate
trust office of the Trustee at the address set forth in the related Prospectus
Supplement. No service charge will be made for any registration of exchange or
transfer of Certificates, but the Trustee may require payment of a sum
sufficient to cover any tax or other governmental charge.
Ownership of each Contract Pool may be evidenced by one or more Classes of
Certificates, each representing the interest in the Contract Pool specified in
the related Prospectus Supplement. Each Series of Certificates may include one
or more Classes ("Subordinated Certificates") which are subordinated in right
of distribution to one or more other Classes ("Senior Certificates"), as
provided in the related Prospectus Supplement. Certificates of a Series which
includes Senior and Subordinated Certificates are referred to herein
collectively as "Senior/Subordinated Certificates." A Series of
Senior/Subordinated Certificates may include one or more Classes ("Mezzanine
Certificates") which are subordinated to one or more Classes of Certificates
and are senior to one or more Classes of Certificates. The Prospectus
Supplement with respect to a Series of Senior/Subordinated Certificates will
set forth, among other things, the extent to which the Subordinated
Certificates are subordinated (which may include a formula for determining the
subordinated amount or for determining the allocation of the Amount Available
(hereinafter defined) among Senior Certificates and Subordinated Certificates),
the allocation of losses among the Classes of Subordinated Certificates, the
period or periods of such subordination, the minimum subordinated amount, if
any, and any distributions or payments which will not be affected by such
subordination. The protection afforded to the Senior Certificateholders from
the subordination feature described above will be effected by the preferential
right of such Certificateholders to receive current distributions from the
Contract Pool. If a Series of Certificates contains more than one Class of
Subordinated Certificates, losses will be allocated among such Classes in the
manner described in the Prospectus Supplement. If so specified in the
applicable Prospectus Supplement, Mezzanine Certificates or other Classes of
Subordinated Certificates may be entitled to the benefits of other forms of
credit enhancement and may, if rated in one of the four highest rating
categories by a nationally recognized statistical rating organization, be
offered pursuant to this Prospectus and such Prospectus Supplement.
If so specified in a Prospectus Supplement, a Series of Certificates may
include one or more Classes which (i) are entitled to receive distributions
only in respect of principal ("Principal Only Certificates"), interest
("Interest Only Certificates") or any combination thereof, or in specified
proportions in respect of such payments, and/or (ii) are entitled to receive
distributions in respect of principal before or after specified principal
distributions have been made on one or more other Classes within such Series
("Fast Pay/Slow Pay Certificates"), or on a planned amortization schedule ("PAC
Certificates") or targeted amortization schedule ("TAC Certificates") or upon
the occurrence of other specified events. The Prospectus Supplement will set
forth the rate at which interest will be paid to Certificateholders of each
Class of a given Series (the "Pass-Through Rate"). Such Pass-Through Rate may
be fixed, variable or adjustable, as specified in the related Prospectus
Supplement.
The related Prospectus Supplement will specify the minimum denomination or
initial principal amount of Contracts evidenced by a single Certificate of each
Class of Certificates of a Series (a "Single Certificate").
Distributions of principal and interest on the Certificates will be made on
the payment dates set forth in the related Prospectus Supplement (each, a
"Payment Date") to the persons in whose names the Certificates are registered
at the close of business on the related record date specified in the related
Prospectus Supplement (the "Record Date"). Distributions will be made by check
mailed to the address of the person entitled thereto as it appears on the
Certificate Register, or, to the extent described in the related Agreement, by
wire transfer, except that the final distribution in retirement of Certificates
will be made only upon presentation and
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surrender of the Certificates at the office or agency of the Trustee specified
in the final distribution notice to Certificateholders.
GLOBAL CERTIFICATES
The Certificates of a Class may be issued in whole or in part in the form of
one or more global certificates (each, a "Global Certificate") that will be
deposited with, or on behalf of, and registered in the name of a nominee for, a
depositary (the "Depositary") identified in the related Prospectus Supplement.
The description of the Certificates contained in this Prospectus assumes that
the Certificates will be issued in definitive form. If the Certificates of a
Class are issued in the form of one or more Global Certificates, the term
"Certificateholder" should be understood to refer to the beneficial owners of
the Global Certificates, and the rights of such Certificateholders will be
limited as described under this subheading.
Global Certificates will be issued in registered form. Unless and until it is
exchanged in whole or in part for a Certificate in definitive form, a Global
Certificate may not be transferred except as a whole by the Depositary for such
Global Certificate to a nominee of such Depositary or by a nominee of such
Depositary to such Depositary or another nominee of such Depositary.
The specific terms of the depositary arrangement with respect to any
Certificates of a Class will be described in the related Prospectus Supplement.
It is anticipated that the following provisions will apply to all depositary
arrangements:
Upon the issuance of a Global Certificate, the Depositary for such Global
Certificate will credit, on its book-entry registration and transfer system,
the respective denominations of the Certificates represented by such Global
Certificate to the accounts of institutions that have accounts with such
Depositary ("participants"). Ownership of beneficial interests in a Global
Certificate will be limited to participants or persons that may hold interests
through participants. Ownership of beneficial interests in such Global
Certificate will be shown on, and the transfer of that ownership will be
effected only through, records maintained by the Depositary for such Global
Certificate or by participants or persons that hold through participants. The
laws of some states require that certain purchasers of securities take physical
delivery of such securities in definitive form. Such limits and such laws may
impair the ability to transfer beneficial interests in a Global Certificate.
So long as the Depositary for a Global Certificate, or its nominee, is the
owner of such Global Certificate, such Depositary or such nominee, as the case
may be, will be considered the sole owner or holder of the Certificates
represented by such Global Certificate for all purposes under the Agreement
relating to such Certificates. Except as set forth below, owners of beneficial
interests in a Global Certificate will not be entitled to have Certificates of
the Series represented by such Global Certificate registered in their names,
will not receive or be entitled to receive physical delivery of Certificates of
such Series in definitive form and will not be considered the owners or holders
thereof under the Agreement governing such Certificates.
Distributions or payments on Certificates registered in the name of or held
by a Depositary or its nominee will be made to the Depositary or its nominee,
as the case may be, as the registered owner for the holder of the Global
Certificate representing such Certificates. In addition, all reports required
under the applicable Agreement to be made to Certificateholders (as described
below under "Reports to Certificateholders") will be delivered to the
Depositary or its nominee, as the case may be. None of the Company, Servicer,
Trustee, or any agent thereof (including any applicable Certificate Registrar
or Paying Agent), will have any responsibility or liability for any aspect of
the records relating to or payments made on account of beneficial ownership
interests in a Global Certificate or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests or for providing
reports to the related beneficial owners.
The Company expects that the Depositary for Certificates of a Class, upon
receipt of any distribution or payment in respect of a Global Certificate, will
credit immediately participants' accounts with payments in
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amounts proportionate to their respective beneficial interest in such Global
Certificate as shown on the records of such Depositary. The Company also
expects that payments by participants to owners of beneficial interests in such
Global Certificate held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers registered in "street name," and will be the
responsibility of such participants.
If a Depositary for Certificates of a Class is at any time unwilling or
unable to continue as Depositary and a successor depositary is not appointed by
or on behalf of the Company within the time period specified in the Agreement,
the Company will cause to be issued Certificates of such Class in definitive
form in exchange for the related Global Certificate or Certificates. In
addition, the Company may at any time and in its sole discretion determine not
to have any Certificates of a Class represented by one or more Global
Certificates and, in such event, will cause to be issued Certificates of such
Class in definitive form in exchange for the related Global Certificate or
Certificates. Further, if the Company so specifies with respect to the
Certificates of a Class, an owner of a beneficial interest in a Global
Certificate representing Certificates of such Class may, on terms acceptable to
the Company and the Depositary for such Global Certificate, receive
Certificates of such Class in definitive form. In any such instance, an owner
of a beneficial interest in a Global Certificate will be entitled to physical
delivery in definitive form of Certificates of the Class represented by such
Global Certificate equal in denominations to such beneficial interest and to
have such Certificates registered in its name.
CONVEYANCE OF CONTRACTS
The Company will transfer, assign, set over and otherwise convey to the
Trustee all right, title and interest of the Company in the Contracts,
including all principal and interest received on or with respect to the
Contracts (other than receipts of principal and interest due on the Contracts
before the Cut-off Date). On behalf of the Trust Fund, as the issuer of the
related Series of Certificates, the Trustee, concurrently with such conveyance,
will execute and deliver the Certificates to the order of the Company. The
Contracts will be as described on a list attached to the Agreement. Such list
will include the amount of monthly payments due on each Contract as of the date
of issuance of the Certificates, the Contract Rate on each Contract and the
maturity date of each Contract. Such list will be available for inspection by
any Certificateholder at the principal executive office of the Servicer. Prior
to the conveyance of the Contracts to the Trust Fund, the Company's internal
audit department will complete a review of all of the Contract files confirming
the accuracy of the list of Contracts delivered to the Trustee. Any Contract
discovered not to agree with such list in a manner that is materially adverse
to the interests of the Certificateholders will be repurchased or substituted
for by the Company, or, if the discrepancy relates to the unpaid principal
balance of a Contract, the Company may deposit cash in the separate account
maintained at an Eligible Institution in the name of the Trustee (the
"Certificate Account") in an amount sufficient to offset such discrepancy. If
the Trust Fund includes a Pre-Funding Account, the related Prospectus
Supplement will specify the conditions that must be satisfied prior to any
transfer of Subsequent Contracts, including the requisite characteristics of
the Subsequent Contracts.
Unless otherwise specified in the related Prospectus Supplement, the Trustee
or its custodian will maintain possession of the Contracts and any other
documents contained in the Contract files. Uniform Commercial Code financing
statements will be filed in Minnesota reflecting the sale and assignment of the
Contracts to the Trustee, and the Company's accounting records and computer
systems will also reflect such sale and assignment.
The counsel to the Company identified in the applicable Prospectus Supplement
will render an opinion to the Trustee that the transfer of the Contracts from
the Company to the related Trust Fund 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 Fund were treated as a pledge to secure
borrowings by the Company, the distribution of proceeds of
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<PAGE>
the Contracts to the Trust Fund 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 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.
Except as otherwise specified in the related Prospectus Supplement, the
Company will make certain representations and warranties in the Agreement with
respect to each Contract as of the related Closing Date, including that: (a) as
of the Cut-off 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 either (i) entered into by a
home improvement contractor in the ordinary course of such contractor's
business and immediately upon funding, assigned to the Company or (ii) 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) (if a Secured Contract) 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 Cut-off 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.
Under the terms of the Agreement, if the Company becomes aware of a breach of
any such representation or warranty that materially adversely affects the Trust
Fund's interest in any Contract or receives written notice of such a breach
from the Trustee or the Servicer, then the Company will be obligated either to
cure such breach or to repurchase or, if so provided in the related Prospectus
Supplement, substitute for the affected Contract, in each case under the
conditions further described herein and in the Prospectus Supplement. This
repurchase obligation will constitute the sole remedy available to the Trust
Fund 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). If a
prohibited transaction tax under the REMIC provisions of the Code is incurred
in connection with such repurchase, distributions otherwise payable to Residual
Certificateholders will be applied to pay such tax. The Company will be
required to pay the amount of such tax that is not funded out of such
distributions.
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 applicable Pass-Through
Rate on such Contract from the end of the Due Period with respect to which the
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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.
PAYMENTS ON CONTRACTS
Each Certificate Account will be a trust account established by the Servicer
as to each Series of Certificates in the name of the Trustee (i) with a
depository institution, the long-term unsecured debt obligations of which at
the time of any deposit therein are rated within the two highest rating
categories or such other rating category as will not adversely affect the
ratings assigned to the Certificates by each rating agency rating the
Certificates of such Series, (ii) with the trust department of a national bank,
(iii) in an account or accounts the deposits in which are fully insured by the
FDIC, (iv) in an account or accounts the deposits in which are insured by the
FDIC (to the limits established by the FDIC), the uninsured deposits in which
are otherwise secured such that, as evidenced by an opinion of counsel, the
Certificateholders have a claim with respect to the funds in the Certificate
Account or a perfected first priority security interest against any collateral
securing such funds that is superior to the claims of any other depositors or
general creditors of the depository institution with which the Certificate
Account is maintained or (v) otherwise acceptable to the rating agency without
reduction or withdrawal of the rating assigned to the relevant Certificates.
The collateral eligible to secure amounts in the Certificate Account is limited
to United States government securities and certain other high-quality
investments specified in the applicable Agreement ("Eligible Investments"). A
Certificate Account may be maintained as an interest-bearing account, or the
funds held therein may be invested pending each succeeding Payment Date in
Eligible Investments.
Unless otherwise specified in the related Prospectus Supplement, the Servicer
will deposit in the Certificate Account on a daily basis all proceeds and
collections received or made by it with respect to the related Contracts
subsequent to the Cut-off Date (including scheduled payments of principal and
interest due after the Cut-off Date but received by the Servicer on or before
the Cut-off Date), including:
(i) all Obligor payments on account of principal, including principal
prepayments, on the Contracts;
(ii) all Obligor payments on account of interest on the Contracts;
(iii) all payments received under FHA Insurance received by the Servicer;
(iv) all amounts received and retained in connection with the liquidation
of defaulted Contracts, net of liquidation expenses ("Net Liquidation
Proceeds");
(v) any Advances made as described under "Advances" below and certain
other amounts required under the Agreement to be deposited in the
Certificate Account;
(vi) all amounts received from any credit enhancement provided with
respect to a Series of Certificates; and
(vii) all proceeds of any Contract or property acquired in respect
thereof repurchased by the Servicer or the Company, as described under
"Conveyance of Contracts" above or under "Repurchase Option" below.
DISTRIBUTIONS ON CERTIFICATES
Except as otherwise provided in the related Prospectus Supplement, on each
Payment Date for a Series of Certificates, the Trustee will withdraw from the
applicable Certificate Account and distribute to the Certificateholders of such
Series of record on the preceding Record Date an amount equal to, in the
aggregate, the "Amount Available" for such Payment Date. Unless otherwise
specified in the applicable Prospectus Supplement, the "Amount Available" for a
Payment Date is an amount equal to the aggregate of all amounts on deposit in
the Certificate Account as of the seventh Business Day following the end of the
related Due Period, or such other date as may be specified in the related
Prospectus Supplement (the "Determination Date") except: (i) all payments on
the Contracts that were due on or before the Cut-off Date; (ii) all payments or
collections received after the Due Period preceding the month in which the
Payment Date occurs; (iii) all
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scheduled payments of principal and interest due on a date or dates subsequent
to the Due Period preceding the Determination Date; (iv) amounts representing
reimbursement for Advances, such reimbursement being limited, if so specified
in the related Prospectus Supplement, to amounts received on particular
Contracts as late collections of principal or interest as to which the Servicer
has made an unreimbursed Advance; and (v) amounts representing reimbursement
for any unpaid Servicing Fee. In the case of a Series of Certificates which
includes only one Class, the Amount Available for each Payment Date will be
distributed pro rata to the holders of such Certificates. In the case of any
other Series of Certificates, the Amount Available for each Payment Date will
be allocated and distributed to holders of the Certificates of such Series
pursuant to the method and in the order of priority specified in the applicable
Prospectus Supplement. The amount of principal and interest specified in the
related Prospectus Supplement to be distributed to Certificateholders is
referred to herein as the "Certificate Distribution Amount."
