<PAGE>
Filed Pursuant to Rule 424(b)(5)
Filed No. 333-63305
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED OCTOBER 9, 1998)
$1,196,000,000 (APPROXIMATE)
GREEN TREE
SELLER AND SERVICER
CERTIFICATES FOR HOME IMPROVEMENT AND HOME EQUITY LOANS
SERIES 1998-E
----------------
The Certificates will consist of 20 classes, but we are offering only the
following classes now:
<TABLE>
<CAPTION>
PASS-
APPROXIMATE THROUGH UNDERWRITING PROCEEDS TO
CLASS PRINCIPAL AMOUNT(1) RATE PRICE TO PUBLIC(2) DISCOUNT COMPANY(3)
- ----- ------------------- ------- ------------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
HI: A-1................. $ 113,500,000 5.907% 100.000000% .240% 99.760000%
HI: A-2................. $ 40,860,000 6.080% 99.971483% .330% 99.641483%
HI: A-3................. $ 40,640,000 6.660% 99.975276% .410% 99.565276%
HE: A-1A NAS............ $ 30,000,000 5.960% 99.989150% .320% 99.669150%
HE: A-1B ARM............ $ 245,000,000 (4) 100.000000% .310% 99.690000%
HE: A-1................. $ 330,000,000 (5) 100.000000% .230% 99.770000%
HE: A-2................. $ 135,150,000 5.829% 100.000000% .320% 99.680000%
HE: A-3................. $ 48,330,000 6.010% 99.991799% .400% 99.591799%
HE: A-4................. $ 146,520,000 6.620%(6) 99.969160% .470% 99.499160%
HE: A-5 IO.............. (7) 6.750% 12.674380% .100% 12.574380%
HE: M-1................. $ 66,000,000 6.930% 99.982425% .500% 99.482425%
Total................... $1,196,000,000 $3,915,306 $1,202,455,353
</TABLE>
(1) May vary plus or minus 5%.
(2) Plus any accrued interest beginning on December 7, 1998.
(3) Before deducting expenses, which we estimate to be $500,000.
(4) The lesser of one-month LIBOR plus the Pass-Through Margin for the Class
HE: A-IB ARM or the Available Funds Pass-Through Rate, but in no case
more than 14%.
(5) For each payment date to and including the January 2014 payment date, the
lesser of one-month LIBOR plus the Pass-Through Margin for the Class HE:
A-1 or 14%. Beginning on the February 2014 payment date, the Certificate
Rate will equal the rate of the Class HE: A-1 Underlying Certificates.
See "Description of the Certificates."
(6) Or the weighted average of the rates on the contracts in the related
contract sub-pool, if less.
(7) Interest on the Class HE: A-5 IO Certificates will be based on a notional
principal amount. That notional principal amount will equal $82,500,000
(or the Class HE: A Principal Balance, if less) for the first 24 months,
and will equal zero thereafter.
INVESTING IN THE CERTIFICATES INVOLVES CERTAIN RISKS. PROSPECTIVE INVESTORS
SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-19 IN THIS
PROSPECTUS SUPPLEMENT AND ON PAGE 9 IN THE PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. 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.
These Certificates will be delivered through the Same-Day Funds
Settlement System of the Depository Trust Company on or about December 7, 1998.
The underwriters named below will offer these securities (other than the
Class HE: A-5 IO and Class HE: M-1 Certificates) to the public at the offering
price listed on this cover page and they will receive the discount listed
above. See "Underwriting" on page S-117 in this prospectus supplement and on
page 57 in the prospectus.
CREDIT SUISSE FIRST BOSTON
CHASE SECURITIES INC.
FIRST UNION CAPITAL MARKETS
LEHMAN BROTHERS
MERRILL LYNCH & CO.
----------------
UNDERWRITER OF THE CLASS HE: M-1 UNDERWRITER OF THE CLASS HE: A-5 IO
CERTIFICATES CREDIT SUISSE FIRST BOSTON CERTIFICATES LEHMAN BROTHERS
----------------
The date of this prospectus supplement is November 17, 1998
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Summary of the Terms of the Certificates.................................. S-4
Risk Factors.............................................................. S-19
Structure of the Transaction.............................................. S-21
Use of Proceeds........................................................... S-23
The Contracts............................................................. S-24
Yield and Prepayment Considerations....................................... S-48
Green Tree Financial Corporation.......................................... S-67
Description of the Certificates........................................... S-68
Description of the Swap Counterparty and the Swap Agreement............... S-109
Description of the Limited Guaranties..................................... S-109
Certain Federal Income Tax Consequences................................... S-111
ERISA Considerations...................................................... S-113
Underwriting.............................................................. S-117
Legal Matters............................................................. S-119
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.............................................. 27
Certain Legal Aspects of the Contracts; Repurchase Obligations............ 28
ERISA Considerations...................................................... 38
Certain Federal Income Tax Consequences................................... 39
Legal Investment Considerations........................................... 57
Ratings................................................................... 57
Underwriting.............................................................. 57
Legal Matters............................................................. 58
Experts................................................................... 58
</TABLE>
No dealer, salesperson or other individual has been authorized to give
any information or make any representations not contained in this prospectus
supplement or the prospectus in connection with the offering covered by this
prospectus supplement and prospectus. If given or made, such information or
representations must not be relied upon as having been authorized by Green Tree
Financial Corporation or the underwriters. This prospectus supplement and
prospectus does 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 offer or solicitation. Neither the delivery of this
prospectus supplement and 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 prospectus or in the
affairs of the Green Tree Home Improvement and Home Equity Loan Trust 1998-E
and Grantor Trust 1998-E since the date hereof.
S-2
<PAGE>
This document consists of a prospectus supplement and a prospectus. The
prospectus provides general information about Green Tree Financial Corporation
("Green Tree" or the "Company"), about Green Tree's home equity and home
improvement lending business, and about any series of certificates for home
improvement and home equity loans that Green Tree may wish to sell. This
prospectus supplement contains more detailed information about this series of
certificates. Since the terms of this series may differ from the general
information provided in the prospectus, you should rely on the information in
this prospectus supplement rather than any different information in the
prospectus.
If you have received a copy of this prospectus supplement and prospectus
in an electronic format, and if the legal prospectus delivery period has not
expired, you may obtain a paper copy of this prospectus supplement and
prospectus from Green Tree or an underwriter by asking for it.
No prospectus regarding these Certificates has been or will be prepared
in the United Kingdom pursuant to the United Kingdom Public Offers of
Securities Regulation 1995. These Certificates may not be offered or sold, or
re-offered or re-sold, to persons in the United Kingdom, except (1) 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 (2) 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 Regulation 1995. You may not pass this
prospectus supplement and prospectus, or any other document inviting
applications or offers to purchase Certificates or offering Certificates for
purchase, to any person in the United Kingdom who (1) does not fall within
article 11(3) of the Financial Services Act 1986 (Investment Advisements)
(Exemptions) Order 1996 or (2) is not otherwise a person to whom passing this
prospectus supplement and prospectus would be lawful.
S-3
<PAGE>
SUMMARY OF THE TERMS OF THE CERTIFICATES
This summary highlights selected information regarding the Certificates,
and does not contain all of the information that you need to consider in making
your investment decision. To understand all of the terms of the Certificates,
read this entire prospectus supplement and the accompanying prospectus.
Home Improvement and Home Equity Loan Trust 1998-E and Grantor Trust 1998-
E will issue the classes of certificates listed in the table below.
<TABLE>
<CAPTION>
APPROXIMATE MOODY'S FITCH
CLASS CERTIFICATE RATE PRINCIPAL AMOUNT (1) RATING RATING
- ----- ---------------- -------------------- ------- ------
<S> <C> <C> <C> <C>
HI: A-1.................... 5.907% $113,500,000 Aaa AAA
HI: A-2.................... 6.080 40,860,000 Aaa AAA
HI: A-3.................... 6.660 40,640,000 Aaa AAA
HI: M-1.................... 7.020 17,500,000 Aa2 AA
HI: M-2.................... 7.450(2) 12,500,000 A2 A
HI: B-1.................... 7.790 12,500,000 Baa2 BBB
HI: B-2.................... 8.500(2) 12,500,000 -- BBB+
HE: A-1A NAS............... 5.960 30,000,000 Aaa AAA
HE: A-1B ARM............... -- (3) 245,000,000 Aaa AAA
HE: A-1.................... -- (4) 330,000,000 Aaa AAA
HE: A-1 Underlying......... 6.2375 330,000,000 -- --
HE: A-2.................... 5.829 135,150,000 Aaa AAA
HE: A-3.................... 6.010 48,330,000 Aaa AAA
HE: A-4.................... 6.620(2) 146,520,000 Aaa AAA
HE: A-5 IO................. 6.750 (5) Aaa AAA
HE: M-1.................... 6.930 66,000,000 Aa2 AA
HE: M-2.................... 7.270 55,000,000 A2 A+
HE: B...................... 8.500(2) 44,000,000 -- BBB+
C Master................... -- (6) -- -- --
C Subsidiary............... -- (6) -- -- --
</TABLE>
- -------
(1) May vary plus or minus 5%.
(2) Or the weighted average of the rates on the contracts in the related
contract sub-pool, if less.
(3) The lesser of one-month LIBOR plus the Pass-Through Margin for the Class
HE: A-IB ARM or the Available Funds Pass-Through Rate, but in no case more
than 14%.
(4) For each payment date to and including the January 2014 payment date, the
lesser of one-month LIBOR plus the Pass-Through Margin for the Class HE: A-
1 or 14%. Beginning on the February 2014 payment date, the Certificate Rate
will equal the rate on the Class HE: A-1 Underlying Certificates. The Class
HE A-1 Underlying Certificate, which bears a fixed rate of interest, will
be issued to Green Tree which will deposit it in the Grantor Trust 1998-E.
The grantor trust will issue the Class HE A-1 Certificates. See
"Description of the Certificates."
(5) Interest on the Class HE: A-5 IO Certificates will be based on a notional
principal amount. That notional principal amount will equal $82,500,000 (or
the Class HE: A Principal Balance, if less) for the first 24 months, and
will equal zero thereafter.
(6) This class is not entitled to any distributions of interest.
Only some classes of the Certificates are being offered pursuant to this
prospectus supplement and the prospectus, and they are identified on the cover
page of this prospectus supplement. Green Tree (or an affiliate) initially will
retain the Class HI: M-1, Class HI: M-2, Class HI: B-1, Class HI: B-2,
Class HE: M-2, Class HE: B, Class C Master and Class C Subsidiary Certificates,
but may sell any or all of these Certificates at a later date.
S-4
<PAGE>
Seller and Servicer........ Green Tree Financial Corporation, 1100 Landmark
Towers, 345 St. Peter Street, St. Paul, Minnesota
55102, telephone: (651) 293-3400.
Trustee.................... U.S. Bank Trust National Association, St. Paul,
Minnesota, as Trustee for the Home Improvement
and Home Equity Loan Trust 1998-E and Grantor
Trust 1998-E.
Payment Date............... For the Certificates (other than the Class HE: A-
1 Certificates) the fifteenth day of each month
(or, if that fifteenth day is not a business day,
the next succeeding business day) beginning on
January 15, 1999. For the Class HE: A-1
Certificates, the eighteenth day of each month
during the term of a swap agreement (or if that
eighteenth day is not a business day, the next
succeeding business day). The payment date for
the Class HE: A-1 Certificates will be an earlier
day (but not earlier than the payment date for
the other Certificates) if the trustee receives
any required swap payment before 11:00 a.m.
Central Standard Time on the earlier day. The
payment date for the Class HE: A-1 Certificates
will be the same as the payment date for the
other Certificates after the swap agreement
terminates.
Record Date................ The business day just before the related payment
date, beginning in January 1999.
Sub-Pool HI Certificates... Payments of principal and interest on some of the
Certificates will be made primarily from payments
on the loans included in Sub-Pool HI. These
Certificates all have an "HI" included in their
class designation, and will be referred to as a
group as the "Sub-Pool HI Certificates."
Sub-Pool HE Certificates... Payments of principal and interest on some of the
Certificates will be made primarily from payments
on the loans included in Sub-Pool HE. Certain
payments of interest on the Class HE: A-1
Certificates may be made by a swap counterparty
under a swap agreement. These Certificates all
have an "HE" included in their class designation,
and will be referred to as a group as the "Sub-
Pool HE Certificates."
Distributions on Sub-Pool
HI Certificates...........
Distributions on the Sub-Pool HI Certificates on
any payment date will be made primarily from
amounts collected on the Home Improvement
Contracts comprising Sub-Pool HI during the prior
calendar month (the "Sub-Pool HI Amount
Available"). On each payment date, the Trustee
will apply the Sub-Pool HI Amount Available to
make distributions of principal and interest on
the Sub-Pool HI Certificates in the following
order of priority:
^ Class HI: A interest;
^ Class HI: M-1 interest;
^ Class HI: M-2 interest;
^ Class HI: B-1 interest;
^ Principal on the class or classes of Class
HI: A Certificates then entitled to
principal;
^ Principal on the Class HI: M Certificates
(if due);
S-5
<PAGE>
^ Class HI: B-1 principal (if due);
^ Class HI: B-2 interest; and
^ Class HI: B-2 principal (if due).
See "Description of the Certificates--Payments on
Contracts" for a detailed description of the
amounts that will constitute the Sub-Pool HI
Amount Available for any payment date.
A. Interest on the Class
HI: A, Class HI:M-1,
Class HI: M-2, and
Class HI: B-1
Certificates............ Interest will be payable first to each class of
the Class HI: A Certificates concurrently, then
to the Class HI: M-1 Certificates, then to the
Class HI: M-2 Certificates and then to the Class
HI: B-1 Certificates, to the extent of the Sub-
Pool HI Amount Available. See "Description of the
Certificates--Distributions on Sub-Pool HI
Certificates" and "--Losses on Liquidated Home
Improvement Contracts" for a more detailed
description of the calculation of interest
payable on the Sub-Pool HI Certificates.
B. Principal on the Class
HI: A, Class HI: M-1,
Class HI: M-2 and Class
HI: B-1 Certificates....
After paying the amounts of interest due on the
Sub-Pool HI Certificates described above, the
Trustee will then apply the remaining Sub-Pool HI
Amount Available to pay principal on the Class
HI: A, Class HI: M-1, Class HI: M-2 and Class HI:
B-1 Certificates. A predetermined class
percentage of scheduled (whether or not
collected) and unscheduled principal payments and
other recoveries on the Home Improvement
Contracts for that payment date, plus any
supplementary principal distribution required
because of high losses on the FHA Home
Improvement Contracts, will be paid:
^ to the Class HI: A-1 Certificates until
retired, then
^ to the Class HI: A-2 Certificates until
retired, then
^ to the Class HI: A-3 Certificates until
retired, then
^ to the Class HI: M-1 Certificates until
retired, and then
^ to the Class HI: M-2 Certificates until
retired.
The Trustee will pay principal on the Class HI:
B-1 Certificates from available funds in an
amount equal to a percentage of the contract
payments and recoveries described above. Prior to
the payment date in January 2002, the percentage
will probably be zero. Thereafter, assuming
delinquencies, defaults and losses on the Home
Improvement Contracts remain below certain
thresholds and that the ratio of the aggregate
outstanding principal balance of the Class HI: B
Certificates to the total outstanding balance of
Sub-Pool HI has become at least 20%, the
percentage will generally equal such ratio.
S-6
<PAGE>
See "Description of the Certificates--
Distributions on Sub-Pool HI Certificates" for a
more detailed description of the
calculation of principal payable on the Sub-Pool
HI Certificates.
C. Class HI: B-2 After paying the amounts of interest and
Interest................... principal due on the other Sub-Pool HI
Certificates described above, the Trustee will
then apply the remaining Sub-Pool HI Amount
Available to pay interest on the Class HI: B-2
Certificates.
D. Class HI: B-2 After paying the amounts of interest and
Principal.................. principal due on the Sub-Pool HI Certificates
described above, the Trustee will then apply the
remaining Sub-Pool HI Amount Available to pay
principal due on the Class HI: B-2 Certificates.
In general, principal will not be payable on the
Class HI: B-2 Certificates until the Class HI: B-
1 Certificates have been retired. After that has
occurred, the Class HI: B-2 Certificates will
generally be entitled to receive principal in an
amount equal to a percentage of the contract
payments and recoveries described above. The
principal balance of the Class HI: B-2
Certificates will generally not be reduced below
$1,250,000 until the Class HI: A, Class HI: M and
Class HI: B-1 Certificates have been paid in
full.
E. Class HI: B-2 Limited Green Tree will guarantee payment of interest and
Guaranty................... principal on the Class HI: B-2 Certificates. The
Class HI: B-2 Limited Guaranty is of no benefit
to any other class of Certificates and will be an
unsecured general obligation of Green Tree
unsupported by any letter of credit or other
credit enhancement. See "Description of the Class
HI: B-2 Limited Guaranty" for a complete
description of Green Tree's obligation under the
Class HI: B-2 Limited Guaranty.
Grantor Trust.............. The Class HE: A-1 Certificates will represent
undivided ownership interests in the assets held
by Green Tree Grantor Trust 1998-E. The assets of
the grantor trust will consist of (1) the Class
HE: A-1 Underlying Certificates issued by the
Home Improvement and Home Equity Loan Trust 1998-
E and (2) a swap agreement between the Grantor
Trust and a swap counterparty. Pursuant to the
swap agreement, the swap counterparty will be
obligated to pay to the Trustee the amount, if
any, by which the interest due to the Class
HE: A-1 Certificates on a payment date
(calculated based on a floating rate) exceeds the
amount of interest due to the Trustee for such
payment date in respect of the Class HE: A-1
Underlying Certificate (calculated based on a
fixed rate). The grantor trust will be created
pursuant to a trust agreement between the Company
and the Trustee.
Swap Counterparty.......... Westdeutsche Landesbank Girozentrale, a bank
organized under the laws of the State of North
Rhine-Westphalia, acting through its New York
branch. See "Description of the Swap
Counterparty."
S-7
<PAGE>
Reserve Account............ The Class HE: A and Class HE: M
Certificateholders will have the benefit of a
reserve account to cover liquidation losses on
the Home Equity Contracts. The reserve account
will equal $44,000,000 on the closing date.
Withdrawals will be made from the reserve account
to cover liquidation losses on the Home Equity
Contracts, and to repay the loan used to fund the
reserve account, as described below. Additions
will be made to the reserve account from the Sub-
Pool HE amount available in an amount equal to
those withdrawals from the reserve account that
are used to repay the loan upon certain
triggering events described below.
Reserve Account Loan....... The reserve account will be fully funded on the
closing date by a loan. Loan fees on the reserve
account loan will be paid on each payment date
from the amount available to pay the Class HE
Certificateholders.
Amounts will be released on each payment date
from the reserve account to pay a portion of the
principal on the reserve account loan, commencing
on or after the payment date in January 2002 if
on that payment date, certain tests have been
met. The loan reduction amount on any such
payment date will be the excess of the sum of the
Class HE: B adjusted principal balance and the
reserve account balance over 16% of the pool
scheduled principal balance of Sub-Pool HE as of
that payment date. However, if the Class HE: A
and Class HE: M Certificate principal balances
have been reduced to zero, the reserve account
balance will also be reduced to zero.
In addition, if on a payment date certain
triggering events have occurred, amounts will be
released from the reserve account to pay the
reserve account loan on that payment date, and on
each succeeding payment date, until the
triggering event is cured. In this case, the
amount of the repayment on that date will equal,
in general, the amount available to Class HE
Certificateholders on that payment date less all
amounts which the Class HE: A and Class HE: M
Certificateholders are entitled to receive on
that payment date. A triggering event will occur
if liquidation losses on contracts included in
Sub-Pool HE exceed specified amounts, if
prepayments fall below certain levels, or if the
Sub-Pool HE amount available, after payment of
interest and principal to Class HE: A and Class
HE: M Certificateholders, is less than a
specified amount.
On the earlier of the payment date in January
2006 or the payment date on which any termination
event has occurred, a portion of the Sub-Pool HE
amount available may be applied to pay the
reserve account loan on that payment date, and on
each succeeding payment date, until the reserve
account loan has been paid in full. In this case,
the amount of each repayment will equal, in
general, the amount available to
S-8
<PAGE>
the Class HE Certificateholders on that payment
date, less all amounts which the Class HE: A and
Class HE: M Certificateholders are entitled to
receive on that payment date. Termination events
include an event of default under the reserve
account loan agreement, the exercise by the
Servicer of its right to purchase the contracts
in the trust created under the Pooling and
Servicing Agreement after the scheduled principal
balance of all such contracts is less than 10% of
the aggregate principal balance of the
certificates on the closing date, and the failure
of certain tests related to the performance of
the contracts included in Sub-Pool HE.
Distributions on Sub-Pool
HE Certificates............
Distributions on the Sub-Pool HE Certificates on
any payment date will be made primarily from
amounts collected on the Home Equity Contracts
comprising Sub-Pool HE during the prior calendar
month (the "Sub-Pool HE Amount Available"). The
portion of the Sub-Pool HE Amount Available
payable to the Class HE: A-1 Underlying
Certificate will be deposited by the Trustee into
the grantor trust for payment to the Class HE: A-
1 Certificates, together with any payments
received from the swap counterparty. On each
payment date, the Trustee will apply these
amounts to make distributions of principal and
interest on the Sub-Pool HE Certificates in the
following order of priority:
^ Class HE: A interest;
^ Class HE: M-1 interest;
^ Class HE: M-2 interest;
^ Principal on the class or classes of Class
HE: A Certificates then entitled to
principal;
^ Principal on the Class HE: M Certificates
(if due);
^ Class HE: B interest; and
^ Class HE: B principal (if due).
See "Description of the Certificates--Payments on
Contracts" for a detailed description of the
amounts that will constitute the Sub-Pool HE
Amount Available for any Payment date.
A. Interest on the Class
HE: A, Class HE: M-1
and Class HE: M-2
Certificates............
Interest will be payable first to each class of
Class HE: A Certificates concurrently (including
the Class HE: A-1 Underlying Certificate but
excluding the Class HE: A-1 Certificates), then
to the Class HE: M-1 Certificates and then to the
Class HE: M-2 Certificates, to the extent of the
Sub-Pool HE Amount Available. Certain payments of
interest on the Class HE: A-1 Certificates may be
made by a swap counterparty under a swap
agreement. See "Description of the Certificates--
Distributions on Sub-Pool HE Certificates"
S-9
<PAGE>
and "--Losses on Liquidated Home Equity
Contracts" for a more detailed description of the
calculation of interest payable on the Sub-Pool
HE Certificates.
B. Principal on the Class
HE: A, Class HE: M-1
and Class HE: M-2
Certificates............
After paying the amounts due on the Sub-Pool HE
Certificates described above and other amounts
due, the Trustee will then apply any remaining
amounts available, plus withdrawals from a
reserve account to cover any liquidation losses,
to pay principal on the Class HE: A (except the
Class HE: A-5 IO Certificates, which will receive
no principal), Class HE: M-1 and Class HE: M-2
Certificates, in the amounts and order of
priority set forth below:
First, the Trustee will distribute a formula
amount dictated by the amount of principal due
(whether or not collected) on the Adjustable Rate
Home Equity Contracts for that payment date, to
the Class HE: A-1A NAS Certificates and the Class
HE: A-1B ARM Certificates according to the Class
HE: A-1A NAS Percentage and the Class HE: A-1B
ARM Percentage, respectively.
Second, the Trustee will distribute a formula
amount dictated by the amount of principal due
(whether or not collected) on the Group I Home
Equity Contracts for that payment date, to the
Class HE: A-1 Certificates. Each Group I
Contract, together with any prior mortgage, has
an original principal balance of no more than
$227,150.
Third, the Trustee will distribute a formula
amount dictated by the amount of principal due
(whether or not collected) on the Group II Home
Equity Contracts for that payment date. The Group
II Contracts are all of the Fixed Rate Home
Equity Contracts other than those specifically
designated as Group I Contracts. These
distributions will be made:
^ to the Class HE: A-2 Certificates until
retired, then
^ to the Class HE: A-3 Certificates until
retired, and then
^ to the Class HE: A-4 Certificates until
retired.
After paying the amounts of interest and
principal due on the Sub-Pool HE Certificates
described above and the satisfaction of certain
additional tests, the Trustee will then apply any
remaining amounts available, plus withdrawals
from a reserve account to cover liquidation
losses, to pay principal to the Class HE: M-1 and
Class HE: M-2 Certificates according to a formula
based on a percentage of the principal balance of
the Home Equity Contracts.
See "Description of the Certificates--
Distributions on Sub-Pool HE Certificates" for a
more detailed description of the
S-10
<PAGE>
calculation of principal payable on the Sub-Pool
HE Certificates.
C. Class HE: B Interest.... After paying the amounts of interest and
principal due on the Sub-Pool HE Certificates
described above, the Trustee will then apply the
remaining Sub-Pool HE Amount Available to pay
interest on the Class HE: B Certificates, unless
the reserve account lenders are entitled to loan
payments as a result of a triggering event or
termination event under the reserve account loan
described above.
D. Class HE: B Principal... After paying the amounts of interest and
principal due on the Sub-Pool HE Certificates
described above, the Trustee will then apply the
remaining Sub-Pool HE Amount Available to pay
principal due on the Class HE: B Certificates.
Class HE: B Certificates will not be paid
principal before January 2002, the reserve
account (described above) has been reduced to
zero and certain tests are satisfied. The
principal balance of the Class HE: B Certificates
will generally not be reduced below $5,500,000
until the Class HE: A and Class HE: M
Certificates have been retired. Principal will be
distributed generally according to a formula
amount dictated by the principal balance of the
Home Equity Contracts.
E. Class HE: B Limited Green Tree will guarantee payment of interest and
Guaranty................... principal on the Class HE: B Certificates. The
Class HE: B Limited Guaranty is of no benefit to
any other class of Certificates and will be an
unsecured general obligation of Green Tree
unsupported by any letter of credit or other
credit enhancement. See "Description of the Class
HE: B Limited Guaranty" for a complete
description of Green Tree's obligation under the
Class HE: B Limited Guaranty.
Subordination of Class HI:
M and Class HI: B
Certificates............... The Class HI: M Certificates and Class HI: B
Certificates will be subordinate to the Class HI:
A Certificates in payment of both interest and
principal:
^ the Trustee will apply the Sub-Pool HI
Amount Available to pay all interest then
due on the Class HI: A Certificates and
Class HI: M Certificates before paying the
interest then due on the Class HI: B
Certificates;
^ the Class HI: M Certificates are entitled to
principal distributions only after all the
Class HI: A Certificates are paid in full;
and
^ The Class HI: B Certificates are entitled to
principal distributions only after all the
Class HI: A Certificates are paid in full,
or if certain tests are met.
This increases the possibility that the Class HI:
A Certificates will be paid in full but the Class
HI: M and Class HI: B
S-11
<PAGE>
Certificates will not. See "Description of the
Certificates--Distributions on Sub-Pool HI
Certificates" for a more detailed description of
the manner and order of priority of distributions
on the Sub-Pool HI Certificates.
In addition, in the event of severe losses and
delinquencies on the Home Improvement Contracts
comprising Sub-Pool HI, those losses will first
be imposed on the Class HI: B-2 Certificates, and
then on the Class HI: B-1 Certificates, and so on
through classes of increasing seniority. See
"Description of Certificates--Losses on Home
Improvement Contracts" for a more detailed
description of the allocation of losses on the
Home Improvement Contracts.
Subordination of Class HE:
M and Class HE: B
Certificates............... The Class HE: M Certificates will be subordinate
to the Class HE: A Certificates, meaning that the
Trustee will apply the Sub-Pool HE Amount
Available to pay all interest then due on the
Class HE: A Certificates before paying the
interest then due on the Class HE: M
Certificates, and the Class HE: M Certificates
are entitled to principal distributions only
after all the Class HE: A Certificates are paid
in full, or if certain tests are met. This
increases the possibility that the Class HE: A
Certificates would be paid in full but the Class
HE: M Certificates would not. The Class HE: B
Certificates will be subordinated to all the
other Sub-Pool HE Certificates, with interest
payable from the Sub-Pool HE Amount Available
only after payment of all interest and principal
then due on the other Sub-Pool HE Certificates,
and principal due only after the Class HE: A
Certificates have been retired, or if certain
tests are met. See "Description of the
Certificates--Distributions on Sub-Pool HE
Certificates" for a more detailed description of
the manner and order of priority of distributions
on the Sub-Pool HE Certificates.
In addition, in the event of severe losses and
delinquencies on the Home Equity Contracts
comprising Sub-Pool HE, those losses will first
be imposed on the Class HE: B Certificates then
on the Reserve Account, and then on the Class HE:
M-2 Certificates, and so on through classes of
increasing seniority. See "Description of
Certificates--Losses on Home Equity Contracts"
for a more detailed description of the allocation
of losses on the Home Equity Contracts.
Home Improvement Sub-Pool HI will consist of a pool of
Contracts.................. conventional and FHA-insured home improvement
contracts and promissory notes. This prospectus
supplement provides information regarding a
portion of the Home Improvement Contracts,
representing about 65.3% of Sub-Pool HI. Green
Tree will transfer another portion of the Home
Improvement Contracts to the Trust on the Closing
Date, and will transfer the remaining Home
Improvement Contracts to the Trust within 60 days
after the Closing Date.
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<PAGE>
With respect to the first portion of Home
Improvement Contracts (as of the Cut-off Date):
^ 4,636 are conventional and 7,663 are FHA-
insured;
^ all are secured by a lien on the related
real property;
^ the related properties are located in 50
states and the District of Columbia;
^ the Contract Rates range from 8.00% to
18.75%, with a weighted average of 12.94%;
^ the weighted average term to scheduled
maturity, as of their dates of origination,
was 197 months, and the weighted average term
to scheduled maturity, as of the Cut-off
Date, was 191 months; and
^ the latest scheduled maturity date was in
November 2023.
See "The Contracts--Home Improvement Contracts"
for a more detailed description of the first
group of Home Improvement Contracts and the
permissible characteristics of the second and
third groups of Home Improvement Contracts.
Sub-Pool HI Pre-Funding If the aggregate principal balance of the Home
Account.................... Improvement Contracts transferred by Green Tree
to the Trust on the Closing Date is less than the
aggregate original principal balance of the Sub-
Pool HI Certificates, that difference (which
Green Tree expects will be approximately
$62,500,000) will be deposited by the Trustee in
the Sub-Pool HI pre-funding account, and those
funds will be used to purchase Home Improvement
Contracts from time to time until February 5,
1999. If those funds are not completely used by
February 5, 1999, any remaining funds will be
distributed as principal on the Class HI: A-1
Certificates on the February 1999 payment date.
Home Equity Contracts...... Sub-Pool HE will include both fixed-rate Home
Equity Contracts (divided into Group I and Group
II) and adjustable rate Home Equity Contracts.
A. Group I Fixed-Rate Home
Equity Contracts........
This prospectus supplement provides information
regarding a portion of the Group I fixed-rate
Home Equity Contracts, representing about 34.1%
of all the Group I fixed-rate Home Equity
Contracts. Green Tree will transfer another
portion of the Group I fixed-rate Home Equity
Contracts to the Trust on the Closing Date, and
will transfer the remaining Group I fixed-rate
Home Equity Contracts to the Trust within 60 days
after the Closing Date.
S-13
<PAGE>
Each Group I Home Equity Contract, together with
any prior mortgage, has an original principal
balance of no more than $227,150.
With respect to the first portion of Group I
fixed-rate Home Equity Contracts (as of the Cut-
off Date):
^ all are secured by a lien on the related real
property;
^ the related properties are located in 47
states and the District of Columbia;
^ there are 2,262 loans;
^ the contract rates range from 7.00% to
18.20%, with a weighted average of 11.12%;
^ the weighted average term to scheduled
maturity, as of their dates of origination,
was 258 months, and the weighted average term
to scheduled maturity, as of the Cut-off
Date, was 258 months;
^ 22.68% are balloon loans and the rest provide
for level monthly payments for the duration
of the loan;
^ the weighted average contract rate on the
balloon loans was 11.00%;
^ the balloon loans had a weighted average term
to scheduled maturity, as of their dates of
origination, of 197 months; and a weighted
average to maturity as of the Cut-off Date of
197 months; and
^ the latest scheduled maturity date was in
October 2028.
See "The Contracts--Home Equity Contracts" for a
more detailed description of the first portion of
Group I fixed-rate Home Equity Contracts and the
permissible characteristics of the second and
third portions of Group I fixed-rate Home Equity
Contracts.
B. Group II Fixed-Rate
Home Equity Contracts...
This prospectus supplement provides information
regarding a portion of the Group II fixed-rate
Home Equity Contracts, representing about 34.1%
of all the Group II fixed-rate Home Equity
Contracts. Green Tree will transfer another
portion of the Group II fixed-rate Home Equity
Contracts to the Trust on the Closing Date, and
will transfer the remaining Group II fixed-rate
Home Equity Contracts to the Trust within 60 days
after the Closing Date.
S-14
<PAGE>
With respect to the first portion of Group II
fixed-rate Home Equity Contracts (as of the Cut-
off Date):
^ all are secured by a lien on the related real
property;
^ the related properties are located in 48
states and the District of Columbia;
^ there are 2,230 loans;
^ the contract rates range from 7.55% to
17.70%, with a weighted average of 11.18%;
^ the weighted average term to scheduled
maturity, as of their dates of origination,
was 255 months, and the weighted average term
to scheduled maturity, as of the Cut-off
Date, was 255 months;
^ 21.08% are balloon loans and the rest provide
for level monthly payments for the duration
of the loan;
^ the weighted average contract rate on the
balloon loans was 10.91%;
^ the balloon loans had a weighted average term
to scheduled maturity, as of their dates of
origination, of 198 months; and a weighted
average to maturity as of the Cut-off Date of
197 months; and
^ the latest scheduled maturity date was in
October 2028.
See "The Contracts--Home Equity Contracts" for a
more detailed description of the first portion of
Group II fixed-rate Home Equity Contracts and the
permissible characteristics of the second and
third portions of Group II fixed-rate Home Equity
Contracts.
C. Adjustable Rate Home
Equity Contracts........
This Prospectus Supplement provides information
regarding a portion of the adjustable rate Home
Equity Contracts, representing about 41.0% of all
the adjustable rate Home Equity Contracts. Green
Tree will transfer another portion of the
adjustable rate Home Equity Contracts to the
Trust on the closing date, and will transfer the
remaining adjustable rate Home Equity Contracts
to the Trust within 60 days after the Closing
Date.
With respect to the first portion of adjustable
rate Home Equity Contracts (as of the Cut-off
Date):
^ all are secured by a lien on the related real
property;
^ the related properties are located in 45
states and the District of Columbia;
^ there are 935 loans;
S-15
<PAGE>
^ each loan accrues interest at a fixed rate
for no more than 36 months, and thereafter
the interest rate adjusts annually or
semiannually to equal the sum of the six-
month LIBOR or one year treasury index and
the gross margin specified in that loan;
^ the weighted average term to scheduled
maturity, as of their dates of origination,
was 360 months, and the weighted average term
to scheduled maturity, as of the Cut-off
Date, was 359 months; and
^ the latest scheduled maturity date was in
October 2028.
See "The Contracts--Home Equity Contracts" for a
more detailed description of the first portion of
adjustable rate Home Equity Contracts and the
permissible characteristics of the second and
third portions of adjustable rate Home Equity
Contracts.
Sub-Pool HE Pre-Funding If the aggregate principal balance of the Home
Account.................... Equity Contracts transferred by Green Tree to the
Trust on the closing date is less than the
aggregate original principal balance of the Sub-
Pool HE Certificates, that difference (which
Green Tree expects will be approximately
$275,000,000) will be deposited by the Trustee in
the Sub-Pool HE pre-funding Account, and those
funds will be used to purchase Home Equity
Contracts from time to time until February 5,
1999. If those funds are not completely used by
February 5, 1999, the remaining funds (if any)
will be distributed as principal on the Class HE:
A-1 Certificates (to the extent of remaining
funds that had been allocated for the purchase of
Group I fixed-rate Home Equity Contracts), on the
Class HE: A-2 Certificates (to the extent of
remaining funds that had been allocated for the
purchase of Group II fixed-rate Home Equity
Contracts) and on the Class HE: A-1B ARM
Certificates (to the extent of remaining funds
that had been allocated for the purchase of
adjustable rate Home Equity Contracts) on the
February 1999 payment date.
Advances................... The Servicer is obligated to make advances each
month of any scheduled payments on the Contracts
that were due but not received during the prior
Due Period, but it will be entitled to
reimbursement for any advance. See "Description
of the Certificates--Advances" in this prospectus
supplement and in the prospectus for a more
detailed description of the Servicer's obligation
to make advances and its right to be reimbursed
for advances.
Repurchase or Substitution Green Tree will make representations and
Obligations................ warranties about the Contracts when it transfers
them to the Trust. If a representation or
warranty is breached in a way that materially and
adversely affects the interests of the
S-16
<PAGE>
Certificateholders, then Green Tree must, within
90 days, either (i) cure the breach or (ii)
repurchase the defective Contracts. During the
first two years after the Closing Date, Green
Tree may substitute other Contracts instead of
repurchasing defective Contracts. See
"Description of the Certificates--Conveyance of
Contracts" herein and in the
prospectus for a more complete description of
Green Tree's representations and warranties about
the Contracts, its repurchase obligation, and its
right to substitute Contracts.
Repurchase Option.......... After the scheduled principal balance of the
Contracts is less than 10% of the aggregate
principal balance of the Certificates on the
closing date, Green Tree will have the option to
purchase all of the outstanding Contracts. See
"Description of the Certificates--Repurchase
Option" in this prospectus supplement and in the
prospectus for a more detailed description of the
terms of this repurchase option.
Tax Status................. In the opinion of counsel to Green Tree, for
federal income tax purposes the Trust, in part,
will consist of two segregated asset pools--the
"Master REMIC" and the "Subsidiary REMIC"--and
each will be treated as a separate "real estate
mortgage investment conduit" or "REMIC." Each
Class of Sub-Pool HI Certificates and each Class
of Sub-Pool HE Certificates (other than the Class
HE:A-1 Certificates) and the Class HE: A-1
Underlying 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. A holder of a
Certificate will be required to include as income
all interest paid on the Certificates (including
any original issue discount), in accordance with
the accrual method of accounting, even if the
holder usually uses the cash method of
accounting. The Class HE: A-5 IO Certificates
will be considered to have been issued with
original issue discount. The Class HE:A-1
Certificates will represent undivided ownership
interests in the assets held by a grantor trust.
No election will be made to treat the grantor
trust as a REMIC for federal income tax purposes.
See "Certain Federal Income Tax Consequences"
herein and in the prospectus for a more detailed
description of the federal income tax
consequences of an investment in the
Certificates.
ERISA Considerations....... Subject to the conditions described under "ERISA
Considerations," employee benefit plans that are
subject to the Employee Retirement Income
Security Act of 1974, as amended, may purchase
the following classes of Certificates: Class HI:
A-1; Class HI: A-2; Class HI: A-3; Class HE: A-1A
NAS; Class HE: A-1B ARM; Class HE: A-2; Class HE:
A-3; Class HE: A-4 and Class HE: A-5 IO. An
employee benefit plan may not purchase any other
class of Certificates, unless it satisfies the
conditions described under "ERISA Considerations"
in this prospectus supplement and in the
prospectus.
S-17
<PAGE>
Legal Investment The Certificates will not constitute "mortgage
Considerations............. related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA")
because a number of the Contracts are not secured
by first liens on the related real estate, as
required by SMMEA. This means that many
institutions that have the legal authority to
invest in "mortgage related securities" may not
be legally authorized to invest in the
Certificates. You should consult with your own
legal advisor to decide whether and to what
extent you may legally invest in the
Certificates.
Ratings.................... The Certificates will not be issued and sold
unless Moody's Investors Service, Inc.
("Moody's") and Fitch IBCA, Inc. ("Fitch") have
assigned the ratings specified on page S-4 (or
better) to the Certificates.
The rating of each class of Certificates by
Moody's 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 of Certificateholders of all
distributions to which such Certificateholders
are entitled. The ratings of the Class HE: A-1B
ARM Certificates do not address the likelihood of
payment of supplemental interest in the event the
Available Funds Pass-Through Rate is less than
one month LIBOR plus the Pass-Through Margin, as
described under "Description of the
Certificates--Distributions on Sub-Pool HE
Certificates." A security rating is not a
recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at
any time by the assigning rating agency.
The ratings of the Class HE: B Certificates and
Class HI: B-2 Certificates are based in part on
an assessment of the Company's ability to make
payments under the Class HE: B Limited Guaranty
and the Class HI: B-2 Limited Guaranty. Any
reduction in the rating of the Company's debt
securities may result in a similar reduction in
the ratings of the Class HE: B and Class HI: B-2
Certificates.
Green Tree's senior debt securities were recently
downgraded by Moody's to "Bal".
The ratings of the Class HE: A-1 Certificates are
based partially on the creditworthiness of the
swap counterparty. Any reduction in the rating
assigned to the swap counterparty would likely
result in a reduction in the ratings of the
Class HE: A-1 Certificates.
