<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 11, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
GREEN TREE FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE 41-1807858
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1100 LANDMARK TOWERS
345 ST. PETER STREET
SAINT PAUL, MINNESOTA 55102-1639
(612) 293-3400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
JOEL H. GOTTESMAN
300 LANDMARK TOWERS
345 ST. PETER STREET
SAINT PAUL, MINNESOTA 55102-1639
(612) 293-3400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
CHARLES F. SAWYER CATHY M. KAPLAN
DORSEY & WHITNEY LLP BROWN & WOOD LLP
220 SOUTH SIXTH STREET ONE WORLD TRADE CENTER
MINNEAPOLIS, MINNESOTA 55402 NEW YORK, NEW YORK 10048
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE
PUBLIC: As soon as practicable after the effective date of this Registration
Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED PROPOSED
TITLE OF EACH CLASS OF AMOUNT MAXIMUM MAXIMUM AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE FEE
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<S> <C> <C> <C> <C>
Manufactured Housing
Contract
Pass-Through
Certificates......... $3,000,000,000 100% $3,000,000,000 $885,000(2)
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Limited Guarantee of
Green Tree Financial
Corporation.......... (3) (3) (3) (3)
</TABLE>
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(1) Estimated solely for the purpose of calculating the registration fee on
the basis of the proposed maximum aggregate offering price, pursuant to
Rule 457(c).
(2) The amount of Manufactured Housing Contract Pass Through Certificates
being carried forward from Registration Statement No. 333-49933 pursuant
to Rule 429 is $2,422,543,119.03, and the Registrant previously paid a
filing fee with respect to such securities of $714,650.22 (calculated at
the rate of 1/29th of 1% of the amount of securities registered, the rate
in effect at the time such Registration Statement was filed).
(3) No additional consideration will be paid for the Limited Guarantee;
accordingly, no separate filing fee is being paid herewith pursuant to
Rule 457(n).
---------------
Pursuant to Rule 429, the Prospectus contained in this Registration
Statement relates to and constitutes Post-Effective Amendment No. 1 to
Registration Statement No. 333-49933, which first became effective on April
20, 1998.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that the Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OR AN OFFER TO BUY NOR SHALL THERE BY ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS
GREEN TREE FINANCIAL CORPORATION, SELLER AND SERVICER
Manufactured Housing Contract Pass-Through Certificates
(Issuable In Series)
Manufactured Housing Contract Pass-Through Certificates ("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
manufactured housing installment sales contracts and installment loan
agreements (the "Contracts"), as more particularly described herein, and in
certain other property conveyed by Green Tree Financial Corporation (the
"Company"). The Contracts included in any Contract Pool will be described in
the related Prospectus Supplement. Except as otherwise specified in the related
Prospectus Supplement, the Contracts will have been originated in the ordinary
course of business by 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 Remittance Rate that will be
paid to Certificateholders of each Class or sub-class of such Series. Such
Remittance 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 for certain
representations and warranties relating to the Contracts and certain other
exceptions, the Servicer's obligations with respect to the Certificates 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 Contracts or otherwise.
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.
THE CERTIFICATES WILL NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE
COMPANY OR ANY OF ITS AFFILIATES, EXCEPT TO THE LIMITED EXTENT DESCRIBED
HEREIN. THE CERTIFICATES WILL NOT BE INSURED OR GUARANTEED BY ANY GOVERNMENTAL
AGENCY OR INSTRUMENTALITY, OR (EXCEPT AS OTHERWISE SPECIFIED IN THE RELATED
PROSPECTUS SUPPLEMENT) BY ANY OTHER PERSON OR ENTITY.
-----------
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.
THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF A SERIES OF
CERTIFICATES UNLESS ACCOMPANIED BY A PROSPECTUS SUPPLEMENT.
The date of this Prospectus is August , 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 (the "Exchange Act") and in accordance therewith files
reports and other information with the Securities and Exchange Commission (the
"Commission"). Information concerning the Company can be inspected and copied
at the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Commission located at 500 West Madison Street, 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 is listed on the New York Stock Exchange ("NYSE") and
on the Pacific Stock Exchange. 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., 115 Sansome
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 (the "Act"). 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, Suite 1400, 500 West
Madison Street, Chicago, Illinois 60661.
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 on Form 10-Q for the periods 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.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended, 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
2
<PAGE>
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. Capitalized terms used herein shall have the respective
meanings assigned them in the "Glossary."
Title of Securities.......... Manufactured Housing Contract Pass-Through Cer-
tificates (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").
Special Considerations....... 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 Series pursuant to sepa-
rate Pooling and Servicing Agreements (each, an
"Agreement") between the Company, as Seller and
Servicer, and the Trustee specified in the re-
lated Prospectus Supplement for such Series of
Certificates (the "Trustee").
The Contracts................ The Contracts evidenced by 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 manufactured housing install-
ment sales contracts and installment loan
agreements and will be conventional contracts
or contracts insured by the Federal Housing Ad-
ministration ("FHA") or partially guaranteed by
the Veterans Administration ("VA"). Each Con-
tract will be secured by a new or used Manufac-
tured Home (as defined herein) or, in certain
cases, by a mortgage or deed of trust on the
real estate to which the manufactured home is
deemed permanently affixed (a "Land-and-Home
Contract").
The Prospectus Supplement for each Series will
provide information with respect to (i) the ag-
gregate principal balance of the Contracts com-
prising the Contract Pool, as of the date spec-
ified in the Prospectus Supplement (the "Cut-
off Date"); (ii) the weighted average contrac-
tual rate of interest (the "Contract Rate") on
the Contracts; (iii) the weighted average term
to scheduled maturity as of origination; (iv)
the weighted average term to scheduled maturity
as of the Cut-off Date and the range of terms
to maturity; (v) the percentage amount of Con-
tracts secured by new or used Manufactured
Homes; (vi) the average outstanding principal
balance of the Contracts as of the Cut-off
Date; (vii) the range of Loan-to-Value Ratios;
and (viii) the geographic location and types of
Manufactured Homes securing the Contracts. In
addition, if so specified in the related Pro-
spectus Supplement, additional Contracts may be
purchased from the Company during the Pre-Fund-
ing Period specified in the related Prospectus
Supplement, from funds on deposit in a Pre-
Funding Account.
4
<PAGE>
Except as otherwise specified in the related
Prospectus Sup-plement, the Contracts will have
been originated by the Company on an individual
basis in the ordinary course of its business.