Within the time specified in the Agreement and described in the related
Prospectus Supplement, the Servicer will furnish a statement to the Trustee
setting forth the amount to be distributed on the related Payment Date on
account of principal and interest, stated separately, and a statement setting
forth certain information with respect to the Contracts.
ADVANCES
Unless otherwise specified in the related Prospectus Supplement, 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 Certificate 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), if any, 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), if any, of the Contract (an "Uncollectible
Advance"), the Servicer will be entitled to reimbursement from payments on
other Contracts or from other funds available therefor.
Unless otherwise specified in the related Prospectus Supplement, 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 Certificate
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 from subsequent collections on the Contract or from liquidation
proceeds thereof, if any, or (ii) the Trustee determines that it is not legally
able to make such Advance.
EXAMPLE OF DISTRIBUTIONS
The following is an example of the flow of funds as it would relate to a
hypothetical Series of Certificates issued, and with a Cut-off Date occurring,
in September 1995 (all weekdays are assumed to be business days):
<TABLE>
<S> <C> <C>
September 1..................................... (1) Cut-off Date.
September 1-30.................................. (2) Due Period. Servicer
receives scheduled payments
on the Contracts and any
principal prepayments made
by Obligors and applicable
interest thereon.
September 30.................................... (3) Record Date.
October 10...................................... (4) Determination Date.
Distribution amount
determined.
October 15...................................... (5) Payment Date.
</TABLE>
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Succeeding months follow the pattern of (2) through (5). The flow of funds
with respect to any Series of Certificates may differ from the above example,
as specified in the related Prospectus Supplement.
- --------
(1) The initial principal balance of the Contract Pool will be the aggregate
principal balance of the Contracts at the close of business on the Cut-off
Date, after deducting principal payments due on or before such date, which,
together with corresponding interest payments, are not part of the Contract
Pool and will not be passed through to Certificateholders.
(2) Scheduled payments and principal prepayments may be received at any time
during this period and will be deposited in the Certificate Account by the
Servicer for distribution to Certificateholders. When a Contract is prepaid
in full, interest on the amount prepaid is collected from the Obligor only
to the date of payment.
(3) Distributions on October 15 will be made to Certificateholders of record at
the close of business on the last Business Day of September, being the
month immediately preceding the month of distribution.
(4) On October 10 (the seventh Business Day following the end of the prior Due
Period), the Servicer will determine the amounts of principal and interest
which will be passed through on October 15. In addition, the Servicer may
advance funds to cover any delinquencies, in which event the distribution
to Certificateholders on October 15 will include the full amounts of
principal and interest due during September. The Servicer will also
calculate any changes in the relative interests evidenced by the Senior
Certificates and the Subordinated Certificates in the Trust Fund.
(5) On October 15, the amounts determined on October 10 will be distributed to
Certificateholders.
INDEMNIFICATION
The Agreement requires the Company to defend and indemnify the Trust Fund,
the Trustee (including any agent of the Trustee) and the Certificateholders
(which indemnification will survive any removal of the Servicer as servicer of
the Contracts) against any and all costs, expenses, losses, damages, claims and
liabilities, including reasonable fees and expenses of counsel and expenses of
litigation (a) arising out of or resulting from the use or ownership by the
Company or the Servicer or any affiliate thereof of any real estate related to
a Secured Contract and (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
Fund (but not including any federal, state or other tax arising out of the
creation of the Trust Fund and the issuance of the Certificates).
The Agreement also requires the Servicer, in connection with its duties as
servicer of the Contracts, to defend and indemnify the Trust Fund, the Trustee
and the Certificateholders (which indemnification will survive any removal of
the Servicer as servicer of the Contracts) against any and all costs, expenses,
losses, damages, claims and liabilities, including reasonable fees and expenses
of counsel and expenses of litigation, in respect of any action taken by the
Servicer with respect to any Contract while it was the Servicer.
SERVICING
Pursuant to the Agreement, the Servicer will service and administer the
Contracts assigned to the Trustee as more fully set forth below. The Servicer
will perform diligently all services and duties specified in each Agreement, in
the same manner as prudent lending institutions of home improvement contracts
of the same type as the Contracts in those jurisdictions where the related real
properties are located or as otherwise specified in the Agreement. The duties
to be performed by the Servicer will include collection and remittance of
principal and interest payments, collection of insurance claims and, if
necessary, foreclosure of Secured Contracts.
The Servicer will make reasonable efforts to collect all payments called for
under the Contracts and, consistent with the Agreement and any FHA Insurance,
will follow such collection procedures with respect to the Contracts as it
follows with respect to mortgage loans or contracts serviced by it that are
comparable to the Contracts.
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Evidence as to Compliance. Unless otherwise specified in the related
Prospectus Supplement, each Agreement will require the Servicer to deliver to
the Trustee a monthly report prior to each Payment Date, setting forth certain
information regarding the Contract Pool and the Certificates of such Series as
is specified in the related Prospectus Supplement. Each such report to the
Trustee will be accompanied by a statement from an appropriate officer of the
Servicer certifying the accuracy of such report and stating that the Servicer
has not defaulted in the performance of its obligations under the Agreement. On
or before May 1 of each year, the Servicer will deliver to the Trustee a report
of a nationally recognized accounting firm stating that such firm has examined
certain documents and records relating to the servicing of home improvement
contracts serviced by the Servicer under pooling and servicing agreements
similar to the Agreement and stating that, on the basis of such procedures,
such servicing has been conducted in compliance with the Agreement, except for
any exceptions set forth in such report.
Certain Matters Regarding the Servicer. The Servicer may not resign from its
obligations and duties under an Agreement except upon a determination that its
duties thereunder are no longer permissible under applicable law. No such
resignation will become effective until the Trustee or a successor servicer has
assumed the Servicer's obligations and duties under such Agreement. The
Servicer can only be removed as servicer upon the occurrence of an Event of
Termination as discussed below.
The Servicer shall keep in force throughout the term of the Agreement (i) a
policy or policies of insurance covering errors and omissions for failure to
maintain insurance as required by the Agreement, and (ii) a fidelity bond. Such
policy or policies and such fidelity bond shall be in such form and amount as
is generally customary among persons which service a portfolio of home
improvement contracts having an aggregate principal amount of $10 million or
more and which are generally regarded as servicers acceptable to institutional
investors.
Servicing Compensation and Payment of Expenses. For its servicing of the
Contracts, the Servicer will receive servicing fees ("Servicing Fees") which
include a Monthly Servicing Fee (which the Company may assign) for each Due
Period (paid on the next succeeding Payment Date) equal to 1/12th of the
product of the annual servicing fee rate described in the applicable Prospectus
Supplement and the Pool Scheduled Principal Balance for such Payment Date. As
long as the Company is the Servicer, the Trustee will pay the Company its
Monthly Servicing Fee from any monies remaining after the Certificateholders
have received all payments of principal and interest for such Payment Date.
The Monthly Servicing Fee provides compensation for customary third-party
servicing activities to be performed by the Servicer for the Trust Fund, for
additional administrative services performed by the Servicer on behalf of the
Trust Fund and for expenses paid by the Servicer on behalf of the Trust Fund.
Customary servicing activities include collecting and recording payments,
communicating with Obligors, investigating payment delinquencies, providing
billing and tax records to Obligors and maintaining internal records with
respect to each Contract. Administrative services performed by the Servicer on
behalf of the Trust Fund include 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 Monthly 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 Trustee's fees, and payment of expenses incurred in connection with
distributions and reports to Certificateholders, except that the Servicer shall
be reimbursed out of the liquidation proceeds of a liquidated Contract
(including FHA Insurance proceeds) for customary out-of-pocket liquidation
expenses incurred by it.
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Events of Termination. Except as otherwise specified in the related
Prospectus Supplement, Events of Termination under each 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.
Rights Upon Event of Termination. Except as otherwise specified in the
related Prospectus Supplement, so long as an Event of Termination remains
unremedied, the Trustee may, and at the written direction of the
Certificateholders of a Series evidencing interests aggregating 25% or more of
the related Trust Fund, shall, terminate all of the rights and obligations of
the Servicer under the related Agreement and in and to the Contracts, and the
proceeds thereof, whereupon (subject to applicable law regarding the Trustee's
ability to make advances) the Trustee or a successor Servicer under the
Agreement will succeed to all the responsibilities, duties and liabilities of
the Servicer under the Agreement and will be entitled to similar compensation
arrangements; provided, however, that neither the Trustee nor any successor
Servicer will assume any obligation of the Company to repurchase Contracts for
breaches of representations or warranties, and the Trustee and such successor
Servicer will not be liable for any acts or omissions of the prior Servicer
occurring prior to a transfer of the Servicer's servicing and related functions
or for any breach by such Servicer of any of its obligations contained in the
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 Servicer shall be entitled to
payment of certain amounts payable to it prior to such termination, for
services rendered prior to such termination. No such termination will affect in
any manner the Company's obligation to repurchase certain Contracts for
breaches of representations or warranties under the Agreement. In the event
that the Trustee would be obligated to succeed the Servicer but is unwilling or
unable so to act, it may appoint, or petition to a court of competent
jurisdiction for the appointment of, a Servicer. Pending such appointment, the
Trustee is obligated to act in such capacity. The Trustee and such successor
may agree upon the servicing compensation to be paid, which in no event may be
greater than the compensation to the Servicer under the Agreement.
No Certificateholder will have any right under an Agreement to institute any
proceeding with respect to such Agreement unless such Holder previously has
given to the Trustee written notice of default and unless the Holders of
Certificates evidencing interests aggregating not less than 25% of the related
Trust Fund requested the Trustee in writing to institute such proceeding in its
own name as Trustee and have offered to the Trustee reasonable indemnity and
the Trustee for 60 days has neglected or refused to institute any such
proceeding. The Trustee will be under no obligation to take any action or to
institute, conduct or defend any litigation under the Agreement at the request,
order or direction of any of the Holders of Certificates, unless such
Certificateholders have offered to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which the Trustee may incur.
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REPORTS TO CERTIFICATEHOLDERS
The Trustee will forward to each Certificateholder on each Payment Date, or
as soon thereafter as is practicable, as specified in the related Prospectus
Supplement, a statement setting forth, among other things:
(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 amount of fees payable out of the Trust Fund;
(f) 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;
(g) the number and aggregate principal balance of Contracts delinquent
(i) 31-59 days, (ii) 60-89 and (iii) 90 or more days;
(h) the number of Contracts liquidated during the Due Period ending
immediately before such Payment Date;
(i) such customary factual information as is necessary to enable
Certificateholders to prepare their tax returns; and
(j) 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
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will provide that on any Payment Date on which the Principal Balance
is less than 10% of the Initial Principal Amount of the Certificates, the
Company or the Servicer will have the option to repurchase, on 20 days' prior
written notice to the Trustee, all outstanding Contracts in the related
Contract Pool at a price equal to the principal balance of the Contracts on the
prior Payment Date plus 30 days' accrued interest thereon at the applicable
Pass-Through Rate and any delinquent payments of 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 on which such purchase occurs 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 and any acquired properties to the Servicer. The
distribution of such purchase price to Certificateholders will be in lieu of
any other distribution to be made on such Payment Date with respect to the
related Contracts.
AMENDMENT
Unless otherwise specified in the related Prospectus Supplement, the
Agreement may be amended by the Company, the Servicer and the Trustee without
the consent of the Certificateholders, (i) to cure any ambiguity, (ii) to
correct or supplement any provision therein that may be inconsistent with any
other provision therein, (iii) if an election has been made with respect to a
particular Series of Certificates to treat the Trust Fund as a real estate
mortgage investment conduit ("REMIC") within the meaning of Section 860D(a) of
the Internal Revenue Code of 1986, as amended, to maintain the REMIC status of
the Trust Fund and to avoid the imposition of certain taxes on the REMIC or
(iv) to make any other provisions with respect to matters or questions arising
under such Agreement that are not inconsistent with the provisions thereof,
provided that such action will not adversely affect in any material respect the
interests of the Certificateholders of the related Series. Unless otherwise
specified in the related Prospectus Supplement, the Agreement may also be
amended by the Company, the Servicer and the Trustee with the consent of the
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Certificateholders (other than holders of Residual Certificates) evidencing
interests aggregating not less than 66 2/3% of the Trust Fund for the purpose
of adding any provisions to or changing in any manner or eliminating any of the
provisions of such Agreement or of modifying in any manner the rights of the
Certificateholders; provided, however, that no such amendment that reduces in
any manner the amount of, or delays the timing of, any payment received on or
with respect to Contracts which are required to be distributed on any
Certificate may be effective without the consent of the Holders of each such
Certificate.
TERMINATION OF THE AGREEMENT
The obligations created by each Agreement will terminate (after distribution
of all Monthly Principal and Monthly Interest then due to Certificateholders)
on the earlier of (a) the Payment Date next succeeding the later of the final
payment or other liquidation of the last Contract or the disposition of all
property acquired upon foreclosure of any Secured Contract; or (b) the Payment
Date on which the Company or the Servicer 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.
THE TRUSTEE
The Prospectus Supplement for a Series of Certificates will specify the
Trustee under the related Agreement. The Trustee may have customary commercial
banking relationships with the Company or its affiliates and the Servicer or
its affiliates.
The Trustee may resign at any time, in which event the Company will be
obligated to appoint a successor Trustee. The Company may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Agreement or if the Trustee becomes insolvent. Any resignation or removal of
the Trustee and appointment of a successor Trustee will not become effective
until acceptance of the appointment by the successor Trustee.
The Trustee will make no representation as to the validity or sufficiency of
the Agreement, the Certificates or any Contract, Contract file or related
documents, and will not be accountable for the use or application by the
Company of any funds paid to the Company, as seller, in consideration of the
conveyance of the Contracts, or deposited into or withdrawn from the
Certificate Account by the Servicer. If no Event of Termination has occurred,
the Trustee will be required to perform only those duties specifically required
of it under the Agreement. However, upon receipt of the various certificates,
reports or other instruments required to be furnished to it, the Trustee will
be required to examine them to determine whether they conform as to form to the
requirements of the Agreement. Whether or not an Event of Termination has
occurred, the Trustee is not required to expend or risk its own funds or
otherwise incur any financial liability in the performance of its duties or the
exercise of its powers if it has reasonable grounds to believe that repayment
of such funds or adequate indemnity against such risk or liability is not
reasonably assured to it.
