<PAGE>
Filed Pursuant to Rule 424(B)(5)
File Number 333-49951
PROSPECTUS SUPPLEMENT
(To Prospectus dated May 20, 1998)
$500,000,000 (APPROXIMATE)
LOGO
[LOGO OF GREENTREE]
SELLER AND SERVICER
CERTIFICATES FOR HOME EQUITY LOANS
SERIES 1998-C
$ 14,000,000 (APPROX.) 6.00% CLASS A-1A ARM $20,000,000 (APPROX.) 6.29%
CLASS A-6
$106,000,000 (APPROX.) FLOATING RATE CLASS A-1B ARM
$105,000,000 (APPROX.) 5.95% CLASS A-1 (1) 10.00% CLASS A-7 IO
$ 79,700,000 (APPROX.) 6.03% CLASS A-2 $32,500,000 (APPROX.) 6.80%
$ 41,900,000 (APPROX.) 6.18% CLASS A-3 CLASS M-1
$ 31,000,000 (APPROX.) 6.30% CLASS A-4 $18,750,000 (APPROX.) 7.14%
$ 19,900,000 (APPROX.) 6.39% CLASS A-5 CLASS M-2
$20,000,000 (APPROX.) 7.77%
CLASS B-1
(PRINCIPAL AND INTEREST PAYABLE ON THE 15TH DAY OF EACH MONTH BEGINNING IN
JUNE 1998)
----------------- $11,250,000 (APPROX.) 8.06%
CLASS B-2
The Certificates for Home Equity Loans, Series 1998-C, offered hereby (the
"Certificates") will be comprised of 13 Classes, designated as the Class A-1A
ARM, Class A-1B ARM, Class A-1, Class A-2, Class A-3, Class A-4, Class A-5,
Class A-6, Class A-7 IO, Class M-1, Class M-2, Class B-1 and Class B-2
(Continued on next page)
-----------------
PROSPECTIVE INVESTORS SHOULD CONSIDER THE INFORMATION SET FORTH UNDER "RISK
FACTORS" ON PAGE S-27 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>
Underwriting Proceeds to
Price to Public(2) Discount Company(3)
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Class A-1A ARM
Certificate............ 100% .31% 99.69%
- ----------------------------------------------------------------------------------
Per Class A-1B ARM
Certificate............ 100% .3% 99.7%
- ----------------------------------------------------------------------------------
Per Class A-1
Certificate............ 100% .21% 99.79%
- ----------------------------------------------------------------------------------
Per Class A-2
Certificate............ 100% .3% 99.7%
- ----------------------------------------------------------------------------------
Per Class A-3
Certificate............ 99.984375% .37% 99.614375%
- ----------------------------------------------------------------------------------
Per Class A-4
Certificate............ 99.984375% .43% 99.554375%
- ----------------------------------------------------------------------------------
Per Class A-5
Certificate............ 99.953125% .46% 99.493125%
- ----------------------------------------------------------------------------------
Per Class A-6
Certificate............ 99.96875% .48% 99.48875%
- ----------------------------------------------------------------------------------
Per Class A-7 IO
Certificate............ 26.92739% .2% 26.72739%
- ----------------------------------------------------------------------------------
Per Class M-1
Certificate............ 99.984375% .5% 99.484375%
- ----------------------------------------------------------------------------------
Per Class M-2
Certificate............ 99.984375% .53% 99.454375%
- ----------------------------------------------------------------------------------
Per Class B-1
Certificate............ 100% .59% 99.41%
- ----------------------------------------------------------------------------------
Per Class B-2
Certificate............ 99.984375% .66% 99.324375%
- ----------------------------------------------------------------------------------
Total................... $506,695,113.14 $1,800,995.00 $504,894,118.14
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
</TABLE>
(1) Interest will be based on a notional principal amount which will equal
$25,000,000 (or the Class A Principal Balance for such Payment Date, if
less), for the first 36 Payment Dates, and will thereafter equal zero.
(2) Plus accrued interest, if any, from and including May 28, 1998.
(3) Before deducting expenses, estimated to be $500,000.
-----------------
The Certificates are offered subject to prior sale, when, as and if issued
by the Trust and accepted by the Underwriters and subject to their 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 May 28, 1998
(the actual such date being hereinafter referred to as the "Closing Date").
-----------------
Underwriters of the Certificates (other than the Class A-7 IO Certificates)
LEHMAN BROTHERS
FIRST UNION CAPITAL MARKETS
MERRILL LYNCH & CO.
-----------------
Underwriter of the Class A-7 IO Certificates
LEHMAN BROTHERS
-----------------
May 20, 1998
<PAGE>
(Continued from previous page)
Certificates, respectively. The Certificates will be issued by, and evidence
beneficial ownership interests in, Home Equity Loan Trust 1998-C (the
"Trust"). The Trust will be created by Green Tree Financial Corporation (the
"Company") pursuant to a Pooling and Servicing Agreement, dated as of May 1,
1998 (the "Agreement") between the Company and U.S. Bank Trust National
Association, as Trustee (the "Trustee"). The Trust property will consist
primarily of a pool (the "Loan Pool") comprised of closed-end home equity
loans (the "Loans"), including the right to receive payments due on the Loans
after the "Cut-off Date" (which will be April 30, 1998 (or the date of
origination thereof, if later) for each Loan other than the Subsequent Loans
(as defined herein), and for each Subsequent Loan, the date on which such Loan
is purchased by the Trust), together with liens on the related real estate and
amounts held for the Trust in the Certificate Account and, during the Funding
Period, in the Pre-Funding Account (each as defined herein). The Loans include
adjustable-rate closed-end home equity loans subject to interest rate
adjustments after an initial period of up to 36 months (the "Adjustable Rate
Loans;" all Loans other than the Adjustable Rate Loans are referred to herein
as the "Fixed-Rate Loans"). Each of the Loans is secured by a lien on the
related real estate.
The Agreement provides for a pre-funding account (the "Pre-Funding Account")
to provide the Trust with sufficient funds to purchase additional Loans (the
"Subsequent Loans") for up to 90 days after the Closing Date.
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-1A ARM, Class A-1B
ARM, Class A-1, Class A-2, Class A-3, Class A-4, Class A-5, Class A-6 and
Class A-7 IO 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) and of the Class M-2 Certificates (in the case of the Class
B-1 and Class B-2 Certificates), all to the extent described 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 June 1998. The
entitlement of Certificateholders (other than Class A-7 IO Certificateholders)
to such distributions of principal from available funds includes not only
actual payments and recoveries of principal but also scheduled payments of
principal due on each outstanding Loan during the calendar month preceding the
month in which the related Payment Date occurs (the "Due Period"). The Company
will act as servicer (in such capacity, the "Servicer") of the Loans. The
final scheduled Payment Date of the Certificates is in July 2029. See
"Description of the Certificates" herein and in the Prospectus.
Elections will be made to treat the Trust as comprising two separate real
estate mortgage investment conduits (the "Master REMIC" and "Subsidiary
REMIC") for federal income tax purposes. As described more fully herein, the
Certificates will constitute "regular interests" in the Master REMIC. The
Class C Subsidiary Certificate, which is not being offered hereby, will
constitute the sole class of "residual interests" in the Subsidiary REMIC, and
the Class C Master Certificate, which is not being offered hereby, will
constitute the sole class of "residual interests" in the Master REMIC. The
Class C Subsidiary Certificate and the Class C Master Certificate are referred
to herein collectively as the "Class C Certificates." 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., First Union Capital
Markets, a division of Wheat First Securities Corp., and Merrill Lynch,
Pierce, Fenner & Smith Incorporated (the "Underwriters") expect, but are not
obligated, to make a market in the Certificates.
All dollar amounts in this Prospectus Supplement and the Prospectus are
expressed in United States dollars.
S-2
<PAGE>
The Certificates initially will be represented by certificates registered in
the name of Cede & Co., the nominee of The Depository Trust Company ("DTC").
The interests of beneficial owners of the Certificates will be represented by
book entries on the records of the participating members of DTC. Definitive
Certificates will be available only under the limited circumstances described
herein. Holders of the Certificates may hold through DTC (in the United
States), CEDEL or Euroclear (as defined herein) (in Europe) if they are
participants of such systems, or indirectly through organizations that are
participants in such systems.
No prospectus in respect of the Certificates has been or will be prepared
and filed in the United Kingdom pursuant to the United Kingdom Public Offers
of Securities Regulations 1995. Accordingly, the Certificates being offered
hereby may not be offered or sold or re-offered or re-sold to persons in the
United Kingdom except to persons whose ordinary activities involve them in
acquiring, holding, managing and disposing of investments (as principal or
agent) for the purpose of their businesses, or otherwise in circumstances that
will not constitute or result in an offer to the public in the United Kingdom
within the meaning of the United Kingdom Public Offers of Securities
Regulations 1995. Neither this Prospectus Supplement nor the Prospectus nor
any other document inviting applications or offers to purchase Certificates or
offering Certificates for purchase may be passed to any person in the United
Kingdom who does not fall within article 11(3) of the Financial Services Act
1986 (Investment Advisements) (Exemptions) Order 1996 or who is not otherwise
a person to whom the document may lawfully be issued or passed.
Certain persons participating in this offering may engage in transactions
that stabilize, maintain, or otherwise affect the price of the Certificates
offered hereby. Such transactions may include stabilizing and the purchase of
Certificates to cover syndicate short positions. For a description of these
activities, see "Underwriting" herein.
For 90 days after the date of this Prospectus Supplement, 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 Underwriters
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 Equity 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-3
<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 Equity Loans, Series 1998-
C (the "Certificates"), comprised of 13 Classes
designated as the Class A-1A ARM, Class A-1B
ARM, Class A-1, Class A-2, Class A-3, Class A-
4, Class A-5, Class A-6, Class A-7 IO, Class M-
1, Class M-2, Class B-1 and Class B-2 Certifi-
cates, respectively. The Class A-1B ARM Certif-
icates are floating-rate and the Certificates
of each of the other Classes are fixed-rate.
The Certificates will be issued by, and evi-
dence beneficial ownership interests in, Home
Equity Loan Trust 1998-C (the "Trust"), the
property of which consists primarily of the
Loans, and all rights, benefits, obligations
and proceeds arising therefrom or in connection
therewith, including liens on the related real
estate.
Trustee...................... U.S. Bank 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 June 1998.
Cut-off Date................. April 30, 1998 (or the date of origination of
the Loan, if later) for each Loan other than
the Subsequent Loans, and for each Subsequent
Loan, the date on which the Subsequent Loan is
purchased by the Trust.
Record Date.................. The Business Day immediately preceding the re-
lated Payment Date.
Original Certificate $500,000,000 (approximate).
Principal Balance...........
Original Class A-1A ARM
Principal Balance...........
$14,000,000 (approximate).
Original Class A-1B ARM
Principal Balance...........
$106,000,000 (approximate).
Original Class A-1 Principal $105,000,000 (approximate).
Balance.....................
Original Class A-2 Principal $79,700,000 (approximate).
Balance.....................
Original Class A-3 Principal $41,900,000 (approximate).
Balance.....................
Original Class A-4 Principal $31,000,000 (approximate).
Balance.....................
Original Class A-5 Principal $19,900,000 (approximate)
Balance.....................
Original Class A-6 Principal $20,000,000 (approximate)
Balance.....................
S-4
<PAGE>
Original Class A-7 IO $0. Interest will be calculated on the Class A-7
Principal Balance........... IO Certificates on each Payment Date based on a
"Notional Principal Amount" which will, for the
first 36 Payment Dates, equal $25,000,000 (or
the Class A Principal Balance for such Payment
Date, if less) and will thereafter equal zero.
The Notional Principal Amount provides a basis
for calculating interest payments only, and
does not represent the right to receive any
distribution in respect of principal.
Original Class M-1 Principal $32,500,000 (approximate).
Balance.....................
Original Class M-2 Principal $18,750,000 (approximate).
Balance.....................
Original Class B-1 Principal $20,000,000 (approximate).
Balance.....................
Original Class B-2 Principal $11,250,000 (approximate).
Balance.....................
Class A-1A ARM Pass-Through 6.00% per annum.
Rate........................
Class A-1B ARM Pass-Through A floating rate equal to the lesser of (i) one-
Rate........................ month LIBOR plus the applicable Pass-Through
Margin, (ii) the applicable Available Funds
Pass-Through Rate or (iii) 14.00%. The Pass-
Through Margin will equal 0.18% per annum
through the Payment Date on which the aggregate
outstanding principal balance of the Loans is
10% or more of the aggregate outstanding prin-
cipal balance of the Loans as of the Cut-off
Date, and 0.36% per annum on each Payment Date
on which the aggregate outstanding principal
balance of the Loans is less than 10% of the
aggregate outstanding principal balance of the
Loans as of the Cut-off Date. The Available
Funds Pass-Through Rate for any Payment Date is
the rate per annum equal to the weighted aver-
age of the Expense Adjusted Loan Rates on the
then outstanding Adjustable Rate Loans. The Ex-
pense Adjusted Loan Rate on any Adjustable Rate
Loan is equal to the then applicable Loan Rate
thereon, minus the Expense Fee Rate. The Ex-
pense Fee Rate is .75% per annum. One-month LI-
BOR with respect to any monthly interest period
will equal the offered rate for United States
dollar deposits for one month that appears on
Telerate Page 3750 as of 11:00 A.M., London
time, on the second LIBOR business day prior to
such monthly interest period. For a description
of the method used to calculate one-month LI-
BOR, see "Description of the Certificates--Cal-
culation of One-Month LIBOR."
Class A-1 Pass-Through 5.95% per annum.
Rate........................
Class A-2 Pass-Through 6.03% per annum.
Rate........................
Class A-3 Pass-Through 6.18% per annum.
Rate........................
Class A-4 Pass-Through 6.30% per annum.
Rate........................
Class A-5 Pass-Through 6.39% per annum.
Rate........................
Class A-6 Pass-Through 6.29% per annum.
Rate........................
S-5
<PAGE>
Class A-7 IO Pass-Through 10.00% per annum.
Rate........................
Class M-1 Pass-Through 6.80% per annum.
Rate........................
Class M-2 Pass-Through 7.14% per annum.
Rate........................
Class B-1 Pass-Through 7.77% per annum.
Rate........................
Class B-2 Pass-Through 8.06% per annum.
Rate........................
Description of The Class A-1A ARM, Class A-1B ARM, Class A-1,
Certificates................ Class A-2, Class A-3, Class A-4, Class A-5,
Class A-6 and Class A-7 IO Certificates (the
"Class A Certificates") are Senior Certificates
and the Class M-1 and Class M-2 Certificates
(the "Class M Certificates") and the Class B-1
and Class B-2 Certificates (the "Class B Cer-
tificates") 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 In-
terest") will be equal to the percentage ob-
tained by dividing the denomination specified
on such Certificate by the Original Principal
Balance of such Class. The "Principal Balance"
of a Class of Certificates as of any Payment
Date is the Original Principal Balance of such
Class of Certificates less all amounts previ-
ously distributed to such Class on account of
principal.
Distributions on On each Payment Date, distributions on the Cer-
Certificates................ 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 (as defined herein) in the Certificate Ac-
count is sufficient therefor, in an amount
equal to the sum of (i) their respective Per-
centage Interests of the amount of interest
calculated as described below under "A. Class A
Interest," (ii) with respect to the Class A-1A
ARM Certificates, their respective Percentage
Interests of the Class A-1A ARM Percentage of
the Class A-1 ARM Formula Principal Distribu-
tion Amount (as defined below), (iii) with re-
spect to the Class A-1B ARM Certificates, their
respective Percentage Interests of the Class A-
1B ARM Percentage of the Class A-1 ARM Formula
Principal Distribution Amount (as defined be-
low) and (iv) with respect to each other Class
of Class A Certificates (other than the Class
A-7 IO Certificates), their respective Percent-
age Interests of the Senior Percentage of the
Formula Principal Distribution Amount (each as
defined below) for the related 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 Interests
multiplied by the Class M-1 Dis-
S-6
<PAGE>
tribution Amount (as described below). Distri-
butions of interest and principal to the Class
M-2 Certificateholders will be made in an
amount equal to their respective Percentage In-
terests multiplied by the Class M-2 Distribu-
tion Amount (as described below). Distributions
of interest and principal to the Class B-1
Certificateholders will be made in an amount
equal to their respective Percentage Interests
of the Class B-1 Distribution Amount (as de-
scribed below). Distributions of interest and
principal to the Class B-2 Certificateholders
will be made in an amount equal to their re-
spective Percentage Interests of the Class B-2
Distribution Amount and any Class B-2 Guaranty
Payment (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 A and Class M
Certificateholders; and the rights of the Class
B-2 Certificateholders to receive such distri-
butions are subordinated to the rights of the
Class A, Class M and Class B-1
Certificateholders. Distributions will be made
on each Payment Date commencing in June 1998 to
holders of record on the related Record Date,
except that the final distribution in respect
of the Certificates will only be made upon pre-
sentation and surrender of the Certificates at
the office or agency appointed by the Trustee
for that purpose in Minneapolis or St. Paul,
Minnesota.
The "Amount Available" will consist primarily of
payments made on or in respect of the Loans and
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 with respect to the Loans and to
the Class C Certificateholders.
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
Certificateholders) 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
S-7
<PAGE>
Amount," which equals the sum of (i) the amount
of interest calculated as described under "E.
Class M-2 Interest" below and (ii) an amount of
principal calculated as described under "F.
Class M-2 Principal" below. The "Class M-2 Dis-
tribution Amount" for any Payment Date will
equal the lesser of (i) the Class M-2 Formula
Distribution Amount for such Payment Date or
(ii) the Amount Available in the Certificate
Account 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) an amount of principal cal-
culated as described under "J. Class B-2 Prin-
cipal" below. The "Class B-2 Distribution
Amount" for any Payment Date will equal the
lesser of (i) the Class B-2 Formula Distribu-
tion Amount for such Payment Date or (ii) the
Amount Available in the Certificate 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 consist primarily of pay-
ments made on or in respect of the Loans and
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 related Monthly Servicing Fee
with respect to the Loans, and to the Class C
Certificateholders. 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 subsidi-
S-8
<PAGE>
ary of the Company is the Servicer) as the re-
lated Monthly Servicing Fee with respect to the
Loans, and to the Class C Certificateholders.
The Class M-2 Remaining Amount Available will
include amounts otherwise payable to the hold-
ers 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 related Monthly Servicing Fee
with respect to the Loans, and to the Class C
Certificateholders. 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 related Monthly Servicing Fee
with respect to the Loans, and to the Class C
Certificateholders. 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 related Monthly Servic-
ing Fee with respect to the Loans and to the
Class C Certificateholders.
The "Class A Principal Balance" as of any Pay-
ment Date is the sum of the Class A-1A ARM
Principal Balance, the Class A-1B ARM Principal
Balance, the Class A-1 Principal Balance, the
Class A-2 Principal Balance, the Class A-3
Principal Balance, the Class A-4 Principal Bal-
ance, the Class A-5 Principal Balance and the
Class A-6 Principal Balance.
The "Class M Principal Balance" as of any Pay-
ment Date is the sum of the Class M-1 Principal
Balance and the Class M-2 Principal Balance.
A portion of the interest otherwise payable on a
Payment Date to the Class M and Class B
Certificateholders will be subordinated to
other amounts payable to Certificateholders on
that Payment Date if on the preceding Payment
Date the Principal Balance of the Loans is less
than the sum of the Class A, Class M and Class
B Principal Balances, as further described be-
low in the sections describing interest payable
on the Class M and Class B Certificates.
A. Class A Interest.......... Interest on the outstanding Principal Balance of
each Class of Class A Certificates will accrue
from May 28, 1998, or from the most recent Pay-
ment Date on which interest has been paid, to
but excluding the following Payment Date. In-
terest on each Class of Class A Certificates,
other than the Class A-1B ARM Certificates,
will be computed on the basis of a 360-day year
of twelve 30-day months. Interest on the Class
A-lB ARM Certificates will be computed on the
basis of actual days elapsed in a 360-day year.
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-1A ARM
S-9
<PAGE>
Principal Balance, Class A-1B ARM Principal
Balance, Class A-1 Principal Balance, Class A-2
Principal Balance, Class A-3 Principal Balance,
Class A-4 Principal Balance, Class A-5 Princi-
pal Balance, Class A-6 Principal Balance and
Class A-7 IO Notional Principal Amount. The
Notional Principal Amount will equal
$25,000,000 (or the Class A Principal Balance
for such Payment Date, if less), for the first
36 Payment Dates, and will thereafter equal ze-
ro.
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--Distributions on
Certificates--Class A Interest."
B. Class A Principal......... Holders of a Class of Class A Certificates
(other than the Class A-7 IO Certificates) will
be entitled to receive payments of principal on
each Payment Date in the order of priority set
forth below and to the extent of the Amount
Available in the Certificate Account after pay-
ment of all interest payable on each Class of
Class A Certificates.
Holders of the Class A-1B ARM Certificates will
be entitled to receive, as payments of princi-
pal, an amount equal to the lesser of (i) the
Class A-1B ARM Principal Balance and (ii) the
Class A-1 ARM Formula Principal Destribution
Amount minus the lesser of (a) the Class A-1A
ARM Principal Balance and (b) the Class A-1A
ARM Percentage of the Class A-1 ARM Formula
Principal Distribution Amount on that Payment
Date. Any amount of the Class A-1 ARM Formula
Principal Distribution Amount remaining on a
Payment Date will be paid to the Class A-1A ARM
Certificateholders. The "Class A-1 ARM Formula
Principal Distribution Amount" will generally
be equal to the lesser of (A) the sum of the
Class A-1A ARM Principal Balance and the Class
A-1B ARM Principal Balance or (B) the sum of
the following: (i) all scheduled payments of
principal due on each outstanding Adjustable
Rate Loan during the related Due Period; (ii)
the Scheduled Principal Balance of each Adjust-
able Rate Loan which, during the related Due
Period, was purchased by the Company pursuant
to the Agreement on account of certain breaches
of its representations and warranties; (iii)
the Scheduled Principal Balance of each Adjust-
able Rate Loan that became a Liquidated Loan
during the related Due Period; (iv) all
S-10
<PAGE>
partial Principal Prepayments applied and Prin-
cipal Prepayments in Full received on each Ad-
justable Rate Loan during the related Due Peri-
od; and (v) on any Payment Date which is on or
after the Payment Date on which the Class A-1,
Class A-2, Class A-3, Class A-4, Class A-5 and
Class A-6 Certificates have been paid in full,
(a) the Senior Percentage times the Formula
Principal Distribution Amount less (b) the
amount, if any, distributed in payment of prin-
cipal on the Class A-1, Class A-2, Class A-3,
Class A-4, Class A-5 and Class A-6 Certificates
on such Payment Date.
The Class A-1A ARM Percentage for any Payment
Date will be (i) 0% prior to the Payment Date
in February 2000 (unless the Class A-1B ARM
Principal Balance has been reduced to zero),
(ii) 90% on the Payment Date in February 2000
and each Payment Date thereafter (unless the
Class A-1B ARM Principal Balance has been re-
duced to zero), and (iii) on and after any Pay-
ment Date on which the Class A-1B ARM Principal
Balance has been reduced to zero (until the
Class A-1A ARM Principal Balance has been re-
duced to zero), 100%. The Class A-1B ARM Per-
centage for any Payment Date will equal 100%
minus the Class A-1A ARM Percentage.
The Scheduled Principal Balance of a Loan with
respect to any Payment Date is its principal
balance as of the scheduled payment date (the
"Due Date") in the Due Period, after giving ef-
fect to any previous partial Principal Prepay-
ments applied and to the scheduled payment due
on such Due Date, and after giving effect to
any adjustments due to bankruptcy or similar
proceedings.
The Class A-7 IO Certificates are interest-only
Certificates and are not entitled to receive
distributions of principal.
Holders of the Class A Certificates (other than
the Class A-1A ARM Certificates, the Class A-1B
ARM Certificates and the Class A-7 IO Certifi-
cates) will be entitled to receive, as payments
of principal, an amount equal to the Senior
Percentage of the Formula Principal Distribu-
tion Amount. The Formula Principal Distribution
Amount will generally be equal to the sum of
(i) all scheduled payments of principal due on
each outstanding Fixed-Rate Loan during the re-
lated Due Period, (ii) the Scheduled Principal
Balance of each Fixed-Rate Loan which, during
such Due Period, 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 Due Period in respect of the Fixed-
Rate Loans, (iv) the Scheduled Principal Bal-
ance of each Fixed-Rate Loan that became a Liq-
uidated Loan during such Due Period, (v) any
amount described in clauses (i) through
(iv) above that was not previously distributed
because of an insufficient amount of funds
available
S-11
<PAGE>
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 Prin-
cipal Balance, and (vi) on any Payment Date
which is on or after the Payment Date on which
the Class A-1A ARM and Class A-1B ARM Certifi-
cates have been paid in full, (a) the Class A-1
ARM Formula Principal Distribution Amount less
(b) the amount, if any, distributed in payment
of principal on the Class A-1A ARM and Class A-
1B ARM Certificates on such Payment Date. 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 will equal 100% on each
Payment Date on which the Class B Principal
Distribution Test (as described below) is not
satisfied. On each Payment Date on which the
Class B Principal Distribution Test has been
satisfied, the Senior Percentage will equal the
lesser of (i) 100% and (ii) a fraction, ex-
pressed as a percentage, the numerator of which
is the sum of the Class A Principal Balance
(excluding the Class A-1A ARM Principal Balance
and the Class A-1B ARM Principal Balance) and
the Class M Principal Balance for such Payment
Date, and the denominator of which is the Pool
Scheduled Principal Balance of the Fixed-Rate
Loans for the immediately preceding Payment
Date.
The Pool Scheduled Principal Balance, with re-
spect to the Loan Pool as of any Payment Date,
is the aggregate of the Scheduled Principal
Balances of Loans comprising the Loan Pool that
were outstanding during the preceding Due Peri-
od. A Liquidated Loan is a defaulted Loan as to
which all amounts that the Servicer expects to
recover on account of such Loan have been re-
ceived.
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,
as follows: (i) that portion, if any, of the
Senior Percentage of the Formula Principal Dis-
tribution Amount equal to the Class A-6 Lockout
Pro Rata Distribution Amount will be distrib-
uted to the Class A-6 Certificateholders; and
(ii) the remainder of the Senior Percentage of
the Formula Principal Distribution Amount will
be distributed in the following order: 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 Princi-
pal Balance has been reduced to zero, then to
the Class A-4 Certificateholders until the
Class A-4 Principal
S-12
<PAGE>
Balance has been reduced to zero, and then to
the Class A-5 Certificateholders until the
Class A-5 Principal Balance has been reduced to
zero. After the Class A-5 Principal Balance has
been reduced to zero, holders of the Class A-6
Certificates will be entitled to receive the
entire Senior Percentage of the Formula Princi-
pal Distribution Amount up to the amount neces-
sary to reduce the Class A-6 Principal Balance
to zero, to the extent the remaining Amount
Available is sufficient therefor.
The "Class A-6 Lockout Pro Rata Distribution
Amount," as to any Payment Date, is an amount
equal to the lesser of:
(a) the product of (1) the Class A-6 Lockout
Percentage, and (2) the product of (A) a
fraction, the numerator of which is the Class
A-6 Principal Balance immediately preceding
such Payment Date and the denominator of which
is the Class A Principal Balance less the sum
of the Class A-1A ARM Principal Balance and
the Class A-1B ARM Principal Balance
immediately preceding such Payment Date, and
(B) the Senior Percentage of the Formula
Principal Distribution Amount for such Payment
Date, and
(b) the Class A-6 Principal Balance immediately
preceding such Payment Date.
The "Class A-6 Lockout Percentage," as to any
Payment Date occurring during the periods set
forth below, is the percentage designated as
such as follows:
<TABLE>
<CAPTION>
CLASS A-6
PERIODS (DATES INCLUSIVE) LOCKOUT PERCENTAGE
------------------------- ------------------
<S> <C>
June 1998 through May 2000............... 0%
June 2000 through May 2002............... 20%
June 2002 through May 2003............... 80%
June 2003 through May 2004............... 100%
June 2004 and thereafter................. 300%
</TABLE>
On any Payment Date as to which there is a Class
A Liquidation Loss Principal Amount (which is
the amount, if any, by which the Pool Scheduled
Principal Balance plus the Pre-Funded Amount is
less than the Class A Principal Balance), the
remaining Amount Available will be distributed
pro rata to each Class of Class A Certificates
(other than the Class A-7 IO Certificates)
based on the Class Principal Balance of each
Class (but in no event will such amount exceed
the Class Principal Balance of any such Class).