Green Tree has not requested a rating of the
Certificates from any rating agencies other than
Moody's and Fitch. You cannot assume that no
other rating agency will assign a rating to any
of these Certificates, nor can you assume what
any such rating, if issued, would be.
S-18
<PAGE>
RISK FACTORS
Consider the following risk factors in deciding whether to purchase
Certificates. More risk factors, applicable to any series of certificates like
these, are printed in the prospectus, and you should consider those risk
factors also.
Reliance on Historical Data With Respect to Home Improvement
Contracts. If you purchase a Sub-Pool HI Certificate, the return on your
investment will depend largely on the performance of the Home Improvement
Contracts constituting Sub-Pool HI. We have disclosed the Company's historical
delinquency and loan loss and liquidation experience with home improvement
contracts under "The Contracts--Home Improvement Contracts" herein, but the
historical experience may not be an accurate prediction of the performance of
the Home Improvement Contracts constituting Sub-Pool HI for several reasons.
First, the Company's historical experience with home improvement contracts is
limited: it began purchasing and servicing FHA-insured home improvement
contracts in 1989 and conventional home improvement contracts in 1992. If the
Company's historical experience were longer, or involved a larger number of
home improvement contracts, the data might well be substantially different, and
some investors might consider that data a better predictor of the performance
of Sub-Pool HI. Second, historical experience with the performance of one pool
of loans is never a completely reliable predictor of the future performance of
another pool of loans. You must not assume that Sub-Pool HI will experience
delinquencies and losses identical to the historical data presented here. Also,
the Company has limited information on the performance of a portfolio of FHA-
insured home improvement contracts purchased in bulk from Empire Funding Corp.,
a mortgage lender engaged in the business of originating, purchasing, selling
and servicing home loans. The contracts purchased from Empire Funding Corp. are
expected to make up approximately 27% of Sub-Pool HI.
Reliance on Historical Data With Respect to Home Equity Loans. If you
purchase a Sub-Pool HE Certificate, the return on your investment will depend
largely on the performance of the Home Equity Contracts constituting Sub-Pool
HE. We have disclosed the Company's historical delinquency experience with home
equity loans under "The Contracts--Home Equity Contracts" herein, but the
historical experience may not be an accurate prediction of the performance of
the Home Equity Contracts constituting Sub-Pool HE for several reasons. First,
the Company's historical experience with home equity loans is limited: it began
purchasing and servicing them in January 1996. If the Company's historical
experience were longer, or involved a larger number of home equity loans, the
data might well be substantially different, and some investors might consider
that data a better predictor of the performance of Sub-Pool HE. Second,
historical experience with the performance of one pool of loans is never a
completely reliable predictor of the future performance of another pool of
loans. Third, the information incorporates some home equity loans that are not
of the type to be included in Sub-Pool HE, and therefore the information
presented is not necessarily indicative of the Company's delinquency experience
with respect to home equity loans similar to the home equity contracts
compromising Sub-Pool HE. You must not assume that Sub-Pool HE will experience
delinquencies and losses identical to the historical data presented here.
Balloon Loans. A substantial number (approximately 22%) of the Home
Equity Contracts are "balloon loans." These loans require 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 loan
at maturity. The remainder of the Contracts require substantially equal monthly
payments that are, if timely paid, sufficient to amortize fully the principal
balance of the loan on or before its maturity date. The balloon loans may
present a higher risk of default than the fully-amortizing Home Equity
Contracts, because the balloon loan borrowers are required to make a larger
payment at maturity. If you purchase a Sub-Pool HE Certificate, the return on
your investment will depend largely on the performance of the Home Equity
Contracts constituting Sub-Pool HE. If a substantial number of the balloon
loans default, causing higher than expected defaults and losses on Sub-Pool HE,
you may suffer a loss on your investment.
Truth-in-Lending Considerations. It is likely that some Contracts
included in the Contract Pool will be subject to the Home Ownership and Equity
Protection Act of 1994 (the "Home Protection Act").
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<PAGE>
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 up-front fees
and charges. A violation of these provisions of the Home Protection Act can
affect the enforceability of the related loan, and it subjects any assignee of
such a loan (such as the Trust) to all the claims and defenses that the
consumer could assert against the creditor, including the right to rescind the
loan. If you purchase a Sub-Pool HE Certificate, the return on your investment
will depend largely on the
performance of the Home Equity Contracts constituting Sub-Pool HE. If the
Company is found to have violated the provisions of the Home Protection Act
with respect to any Home Equity Contract that is subject to the Home Protection
Act, the Trust may be unable to collect on that Contract. The Company would,
however, be obligated to repurchase that Contract because of the breach of its
representation and warranty.
Variations in Contract Characteristics. This prospectus supplement
provides information regarding only a portion of the Home Improvement Contracts
and Home Equity Contracts that will be transferred to the Trust. The subsequent
Home Improvement Contracts and Home Equity Contracts will have characteristics
that differ somewhat from the Contracts described herein. All of the subsequent
Contracts must satisfy various criteria specified in the Pooling and Servicing
Agreement and described under "Description of the Certificates--Conveyance of
Contracts," "--Conveyance of Subsequent Home Improvement Contracts and the Sub-
Pool HI Pre-Funding Account," and "--Conveyance of Subsequent Home Equity
Contracts and the Sub-Pool HE Pre-Funding Account." If you purchase a
Certificate, you must not assume that the characteristics of the Contract Pool
will be identical to the characteristics of the Home Improvement Contracts and
Home Equity Contracts disclosed in this prospectus supplement. Current Reports
on Form 8-K will be filed following each purchase of Contracts by the Trust.
The final report will include the same type of information regarding the entire
contract pool as this prospectus supplement contains with respect to the first
group of Home Improvement Contracts and Home Equity Contracts.
The Swap Agreement. The purchase of the Class HE: A-1 Certificates
involves risks associated with a swap agreement under which a swap counterparty
is obligated to make payments to support the interest paid to the holders of
the Class HE: A-1 Certificates. Pursuant to the swap agreement, the swap
counterparty will be obligated to pay to the Trustee the amount, if any, by
which the interest due to the Class HE: A-1 Certificates on a payment date
(calculated based on a floating rate) exceeds the amount of interest due to the
trustee for such payment date in respect of the Class HE: A-1 Underlying
Certificate (calculated based on a fixed rate). In the event that the swap
counterparty fails to make the required payments or if the swap agreement is
terminated in accordance with its terms, holders of the Class HE: A-1
Certificates would receive only the fixed Pass-Through Rate on the Class HE: A-
1 Underlying Certificates. Apart from the swap counterparty's payment
obligation, there will be no other assets of the grantor trust available to
support the floating rate of interest on the Class HE: A-1 Certificates.
The senior debt of the swap counterparty is rated Aa1 by Moody's and AAA
by Fitch. If the debt rating of the swap counterparty is withdrawn or reduced
below a level acceptable to Fitch and Moody's, the swap counterparty is
required, no later than the 30th day following such rating agency downgrade
either to enter into a collateral security agreement or secure a replacement
swap counterparty acceptable to Fitch and Moody's to maintain the ratings of
the Class HE: A-1 Certificates. In the event that no such agreement is entered
into or replacement swap counterparty secured within such period, an early
termination of the swap agreement could occur.
The swap agreement will terminate on the earliest to occur of (a) January
15, 2014, (b) the date on which there are no further amounts due on the Class
HE: A-1 Underlying Certificates and (c) such date designated by either the
trustee or swap counterparty as an early termination date with respect to the
swap agreement following a payment default by the swap counterparty or the
trustee, or certain other customary early termination events, such as the
downgrade referred to above. In the event of a termination pursuant to clause
(a) or (b) above, no termination fee will be payable either to or by the
grantor trust. In the event of a termination pursuant to clause (c) above, no
termination fee will be payable by the grantor trust and depending on the then-
current market conditions, the trust fund may receive a termination fee. Even
if the trust fund receives a fee, the holders of the Class HE: A-1 Certificates
might not receive full interest payments.
S-20
<PAGE>
STRUCTURE OF THE TRANSACTION
The Certificates for Home Improvement and Home Equity Loans, Series 1998-
E (the "Certificates") will represent interests in a Trust (the "Trust")
consisting of a sub-pool ("Sub-Pool HI") of home improvement contracts and
promissory notes (the "Home Improvement Contracts") and a sub-pool ("Sub-Pool
HE") of fixed-rate home equity contracts (the "Fixed-Rate Home Equity
Contracts") and adjustable rate home equity contracts (the "Adjustable Rate
Home Equity Contracts"). The Company will convey the Home Improvement
Contracts, Fixed-Rate Home Equity Contracts and Adjustable Rate Home Equity
Contracts (together, the "Contracts") and certain related property to the
Trust. On or about December 7, 1998 (the "Closing Date"), the Company will
establish the Trust pursuant to a Pooling and Servicing Agreement to be dated
as of December 1, 1998 (the "Agreement"), between the Company, as Seller and
Servicer, and the Trustee.
The Class HI: A-1, Class HI: A-2, Class HI: A-3, Class HI: M-1, Class HI:
M-2, Class HI: B-1 and Class HI: B-2 Certificates (the "Sub-Pool HI
Certificates"), and the Class HE: A-1A NAS, Class HE: A-1B ARM, Class HE: A-2,
Class HE: A-3, Class HE: A-4, Class HE: A-5 IO, Class HE: M-1, Class HE: M-2,
Class HE: B, Class HE: A-1 Underlying, Class C Master and Class C Subsidiary
Certificates, will be issued by the Trust, the corpus of which will consist
primarily of the Contracts, including all rights to receive payments due on
such Contracts after (i) September 30, 1998 (or the date of origination
thereof, if later) for each Home Equity Contract other than the Subsequent Home
Equity Contracts (as defined below); (ii) October 31, 1998 with respect to all
Home Improvement Contracts other than Subsequent Home Improvement Contracts (as
defined below); and (iii) for each Subsequent Home Equity Contract or
Subsequent Home Improvement Contract, the date on which such Contract is
purchased by the Trust (each such date, a "Cut-off Date"), all rights under FHA
Insurance with respect to the FHA-insured Home Improvement Contracts, liens on
the related real estate, amounts held for the Trust in the Certificate Account
(as defined below), the Class HI: B-2 Limited Guaranty of the Company for the
benefit of the Class HI: B-2 Certificates, as described in "Description of the
Class HI: B-2 Limited Guaranty" herein, and the Class HE: B Limited Guaranty of
the Company for the benefit of the Class HE: B Certificates, as described in
"Description of the Class HE: B Limited Guaranty" herein. The Class HI: M-1,
Class HI: M-2, Class HI: B-1, Class HI: B-2, Class HE: A-1 Underlying
Certificates, Class HE: M-2, Class HE: B, Class C Master and Class C Subsidiary
Certificates are not being offered hereby. Sub-Pool HI and Sub-Pool HE will
each be deemed to be a separate sub-trust within the Trust.
The Class HE: A-1 Certificates will represent undivided ownership
interests in the assets held by Green Tree Grantor Trust 1998-E (the "Grantor
Trust"). The assets of the Grantor Trust will consist of (1) the Class HE: A-1
Underlying Certificates issued by the Trust and (2) a swap agreement (the "Swap
Agreement") between the Grantor Trust and Westdeutsche Landesbank Girozentrale,
New York branch (the "Swap Counterparty") pursuant to which the Swap
Counterparty, or any successor counterparty prior to the Payment Date in
January 2014, will be obligated to pay to the Trustee the amount, if any, by
which the interest due on the Class HE: A-1 Certificates on a Payment Date (as
defined below) (which is calculated on a floating rate) exceeds the amount of
interest due to the Trustee for such Payment Date in respect of the Class HE:
A-1 Underlying Certificate (which is calculated on a fixed rate). The Grantor
Trust will be created pursuant to a trust agreement (the "Grantor Trust
Agreement") to be dated as of December 1, 1998, between the Company, as the
depositor and servicer, and U.S. Bank Trust National Association, as the
trustee.
The Class HE: A-1A NAS, Class HE: A-1B ARM, Class HE: A-1, Class HE: A-2,
Class HE: A-3, Class HE: A-4, Class HE: A-5 IO, Class HE: M-1, Class HE: M-2,
and Class HE: B Certificates are referred to herein as the "Sub-Pool HE
Certificates."
Payments and recoveries in respect of principal and interest on the
Contracts will be paid into a separate trust account maintained at an Eligible
Institution (as defined below) (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. Holders of Certificates (other
than Class HE: A-1 Certificates) will receive payments on the fifteenth day of
each month (or, if such day is not a business day, the next
S-21
<PAGE>
succeeding business day) and holders of the HE: A-1 Certificates will receive
payments on the eighteenth day of each month during the term of the Swap
Agreement (or if that eighteenth day is not a business day, the next succeeding
business day), (each a "Payment Date"). The Payment Date for the Class HE: A-1
Certificates will be an earlier day (but not earlier than the Payment Date for
the other Certificates) if the Trustee receives any required swap payment
before 11:00 a.m. Central Standard Time on the earlier day. The Payment Date
for the Class HE: A-1 Certificates will be the same as the Payment Date for the
other Certificates after the Swap Agreement terminates. Payments on deposit in
the Certificate Account and trust account under the Grantor Trust Agreement
will be applied on each Payment Date to make the distributions to the
Certificateholders as of the immediately preceding Record Date as described
under "Description of the Certificates--Distributions on Sub-Pool HI
Certificates" and "--Distributions on Sub-Pool HE Certificates" herein and to
pay certain monthly fees to the Servicer as compensation for its servicing of
the Contracts (the "Monthly Servicing Fee") and to pay certain monthly fees to
the Company as compensation for providing the Class HI: B-2 Limited Guaranty
and the Class HE: B Limited Guaranty (the "Class HI: B-2 Guaranty Fee" and the
"Class HE: B Guaranty Fee").
The Servicer will be obligated to advance for each Payment Date any
scheduled payments on the Contracts that were due but not received during the
prior Due Period ("Advances"). The Servicer will be entitled to reimbursement
of an Advance from funds available therefor in the Certificate Account. The
Servicer will not be required to make any Advance to the extent that it does
not expect to recoup the Advance from subsequent funds available therefor in
the Certificate Account. If the Servicer fails to make any Advance required
under the Agreement, the Trustee is obligated (subject to certain conditions)
to make such Advance.
Following the transfer of the Contracts from the Company to the Trust,
the obligations of the Company are limited to (a) its obligations as Servicer
to service the Contracts, (b) certain representations and warranties in the
Agreement as described under "Description of the Certificates--Conveyance of
Contracts" herein, (c) certain indemnities, (d) the Class HI: B-2 Limited
Guaranty and (e) the Class HE: B Limited Guaranty. The Company is obligated
under the Agreement to repurchase at the Repurchase Price (as defined herein),
or, at its option, to substitute another contract for, any Contract on the
first Payment Date which is more than 90 days after the Company becomes aware,
or the Company receives written notice from the Trustee, of any breach of any
such representation and warranty in the Agreement that materially and adversely
affects the Certificateholders' interest in such Contract if such breach has
not been cured prior to such date. The Agreement also provides that the Company
has certain obligations to repurchase Contracts and to indemnify the Trustee
and Certificateholders with respect to certain other matters.
Distributions of interest and principal on the Sub-Pool HI Certificates
will be made primarily from amounts available in respect of the Home
Improvements Contracts comprising Sub-Pool HI, while distributions of principal
and interest on the Sub-Pool HE Certificates will be made primarily from
amounts available in respect of the Home Equity Contracts comprising Sub-Pool
HE and the payments, if any, by the Swap Counterparty. Under certain
circumstances as described herein, amounts available in respect of the
Contracts in one Sub-Pool may be available to make distributions to the holders
of Certificates relating to the other Sub-Pool. The rights of the holders of
the Class HI: M-1, Class HI: M-2, Class HI: B-1 and Class HI: B-2 Certificates
to receive distributions on each Payment Date will be subordinated to such
rights of the holders of the Class HI: A-1, Class HI: A-2, and Class HI: A-3
Certificates and, in addition, to such rights of the holders of the Class HI:
M-1 Certificates (in the case of the Class HI: M-2, Class HI: B-1 and Class HI:
B-2 Certificates), of the Class HI: M-2 Certificates (in the case of the Class
HI: B-1 and Class HI: B-2 Certificates) and of the Class HI: B-1 Certificates
(in the case of the Class HI: B-2 Certificates), all to the extent described
herein. Likewise, the rights of the holders of the Class HE: M-1, Class HE: M-2
and Class HE: B Certificates to receive distributions on each Payment Date will
be subordinated to such rights of the holders of the Class HE: A-1A NAS, Class
HE: A-1B ARM, Class HE: A-1 Underlying, Class HE: A-1, Class HE: A-2, Class HE:
A-3, Class HE: A-4 and Class HE: A-5 IO Certificates and, in addition, to such
rights of the holders of the Class HE: M-1 Certificates (in the case of the
Class HE: M-2 and Class HE: B Certificates) and of the Class HE: M-2
Certificates (in the case of the Class HE: B Certificates), all to the extent
described herein.
S-22
<PAGE>
Elections will be made to treat certain portions of 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 (other than the Class HE: A-1, Class C
Master and Class C Subsidiary Certificates) will constitute "regular interests"
in the Master REMIC. See "Certain Federal Income Tax Consequences" herein and
in the Prospectus.
There is currently no secondary market for the Certificates offered
hereby, and there is no assurance that any such market will develop or, if it
does develop, that it will continue. Credit Suisse First Boston Corporation,
Chase Securities Inc., First Union Capital Markets, a Division of Wheat First
Securities, Inc., Lehman Brothers Inc. 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.
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.
USE OF PROCEEDS
The Company will use the net proceeds received from the sale of the
Certificates for working capital and general corporate purposes, including
building a portfolio of home improvement contracts and home equity loans,
providing warehouse financing for the purchase of contracts and loans and other
costs of maintaining such contracts and loans until they are pooled and sold to
other investors.
S-23
<PAGE>
THE CONTRACTS
HOME IMPROVEMENT CONTRACTS
This Prospectus Supplement contains information regarding certain Home
Improvement Contracts, which will represent approximately 65.3% of all Home
Improvement Contracts by aggregate principal balance as of the Cut-Off Date,
and which consist of home improvement contracts and promissory notes originated
through October 27, 1998 (the "Initial Home Improvement Contracts"). The
information for each Initial Home Improvement Contract is as of the Cut-Off
Date for such Contract. The Agreement provides that additional Home Improvement
Contracts (the "Subsequent Home Improvement Contracts") will be purchased by
the Trust up to 60 days after the Closing Date. See "Description of the
Certificates--Conveyance of Subsequent Home Improvement Contracts and Sub-Pool
HI Pre-Funding Account" below.
The Initial Home Improvement Contracts have an aggregate principal
balance as of the Cut-off Date of $163,223,007.53. Each Home Improvement
Contract is a home improvement contract originated by a Company-approved home
improvement contractor and purchased by the Company, or a home improvement
promissory note originated by the Company directly. Each Home Improvement
Contract is secured by a lien on the related real estate. Each Home Improvement
Contract finances improvements to a one- to four-family residential property,
an owner-occupied condominium or town house or a manufactured home which either
qualifies as real estate under state law or is located in a Company-approved
park.
The Company will make certain representations and warranties in the
Agreement, including that (a) each Home Improvement Contract is fully
amortizing with a fixed contractual rate of interest and provides for level
monthly payments over the term of such loan, computed on the simple interest
method, (b) each Home Improvement Contract has its last scheduled payment due
no later than November 2023, (c) 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, and (d) each Home
Improvement Contract is secured by a lien (which is typically a subordinate
lien) on the related real estate. The Home Improvement Contracts will be
originated or acquired by the Company in the ordinary course of the Company's
business. A detailed listing of the Home Improvement Contracts is appended to
the Agreement. See "Description of the Certificates" herein and in the
Prospectus. Approximately 44.57% of the Initial Home Improvement Contracts, by
aggregate principal balance as of the Cut-off Date, are insured by FHA to the
extent described in "Description of FHA Insurance" in the Prospectus. Each of
the Initial Home Improvement Contracts has a Contract Rate of at least 8.00%
per annum and not more than 18.75% and the weighted average of the Contract
Rates of the Initial Home Improvement Contracts as of the Cut-off Date is
12.94%. As of the Cut-off Date, the Initial Home Improvement Contracts had
remaining maturities of at least 8 months but not more than 300 months and
original maturities of at least 24 months but not more than 300 months. The
Initial Home Improvement Contracts had a weighted average term to scheduled
maturity, as of origination, of 197 months, and a weighted average term to
scheduled maturity, as of the Cut-off Date, of 191 months. The average
principal balance per Initial Home Improvement Contract as of the Cut-off Date
was $13,271.24 and the principal balances on the Initial Home Improvement
Contracts as of the Cut-off Date ranged from $1,065.35 to $212,121.38. The
Initial Home Improvement Contracts arise from loans relating to real property
located in 50 states and the District of Columbia. By principal balance as of
the Cut-off Date, approximately 19.25% of the Initial Home Improvement
Contracts financed improvements to real estate located in California, 8.94% in
Texas, 6.65% in New York, and 6.54% in Michigan. No other state represented 5%
or more of the aggregate principal balance as of the Cut-off Date of the
Initial Home Improvement Contracts. Substantially none of the Initial Home
Improvement Contracts provide for recourse to the originating contractor in the
event of a default by the obligor.
S-24
<PAGE>
Set forth below is a description of certain additional characteristics of
the Initial Home Improvement Contracts.
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES--INITIAL HOME IMPROVEMENT
CONTRACTS
<TABLE>
<CAPTION>
% OF
INITIAL
% OF SUB-POOL
INITIAL HI BY
SUB-POOL HI BY AGGREGATE PRINCIPAL OUTSTANDING
NUMBER OF NUMBER OF BALANCE PRINCIPAL
CONTRACTS AS OF CONTRACTS AS OUTSTANDING AS OF BALANCE AS OF
CUT-OFF DATE OF CUT-OFF DATE CUT-OFF DATE CUT-OFF DATE
--------------- --------------- ------------------- -------------
<S> <C> <C> <C> <C>
Alabama................. 116 .94% $ 2,160,596.84 1.32%
Alaska.................. 3 .02 33,926.81 .02
Arizona................. 239 1.94 4,328,799.85 2.65
Arkansas................ 598 4.86 4,446,957.80 2.72
California.............. 1,279 10.40 31,421,363.37 19.25
Colorado................ 391 3.18 4,667,979.85 2.86
Connecticut............. 146 1.19 2,896,726.98 1.77
Delaware................ 14 .11 257,065.07 .16
District of Columbia.... 4 .03 22,156.18 .01
Florida................. 420 3.41 5,623,578.55 3.45
Georgia................. 162 1.32 2,041,028.12 1.25
Hawaii.................. 10 .08 219,987.92 .13
Idaho................... 61 .50 754,768.09 .46
Illinois................ 344 2.80 4,650,147.68 2.85
Indiana................. 177 1.44 2,355,703.15 1.44
Iowa.................... 53 .43 420,705.18 .26
Kansas.................. 140 1.14 1,301,820.35 .80
Kentucky................ 104 .85 894,700.38 .55
Louisiana............... 196 1.59 1,557,261.83 .95
Maine................... 55 .45 1,147,343.12 .70
Maryland................ 82 .67 1,249,860.51 .77
Massachusetts........... 79 .64 1,731,001.03 1.06
Michigan................ 1,054 8.57 10,670,169.58 6.54
Minnesota............... 133 1.08 2,456,495.44 1.50
Mississippi............. 285 2.32 2,085,693.63 1.28
Missouri................ 315 2.56 3,051,823.43 1.87
Montana................. 20 .16 274,395.42 .17
Nebraska................ 60 .49 581,140.99 .36
Nevada.................. 127 1.03 2,513,276.21 1.54
New Hampshire........... 36 .29 807,084.35 .49
New Jersey.............. 303 2.46 6,279,115.60 3.85
New Mexico.............. 115 .94 1,325,514.70 .81
New York................ 519 4.22 10,846,915.36 6.65
North Carolina.......... 286 2.33 2,269,963.11 1.39
North Dakota............ 9 .07 184,208.43 .11
Ohio.................... 371 3.02 3,802,147.16 2.33
Oklahoma................ 406 3.30 2,889,978.47 1.77
Oregon.................. 101 .82 1,536,595.47 .94
Pennsylvania............ 532 4.33 7,525,943.13 4.61
Rhode Island............ 28 .23 497,803.49 .30
South Carolina.......... 153 1.24 1,515,647.18 .93
South Dakota............ 12 .10 224,971.97 .14
Tennessee............... 260 2.11 1,942,148.37 1.19
Texas................... 1,638 13.32 14,589,008.14 8.94
Utah.................... 62 .50 903,180.08 .55
Vermont................. 10 .08 207,382.25 .13
Virginia................ 193 1.57 3,113,183.02 1.91
Washington.............. 445 3.62 4,888,386.01 2.99
West Virginia........... 51 .41 846,714.32 .52
Wisconsin............... 50 .41 705,429.85 .43
Wyoming................. 51 .41 501,244.48 .31
Other................... 1 .01 3,969.23 .00
------ ------ --------------- ------
Total............... 12,299 100.00% $163,223,007.53 100.00%
====== ====== =============== ======
</TABLE>
S-25
<PAGE>
YEARS OF ORIGINATION--INITIAL HOME IMPROVEMENT CONTRACTS
<TABLE>
<CAPTION>
% OF INITIAL
NUMBER OF SUB-POOL HI BY
CONTRACTS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
YEAR OF ORIGINATION OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ------------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
1989...................... 196 $ 1,016,947.73 .62%
1990...................... 731 3,989,118.44 2.44
1996...................... 4 70,893.31 .04
1997...................... 2,528 17,170,639.29 10.52
1998...................... 8,840 140,975,408.76 86.37
------ --------------- ------
Total................. 12,299 $163,223,007.53 100.00%
====== =============== ======
</TABLE>
DISTRIBUTION OF ORIGINAL CONTRACT AMOUNTS--INITIAL HOME IMPROVEMENT CONTRACTS
<TABLE>
<CAPTION>
% OF INITIAL
NUMBER OF SUB-POOL HI BY
CONTRACTS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
ORIGINAL HOME IMPROVEMENT AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
CONTRACT AMOUNT (IN DOLLARS) OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ---------------------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
Less than$ 10,000............ 6,072 $ 31,524,770.66 19.31%
Between$ 10,000--$ 19,999.... 3,293 43,560,078.62 26.69
Between$ 20,000--$ 29,999.... 1,958 46,867,164.19 28.71
Between$ 30,000--$ 39,999.... 487 16,593,919.61 10.17
Between$ 40,000--$ 49,999.... 301 13,154,624.12 8.06
Between$ 50,000--$ 59,999.... 89 4,695,284.80 2.88
Between$ 60,000--$ 69,999.... 70 4,261,300.81 2.61
Between$ 70,000--$ 79,999.... 18 1,352,291.66 .83
Between$ 80,000--$ 89,999.... 5 426,764.55 .26
Between$ 90,000--$ 99,999.... 0 .00 .00
Between$100,000--$109,999.... 2 166,175.64 .10
Between$110,000--$119,999.... 0 .00 .00
Between$120,000--$129,999.... 2 246,712.25 .15
Between$130,000--$139,999.... 0 .00 .00
Between$140,000--$149,999.... 0 .00 .00
Between$150,000--$159,999.... 0 .00 .00
Between$160,000--$169,999.... 1 161,799.24 .10
Between$170,000--$179,999.... 0 .00 .00
Between$180,000--$189,999.... 0 .00 .00
Between$190,000--$199,999.... 0 .00 .00
Over $200,000............... 1 212,121.38 .13
------ --------------- ------
Total.................... 12,299 $163,223,007.53 100.00%
====== =============== ======
</TABLE>
CONTRACT RATES--INITIAL HOME IMPROVEMENT CONTRACTS
<TABLE>
<CAPTION>
% OF INITIAL
NUMBER OF SUB-POOL HI BY
CONTRACTS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
RANGE OF HOME IMPROVEMENT AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
CONTRACTS BY CONTRACT RATE OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
-------------------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
From 7.01%-- 8.00%......... 1 $ 16,642.53 .01%
From 8.01%-- 9.00%......... 51 1,626,587.38 1.00
From 9.01%--10.00%......... 1,291 21,244,007.77 13.02
From 10.01%--11.00%......... 1,018 18,193,974.96 11.15
From 11.01%--12.00%......... 1,205 18,654,692.74 11.43
From 12.01%--13.00%......... 1,926 24,656,543.72 15.11
From 13.01%--14.00%......... 2,521 31,291,942.12 19.17
From 14.01%--15.00%......... 2,482 28,441,614.72 17.43
From 15.01%--16.00%......... 1,521 14,602,428.25 8.95
From 16.01%--17.00%......... 221 3,225,973.74 1.98
Over17.01%.................. 62 1,268,599.60 .78
------ --------------- ------
Total................... 12,299 $163,223,007.53 100.00%
====== =============== ======
</TABLE>
S-26
<PAGE>
REMAINING MONTHS TO MATURITY--INITIAL HOME IMPROVEMENT CONTRACTS
<TABLE>
<CAPTION>
% OF
INITIAL
NUMBER OF SUB-POOL HI BY
MONTHS REMAINING TO CONTRACTS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
SCHEDULED MATURITY AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
AS OF CUT-OFF DATE OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
------------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
Less than 31.............. 581 $ 1,542,646.32 .95%
31 to 60.................. 2,101 10,400,911.22 6.37
61 to 90.................. 1,675 10,932,402.46 6.70
91 to 120................. 2,896 28,716,927.20 17.59
121 to 150................ 216 1,933,101.46 1.18
151 to 180................ 1,798 31,470,919.04 19.28
181 to 210................ 18 332,628.92 .20
211 to 240................ 1,888 43,917,141.20 26.91
241 to 270................ 2 38,962.81 .02
271 to 300................ 1,124 33,937,366.90 20.79
------ --------------- ------
Total................. 12,299 $163,223,007.53 100.00%
====== =============== ======
</TABLE>
DELINQUENCY, LOAN DEFAULT AND LOSS INFORMATION
The following tables set forth the delinquency experience for the periods
indicated of the portfolios of conventional and FHA-insured secured home
improvement loans serviced by the Company (other than Home Improvement
Contracts already in foreclosure).
DELINQUENCY EXPERIENCE--CONVENTIONAL HOME IMPROVEMENT CONTRACTS
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT SEPTEMBER 30, -------------------------------------
1998 1997 1996 1995 1994 1993
---------------- ------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
Number of Contracts
Outstanding(1)......... 96,496 85,958 74,021 56,028 29,788 3,893
Number of Contracts
Delinquent(2)(3)
30-59 Days............ 1,273 946 656 394 57 5
60-89 Days............ 307 258 241 109 10 1
90 Days or More....... 510 338 279 126 15 0
------ ------ ------ ------ ------ -----
Total Contracts
Delinquent............. 2,090 1,542 1,176 629 82 6
Delinquencies as a
Percent of Contracts
Outstanding(4)......... 2.17% 1.79% 1.59% 1.12% .28% .15%
</TABLE>
- --------
(1) Excludes defaulted contracts not yet liquidated.
(2) A contract is considered delinquent by the Company if any payment of $25 or
more is past-due 30 days or more.
(3) The period of delinquency is based on the number of days that payments are
contractually past-due (assuming 30-day months). Consequently, a contract
due on the first day of a month is not 30 days delinquent until the first
day of the next month. The information for 1996 and 1997 does not include
as delinquent the home improvement contracts of obligors who have entered
bankruptcy proceedings, provided that such obligors are current under their
bankruptcy payment plan.
(4) By number of contracts.
S-27
<PAGE>
DELINQUENCY EXPERIENCE--FHA-INSURED HOME IMPROVEMENT CONTRACTS
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------
AT SEPTEMBER 30,
1998 1997 1996 1995 1994 1993
---------------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Number of Contracts
Outstanding(1)......... 13,508 17,539 22,001 25,925 26,885 29,787
Number of Contracts
Delinquent(2)(3)
30-59 Days............ 417 439 459 462 237 262
60-89 Days............ 97 95 123 121 95 87
90 Days or More....... 89 141 198 183 146 164
------ ------ ------ ------ ------ ------
Total Contracts
Delinquent............. 603 675 780 766 478 513
Delinquencies as a
Percent of Contracts
Outstanding(4)......... 4.46% 3.85% 3.55% 2.95% 1.78% 1.72%
</TABLE>
- --------
(1) Excludes defaulted contracts not yet liquidated.
(2) A contract is considered delinquent by the Company if any payment of $25 or
more is past-due 30 days or more.
(3) The period of delinquency is based on the number of days that payments are
contractually past-due (assuming 30-day months). Consequently, a contract
due on the first day of a month is not 30 days delinquent until the first
day of the next month. The information for 1996 and 1997 does not include
as delinquent the home improvement contracts of obligors who have entered
bankruptcy proceedings, provided that such obligors are current under their
bankruptcy payment plan.
(4) By number of contracts.
The following tables set forth the loan default and loss experience for
the periods indicated of the portfolios of conventional and FHA-insured secured
home improvement loans serviced by the Company.
LOAN DEFAULT AND LOSS EXPERIENCE--CONVENTIONAL HOME IMPROVEMENT CONTRACTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED DECEMBER 31,
---------------------------------------------------
AT SEPTEMBER 30,
1998 1997 1996 1995 1994 1993
---------------- ---------- ---------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Principal Balance of
Contracts Serviced(1).. $1,741,669 $1,435,535 $1,147,111 $824,419 $418,055 $59,281
Contract Defaults(2).... 1.08% 1.60% 1.25% .53% .12% .05%
Net Losses:
Dollars(3)............ $ 16,840 $ 16,034 $ 11,072 $ 3,424 $ 285 $ 0
Percentage(4)......... .97% 1.12% .97% .42% .07% .00%
</TABLE>
- --------
(1) As of period end. Includes defaulted contracts not yet liquidated.
(2) As a percentage of the total number of contracts being serviced as of
period end. The Company considers a contract defaulted when the Company has
commenced foreclosure or enforcement proceedings or the contract is 180
days delinquent.
(3) Does not include any estimated losses for defaulted contracts not yet
liquidated.
(4) As a percentage of the principal amount of contracts being serviced as of
period end.
S-28
<PAGE>
LOAN DEFAULT AND LOSS EXPERIENCE--FHA-INSURED HOME IMPROVEMENT CONTRACTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED DECEMBER 31,
------------------------------------------------
AT SEPTEMBER
30, 1998 1997 1996 1995 1994 1993
------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Principal Balance of
Contracts Serviced(1).. $98,915 $128,657 $161,438 $191,364 $199,286 $235,908
Contract Defaults(2).... 4.03% 3.17% 2.90% 1.81% 1.88% 1.86%
Net Losses:
Dollars(3)............ $ 511 $ 500 $ 574 $ 291 $ 623 $ 737
Percentage(4)......... .52% .39% .36% .15% .31% .31%
</TABLE>
- --------
(1) As of period end. Includes defaulted contracts not yet liquidated.
(2) As a percentage of the total number of contracts being serviced as of
period end. The Company considers a contract defaulted when the Company has
submitted a claim to FHA, the Company has commenced foreclosure or
enforcement proceedings, or the contract is 180 days delinquent.
(3) Does not include any estimated losses for defaulted contracts not yet
liquidated. Includes unpaid interest to the date of FHA claim submission
and all expenses of liquidation, and reflects proceeds of FHA Insurance
claims paid.
(4) As a percentage of the principal amount of contracts being serviced as of
period end.
The Company's management is not aware of any trends or anomalies which
have adversely affected the delinquency, loan default and loss experience of
its portfolio of home improvement contracts.
The data presented in the foregoing tables are for illustrative purposes
only and there is no assurance that the delinquency, loan default and loss
experience of the Home Improvement Contracts will be similar to that set forth
above. Moreover, because the Company began originating and purchasing FHA-
insured home improvement contracts in April 1989, and secured conventional home
improvement contracts in September 1992, it is possible that the Company's
portfolio is not yet sufficiently seasoned to show the delinquencies and losses
that would be experienced if such data were collected over a longer period of
time. The delinquency, loan default and loss experience of home improvement
loans may be adversely affected by a downturn in regional or local economic
conditions. Regional and local economic conditions are often volatile, and no
predictions can be made regarding future economic conditions in any particular
area.
FIXED-RATE HOME EQUITY CONTRACTS
Sub-Pool HE includes Fixed-Rate Home Equity Contracts (meaning all Home
Equity Contracts other than the Adjustable Rate Home Equity Contracts,
described separately below). This Prospectus Supplement contains information
regarding certain Fixed-Rate Home Equity Contracts (divided into Group I and
Group II), which will represent approximately 34.1% of all Fixed-Rate Home
Equity Contracts by aggregate principal balance as of the Cut-off Date, and
which consist of closed-end home equity loans originated through September 30,
1998 (the "Initial Fixed-Rate Home Equity Contracts"). The information for each
Initial Fixed-Rate Home Equity Contract is as of the Cut-off Date for such
Contract. The Agreement provides that additional Fixed-Rate Home Equity
Contracts (the "Subsequent Fixed-Rate Home Equity Contracts") will be purchased
by the Trust prior to or up to 60 days after the Closing Date. See "Description
of the Certificates--Conveyance of Subsequent Home Equity Contracts and Sub-
Pool HE Pre-Funding Account" below.
The initial Group I Fixed-Rate Home Equity Contracts (the "Initial Group
I Fixed-Rate Home Equity Contracts") have an aggregate principal balance of
$140,757,066.53. Each Group I Fixed-Rate Home Equity Contract is a closed-end
home equity loan originated by the Company or by a Company-approved
correspondent lender and purchased by the Company. Each Group I Fixed-Rate Home
Equity Contract is secured by a lien on the related real estate.
S-29
<PAGE>
The Company will make certain representations and warranties in the
Agreement, including that (a) each Group I Fixed-Rate Home Equity Contract 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),
(b) each Group I Initial Fixed-Rate Home Equity Contract has its last scheduled
payment due no later than October 2028, and (c) each Group I Fixed-Rate Home
Equity Contract is secured by a lien on the related real estate. The Group I
Fixed-Rate Home Equity Contracts will be originated or acquired by the Company
in the ordinary course of the Company's business. A detailed listing of the
Initial Group I Fixed-Rate Home Equity Contracts is appended to the Agreement.
See "Description of the Certificates" herein and in the Prospectus. Each of the
Initial Group I Fixed-Rate Home Equity Contracts has a Contract Rate of at
least 7.00% per annum and not more than 18.20% and the weighted average of the
Contract Rates of the Initial Group I Fixed-Rate Home Equity Contracts as of
the Cut-off Date is 11.12%. As of the Cut-off Date, the Initial Group I Fixed-
Rate Home Equity Contracts had remaining maturities of at least 42 months but
not more than 360 months and original maturities of at least 48 months but not
more than 360 months. The Initial Group I Fixed-Rate Home Equity Contracts had
a weighted average term to scheduled maturity, as of origination, of 258
months, and a weighted average term to scheduled maturity, as of the Cut-off
Date, of 258 months. The average principal balance per Initial Group I Fixed-
Rate Home Equity Contract as of the Cut-off Date was $62,226.82 and the
principal balances on the Initial Group I Fixed-Rate Home Equity Contracts as
of the Cut-off Date ranged from $449.96 to $223,200.00. The Balloon Loans
included in the Initial Group I Fixed-Rate Home Equity Contracts consisted of
367 closed-end home equity loans and have a principal balance as of the Cut-off
Date of $31,923,834.13. The weighted average of the Contract Rates of such
Balloon Loans as of the Cut-off Date was 11.00%, and such Balloon Loans had a
weighted average term to scheduled maturity, as of origination, of 197 months,
and a weighted average term to scheduled maturity, as of the Cut-off Date, of
197 months. The Initial Group I Fixed-Rate Home Equity Contracts arise from
loans relating to real property located in 47 states and the District of
Columbia. By principal balance as of the Cut-off Date, approximately 7.70% of
the Initial Group I Fixed-Rate Home Equity Contracts were secured by real
property located in California, 6.33% in Illinios, 6.22% in Ohio, 5.29% in
Michigan, and 5.06% in Pennsylvania. No other state represented 5% or more of
the Cut-off Date Pool Principal Balance of the Initial Group I Fixed-Rate Home
Equity Contracts.
S-30
<PAGE>
Set forth below is a description of certain additional characteristics of the
Initial Group I Fixed-Rate Home Equity Contracts.