Under the Agreement, the Servicer agrees to pay to the Trustee on each
Payment Date (a) 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) and (b)
reimbursement for all reasonable expenses, disbursements and advances incurred
or made by the Trustee in accordance with any provision of the Agreement
(including 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 the
Trustee's negligence or bad faith. The Company has agreed to indemnify the
Trustee for, and to hold it harmless against, any loss, liability or expense
incurred without negligence or bad faith on its part, arising out of or in
connection with the acceptance or administration of the Trust Fund and the
Trustee's duties thereunder, including the costs and expenses of defending
itself against any claim or liability in connection with the exercise or
performance of any of the Trustee's powers or duties thereunder.
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DESCRIPTION OF FHA INSURANCE
Certain of the Contracts may be FHA-insured, the payments upon which, subject
to the following discussion, are insured by the FHA under Title I of the
National Housing Act.
The insurance available to any Trust Fund will be 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 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 be reduced by 10% of the principal balance of any loans reported to FHA as
sold without recourse by the Company. In the Agreement, the Company will agree
to 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)
with respect to each Series is obligated to pay such premium and is entitled to
be reimbursed by the Company and from collections on the related Contracts.
As of September 30, 1995, the Company's FHA Insurance reserve amount was
equal to approximately $105,845,000. These insurance reserves were available to
cover losses on approximately $1,397,423,000 of FHA-insured manufactured
housing contracts and approximately $190,496,000 of FHA-insured home
improvement loans, including the FHA-insured Contracts that may be owned by a
Trust Fund. If an Event of Termination (as defined under "Description of the
Certificates--Events of Termination") occurs, each Trustee will notify FHA of
the Company's termination as Servicer of the related 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 each 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 FHA's 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 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, if applicable, 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
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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 related Trust Fund 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, if applicable.
CERTAIN LEGAL ASPECTS OF THE CONTRACTS; REPURCHASE OBLIGATIONS
As a result of the Company's conveyance and assignment of a pool of Contracts
to a Trust Fund, the Certificateholders of such Series, as the beneficial
owners of the Trust Fund, will succeed collectively to all of the rights
thereunder (including the right to receive payment on the Contracts). The
following discussion contains summaries of certain legal aspects of home
improvement contracts and loans secured by residential properties 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 may be situated or which may govern any Contract. 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 will be secured by either mortgages, deeds of trust,
security deeds or deeds to secure debt depending upon the prevailing practice
in the state in which the underlying property is located, and may have first,
second or third priority. In some states, a mortgage creates a lien upon the
real property encumbered by the mortgage or deed of trust. In other states, the
mortgage conveys legal title to the property to the mortgagee subject to a
condition subsequent, i.e., the payment of the indebtedness secured thereby.
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 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 trustee's authority under a deed of trust and the mortgagee's authority
under a mortgage are governed by applicable state law, the express provisions
of the deed of trust or mortgage, and, in some cases with respect to deeds of
trust, the directions
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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, the knowledge of the
parties to such instrument 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, security deeds, deeds to secure debt
and deeds of trust securing the Secured Contracts in any Contract Pool are
expected to be 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 related Trust Fund (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 under the senior mortgage or deed of trust, thereby
extinguishing the junior mortgagee's or junior beneficiary's lien unless the
Servicer on behalf of the Trust Fund 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 usually
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
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
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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 generally become part of the indebtedness secured by the senior
mortgage or deed of trust.
SUBORDINATE FINANCING
Where the borrower encumbers the mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the borrower
may have difficulty servicing and repaying multiple loans. Second, acts of the
senior lender which prejudice the junior lender or impair the junior lender's
security may create a superior equity in favor of the junior lender. For
example, if the borrower and the senior lender agree to an increase in the
principal amount of or the interest rate payable on the senior loan, the senior
lender may lose its priority to the extent any existing junior lender is harmed
or the borrower is additionally burdened. Third, if the borrower defaults on
the senior loan and/or any junior loan or loans, the existence of junior loans
and actions taken by junior lenders can impair the security available to the
senior lender and can interfere with or delay the taking of action by the
senior lender. The bankruptcy of a junior lender may operate to stay
foreclosure or similar proceedings by the senior lender.
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, deed to secure debt or security deed. Foreclosure of a
mortgage is generally accomplished by judicial action. A foreclosure action is
regulated by statutes and rules and subject throughout to the court's equitable
powers. Generally, a mortgagor is bound by the terms of the mortgage note and
the mortgage as made and cannot be relieved from its own default. However,
since a foreclosure action is equitable in nature and is addressed to a court
of equity, the court may relieve a mortgagor of a default and deny the
mortgagee foreclosure on proof that the mortgagor's default was neither willful
nor in bad faith and that the mortgagee's action was such as to establish a
waiver, or fraud, bad faith, oppressive or unconscionable conduct as to warrant
a court of equity to refuse affirmative relief to the mortgagee. Under certain
circumstances a court of equity may relieve the mortgagor from an entirely
technical default where such default was not willful. Generally, the action is
initiated by the service of legal pleadings upon all parties having an interest
of record in the real property. Delays in completion of the foreclosure
occasionally may result from difficulties in locating necessary parties
defendant. When the mortgagee's right to foreclosure is contested, the legal
proceedings necessary to resolve the issue can be time-consuming. 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 trustee's sale under a specific provision in the
deed of trust, security deed or deed to secure debt that
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authorizes the trustee to sell the property upon any default by the borrower
under the terms of the note, deed of trust, security deed 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,
prior to a sale, 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, prior to such sale, 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.
Certain states require that a notice of sale be posted in a public place and,
in most states, published for a specified period of time in one or more
newspapers in a specified manner prior to the date of trustee's sale. 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 trustee's sale. In general,
the borrower, or any other person having a junior encumbrance on the real
estate, may, during a reinstatement period, cure the default by paying the
entire amount in arrears plus the costs and expenses incurred in enforcing the
obligation. Certain state laws control the amount of foreclosure expenses and
costs, including attorney's 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
generally a public sale. However, because of the difficulty a potential third
party buyer at the sale might have in determining the exact status of title and
because the physical condition of the property may have deteriorated during the
foreclosure proceedings, it is not common for a third party to purchase the
property at the foreclosure sale. In some states, there is a statutory minimum
purchase price which the lender may offer for the property. Thereafter, subject
to the right of the borrower in some states to remain in possession during the
redemption period, the lender will assume the burdens of ownership, including
obtaining hazard insurance, paying taxes and making such repairs at its own
expense as are necessary to render the property suitable for sale. The lender
commonly will obtain the services of a real estate broker and pay the broker a
commission in connection with the sale of the property. Depending upon market
conditions, the ultimate proceeds of the sale of the property may not equal the
lender's investment in the property. Any loss resulting from such sale may be
reduced by the receipt of mortgage insurance proceeds, if any.
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 prior to or at the time of the
foreclosure sale 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 lender's 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.
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In certain jurisdictions, real property transfer or recording taxes or fees
may be imposed on the related Trust Fund 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 proceeds and, upon
default of the mortgagor under the senior mortgage or deed of trust, 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 mortgagee's 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, deed to secure
debt or security deed are subordinate to the terms of the senior mortgage, deed
of trust, deed to secure debt or security deed. In the event of a conflict
between the terms of the senior mortgage, deed of trust, deed to secure debt or
security deed and the junior mortgage, deed of trust, deed to secure debt or
security deed, the terms of the senior mortgage, deed of trust, deed to secure
debt 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, deed of trust, deed to secure debt
or security deed 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, deed of trust, deed to secure debt or
security deed. 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, deed to secure debt or security deed.
RIGHTS OF REDEMPTION
The purposes of a foreclosure action are to enable the mortgagee to realize
upon its security and to bar the mortgagor, and all persons who have an
interest in the property which is subordinate to the foreclosing mortgagee,
from their "equity of redemption." The doctrine of equity of redemption
provides that, until the property covered by a mortgage has been sold in
accordance with a properly conducted foreclosure and foreclosure sale, those
having an interest which is subordinate to that of the foreclosing mortgagee
have an equity of redemption and may redeem the property by paying the entire
debt with interest. In addition, in some states, when a foreclosure action has
been commenced, the redeeming party must pay certain costs of such action.
Those having an equity of redemption must generally be made parties and duly
summoned to the foreclosure action in order for their equity of redemption to
be barred.
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
expenses of foreclosure. In other states, redemption may be authorized if the
former borrower pays only a portion of the sums due. In some states, the right
to redeem is an equitable right. The equity of redemption, which is a non-
statutory right that must be exercised prior to foreclosure sale, should be
distinguished from statutory rights of redemption. The effect of a right of
redemption is to diminish the
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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. In some states, there is no
right to redeem property after a trustee's sale under a deed of trust.
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 public 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
borrower following a foreclosure sale to the excess of the outstanding debt
over the fair market value of the property at the time of such sale. The
purpose of these statutes is to prevent a beneficiary or a mortgagee from
obtaining a large deficiency judgment against the former borrower as a result
of low or no bids at the foreclosure sale.
In some states, exceptions to the anti-deficiency statutes are provided for
in certain instances where the value of the lender's security has been impaired
by acts or omissions of the borrower, for example, in the event of waste of the
property.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
the federal 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 and/or enforce a
deficiency judgment. 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.
Generally, with respect to the federal bankruptcy law, the filing of a petition
acts as a stay against virtually all actions against the debtor, including the
enforcement of remedies of collection of a debt and, often, no interest or
principal payments are made during bankruptcy proceedings. A bankruptcy court
may also grant the debtor a reasonable time to cure a payment default with
respect to a mortgage loan on a debtor's residence by paying arrearages and
reinstate the original mortgage loan payment schedule even though the lender
accelerated the mortgage loan and final judgment of foreclosure had been
entered in state court (provided no sale of the property had yet occurred)
prior to the filing of the debtor's Chapter 13 petition. Some courts with
federal bankruptcy jurisdiction have approved plans, based on the particular
facts of the reorganization case, that effected the curing of a mortgage loan
default by paying arrearages over a number of years. In the case of a mortgage
loan not secured by the debtor's principal residence, courts with federal
bankruptcy jurisdiction 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
Bankruptcy Code also provides priority to certain tax liens over
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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.
CONSUMER PROTECTION LAWS WITH RESPECT TO CONTRACTS
Numerous Federal and state consumer protection laws impose substantial
requirements upon creditors involved in consumer finance. These laws include
the Federal Truth-in-Lending Act, Regulation "Z", the Equal Credit Opportunity
Act, Regulation "B", the Fair Credit Reporting Act, and related statutes. The
Home Ownership and Equity Protection Act of 1994 (the "Act"), which becomes
effective on October 1, 1995, adds provisions to Regulation Z which impose
additional disclosure and other requirements on creditors involved in non-
purchase money mortgage loans with high interest rates or high up-front fees
and charges; it is possible that some Contracts included in a Contract Pool may
be subject to its provisions. The Act applies to mortgage loans originated on
or after the effective date of such regulations. These laws can impose specific
statutory liabilities upon creditors who fail to comply with their provisions
and may affect the enforceability of the contract.
Courts have imposed general equitable principles upon repossession and
litigation involving deficiency balances. These equitable principles are
generally designed to relieve a consumer from the legal consequences of a
default.
In several cases, consumers have asserted that the remedies provided secured
parties under the UCC and related laws violate the due process protections
provided under the 14th Amendment to the Constitution of the United States. For
the most part, courts have upheld the notice provisions of the UCC and related
laws as reasonable or have found that the repossession and resale by the
creditor does not involve sufficient state action to afford constitutional
protection to consumers.
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 Act provides that assignees of
certain high-interest, non-purchase money mortgage loans (which may include
some Contracts) are subject to all claims and defenses that the debtor could
assert against the original creditor, unless the assignee demonstrates that a
reasonable person in the exercise of ordinary due diligence could not have
determined that the mortgage loan was subject to the provisions of the Act.
The obligations of the Obligor under each Unsecured Contract are not secured
by an interest in the related real estate or otherwise, and the related Trust
Fund, as the owner of an Unsecured Contract, will be a general unsecured
creditor as to such obligations. As a consequence, in the event of a default
under an Unsecured Contract, the related Trust Fund 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 Fund
as a general unsecured creditor to pay amounts due and owing thereunder are
insufficient to pay all such amounts.
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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.
The standard forms of note, mortgage and deed of trust also include a debt-
acceleration clause, which permits the lender to accelerate the debt upon a
monetary default of the borrower, after the applicable cure period. Courts will
generally enforce clauses providing for acceleration in the event of a material
payment default. However, courts, exercising equity jurisdiction, may refuse to
allow a lender to foreclose a mortgage or deed of trust when an acceleration of
the indebtedness would be inequitable or unjust and the circumstances would
render the acceleration unconscionable.
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
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 will contain due-on-sale clauses unless
the Prospectus Supplement indicates otherwise. 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 without
the prior consent of the mortgagee. 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 three-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,
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(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 lender's 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 will
represent and warrant in each Agreement that all Contracts comply with any
applicable usury limitations.
ENVIRONMENTAL LEGISLATION
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act, as amended ("CERCLA"), and under state law in certain states, a
secured party which takes a deed-in-lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, or operates a mortgaged property may become
liable in certain circumstances for the costs of cleaning up hazardous
substances regardless of whether they have contaminated the property. CERCLA
imposes strict, as well as joint and several, liability on several classes of
potentially responsible parties, including current owners and operators of the
property who did not cause or contribute to the contamination. Furthermore,
liability under CERCLA is not limited to the original or unamortized principal
balance of a loan or to the value of the property securing a loan. Lenders may
be held liable under CERCLA as owners or operators unless they qualify for the
secured creditor exemption to CERCLA. This exemption exempts from the
definition of owners and operators those who, without participating in the
management of a facility, hold indicia of ownership primarily to protect a
security interest in the facility. What constitutes sufficient participation in
the management of a property securing a loan or the business of a borrower to
render the exemption unavailable to a lender has been a matter of
interpretation by the courts. CERCLA has been interpreted to impose liability
on a secured party, even absent foreclosure, where the party participated in
the financial management of the borrower's business to a degree indicating a
capacity to influence waste disposal decisions. However, court interpretations
of the secured creditor exemption have been inconsistent. In addition, when
lenders foreclose and thereupon become owners of collateral property, courts
are inconsistent as to whether such ownership renders the secured creditor
exemption unavailable. Other federal and state laws in certain circumstances
may impose liability on a secured party which takes a deed-in-lieu of
foreclosure, purchases a mortgaged property at a foreclosure sale, or operates
a mortgaged property on which contaminants other than CERCLA hazardous
substances are present, including petroleum, agricultural chemicals, hazardous
wastes, asbestos, radon, and lead-based paint. Such cleanup costs may be
substantial. It is possible that such cleanup costs could become a liability of
a Trust Fund and reduce the amounts otherwise distributable to the holders of
the related Series of Certificates in certain circumstances if such cleanup
costs were incurred. Moreover, certain states by statute impose a lien for any
cleanup costs incurred by such state on the property that is the subject of
such cleanup costs (an "environmental lien"). All subsequent liens on such
property generally are subordinated to such an environmental lien and, in some
states, even prior recorded liens are subordinated to environmental liens. In
the latter states, the security interest of the Trustee in a related parcel of
real property that is subject to such an environmental lien could be adversely
affected.