If, as to any Payment Date, the Amount Available
remaining after distributions of interest on
the Class A Certificates is less than the sum
of the Senior Percentage of the Formula
Principal Distribution Amount and the Class A-1
ARM Formula Principal Distribution Amount, the
amounts to be distributed to the Class A
Certificateholders (including the Class A-1A
ARM Certificateholders and Class A-1B ARM
Certificateholders but
S-13
<PAGE>
excluding the Class A-7 IO Certificateholders)
will be allocated pro rata based upon the
respective portions of the Amount Available
that would have been distributed to the Class A
Certificateholders, as described above, had the
remaining Amount Available been sufficient
therefor.
C. Class M-1 Interest........ Interest on the outstanding Class M-1 Principal
Balance will accrue from May 28, 1998, 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.
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 in
an amount (the "Class M-1 Interest Payment
Amount") equal to the product of (a) the Class
M-1 Pass-Through Rate and (b) the then out-
standing Class M-1 Principal Balance less the
Class M-1 Liquidation Loss Principal Amount, if
any. The "Class M-1 Liquidation Loss Principal
Amount" as of any Payment Date will equal the
excess, if any, of the Aggregate Liquidation
Loss Principal Amount over the aggregate of the
Principal Balances of the Class M-2 Certifi-
cates and the Class B Certificates. The "Aggre-
gate Liquidation Loss Principal Amount" as of
any Payment Date will equal the excess, if any,
of (i) the sum of the Class A Principal Bal-
ance, the Class M Principal Balance and the
Class B Principal Balance as of the preceding
Payment Date (after giving effect to distribu-
tions of principal thereon) over (ii) the sum
of the Pool Scheduled Principal Balance plus
the Pre-Funded Amount for such preceding Pay-
ment Date.
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 the Class M-1 Interest
Payment Amount, the amount of interest to be
distributed in respect of the Class M-1 Certif-
icates will be allocated among the Class M-1
Certificates pro rata in accordance with their
respective entitlements to interest, and the
amount of the deficiency will be carried for-
ward 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--Distributions on Certificates--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-14
<PAGE>
E. Class M-2 Interest........ Interest on the outstanding Class M-2 Principal
Balance will accrue from May 28, 1998, 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.
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 in an
amount (the "Class M-2 Interest Payment
Amount") equal to the product of (a) the Class
M-2 Pass-Through Rate and (b) the then out-
standing Class M-2 Principal Balance less the
Class M-2 Liquidation Loss Principal Amount, if
any. The "Class M-2 Liquidation Loss Principal
Amount" as of any Payment Date will equal the
excess, if any, of the Aggregate Liquidation
Loss Principal Amount over the aggregate Prin-
cipal Balance of the Class B Certificates.
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 the Class M-2 Interest
Payment Amount, the amount of interest to be
distributed in respect of the Class M-2 Certif-
icates will be allocated among the Class M-2
Certificates pro rata in accordance with their
respective entitlements to interest, and the
amount of the deficiency will be carried for-
ward 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--Distributions on Certificates--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 have 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 May 28, 1998, 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.
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
S-15
<PAGE>
the Class B-1 Certificateholders on such Pay-
ment Date in an amount (the "Class B-1 Interest
Payment Amount") equal to the product of (a)
the Class B-1 Pass-Through Rate and (b) the
then outstanding Class B-1 Principal Balance
less the Class B-1 Liquidation Loss Principal
Amount, if any. The "Class B-1 Liquidation Loss
Principal Amount" as of any Payment Date will
equal the excess, if any, of the Aggregate Liq-
uidation Loss Principal Amount over the
Class B-2 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 the Class B-1 Interest
Payment Amount, the amount of interest to be
distributed in respect of the Class B-1 Certif-
icates will be allocated among the Class B-1
Certificates pro rata in accordance with their
respective entitlements to interest, and the
amount of the deficiency will be carried for-
ward as an amount that the Class B-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 B-1 Pass-
Through Rate. See "Description of the Certifi-
cates--Distributions on Certificates--Class B-1
Interest."
H. Class B-1 Principal....... Payments of principal on the Class B-1 Certifi-
cates will not be made unless the Class B Prin-
cipal Distribution Test is satisfied. The Class
B Principal Distribution Test will be deemed to
be satisfied on a Payment Date if either (a)
the Class A Principal Balance and the Class M
Principal Balance have each been reduced to
zero or (b) each of the following conditions is
met (i) the average of the Sixty-Day Delin-
quency Ratio (as defined in the Agreement) as
of the Payment Date and the prior two Payment
Dates must not exceed 6.0%; (ii) the average of
the Thirty-Day Delinquency Ratio (as defined in
the Agreement) as of the Payment Date and the
prior two Payment Dates must not exceed 12.0%;
(iii) the Cumulative Realized Loss Ratio (as
defined in the Agreement) as of the Payment
Date must not exceed 7.5%; (iv) the Current Re-
alized Loss Ratio (as defined in the Agreement)
as of the Payment Date must not exceed 2.0%;
(v) the Payment Date is on or after June 2001;
and (vi) 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 12.5%.
On each Payment Date on which the Class B Dis-
tribution Test is satisfied, the Class B Per-
centage of the Formula Principal Distribution
Amount will be paid to the Class B-1 Certifi-
cateholders to the extent of the Class B-1 Re-
maining Amount Available after payment of in-
terest 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
S-16
<PAGE>
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 May 28, 1998, 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.
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
Distribution 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 in an
amount (the "Class B-2 Interest Payment
Amount") equal to the product of (a) the Class
B-2 Pass-Through Rate and (b) the then out-
standing Class B-2 Principal Balance less the
Class B-2 Liquidation Loss Principal Amount, if
any. The "Class B-2 Liquidation Loss Principal
Amount" as of any Payment Date will equal the
lesser of the Aggregate Liquidation Loss Prin-
cipal Amount and the Class B-2 Principal Bal-
ance.
In the event that, on a particular Payment Date,
the Class B-2 Remaining Amount Available, plus
other funds in the Certificate Account avail-
able therefor, are not sufficient to make a
full distribution of the Class B-2 Interest
Payment Amount, the amount of interest to be
distributed in respect of the Class B-2 Certif-
icates will be allocated among the Class B-2
Certificates pro rata in accordance with their
respective entitlements to interest, and the
amount of the deficiency will be carried for-
ward as an amount that the Class B-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 B-2 Pass-
Through Rate. See "Description of the Certifi-
cates--Distributions on Certificates--Class B-2
Interest."
J. Class B-2 Principal....... Except for payments of the Class B-2 Liquidation
Loss Principal Amount, 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
"Class B-1 Cross-over Date"), and will be made
on that Payment Date and each Payment Date
thereafter only if the Class B Principal Dis-
tribution Test is satisfied on such Payment
Date. On any such Payment Date, the Class B
Percentage of the Formula Principal Distribu-
tion 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 Princi-
pal Balance has been reduced to zero.
S-17
<PAGE>
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 Liquidation Loss Principal Amount un-
til the Class B-2 Principal Balance has been
reduced to zero.
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 Loans, as well
as any other amounts constituting the Amount
Available, will be subordinated, to the extent
described herein, to such rights of the holders
of the Class A Certificates. This subordination
is intended to enhance the likelihood of 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 Loans.
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
the Class A Certificateholders to receive fu-
ture distributions from the Loans 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
Loans, as well as any other amounts constitut-
ing the Amount Available, will be subordinated,
to the extent described herein, to such rights
of the holders of the Class M-1 Certificates.
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 interest
and principal and to afford such holders pro-
tection against losses on Liquidated Loans.
The protection afforded to the holders of the
Class M-1 Certificates by means of the
subordination of the Class M-2 and Class B
Certificates 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 interest 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 the Class M-1
Certificateholders to receive future
distributions from the Loans that would
otherwise be payable to the holders of the
Class M-2 and Class B Certificates.
S-18
<PAGE>
In addition, the rights of the holders of the
Class B Certificates to receive distributions
with respect to the Loans, as well as any other
amounts constituting the Amount Available, will
be subordinated, to the extent described here-
in, to such rights of the holders of the Class
M-2 Certificates. This subordination is in-
tended to enhance the likelihood of regular re-
ceipt by the holders of the Class M-2 Certifi-
cates of the full amount of their scheduled
monthly payments of interest and principal and
to afford such holders protection against
losses on Liquidated Loans.
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 the Class M-2 Certificateholders to
receive future distributions from the Loans
that would otherwise be payable to the holders
of the Class B Certificates.
In addition, the rights of the holders of the
Class B-2 Certificates to receive distributions
with respect to the Loans, as well as any other
amounts constituting the Amount Available, will
be subordinated, to the extent described here-
in, to such rights of the holders of the Class
B-1 Certificates. This subordination is in-
tended to enhance the likelihood of regular re-
ceipt by the holders of the Class B-1 Certifi-
cates of the full amount of their scheduled
monthly payments of interest and principal and
to afford such holders protection against
losses on Liquidated Loans.
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 the Class B-1 Certificateholders to
receive future distributions from the Loans
that would otherwise be payable to the holders
of the Class B-2 Certificates.
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 Loans.
See "Description of the Certificates--Subordi-
nation of Class M Certificates and Class B Cer-
tificates."
S-19
<PAGE>
Losses on Liquidated Loans... As described above, the distribution of princi-
pal to the Class A Certificateholders is in-
tended to include the Senior Percentage of the
Scheduled Principal Balance of each Loan (other
than the Adjustable Rate Loans) that became a
Liquidated Loan during the preceding Due Period
and the Scheduled Principal Balance of each Ad-
justable Rate Loan that became a Liquidated
Loan during the preceding Due Period. If the
Net Liquidation Proceeds from such Liquidated
Loans are less than the Scheduled Principal
Balance of such Liquidated Loans plus accrued
and unpaid interest thereon, the deficiency
will, in effect, be absorbed by the Class C
Certificateholders, then the related Monthly
Servicing Fee otherwise payable to the Servicer
(so long as the Company or any wholly owned
subsidiary of the Company is the Servicer) with
respect to the Loans, 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 related Monthly Servicing Fee otherwise
payable to the Servicer (so long as the Company
or any wholly owned subsidiary of the Company
is the Servicer) with respect to the Loans, the
Class M-1 Certificateholders will absorb all
losses on each Liquidated Loan 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 Certifi-
cates and Class B Certificates."
But for the effect of the subordination of the
Class B and Class C Certificates and the re-
lated Monthly Servicing Fee otherwise payable
to the Servicer (so long as the Company or any
wholly owned subsidiary of the Company is the
Servicer) with respect to the Loans, the Class
M-2 Certificateholders will absorb all losses
on each Liquidated Loan in the amount by which
its Net Liquidation Proceeds are less than its
unpaid principal balance
S-20
<PAGE>
plus accrued and unpaid interest thereon less
the related Monthly Servicing Fee. See "De-
scription of the Certificates--Subordination of
Class M Certificates and Class B Certificates."
But for the effect of the subordination of the
Class B-2 and Class C Certificates and the re-
lated Monthly Servicing Fee otherwise payable
to the Servicer (so long as the Company or any
wholly owned subsidiary of the Company is the
Servicer) with respect to the Loans, the Class
B-1 Certificateholders will absorb all losses
on each Liquidated Loan in the amount by which
its Net Liquidation Proceeds are less than its
unpaid principal balance plus accrued and un-
paid interest thereon less the related Monthly
Servicing Fee. See "Description of the Certifi-
cates--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 Loans,
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, un-
der the Class B-2 Limited Guaranty of the Com-
pany. Prior to the Class B-1 Cross-over Date,
and on any Payment Date on or after the Class
B-1 Cross-over Date on which the Class B Prin-
cipal Distribution Test is not satisfied, 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 unpaid interest on
the Class B-2 Certificates) for such Payment
Date and (ii) the Class B-2 Liquidation Loss
Principal 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 Class B-1 Cross-over Date
on which the Class B Principal Distribution
Test is satisfied, the Class B-2 Guaranty Pay-
ment will equal the amount, if any, by which
(a) the sum of (i) the Class B-2 Formula Dis-
tribution Amount (which will include both in-
terest and principal) for such Payment Date and
(ii) the Class B-2 Liquidation Loss Principal
Amount, if any, exceeds (b) the Class B-2 Dis-
tribution 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
ratings assigned to the Class B-2 Certificates
may be affected by the ratings of the Company's
debt securities. The Company's senior debt se-
curities were recently downgraded by Standard &
Poor's Rating Services, a division of the Mc-
Graw-Hill Companies, Inc. ("S&P") to "BBB-" and
by Fitch IBCA, Inc. ("Fitch") to "BBB," which
has been reflected in the ratings assigned to
the Class B-2 Certificates. See "Summary of the
Terms of the Certificates--Rating."
Registration of The Certificates initially will each be repre-
Certificates................ sented by one or more certificates registered
in the name of Cede & Co. ("Cede") as
S-21
<PAGE>
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 par-
ticipating members thereof. Holders of the
Class A-1B ARM Certificates may elect to hold
their Certificate interests in Europe through
Cedel Bank, societe anonyme ("CEDEL") or the
Euroclear System ("Euroclear"). 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 in-
directly exercise such rights through DTC and
participating members thereof, except as other-
wise specified herein. See "Description of the
Certificates--Registration of the Certificates"
herein.
Fixed-Rate Loans ............ The Loan Pool includes Fixed-Rate Loans (meaning
all Loans other than the Adjustable Rate
Loans). This Prospectus Supplement contains in-
formation regarding certain Fixed-Rate Loans
(the "Initial Fixed-Rate Loans"), which will
represent approximately 81% of all Fixed-Rate
Loans. The Agreement provides that additional
Fixed-Rate Loans (the "Additional Fixed-Rate
Loans") may be purchased by the Trust on the
Closing Date. The Agreement also provides that
Fixed-Rate Loans (the "Subsequent Fixed-Rate
Loans"), which together with the Subsequent Ad-
justable Rate Loans will represent no more than
25% of the Loan Pool, may be purchased by the
Trust for a period of up to 90 days after the
Closing Date. The Initial Fixed-Rate Loans con-
sist of 5,581 closed-end home equity loans (of
which 831 are Balloon Loans), including any and
all rights to receive payments due thereunder
on and after the Cut-off Date. The obligations
of the Obligor under each Fixed-Rate Loan are
secured by the related real estate. The Initial
Fixed-Rate Loans arise from loans relating to
real estate located in 48 states and the Dis-
trict of Columbia. The Loan Rate on the Initial
Fixed-Rate Loans as of the Cut-off Date ranges
from 7.45% to 18.94% with a weighted average of
11.56%. The Initial Fixed-Rate Loans had a
weighted average term to scheduled maturity, as
of origination, of 242 months, and a weighted
average term to scheduled maturity, as of the
Cut-off Date, of 241 months. The weighted aver-
age Loan Rate on the Balloon Loans is 11.40%.
The Balloon Loans had a weighted average term
to scheduled maturity, as of origination, of
190 months, and a weighted average term to
scheduled maturity, as of the Cut-off Date, of
189 months. The final scheduled payment date on
the Initial Fixed-Rate Loan with the latest
scheduled maturity is in May 2028. See "The
Loans--Fixed-Rate Loans" herein.
Adjustable Rate Loans........ The Loan Pool includes Adjustable Rate Loans.
This Prospectus Supplement contains information
regarding certain Adjustable Rate Loans (the
"Initial Adjustable Rate Loans"), which will
represent approximately 78% of all Adjustable
Rate Loans. The Agreement provides that addi-
tional Adjustable Rate Loans (the
S-22
<PAGE>
"Additional Adjustable Rate Loans" together
with the Additional Fixed-Rate Loans, the "Ad-
ditional Loans") may be purchased by the Trust
on the Closing Date. The Agreement also pro-
vides that Adjustable Rate Loans (the "Subse-
quent Adjustable Rate Loans"), which together
with the Subsequent Fixed-Rate Loans will rep-
resent no more than 25% of the Loan Pool, may
be purchased by the Trust for a period of up to
90 days after the Closing Date. The Initial Ad-
justable Rate Loans consist of 785 closed-end
home equity loans including any and all rights
to receive payments due thereunder on and after
the Cut-off Date. The Initial Adjustable Rate
Loans accrue interest at a fixed rate for up to
36 months and thereafter, the interest rate ad-
justs semiannually to equal the sum of the Six-
Month LIBOR Index and the Gross Margin speci-
fied in the related Loan. The obligations of
the Obligor under each Adjustable Rate Loan are
secured by the related real estate. The Initial
Adjustable Rate Loans arise from loans relating
to real estate located in 42 states and the
District of Columbia. The Loan Rate on the Ini-
tial Adjustable Rate Loans as of the Cut-off
Date ranges from 6.99% to 16.89% with a
weighted average of 9.11%. The Initial Adjust-
able Rate Loans had a weighted average term to
scheduled maturity, as of origination, of 360
months, and a weighted average term to sched-
uled maturity, as of the Cut-off Date, of 359
months. The final scheduled payment date on the
Initial Adjustable Rate Loan with the latest
scheduled maturity is in May 2028. See "The
Loans--Adjustable Rate Loans" herein.
Pre-Funding Account.......... On the Closing Date, the Company will pay to the
Trustee up to approximately $100,000,000 (as
reduced from time to time, the "Pre-Funded
Amount") for deposit in the Pre-Funding Account
to provide the Trust with sufficient funds to
purchase the Subsequent Loans. The Pre-Funded
Amount will be reduced during the Funding Pe-
riod (as defined herein) by the amount used to
purchase the Subsequent Loans. See "Description
of the Certificates--Conveyance of Subsequent
Loans and Pre-Funding Account."
The Class A-1B ARM Certificates and the Class A-
1 Certificates will be prepaid in part on the
first Payment Date after the Funding Period in
the event that any amount remains on deposit in
the Pre-Funding Account on such Payment Date
after the purchase by the Trust of the Subse-
quent Loans. Any amounts remaining which had
been allocated to the purchase of Subsequent
Adjustable Rate Loans will be paid to the Class
A-1B ARM Certificateholders and any amounts re-
maining which had been allocated to the pur-
chase of Subsequent Fixed-Rate Loans will be
paid to the Class A-1 Certificateholders.
Although no assurance can be given, the Company
anticipates that the principal amount of the
Subsequent Loans purchased by the Trust will
require the application of substantially all of
the Pre-
S-23
<PAGE>
Funded Amount and that there should be no mate-
rial amount of principal prepaid to the Class
A-1B ARM Certificateholders and the Class A-1
Certificateholders from the Pre-Funding Ac-
count. However, it is unlikely that the Company
will be able to deliver Subsequent Loans with
an aggregate principal balance identical to the
Pre-Funded Amount. See "Yield and Prepayment
Considerations" herein.
Advances..................... The Servicer is obligated to make Advances each
month of any scheduled payments on the Loans
that were due but not received during the prior
Due Period. The Servicer will be entitled to
reimbursement of an Advance from funds avail-
able 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 Certificate Ac-
count. If the Servicer fails to make any Ad-
vance required under the Agreement, the Trustee
will be obligated (subject to certain condi-
tions) to make such Advance. See "Description
of the Certificates--Advances" herein and in
the Prospectus.
Repurchase or Substitution The Company has agreed to repurchase any Loan in
Obligations................. 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 Loan made in the Agreement
if such breach has not been cured within 90
days of the day it was or should have been dis-
covered by the Servicer or the Trustee. In lieu
of repurchasing a Loan, during the two-year pe-
riod following the Closing Date, the Company
may, at its option, substitute another loan for
the Loan that it is otherwise obligated to re-
purchase. See "Description of the Certifi-
cates--Conveyance of Loans" herein and in the
Prospectus.
Repurchase Option............ The Servicer will have the option to repurchase
all of the outstanding Loans on any Payment
Date on which the Pool Scheduled Principal Bal-
ance of the Loan Pool is less than 10% of the
Cut-off Date Pool Principal Balance of the Loan
Pool. See "Description of the Certificates--Re-
purchase Option" herein and in the Prospectus.
Monthly Servicing Fee........ The Servicer will be entitled to monthly compen-
sation for servicing the Loans comprising each
Sub-Pool equal to 1/12 of the product of .75%
and the Pool Scheduled Principal Balance plus
the Pre-Funded Amount (each a "Monthly Servic-
ing Fee"). See "Description of the Certifi-
cates--Servicing Compensation and Payment of
Expenses" and "--Rights upon an Event of Termi-
nation" herein.
Tax Status................... In the opinion of counsel to the Company, the
Trust created by the Agreement will consist of
two segregated asset pools (respectively, the
"Master REMIC" and the "Subsidiary REMIC") and
for federal income tax purposes, each will be
treated as a separate real estate mortgage in-
vestment conduit ("REMIC").
S-24
<PAGE>
Each Class of Certificates will constitute
"regular interests" in the Master 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 Master Certifi-
cate and the Class C Subsidiary Certificate,
which are not being offered hereby, will con-
stitute the "residual interests" in the Master
REMIC and the Subsidiary REMIC, respectively.
The holders of Certificates will be required to
include in income interest on such Certificates
(including any original issue discount) in ac-
cordance with the accrual method of accounting.
Other than the Class A-7 IO Certificates, the
Certificates will not be issued with original
issue discount. See "Certain Federal Income Tax
Consequences" herein and in the Prospectus.
ERISA Considerations......... Subject to the conditions described herein, the
Class A-1A ARM, Class A-1B ARM, Class A-1,
Class A-2, Class A-3, Class A-4, Class A-5,
Class A-6 and Class A-7 IO Certificates may be
purchased by employee benefit plans that are
subject to the Employee Retirement Income Secu-
rity Act of 1974, as amended ("ERISA"). Any
transfer of any other Certificates to be made
to any employee benefit plan subject to ERISA
or to the Internal Revenue Code of 1986, as
amended (the "Code"), will be subject to the
restrictions described under "ERISA Considera-
tions" herein and in the Prospectus. See "ERISA
Considerations" herein and in the Prospectus.
Rating....................... It is a condition precedent to the issuance of
the Certificates that the Class A-1A ARM, Class
A-1B ARM, Class A-1, Class A-2, Class A-3,
Class A-4, Class A-5 and Class A-6 Certificates
each be rated at least "AAA" by S&P and "AAA"
by Fitch. It is a condition precedent to the
issuance of the Class A-7 IO Certificates that
they be rated at least "AAAr" by S&P and "AAA"
by Fitch. It is a condition precedent to the
issuance of the Class M-1 Certificates that
they be rated at least "AA" by S&P and "AA" by
Fitch. It is a condition precedent to the issu-
ance of the Class M-2 Certificates that they be
rated at least "A" by S&P and "A+" by Fitch. It
is a condition precedent to the issuance of the
Class B-1 Certificates that they be rated at
least "BBB" by S&P and "BBB" by Fitch. It is a
condition precedent to the issuance of the
Class B-2 Certificates that they be rated at
least "BBB-" by S&P and "BBB" by Fitch.
The rating of each Class of Certificates by S&P
addresses the likelihood of timely receipt of
interest and ultimate receipt of principal. The
rating of each Class of Certificates by Fitch
addresses the likelihood of the receipt by
Certificateholders of all distributions to
which such Certificateholders are entitled. The
ratings of the Class B-2 Certificates are based
in part on an assessment of the Company's abil-
ity to make payments under the Class B-2 Lim-
ited Guaranty. Any reduction in S&P's or
S-25
<PAGE>
Fitch's rating of the Company's debt securities
may result in a similar reduction in the rating
of the Class B-2 Certificates. The Company's
senior debt securities were recently downgraded
by S&P to "BBB-" and by Fitch to "BBB." A secu-
rity 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" in the
Prospectus.
The Company has not requested a rating of the
Certificates from any rating agencies other
than S&P and Fitch. 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 Second-
ary Mortgage Market Enhancement Act of 1984
("SMMEA") because there are a substantial num-
ber of Loans that are secured by liens on real
estate that are not
first liens, as required by SMMEA. Accordingly,
many institutions with legal authority to in-
vest in "mortgage related securities" may not
be legally authorized to invest in the Certifi-
cates. Investors should consult with their own
legal advisors to determine whether and to what
extent the Certificates constitute legal in-
vestments for them.
S-26
<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 Equity Loans. The Company began
originating, purchasing and servicing home equity loans in January 1996, and
thus has no significant historical experience with respect to the performance,
including the rate of prepayments, of such loans. Accordingly, no information
has been included herein with respect to the Company's loan loss or
liquidation experience for home equity loans, inasmuch as such information as
is available would likely not be indicative of the performance of the Loans.
Balloon Loans. A substantial number of the Loans provide for the payment of
the unamortized principal balance of the loan in a single payment at the
maturity of the loan that is greater than the preceding monthly payment (the
"Balloon Loans"). All of the Balloon Loans provide for equal monthly payments,
consisting of principal and interest, based on a stated amortization schedule,
and a single payment of the remaining principal balance of the Balloon Loan at
the end of a specified period following origination. The remainder of the
Loans provide for a schedule of substantially equal payments that are, if
timely paid, sufficient to amortize fully the principal balance of the loan on
or before its maturity date. Because borrowers under Balloon Loans are
required to make a relatively large single payment upon maturity, it is
possible that the default risk associated with Balloon Loans is greater than
that associated with fully-amortizing Loans.
Certain Truth-In-Lending Considerations. It is likely that some Loans
included in the Loan Pool will be subject to the Home Ownership and Equity
Protection Act of 1994 (the "Home Protection Act"). The Home Protection Act
adds certain additional provisions to Regulation Z, the implementing
regulation of the Federal Truth-In-Lending Act. These provisions impose
additional disclosure and other requirements on creditors with respect to non-
purchase money mortgage loans with high interest rates or high up-front fees
and charges. In general, mortgage loans within the purview of the Home
Protection Act have annual percentage rates over 10% greater than the yield on
Treasury Securities of comparable maturity and/or fees and points which exceed
the greater of 8% of the total loan amount or $400. These provisions can
impose specific statutory liabilities upon creditors who fail to comply with
their provisions and may affect the enforceability of the related loans. In
addition, any assignee of the creditor would generally be subject to all
claims and defenses that the consumer could assert against the creditor,
including, without limitation, the right to rescind the mortgage loan. The
Company will represent and warrant in the Agreement that each of the Loans was
originated in compliance with all applicable laws, including the Truth-In-
Lending Act, as amended. If any Loan is found to be in breach of such
representation and warranty, the Company will be required by the Agreement to
repurchase such Loan at a price equal to the principal amount thereof plus
accrued interest thereon. The amount of such purchase price will be treated as
a Principal Prepayment in Full of the related Loan. In lieu of purchasing a
Loan, the Company may under certain circumstances substitute another loan.
Variations in Loan Characteristics. The Additional Loans and Subsequent
Loans will have characteristics that differ somewhat from the Initial Loans
described herein. However, each of such Additional Loans and Subsequent Loans
must satisfy the eligibility criteria described under "Description of the
Certificates--Conveyance of Loans" and "--Conveyance of Subsequent Loans and
Pre-Funding Account" herein. Current Reports on Form 8-K will be filed
following the purchase of Additional Loans and Subsequent Loans by the Trust
and following the termination of the Funding Period, which latter report will
include the same type of information regarding such Subsequent Loans as are
included in this Prospectus Supplement with respect to the Initial Loans.
S-27
<PAGE>
STRUCTURE OF THE TRANSACTION
On or about May 28, 1998 (the "Closing Date"), the Company will establish
the Trust pursuant to a Pooling and Servicing Agreement to be dated as of May
1, 1998 (the "Agreement"), between the Company, as Seller and Servicer, and
the Trustee.
The Class A-1A ARM, Class A-1B ARM, Class A-1, Class A-2, Class A-3, Class
A-4, Class A-5, Class A-6, Class A-7 IO, Class M-1, Class M-2, Class B-1 and
Class B-2 Certificates (the "Certificates"), will be issued by the Trust, the
corpus of which will consist primarily of the Loans, including all rights to
receive payments due on such Loans after (i) April 30, 1998 (or the date of
origination thereof, if later) for each Loan other than the Subsequent Loans
and (ii) for each Subsequent Loan, the date on which such Loan is purchased by
the Trust (the "Cut-off Date"), liens on the related real estate and amounts
held for the Trust in the Certificate Account (as defined below).