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES--INITIAL GROUP I FIXED-RATE
HOME EQUITY CONTRACTS
<TABLE>
<CAPTION>
% OF INITIAL
% OF INITIAL GROUP I
GROUP I FIXED-RATE
FIXED-RATE HOME EQUITY
HOME EQUITY CONTRACTS BY
CONTRACTS AGGREGATE PRINCIPAL OUTSTANDING
NUMBER OF BY NUMBER OF BALANCE PRINCIPAL
CONTRACTS AS OF CONTRACTS AS OUTSTANDING AS OF BALANCE AS OF
CUT-OFF DATE OF CUT-OFF DATE CUT-OFF DATE CUT-OFF DATE
--------------- --------------- ------------------- -------------
<S> <C> <C> <C> <C>
Alabama................. 102 4.51% $ 6,351,162.44 4.51%
Arizona................. 32 1.41 2,096,904.82 1.49
Arkansas................ 13 .57 639,990.00 .45
California.............. 140 6.19 10,839,400.30 7.70
Colorado................ 40 1.77 2,552,946.29 1.81
Connecticut............. 25 1.11 1,957,593.27 1.39
Delaware................ 13 .57 1,560,150.00 1.11
District of Columbia.... 5 .22 301,213.50 .21
Florida................. 97 4.29 5,681,629.47 4.04
Georgia................. 76 3.36 4,656,161.89 3.31
Idaho................... 18 .80 925,891.49 .66
Illinois................ 138 6.10 8,905,600.68 6.33
Indiana................. 70 3.09 3,716,398.09 2.64
Iowa.................... 34 1.50 2,176,800.97 1.55
Kansas.................. 30 1.33 1,707,597.35 1.21
Kentucky................ 34 1.50 1,767,488.40 1.26
Louisiana............... 60 2.65 3,127,675.37 2.22
Maryland................ 55 2.43 3,906,472.81 2.78
Massachusetts........... 28 1.24 1,916,694.31 1.36
Michigan................ 124 5.48 7,444,626.33 5.29
Minnesota............... 50 2.21 2,817,887.12 2.00
Mississippi............. 20 .88 1,178,613.11 .84
Missouri................ 65 2.87 3,519,503.44 2.50
Montana................. 5 .22 502,531.48 .36
Nebraska................ 31 1.37 1,812,059.77 1.29
Nevada.................. 28 1.24 2,653,520.66 1.89
New Hampshire........... 4 .18 144,283.51 .10
New Jersey.............. 31 1.37 2,042,053.12 1.45
New Mexico.............. 16 .71 1,187,361.70 .84
New York................ 77 3.40 5,900,795.80 4.19
North Carolina.......... 99 4.38 6,037,563.78 4.29
North Dakota............ 9 .40 567,136.53 .40
Ohio.................... 155 6.85 8,750,260.10 6.22
Oklahoma................ 10 .44 520,553.55 .37
Oregon.................. 19 .84 1,317,992.65 .94
Pennsylvania............ 110 4.86 7,121,358.00 5.06
Rhode Island............ 10 .44 743,326.08 .53
South Carolina.......... 51 2.25 2,964,313.72 2.11
South Dakota............ 4 .18 297,264.68 .21
Tennessee............... 39 1.72 2,642,640.93 1.88
Texas................... 132 5.84 6,366,782.76 4.52
Utah.................... 16 .71 1,089,213.42 .77
Vermont................. 3 .13 79,971.89 .06
Virginia................ 54 2.39 3,281,890.16 2.33
Washington.............. 26 1.15 1,219,512.29 .87
West Virginia........... 12 .53 772,240.84 .55
Wisconsin............... 44 1.95 2,579,788.23 1.83
Wyoming................. 8 .35 414,249.43 .29
----- ------ --------------- ------
Total............... 2,262 100.00% $140,757,066.53 100.00%
===== ====== =============== ======
</TABLE>
S-31
<PAGE>
YEARS OF ORIGINATION--INITIAL GROUP I FIXED-RATE HOME EQUITY CONTRACTS
<TABLE>
<CAPTION>
% OF INITIAL GROUP I
FIXED-RATE
NUMBER OF HOME EQUITY CONTRACTS BY
CONTRACTS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
YEAR OF ORIGINATION OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ------------------- ---------- ------------------- ------------------------
<S> <C> <C> <C>
1987................... 1 $14,054.92 .01%
1996................... 2 31,379.19 .02
1997................... 26 824,574.64 .59
1998................... 2,233 139,887,057.78 99.38
----- --------------- ------
Total.............. 2,262 $140,757,066.53 100.00%
===== =============== ======
</TABLE>
DISTRIBUTION OF ORIGINAL CONTRACT AMOUNTS--INITIAL GROUP I FIXED-RATE HOME
EQUITY CONTRACTS
<TABLE>
<CAPTION>
% OF INITIAL GROUP I
FIXED-RATE
NUMBER OF HOME EQUITY CONTRACTS BY
CONTRACTS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
ORIGINAL CONTRACT AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
AMOUNT (IN DOLLARS) OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
------------------- ---------- ------------------- ------------------------
<S> <C> <C> <C>
Less than$ 10,000....... 3 $ 22,682.56 .02%
Between$ 10,000--
$ 19,999............... 304 4,523,120.50 3.21
Between$ 20,000--
$ 29,999............... 317 7,650,194.46 5.44
Between$ 30,000--
$ 39,999............... 236 8,093,618.49 5.75
Between$ 40,000--
$ 49,999............... 211 9,355,851.83 6.65
Between$ 50,000--
$ 59,999............... 223 12,243,752.60 8.70
Between$ 60,000--
$ 69,999............... 198 12,803,616.76 9.10
Between$ 70,000--
$ 79,999............... 167 12,487,832.93 8.87
Between$ 80,000--
$ 89,999............... 113 9,553,610.74 6.79
Between$ 90,000--
$ 99,999............... 92 8,668,233.60 6.16
Between$100,000--
$109,999............... 65 6,850,592.30 4.87
Between$110,000--
$119,999............... 75 8,633,535.25 6.13
Between$120,000--
$129,999............... 58 7,214,993.06 5.13
Between$130,000--
$139,999............... 41 5,519,344.80 3.92
Between$140,000--
$149,999............... 39 5,659,781.96 4.02
Between$150,000--
$159,999............... 30 4,611,594.82 3.28
Between$160,000--
$169,999............... 14 2,287,794.00 1.63
Between$170,000--
$179,999............... 23 3,991,969.45 2.84
Between$180,000--
$189,999............... 12 2,219,652.33 1.58
Between$190,000--
$199,999............... 18 3,533,091.16 2.51
Between$200,000--
$209,999............... 12 2,443,284.29 1.74
Between$210,000--
$219,999............... 9 1,942,718.64 1.38
Over $220,000......... 2 446,200.00 .32
----- --------------- ------
Total............... 2,262 $140,757,066.53 100.00%
===== =============== ======
</TABLE>
S-32
<PAGE>
CONTRACT RATES--INITIAL GROUP I FIXED-RATE HOME EQUITY CONTRACTS
<TABLE>
<CAPTION>
% OF INITIAL GROUP I FIXED-RATE
NUMBER OF HOME EQUITY CONTRACTS BY
CONTRACTS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
RANGE OF HOME EQUITY AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
CONTRACTS BY CONTRACT RATE OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- -------------------------- ---------- ------------------- -------------------------------
<S> <C> <C> <C>
From 7.00%-- 9.00%....... 70 $ 7,729,698.12 5.49%
From 9.01%--10.00%....... 279 26,505,510.84 18.83
From 10.01%--11.00%....... 567 49,508,948.71 35.17
From 11.01%--12.00%....... 385 23,211,999.50 16.49
From 12.01%--13.00%....... 432 17,146,823.56 12.18
From 13.01%--14.00%....... 322 10,338,580.32 7.34
From 14.01%--15.00%....... 131 4,138,327.86 2.94
From 15.01%--16.00%....... 45 1,372,339.98 .97
From 16.01%--17.00%....... 23 640,792.73 .46
Over 17.00%............... 8 164,044.91 .12
----- --------------- ------
Total................. 2,262 $140,757,066.53 100.00%
===== =============== ======
</TABLE>
REMAINING MONTHS TO MATURITY--INITIAL GROUP I FIXED-RATE HOME EQUITY CONTRACTS
<TABLE>
<CAPTION>
% OF INITIAL GROUP I
FIXED-RATE
NUMBER OF HOME EQUITY CONTRACTS BY
MONTHS REMAINING TO CONTRACTS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
SCHEDULED MATURITY AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
AS OF CUT-OFF DATE OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
------------------- ---------- ------------------- ------------------------
<S> <C> <C> <C>
31--60................. 19 $ 324,744.56 .23%
61--90................. 10 215,562.77 .15
91--120................ 138 3,798,261.68 2.70
121--150............... 10 413,510.08 .29
151--180............... 686 37,046,906.84 26.32
181--210............... 5 216,006.76 .15
211--240............... 715 42,409,122.43 30.13
241--270............... 4 195,250.00 .14
271--300............... 315 22,960,657.76 16.31
301--330............... 0 .00 .00
331--360............... 360 33,177,043.65 23.57
----- --------------- ------
Total.............. 2,262 $140,757,066.53 100.00%
===== =============== ======
</TABLE>
LIEN POSITION--INITIAL GROUP I FIXED-RATE HOME EQUITY CONTRACTS
<TABLE>
<CAPTION>
% OF INITIAL
GROUP I
FIXED-RATE % OF INITIAL GROUP I
HOME EQUITY FIXED-RATE
NUMBER OF CONTRACTS BY HOME EQUITY CONTRACTS BY
CONTRACTS NUMBER OF AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
AS OF CUT- CONTRACTS AS OF BALANCE OUTSTANDING BALANCE AS OF
OFF DATE CUT-OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
---------- --------------- ------------------- ------------------------
<S> <C> <C> <C> <C>
First................... 1,477 65.30% $120,169,110.27 85.37%
Second.................. 785 34.70 20,587,956.26 14.63
----- ------ --------------- ------
Total............... 2,262 100.00% $140,757,066.53 100.00%
===== ====== =============== ======
</TABLE>
S-33
<PAGE>
COMBINED LOAN-TO-VALUE RATIO--INITIAL GROUP I FIXED-RATE HOME EQUITY CONTRACTS
<TABLE>
<CAPTION>
% OF INITIAL GROUP I
FIXED-RATE
NUMBER OF HOME EQUITY CONTRACTS BY
CONTRACTS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
COMBINED LOAN-TO-VALUE RATIO OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ---------------------------- ---------- ------------------- ------------------------
<S> <C> <C> <C>
From 0.00%-10.00%........... 1 $ 39,000.00 .03%
From 10.01%-20.00%.......... 6 132,221.69 .09
From 20.01%-30.00%.......... 15 336,911.21 .24
From 30.01%-40.00%.......... 16 393,225.93 .28
From 40.01%-50.00%.......... 37 1,324,531.47 .94
From 50.01%-60.00%.......... 40 1,561,766.32 1.11
From 60.01%-70.00%.......... 84 4,300,503.84 3.06
From 70.01%-80.00%.......... 303 16,607,064.69 11.80
From 80.01%-90.00%.......... 776 49,653,493.52 35.28
Over 90.00%................. 984 66,408,347.86 47.18
----- --------------- ------
Total................... 2,262 $140,757,066.53 100.00%
===== =============== ======
</TABLE>
The initial Group II Fixed-Rate Home Equity Contracts (the "Initial Group
II Fixed-Rate Home Equity Contracts") have an aggregate principal balance of
$140,753,245.78. Each Group II Fixed-Rate Home Equity Contract is a closed-end
home equity loan originated by the Company or by a Company-approved
correspondent lender and purchased by the Company. Each Group II Fixed-Rate
Home Equity Contract is secured by a lien on the related real estate.
The Company will make certain representations and warranties in the
Agreement, including that (a) each Group II Fixed-Rate Home Equity Contract 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) (b)
each Initial Group II Fixed-Rate Home Equity Contract has its last scheduled
payment due no later than October 2028, and (c) each Group II Fixed-Rate Home
Equity Contract is secured by a lien on the related real estate. The Group II
Fixed-Rate Home Equity Contracts will be originated or acquired by the Company
in the ordinary course of the Company's business. A detailed listing of the
Initial Group II Fixed-Rate Home Equity Contracts is appended to the Agreement.
See "Description of the Certificates" herein and in the Prospectus. Each of the
Initial Group II Fixed-Rate Home Equity Contracts has a Contract Rate of at
least 7.55% per annum and not more than 17.70% and the weighted average of the
Contract Rates of the Initial Group II Fixed-Rate Home Equity Contracts as of
the Cut-off Date is 11.18%. As of the Cut-off Date, the Initial Group II Fixed-
Rate Home Equity Contracts had remaining maturities of at least 53 months but
not more than 360 months and original maturities of at least 60 months but not
more than 360 months. The Initial Group II Fixed-Rate Home Equity Contracts had
a weighted average term to scheduled maturity, as of origination, of 255
months, and a weighted average term to scheduled maturity, as of the Cut-off
Date, of 255 months. The average principal balance per Initial Group II Fixed-
Rate Home Equity Contract as of the Cut-off Date was $63,118.05 and the
principal balances on the Initial Group II Fixed-Rate Home Equity Contracts as
of the Cut-off Date ranged from $8,759.48 to $458,500.00. The Balloon Loans
included in the Initial Group II Fixed-Rate Home Equity Contracts consisted of
323 closed-end home equity loans and have a principal balance as of the Cut-off
Date of $29,673,860.82. The weighted average of the Contract Rates of such
Balloon Loans as of the Cut-off Date was 10.91%, and such Balloon Loans had a
weighted average term to scheduled maturity, as of origination, of 198 months,
and a weighted average term to scheduled maturity, as of the Cut-off Date, of
197 months. The Initial Group II Fixed-Rate Home Equity Contracts arise from
loans relating to real property located in 48 states and the District of
Columbia. By principal balance as of the Cut-off Date, approximately 14.27% of
the Initial Group II Fixed-Rate Home Equity Contracts were secured by real
property located in California. No other state represented 5% or more of the
Cut-off Date Pool Principal Balance of the Initial Group II Fixed-Rate Home
Equity Contracts.
S-34
<PAGE>
Set forth below is a description of certain additional characteristics of the
Initial Group II Fixed-Rate Home Equity Contracts.
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES--INITIAL GROUP II FIXED-RATE
HOME EQUITY CONTRACTS
<TABLE>
<CAPTION>
% OF INITIAL
% OF INITIAL GROUP II
GROUP II FIXED-RATE
FIXED-RATE HOME EQUITY
HOME EQUITY CONTRACTS BY
CONTRACTS AGGREGATE PRINCIPAL OUTSTANDING
NUMBER OF BY NUMBER OF BALANCE PRINCIPAL
CONTRACTS AS OF CONTRACTS AS OUTSTANDING AS OF BALANCE AS OF
CUT-OFF DATE OF CUT-OFF DATE CUT-OFF DATE CUT-OFF DATE
--------------- --------------- ------------------- -------------
<S> <C> <C> <C> <C>
Alabama................. 106 4.75% $ 5,252,374.86 3.73%
Arizona................. 31 1.39 1,517,948.27 1.08
Arkansas................ 8 .36 516,785.40 .37
California.............. 209 9.37 20,090,154.67 14.27
Colorado................ 47 2.11 2,960,384.57 2.10
Connecticut............. 26 1.17 2,144,567.05 1.52
Delaware................ 16 .72 1,181,677.60 .84
District of Columbia.... 2 .09 162,253.40 .12
Florida................. 96 4.30 5,102,993.66 3.63
Georgia................. 65 2.91 4,086,370.25 2.90
Idaho................... 10 .45 345,276.66 .25
Illinois................ 95 4.26 6,263,210.04 4.45
Indiana................. 72 3.23 3,417,239.40 2.43
Iowa.................... 33 1.48 1,478,710.23 1.05
Kansas.................. 57 2.56 3,258,891.48 2.32
Kentucky................ 33 1.48 1,783,253.54 1.27
Louisianna.............. 43 1.93 2,315,062.24 1.64
Maine................... 4 .18 232,161.26 .16
Maryland................ 61 2.74 3,919,887.33 2.78
Massachusetts........... 24 1.08 2,159,889.25 1.53
Michigan................ 109 4.89 7,020,155.04 4.99
Minnesota............... 54 2.42 4,202,086.47 2.99
Mississippi............. 20 .90 909,076.40 .65
Missouri................ 64 2.87 3,199,577.87 2.27
Montana................. 3 .13 90,953.47 .06
Nebraska................ 21 .94 1,240,533.90 .88
Nevada.................. 24 1.08 1,931,729.60 1.37
New Hampshire........... 4 .18 193,374.25 .14
New Jersey.............. 34 1.52 3,036,539.36 2.16
New Mexico.............. 14 .63 1,313,053.20 .93
New York................ 75 3.36 4,975,142.61 3.53
North Carolina.......... 102 4.57 6,195,248.75 4.40
North Dakota............ 3 .13 100,697.00 .07
Ohio.................... 140 6.28 6,886,280.63 4.89
Oklahoma................ 19 .85 1,004,455.93 .71
Oregon.................. 17 .76 849,909.15 .60
Pennsylvania............ 101 4.53 6,068,618.19 4.31
Rhode Island............ 8 .36 422,724.05 .30
South Carolina.......... 41 1.84 2,303,348.72 1.64
South Dakota............ 6 .27 267,175.00 .19
Tennessee............... 29 1.30 1,451,132.98 1.03
Texas................... 102 4.57 5,378,332.10 3.82
Utah.................... 24 1.08 1,433,885.40 1.02
Vermont................. 1 .04 10,000.00 .01
Virginia................ 66 2.96 4,862,457.33 3.45
Washington.............. 44 1.97 2,788,875.32 1.98
West Virginia........... 7 .31 285,048.86 .20
Wisconsin............... 57 2.56 4,034,330.87 2.87
Wyoming................. 3 .13 109,412.17 .08
----- ------ --------------- ------
Total............... 2,230 100.00% $140,753,245.78 100.00%
===== ====== =============== ======
</TABLE>
S-35
<PAGE>
YEARS OF ORIGINATION--INITIAL GROUP II FIXED-RATE HOME EQUITY CONTRACTS
<TABLE>
<CAPTION>
% OF INITIAL
GROUP II FIXED-RATE
NUMBER OF HOME EQUITY CONTRACTS BY
CONTRACTS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
YEAR OF ORIGINATION OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ------------------- ---------- ------------------- ------------------------
<S> <C> <C> <C>
1995................... 1 $ 11,814.32 .01%
1996................... 1 21,750.28 .02
1997................... 34 1,095,449.98 .78
1998................... 2,194 139,624,231.20 99.20
----- --------------- ------
Total.............. 2,230 $140,753,245.78 100.00%
===== =============== ======
</TABLE>
DISTRIBUTION OF ORIGINAL CONTRACT AMOUNTS--INITIAL GROUP II FIXED-RATE HOME
EQUITY CONTRACTS
<TABLE>
<CAPTION>
% OF INITIAL
GROUP II FIXED-RATE
NUMBER OF HOME EQUITY CONTRACTS BY
CONTRACTS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
ORIGINAL CONTRACT AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
AMOUNT (IN DOLLARS) OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
------------------- ---------- ------------------- ------------------------
<S> <C> <C> <C>
Between$ 10,000--
$ 19,999............... 329 $ 4,778,539.22 3.39%
Between$ 20,000--
$ 29,999............... 326 7,981,406.21 5.67
Between$ 30,000--
$ 39,999............... 247 8,485,382.20 6.03
Between$ 40,000--
$ 49,999............... 230 10,142,406.33 7.21
Between$ 50,000--
$ 59,999............... 225 12,242,798.48 8.70
Between$ 60,000--
$ 69,999............... 156 10,140,569.17 7.20
Between$ 70,000--
$ 79,999............... 138 10,298,923.70 7.32
Between$ 80,000--
$ 89,999............... 115 9,690,213.99 6.88
Between$ 90,000--
$ 99,999............... 94 8,886,379.41 6.31
Between$100,000--
$109,999............... 72 7,571,789.34 5.38
Between$110,000--
$119,999............... 51 5,867,988.45 4.17
Between$120,000--
$129,999............... 50 6,229,912.09 4.43
Between$130,000--
$139,999............... 32 4,304,579.90 3.06
Between$140,000--
$149,999............... 23 3,322,481.89 2.36
Between$150,000--
$159,999............... 16 2,469,508.34 1.75
Between$160,000--
$169,999............... 17 2,786,120.06 1.98
Between$170,000--
$179,999............... 16 2,765,766.00 1.96
Between$180,000--
$189,999............... 7 1,302,680.00 .93
Between$190,000--
$199,999............... 11 2,148,002.29 1.53
Between$200,000--
$209,999............... 8 1,642,550.00 1.17
Between$210,000--
$219,999............... 10 2,141,179.40 1.52
Between$220,000--
$229,999............... 8 1,793,568.89 1.27
Between$230,000--
$239,999............... 8 1,878,845.39 1.33
Between$240,000--
$249,999............... 6 1,436,060.56 1.02
Between$250,000--
$299,999............... 23 6,265,141.28 4.45
Between$300,000--
$349,999............... 8 2,592,153.19 1.84
Between$350,000--
$399,999............... 2 724,800.00 0.51
Between$400,000--
$449,999............... 1 405,000.00 0.29
Between$450,000--
$499,999............... 1 458,500.00 0.33
----- --------------- ------
Total............... 2,230 $140,753,245.78 100.00%
===== =============== ======
</TABLE>
S-36
<PAGE>
CONTRACT RATES--INITIAL GROUP II FIXED-RATE HOME EQUITY CONTRACTS
<TABLE>
<CAPTION>
% OF INITIAL GROUP II
FIXED-RATE
NUMBER OF HOME EQUITY CONTRACTS BY
CONTRACTS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
RANGE OF HOME EQUITY AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
CONTRACTS BY CONTRACT RATE OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- -------------------------- ---------- ------------------- ------------------------
<S> <C> <C> <C>
From 7.01%-- 9.00%....... 68 $ 9,133,662.94 6.49%
From 9.01%--10.00%....... 241 25,409,761.24 18.05
From 10.01%--11.00%....... 503 45,950,704.34 32.65
From 11.01%--12.00%....... 374 22,910,288.48 16.28
From 12.01%--13.00%....... 438 17,950,001.52 12.75
From 13.01%--14.00%....... 365 12,704,850.46 9.03
From 14.01%--15.00%....... 158 4,499,336.25 3.20
From 15.01%--16.00%....... 43 1,161,472.70 .83
From 16.01%--17.00%....... 30 865,040.33 .61
Over 17.00%............... 10 168,127.52 .12
----- --------------- ------
Total................. 2,230 $140,753,245.78 100.00%
===== =============== ======
</TABLE>
REMAINING MONTHS TO MATURITY--INITIAL GROUP II FIXED-RATE HOME EQUITY CONTRACTS
<TABLE>
<CAPTION>
% OF INITIAL GROUP II
FIXED-RATE
NUMBER OF HOME EQUITY CONTRACTS BY
MONTHS REMAINING TO CONTRACTS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
SCHEDULED MATURITY AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
AS OF CUT-OFF DATE OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
------------------- ---------- ------------------- ------------------------
<S> <C> <C> <C>
31--60................. 13 $ 236,436.71 .17%
61--90................. 10 313,815.05 .22
91--120................ 132 3,951,581.56 2.81
121--150............... 11 643,259.73 .46
151--180............... 790 39,309,249.50 27.93
181--210............... 6 150,050.00 .11
211--240............... 688 44,128,882.73 31.35
271--300............... 264 17,511,194.08 12.44
301--330............... 1 276,600.00 .20
331--360............... 315 34,232,176.42 24.32
----- --------------- ------
Total.............. 2,230 $140,753,245.78 100.00%
===== =============== ======
</TABLE>
LIEN POSITION--INITIAL GROUP II FIXED-RATE HOME EQUITY CONTRACTS
<TABLE>
<CAPTION>
% OF INITIAL
GROUP II
FIXED-RATE % OF INITIAL GROUP II
HOME EQUITY FIXED-RATE
NUMBER OF CONTRACTS BY HOME EQUITY CONTRACTS BY
CONTRACTS NUMBER OF AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
AS OF CUT- CONTRACTS AS OF BALANCE OUTSTANDING BALANCE AS OF
OFF DATE CUT-OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
---------- --------------- ------------------- ------------------------
<S> <C> <C> <C> <C>
First................... 1,282 57.49% $110,697,689.76 78.65%
Second.................. 933 41.84 29,695,486.52 21.10
Third................... 15 .67 360,069.50 .26
----- ------ --------------- ------
Total............... 2,230 100.00% $140,753,245.78 100.00%
===== ====== =============== ======
</TABLE>
S-37
<PAGE>
COMBINED LOAN-TO-VALUE RATIO--INITIAL GROUP II FIXED-RATE HOME EQUITY CONTRACTS
<TABLE>
<CAPTION>
% OF INITIAL
GROUP II
FIXED-RATE
NUMBER OF HOME EQUITY CONTRACTS BY
CONTRACTS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
COMBINED LOAN-TO-VALUE RATIO OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ---------------------------- ---------- ------------------- ------------------------
<S> <C> <C> <C>
From 0.00%-10.00%........... 2 $ 49,995.51 .04%
From 10.01%-20.00%.......... 7 201,326.00 .14
From 20.01%-30.00%.......... 8 188,300.00 .13
From 30.01%-40.00%.......... 20 664,935.89 .47
From 40.01%-50.00%.......... 31 1,108,894.36 .79
From 50.01%-60.00%.......... 44 1,898,282.09 1.35
From 60.01%-70.00%.......... 73 3,574,239.66 2.54
From 70.01%-80.00%.......... 266 15,182,751.36 10.79
From 80.01%-90.00%.......... 694 44,222,003.24 31.42
Over 90.01%................. 1,085 73,662,517.67 52.33
----- --------------- ------
Total................... 2,230 $140,753,245.78 100.00%
===== =============== ======
</TABLE>
ADJUSTABLE RATE HOME EQUITY CONTRACTS
Sub-Pool HE includes Adjustable Rate Home Equity Contracts. This
Prospectus Supplement contains information regarding certain Adjustable Rate
Home Equity Contracts, which will represent approximately 41.0% of all
Adjustable Rate Home Equity Contracts by aggregate principal balance as of the
Cut-off Date, and which consist of closed-end home equity loans originated
through September 25, 1998 (the "Initial Adjustable Rate Home Equity
Contracts"). The information for each Initial Adjustable Rate Home Equity
Contract is as of the Cut-off Date for such Contract. The Agreement also
provides that additional Adjustable Rate Home Equity Contracts (the "Subsequent
Adjustable Rate Home Equity Contracts") will be purchased by the Trust up to 60
days after the Closing Date. See "Description of the Certificates--Conveyance
of Subsequent Home Equity Contracts and Sub-Pool HE Pre-Funding Account" below.
The Initial Adjustable Rate Home Equity Contracts have an aggregate
principal balance of $112,688,324.74. Each Adjustable Rate Home Equity Contract
is a closed-end home equity loan originated by the Company or by a Company-
approved correspondent lender and purchased by the Company. Each Adjustable
Rate Home Equity Contract is secured by a lien on the related real estate.
The Initial Adjustable Rate Home Equity Contracts have Contract Rates
subject to annual or semiannual adjustment after an initial period of up to 36
months on the day of the month specified in the Adjustable Rate Home Equity
Contract (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 Home Equity Contract (the "Gross
Margin"). The Contract Rates will not increase on any Adjustment Date by more
than 3% per annum. All of the Initial Adjustable Rate Home Equity Contracts
further provide that the Contract Rate will in no event be more than the fixed
percentage set forth in the Adjustable Rate Home Equity Contract (such rate,
the "Maximum Contract Rate"). Each Initial Adjustable Rate Home Equity Contract
provides that in no event will the Contract Rate be less than the initial
Contract Rate (such rate, the "Minimum Contract Rate"). Effective with the
first payment due on an Initial Adjustable Rate Home Equity Contract 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 Home Equity Contract over its remaining term, and pay interest at the
Contract Rate as so adjusted. Substantially all of the Initial Adjustable Rate
Home Equity Contracts were originated with a Contract Rate less than the sum of
(i) the Six-Month LIBOR Index at the time the initial Contract 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 Home Equity Contract.
S-38
<PAGE>
The Company will make certain representations and warranties in the
Agreement, including that (a) each Adjustable Rate Home Equity Contract is
fully amortizing and provides for monthly payments, over the term of such loan,
computed on the simple interest method, (b) each Initial Adjustable Rate Home
Equity Contract has its last scheduled payment due no later than October 2028,
and (c) each Adjustable Rate Home Equity Contract is secured by a lien on the
related real estate. The Adjustable Rate Home Equity Contracts will be
originated or acquired by the Company in the ordinary course of the Company's
business. A detailed listing of the Initial Adjustable Rate Home Equity
Contracts is appended to the Agreement. See "Description of the Certificates"
herein and in the Prospectus. The Contract Rates on the Initial Adjustable Rate
Home Equity Contracts as of the Cut-off Date range from 7.00% to 12.69% with a
weighted average Contract Rate of 9.10%. As of the Cut-off Date, the weighted
average Maximum Contract Rate of the Initial Adjustable Rate Home Equity
Contracts was 15.28%, with Maximum Contract Rates that range from 10.30% to
19.87%. As of the Cut-Off Date, the Initial Adjustable Rate Home Equity
Contracts had a weighted average gross margin of 6.51% and gross margins
ranging from 4.35% to 11.45%. As of the Cut-off Date, the Initial Adjustable
Rate Home Equity Contracts had remaining maturities of at least 178 months but
not more than 360 months and original maturities of at least 180 months but not
more than 360 months. The Initial Adjustable Rate Home Equity Contracts 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 Home
Equity Contract as of the Cut-off Date was $120,522.27 and the principal
balances on the Initial Adjustable Rate Home Equity Contracts as of the Cut-off
Date ranged from $22,961.46 to $400,000.00. The Initial Adjustable Rate Home
Equity Contracts arise from loans relating to real property located in 45
states and the District of Columbia. By principal balance as of the Cut-off
Date, approximately 12.22% of the Initial Adjustable Rate Home Equity Contracts
were secured by real property located in Maryland, 10.16% in California, 5.45%
in Ohio, 5.31% in Illinois, 5.28% in North Carolina and 5.26% in Washington. No
other state represented 5% or more of the Cut-off Date Pool Principal Balance
of the Initial Adjustable Rate Home Equity Contracts.
S-39
<PAGE>
Set forth below is a description of certain additional characteristics of
the Initial Adjustable Rate Home Equity Contracts.
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES--INITIAL ADJUSTABLE RATE HOME
EQUITY CONTRACTS
<TABLE>
<CAPTION>
% OF INITIAL
% OF INITIAL ADJUSTABLE
ADJUSTABLE RATE HOME
RATE HOME EQUITY CONTRACTS
EQUITY CONTRACTS AGGREGATE PRINCIPAL BY OUTSTANDING
NUMBER OF BY NUMBER OF BALANCE PRINCIPAL
CONTRACTS AS OF CONTRACTS AS OUTSTANDING AS OF BALANCE AS OF
STATE CUT-OFF DATE OF CUT-OFF DATE CUT-OFF DATE CUT-OFF DATE
- ------------------------ --------------- ----------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Alabama................. 46 4.92% $ 4,135,085.89 3.67%
Arizona................. 39 4.17 4,746,897.79 4.21
Arkansas................ 1 .11 197,497.00 .18
California.............. 65 6.95 11,448,044.38 10.16
Colorado................ 32 3.42 4,061,629.11 3.60
Connecticut............. 3 .32 395,884.19 .35
Delaware................ 1 .11 75,007.61 .07
District of Columbia.... 2 .21 350,836.76 .31
Florida................. 34 3.64 2,989,057.48 2.65
Georgia................. 33 3.53 4,123,230.40 3.66
Idaho................... 4 .43 434,656.56 .39
Illinois................ 51 5.45 5,987,705.39 5.31
Indiana................. 40 4.28 3,754,323.44 3.33
Iowa.................... 6 .64 479,710.93 .43
Kansas.................. 7 .75 866,413.58 .77
Kentucky................ 15 1.60 1,549,351.69 1.37
Louisiana............... 7 .75 674,336.70 .60
Maine................... 3 .32 238,702.16 .21
Maryland................ 83 8.88 13,774,932.98 12.22
Massachusetts........... 18 1.93 2,317,604.46 2.06
Michigan................ 15 1.60 2,097,982.71 1.86
Minnesota............... 4 .43 301,035.31 .27
Mississippi............. 3 .32 330,533.95 .29
Missouri................ 8 .86 669,188.86 .59
Montana................. 2 .21 109,798.05 .10
Nebraska................ 1 .11 55,777.59 .05
Nevada.................. 6 .64 762,703.03 .68
New Hampshire........... 1 .11 49,052.72 .04
New Jersey.............. 11 1.18 1,507,571.44 1.34
New Mexico.............. 3 .32 278,000.00 .25
New York................ 8 .86 1,141,178.58 1.01
North Carolina.......... 56 5.99 5,952,251.69 5.28
North Dakota............ 3 .32 188,505.47 .17
Ohio.................... 70 7.49 6,142,190.32 5.45
Oklahoma................ 3 .32 229,756.27 .20
Oregon.................. 14 1.50 1,931,180.86 1.71
Pennsylvania............ 30 3.21 3,640,120.11 3.23
Rhode Island............ 8 .86 934,821.55 .83
South Carolina.......... 19 2.03 1,434,856.74 1.27
Tennessee............... 27 2.89 2,813,998.70 2.50
Texas................... 42 4.49 5,043,617.77 4.48
Utah.................... 18 1.93 1,978,516.41 1.76
Virginia................ 27 2.89 4,414,442.40 3.92
Washington.............. 43 4.60 5,932,567.22 5.26
West Virginia........... 2 .21 137,067.34 .12
Wisconsin............... 21 2.25 2,010,701.15 1.78
--- ------ --------------- ------
Total............... 935 100.00% $112,688,324.74 100.00%
=== ====== =============== ======
</TABLE>
S-40
<PAGE>
YEARS OF ORIGINATION--INITIAL ADJUSTABLE RATE HOME EQUITY CONTRACTS
<TABLE>
<CAPTION>
% OF INITIAL
ADJUSTABLE RATE
HOME EQUITY
NUMBER OF CONTRACTS BY
CONTRACTS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
YEAR OF ORIGINATION OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ------------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
1997...................... 1 $ 49,910.38 .04%
1998...................... 934 112,638,414.36 99.96
--- --------------- ------
Total................. 935 $112,688,324.74 100.00%
=== =============== ======
</TABLE>
DISTRIBUTION OF ORIGINAL CONTRACT AMOUNTS--INITIAL ADJUSTABLE RATE HOME EQUITY
CONTRACTS
<TABLE>
<CAPTION>
% OF INITIAL
ADJUSTABLE RATE
HOME EQUITY
NUMBER OF CONTRACTS BY
CONTRACTS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
ORIGINAL CONTRACT AMOUNT AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
(IN DOLLARS) OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
------------------------ ---------- ------------------- ---------------------
<S> <C> <C> <C>
Between$ 20,000--
$ 29,999................. 4 $ 102,073.39 .09%
Between$ 30,000--
$ 39,999................. 13 468,232.76 .42
Between$ 40,000--
$ 49,999................. 22 1,006,294.54 .89
Between$ 50,000--
$ 59,999................. 65 3,579,682.01 3.18
Between$ 60,000--
$ 69,999................. 79 5,069,442.47 4.50
Between$ 70,000--
$ 79,999................. 80 6,002,555.27 5.33
Between$ 80,000--
$ 89,999................. 82 6,872,986.90 6.10
Between$ 90,000--
$ 99,999................. 72 6,839,302.18 6.07
Between$100,000--
$109,999................. 50 5,238,805.08 4.65
Between$110,000--
$119,999................. 79 9,087,096.10 8.06
Between$120,000--
$129,999................. 66 8,219,992.39 7.29
Between$130,000--
$139,999................. 54 7,266,239.24 6.45
Between$140,000--
$149,999................. 39 5,631,425.90 5.00
Between$150,000--
$159,999................. 29 4,488,939.49 3.98
Between$160,000--
$169,999................. 31 5,070,756.37 4.50
Between$170,000--
$179,999................. 30 5,234,638.32 4.65
Between$180,000--
$189,999................. 18 3,319,779.44 2.95
Between$190,000--
$199,999................. 17 3,322,196.59 2.95
Between$200,000--
$249,999................. 66 14,568,963.21 12.93
Between$250,000--
$299,999................. 27 7,325,592.05 6.50
Over$300,000.............. 12 3,973,331.04 3.53
--- --------------- ------
Total................. 935 $112,688,324.74 100.00%
=== =============== ======
</TABLE>
CURRENT CONTRACT RATES--INITIAL ADJUSTABLE RATE HOME EQUITY CONTRACTS
<TABLE>
<CAPTION>
% OF
INITIAL
ADJUSTABLE RATE
HOME EQUITY
NUMBER OF CONTRACTS BY
CONTRACTS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
RANGE OF CONTRACTS BY AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
CONTRACT RATE OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
---------------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
From 7.00%--8.00%......... 148 $ 22,798,039.60 20.23%
From 8.01%--9.00%......... 323 41,603,567.86 36.92
From 9.01%--10.00%....... 285 30,024,179.80 26.64
From 10.01%--11.00%....... 142 14,813,536.38 13.15
From 11.01%--12.00%....... 32 3,196,855.32 2.84
From 12.01%--13.00%....... 5 252,145.78 .22
--- --------------- ------
Total................. 935 $112,688,324.74 100.00%
=== =============== ======
</TABLE>
S-41
<PAGE>
REMAINING MONTHS TO MATURITY--INITIAL ADJUSTABLE RATE HOME EQUITY CONTRACTS
<TABLE>
<CAPTION>
% OF
INITIAL
ADJUSTABLE RATE HOME
NUMBER OF EQUITY CONTRACTS BY
MONTHS REMAINING TO CONTRACTS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
SCHEDULED MATURITY AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
AS OF CUT-OFF DATE OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
------------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
Less than 346............. 3 $ 280,446.34 .25%
346-360................... 932 112,407,878.40 99.75
--- --------------- ------
Total................. 935 $112,688,324.74 100.00%
=== =============== ======
</TABLE>
LIEN POSITION--INITIAL ADJUSTABLE RATE HOME EQUITY CONTRACTS
<TABLE>
<CAPTION>
% OF
INITIAL
ADJUSTABLE % OF
RATE HOME INITIAL
EQUITY ADJUSTABLE RATE HOME
NUMBER OF CONTRACTS BY EQUITY CONTRACTS BY
CONTRACTS NUMBER OF AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
AS OF CUT- CONTRACTS AS OF BALANCE OUTSTANDING BALANCE AS OF
OFF DATE CUT-OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
---------- --------------- ------------------- ---------------------
<S> <C> <C> <C> <C>
First................... 935 100.00% $112,688,324.74 100.00%
--- ------ --------------- ------
Total............... 935 100.00% $112,688,324.74 100.00%
=== ====== =============== ======
</TABLE>
LOAN-TO-VALUE RATIO--INITIAL ADJUSTABLE RATE HOME EQUITY CONTRACTS
<TABLE>
<CAPTION>
% OF
INITIAL
ADJUSTABLE RATE HOME
NUMBER OF EQUITY CONTRACTS BY
CONTRACTS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
LOAN-TO-VALUE RATIO OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ------------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
From 30.01% to 40.00%..... 2 $ 351,300.00 .31%
From 40.01% to 50.00%..... 1 65,000.00 .06
From 50.01% to 60.00%..... 8 871,113.90 .77
From 60.01% to 70.00%..... 9 561,433.84 .50
From 70.01% to 80.00%..... 171 19,606,645.73 17.40
From 80.01% to 90.00%..... 466 55,630,672.17 49.37
Over 90.00%............... 278 35,602,159.10 31.59
--- --------------- ------
Total................. 935 $112,688,324.74 100.00%
=== =============== ======
</TABLE>
S-42
<PAGE>
MONTH OF NEXT RATE ADJUSTMENT--INITIAL ADJUSTABLE RATE HOME EQUITY CONTRACTS
<TABLE>
<CAPTION>
% OF
INITIAL
ADJUSTABLE RATE
NUMBER OF HOME EQUITY CONTRACTS
CONTRACTS AGGREGATE PRINCIPAL BY OUTSTANDING PRINCIPAL
AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
MONTH OF NEXT RATE ADJUSTMENT OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ----------------------------- ---------- ------------------- ------------------------
<S> <C> <C> <C>
February 1999............... 2 $ 216,900.00 .19%
March 1999.................. 1 119,000.00 .11
December 1999............... 1 49,910.38 .04
January 2000................ 2 325,315.89 .29
February 2000............... 4 502,957.46 .45
March 2000.................. 9 789,991.46 .70
April 2000.................. 20 2,340,382.68 2.08
May 2000.................... 51 5,989,739.83 5.32
June 2000................... 137 15,411,221.21 13.68
July 2000................... 212 26,848,794.16 23.83
August 2000................. 296 37,556,143.35 33.33
September 2000.............. 166 19,129,184.70 16.98
October 2000................ 2 130,100.00 .12
February 2001............... 1 58,788.69 .05
March 2001.................. 1 78,102.33 .07
June 2001................... 2 172,334.43 .15
July 2001................... 2 168,478.92 .15
August 2001................. 20 2,198,723.25 1.95
September 2001.............. 6 602,256.00 .53
--- --------------- ------
Total................... 935 $112,688,324.74 100.00%
=== =============== ======
</TABLE>
S-43
<PAGE>
DISTRIBUTION OF GROSS MARGIN--INITIAL ADJUSTABLE RATE HOME EQUITY CONTRACTS
<TABLE>
<CAPTION>
% OF
INITIAL
ADJUSTABLE RATE
NUMBER OF HOME EQUITY CONTRACTS
CONTRACTS AGGREGATE PRINCIPAL BY OUTSTANDING PRINCIPAL
AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
GROSS MARGIN OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ------------ ---------- ------------------- ------------------------
<S> <C> <C> <C>
4.250 to 4.499%........ 3 $ 281,270.00 .25%
4.500 to 4.749%........ 2 242,900.00 .22
4.750 to 4.999%........ 6 502,872.07 .45
5.000 to 5.249%........ 18 2,230,550.82 1.98
5.250 to 5.499%........ 32 3,923,537.51 3.48
5.500 to 5.749%........ 81 9,191,686.52 8.16
5.750 to 5.999%........ 89 9,909,605.04 8.79
6.000 to 6.249%........ 141 18,449,309.84 16.37
6.250 to 6.499%........ 98 11,545,884.78 10.25
6.500 to 6.749%........ 67 6,613,260.39 5.87
6.750 to 6.999%........ 195 27,828,508.51 24.70
7.000 to 7.249%........ 80 10,006,699.34 8.88
7.250 to 7.499%........ 37 3,269,413.78 2.90
7.500 to 7.749%........ 23 2,436,513.93 2.16
7.750 to 7.999%........ 15 1,672,913.26 1.48
8.000 to 8.249%........ 13 1,540,314.85 1.37
8.250 to 8.499%........ 6 582,751.03 .52
8.500 to 8.749%........ 6 522,246.71 .46
8.750 to 8.999%........ 5 466,523.93 .41
9.000 to 9.249%........ 8 619,715.38 .55
9.250 to 9.499%........ 1 127,000.00 .11
9.500 to 9.749%........ 1 57,049.99 .05
Over 9.750%............ 8 667,797.06 .59
--- --------------- ------
Total.............. 935 $112,688,324.74 100.00%
=== =============== ======
</TABLE>
S-44
<PAGE>
MAXIMUM CONTRACT RATES--INITIAL ADJUSTABLE RATE HOME EQUITY CONTRACTS
<TABLE>
<CAPTION>
% OF
INITIAL
ADJUSTABLE RATE
NUMBER OF HOME EQUITY CONTRACTS
CONTRACTS AGGREGATE PRINCIPAL BY OUTSTANDING PRINCIPAL
AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
MAXIMUM CONTRACT RATES OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ---------------------- ---------- ------------------- ------------------------
<S> <C> <C> <C>
Less than 13.000%...... 8 $ 864,517.66 .77%
13.000 to 13.249%...... 3 482,220.00 .43
13.250 to 13.499%...... 1 163,555.63 .15
13.500 to 13.749% ..... 23 3,540,488.60 3.14
13.750 to 13.999%...... 99 14,876,037.87 13.20
14.000 to 14.249%...... 14 1,520,366.22 1.35
14.250 to 14.499%...... 39 5,495,406.47 4.88
14.500 to 14.749%...... 73 9.275,691.79 8.23
14.750 to 14.999%...... 149 18,807,345.62 16.69
15.000 to 15.249%...... 44 5,062,757.90 4.49
15.250 to 15.499%...... 79 9,873,345.98 8.76
15.500 to 15.749%...... 65 7,349,839.68 6.52
15.750 to 15.999%...... 83 9,268,506.04 8.22
16.000 to 16.249%...... 21 1,899,459.66 1.69
16.250 to 16.499%...... 51 5,519,636.13 4.90
16.500 to 16.749%...... 43 4,616,325.71 4.10
16.750 to 16.999%...... 69 7,033,657.74 6.24
17.000 to 17.249%...... 16 1,422,631.76 1.26
17.250 to 17.499%...... 12 1,238,191.90 1.10
17.500 to 17.749%...... 15 1,397,890.30 1.24
17.750 to 17.999%...... 12 1,454,666.73 1.29
18.000 to 18.249%...... 2 334,050.00 .30
18.250 to 18.499%...... 4 294,022.56 .26
18.500 to 18.749%...... 3 118,412.50 .11
18.750 to 18.999%...... 3 414,917.46 .37
19.000 to 19.249%...... 1 60,720.00 .05
19.250 to 19.499%...... 0 .00 .00
19.500 to 19.749%...... 2 202,300.00 .18
19.750 to 19.999%...... 1 101,362.83 .09
--- --------------- ------
Total.............. 935 $112,688,324.74 100.00%
=== =============== ======
</TABLE>
S-45
<PAGE>
MINIMUM CONTRACT RATES--INITIAL ADJUSTABLE RATE HOME EQUITY CONTRACTS
<TABLE>
<CAPTION>
% OF
INITIAL
ADJUSTABLE RATE
NUMBER OF HOME EQUITY CONTRACTS
CONTRACTS AGGREGATE PRINCIPAL BY OUTSTANDING PRINCIPAL
AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
MINIMUM CONTRACT RATES OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ---------------------- ---------- ------------------- ------------------------
<S> <C> <C> <C>
Less than 7.250%...... 5 $ 779,471.65 .69%
7.250 to 7.499%...... 2 288,900.00 .26
7.500 to 7.749%...... 25 3,927,318.28 3.49
7.750 to 7.999%...... 117 18,073,549.67 16.04
8.000 to 8.249%...... 19 2,077,160.45 1.84
8.250 to 8.499%...... 57 8,585,694.04 7.62
8.500 to 8.749%...... 79 9,865,728.68 8.75
8.750 to 8.999%...... 154 18,765,544.95 16.65
9.000 to 9.249%...... 46 5,595,481.52 4.97
9.250 to 9.499%...... 75 8,166,749.48 7.25
9.500 to 9.749%...... 75 7,985,942.51 7.09
9.750 to 9.999%...... 96 9,836,476.31 8.73
10.000 to 10.249%...... 21 1,756,931.93 1.56
10.250 to 10.499%...... 44 4,998,214.17 4.44
10.500 to 10.749%...... 37 3,633,607.91 3.22
10.750 to 10.999%...... 41 4,350,947.85 3.86
11.000 to 11.249%...... 11 1,229,746.89 1.09
11.250 to 11.499%...... 10 635,033.76 .56
11.500 to 11.749%...... 6 636,383.45 .56
11.750 to 11.999%...... 10 1,258,575.46 1.12
12.000 to 12.249%...... 1 60,720.00 .05
12.250 to 12.499%...... 1 61,733.28 .05
12.500 to 12.749%...... 3 118,412.50 .11
--- --------------- ------
Total................ 935 $112,688,324.74 100.00%
=== =============== ======
</TABLE>
S-46
<PAGE>
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 Sub-
Pool HE, and thus the information presented is not necessarily indicative of
the Company's delinquency experience with respect to home equity loans similar
to the Home Equity Contracts comprising Sub-Pool HE. 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.