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Traditionally, many residential mortgage lenders have not taken steps to
evaluate whether contaminants are present with respect to any mortgaged
property prior to the origination of the mortgage loan or prior to foreclosure
or accepting a deed-in-lieu of foreclosure. Accordingly, the Company has not
made and will not make such evaluations prior to the origination of the Secured
Contracts. Neither the Company nor any replacement Servicer will be required by
any Agreement to undertake any such evaluations prior to foreclosure or
accepting a deed-in-lieu of foreclosure. The Company does not make any
representations or warranties or assume any liability with respect to the
absence or effect of contaminants on any related real property or any casualty
resulting from the presence or effect of contaminants. However, the Company
will not foreclose on related real property or accept a deed-in-lieu of
foreclosure if it knows or reasonably believes that there are material
contaminated conditions on such property. A failure so to foreclose may reduce
the amounts otherwise available to Certificateholders of the related Series.
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, deed to secured debt 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 each Agreement
that each Contract complies with all requirements of law. Accordingly, if any
Obligor has a claim against the related Trust Fund for violation of any law and
such claim materially adversely affects the Trust Fund'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."
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.
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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 prohibit a broad range of
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 Fund), 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 Fund 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 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 Fund and cause the Company, the Trust Fund, 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 Fund, including the
assets held in the Trust Fund, 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 Fund, 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 Fund 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 Fund 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 Fund, 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
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of the Trust Fund being deemed to be Plan Assets and subject to the prohibited
transaction provisions of ERISA and the Code and will not subject the Trustee,
the Trust Fund, the Company or the Servicer to any obligation or 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 proposes 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.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of certain federal income tax
consequences relating to the purchase, ownership, and disposition of the
Certificates. The discussion is based upon laws, regulations, rulings, and
decisions now in effect, including Treasury Regulations issued on December 23,
1992, and generally effective for REMICs with startup days on or after November
12, 1991 (the "REMIC Regulations"), all of which are subject to change or
possibly differing interpretations. The discussion does not purport to deal
with federal income tax consequences applicable to all categories of investors,
some of which may be subject to special rules. Investors should consult their
own tax advisors to determine the federal, state, local, and any other tax
consequences of the purchase, ownership, and disposition of the Certificates.
Many aspects of the federal tax treatment of the purchase, ownership, and
disposition of the Certificates will depend upon whether an election is made to
treat the Trust Fund or a segregated portion thereof evidenced by a particular
Series or sub-series of Certificates as a REMIC within the meaning of Section
860D(a) of the Code. The Prospectus Supplement for each series will indicate
whether or not an election to be treated as a REMIC has been or will be made
with respect thereto. The following discussion deals first with Series with
respect to which a REMIC Election is made and then with Series with respect to
which a REMIC Election is not made.
REMIC SERIES
With respect to each Series of Certificates for which a REMIC Election is
made, the counsel to the Company identified in the applicable Prospectus
Supplement will have advised the Company that in its opinion, assuming (i) the
making of that election in accordance with the requirements of the Code and
(ii) ongoing compliance with the applicable Agreement, at the initial issuance
of the Certificates in such series the Trust Fund will qualify as a REMIC and
the Certificates in such a Series ("REMIC Certificates") will be treated either
as regular interests in the REMIC within the meaning of Section 860G(a)(1) of
the Code ("Regular Certificates") or as residual interests in the REMIC within
the meaning of Section 860G(a)(2) of the Code ("Residual Certificates").
Qualification as a REMIC. Qualification as a REMIC involves ongoing
compliance with certain requirements and the following discussion assumes that
such requirements will be satisfied by the Trust Fund so long as there are any
REMIC Certificates outstanding. Substantially all of the assets of the REMIC
must consist of "qualified mortgages" and "permitted investments" as of the
close of the third month beginning after the day on which the REMIC issues all
of its regular and residual interests (the "Startup Day") and at all times
thereafter. The term "qualified mortgage" means any obligation (including a
participation or
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certificate of beneficial ownership in such obligation) which is principally
secured by an interest in real property that is transferred to the REMIC on the
Startup Day in exchange for regular or residual interests in the REMIC or is
purchased by the REMIC within the three-month period beginning on the Startup
Day if such purchase is pursuant to a fixed price contract in effect on the
Startup Day. The REMIC Regulations provide that a Contract is principally
secured by an interest in real property if the fair market value of the real
property securing the Contract is at least equal to either (i) 80% of the issue
price (generally, the principal balance) of the Contract at the time it was
originated or (ii) 80% of the adjusted issue price (the then-outstanding
principal balance, with certain adjustments) of the Contract at the time it is
contributed to a REMIC. The fair market value of the underlying real property
is to be determined after taking into account other liens encumbering that real
property. Alternatively, a Contract is principally secured by an interest in
real property if substantially all of the proceeds of the Contract were used to
acquire or to improve or protect an interest in real property that, at the
origination date, is the only security for the Contract (other than the
personal liability of the obligor). A qualified mortgage also includes a
qualified replacement mortgage that is used to replace any qualified mortgage
within three months of the Startup Day or to replace a defective mortgage
within two years of the Startup Day.
"Permitted investments" consist of (a) temporary investments of cash received
under qualified mortgages before distribution to holders of interests in the
REMIC ("cash-flow investments"), (b) amounts, such as a Reserve Fund, if any,
reasonably required to provide for full payment of expenses of the REMIC, the
principal and interest due on regular or residual interests in the event of
defaults on qualified mortgages, lower than expected returns on cash-flow
investments, prepayment interest shortfalls or certain other contingencies
("qualified reserve assets"), and (c) certain property acquired as a result of
foreclosure of defaulted qualified mortgages ("foreclosure property"). A
reserve fund will not be qualified if more than 30% of the gross income from
the assets in the reserve fund is derived from the sale or other disposition of
property held for three months or less, unless such sale is necessary to
prevent a default in payment of principal or interest on Regular Certificates.
In accordance with Section 860G(a)(7) of the Code, a reserve fund must be
"promptly and appropriately" reduced as payments on contracts are received.
Foreclosure property will be a permitted investment only to the extent that
such property is not held for more than two years.
The Code requires that in order to qualify as a REMIC an entity must make
reasonable arrangements designed to ensure that certain specified entities,
generally including governmental entities or other entities that are exempt
from United States tax, including the tax on unrelated business income
("Disqualified Organizations"), not hold residual interests in the REMIC.
Consequently, it is expected that in the case of any Trust Fund for which a
REMIC Election is made the transfer, sale, or other disposition of a Residual
Certificate to a Disqualified Organization will be prohibited and the ability
of a Residual Certificate to be transferred will be conditioned on the
Trustee's receipt of a certificate or other document representing that the
proposed transferee is not a Disqualified Organization. The transferor of a
Residual Certificate must not, as of the time of the transfer, have actual
knowledge that such representation is false. The Code further requires that
reasonable arrangements must be made to enable a REMIC to provide the Internal
Revenue Service (the "Service") and certain other parties, including
transferors of residual interests in a REMIC, with the information needed to
compute the tax imposed by Section 860E(e)(1) of the Code if, in spite of the
steps taken to prevent Disqualified Organizations from holding residual
interests, such an organization does, in fact, acquire a residual interest. See
"REMIC Series--Restrictions on Transfer of Residual Certificates" below.
If the Trust Fund fails to comply with one or more of the ongoing
requirements for qualification as a REMIC, the Trust Fund will not be treated
as a REMIC for the year during which such failure occurs and thereafter unless
the Service determines, in its discretion, that such failure was inadvertent
(in which case, the Service may require any adjustments which it deems
appropriate). If the ownership interests in the assets of the Trust Fund
consist of multiple classes, failure to treat the Trust Fund as a REMIC may
cause the Trust Fund to be treated as an association taxable as a corporation.
Such treatment could result in income of the Trust Fund being subject to
corporate tax in the hands of the Trust Fund and in a reduced amount being
available for distribution to Certificateholders as a result of the payment of
such taxes.
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Two-Tier REMIC Structures. For certain series of Certificates, two separate
elections may be made to treat segregated portions of the assets of a single
Trust Fund as REMICs for federal income tax purposes (respectively, the
"Subsidiary REMIC" and the "Master REMIC"). Upon the issuance of any such
series of Certificates, Counsel will have advised the Company, as described
above, that at the initial issuance of the Certificates, the Subsidiary REMIC
and the Master REMIC will each qualify as a REMIC for federal income tax
purposes, and that the Certificates in such a series will be treated either as
Regular Certificates or Residual Certificates of the appropriate REMIC. Only
REMIC Certificates issued by the Master REMIC will be offered hereunder. Solely
for the purpose of determining whether such Regular Certificates will
constitute qualifying real estate or real property assets for certain
categories of financial institutions or real estate investment trusts as
described below, both REMICs in a two-tier REMIC structure will be treated as
one. See the discussion below under "REMIC Series--Taxation of Regular
Interests."
Taxation of Regular Interests. Regular Certificates will be treated as new
debt instruments issued by the REMIC on the Startup Day. If a Regular
Certificate represents an interest in a REMIC that consists of a specified
portion of the interest payments on the REMIC's qualified mortgages, the stated
principal amount with respect to that Regular Certificate may be zero. Such a
specified portion may consist of a fixed number of basis points, a fixed
percentage of interest or a qualified variable rate on some or all of the
qualified mortgages. Stated interest on a Regular Certificate will be taxable
as ordinary income. Holders of Regular Certificates that would otherwise report
income under a cash method of accounting will be required to report income with
respect to such Regular Certificates under the accrual method. Under Temporary
Treasury Regulations, if a Trust Fund, with respect to which a REMIC Election
is made, is considered to be a "single-class REMIC," a portion of the REMIC's
servicing fees, administrative and other non-interest expenses, including
assumption fees and late payment charges retained by the Company, will be
allocated as a separate item of gross income and as a separate item of expense
to those Regular Certificateholders that are "pass-through interest holders."
Generally, a single-class REMIC is defined as a REMIC that would be treated as
a fixed investment trust under applicable law but for its qualification as a
REMIC, or a REMIC that is substantially similar to an investment trust but is
structured with the principal purpose of avoiding this allocation requirement
imposed by the Temporary Treasury Regulations. Generally, a pass-through
interest holder refers to individuals, trusts and estates, certain other pass-
through entities beneficially owned by one or more individuals, trusts or
estates, and regulated investment companies. Such an individual, estate, trust
or pass-through entity that holds a Regular Certificate in such a REMIC will be
allowed to deduct the foregoing separate item of expense under Section 212 of
the Code only to the extent that, in the aggregate and combined with certain
other itemized deductions, it exceeds 2% of the adjusted gross income of the
holder. In addition, Section 68 of the Code provides that the amount of
itemized deductions (including those provided for in Section 212 of the Code)
otherwise allowable for the taxable year for an individual whose adjusted gross
income exceeds a threshold amount specified in the Code ($100,000 in the case
of a joint return) will be reduced by the lesser of (i) 3% of the excess of
adjusted gross income over the specified threshold amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for such taxable year.
Furthermore, in determining the alternative minimum taxable income of such an
individual, trust, estate or pass-through entity that is a holder of a Regular
Certificate in such a REMIC, no deduction will be allowed for such holder's
allocable portion of the foregoing expenses, even though an amount equal to the
total of such expenses will be included in such holder's gross income for
alternative minimum tax purposes. Unless otherwise stated in the related
Prospectus Supplement, the foregoing expenses will not be allocated to holders
of a Regular Certificate in a REMIC. If the foregoing limitations apply,
certain holders of Regular Certificates in "single-class REMICs" may not be
entitled to deduct all or any part of the foregoing expenses. Accordingly,
Regular Certificates in such a "single class-REMIC" may not be appropriate
investments for individuals, trusts, estates or pass-through entities
beneficially owned by one or more individuals, trusts or estates. Such
prospective investors should carefully consult with their own tax advisors
prior to making an investment in any such Regular Certificates.
Tax Status of REMIC Certificates. In general, (i) Regular Certificates held
by a financial institution as described in Section 593(a) of the Code will
represent interests in "qualifying real property loans" within the meaning of
Section 593(d) of the Code; (ii) Regular Certificates held by a thrift
institution taxed as a
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"domestic building and loan association" within the meaning of Section
7701(a)(19) of the Code will constitute "a regular ... interest in a REMIC"
within the meaning of Section 7701(a)(19)(C)(xi) of the Code; and (iii) Regular
Certificates held by a real estate investment trust will constitute "real
estate assets" within the meaning of Section 856(c)(5)(A) of the Code and
interest thereon will be considered "interest on obligations secured by
mortgages on real property" within the meaning of Section 856(c)(3)(B) of the
Code. If less than 95% of the average adjusted basis of the assets comprising
the REMIC are assets qualifying under any of the foregoing Sections of the Code
(including assets described in Section 7701(a)(19)(C) of the Code), then the
Regular Certificates will be qualifying assets only to the extent that the
assets comprising the REMIC are qualifying assets. Furthermore, interest paid
with respect to Certificates held by a real estate investment trust will be
considered "interest on obligations secured by mortgages on real property or on
interests in real property" within the meaning of Section 856(c)(3)(B) of the
Code to the same extent that the Certificates themselves are treated as real
estate assets. Regular Certificates held by a regulated investment company or a
real estate investment trust will not constitute "Government securities" within
the meaning of Sections 851(b)(4)(A)(i) and 856(c)(5)(A) of the Code,
respectively. In addition, the REMIC Regulations provide that payments on
Contracts held and reinvested pending distribution to Certificateholders will
be considered to be "qualifying real property loans" within the meaning of
Section 593(d) of the Code and "real estate assets" within the meaning of
Section 856(c)(5)(A) of the Code. Entities affected by the foregoing provisions
of the Code that are considering the purchase of Certificates should consult
their own tax advisors regarding these provisions.
Original Issue Discount. Regular Certificates may be issued with "original
issue discount." Rules governing original issue discount are set forth in
Sections 1271-1273 and 1275 of the Code and the Treasury Regulations issued
thereunder in January 1994 (the "OID Regulations"). The discussion herein is
based in part on the OID Regulations, which generally apply to debt instruments
issued on or after April 4, 1994, but which generally may be relied upon for
debt instruments issued after December 21, 1992. Moreover, although the rules
relating to original issue discount contained in the Code were modified by the
Tax Reform Act of 1986 specifically to address the tax treatment of securities,
such as the Regular Certificates, on which principal is required to be prepaid
based on prepayments of the underlying assets, regulations under that
legislation have not yet been issued. Nonetheless, the Code requires that a
prepayment assumption be used with respect to the underlying assets of a REMIC
in computing the accrual of original issue discount on Regular Certificates,
and that regular adjustments be made in the amount and the rate of accrual to
reflect differences between the actual prepayment rate and the prepayment
assumption. Although regulations have not been issued concerning the use of a
prepayment assumption, the legislative history associated with the Tax Reform
Act of 1986 indicates that such regulations are to provide that the prepayment
assumption used with respect to a Regular Certificate must be the same as that
used in pricing the initial offering of such Regular Certificate. The
prepayment assumption (the "Prepayment Assumption") used in reporting original
issue discount for each series of Regular Certificates will be consistent with
this standard and will be disclosed in the related Prospectus Supplement.