Payments and recoveries in respect of principal and interest on the Loans
will be paid into a separate trust account maintained at an Eligible
Institution (initially U.S. Bank National Association, Minneapolis, Minnesota)
in the name of the Trust (the "Certificate Account"), no later than one
Business Day after receipt. Payments on deposit in the Certificate Account and
constituting the Amount Available will be applied on the fifteenth day of each
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--Distribution on Certificates" herein
and to pay certain monthly fees to the Servicer as compensation for its
servicing of the Loans (the "Monthly Servicing Fee").
The Servicer will be obligated to advance for each Payment Date any
scheduled payments on the Loans 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 Loans from the Company to the Trust, the
obligations of the Company are limited to (a) its obligations as Servicer to
service the Loans, (b) certain representations and warranties in the Agreement
as described under "Description of the Certificates--Conveyance of Loans"
herein and (c) certain indemnities. The Company is obligated under the
Agreement to repurchase at the Repurchase Price (as defined herein), or, at
its option, to substitute another loan for, any Loan 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 and adversely
affects the Certificateholders' interest in such Loan if such breach has not
been cured prior to such date. The Agreement also provides that the Company
has certain obligations to repurchase Loans and to indemnify the Trustee and
Certificateholders with respect to certain other matters.
USE OF PROCEEDS
The Company will use the net proceeds received from the sale of the
Certificates for working capital and general corporate purposes, including
building a portfolio of home equity loans, providing warehouse financing for
the purchase of loans and other costs of maintaining such loans until they are
pooled and sold to other investors.
S-28
<PAGE>
THE LOANS
FIXED-RATE LOANS
The Loan Pool includes Fixed-Rate Loans (meaning all Loans other than the
Adjustable Rate Loans, described separately below). This Prospectus Supplement
contains information regarding the Initial Fixed-Rate Loans, which will
represent approximately 81% of all Fixed-Rate Loans, and which consist of
closed-end home equity loans originated through April 30, 1998. The
information for each Initial Fixed-Rate Loan is as of the Cut-off Date for
such Loan. Under the Agreement, the Trust may purchase Additional Fixed-Rate
Loans on the Closing Date and may purchase Subsequent Fixed-Rate Loans for a
period of up to 90 days thereafter. See "Description of the Certificates--
Conveyance of Subsequent Loans and Pre-Funding Account" below.
The Initial Fixed-Rate Loans have an aggregate principal balance of
$306,936,214.12. Each Fixed-Rate Loan is a closed-end home equity loan
originated by the Company or by a Company-approved correspondent lender and
purchased by the Company. Each Fixed-Rate Loan 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 Fixed-Rate Loan is fully amortizing and
provides for level monthly payments over the term of such loan, computed on
the simple interest method (except for the Balloon Loans and the step-up rate
Loans), (b) each Initial Fixed-Rate Loan has its last scheduled payment due no
later than May 2028, and (c) each Fixed-Rate Loan is secured by a lien on the
related real estate. The Fixed-Rate Loans will be originated or acquired by
the Company in the ordinary course of the Company's business. A detailed
listing of the Initial Fixed-Rate Loans is appended to the Agreement.
See "Description of the Certificates" herein and in the Prospectus. Each of
the Initial Fixed-Rate Loans has a Loan Rate of at least 7.45% per annum and
not more than 18.94% and the weighted average of the Loan Rates of the Initial
Fixed-Rate Loans as of the Cut-off Date is 11.56%. As of the Cut-off Date, the
Initial Fixed-Rate Loans had remaining maturities of at least eight months but
not more than 360 months and original maturities of at least 24 months but not
more than 360 months. The Initial Fixed-Rate Loans had a weighted average term
to scheduled maturity, as of origination, of 242 months, and a weighted
average term to scheduled maturity, as of the Cut-off Date, of 241 months. The
average principal balance per Initial Fixed-Rate Loan as of the Cut-off Date
was $54,996.63 and the principal balances on the Initial Fixed-Rate Loans as
of the Cut-off Date ranged from $512.29 to $350,000.00. The Balloon Loans
included in the Initial Fixed-Rate Loans consisted of 831 closed-end home
equity loans and have a principal balance as of the Cut-off Date of
$64,781,261.42. The weighted average of the Loan Rates of such Balloon Loans
as of the Cut-off Date was 11.40%, and such Balloon Loans had a weighted
average term to scheduled maturity, as of origination, of 190 months, and a
weighted average term to scheduled maturity, as of the Cut-off Date, of
189 months. The Initial Fixed-Rate Loans 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 6.72% of the Initial Fixed-Rate
Loans were secured by real property located in Ohio, 6.38% in Pennsylvania,
6.16% in Illinois, 5.77% in North Carolina, 5.66% in Michigan, and 5.46% in
California. No other state represented 5% or more of the Cut-off Date Pool
Principal Balance of the Initial Fixed-Rate Loans.
S-29
<PAGE>
Set forth below is a description of certain additional characteristics of the
Initial Fixed-Rate Loans.
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES--INITIAL FIXED-RATE LOANS
<TABLE>
<CAPTION>
% OF INITIAL % OF INITIAL
FIXED-RATE LOANS FIXED-RATE LOANS
NUMBER OF BY NUMBER OF AGGREGATE PRINCIPAL BY OUTSTANDING
LOANS AS OF LOANS AS BALANCE OUTSTANDING PRINCIPAL BALANCE
CUT-OFF DATE OF CUT-OFF DATE AS OF CUT-OFF DATE AS OF CUT-OFF DATE
------------ ----------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Alabama................. 222 3.98% $ 11,740,313.71 3.83%
Arizona................. 112 2.01 6,085,708.26 1.98
Arkansas................ 26 .47 1,298,106.67 .42
California.............. 252 4.52 16,757,404.32 5.46
Colorado................ 103 1.85 5,129,500.44 1.67
Connecticut............. 66 1.18 4,165,385.67 1.36
Delaware................ 24 .43 1,632,012.90 .53
District of Columbia.... 9 .16 359,346.17 .12
Florida................. 227 4.07 12,270,809.41 4.00
Georgia................. 137 2.45 7,534,075.33 2.45
Idaho................... 31 .56 1,714,507.04 .56
Illinois................ 324 5.80 18,894,058.71 6.16
Indiana................. 154 2.76 6,688,258.42 2.18
Iowa.................... 100 1.79 4,805,241.83 1.57
Kansas.................. 117 2.10 5,752,166.55 1.87
Kentucky................ 88 1.58 4,578,436.84 1.49
Louisiana............... 83 1.49 4,097,670.44 1.34
Maine................... 12 .22 558,267.94 .18
Maryland................ 139 2.49 7,112,887.38 2.32
Massachusetts........... 76 1.36 5,546,378.01 1.81
Michigan................ 307 5.50 17,378,181.65 5.66
Minnesota............... 114 2.04 5,328,283.24 1.74
Mississippi............. 47 .84 1,865,511.92 .61
Missouri................ 196 3.51 9,316,598.42 3.04
Montana................. 9 .16 656,441.76 .21
Nebraska................ 58 1.04 3,088,656.88 1.01
Nevada.................. 61 1.09 5,273,249.33 1.72
New Hampshire........... 10 .18 553,121.43 .18
New Jersey.............. 73 1.31 5,569,673.88 1.81
New Mexico.............. 36 .65 2,253,706.82 .73
New York................ 200 3.58 11,204,223.16 3.65
North Carolina.......... 336 6.01 17,707,987.56 5.77
North Dakota............ 18 .32 992,511.29 .32
Ohio.................... 377 6.75 20,637,620.56 6.72
Oklahoma................ 47 .84 1,856,403.47 .60
Oregon.................. 36 .65 1,895,254.46 .62
Pennsylvania............ 357 6.39 19,576,926.94 6.38
Rhode Island............ 19 .34 982,333.00 .32
South Carolina.......... 172 3.08 9,661,563.02 3.15
South Dakota............ 11 .20 598,522.08 .19
Tennessee............... 132 2.37 7,922,104.18 2.58
Texas................... 203 3.64 8,509,487.55 2.77
Utah.................... 62 1.11 3,220,713.82 1.05
Vermont................. 4 .07 115,370.59 .04
Virginia................ 158 2.83 10,344,336.46 3.37
Washington.............. 63 1.13 3,928,858.02 1.28
West Virginia........... 30 .54 1,745,653.14 .57
Wisconsin............... 135 2.42 7,592,092.79 2.47
Wyoming................. 8 .14 440,290.66 .14
----- ------ --------------- ------
Total............... 5,581 100.00% $306,936,214.12 100.00%
===== ====== =============== ======
</TABLE>
S-30
<PAGE>
YEARS OF ORIGINATION--INITIAL FIXED-RATE LOANS
<TABLE>
<CAPTION>
% OF INITIAL FIXED-
RATE LOANS BY
AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
NUMBER OF LOANS BALANCE OUTSTANDING BALANCE AS OF
YEAR OF ORIGINATION AS OF CUT-OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ------------------- ------------------ ------------------- ---------------------
<S> <C> <C> <C>
1995.................... 1 $ 39,093.06 .01%
1996.................... 6 217,002.33 .07
1997.................... 256 12,644,910.16 4.12
1998.................... 5,318 294,035,208.57 95.80
----- --------------- ------
Total............... 5,581 $306,936,214.12 100.00%
===== =============== ======
</TABLE>
DISTRIBUTION OF ORIGINAL LOAN AMOUNTS--INITIAL FIXED-RATE LOANS
<TABLE>
<CAPTION>
% OF INITIAL FIXED-
RATE LOANS BY
AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
ORIGINAL LOAN NUMBER OF LOANS BALANCE OUTSTANDING BALANCE AS OF
AMOUNT (IN DOLLARS) AS OF CUT-OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
------------------- ------------------ ------------------- ---------------------
<S> <C> <C> <C>
Less than$ 10,000....... 24 $ 173,027.41 .06%
$ 10,000 to $ 19,999.... 930 13,642,987.23 4.44
$ 20,000 to $ 29,999.... 848 20,779,089.78 6.77
$ 30,000 to $ 39,999.... 654 22,459,423.26 7.32
$ 40,000 to $ 49,999.... 610 27,175,688.38 8.85
$ 50,000 to $ 59,999.... 586 31,947,464.29 10.41
$ 60,000 to $ 69,999.... 445 28,544,957.91 9.30
$ 70,000 to $ 79,999.... 321 23,855,288.73 7.77
$ 80,000 to $ 89,999.... 264 22,154,495.01 7.22
$ 90,000 to $ 99,999.... 205 19,369,099.07 6.31
$100,000 to $109,999.... 146 15,240,464.64 4.97
$110,000 to $119,999.... 140 15,986,334.52 5.21
$120,000 to $129,999.... 102 12,689,057.45 4.13
$130,000 to $139,999.... 61 8,209,309.92 2.67
$140,000 to $149,999.... 61 8,825,232.21 2.88
$150,000 to $159,999.... 42 6,464,756.04 2.11
$160,000 to $169,999.... 29 4,725,067.76 1.54
$170,000 to $179,999.... 24 4,195,797.48 1.37
$180,000 to $189,999.... 14 2,579,528.05 .84
$190,000 to $199,999.... 16 3,127,943.86 1.02
$200,000 to $249,999.... 36 8,023,167.39 2.61
$250,000 to $299,999.... 13 3,533,754.77 1.15
Greater than $299,999... 10 3,234,278.96 1.05
----- --------------- ------
Total............... 5,581 $306,936,214.12 100.00%
===== =============== ======
</TABLE>
S-31
<PAGE>
LOAN RATES--INITIAL FIXED-RATE LOANS
<TABLE>
<CAPTION>
% OF INITIAL FIXED-RATE
LOANS BY
AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
NUMBER OF LOANS BALANCE OUTSTANDING BALANCE AS OF
RANGE OF LOANS BY LOAN RATE AS OF CUT-OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- --------------------------- ------------------ ------------------- -----------------------
<S> <C> <C> <C>
Less than 9.001%........... 64 $ 6,120,514.98 1.99%
9.001 to 10.000%.......... 415 39,463,901.86 12.86
10.001 to 11.000%.......... 1,188 97,494,313.37 31.77
11.001 to 12.000%.......... 944 55,585,129.34 18.11
12.001 to 13.000%.......... 1,296 54,033,551.80 17.60
13.001 to 14.000%.......... 1,087 36,497,920.05 11.89
14.001 to 15.000%.......... 387 12,185,235.23 3.97
15.001 to 16.000%.......... 119 3,739,032.51 1.22
16.001 to 17.000%.......... 53 1,318,181.71 .43
Greater than 17.000%....... 28 498,433.27 .16
----- --------------- ------
Total.................. 5,581 $306,936,214.12 100.00%
===== =============== ======
</TABLE>
REMAINING MONTHS TO MATURITY--INITIAL FIXED-RATE LOANS
<TABLE>
<CAPTION>
% OF INITIAL FIXED-RATE
LOANS BY
MONTHS REMAINING TO AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
SCHEDULED MATURITY NUMBER OF LOANS BALANCE OUTSTANDING BALANCE AS OF
AS OF CUT-OFF DATE AS OF CUT-OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
------------------- ------------------ ------------------- -----------------------
<S> <C> <C> <C>
Fewer than 31........... 2 $ 70,717.56 .02%
31 to 60................ 52 794,803.95 .26
61 to 90................ 38 1,014,180.21 .33
91 to 120............... 358 10,102,554.88 3.29
121 to 150.............. 33 980,243.41 .32
151 to 180.............. 2,095 100,799,790.25 32.84
181 to 210.............. 27 755,043.82 .25
211 to 240.............. 1,768 99,625,692.18 32.46
241 to 270.............. 3 150,800.00 .05
271 to 300.............. 663 46,024,655.42 14.99
301 to 330.............. 2 142,999.24 .05
331 to 360.............. 540 46,474,733.20 15.14
----- --------------- ------
Total............... 5,581 $306,936,214.12 100.00%
===== =============== ======
</TABLE>
LIEN POSITION--INITIAL FIXED-RATE LOANS
<TABLE>
<CAPTION>
% OF INITIAL
FIXED-RATE % OF INITIAL FIXED-RATE
LOANS BY LOANS BY
NUMBER OF AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
NUMBER OF LOANS LOANS AS OF BALANCE OUTSTANDING BALANCE AS OF
AS OF CUT-OFF DATE CUT-OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
------------------ ------------ ------------------- -----------------------
<S> <C> <C> <C> <C>
First................... 3,228 57.84% $240,258,963.86 78.27%
Second.................. 2,333 41.80 66,225,503.00 21.58
Third................... 20 .36 451,747.26 .15
----- ------ --------------- ------
Total............... 5,581 100.00% $306,936,214.12 100.00%
===== ====== =============== ======
</TABLE>
S-32
<PAGE>
LOAN-TO-VALUE RATIO--INITIAL FIXED-RATE LOANS
<TABLE>
<CAPTION>
% OF INITIAL FIXED-RATE
LOANS BY
AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
NUMBER OF LOANS BALANCE OUTSTANDING BALANCE AS OF
LOAN-TO-VALUE RATIO AS OF CUT-OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ------------------- ------------------ ------------------- -----------------------
<S> <C> <C> <C>
Less than 10.0001%...... 4 $ 49,079.01 .02%
10.0001 to 20.0000%..... 16 335,708.83 .11
20.0001 to 30.0000%..... 35 978,126.78 .32
30.0001 to 40.0000%..... 65 2,242,734.77 .73
40.0001 to 50.0000%..... 68 2,602,841.15 .85
50.0001 to 60.0000%..... 118 4,846,182.28 1.58
60.0001 to 70.0000%..... 212 9,912,707.26 3.23
70.0001 to 80.0000%..... 714 36,869,973.42 12.01
80.0001 to 90.0000%..... 1,926 109,861,492.61 35.79
Greater than 90.0000%... 2,423 139,237,368.01 45.36
----- --------------- ------
Total............... 5,581 $306,936,214.12 100.00%
===== =============== ======
</TABLE>
ADJUSTABLE RATE LOANS
The Loan Pool includes Adjustable Rate Loans. This Prospectus Supplement
contains information regarding the Initial Adjustable Rate Loans, which will
represent approximately 78% of all Adjustable Rate Loans, and which consist of
closed-end loans originated through April 14, 1998. The information for each
Initial Adjustable Rate Loan is as of the Cut-off Date for such Loan. Under
the Agreement, the Trust may purchase Additional Adjustable Rate Loans on the
Closing Date and may purchase Subsequent Adjustable Rate Loans for a period of
up to 90 days thereafter. See "Description of the Certificates--Conveyance of
Subsequent Loans and Pre-Funding Account" below.
The Initial Adjustable Rate Loans have an aggregate principal balance of
$93,026,255.05. Each Adjustable Rate Loan is a closed-end loan originated by
the Company or by a Company-approved correspondent lender and purchased by the
Company. Each Adjustable Rate Loan is secured by a lien on the related real
estate.
The Initial Adjustable Rate Loans have Loan Rates subject to semiannual
adjustment after an initial period of up to 36 months on the day of the month
specified in the Adjustable Rate Loan (each such date, an "Adjustment Date"),
to equal the sum of (i) the Six-Month LIBOR Index (as defined below) and (ii)
a fixed percentage amount specified in the related Adjustable Rate Loan (the
"Gross Margin"). The Loan Rates will not increase on any Adjustment Date by
more than 2% per annum. All of the Initial Adjustable Rate Loans further
provide that the Loan Rate will in no event be more than the fixed percentage
set forth in the Adjustable Rate Loan (such rate, the "Maximum Loan Rate").
Each Initial Adjustable Rate Loan provides that in no event will the Loan Rate
be less than a specified lifetime interest rate floor (such rate, the "Minimum
Loan Rate"). Effective with the first payment due on an Initial Adjustable
Rate Loan after each related Adjustment Date, the monthly payment will be
adjusted to an amount which will fully amortize the outstanding principal
balance of such Adjustable Rate Loan over its remaining term, and pay interest
at the Loan Rate as so adjusted. All of the Initial Adjustable Rate Loans were
originated with a Loan Rate less than the sum of (i) the Six-Month LIBOR Index
at the time the initial Loan Rate was established and (ii) the Gross Margin.
The Six-Month LIBOR Index is a per annum rate equal to the average of
interbank offered rates for six-month U.S. dollar-denominated deposits in the
London market based on quotations of major banks, as published in The Wall
Street Journal and as most recently available as of the date specified in the
related Adjustable Rate Loan.
The Company will make certain representations and warranties in the
Agreement, including that (a) each Adjustable Rate Loan is fully amortizing
and provides for monthly payments, except, in the case of a Balloon Loan, for
the final monthly payment, over the term of such loan, computed on the simple
interest method, (b) each Initial Adjustable Rate Loan has its last scheduled
payment due no later than May 2028, and (c) each Adjustable Rate Loan is
secured by a lien on the related real estate. The Adjustable Rate Loans will
be originated
S-33
<PAGE>
or acquired by the Company in the ordinary course of the Company's business. A
detailed listing of the Initial Adjustable Rate Loans is appended to the
Agreement. See "Description of the Certificates" herein and in the Prospectus.
As of the Cut-off Date, the Initial Adjustable Rate Loans had Loan Rates
ranging from 6.99% to 16.89% and a weighted average Loan Rate of 9.11%. As of
the Cut-off Date, the weighted average Maximum Loan Rate of the Initial
Adjustable Rate Loans was 15.37%, with Maximum Loan Rates that range from
10.99% to 22.89%. As of the Cut-Off Date, the Initial Adjustable Rate Loans
had a weighted average gross margin of 6.47% and gross margins ranging from
2.54% to 11.14%. As of the Cut-off Date, the Initial Adjustable Rate Loans had
remaining maturities of at least 350 months but not more than 360 months and
original maturities of 360 months. The Initial Adjustable Rate Loans had a
weighted average term to scheduled maturity, as of origination, of 360 months,
and a weighted average term to scheduled maturity, as of the Cut-off Date, of
359 months. The average principal balance per Initial Adjustable Rate Loan as
of the Cut-off Date was $118,504.78 and the principal balances on the Initial
Adjustable Rate Loans as of the Cut-off Date ranged from $19,500.00 to
$401,110.94. The Initial Adjustable Rate Loans arise from loans relating to
real property located in 42 states and the District of Columbia. By principal
balance as of the Cut-off Date, approximately 15.49% of the Initial Adjustable
Rate Loans were secured by real property located in California, 10.70% in
Washington, 9.95% in Ohio, 7.77% in Maryland, and 5.02% in Oregon. No other
state represented 5% or more of the Cut-off Date Pool Principal Balance of the
Initial Adjustable Rate Loans.
S-34
<PAGE>
Set forth below is a description of certain additional characteristics of the
Initial Adjustable Rate Loans.