DELINQUENCY EXPERIENCE--HOME EQUITY CONTRACTS
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------
AT SEPTEMBER 30,
1998 1997 1996
---------------- ------- -------
<S> <C> <C> <C>
Number of Contracts Outstanding(1)......... 100,161 65,355 17,731
Number of Contracts Delinquent(2)(3)
30-59 Days............................... 1,846 1,141 504
60-89 Days............................... 531 283 94
90 Days or More.......................... 686 411 52
------- ------- -------
Total Contracts Delinquent................. 3,063 1,835 650
Delinquencies as a Percent of Contracts
Outstanding(4)............................ 3.06% 2.81% 3.67%
</TABLE>
- --------
(1) Excludes defaulted contracts not yet liquidated.
(2) A contract is considered delinquent by the Company if any payment of $25 or
more is past-due 30 days or more.
(3) The period of delinquency is based on the number of days that payments are
contractually past-due (assuming 30-day months). Consequently, a contract
due on the first day of a month is not 30 days delinquent until the first
day of the next month. The information does not include as delinquent the
home equity contracts of obligors who have entered bankruptcy proceedings,
provided that such obligors are current under their bankruptcy payment
plan.
(4) By number of contracts.
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-47
<PAGE>
YIELD AND PREPAYMENT CONSIDERATIONS
The yield on any Certificate will depend on the price paid by the
Certificateholder, the timing of principal payments, and the timing and amount
of any liquidation losses on the related Contracts.
Higher than expected "Principal Prepayments" (payments received from
Obligors, other than regular payments of principal, which are applied upon
receipt or, in the case of partial prepayments, upon the next scheduled payment
date for such Contract, to reduce the outstanding principal balance on the
Contracts) will increase the yield on Certificates purchased at a price less
than the undivided ownership interest in the aggregate principal balance of the
Contracts represented by such Certificates and will decrease the yield on
Certificates purchased at a price greater than the undivided ownership interest
in the aggregate principal balance of the Contracts represented by such
Certificates. The Company has no significant experience with respect to the
rate of Principal Prepayments on home improvement contracts or home equity
loans. Because the Contracts have scheduled due dates throughout the calendar
month, 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 the preceding month (thus paying less than 30 days' interest for that
month) while very few Contracts prepaid after their respective due dates in the
preceding month. In addition, liquidations of defaulted contracts or the
Servicer's exercise of its option to repurchase the entire remaining pool of
Contracts (see "Description of the Certificates--Repurchase Option" herein)
will affect the timing of principal distributions on the Certificates. Under
the Agreement, the Company has the option of substituting new contracts for
Contracts which are prepaid in full prior to February 1, 1999. See "Description
of the Certificates--Conveyance of Contracts" herein. There is no assurance
that the Company will exercise its option to make any such substitutions nor,
should it desire to exercise such option, that contracts meeting the
eligibility criteria will be available therefor. To the extent any such
substitutions are made, the impact on the applicable Sub-Pool and related
Certificates of what would otherwise have consituted a Principal Prepayment
will be averted.
The Class HI: 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 Sub-Pool HI Pre-Funding Account on such Payment Date after the
purchase by the Trust of the Subsequent Home Improvement Contracts. The Class
HE: A-1B ARM Certificates, the Class HE: A-1 Certificates and the Class HE: A-2
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 Sub-Pool
HE: Pre-Funding Account on such Payment Date after the purchase by the Trust of
the Subsequent Home Equity Contracts. Any amounts remaining which had been
allocated to the purchase of Subsequent Adjustable Rate Home Equity Contracts
will be paid to the Class HE: A-1B ARM Certificateholders; any amounts
remaining which had been allocated to the purchase of Subsequent Group I Home
Equity Contracts will be paid to the Class HE: A-1 Certificateholders and any
amounts remaining which had been allocated to the purchase of Subsequent Group
II Home Equity Contracts will be paid to the Class HE: A-2 Certificateholders.
The Company believes that the principal amount of Subsequent Home Improvement
Contracts and Subsequent Home Equity Contracts 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 Home
Improvement Contracts and Subsequent Home Equity Contracts purchased by the
Trust will be identical to the Pre-Funded Amount, and that consequently, Class
HI: A-1 Certificateholders, Class HE: A-1B ARM Certificateholders, Class HE: A-
1 Certificateholders and Class HE: A-2 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
Sub-Pool HI Certificates were priced using a prepayment assumption of 100% of
the applicable Prepayment Assumption and the Sub-Pool HE Certificates were
priced using a prepayment assumption of, with respect to the Fixed-Rate
Contracts, 125% of the applicable Prepayment Assumption (as described below),
and with respect to the Adjustable Rate Contracts, 30% CPR. There
S-48
<PAGE>
can be no assurance that the Contracts comprising each Sub-Pool will prepay at
the applicable rate, and it is unlikely that prepayments or liquidations of the
Contracts in either Sub-Pool 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 amount adjustment) the
principal balance of such Class, or in the case of the Class HE: A-5 IO
Certificates, the Notional Principal Amount, immediately following the
preceding Payment Date. Interest on each Class of Certificates other than the
Class HE: A-1B ARM Certificates and Class HE: A-1 Certificates (prior to the
February 2014 Payment Date), will be computed on the basis of a 360-day year of
twelve 30-day months. Interest on the Class HE: A-1B ARM Certificates and Class
HE: A-1 Certificates (prior to the February 2014 Payment Date) will be computed
on the basis of actual days elapsed in a 360-day year. On and after the
February 2014 Payment Date, interest on the Class HE: A-1 Certificates will be
computed on the basis of a 360-day year of twelve 30-day months.
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 Sub-Pool HI Certificates" and "--Distributions
on Sub-Pool HE Certificates," as applicable. As required by applicable state
laws, interest paid by Obligors on the Contracts is computed according to the
simple interest method.
The final scheduled payment date on the Initial Home Improvement Contract
with the latest maturity is in November 2023. The expected final maturity of
each Class of Sub-Pool HI Certificates, based on the assumptions that there are
no defaults, prepayments or delinquencies with respect to payments due under
the Home Improvement Contracts and that the repurchase option has not been
exercised, are as follows:
<TABLE>
<CAPTION>
CLASS EXPECTED FINAL MATURITY
----- -----------------------
<S> <C>
HI: A-1.............................................. August 15, 2007
HI: A-2.............................................. July 15, 2012
HI: A-3.............................................. August 15, 2017
HI: M-1.............................................. February 15, 2021
HI: M-2.............................................. September 15, 2023
HI: B-1.............................................. February 15, 2015
HI: B-2.............................................. November 15, 2023
</TABLE>
The final scheduled payment date on the Initial Home Equity Contract with
the latest maturity is in October 2028. The expected final maturity of each
Class of Sub-Pool HE Certificates, based on the assumptions that there are no
defaults, prepayments or delinquencies with respect to payments due under the
Home Equity Contracts and that the repurchase option has not been exercised,
are as follows:
<TABLE>
<CAPTION>
CLASS EXPECTED FINAL MATURITY
----- -----------------------
<S> <C>
HE: A-1A NAS......................................... October 15, 2012
HE: A-1B ARM......................................... September 15, 2028
HE: A-1.............................................. August 15, 2028
HE: A-2.............................................. February 15, 2012
HE: A-3.............................................. September 15, 2013
HE: A-4.............................................. July 15, 2027
HE: A-5 IO........................................... December 15, 2000
HE: M-1.............................................. July 15, 2028
HE: M-2.............................................. June 15, 2028
HE: B................................................ December 15, 2028
</TABLE>
WEIGHTED AVERAGE LIFE OF THE CERTIFICATES
The following information is given solely to illustrate the effect of
prepayments of the related Contracts on the weighted average life of each Class
of Certificates under the stated assumptions and is
S-49
<PAGE>
not a prediction of the prepayment rate that might actually be experienced by
the Contracts in either Sub-Pool.
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 Contracts is paid.
Principal payments on Contracts may be in the form of scheduled amortization or
prepayments (for this purpose, the term "prepayment" includes repayments and
liquidations due to default or other dispositions of the Contracts).
The rate of principal payments on pools of home improvement contracts and
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 contracts or loans. Other
factors affecting prepayment of Contracts include changes in obligors' housing
needs, job transfers, unemployment and obligors' net equity in their homes. In
the case of home improvement contracts and home equity loans secured by real
estate, in general, if prevailing interest rates fall significantly below the
interest rates on such contracts or loans, the contracts or loans are likely to
be subject to higher prepayment rates than if prevailing interest rates
remained at or above the rates borne by such contracts or loans. Conversely, if
prevailing interest rates rise above the interest rates on such home
improvement contracts or home equity loans, the rate of prepayment would be
expected to decrease. However, as described above and in "Description of the
Certificates--Conveyance of Contracts" herein, the Company has the option of
substituting new contracts for Contracts which are prepaid in full prior to
February 1, 1999, which, if exercised, would neutralize the impact to related
Certificateholders of such prepayments.
Sub-Pool HI Certificates
The percentages and weighted average lives in the following tables were
determined assuming that: (i) scheduled interest and principal payments on the
Home Improvement Contracts 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 does not exercise its option to repurchase the
Contracts, as described under "Description of the Certificates--Repurchase
Option"; (iii) the aggregate principal balance of the Initial Home Improvement
Contracts as of the Cut-off Date is $163,223,007.53 and such Contracts have the
characteristics set forth under "The Contracts--Home Improvement Contracts";
(iv) the Home Improvement Contracts will, as of the Cut-off Date, be grouped
into 10 pools having the additional characteristics set forth below under
"Assumed Initial Home Improvement Contract Characteristics" and "Assumed
Subsequent Home Improvement Contract Characteristics"; (v) each Class of the
Sub-Pool HI Certificates has an Original Principal Balance as shown on the
cover page of this Prospectus Supplement; (vi) the Subsequent Home Improvement
Contracts will have the characteristics set forth in the table below and have
their first scheduled payment date in December 1998; (vii) the Pass-Through
Rates for the Certificates are as indicated in "Summary of the Terms of the
Certificates"; (viii) no interest shortfalls will arise in connection with
prepayments in full of the Home Improvement Contracts; (ix) no delinquencies or
losses are experienced on the Home Improvement Contracts; (x) distributions are
made on the Sub-Pool HI Certificates on the 15th day of each month, commencing
in January 1999; (xi) the Sub-Pool HI Certificates are issued on December 7,
1998 and (xii) the Company does not exercise its option to substitute new
contracts for Sub-Pool HI Contracts prepaid in full prior to February 1, 1999
(see "Description of the Certificates--Conveyance of Contracts" herein). No
representation is made that the Home Improvement Contracts will not experience
delinquencies or losses.
The Prepayment Assumption (as defined below) used in this Prospectus
Supplement with respect to the Home Improvement Contracts represents an assumed
rate of prepayment each month relative to the then outstanding principal
balance of a pool of home improvement loans for the life of such home
improvement loans. The "100% Prepayment Assumption for Home Improvement
Contracts" assumes a constant prepayment of 12% per annum of the then
outstanding principal balance of such loans in the first month of the life of
such loans and an additional 1.09% (precisely, 12/11%) per annum in each month
S-50
<PAGE>
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
for Home Improvement Contracts assumes a constant prepayment rate of 24% per
annum each month.
It is not likely that the Home Improvement Contracts will prepay at any
constant percentage of the Prepayment Assumption or that all of the Home
Improvement Contracts will prepay at the same rate.
Investors are urged to make their investment decisions on a basis that
includes their determination as to anticipated prepayment rates under a variety
of the assumptions discussed herein.
PREPAYMENT SCENARIOS
<TABLE>
<CAPTION>
SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIOV
---------- ----------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
Home Improvement
Contracts (1).......... 60% 80% 100% 120% 140%
</TABLE>
- --------
(1) As a percentage of the Prepayment Assumption for Home Improvement
Contracts.
ASSUMED INITIAL HOME IMPROVEMENT CONTRACT CHARACTERISTICS
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
WEIGHTED AVERAGE AVERAGE
CUT-OFF DATE AVERAGE REMAINING TERM ORIGINAL TERM
POOL PRINCIPAL CONTRACT TO MATURITY TO MATURITY
POOL BALANCE RATE (MONTHS) (MONTHS)
- ---- -------------- -------- -------------- -------------
<S> <C> <C> <C> <C>
1. ........................ $11,943,557.54 13.371% 47 65
2. ........................ 39,649,329.66 13.029 105 118
3. ........................ 33,404,020.50 12.574 175 178
4. ........................ 44,249,770.12 13.456 235 240
5. ........................ 33,976,329.71 12.348 299 300
</TABLE>
It is not likely that the Home Improvement Contracts will prepay at any
constant percentage of the CPR to maturity or that all of the Home Improvement
Contracts will prepay at the same rate.
Investors are urged to make their investment decisions on a basis that
includes their determination as to anticipated prepayment rates under a variety
of the assumptions discussed herein.
ASSUMED SUBSEQUENT HOME IMPROVEMENT CONTRACT CHARACTERISTICS
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
WEIGHTED AVERAGE AVERAGE
CUT-OFF DATE AVERAGE REMAINING TERM ORIGINAL TERM
POOL PRINCIPAL LOAN TO MATURITY TO MATURITY
POOL BALANCE RATE (MONTHS) (MONTHS)
- ---- -------------- -------- -------------- -------------
<S> <C> <C> <C> <C>
1. ........................ $ 6,349,754.35 13.371% 47 65
2. ........................ 21,079,439.92 13.029 105 118
3. ........................ 17,759,141.19 12.574 175 178
4. ........................ 23,525,249.45 13.456 235 240
5. ........................ 18,063,407.56 12.348 299 300
</TABLE>
Based on the foregoing assumptions, the following tables indicate the
projected weighted average lives of each Class of Sub-Pool HI Certificates, and
set forth the percentages of the Original Principal Balance of each Class that
would be outstanding after each of the dates shown, at the indicated
percentages of the CPR.
S-51
<PAGE>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS HI: A-1
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE
PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIOV
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
December 15, 1999....... 61 52 42 33 23
December 15, 2000....... 28 12 0 0 0
December 15, 2001....... 0 0 0 0 0
Weighted Average Life
(1) (years)............ 1.4 1.1 0.9 0.8 0.7
- --------
(1) The weighted average life of a Class HI: 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 HI: 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 HI: A-1 Certificate.
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS HI: A-2
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE
PREPAYMENT ASSUMPTION SET FORTH BELOW:
<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%
December 15, 1999....... 100 100 100 100 100
December 15, 2000....... 100 100 93 54 18
December 15, 2001....... 98 46 0 0 0
December 15, 2002....... 38 0 0 0 0
December 15, 2003....... 0 0 0 0 0
Weighted Average Life
(1) (years)............ 3.9 3.1 2.5 2.1 1.8
</TABLE>
- --------
(1) The weighted average life of a Class HI: 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 HI: 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 HI: A-2 Certificate.
S-52
<PAGE>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS HI: 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%
December 15, 1999....... 100 100 100 100 100
December 15, 2000....... 100 100 100 100 100
December 15, 2001....... 100 100 100 59 23
December 15, 2002....... 100 92 50 15 0
December 15, 2003....... 98 53 15 0 0
December 15, 2004....... 64 22 0 0 0
December 15, 2005....... 35 0 0 0 0
December 15, 2006....... 10 0 0 0 0
December 15, 2007....... 0 0 0 0 0
Weighted Average Life
(1) (years)............ 6.6 5.2 4.2 3.3 2.8
</TABLE>
- --------
(1) The weighted average life of a Class HI: 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 HI: 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 HI: A-3 Certificate.
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS HI: 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%
December 15, 1999....... 100 100 100 100 100
December 15, 2000....... 100 100 100 100 100
December 15, 2001....... 100 100 100 100 100
December 15, 2002....... 100 100 100 100 69
December 15, 2003....... 100 100 100 67 17
December 15, 2004....... 100 100 75 21 0
December 15, 2005....... 100 95 31 0 0
December 15, 2006....... 100 50 0 0 0
December 15, 2007....... 80 17 0 0 0
December 15, 2008....... 50 0 0 0 0
December 15, 2009....... 26 0 0 0 0
December 15, 2010....... 5 0 0 0 0
December 15, 2011....... 0 0 0 0 0
Weighted Average Life
(1) (years)............ 10.2 8.2 6.7 5.5 4.4
</TABLE>
- --------
(1) The weighted average life of a Class HI: 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 HI: 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 HI: M-1 Certificate.
S-53
<PAGE>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS HI: 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%
December 15, 1999....... 100 100 100 100 100
December 15, 2000....... 100 100 100 100 100
December 15, 2001....... 100 100 100 100 100
December 15, 2002....... 100 100 100 100 100
December 15, 2003....... 100 100 100 100 100
December 15, 2004....... 100 100 100 100 77
December 15, 2005....... 100 100 100 85 47
December 15, 2006....... 100 100 99 55 28
December 15, 2007....... 100 100 68 35 17
December 15, 2008....... 100 94 49 24 7
December 15, 2009....... 100 71 34 13 1
December 15, 2010....... 100 53 22 5 0
December 15, 2011....... 82 38 12 0 0
December 15, 2012....... 61 24 5 0 0
December 15, 2013....... 45 14 0 0 0
December 15, 2014....... 33 7 0 0 0
December 15, 2015....... 22 2 0 0 0
December 15, 2016....... 12 0 0 0 0
December 15, 2017....... 4 0 0 0 0
December 15, 2018....... 0 0 0 0 0
Weighted Average Life
(1) (years)............ 15.1 12.6 10.4 8.7 7.4
</TABLE>
- --------
(1) The weighted average life of a Class HI: 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 HI: 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 HI: M-2 Certificate.
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS HI: 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%
December 15, 1999....... 100 100 100 100 100
December 15, 2000....... 100 100 100 100 100
December 15, 2001....... 100 100 100 100 100
December 15, 2002....... 75 51 42 33 24
December 15, 2003....... 42 15 2 0 0
December 15, 2004....... 14 0 0 0 0
December 15, 2005....... 0 0 0 0 0
Weighted Average Life
(1) (years)............ 4.9 4.2 4.0 3.8 3.7
</TABLE>
- --------
(1) The weighted average life of a Class HI: 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 HI: 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 HI: B-1 Certificate.
S-54
<PAGE>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS HI: 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%
December 15, 1999....... 100 100 100 100 100
December 15, 2000....... 100 100 100 100 100
December 15, 2001....... 100 100 100 100 100
December 15, 2002....... 100 100 100 100 100
December 15, 2003....... 100 100 100 90 78
December 15, 2004....... 100 87 73 60 49
December 15, 2005....... 90 65 51 39 30
December 15, 2006....... 70 48 35 25 18
December 15, 2007....... 54 35 24 16 11
December 15, 2008....... 43 26 17 11 10
December 15, 2009....... 35 20 12 10 10
December 15, 2010....... 27 15 10 10 7
December 15, 2011....... 21 11 10 10 4
December 15, 2012....... 15 10 10 6 2
December 15, 2013....... 11 10 10 4 1
December 15, 2014....... 10 10 7 2 1
December 15, 2015....... 10 10 4 1 0
December 15, 2016....... 10 8 3 1 0
December 15, 2017....... 10 5 1 0 0
December 15, 2018....... 9 3 1 0 0
December 15, 2019....... 6 2 1 0 0
December 15, 2020....... 4 1 0 0 0
December 15, 2021....... 3 1 0 0 0
December 15, 2022....... 1 0 0 0 0
December 15, 2023....... 0 0 0 0 0
Weighted Average Life
(1) (years)............ 10.9 9.2 8.2 7.4 6.8
</TABLE>
- --------
(1) The weighted average life of a Class HI: 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 HI: 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 HI: B-2 Certificate.
S-55
<PAGE>
Sub-Pool HE Certificates
The percentages and weighted average lives in the following tables were
determined assuming that: (i) scheduled interest and principal payments on the
Home Equity Contracts 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 does not exercise its option to repurchase the
Contracts, as described under "Description of the Certificates--Repurchase
Option;" (iii) the aggregate principal balance of the Initial Home Equity
Contracts as of the Cut-off Date is $394,198,637.05 and such Contracts have the
characteristics set forth under "The Contracts--Fixed Rate Home Equity
Contracts" and "The Contracts--Adjustable Rate Home Equity Contracts"; (iv) the
Group I Fixed-Rate Home Equity Contracts will, as of the Cut-off Date, be
grouped into 14 pools having the additional characteristics set forth below
under "Assumed Initial Group I Fixed-Rate Home Equity Contract Characteristics"
and "Assumed Subsequent Group I Fixed-Rate Home Equity Contract
Characteristics"; (v) the Group II Fixed-Rate Home Equity Contracts will, as of
the Cut-off Date, be grouped into 14 pools having the additional
characteristics set forth below under "Assumed Initial Group II Fixed-Rate Home
Equity Contract Characteristics" and "Assumed Subsequent Group II Fixed-Rate
Home Equity Contract Characteristics"; (vi) the Adjustable Rate Home Equity
Contracts will, as of the Cut-off Date, be grouped into 38 pools having the
additional characteristics set forth below under "Assumed Initial Adjustable
Rate Home Equity Contract Characteristics" and "Assumed Subsequent Adjustable
Rate Home Equity Contract Characteristics"; (vii) each Class of the Sub-Pool HE
Certificates (other than the Class HE: A-5 IO Certificates) has an Original
Principal Balance as shown on the cover page of this Prospectus Supplement;
(viii) the rate for one-month LIBOR is 5.2764% and the rate for six-month LIBOR
is 5.1906%; (ix) the Pass-Through Rates for the Certificates are as indicated
in "Summary of the Terms of the Certificates"; (x) the Pass-Through Margin for
the Class HE: A-1B ARM Certificates is 0.65%; (xi) the Subsequent Home Equity
Contracts will have the characteristics set forth in the tables below and have
their first scheduled payment date in December 1998; (xii) no interest
shortfalls will arise in connection with prepayments in full of the Home Equity
Contracts; (xiii) no delinquencies or losses are experienced on the Home Equity
Contracts; (xiv) distributions are made on the Sub-Pool HE Certificates on the
15th day of each month, commencing in January 1999; (xv) the Sub-Pool HE
Certificates are issued on December 7, 1998; (xvi) interest on the Class HE: A-
1 Underlying Certificates was computed on the basis of a 360-day year of twelve
30-day months and (xvii) the Company does not exercise its option to substitute
new contracts for Sub-Pool HE Contracts prepaid in full prior to February 1,
1999 (see "Description of the Certificates--Conveyance of Contracts" herein).
No representation is made that the Home Equity Contracts 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 with respect to the
Adjustable Rate Home Equity Contracts, on the one hand, and the Fixed-Rate Home
Equity Contracts, on the other. 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 Home Equity
Contracts or the Fixed-Rate Home Equity Contracts.
The percentages and weighted average life information for the Class HE:
A-1A NAS Certificates and the Class HE: A-1B ARM Certificates in the following
table are based on a CPR model that assumes that the outstanding principal
balance of the Adjustable Rate Home Equity Contracts will prepay at the
indicated percentages of CPR set forth in the table.
The Prepayment Assumption used in this Prospectus Supplement with respect
to the Fixed-Rate Home Equity Contracts 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 equity loans. The "100%
Prepayment Assumption for Fixed-Rate Home Equity Contracts" 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.
S-56
<PAGE>
It is not likely that the Home Equity Contracts will prepay at any
constant percentage of the Prepayment Assumption or of the CPR to maturity or
that all of the Home Equity Contracts will prepay at the same rate.
Investors are urged to make their investment decisions on a basis that
includes their determination as to anticipated prepayment rates under a variety
of the assumptions discussed herein.
PREPAYMENT SCENARIOS
<TABLE>
<CAPTION>
SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Adjustable Rate Home
Equity Contracts (1)... 18% 24% 30% 36% 42%
Fixed-Rate Home Equity
Contracts (2).......... 75 100 125 150 175
</TABLE>
- --------
(1) As a conditional prepayment rate ("CPR") percentage.
(2) As a percentage of the Prepayment Assumption for Fixed Rate Home Equity
Contracts.
ASSUMED INITIAL GROUP I FIXED-RATE HOME EQUITY CONTRACT CHARACTERISTICS
<TABLE>
<CAPTION>
BALLOON LOAN
WEIGHTED WEIGHTED WEIGHTED
CUT-OFF DATE WEIGHTED AVERAGE AVERAGE AVERAGE
POOL AVERAGE REMAINING TERM ORIGINAL TERM AMORTIZATION
PRINCIPAL CONTRACT TO MATURITY TO MATURITY TERM
POOL BALANCE RATE (MONTHS) (MONTHS) (MONTHS)
- ---- ------------- -------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
1. ........... $4,338,569.01 12.329% 113 113 N/A
2. ........... 14,648,775.04 11.808 178 179 N/A
3. ........... 33,512,936.94 11.425 239 240 N/A
4. ........... 23,155,907.76 10.979 300 300 N/A
5. ........... 33,177,043.65 10.554 359 360 N/A
6. ........... 22,811,641.88 11.056 180 180 360
7. ........... 9,112,192.25 10.874 240 240 360
ASSUMED SUBSEQUENT GROUP I FIXED-RATE HOME EQUITY CONTRACT CHARACTERISTICS
<CAPTION>
BALLOON LOAN
WEIGHTED WEIGHTED WEIGHTED
CUT-OFF DATE WEIGHTED AVERAGE AVERAGE AVERAGE
POOL AVERAGE REMAINING TERM ORIGINAL TERM AMORTIZATION
PRINCIPAL CONTRACT TO MATURITY TO MATURITY TERM
POOL BALANCE RATE (MONTHS) (MONTHS) (MONTHS)
- ---- ------------- -------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
1. ........... $8,375,959.37 12.329% 113 113 N/A
2. ........... 28,280,648.35 11.808 178 179 N/A
3. ........... 64,699,442.93 11.425 239 240 N/A
4. ........... 44,704,358.06 10.979 300 300 N/A
5. ........... 64,050,973.69 10.554 359 360 N/A
6. ........... 44,039,724.86 11.056 180 180 360
7. ........... 17,591,826.21 10.874 240 240 360
ASSUMED INITIAL GROUP II FIXED-RATE HOME EQUITY CONTRACT CHARACTERISTICS
<CAPTION>
BALLOON LOAN
WEIGHTED WEIGHTED WEIGHTED
CUT-OFF DATE WEIGHTED AVERAGE AVERAGE AVERAGE
POOL AVERAGE REMAINING TERM ORIGINAL TERM AMORTIZATION
PRINCIPAL CONTRACT TO MATURITY TO MATURITY TERM
POOL BALANCE RATE (MONTHS) (MONTHS) (MONTHS)
- ---- ------------- -------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
1. ........... $4,351,831.59 12.003% 114 115 N/A
2. ........... 19,354,521.22 12.071 178 179 N/A
3. ........... 35,353,061.65 11.485 239 240 N/A
4. ........... 17,511,194.08 11.334 300 300 N/A
5. ........... 34,508,776.42 10.412 359 360 N/A
6. ........... 20,747,989.74 10.998 179 179 360
7. ........... 8,925,871.08 10.707 240 240 360
</TABLE>
S-57
<PAGE>
ASSUMED SUBSEQUENT GROUP II FIXED-RATE HOME EQUITY CONTRACT CHARACTERISTICS
<TABLE>
<CAPTION>
BALLOON LOAN
WEIGHTED WEIGHTED WEIGHTED
WEIGHTED AVERAGE AVERAGE AVERAGE
CUT-OFF DATE AVERAGE REMAINING TERM ORIGINAL TERM AMORTIZATION
POOL PRINCIPAL CONTRACT TO MATURITY TO MATURITY TERM
POOL BALANCE RATE (MONTHS) (MONTHS) (MONTHS)
- ---- -------------- -------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
1. ......... $ 8,401,910.04 12.003% 114 115 N/A
2. ......... 37,367,012.69 12.071 178 179 N/A
3. ......... 68,254,765.29 11.485 239 240 N/A
4. ......... 33,808,173.50 11.334 300 300 N/A
5. ......... 66,624,737.02 10.412 359 360 N/A
6. ......... 40,057,327.54 10.998 179 179 360
7. ......... 17,232,828.14 10.707 240 240 360
</TABLE>
ASSUMED INITIAL ADJUSTABLE RATE HOME EQUITY CONTRACT CHARACTERISTICS
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
WEIGHTED REMAINING ORIGINAL WEIGHTED
CUT-OFF DATE AVERAGE TERM TO TERM TO AVERAGE MONTH(S)
POOL PRINCIPAL CONTRACT 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>
1. .................... $ 216,900.00 9.832% 360 360 7.530% 16.053% 9.832% 1.110% 5
2. .................... 119,000.00 9.850 360 360 8.500 15.850 9.850 1.000 6
3. .................... 49,910.38 11.250 352 360 7.875 17.250 11.250 1.000 15
4. .................... 325,315.89 10.038 354 360 7.420 16.038 10.038 1.000 16
5. .................... 502,957.46 9.682 354 360 6.141 15.682 9.682 1.000 17
6. .................... 789,991.46 9.904 355 360 6.582 16.043 9.904 1.163 18
7. .................... 2,340,382.68 9.813 356 360 6.777 15.970 9.813 1.127 19
8. .................... 5,989,739.83 9.638 357 360 6.163 15.783 9.638 1.233 20
9. .................... 15,411,221.21 9.413 357 359 6.372 15.560 9.402 1.202 21
10. .................... 26,848,794.16 9.070 358 360 6.418 15.376 9.070 1.260 22
11. .................... 37,556,143.35 8.850 359 360 6.563 15.005 8.838 1.171 23
12. .................... 19,129,184.70 8.935 360 360 6.459 15.099 8.935 1.105 24
13. .................... 130,100.00 10.043 360 360 6.858 16.565 10.043 1.000 25
14. .................... 58,788.69 9.425 354 360 5.500 10.430 9.425 1.000 29
15. .................... 78,102.33 9.450 355 360 10.250 15.450 9.450 1.000 30
16. .................... 172,334.43 10.259 358 360 8.685 16.259 10.259 1.000 33
17. .................... 168,478.92 10.171 358 360 8.374 16.171 10.171 1.000 34
18. .................... 2,198,723.25 9.444 359 360 7.707 15.235 9.277 1.067 35
19. .................... 602,256.00 9.644 360 360 7.961 15.644 9.644 1.000 36
</TABLE>
S-58
<PAGE>
ASSUMED SUBSEQUENT ADJUSTABLE RATE HOME EQUITY CONTRACT CHARACTERISTICS
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
WEIGHTED REMAINING ORIGINAL WEIGHTED
CUT-OFF DATE AVERAGE TERM TO TERM TO AVERAGE MONTH(S)
POOL PRINCIPAL CONTRACT 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>
1. .................... $ 312,413.93 9.832% 360 360 7.530% 16.053% 9.832% 1.110% 5
2. .................... 171,402.76 9.850 360 360 8.500 15.850 9.850 1.000 6
3. .................... 71,888.88 11.250 352 360 7.875 17.250 11.250 1.000 15
4. .................... 468,571.76 10.038 354 360 7.420 16.038 10.038 1.000 16
5. .................... 724,439.45 9.682 354 360 6.141 15.682 9.682 1.000 17
6. .................... 1,137,871.54 9.904 355 360 6.582 16.043 9.904 1.163 18
7. .................... 3,370,991.93 9.813 356 360 6.777 15.970 9.813 1.127 19
8. .................... 8,627,377.40 9.638 357 360 6.163 15.783 9.638 1.233 20
9. .................... 22,197,695.62 9.413 357 359 6.372 15.560 9.402 1.202 21
10. .................... 38,671,910.06 9.070 358 360 6.418 15.376 9.070 1.260 22
11. .................... 54,094,339.92 8.850 359 360 6.563 15.005 8.838 1.171 23
12. .................... 27,552,898.87 8.935 360 360 6.459 15.099 8.935 1.105 24
13. .................... 187,390.74 10.043 360 360 6.858 16.565 10.043 1.000 25
14. .................... 84,676.84 9.425 354 360 5.500 10.430 9.425 1.000 29
15. .................... 112,495.42 9.450 355 360 10.250 15.450 9.450 1.000 30
16. .................... 248,223.50 10.259 358 360 8.685 16.259 10.259 1.000 33
17. .................... 242,670.18 10.171 358 360 8.374 16.171 10.171 1.000 34
18. .................... 3,166,951.46 9.444 359 360 7.707 15.235 9.277 1.067 35
19. .................... 867,465.02 9.644 360 360 7.961 15.644 9.644 1.000 36
</TABLE>
Based on the foregoing assumptions, the following tables indicate the
projected weighted average lives of each Class of Sub-Pool HE Certificates, and
set forth the percentages of the Original Principal Balance of each Class that
would be outstanding after each of the dates shown, at the indicated
percentages of the applicable Prepayment Assumption.
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS HE: A-1A NAS
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%
December 15, 1999....... 100 100 100 100 100
December 15, 2000....... 62 55 50 47 47
December 15, 2001....... 0 0 0 0 0
Weighted Average Life
(1) (years)............ 2.2 2.1 2.1 2.1 2.1
</TABLE>
- --------
(1) The weighted average life of a Class HE: A-1A NAS 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 HE: A-1A NAS Certificate to the stated Payment
Date, (ii) adding the results, and (iii) dividing the sum by the initial
principal balance of such Class HE: A-1A NAS Certificate.
S-59
<PAGE>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS HE: 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%
December 15, 1999....... 78 71 64 57 50
December 15, 2000....... 66 56 47 38 30
December 15, 2001....... 60 47 37 28 21
December 15, 2002....... 49 36 26 18 12
December 15, 2003....... 40 27 18 11 7
December 15, 2004....... 32 20 12 7 4
December 15, 2005....... 26 15 9 5 2
December 15, 2006....... 21 12 6 3 1
December 15, 2007....... 17 9 4 2 1
December 15, 2008....... 14 7 3 1 0
December 15, 2009....... 11 5 2 1 0
December 15, 2010....... 9 4 1 0 0
December 15, 2011....... 7 3 1 0 0
December 15, 2012....... 6 2 1 0 0
December 15, 2013....... 5 2 0 0 0
December 15, 2014....... 4 1 0 0 0
December 15, 2015....... 3 1 0 0 0
December 15, 2016....... 2 1 0 0 0
December 15, 2017....... 2 0 0 0 0
December 15, 2018....... 1 0 0 0 0
December 15, 2019....... 1 0 0 0 0
December 15, 2020....... 0 0 0 0 0
Weighted Average Life
(1) (years)............ 5.1 3.7 2.8 2.2 1.8
</TABLE>
- --------
(1) The weighted average life of a Class HE: 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 HE: 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 HE: A-1B ARM Certificate.