However, no representation is made hereby nor can there be any assurance that
the underlying assets of a REMIC will in fact prepay at a rate conforming to
the prepayment assumption or at any other rate. Certificateholders also should
be aware that the OID Regulations do not address certain issues relevant to, or
are not applicable to, prepayable securities such as the Regular Certificates.
In general, in the hands of the original holder of a Regular Certificate,
original issue discount, if any, is the difference between the "stated
redemption price at maturity" of the Regular Certificate and its "issue price."
The original issue discount with respect to a Regular Certificate will be
considered to be zero if it is less than .25% of the Regular Certificate's
stated redemption price at maturity multiplied by the number of complete years
from the date of issue of such Regular Certificate to its maturity date. The
OID Regulations, however, provide a special de minimis rule to apply to
obligations such as the Regular Certificates that have more than one principal
payment or that have interest payments that are not qualified stated interest
as defined in the OID Regulations, payable before maturity ("installment
obligations"). Under the special rule, original issue discount on an
installment obligation is generally considered to be zero if it is less than
.25% of the principal amount of the obligation multiplied by the weighted
average maturity of the obligation as defined
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in the OID Regulations. Because of the possibility of prepayments, it is not
clear whether or how the de minimis rules will apply to the Regular
Certificates. As described above, it appears that the Prepayment Assumption
will be required to be used in determining the weighted average maturity of the
Regular Certificates. In the absence of authority to the contrary, the Company
expects to apply the de minimis rule applicable to installment obligations by
using the Prepayment Assumption.
Generally, the original holder of a Regular Certificate that includes a de
minimis amount of original issue discount (other than de minimis original issue
discount attributable to a so-called "teaser" interest rate or initial interest
rate holiday) includes that original issue discount in income as principal
payments are made. The amount includable in income with respect to each
principal payment equals a pro rata portion of the entire amount of de minimis
original issue discount with respect to that Regular Certificate. Any de
minimis amount of original issue discount includable in income by a holder of a
Regular Certificate is generally treated as a capital gain if the Regular
Certificate is a capital asset in the hands of the holder thereof. Pursuant to
the OID Regulations, a holder of a Regular Certificate that uses the accrual
method of tax accounting or that acquired such Regular Certificate on or after
April 4, 1994, may, however, elect to include in gross income all interest that
accrues on a Regular Certificate, including any de minimis original issue
discount and market discount, by using the constant yield method described
below with respect to original issue discount.
The stated redemption price at maturity of a Regular Certificate generally
will be equal to the sum of all payments, whether denominated as principal or
interest, to be made with respect thereto other than "qualified stated
interest." Pursuant to the OID Regulations, qualified stated interest is stated
interest that is unconditionally payable at least annually at a single fixed
rate of interest (or, under certain circumstances, a variable rate tied to an
objective index) during the entire term of the Regular Certificate (including
short periods). Under the OID Regulations, interest is considered
unconditionally payable only if late payment or nonpayment is expected to be
penalized or reasonable remedies exist to compel payment. It is possible that
interest payable on Regular Certificates may not be considered to be
unconditionally payable under the OID Regulations because Regular
Certificateholders may not have default remedies ordinarily available to
holders of debt instruments. Until further guidance is issued, however, the
REMIC will treat the interest on Regular Certificates as unconditionally
payable under the OID Regulations. In addition, under the OID Regulations,
certain variable interest rates payable on Regular Certificates, including
rates based upon the weighted average interest rate of a Pool of Contracts, may
not be treated as qualified stated interest. In such case, the OID Regulations
would treat interest under such rates as contingent interest which generally
must be included in income by the Regular Certificateholder when the interest
becomes fixed, as opposed to when it accrues. Until further guidance is issued
concerning the treatment of such interest payable on Regular Certificates, the
REMIC will treat such interest as being payable at a variable rate tied to a
single objective index of market rates. Prospective investors should consult
their tax advisors regarding the treatment of such interest under the OID
Regulations. In the absence of authority to the contrary and if otherwise
appropriate, the Company expects to determine the stated redemption price at
maturity of a Regular Certificate by assuming that the anticipated rate of
prepayment for all Contracts will occur in such a manner that the initial Pass-
Through Rate for a Certificate will not change. Accordingly, interest at the
initial Pass-Through Rate will constitute qualified stated interest payments
for purposes of applying the original issue discount provisions of the Code. In
general, the issue price of a Regular Certificate is the first price at which a
substantial amount of the Regular Certificates of such class are sold for money
to the public (excluding bond houses, brokers or similar persons or
organizations acting in the capacity of underwriters, placement agents or
wholesalers). If a portion of the initial offering price of a Regular
Certificate is allocable to interest that has accrued prior to its date of
issue, the issue price of such a Regular Certificate includes that pre-issuance
accrued interest.
If the Regular Certificates are determined to be issued with original issue
discount, a holder of a Regular Certificate must generally include the original
issue discount in ordinary gross income for federal income tax purposes as it
accrues in advance of the receipt of any cash attributable to such income. The
amount of original issue discount, if any, required to be included in a Regular
Certificateholder's ordinary gross income for federal income tax purposes in
any taxable year will be computed in accordance with Section 1272(a) of
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the Code and the OID Regulations. Under such Section and the OID Regulations,
original issue discount accrues on a daily basis under a constant yield method
that takes into account the compounding of interest. The amount of original
issue discount to be included in income by a holder of a debt instrument, such
as a Regular Certificate, under which principal payments may be subject to
acceleration because of prepayments of other debt obligations securing such
instruments, is computed by taking into account the Prepayment Assumption.
The amount of original issue discount includable in income by a holder of a
Regular Certificate is the sum of the "daily portions" of the original issue
discount for each day during the taxable year on which the holder held the
Regular Certificate. The daily portions of original issue discount are
determined by allocating to each day in any "accrual period" a pro rata portion
of the excess, if any, of the sum of (i) the present value of all remaining
payments to be made on the Regular Certificate as of the close of the "accrual
period" and (ii) the payments during the "accrual period" of amounts included
in the stated redemption price of the Regular Certificate over the "adjusted
issue price" of the Regular Certificate at the beginning of the "accrual
period." Generally, the "accrual period" for the Regular Certificates
corresponds to the intervals at which amounts are paid or compounded with
respect to such Regular Certificate, beginning with their date of issuance and
ending with the maturity date. The "adjusted issue price" of a Regular
Certificate at the beginning of any accrual period is the sum of the issue
price and accrued original issue discount for each prior accrual period reduced
by the amount of payments other than payments of qualified stated interest made
during each prior accrual period. The Code requires the present value of the
remaining payments to be determined on the bases of (a) the original yield to
maturity (determined on the basis of compounding at the close of each accrual
period and properly adjusted for the length of the accrual period), (b) events,
including actual prepayments, which have occurred before the close of the
accrual period, and (c) the assumption that the remaining payments will be made
in accordance with the original Prepayment Assumption. The effect of this
method is to increase the portions of original issue discount that a Regular
Certificateholder must include in income to take into account prepayments with
respect to the Contracts held by the Trust Fund that occur at a rate that
exceeds the Prepayment Assumption and to decrease (but not below zero for any
period) the portions of original issue discount that a Regular
Certificateholder must include in income to take into account prepayments with
respect to the Contracts that occur at a rate that is slower than the
Prepayment Assumption. Although original issue discount will be reported to
Regular Certificateholders based on the Prepayment Assumption, no
representation is made to Regular Certificateholders that the Contracts will be
prepaid at that rate or at any other rate.
A subsequent purchaser of a Regular Certificate will also be required to
include in such purchaser's ordinary gross income for federal income tax
purposes the original issue discount, if any, accruing with respect to such
Regular Certificate, unless the price paid equals or exceeds the Regular
Certificate's remaining stated redemption price. If the price paid exceeds the
Regular Certificate's adjusted issue price, but does not equal or exceed the
remaining stated redemption price of the Regular Certificate, the amount of
original issue discount to be accrued will be reduced in accordance with a
formula set forth in Section 1272(a)(7)(B) of the Code. Under this provision,
the daily portions of original issue discount which must be included in gross
income will be reduced by an amount equal to such daily portion multiplied by
the fraction obtained by dividing (i) the excess of the purchase price therefor
over the Regular Certificate's adjusted issue price by (ii) the aggregate
original issue discount remaining to be accrued with respect to such Regular
Certificate.
The Company believes that the holder of a Regular Certificate determined to
be issued with non-de minimis original issue discount will be required to
include the original issue discount in ordinary gross income for federal income
tax purposes computed in the manner described above. However, the OID
Regulations either do not address or are subject to varying interpretations
with respect to several issues concerning the computation of original issue
discount for obligations such as the Regular Certificates.
Adjustable Rate Regular Certificates. Regular Certificates may bear interest
at an adjustable rate. Under the OID Regulations, if an adjustable rate Regular
Certificate provides for qualified stated interest payments computed on the
basis of certain qualified floating rates or objective rates, then any original
issue discount on
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such a Regular Certificate may be computed and accrued under the same
methodology that applies to Regular Certificates paying qualified stated
interest at a fixed rate. See the discussion above under "REMIC Series--
Original Issue Discount." If adjustable rate Regular Certificates are issued,
the related Prospectus Supplement will describe the manner in which the
original issue discount rules may be applied with respect thereto and the
method to be used in preparing information returns to the holders of such
adjustable rate Regular Certificates and to the Service.
For purposes of applying the original issue discount provisions of the Code,
all or a portion of the interest payable with respect to adjustable rate
Regular Certificate may not be treated as qualified stated interest in certain
circumstances, including the following: (i) if the adjustable rate of interest
is subject to one or more minimum or maximum rate floors or ceilings which are
not fixed throughout the term of the Regular Certificate and which are
reasonably expected as of the issue date to cause the rate in certain accrual
periods to be significantly higher or lower than the overall expected return on
the Regular Certificate determined without such floor or ceiling; (ii) if it is
reasonably expected that the average value of the adjustable rate during the
first half of the term of the Regular Certificate will be either significantly
less than or significantly greater than the average value of the rate during
the final half of the term of the Regular Certificate; or (iii) if interest is
not payable in all circumstances. In these situations, as well as others, it is
unclear under the OID Regulations whether such interest payments constitute
qualified stated interest payments, or must be treated as part of a Regular
Certificate's stated redemption price at maturity resulting in original issue
discount.
Market Discount. Regular Certificates, whether or not issued with original
issue discount, will be subject to the market discount rules of the Code. A
purchaser of a Regular Certificate who purchases the Regular Certificate at a
market discount (i.e., a discount from its original issue price plus any
accrued original issue discount, if any, as described above) will be required
to recognize accrued market discount as ordinary income as payments of
principal are received on such Regular Certificate or upon the sale or exchange
of the Regular Certificate. Section 1276(b)(3) of the Code authorizes the
issuance of regulations providing for the method for accruing market discount
on debt instruments, the principal of which is payable in more than one
installment, such as a Regular Certificate. Until such regulations are issued,
the legislative history associated with this provision indicates certain
methods which are to be used. In general, the holder of a Regular Certificate
may elect to treat market discount as accruing either (i) under a constant
yield method that is similar to the method for the accrual of original issue
discount or (ii) in proportion to accruals of original issue discount (or, if
there is no original issue discount, in proportion to accruals of stated
interest), in each case computed taking into account the Prepayment Assumption.
Because the regulations referred to above have not been issued, it is not
possible to predict what effect, if any, such regulations, when issued, might
have on the tax treatment of a Regular Certificate purchased at a discount in
the secondary market.
The Code provides that the market discount in respect of a Regular
Certificate will be considered to be zero if the amount allocable to the
Regular Certificate is less than 0.25% of the Regular Certificate's stated
redemption price at maturity multiplied by the number of complete years
remaining to its maturity after the holder acquired the obligation. If market
discount is treated as de minimis under this rule, the actual discount would be
allocated among a portion of each scheduled distribution representing the
stated redemption price of such Regular Certificate and that portion of the
discount allocable to such distribution would be reported as income when such
distribution occurs or is due.
The Code further provides that any principal payment with respect to a
Regular Certificate acquired with market discount or any gain on disposition of
such a Regular Certificate shall be treated as ordinary income to the extent it
does not exceed the accrued market discount at the time of such payment. The
amount of accrued market discount for purposes of determining the amount of
ordinary income to be recognized with respect to subsequent payments on such a
Regular Certificate is to be reduced by the amount previously treated as
ordinary income.
In general, limitations imposed by the Code that are intended to match
deductions with the taxation of income may require a holder of a Regular
Certificate having market discount to defer a portion of the interest
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deductions attributable to any indebtedness incurred or continued to purchase
or carry such Regular Certificate. Alternatively, a holder of a Regular
Certificate may elect to include market discount in gross income as it accrues
and, if he makes such an election, is exempt from this rule. The adjusted basis
of a Regular Certificate subject to such election will be increased to reflect
market discount included in gross income, thereby reducing any gain or
increasing any loss on a sale or taxable disposition.
Amortizable Premium. A holder of a Regular Certificate who holds the Regular
Certificate as a capital asset and who purchased the Regular Certificate at a
cost greater than its stated redemption price will be considered to have
purchased the Regular Certificate at a premium. In general, the Regular
Certificateholder may elect to deduct the amortizable bond premium as it
accrues under a constant yield method. A Regular Certificateholder's tax basis
in the Regular Certificate will be reduced by the amount of the amortizable
bond premium deducted. In addition, it appears that the same methods which
apply to the accrual of market discount on installment obligations are intended
to apply in computing the amortizable bond premium deduction with respect to a
Regular Certificate. Accordingly, (i) such methods should include the
alternatives to the constant-yield method which may be available for the
accrual of market discount and (ii) the Prepayment Assumption should be taken
into account in determining the term of a Regular Certificate for this purpose.
Certificateholders who pay a premium for a Regular Certificate should consult
their tax advisors concerning such an election and rules for determining the
method for amortizing bond premium.
Realized Losses. Holders of a Regular Certificate acquired in connection with
a trade or business should be allowed to deduct as ordinary losses any losses
sustained during a taxable year in which the Regular Certificates become wholly
or partially worthless as a result of one or more realized losses on the
underlying assets of the REMIC. However, it appears that a noncorporate holder
of a Regular Certificate that does not acquire such certificate in connection
with a trade or business may not be entitled to deduct such a loss until such
holder's certificate becomes wholly worthless, which may not occur until its
outstanding principal balance has been reduced to zero. Any such loss may be
characterized as a short-term capital loss.
At present, the law is unclear with respect to the timing and character of
any loss which may be realized by a holder of a Regular Certificate. Such a
holder may be required to accrue interest and original issue discount with
respect to such Regular Certificate without giving effect to any defaults or
deficiencies on the underlying assets of the REMIC until such holder can
establish that such losses will not be recoverable under any circumstances. As
a result, the holder of a Regular Certificate may be required to report taxable
income in excess of the amount of economic income actually accruing to the
benefit of such holder in a particular period. It is expected, however, that
the holder of such a Regular Certificate would eventually recognize a loss or
reduction in income attributable to such income when such loss is, in fact,
realized for federal income tax purposes.