Description of The Certificates of each Series may be issued in
Certificates................ one or more Classes or subclasses as and on the
terms specified in the related Prospectus Sup-
plement, each of which will evidence the inter-
est specified in the related Prospectus Supple-
ment in the Contract Pool and certain other
property held in trust for the benefit of the
Certificateholders (the "Trust Fund"). For con-
venience of description, any reference in this
Prospectus to a "Class" of Certificates in-
cludes a reference to any subclasses of such
Class. If so specified in a Prospectus Supple-
ment, a Series of Certificates may include one
or more Classes which (i) are entitled to re-
ceive distributions only in respect of princi-
pal ("Principal Only Certificates"), interest
("Interest Only Certificates") or any combina-
tion thereof, or in specified proportions in
respect of such payments, and/or (ii) are enti-
tled to receive distributions in respect of
principal before or after specified principal
distributions have been made on one or more
other Classes within such Series ("Fast
Pay/Slow Pay Certificates"), or on a planned
amortization schedule ("PAC Certificates") or
targeted amortization schedule ("TAC Certifi-
cates") or upon the occurrence of other speci-
fied events. See "Description of Certificates"
herein. The Prospectus Supplement will set
forth the rate at which interest will be paid
to Certificateholders of each Class of a given
Series (the "Pass-Through Rate"). Such Pass-
Through Rate may be fixed, variable or adjust-
able, as specified in the related Prospectus
Supplement.
Each Series of Certificates may include one or
more Classes ("Subordinated Certificates")
which are subordinated in right of distribution
to one or more other Classes ("Senior
Certificates"). Certificates of a Series which
includes Senior and Sub-ordinated Certificates
are referred to herein collectively
as "Senior/Subordinated Certificates." A Series
of Senior/Subordinated Certificates may include
one or more Classes ("Mezzanine Certificates")
which are subordinated to one or more Classes
of Certificates and are senior to one or more
Classes of Certificates.
The Certificates will be issuable in fully reg-
istered form in the authorized denominations
specified in the related Prospectus Supplement.
See "Description of the Certificates." The Sub-
ordinated Certificates of a Series will be sub-
ordinated in certain respects to the Senior
Certificates of the same Series. 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 Certificates will not be guar-
anteed or insured by any government agency or,
unless otherwise specified in the
5
<PAGE>
related Prospectus Supplement, other insurer
and, except as described below and in the re-
lated 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 Senior
Certificateholders. This subordination is in-
tended to enhance the likelihood of regular re-
ceipt by Senior Certificateholders of the full
amount of scheduled monthly payments of princi-
pal and interest due them and to protect the
Senior Certificateholders against losses. If so
specified in the applicable Prospectus Supple-
ment, Mezzanine Certificates or other Classes
of Subordinated Certificates may be entitled to
the benefits of other forms of credit enhance-
ment and may, if rated in one of the four high-
est rating categories by a nationally recog-
nized statistical rating organization, be of-
fered pursuant to this Prospectus and such Pro-
spectus 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 "Re-
mittance Date"), commencing on the date speci-
fied in the related Prospectus Supplement. The
related Prospectus Supplement will set forth
for each Class or sub-class of Certificates the
interest rate, if any, for each such Class or
sub-class or the method of determining such in-
terest rate. See "Yield Considerations" and
"Description of the Certificates." As specified
in the related Prospectus Supplement, Classes
of a Series of Certificates or sub-classes
within a Class may be entitled to receive no
interest or interest which is not proportionate
to the principal allocable to such Certifi-
cates.
6
<PAGE>
Principal (Including Except as otherwise set forth in the related
Prepayments)................ Prospectus Supplement, principal on each Con-
tract, including any principal prepayments,
will be passed through on each Remittance Date.
See "Maturity and Prepayment Considerations"
and "Description of the Certificates." If so
specified in the Prospectus Supplement with re-
spect to a Class or sub-class of a Series hav-
ing a Stated Balance, such distributions may be
made in reduction of the Stated Balance, in an
amount equal to the Certificate Remittance
Amount or such other amounts as are specified
in the related Prospectus Supplement. See "Ma-
turity and Prepayment Considerations" and "De-
scription of the Certificates--Distributions on
Certificates" and "--Payments on Contracts."
Optional Termination......... If so specified in the related Prospectus Sup-
plement, each of the Company or the Servicer
may at its option repurchase all Contracts re-
lating to a Series of Certificates remaining
outstanding at such time and under the circum-
stances 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 interest from the first day
of the month of repurchase to the first day of
the next succeeding month at the Contract Rates
borne by such Contracts. See "Description of
the Certificates--Termination of the Agree-
ment."
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 substitute for the affected Con-
tract, in each case under the conditions fur-
ther described herein. See "Description of the
Certificates--Conveyance of Contracts" herein.
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"), each class 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 Pooling
and Servicing 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 will be treated as
a grantor trust for federal income tax purposes
and will not be classified as an association
taxable as a corporation. In such event, each
Certificateholder will be treated as the owner
of an undivided pro rata interest in income and
corpus attributable 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 in-
cluded in such Contract Pool. 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" herein.
Legal Investment............. Unless otherwise indicated in the applicable
Prospectus Supplement, any Certificates offered
hereby that are rated by at least one nation-
ally recognized statistical rating organization
in one of its two highest rating categories
will constitute "mortgage related securities"
under the Secondary Mortgage Market Enhancement
Act of 1984, as amended, and as such (unless
otherwise indicated in the applicable Prospec-
tus Supplement) will be "legal investments" for
certain types of institutional investors to the
extent provided in that Act. Some Classes of
Certificates offered hereby may not be rated in
one of the two highest rating categories and
thus would not constitute "mortgage related se-
curities." See "Legal Investment" herein.
Ratings...................... It is a condition precedent to the issuance of
any Class of Certificates sold under this Pro-
spectus that they be rated in one of the four
highest rating categories (within which there
may be sub-categories or gradations indicating
relative standing) of at least one nationally
recognized statistical rating organization. A
security rating is not a recommendation to buy,
sell or hold securities and may be subject to
revision or withdrawal at any time by the as-
signing rating agency. See "Ratings" herein.
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. General. An investment in Certificates may be affected by, among other
things, a downturn in regional or local economic conditions. These regional
or local economic conditions are often volatile, and historically have
affected the delinquency, loan loss and repossession experience of the
Contracts. Moreover, regardless of its location, manufactured housing
generally depreciates in value. Consequently, the market value of certain
Manufactured Homes could be or become lower than the outstanding principal
balances of the Contracts that they secure. To the extent that losses on
the Contracts are not covered by the subordination of other Classes of
Certificates, if any, or by any other form of credit enhancement, Holders
of the Certificates of a Series evidencing interests in such Contracts will
bear all risk of loss resulting from default by obligors and will have to
look primarily to the value of the Manufactured Homes for recovery of the
outstanding principal and unpaid interest on the defaulted Contracts. See
"The Trust Fund--The Contract Pools."