S-60
<PAGE>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS HE: 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%
December 15, 1999....... 86 81 77 72 68
December 15, 2000....... 68 59 50 42 35
December 15, 2001....... 53 41 31 21 13
December 15, 2002....... 40 31 23 17 13
December 15, 2003....... 32 23 16 12 9
December 15, 2004....... 26 17 12 8 6
December 15, 2005....... 20 13 9 6 4
December 15, 2006....... 16 10 7 4 2
December 15, 2007....... 13 8 5 3 1
December 15, 2008....... 11 6 3 2 1
December 15, 2009....... 9 5 3 1 0
December 15, 2010....... 7 4 2 1 0
December 15, 2011....... 6 3 1 0 0
December 15, 2012....... 5 2 1 0 0
December 15, 2013....... 3 1 0 0 0
December 15, 2014....... 2 1 0 0 0
December 15, 2015....... 2 0 0 0 0
December 15, 2016....... 1 0 0 0 0
December 15, 2017....... 1 0 0 0 0
December 15, 2018....... 0 0 0 0 0
Weighted Average Life
(1) (years)............ 4.6 3.6 3.0 2.5 2.1
</TABLE>
- --------
(1) The weighted average life of a Class HE: 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 HE: 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 HE: A-1 Certificate.
S-61
<PAGE>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS HE: 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%
December 15, 1999....... 64 54 43 32 21
December 15, 2000....... 21 0 0 0 0
December 15, 2001....... 0 0 0 0 0
Weighted Average Life
(1) (years)............ 1.4 1.1 0.9 0.8 0.7
</TABLE>
- --------
(1) The weighted average life of a Class HE: 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 HE: 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 HE: A-2 Certificate.
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS HE: 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%
December 15, 1999....... 100 100 100 100 100
December 15, 2000....... 100 97 39 0 0
December 15, 2001....... 55 0 0 0 0
December 15, 2002....... 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 HE: 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 HE: 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 HE: A-3 Certificate.
S-62
<PAGE>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS HE: 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%
December 15, 1999... 100 100 100 100 100
December 15, 2000... 100 100 100 95 78
December 15, 2001... 100 92 69 48 29
December 15, 2002... 89 69 52 39 29
December 15, 2003... 72 51 36 27 19
December 15, 2004... 57 38 27 18 12
December 15,
2005............... 45 29 20 13 8
December 15, 2006... 36 23 14 9 5
December 15, 2007... 29 18 10 6 3
December 15, 2008... 24 14 7 4 1
December 15, 2009... 19 11 5 3 0
December 15, 2010... 16 8 4 1 0
December 15, 2011... 13 6 3 0 0
December 15, 2012... 10 4 2 0 0
December 15, 2013... 6 2 0 0 0
December 15, 2014... 5 2 0 0 0
December 15, 2015... 3 1 0 0 0
December 15, 2016... 3 0 0 0 0
December 15, 2017... 2 0 0 0 0
December 15, 2018... 1 0 0 0 0
December 15, 2019... 0 0 0 0 0
Weighted Average
Life (1) (years)... 7.9 6.3 5.1 4.2 3.5
</TABLE>
- --------
(1) The weighted average life of a Class HE: 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 HE: 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 HE: A-4 Certificate.
S-63
<PAGE>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS HE: 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%
December 15, 1999....... 100 100 100 100 100
December 15, 2000....... 100 100 100 100 100
December 15, 2001....... 100 100 100 100 100
December 15, 2002....... 100 78 61 46 37
December 15, 2003....... 82 61 44 31 22
December 15, 2004....... 68 47 32 21 14
December 15, 2005....... 56 37 23 14 9
December 15, 2006....... 46 28 17 10 5
December 15, 2007....... 38 22 12 6 2
December 15, 2008....... 31 17 9 4 0
December 15, 2009....... 25 13 6 1 0
December 15, 2010....... 20 10 4 0 0
December 15, 2011....... 16 7 2 0 0
December 15, 2012....... 13 5 0 0 0
December 15, 2013....... 9 2 0 0 0
December 15, 2014....... 7 0 0 0 0
December 15, 2015....... 5 0 0 0 0
December 15, 2016....... 4 0 0 0 0
December 15, 2017....... 2 0 0 0 0
December 15, 2018....... 0 0 0 0 0
Weighted Average Life
(1) (years)............ 8.8 6.8 5.6 4.9 4.5
</TABLE>
- --------
(1) The weighted average life of a Class HE: 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 HE: 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 HE: M-1 Certificate.
S-64
<PAGE>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS HE: 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%
December 15, 1999....... 100 100 100 100 100
December 15, 2000....... 100 100 100 100 100
December 15, 2001....... 100 100 100 100 100
December 15, 2002....... 100 78 61 46 35
December 15, 2003....... 82 61 44 31 22
December 15, 2004....... 68 47 32 21 14
December 15, 2005....... 56 37 23 14 9
December 15, 2006....... 46 28 17 10 4
December 15, 2007....... 38 22 12 6 0
December 15, 2008....... 31 17 9 1 0
December 15, 2009....... 25 13 6 0 0
December 15, 2010....... 20 10 1 0 0
December 15, 2011....... 16 7 0 0 0
December 15, 2012....... 13 4 0 0 0
December 15, 2013....... 9 0 0 0 0
December 15, 2014....... 7 0 0 0 0
December 15, 2015....... 4 0 0 0 0
December 15, 2016....... 1 0 0 0 0
December 15, 2017....... 0 0 0 0 0
Weighted Average Life
(1) (years)............ 8.7 6.8 5.5 4.7 4.2
</TABLE>
- --------
(1) The weighted average life of a Class HE: 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 HE: 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 HE: M-2 Certificate.
S-65
<PAGE>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS HE: B 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%
December 15, 1999....... 100 100 100 100 100
December 15, 2000....... 100 100 100 100 100
December 15, 2001....... 100 100 100 100 100
December 15, 2002....... 100 100 100 92 69
December 15, 2003....... 100 100 88 63 43
December 15, 2004....... 100 94 64 42 27
December 15, 2005....... 100 73 46 29 17
December 15, 2006....... 92 56 33 19 13
December 15, 2007....... 76 43 24 13 13
December 15, 2008....... 62 33 17 13 13
December 15, 2009....... 50 25 13 13 13
December 15, 2010....... 41 19 13 13 10
December 15, 2011....... 33 15 13 13 6
December 15, 2012....... 26 13 13 10 4
December 15, 2013....... 17 13 13 5 2
December 15, 2014....... 14 13 11 3 1
December 15, 2015....... 13 13 7 2 1
December 15, 2016....... 13 13 5 1 0
December 15, 2017....... 13 12 3 1 0
December 15, 2018....... 13 7 2 0 0
December 15, 2019....... 13 5 1 0 0
December 15, 2020....... 13 4 1 0 0
December 15, 2021....... 11 3 1 0 0
December 15, 2022....... 8 2 0 0 0
December 15, 2023....... 5 1 0 0 0
December 15, 2024....... 4 1 0 0 0
December 15, 2025....... 2 0 0 0 0
December 15, 2026....... 1 0 0 0 0
December 15, 2027....... 1 0 0 0 0
December 15, 2028....... 0 0 0 0 0
Weighted Average Life
(1) (years)............ 12.8 10.1 8.3 6.9 5.9
</TABLE>
- --------
(1) The weighted average life of a Class HE: B 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 HE: B Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class HE: B Certificate.
S-66
<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 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 (651) 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 (losses) to fixed
charges for the past five years and the nine months ended September 30, 1998.
For the purposes of compiling these ratios, earnings (losses) consist of
earnings (losses) before both income taxes and fixed charges. Fixed charges
consist of interest expense and the interest portion of rent expense.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ -----------------
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings (Losses)
to Fixed Charges.......... 4.81 7.98 7.90 5.44 3.94 (.53)*
</TABLE>
- --------
*On July 6, 1998, Conseco, Inc. announced a second-quarter charge of $498
million, net of income taxes, related to the acquisition of Green Tree. The
charges are directly related to (1) $148 million in merger-related costs and
(2) $350 million non-cash supplemental reserve against the valuation of Green
Tree's interest only securities and servicing rights. As a result, the ratio of
earnings (losses) to fixed charges was less than 1.00 for the nine month period
ended September 30, 1998 and earnings were inadequate to cover fixed charges
for such period. The amount of the coverage deficiency for such period was
$251,600,000.
RECENT DEVELOPMENTS
On June 30, 1998, Green Tree became a wholly owned subsidiary of Conseco,
Inc., pursuant to a Merger Agreement announced on April 7, 1998. Green Tree
continues to operate from its headquarters in St. Paul, Minnesota, and its 200
local offices throughout the country. Lawrence M. Coss, Green Tree's Chairman
and Chief Executive Officer has announced his retirement from active management
of Green Tree at the end of 1998, but will remain a director of Conseco, Inc.
Headquartered in Carmel, Indiana, Conseco is among the nation's leading
providers of supplemental health insurance, retirement annuities and universal
life insurance.
Green Tree 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 Green Tree as purported class actions on behalf of
persons or entities who purchased common stock of Green Tree during the alleged
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<PAGE>
class periods. In addition to Green Tree, certain current and former officers
and directors of Green Tree are named as defendants in one or more of the
lawsuits. Green Tree 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 Green Tree 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 Green Tree (particularly with respect to
prepayment assumptions and performance of certain of Green Tree's loan
portfolios) which allegedly rendered Green Tree's financial statements false
and misleading. Green Tree believes that the lawsuits are without merit and
intends to defend such lawsuits vigorously.
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 Contracts and the
rights, benefits, obligations and proceeds arising therefrom or in connection
therewith, including liens on the related real estate, rights under applicable
FHA Insurance for FHA-insured Home Improvement Contracts, amounts held in the
Certificate Account and the Class HI: B-2 Limited Guaranty and the Class HE: B
Limited Guaranty of the Company for the benefit of the Class HI: B-2
Certificateholders and the Class HE: B Certificateholders, respectively.
Distributions on the Certificates will be made each month 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 the Payment Date (the "Record Date"). See "Description of the
Certificates--Registration of the Certificates" herein. The first Payment Date
for the Certificates will be in January 1999. 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 CONTRACTS
On the Closing Date, the Company will establish the Trust and transfer,
assign, set over and otherwise convey to the Trust all right, title and
interest of the Company in the Initial Home Improvement Contracts and the
Initial Home Equity Contracts, including all principal and interest received on
or with respect to such Contracts (other than receipts of principal and
interest due on such Contracts before the Cut-off Date). The Agreement permits
the Trust to purchase approximately $62,500,000 aggregate principal balance of
Subsequent Home Improvement Contracts and approximately $275,000,000 aggregate
principal balance of Subsequent Home Equity Contracts within 60 days after the
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<PAGE>
Closing Date on one or more closing dates. See "Conveyance of Subsequent Home
Improvement Contracts and Sub-Pool HI Pre-Funding Account" and "Conveyance of
Subsequent Home Equity Contracts and Sub-Pool HE Pre-Funding Account" herein.
The Trustee, concurrently with each conveyance, will execute and deliver
the Certificates to or upon the order of the Company. The Contracts are
described on a list delivered to the Trustee and certified by a duly authorized
officer of the Company. Such list includes the amount of monthly payments due
on each Contract as of the date of issuance of the Certificates, the Contract
Rate on each Contract and the maturity date of each Contract. The list will be
attached as an exhibit to the Agreement and will be available for inspection by
any Certificateholder at the principal office of the Company. Prior to the
conveyance of the Contracts to the Trust, the Company will have completed a
review of all the Contract files, confirming the accuracy of each item on the
list of Contracts delivered to the Trustee. Any Contract discovered not to
agree with such list in a manner that is materially adverse to the interests of
the Certificateholders will be repurchased by the Company, or, if the
discrepancy relates to the unpaid principal balance of a Contract, the Company
may deposit cash in the Certificate Account in an amount sufficient to offset
such discrepancy.
The Trustee will maintain possession of the Contracts and any other
documents contained in the Contract files. Uniform Commercial Code financing
statements will be filed in Minnesota, reflecting the conveyance and assignment
of the Contracts to the Trustee, and the Company's accounting records and
computer systems will also reflect such conveyance and assignment.
Briggs and Morgan, Professional Association, counsel to the Company, will
render an opinion to the Trustee that the transfer of the Contracts from the
Company to the Trust would, in the event the Company became a debtor under the
United States Bankruptcy Code, be treated as a true sale and not as a pledge to
secure borrowings. If, however, the transfer of the Contracts from the Company
to the Trust were treated as a pledge to secure borrowings by the Company, the
distribution of proceeds of the Contracts to the Trust might be subject to the
automatic stay provisions of the United States Bankruptcy Code, which would
delay the distribution of such proceeds for an uncertain period of time. In
addition, a bankruptcy trustee would have the power to sell the Contracts if
the proceeds of such sale could satisfy the amount of the debt deemed owed by
the Company, or the bankruptcy trustee could substitute other collateral in
lieu of the Contracts to secure such debt, or such debt could be subject to
adjustment by the bankruptcy trustee if the Company were to file for
reorganization under Chapter 11 of the United States Bankruptcy Code.
The Company will make certain representations and warranties in the
Agreement with respect to each Contract, including that: (a) for each Contract
other than the Subsequent Home Improvement Contracts and the Subsequent Home
Equity Contracts, as of the applicable Cut-off Date, the most recent scheduled
payment was made or was not delinquent more than 30 days; (b) for each
Subsequent Home Improvement Contract and each Subsequent Home Equity Contract,
as of the respective Subsequent Cut-off Date, the most recent scheduled payment
was made or was not delinquent more than 30 days; (c) no provision of a
Contract has been waived, altered or modified in any respect, except by
instruments or documents included in the Contract file and reflected on the
list of Contracts delivered to the Trustee; (d) 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);
(e) no Contract is subject to any right of rescission, set-off, counterclaim or
defense; (f) each Contract (if an 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; (g) each Contract was
originated by a home improvement contractor or home equity lender in the
ordinary course of its business or was originated by the Company directly; (h)
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; (i) each Contract
complies with all requirements of law; (j) no Contract has been satisfied,
subordinated to a lower lien ranking than its original position (if any) or
rescinded; (k) each Contract creates a valid and perfected lien on the related
real estate; (l) all parties to each Contract had full legal capacity to
execute such Contract; (m) no Contract has been sold, conveyed
S-69
<PAGE>
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,
lien, pledge, charge, claim or security interest, and is the sole owner and has
full right to transfer such Contract to the Trustee; (n) 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 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 Contract, and the Company has not waived any of the
foregoing; (o) each Contract is a fully-amortizing loan and provides for level
monthly payments based on its applicable Contract Rate, except, in the case of
a Balloon Loan, for the final monthly payment, over the term of such Contract;
(p) each Contract contains customary and enforceable provisions such as to
render the rights and remedies of the holder thereof adequate for realization
against the collateral; (q) the description of each Contract set forth in the
list delivered to the Trustee is true and correct; (r) there is only one
original of each Contract; (s) each Contract was originated or purchased in
accordance with the Company's then-current underwriting guidelines; and (t)
each Contract 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 Home Improvement Contracts in the aggregate, including that (i)
each Home Improvement Contract has a contractual rate of interest of at least
7.00%; (ii) no Home Improvement Contract had a remaining term to maturity at
origination of more than 300 months; (iii) no more than 1% of the Home
Improvement Contracts, by principal balance as of the Cut-off Date, were
secured by properties located in an area with the same zip code; (iv) no more
than 5% of the Home Improvement Contracts, by principal balance as of the Cut-
off Date, were originated by any one contractor or lender, other than the Home
Improvement Contracts purchased from Empire Funding Corp.; and (v) no adverse
selection procedures were employed in selecting the Home Improvement Contracts
from the Company's portfolio. The Company will make certain additional
representations and warranties with respect to the Subsequent Home Improvement
Contracts. See "--Conveyance of Subsequent Home Improvement Contracts and Sub-
Pool HI Pre-Funding Account" herein.
The Company will also make certain representations and warranties with
respect to the Home Equity Contracts in the aggregate, including that (i) each
Home Equity Contract (other than the Adjustable Rate Home Equity Contracts) has
a contractual rate of interest of at least 6.00%; (ii) no Home Equity Contract
had a remaining term to maturity at origination of more than 360 months; (iii)
no more than 1% of the Home Equity Contracts, by principal balance as of the
Cut-off Date, were secured by properties located in an area with the same zip
code; (iv) no more than 7% of the Home Equity Contracts, by principal balance
as of the Cut-off Date, were originated by any one lender other than the
Company; and (v) no adverse selection procedures were employed in selecting the
Home Equity Contracts from the Company's portfolio. The Company will make
certain additional representations and warranties with respect to the
Subsequent Home Equity Contracts. See "--Conveyance of Subsequent Home Equity
Contracts and Sub-Pool HE 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 (as defined below), any Contract
that is materially and adversely affected by a breach of a representation and
warranty with respect to such Contract made in the Agreement if such breach has
not been cured within 90 days of the day it was or should have been discovered
by the Servicer or the Trustee. The "Repurchase Price," with respect to any
Contract to be so repurchased or with respect to a liquidated contract, means
the outstanding principal balance of such Contract (without giving effect to
any advances made by the Servicer or the Trustee), plus interest on such
Contract 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 Contracts (but not with respect to any other breach by the Company of
its obligations under the Agreement).
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<PAGE>
In lieu of repurchasing a Contract as specified in the preceding
paragraph, during the two-year period following the Closing Date, the Company
may, at its option, substitute an Eligible Substitute Contract (as defined
below) for the Contract that it is otherwise obligated to repurchase (referred
to herein as the "Replaced Contract"). An Eligible Substitute Contract is a
Contract that satisfies, as of the date of its substitution, the
representations and warranties specified in Article III of the Agreement, has a
Scheduled Principal Balance that is not greater than the Scheduled Principal
Balance of the Replaced Contract, has a Contract Rate that is at least equal to
the Contract Rate of the Replaced Contract and has a remaining term to
scheduled maturity that is not greater than the remaining term to scheduled
maturity of the Replaced Contract. The Company will be required to deposit in
the Certificate Account cash in the amount, if any, by which the Scheduled
Principal Balance of the Replaced Contract exceeds the Scheduled Principal
Balance of the Contract being substituted. Such deposit will be deemed to be a
partial Principal Prepayment.
Under the Agreement, the Company may, at its option, substitute new
contracts for Contracts which are prepaid in full prior to February 1, 1999.
Any such substitute contracts shall constitute Eligible Substitute Contracts
and must be substituted prior to the Determination Date immediately following
the calendar month in which the prepayment was received by the Servicer. In the
event the aggregate amount of principal received in respect of Contracts
prepaid in full in a given calendar month exceeds the aggregate of the
Scheduled Principal Balances of Eligible Substitute Contracts substituted
therefor, such excess shall be distributed to Certificateholders on the related
Payment Date as a prepayment of principal. Notwithstanding the foregoing, there
is no assurance that the Company will opt to make any such substitutions nor,
should it desire to exercise such option, that Eligible Substitute Contracts
will be available therefor.
Pursuant to the Agreement, the Servicer will service and administer the
Contracts conveyed and assigned to the Trustee as more fully set forth below.
CONVEYANCE OF SUBSEQUENT HOME IMPROVEMENT CONTRACTS AND SUB-POOL HI PRE-FUNDING
ACCOUNT
An account (the "Sub-Pool HI Pre-Funding Account") will be established by
the Trustee and funded by the Company with approximately $62,500,000 (the "Sub-
Pool HI Pre-Funded Amount") on the Closing Date to provide the Trust with
sufficient funds to purchase Subsequent Home Improvement Contracts. In no event
will the Sub-Pool HI Pre-Funded Amount, less the aggregate principal balance of
Subsequent Home Improvement Contracts specifically identified for purchase by
the Trust as of the Closing Date, represent more than 25% of the Original Sub-
Pool HI Certificate Principal Balance. The Sub-Pool HI Pre-Funding Account will
be used to purchase Subsequent Home Improvement Contracts during the period
from the Closing Date until the earliest of (i) the date on which the amount on
deposit in the Sub-Pool HI Pre-Funding Account is less than $10,000, (ii) 60
days after the Closing Date or (iii) the date on which an event of termination
occurs under the Agreement (the "Funding Period"). The Sub-Pool HI Pre-Funded
Amount will be reduced during the Funding Period by the amount used to purchase
Subsequent Home Improvement Contracts in accordance with the Agreement.
Under the Agreement following the initial issuance of the Certificates,
the Trust will be obligated to purchase Subsequent Home Improvement Contracts
from the Company during the Funding Period, subject to the availability
thereof. In connection with the purchase of Subsequent Home Improvement
Contracts 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
Sub-Pool HI 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 Home Improvement Contracts purchased on such date. The amount paid
from the Sub-Pool HI Pre-Funding Account on each Subsequent Transfer Date will
not include accrued interest on the related Subsequent Home Improvement
Contracts. Following each Subsequent Transfer Date, the aggregate principal
balance of the Subsequent Home Improvement Contracts in Sub-Pool HI will
increase by an amount equal to the aggregate principal balance of the Home
Improvement Contracts so purchased and the amount in the Sub-Pool HI Pre-
Funding Account will decrease accordingly.
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<PAGE>
Any Sub-Pool HI 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 HI: A-1 Certificates. Although no assurance can be given, the Company
anticipates that the principal amount of the related Subsequent Home
Improvement Contracts purchased by the Trust will require the application of
substantially all of the Sub-Pool HI Pre-Funded Amount and that there should be
no material amount of principal prepaid to the Class HI: A-1 Certificateholders
from the Sub-Pool HI Pre-Funding Account. However, it is unlikely that the
Company will be able to deliver Subsequent Home Improvement Contracts with an
aggregate principal balance identical to the remaining Sub-Pool HI Pre-Funded
Amount.
Any conveyance of Subsequent Home Improvement Contracts on a Subsequent
Transfer Date is subject to certain conditions including, but not limited to:
(a) each Subsequent Home Improvement Contract must satisfy the representations
and warranties specified in the related subsequent transfer instrument and the
Agreement; (b) the Company may not select Subsequent Home Improvement Contracts
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 Home Improvement Contracts must satisfy the following criteria: (i)
no Subsequent Home Improvement Contract may be more than 30 days contractually
delinquent as of the related Subsequent Cut-off Date; (ii) the remaining stated
term to maturity of each Subsequent Home Improvement Contract may not exceed
360 months; (iii) each Subsequent Home Improvement Contract must have been
underwritten in accordance with the Company's standard underwriting criteria;
(iv) no Subsequent Home Improvement Contract may have a loan-to-value ratio
greater than 100%; (v) as a result of the purchase of the Subsequent Home
Improvement Contracts, neither the Class HI: A Certificates nor the Class HE: A
Certificates will receive from Moody's 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 Home Improvement Contracts conform to the
characteristics described herein.
CONVEYANCE OF SUBSEQUENT HOME EQUITY CONTRACTS AND SUB-POOL HE PRE-FUNDING
ACCOUNT
An account (the "Sub-Pool HE Pre-Funding Account") will be established by
the Trustee and funded by the Company with approximately $275,000,000 (the
"Sub-Pool HE Pre-Funded Amount") on the Closing Date to provide the Trust with
sufficient funds to purchase Subsequent Home Equity Contracts. In no event will
the Sub-Pool HE Pre-Funded Amount, less the aggregate principal balance of
Subsequent Home Equity Contracts specifically identified for purchase by the
Trust as of the Closing Date, represent more than 25% of the Original Sub-Pool
HE Certificate Principal Balance. The Sub-Pool HE Pre-Funding Account will be
used to purchase Subsequent Home Equity Contracts during the period from the
Closing Date until the earliest of (i) the date on which the amount on deposit
in the Sub-Pool HE Pre-Funding Account is less than $10,000, (ii) 60 days after
the Closing Date or (iii) the date on which an Event of Termination occurs
under the Agreement (the "Funding Period"). The Sub-Pool HE Pre-Funded Amount
will be reduced during the Funding Period by the amount used to purchase
Subsequent Home Equity Contracts in accordance with the Agreement.
Under the Agreement following the initial issuance of the Certificates,
the Trust will be obligated to purchase Subsequent Home Equity Contracts from
the Company during the Funding Period, subject to the availability thereof. In
connection with the purchase of Subsequent Home Equity Contracts 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 Sub-Pool HE 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 Home Equity
Contracts purchased on such date. The amount paid from the Sub-Pool HE Pre-
Funding Account on each Subsequent Transfer Date will not include accrued
interest on the related Subsequent Home Equity Contracts. Following each
Subsequent Transfer Date, the aggregate principal balance of the Subsequent
Home Equity Contracts in Sub-Pool HE will increase by an amount equal to the
aggregate principal balance of the Home Equity Contracts so purchased and the
amount in the Sub-Pool HE Pre-Funding Account will decrease accordingly.
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<PAGE>
Any Sub-Pool HE 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 HE: A-1B ARM, Class HE: A-1 and Class HE: A-2 Certificates. Any amounts
remaining which had been allocated to the purchase of Subsequent Adjustable
Rate Home Equity Contracts will be paid to the Class HE: A-1B ARM
Certificateholders, any amounts remaining which had been allocated to the
purchase of Group I Subsequent Fixed-Rate Home Equity Contracts will be paid
to the Class HE: A-1 Certificateholders and any amounts remaining which had
been allocated to the purchase of Group II Subsequent Fixed-Rate Home Equity
Contracts will be paid to the Class HE: A-2 Certificateholders. Although no
assurance can be given, the Company anticipates that the principal amount of
the related Subsequent Home Equity Contracts purchased by the Trust will
require the application of substantially all of the Sub-Pool HE Pre-Funded
Amount and that there should be no material amount of principal prepaid to the
Class HE: A-1B ARM Certificateholders, the Class HE: A-1 Certificateholders or
the Class HE: A-2 Certificateholders from the Sub-Pool HE Pre-Funding Account.
However, it is unlikely that the Company will be able to deliver Subsequent
Home Equity Contracts with an aggregate principal balance identical to the
remaining Sub-Pool HE Pre-Funded Amount.
Any conveyance of Subsequent Home Equity Contracts on a Subsequent
Transfer Date is subject to certain conditions including, but not limited to:
(a) each Subsequent Home Equity Contract must satisfy the representations and
warranties specified in the related subsequent transfer instrument and the
Agreement; (b) the Company may not select Subsequent Home Equity Contracts 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 Home Equity Contracts must satisfy the following criteria: (i) no
Subsequent Home Equity Contract 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 Home Equity Contract may not exceed
360 months; (iii) each Subsequent Home Equity Contract must have been
underwritten in accordance with the Company's standard underwriting criteria;
(iv) as a result of the purchase of the Subsequent Home Equity Contracts, the
weighted average loan to value ratio of Sub-Pool HE will not be more than 200
basis points more than such ratio with respect to the Initial Home Equity
Contracts; (v) as a result of the purchase of the Subsequent Home Equity
Contracts, neither the Class HI: A Certificates nor the Class HE: A
Certificates will receive from Moody's 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 Home Equity Contracts conform to the
characteristics described herein.
GRANTOR TRUST
Green Tree Grantor Trust 1998-E will be created and established pursuant
to the Grantor Trust Agreement. The Depositor will deposit into the Grantor
Trust without recourse $330,000,000 of Class HE: A-1 Underlying Certificates
issued by the Trust, and the Grantor Trust will issue the Class HE: A-1
Certificates.
The property of the Grantor Trust will include (a) the Class HE: A-1
Underlying Certificates issued by the Trust and all payments thereon, (b) such
amounts as may be held by the Trustee in a trust account (the "Grantor Trust
Account") held by the Trustee for the benefit of the Class HE: A-1
Certificateholders, (c) the Swap Agreement and all payments received
thereunder and (d) proceeds of all of the foregoing. The Grantor Trust will
not acquire any receivables or assets other than the foregoing and will not
have any need for additional capital resources. To the extent that payments
are made on the Class HE: A-1 Underlying Certificates and payments are
received by the Trustee as required under the Swap Agreement, the Grantor
Trust will have sufficient liquidity to make interest and principal
distributions on the Class HE: A-1 Certificates.
On each Payment Date with respect to the Class HE: A-1 Certificates, the
Trustee will pay to the Class HE: A-1 Certificateholders, to the extent of
funds available in the Grantor Trust Account:
(i) interest at a rate equal to the Class HE: A-1 Pass-Through Rate,
less any interest shortfall on the Class HE: A-1 Underlying Certificate
for that period, plus any interest shortfall distributed on the related
Payment Date with respect to the Class HE: A-1 Underlying Certificate;
and
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(ii) principal in an amount equal to the principal received by the
Grantor Trust on the related Payment Date with respect to the Class
HE: A-1 Underlying Certificate.
PAYMENTS ON CONTRACTS
The Servicer, on behalf of the Trust, will establish and maintain a
Certificate Account in an "Eligible Account" (as defined below) at a
depository institution (initially 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 P-1 by Moody's 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 Moody's 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 Moody's or Fitch to downgrade or withdraw its
then-current rating assigned to the Certificates, as evidenced in writing by
Moody's 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 Aa2 by Moody's
and AA from 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 P-1 by Moody's and 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 Contracts,
including Principal Prepayments and advance payments by Obligors not
constituting Principal Prepayments ("Advance Payments"), shall be paid into
the Certificate Account no later than one Business Day following receipt
thereof, except amounts received as extension fees or assumption fees not
allocated to regular installments due on Contracts, which are retained by the
Servicer as part of its servicing fees and are not paid into the Certificate
Account and except for certain proceeds from Liquidated Contracts 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 Contracts repurchased, or upon substitution for a Contract
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 Contracts," shall be paid into
the Certificate Account.
On the second Business Day preceding each Payment Date (the
"Determination Date"), the Servicer will determine the Sub-Pool HI Amount
Available and the Sub-Pool HE Amount Available in the Certificate Account and
the amount of funds necessary to make all payments to be made on the next
Payment Date from the Certificate Account. Not later than one Business Day
after the Determination Date, the Company will deposit in the Certificate
Account the Repurchase Price of any Contracts required to be repurchased on
such Payment Date, or any amounts required to be deposited upon substitution
for any Contract otherwise required to be repurchased on such Purchase Date,
as a result of a breach of representations and warranties under the Agreement.
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On each Payment Date the Trustee will withdraw the Sub-Pool HI Amount
Available (which will consist primarily of amounts received in respect of the
Home Improvement Contracts, but will also include that portion of the Sub-Pool
HE Amount Available in excess of the amounts necessary to make the payments
described in clauses (i) through (ix) of the succeeding paragraph) from the
Certificate Account and make the following payments, in the following order of
priority:
(i) 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 Home
Improvement Contracts to the Servicer;
(ii) to pay interest and principal on the Sub-Pool HI Certificates, in the
following order of priority:
(A) interest on the Class HI: A, Class HI: M-1, Class HI: M-2 and Class
HI: B-1 Certificates as follows (including, in each case, any such
interest due on a prior Payment Date but not received):
(I) first, to Class HI: A Certificateholders, interest on the Class
HI: A Principal Balance;
(II) second, to Class HI: M-1 Certificateholders, interest on the
Class HI: M-1 Adjusted Principal Balance;
(III) third, to Class HI: M-2 Certificateholders, interest on the
Class HI: M-2 Adjusted Principal Balance; and
(IV) fourth, to Class HI: B-1 Certificateholders, interest on the
Class HI: B-1 Adjusted Principal Balance;
(B) principal on the Class HI: A, Class HI: M-1, Class HI: M-2 and
Class HI: B-1 Certificates, in the manner and order of priority
described below under "Distributions on Sub-Pool HI Certificates--
Principal on the Class HI: A, Class HI: M-1, Class HI: M-2 and Class
HI: B-1 Certificates," in respect of the Sub-Pool HI Formula Principal
Distribution Amount;
(C) principal on the Class HI: A, Class HI: M-1 and Class HI: M-2
Certificates, in the manner and order of priority described below under
"Distributions on Sub-Pool HI Certificates-- Principal on the Class HI:
A, Class HI: M-1, Class HI: M-2 and Class HI: B-1 Certificates," in
respect of any Sub-Pool HI Supplementary Principal Distribution Amount;
(D) payments on the Class HI: M-1, Class HI: M-2 and Class HI: B-1
Certificates in respect of Sub-Pool HI Liquidation Loss Interest
Amounts as follows:
(I) first, to Class HI: M-1 Certificateholders, any unpaid Class
HI: M-1 Liquidation Loss Interest Amount;
(II) second, to Class HI: M-2 Certificateholders, any unpaid Class
HI: M-2 Liquidation Loss Interest Amount; and
(III) third, to Class HI: B-1 Certificateholders, any unpaid Class
HI: B-1 Liquidation Loss Interest Amount; and
(E) interest and principal on the Class HI: B-2 Certificates, in the
manner and order of priority described below under "Distributions on
Sub-Pool HI Certificates--Class HI: B-2 Interest" and "--Class HI: B-2
Principal."
(iii) 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 Home Improvement Contracts;
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(iv) to reimburse the Trustee or any successor Servicer for any payments of
FHA Insurance premiums with respect to the Home Improvement Contracts not
paid by the Company, as Servicer, and for which the Trustee or such
successor Servicer has not been reimbursed by the Company;
(v) to reimburse the Servicer or the Trustee, as applicable, for any
unreimbursed Advances with respect to the Home Improvement Contracts made
in respect of current or prior Payment Dates;
(vi) to reimburse the holder of the Class C Certificate for expenses
incurred by and reimbursable to it with respect to taxes or charges imposed
upon the Trust as a REMIC or otherwise;
(vii) to reimburse the Company for any prior unreimbursed Class HI: B-2
Guaranty Payments;
(viii) to pay the Class HI: B-2 Guaranty Fee to the Company; and
(ix) to pay any remaining amounts to the holder of the Class C
Certificate.
On each Payment Date the Trustee will withdraw the Sub-Pool HE Amount
Available (which will consist primarily of amounts received in respect of the
Home Equity Contracts, but will also include that portion of the Sub-Pool HI
Amount Available in excess of the amounts necessary to make the payments
described in clauses (i) through (viii) of the preceding paragraph) and
withdrawals from the Reserve Account from the Certificate Account and make the
following payments (together with payments in respect of the Reserve Account
loan), in the following order of priority:
(i) 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 Home
Equity Contracts to the Servicer;
(ii) to pay interest and principal on the Sub-Pool HE Certificates, in the
following order of priority:
(A) interest on the Class HE: A Certificates (including the Class
HE: A-1 Underlying Certificate but excluding the Class HE: A-1
Certificates), and the Class HE: M-1 and Class HE: M-2 Certificates as
follows (including, in each case, any such interest due on a prior
Payment Date but not received):
(I) first, to such Class HE: A Certificateholders, interest on the
Class HE: A Principal Balance or, in the case of the Class HE: A-5
IO Certificates, on the Notional Principal Amount;
(II) second, to Class HE: M-1 Certificateholders, interest on the
Class HE: M-1 Adjusted Principal Balance; and
(III) third, to Class HE: M-2 Certificateholders, interest on the
Class HE: M-2 Adjusted Principal Balance;
(B) principal on the Class HE: A Certificates (including the Class
HE: A-1 Underlying Certificate but excluding the Class HE: A-1
Certificates), and the Class HE: M-1 and Class HE: M-2 Certificates, in
the manner and order of priority described below under "Distributions
on Sub-Pool HE Certificates--Principal on the Class HE: A, Class HE: M-
1 and Class HE: M-2 Certificates," in respect of the Sub-Pool HE
Formula Principal Distribution Amount;
(C) payments on the Class HE: M-1 and Class HE: M-2 Certificates in
respect of Sub-Pool HE Liquidation Loss Interest Amounts as follows:
(I) first, to Class HE: M-1 Certificateholders, any unpaid Class
HE: M-1 Liquidation Loss Interest Amount; and
(II) second, to Class HE: M-2 Certificateholders, any unpaid Class
HE: M-2 Liquidation Loss Interest Amount;
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(D) interest and principal on the Class HE: B Certificates, in the
manner and order of priority described below under "Distributions on
Sub-Pool HE Certificates--Class HE: B Interest" and "--Class HE: B
Principal;" and
(E) interest (to the extent not paid on a prior Payment Date) on the
Class HE: A-1B ARM Certificates for any Payment Date with respect to
which the Available Funds Pass-Through Rate was less than one-month
LIBOR plus the Pass-Through Margin (or 14.0% if less), calculated on
the Class HE: A-1B ARM Principal Balance for such Payment Date at a
rate equal to such difference, plus interest on such amount accrued
from such Payment Date to the Payment Date on which such amount is
paid.
(iii) 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 Home Equity Contracts;
(iv) to reimburse the Servicer or the Trustee, as applicable, for any
unreimbursed Advances with respect to the Home Equity Contracts made in
respect of current or prior Payment Dates;
(v) to reimburse the holder of the Class C Certificate for expenses
incurred by and reimbursable to it with respect to taxes or charges imposed
upon the Trust as a REMIC or otherwise;
(vi) to reimburse the Company for any prior unreimbursed Class HE: B
Guaranty Payments;
(vii) to pay the Class HE: B Guaranty Fee to the Company; and
(viii) to pay any remaining amounts to the holder of the Class C
Certificate.
The Scheduled Principal Balance of a Contract with respect to any
Payment Date is its principal balance as of the scheduled payment date (the
"Due Date") in the calendar month preceding such Payment Date 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, with
respect to the Contract Pool or a given Sub-Pool, as of any Payment Date, is
the aggregate of the Scheduled Principal Balances of Contracts comprising the
Contract Pool or such Sub-Pool, as the case may be, that were outstanding
during the preceding Due Period. A Liquidated Contract is a defaulted Contract
as to which all amounts that the Servicer expects to recover on account of
such Contract have been received.
DISTRIBUTIONS ON SUB-POOL HI CERTIFICATES
On each Payment Date, distributions on the Sub-Pool HI Certificates will
be made to the holders of the Class HI: A Certificates, the Class HI: M
Certificates and the Class HI: B Certificates in the manner described below.
Distributions of interest and principal on the Sub-Pool HI Certificates will
be made primarily from amounts available in respect of the Home Improvement
Contracts comprising Sub-Pool HI, although, under certain circumstances as
described herein, amounts available in respect of the Home Equity Contracts in
Sub-Pool HE may be available to make such distributions.
Sub-Pool HI Certificateholders will be entitled to receive on each
Payment Date commencing in January 1999, to the extent that the Sub-Pool HI
Amount Available (as defined herein) in the Certificate Account (together
with, in the case of the Class HI: B-2 Certificates, any Class HI: B-2
Guaranty Payment, as described below) is sufficient therefor, distributions
allocable to interest and principal, as described herein. The rights of the
Class HI: M and Class HI: B Certificateholders to receive distributions in
respect of the Sub-Pool HI Amount Available are subordinated to the rights of
the Class HI: A Certificateholders; the rights of the Class HI: M-2 and Class
HI: B Certificateholders to receive such distributions are further
subordinated to the rights of the Class HI: M-1 Certificateholders; the rights
of
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the Class HI: B Certificateholders to receive such distributions are further
subordinated to the rights of the Class HI: M-2 Certificateholders; and the
rights of the Class HI: B-2 Certificateholders to receive such distributions
are further subordinated to the rights of the Class HI: B-1 Certificateholders.
Distributions will be made on each Payment Date commencing in January 1999 to
holders of record on the related Record Date, except that the final
distribution in respect of the Sub-Pool HI Certificates will only be made upon
presentation and surrender of the Sub-Pool HI Certificates at the office or
agency appointed by the Trustee for that purpose in Minneapolis or St. Paul,
Minnesota.
The Sub-Pool HI Amount Available will consist primarily of payments made
on or in respect of the Home Improvement Contracts comprising Sub-Pool HI and
will include amounts payable, subject to the subordination described herein, 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 Home
Improvement Contracts, to the Company as the Class HI: B-2 Guaranty Fee, and to
the Class C Certificateholders.
Interest on the Class HI: A, Class HI: M-1, Class HI: M-2 and Class HI: B-1
Certificates
Interest will be distributable first to each Class of Class HI: A
Certificates concurrently, then to the Class HI: M-1 Certificates, then to the
Class HI: M-2 Certificates and then to the Class HI: B-1 Certificates. Interest
on the outstanding Class HI: A Principal Balance, Class HI: M-1 Adjusted
Principal Balance, Class HI: M-2 Adjusted Principal Balance and Class HI: B-1
Adjusted Principal Balance, as applicable, will accrue at the related Pass-
Through Rate from December 7, 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. The
"Principal Balance" of a Class of Sub-Pool HI Certificates as of any Payment
Date is the Original Principal Balance of such Class less all amounts
previously distributed on account of principal of such Class. The "Class HI: A
Principal Balance" as of any Payment Date is the sum of the Class HI: A-1
Principal Balance, the Class HI: A-2 Principal Balance and the Class HI: A-3
Principal Balance. The "Class HI: M Principal Balance" as of any Payment Date
is the sum of the Class HI: M-1 Principal Balance and the Class HI: M-2
Principal Balance. The "Class HI: M-1 Adjusted Principal Balance" as of any
Payment Date is the Class HI: M-1 Principal Balance less any Class HI: M-1
Liquidation Loss Amount. The Pass-Through Rates for the Class HI: A, Class HI:
M and Class HI: B-1 Certificates are set forth on the cover of this Prospectus
Supplement. The "Class HI: M-2 Adjusted Principal Balance" as of any Payment
Date is the Class HI: M-2 Principal Balance less any Class HI: M-2 Liquidation
Loss Amount (described below under "Losses on Liquidated Home Improvement
Contracts"). The "Class HI: B Principal Balance" as of any Payment Date is the
sum of the Class HI: B-1 Principal Balance and the Class HI: B-2 Principal
Balance. The "Class HI: B-1 Adjusted Principal Balance" as of any Payment Date
is the Class HI: B-1 Principal Balance less any Class HI: B-1 Liquidation Loss
Amount (described below under "Losses on Liquidated Home Improvement
Contracts").