Gain or Loss on Disposition. If a Regular Certificate is sold, the seller
will recognize gain or loss equal to the difference between the amount realized
from the sale and the seller's adjusted basis in such Regular Certificate. The
adjusted basis generally will equal the cost of such Regular Certificate to the
seller, increased by any original issue discount included in the seller's
ordinary gross income with respect to such Regular Certificate and reduced (but
not below zero) by any payments on the Regular Certificate previously received
or accrued by the seller (other than qualified stated interest payments) and
any amortizable premium. Similarly, a Regular Certificateholder who receives a
principal payment with respect to a Regular Certificate will recognize gain or
loss equal to the difference between the amount of the payment and the holder's
allocable portion of his or her adjusted basis in the Regular Certificate.
Except as discussed below or with respect to market discount, any gain or loss
recognized upon a sale, exchange, retirement, or other disposition of a Regular
Certificate will be capital gain if the Regular Certificate is held as a
capital asset.
Gain from the disposition of a Regular Certificate that might otherwise be
capital gain, including any gain attributable to de minimis original issue
discount or market discount, will be treated as ordinary income to the extent
of the excess, if any, of (i) the amount that would have been includable in the
holder's income if
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the yield on such Regular Certificate had equaled 110% of the applicable
federal rate determined as of the beginning of such holder's holding period,
over (ii) the amount of ordinary income actually recognized by the holder with
respect to such Regular Certificate.
Taxation of Residual Interests. Generally, the "daily portions" of the
taxable income or net loss of a REMIC will be includable as ordinary income or
loss in determining the taxable income of holders of Residual Certificates
("Residual Holders"), and will not be taxed separately to the REMIC. The daily
portions are determined by allocating the REMIC's taxable income or net loss
for each calendar quarter ratably to each day in such quarter and by allocating
such daily portion among the Residual Holders in proportion to their respective
holdings of Residual Certificates in the REMIC on such day.
REMIC taxable income is generally determined in the same manner as the
taxable income of an individual using the accrual method of accounting except
that (i) the limitation on deductibility of investment interest expense and
expenses for the production of income do not apply, (ii) all bad loans will be
deductible as business bad debts, and (iii) the limitation on the deductibility
of interest and expenses related to tax-exempt income will apply. REMIC taxable
income generally means a REMIC's gross income, including interest, original
issue discount income, and market discount income, if any, on the Contracts,
plus any cancellation of indebtedness income due to realized losses with
respect to Regular Certificates and income on reinvestment of cash flows and
reserve assets, minus deductions, including interest and original issue
discount expense on the Regular Certificates, bad debt losses with respect to
the underlying assets of a REMIC, servicing fees on the Contracts, other
administrative expenses of a REMIC, and amortization of premium, if any, with
respect to the Contracts.
The taxable income recognized by a Residual Holder in any taxable year will
be affected by, among other factors, the relationship between the timing of
interest, original issue discount or market discount income, or amortization of
premium with respect to the Contracts, on the one hand, and the timing of
deductions for interest (including original issue discount) on the Regular
Certificates, on the other hand. In the event that an interest in the Contracts
is acquired by a REMIC at a discount, and one or more of such Contracts is
prepaid, the Residual Holder may recognize taxable income without being
entitled to receive a corresponding cash distribution because (i) the
prepayment may be used in whole or in part to make distributions on Regular
Certificates, and (ii) the discount on the Contracts which is includable in a
REMIC's income may exceed its deduction with respect to the distributions on
those Regular Certificates. When there is more than one class of Regular
Certificates that receive payments sequentially (i.e., a fast-pay, slow-pay
structure), this mismatching of income and deductions is particularly likely to
occur in the early years following issuance of the Regular Certificates, when
distributions are being made in respect of earlier classes of Regular
Certificates to the extent that such classes are not issued with substantial
discount. If taxable income attributable to such a mismatching is realized, in
general, losses would be allowed in later years as distributions on the later
classes of Regular Certificates are made. Taxable income may also be greater in
earlier years than in later years as a result of the fact that interest expense
deductions, expressed as a percentage of the outstanding principal amount of
Regular Certificates, may increase over time as distributions are made on the
lower yielding classes of Regular Certificates, whereas interest income with
respect to any given Contract will remain constant over time as a percentage of
the outstanding principal amount of that loan (assuming it bears interest at a
fixed rate). Consequently, Residual Holders must have sufficient other sources
of cash to pay any federal, state, or local income taxes due as a result of
such mismatching, or such holders must have unrelated deductions against which
to offset such income, subject to the discussion of "excess inclusions" below
under "REMIC Series--Limitations on Offset or Exemption of REMIC Income." The
mismatching of income and deductions described in this paragraph, if present
with respect to a series of Certificates, may have a significant adverse effect
upon the Residual Holder's after-tax rate of return.
The amount of any net loss of a REMIC that may be taken into account by the
Residual Holder is limited to the adjusted basis of the Residual Certificate as
of the close of the quarter (or time of disposition of the Residual Certificate
if earlier), determined without taking into account the net loss for the
quarter. The initial adjusted basis of a purchaser of a Residual Certificate is
the amount paid for such Residual Certificate.
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Such adjusted basis will be increased by the amount of taxable income of the
REMIC reportable by the Residual Holder and decreased (but not below zero) by
the amount of loss of the REMIC reportable by the Residual Holder. A cash
distribution from the REMIC also will reduce such adjusted basis (but not below
zero). Any loss that is disallowed on account of this limitation may be carried
over indefinitely by the Residual Holder for whom such loss was disallowed and
may be used by such Residual Holder only to offset any income generated by the
same REMIC.
If a Residual Certificate has a negative value, it is not clear whether its
issue price would be considered to be zero or such negative amount for purposes
of determining the REMIC's basis in its assets. The REMIC Regulations imply
that residual interests cannot have a negative basis or a negative issue price.
However, the preamble to the REMIC Regulations indicates that, while existing
tax rules do not accommodate such concepts, the Service is considering the tax
treatment of these types of residual interests, including the proper tax
treatment of a payment made by the transferor of such a residual interest to
induce the transferee to acquire that interest. Absent regulations or
administrative guidance to the contrary, the Company does not intend to treat a
class of Residual Certificates as having a value of less than zero for purposes
of determining the basis of the related REMIC in its assets.
Further, to the extent that the initial adjusted basis of a Residual Holder
(other than an original holder) in the Residual Certificate is in excess of the
corresponding portion of the REMIC's basis in the Contracts, the Residual
Holder will not recover such excess basis until termination of the REMIC unless
Treasury Regulations yet to be issued provide for periodic adjustments to the
REMIC income otherwise reportable by such holder.
Treatment of Certain Items of REMIC Income and Expense. Generally, a REMIC's
deductions for original issue discount will be determined in the same manner,
and subject to the same uncertainties, as original issue discount income on
Regular Certificates as described above under "REMIC Series--Original Issue
Discount" and "--Adjustable Rate Regular Certificates," without regard to the
de minimis rule described therein.
The REMIC will have market discount income in respect of the Contracts if, in
general, the basis of the REMIC in such Contracts is exceeded by their unpaid
principal balances. The REMIC's basis in such Contracts is generally the fair
market value of the Contracts immediately after the transfer thereof to the
REMIC (which will equal the aggregate issue prices of the REMIC Certificates
which are sold to investors and the estimated fair market value of any classes
of Certificates which are retained). In respect of the Contracts that have
market discount to which Code Section 1276 applies, the accrued portion of such
market discount would be recognized currently as an item of ordinary income.
Market discount income generally should accrue in the manner described above
under "REMIC Series--Market Discount."
Generally, if the basis of a REMIC in the Contracts exceeds the unpaid
principal balances thereof, the REMIC will be considered to have acquired such
Contracts at a premium equal to the amount of such excess. As stated above, the
REMIC's basis in the Contracts is the fair market value of the Contracts
immediately after the transfer thereof to the REMIC. Generally, a REMIC that
holds a Contract as a capital asset will elect to amortize premium on the
Contracts under a constant interest method. See the discussion under "REMIC
Series--Amortizable Premium."
Limitations on Offset or Exemption of REMIC Income. Subject to an exception
described below, which applies only if the aggregate value of the Residual
Certificates relative to the aggregate value of the Regular Certificates and
Residual Certificates is considered to be "significant," as described below, a
portion (or all) of the REMIC taxable income includable in determining the
federal income tax liability of a Residual Holder will be subject to special
treatment. That portion, referred to as the "excess inclusion," is equal to the
excess of REMIC taxable income for the calendar quarter allocable to a Residual
Certificate over the daily accruals for such quarterly period of (i) 120% of
the long-term applicable Federal rate that would have applied to the Residual
Certificate (if it were a debt instrument) on the Startup Day under Section
1274(d) of the Code,
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multiplied by (ii) the adjusted issue price of such Residual Certificate at the
beginning of such quarterly period. For this purpose, the adjusted issue price
of a Residual Certificate at the beginning of a quarter is the issue price of
the Residual Certificate, plus the amount of such daily accruals of REMIC
income described in this paragraph for all prior quarters, decreased by any
distributions made with respect to such Residual Certificate prior to the
beginning of such quarterly period. The value of the Residual Certificates
would be considered significant in cases where the aggregate issue price of the
Residual Certificates is at least 2% of the aggregate issue price of the
Regular Certificates and Residual Certificates, and the anticipated weighted
average life of the Residual Certificates is at least 20% of the anticipated
weighted average life of the REMIC.
The portion of a Residual Holder's REMIC taxable income consisting of the
excess inclusions generally may not be offset by other deductions on such
Residual Holder's tax return, including net operating loss carry forwards.
Further, if the Residual Holder is an organization subject to the tax on
unrelated business income imposed by Section 511 of the Code, the Residual
Holder's excess inclusions will be treated as unrelated business taxable income
of such Residual Holder for purposes of Section 511. In addition, if the
Residual Holder is not a U.S. person, such Residual Holder's excess inclusions
generally would be ineligible for exemption from or reduction in the rate of
United States withholding tax. Finally, if a real estate investment trust or
regulated investment company owns a Residual Certificate, a portion (allocated
under Treasury Regulations yet to be issued) of dividends paid by such real
estate investment trust or regulated investment company could not be offset by
net operating losses of its shareholders and would constitute unrelated
business taxable income for tax-exempt shareholders.
An exception to the inability of a Residual Holder to offset excess
inclusions with unrelated deductions and net operating losses applies to
certain financial institutions described in Section 593 of the Code ("thrift
institutions"). For purposes of applying this rule, all members of an
affiliated group filing a consolidated return are treated as one taxpayer,
except that thrift institutions to which Section 593 applies and each of their
subsidiaries formed to issue REMICs are treated as separate corporations.
Furthermore, the Code provides that regulations may be issued to disallow the
ability of a thrift institution to use deductions to offset excess inclusions
if necessary or appropriate to prevent the avoidance of tax. A thrift
institution may not so offset its excess inclusions unless the Residual
Certificates have "significant value," which requires that (i) the Residual
Certificates have an issue price that is at least equal to 2% of the aggregate
of the issue prices of all Residual Certificates and Regular Certificates with
respect to the REMIC, and (ii) the anticipated weighted average life of the
Residual Certificates is at least 20% of the anticipated weighted average life
of the REMIC. The anticipated weighted average life of the Residual
Certificates is based on all anticipated payments to be received with respect
thereto (using the Prepayment Assumption). The anticipated weighted average
life of the REMIC is the weighted average of the anticipated weighted average
lives of all classes of Certificates in the REMIC (computed using all
anticipated payments on a Regular Certificate with nominal or no principal).
Finally, an ordering rule under the REMIC Regulations provides that a thrift
institution may only offset its excess inclusion income with deductions after
it has first applied its deductions against income that is not excess inclusion
income. If this exception may be applicable, the Prospectus Supplement with
respect to a series will state that the Residual Certificates are expected to
have "significant value."
Restrictions on Transfer of Residual Certificates. As described above under
"REMIC Series--Qualification as a REMIC," an interest in a Residual Certificate
may not be transferred to a Disqualified Organization. If any legal or
beneficial interest in a Residual Certificate is, nonetheless, transferred to a
Disqualified Organization, a tax would be imposed in an amount equal to the
product of (i) the present value of the total anticipated excess inclusions
with respect to such Residual Certificate for periods after the transfer, and
(ii) the highest marginal federal income tax rate applicable to corporations.
The anticipated excess inclusions are based on actual prepayment experience to
the date of the transfer and projected payments based on the Prepayment
Assumption. The present value rate equals the applicable federal rate under
Section 1274(d) of the Code as of the date of the transfer for a term ending on
the close of the last quarter in which excess inclusions are expected to
accrue. Such rate is applied to the anticipated excess inclusions from the end
of the remaining calendar quarters in which they arise to the date of the
transfer.
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Such a tax generally would be imposed on the transferor of the Residual
Certificate, except that where such transfer is through an agent (including a
broker, nominee, or other middleman) for a Disqualified Organization, the tax
would instead be imposed on such agent. However, a transferor of a Residual
Certificate would in no event be liable for such tax with respect to a transfer
if the transferee furnishes to the transferor an affidavit, under penalties of
perjury, that the transferee is not a Disqualified Organization and, as of the
time of the transfer, the transferor does not have actual knowledge that such
affidavit is false. The tax also may be waived by the Treasury Department if
the Disqualified Organization promptly disposes of the residual interest and
the transferor pays such amount of tax as the Treasury Department may require
(presumably, a corporate tax on the excess inclusion for the period the
residual interest is actually held by the Disqualified Organization).
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Certificate during a taxable year
and a Disqualified Organization is the record holder of an equity interest in
such entity, then a tax is imposed on such entity equal to the product of (i)
the amount of excess inclusions on the Residual Certificate that are allocable
to the interest in the Pass-Through Entity during the period such interest is
held by such Disqualified Organization, and (ii) the highest marginal federal
income tax rate imposed on corporations. Such tax would be deductible from the
ordinary gross income of the Pass-Through Entity for the taxable year. The
Pass-Through Entity would not be liable for such tax if it has received an
affidavit from such record holder that it is not a Disqualified Organization
and, during the period such person is the record holder of the Residual
Certificate, the Pass-Through Entity does not have actual knowledge that such
affidavit is false.
For these purposes, a "Pass-Through Entity" means any regulated investment
company, real estate investment trust, common trust fund, partnership, trust or
estate and certain corporations operating on a cooperative basis. Except as may
be provided in Treasury Regulations, any person holding an interest in a Pass-
Through Entity as a nominee for another will, with respect to such interest, be
treated as a Pass-Through Entity.
Noneconomic Residual Interests. The REMIC Regulations would disregard certain
transfers of Residual Certificates, in which case the transferor would continue
to be treated as the owner of the Residual Certificates and thus would continue
to be subject to tax on its allocable portion of the net income of the REMIC.