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES--INITIAL ADJUSTABLE RATE
LOANS
<TABLE>
<CAPTION>
% OF INITIAL
% OF INITIAL ADJUSTABLE
ADJUSTABLE RATE LOANS
RATE LOANS AGGREGATE PRINCIPAL BY OUTSTANDING
BY NUMBER OF BALANCE PRINCIPAL
NUMBER OF LOANS LOANS AS OUTSTANDING AS OF BALANCE AS OF
AS OF CUT-OFF DATE OF CUT-OFF DATE CUT-OFF DATE CUT-OFF DATE
------------------ --------------- ------------------- --------------
<S> <C> <C> <C> <C>
Alabama................. 47 5.99% $ 4,242,105.13 4.56%
Arizona................. 20 2.55 3,179,525.37 3.42
California.............. 80 10.20 14,417,129.18 15.49
Colorado................ 25 3.18 3,187,845.94 3.43
Connecticut............. 4 .51 423,044.84 .45
Delaware................ 1 .13 27,986.93 .03
District of Columbia.... 3 .38 392,689.83 .42
Florida................. 19 2.42 2,037,390.79 2.19
Georgia................. 24 3.06 2,400,443.63 2.58
Idaho................... 4 .51 674,574.33 .73
Illinois................ 10 1.27 1,376,094.29 1.48
Indiana................. 10 1.27 1,015,643.70 1.09
Iowa.................... 2 .25 135,467.98 .15
Kansas.................. 9 1.15 1,303,723.60 1.40
Kentucky................ 15 1.91 1,240,032.30 1.33
Louisiana............... 5 .64 415,336.17 .45
Maine................... 1 .13 95,250.00 .10
Maryland................ 49 6.25 7,229,643.22 7.77
Massachusetts........... 2 .25 214,875.71 .23
Michigan................ 47 5.99 3,980,782.95 4.28
Minnesota............... 3 .38 240,062.93 .26
Missouri................ 10 1.27 814,982.49 .88
Montana................. 1 .13 109,572.49 .12
Nebraska................ 2 .25 135,009.80 .15
Nevada.................. 4 .51 828,605.24 .89
New Hampshire........... 1 .13 54,297.70 .06
New Jersey.............. 4 .51 541,122.19 .58
New Mexico.............. 4 .51 426,551.94 .46
New York................ 5 .64 562,999.41 .61
North Carolina.......... 26 3.31 2,151,315.03 2.31
Ohio.................... 94 11.98 9,258,027.90 9.95
Oklahoma................ 2 .25 98,507.52 .11
Oregon.................. 36 4.59 4,674,446.77 5.02
Pennsylvania............ 38 4.84 3,997,706.25 4.30
Rhode Island............ 2 .25 223,100.00 .24
South Carolina.......... 10 1.27 895,433.37 .96
Tennessee............... 16 2.04 1,237,759.55 1.33
Texas................... 15 1.91 1,546,396.13 1.66
Utah.................... 25 3.18 3,237,410.06 3.48
Virginia................ 14 1.78 2,107,907.65 2.27
Washington.............. 69 8.79 9,960,863.48 10.70
West Virginia........... 12 1.53 595,954.21 .64
Wisconsin............... 15 1.91 1,338,637.05 1.44
--- ------ -------------- ------
Total............... 785 100.00% $93,026,255.05 100.00%
=== ====== ============== ======
</TABLE>
S-35
<PAGE>
YEARS OF ORIGINATION--INITIAL ADJUSTABLE RATE LOANS
<TABLE>
<CAPTION>
% OF INITIAL
ADJUSTABLE RATE
LOANS BY
AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
NUMBER OF LOANS BALANCE OUTSTANDING BALANCE AS OF
YEAR OF ORIGINATION AS OF CUT-OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ------------------- ------------------ ------------------- ---------------------
<S> <C> <C> <C>
1997.................... 107 $11,173,749.21 12.01%
1998.................... 678 81,852,505.84 87.99
--- -------------- ------
Total............... 785 $93,026,255.05 100.00%
=== ============== ======
</TABLE>
DISTRIBUTION OF ORIGINAL LOAN AMOUNTS--INITIAL ADJUSTABLE RATE LOANS
<TABLE>
<CAPTION>
% OF INITIAL
ADJUSTABLE RATE
LOANS BY
AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
ORIGINAL LOAN AMOUNT NUMBER OF LOANS BALANCE OUTSTANDING BALANCE AS OF
(IN DOLLARS) AS OF CUT-OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
-------------------- ------------------ ------------------- ---------------------
<S> <C> <C> <C>
Less than$ 20,000....... 1 $ 19,500.00 .02%
$ 20,000 to $ 29,999.... 10 251,184.62 .27
$ 30,000 to $ 39,999.... 14 480,498.22 .52
$ 40,000 to $ 49,999.... 38 1,725,572.39 1.85
$ 50,000 to $ 59,999.... 62 3,403,092.37 3.66
$ 60,000 to $ 69,999.... 48 3,090,390.59 3.32
$ 70,000 to $ 79,999.... 50 3,700,182.75 3.98
$ 80,000 to $ 89,999.... 69 5,822,450.12 6.26
$ 90,000 to $ 99,999.... 54 5,111,354.30 5.49
$100,000 to $109,999.... 59 6,163,965.35 6.63
$110,000 to $119,999.... 62 7,097,316.22 7.63
$120,000 to $129,999.... 60 7,449,691.82 8.01
$130,000 to $139,999.... 41 5,512,533.31 5.93
$140,000 to $149,999.... 24 3,460,464.41 3.72
$150,000 to $159,999.... 32 4,962,825.80 5.33
$160,000 to $169,999.... 35 5,749,252.17 6.18
$170,000 to $179,999.... 20 3,463,263.42 3.72
$180,000 to $189,999.... 21 3,862,154.87 4.15
$190,000 to $199,999.... 14 2,715,700.91 2.92
$200,000 to $249,999.... 35 7,874,101.59 8.47
$250,000 to $299,999.... 17 4,551,132.70 4.89
Greater than $299,999... 19 6,559,627.12 7.05
--- -------------- ------
Total............... 785 $93,026,255.05 100.00%
=== ============== ======
</TABLE>
S-36
<PAGE>
CURRENT LOAN RATES--INITIAL ADJUSTABLE RATE LOANS
<TABLE>
<CAPTION>
% OF INITIAL
AGGREGATE PRINCIPAL ADJUSTABLE RATE LOANS BY
RANGE OF LOANS BY NUMBER OF LOANS BALANCE OUTSTANDING OUTSTANDING PRINCIPAL
LOAN RATE AS OF CUT-OFF DATE AS OF CUT-OFF DATE BALANCE AS OF CUT-OFF DATE
----------------- ------------------ ------------------- --------------------------
<S> <C> <C> <C>
Less than 9.001%........ 407 $54,388,566.56 58.46%
9.001 to 10.000%........ 195 23,264,748.41 25.01
10.001 to 11.000%....... 97 8,835,778.41 9.50
11.001 to 12.000%....... 43 3,507,397.90 3.77
12.001 to 13.000%....... 21 1,707,100.23 1.84
13.001 to 14.000%....... 16 960,254.51 1.03
14.001 to 15.000%....... 4 307,064.69 .33
15.001 to 16.000%....... 1 30,348.27 .03
16.001 to 17.000%....... 1 24,996.07 .03
--- -------------- ------
Total............... 785 $93,026,255.05 100.00%
=== ============== ======
</TABLE>
REMAINING MONTHS TO MATURITY--INITIAL ADJUSTABLE RATE LOANS
<TABLE>
<CAPTION>
% OF INITIAL
MONTHS REMAINING TO AGGREGATE PRINCIPAL ADJUSTABLE RATE LOANS BY
SCHEDULED MATURITY NUMBER OF LOANS BALANCE OUTSTANDING OUTSTANDING PRINCIPAL
AS OF CUT-OFF DATE AS OF CUT-OFF DATE AS OF CUT-OFF DATE BALANCE AS OF CUT-OFF DATE
------------------- ------------------ ------------------- --------------------------
<S> <C> <C> <C>
346 to 360.............. 785 $93,026,255.05 100.00%
--- -------------- ------
Total............... 785 $93,026,255.05 100.00%
=== ============== ======
</TABLE>
LIEN POSITION--INITIAL ADJUSTABLE RATE LOANS
<TABLE>
<CAPTION>
% OF INITIAL
ADJUSTABLE RATE
LOANS BY % OF INITIAL
NUMBER OF LOANS AGGREGATE PRINCIPAL ADJUSTABLE RATE LOANS BY
NUMBER OF LOANS AS OF CUT-OFF BALANCE OUTSTANDING OUTSTANDING PRINCIPAL
AS OF CUT-OFF DATE DATE AS OF CUT-OFF DATE BALANCE AS OF CUT-OFF DATE
------------------ --------------- ------------------- --------------------------
<S> <C> <C> <C> <C>
First................... 785 100.00% $93,026,255.05 100.00%
--- ------ -------------- ------
Total............... 785 100.00% $93,026,255.05 100.00%
=== ====== ============== ======
</TABLE>
LOAN-TO-VALUE RATIO--INITIAL ADJUSTABLE RATE LOANS
<TABLE>
<CAPTION>
% OF INITIAL
AGGREGATE PRINCIPAL ADJUSTABLE RATE LOANS BY
NUMBER OF LOANS BALANCE OUTSTANDING OUTSTANDING PRINCIPAL
LOAN-TO-VALUE RATIO AS OF CUT-OFF DATE AS OF CUT-OFF DATE BALANCE AS OF CUT-OFF DATE
- ------------------- ------------------ ------------------- --------------------------
<S> <C> <C> <C>
30.0001 to 40.0000%..... 2 $ 142,887.26 .15%
40.0001 to 50.0000%..... 9 626,963.05 .67
50.0001 to 60.0000%..... 4 395,702.67 .43
60.0001 to 70.0000%..... 30 2,967,327.07 3.19
70.0001 to 80.0000%..... 187 19,354,054.77 20.80
80.0001 to 90.0000%..... 473 60,257,369.97 64.78
Greater than 90.0000%... 80 9,281,950.26 9.98
--- -------------- ------
Total............... 785 $93,026,255.05 100.00%
=== ============== ======
</TABLE>
S-37
<PAGE>
MONTH OF NEXT RATE ADJUSTMENT--INITIAL ADJUSTABLE RATE LOANS
<TABLE>
<CAPTION>
% OF INITIAL
AGGREGATE PRINCIPAL ADJUSTABLE RATE LOANS
NUMBER OF LOANS BALANCE OUTSTANDING BY OUTSTANDING PRINCIPAL
MONTH OF NEXT RATE ADJUSTMENT AS OF CUT-OFF DATE AS OF CUT-OFF DATE BALANCE AS OF CUT-OFF DATE
- ----------------------------- ------------------ ------------------- --------------------------
<S> <C> <C> <C>
May 1998.................... 3 $ 290,720.97 .31%
June 1998................... 5 614,024.58 .66
July 1998................... 1 59,737.76 .06
August 1998................. 7 638,060.18 .69
September 1998.............. 8 911,423.32 .98
February 1999............... 3 562,996.76 .61
March 1999.................. 2 325,250.00 .35
May 1999.................... 3 248,519.54 .27
June 1999................... 11 828,946.90 .89
July 1999................... 6 711,276.18 .76
August 1999................. 1 31,550.34 .03
September 1999.............. 3 239,340.67 .26
October 1999................ 11 1,315,277.19 1.41
November 1999............... 18 1,851,370.82 1.99
December 1999............... 36 4,276,134.34 4.60
January 2000................ 118 12,138,879.53 13.05
February 2000............... 226 26,807,438.52 28.82
March 2000.................. 273 35,636,565.94 38.30
April 2000.................. 34 4,043,638.57 4.35
May 2000.................... 1 25,000.00 .03
December 2000............... 1 22,979.03 .02
January 2001................ 1 32,864.93 .04
February 2001............... 8 862,618.98 .93
March 2001.................. 5 551,640.00 .59
--- -------------- ------
Total................... 785 $93,026,255.05 100.00%
=== ============== ======
</TABLE>
S-38
<PAGE>
DISTRIBUTION OF GROSS MARGIN--INITIAL ADJUSTABLE RATE LOANS
<TABLE>
<CAPTION>
% OF INITIAL
AGGREGATE PRINCIPAL ADJUSTABLE RATE LOANS
NUMBER OF LOANS BALANCE OUTSTANDING BY OUTSTANDING PRINCIPAL
GROSS MARGIN AS OF CUT-OFF DATE AS OF CUT-OFF DATE BALANCE AS OF CUT-OFF DATE
- ------------ ------------------ ------------------- --------------------------
<S> <C> <C> <C>
Less than 4.000%........ 2 $ 292,235.72 .31%
4.000 to 4.249%......... 2 124,391.60 .13
4.250 to 4.499%......... 2 290,914.66 .31
4.500 to 4.749%......... 7 579,570.57 .62
4.750 to 4.999%......... 8 1,135,102.47 1.22
5.000 to 5.249%......... 11 1,009,415.56 1.09
5.250 to 5.499%......... 26 2,616,888.13 2.81
5.500 to 5.749%......... 77 8,575,024.42 9.22
5.750 to 5.999%......... 71 9,405,674.79 10.11
6.000 to 6.249%......... 82 9,569,445.82 10.29
6.250 to 6.499%......... 47 5,310,843.06 5.71
6.500 to 6.749%......... 96 12,842,377.31 13.82
6.750 to 6.999%......... 147 19,031,582.65 20.47
7.000 to 7.249%......... 118 13,935,784.64 14.98
7.250 to 7.499%......... 29 2,904,882.37 3.12
7.500 to 7.749%......... 13 1,537,745.64 1.65
7.750 to 7.999%......... 16 1,436,066.04 1.54
8.000 to 8.249%......... 5 404,107.79 .43
8.250 to 8.499%......... 1 47,966.91 .05
8.500 to 8.749%......... 10 998,490.82 1.07
8.750 to 8.999%......... 3 284,381.68 .31
9.000 to 9.249%......... 5 261,517.28 .28
9.250 to 9.499%......... 2 239,420.41 .26
9.500 to 9.749%......... 3 114,505.00 .12
Greater than 9.749%..... 2 77,919.71 .08
--- -------------- ------
Total............... 785 $93,026,255.05 100.00%
=== ============== ======
</TABLE>
S-39
<PAGE>
MAXIMUM LOAN RATES--INITIAL ADJUSTABLE RATE LOANS
<TABLE>
<CAPTION>
% OF INITIAL
ADJUSTABLE RATE LOANS
NUMBER OF LOANS AGGREGATE PRINCIPAL BY OUTSTANDING PRINCIPAL
AS OF CUT-OFF BALANCE OUTSTANDING BALANCE AS OF
MAXIMUM LOAN RATES DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ------------------ --------------- ------------------- ------------------------
<S> <C> <C> <C>
Less than 14.000%....... 116 $15,865,233.16 17.06%
14.000 to 14.249%....... 10 1,400,861.21 1.51
14.250 to 14.499%....... 36 4,567,969.49 4.91
14.500 to 14.749%....... 75 8,884,108.04 9.55
14.750 to 14.999%....... 112 14,735,718.75 15.84
15.000 to 15.249%....... 40 5,074,014.40 5.45
15.250 to 15.499%....... 52 6,653,549.65 7.15
15.500 to 15.749%....... 38 4,109,628.40 4.42
15.750 to 15.999%....... 62 9,057,932.22 9.74
16.000 to 16.249%....... 17 1,591,179.92 1.71
16.250 to 16.499%....... 38 3,518,456.83 3.78
16.500 to 16.749%....... 24 2,964,716.71 3.19
16.750 to 16.999%....... 39 4,420,373.07 4.75
17.000 to 17.249%....... 17 1,625,039.80 1.75
17.250 to 17.499%....... 17 1,573,010.49 1.69
17.500 to 17.749%....... 13 1,083,746.77 1.16
17.750 to 17.999%....... 19 1,585,157.95 1.70
18.000 to 18.249%....... 8 773,280.43 .83
18.250 to 18.499%....... 7 483,516.45 .52
18.500 to 18.749%....... 6 432,777.95 .47
18.750 to 18.999%....... 9 654,999.79 .70
19.000 to 19.249%....... 7 462,399.28 .50
19.250 to 19.499%....... 5 290,938.00 .31
19.500 to 19.749%....... 2 118,475.67 .13
19.750 to 19.999%....... 10 736,761.59 .79
Greater than 19.999%.... 6 362,409.03 .39
--- -------------- ------
Total............... 785 $93,026,255.05 100.00%
=== ============== ======
</TABLE>
S-40
<PAGE>
MINIMUM LOAN RATES--INITIAL ADJUSTABLE RATE LOANS
<TABLE>
<CAPTION>
% OF
INITIAL
ADJUSTABLE RATE
NUMBER OF LOANS
LOANS AGGREGATE PRINCIPAL BY OUTSTANDING PRINCIPAL
AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
MINIMUM LOAN RATES OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ------------------ ---------- ------------------- ------------------------
<S> <C> <C> <C>
Less than 7.250%...... 25 $ 3,399,157.68 3.65%
7.250 to 7.499%...... 9 1,242,607.77 1.34
7.500 to 7.749%...... 33 4,557,820.78 4.90
7.750 to 7.999%...... 109 15,304,267.38 16.46
8.000 to 8.249%...... 18 2,476,935.84 2.66
8.250 to 8.499%...... 45 6,225,216.88 6.69
8.500 to 8.749%...... 79 9,167,134.03 9.85
8.750 to 8.999%...... 91 12,011,439.10 12.91
9.000 to 9.249%...... 34 3,937,625.06 4.23
9.250 to 9.499%...... 55 5,779,160.55 6.21
9.500 to 9.749%...... 40 4,686,593.20 5.04
9.750 to 9.999%...... 64 8,563,414.43 9.21
10.000 to 10.249%...... 17 1,665,921.41 1.79
10.250 to 10.499%...... 37 3,581,366.78 3.85
10.500 to 10.749%...... 15 1,489,114.65 1.60
10.750 to 10.999%...... 28 2,345,734.93 2.52
11.000 to 11.249%...... 13 1,211,061.12 1.30
11.250 to 11.499%...... 10 728,022.77 .78
11.500 to 11.749%...... 14 1,190,274.87 1.28
11.750 to 11.999%...... 7 493,743.07 .53
12.000 to 12.249%...... 6 476,715.74 .51
12.250 to 12.499%...... 5 353,343.99 .38
12.500 to 12.749%...... 2 139,983.26 .15
12.750 to 12.999%...... 7 676,936.22 .73
13.000 to 13.249%...... 5 361,934.73 .39
13.250 to 13.499%...... 2 52,643.06 .06
13.500 to 13.749%...... 2 118,475.67 .13
Greater than 13.749%... 13 789,610.08 .85
--- -------------- ------
Total................ 785 $93,026,255.05 100.00%
=== ============== ======
</TABLE>
DELINQUENCY, LOAN DEFAULT AND LOSS INFORMATION
The following table sets forth information relating to the Company's
delinquency experience with respect to all home equity loans serviced by the
Company. Not all such home equity loans are of the type to be included in the
Loan Pool and thus the information presented is not necessarily indicative of
the Company's delinquency experience with respect to home equity loans similar
to the Loans. In addition, the Company began originating, purchasing and
servicing home equity loans in January 1996, and thus has no significant
experience with respect to the performance of such loans. Moreover, because
all such home equity loans have been recently originated, it is likely that
this experience is not indicative of the delinquency experience to be expected
from a more seasoned portfolio.
S-41
<PAGE>
DELINQUENCY EXPERIENCE--LOANS
<TABLE>
<CAPTION>
AT DECEMBER 31, AT MARCH 31,
---------------- ------------
1997 1996 1998
------- ------- ------------
<S> <C> <C> <C>
Number of Loans Outstanding(1)................. 65,355 17,731 77,454
Number of Loans Delinquent(2)(3)
30-59 Days................................... 1,141 504 1,263
60-89 Days................................... 283 94 340
90 Days or More.............................. 411 52 589
------- ------- ------
Total Loans Delinquent......................... 1,835 650 2,192
Delinquencies as a Percent of Loans
Outstanding(4)................................ 2.81% 3.67% 2.83%
</TABLE>
- --------
(1) Excludes defaulted loans not yet liquidated.
(2) A loan 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 loan due
on the first day of a month is not 30 days delinquent until the first day
of the next month. The information for 1996 and 1997 does not include as
delinquent the home equity loans of obligors who have entered bankruptcy
proceedings, provided that such obligors are current under their
bankruptcy payment plan.
(4) By number of loans.
Because of the Company's limited historical experience with respect to the
performance of home equity loans, no information has been included herein with
respect to the Company's loan loss or liquidation experience with respect to
home equity loans.
S-42
<PAGE>
YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity of any Certificate will depend on the price paid by
the Certificateholder and will be sensitive to the rate and timing of
principal payments (including prepayments, repurchases, defaults and
liquidations) on the Loans, which may fluctuate significantly from time to
time. The Loans generally may be prepaid in full or in part at any time.
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 Loan, to reduce the outstanding principal balance on the
Loans) will increase the yield on Certificates purchased at a price less than
the undivided ownership interest in the aggregate principal balance of the
Loans 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 Loans represented by such
Certificates. The Company has no significant experience with respect to the
rate of Principal Prepayments on home equity loans. Because the Loans have
scheduled due dates throughout the calendar month, prepayments on the Loans
would affect the amount of funds available to make distributions on the
Certificates on any Payment Date only if a substantial portion of the Loans
prepaid prior to their respective due dates in the preceding month (thus
paying less than 30 days' interest for that month) while very few Loans
prepaid after their respective due dates in the preceding month. In addition,
liquidations of Defaulted Loans or the Servicer's exercise of its option to
repurchase the entire remaining pool of Loans (see "Description of the
Certificates--Repurchase Option" herein) will affect the timing of principal
distributions on the Certificates.
The Class A-1B ARM Certificates and the Class A-1 Certificates will be
prepaid in part on the first Payment Date after the Funding Period in the
event that any Pre-Funded Amount remains in the Pre-Funding Account on such
Payment Date after the purchase by the Trust of the Subsequent Loans. Any
amounts remaining which had been allocated to the purchase of Subsequent
Adjustable Rate Loans will be paid to the Class A-1B ARM Certificateholders
and any amounts remaining which had been allocated to the purchase of
Subsequent Fixed-Rate Loans will be paid to the Class A-1 Certificateholders.
The Company believes that the principal amount of Subsequent Loans to be
purchased by the Trust will require the application of substantially all of
the Pre-Funded Amount. It is unlikely, however, that the aggregate principal
amount of Subsequent Loans purchased by the Trust will be identical to the
Pre-Funded Amount, and that consequently, Class A-1B ARM Certificateholders
and Class A-1 Certificateholders will receive some prepayment of principal.
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, with respect to the
Fixed-Rate Loans, 125% of the applicable Prepayment Assumption (as described
below), and with respect to the Adjustable Rate Loans, 30% of CPR. There can
be no assurance that the Loans will prepay at the applicable rate, and it is
unlikely that prepayments or liquidations of the Loans 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 (in the absence of any liquidation loss principal amount adjustment)
the Principal Balance of such Class, or in the case of the Class A-7 IO
Certificates, the Notional Principal Amount, immediately following the
preceding Payment Date. Interest on each Class of Certificates, other than the
Class A-1B ARM Certificates, will be computed on the basis of a 360-day year
of twelve 30-day months. Interest on the Class A-1B ARM Certificates will be
computed on the basis of actual days elapsed in a 360-day year.
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 Certificates." As required by applicable state
laws, interest paid by Obligors on the Loans is computed according to the
simple interest method.
The final scheduled payment date on the Initial Loan with the latest
maturity is in May 2028.
S-43
<PAGE>
WEIGHTED AVERAGE LIFE OF THE CERTIFICATES
The following information is given solely to illustrate the effect of
prepayments of the related Loans 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 Loans.
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 related Loans is paid.
Principal payments on Loans 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 Loans).
The rate of principal payments on pools of home equity loans 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 loans. Other factors affecting prepayment of Loans include
changes in obligors' housing needs, job transfers, unemployment and obligors'
net equity in their homes. In the case of home equity loans secured by real
estate, in general, if prevailing interest rates fall significantly below the
interest rates on such loans, the loans are likely to be subject to higher
prepayment rates than if prevailing interest rates remained at or above the
rates borne by such loans. Conversely, if prevailing interest rates rise above
the interest rates on such home equity loans, the rate of prepayment would be
expected to decrease.
The percentages and weighted average lives in the following tables were
determined assuming that: (i) scheduled interest and principal payments on the
Loans are received in a timely manner and prepayments are made at the
indicated percentages of the model as described below set forth in the table;
(ii) the Servicer exercises its option to repurchase the Loans, as described
under "Description of the Certificates--Repurchase Option;" (iii) the
aggregate principal balance of the Initial Loans as of the Cut-off Date is
$399,962,469.17 and such Loans have the characteristics set forth under "The
Loans--Fixed-Rate Loans" and "The Loans--Adjustable Rate Loans;" (iv) the
Initial Fixed-Rate Loans will, as of the Cut-off Date, be grouped into ten
pools having the additional characteristics set forth below under "Assumed
Initial Fixed-Rate Loan Characteristics" and the Additional and Subsequent
Fixed-Rate Loans will, as of the Cut-off Date, be grouped into ten pools
having the additional characteristics set forth below under "Assumed
Additional and Subsequent Fixed-Rate Loan Characteristics;" (v) the Initial
Adjustable Rate Loans will, as of the Cut-off Date, be grouped into four pools
having the additional characteristics set forth below under "Assumed Initial
Adjustable Rate Loan Characteristics" and the Additional and Subsequent
Adjustable Rate Loans will, as of the Cut-off date, be grouped into four pools
having the additional characteristics set forth below under "Assumed
Additional and Subsequent Adjustable Rate Loan Characteristics;" (vi) each
Class of the Certificates (other than the Class A-7 IO Certificates) has an
Original Principal Balance as shown on the cover page of this Prospectus
Supplement; (vii) the rate for one-month LIBOR is 5.6484% and the rate for
six-month LIBOR is 5.75%; (viii) the Subsequent Loans will have their first
scheduled payment date in June, 1998; (ix) no interest shortfalls will arise
in connection with prepayments in full of the Loans; (x) no delinquencies or
losses are experienced on the Loans; (xi) distributions are made on the
Certificates on the 15th day of each month, commencing in June 1998; and (xii)
the Certificates are issued on May 28, 1998. No representation is made that
the Loans will not experience delinquencies or losses.
Prepayments on home equity loans are commonly measured relative to a
prepayment standard or model. Two different models (each a "Prepayment
Assumption") are used in this Prospectus Supplement, one for the Adjustable
Rate Loans and the other for the Fixed-Rate Loans. Reference in this
Prospectus Supplement to a "Prepayment Assumption" shall refer to the
appropriate model, depending upon whether the reference is with respect to the
Adjustable Rate Loans or the Fixed-Rate Loans.
The percentages and weighted average life information for the Class A-1A ARM
Certificates and the Class A-1B ARM Certificates in the following tables are
based on a CPR model that assumes that the outstanding principal balance of
the Adjustable Rate Loans will prepay at the percentages of CPR set forth in
the Prepayment Scenarios table below.
The Prepayment Assumption used for the Fixed-Rate Loans represents an
assumed rate of prepayment each month relative to the then outstanding
principal balance of a pool of home equity loans for the life of such home
S-44
<PAGE>
equity loans. The "100% Prepayment Assumption" assumes a constant prepayment
of 4% per annum of the then outstanding principal balance of such loans in the
first month of the life of such loans and an additional 1.45% (precisely,
16/11%) per annum in each month thereafter until the twelfth month. Beginning
in the twelfth month and in each month thereafter during the life of such
loans, the 100% Prepayment Assumption assumes a constant prepayment rate of
20% per annum each month.
It is not likely that the Loans will prepay at any constant percentage of
the Prepayment Assumption or of the CPR to maturity or that all of the Loans
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.
PREPAYMENT SCENARIOS
<TABLE>
<CAPTION>
SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Adjustable Rate Loans
(1).................... 18 24 30 36 42
Fixed-Rate Loans (2).... 75 100 125 150 175
</TABLE>
- --------
(1) As a CPR percentage.
(2) As a percentage of the Prepayment Assumption.
ASSUMED INITIAL FIXED-RATE LOAN CHARACTERISTICS
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED BALLOON LOAN
WEIGHTED AVERAGE AVERAGE WEIGHTED
CUT-OFF DATE AVERAGE REMAINING TERM ORIGINAL TERM AVERAGE
POOL PRINCIPAL LOAN TO MATURITY TO MATURITY AMORTIZATION
POOL BALANCE RATE (MONTHS) (MONTHS) TERM
- ---- -------------- -------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
1. .......... $ 1,627,545.35 12.643% 69 70 N/A
2. .......... 10,102,554.88 12.144 118 119 N/A
3. .......... 941,150.35 12.212 140 140 N/A
4. .......... 47,195,835.46 12.277 179 180 N/A
5. .......... 788,648.25 13.123 194 195 N/A
6. .......... 88,706,030.55 11.660 240 240 N/A
7. .......... 46,175,455.42 11.317 299 300 N/A
8. .......... 46,617,732.44 10.928 359 360 N/A
9. .......... 53,861,599.79 11.558 178 179 360
10. ......... 10,919,661.63 10.649 240 240 360
</TABLE>
ASSUMED ADDITIONAL AND SUBSEQUENT FIXED-RATE LOAN CHARACTERISTICS
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED BALLOON LOAN
WEIGHTED AVERAGE AVERAGE WEIGHTED
CUT-OFF DATE AVERAGE REMAINING TERM ORIGINAL TERM AVERAGE
POOL PRINCIPAL LOAN TO MATURITY TO MATURITY AMORTIZATION
POOL BALANCE RATE (MONTHS) (MONTHS) TERM
- ---- -------------- -------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
1. ......... $ 387,424.55 12.643% 70 70 N/A
2. ......... 2,404,834.86 12.144 119 119 N/A
3. ......... 224,033.54 12.212 140 140 N/A
4. ......... 11,234,602.69 12.277 180 180 N/A
5. ......... 187,731.60 13.123 195 195 N/A
6. ......... 21,115,782.78 11.660 240 240 N/A
7. ......... 10,991,709.13 11.317 300 300 N/A
8. ......... 11,096,989.75 10.928 360 360 N/A
9. ......... 12,821,336.20 11.558 179 179 360
10. ......... 2,599,340.78 10.649 240 240 360
</TABLE>
S-45
<PAGE>
ASSUMED INITIAL ADJUSTABLE RATE LOAN CHARACTERISTICS
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
WEIGHTED REMAINING ORIGINAL WEIGHTED
CUT-OFF DATE AVERAGE TERM TO TERM TO AVERAGE MONTH(S)
POOL PRINCIPAL LOAN MATURITY MATURITY GROSS LIFE LIFE PERIODIC TO RATE
POOL BALANCE RATE (MONTHS) (MONTHS) MARGIN CAP FLOOR CAP CHANGE
- ---- -------------- -------- --------- -------- -------- ------ ----- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. ..................... $12,904,629.55 9.510% 356 360 6.271% 15.826% 9.491% 1.134% 15
2. ..................... 12,352,644.51 9.786 358 360 6.433 16.079 9.771 1.151 21
3. ..................... 26,886,295.86 9.080 359 360 6.352 15.353 9.051 1.195 22
4. ..................... 40,882,685.13 8.792 360 360 6.628 15.030 8.662 1.090 23
</TABLE>
ASSUMED ADDITIONAL AND SUBSEQUENT ADJUSTABLE RATE LOAN CHARACTERISTICS
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
WEIGHTED REMAINING ORIGINAL WEIGHTED
CUT-OFF DATE AVERAGE TERM TO TERM TO AVERAGE MONTH(S)
POOL PRINCIPAL LOAN MATURITY MATURITY GROSS LIFE LIFE PERIODIC TO RATE
POOL BALANCE RATE (MONTHS) (MONTHS) MARGIN CAP FLOOR CAP CHANGE
- ---- -------------- -------- --------- -------- -------- ------ ----- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. ..................... $ 3,741,805.86 9.510% 360 360 6.271% 15.826% 9.491% 1.134% 15
2. ..................... 3,581,753.15 9.786 360 360 6.433 16.079 9.771 1.151 21
3. ..................... 7,795,907.58 9.080 360 360 6.352 15.353 9.051 1.195 22
4. ..................... 11,854,278.36 8.792 360 360 6.628 15.030 8.662 1.090 23
</TABLE>
Based on the foregoing assumptions, the following tables indicated 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, under the indicated Prepayment
Scenarios.
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS A-1A ARM
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE
CPR SET FORTH BELOW:
<TABLE>
<CAPTION>
SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
May 15, 1999............ 100 100 100 100 100
May 15, 2000............ 64 57 52 49 48
May 15, 2001............ 0 0 0 0 0
Weighted Average Life
(1) (years)............ 2.1 2.1 2.0 2.0 2.0
</TABLE>
- --------
(1) The weighted average life of a Class A-1A ARM 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-1A ARM Certificate to the stated Payment Date,
(ii) adding the results, and (iii) dividing the sum by the initial
principal balance of such Class A-1A ARM Certificate.
S-46
<PAGE>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS A-1B ARM
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE
CPR SET FORTH BELOW:
<TABLE>
<CAPTION>
SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
May 15, 1999............ 79 73 66 59 53
May 15, 2000............ 67 57 48 40 32
May 15, 2001............ 61 49 38 29 22
May 15, 2002............ 50 37 27 19 13
May 15, 2003............ 41 28 19 12 0
May 15, 2004............ 33 21 13 0 0
May 15, 2005............ 27 16 0 0 0
May 15, 2006............ 22 10 0 0 0
May 15, 2007............ 18 0 0 0 0
May 15, 2008............ 15 0 0 0 0
May 15, 2009............ 2 0 0 0 0
May 15, 2010............ 0 0 0 0 0
Weighted Average Life
(1) (years)............ 4.6 3.4 2.6 2.0 1.6
</TABLE>
- --------
(1) The weighted average life of a Class A-1B ARM 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-1B ARM Certificate to the stated Payment Date,
(ii) adding the results, and (iii) dividing the sum by the initial
principal balance of such Class A-1B ARM Certificate.
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS A-1
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE
PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
May 15, 1999............ 62 51 39 28 16
May 15, 2000............ 9 0 0 0 0
May 15, 2001............ 0 0 0 0 0
Weighted Average Life
(1) (years)............ 1.2 1.0 0.9 0.8 0.7
</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.
S-47
<PAGE>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS A-2 CERTIFICATES AT
THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
May 15, 1999............ 100 100 100 100 100
May 15, 2000............ 100 79 48 18 0
May 15, 2001............ 55 12 0 0 0
May 15, 2002............ 6 0 0 0 0
May 15, 2003............ 0 0 0 0 0
Weighted Average Life
(1) (years)............ 3.1 2.4 2.0 1.7 1.5
</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.