2. Limited Obligations. The Certificates will not represent an interest
in or obligation of the Company, except to the limited extent described
herein. The Certificates will not be insured or guaranteed by any
governmental agency or instrumentality, any Underwriter or its affiliates,
the Servicer or (except as otherwise specified in the related Prospectus
Supplement) by the Company.
3. 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 it will remain for the term of any Series of
Certificates.
4. Prepayment Considerations. The prepayment experience on the related
Contracts will affect the average life of each Class of Certificates.
Prepayments on the Contracts (which include both voluntary prepayments and
liquidations following default) may be influenced by a variety of economic,
geographic, social and other factors, including repossessions, aging,
seasonality, market interest rates, changes in housing needs, job transfers
and unemployment. In the event a Contract is prepaid in full, interest on
such Contract will accrue only to the date of prepayment. If the
Certificates of any Series are purchased at a discount and the purchaser
calculates its anticipated yield to maturity based on an assumed rate of
payment of principal on such Certificates that is faster than the rate
actually realized, such purchaser's actual yield to maturity will be lower
than the yield so calculated by such purchaser. See "Maturity and
Prepayment Considerations."
5. Security Interests and Certain Other Aspects of the Contracts. Each
Contract will be secured by a security interest in a Manufactured Home (or,
in the case of a Land-and-Home Contract, by a mortgage or deed of trust on
the real estate to which the Manufactured Home is permanently affixed).
Perfection of security interests in the Manufactured Homes and enforcement
of rights to realize upon the value of the Manufactured Homes as collateral
for the Contracts are subject to a number of federal and state laws,
including the Uniform Commercial Code (the "UCC") as adopted in each state
and, in most states, certificate of title statutes, but generally not state
real estate laws. The steps necessary to perfect the security interest in a
Manufactured Home will vary from state to state. Because of the expense and
administrative inconvenience involved, the Company will not amend any
certificate of title to name the Trustee as the lienholder and will not
deliver any certificate of title to the Trustee or note thereon the
Trustee's interest. Consequently, in some states in the absence of such an
amendment to the certificate of title the assignment to the Trustee of the
security interest in the Manufactured Home may not be effective or such
security interest may not be perfected and in the absence of such notation
or delivery to the Trustee the assignment of the security interest in the
Manufactured Home to the Trustee may not be effective against creditors of
the Company or a trustee in bankruptcy of the Company. Because of the
expense and administrative inconvenience involved, the Company will not
record the assignment to the Trustee of the mortgage or deed of trust
securing each Land-and-Home Contract. Consequently, in some states in the
absence of such recordation the assignment to the Trustee of the mortgage
or deed of trust securing a Land-and-Home
9
<PAGE>
Contract may not be effective, and in the absence of such recordation the
assignment of the mortgage or deed of trust to the Trustee may not be
effective against creditors of or purchasers from the Company or a trustee
in bankruptcy of the Company. In addition, numerous federal and state
consumer protection laws impose requirements on lenders under installment
sales contracts and installment loan agreements such as the Contracts, and
the failure by the lender or seller of goods to comply with such
requirements could give rise to liabilities of assignees for amounts due
under such agreements and the right of set-off against claims by such
assignees. These laws would apply to the Trust Fund as assignee of the
Contracts. From time to time, the Company has been involved in litigation
under consumer or debtor protection laws, some of which have been class
actions. Pursuant to the Agreement, the Company will represent and warrant
that each Contract complies with all requirements of law and will provide
certain warranties relating to the validity, perfection and priority of the
security interest in each Manufactured Home securing a Contract. A breach
by the Company of any such warranty that materially adversely affects any
Contract would require the Company to repurchase, or at its option
substitute another manufactured housing contract for, such Contract unless
such breach is cured within 90 days. If the Company does not honor its
repurchase obligation in respect of a Contract and such Contract were to
become defaulted, recovery of amounts due on such Contract would be
dependent on repossession and resale of the Manufactured Home securing such
Contract. Certain other factors may limit the ability of the
Certificateholders to realize upon the Manufactured Homes or may limit the
amount realized to less than the amount due. See "Certain Legal Aspects of
the Contracts" herein.
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 case of Octagon Gas Systems, Inc. v. Rimmer, 995 F.2d 948 (10th Cir.
1993) contains language to the effect that accounts sold by an entity which
subsequently became bankrupt remained property of the debtor's bankruptcy
estate. Although the Contracts constitute chattel paper rather than
accounts under the UCC, sales of chattel paper, like sales of accounts, are
governed by Article 9 of the UCC. If the Company were to become a debtor
under the federal bankruptcy code and a court were to follow the reasoning
of the Tenth Circuit and apply such reasoning to chattel paper,
Certificateholders could experience a delay or reduction in distributions.
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 certain hazard
insurance on individual Manufactured Homes and Manufactured Homes (or the
related real estate, in the case of Land-and-Home Contracts) acquired by
repossession, (iv) any letter of credit, guarantee, surety bond, insurance
policy, cash reserve fund or other credit enhancement securing payment of all
or part of a Series of Certificates, and (v) such other property as may be
specified in the related Prospectus Supplement.
Each Certificate will evidence the interest specified in the related
Prospectus Supplement in one Trust Fund, containing one Contract Pool
comprised of Contracts having the aggregate principal balance as of the
specified day of the month of the creation of the pool (the "Cut-off Date")
specified in the related Prospectus Supplement. Holders of Certificates of a
Series will have interests only in such Contract Pool and will have no
interest in the Contract Pool created with respect to any other Series of
Certificates. If so specified in the related Prospectus Supplement, the Trust
Fund may include a Pre-Funding Account which would be used to purchase
additional
10
<PAGE>
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. The following is a brief description of the Contracts
expected to be included in the Trust Fund. Specific information respecting the
Contracts will be provided in the 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 Securities and Exchange Commission within fifteen days after
the initial issuance of such 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 "Remittance Rate" are used, those terms respectively apply,
unless the context otherwise indicates, to one specific Contract Pool, Trust
Fund, each Agreement and the Remittance Rate applicable to the related Series
of Certificates.
THE CONTRACT POOLS
Except as otherwise specified in the related Prospectus Supplement, each
pool of Contracts with respect to a Series of Certificates (the "Contract
Pool") will consist of manufactured housing installment sales contracts and
installment loan agreements (collectively, the "Contracts") originated by the
Company on an individual basis in the ordinary course of business. The
Contracts may be conventional manufactured housing contracts or contracts
insured by the FHA or partially guaranteed by the VA. Each Contract will be
secured by a Manufactured Home (as defined below) or by a mortgage or deed of
trust relating to the real estate to which the Manufactured Home is deemed
permanently affixed (a "Land-and-Home Contract"). 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") or at a Contract Rate which steps up on a
particular date or dates (a "step-up rate").