Under the REMIC Regulations, a transfer of a "noneconomic residual interest"
(as defined below) to a Residual Holder is disregarded for all federal income
tax purposes if a significant purpose of the transfer is to enable the
transferor to impede the assessment or collection of tax. A residual interest
in a REMIC (including a residual interest with a positive value at issuance) is
a "noneconomic residual interest" unless, at the time of transfer, (i) the
present value of the expected future distributions on the residual interest at
least equals the product of the present value of the anticipated excess
inclusions and the highest corporate income tax rate in effect for the year in
which the transfer occurs, and (ii) the transferor reasonably expects that the
transferee will receive distributions from the REMIC at or after the time at
which taxes accrue on the anticipated excess inclusions in an amount sufficient
to satisfy the accrued taxes. The anticipated excess inclusions and the present
value rate are determined in the same manner as set forth above. The REMIC
Regulations explain that a significant purpose to impede the assessment or
collection of tax exists if the transferor, at the time of the transfer, either
knew or should have known that the transferee would be unwilling or unable to
pay taxes due on its share of the taxable income of the REMIC. A safe harbor is
provided if (i) the transferor conducted, at the time of the transfer, a
reasonable investigation of the financial condition of the transferee and found
that the transferee historically had paid its debts as they came due and found
no significant evidence to indicate that the transferee would not continue to
pay its debts as they came due in the future, and (ii) the transferee
represents to the transferor that it understands that, as the holder of a non-
economic residual interest, the transferee may incur tax liabilities in excess
of any cash flows generated by the interest and that the transferee intends to
pay taxes associated with holding the residual interest as they become due. The
Agreement with respect to each series of REMIC Certificates will require the
transferee of a Residual Certificate to certify to the statements in clause
(ii) of the preceding sentence as part of the affidavit described above under
"Restrictions on Transfer of Residual Certificates."
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Sale or Exchange of a Residual Certificate. Upon the sale or exchange of a
Residual Certificate, the Residual Holder will recognize gain or loss equal to
the excess, if any, of the amount realized over the adjusted basis as described
above of such Residual Holder in such Residual Certificate at the time of the
sale or exchange. In addition to reporting the taxable income of the REMIC, a
Residual Holder will have taxable income to the extent that any cash
distribution to him from the REMIC exceeds such adjusted basis on that
Distribution Date. Such income will be treated as gain from the sale or
exchange of the Residual Certificate. It is possible that the termination of
the REMIC may be treated as a sale or exchange of a Residual Holder's Residual
Certificate, in which case, if the Residual Holder has an adjusted basis in his
Residual Certificate remaining when his interest in the REMIC terminates, and
if he holds such Residual Certificate as a capital asset, then he will
recognize a capital loss at that time in the amount of such remaining adjusted
basis.
The Conference Committee Report to the Tax Reform Act of 1986 provides that,
except as provided in Treasury Regulations, the wash sale rules of Code Section
1091 will apply to dispositions of Residual Certificates where the seller of
the Residual Certificate, during the period beginning six months before the
sale or disposition of the Residual Certificate and ending six months after
such sale or disposition, acquires (or enters into any other transaction that
results in the application of Code Section 1091) any residual interest in any
REMIC or any interest in a "taxable mortgage pool" that is economically
comparable to a Residual Certificate.
Certain Other Taxes on the REMIC. The REMIC provisions of the Code impose a
100% tax on any net income derived by a REMIC from certain prohibited
transactions. Such transactions are: (i) any disposition of a qualified
mortgage, other than pursuant to the substitution of a qualified replacement
mortgage for a qualified mortgage (or the repurchase in lieu of substitution of
a defective obligation), a disposition incident to the foreclosure, default, or
imminent default of a mortgage, the bankruptcy or insolvency of the REMIC, or a
qualified liquidation of the REMIC; (ii) the receipt of income from assets
other than qualified mortgages and permitted investments; (iii) the receipt of
compensation for services; and (iv) the receipt of gain from the dispositions
of cash flow investments. The REMIC Regulations provide that the modification
of the terms of a Contract occasioned by default or a reasonably foreseeable
default of the Contract, the assumption of the Contract, the waiver of a due-
on-sale clause or the conversion of an interest rate by an Obligor pursuant to
the terms of a convertible adjustable-rate Contract will not be treated as a
disposition of the Contract. In the event that a REMIC holds Convertible ARM
Loans which are convertible at the option of the Obligor into fixed-rate, fully
amortizing, level payment Contracts, a sale of such Contracts by the REMIC
pursuant to a purchase agreement or other contract with the Company or other
party, if and when the Obligor elects to so convert the terms of the Contract,
will not result in a prohibited transaction for the REMIC. The Code also
imposes a 100% tax on contributions to a REMIC made after the Startup Day,
unless such contributions are payments made to facilitate a cleanup call or a
qualified liquidation of the REMIC, payments in the nature of a guaranty,
contributions during the three-month period beginning on the Startup Day or
contributions to a qualified reserve fund of the REMIC by a holder of a
residual interest in the REMIC. The Code also imposes a tax on a REMIC at the
highest corporate rate on certain net income from foreclosure property that the
REMIC derives from the management, sale, or disposition of any real property,
or any personal property incident thereto, acquired by the REMIC in connection
with the default or imminent default of a loan. Generally, it is not
anticipated that a REMIC will incur a significant amount of such taxes or any
material amount of state or local income or franchise taxes. However, if any
such taxes are imposed on a REMIC they will be paid by the Company or the
Trustee, if due to the breach of the Company's or the Trustee's obligations, as
the case may be, under the related Pooling and Servicing Agreement or in other
cases, such taxes shall be borne by the related Trust Fund resulting in a
reduction in amounts otherwise payable to holders of the related Regular or
Residual Certificates.
Liquidation of the REMIC. A REMIC may liquidate without the imposition of
entity-level tax only in a "qualified liquidation." A liquidation is considered
qualified if a REMIC adopts a plan of complete liquidation (which may be
accomplished by designating in the REMIC's final tax return a date on which
such adoption is deemed to occur) and sells all of its assets (other than cash)
within the ninety-day period beginning on the
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date of the adoption of the plan of liquidation, provided that it distributes
to holders of Regular or Residual Certificates, on or before the last day of
the ninety-day liquidation period, all the proceeds of the liquidation
(including all cash), less amounts retained to meet claims.
Taxation of Certain Foreign Investors. For purposes of this discussion, a
"Foreign Holder" is a Certificateholder who holds a Regular Certificate and who
is not (i) a citizen or resident of the United States, (ii) a corporation,
partnership, or other entity organized in or under the laws of the United
States or a political subdivision thereof or (iii) an estate or trust the
income of which is includible in gross income for United States tax purposes
regardless of its source. Unless the interest on a Regular Certificate is
effectively connected with the conduct by the Foreign Holder of a trade or
business within the United States, the Foreign Holder is not subject to federal
income or withholding tax on interest (or original issue discount, if any) on a
Regular Certificate (subject to possible backup withholding of tax, discussed
below). To qualify for this tax exemption, the Foreign Holder will be required
to provide periodically a statement signed under penalties of perjury
certifying that the Foreign Holder meets the requirements for treatment as a
Foreign Holder and providing the Foreign Holder's name and address. The
statement, which may be made on a Form W-8 or substantially similar substitute
form, generally must be provided in the year a payment occurs or in either of
the two preceding years. The statement must be provided, either directly or
through clearing organization or financial institution intermediaries, to the
person that otherwise would withhold tax. This exemption may not apply to a
Foreign Holder that owns both Regular Certificates and Residual Certificates.
If the interest on a Regular Certificate is effectively connected with the
conduct by a Foreign Holder of a trade or business within the United States,
then the Foreign Holder will be subject to tax at regular graduated rates. In
addition, the foregoing rules will not apply to exempt a U.S. shareholder of a
controlled foreign corporation from taxation on such U.S. shareholder's
allocable portion of the interest income received by such controlled foreign
corporation. Foreign Holders should consult their own tax advisors regarding
the specific tax consequences of their owning a Regular Certificate.
Any gain recognized by a Foreign Holder upon a sale, retirement or other
taxable disposition of a Regular Certificate generally will not be subject to
United States federal income tax unless either (i) the Foreign Holder is a
nonresident alien individual who holds the Regular Certificate as a capital
asset and who is present in the United States for 183 days or more in the
taxable year of the disposition and either the gain is attributable to an
office or other fixed place of business maintained in the U.S. by the
individual or the individual has a "tax home" in the United States, or (ii) the
gain is effectively connected with the conduct by the Foreign Holder of a trade
or business within the United States.
It appears that a Regular Certificate will not be included in the estate of a
Foreign Holder and will not be subject to United States estate taxes. However,
Foreign Holders should consult their own tax advisors regarding estate tax
consequences.
Unless otherwise stated in the related Prospectus Supplement, transfers of
Residual Certificates to Foreign Holders will be prohibited by the related
Agreement.
Backup Withholding. Under certain circumstances, a REMIC Certificateholder
may be subject to "backup withholding" at a 31% rate. Backup withholding may
apply to a REMIC Certificateholder who is a United States person if the holder,
among other circumstances, fails to furnish his Social Security number or other
taxpayer identification number to the Trustee. Backup withholding may apply,
under certain circumstances, to a REMIC Certificateholder who is a foreign
person if the REMIC Certificateholder fails to provide the Trustee or the REMIC
Certificateholder's securities broker with the statement necessary to establish
the exemption from federal income and withholding tax on interest on the REMIC
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. REMIC Certificateholders
should consult their tax advisors for additional information concerning the
potential application of backup withholding to payments received by them with
respect to a Certificate.
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Reporting Requirements and Tax Administration. The Company will report
annually to the Service, holders of record of the Regular Certificates that are
not excepted from the reporting requirements and, to the extent required by the
Code, other interested parties, information with respect to the interest paid
or accrued on the Regular Certificates, original issue discount, if any,
accruing on the Regular Certificates and information necessary to compute the
accrual of any market discount or the amortization of any premium on the
Regular Certificates.
The Treasury Department has issued temporary regulations concerning certain
aspects of REMIC tax administration. Under those regulations, a Residual
Certificateholder must be designated as the REMICs "tax matters person." The
tax matters person, generally, has responsibility for overseeing and providing
notice to the other Residual Certificateholders of certain administrative and
judicial proceedings regarding the REMIC's tax affairs. Unless otherwise
indicated in the related Prospectus Supplement, the Company will be designated
as tax matters person for each REMIC, and in conjunction with the Trustee will
act as the agent of the Residual Certificateholders in the preparation and
filing of the REMIC's federal and state income tax and other information
returns.
NON-REMIC SERIES
Tax Status of the Trust Fund. In the case of a Trust Fund evidenced by a
series of Certificates, or a segregated portion thereof, with respect to which
a REMIC Election is not made ("Non-REMIC Certificates"), Counsel will, unless
otherwise specified in the related Prospectus Supplement, have advised the
Company that, in their opinion, each Contract Pool and the arrangement to be
administered by the Company under which the Trustee will hold and the Company
will be obligated to service the Contracts and pursuant to which Non-REMIC
Certificates will be issued to Non-REMIC Certificateholders will not be
classified as an association taxable as a corporation or a "taxable mortgage
pool", within the meaning of Code Section 7701(i), but rather will be
classified as a grantor trust under Subpart E, Part 1 of Subchapter J of the
Code. In such event, each Non-REMIC Certificateholder will be treated as the
owner of a pro rata undivided interest in the ordinary income and corpus
portions of the trust attributable to the Contract Pool in which its
Certificate evidences an ownership interest and will be considered the
equitable owner of a pro rata undivided interest in each of the Contracts
included therein. The following discussion assumes the Trust Fund will be so
classified as a grantor trust.
Tax Status of Non-REMIC Certificates. In general, (i) Certificates held by a
financial institution taxed as described in Section 593(a) of the Code may
represent interests in "qualifying real property loans" within the meaning of
Section 593(d) of the Code; (ii) Certificates held by a "domestic building and
loan association" within the meaning of Section 7701(a)(19) of the Code may be
considered to represent "loans secured by an interest in real property" within
the meaning of Section 7701(a)(19)(C)(v) of the Code; and (iii) Certificates
held by a real estate investment trust may constitute "real estate assets"
within the meaning of Section 856(c)(5)(A) of the Code and interest thereon may
be considered "interest on obligations secured by mortgages on real property"
within the meaning of Section 856(c)(3)(B) of the Code. See the discussions of
such Code provisions above under "REMIC Series Tax Status of REMIC
Certificates." Investors should review the related Prospectus Supplement for a
discussion of the treatment of Non-REMIC Certificates and Contracts under these
Code sections and should, in addition, consult with their own tax advisors with
respect to these matters.
Tax Treatment of Non-REMIC Certificates. Non-REMIC Certificateholders will be
required to report on their federal income tax returns, and in a manner
consistent with their respective methods of accounting, their pro rata share of
the entire income arising from the Contracts comprising such Contract Pool,
including interest, market or original issue discount, if any, prepayment fees,
assumption fees, and late payment charges received by the Company, and any gain
upon disposition of such Contracts. (For purposes of this discussion, the term
"disposition," when used with respect to the Contracts, includes scheduled or
prepaid collections with respect to the Contracts, as well as the sale or
exchange of a Non-REMIC Certificate.) Non-REMIC Certificateholders will be
entitled under Section 162 or 212 of the Code to deduct their pro rata share of
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related servicing fees, administrative and other non-interest expenses,
including assumption fees and late payment charges retained by the Company. An
individual, an estate, or a trust that holds a Non-REMIC Certificate either
directly or through a pass-through entity will be allowed to deduct such
expenses under Section 212 of the Code only to the extent that, in the
aggregate and combined with certain other itemized deductions, they exceed 2%
of the adjusted gross income of the holder. In addition, Section 68 of the Code
provides that the amount of itemized deductions (including those provided for
in Section 212 of the Code) otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds a threshold amount specified in
the Code ($100,000 in the case of a joint return) will be reduced by the lesser
of (i) 3% of the excess of adjusted gross income over the specified threshold
amount or (ii) 80% of the amount of itemized deductions otherwise allowable for
such taxable year. Furthermore, in determining the alternative minimum taxable
income of an individual, trust, estate or pass-through entity that is a holder
of a Regular Certificate in such a REMIC, no deduction will be allowed for such
holder's allocable portion of the foregoing expenses, even though an amount
equal to the total of such expenses will be included in such holder's gross
income for alternative minimum tax purposes. Unless otherwise stated in the
related Prospectus Supplement, the foregoing expenses will not be allocated to
holders of a Regular Certificate in a REMIC. To the extent that a Non-REMIC
Certificateholder is not permitted to deduct servicing fees allocable to a Non-
REMIC Certificate, the taxable income of the Non-REMIC Certificateholder
attributable to that Non-REMIC Certificate will exceed the net cash
distributions related to such income. Non-REMIC Certificateholders may deduct
any loss on disposition of the Contracts to the extent permitted under the
Code.