The Pass-Through Rates on the Class HI: A, Class HI: M and Class HI: B-1
Certificates are set forth on the cover of this Prospectus Supplement. The
Class HI: B-2 Pass-Through Rate is 8.50%, subject to a maximum rate equal to
the weighted average of the Contract Rates on the Home Improvement Contracts.
In the event that, on a particular Payment Date, the Sub-Pool HI Amount
Available in the Certificate Account is not sufficient to make a full
distribution of interest to the holders of a Class of Class HI: A Certificates,
Class HI: M-1 Certificates, Class HI: M-2 Certificates or Class HI: B-1
Certificates, after payment of interest on each Class of Sub-Pool HI
Certificates that is senior to such Class of Certificates (the Class HI: A
Certificates being treated as a single Class for this purpose), the amount of
interest to be distributed in respect of such Class will be allocated among the
outstanding Certificates of such Class pro rata in accordance with their
respective entitlements to interest, and the amount of the shortfall will be
carried forward and added to the amount such holders will be entitled to
receive on the next Payment Date. Any such amount so carried forward will bear
interest at the applicable Pass-Through Rate, to the extent legally
permissible.
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Principal on the Class HI: A, Class HI: M-1, Class HI: M-2 and Class HI: B-1
Certificates.
The Class HI: A, Class HI: M-1, Class HI: M-2 and Class HI: B-1
Certificates will be entitled to receive on each Payment Date as distributions
of principal, in the order of priority set forth below and to the extent of the
Sub-Pool HI Amount Available in the Certificate Account after payment of all
interest then accrued on the Class HI: A Principal Balance, Class HI: M-1
Adjusted Principal Balance, Class HI: M-2 Adjusted Principal Balance and Class
HI: B-1 Adjusted Principal Balance, an amount equal to the Sub-Pool HI Senior
Percentage (as defined below) or the Class HI: B Percentage, as applicable, of
the "Sub-Pool HI Formula Principal Distribution Amount," which is the sum of
(i) all scheduled payments of principal due on each outstanding Home
Improvement Contract during the related Due Period, (ii) the Scheduled
Principal Balance of each Home Improvement Contract 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 Home Improvement Contracts, (iv) the
Scheduled Principal Balance of each Home Improvement Contract that became a
Liquidated Contract during such Due Period, and (v) any amount described in
clauses (i) through (iv) above that was not previously distributed because of
an insufficient amount of funds available in the Certificate Account if (a) the
Payment Date occurs on or after the Payment Date on which the Class HI: B-2
Principal Balance has been reduced to zero, or (b) such amount was not covered
by a Class HI: B-2 Guaranty Payment and corresponding reduction in the Class
HI: B-2 Principal Balance, less any Sub-Pool HI Over-Collateralization
Adjustment Amount (as described below). In addition, on each Payment Date
occurring in January 2002 or after on which the Sub-Pool HI Current Realized
Loss Test (as described below) has not been met and the ratio of (i) the Net
Liquidation Losses on all FHA-Insured Contracts that became Liquidated
Contracts in any Due Period preceding such Payment Date to (ii) the aggregate
Repurchase Price of all such Liquidated Contracts is 50% or more, Holders of a
Class of Class HI: A or Class HI: M Certificates will be entitled to receive as
payments of principal, in the order of priority set forth below, the Sub-Pool
HI Supplementary Principal Distribution Amount (which is the balance, if any,
of the Sub-Pool HI Amount Available in the Certificate Account after payment of
(1) all interest then accrued on the Class HI: A Principal Balance, Class HI:
M-1 Adjusted Principal Balance, Class HI: M-2 Adjusted Principal Balance and
Class HI: B-1 Adjusted Principal Balance, and (2) the Sub-Pool HI Formula
Principal Distribution Amount). When the Principal Balance of a Class of Sub-
Pool HI Certificates is reduced to zero, no further distributions of principal
will be made to the holders of such Class.
The Scheduled Principal Balance of a Contract with respect to any Payment
Date is its principal balance as of the scheduled payment date (the "Due Date")
in the Due Period, after giving effect to any previous partial Principal
Prepayments 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 Pool Scheduled Principal Balance, with respect to the Contract
Pool or a given Sub-Pool as of any Payment Date, is the aggregate of the
Scheduled Principal Balances of Contracts comprising the Contract Pool or such
Sub-Pool, as the case may be, that were outstanding during the preceding Due
Period. A Liquidated Contract is a defaulted Contract as to which all amounts
that the Servicer expects to recover on account of such Contract have been
received.
The Sub-Pool HI Over-Collateralization Adjustment Amount for any Payment
Date will be the excess, if any, of the (1) the excess of (x) the Pool
Scheduled Principal Balance of Sub-Pool HI over (y) the sum of the Class HI: A
Principal Balance, the Class HI: M Principal Balance and the Class HI: B
Principal Balance, over (2) 2% of the Pool Scheduled Principal Balance of Sub-
Pool HI.
The Sub-Pool HI Senior Percentage of the Sub-Pool HI Formula Principal
Distribution Amount and any Sub-Pool HI Supplementary Principal Distribution
Amount will be distributed, to the extent of the Sub-Pool HI Amount Available,
after payment of all interest then accrued on the Class HI: A Principal
Balance, Class HI: M-1 Adjusted Principal Balance, Class HI: M-2 Adjusted
Principal Balance and Class HI: B-1 Adjusted Principal Balance, first, to the
Class HI: A-1 Certificateholders until the Class HI: A-1 Principal Balance has
been reduced to zero, then to the Class HI: A-2 Certificateholders until the
Class HI: A-2 Principal Balance has been reduced to zero, then to the Class HI:
A-3 Certificateholders until the Class HI: A-3 Principal Balance has been
reduced to zero, then to the Class HI: M-1
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Certificateholders until the Class HI: M-1 Principal Balance has been reduced
to zero and then to the Class HI: M-2 Certificateholders until the Class HI: M-
2 Principal Balance has been reduced to zero.
The Sub-Pool HI Senior Percentage for any Payment Date prior to the Class
HI: B Cross-over Date (as described below), and for any Payment Date on or
after the Class HI: B Cross-over Date on which each Class HI: B Principal
Distribution Test (as described below) has not been satisfied, will equal 100%.
On each Payment Date on or after the Class HI: B Cross-over Date, if each Class
HI: B Principal Distribution Test has been satisfied on such Payment Date, the
Sub-Pool HI Senior Percentage will equal a fraction, expressed as a percentage,
the numerator of which is the sum of the Class HI: A Principal Balance and the
Class HI: M Principal Balance for such Payment Date and the denominator of
which is the Pool Scheduled Principal Balance of Sub-Pool HI for the
immediately preceding Payment Date.
Payments of principal on the Class HI: B-l Certificates will not commence
until the Class HI: B Cross-over Date, and will be made on that Payment Date
and each Payment Date thereafter only if each Class HI: B Principal
Distribution Test (as defined below) is satisfied on such Payment Date (unless
the Class HI: A Principal Balance and the Class HI: M Principal Balance have
been reduced to zero). The Class HI: B Cross-over Date will be the earlier of
(A) the Payment Date on which the Class HI: M-2 Principal Balance is reduced to
zero and (B) the first Payment Date on or after the Payment Date in January
2002 on which the fraction, expressed as a percentage, the numerator of which
is the Class HI: B Principal Balance as of such Payment Date and the
denominator of which is the Pool Scheduled Principal Balance of Sub-Pool HI as
of the immediately preceding Payment Date, is equal to or greater than 20%.
On each Payment Date on or after the Class HI: B Cross-over Date and
prior to the Payment Date on which the Class HI: A Principal Balance and the
Class HI: M Principal Balance have been reduced to zero, holders of Class HI: B
Certificates will be entitled to distributions of principal only if each of the
following tests (each a "Class HI: B Principal Distribution Test") is satisfied
on such Payment Date: (i) the average of the Sub-Pool HI Sixty-Day Delinquency
Ratio (as defined in the Agreement) as of such Payment Date and the prior two
Payment Dates must not exceed 2.5%; (ii) the average of the Sub-Pool HI Thirty-
Day Delinquency Ratio (as defined in the Agreement) as of such Payment Date and
the prior two Payment Dates must not exceed 5%; (iii) the Sub-Pool HI
Cumulative Realized Loss Ratio (as defined in the Agreement) as of such Payment
Date must not exceed 10%; (iv) the Sub-Pool HI Current Realized Loss Ratio (as
defined in the Agreement) as of such Payment Date must not exceed 2.5%; and (v)
the Class HI: B Principal Balance divided by the Pool Scheduled Principal
Balance of Sub-Pool HI as of the immediately preceding Payment Date must be
equal to or greater than 20%.
On each Payment Date on which the Class HI: B Certificates are eligible
to receive distributions of principal, the Class HI: B Percentage of the Sub-
Pool HI Formula Principal Distribution Amount less the Class HI: B Floor
Reduction Amount (as described below) will be paid to the Class HI: B-1
Certificateholders to the extent of the Sub-Pool HI Amount Available, after
payment of all interest then accrued on the Class HI: A Principal Balance,
Class HI: M-1 Adjusted Principal Balance, Class HI: M-2 Adjusted Principal
Balance and Class HI: B-1 Adjusted Principal Balance and all principal then due
on the Class HI: A Certificates and Class HI: M Certificates, until the Class
HI: B-l Principal Balance has been reduced to zero. The Class HI: B Floor
Reduction Amount means as to any payment date prior to the Class HI: M-2 Cross-
over Date, the amount, if any, by which the Class HI: B Percentage of the Sub-
Pool HI Formula Principal Distribution Amount exceeds (a) the Class HI: B
Principal Balance prior to the effect of such distribution less (b) $1,250,000,
and after the Class HI: M-2 Cross-over Date the amount will equal zero.
Any Class HI: B Floor Reduction Amount will be distributed to the Class
HI: A-1 Certificates until the balance is reduced to zero, then to Class HI: A-
2 Certificates until the balance is reduced to zero, then to Class HI: A-3
Certificates until the balance is reduced to zero, then to Class HI: M-1
Certificates, until the balance is reduced to zero, and then to Class HI: M-2
Certificates until the balance is reduced to zero.
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The Class HI: B Percentage for any Payment Date will be equal to 100%
minus the Sub-Pool HI Senior Percentage. The Class HI: B Percentage for each
Payment Date, if any, after the Class HI: A Principal Balance and the Class HI:
M Principal Balance have been reduced to zero will be equal to 100%.
Notwithstanding the foregoing, on any Payment Date as to which there is a
Class HI: A Liquidation Loss Principal Amount (which is the amount, if any, by
which the Pool Scheduled Principal Balance of Sub-Pool HI plus the Sub-Pool HI
Pre-Funded Amount is less than the Class HI: A Principal Balance), the
remaining Sub-Pool HI Amount Available, after payment of all interest then
accrued on the Class HI: A Principal Balance, Class HI: M-1 Adjusted Principal
Balance, Class HI: M-2 Adjusted Principal Balance and Class HI: B-1 Adjusted
Principal Balance, will be distributed pro rata to each Class of Class HI: A
Certificates based on the Principal Balance of each Class (but in no event will
such amount exceed the Principal Balance of any such Class).
Class HI: B-2 Interest.
Interest on the outstanding Class HI: B-2 Principal Balance will accrue
from December 7, 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 remaining Sub-Pool HI Amount Available, if any,
for a Payment Date after payment of all interest and principal then payable on
the Class HI: A, Class HI: M-1, Class HI: M-2 and Class HI: B-1 Certificates,
and (ii) the Class HI: B-2 Guaranty Payment, if any, for such date, interest
will be paid to the Class HI: B-2 Certificateholders on such Payment Date at
the Class HI: B-2 Pass-Through Rate on the then outstanding Class HI: B-2
Principal Balance. The Class HI: B-2 Principal Balance is the Original Class
HI: B-2 Principal Balance less all amounts previously distributed to the Class
HI: B-2 Certificateholders (including any Class HI: B-2 Guaranty Payments) on
account of principal.
In the event that, on a particular Payment Date, the remaining Sub-Pool
HI Amount Available in the Certificate Account plus any amounts actually paid
under the Class HI: B-2 Limited Guaranty are not sufficient to make a full
distribution of interest to the Class HI: B-2 Certificateholders, the amount of
the deficiency will be carried forward as an amount that the Class HI: B-2
Certificateholders are entitled to receive on the next Payment Date. Any amount
so carried forward will, to the extent legally permissible, bear interest at
the Class HI: B-2 Pass-Through Rate.
Class HI: B-2 Principal.
Except for payments of the Class HI: B-2 Liquidation Loss Principal
Amount, payments of principal on the Class HI: B-2 Certificates will not
commence until the Payment Date on which the Class HI: B-1 Principal Balance
has been reduced to zero (the "Class HI: B-1 Cross-over Date"), and will be
made on that Payment Date and each Payment Date thereafter only if each Class
HI: B Principal Distribution Test is satisfied on such Payment Date (unless the
Class HI: A Principal Balance and the Class HI: M Principal Balance have been
reduced to zero). On any such Payment Date, the Class HI: B Percentage of the
Sub-Pool HI Formula Principal Distribution Amount less the Class HI: B Floor
Reduction Amount will be distributed, to the extent of the Sub-Pool HI Amount
Available, after payment of all interest and principal then due on the Class
HI: A and Class HI: M Certificates, and any amounts actually paid under the
Class HI: B-2 Limited Guaranty, in each case after payment of interest on the
Class HI: B-2 Certificates, to the Class HI: B-2 Certificateholders until the
Class HI: B-2 Principal Balance has been reduced to zero. The Class HI: B-2
Principal Balance generally will not be reduced below $1,250,000 until the
Class HI: A Principal Balance, the Class HI: M Principal Balance and the Class
HI: B-1 Principal Balance have been reduced to zero.
On each Payment Date, the Class HI: B-2 Certificateholders will be
entitled to receive, pursuant to the Class HI: B-2 Limited Guaranty, the Class
HI: B-2 Liquidation Loss Principal Amount until the Class HI: B-2 Principal
Balance has been reduced to zero.
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DISTRIBUTIONS ON SUB-POOL HE CERTIFICATES
On each Payment Date, distributions on the Sub-Pool HE Certificates will
be made to the holders of the Class HE: A Certificates, the Class HE: M
Certificates and the Class HE: B Certificates, in the manner described below.
Distributions of interest and principal on the Sub-Pool HE Certificates will be
made primarily from amounts available in respect of the Home Equity Contracts
comprising Sub-Pool HE, although, under certain circumstances as described
herein, amounts available in respect of the Home Improvement Contracts in Sub-
Pool HI may be available to make such distributions.
Sub-Pool HE Certificateholders will be entitled to receive on each
Payment Date commencing in January 1999, to the extent that the Sub-Pool HE
Amount Available plus any Reserve Account Withdrawal Amount (as defined herein)
in the Certificate Account (together with, in the case of the Class HE: B
Certificates, the Class HE: B Guaranty Payment, as described below) is
sufficient therefor, distributions allocable to interest and principal, as
described herein. The rights of the Class HE: M and Class HE: B
Certificateholders to receive distributions in respect of the Sub-Pool HE
Amount Available are subordinated to the rights of the Class HE: A
Certificateholders; the rights of the Class HE: M-2 and Class HE: B
Certificateholders to receive such distributions are further subordinated to
the rights of the Class HE: M-1 Certificateholders; and the rights of the Class
HE: B Certificateholders to receive such distributions are further subordinated
to the rights of the Class HE: M-2 Certificateholders. Distributions will be
made on each Payment Date commencing in January 1999 to holders of record on
the related Record Date, except that the final distribution in respect of the
Sub-Pool HE Certificates will only be made upon presentation and surrender of
the Sub-Pool HE Certificates at the office or agency appointed by the Trustee
for that purpose in Minneapolis or St. Paul, Minnesota.
The Class HE: A and Class HE: M Certificateholders will have the benefit
of a reserve account (the "Reserve Account") to cover Liquidation Losses on the
Home Equity Contracts. The Reserve Account will equal $44,000,000 on the
Closing Date. Withdrawals will be made from the Reserve Account to cover
Liquidation Losses on the Home Equity Contracts, and to repay the loan used to
fund the Reserve Account, as described below. Additions will be made to the
Reserve Account from the Sub-Pool HE Amount Available in an amount equal to
those withdrawals from the Reserve Account that are used to repay the loan upon
certain triggering events described below.
Reserve Account Loan
The Reserve Account will be fully funded on the closing date by a loan.
Loan fees due on the Reserve Account Loan will be paid on each Payment Date
from the amount available to the Class HE Certificateholders.
Amounts will be released on each Payment Date from the Reserve Account to
pay a portion of the principal on the Reserve Account loan, commencing on or
after the Payment Date in January 2002 if on that Payment Date, certain tests
have been met. The loan reduction amount on any such Payment Date will be the
excess of the sum of the Class HE: B Adjusted Principal Balance and the Reserve
Account balance over 16% of the Pool Scheduled Principal Balance of Sub-Pool HE
as of that Payment Date. However, if the Class HE: A and Class HE: M Principal
Balances have been reduced to zero, the Reserve Account Balance will also be
zero.
In addition, if on a Payment Date certain triggering events have
occurred, amounts will be released from the reserve account to pay the Reserve
Account loan on that Payment Date, and on each succeeding Payment Date until
the triggering event is cured. In this case, the amount of the repayment on
that date will equal, in general, the Sub-Pool HE Amount Available on that
Payment Date less all amounts which the Class HE: A and Class HE: M
Certificateholders are entitled to receive on that Payment Date. A triggering
event will occur if Liquidation Losses on Contracts included in Sub-Pool HE
exceed specified amounts, if prepayments fall below certain levels, or if the
Sub-Pool HE Amount Available, after payment of interest and principal to Class
HE: A and Class HE: M Certificateholders, is less than a specified amount.
On the earlier of the Payment Date in January 2006 or the Payment Date on
which any termination event has occurred, a portion of the Sub-Pool HE Amount
Available may be applied to pay
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the Reserve Account loan on that Payment Date, and on each succeeding Payment
Date, until the Reserve Account loan has been paid in full. In this case, the
amount of each repayment will equal, in general, the Sub-Pool HE Amount
Available on that Payment Date, less all amounts which the Class HE: A and
Class HE: M Certificateholders are entitled to receive on that Payment Date.
Termination events include an event of default under the Reserve Account loan
agreement, the exercise by the Servicer of its right to purchase the Contracts
in the trust created under the Pooling and Servicing Agreement after the
scheduled principal balance of all such Contracts is less than 10% of the
aggregate principal balance of the Certificates on the Closing Date, and the
failure of certain tests related to the performance of the Contracts included
in Sub-Pool HE.
See "Description of the Certificates" for a detailed description of the
amounts on deposit in the Certificate Account that will constitute the Sub-Pool
HE Amount Available on each Payment Date. The Sub-Pool HE Amount Available will
consist primarily of payments made on or in respect of the Home Equity
Contracts comprising Sub-Pool HE and will include amounts payable, subject to
the subordination described herein, 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 Home Equity Contracts, to the Company
as the Class HE: B Guaranty Fee, and to the Class C Certificateholders.
Interest on the Class HE: A, Class HE: M-1 and Class HE: M-2.
Interest will be distributable first to each Class of Class HE: A
Certificates concurrently, then to the Class HE: M-1 Certificates and then to
the Class HE: M-2 Certificates. Interest on the outstanding Class HE: A
Principal Balance (or, in the case of the Class HE: A-5 IO Certificates, on the
Notional Principal Amount), Class HE: M-1 Adjusted Principal Balance and Class
HE: M-2 Adjusted Principal Balance, as applicable, will accrue at the related
Pass-Through Rate from December 7, 1998, 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 HE: A Certificates, other than the Class HE: A-
1B ARM and Class HE: A-1 Certificates, will be computed on the basis of a 360-
day year of twelve 30-day months. Interest on the Class HE: A-1B ARM and Class
HE: A-1 Certificates will be computed on the basis of actual days elapsed in a
360-day year. The "Principal Balance" of a Class of Sub-Pool HE Certificates
(other than the Class HE: A-5 IO Certificates, which has no Principal Balance)
as of any Payment Date is the Original Principal Balance of such Class less all
amounts previously distributed on account of principal of such Class. The
"Class HE: A Principal Balance" as of any Payment Date is the sum of the Class
HE: A-1A NAS Principal Balance, the Class HE: A-1B ARM Principal Balance, the
Class HE: A-1 Principal Balance, the Class HE: A-2 Principal Balance, the Class
HE: A-3 Principal Balance and the Class HE: A-4 Principal Balance. The "Class
HE: M Principal Balance" as of any Payment Date is the sum of the Class HE: M-1
Principal Balance and the Class HE: M-2 Principal Balance. The "Class HE: M-1
Adjusted Principal Balance" as of any Payment Date is the Class HE: M-1
Principal Balance less any Class HE: M-1 Liquidation Loss Amount (described
below under "Losses on Liquidated Home Equity Contracts"). The "Class HE: M-2
Adjusted Principal Balance" as of any Payment Date is the Class HE: M-2
Principal Balance less any Class HE: M-2 Liquidation Loss Amount (described
below under "Losses on Liquidated Home Equity Contracts").
The Pass-Through Rates for the Class HE: A (other than the Class HE: A-1B
ARM and Class HE: A-1) and Class HE: M Certificates are set forth on the cover
of this Prospectus Supplement.
The Class HE: A-1B ARM Pass-Through Rate is a floating rate equal to the
lesser of one-month LIBOR plus the Class A-1B ARM Pass-Through Margin or the
Available Funds Pass-Through Rate, but in no case more than 14.0%. The Class A-
1B ARM Pass-Through Margin will equal 0.65% per annum on each Payment Date on
which the Pool Scheduled Principal Balance of the Contract Pool is 10% or more
of the Cut-off Date Pool Principal Balance of the Contract Pool, and 0.90% per
annum on each Payment Date on which the Pool Scheduled Principal Balance of the
Contract Pool is less than 10% of the aggregate principal balance of the
Certificates on the Closing Date. The Available Funds Pass-Through Rate for any
Payment Date will be a rate per annum equal to the weighted average of the
Expense Adjusted Contract Rates on the then outstanding Adjustable Rate Home
Equity Contracts. The
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Expense Adjusted Contract Rate on any Adjustable Rate Home Equity Contract is
equal to the then applicable Mortgage Rate thereon, minus the Expense Fee Rate.
The Expense Fee Rate is 0.50% per annum.
In addition, if on any Payment Date the Class HE: A-1B ARM Pass-Through
Rate is less than one-month LIBOR plus the Pass-Through Margin (or 14.0% if
less) because of the limit of the Available Funds Pass-Through Rate,
supplemental interest on the Class HE: A-1B ARM Principal Balance at a rate
equal to such difference will be payable on the Class HE: A-1B ARM
Certificates, to the extent the Sub-Pool HE Amount Available is sufficient
therefor after payment of all interest and principal due on the Sub-Pool HE
Certificates on, and unpaid loan fees and certain other amounts payable to the
Reserve Account Lenders as of, such Payment Date. The loan fees are generally
calculated at 1.50% per annum until the seventh anniversary of the Closing Date
and thereafter at a rate of 2.5% 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."
Through the Payment Date in January 2014, or as described below in this
paragraph, the Class HE: A-1 Pass-Through Rate will be a floating rate equal to
one-month LIBOR (as defined under the Swap Agreement) plus 0.57%, but in no
case more than 14.0%. On each Payment Date after January 2014, the Class HE: A-
1 Pass-Through Rate will equal the Pass-Through Rate on the Class HE: A-1
Underlying Certificates, which is 6.2375%. On the Payment Date on which the
Pool Scheduled Principal Balance of the Contract Pool is less than 10% of the
aggregate Principal Balance of the Certificates on the Closing Date, the Class
HE: A-1 Pass-Through Rate will increase by 0.25%.
Interest will be calculated on the Class HE: A-5 IO Certificates on each
Payment Date based on the Notional Principal Amount, which for the first 24
Payment Dates is equal to $82,500,000 (or the Class HE: 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 Sub-Pool HE Amount
Available in the Certificate Account is not sufficient to make a full
distribution of interest to the holders of a Class of Class HE: A Certificates,
Class HE: M-1 Certificates or Class HE: M-2 Certificates, after payment of
interest on each Class of Sub-Pool HE Certificates that is senior to such Class
of Certificates (the Class HE: A Certificates being treated as a single Class
for this purpose), the amount of interest to be distributed in respect of such
Class will be allocated among the outstanding Certificates of such Class pro
rata in accordance with their respective entitlements to interest, and the
amount of the shortfall will be carried forward and added to the amount such
holders will be entitled to receive on the next Payment Date. In such event,
the amount of interest to be distributed to the Class HE: A-1 Certificates will
be reduced by the amount of the interest shortfall in respect of the Class
HE: A-1 Underlying Certificates. Any such amount so carried forward will bear
interest at the applicable Pass-Through Rate (and in the case of the Class
HE: A-1 Certificates, at the Pass-Through Rate for the Class HE: A-1 Underlying
Certificates), to the extent legally permissible.
Principal on the Class HE: A, Class HE: M-1 and Class HE: M-2 Certificates.
The Class HE: A (other than the Class HE: A-5 IO Certificates, which will
receive no distributions of principal), Class HE: M-1 and Class HE: M-2
Certificates will be entitled to receive on each Payment Date distributions of
principal in the order of priority set forth and as otherwise described below,
to the extent of the Sub-Pool HE Amount Available in the Certificate Account
after payment of all interest then accrued on the Class HE: A Principal
Balance, Class HE: M-1 Adjusted Principal Balance and Class HE: M-2 Adjusted
Principal Balance and after payment of any unpaid Loan Fees payable to the
Reserve Account Lenders.
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Holders of the Class HE: A-1A NAS Certificates will generally be entitled
to receive, as payments of principal, an amount equal to Class HE: A-1A NAS
Percentage of the Class HE: A ARM Portion, until the Class HE: A-1A NAS
Principal Balance is reduced to zero. Holders of the Class HE: A-1B ARM
Certificates will generally be entitled to receive, as payments of principal,
the Class HE: A ARM Portion less an amount equal to the lesser of the
Class A-1A NAS Principal Balance and the Class HE: A-1A NAS Percentage of the
Class HE: A ARM Portion, until the Class HE: A-1B ARM Principal Balance is
reduced to zero.
"Class HE: A-1A NAS Percentage" means, as to any Payment Date, (i) 0%
prior to the Payment Date in September 2000 (unless the Class HE: A-1B ARM
Principal Balance has been reduced to zero), (ii) 90% on the Payment Date in
September 2000 and thereafter (unless the Class HE: A-1B ARM Principal Balance
has been reduced to zero), and (iii) on and after any Payment Date on which the
Class HE: A-1B ARM Principal Balance has been reduced to zero (until the Class
HE: A-1A NAS Principal Balance has been reduced to zero), 100%.
"Class HE: A ARM Portion" means, generally, as to any Payment date,
(a) if such Payment Date is on or prior to the Class HE: A ARM Cross-
over Date, an amount equal to the Sub-Pool HE ARM Formula Principal
Distribution Amount;
(b) if such Payment Date is on or prior to the Class HE: A ARM Cross-
over Date, and after the Class HE: A-1 Underlying and Class HE: A-4 Cross-
over Dates, an amount equal to the Sub-Pool HE Formula Principal
Distribution Amount less the sum of the Class HE: M-1, Class HE: M-2, and
Class HE: B Formula Principal Distribution Amounts;
(c) if such Payment Date is after the Class HE: ARM Cross-over Date,
$0.
"Sub-Pool HE: ARM Formula Principal Distribution Amount" means, as to any
Payment Date, the sum of the following amounts with respect to the related Due
Period, in each case computed in accordance with the method specified in the
relevant Adjustable Rate Home Equity Contract:
(a) all scheduled payments of principal due on each outstanding
Adjustable Rate Home Equity Contract during the prior Due Period as
specified in the amortization schedule at the time applicable thereto
(after adjustments for previous Partial Principal Prepayments and any
adjustment to such amortization schedule by reason of any bankruptcy of an
Obligor or similar proceeding or any moratorium or similar waiver or grace
period); plus
(b) all Partial Principal Prepayments applied and all Principal
Prepayments in Full received during the prior Due Period in respect of the
Adjustable Rate Home Equity Contracts; plus
(c) the aggregate Scheduled Principal Balance of all Adjustable Rate
Home Equity Contracts that became Liquidated Contracts during the prior Due
Period plus the amount of any reduction in principal balance of any
Adjustable Rate Home Equity Contracts during the prior Due Period pursuant
to bankruptcy proceedings involving the related Obligor; plus
(d) the aggregate Scheduled Principal Balance of all Adjustable Rate
Home Equity Contracts repurchased, and all amounts deposited in lieu of the
repurchase of any Adjustable Rate Home Equity Contract, during the prior
Due Period, any amount required to be deposited by the Company in the
Certificate Account during the prior Due Period; plus
(e) on the Payment Date which is on or after the last day of the Pre-
Funding Period, the amount (if any) then on deposit in the Sub-Pool HE Pre-
Funding ARM Subaccount.
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The Class HE: A-1 Underlying Certificateholders will be entitled to
receive, as payments of principal, the Class HE: A-1 Underlying Portion, until
the Class HE: A-1 Principal Balance is reduced to zero. "Class HE: A-1
Underlying Portion" means, generally, as to any payment Date,
(a) if such Payment Date is on or prior to the Class HE: A-1
Underlying and Class HE: A-4 Cross-over Dates, an amount equal to the Sub-
Pool HE Group I Formula Principal Distribution Amount less the product of
(i) the sum of the Class HE: M-1, Class HE: M-2, and Class HE: B Formula
Principal Distribution Amounts times (ii) a fraction, the numerator of
which is the Sub-Pool HE Group I Formula Principal Distribution Amount and
the denominator of which is the Sub-Pool HE: Group I Formula Principal
Distribution Amount plus the Sub-Pool HE: Group II Formula Principal
Distribution Amount;
(b) if such Payment Date is on or prior to the Class HE: A-1
Underlying Cross-over Date and the Class HE: A ARM Cross-over Date but
after the Class HE: A-4 Cross-over Date, an amount equal to the Sub-Pool HE
Fixed Rate Formula Principal Distribution Amount less the sum of the Class
HE: M-1, Class HE: M-2, and Class HE: B Formula Principal Distribution
Amounts;
(c) if such Payment Date is on or prior to the Class HE: A-1
Underlying Cross-over Date and after the Class HE: A-4 and Class HE: A ARM
Cross-over Dates, an amount equal to the Sub-Pool HE Formula Principal
Distribution Amount less the sum of the Class HE: M-1, Class HE: M-2, and
Class HE: B Formula Principal Distribution Amounts times;
(d) if such Payment Date is after the Class HE: A-1 Underlying Cross-
over Date, $0.
"Sub-Pool HE: Group I Formula Principal Distribution Amount" means, as
to any Payment Date, the sum of:
(a) all scheduled payments of principal due on each outstanding Group
I Contract during the prior Due Period as specified in the amortization
schedule at the time applicable thereto (after adjustments for previous
Partial Principal Prepayments and after any adjustment to such amortization
schedule by reason of any bankruptcy of an Obligor or similar proceeding or
any moratorium or similar waiver or grace period); plus
(b) all Partial Principal Prepayments applied and all Principal
Prepayments in Full received during the prior Due Period with respect to
the Group I Contracts; plus
(c) the aggregate Scheduled Principal Balance of all Group I
Contracts that became Liquidated Contracts during the prior Due Period plus
the amount of any reduction in principal balance of any Group I Contract
during the prior Due Period pursuant to bankruptcy proceedings involving
the related Obligor; plus
(d) the aggregate Scheduled Principal Balance of all Group I
Contracts repurchased, and all amounts deposited in lieu of the repurchase
of any Group I Contract, during the prior Due Period, any amount required
to be deposited by the Company in the Certificate Account during the prior
Due Period; plus
(e) any amount described in clauses (a) through (d) above that was
not previously distributed because of an insufficient amount of funds
available in the Certificate Account if (1) the Payment Date occurs on or
after the Payment Date on which the Class HE: B Principal Balance has been
reduced to zero, or (2) such amount was not covered by a Class HE: B
Guaranty Payment and corresponding reduction in the Class HE: B Principal
Balance; plus
(f) on the Payment Date on or after the last day of the Pre-Funding
Period, the Sub-Pool HE Pre-Funded Group I Amount.
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Holders of the Class HE: A-2, Class HE: A-3 and Class HE: A-4
Certificates will be entitled to receive, as payments of principal, an amount
equal to the Class HE: A(2, 3, 4) Portion. When the Principal Balance of a
Class of Sub-Pool HE Certificates is reduced to zero, no further distributions
of principal will be made to the holders of such Class.
"Class HE: A (2, 3, 4) Portion" means, generally, as to any Payment Date,
(a) if such Payment Date is on or prior to the Class HE: A-4, Class
HE: A-1 Underlying, and Class HE: A ARM Cross-over Dates, an amount equal
to the Sub-Pool HE Group II Formula Principal Distribution Amount less the
product of (i) the sum of the Class HE: M-1, Class HE: M-2, and Class HE: B
Formula Principal Distribution Amounts times (ii) a fraction, the numerator
of which is the Sub-Pool HE Group II Formula Principal Distribution Amount
and the denominator of which is the Sub-Pool HE: Group I Formula Principal
Distribution Amount plus the Sub-Pool HE: Group II Formula Principal
Distribution Amount;
(b) if such Payment Date is on or prior to the Class HE: A-4 and
Class HE: A ARM Cross-over Dates but after the Class HE: A-1 Cross-over
Date, an amount equal to the Sub-Pool HE Fixed Rate Formula Principal
Distribution Amount less the sum of the Class HE: M-1, Class HE: M-2, and
Class HE: B Formula Principal Distribution Amounts;
(c) if such Payment Date is on or prior to the Class HE: A-4 and
Class HE: A-1 Underlying Cross-over Dates but after the Class HE: A ARM
Cross-over Date, an amount equal to the Sub-Pool HE Group II Formula
Principal Distribution Amount plus the Sub-Pool HE ARM Formula Principal
Distribution Amount less the product of (i) the sum of the Class HE: M-1,
Class HE: M-2, and Class HE: B Formula Principal Distribution Amounts times
(ii) a fraction, the numerator of which is the Sub-Pool HE Group II Formula
Principal Distribution Amount and the denominator of which is the Sub-Pool
HE: Group I Formula Principal Distribution Amount plus the Sub-Pool HE:
Group II Formula Principal Distribution Amount;
(d) if such Payment Date is on or prior to the Class HE: A-4 Cross-
over Date and after the Class HE: A-1 Underlying and Class HE: A ARM Cross-
over Dates, an amount equal to the Sub-Pool HE Formula Principal
Distribution Amount less the sum of the Class HE: M-1, Class HE: M-2, and
Class HE: B Formula Principal Distribution Amounts;
(e) if such Payment Date is after the Class HE: A-4 Cross-over Date,
$0.
"Sub-Pool HE Group II Formula Principal Distribution Amount" means, as to
any Payment Date, the sum of:
(a) all scheduled payments of principal due on each outstanding Group
II Contract during the prior Due Period as specified in the amortization
schedule at the time applicable thereto (after adjustments for previous
Partial Principal Prepayments and after any adjustment to such amortization
schedule by reason of any bankruptcy of an Obligor or similar proceeding or
any moratorium or similar waiver or grace period); plus
(b) all Partial Principal Prepayments applied and all Principal
Prepayments in Full received during the prior Due Period with respect to
the Group II Contracts; plus
(c) the aggregate Scheduled Principal Balance of all Group II
Contracts that became Liquidated Contracts during the prior Due Period plus
the amount of any reduction in principal balance of any Group II Contract
during the prior Due Period pursuant to bankruptcy proceedings involving
the related Obligor; plus
(d) the aggregate Scheduled Principal Balance of all Group II
Contracts repurchased, and all amounts deposited in lieu of the repurchase
of any Group II Contract, during the prior Due Period, any amount required
to be deposited by the Company in the Certificate Account during the prior
Due Period; plus
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(e) any amount described in clauses (a) through (d) above that was
not previously distributed because of an insufficient amount of funds
available in the Certificate Amount if (1) the Payment Date occurs on or
after the Payment Date on which the Class HE: B Principal Balance has been
reduced to zero, or (2) such amount was not covered by a Class HE: B
Guaranty Payment and corresponding reduction in the Class HE: B Principal
Balance; plus
(f) on the Payment Date on or after the last day of the Pre-Funding
Period, the Sub-Pool HE Pre-Funded Group II Amount.
The Class HE: A-5 IO Certificates are interest-only Certificates and are
not entitled to receive distributions of principal.
The Class HE: M-1 Certificateholders will be entitled to receive, as
payments of principal, the Class HE: M-1 Formula Principal Distribution
Amount.
"Class HE: M-1 Formula Principal Distribution Amount" means, as to any
Payment Date,
(a) if such Payment Date is prior to the January 2002 Payment Date, or if
such Payment Date is on or prior to the Class HE: A Cross-over Date and any
Class HE: Subordinate Principal Distribution Test is not satisfied, $0;
(b) if such Payment Date is on or after the January 2002 Payment Date and
on or prior to the Class HE: A Cross-over Date and each Class HE:
Subordinate Principal Distribution Test is satisfied, the excess of (i) the
difference between (x) the sum of the Class HE: M-1, Class HE: M-2, and
Class HE: B Adjusted Principal Balances and the Reserve Account Balance and
(y) the sum of the Class HE: M-2 Formula Principal Distribution Amount, the
Class HE: B Formula Principal Distribution Amount, and the net reduction of
the Reserve Account for the Payment Date over (ii) the product of 38% and
the Pool Scheduled Principal Balance of Sub-Pool HE as of such Payment
Date; or
(c) if such Payment Date is after the Class HE: A Cross-over Date, the
Sub-Pool HE Formula Principal Distribution Amount less the sum of the Class
HE: M-2 Formula Principal Distribution Amount and the Class HE: B Formula
Principal Distribution Amount.
The Class HE: M-2 Certificateholders will be entitled to receive, as
payments of principal, the Class HE: M-2 Formula Principal Distribution
Amount.
"Class HE: Subordinate Principal Distribution Test" means, as to any
Payment Date, each of the Sub-Pool HE Average Sixty-Day Delinquency Ratio
Test, the Sub-Pool HE Average Thirty-Day Delinquency Ratio Test, the Sub-Pool
HE Cumulative Realized Losses Test and the Sub-Pool HE Current Realized Losses
Test.
"Class HE: M-2 Formula Principal Distribution Amount" means, as to any
Payment Date,
(a) if such Payment Date is prior to the January 2002 Payment Date, or on
or prior to the Class HE: M-1 Cross-over Date and any Class HE: Subordinate
Principal Distribution Test is not satisfied, $0);
(b) if such Payment Date is on or after the January 2002 Payment Date and
on or prior to the Class HE: A Cross-over Date or the Class HE: M-1 Cross-
over Date and each Class HE: Subordinated Principal Distribution Test is
satisfied, the excess of (i) the difference between (x) the sum of the
Class HE: M-2 Adjusted Principal Balance, the Class HE: B Adjusted
Principal Balance and the Reserve Account Balance and (y) the sum of the
Class HE: B Formula Principal Distribution Amount and the net reduction of
the Reserve Account for that Payment Date over (ii) the product of 26% and
the Pool Scheduled Principal Balance of Sub-Pool HE as of such Payment
Date; or
(c) if such Payment Date is after Class HE: A Cross-over Date and the
Class M-1 Cross-over Date, the Sub-Pool HE Formula Principal Distribution
Amount less the Class HE: B Formula Principal Distribution Amount.
S-88
<PAGE>
Class HE: B Interest.
Interest on the outstanding Class HE: B Principal Balance will accrue
from December 7, 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 remaining Sub-Pool HE Amount Available, if any,
for a Payment Date after payment of all interest and principal then payable on
the Class HE: A, Class HE: M-1 and Class HE: M-2 Certificates and any amounts
payable to the Reserve Account lenders, and (ii) the Class HE: B Guaranty
Payment, if any, for such date, interest will be paid to the Class HE: B
Certificateholders on such Payment Date at the Class HE: B Pass-Through Rate
on the then outstanding Class HE: B Principal Balance. The Class HE: B
Principal Balance is the Original Class HE: B Principal Balance less all
amounts previously distributed to the Class HE: B Certificateholders
(including any Class HE: B Guaranty Payments) on account of principal.
In the event that, on a particular Payment Date, the remaining Sub-Pool
HE Amount Available in the Certificate Account plus any amounts actually paid
under the Class HE: B Limited Guaranty are not sufficient to make a full
distribution of interest to the Class HE: B Certificateholders, the amount of
the deficiency will be carried forward as an amount that the Class HE: B
Certificateholders are entitled to receive on the next Payment Date. Any
amount so carried forward will, to the extent legally permissible, bear
interest at the Class HE: B Pass-Through Rate.
Class HE: B Principal.