The Company will represent that the Manufactured Homes securing the
Contracts consist of manufactured homes within the meaning of 42 United States
Code, Section 5402(6), which defines a "manufactured home" as "a structure,
transportable in one or more sections, which in the traveling mode, is eight
body feet or more in width or forty body feet or more in length, or, when
erected on site, is three hundred twenty or more square feet, and which is
built on a permanent chassis designed to be used as a dwelling with or without
a permanent foundation when connected to the required utilities, and includes
the plumbing, heating, air-conditioning, and electrical systems contained
therein; except that such term shall include any structure which meets all the
requirements of this paragraph except the size requirements and with respect
to which the manufacturer voluntarily files a certification required by the
Secretary [of Housing and Urban Development] and complies with the standards
established under this chapter."
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"), 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 (other than the documents relating to Land-and-Home Contracts) will
be held by the Servicer as custodian for the Trustee. The documents relating
to any Land-and-Home Contracts will be held for the benefit of the Trustee by
a Custodian (the "Custodian") appointed pursuant to a Custodial Agreement (the
"Custodial Agreement") between the Trustee and the Custodian.
Each Contract Pool will be composed of Contracts bearing interest at the
annual fixed or variable Contract Rates or step-up rates specified in the
Prospectus Supplement. Unless otherwise specified in the related
11
<PAGE>
Prospectus Supplement, the Monthly Payments for Contracts bearing interest at
a step-up rate (sometimes referred to herein as "step-up rate Contracts") will
increase on the dates on which the Contract Rates are stepped up. 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 at the Remittance Rate,
or both.
A Contract Pool may include "staged-funding" Contracts, under which the
Company makes multiple disbursements to enable the Obligor to finance both the
purchase of a Manufactured Home and the acquisition or improvement of the
related real estate. For example, the Company might make disbursements to
enable the Obligor to purchase the real estate on which the Manufactured Home
is to be located, then to make improvements on the real estate (such as a
driveway, well and septic system), then to purchase and deliver the
Manufactured Home, and then to make final site improvements. Prior to the
final disbursement, the Obligor pays only interest on the disbursed amount of
the loan; following the final disbursement, the Obligor begins making fully
amortizing payments of principal and interest. The Company will represent and
warrant in the related Agreement that all staged-funding Contracts included in
a Contract Pool will have been fully disbursed within 90 days after the
related Closing Date, and the Company will be obligated to repurchase on the
next Remittance Date any staged-funding Contract that has not been fully
disbursed by such date.
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 Loan-to-Value Ratios; the minimum and maximum
outstanding principal balances as of the Cut-off Date and the average
outstanding principal balance as of the Cut-off Date; the aggregate principal
balances 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 original maturities of the
Contracts and the last maturity date of any Contract; and the locations of the
Obligors on 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 that materially and adversely affects the interests of the
Certificateholders in a Contract, the Company will be obligated either to cure
the breach in all material respects, to purchase the Contract or to substitute
another Contract as described below. This repurchase or substitution
obligation constitutes the sole remedy available to the Certificateholders or
the Trustee for a breach of representation by the Company. See "Description of
the Certificates--Conveyance of Contracts."
USE OF PROCEEDS
Unless otherwise specified in an applicable Prospectus Supplement,
substantially all of the net proceeds to be received from the sale of each
Series of Certificates will be used by the Company for general corporate
purposes, including the purchase of the Contracts, costs of carrying the
Contracts until sale of the related Certificates and to pay other expenses
connected with pooling the Contracts and issuing the Certificates.
GREEN TREE FINANCIAL CORPORATION
GENERAL
The Company is a Delaware corporation which, as of December 31, 1997, had
stockholders' equity of approximately $1,332,000,000. The Company purchases,
pools, sells and services conditional sales contracts for
12
<PAGE>
manufactured housing throughout the nation. The Company is the largest
servicer of manufactured housing government insured or guaranteed contracts
and of conventional manufactured housing contracts in the United States. The
Company acts as Servicer of the Contracts. Servicing functions are performed
through Green Tree Financial Servicing Corporation, a wholly owned subsidiary
of the Company. Through its principal offices in Saint Paul, Minnesota and
service centers throughout the United States, the Company serves all 50
states. 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 Annual Report on Form 10-K for the year ended
December 31, 1997, most recent Proxy Statement and, when available, subsequent
quarterly and annual reports are available from the Company upon written
request.
CONTRACT ORIGINATION
Through its regional service centers, the Company arranges to purchase
manufactured housing contracts from manufactured housing dealers located
throughout the United States. The Company's regional service center personnel
contact dealers located in their region and explain the Company's available
financing plans, terms, prevailing rates and credit and financing policies. If
the dealer wishes to use the Company's available customer financing, the
dealer must make an application for dealer approval. Upon satisfactory results
of the Company's investigation of the dealer's creditworthiness and general
business reputation, the Company and the dealer execute a dealer agreement.
The Company also originates manufactured housing installment loan agreements
directly with customers, particularly in instances where a homeowner wants to
refinance an existing manufactured housing contract (which may or may not be
with the Company).
All contracts that the Company originates are written on forms provided by
the Company and are originated on an individually approved basis in accordance
with the Company's guidelines. The dealer or the customer submits the
customer's credit application and purchase order to a regional service center
where Company personnel make an analysis of the creditworthiness of the
proposed buyer. The analysis includes a review of the applicant's paying
habits, length and likelihood of continued employment, and certain other
factors. The Company uses a proprietary automated credit scoring system, which
is a statistically based scoring system that quantifies information using
variables obtained from customers' credit applications and credit reports. As
of December 31, 1997, this credit scoring system has been used in making
credit determinations on over $3.1 million applications. The Company believes
the use of this proprietary credit scoring system has contributed to the
reduction in the number of repossessions incurred as a percentage of the
Company's servicing portfolio. Manufactured housing contracts are assumable by
any individual who meets the Company's then-current underwriting criteria. If
the application meets the Company's guidelines and the credit is approved, the
Company purchases the contract after the manufactured home is delivered and
set up and the customer has moved in.
The Company computes the loan-to-value ratio with respect to each Contract
by first computing the percentage relationship that the down payment (which,
in the case of certain Contracts, including Land-and-Home Contracts, may
include the borrower's equity in land (based on the appraised value,
discounted up to 20%, less encumbrances) for which a lien has been granted to
the Company) bears to the total loan amount plus any cash down payment (plus,
in certain cases, fees and insurance premiums financed), then subtracting the
result from one. For certain Contracts in which a lien on land has been
granted to the Company in lieu of or as a supplement to a cash down payment,
the loan-to-value ratio is computed by dividing the appraised value of the
land (discounted up to 20%) by the total loan amount and subtracting the
result from one. If the customer is refinancing an existing loan, the Company
may in some situations rely on an appraisal made at the time the prior loan
was originated. Manufactured Homes, unlike site-built homes, generally
depreciate in value. Consequently, at any time after origination it is
possible, especially in the case of Contracts with high loan-to-value ratios
at origination, that the market value of a Manufactured Home may be lower than
the principal amount outstanding under the related Contract.