To the extent that any of the Contracts comprising a Contract Pool were
originated on or after March 2, 1984 and under circumstances giving rise to
original issue discount, Certificateholders will be required to report annually
an amount of additional interest income attributable to such discount in such
Contracts prior to receipt of cash related to such discount. See the discussion
above under "REMIC Series--Original Issue Discount." Similarly, Code provisions
concerning market discount and amortizable premium will apply to the Contracts
comprising a Contract Pool to the extent that the loans were originated after
July 18, 1984 and September 27, 1985, respectively. See the discussions above
under "REMIC Series--Market Discount" and "REMIC Series--Amortizable Premium."
However, it is unclear whether a prepayment assumption should be used in
accruing or amortizing any such discount or premium.
Stripped Non-REMIC Certificates. Certain classes of Non-REMIC Certificates
may be subject to the stripped bond rules of Section 1286 of the Code and for
purposes of this discussion will be referred to as "Stripped Certificates." In
general, a Stripped Certificate will be subject to the stripped bond rules
where there has been a separation of ownership of the right to receive some or
all of the principal payments on a Contract from ownership of the right to
receive some or all of the related interest payments. Non-REMIC Certificates
will constitute Stripped Certificates and will be subject to these rules under
various circumstances, including the following: (i) if any servicing
compensation is deemed to exceed a reasonable amount; (ii) if the Company or
any other party retains a Retained Yield with respect to the Contracts
comprising a Contract Pool; (iii) if two or more classes of Non-REMIC
Certificates are issued representing the right to non-pro rata percentages of
the interest or principal payments on the Contracts; or (iv) if Non-REMIC
Certificates are issued which represent the right to interest only payments or
principal only payments.
Although not entirely clear, each Stripped Certificate should be considered
to be a single debt instrument issued on the day it is purchased for purposes
of calculating any original issue discount. Original issue discount with
respect to a Stripped Certificate, if any, must be included in ordinary gross
income for federal income tax purposes as it accrues in accordance with the
constant-yield method that takes into account the compounding of interest and
such accrual of income may be in advance of the receipt of any cash
attributable to such income. See "REMIC Series--Original Issue Discount" above.
For purposes of applying the original issue discount provisions of the Code,
the issue price of a Stripped Certificate will be the purchase price paid by
each holder thereof and the stated redemption price at maturity may include the
aggregate amount of all payments to be made with respect to the Stripped
Certificate whether or not denominated as interest. The amount of original
issue discount with respect to a Stripped Certificate may be treated as zero
under the
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original issue discount de minimis rules described above. A purchaser of a
Stripped Certificate will be required to account for any discount on the
certificate as market discount rather than original issue discount if either
(i) the amount of original issue discount with respect to the certificate was
treated as zero under the original issue discount de minimis rule when the
certificate was stripped or (ii) no more than 100 basis points (including any
amount of servicing in excess of reasonable servicing) is stripped off of the
Contracts. See "REMIC Series--Market Discount" above.
Although the OID Regulations suggest that a prepayment assumption is not to
be used in computing the yield on the underlying assets of a Trust Fund with
respect to which a REMIC election is not made, the Code appears to require that
such a prepayment assumption be used in computing yield with respect to
Stripped Certificates. In the absence of authority to the contrary, the Company
intends to base information reports and returns to the Service and the holders
of Stripped Certificates taking into account an appropriate prepayment
assumption. Holders of Stripped Certificates should refer to the related
Prospectus Supplement to determine whether and in what manner the original
issue discount rules will apply thereto.
When an investor purchases more than one class of Stripped Certificates it is
currently unclear whether for federal income tax purposes such classes of
Stripped Certificates should be treated separately or aggregated for purposes
of applying the original issue discount rules described above.
It is possible that the Service may take a contrary position with respect to
some or all of the foregoing tax consequences. For example, a holder of a
Stripped Certificate may be treated as the owner of (i) as many stripped bonds
or stripped coupons as there are scheduled payments of principal and/or
interest on each Contract or (ii) a separate installment obligation for each
Contract representing the Stripped Certificate's pro rata share of principal
and/or interest payments to be made with respect thereto. As a result of these
possible alternative characterizations, investors should consult their own tax
advisors regarding the proper treatment of Stripped Certificates for federal
income tax purposes.
Gain or Loss on Disposition. Upon sale or exchange of a Non-REMIC
Certificate, a Non-REMIC Certificateholder will recognize gain or loss equal to
the difference between the amount realized in the sale and its aggregate
adjusted basis in the Contracts represented by the Non-REMIC Certificate.
Generally, the aggregate adjusted basis will equal the Non-REMIC
Certificateholder's cost for the Non-REMIC Certificate increased by the amount
of any previously reported income or gain with respect to the Non-REMIC
Certificate and decreased by the amount of any losses previously reported with
respect to the Non-REMIC Certificate and the amount of any distributions
received thereon. Except as provided above with respect to the original issue
discount and market discount rules, any such gain or loss would be capital gain
or loss if the Non-REMIC Certificate was held as a capital asset.
Recharacterization of Servicing Fees. The servicing compensation to be
received by the Company may be questioned by the Service with respect to
certain Certificates or Contracts as exceeding a reasonable fee for the
services being performed in exchange therefor, and a portion of such servicing
compensation could be recharacterized as an ownership interest retained by the
Company or other party in a portion of the interest payments to be made
pursuant to the Contracts. In this event, a Certificate might be treated as a
Stripped Certificate subject to the stripped bond rules of Section 1286 of the
Code and the original issue discount provisions rather than to the market
discount and premium rules. See the discussion above under "Non-REMIC Series--
Stripped Non-REMIC Certificates."
Tax Treatment of Certain Foreign Investors. Generally, interest or original
issue discount paid to or accruing for the benefit of a Non-REMIC
Certificateholder who is a Foreign Holder (as defined in "REMIC Series--
Taxation of Certain Foreign Investors") will be treated as "portfolio interest"
and therefore will be exempt from the 30% withholding tax. Such Non-REMIC
Certificateholder will be entitled to receive interest payments and original
issue discount on the Non-REMIC Certificates free of United States federal
income tax, but only to the extent the Contracts were originated after July 18,
1984 and provided that such Non-REMIC Certificateholder periodically provides
the Trustee (or other person who would otherwise be required
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to withhold tax) with a statement certifying under penalty of perjury that such
Non-REMIC Certificateholder is not a United States person and providing the
name and address of such Non-REMIC Certificateholder. For additional
information concerning interest or original issue discount paid by the Company
to a Foreign Holder and the treatment of a sale or exchange of a Non-REMIC
Certificate by a Foreign Holder, which will generally have the same tax
consequences as the sale of a Regular Certificate, see the discussion above
under "REMIC Series--Taxation of Certain Foreign Investors".
Tax Administration and Reporting. The Company will furnish to each Non-REMIC
Certificateholder with each distribution a statement setting forth the amount
of such distribution allocable to principal and to interest. In addition, the
Company will furnish, within a reasonable time after the end of each calendar
year, to each Non-REMIC Certificateholder who was a Certificateholder at any
time during such year, information regarding the amount of servicing
compensation received by the Company and any sub-servicer and such other
customary factual information as the Company deems necessary or desirable to
enable Certificateholders to prepare their tax returns. Reports will be made
annually to the Service and to holders of record that are not 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 Non-REMIC
Certificates.
OTHER TAX CONSEQUENCES
No advice has been received as to local income, franchise, personal property,
or other taxation in any state or locality, or as to the tax effect of
ownership of Certificates in any state or locality. Certificateholders are
advised to consult their own tax advisors with respect to any state or local
income, franchise, personal property, or other tax consequences arising out of
their ownership of Certificates.
LEGAL INVESTMENT CONSIDERATIONS
Unless otherwise indicated in the applicable Prospectus Supplement, any
Certificates offered hereby are not expected to constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") because there will be 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.
The Federal Financial Institutions Examination Council, The Federal Deposit
Insurance Corporation, the Office of Thrift Supervision, the Office of the
Comptroller of the Currency and the National Credit Union Administration have
proposed or adopted guidelines regarding investment in various types of
mortgage-backed securities. In addition, certain state regulators have taken
positions that may prohibit regulated institutions subject to their
jurisdiction from holding securities representing residual interests, including
securities previously purchased. There may be other restrictions on the ability
of certain investors, including depository institutions, either to purchase
Certificates or to purchase Certificates representing more than a specified
percentage of the investor's assets. Investors should consult their own legal
advisors in determining whether and to what extent the Certificates constitute
legal investments for such investors.
RATINGS
It is a condition precedent to the issuance of any Class of Certificates sold
under this Prospectus that they be rated by at least one nationally recognized
statistical rating organization in one of its four highest rating categories
(within which there may be sub-categories or gradations indicating relative
standing). A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating agency. The security rating of any Series of Certificates
should be evaluated independently of similar security ratings assigned to other
kinds of securities.
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UNDERWRITING
The Company may sell Certificates of each Series to or through underwriters
(the "Underwriters") by a negotiated firm commitment underwriting and public
reoffering by the Underwriters, and also may sell and place Certificates
directly to other purchasers or through agents. The Company intends that
Certificates will be offered through such various methods from time to time and
that offerings may be made concurrently through more than one of these methods
or that an offering of a particular Series of Certificates may be made through
a combination of such methods.
The distribution of the Certificates may be effected from time to time in one
or more transactions at a fixed price or prices, which may be changed, or at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices.
If so specified in the Prospectus Supplement relating to a Series of
Certificates, the Company or any affiliate thereof may purchase some or all of
one or more Classes of Certificates of such Series from the Underwriter or
Underwriters at a price specified in such Prospectus Supplement. Such purchaser
may thereafter from time to time offer and sell, pursuant to this Prospectus,
some or all of such Certificates so purchased directly, through one or more
Underwriters to be designated at the time of the offering of such Certificates
or through broker-dealers acting as agent and/or principal. Such offering may
be restricted in the manner specified in such Prospectus Supplement. Such
transactions may be effected at market prices prevailing at the time of sale,
at negotiated prices or at fixed prices.
In connection with the sale of the Certificates, Underwriters may receive
compensation from the Company or from purchasers of Certificates for whom they
may act as agents in the form of discounts, concessions or commissions.
Underwriters may sell the Certificates of a Series to or through dealers and
such dealers may receive compensation in the form of discounts, concessions or
commissions from the Underwriters and/or commissions from the purchasers for
whom they may act as agents. Underwriters, dealers and agents that participate
in the distribution of the Certificates of a Series may be deemed to be
Underwriters, and any discounts or commissions received by them from the
Company and any profit on the resale of the Certificates by them may be deemed
to be underwriting discounts and commissions, under the Securities Act of 1933,
as amended (the "Act"). Any such Underwriters or agents will be identified, and
any such compensation received from the Company will be described, in the
Prospectus Supplement.
Under agreements which may be entered into by the Company, Underwriters and
agents who participate in the distribution of the Certificates may be entitled
to indemnification by the Company against certain liabilities, including
liabilities under the Act.
If so indicated in the Prospectus Supplement, the Company will authorize
Underwriters or other persons acting as the Company's agents to solicit offers
by certain institutions to purchase the Certificates from the Company pursuant
to contracts providing for payment and delivery on a future date. Institutions
with which such contracts may be made include commercial and savings banks,
insurance companies, pension funds, investment companies, educational
charitable institutions and others, but in all cases such institutions must be
approved by the Company. The obligation of any purchaser under any such
contract will be subject to the condition that the purchaser of the offered
Certificates shall not at the time of delivery be prohibited under the laws of
the jurisdiction to which such purchaser is subject from purchasing such
Certificates. The Underwriters and such other agents will not have
responsibility in respect of the validity or performance of such contracts.
The Underwriters may, from time to time, buy and sell Certificates, but there
can be no assurance that an active secondary market will develop and there is
no assurance that any such market, if established, will continue.
Certain of the Underwriters and their associates may engage in transactions
with and perform services for the Company in the ordinary course of business.
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LEGAL MATTERS
The legality and material federal income tax consequences of the Certificates
will be passed upon for the Company by the counsel to the Company identified in
the applicable Prospectus Supplement.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1994
and 1993 and for each of the three years in the period ended December 31, 1994
incorporated by reference herein have been audited by KPMG Peat Marwick LLP,
independent accountants, as stated in their opinion given upon their authority
as experts in accounting and auditing.
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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 SUP-
PLEMENT AND THE PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS
PROSPECTUS SUPPLEMENT. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDER-
WRITER. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OF-
FER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE CERTIFICATES IN ANY JU-
RISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE
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 SUPPLEMENT AND THE PROSPECTUS OR IN THE AFFAIRS OF THE TRUST
SINCE THE DATE HEREOF.
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TABLE OF CONTENTS
Prospectus Supplement
<TABLE>
<CAPTION>
Page
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<S> <C>
Summary of the Terms of the Certificates................................... S-3
Risk Factors............................................................... S-20
Structure of the Transaction............................................... S-20
Use of Proceeds............................................................ S-21
The Contracts.............................................................. S-21
Yield and Prepayment Considerations........................................ S-25
Green Tree Financial Corporation........................................... S-32
Description of the Certificates............................................ S-32
Description of the Class B-2 Limited Guaranty.............................. S-51
Certain Federal Income Tax Consequences.................................... S-52
ERISA Considerations....................................................... S-52
Underwriting............................................................... S-54
Legal Matters.............................................................. S-55
Prospectus
Reports to Certificateholders.............................................. 2
Available Information...................................................... 2
Additional Information..................................................... 2
Incorporation of Certain Documents by Reference............................ 2
Summary of Terms........................................................... 4
Risk Factors............................................................... 9
The Trust Fund............................................................. 10
Use of Proceeds............................................................ 12
Green Tree Financial Corporation........................................... 12
Yield Considerations....................................................... 14
Maturity and Prepayment Considerations..................................... 14
Description of the Certificates............................................ 15
Description of FHA Insurance............................................... 27
Certain Legal Aspects of the Contracts; Repurchase Obligations............. 28
ERISA Considerations....................................................... 37
Certain Federal Income Tax Consequences.................................... 39
Legal Investment Considerations............................................ 56
Ratings.................................................................... 56
Underwriting............................................................... 57
Legal Matters.............................................................. 58
Experts.................................................................... 58
</TABLE>
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$132,722,512 (APPROXIMATE)
LOGO
SELLER AND SERVICER
CERTIFICATES FOR HOME IMPROVEMENT LOANS
SERIES 1995-F
$22,000,000 (APPROXIMATE) 6.00% CLASS A-1
$32,000,000 (APPROXIMATE) 5.90% CLASS A-2
$15,000,000 (APPROXIMATE) 5.90% CLASS A-3
$23,800,000 (APPROXIMATE) 6.15% CLASS A-4
$13,300,000 (APPROXIMATE) 6.65% CLASS M-1
$10,600,000 (APPROXIMATE) 6.95% CLASS M-2
$ 8,000,000 (APPROXIMATE) 6.75% CLASS B-1
$ 8,022,512 (APPROXIMATE) 7.10% CLASS B-2
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PROSPECTUS SUPPLEMENT
December 12, 1995
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LEHMAN BROTHERS
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