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS A-3 CERTIFICATES AT
THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
May 15, 1999............ 100 100 100 100 100
May 15, 2000............ 100 100 100 100 80
May 15, 2001............ 100 100 49 0 0
May 15, 2002............ 100 36 0 0 0
May 15, 2003............ 52 0 0 0 0
May 15, 2004............ 5 0 0 0 0
May 15, 2005............ 0 0 0 0 0
Weighted Average Life
(1) (years)............ 5.1 3.9 3.0 2.5 2.2
</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 PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
May 15, 1999............ 100 100 100 100 100
May 15, 2000............ 100 100 100 100 100
May 15, 2001............ 100 100 100 79 2
May 15, 2002............ 100 100 52 0 0
May 15, 2003............ 100 70 0 0 0
May 15, 2004............ 100 12 0 0 0
May 15, 2005............ 65 0 0 0 0
May 15, 2006............ 19 0 0 0 0
May 15, 2007............ 0 0 0 0 0
Weighted Average Life
(1) (years)............ 7.3 5.4 4.1 3.3 2.7
</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-48
<PAGE>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS A-5 CERTIFICATES AT
THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
May 15, 1999............ 100 100 100 100 100
May 15, 2000............ 100 100 100 100 100
May 15, 2001............ 100 100 100 100 100
May 15, 2002............ 100 100 100 58 0
May 15, 2003............ 100 100 79 0 0
May 15, 2004............ 100 100 14 0 0
May 15, 2005............ 100 61 0 0 0
May 15, 2006............ 100 0 0 0 0
May 15, 2007............ 62 0 0 0 0
May 15, 2008............ 2 0 0 0 0
May 15, 2009............ 0 0 0 0 0
Weighted Average Life
(1) (years)............ 9.2 7.2 5.5 4.2 3.3
</TABLE>
- --------
(1) The weighted average life of a Class A-5 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-5 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class A-5 Certificate.
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS A-6 CERTIFICATES AT
THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
May 15, 1999............ 100 100 100 100 100
May 15, 2000............ 100 100 100 100 100
May 15, 2001............ 95 93 90 87 82
May 15, 2002............ 90 86 81 74 25
May 15, 2003............ 71 61 45 9 0
May 15, 2004............ 52 35 8 0 0
May 15, 2005............ 16 2 0 0 0
May 15, 2006............ 3 0 0 0 0
May 15, 2007............ * 0 0 0 0
May 15, 2008............ 0 0 0 0 0
Weighted Average Life
(1) (years)............ 5.7 5.2 4.7 4.2 3.6
</TABLE>
- --------
* Indicates an amount greater than zero but less than .5% of the Original
Class A-6 Principal Balance.
(1) The weighted average life of a Class A-6 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-6 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class A-6 Certificate.
S-49
<PAGE>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS M-1
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE
PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
May 15, 1999............ 100 100 100 100 100
May 15, 2000............ 100 100 100 100 100
May 15, 2001............ 100 100 100 100 100
May 15, 2002............ 100 100 100 100 100
May 15, 2003............ 100 100 100 100 70
May 15, 2004............ 100 100 100 73 0
May 15, 2005............ 100 100 93 0 0
May 15, 2006............ 100 100 0 0 0
May 15, 2007............ 100 84 0 0 0
May 15, 2008............ 100 0 0 0 0
May 15, 2009............ 100 0 0 0 0
May 15, 2010............ 70 0 0 0 0
May 15, 2011............ 0 0 0 0 0
Weighted Average Life
(1) (years)............ 11.9 9.2 7.4 6.1 5.1
</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 PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
May 15, 1999............ 100 100 100 100 100
May 15, 2000............ 100 100 100 100 100
May 15, 2001............ 100 100 100 100 100
May 15, 2002............ 100 100 100 100 100
May 15, 2003............ 100 100 100 100 100
May 15, 2004............ 100 100 100 100 0
May 15, 2005............ 100 100 100 0 0
May 15, 2006............ 100 100 0 0 0
May 15, 2007............ 100 100 0 0 0
May 15, 2008............ 100 0 0 0 0
May 15, 2009............ 100 0 0 0 0
May 15, 2010............ 100 0 0 0 0
May 15, 2011............ 0 0 0 0 0
Weighted Average Life
(1) (years)............ 12.0 9.3 7.5 6.2 5.2
</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-50
<PAGE>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS B-1
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE
PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
May 15, 1999............ 100 100 100 100 100
May 15, 2000............ 100 100 100 100 100
May 15, 2001............ 100 100 100 100 100
May 15, 2002............ 100 69 59 51 43
May 15, 2003............ 76 42 28 17 16
May 15, 2004............ 53 20 5 3 0
May 15, 2005............ 34 3 0 0 0
May 15, 2006............ 18 0 0 0 0
May 15, 2007............ 4 0 0 0 0
May 15, 2008............ 0 0 0 0 0
Weighted Average Life
(1) (years)............ 6.3 4.8 4.4 4.2 4.0
</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
PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
May 15, 1999............ 100 100 100 100 100
May 15, 2000............ 100 100 100 100 100
May 15, 2001............ 100 100 100 100 100
May 15, 2002............ 100 100 100 100 100
May 15, 2003............ 100 100 100 100 100
May 15, 2004............ 100 100 100 100 0
May 15, 2005............ 100 100 90 0 0
May 15, 2006............ 100 82 0 0 0
May 15, 2007............ 100 77 0 0 0
May 15, 2008............ 88 0 0 0 0
May 15, 2009............ 79 0 0 0 0
May 15, 2010............ 79 0 0 0 0
May 15, 2011............ 0 0 0 0 0
Weighted Average Life
(1) (years)............ 11.6 8.9 7.4 6.2 5.2
</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-51
<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, 1997, had
stockholders' equity of approximately $1,332,000,000. The Company purchases,
pools, sells and services conditional sales contracts for manufactured homes
and other consumer installment sales contracts, as well as home equity loans.
The Company is the largest servicer of government-insured manufactured housing
contracts and conventional manufactured housing contracts in the United
States. Servicing functions are performed through Green Tree Financial
Servicing Corporation, a wholly owned subsidiary of the Company. Through its
principal offices in St. Paul, Minnesota, and service centers throughout the
United States, the Company serves all 50 states. The Company began financing
home equity loans in January 1996. 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.
RATIO OF EARNINGS TO FIXED CHARGES FOR THE COMPANY
Set forth below are the Company's ratios of earnings to fixed charges for
the past five years ended December 31, 1997 and the three months ended March
31, 1998. For the purposes of compiling these ratios, earnings consist of
earnings before income taxes plus fixed charges. Fixed charges consist of
interest expense and the interest portion of rent expense.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------ ------------
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ------------
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges....... 4.81 7.98 7.90 5.44 3.94 3.06
</TABLE>
RECENT DEVELOPMENTS
The Company recently announced that it has decided to take a supplemental
reserve of $190 million against the valuation of its interest only securities
in the quarter ended December 31, 1997, and that the carrying value of its
interest only securities should be reduced by an additional $200 million in
the audited financial statements for 1996, which have been restated
accordingly.
The Company has been served with various lawsuits in the United States
District Court for the District of Minnesota. These lawsuits were filed by
certain stockholders of the Company as purported class actions on behalf of
persons or entities who purchased common stock of the Company during the
alleged class periods. In addition to the Company, certain current and former
officers and directors of the Company are named as defendants in one or more
of the lawsuits. The Company and the other defendants intend to seek
consolidation of each of the lawsuits in the United States District Court for
the District of Minnesota. Plaintiffs in the lawsuits assert claims under
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. In each case,
plaintiffs allege that the Company and the other defendants violated federal
securities laws by, among other things, making false and misleading statements
about the current state and future prospects of the Company (particularly with
respect to prepayment assumptions and performance of certain of the Company's
loan portfolios) which allegedly rendered the Company's financial statements
false and misleading. The Company believes that the lawsuits are without merit
and intends to defend such lawsuits vigorously.
On April 7, 1998, Conseco, Inc. and the Company announced that they had
entered into a Merger Agreement, pursuant to which each share of the Company's
common stock will be converted into 0.9165 of a
S-52
<PAGE>
share of Conseco common stock. The Company's stockholders will own
approximately 38% of the combined company. The Company will continue to
operate as a wholly owned subsidiary of Conseco from its existing headquarters
in St. Paul, Minnesota, and its 200 local offices throughout the country.
Lawrence M. Coss, the Company's Chairman and Chief Executive Officer, has
agreed to continue to manage the Company's business for at least one year. The
merger is scheduled to be completed late in the second quarter or early in the
third quarter of 1998, and is subject to approval by shareholders of both the
Company and Conseco and to regulatory approvals. Headquartered in Carmel,
Indiana, Conseco is among the nation's leading providers of supplemental
health insurance, retirement annuities and universal life insurance.
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 or any integral multiple in excess thereof.
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 Loans and the rights, benefits,
obligations and proceeds arising therefrom or in connection therewith,
including liens on the related real estate, 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 June 1998. 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.
CONVEYANCE OF LOANS
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 Initial and Additional Loans, including all
principal and interest received on or with respect to such Loans (other than
receipts of principal and interest due on such Loans before the Cut-off Date).
The Agreement permits the Trust to purchase up to approximately $100,000,000
aggregate principal balance of Subsequent Loans on or within 90 days after the
Closing Date on one or more closing dates (each a "Subsequent Transfer Date").
See "--Conveyance of Subsequent Loans and Pre-Funding Account" herein.
On behalf of the Trust, as the issuer of the Certificates offered hereby,
the Trustee, concurrently with each conveyance, will execute and deliver the
Certificates to or upon the order of the Company. The Loans will be
S-53
<PAGE>
described on a list delivered to the Trustee and certified by a duly
authorized officer of the Company. Such list will include the amount of
monthly payments due on each Loan as of the date of issuance of the
Certificates, the Loan Rate on each Loan and the maturity date of each Loan.
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 Loans to the Trust, the Company will
have completed a review of all the Loan files, confirming the accuracy of each
item on the list of Loans delivered to the Trustee. Any Loan 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 Loan, the Company may
deposit cash in the Certificate Account in an amount sufficient to offset such
discrepancy.
The Trustee will maintain possession of the Loans and any other documents
contained in the Loan files. Uniform Commercial Code financing statements will
be filed in Minnesota, reflecting the conveyance and assignment of the Loans
to the Trustee, and the Company's accounting records and computer systems will
also reflect such conveyance and assignment.
Briggs and Morgan, Professional Association, counsel to the Company, will
render an opinion to the Trustee that the transfer of the Loans 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 Loans from the Company
to the Trust were treated as a pledge to secure borrowings by the Company, the
distribution of proceeds of the Loans 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 Loans 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 Loans 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 Loan, including that: (a) for each Loan other
than the Subsequent Loans, as of the applicable Cut-off Date, the most recent
scheduled payment was made or was not delinquent more than 59 days; (b) for
each Subsequent Loan, as of the respective Subsequent Cut-off Date, the most
recent scheduled payment was made or was not delinquent more than 59 days; (c)
no provision of a Loan has been waived, altered or modified in any respect,
except by instruments or documents included in the Loan file and reflected on
the list of Loans delivered to the Trustee; (d) each Loan 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); (e) no Loan is subject to any right of rescission, set-off,
counterclaim or defense; (f) each Loan was originated by a home equity lender
in the ordinary course of its business or was originated by the Company
directly; (g) no Loan was originated in or is subject to the laws of any
jurisdiction whose laws would make the transfer of the Loan or an interest
therein pursuant to the Agreement or the Certificates unlawful; (h) each Loan
complies with all requirements of law; (i) no Loan has been satisfied,
subordinated to a lower lien ranking than its original position (if any) or
rescinded; (j) each Loan creates a valid and perfected lien on the related
real estate; (k) all parties to each Loan had full legal capacity to execute
such Loan; (l) no Loan has been sold, conveyed and assigned or pledged to any
other person and the Company has good and marketable title to each Loan free
and clear of any encumbrance, equity, lien, pledge, charge, claim or security
interest, and is the sole owner and has full right to transfer such Loan to
the Trustee; (m) as of the Cut-off Date there was no default, breach,
violation or event permitting acceleration under any Loan (except for payment
delinquencies permitted by clauses (a) and (b) 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 Loan,
and the Company has not waived any of the foregoing; (n) each Loan is a fully-
amortizing loan and provides for level monthly payments based on its
applicable Loan Rate, except, in the case of a Balloon Loan, for the final
monthly payment, over the term of such Loan; (o) each Loan 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 Loan set forth in the list delivered to the Trustee
S-54
<PAGE>
is true and correct; (q) there is only one original of each Loan; (r) each
Loan was originated or purchased in accordance with the Company's then-current
underwriting guidelines; and (s) each Loan is a "qualified mortgage" under
section 860G(a)(3) of the Internal Revenue Code of 1986, as amended.
The Company will also make certain representations and warranties with
respect to the Loans in the aggregate, including that (i) each Loan (other
than the Adjustable Rate Loans) has a contractual rate of interest of at least
7.45%; (ii) no Loan had a remaining term to maturity at origination of more
than 360 months; (iii) no more than 1% of the Loans, 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 5.0% of the Loans, by principal balance as of
the Cut-off Date, were originated by any one lender; and (v) no adverse
selection procedures were employed in selecting the Loans from the Company's
portfolio. The Company will make certain additional representations and
warranties with respect to the Subsequent Loans. See "--Conveyance of
Subsequent Loans and Pre-Funding Account" herein.
Under the terms of the Agreement, and subject to the Company's option to
effect a substitution as described in the next paragraph, the Company has
agreed to repurchase, at the Repurchase Price, any Loan that is materially and
adversely affected by a breach of a representation and warranty with respect
to such Loan 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. The "Repurchase Price," with respect to any Loan to be so repurchased
or with respect to a Liquidated Loan, means the outstanding principal balance
of such Loan (without giving effect to any Advances made by the Servicer or
the Trustee), plus interest on such Loan at the Pass-Through Rate (which will
be the weighted average of the Pass-Through Rates of the related Classes of
Certificates) 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. 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 Loans (but not with respect
to any other breach by the Company of its obligations under the Agreement).
In lieu of repurchasing a Loan as specified in the preceding paragraph,
during the two-year period following the Closing Date, the Company may, at its
option, substitute an Eligible Substitute Loan (as defined below) for the Loan
that it is otherwise obligated to repurchase (referred to herein as the
"Replaced Loan"). An Eligible Substitute Loan is a Loan that satisfies, as of
the date of its substitution, the representations and warranties specified in
Article III of the Agreement, has a Scheduled Principal Balance that is not
greater than the Scheduled Principal Balance of the Replaced Loan, has a Loan
Rate that is at least equal to the Loan Rate of the Replaced Loan and has a
remaining term to scheduled maturity that is not greater than the remaining
term to scheduled maturity of the Replaced Loan. The Company will be required
to deposit in the Certificate Account cash in the amount, if any, by which the
Scheduled Principal Balance of the Replaced Loan exceeds the Scheduled
Principal Balance of the Loan being substituted. Such deposit will be deemed
to be a Partial Principal Prepayment.
Pursuant to the Agreement, the Servicer will service and administer the
Loans conveyed and assigned to the Trustee as more fully set forth below.
CONVEYANCE OF SUBSEQUENT LOANS AND PRE-FUNDING ACCOUNT
An account (the "Pre-Funding Account") will be established by the Trustee
and funded by the Company with up to approximately $100,000,000 (the "Pre-
Funded Amount") on the Closing Date to provide the Trust with sufficient funds
to purchase Subsequent Loans. The Pre-Funding Account will be used to purchase
Subsequent Loans during the period from the Closing Date until the earliest of
(i) the date on which the amount on deposit in the Pre-Funding Account is less
than $10,000, (ii) 90 days after the Closing Date or (iii) the date on which
an Event of Termination occurs under the Agreement (the "Funding Period"). The
Pre-Funded Amount will be reduced during the Funding Period by the amount used
to purchase Subsequent Loans in accordance with the Agreement.
S-55
<PAGE>
Under the Agreement, the Trust will be obligated to purchase Subsequent
Loans from the Company during the Funding Period, subject to the availability
thereof. In connection with the purchase of Subsequent Loans on such dates of
transfer (the "Subsequent Transfer Dates"), the Trust will be required to pay
to the Company from amounts on deposit in the Pre-Funding Account a cash
purchase price of 100% of the principal balance thereof. The Company will
designate the Subsequent Transfer Date as the cut-off date (the "Subsequent
Cut-off Date") with respect to the related Subsequent Loans purchased on such
date. The amount paid from the Pre-Funding Account on each Subsequent Transfer
Date will not include accrued interest on the related Subsequent Loans.
Following each Subsequent Transfer Date, the aggregate principal balance of
the Subsequent Loans will increase by an amount equal to the aggregate
principal balance of the Loans so purchased and the amount in the Pre-Funding
Account will decrease accordingly.
Any Pre-Funded Amount remaining after the end of the Funding Period will be
applied on the next Payment Date to prepay principal on the Class A-1B ARM
Certificates and the Class A-1 Certificates. Any amounts remaining which had
been allocated to the purchase of Subsequent Adjustable Rate Loans will be
paid to the Class A-1B ARM Certificateholders and any amounts remaining which
had been allocated to the purchase of Subsequent Fixed-Rate Loans will be paid
to the Class A-1 Certificateholders. Although no assurance can be given, the
Company anticipates that the principal amount of the related Subsequent Loans
purchased by the Trust will require the application of substantially all of
the related Pre-Funded Amount (as defined herein) and that there should be no
material amount of principal prepaid to the Class A-1B ARM Certificateholders
or the Class A-1 Certificateholders from the Pre-Funding Account. However, it
is unlikely that the Company will be able to deliver Subsequent Loans with an
aggregate principal balance identical to the remaining Pre-Funded Amount.
Any conveyance of Subsequent Loans on a Subsequent Transfer Date is subject
to certain conditions including, but not limited to: (a) each Subsequent Loan
must satisfy the representations and warranties specified in the related
subsequent transfer instrument and the Agreement; (b) the Company may not
select Subsequent Loans in a manner that it believes is adverse to the
interests of the Certificateholders; (c) as of the respective Subsequent Cut-
off Date the Subsequent Loans must satisfy the following criteria: (i) no
Subsequent Loan may be more than 59 days contractually delinquent as of the
related Subsequent Cut-off Date; (ii) the remaining stated term to maturity of
each Subsequent Loan may not exceed 360 months; (iii) each Subsequent Loan
must have been underwritten in accordance with the Company's standard
underwriting criteria; (iv) as a result of the purchase of the Subsequent
Loans, the weighted average loan to value ratio of the Loan Pool will not be
more than 200 basis points more than such ratio with respect to the Initial
Loans; (v) as a result of the purchase of the Subsequent Loans, the Class A
Certificates will not receive from S&P or Fitch a lower credit rating than the
rating assigned at the initial issuance of such Certificates; and (vi) an
independent accountant will provide a letter stating whether or not the
characteristics of the Subsequent Loans conform to the characteristics
described herein.
PAYMENTS ON LOANS
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 U.S. 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 A-1 by S&P and F-1 by Fitch (if rated by Fitch)
or whose unsecured long-term debt has been rated in one of the two highest
rating categories by S&P and Fitch (if rated by Fitch), 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 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
S&P or Fitch to downgrade or withdraw its then-current rating assigned to the
Certificates, as evidenced in
S-56
<PAGE>
writing by S&P and Fitch. 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 "AA" from S&P
and Fitch (if rated by Fitch) 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 A-1+ by S&P and at least F-1+ by Fitch (if rated
by Fitch). 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 Loans,
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 or assumption fees not
allocated to regular installments due on Loans, which are retained by the
Servicer as part of its servicing fees and are not paid into the Certificate
Account and except for certain proceeds from Liquidated Loans which are used
to reimburse the Servicer for customary out-of-pocket liquidation expenses.
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 Loans repurchased, or upon substitution for a Loan otherwise required to
be repurchased, as a result of a breach of representations or warranties under
the Agreement, as described under "Description of the Certificates--Conveyance
of Loans," shall be paid into the Certificate Account.
On the second Business Day preceding each Payment Date (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 Loans required to be
repurchased on such Payment Date, or any amounts required to be deposited upon
substitution for any Loan otherwise required to be repurchased on such Payment
Date, as a result of a breach of representations and warranties under the
Agreement.
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:
(a) if neither the Company nor any wholly owned subsidiary of the Company
is the Servicer, to pay the Monthly Servicing Fee with respect to the Loans
to the Servicer;
(b) to pay interest and principal on the Certificates, in the manner and
the order of priority described below;
(c) if the Company or any wholly owned subsidiary of the Company is the
Servicer, to pay the Monthly Servicing Fee to the Servicer with respect to
the Loans;
(d) to reimburse the Servicer or the Trustee, as applicable, for any
unreimbursed Advances with respect to the Loans made in respect of current
or prior Payment Dates;
(e) to reimburse the holder of the Class C Certificates for expenses
incurred by and reimbursable to it with respect to taxes or charges imposed
upon the Trust as a REMIC or otherwise;
(f) to reimburse the Company for any prior unreimbursed Class B-2
Guaranty Payments; and
(g) to pay any remaining amounts to the holder of the Class C
Certificates.
S-57
<PAGE>
The Scheduled Principal Balance of a Loan 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 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 Loans comprising
the Loan Pool that were outstanding during the preceding Due Period. A
Liquidated Loan is a defaulted Loan as to which all amounts that the Servicer
expects to recover on account of such Loan have been received.
DISTRIBUTIONS ON CERTIFICATES
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 and then to the holders of the Class B
Certificates, as described below. Distributions of interest and principal on
the Certificates will be made primarily from amounts available in respect of
the Loans.
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, (ii) with
respect to the Class A-1 ARM Certificates, their respective Percentage
Interests of the Class A-1 ARM Formula Principal Distribution Amount and (iii)
with respect to each other Class of Class A Certificates (other than the Class
A-7 IO Certificates), 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, (ii) the Class A-1 ARM
Formula Principal Distribution Amount and (iii) 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 and until the
Class M-1 Principal Balance has been reduced to zero, the Senior Percentage of
the Formula Principal Distribution Amount. 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
S-58
<PAGE>
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
and until the Class M-2 Principal Balance has been reduced to zero, the Senior
Percentage of the Formula Principal Distribution Amount. 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 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 (i) the amount
of interest calculated as set forth under "Class B-1 Interest" below and (ii)
until the Class B-1 Principal Balance has been reduced to zero, an amount of
principal equal to the Class B Percentage of the Formula Principal
Distribution Amount. 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 (i) the amount of interest calculated as set forth
under "Class B-2 Interest" below and (ii) after the Class B-1 Principal
Balance has been reduced to zero and until the Class B-2 Principal Balance has
been reduced to zero, the Class B Percentage of the Formula Principal
Distribution Amount. 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 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, or in the case of the Class A-7 IO Certificates, on the Notional
Principal Amount. Interest on each Class of Class A Certificates will accrue
from the Closing Date, or from the most recent Payment Date on which interest
has been paid, to but excluding the following Payment Date. Interest on each
Class of Class A Certificates, other than the Class A-1B ARM Certificates,
will be computed on the basis of a 360-day year of twelve 30-day months.
Interest on the Class A-1B ARM Certificates will be computed on the basis of
actual days elapsed in a 360-day year.
S-59
<PAGE>
The Pass-Through Rate for the Class A-1B ARM Certificates for any Payment
Date will equal the lesser of (i) one-month LIBOR plus the applicable Pass-
Through Margin, (ii) the applicable Available Funds Pass-Through Rate or (iii)
14.00%. The Pass-Through Margin will equal 0.18% per annum through the Payment
Date on which the Principal Balance of the Loans is 10% or more of the
Principal Balance of the Loans as of the Cut-off Date, and 0.36% per annum on
each Payment Date on which the Principal Balance of the Loans is less than 10%
of the Principal Balance of the Loans as of the Cut-off Date. The Available
Funds Pass-Through Rate for any Payment Date is the rate per annum equal to
the weighted average of the Expense Adjusted Loan Rates on the then
outstanding Adjustable Rate Loans. The Expense Adjusted Loan Rate on any
Adjustable Rate Loan is equal to the then applicable Loan Rate thereon, minus
the Expense Fee Rate. The Expense Fee Rate is .75% per annum. One-month LIBOR
with respect to any monthly interest period will equal the offered rate for
United States dollar deposits for one month that appears on Telerate Page 3750
as of 11:00 A.M., London time, on the second LIBOR business day prior to such
monthly interest period. For a description of the method used to calculate
one-month LIBOR, see "Description of the Certificates--Calculation of One-
Month LIBOR."
The Pass-Through Rates for the Class A-1A ARM, Class A-1, Class A-2, Class
A-3, Class A-4, Class A-5, Class A-6 and Class A-7 IO Certificates are set
forth on the cover of this Prospectus Supplement.
The Principal Balance of any Class of Class A Certificates (other than the
Class A-7 IO 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-1A ARM Principal Balance, Class A-1B
ARM Principal Balance, the Class A-1 Principal Balance, the Class A-2
Principal Balance, the Class A-3 Principal Balance, the Class A-4 Principal
Balance, the Class A-5 Principal Balance and the Class A-6 Principal Balance.
Interest will be calculated on the Class A-7 IO Certificates on each Payment
Date based on the Notional Principal Amount, which for the first 36 Payment
Dates is equal to $25,000,000 (or the Class A Principal Balance for such
Payment Date, if less), and will thereafter equal zero. The Notional Principal
Amount provides a basis for calculating interest payments only, and does not
represent the right to receive any distributions of principal.
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 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 Loans 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 (other than the Class A-7 IO
Certificates) will be entitled to receive payments of principal on each
Payment Date in the order of priority set forth below and to the extent of the
Amount Available in the Certificate Account after payment of all interest
payable on each Class of Class A Certificates. Holders of the Class A-1B ARM
Certificates will be entitled to receive, as payments of principal, an amount
equal to the lesser of (i) the Class A-1B ARM Principal Balance and (ii) the
Class A-1 ARM Formula Principal Distribution Amount minus the lesser of (a)
the Class A-1A ARM Principal Balance and (b) the Class A-1A ARM Percentage of
the Class A-1 ARM Formula Principal Distribution Amount on that Payment Date.
Any amount of the Class A-1 ARM Formula Principal Distribution Amount
remaining on a Payment Date will be paid to the Class A-1A ARM
Certificateholders. The "Class A-1 ARM Formula Principal Distribution Amount"
will generally be equal to the lesser of (A) the sum of the Class A-1A ARM
Principal Balance and the Class A-1B ARM Principal Balance or (B) the sum of
the following: (i) all scheduled payments of principal due on each outstanding
Adjustable Rate Loan during the related Due Period; (ii) the Scheduled
Principal Balance of each Adjustable Rate Loan which, during the related Due
Period, was purchased by the Company pursuant to the Agreement on account of
certain breaches of its representations and warranties; (iii) the Scheduled
Principal
S-60
<PAGE>
Balance of each Adjustable Rate Loan that became a Liquidated Loan during the
related Due Period; (iv) all partial Principal Prepayments applied and
Principal Prepayments in Full received on each Adjustable Rate Loan during the
related Due Period; and (v) on any Payment Date which is on or after the
Payment Date on which the Class A-1, Class A-2, Class A-3, Class A-4, Class A-
5 and Class A-6 Certificates have been paid in full, (a) the Senior Percentage
times the Formula Principal Distribution Amount less (b) the amount, if any,
distributed in payment of principal on the Class A-1, Class A-2, Class A-3,
Class A-4, Class A-5 and Class A-6 Certificates on such Payment Date.
The Class A-1A ARM Percentage for any Payment Date will be (i) 0% prior to
the Payment Date in February 2000 (unless the Class A-1B ARM Principal Balance
has been reduced to zero), (ii) 90% on the Payment Date in February 2000 and
each Payment Date thereafter (unless the Class A-1B ARM Principal Balance has
been reduced to zero), and (iii) on and after any Payment Date on which the
Class A-1B ARM Principal Balance has been reduced to zero (until the Class A-
1A ARM Principal Balance has been reduced to zero), 100%. The Class A-1B ARM
Percentage for any Payment Date will equal 100% minus the Class A-1A ARM
Percentage.
The Class A-7 IO Certificates are interest-only Certificates and are not
entitled to receive distributions of principal.