Except for payments of the Class HE: B Liquidation Loss Principal
Amount, payments of principal on the Class HE: B Certificates will not
commence until the Payment Date in or after January 2002, on which the Reserve
Account has been reduced to zero (the "Class HE: B Cross-over Date"), and will
be made on that Payment Date and each Payment Date thereafter only if the
Class HE: Subordinate Principal Distribution Test is satisfied on such Payment
Date (unless the Class HE: A Principal Balance and the Class HE: M
Principal Balance have been reduced to zero). The Class HE: B Principal
Balance will not be reduced below $5,500,000 until the Class HE: A and Class
HE: M Certificates have been retired. On any such Payment Date, Class HE: B
Certificateholders will be entitled to receive the Class HE: Formula Principal
Distribution Amount, to the extent of the Sub-Pool HE Amount Available, after
payment of all interest and principal then due on the Class HE: A and Class
HE: M Certificates, and any amounts actually paid under the Class HE: B
Limited Guaranty, in each case after payment of interest on the Class HE: B
Certificates.
On each Payment Date, the Class HE: B Certificateholders will be
entitled to receive, pursuant to the Class HE: B Limited Guaranty, the Class
HE: B Liquidation Loss Principal Amount until the Class HE: B Principal
Balance has been reduced to zero.
"Class HE: B Formula Principal Distribution Amount" means, as to any
Payment Date,
(a) if such Payment Date is prior to the January 2002 Payment Date or
on or before the Class HE: B Cross-over Date or any Class HE: Subordinate
Principal Distribution Test is not satisfied, $0;
(b) if such Payment Date is on or after the January 2002 Payment Date,
after the Class HE: B Cross-over Date and on or before either the Class HE: A
or Class HE: M-2 Cross-over Dates and each Class HE: Subordinate Principal
Distribution Test is satisfied, the excess of (i) the difference between (x)
the sum of the Class HE: B Adjusted Principal Balance and Reserve Account
Balance and (y) the net reduction of the Reserve Account for that Payment Date
over (ii) the greater of (x) $5,500,000 and (y) the product of 16% and the
Pool Scheduled Principal Balance of Sub-Pool HE as of such Payment Date;
(c) if such Payment Date is after the Class HE: A, Class HE: M-1 and
Class HE: M-2 Cross-over Dates, the Sub-Pool HE Formula Principal Distribution
Amount.
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<PAGE>
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.
SUBORDINATION OF CLASS HI: M CERTIFICATES AND CLASS HI: B CERTIFICATES
The rights of the holders of the Class HI: M Certificates and Class HI: B
Certificates to receive distributions with respect to the Home Improvement
Contracts comprising Sub-Pool HI, as well as any other amounts constituting the
Sub-Pool HI Amount Available, will be subordinated, to the extent described
herein, to such rights of the holders of the Class HI: A Certificates. This
subordination is intended to enhance the likelihood of regular receipt by the
holders of the Class HI: A Certificates of the full amount of their scheduled
monthly payments of interest and principal and to afford such holders
protection against losses on Liquidated Home Improvement Contracts.
A portion of the protection afforded to the holders of the Class HI: A
Certificates by means of the subordination of the Class HI: M and Class HI: B
Certificates will be accomplished by the preferential right of the Class HI: A
Certificateholders to receive on any Payment Date the amount of interest due on
the Class HI: A Certificates, including any interest due on a prior Payment
Date but not received, prior to any distribution being made on a Payment Date
in respect of interest on the Class HI: M and Class HI: B Certificates.
Thereafter, any remaining Sub-Pool HI Amount Available in the Certificate
Account will be applied to the payment of interest due on the Class HI: M-1
Adjusted Principal Balance, then interest due on the Class HI: M-2 Adjusted
Principal Balance and then interest due on the Class HI: B-1 Adjusted Principal
Balance.
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<PAGE>
After payment of all interest then accrued on the Class HI: A Principal
Balance, Class HI: M-1 Adjusted Principal Balance, Class HI: M-2 Adjusted
Principal Balance and Class HI: B-1 Adjusted Principal Balance as aforesaid,
any remaining Sub-Pool HI Amount Available will be distributed in the following
order of priority: first, the Sub-Pool HI Senior Percentage or the Class HI: B
Percentage, as applicable, of the Sub-Pool HI Formula Principal Distribution
Amount, together with any Sub-Pool HI Supplementary Principal Distribution
Amount, will be distributed to the Class HI: A, Class HI: M and Class HI: B-1
Certificateholders in the order of priority described above under
"Distributions on Sub-Pool HI Certificates--Principal on the Class HI: A, Class
HI: M-1, Class HI: M-2 and Class HI: B-1 Certificates;" thereafter, the
remaining Sub-Pool HI Amount Available, to the extent sufficient therefor, will
be distributed in the following order of priority: first, any unpaid Class HI:
M-1 Liquidation Loss Interest Amount (as described below under "Losses on
Liquidated Home Improvement Contracts") will be distributed to the Class HI: M-
1 Certificateholders; then, any unpaid Class HI: M-2 Liquidation Loss Interest
Amount (as described below under "Losses on Liquidated Home Improvement
Contracts") will be distributed to the Class HI: M-2 Certificateholders; and,
finally, any unpaid Class HI: B-1 Liquidation Loss Interest Amount (as
described below under "Losses on Liquidated Home Improvement Contracts") will
be distributed to the Class HI: B-1 Certificateholders.
The rights of the holders of the Class HI: B-2 Certificates to receive
distributions with respect to the Home Improvement Contracts and other amounts
in the Certificate Account will be subordinated to such rights of the holders
of the Class HI: A Certificates, Class HI: M Certificates and Class HI: B-1
Certificates. Thus, the Class HI: B-2 Certificateholders will be entitled to
distribution of interest and principal on the Class HI: B-2 Certificates only
after distribution of all interest and principal then payable on the Class HI:
A, Class HI: M and Class HI: B-1 Certificates.
If a Class HI: B-2 Liquidation Loss Amount is realized for any Payment
Date and the Company fails to pay such amount pursuant to its Class HI: B-2
Limited Guaranty, the Class HI: B-2 Certificateholders may incur losses on
their investment in the Class HI: B-2 Certificates to the extent such losses
are not made up from future payments on the Home Improvement Contracts or the
Class HI: B-2 Limited Guaranty.
LOSSES ON LIQUIDATED HOME IMPROVEMENT CONTRACTS
As described above, the distribution of principal to the Class HI: A
Certificateholders is intended to include the Sub-Pool HI Senior Percentage of
the Scheduled Principal Balance of each Home Improvement Contract that became a
Liquidated Contract during the preceding Due Period. If the Net Liquidation
Proceeds from such Liquidated Contract are less than the Scheduled Principal
Balance of such Liquidated Contract plus accrued and unpaid interest thereon,
the deficiency will, in effect, be absorbed by the Class C Certificateholders,
then the Class HI: B-2 Guaranty Fee otherwise payable to the Company, then 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 Home Improvement Contracts, then the Class HI: B-2 Certificateholders, then
the Class HI: B-1 Certificateholders, then the Class HI: M-2 Certificateholders
and then the Class HI: M-1 Certificateholders, since a portion of the Sub-Pool
HI Amount Available equal to such deficiency and otherwise distributable to
them will be paid to the Class HI: A Certificateholders. Likewise, to the
extent the Class HI: M-1 Certificateholders, the Class HI: M-2
Certificateholders or the Class HI: B-1 Certificateholders are entitled to
receive distributions of principal, similar deficiencies could result for each
Class of Certificates with a lower payment priority.
If the Sub-Pool HI Amount Available is not sufficient to cover the entire
amount distributable to the Class HI: A Certificateholders, the Class HI: M-1
Certificateholders or the Class HI: M-2 Certificateholders on a particular
Payment Date, then the Sub- Pool HI Senior Percentage on future Payment Dates
may be increased and the Class HI: B Percentage on future Payment Dates may be
reduced as a result of such deficiency.
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<PAGE>
In the event the Sub-Pool HI Amount Available in the Certificate Account
for any Payment Date is insufficient to distribute the full Sub-Pool HI Formula
Principal Distribution Amount for such Payment Date to the Sub-Pool HI
Certificateholders, the aggregate outstanding Principal Balance of the Sub-Pool
HI Certificates will be greater than the Pool Scheduled Principal Balance of
Sub-Pool HI for such Payment Date. In such event, the amount of such deficiency
(the "Sub-Pool HI Liquidation Loss Amount") would be allocated first to the
Class HI: B-2 Certificates (the "Class HI: B-2 Liquidation Loss Amount"), and
the Company would be obligated to pay the amount of such Class HI: B-2
Liquidation Loss Amount to the Class HI: B-2 Certificateholders pursuant to the
Class HI: B-2 Limited Guaranty. If on any Payment Date the sum of the Class HI:
A Principal Balance, the Class HI: M-1 Principal Balance, the Class HI: M-2
Principal Balance and the Class HI: B-1 Principal Balance were equal to the
Pool Scheduled Principal Balance of Sub-Pool HI, no further Sub-Pool HI
Liquidation Loss Amounts could be allocated to the Class HI: B-2 Certificates
and any further Sub-Pool HI Liquidation Loss Amounts realized would be
allocated to reduce the Class HI: B-1 Adjusted Principal Balance (a "Class HI:
B-1 Liquidation Loss Amount"). If the Class HI: B-1 Adjusted Principal Balance
were reduced to zero, any further Sub-Pool HI Liquidation Loss Amounts realized
would be allocated to reduce the Class HI: M-2 Adjusted Principal Balance (a
"Class HI: M-2 Liquidation Loss Amount"). If the Class HI: M-2 Adjusted
Principal Balance were reduced to zero, any further Sub-Pool HI Liquidation
Loss Amounts realized would be allocated to reduce the Class HI: M-1 Adjusted
Principal Balance (a "Class HI: M-1 Liquidation Loss Amount"). Any such Sub-
Pool HI Liquidation Loss Amounts would be reduced on subsequent Payment Dates
to the extent that the Sub-Pool HI Amount Available in the Certificate Account
on such Payment Dates is sufficient to permit the distribution of principal
due, but not paid, on the Sub-Pool HI Certificates on prior Payment Dates. In
the event the Adjusted Principal Balance of the Class HI: M-1, Class HI: M-2 or
Class HI: B-1 Certificates were reduced by a Sub-Pool HI Liquidation Loss
Amount, interest accruing on such Class would be calculated on the reduced
Adjusted Principal Balance of such Class. The interest accruing on such Class's
Sub-Pool HI Liquidation Loss Amount each month (such Class's "Sub-Pool HI
Liquidation Loss Interest Amount"), plus interest at the applicable Pass-
Through Rate on any Sub-Pool HI Liquidation Loss Interest Amount due on a prior
Payment Date but not paid, would be paid to the Certificateholders of such
Class from the Sub-Pool HI Amount Available, after distributions of principal
on all Class HI: A, Class HI: M and Class HI: B-1 Certificates, in the order of
priority described above under "Subordination of Class HI: M and Class HI: B
Certificates."
But for the effect of the subordination of the Class HI: M-2, Class HI: B
and Class C Certificates, the Class HI: B-2 Guaranty Fee otherwise payable to
the Company 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 Home Improvement Contracts, the Class HI:
M-1 Certificateholders will absorb all losses on each Liquidated Home
Improvement Contract in the amount by which its Net Liquidation Proceeds are
less than its unpaid principal balance plus accrued and unpaid interest thereon
less the related Monthly Servicing Fee.
But for the effect of the subordination of the Class HI: B and Class C
Certificates, the Class HI: B-2 Guaranty Fee otherwise payable to the Company
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 Home Improvement Contracts, the Class HI: M-2
Certificateholders will absorb all losses on each Liquidated Home Improvement
Contract in the amount by which its Net Liquidation Proceeds are less than its
unpaid principal balance plus accrued and unpaid interest thereon less the
related Monthly Servicing Fee.
But for the effect of the subordination of the Class HI: B-2 and Class C
Certificates, the Class HI: B-2 Guaranty Fee otherwise payable to the Company
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 Home Improvement Contracts, the Class HI: B-1
Certificateholders will absorb all losses on each Liquidated Home Improvement
Contract in the amount by which its Net Liquidation Proceeds are less than its
unpaid principal balance plus accrued and unpaid interest thereon less the
related Monthly Servicing Fee.
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<PAGE>
But for the payments under the Class HI: B-2 Limited Guaranty described
below and the subordination of the Class C Certificates, the Class HI: B-2
Guaranty Fee otherwise payable to the Company 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 Home
Improvement Contracts, the Class HI: B-2 Certificateholders will absorb all
losses on each Liquidated Home Improvement Contract in the amount by which its
Net Liquidation Proceeds are less than its unpaid principal balance plus
accrued and unpaid interest thereon less the related Monthly Servicing Fee.
SUBORDINATION OF CLASS HE: M CERTIFICATES AND CLASS HE: B CERTIFICATES
The rights of the holders of the Class HE: M Certificates and Class HE: B
Certificates to receive distributions with respect to the Home Equity Contracts
comprising Sub-Pool HE, as well as any other amounts constituting the Sub-Pool
HE Amount Available, will be subordinated, to the extent described herein, to
such rights of the holders of the Class HE: A Certificates. This subordination
is intended to enhance the likelihood of regular receipt by the holders of the
Class HE: A Certificates of the full amount of their scheduled monthly payments
of interest and principal and to afford such holders protection against losses
on Liquidated Home Equity Contracts.
A portion of the protection afforded to the holders of the Class HE: A
Certificates by means of the subordination of the Class HE: M and Class HE: B
Certificates will be accomplished by the preferential right of the Class HE: A
Certificateholders to receive on any Payment Date the amount of interest due on
the Class HE: A Certificates, including any interest due on a prior Payment
Date but not received, prior to any distribution being made on a Payment Date
in respect of interest on the Class HE: M and Class HE: B Certificates.
Thereafter, any remaining Sub-Pool HE Amount Available in the Certificate
Account will be applied to the payment of interest due on the Class HE: M-1
Adjusted Principal Balance, then interest due on the Class HE: M-2 Adjusted
Principal Balance and then interest due on the Class HE: B Adjusted Principal
Balance.
After payment of all interest then accrued on the Class HE: A Principal
Balance, Class HE: A-5 IO Notional Principal Amount, Class HE: M-1 Adjusted
Principal Balance, Class HE: M-2 Adjusted Principal Balance and Class HE: B
Adjusted Principal Balance, any remaining Sub-Pool HE Amount Available will be
distributed in the following order of priority: first, the Class HE: ARM
Portion will be distributed to the Class HE: A-1A NAS and Class HE: A-1B ARM
Certificateholders; second, the Class HE: A-1 Underlying Portion will be paid
to the Grantor Trust for payment to the Class HE: A-1 Certificateholders;
third, the Class HE: A (2,3,4) Portion will be paid sequentially to the Class
HE: A-2, Class HE: A-3 and Class HE: A-4 Certificateholders; fourth, the Class
HE: M-1 Formula Principal Distribution Amount will be paid to the Class HE: M-1
Certificateholders; and fifth, the Class HE: M-2 Formula Principal Distribution
Amount will be paid to the Class HE: M-2 Certificateholders, as described above
under "Distributions on Sub-Pool HE Certificates--Principal on the Class HE: A,
Class HE: M-1 and Class HE: M-2 Certificates"; thereafter, the remaining Sub-
Pool HE Amount Available, to the extent sufficient therefor, will be
distributed in the following order of priority: first, any unpaid Class HE: M-1
Liquidation Loss Interest Amount (as described below under "Losses on
Liquidated Home Equity Contracts") will be distributed to the Class HE: M-1
Certificateholders; and, finally, any unpaid Class HE: M-2 Liquidation Loss
Interest Amount (as described below under "Losses on Liquidated Home Equity
Contracts") will be distributed to the Class HE: M-2 Certificateholders.
The rights of the holders of the Class HE: B Certificates to receive
distributions with respect to the Home Equity Contracts and other amounts in
the Certificate Account will be subordinated to such rights of the holders of
the Class HE: A Certificates and Class HE: M Certificates. Thus, the Class HE:
B Certificateholders will be entitled to distributions of interest and
principal on the Class HE: B Certificates only after distributions of all
interest and principal then payable on the Class HE: A and Class HE: M
Certificates.
If a Class HE: B Liquidation Loss Amount is realized for any Payment Date
and the Company fails to pay such amount pursuant to its Class HE: B Limited
Guaranty, the Class HE: B
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<PAGE>
Certificateholders may incur losses on their investment in the Class HE: B
Certificates to the extent such losses are not made up from future payments on
the Home Equity Contracts or the Class HE: B Limited Guaranty.
LOSSES ON LIQUIDATED HOME EQUITY CONTRACTS
As described above, the distribution of principal to the Class HE: A
Certificateholders is intended to include the Sub-Pool HE Senior Percentage of
the Scheduled Principal Balance of each Home Equity Contract (other than the
Adjustable Rate Contracts) that became a Liquidated Contract during the
preceding Due Period and the Scheduled Principal Balance of each Adjustable
Rate Contract that became a Liquidated Contract during the preceding Due
Period. If the Net Liquidation Proceeds from such Liquidated Contracts are less
than the Scheduled Principal Balance of such Liquidated Contracts plus accrued
and unpaid interest thereon, the deficiency will, in effect, be absorbed by the
Class C Certificateholder, then the Class HE: B Guaranty Fee otherwise payable
to the Company, 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 Home Equity Contracts, then the Class HE:
B Certificateholders, then the Class HE: M-2 Certificateholders and then the
Class HE: M-1 Certificateholders, since a portion of the Sub-Pool HE Amount
Available equal to such deficiency and otherwise distributable to them will be
paid to the Class HE: A Certificateholders. Likewise, to the extent the Class
HE: M-1 Certificateholders or the Class HE: M-2 Certificateholders are entitled
to receive distributions of principal, similar deficiencies could result for
each Class of Sub-Pool HE Certificates with a lower payment priority.
In the event the Sub-Pool HE Amount Available in the Certificate Account
for any Payment Date is insufficient to distribute the full Sub-Pool HE Formula
Principal Distribution Amount for such Payment Date to the Sub-Pool HE
Certificateholders, the aggregate outstanding Principal Balance of the Sub-Pool
HE Certificates will be greater than the Pool Scheduled Principal Balance of
Sub-Pool HE for such Payment Date. In such event, the amount of such deficiency
(the "Sub-Pool HE Liquidation Loss Amount") would be allocated first to the
Class HE: B Certificates (the "Class HE: B Liquidation Loss Amount"), and the
Company would be obligated to pay the amount of such Class HE: B Liquidation
Loss Amount to the Class HE: B Certificateholders pursuant to the Class HE: B
Limited Guaranty. If on any Payment Date the sum of the Class HE: A Principal
Balance, the Class HE: M-1 Principal Balance and the Class HE: M-2 Principal
Balance were equal to the Pool Scheduled Principal Balance of Sub-Pool HE, no
further Sub-Pool HE Liquidation Loss Amounts could be allocated to the Class
HE: B Certificates and any further Sub-Pool HE Liquidation Loss Amounts
realized would be allocated to reduce the Class HE: M-2 Adjusted Principal
Balance (a "Class HE: M-2 Liquidation Loss Amount"). If the Class HE: M-2
Adjusted Principal Balance were reduced to zero, any further Sub-Pool HE
Liquidation Loss Amounts realized would be allocated to reduce the Class HE: M-
1 Adjusted Principal Balance (a "Class HE: M-1 Liquidation Loss Amount"). Any
such Sub-Pool HE Liquidation Loss Amounts would be reduced on subsequent
Payment Dates to the extent that the Sub-Pool HE Amount Available in the
Certificate Account on such Payment Dates is sufficient to permit the
distribution of principal due, but not paid, on the Sub-Pool HE Certificates on
prior Payment Dates. In the event the Adjusted Principal Balance of the Class
HE: M-1 or Class HE: M-2 Certificates were reduced by a Sub-Pool HE Liquidation
Loss Amount, interest accruing on such Class would be calculated on the reduced
Adjusted Principal Balance of such Class. The interest accruing on such Class's
Sub-Pool HE Liquidation Loss Amount each month (such Class's "Sub-Pool HE
Liquidation Loss Interest Amount"), plus interest at the applicable Pass-
Through Rate on any Sub-Pool HE Liquidation Loss Interest Amount due on a prior
Payment Date but not paid, would be paid to the Certificateholders of such
Class from the Sub-Pool HE Amount Available, after distributions of principal
on all Class HE: A and Class HE: M Certificates, in the order of priority
described above under "Subordination of Class HE: M and Class HE: B
Certificates."
If the Sub-Pool HE Amount Available is not sufficient to cover the entire
amount distributable to the Class HE: A Certificateholders, the Class HE: M-1
Certificateholders or the Class HE: M-2 Certificateholders on a particular
Payment Date, then the Sub-Pool HE Senior Percentage on future
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<PAGE>
Payment Dates may be increased and the Class HE: 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 HE: M-2, Class HE:
B and Class C Certificates, the Class HE: B Guaranty Fee otherwise payable to
the Company 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 Home Equity Contracts, the Class HE: M-1
Certificateholders will absorb all losses on each Liquidated Home Equity
Contract in the amount by which its Net Liquidation Proceeds are less than its
unpaid principal balance plus accrued and unpaid interest thereon less the
related Monthly Servicing Fee.
But for the effect of the subordination of the Class HE: B and Class C
Certificates, the Class HE: B Guaranty Fee otherwise payable to the Company
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 Home Equity Contracts, the Class HE: M-2
Certificateholders will absorb all losses on each Liquidated Home Equity
Contract in the amount by which its Net Liquidation Proceeds are less than its
unpaid principal balance plus accrued and unpaid interest thereon less the
related Monthly Servicing Fee.
But for the payments under the Class HE: B Limited Guaranty described
below and the subordination of the Class C Certificate, the Class HE: B
Guaranty Fee otherwise payable to the Company 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
Home Equity Contracts, the Class HE: B Certificateholders will absorb all
losses on each Liquidated Home Equity Contract in the amount by which its Net
Liquidation Proceeds are less than its unpaid principal balance plus accrued
and unpaid interest thereon less the related Monthly Servicing Fee.
ADVANCES
To the extent that collections on a Contract in any Due Period are less
than the scheduled payment due thereon, the Servicer will be obligated to make
an advance of the uncollected portion of such scheduled payment. The Servicer
will be obligated to advance a Delinquent Payment on a Contract only to the
extent that the Servicer, in its sole discretion, expects to recoup such
Advance from subsequent funds available therefor in the Certificate Account.
If the Servicer fails to make an Advance required under the Agreement,
the Trustee will be obligated to deposit the amount of such Advance in the
Certificate Account on the Payment Date. The Trustee will not, 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 HI: 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
HI: 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
HI: A Certificates allocable to principal (separately identifying the
aggregate amount of any Principal Prepayments and any Sub-Pool HI
Supplementary Principal Distribution Amount included);
(c) the amount, if any, by which the Class HI: A Formula Distribution
Amount exceeds the Class HI: A Distribution Amount for such Payment
Date;
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(d) the Principal Balance of each Class of Class HI: A Certificates
after giving effect to the distribution of principal on such Payment
Date;
(e) the Sub-Pool HI Senior Percentage for such Payment Date;
(f) the Pool Scheduled Principal Balance of Sub-Pool HI for such
Payment Date;
(g) the Sub-Pool HI Pool Factor (a percentage derived from a fraction
the numerator of which is the sum of the Class HI: A Principal Balance,
the Class HI: M Principal Balance and the Class HI: B Principal Balance
and the denominator of which is the Cut-off Date Pool Principal Balance
of Sub-Pool HI); and
(h) the number and aggregate principal balance of Home Improvement
Contracts delinquent (i) 30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (d) will be
expressed as dollar amounts for a Class HI: A Certificate with a 1% Percentage
Interest or per $1,000 denomination of Class HI: 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 HI: 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 HI: 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 HI: M-1
Certificates allocable to interest (separately identifying any unpaid
interest shortfall included);
(b) the amount of such distribution to holders of the Class HI: M-1
Certificates allocable to principal (separately identifying the
aggregate amount of any Principal Prepayments and any Sub-Pool HI
Supplementary Principal Distribution Amount included);
(c) the amount, if any, by which the Class HI: M-1 Formula Distribution
Amount exceeds the Class HI: M-1 Distribution Amount for such Payment
Date;
(d) the Principal Balance of the Class HI: M-1 Certificates after
giving effect to the distribution of principal on such Payment Date;
(e) any unpaid Class HI: M-1 Liquidation Loss Interest Amount, after
giving effect to payments of interest on such Payment Date;
(f) the Sub-Pool HI Senior Percentage for such Payment Date;
(g) the Pool Scheduled Principal Balance of Sub-Pool HI for such
Payment Date;
(h) the Pool Factor; and
(i) the number and aggregate principal balance of Home Improvement
Contracts delinquent (i) 30-59 days and (ii) 60 or more days.
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Information furnished pursuant to clauses (a) through (d) will be
expressed as dollar amounts for a Class HI: M-1 Certificate with a 1%
Percentage Interest or per $1,000 denomination of Class HI: M-1 Certificate.
(b) the amount of such distribution to holders of the Class HI: M-2
Certificates allocable to principal (separately identifying the
aggregate amount of any Principal Prepayments and any Sub-Pool HI
Supplementary Principal Distribution Amount included);
(c) the amount, if any, by which the Class HI: M-2 Formula Distribution
Amount exceeds the Class HI: M-2 Distribution Amount for such Payment
Date;
(d) the Principal Balance of the Class HI: M-2 Certificates after
giving effect to the distribution of principal on such Payment Date;
(e) any unpaid Class HI: M-2 Liquidation Loss Interest Amount, after
giving effect to payments of interest on such Payment Date;
(f) the Sub-Pool HI Senior Percentage for such Payment Date;
(g) the Pool Scheduled Principal Balance of Sub-Pool HI for such
Payment Date;
(h) the Sub-Pool HI Pool Factor; and
(i) the number and aggregate principal balance of Home Improvement
Contracts delinquent (i) 30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (d) will be
expressed as dollar amounts for a Class HI: M-2 Certificate with a 1%
Percentage Interest or per $1,000 denomination of Class HI: 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 HI: 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 HI: 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 HI: B-1
Certificates allocable to interest (separately identifying any unpaid
interest shortfall included);
(b) the amount of such distribution to holders of the Class HI: 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 HI: B-1 Formula Distribution
Amount exceeds the Class HI: B-1 Distribution Amount for such Payment
Date;
(d) the Principal Balance of the Class HI: B-1 Certificates after
giving effect to the distribution of principal on such Payment Date;
(e) any unpaid Class HI: B-1 Liquidation Loss Interest Amount, after
giving effect to payments of interest on such Payment Date;
(f) the Class HI: B Percentage for such Payment Date;
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(g) the Pool Scheduled Principal Balance of Sub-Pool HI for such
Payment Date;
(h) the Sub-Pool HI Pool Factor; and
(i) the number and aggregate principal balance of Sub-Pool HI
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 HI: B-1 Certificate with a 1%
Percentage Interest or per $1,000 denomination of Class HI: 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 HI: 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 HI: 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 HI: B-2
Certificates allocable to interest;
(b) the amount of such distribution to holders of Class HI: 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 HI: B-2 Formula
Distribution Amount and the Class HI: B-2 Liquidation Loss Principal
Amount, if any, exceeds the Class HI: B-2 Distribution Amount for such
Payment Date;
(d) the Class HI: B-2 Liquidation Loss Principal Amount, if any, for
such Payment Date;
(e) the Class HI: B-2 Guaranty Payment, if any, for such Payment Date;
(f) the Class HI: B-2 Principal Balance after giving effect to the
distribution of principal on such Payment Date;
(g) the Class HI: B Percentage for such Payment Date;
(h) the Pool Scheduled Principal Balance of Sub-Pool HI for such
Payment Date;
(i) the Sub-Pool HI Pool Factor; and
(j) the number and aggregate principal balance of Home Improvement
Contracts delinquent (i) 30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (c) will be
expressed as dollar amounts for a Class HI: B-2 Certificate with a 1%
Percentage Interest or per $1,000 denomination of Class HI: 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 HI: 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.
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The Servicer will furnish to the Trustee, and the Trustee will include
with each distribution to a Class HE: A Certificateholder, statements 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
HE: A Certificates allocable to interest (separately identifying any
unpaid interest shortfall included) and, in the case of a Class HE: A-1
Certificateholder, the amount, if any, paid by the Swap Counterparty;
(b) the amount of such distribution to holders of each Class of Class
HE: A Certificates allocable to principal (separately identifying the
aggregate amount of any Principal Prepayments included);
(c) the amount, if any, by which the Class HE: A Formula Distribution
Amount exceeds the Class HE: A Distribution Amount for such Payment
Date;
(d) the Principal Balance of each Class of Class HE: A Certificates and
the Notional Principal Amount for the Class HE: A-5 IO Certificates
after giving effect to the distribution of principal on such Payment
Date;
(e) the amounts to be paid to and by the Swap Counterparty on the
related Swap Payment Date;
(f) the Pool Scheduled Principal Balance of Sub-Pool HE for such
Payment Date;
(g) the Sub-Pool HE Pool Factor (a percentage derived from a fraction
the numerator of which is the sum of the Class HE: A Principal Balance,
the Class HE: M Principal Balance and the Class HE: B Principal Balance
and the denominator of which is the Cut-off Date Pool Principal Balance
of Sub-Pool HE); and
(h) the number and aggregate principal balance of Home Equity Contracts
delinquent (i) 30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (d) will be
expressed as dollar amounts for a Class HE: A Certificate with a 1% Percentage
Interest or per $1,000 denomination of Class HE: 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 HE: 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 HE: 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 HE: M-1
Certificates allocable to interest (separately identifying any unpaid
interest shortfall included);
(b) the amount of such distribution to holders of the Class HE: 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 HE: M-1 Formula Distribution
Amount exceeds the Class HE: M-1 Distribution Amount for such Payment
Date;
(d) the Principal Balance of the Class HE: M-1 Certificates after
giving effect to the distribution of principal on such Payment Date;
(e) any unpaid Class HE: M-1 Liquidation Loss Interest Amount, after
giving effect to payments of interest on such Payment Date;
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(f) the Sub-Pool HE Senior Percentage for such Payment Date;
(g) the Pool Scheduled Principal Balance of Sub-Pool HE for such
Payment Date;
(h) the Sub-Pool HE Pool Factor; and
(i) the number and aggregate principal balance of Home Equity Contracts
delinquent (i) 30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (d) will be
expressed as dollar amounts for a Class HE: M-1 Certificate with a 1%
Percentage Interest or per $1,000 denomination of Class HE: 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 HE: 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 HE: 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 HE: M-2
Certificates allocable to interest (separately identifying any unpaid
interest shortfall included);
(b) the amount of such distribution to holders of the Class HE: 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 HE: M-2 Formula Distribution
Amount exceeds the Class HE: M-2 Distribution Amount for such Payment
Date;
(d) the Principal Balance of the Class HE: M-2 Certificates after
giving effect to the distribution of principal on such Payment Date;
(e) any unpaid Class HE: M-2 Liquidation Loss Interest Amount, after
giving effect to payments of interest on such Payment Date;
(f) the Sub-Pool HE Senior Percentage for such Payment Date;
(g) the Pool Scheduled Principal Balance of Sub-Pool HE for such
Payment Date;
(h) the Sub-Pool HE Pool Factor; and
(i) the number and aggregate principal balance of Home Equity Contracts
delinquent (i) 30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (d) will be
expressed as dollar amounts for a Class HE: M-2 Certificate with a 1%
Percentage Interest or per $1,000 denomination of Class HE: 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 HE: 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.
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The Servicer will furnish to the Trustee, and the Trustee will include
with each distribution to a Class HE: B 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 HE: B
Certificates allocable to interest;
(b) the amount of such distribution to holders of Class HE: B
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 HE: B Formula
Distribution Amount and the Class HE: B Liquidation Loss Principal
Amount, if any, exceeds the Class HE: B Distribution Amount for such
Payment Date;
(d) the Class HE: B Liquidation Loss Principal Amount, if any, for such
Payment Date;
(e) the Class HE: B Guaranty Payment, if any, for such Payment Date;
(f) the Class HE: B Principal Balance after giving effect to the
distribution of principal on such Payment Date;
(g) the Class HE: B Percentage for such Payment Date;
(h) the Pool Scheduled Principal Balance of Sub-Pool HE for such
Payment Date;
(i) the Sub-Pool HE Pool Factor; and
(j) the number and aggregate principal balance of Home Equity Contracts
delinquent (i) 30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (c) will be
expressed as dollar amounts for a Class HE: B Certificate with a 1% Percentage
Interest or per $1,000 denomination of Class HE: B 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 HE: B
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 Contract Pool is less than 10% of the aggregate
Principal Balance of the Certificates on the Closing Date, the Servicer will
have the option to repurchase, on 30 days' prior written notice to the
Trustee, all outstanding Contracts (other than any Contract as to which title
to the underlying property has been assigned) at a price sufficient to pay (i)
the Aggregate Certificate Principal Balance, (ii) the Monthly Interest due on
all Certificates on the Payment Date occurring in the month following the date
of repurchase and (iii) any accrued but unpaid interest thereon, including
interest (to the extent not paid on a prior Payment Date) on the Class HE: A-
1B ARM Certificates for any Payment Date with respect to which the Available
Funds Pass-Through Rate was less than one-month LIBOR plus the Pass-Through
Margin (or 14.0% if less), calculated on the Class HE: A-1B ARM Principal
Balance for such Payment Date at a rate equal to such difference, plus
interest on such amount accrued from such Payment Date to the Payment Date on
which such amount is paid. 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 Contracts, exercising the degree of skill and care required by FHA and
otherwise consistent with the highest degree of skill and
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care that the Servicer exercises with respect to similar contracts (including
manufactured housing contracts) serviced by the Servicer. The Servicer will not
be required to cause to be maintained, or otherwise monitor the maintenance of,
hazard insurance on the improved properties, but is required under FHA
regulations to monitor and ensure the maintenance of flood insurance on
properties securing FHA-insured Home Improvement Contracts located in federally
designated special flood hazard areas. The Company does, however, as a matter
of its own policy, monitor proof of hazard insurance coverage (other than flood
insurance) and require that it be named as an additional loss payee on all
first lien secured contracts and generally on junior lien secured contracts
with amounts financed of over $20,000.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Servicer will receive a Monthly Servicing Fee for each Due Period
(paid on the next succeeding Payment Date) for servicing the Contracts
comprising each Sub-Pool equal to one-twelfth of the product of .50% and the
remaining Pool Scheduled Principal Balance of the Contracts in such Sub-Pool
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 Contract (including FHA Insurance proceeds) 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 Contract. Administrative services performed by the Servicer on
behalf of the Trust include selecting and packaging the Contracts, calculating
distributions to Certificateholders and providing related data processing and
reporting services for Certificateholders and on behalf of the Trustee.
Expenses incurred in connection with the servicing of the Contracts and paid by
the Servicer from its servicing fees include payment of FHA Insurance premiums,
payment of fees and expenses of accountants, payments of all fees and expenses
incurred in connection with the enforcement of Contracts or foreclosure on
collateral relating thereto (including submission of FHA Insurance claims, if
applicable), payment of Trustee's fees, and payment of expenses incurred in
connection with distributions and reports to Certificateholders.
EVIDENCE AS TO COMPLIANCE
The Agreement provides for delivery to the Trustee of a monthly report by
the Servicer no later than one Business Day following the Determination Date,
setting forth the information described under "Description of the
Certificates--Reports to Certificateholders." Each report to the Trustee will
be accompanied by a statement from an appropriate officer of the Servicer
certifying the accuracy of such report and stating that the Servicer has not
defaulted in the performance of its obligations under the Agreement. On or
before May 1 of each year, beginning in 1999, 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
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.
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.
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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 contract with
GNMA is terminated. The Servicer will be required under the Agreement to give
the Trustee and the Certificateholders notice of an Event of Termination
promptly upon the occurrence of such event.
RIGHTS UPON AN EVENT OF TERMINATION
If an Event of Termination has occurred and is continuing, either the
Trustee or holders of Certificates representing 25% or more of the Aggregate
Certificate Principal Balance may terminate all of the Servicer's management,
administrative, servicing and collection functions under the Agreement. Upon
such termination, the Trustee or its designee will succeed to all the
responsibilities, duties and liabilities of the Company as Servicer under the
Agreement and will be entitled to similar compensation arrangements; provided,
however, that neither the Trustee nor any successor Servicer will assume any
accrued obligation of the prior servicer or any obligation of the Company to
repurchase Contracts for breach of representations and warranties, and the
Trustee will not be liable for any acts or omissions of the Servicer occurring
prior to a transfer of the Servicer's servicing and related functions or for
any breach by the Servicer of any of its representations and warranties
contained in the Agreement or any related document or agreement. In addition,
the Trustee will notify FHA of the Servicer's termination as Servicer of the
FHA-insured Home Improvement Contracts and will request that the portion of the
Servicer'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" in the Prospectus. Notwithstanding such
termination, the Servicer shall be entitled to payment of certain amounts
payable to it prior to such termination, for services rendered prior to such
termination. No such termination will affect in any manner the Company's
obligation to repurchase certain Contracts for
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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 Certificateholders) on the earlier of (a) the Payment Date
on which the Pool Scheduled Principal Balance of the Contract Pool is reduced
to zero; or (b) the Payment Date occurring in the month following the
Servicer's repurchase of the Contracts as described under "Description of the
Certificates--Repurchase Option." However, the Company's representations,
warranties and indemnities will survive any termination of the Agreement.
AMENDMENT; WAIVER
The Agreement may be amended by agreement of the Trustee, the Servicer
and the Company at any time without the consent of the Certificateholders to
cure any ambiguity, to correct or supplement any provision which may be
inconsistent with any other provision or to add other provisions not
inconsistent with the Agreement, upon receipt of an opinion of counsel to the
Servicer that such amendment will not adversely affect in any material respect
the interests of any Certificateholder.
The Agreement may also be amended by agreement of the Trustee, the
Servicer and the Company at any time without the consent of the
Certificateholders to effect the transfer of FHA Insurance reserves to another
entity in compliance with revisions to FHA regulations, provided that prior to
any such amendment Moody's and Fitch shall have confirmed that the ratings of
the Certificates will not be lowered or withdrawn following such amendment.
The Agreement may also be amended from time to time by the Trustee, the
Servicer and the Company with the consent of holders of Certificates
representing 66 2/3% or more of the Aggregate Certificate Principal Balance,
and holders of Certificates representing 51% or more of the Aggregate
Certificate Principal Balance may vote to waive any Event of Termination,
provided that no such amendment or waiver shall (a) reduce in any manner the
amount of, or delay the timing of, collections of payments on Contracts or
distributions which are required to be made on any Certificate, or (b) reduce
the aggregate amount of Certificates required for any amendment of the
Agreement, without unanimous consent of the Certificateholders.
The Trustee is required under the Agreement to furnish Certificateholders
with notice promptly upon execution of any amendment to the Agreement.
INDEMNIFICATION
The Agreement provides that the Company will defend and indemnify the
Trust, the Trustee (including any agent of the Trustee) and the
Certificateholders against any and all costs, expenses, losses, damages, claims
and liabilities, including reasonable fees and expenses of counsel and expenses
of litigation (a) arising out of or resulting from the use or ownership by the
Company or any affiliate thereof of any real estate securing a Contract, (b)
for any taxes which may at any time be asserted with respect to, and as of the
date of, the conveyance of the Contracts to the Trust (but not including any
federal, state or other tax arising out of the creation of the Trust and the
issuance of the Certificates), and (c) with respect to certain other tax
matters.
The Agreement also provides that the Servicer will defend and indemnify
the Trust, the Trustee and the Certificateholders (which indemnification will
survive any removal of the Servicer) against any
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and all costs, expenses, losses, damages, claims and liabilities, including
reasonable fees and expenses of counsel and expenses of litigation, in respect
of any action taken by the Company as Servicer with respect to any Contract.
DUTIES AND IMMUNITIES OF THE TRUSTEE
The Trustee will make no representations as to the validity or
sufficiency of the Agreement, the Certificates or any Contract, Contract file
or related documents, and will not be accountable for the use or application by
the Company of any funds paid to the Company in consideration of the conveyance
of the Contracts, or deposited into the Certificate Account by the Servicer. If
no Event of Termination has occurred, the Trustee will be required to perform
only those duties specifically required of it under the Agreement. However,
upon receipt of the various certificates, reports or other instruments required
to be furnished to it, the Trustee will be required to examine them to
determine whether they conform as to form to the requirements of the Agreement.
Under the Agreement the Servicer will agree (a) to pay to the Trustee
from time to time reasonable compensation for all services rendered by it
thereunder (which compensation shall not be limited by any provision of law in
regard to the compensation of a trustee of an express trust); (b) to reimburse
the Trustee upon its request for all reasonable expenses, disbursements and
advances incurred or made by the Trustee in accordance with any provision of
the Agreement (including FHA Insurance premiums not paid by the Servicer and
reasonable compensation and the expenses and disbursements of its agents and
counsel), except any such expense, disbursement or advance as may be
attributable to its negligence or bad faith; and (c) to indemnify the Trustee
for, and to hold it harmless against, any loss, liability or expense incurred
without negligence or bad faith on its part, arising out of or in connection
with the acceptance or administration of the Trust and its duties thereunder,
including the costs and expenses of defending itself against any claim or
liability in connection with the exercise or performance of any of its powers
or duties thereunder.