13
<PAGE>
The volume of manufactured housing contracts purchased or originated by the
Company for the past five years and certain other information at the end of
such years were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS EXCEPT FOR AVERAGE SIZE)
<S> <C> <C> <C> <C> <C>
Principal balance of
contracts purchased:
FHA/VA................ $ 252,466 $ 67,260 $ 18,842 $ 14,333 $ 13,398
Conventional.......... 2,196,655 3,134,231 4,140,994 4,867,685 5,541,120
---------- ---------- ---------- ---------- ----------
Total............. $2,449,121 $3,201,491 $4,159,836 $4,882,018 $5,554,518
========== ========== ========== ========== ==========
Number of contracts pur-
chased................. 96,934 117,742 133,398 143,145 152,839
Average contract size... $ 25,266 $ 27,191 $ 31,184 $ 34,105 $ 36,342
Average interest rate... 10.1% 11.0% 10.7% 10.2% 10.3%
Weighted average remain-
ing term at purchase
(months)............... 205 218 266 291 298
</TABLE>
POOLING AND DISPOSITION OF CONTRACTS
The Company generally pools contracts for sale to investors within 15 to 120
days of purchase. In the case of FHA-insured and VA-guaranteed manufactured
housing contracts, the Company generally issues modified pass-through
certificates secured by the contracts and guaranteed by the Government
National Mortgage Association ("GNMA certificates"). The GNMA certificates
provide for the payment by the Company to registered holders of GNMA
certificates of monthly payments of principal and interest and the "pass-
through" of any prepayments of the contracts.
In the case of conventional manufactured housing contracts, the Company
sells pools of contracts through asset securitization vehicles such as the
Trust Funds described herein. The Company establishes a specified level of
recourse (which may take the form of a subordinated right to interest payments
on the Contracts, payable after the payment of scheduled principal and
interest on the related investor interests) or a cash reserve fund for losses
on the contracts comprising the pools. Upon a default under a contract and a
liquidation of the underlying collateral, any net losses are charged against
the established recourse amount or the reserve fund.
SERVICING
The Company services all of the manufactured housing contracts it originates
or purchases from other originators, collecting loan payments, taxes and
insurance payments where applicable and other payments from borrowers and
remitting principal and interest payments to the holders of the conventional
contracts or of the GNMA certificates backed by FHA-insured and VA-guaranteed
contracts.
The following table shows the composition of the Company's servicing
portfolio of contracts that the Company originated, together with subserviced
Contracts not originated by the Company, including manufactured housing
contracts, recreational vehicle contracts, motorcycle contracts, special
product contracts and home improvement contracts, on the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Fixed term contracts.................. $7,194 $9,653 $13,314 $18,965 $ 26,036
Revolving credit ..................... -- 168 574 1,108 1,921
------- ------- ------- ------- ---------
Total............................... $7,194 $9,821 $13,888 $20,073 $ 27,957
======= ======= ======= ======= =========
Number of contracts serviced.......... 406,393 511,519 656,845 826,863 1,076,000
</TABLE>
14
<PAGE>
YIELD CONSIDERATIONS
The Remittance Rates and the weighted average Contract Rate of the Contracts
relating to each Series of Certificates will be set forth in the related
Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, each
monthly accrual of interest on a Contract is calculated at one-twelfth of the
product of the Contract Rate and the principal balance outstanding on the
scheduled payment date for such Contract in the preceding month. Unless
otherwise specified in the related Prospectus Supplement, the Remittance Rate
with respect to each Certificate will be calculated similarly.
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, each as further described in "Description of Certificates--
General," 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.
If a Series of Certificates contains Classes of Certificates entitled to
receive distributions of principal or interest or both, in a specified order
other than as a specified percentage of each distribution of principal or
interest or both, the Prospectus Supplement will set forth information,
measured relative to a prepayment standard or model specified in such
Prospectus Supplement, with respect to the projected weighted average life of
each such Class and the percentage of the original principal of each such
Class that would be outstanding on specified Remittance Dates for such Series
based on the assumptions stated in such Prospectus Supplement, including
assumptions that prepayments on the Contracts in the related Trust Fund are
made at rates corresponding to the various percentages of such prepayment
standard or model.
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 30 years.
PREPAYMENT CONSIDERATIONS
Contracts generally may be prepaid in full or in part without penalty. FHA
Contracts and VA Contracts may be prepaid at any time without penalty. Based
on the Company's experience with the portfolio of manufactured housing
contracts serviced by it, the Company anticipates that a number of the
Contracts will be prepaid prior to their maturity. A number of factors,
including homeowner mobility, general and regional economic conditions and
prevailing interest rates, may influence prepayments. In addition, repurchases
of Contracts on account of certain breaches of representations and warranties
have the effect of prepaying such Contracts and therefore would affect the
average life of the Certificates. Most of the Contracts contain a "due-on-
15
<PAGE>
sale" clause that would permit the Servicer to accelerate the maturity of a
Contract upon the sale of the related Manufactured Home. In the case of those
Contracts that do contain due-on-sale clauses, the Servicer will permit
assumptions of such Contracts if the purchaser of the related Manufactured
Home satisfies the Company's then-current underwriting standards.
Information regarding the Prepayment 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.
See "Description of the Certificates--Termination of the Agreement" 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. Section references contained herein refer to sections of the form
of Agreement filed as an exhibit to the Registration Statement of which this
Prospectus is a part (the "Registration Statement"). The portions of such
sections described herein may be contained in different numbered sections in
the actual Agreement pursuant to which any Series of Certificates is issued.
The provisions of the form of Agreement filed as an exhibit to the
Registration Statement that are not described herein may differ from the
provisions of any actual Agreement. The material differences will be described
in the related Prospectus Supplement. Capitalized terms used herein and not
otherwise defined herein shall have the meanings assigned to them in the form
of Agreement filed as an exhibit to the Registration Statement.
Each Series of Certificates will have been rated in the rating category by
the rating agency or agencies specified in the related Prospectus Supplement.