Holders of the Class A Certificates (other than the Class A-1A ARM
Certificates, the Class A-1B ARM Certificates and the Class A-7
IO Certificates) will be entitled to receive, as payments of principal, an
amount equal to the Senior Percentage of the Formula Principal Distribution
Amount. The "Formula Principal Distribution Amount" will generally be equal to
the sum of (i) all scheduled payments of principal due on each outstanding
Fixed-Rate Loan during the related Due Period, (ii) the Scheduled Principal
Balance of each Fixed-Rate Loan which, during such Due Period, 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 Due Period
in respect of the Fixed-Rate Loans, (iv) the Scheduled Principal Balance of
each Fixed-Rate Loan that became a Liquidated Loan during such Due Period,
(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, and (vi) on any Payment Date
which is on or after the Payment Date on which the Class A-1A ARM and Class A-
1B ARM Certificates have been paid in full, (a) the Class A-1 ARM Formula
Principal Distribution Amount less (b) the amount, if any, distributed in
payment of principal on the Class A-1A ARM and Class A-1B ARM Certificates on
such Payment Date. 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 will equal 100% on each Payment Date on which the
Class B Principal Distribution Test (as described below) is not satisfied. On
each Payment Date on which the Class B Principal Distribution Test has been
satisfied, the Senior Percentage will equal the lesser of (i) 100% and (ii) a
fraction, expressed as a percentage, the numerator of which is the sum of the
Class A Principal Balance (excluding the Class A-1A ARM Principal Balance and
the Class A-1B ARM Principal Balance) and the Class M Principal Balance for
such Payment Date, and the denominator of which is the Pool Scheduled
Principal Balance of the Fixed-Rate Loans for the immediately preceding
Payment Date.
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 (other than the Class A-7 IO
Certificates), as follows: (i) that portion, if any, of the Senior Percentage
of the Formula Principal Distribution Amount equal to the Class A-6 Lockout
Pro Rata Distribution Amount will be distributed to the Class A-6
Certificateholders; and (ii) the remainder of the Senior Percentage of the
Formula Principal Distribution Amount will be distributed in the following
order: 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
S-61
<PAGE>
reduced to zero, then to the Class A-4 Certificateholders until the Class A-4
Principal Balance has been reduced to zero and then to the Class A-5
Certificateholders until the Class A-5 Principal Balance has been reduced to
zero. After the Class A-5 Principal Balance has been reduced to zero, holders
of the Class A-6 Certificates will be entitled to receive the entire Senior
Percentage of the Formula Principal Distribution Amount up to the amount
necessary to reduce the Class A-6 Principal Balance to zero, to the extent the
remaining Amount Available is sufficient therefor.
The "Class A-6 Lockout Pro Rata Distribution Amount," as to any Payment
Date, is an amount equal to the lesser of:
(a) the product of (1) the Class A-6 Lockout Percentage, and (2) the
product of (A) a fraction, the numerator of which is the Class A-6
Principal Balance immediately preceding such Payment Date and the
denominator of which is the Class A Principal Balance less the sum of the
Class A-1A ARM Principal Balance and the Class A-1B ARM Principal Balance
immediately preceding such Payment Date, and (B) the Senior Percentage of
the Formula Principal Distribution Amount for such Payment Date, and
(b) the Class A-6 Principal Balance immediately preceding such Payment
Date.
The "Class A-6 Lockout Percentage," as to any Payment Date occurring during
the periods set forth below, is the percentage designated as such as follows:
<TABLE>
<CAPTION>
CLASS A-6
PERIOD (DATES INCLUSIVE) LOCKOUT PERCENTAGE
------------------------ ------------------
<S> <C>
June 1998 through May 2000................................ 0%
June 2000 through May 2002................................ 20%
June 2002 through May 2003................................ 80%
June 2003 through May 2004................................ 100%
June 2004 and thereafter.................................. 300%
</TABLE>
On any Payment Date as to which there is a Class A Liquidation Loss
Principal Amount (which is the amount, if any, by which the Pool Scheduled
Principal Balance plus the Pre-Funded Amount is less than the Class A
Principal Balance), the remaining Amount Available will be distributed pro
rata to each Class of Class A Certificates (other than the Class A-7 IO
Certificates) based on the Class Principal Balance of each Class (but in no
event will such amount exceed the Class Principal Balance of any such Class).
If, as to any Payment Date, the Amount Available remaining after
distribution of interest on the Class A Certificates is less than the sum of
the Senior Percentage of the Formula Principal Distribution Amount and the
Class A-1 ARM Formula Principal Distribution Amount, the amounts to be
distributed to the Class A Certificateholders (including the Class A-1A ARM
Certificateholders and the Class A-1B ARM Certificateholders but excluding the
Class A-7 IO Certificateholders) will be allocated pro rata based upon the
respective portions of the Amount Available that would have been distributed
to the Class A Certificateholders, as described above, had the remaining
Amount Available been sufficient therefor.
As hereinafter described, all losses on Liquidated Loans will be absorbed
first by the Class C Certificates, then by 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) with respect to the Loans, 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 Classes 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, in an
amount (the "Class M-1 Interest Payment Amount")
S-62
<PAGE>
equal to the product of (a) the Class M-1 Pass-Through Rate and (b) the then
outstanding Class M-1 Principal Balance less the Class M-1 Liquidation Loss
Principal Amount, if any. The "Class M-1 Liquidation Loss Principal Amount" as
of any Payment Date will equal the excess, if any, of the Aggregate
Liquidation Loss Principal Amount over the aggregate of the Principal Balances
of the Class M-2 Certificates and the Class B Certificates (but in no event
greater than the Class M-1 Principal Balance). The "Aggregate Liquidation Loss
Principal Amount" as of any Payment Date will equal the excess, if any, of (i)
the aggregate Principal Balance of the Certificates as of the preceding
Payment Date (after giving effect to distributions of principal thereon) over
(ii) the Pool Scheduled Principal Balance for such preceding Payment Date plus
the Pre-Funded Amount for such preceding Payment Date. Interest on the
outstanding Class M-1 Principal Balance will accrue from the Closing Date, 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 the Class M-1 Interest Payment
Amount to the Class M-1 Certificateholders, the amount of such interest to be
distributed in respect of the Class M-1 Certificates will be allocated among
the Class M-1 Certificates 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. Interest will accrue on the Class M-1 Liquidation Loss Principal
Amount, if any, and will be payable on the current or succeeding Payment Dates
to the extent of the Amount Available remaining after payment of the Class A
Distribution Amount, the Class M-1 Distribution Amount, the Class M-2
Distribution Amount and the Class B Distribution Amount. Any interest amounts
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 of the Formula Principal Distribution Amount
(as described under "Class A Principal" above) 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 which
the Class B Principal Distribution Test is satisfied, payments of principal
will be made to the 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, in an
amount (the "Class M-2 Interest Payment Amount") equal to the product of (a)
the Class M-2 Pass-Through Rate and (b) the then outstanding Class M-2
Principal Balance less the Class M-2 Liquidation Loss Principal Amount, if
any. The "Class M-2 Liquidation Loss Principal Amount" as of any Payment Date
will equal the excess, if any, of the Aggregate Liquidation Loss Principal
Amount over the aggregate Principal Balance of the Class B Certificates (but
in no event greater than the Class M-2 Principal Balance). Interest on the
outstanding Class M-2 Principal Balance will accrue from the Closing Date, 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
S-63
<PAGE>
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 the Class M-2 Interest Payment Amount to the Class M-2
Certificateholders, the amount of such interest to be distributed in respect
of the Class M-2 Certificates will be allocated among the Class M-2
Certificates 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.
Interest will accrue on the Class M-2 Liquidation Loss Principal Amount, if
any, and will be payable on the current or succeeding Payment Dates to the
extent of the Amount Available remaining after payment in full of the Class A
Distribution Amount, the Class M-1 Distribution Amount, the Class M-2
Distribution Amount, the Class B-1 Distribution Amount, the Class B-2
Distribution Amount and interest accrued and unpaid on the Class M-1
Liquidation Loss Principal Amount. Any interest amounts 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.
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 of the
Formula Principal Distribution Amount (as described under "Class A Principal"
above) 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 which the Class B Principal Distribution Test
is satisfied, payments of principal will be made to Class B
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, in an
amount (the "Class B-1 Interest Payment Amount") equal to the product of (a)
the Class B-1 Pass-Through Rate and (b) the then outstanding Class B-1
Principal Balance less the Class B-1 Liquidation Loss Principal Amount, if
any. The "Class B-1 Liquidation Loss Principal Amount" as of any Payment Date
will equal the excess, if any, of the Aggregate Liquidation Loss Principal
Amount over the Class B-2 Principal Balance (but in no event greater than the
Class B-1 Principal Balance). Interest on the outstanding Class B-1 Principal
Balance will accrue from the Closing Date, 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 the Class B-1 Interest Payment Amount to the Class B-1
Certificateholders, the amount of such interest to be distributed in respect
of the Class B-1 Certificates will be allocated among the Class B-1
Certificates 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.
Interest will accrue on the Class B-1 Liquidation Loss Principal Amount, if
any, and will be payable on the current or succeeding Payment Dates to the
extent of the Amount Available remaining after payment in full of the Class A
Distribution Amount, the Class M-1 Distribution Amount, the Class M-2
Distribution Amount, the Class B-1 Distribution Amount, the Class B-2
Distribution Amount and interest accrued and unpaid on the Class M-1
Liquidation Loss Principal Amount and the Class M-2 Liquidation Loss Principal
Amount. Any interest amounts carried forward will bear interest at the Class
B-1 Pass-Through Rate, to the extent permitted by law.
S-64
<PAGE>
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
Payments of principal on the Class B-1 Certificates will not be made unless
the Class B Principal Distribution Test is satisfied. The Class B Principal
Distribution Test will be deemed to be satisfied on a Payment Date if either
(a) the Class A Principal Balance and the Class M Principal Balance have each
been reduced to zero or (b) each of the following conditions is met (i) the
average of the Sixty-Day Delinquency Ratio (as defined in the Agreement) as of
the Payment Date and the prior two Payment Dates must not exceed 6.0%; (ii)
the average of the Thirty-Day Delinquency Ratio (as defined in the Agreement)
as of the Payment Date and the prior two Payment Dates must not exceed 12.0%;
(iii) the Cumulative Realized Loss Ratio (as defined in the Agreement) as of
the Payment Date must not exceed 7.5%; (iv) the Current Realized Loss Ratio
(as defined in the Agreement) as of the Payment Date must not exceed 2.0%; (v)
the Payment Date is on or after June 2001; and (vi) 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 12.5%.
On each Payment Date on which the Class B Distribution Test is satisfied,
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 Available 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%.
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 Guaranty,
in an amount (the "Class B-2 Interest Payment Amount") equal to the product of
(a) the Class B-2 Pass-Through Rate and (b) the then outstanding Class B-2
Principal Balance less the Class B-2 Liquidation Loss Principal Amount, if
any. The "Class B-2 Liquidation Loss Principal Amount" as of any Payment Date
will equal the Aggregate Liquidation Loss Principal Amount (but in no event
greater than the Class B-2 Principal Balance). Interest on the outstanding
Class B-2 Principal Balance will accrue from the Closing Date, 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 the Class
B-2 Interest Payment Amount to the Class B-2 Certificateholders and the
Company fails to pay such amount under the Class B-2 Limited Guaranty, the
amount of such interest to be distributed in respect of the Class B-2
Certificates will be allocated among the Class B-2 Certificates 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. Interest will accrue in
respect of the Class B-2 Liquidation Loss Principal Amount, if any, and will
be payable on the current or succeeding Payment Dates to the extent of the
Amount Available remaining after payment in full of the Class A Distribution
Amount, the Class M-1 Distribution Amount, the Class M-2 Distribution Amount,
the Class B-1 Distribution Amount, the Class B-2 Distribution Amount and
interest accrued and unpaid on the Class M-1 Liquidation Loss Principal
Amount, the Class M-2 Liquidation Loss Principal Amount and the Class B-1
Liquidation Loss Principal Amount. Any interest amounts carried forward will
bear interest at the Class B-2 Pass-Through Rate, to the extent permitted by
law.
S-65
<PAGE>
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 payments of the Class B-2 Liquidation Loss Principal Amount,
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 "Class B-1 Cross-over Date"), and will be made on that Payment Date
and each Payment Date thereafter only if the Class B Principal Distribution
Test is satisfied on such Payment Date. 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 Class B-2 Liquidation
Loss Principal Amount until the Class B-2 Principal Balance has been reduced
to zero.
CALCULATION OF ONE-MONTH LIBOR
"LIBOR" ("London Interbank Offered Rate") with respect to any monthly
interest period will be established by the calculation agent appointed by the
Trust (the "Calculation Agent") and will equal the offered rate for United
States dollar deposits for one month that appears on Telerate Page 3750 as of
11:00 A.M., London time, on the second LIBOR Business Day prior to such
monthly interest period (a "LIBOR Determination Date"). "Telerate Page 3750"
means the display page so designated on the Dow Jones Telerate Service (or
such other page as may replace that page on that service, or such other
service as may be designated by the Calculation Agent as the information
vendor, for the purpose of displaying London interbank offered rates of major
banks). If such rate appears on Telerate Page 3750, LIBOR will be such rate.
"LIBOR Business Day" as used herein means a day that is both a business day
and a day on which banking institutions in the City of London, England are not
required or authorized by law to be closed. If on any LIBOR Determination Date
the offered rate does not appear on Telerate Page 3750, the Calculation Agent
will request each of the reference banks (which shall be major banks that are
engaged in transactions in the London interbank market selected by the
Calculation Agent) to provide the Calculation Agent with its offered quotation
for United States dollar deposits for one month to prime banks in the London
interbank market as of 11:00 A.M., London time, on such date. If at least two
reference banks provide the Calculation Agent with such offered quotations,
LIBOR on such date will be the arithmetic mean, rounded upward, if necessary,
to the nearest 1/100,000 of 1% (.0000001), with five one-millionths of a
percentage point rounded upward, of all such quotations. If on such date fewer
than two of the reference banks provide the Calculation Agent with such
offered quotations, LIBOR on such date will be the arithmetic mean, rounded
upward, if necessary, to the nearest 1/100,000 of 1% (.0000001), with five
one-millionths of a percentage point rounded upward, of the offered per annum
rates that one or more leading banks in the City of New York selected by the
Calculation Agent are quoting as of 11:00 A.M., New York City time, on such
date to leading European banks for United States dollar deposits for one
month; provided, however, that if such banks are not quoting as described
above, LIBOR for such date will be LIBOR applicable to the monthly interest
period immediately preceding such monthly interest period. Notwithstanding the
foregoing, however, LIBOR for a Payment Date shall not be based on LIBOR for
the prior Payment Date for three consecutive Payment Dates. If, under the
priorities described above, LIBOR for a Payment Date would be based on LIBOR
for the previous Payment Date for the second consecutive Payment Date, the
Calculation Agent shall select an alternative comparable index (over which the
Calculation Agent has no control) used for determining one-month Eurodollar
lending rates that is calculated and published (or otherwise made available)
by an independent third party. The "Calculation Agent" will initially be the
Trustee.
S-66
<PAGE>
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 Loans, as well as
any other amounts constituting the Amount Available, 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 Loans. 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 from the Loans 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 Loans, as
well as any other amounts constituting the Amount Available, 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 Loans. 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 from the Loans 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 Loans, as
well as any other amounts constituting the Amount Available, 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 Loans. 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 from the Loans 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 Loans, as well as any other amounts
constituting the Amount Available, 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 Loans. 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
S-67
<PAGE>
Class B-1 Remaining Amount Available on deposit on such date in the
Certificate Account and by the right of the Class B-1 Certificateholders to
receive future distributions from the Loans 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 (i) the Senior Percentage of the
Scheduled Principal Balance of each Loan (other than the Adjustable Rate
Loans) that became a Liquidated Loan during the preceding Due Period and (ii)
the Scheduled Principal Balance of each Adjustable Rate Loan that became a
Liquidated Loan during the preceding Due Period. If the Liquidation Proceeds,
net of related Liquidation Expenses, from such Liquidated Loans are less than
the Scheduled Principal Balance of such Liquidated Loans 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 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 related Monthly
Servicing Fee payable to the Servicer (so long as the Company or any wholly
owned subsidiary of the Company is the Servicer) with respect to the Loans 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 Loan 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 related Monthly Servicing
Fee. But for the effect of the related Monthly Servicing Fee payable to the
Servicer (so long as the Company or any wholly owned subsidiary of the Company
is the Servicer) with respect to the Loans 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 Loan 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 related Monthly Servicing Fee. But for the effect of
the related Monthly Servicing Fee payable to the Servicer (so long as the
Company or any wholly owned subsidiary of the Company is the Servicer) with
respect to the Loans 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 Loan 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 related
Monthly Servicing Fee. But for the effect of the related Monthly Servicing Fee
payable to the Servicer (so long as the Company or any wholly owned subsidiary
of the Company is the Servicer) with respect to the Loans 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 Loan 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 related 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 Loan 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 Loan 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.
S-68
<PAGE>
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 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 (1) the
aggregate amount of any Principal Prepayments included and (2) that portion
of any such distribution to Class A-6 Certificateholders constituting the
Class A-6 Lockout Pro Rata Distribution Amount);
(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 and the
Notional Principal Amount for the Class A-7 IO Certificates after giving
effect to the distribution of principal on such Payment Date;
(e) the Senior Percentage and the Class A-6 Lockout Percentage for such
Payment Date;
(f) the Pool Scheduled Principal Balance for such 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 plus the amount in the Pre-Funding
Account); and
(h) the number and aggregate principal balance of Loans 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) any unpaid interest on any Class M-1 Liquidation Loss Principal
Amounts, after giving effect to payments of such interest on such Payment
Date;
S-69
<PAGE>
(f) the Senior Percentage for such Payment Date;
(g) the Pool Scheduled Principal Balance for such Payment Date;
(h) the Pool Factor; and
(i) the number and aggregate principal balance of Loans 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-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) any unpaid interest on any Class M-2 Liquidation Loss Principal
Amounts, after giving effect to payments of such interest on such Payment
Date;
(f) the Senior Percentage for such Payment Date;
(g) the Pool Scheduled Principal Balance for such Payment Date;
(h) the Pool Factor; and
(i) the number and aggregate principal balance of Loans 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-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 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;
S-70
<PAGE>
(e) any unpaid interest on any Class B-1 Liquidation Loss Principal
Amounts, after giving effect to payments of such interest on such Payment
Date;
(f) the Class B Percentage for such Payment Date;
(g) the Pool Scheduled Principal Balance for such Payment Date;
(h) the Pool Factor; and
(i) the number and aggregate principal balance of Loans 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 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 sum of the Class B-2 Formula
Distribution Amount and the Class B-2 Liquidation Loss Principal Amount, if
any, exceeds the Class B-2 Distribution Amount for such Payment Date;
(d) the Class B-2 Liquidation Loss Principal Amount, if any, for such
Payment Date;
(e) any unpaid interest on any Class B-2 Liquidation Loss Principal
Amounts, after giving effect to payments of such interest on such Payment
Date;
(f) the Class B-2 Guaranty Payment, if any, for such Payment Date;
(g) the Class B-2 Principal Balance after giving effect to the
distribution of principal on such Payment Date;
(h) the Class B Percentage for such Payment Date;
(i) the Pool Scheduled Principal Balance for such Payment Date;
(j) the Pool Factor; and
(k) the number and aggregate principal balance of Loans delinquent (i)
30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (c) and clause (g) 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 of the Loan Pool is less than 10% of the Cut-off Date Pool Principal
Balance of the Loan Pool, the Servicer will have the option to repurchase, on
30 days' prior written notice to the Trustee, all outstanding Loans (other
than any Loan as to which title to the underlying property has been assigned)
at a price sufficient to pay the Aggregate Certificate
S-71
<PAGE>
Principal Balance plus the Monthly Interest due on all Certificates on the
Payment Date occurring in the month following the date of repurchase. Such
amount will be distributed on such Payment Date.
COLLECTION AND OTHER SERVICING PROCEDURES
The Servicer will manage, administer, service and make collections on the
Loans, exercising the degree of skill and care consistent with the highest
degree of skill and care that the Servicer exercises with respect to similar
loans (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. The Company
does, however, as a matter of its own policy, monitor proof of hazard
insurance coverage (other than flood insurance) and require that it be named
as an additional loss payee on all first lien secured loans and generally on
junior lien secured loans with amounts financed of over $20,000.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Servicer will receive a Monthly Servicing Fee for each Due Period (paid
on the next succeeding Payment Date) for servicing the Loans equal to one-
twelfth of the product of .75% and the remaining Pool Scheduled Principal
Balance plus the related Pre-Funded Amount (if any).
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. The
Servicer is also entitled to reimbursement out of the liquidation proceeds of
a Liquidated Loan for customary out-of-pocket liquidation expenses incurred by
it.
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 Loan. Administrative services performed by the Servicer on
behalf of the Trust include selecting and packaging the Loans, 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 the servicing of the Loans and paid by
the Servicer from its servicing fees include payment of fees and expenses of
accountants, payments of all fees and expenses incurred in connection with the
enforcement of Loans or foreclosure on collateral relating thereto, 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 1999, 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 loans 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.
S-72
<PAGE>
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.
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 loan 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 Loans for breaches 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.
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
S-73
<PAGE>
repurchase certain Loans for breaches of representations or 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 without the consent of all of the
Certificateholders.
TERMINATION OF THE AGREEMENT
The Agreement will terminate (after distribution of all principal and
interest then due to the Certificateholders) on the earlier of (a) the Payment
Date on which the Pool Scheduled Principal Balance of the Loan Pool is reduced
to zero; or (b) the Payment Date occurring in the month following the
Servicer's repurchase of the Loans 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 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 Loans 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 the 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 Loan, (b) for any taxes
which may at any time be asserted with respect to, and as of the date of, the
conveyance of the Loans 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 Loan.
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 Loan, Loan file or related
documents, and will not be accountable for the use or application by the
S-74
<PAGE>
Company of any funds paid to the Company in consideration of the conveyance of
the Loans, 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 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 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
U.S. Bank 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.
REGISTRATION OF THE CERTIFICATES
The Certificates initially will be represented by certificates registered in
the name of Cede & Co., the nominee of The Depository Trust Company ("DTC").
The interests of beneficial owners of the Certificates will be represented by
book entries on the records of the participating members of DTC. Definitive
Certificates will be available only under the limited circumstances described
herein. Holders of the Certificates may hold through DTC (in the United
States), CEDEL or Euroclear (as defined herein) (in Europe) if they are
participants of such systems, or indirectly through organizations that are
participants in such systems.
CEDEL and Euroclear will hold omnibus positions in the Certificates on
behalf of the CEDEL Participants and the Euroclear Participants, respectively,
through customers' securities accounts in CEDEL's and Euroclear's
S-75
<PAGE>
names on the books of their respective depositaries (collectively, the
"Depositaries"), which in turn will hold such positions in customers'
securities accounts in the Depositaries' names on the books of DTC.
DTC is a limited-purpose trust company organized under the laws of the State
of New York, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the 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 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.
S-76
<PAGE>
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.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC
in accordance with DTC rules on behalf of the relevant European international
clearing system by its Depositary; however, such cross-market transactions
will require delivery of instructions to the relevant European international
clearing system by the counterparty in such system in accordance with its
rules and procedures and within its established deadlines (European time). The
relevant European international clearing system will, if the transaction meets
its settlement requirements, deliver instructions to its Depositary to take
action to effect final settlement on its behalf by delivering or receiving
securities in DTC, and making or receiving payment in accordance with normal
procedures for same-day funds settlement applicable to DTC. CEDEL Participants
and Euroclear Participants may not deliver instructions directly to the
Depositaries.
Because of time-zone differences, credits of securities in CEDEL or
Euroclear as a result of a transaction with a Participant will be made during
the subsequent securities settlement processing, dated the business day
following the DTC settlement date, and such credits or any transactions in
such securities settled during such processing will be reported to the
relevant CEDEL Participant or Euroclear Participant on such business day. Cash
received in CEDEL or Euroclear as a result of sales of securities by or
through a CEDEL Participant or a Euroclear Participant to a Participant will
be received with value on the DTC settlement date but will be available in the
relevant CEDEL or Euroclear cash account only as of the business day following
settlement in DTC.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes
in accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations and may include the Underwriters. Indirect access to CEDEL is
also available to others, such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a CEDEL
Participant, either directly or indirectly.
The Euroclear System was created in 1968 to hold securities for participants
of the Euroclear System ("Euroclear Participants") and to clear and settle
transactions between Euroclear Participants through simultaneous electronic
book-entry delivery against payment, thereby eliminating the need for physical
movement of certificates and any risk from lack of simultaneous transfers of
securities and cash. Transactions may now be settled in Euroclear in any of 32
currencies, including United States dollars. The Euroclear System includes
various other services, including securities lending and borrowing, and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described in Annex I hereto.
The Euroclear System is operated by Morgan Guaranty Trust Company of New York,
Brussels, Belgium office (the "Euroclear Operator" or "Euroclear"), under loan
with Euroclear Clearance System, S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and
all Euroclear securities clearance accounts and Euroclear cash accounts are
accounts with the Euroclear Operator, not the Cooperative. The Cooperative
establishes policy for the Euroclear System on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and
S-77
<PAGE>
dealers and other professional financial intermediaries and may include the
Underwriters. Indirect access to the Euroclear System is also available to
other firms that clear through or maintain a custodial relationship with a
Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions
govern transfers of securities and cash within the Euroclear System,
withdrawal of securities and cash from the Euroclear System, and receipts of
payments with respect to securities in the Euroclear System. All securities in
the Euroclear System are held on a fungible basis without attribution of
specific certificates to specific securities clearance accounts. The Euroclear
Operator acts under the Terms and Conditions only on behalf of Euroclear
Participants and has no record of or relationship with persons holding through
Euroclear Participants.
Distributions with respect to Certificates held through CEDEL or Euroclear
will be credited to the cash accounts of CEDEL Participants or Euroclear
Participants in accordance with the relevant system's rules and procedures, to
the extent received by its Depositary. Such distributions will be subject to
tax reporting in accordance with relevant United States tax laws and
regulations. See "Certain Federal Income Tax Consequences" in the Prospectus
and "Global Clearance, Settlement and Tax Documentation Procedures" in Annex I
to this Prospectus Supplement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures in
order to facilitate transfers of Certificates among participants of DTC, CEDEL
and Euroclear, they are under no obligation to perform or continue to perform
such procedures and such procedures may be discontinued at any time.
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 Loans, 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 to be made under the Class B-2 Limited Guaranty is referred
to as a "Class B-2 Guaranty Payment." Prior to the Class B-1 Cross-over Date,
and on any Payment Date on or after the Class B-1 Cross-over Date on which the
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 Liquidation Loss Principal Amount, if any, for such Payment Date exceeds
(ii) the Class B-2 Distribution Amount for such Payment Date. The Class B-2
Liquidation Loss Principal 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 (but in no event
greater than the Class B-2 Principal Balance). The Class B-2 Liquidation Loss
Principal Amount is, in substance, the amount of delinquencies and losses
experienced on the Loans during the related Due Period that was not absorbed
by the Class C Certificate and the related Monthly Servicing Fee otherwise
payable to the Company (so long as the Company or any wholly owned subsidiary
of the Company is the Servicer) with respect to the Loans. On each Payment
Date on or after the Class B-1 Cross-over Date, if the Class B Principal
Distribution Test is satisfied on such Payment Date, 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.
S-78
<PAGE>
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-1A ARM, Class A-1B ARM,
Class A-1, Class A-2, Class A-3, Class A-4, Class A-5, Class A-6, Class A-7
IO, Class M-1, Class M-2 or Class B-1 Certificateholders.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Certificates, Briggs and Morgan, Professional
Association, counsel to the Company, will deliver its opinion that, assuming
that two separate elections are made to treat segregated portions of the
assets of the Trust as REMICs (respectively, the "Master REMIC" and the
"Subsidiary REMIC"), and further assuming ongoing compliance with the terms of
the Agreement, the Master REMIC and the Subsidiary REMIC will each qualify as
a REMIC, the Subsidiary REMIC Regular Interests, which are not being offered
hereunder, will be treated as "regular interests" in the Subsidiary REMIC, and
each Class of Certificates will be treated as "regular interests" in the
Master REMIC for federal income tax purposes. The Class C Subsidiary
Certificate, which is not being offered hereby, will constitute the sole class
of "residual interests" in the Subsidiary REMIC, and the Class C Master
Certificate, which is not being offered hereby, will constitute the sole class
of "residual interests" in the Master REMIC.