The Trustee is not obligated to expend or risk its own funds or otherwise
incur financial liability in the performance of its duties under the Agreement
if there is a reasonable ground for believing that the repayment of such funds
or adequate indemnity against such risk or liability is not reasonably assured.
The Agreement also provides that the Trustee will maintain at its expense
in Minneapolis or St. Paul, Minnesota, an office or agency where Certificates
may be surrendered for registration of transfer or exchange and where notices
and demands to or upon the Trustee and the certificate registrar and transfer
agent in respect of the Certificates pursuant to the Agreement may be served.
On the date hereof the Trustee's office for such purposes is located at 180
East Fifth Street, St. Paul, Minnesota 55101. The Trustee will promptly give
written notice to the Company, the Servicer and the Certificateholders of any
change thereof.
THE TRUSTEE
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. Any successor Trustee must be an FHA Title I approved
lender.
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THE GRANTOR TRUST AGREEMENT
On the Closing Date, pursuant to the Grantor Trust Agreement, the Company
will transfer, assign, set over and otherwise convey without recourse to the
Grantor Trustee in trust all of its right, title and interest in and to the
Class HE: A-1 Underlying Certificates and to the principal and interest due
thereon.
U.S. Bank Trust National Association serves as the Grantor Trustee under
the Grantor Trust Agreement. The Grantor Trustee may resign from its duties or
be removed under substantially the same circumstances as the Trustee may resign
or be removed under the Agreement. Likewise, the Grantor Trust Agreement may be
amended under substantially the same circumstances as the Agreement may be
amended. The Grantor Trust Agreement provides that the Grantor Trust will
terminate upon payment to the Class HE: A-1 Certificateholders of all amounts
required to be paid to them upon the final payment of the Class HE: A-1
Underlying Certificates.
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 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.
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While Certificates are outstanding (except under the circumstances
described below), under the rules, regulations and procedures creating and
affecting DTC and its operations (the "Rules"), DTC is required to make book-
entry transfers among Participants on whose behalf it acts with respect to the
Certificates and is required to receive and transmit distributions of principal
of, and interest on, the Certificates. Participants with whom Certificate
Owners have accounts with respect to Certificates are similarly required to
make book-entry transfers and receive and transmit such distributions on behalf
of their respective Certificate Owners. Accordingly, although Certificate
Owners will not possess certificates, the Rules provide a mechanism by which
Certificate Owners will receive distributions and will be able to transfer
their interests.
Certificates will be issued in registered form to Certificate Owners, or
their nominees, rather than to DTC (such Certificates being referred to herein
as "Definitive Certificates"), only if (i) DTC or the Company advise the
Trustee in writing that DTC is no longer willing or able to discharge properly
its responsibilities as nominee and depository with respect to the Certificates
and the Company or the Trustee is unable to locate a qualified successor or
(ii) the Company at its sole option advises the Trustee in writing that it
elects to terminate the book-entry system through DTC. Upon issuance of
Definitive Certificates to Certificate Owners, such Certificates will be
transferable directly (and not exclusively on a book-entry basis) and
registered holders will deal directly with the Trustee with respect to
transfers, notices and distributions.
DTC has advised the Company that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by a
Certificateholder under the Agreement only at the direction of one or more
Participants to whose DTC accounts the Certificates are credited. DTC has
advised the Company that DTC will take such action with respect to any
fractional interest of the Certificates only at the direction of and on behalf
of such Participants beneficially owning a corresponding fractional interest of
the Certificates. DTC may take actions, at the direction of the Participants,
with respect to some Certificates which conflict with actions taken with
respect to other Certificates.
Issuance of Certificates in book-entry form rather than as physical
certificates may adversely affect the liquidity of the Certificates in the
secondary market and the ability of Certificate Owners to pledge them. In
addition, since distributions on the Certificates will be made by the Trustee
to DTC and DTC will credit such distributions to the accounts of its
Participants, with the Participants further crediting such distributions to the
accounts of indirect participants or Certificate Owners, Certificate Owners may
experience delays in the receipt of such distributions.
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
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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 contract 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 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.
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DESCRIPTION OF THE SWAP COUNTERPARTY AND THE SWAP AGREEMENT
THE SWAP COUNTERPARTY
The Swap Counterparty, Westdeutsche Landesbank Girozentrale ("WestLB"),
which traces its history to 1832, was created by the merger of two central
banks, or Landesbanks (German State Banks), in the State of North Rhine-
Westphalia, Germany on January 1, 1969. As a German universal bank, WestLB
provides commercial and investment banking services regionally, nationally and
internationally to public, corporate and bank customers.
The New York Branch of WestLB ("WestLB New York") is licensed and subject
to supervision and regulation by the Superintendent of Banks of the State of
New York. WestLB New York is examined by the New York State Banking Department
and is subject to banking laws and regulations applicable to a foreign bank
that operates a New York branch.
Upon written request, WestLB will provide without charge to each person
to whom this prospectus supplement is delivered a copy of WestLB's most recent
annual report. Written requests for such annual reports or any additional
information concerning WestLB should be directed to Westdeutsche Landesbank
Girozentrale, New York Branch, 1211 Avenue of the Americas, New York, New York
10036, Attention: Branch Management.
THE SWAP AGREEMENT
The Swap Agreement will provide for payments by (i) the Swap Counterparty
to the Grantor Trust equal to the amount of interest due to the Class HE: A-1
Certificateholders on a Payment Date (calculated based on a floating rate), and
(ii) the Grantor Trust to the Swap Counterparty equal to the amount of interest
received by the Grantor Trust in respect of interest due on the Class HE: A-1
Underlying Certificates on a Payment Date (calculated based on a fixed rate).
All amounts due under the Swap Agreement will be netted thereunder. If the
resulting net amount is due to the Grantor Trust, it will be deposited by the
Trustee into the Grantor Trust Account for distribution to the Class HE: A-1
Certificateholders. If the resulting net amount is due to the Swap Counterparty
it will be paid out of funds on deposit in the Grantor Trust Account. The
Trustee will be the calculation agent for purposes of determining the amounts
due by either party.
In addition to the terms set forth above, it is expected that the Swap
Agreement will have such additional terms and conditions as are necessary to
ensure that the Swap Counterparty does not bear the risk of any shortfall
attributable to defaulted payment obligations on the Group I Fixed-Rate Home
Equity Contracts. The Swap Agreement will not provide credit enhancement for
the Class HE: A-1 Certificates.
The Swap Agreement will be governed by and construed in accordance with
the law of the State of New York and will be documented on the ISDA Master
Agreement, as supplemented by a schedule and a confirmation.
The obligations of the Swap Counterparty are limited to those
specifically set forth in the Swap Agreement.
The Swap Agreement will have a termination date that is the earlier to
occur of (a) January 15, 2014 or (b) the date on which there are no further
amounts due on the Class HE: A-1 Underlying Certificates. An early termination
of the Swap Agreement may occur on such date designated by either the Trustee
or the Swap Counterparty as an early termination date with respect to the Swap
Agreement following a payment default by the Swap Counterparty or the Trustee,
respectively, or the occurrence of certain other customary early termination
events. One such other early termination event would be the withdrawal or
reduction of the senior debt rating of WestLB (presently rated Aa1 by Moody's
and AAA by Fitch) to below a level acceptable to Fitch and Moody's and the
failure of WestLB
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thereupon to either deposit certain amounts as collateral pursuant to a
collateral security agreement or secure a replacement swap counterparty
acceptable to Fitch and Moody's to maintain the ratings of the Class HE: A-1
Certificates. In the event of an early termination, a termination fee may be
payable by the Swap Counterparty to the Grantor Trust. Upon the occurrence of
an early termination, even if a collateral deposit is made or a termination fee
is paid, the Class HE: A-1 Certificateholders could incur interest payment
shortfalls and ultimate loss on the Class HE: A-1 Certificates. Upon the
termination of the Swap Agreement, holders of the Class HE: A-1 Certificates
would receive only the fixed Pass-Through Rate on the Class HE: A-1 Underlying
Certificates.
DESCRIPTION OF THE LIMITED GUARANTIES
CLASS HI: B-2 LIMITED GUARANTY
In order to mitigate the effect of the subordination of the Class HI: B-2
Certificates and liquidation losses and delinquencies on the Home Improvement
Contracts, the Company will provide a guaranty (the "Class HI: B-2 Limited
Guaranty") against losses that would otherwise be borne by the Class HI: B-2
Certificates. Each payment required to be made under the Class HI: B-2 Limited
Guaranty is referred to as a "Class HI: B-2 Guaranty Payment." Prior to the
Class HI: B-1 Cross-over Date, and on any Payment Date on or after the Class
HI: B-1 Cross-over Date on which a Class HI: B Principal Distribution Test is
not satisfied, the Class HI: B-2 Guaranty Payment will equal the amount, if
any, by which (i) the sum of (a) the Class HI: B-2 Formula Distribution Amount
for such Payment Date (which will be equal to accrued and unpaid interest on
the Class HI: B-2 Certificates) and (b) the Class HI: B-2 Liquidation Loss
Principal Amount, if any, for such Payment Date exceeds (ii) the Class HI: B-2
Distribution Amount for such Payment Date. The Class HI: B-2 Liquidation Loss
Principal Amount for any Payment Date equals the amount, if any, by which the
sum of the Class HI: A Principal Balance, the Class HI: M Principal Balance and
the Class HI: B Principal Balance for such Payment Date exceeds the Pool
Scheduled Principal Balance of Sub-Pool HI for such Payment Date (but in no
event greater than the Class HI: B-2 Principal Balance). The Class HI: B-2
Liquidation Loss Principal Amount is, in substance, the amount of delinquencies
and losses experienced on the Home Improvement Contracts 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
Home Improvement Contracts. On each Payment Date on or after the Class HI: B-1
Cross-over Date, if each Class HI: B Principal Distribution Test is satisfied
on such Payment Date (or the Class HI: A Principal Balance and the Class HI: M
Principal Balance have been reduced to zero), the Class HI: B-2 Guaranty
Payment will equal the amount, if any, by which (a) the sum of (i) the Class
HI: B-2 Formula Distribution Amount for such Payment Date (which will include
both interest and principal) and (ii) the Class HI: B-2 Liquidation Loss
Principal Amount, if any, for such Payment Date exceeds (b) the Class HI: B-2
Distribution Amount for such Payment Date.
The Class HI: 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 HI: B-2 Limited Guaranty will
not benefit in any way, or result in any payment to, the Class HI: A, Class HI:
M or Class HI: B-1 Certificateholders.
As compensation for providing the Class HI: B-2 Limited Guaranty, the
Company will be entitled to receive a Class HI: B-2 Guaranty Fee on each
Payment Date equal to the lesser of (a) the Sub-Pool HI Amount Available less
the Class HI: A Distribution Amount, the Class HI: M-1 Distribution Amount, the
Class HI: M-2 Distribution Amount, the Class HI: B-1 Distribution Amount, the
Class HI: B-2 Distribution Amount, the Monthly Servicing Fee and certain other
amounts required to be paid to the Servicer, the Trustee, the Class C
Certificateholder and the Company (see "Description of the Certificates--
Payments on Contracts"), and (b) an amount equal to 1/12th of the product of 3%
and the Pool Scheduled Principal Balance of Sub-Pool HI plus the Sub-Pool HI
Pre-Funded Amount for the immediately preceding Payment Date.
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CLASS HE: B LIMITED GUARANTY
In order to mitigate the effect of the subordination of the Class HE: B
Certificates and liquidation losses and delinquencies on the Home Equity
Contracts, the Company will provide a guaranty (the "Class HE: B Limited
Guaranty") against losses that would otherwise be borne by the Class HE: B
Certificates. Each payment required to be made under the Class HE: B Limited
Guaranty is referred to as a "Class HE: B Guaranty Payment." Prior to the Class
HE: B-1 Cross-over Date, and on any Payment Date on or after the Class HE: B
Cross-over Date on which a Class HE: B Principal Distribution Test is not
satisfied, the Class B Guaranty Payment will equal the amount, if any, by which
(i) the sum of (a) the Class HE: B Formula Distribution Amount for such Payment
Date (which will be equal to accrued and unpaid interest on the Class HE: B
Certificates) and (b) the Class HE: B Liquidation Loss Principal Amount, if
any, for such Payment Date exceeds (ii) the Class HE: B Distribution Amount for
such Payment Date. The Class HE: B Liquidation Loss Principal Amount for any
Payment Date equals the amount, if any, by which the sum of the Class HE: A
Principal Balance, the Class HE: M Principal Balance and the Class HE: B
Principal Balance for such Payment Date exceeds the Pool Scheduled Principal
Balance of Sub-Pool HE for such Payment Date (but in no event greater than the
Class HE: B Principal Balance). The Class HE: B Liquidation Loss Principal
Amount is, in substance, the amount of delinquencies and losses experienced on
the Home Equity Contracts 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 Home Equity Contracts. On
each Payment Date on or after the Class HE: B-1 Cross-over Date, if each Class
HE: B Principal Distribution Test is satisfied on such Payment Date (or the
Class HE: A Principal Balance and the Class HE: M Principal Balance have been
reduced to zero), the Class HE: B Guaranty Payment will equal the amount, if
any, by which (a) the sum of (i) the Class HE: B Formula Distribution Amount
for such Payment Date (which will include both interest and principal) and (ii)
the Class HE: B Liquidation Loss Principal Amount, if any, for such Payment
Date exceeds (b) the Class HE: B Distribution Amount for such Payment Date.
The Class HE: B 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 HE: B Limited Guaranty will not
benefit in any way, or result in any payment to, the Class HE: A or Class HE: M
Certificateholders.
As compensation for providing the Class HE: B Limited Guaranty, the
Company will be entitled to receive a Class HE: B Guaranty Fee on each Payment
Date equal to the lesser of (a) the Sub-Pool HE Amount Available less the Class
HE: A Distribution Amount, the Class HE: M-1 Distribution Amount, the Class HE:
M-2 Distribution Amount, the Class HE B-1 Distribution Amount, the Class HE B
Distribution Amount, the Monthly Servicing Fee and certain other amounts
required to be paid to the Servicer, the Trustee, the Class C Certificateholder
and the Company (see "Description of the Certificates--Payments on Contracts"),
and (b) an amount equal to 1/12th of the product of 3% and the Pool Scheduled
Principal Balance of Sub-Pool HE plus the Sub-Pool HE Pre-Funded Amount for the
immediately preceding Payment Date.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
REMIC ELECTION
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 Sub-Pool HI Certificates and Sub-Pool HE Certificates (other than
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the Class HE: A-1 Certificates) and the Class HE: A-1 Underlying 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 HE: A-5 IO Certificates, it is not anticipated that
any of the Certificates will be issued with original issue discount for federal
income tax purposes. The prepayment assumption that will be used to determine
the rate of accrual of original issue discount, market discount and premium, if
any, will be based on the assumption that the Contracts will prepay at a rate
equal to 100% of the applicable Prepayment Assumption as to the Home
Improvement Contracts comprising Sub-Pool HI and 125% of the applicable
Prepayment Assumption as to the Fixed-Rate Home Equity Contracts included in
Sub-Pool HE and 30% CPR as to the Adjustable Rate Contracts included in Sub-
Pool HE.
Although the tax treatment is not entirely certain, the Class HE: A-5 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. Although unclear, a
holder of a Class HE: A-5 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 Home Equity Contracts.
Certificates (but with respect to the Class HE: A-1 Certificates, only to
the extent of the Class HE: A-1 Underlying 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) 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 (but with respect to the Class HE: A-1 Certificates,
only to the extent of the Class HE: A-1 Underlying Certificates) are treated as
"real estate assets" under Section 856(c) 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.
GRANTOR TRUST
Briggs and Morgan, Professional Association, counsel to the Company, will
deliver its opinion that for federal income tax purposes, assuming compliance
with the terms of the Grantor Trust Agreement, the Grantor Trust created
pursuant to the Grantor Trust Agreement will constitute a grantor trust under
Subpart E, Part I of Subchapter J of the Code, and not an association taxable
as a corporation. A holder of a Class HE: A-1 Certificate issued by the Grantor
Trust will be treated as the owner of an undivided interest in the Class HE: A-
1 Underlying Certificates (which are "regular interests" in a REMIC), the Swap
Agreement and other assets held by the Grantor Trust. See "Certain Federal
Income Tax Consequences--Non-REMIC Series" in the Prospectus.
A holder of Class HE: A-1 Certificates will be required to allocate the
purchase price between the holder's ownership interest in the various assets of
the Grantor Trust. In general, the allocation would be based on the relative
fair market values of such assets on the date Class HE: A-1 Certificate was
purchased. The Company will make no representation as to such relative fair
market values and a holder of Class HE: A-1 Certificates should consult its tax
adviser concerning the determination of such fair market values and the
taxation of the holder's interest in the Swap Agreement, the tax treatment of
which is generally governed by the provisions of the Code and Treasury
regulations relating to notional principal contracts and straddles.
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A holder of a Class HE: A-1 Certificate must report ordinary income
equal to its share of the interest payable with respect to the Class HE: A-1
Underlying Certificates and a proportionate share of the net amounts payable
to the Grantor Trust under the Swap Agreement, and may deduct the expenses
incurred by the Grantor Trust that are allocable to such Certificate
(including net payments under the Swap Agreement), at the same time and to the
same extent as such items would be reported by such holder if it had purchased
and held directly the assets held by the Grantor Trust and incurred directly
its share of expenses incurred by the Grantor Trust. A holder of a Class HE:
A-1 Certificate that is an individual, estate or trust should consult its tax
adviser concerning possible limitations on the deductibility of expenses of
the Grantor Trust. For further information regarding federal income tax
consequences of investing in the Class HE: A-1 Certificates, see "Certain
Federal Income Tax Consequences--Tax Status of Non-REMIC Certificates" 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. Accordingly, assets of such
plans may be invested in the Class HI: A Certificates and the Class HE: A
Certificates, other than the Class HE: A-1 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 Credit Suisse First Boston Corporation (Prohibited Transaction
Exemption No. 89-90; Exemption Application No. D-6555, 54 Fed. Reg. 42,581
(1989)) (the "Exemption") from certain of the prohibited transaction rules of
ERISA and the Code with respect to the initial purchase, the holding and the
subsequent resale by Plans of certificates representing interests in asset-
backed pass-through trusts that consist of certain receivables, loans and
other obligations that meet the conditions and requirements of the Exemption.
The receivables covered by the Exemption include home improvement contracts
and home equity loans such as the Contracts. The Exemption will apply to the
acquisition, holding, and resale of the Class HI: A Certificates and the Class
HE: A Certificates, other than the Class HE: A-1 Certificates, (together, the
"Exempted 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 Exempted Certificates are the following:
(1) The acquisition of the Exempted Certificates by a Plan is on terms
(including the price for the Exempted 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 Exempted Certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other certificates of the Trust;
(3) The Exempted 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 Moody's, Fitch, S&P, Duff & Phelps Credit
Rating Co. (the "Exemption Rating Agencies");
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(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 Exempted Certificates represents not more than
reasonable compensation for underwriting the Exempted Certificates, as
applicable. The sum of all payments made to and retained by the Company
pursuant to the sale of the Contracts to the Trust represents not more than
the fair market value of such Contracts. The sum of all payments made to
and retained by the Servicer represents not more than reasonable
compensation for the Servicer's services under the Agreement and
reimbursement of the Servicer's reasonable expenses in connection
therewith; and
(6) The Plan investing in the Exempted 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 Exempted Certificates in
connection with the initial issuance, at least 50% of the Exempted
Certificates are acquired by persons independent of the Restricted Group, (ii)
the Plan's investment in Exempted Certificates does not exceed 25% of all of
the Exempted Certificates outstanding at the time of the acquisition and (iii)
immediately after the acquisition, no more than 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 Contracts included in the Trust
constituting more than 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 each Sub-Pool, the
amendment will generally allow related Contracts supporting payments to
related Certificateholders, and having a value equal to no more than 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
Contracts 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 related Pre-Funding Account to
the total principal amount of the related Certificates being offered must
be less than or equal to 25%;
(2) all Subsequent Home Equity Contracts and Subsequent Home Improvement
Contracts transferred to the related Sub-Pool after the Closing Date must
meet the same terms and conditions for eligibility as the Initial Home
Equity Contracts or Initial Home Improvement Contracts, as the case may be,
which terms and conditions have been approved by one of the Exemption
Rating Agencies;
(3) the transfer of the Subsequent Home Equity Contracts and Subsequent
Home Improvement Contracts 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 Exemption 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 each of
Sub-Pool HE and Sub-Pool HI 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 Home Equity Contracts and the Initial Home Improvement Contracts,
respectively;
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(5) for transactions occurring on or after May 23, 1997, either:
(i) the characteristics of the Subsequent Home Equity Contracts and
Subsequent Home Improvement Contracts 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 Exemption Rating
Agency rating the Certificates, the Underwriter and the Trustee)
stating whether or not the characteristics of the Subsequent Home
Equity Contracts and the Subsequent Home Improvement Contracts conform
to the characteristics described in the Prospectus or Prospectus
Supplement and/or the Agreement. In preparing such letter, the
independent accountant must use the same type of procedures as were
applicable to the Initial Home Equity Contracts and the Initial Home
Improvement Contracts, respectively;
(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 Exemption, Rating
Agencies rating the Certificates, and such investments 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 Exemption 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-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 Accounts may not satisfy the
conditions of the amendment in that each Pre-Funding Account may exceed 25% of
the total principal amount of the related Certificates, funds in the Pre-
Funding Accounts in excess of such 25% threshold will be used by the Trust
solely to purchase Subsequent Home Equity Loans or Subsequent Home Improvement
Loans, as applicable, 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 related Pre-Funded Account. Accordingly,
the Company believes that the existence of the Pre-Funding Accounts should not
cause the Exemption to be inapplicable.
The Company believes that the Exemption will apply to the acquisition
and holding of the Exempted 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
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obligor with respect to Contracts 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 the Exempted
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 Exempted Certificates. Assets of a Plan or individual retirement account
should not be invested in the Exempted 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, and PTCE
91-38, which exempts certain transactions involving employee benefit plans and
bank collective investment funds. 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 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 Exempted
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
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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.
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
AMOUNT OF AMOUNT OF AMOUNT OF
CLASS CLASS CLASS
HI: A-1 HI: A-2 HI: A-3
UNDERWRITER CERTIFICATES CERTIFICATES CERTIFICATES
----------- ------------ ------------ ------------
<S> <C> <C> <C>
Credit Suisse First Boston
Corporation.............. $ 68,100,000 $24,516,000 $24,384,000
Chase Securities Inc. .... 11,350,000 4,086,000 4,064,000
First Union Capital
Markets.................. 11,350,000 4,086,000 4,064,000
Lehman Brothers Inc. ..... 11,350,000 4,086,000 4,064,000
Merrill, Lynch & Co....... 11,350,000 4,086,000 4,064,000
------------ ----------- -----------
Totals.................. $113,500,000 $40,860,000 $40,640,000
============ =========== ===========
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF
CLASS CLASS CLASS CLASS CLASS CLASS
HE: A-1A NAS HE: A-1B ARM HE: A-1 HE: A-2 HE: A-3 HE: A-4
UNDERWRITER CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
----------- ------------ ------------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Credit Suisse First
Boston Corporation..... $18,000,000 $147,000,000 $198,000,000 $80,060,000 $28,998,000 $71,992,000
Chase Securities Inc. .. 3,000,000 24,500,000 33,000,000 13,515,000 4,833,000 14,652,000
First Union Capital
Markets................ 3,000,000 24,500,000 33,000,000 14,545,000 4,833,000 30,272,000
Lehman Brothers Inc. ... 3,000,000 24,500,000 33,000,000 13,515,000 4,833,000 14,952,000
Merrill Lynch & Co...... 3,000,000 24,500,000 33,000,000 13,515,000 4,833,000 14,652,000
----------- ------------ ------------ ------------ ----------- ------------
Totals................ $30,000,000 $245,000,000 $330,000,000 $135,150,000 $48,330,000 $146,520,000
=========== ============ ============ ============ =========== ============
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE PRINCIPAL
INTEREST OF AMOUNT OF
CLASS CLASS
HE: A-5 IO HE: M-1
UNDERWRITER CERTIFICATES CERTIFICATES
----------- ------------ ------------
<S> <C> <C>
Credit Suisse First Boston Corporation................ 0% $66,000,000
Chase Securities Inc. ................................ 0 0
First Union Capital Markets........................... 0 0
Lehman Brothers Inc. ................................. 100 0
Merrill Lynch & Co.................................... 0 0
--- -----------
Totals.............................................. 100% $66,000,000
=== ===========
</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.
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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>
HI:A-1........................................... .144% .100%
HI:A-2........................................... .198% .100%
HI:A-3........................................... .246% .100%
HE:A-1A NAS...................................... .192% .100%
HE:A-1B ARM...................................... .186% .100%
HE:A-1........................................... .138% .100%
HE:A-2........................................... .192% .100%
HE:A-3........................................... .240% .100%
HE:A-4........................................... .282% .100%
HE:A-5 IO........................................ .060% .050%
HE:M-1........................................... .300% .100%
</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.
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.
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The Company has agreed that for a period of 30 days from the date of this
Prospectus Supplement it will not offer or sell publicly any other home
improvement contract 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 or may in the future provide warehouse and other financing to the
Company or its affiliates.
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.
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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
A-2
<PAGE>
purchase Global Certificates from DTC Participants for delivery to CEDEL
Participants or Euroclear Participants should note that these trades would
automatically fail on the sale side unless affirmative action were taken. At
least three techniques should be readily available to eliminate this potential
problem:
(a) borrowing through CEDEL or Euroclear for one day (until the purchase
side of the day trade is reflected in their CEDEL or Euroclear
accounts) in accordance with the clearing system's customary
procedures;
(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).
A-3
<PAGE>
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.
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 (1)(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. 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 October 9, 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 Quarterly Reports for the quarters ended March 31,
1998, and June 30, 1998, which have been filed with the Commission, are hereby
incorporated by reference in this Prospectus and the related Prospectus
Supplement.
2
<PAGE>
All documents filed by the Company pursuant to Section 13(a), 13(c), 14
or 15(d) of the Exchange Act, subsequent to the date of this Prospectus and
prior to the termination of the offering of the Certificates, shall be deemed
to be incorporated by reference into this Prospectus and 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-
4
<PAGE>
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 principal balance of the Contracts as
of the Cut-off Date; and (vii) the geographic
location of improved real estate underlying the
Contracts. In addition, if so specified in the
related 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 Supplement, 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.
5
<PAGE>
The Certificates will be issuable in fully reg-
istered form in the authorized denominations
specified in the related Prospectus Supplement.
See "Description of the Certificates." The Cer-
tificates will not be guaranteed or insured by
any government agency or, unless otherwise
specified in the related Prospectus Supplement,
other insurer and, except as described 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 Sup-
6
<PAGE>
plement, Classes of a Series of Certificates
may be entitled to receive no interest or in-
terest which is not proportionate to the prin-
cipal allocable to such Certificates.
Principal (Including Except as otherwise set forth in the related
Prepayments)................ Prospectus Supple-ment, principal on each Con-
tract, including any principal prepayments,
will be passed through on each Payment Date.
See "Maturity and Prepayment Considerations"
and "Description of the Certificates."
Optional Termination......... Unless otherwise specified in the related Pro-
spectus Supplement, each of the Company or the
Servicer may at its option repurchase all Con-
tracts relating to a Series of Certificates re-
maining outstanding at such time under the cir-
cumstances specified in such Prospectus Supple-
ment. Unless otherwise provided in the related
Prospectus Supplement, the repurchase price
will equal the principal amount of such Con-
tracts plus accrued and unpaid interest there-
on. See "Description of the Certificates--Ter-
mination of the Agreement."
Global Certificates.......... If so specified in the related Prospectus Sup-
plement, the Certificates of a Series, or of
one or more Classes within a Series, will be
issuable in the form of one or more global cer-
tificates (each, a "Global Certificate") to be
held by a depositary (each, a "Depositary") on
behalf of the beneficial owners of the Certifi-
cates, as described herein under "Description
of the Certificates--Global Certificates." The
description of the Certificates in this Pro-
spectus assumes that the Certificates of a Se-
ries will not be issued in the form of Global
Certificates. If some or all of the Certifi-
cates of a Series are issued in the form of one
or more Global Certificates, the term "Global
Certificateholder," as used herein, will refer
to such beneficial owners of such Certificates,
and the rights of such Certificateholders will
be limited as described herein under "Descrip-
tion of the Certificates--Global Certificates."
Representations and
Warranties of the Company...
As a condition to the Company's conveyance of
any Contract Pool to the Trust Fund, the Com-
pany will be required to make certain represen-
tations and warranties in the related Agreement
regarding the Contracts. Under the terms of the
Agreement, if the Company becomes aware of a
breach of any such representation or warranty
that materially adversely affects the Trust
Fund's interest in any Contract or receives
written notice of such a breach from the
Trustee or the Servicer, then the Company will
be obligated either to cure such breach or to
repurchase or, if so provided in the related
Prospectus Supplement, substitute for the
affected Contract, in each case under the con-
ditions further described herein and in the
Prospectus Supplement. See "Description of the
Certificates--Conveyance of Contracts."
7
<PAGE>
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 consequences under the Code described
herein and in such Prospectus Supplement. If so
specified in the applicable Prospectus Supple-
ment, a Class of Certificates offered hereby
may represent 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 indi-
cating relative standing) of at least one na-
tionally recognized statistical rating organi-
zation. A security rating is not a recommenda-
tion to buy, sell or hold securities and may be
subject to revision or withdrawal at any time
by the assigning 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
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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."
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
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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 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
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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.
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
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financial condition, business experience and qualifications of the contractor
are reviewed prior to his or her approval to sell Contracts to the Company. In
addition, the Company has a centralized compliance group which reviews and
updates contractor financial condition and reviews contractors on an annual
basis to determine whether such contractor's approval will be continued. The
Company also reviews monthly contractor trend reports which show the default
and delinquency trends of the particular contractor with respect to contracts
sold to the Company. The Company occasionally will originate directly a home
improvement promissory note involving a home improvement transaction.
All contracts that the Company originates are written on forms provided
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.
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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 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.
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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.
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.
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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
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.
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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 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
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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 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
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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 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.
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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 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
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(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."
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
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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.
(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
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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.
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.
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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 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
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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;
(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
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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.
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.
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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.
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
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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 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
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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 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
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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 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.
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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 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
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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 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.
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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.
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.
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In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws
affording relief to debtors, may interfere with or affect the ability of a
secured mortgage lender to realize upon its security 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.
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.
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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.
"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
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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
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
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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 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."
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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 cause the Company, the Trust Fund, the
Trustee, any successor, or certain
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affiliates thereof, to be considered or become Parties in Interest or
Disqualified Persons with respect to an investing Plan (or of a Plan holding an
interest in such an entity). If so, the acquisition or holding of Certificates
by or on behalf of the investing Plan could also give rise to a prohibited
transaction under ERISA and the Code, unless some statutory or administrative
exemption is available. Certificates acquired by a Plan would be assets of that
Plan. Under the DOL Regulations, the Trust Fund, including the assets held in
the Trust Fund, may also be deemed to be assets of each Plan that acquires
Certificates. Special caution should be exercised before Plan Assets are used
to acquire a Certificate in such circumstances, especially if, with respect to
such assets, the Company, the Trust Fund, the Trustee, any successor or an
affiliate thereof either (i) has investment discretion with respect to the
investment of Plan Assets; or (ii) has authority or responsibility to give (or
regularly gives) investment advice with respect to Plan Assets for a fee
pursuant to an agreement or understanding that such advice will serve as a
primary basis for investment decisions with respect to such assets.
Any person who has discretionary authority or control respecting the
management or disposition of Plan Assets and any person who provides investment
advice with respect to such assets for a fee (in the manner described above),
is a fiduciary of the investing Plan. If the assets of the Trust Fund were to
constitute Plan Assets then any party exercising management or discretionary
control regarding those assets may be deemed to be a Plan "fiduciary," and thus
subject to the fiduciary requirements of ERISA and the prohibited transaction
provisions of ERISA and Section 4975 of the Code with respect to any investing
Plan. In addition, if the assets of the Trust Fund were to constitute Plan
Assets, then the acquisition or holding of Certificates by, on behalf of or
with Plan Assets, as well as the operation of the Trust Fund, may constitute or
involve a prohibited transaction under ERISA and the Code.
No purchases of Certificates by, on behalf of or with Plan Assets of any
Plan will be registered unless the transferee, at its expense, delivers to the
Trustee, the Servicer and the Company an opinion of counsel (satisfactory to
the Trustee, the Servicer and the Company) that the purchase and holding of a
Certificate by, on behalf of, or with Plan Assets of such Plan is permissible
under applicable law, will not result in the assets of the Trust Fund being
deemed to be Plan Assets and subject to the prohibited transaction provisions
of ERISA and the Code and will not subject the Trustee, the Trust Fund, the
Company or the Servicer to any obligation or liability in addition to those
undertaken in the Agreement. Unless such opinion is delivered, each person
acquiring a Certificate will be deemed to represent to the Trustee, the Company
and the Servicer that such person is neither a Plan, nor acting on behalf of a
Plan, nor purchasing with Plan Assets of any Plan.
CONSULTATION WITH COUNSEL
Any fiduciary or other Plan investor that proposes to acquire or hold
Certificates on behalf of or with Plan Assets of any Plan should consult with
its counsel with respect to the potential applicability of the fiduciary
responsibility provisions of ERISA and the prohibited transaction provisions of
ERISA and the Code to the proposed investment and the availability of any
prohibited transaction exemption, 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
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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.
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
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appropriately" reduced as payments on contracts are received. Foreclosure
property will be a permitted investment only to the extent that such property
is not held for more than two years.
The Code requires that in order to qualify as a REMIC an entity must make
reasonable arrangements designed to ensure that certain specified entities,
generally including governmental entities or other entities that are exempt
from United States tax, including the tax on unrelated business income
("Disqualified Organizations"), not hold residual interests in the REMIC.
Consequently, it is expected that in the case of any Trust Fund for which a
REMIC Election is made the transfer, sale, or other disposition of a Residual
Certificate to a Disqualified Organization will be prohibited and the ability
of a Residual Certificate to be transferred will be conditioned on the
Trustee's receipt of a certificate or other document representing that the
proposed transferee is not a Disqualified Organization. The transferor of a
Residual Certificate must not, as of the time of the transfer, have actual
knowledge that such representation is false. The Code further requires that
reasonable arrangements must be made to enable a REMIC to provide the Internal
Revenue Service (the "Service") and certain other parties, including
transferors of residual interests in a REMIC, with the information needed to
compute the tax imposed by Section 860E(e)(1) of the Code if, in spite of the
steps taken to prevent Disqualified Organizations from holding residual
interests, such an organization does, in fact, acquire a residual interest. See
"REMIC Series--Restrictions on Transfer of Residual Certificates" below.
If the Trust Fund fails to comply with one or more of the ongoing
requirements for qualification as a REMIC, the Trust Fund will not be treated
as a REMIC for the year during which such failure occurs and thereafter unless
the Service determines, in its discretion, that such failure was inadvertent
(in which case, the Service may require any adjustments which it deems
appropriate). If the ownership interests in the assets of the Trust Fund
consist of multiple classes, failure to treat the Trust Fund as a REMIC may
cause the Trust Fund to be treated as an association taxable as a corporation.
Such treatment could result in income of the Trust Fund being subject to
corporate tax in the hands of the Trust Fund and in a reduced amount being
available for distribution to Certificateholders as a result of the payment of
such taxes.
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
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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 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
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not yet been issued. Nonetheless, the Code requires that a prepayment
assumption be used with respect to the underlying assets of a REMIC in
computing the accrual of original issue discount on Regular Certificates, and
that regular adjustments be made in the amount and the rate of accrual to
reflect differences between the actual prepayment rate and the prepayment
assumption. Although regulations have not been issued concerning the use of a
prepayment assumption, the legislative history associated with the Tax Reform
Act of 1986 indicates that such regulations are to provide that the prepayment
assumption used with respect to a Regular Certificate must be the same as that
used in pricing the initial offering of such Regular Certificate. The
prepayment assumption (the "Prepayment Assumption") used in reporting original
issue discount for each series of Regular Certificates will be consistent with
this standard and will be disclosed in the related Prospectus Supplement.
However, no representation is made hereby nor can there be any assurance that
the underlying assets of a REMIC will in fact prepay at a rate conforming to
the prepayment assumption or at any other rate. Certificateholders also should
be aware that the OID Regulations do not address certain issues relevant to, or
are not applicable to, prepayable securities such as the Regular Certificates.
In general, in the hands of the original holder of a Regular Certificate,
original issue discount, if any, is the difference between the "stated
redemption price at maturity" of the Regular Certificate and its "issue price."
The original issue discount with respect to a Regular Certificate will be
considered to be zero if it is less than .25% of the Regular Certificate's
stated redemption price at maturity multiplied by the number of complete years
from the date of issue of such Regular Certificate to its maturity date. The
OID Regulations, however, provide a special de minimis rule to apply to
obligations such as the Regular Certificates that have more than one principal
payment or that have interest payments that are not qualified stated interest
as defined in the OID Regulations, payable before maturity ("installment
obligations"). Under the special rule, original issue discount on an
installment obligation is generally considered to be zero if it is less than
.25% of the principal amount of the obligation multiplied by the weighted
average maturity of the obligation as defined 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
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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
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
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Certificateholder must include in income to take into account prepayments with
respect to the Contracts that occur at a rate that is slower than the
Prepayment Assumption. Although original issue discount will be reported to
Regular Certificateholders based on the Prepayment Assumption, no
representation is made to Regular Certificateholders that the Contracts will be
prepaid at that rate or at any other rate.
A subsequent purchaser of a Regular Certificate will also be required to
include in such purchaser's ordinary gross income for federal income tax
purposes the original issue discount, if any, accruing with respect to such
Regular Certificate, unless the price paid equals or exceeds the Regular
Certificate's remaining stated redemption price. If the price paid exceeds the
Regular Certificate's adjusted issue price, but does not equal or exceed the
remaining stated redemption price of the Regular Certificate, the amount of
original issue discount to be accrued will be reduced in accordance with a
formula set forth in Section 1272(a)(7)(B) of the Code. Under this provision,
the daily portions of original issue discount which must be included in gross
income will be reduced by an amount equal to such daily portion multiplied by
the fraction obtained by dividing (i) the excess of the purchase price therefor
over the Regular Certificate's adjusted issue price by (ii) the aggregate
original issue discount remaining to be accrued with respect to such Regular
Certificate.
The Company believes that the holder of a Regular Certificate determined
to be issued with 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
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(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 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
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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 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
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interest (including original issue discount) on the Regular Certificates, on
the other hand. In the event that an interest in the Contracts is acquired by a
REMIC at a discount, and one or more of such Contracts is prepaid, the Residual
Holder may recognize taxable income without being entitled to receive a
corresponding cash distribution because (i) the prepayment may be used in whole
or in part to make distributions on Regular Certificates, and (ii) the discount
on the Contracts which is includable in a REMIC's income may exceed its
deduction with respect to the distributions on those Regular Certificates. When
there is more than one class of Regular Certificates that receive payments
sequentially (i.e., a fast-pay, slow-pay structure), this mismatching of income
and deductions is particularly likely to occur in the early years following
issuance of the Regular Certificates, when distributions are being made in
respect of earlier classes of Regular Certificates to the extent that such
classes are not issued with substantial discount. If taxable income
attributable to such a mismatching is realized, in general, losses would be
allowed in later years as distributions on the later classes of Regular
Certificates are made. Taxable income may also be greater in earlier years than
in later years as a result of the fact that interest expense deductions,
expressed as a percentage of the outstanding principal amount of Regular
Certificates, may increase over time as distributions are made on the lower
yielding classes of Regular Certificates, whereas interest income with respect
to any given Contract will remain constant over time as a percentage of the
outstanding principal amount of that loan (assuming it bears interest at a
fixed rate). Consequently, Residual Holders must have sufficient other sources
of cash to pay any federal, state, or local income taxes due as a result of
such mismatching, or such holders must have unrelated deductions against which
to offset such income, subject to the discussion of "excess inclusions" below
under "REMIC Series--Limitations on Offset or Exemption of REMIC Income." The
mismatching of income and deductions described in this paragraph, if present
with respect to a series of Certificates, may have a significant adverse effect
upon the Residual Holder's after-tax rate of return.
The amount of any net loss of a REMIC that may be taken into account by
the Residual Holder is limited to the adjusted basis of the Residual
Certificate as of the close of the quarter (or time of disposition of the
Residual Certificate if earlier), determined without taking into account the
net loss for the quarter. The initial adjusted basis of a purchaser of a
Residual Certificate is the amount paid for such Residual Certificate. 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
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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 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
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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 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
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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 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,
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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
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.
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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 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
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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 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
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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 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.
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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 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
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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.
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.
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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.
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, have been incorporated by reference herein, in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
incorporated by reference herein, and upon their authority as experts in
accounting and auditing.
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For 90 days after the date of this prospectus supplement, all dealers
that effect transactions in these securities, whether or not participating in
this offering, may be required to deliver a prospectus. This is in addition to
the dealers' obligation to deliver a copy of this prospectus supplement and the
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
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