GENERAL
The Certificates may be issued in one or more Classes. If the Certificates
of a Series are issued in more than one Class, the Certificates of all or less
than all of such Classes may be sold pursuant to this Prospectus, and there
may be separate Prospectus Supplements relating to one or more of such Classes
so sold. Any reference herein to the Prospectus Supplement relating to a
Series comprised of more than one Class should be understood as a reference to
each of the Prospectus Supplements relating to the Classes sold hereunder. Any
reference herein to the Certificates of a Class should be understood to refer
to the Certificates of a Class within a Series or all of the Certificates of a
single-Class Series, as the context may require. For convenience of
description, any reference in this Prospectus to a "Class" of Certificates
includes a reference to any subclass 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 from time to time, (ii) the amounts
held in the Certificate Account from time to time, (iii) proceeds from certain
hazard insurance on individual Manufactured Homes and
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Manufactured Homes (or the related real estate, in the case of Land-and-Home
Contracts) acquired by repossession, (iv) any letter of credit, guarantee,
surety bond, insurance policy, cash reserve fund or other credit enhancement
securing payment of all or part of a Series of Certificates and (v) such other
property as may be specified in the related Prospectus Supplement. Except as
otherwise specified in the related Prospectus Supplement, the Certificates
will be freely transferable and exchangeable at the corporate trust office of
the Trustee at the address set forth in the related Prospectus Supplement. No
service charge will be made for any registration of exchange or transfer of
Certificates, but the Trustee may require payment of a sum sufficient to cover
any tax or other governmental charge.
Ownership of each Contract Pool may be evidenced by one or more Classes of
Certificates, each representing the interest in the Contract Pool specified in
the related Prospectus Supplement. Each Series of Certificates may include one
or more Classes ("Subordinated Certificates") which are subordinated in right
of distribution to one or more other Classes ("Senior Certificates"), as
provided in the related Prospectus Supplement. Certificates of a Series which
includes Senior and Subordinated Certificates are referred to herein
collectively as "Senior/Subordinated Certificates." A Series of
Senior/Subordinated Certificates may include one or more Classes ("Mezzanine
Certificates") which are subordinated to one or more Classes of Certificates
and are senior to one or more Classes of Certificates. The Prospectus
Supplement with respect to a Series of Senior/Subordinated Certificates will
set forth, among other things, the extent to which the Subordinated
Certificates are subordinated (which may include a formula for determining the
subordinated amount or for determining the allocation of the Amount Available
(hereinafter defined) among Senior Certificates and Subordinated
Certificates), the allocation of losses among the Classes of Subordinated
Certificates, the period or periods of such subordination, the minimum
subordinated amount, if any, and any distributions or payments which will not
be affected by such subordination. The protection afforded to the Senior
Certificateholders from the subordination feature described above will be
effected by the preferential right of such Certificateholders to receive
current distributions from the Contract Pool. If a Series of Certificates
contains more than one Class of Subordinated Certificates, losses will be
allocated among such Classes in the manner described in the Prospectus
Supplement. If so specified in the applicable Prospectus Supplement, Mezzanine
Certificates or other Classes of Subordinated Certificates may be entitled to
the benefits of other forms of credit enhancement and may, if rated in one of
the four highest rating categories by a nationally recognized statistical
rating organization, be offered pursuant to this Prospectus and such
Prospectus Supplement.
If so specified in a Prospectus Supplement, a Series of Certificates may
include one or more Classes which (i) are entitled to receive distributions
only in respect of principal ("Principal Only Certificates"), interest
("Interest Only Certificates") or any combination thereof, or in specified
proportions in respect of such payments, and/or (ii) are entitled to receive
distributions in respect of principal before or after specified principal
distributions have been made on one or more other Classes within such Series
("Fast Pay/Slow Pay Certificates"), or on a planned amortization schedule
("PAC Certificates") or targeted amortization schedule ("TAC Certificates") or
upon the occurrence of other specified events. The Prospectus Supplement will
set forth the rate at which interest will be paid to Certificateholders of
each Class of a given Series (the "Pass-Through Rate"). Such Pass-Through Rate
may be fixed, variable or adjustable, as specified in the related Prospectus
Supplement.
The related Prospectus Supplement will specify the minimum denomination or
initial principal amount of Contracts evidenced by a single Certificate of
each Class of Certificates of a Series (a "Single Certificate").
Distributions of principal and interest on the Certificates will be made on
the payment dates set forth in the related Prospectus Supplement (each, a
"Remittance Date") to the persons in whose names the Certificates are
registered at the close of business on the related record date specified in
the related Prospectus Supplement (the "Record Date"). Distributions will be
made by check mailed to the address of the person entitled thereto as it
appears on the Certificate Register, or, to the extent described in the
related Agreement, by wire transfer, except that the final distribution in
retirement of Certificates will be made only upon presentation and surrender
of the Certificates at the office or agency of the Trustee specified in the
final distribution notice to Certificateholders.
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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 Certificates 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 or by
such Depositary or any such nominee to a successor of such Depositary or a
nominee of such successor.
The specific terms of the depositary arrangement with respect to any
Certificates of a Class will be described in the related Prospectus
Supplement. It is anticipated that the following provisions will apply to all
depositary arrangements:
Upon the issuance of a Global Certificate, the Depositary for such Global
Certificate will credit, on its book-entry registration and transfer system,
the respective denominations of the Certificates represented by such Global
Certificate to the accounts of institutions that have accounts with such
Depositary ("participants"). Ownership of beneficial interests in a Global
Certificate will be limited to participants or persons that may hold interests
through participants. Ownership of beneficial interests in such Global
Certificate will be shown on, and the transfer of that ownership will be
effected only through, records maintained by the Depositary for such Global
Certificate or by participants or persons that hold through participants. The
laws of some states require that certain purchasers of securities take
physical delivery of such securities in definitive form. Such limits and such
laws may impair the ability to transfer beneficial interests in a Global
Certificate.
So long as the Depositary for a Global Certificate, or its nominee, is the
owner of such Global Certificate, such Depositary or such nominee, as the case
may be, will be considered the sole owner or holder of the Certificates
represented by such Global Certificate for all purposes under the Agreement
relating to such Certificates. Except as set forth below, owners of beneficial
interests in a Global Certificate will not be entitled to have Certificates of
the Series represented by such Global Certificate registered in their names,
will not receive or be entitled to receive physical delivery of Certificates
of such Series in definitive form and will not be considered the owners or
holders thereof under the Agreement governing such Certificates.
Distributions or payments on Certificates registered in the name of or held
by a Depositary or its nominee will be made to the Depositary or its nominee,
as the case may be, as the registered owner for the holder of the Global
Certificate representing such Certificates. In addition, all reports required
under the applicable Agreement to be made to Certificateholders (as described
below under "Reports to Certificateholders") will be delivered to the
Depositary or its nominee, as the case may be. None of the Company, Servicer,
Trustee, or any agent thereof (including any applicable Certificate Registrar
or Paying Agent), will have any responsibility or liability for any aspect of
the records relating to or payments made on account of beneficial ownership
interests in a Global Certificate or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests or for providing
reports to the related beneficial owners.