Other than the Class A-7 IO Certificates, the Certificates will not be
issued with original issue discount for federal income tax purposes. Although
the tax treatment is not entirely certain, the Class A-7 IO Certificates will
be treated as having been issued with original issue discount for federal
income tax purposes equal to the excess of all expected payments of interest
on such Certificates over their issue price. The prepayment assumption that
will be used to determine the rate of accrual of original issue discount,
market discount and premium, if any, will be based on the assumption that the
Loans will prepay at a rate equal to 125% of the applicable Prepayment
Assumption as to the Fixed-Rate Loans and 30% CPR as to the Adjustable Rate
Loans. Although unclear, a holder of a Class A-7 IO Certificate may be
entitled to deduct a loss to the extent that its remaining basis exceeds the
maximum amount of future payments to which such Certificateholder would be
entitled if there were no further prepayments of the Loans.
Certificates held by financial institutions, thrift institutions taxed as
domestic building and loan associations and real estate investment trusts will
represent interests in "loans secured by an interest in real property" and
"real estate assets" for purposes of Sections 7701(a)(19)(C) and 856(c)(4)(A)
of the Code, respectively, in the same proportion that the assets in the
Master REMIC consist of qualifying assets under such sections. 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 to the extent that such Certificates are treated as
"real estate assets" under Section 856(c)(4)(A) 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."
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.
S-79
<PAGE>
Accordingly, assets of such plans may be invested in the Class A 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 No. 91-14, 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 equity loans such as the Loans. The Exemptions will apply to the
acquisition, holding, and resale of the Class A 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 Certificates are the following:
(1) The acquisition of the Class A Certificates by a Plan is on terms
(including the price for the Class A 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 Certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other certificates of the Trust;
(3) The Class A 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, Fitch, Duff & Phelps Credit Rating Co.
or Moody's Investors Service, Inc. (the "Exemptions Rating Agencies");
(4) The Trustee is not an affiliate of any other member of the Restricted
Group (as defined below);
(5) The sum of all payments made to the Underwriters in connection with
the distribution of the Class A Certificates represents not more than
reasonable compensation for underwriting the Class A Certificates, as
applicable. The sum of all payments made to and retained by the Company
pursuant to the sale of the Loans to the Trust represents not more than the
fair market value of such Loans. 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 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 Certificates in
connection with the initial issuance, at least fifty percent (50%) of the
Class A Certificates, as applicable, are acquired by persons independent of
the Restricted Group, (ii) the Plan's investment in Class A Certificates does
not exceed twenty-five percent (25%) of all of the Class A 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 Underwriters, the
Trustee, the Servicer, any obligor with respect to Loans 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").
On July 21, 1997, the DOL published in the Federal Register an amendment to
the Exemption, which extends exemptive relief to certain mortgage-backed and
asset-backed securities transactions using pre-funding accounts for trusts
issuing pass-through certificates. With respect to the Loan Pool, the
amendment will generally allow related Loans supporting payments to related
Certificateholders, and having a value equal to no more than
S-80
<PAGE>
25% of the total principal amount of the related Certificates, to be
transferred to the Trust during the Pre-Funding Period, instead of requiring
that all such Loans be either identified or transferred on or before the
Closing Date. In general, the relief applies to the purchase, sale and holding
of Certificates which otherwise qualify for the Exemption, provided that the
following general conditions are met:
(1) the ratio of the amount allocated to the Pre-Funding Account to the
total principal amount of the Certificates being offered must be less than
or equal to 25%;
(2) all Subsequent Loans transferred to the Loan Pool after the Closing
Date must meet the same terms and conditions for eligibility as the Initial
Loans, which terms and conditions have been approved by one of the
Exemptions Rating Agencies;
(3) the transfer of the Subsequent Loans to the Trust during the Pre-
Funding Period must not result in the Certificates to be covered by the
Exemption receiving a lower credit rating from an Exemptions Rating Agency
upon termination of the Pre-Funding Period than the rating that was
obtained at the time of the initial issuance of the Certificates by the
Trust;
(4) solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate (the "Average Interest Rate") for the Loan
Pool at the end of the Pre-Funding Period must not be more than 100 basis
points lower than the Average Interest Rate for the Initial Loans;
(5) for transactions occurring on or after May 23, 1997, either:
(i) the characteristics of the Subsequent Loans must be monitored by
an insurer or other credit support provider which is independent of the
Company; or
(ii) an independent accountant retained by the Company must provide
the Company with a letter (with copies provided to the Exemptions
Rating Agency rating the Certificates, the Underwriter and the Trustee)
stating whether or not the characteristics of the Subsequent Loans
conform to the characteristics described in the Prospectus or
Prospectus Supplement and/or Agreement. In preparing such letter, the
independent accountant must use the same type of procedures as were
applicable to the Initial Loans;
(6) the Funding Period must end no later than three months or 90 days
after the Closing Date or earlier in certain circumstances if the related
Pre-Funding Account falls below the minimum level specified in the
Agreement or an event of default occurs;
(7) amounts transferred to any Pre-Funding Account and any capitalized
interest account used in connection with the pre-funding may be invested
only in cash or in investments which are permitted by the Exemptions Rating
Agencies rating the Certificates, and such investment must be described in
the Agreement and must:
(i) be direct obligations of, or obligations fully guaranteed as to
timely payment of principal and interest by, the United States or any
agency or instrumentality thereof (provided that such obligations are
backed by the full faith and credit of the United States); or
(ii) have been rated (or the obligor has been rated) in one of the
three highest generic rating categories by one of the Exemptions Rating
Agencies;
(8) the Prospectus or Prospectus Supplement must describe the duration of
the Funding Period; and
(9) the Trustee (or any agent with which the Trustee contracts to provide
trust services) must be a substantial financial institution or trust
company experienced in trust activities and familiar with its duties,
responsibilities and liabilities as a fiduciary under ERISA. The Trustee,
as legal owner of the Trust, must enforce all the rights created in favor
of Certificateholders of the Trust, including employee benefit plans
subject to ERISA.
In its prefatory comments to the amendment as proposed by DOL (62 Fed. Reg.
28502), the DOL stated its interpretive position that a transaction which
satisfied the conditions of the Exemption, but did not satisfy the conditions
of the amendment as proposed, could nevertheless qualify for exemptive relief
if it included a pre-
S-81
<PAGE>
funding account that was used only to acquire assets that are specifically
identified by the sponsor or originator as of the closing date, but
transferred to the trust after the closing date for administrative or other
reasons. Although the Pre-Funding Account may not satisfy the conditions of
the amendment in that the Pre-Funding Account may exceed 25% of the total
principal amount of the related Certificates, funds in the Pre-Funding Account
in excess of such 25% threshold will be used by the Trust solely to purchase
Subsequent Home Equity Loans in accordance with the Agreement from a fixed
pool of loans that will have been specifically identified prior to the Closing
Date. It is expected that all of the loans in such fixed pool, except for
those which are determined not to meet the criteria for purchase set forth in
the Agreement, will be acquired using the Pre-Funding Account. Accordingly,
the Company believes that the existence of the Pre-Funding Account should not
cause the Exemption to be inapplicable.
The Company believes that the Exemption will apply to the acquisition and
holding of Class A Certificates sold by the Underwriters 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 Loans included in the Trust constitutes more than 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 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
Certificates. Assets of a Plan or individual retirement account should not be
invested in the Class A 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.
In addition to the Exemption, some or all of the transactions involving the
purchase, holding and resale of Certificates that might otherwise constitute
prohibited transactions under ERISA or the Code might qualify for relief from
the prohibited transaction rules and related taxes and penalties under certain
class exemptions granted by the DOL, including Prohibited Transaction Class
Exemption ("PTCE") 83-1, which exempts certain transactions involving employee
benefit plans and mortgage pool investment trusts, PTCE 86-128, which exempts
certain transactions involving employee benefit plans and certain broker-
dealers, PTCE 90-1, which exempts certain transactions involving employee
benefit plans and insurance company pooled separate accounts, PTCE 91-38,
which exempts certain transactions involving employee benefit plans and bank
collective investment funds and PTCE 96-23, which exempts certain transactions
involving employee benefit plans and in-house asset managers. There also may
be other exemptions applicable to a particular transaction involving the
Trust. A Plan that intends to acquire any class of the Certificates should
consult with its own counsel regarding whether such investment would cause a
prohibited transaction to occur and whether the terms and conditions of an
applicable class exemption may be satisfied.
In addition to any exemption that may be available under PTCE 95-60 for the
purchase and holding of the Certificates by an insurance company general
account, the Small Business Job Protection Act of 1996 added a new Section
401(c) to ERISA, which provides certain exemptive relief from the provisions
of Part 4 of Title I of ERISA and Section 4975 of the Code, including the
prohibited transaction restrictions imposed by ERISA and the related excise
taxes imposed by the Code, for transactions involving an insurance company
general account. Pursuant to Section 401(c) of ERISA, the DOL published
proposed regulations ("Proposed 401(c) Regulations") on December 22, 1997 to
provide guidance for the purpose of determining, in cases where insurance
policies supported by an insurer's general account are issued to or for the
benefit of a Plan on or before December 31, 1998, which general account assets
constitute Plan assets. Section 401(c) of ERISA generally provides that, until
the date which is 18 months after the Proposed 401(c) Regulations become
final, no person will be subject to liability under Part 4 of Title I of ERISA
and Section 4975 of the Code on the basis of a claim that the assets of an
insurance company general account constitute Plan assets, unless (i) as
otherwise provided by the Secretary of Labor in the Proposed 401(c)
Regulations to prevent avoidance of the regulations or (ii) an action is
brought by the Secretary of Labor for certain breaches of fiduciary duty which
would also constitute a violation of federal or state criminal law. Any assets
of an insurance company general account which support insurance policies
issued to a Plan after December 31, 1998 or issued to Plans on or before
December 31, 1998 for which the
S-82
<PAGE>
insurance company does not comply with the Proposed 401(c) Regulations may be
treated as Plan assets. In addition, because Section 401(c) does not relate to
insurance company separate accounts, separate account assets are still treated
as Plan assets of any Plan invested in such separate account. Insurance
companies contemplating the investment of general account assets in the
Certificates should consult with their legal counsel with respect to the
applicability of Section 401(c) of ERISA, including the general account's
ability to continue to hold the Certificates after the date which is 18 months
after the date on which the Proposed 401(c) Regulations become final.
No transfer of any Class of Certificates other than the Class A 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 either (i) that such
person is neither a Plan, nor acting on behalf of a Plan, subject to ERISA or
to Section 4975 of the Code or (ii) that the purchase and holding of the
Certificate 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.
S-83
<PAGE>
UNDERWRITING
The Underwriters have agreed, subject to the terms and conditions of the
Underwriting Agreement, to purchase from the Company the respective principal
amounts of the Certificates set forth opposite their names below.
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF
CLASS A-1A ARM CLASS A-1B ARM CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4 CLASS A-5
UNDERWRITER CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
----------- -------------- -------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Lehman Brothers Inc. ... $ 4,668,000 $ 35,334,000 $35,000,000 $26,568,000 $13,968,000 $10,334,000 $ 6,634,000
First Union Capital
Markets................ 4,666,000 35,333,000 35,000,000 26,566,000 13,966,000 10,333,000 6,633,000
Merrill Lynch, Pierce,
Fenner & Smith
Incorporated..... 4,666,000 35,333,000 35,000,000 26,566,000 13,966,000 10,333,000 6,633,000
----------- ------------ ------------ ----------- ----------- ----------- -----------
Totals................ $14,000,000 $106,000,000 $105,000,000 $79,700,000 $41,900,000 $31,000,000 $19,900,000
=========== ============ ============ =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL PERCENTAGE PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPLE
AMOUNT OF INTEREST OF AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF
CLASS A-6 CLASS A-7 IO CLASS M-1 CLASS M-2 CLASS B-1 CLASS B-2
UNDERWRITER CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
----------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Lehman Brothers Inc..... $6,668,000 100% $ 10,834,000 $ 6,250,000 $ 6,668,000 $ 3,750,000
First Union Capital
Markets................ 6,666,000 0 10,833,000 6,250,000 6,666,000 3,750,000
Merrill Lynch, Pierce,
Fenner & Smith
Incorporated........... 6,666,000 0 10,833,000 6,250,000 6,666,000 3,750,000
----------- --- ------------ ----------- ----------- -----------
Totals................ $20,000,000 100% $32,500,000 $18,750,000 $20,000,000 $11,250,000
=========== === ============ =========== =========== ===========
</TABLE>
In the Underwriting Agreement, the Underwriters have 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 Underwriters, the Underwriting Agreement provides that, in
certain circumstances, the Underwriting Agreement may be terminated.
The Company has been advised by the Underwriters that they propose initially
to offer the Certificates to the public at the respective offering prices set
forth on the cover page of this Prospectus Supplement and to certain dealers
at such price less a concession not in excess of the respective amounts set
forth in the table below (expressed as a percentage of the relative
Certificate Principal Balance). The Underwriters may allow and such dealers
may reallow a discount not in excess of the respective amounts set forth in
the table below to certain other dealers.
<TABLE>
<CAPTION>
SELLING REALLOWANCE
CLASS CONCESSION DISCOUNT
----- ---------- -----------
<S> <C> <C>
A-1A ARM............................ .200% .100%
A-1B ARM............................ .200% .100%
A-1................................. .1375% .100%
A-2................................. .200% .100%
A-3................................. .250% .125%
A-4................................. .300% .150%
A-5................................. .325% .150%
A-6................................. .325% .150%
A-7 IO.............................. .150% .100%
M-1................................. .350% .150%
M-2................................. .375% .150%
B-1................................. .400% .200%
B-2................................. .425% .200%
</TABLE>
In general, purchases of a security for the purpose of stabilization could
cause the price of the security to be higher than it might be in the absence
of such purchases.
S-84
<PAGE>
Neither the Company nor any of the Underwriters makes any representations or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the prices of the Certificates. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Underwriters will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
Until the distribution of the Certificates is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase the Certificates. As an exception to these
rules, the Underwriters are permitted to engage in certain transactions that
stabilize the price of the Certificates. Such transactions consist of bids or
purchases for the purposes of pegging, fixing or maintaining the price of the
Certificates.
Each Underwriter has represented, warranted and agreed that (i) it has not
offered or sold and, prior to the expiration of the period of six months from
the Closing Date, will not offer or sell any Certificates to persons in the
United Kingdom except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or
agent) for the purposes of their businesses or otherwise in circumstances
which have not resulted and will not result in an offer to the public in the
United Kingdom within the meaning of the Public Offers of Securities
Regulations 1995; (ii) it has complied and will comply with all applicable
provisions of the Financial Services Act 1986 with respect to anything done by
it in relation to the Certificates in, from or otherwise involving the United
Kingdom; and (iii) it has only issued or passed on and will only issue or pass
on in the United Kingdom any document received by it in connection with the
issue of the Certificates to a person who is of a kind described in Article
11(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1995 (as amended) or is a person to whom such document may
otherwise lawfully be issued or passed on.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or contribute to payments the Underwriters
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 loan or home equity loan pass-through certificates without the
consent of the Underwriters.
Each of the Underwriters (or affiliates thereof) has from time to time
provided warehouse and other financing to the Company.
LEGAL MATTERS
Certain legal matters relating to the issuance of the Certificates will be
passed upon for the Company and the Trust by Briggs and Morgan, Professional
Association, St. Paul and Minneapolis, Minnesota, and for the Underwriters 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 Briggs
and Morgan, Professional Association.
S-85
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the Certificates will be available
only in book-entry form (the "Global Certificates"). Investors in the Global
Certificates may hold such Global Certificates through any of DTC, CEDEL or
Euroclear. The Global Certificates will be tradeable as home market
instruments in both the European and U.S. domestic markets. Initial settlement
and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Certificates
through CEDEL and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Certificates
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-
payment basis through the respective Depositaries of CEDEL and Euroclear (in
such capacity) and DTC Participants.
Non-U.S. holders (as described below) of Global Certificates will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
INITIAL SETTLEMENT
All Global Certificates will be held in book-entry form by DTC in the name
of Cede & Co. as nominee of DTC. Investors' interests in the Global
Certificates will be represented through financial institutions acting on
their behalf as direct and indirect Participants in DTC. As a result, CEDEL
and Euroclear will hold positions on behalf of their participants through
their respective Depositaries, which in turn will hold such positions in
accounts as DTC Participants.
Investors electing to hold their Global Certificates through DTC will follow
the settlement practices applicable to United States corporate debt
obligations. Investors securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Certificates through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Certificates will be credited to
the securities custody accounts on the settlement date against payments in
same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired
value date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to book-entry
securities in same-day funds.
Trading between CEDEL or Euroclear Participants. Secondary market trading
between CEDEL Participants or Euroclear Participants will be settled using the
procedures applicable to conventional eurobonds in same-day funds.
A-1
<PAGE>
Trading between DTC seller and CEDEL or Euroclear purchaser. When Global
Certificates are to be transferred from the account of a DTC Participant to
the account of a CEDEL Participant or a Euroclear Participant, the purchaser
will send instructions to CEDEL or Euroclear through a CEDEL Participant or
Euroclear Participant at least one business day prior to settlement. CEDEL or
Euroclear, as applicable, will instruct its Depositary to receive the Global
Certificates against payment. Payment will include interest accrued on the
Global Certificates from and including the last coupon payment date to and
excluding the settlement date. Payment will then be made by such Depositary to
the DTC Participant's account against delivery of the Global Certificates.
After settlement has been completed, the Global Certificates will be credited
to the applicable clearing system and by the clearing system, in accordance
with its usual procedures, to the CEDEL Participant's or Euroclear
Participant's account. The Global Certificates credit will appear the next day
(European time) and the cash debit will be back-valued to, and the interest on
the Global Certificates will accrue from, the value date (which would be the
preceding day when settlement occurred in New York). If settlement is not
completed on the intended value date (i.e., the trade fails), the CEDEL or
Euroclear cash debit will be valued instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make available to
the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to pre-position funds for
settlement, either from cash on hand or existing lines of credit, as they
would for any settlement occurring within CEDEL or Euroclear. Under this
approach, they may take on credit exposure to CEDEL or Euroclear until the
Global Certificates are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants or Euroclear Participants can elect not to pre-
position funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, CEDEL Participants or Euroclear Participants
purchasing Global Certificates would incur overdraft charges for one day,
assuming they cleared the overdraft when the Global Certificates were credited
to their accounts. However, interest on the Global Certificates would accrue
from the value date. Therefore, in many cases the investment income on the
Global Certificates earned during that one-day period may substantially reduce
or offset the amount of such overdraft charges, although this result will
depend on each CEDEL Participant's or Euroclear Participant's particular cost
of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Certificates
to the respective Depositary for the benefit of CEDEL Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller
on the settlement date. Thus, to the DTC Participant a cross-market
transaction will settle no differently than a trade between two DTC
Participants.
Trading between CEDEL or Euroclear seller and DTC purchaser. Due to time
zone differences in their favor, CEDEL Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Certificates are to be transferred by the respective clearing systems, through
their respective Depositaries, to a DTC Participant. The seller will send
instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. In these cases,
CEDEL or Euroclear will instruct their respective Depositaries, as
appropriate, to deliver the Certificates to the DTC Participant's account
against payment. Payment will include interest accrued on the Global
Certificates from and including the last coupon payment date to and excluding
the settlement date. The payment will then be reflected in the account of the
CEDEL Participant or Euroclear Participant the following day, and receipt of
the cash proceeds in the CEDEL Participant's or Euroclear Participant's
account would be back-valued to the value date (which would be the preceding
day, when settlement occurred in New York). Should the CEDEL Participant or
Euroclear Participant have a line of credit with its clearing system and elect
to be in debit in anticipation of receipts of the sale proceeds in its
account, the bank-valuation will extinguish any overdraft charges incurred
over that one-day period. If settlement is not completed on the intended value
date (i.e., the trade fails), receipt of the cash proceeds in the CEDEL
Participant's or Euroclear Participant's account would instead be valued as of
the actual settlement date. Finally, day traders that use CEDEL or Euroclear
and that purchase Global Certificates from DTC Participants for delivery to
CEDEL Participants or Euroclear Participants should note that
A-2
<PAGE>
these trades would automatically fail on the sale side unless affirmative
action were taken. At least three techniques should be readily available to
eliminate this potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until the purchase
side of the day trade is reflected in their CEDEL or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Certificates in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Certificates sufficient time to be reflected in their CEDEL or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at least
one day prior to the value date for the sale to the CEDEL Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Certificates holding securities through CEDEL
or Euroclear (or through DTC if the holder has an address outside the U.S.)
will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons, unless (i) each clearing system, bank or other
financial institution that holds customers' securities in the ordinary course
of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (ii) such beneficial owner takes one
of the following steps to obtain an exemption or reduced tax rate:
Exemption of non-U.S. Persons (Form W-8). Beneficial owners of
Certificates that are non-U.S. Persons generally can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (Certificate
of Foreign Status) and a certificate under penalties of perjury (the "Tax
Certificate") that such beneficial owner is (i) not a controlled foreign
corporation (within the meaning of Section 957(a) of the Code) that is
related (within the meaning of Section 846(d)(4) of the Code) to the Trust
or the Transferor and (ii) not a 10% shareholder (within the meaning of
Section 871(h)(3)(B) of the Code) of the Trust or the Transferor. If the
information shown on Form W-8 or the Tax Certificate changes, a new Form W-
8 or Tax Certificate, as the case may be, must be filed within 30 days of
such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a
U.S. branch, for which the interest income is effectively connected with
its conduct of a trade or business in the United States can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a
Trade or Business in the United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons that are beneficial owners of
Certificates residing in a country that has a tax treaty with the United
States can obtain an exemption or reduced tax rate (depending on the treaty
terms) by filing Form 1001 (Ownership, Exemption or Reduced Rate
Certificate). If the treaty provides only for a reduced rate, withholding
tax will be imposed at that rate unless the filer alternatively files Form
W-8. Form 1001 may be filed by the beneficial owner of Certificates or such
owner's agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The beneficial owner of a
Global Certificate or, in the case of a Form 1001 or a Form 4224 filer,
such owner's agent, files by submitting the appropriate form to the person
through whom it holds the security (the clearing agency, in the case of
persons holding directly on the books of the clearing agency). Form W-8 and
Form 1001 are effective for three calendar years and Form 4224 is effective
for one calendar year.
A-3
<PAGE>
The term "U.S. Person" means (i) a citizen or resident of the United States,
(ii) a corporation or partnership organized in or under the laws of the United
States or any political subdivision thereof (except, in the case of a
partnership, to the extent provided in regulations), (iii) an estate the
income of which is includible in gross income for United States tax purposes,
regardless of its source or (iv) a trust other than a foreign trust within the
meaning of Section 7701 (a)(31) of the Code. To the extent prescribed in
regulations by the Secretary of the Treasury, which regulations have not yet
been issued, a trust which was in existence on August 20, 1996 (other than a
trust treated as owned by the grantor under Subpart E of Part 1 of Subchapter
J of Chapter 1 of the Code), and which was treated as a United States person
on August 19, 1996, may elect to continue to be treated as a United States
person notwithstanding the previous sentence.
The provisions described above apply to payments of interest, including OID,
on registered debt made on or before December 31, 1999. New withholding rules
and exemptions will apply to such payments made on or after January 1, 2000.
This summary does not deal with all aspects of U.S. federal income tax
withholding that may be relevant to foreign holders of the Global
Certificates. Investors are advised to consult their own tax advisors for
specific tax advice concerning their holding and disposing of the Global
Certificates.
A-4
<PAGE>
GREEN TREE FINANCIAL CORPORATION, SELLER AND SERVICER
CERTIFICATES FOR HOME IMPROVEMENT AND HOME EQUITY LOANS
(ISSUABLE IN SERIES)
Certificates for Home Improvement and Home Equity 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 (i) home
improvement contracts and promissory notes (the "Home Improvement Contracts")
and (ii) closed-end home equity loans (the "Home Equity Contracts," and,
together with the Home Improvement Contracts, collectively the "Contracts"),
as more particularly described herein, and liens on 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 May 20, 1998.
<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 Commission also maintains a
Web site at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file
electronically with the Commission. 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, 1997, and the Company's current report on Form 8-K dated April 6,
1998, which have been filed with the Commission, is 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 John Dolphin, Vice President and Director of Investor
Relations, 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 and Home Eq-
uity Loans (Issuable in Series) (the "Certifi-
cates").
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
Servicing 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 (1) home improvement contracts
and promissory notes (the "Home Improvement
Contracts"), which will be either conventional
contracts or contracts insured by the Federal
Housing Administration ("FHA") pursuant to Ti-
tle I of the National Housing Act ("Title I"),
and (2) closed-end home equity loans (the "Home
Equity Contracts"). Each Contract will be se-
cured by the related real estate. If so speci-
fied in the related Prospectus Supplement, the
Contract Pool may be divided into two or more
sub-pools, in which event the Certificates of
certain specified Classes may be payable pri-
marily from, and in respect of, the Contracts
comprising a given sub-pool.
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 the Contracts that are Home Improve-
ment Contracts and Home Equity Contracts, re-
spectively; (v) the percentage of Contracts
that are FHA-insured; (vi) the average out-
standing
4
<PAGE>
principal balance of the Contracts as of the
Cut-off Date; and (vii) the geographic location
of improved real estate underlying the Con-
tracts. In addition, if so specified in the re-
lated Prospectus Supplement, additional Con-
tracts may be purchased from the Company during
the 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 The Certificates of each Series may be issued in
Certificates................ 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."
The Prospectus Supplement will set forth the
rate at which interest will be paid to
Certificateholders of each Class of a given Se-
ries (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
Certifi-
5
<PAGE>
cates will not be guaranteed or insured by any
government agency or, unless otherwise speci-
fied in the related Prospectus Supplement,
other insurer and, except as described herein
and in the related Prospectus Supplement, the
Contracts 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 pre-
6
<PAGE>
payments, will be passed through on each Pay-
ment Date. See "Maturity and Prepayment Consid-
erations" and "Description of the Certifi-
cates."
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
Considerations.............. 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 con-
7
<PAGE>
sequences under the Code described herein and
in such Prospectus Supplement. If so specified
in the applicable Prospectus Supplement, a
Class of Certificates offered hereby may repre-
sent interests in a "two-tier" REMIC, but all
interests in the first and second tier REMIC
will be created under the same Agreement. See
"Certain Federal Income Tax Consequences--REMIC
Series."
If a REMIC Election is not made with respect to
a Series of Certificates, the Trust Fund 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 Home Improvement
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 Home Improvement 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 Home Improvement Contracts.
In addition, any insurance claim paid by FHA will cover only 90% of the sum
of the unpaid principal on the Home Improvement 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 Home
Improvement 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 December 31,
1997, was equal to approximately $86,950,000, but will be reduced by the
amount of all FHA Insurance claims paid 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 Home
Improvement 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 Company
expects that a substantial number of the liens on the improved real estate
securing the Contracts in a given Contract Pool will be junior to other
liens on such real estate. The rights of the Trust Fund (and therefore the
Certificateholders of the related 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."
9
<PAGE>
A substantial portion of the 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 Contract on the one hand, and the value of the
home and an estimate of the value of the financed improvement, where
applicable, 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) Home Improvement Contract or a Home Equity Contract
such that the remaining balance of such 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 Home Improvement 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 Home Improvement 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 may not record the
assignment to the Trustee of the mortgage or deed of trust securing any
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 Contract may not be effective against creditors of or purchasers from the
Company or a trustee in bankruptcy of the Company.
6. 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 Home Improvement Contract included in the Contract
Pool), (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.
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, except with respect to FHA Insurance Reserves. If so specified
in the related Prospectus Supplement, the Contract Pool may be divided into
two or more sub-pools, in which event the Certificates of certain specified
Classes may be payable primarily from, and in respect of, the Contracts
comprising a given sub-pool. 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
10
<PAGE>
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 (i) home improvement contracts and promissory
notes (the "Home Improvement Contracts"), and (ii) closed-end home equity
loans (the "Home Equity Contracts" and, together with the Home Improvement
Contracts, collectively the "Contracts"), originated by the Company on an
individual basis in the ordinary course of business. The Home Improvement
Contracts may be conventional home improvement contracts or contracts insured
by FHA. All Contracts will be secured by the related real estate. Except as
otherwise specified in the related Prospectus Supplement, the Contracts will
be fully amortizing and will bear interest at a fixed or variable annual
percentage rate (the "Contract Rate").