The Company expects that the Depositary for Certificates of a Class, upon
receipt of any distribution or payment in respect of a Global Certificate,
will credit immediately participants' accounts with payments in amounts
proportionate to their respective beneficial interest in such Global
Certificate as shown on the records of such Depositary. The Company also
expects that payments by participants to owners of beneficial interests in
such Global Certificate held through such participants will be governed by
standing instructions and customary
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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 security interests created thereby and any related mortgages or
deeds of trust, 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), all rights under certain hazard insurance policies
on the related Manufactured Homes, all documents contained in the Contract
files and all proceeds derived from any of the foregoing. (Section 2.01.) On
behalf of the Trust, 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. (Sections 1.02 and 2.02.) 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.
(Sections 1.02 and 5.04.) Prior to the conveyance of the Contracts to the
Trust, the Company's internal audit department will complete a review of all
of the Contract files, including the certificates of title to, or other
evidence of a perfected security interest in, the Manufactured Homes,
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 by the
Company or replaced with another Contract, 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.
The Agreement will designate the Company as custodian to maintain
possession, as the Trustee's agent, of the Contracts and any other documents
related to the Manufactured Homes (other than the Land-and-Home Contracts and
related documents). (Sections 2.03 and 4.01.) To facilitate servicing and save
administrative costs, the documents will not be physically segregated from
other similar documents that are in the Company's possession. Uniform
Commercial Code financing statements will be filed in Minnesota reflecting the
sale and assignment of the Contracts to the Trustee, and the Company's
accounting records and computer systems will also reflect such sale and
assignment. In addition, the Contracts will be stamped to reflect their
assignment to the Trustee. However, if through fraud, negligence or otherwise,
a subsequent purchaser were able to take physical possession of the Contracts
without knowledge of the assignment, the Trustee's interest in the Contracts
could be defeated. See "Risk Factors--Security Interests and Certain Other
Aspects of the Contracts." The Agreement will designate the Trustee or another
independent custodian, as the Trustee's agent, to maintain possession of the
documents relating to all Land-and-Home Contracts.
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Except as otherwise specified in the related Prospectus Supplement, the
Company will make certain warranties in the Agreement with respect to each
Contract as of the Closing Date, including that: (a) as of the Cut-off Date,
or the date of origination, if later, 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 contained in the Contract file or the Land-and-Home Contract file;
(c) each Contract is a legal, valid and binding obligation of the Obligor and
is enforceable in accordance with its terms (except as may be limited by laws
affecting creditors' rights generally); (d) no Contract is subject to any
right of rescission, set-off, counterclaim or defense; (e) each Contract is
covered by hazard insurance described under "--Servicing--Hazard Insurance";
(f) each Contract has been originated by a manufactured housing dealer or the
Company in the ordinary course of such dealer's or the Company's business and,
if originated by a manufactured housing dealer, was purchased by the Company
in the ordinary course of business; (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 to the Trustee pursuant to the Agreement
or pursuant to the Certificates unlawful; (h) each Contract complies with all
requirements of law; (i) no Contract has been satisfied, subordinated in whole
or in part or rescinded and the Manufactured Home securing the Contract has
not been released from the lien of the Contract in whole or in part; (j) each
Contract creates a valid and enforceable first priority security interest in
favor of the Company in the Manufactured Home covered thereby and, with
respect to each Land-and-Home Contract, the lien created thereby has been
recorded or will be recorded within six months, and such security interest or
lien has been assigned by the Company to the Trustee; (k) all parties to each
Contract had capacity to execute such Contract; (l) no Contract has been sold,
assigned or pledged to any other person and prior to the transfer of the
Contracts by the Company to the Trustee, the Company had good and marketable
title to each Contract free and clear of any encumbrance, equity, loan,
pledge, charge, claim or security interest, and was the sole owner and had
full right to transfer such Contract to the Trustee; (m) as of the Cut-off
Date, or the date of origination, if later, there was no default, breach,
violation or event permitting acceleration under any Contract (except for
payment delinquencies permitted by clause (a) above), no event which 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) as of the
Closing Date there were, to the best of the Company's knowledge, no liens or
claims which have been filed for work, labor or materials affecting a
Manufactured Home or any related Mortgaged Property securing a Contract, which
are or may be liens prior or equal to the lien of the Contract; (o) each
Contract other than a step-up rate Contract is a fully-amortizing loan with a
fixed Contract Rate and provides for level payments 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 of the benefits of the security; (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) except
as specified in the related Prospectus Supplement, none of the Contracts had a
Loan-to-Value Ratio at origination greater than 95% and, if the related
Manufactured Home was new at the time such Contract was originated, the
original principal balance of such Contract did not exceed 130% of the
manufacturer's invoice price plus 100% of taxes and license fees, 130% of
freight charges, 100% of the dealer's cost of dealer-installed equipment (not
to exceed 25% of the amount financed in all states except California; not to
exceed 70% of the manufacturer's invoice price in California if required to
meet park requirements) and up to $1,500 of set-up costs per module; (t) at
the time of origination of each Contract the Obligor was the primary resident
of the related Manufactured Home; (u) other than the Land-and-Home Contracts,
the related Manufactured Home is not considered or classified as part of the
real estate on which it is located under the laws of the jurisdiction in which
it is located, and as of the Closing Date such Manufactured Home was, to the
best of the Company's knowledge, free of damage and in good repair; (v) the
related Manufactured Home is a "manufactured home" within the meaning of 42
United States Code, Section 5402(6) and each manufactured housing dealer from
whom the Company purchased a Contract was approved by the Company in
accordance with the requirements of the Secretary of Housing and Urban
Development; (w) each Contract is a "qualified mortgage" under Section
860G(a)(3) of the Code and each Manufactured Home is "manufactured housing"
within the meaning of Section 25(e)(10) of the Code; and (x) if a Contract is
an FHA/VA Contract, the Contract has been serviced in accordance with FHA/VA
Regulations, the insurance or guarantee of the Contract under the FHA/VA
Regulations and related laws is in full force and effect, and no event has
occurred which, with or without notice or lapse of time or both, would impair
such insurance or guarantee. (Article III.)
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Under the terms of the Agreement, and subject to the conditions specified in
the preceding paragraph and to the Company's option to effect a substitution
as described in the next paragraph, the Company will be obligated to
repurchase for the Repurchase Price (as defined below) any Contract on the
first business day after the first Determination Date which is more than 90
days after the Company becomes aware, or should have become aware, or the
Company's receipt of written notice from the Trustee or the Servicer, of a
breach of any representation or warranty of the Company in the Agreement that
materially adversely affects the Trust's interest in any Contract if such
breach has not been cured. (Section 3.05.) The Repurchase Price for any
Contract will be the remaining principal amount outstanding on such Contract
on the date of repurchase plus accrued and unpaid interest thereon at its
Contract Rate to the date of such repurchase. (Section 1.02.) This repurchase
obligation constitutes the sole remedy available to the Trust Fund and the
Certificateholders for a breach of a 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. (Section
6.06.)