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.
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 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.
11
<PAGE>
The Company will make representations and warranties as to the types and
geographical distribution of the Contracts included in a Contract Pool and as
to the accuracy in all material respects of certain information furnished to
the Trustee in respect of each such Contract. Upon a breach of any
representation 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 the related 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 contracts and home equity loans, costs of carrying such contracts
and loans 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, 1997, had
stockholders' equity of approximately $1,332,000,000. The Company purchases,
pools, sells and services conditional sales contracts for manufactured homes
and other consumer installment sales contracts, as well as home equity loans.
The Company is the largest servicer of government-insured manufactured housing
contracts and conventional manufactured housing contracts in the United
States. Servicing functions are performed through Green Tree Financial
Servicing Corporation, a wholly owned subsidiary of the Company. Through its
principal offices in St. Paul, Minnesota, and service centers throughout the
United States, the Company serves all 50 states. The Company began financing
FHA-insured home improvement loans in April 1989, conventional home
improvement loans in September 1992 and home equity loans in January 1996. 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
Home Improvement Contracts. Through its centralized loan processing
operations in St. Paul, Minnesota, the Company arranges to purchase certain
contracts from home improvement contractors located throughout the United
States. The Company's regional sales managers contact home improvement
contractors and explain the Company's available financing plans, terms,
prevailing rates and credit and financing policies. If the contractor wishes
to utilize the Company's available customer financing, the contractor must
make an application for contractor approval. The Company has a contractor
approval process pursuant to which the financial condition, business
experience and qualifications of the contractor are reviewed prior to his or
her approval to sell Contracts to the Company. In addition, the Company has a
centralized compliance group which reviews and updates contractor financial
condition and reviews contractors on an annual basis to determine whether such
contractor's approval will be continued. The Company also reviews monthly
contractor trend reports which show the default and delinquency trends of the
particular contractor with respect to contracts sold to the Company. The
Company occasionally will originate directly a home improvement promissory
note involving a home improvement transaction.
12
<PAGE>
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. 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 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 an FHA-insured home improvement contract
with respect to a single family property 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. Certain
other criteria for home improvement contracts eligible for FHA Insurance are
described under the caption "Description of FHA Insurance."
The Company began financing conventional home improvement loans in September
1992. Conventional home improvement loans are not insured by FHA. 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 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.
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 the Home Improvement 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 Home Improvement Contract,
and the improvements being financed. Because the Company does not require
appraisals on most Home Improvement Contracts with loan amounts of less than
$30,000 (which Home Improvement 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 Home Improvement
Contract, the related Prospectus Supplement will not provide detailed
disclosure of loan-to-value ratios on the Home Improvement Contracts.
Home Equity Contracts. The Company has originated closed-end home equity
loans since January 1996. As of December 31, 1997, the Company had
approximately $3,116,054,406 aggregate principal amount of outstanding closed-
end home equity loans.
Through a system of regional offices, the Company markets its home equity
lending directly to consumers using a variety of marketing techniques. The
Company also reviews and re-underwrites loan applications forwarded by
correspondent lenders.
The Company's credit approval process analyzes both the equity position of
the requested loan (including both the priority of the lien and the combined
loan-to-value ratio) and the applicant's creditworthiness; to the
13
<PAGE>
extent the requested loan would have a less favorable (or more favorable)
equity position, the creditworthiness of the borrower must be stronger (or may
be weaker). The loan-to-value ratio of the requested loan, combined with any
existing loans with a senior lien position, may not exceed 95% without senior
management approval. In most circumstances, an appraisal of the property is
required. Currently, loans secured by a first mortgage with an obligor having
a superior credit rating may not exceed $300,000 without senior management
approval, and loans secured by a second mortgage with an obligor having a
superior credit rating may not exceed $250,000 without senior management
approval.
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.
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 25 years.
PREPAYMENT CONSIDERATIONS
Contracts generally may be prepaid in full or in part without penalty. FHA-
insured Home Improvement 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 or home equity loans.
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 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.
14
<PAGE>
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 "Contract
Pool") which are subject to the Agreement, (ii) the amounts held in the
Certificate Account from time to time, (iii) proceeds from FHA Insurance (with
respect to any FHA-insured Home Improvement Contract included in the Contract
Pool), (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
15
<PAGE>
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 Prospectus
Supplement, by wire transfer, except that the final distribution in retirement
of Certificates will be made only upon presentation and surrender of the
Certificates at the office or agency of the Trustee specified in the final
distribution notice to Certificateholders.
GLOBAL CERTIFICATES
The Certificates of a Class may be issued in whole or in part in the form of
one or more global certificates (each, a "Global Certificate") that will be
deposited with, or on behalf of, and registered in the name of a
16
<PAGE>
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 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
17
<PAGE>
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
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
18
<PAGE>
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 FHA-insured Home Improvement 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, (ii) was originated by a home equity lender in the ordinary
course of such lender's business and assigned to the Company, or (iii) 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 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 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
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
19
<PAGE>
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 FHA Insurance payments 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 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."
20
<PAGE>
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, if applicable, 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 March 1996 (all weekdays are assumed to be business days):
<TABLE>
<S> <C> <C>
March 1......................................... (1) Cut-off Date.
March 1-31...................................... (2) Due Period. Servicer
receives scheduled payments
on the Contracts and any
principal prepayments made
by Obligors and applicable
interest thereon.
March 29........................................ (3) Record Date.
April 9......................................... (4) Determination Date.
Distribution amount
determined.
April 15........................................ (5) Payment Date.
</TABLE>
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.
21
<PAGE>
(3) Distributions on April 15 will be made to Certificateholders of record at
the close of business on the last Business Day of March, being the month
immediately preceding the month of distribution.
(4) On April 9 (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 April 15. In addition, the Servicer may
advance funds to cover any delinquencies, in which event the distribution
to Certificateholders on April 15 will include the full amounts of
principal and interest due during March. 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 April 15, the amounts determined on April 9 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 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 and home equity loans 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 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.
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 and home equity loans 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.
22
<PAGE>
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 and home equity loans 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 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.
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
23
<PAGE>
furtherance of the foregoing; (f) the Servicer fails to be an Eligible
Servicer; or (g) if the Company is the Servicer, the Company's servicing
rights under its master seller-servicer contract with GNMA are 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
Certificateholders representing 25% or more of the Aggregate Certificate
Principal Balance of a Series 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 Home Improvement 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.
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.
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;
24
<PAGE>
(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 Pool Scheduled
Principal Balance is less than 10% of the Cut-Off Date Pool Principal Balance,
the Company or the Servicer will have the option to repurchase, on 30 days'
prior written notice to the Trustee, all outstanding Contracts in the related
Contract Pool at a price equal to the greatest of (i) 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, (ii) the fair market value of all of the assets of the
Trust Fund, and (iii) an amount equal to the Aggregate Certificate Principal
Balance of the related Certificates plus interest on such Certificates payable
on and prior to the Payment Date occurring in the month following such
repurchase (less amounts on deposit in the Certificate Account and available
to pay such principal and interest). 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 Code, 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
Certificateholders (other than holders of Residual Certificates) representing
66 2/3% or more of the Aggregate Certificate Principal Balance of a Series 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 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.
25
<PAGE>
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.
DESCRIPTION OF FHA INSURANCE
Certain of the Home Improvement 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 Home
Improvement Contracts.
26
<PAGE>
As of December 31, 1997, the Company's FHA Insurance reserve amount was
equal to approximately $86,950,000. These insurance reserves were available to
cover losses on approximately $883,889,000 of FHA-insured manufactured housing
contracts and approximately $128,145,000 of FHA-insured home improvement
loans, including the FHA-insured Home Improvement 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 Home
Improvement Contracts and will request that the portion of the Company's FHA
Insurance reserves allocable to the FHA-insured Home Improvement 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 Home Improvement 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 Home Improvement 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 Home
Improvement Contract is subject to a number of conditions, including strict
compliance by the Company with FHA regulations in originating and servicing
the Home Improvement 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 Home Improvement 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 days' 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 Home Improvement 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 Home Improvement Contract to the United States. In
general, the claim payment will equal 90% of the sum of (i) the unpaid
principal amount of the Home Improvement 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 Home
Improvement 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
27
<PAGE>
court costs, (iv) legal fees, not to exceed $500, and (v) expenses for
recording the assignment of the lien 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 home equity 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 Home Improvement 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 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.
MORTGAGES AND DEEDS OF TRUST
The 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 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 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 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
28
<PAGE>
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 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
29
<PAGE>
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 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
30
<PAGE>
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.
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 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 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
31
<PAGE>
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 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.
32
<PAGE>
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 Code 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 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 "Home Protection Act"),
which became 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 such provisions. The Home Protection 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.
33
<PAGE>
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 such a contract to all claims and defenses which the debtor could
assert against the seller of goods, such as a 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 Fund against
such Obligor. The Home Protection 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 Home Protection
Act.
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 Home Improvement 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 Home Improvement 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.
34
<PAGE>
"DUE-ON-SALE" CLAUSES
All of the 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 30 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 "Garn-St.
Germain 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
Contracts) made after the effective date of the Garn-St. Germain Act are
enforceable within certain limitations as set forth in the Garn-St. Germain
Act and the regulations promulgated thereunder.
By virtue of the Garn-St. Germain Act, the Servicer generally may be
permitted to accelerate any Contract which contains a "due-on-sale" clause
upon transfer of an interest in the mortgaged property. This ability to
accelerate will not apply to certain types of transfers, including (i) the
granting of a leasehold interest which has a term of three years or less and
which does not contain an option to purchase, (ii) a transfer to a relative
resulting from the death of a mortgagor or trustor, or a transfer where the
spouse or child(ren) becomes an owner of the mortgaged property in each case
where the transferee(s) will occupy the mortgaged property, (iii) a transfer
resulting from a decree of dissolution of marriage, legal separation agreement
or from an incidental property settlement agreement by which the spouse
becomes an owner of the mortgaged property, (iv) the creation of a lien or
other encumbrance subordinate to the 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 Garn-St. Germain Act and the regulations thereunder. As a result,
a lesser number of 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 Garn-St. Germain Act on
the average lives and delinquency rates of the Contracts, however, cannot be
predicted.
The inability to enforce a due-on-sale clause may result in 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 Contracts and the number of 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
35
<PAGE>
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.
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
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 Home Improvement 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 Home Improvement Contract due to a
violation of FHA regulations in originating or servicing such Home Improvement
Contracts, such violation would constitute
36
<PAGE>
a breach of a representation and warranty under the Agreement and would create
an obligation of the Company to repurchase such Home Improvement 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.
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
Certain transactions involving the Trust Fund might be deemed to constitute
prohibited transactions under ERISA and the Code with respect to a Plan that
purchased Certificates, if assets of the Trust Fund were deemed to be assets
of the Plan. 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
37
<PAGE>
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. Consequently, the related Prospectus Supplement may set forth
restrictions on the purchase of Certificates by, on behalf of or 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, as well as other issues and their potential
consequences.
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 (which change may be retroactive) 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 Internal Revenue Code of 1986, as amended (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.
38
<PAGE>
REMIC SERIES
With respect to each Series of Certificates for which a REMIC Election is
made, at the initial issuance of the Certificates in such Series the counsel
to the Company identified in the applicable Prospectus Supplement will have
advised the Company that in its opinion, assuming ongoing compliance with the
applicable Agreement, 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 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 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
39
<PAGE>
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.
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 ($124,500 for 1998, 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
40
<PAGE>
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 thrift institution taxed as a "domestic building and loan association"
within the meaning of Section 7701(a)(19) of the Code will constitute "a
regular ... interest in a REMIC" within the meaning of Section
7701(a)(19)(C)(xi) of the Code; and (ii) Regular Certificates held by a real
estate investment trust will constitute "real estate assets" within the
meaning of Section 856(c)(4)(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)(4)(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 "real estate assets" within the
meaning of Section 856(c)(4)(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.
41
<PAGE>
In general, in the hands of the original holder of a Regular Certificate,
original issue discount, if any, is the difference between the "stated
redemption price at maturity" of the Regular Certificate and its "issue
price." The original issue discount with respect to a Regular Certificate will
be considered to be zero if it is less than .25% of the Regular Certificate's
stated redemption price at maturity multiplied by the number of complete years
from the date of issue of such Regular Certificate to its maturity date. The
OID Regulations, however, provide a special de minimis rule to apply to
obligations such as the Regular Certificates that have more than one principal
payment or that have interest payments that are not qualified stated interest
as defined in the OID Regulations, payable before maturity ("installment
obligations"). Under the special rule, original issue discount on an
installment obligation is generally considered to be zero if it is less than
.25% of the principal amount of the obligation multiplied by the weighted
average maturity of the obligation as defined in the OID Regulations. Because
of the possibility of prepayments, it is not clear whether or how the de
minimis rules will apply to the Regular Certificates. 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 or because no penalties are imposed as a result of
any failure to make interest payments on the Regular Certificates. 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 Contract Pool, 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
42
<PAGE>
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 generally includes that
pre-issuance accrued interest.
If the Regular Certificates are determined to be issued with original issue
discount, a holder of a Regular Certificate must generally include the
original issue discount in ordinary gross income for federal income tax
purposes as it accrues in advance of the receipt of any cash attributable to
such income. The amount of original issue discount, if any, required to be
included in a Regular Certificateholder's ordinary gross income for federal
income tax purposes in any taxable year will be computed in accordance with
Section 1272(a) of the Code and the OID Regulations. Under such Section and
the OID Regulations, original issue discount accrues on a daily basis under a
constant yield method that takes into account the compounding of interest. The
amount of original issue discount to be included in income by a holder of a
debt instrument, such as a Regular Certificate, under which principal payments
may be subject to acceleration because of prepayments of other debt
obligations securing such instruments, is computed by taking into account the
Prepayment Assumption.
The 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.
43
<PAGE>
The Company believes that the holder of a Regular Certificate determined to
be issued with more than 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 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 adjusted issue price as described
above) will be required to recognize accrued market discount as ordinary
income as payments of principal are received on such Regular Certificate or
upon the sale or exchange of the Regular Certificate. In general, the holder
of a Regular Certificate may elect to treat market discount as accruing either
(i) under a constant yield method that is similar to the method for the
accrual of original issue discount or (ii) under a ratable accrual method
(pursuant to which the market discount is treated as accruing in equal daily
installments during the period the Regular Certificate is held by the
purchaser), 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
44
<PAGE>
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 will require a holder of a Regular
Certificate having market discount to defer a portion of the interest
deductions attributable to any indebtedness incurred or continued to purchase
or carry such Regular Certificate. Alternatively, a holder of a Regular
Certificate may elect to include market discount in gross income as it accrues
and, if he makes such an election, is exempt from this rule. The adjusted
basis of a Regular Certificate subject to such election will be increased to
reflect market discount included in gross income, thereby reducing any gain or
increasing any loss on a sale or taxable disposition.
Amortizable Premium. A holder of a Regular Certificate who holds the Regular
Certificate as a capital asset and who purchased the Regular Certificate at a
cost greater than its stated redemption price at maturity 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. It appears that the Prepayment Assumption
should be taken into account in determining the term of a Regular Certificate
for this purpose. Amortizable bond premium with respect to a Regular
Certificate will be treated as an offset to interest income on such Regular
Certificate, and a Certificateholder's deduction for amortizable bond premium
will be limited in each year to the amount of interest income derived with
respect to such Regular Certificate for such year. Any election to deduct
amortizable bond premium will apply to all debt instruments (other than
instruments the interest on which is excludable from gross income) held by the
Certificateholder at the beginning of the first taxable year to which the
election applies or thereafter acquired, and may be revoked only with the
consent of the Service. Bond premium on a Regular Certificate held by a
Certificateholder who does not elect to deduct the premium will decrease the
gain or increase the loss otherwise recognized on the disposition of the
Regular Certificate. 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. Except as discussed below
45
<PAGE>
or with respect to market discount, any gain or loss recognized upon a sale,
exchange, retirement, or other taxable 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 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.
46
<PAGE>
The amount of any net loss of a REMIC that may be taken into account by the
Residual Holder is limited to the adjusted basis of the Residual Certificate
as of the close of the quarter (or time of disposition of the Residual
Certificate if earlier), determined without taking into account the net loss
for the quarter. The initial adjusted basis of a purchaser of a Residual
Certificate is the amount paid for such Residual Certificate. Such adjusted
basis will be increased by the amount of taxable income of the REMIC
reportable by the Residual Holder and decreased (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. 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, multiplied by (ii) the adjusted issue
47
<PAGE>
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 portion of a Residual Holder's REMIC taxable income consisting of the
excess inclusions will be subject to federal income tax in all events and 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.
Furthermore, for purposes of the alternative minimum tax, (i) excess
inclusions will not be permitted to be offset by the alternative tax net
operating loss deduction and (ii) alternative minimum taxable income may not
be less than the taxpayer's excess inclusions. The latter rule has the effect
of preventing nonrefundable tax credits from reducing the taxpayer's income
tax to an amount lower than the tentative minimum tax on excess inclusions.
Restrictions on Transfer of Residual Certificates. As described above under
"REMIC Series--Qualification as a REMIC," an interest in a Residual
Certificate may not be transferred to a Disqualified Organization. If any
legal or beneficial interest in a Residual Certificate is, nonetheless,
transferred to a Disqualified Organization, a tax would be imposed in an
amount equal to the product of (i) the present value of the total anticipated
excess inclusions with respect to such Residual Certificate for periods after
the transfer, and (ii) the highest marginal federal income tax rate applicable
to corporations. The anticipated excess inclusions are based on actual
prepayment experience to the date of the transfer and projected payments based
on the Prepayment Assumption. The present value rate equals the applicable
federal rate under Section 1274(d) of the Code as of the date of the transfer
for a term ending on the close of the last quarter in which excess inclusions
are expected to accrue. Such rate is applied to the anticipated excess
inclusions from the end of the remaining calendar quarters in which they arise
to the date of the transfer. Such a tax generally would be imposed on the
transferor of the Residual Certificate, except that where such transfer is
through an agent (including a broker, nominee, or other middleman) for a
Disqualified Organization, the tax would instead 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
48
<PAGE>
false. For taxable years beginning after December 31, 1997, notwithstanding
the preceding sentences, in the case of a REMIC Residual Certificate held by
an "electing large partnership," all interests in such partnership shall be
treated as held by disqualified organizations (without regard to whether the
recordholders of the partnership furnish statements described in the preceding
sentence) and the amount that is subject to tax the second preceding sentence
is excluded from the gross income of the partnership allocated to the partners
(in lieu of allocating to the partners a deduction for such tax paid by the
partnership).
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."
Mark-to-Market Rules. On December 24, 1996, the Service released final
regulations (the "Mark-to-Market Regulations") relating to the requirement
that a securities dealer mark to market securities held for sale to customers.
This mark-to-market requirement applies to all securities owned by a dealer,
except to the extent that the dealer has specifically identified a security as
held for investment. The Mark-to-Market Regulations provide that for purposes
of this mark-to-market requirement, a Residual Certificate acquired on or
after January 4, 1995 is not treated as a security and thus may not be marked
to market. Prospective purchasers of a Residual Certificate should consult
their tax advisors regarding the possible application of the mark-to-market
requirement to Residual Certificates.
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
49
<PAGE>
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.
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 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 (except, in the case of a
partnership, to the extent provided in regulations), (iii) an estate the
income of which is includible in gross income for United States tax purposes
regardless of its source or (iv) a trust if (A) a court within the United
States is able to exercise primary supervision over the administration of the
50
<PAGE>
trust and (B) one or more United States persons have authority to control all
substantial decisions of the trust. To the extent prescribed in regulations by
the Secretary of the Treasury, which regulations have not yet been issued, a
trust which was in existence on August 20, 1996 (other than a trust treated as
owned by the grantor under Subpart E of Part I of Subchapter J of Chapter 1 of
the Code), and which was treated as a United States person on August 19, 1996,
may elect to continue to be treated as a United States person notwithstanding
the previous sentence. 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.
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
51
<PAGE>
necessary to compute the accrual of any market discount or the amortization of
any premium on the Regular Certificates.
The Treasury Department has issued temporary regulations concerning certain
aspects of REMIC tax administration. Under those regulations, a Residual
Certificateholder must be designated as the REMIC's "tax matters person." The
tax matters person, generally, has responsibility for overseeing and providing
notice to the other Residual Certificateholders of certain administrative and
judicial proceedings regarding the REMIC's tax affairs. 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 I of Subchapter J of
Chapter 1 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
"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 (ii) Certificates held by a real estate investment trust may
constitute "real estate assets" within the meaning of Section 856(c)(4)(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. Subject to the discussion below of
the "stripped bond" rules of the Code, 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.) Subject to the discussion below
of certain limitations on itemized deductions, Non-REMIC Certificateholders
will be entitled under Section 162 or 212 of the Code to deduct their pro rata
share of related servicing fees, administrative and other non-interest
expenses, including assumption fees and late payment charges retained by the
Company. An individual, an estate, or a trust that holds a Non-REMIC
Certificate either directly or through a pass-through entity will be allowed
to deduct such expenses under Section 212 of the Code only to the extent that,
in the aggregate and combined with certain other itemized deductions, they
exceed 2% of the adjusted gross income of the holder. In addition, Section 68
of the Code provides that the amount of itemized deductions (including those
provided for in Section 212 of the Code) otherwise allowable
52
<PAGE>
for the taxable year for an individual whose adjusted gross income exceeds a
threshold amount specified in the Code ($124,500 for 1998, 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 Non-
REMIC Certificate, 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. 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. To the
extent that the Non-REMIC Certificates represent an interest in any pool of
debt instruments the yield on which may be affected by reason of prepayments,
for taxable years beginning after August 5, 1997, a prepayment assumption must
be used with respect to the Contracts comprising the Contract Pool in
computing the accrual of any original issue discount, market discount or
amortizable premiums. See the discussion above under "REMIC Series--Original
Issue Discount." Similarly, Code provisions concerning market discount and
amortizable premium will apply to the Contracts comprising a Contract Pool to
the extent that the loans were originated after July 18, 1984 and September
27, 1985, respectively. See the discussions above under "REMIC Series--Market
Discount" and "REMIC Series--Amortizable Premium." It is unclear whether a
prepayment assumption would be applicable in accruing or amortizing any such
original issue or market discount or premium with respect to Non-REMIC
Certificates that do not represent an interest in any pool of debt instruments
the yield on which may be affected by reason of prepayments, or for taxable
years beginning prior to August 5, 1997.
Stripped Non-REMIC Certificates. Certain classes of Non-REMIC Certificates
may be subject to the stripped bond rules of Section 1286 of the Code and for
purposes of this discussion will be referred to as "Stripped Certificates." In
general, a Stripped Certificate will be subject to the stripped bond rules
where there has been a separation of ownership of the right to receive some or
all of the principal payments on a Contract from ownership of the right to
receive some or all of the related interest payments. Non-REMIC Certificates
will constitute Stripped Certificates and will be subject to these rules under
various circumstances, including the following: (i) if any servicing
compensation is deemed to exceed a reasonable amount; (ii) if the Company or
any other party retains a Retained Yield with respect to the Contracts
comprising a Contract Pool; (iii) if two or more classes of Non-REMIC
Certificates are issued representing the right to non-pro rata percentages of
the interest or principal payments on the Contracts; or (iv) if Non-REMIC
Certificates are issued which represent the right to interest only payments or
principal only payments.
Although not entirely clear, each Stripped Certificate should be considered
to be a single debt instrument issued on the day it is purchased for purposes
of calculating any original issue discount. Original issue discount with
respect to a Stripped Certificate, if any, must be included in ordinary gross
income for federal income tax purposes as it accrues in accordance with the
constant-yield method that takes into account the compounding of interest and
such accrual of income may be in advance of the receipt of any cash
attributable to such income. See "REMIC Series--Original Issue Discount"
above. For purposes of applying the original issue discount provisions of the
Code, the issue price of a Stripped Certificate will be the purchase price
paid by each holder thereof and the stated redemption price at maturity may
include the aggregate amount of all payments to be made with respect to the
Stripped Certificate whether or not denominated as interest. The amount of
original issue discount with respect to a Stripped Certificate may be treated
as zero under the original issue discount de minimis rules described above. A
purchaser of a Stripped Certificate will be required to account for any
discount on the certificate as market discount rather than original issue
discount if either (i) the amount of original issue discount
53
<PAGE>
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.
To the extent the Stripped Certificates represent an interest in any pool of
debt instrument the yield on which may by affected by reason of prepayments,
for taxable years beginning after August 5, 1997, a prepayment assumption must
be used in computing yield on the underlying assets of a Trust Fund with
respect to which a REMIC election is not made. It is unclear whether a
prepayment assumption would be applicable to the Stripped Certificates that do
not represent an interest in any such pool or for taxable years beginning
prior to August 5, 1997. The Code appears to require that such a prepayment
assumption be used in computing yield with respect to Stripped Certificates
that do not represent an interest in a pool of debt instruments the yield on
which may be affected by reason of prepayments or for taxable years beginning
prior to August 5, 1997. 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.
The servicing compensation to be received by the Company and the fee for
credit enhancement, if any, 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.
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.
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 above under "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
54
<PAGE>
Certificateholder periodically provides the Trustee (or other person who would
otherwise be required to withhold tax) with a statement certifying under
penalty of perjury that such Non-REMIC Certificateholder is not a United
States person and providing the name and address of such Non-REMIC
Certificateholder. For additional information concerning interest or original
issue discount paid by the Company to a Foreign Holder and the treatment of a
sale or exchange of a Non-REMIC Certificate by a Foreign Holder, which will
generally have the same tax consequences as the sale of a Regular Certificate,
see the discussion above under "REMIC Series--Taxation of Certain Foreign
Investors."
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 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.
55
<PAGE>
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 "Securities 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 Securities 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.
56
<PAGE>
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, 1997
and 1996 and for each of the years in the three-year period ended December 31,
1997, incorporated by reference herein, have been audited by KPMG Peat Marwick
LLP, independent accountants, as stated in their report given upon their
authority as experts in accounting and auditing.
57
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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-
WRITERS. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE CERTIFICATES IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OF-
FER 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.
-----------------
TABLE OF CONTENTS
Prospectus Supplement
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary of the Terms of the Certificates................................... S-4
Risk Factors............................................................... S-27
Structure of the Transaction............................................... S-28
Use of Proceeds............................................................ S-28
The Loans.................................................................. S-29
Yield and Prepayment Considerations........................................ S-43
Green Tree Financial Corporation........................................... S-52
Description of the Certificates............................................ S-53
Certain Federal Income Tax Consequences.................................... S-79
ERISA Considerations....................................................... S-79
Underwriting............................................................... S-84
Legal Matters.............................................................. S-85
Annex I.................................................................... A-1
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............................................... 26
Certain Legal Aspects of the Contracts; Repurchase Obligations............. 28
ERISA Considerations....................................................... 37
Certain Federal Income Tax Consequences.................................... 38
Legal Investment Considerations............................................ 55
Ratings.................................................................... 55
Underwriting............................................................... 56
Legal Matters.............................................................. 57
Experts.................................................................... 57
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$500,000,000 (APPROXIMATE)
LOGO
SELLER AND SERVICER
CERTIFICATES FOR HOME EQUITY LOANS
SERIES 1998-C
$14,000,000 (Approx.) 6.00% Class A-1A ARM
$106,000,000 (Approx.) Floating Rate Class A-1B ARM
$105,000,000 (Approx.) 5.95% Class A-1
$79,700,000 (Approx.) 6.03% Class A-2
$41,900,000 (Approx.) 6.18% Class A-3
$31,000,000 (Approx.) 6.30% Class A-4
$19,900,000 (Approx.) 6.39% Class A-5
$20,000,000 (Approx.) 6.29% Class A-6
10.00% Class A-7 IO
$32,500,000 (Approx.) 6.80% Class M-1
$18,750,000 (Approx.) 7.14% Class M-2
$20,000,000 (Approx.) 7.77% Class B-1
$11,250,000 (Approx.) 8.06% Class B-2
-------------------------
PROSPECTUS SUPPLEMENT
May 20, 1998
-------------------------
LEHMAN BROTHERS
FIRST UNION CAPITAL MARKETS
MERRILL LYNCH & CO.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