In lieu of purchasing 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. (Section 1.02.) 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. (Sections 1.02 and 3.05.)
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
Remittance Date in Eligible Investments.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will deposit in the Certificate Account on a daily basis the
following payments and collections received or made by it 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):
(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;
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(iii) all amounts received and retained in connection with the
liquidation of defaulted Contracts, net of liquidation expenses ("Net
Liquidation Proceeds");
(iv) all proceeds received under any hazard or other insurance policy
covering any Contract, other than proceeds to be applied to the restoration
or repair of the Manufactured Home or released to the Obligor;
(v) any Advances made as described under "Advances" and certain other
amounts required under the Agreement to be deposited in the Certificate
Account;
(vi) all amounts received from any credit enhancement provided with
respect to a Series of Certificates; and
(vii) all proceeds of any Contract or property acquired in respect
thereof repurchased by the Servicer, or the Company, or otherwise as
described above or under "Termination" below.
DISTRIBUTIONS ON CERTIFICATES
Except as otherwise provided in the related Prospectus Supplement, on each
Remittance Date, the Trustee will withdraw from the applicable Certificate
Account and distribute to the Certificateholders of each Class (other than a
Series having a Class of Subordinated Certificates, as described below),
either the specified interest of such Class in the Contract Pool times the
aggregate of all amounts on deposit in the Certificate Account as of the third
Business Day preceding the Remittance Date or such other date as may be
specified in the related Prospectus Supplement (the "Determination Date"), or,
in the case of a Series of Certificates comprised of Classes which have been
assigned a Stated Balance, payments of interest and payments in reduction of
the Stated Balance from all amounts on deposit in the Certificate Account on
the Determination Date, in the priority and calculated in the manner set forth
in the related Prospectus Supplement, except, in each case: (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 Remittance 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 and expenses from Liquidation Proceeds, condemnation proceeds and proceeds
of insurance policies with respect to the related Contracts. 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." The amounts on deposit in the Certificate Account on a
Determination Date, less the amounts specified in (i) through (v) above, are
referred to herein as the "Amount Available."
Unless otherwise specified in the related Prospectus Supplement, with
respect to a Series of Certificates having a Class of Subordinated
Certificates, on each Remittance Date, the Trustee will withdraw from the
applicable Certificate Account and distribute to the Holders of Senior
Certificates, in the aggregate, the lesser of (i) the Senior Distribution
Amount plus the Outstanding Senior Shortfall (each defined below), or (ii) the
percentage interest (which may vary as specified in the related Prospectus
Supplement) of the Classes of Senior Certificates times the Amount Available
plus (a) the percentage interest (which may vary as specified in the related
Prospectus Supplement) of the Classes of Subordinated Certificates times the
Amount Available, not to exceed the Available Subordination Amount, if any, as
defined in the related Prospectus Supplement, and (b) Advances, if any, made
by the Servicer. The distribution made to the Certificateholders of each Class
of Senior Certificates shall be calculated as described in the related
Prospectus Supplement and may vary as to the allocation of principal or
interest or both. Unless otherwise specified in the related Prospectus
Supplement, the Senior Distribution Amount is an amount equal to the
percentage interest of the Classes of Senior Certificates times:
(i) all regularly scheduled payments of principal of and interest which
were due on Contracts during the related Due Period, whether or not
received, with the interest portions thereof adjusted to the Remittance
Rate;
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(ii) all Principal Prepayments made by the Obligor during the prior Due
Period;
(iii) with respect to each Contract not described in (iv) below, all
insurance proceeds, all condemnation awards and any other cash proceeds
from a source other than the Obligor, to the extent required to be
deposited in the Certificate Account, which were received during the prior
Due Period, net of related unreimbursed Advances and net of any portion
thereof which, as to any Contract, constitutes late collections;
(iv) with respect to each Contract as to which a receipt of Liquidation
Proceeds has been received during the prior Due Period or other event of
termination of the Contract has occurred during the prior Due Period, an
amount equal to the principal amount of the Contract outstanding
immediately prior to the date of receipt of such Liquidation Proceeds or
such other event of termination, reduced by the principal portion of any
unpaid payments due on or before such date to the extent previously
advanced against or otherwise received by the Certificateholder, plus
interest thereon from the most recent Due Date at the Remittance Rate; and
(v) with respect to each Contract repurchased by the Company for which
the repurchase price was not distributed previously, an amount equal to the
principal amount of the Contract outstanding on the date of such repurchase
reduced by the principal portion of any unpaid payments due on or before
such date (but only to the extent advanced against or otherwise received by
the Certificateholders), plus interest thereon to the most recent Due Date.
The Outstanding Senior Shortfall for any Class of Senior Certificates means
as of any date, to the extent not previously paid, the aggregate of the
amounts by which the Senior Distribution Amount for such Class for any
Remittance Date exceeded the amount actually paid on such Remittance Date plus
interest at the Remittance Rate.
Unless otherwise specified in the related Prospectus Supplement, on each
Remittance Date, the Servicer shall distribute to the Classes of Subordinated
Certificateholders, in the order set forth in the related Prospectus
Supplement, the balance of the Amount Available, if any, after the payment to
the Senior Certificateholders, as described above.
Unless otherwise specified in the Prospectus Supplement relating to a Series
of Certificates, one or more Classes of which have been assigned a Stated
Balance, distributions in reduction of the Stated Balance of such Certificates
will be made on each Remittance Date to the Certificateholders of the Class
then entitled to receive such Certificate distributions until the aggregate
amount of such distributions have reduced the Stated Balance of the
Certificates of such Class to zero or a specified percentage. Allocation of
distributions in reduction of Stated Balance will be made to each Class of
such Certificates in the order specified in the related Prospectus Supplement,
which, if so specified in such Prospectus Supplement, may be concurrently.
Unless otherwise specified in the related Prospectus Supplement, distributions
in reduction of the Stated Balance of each Certificate of a Class then
entitled to receive such distributions will be made pro rata among the
Certificates of such Class.
Unless otherwise specified in the related Prospectus Supplement, the maximum
amount which will be distributed in reduction of Stated Balance to holders of
Certificates of a Class then entitled thereto on any Remittance Date will
equal, to the extent funds are available, the sum of (i) the amount of the
interest, if any, that has accrued but is not yet payable on the Compound
Interest Certificates of such Series, if any, from the prior Remittance Date
(or since the date specified in the related Prospectus Supplement in the case
of first Remittance Date) (the "Accrual Remittance Amount"); (ii) the
Certificate Remittance Amount; and (iii) the applicable percentage of the
Excess Cash Flow, if any, specified in such Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
Certificate Remittance Amount with respect to a Remittance Date will equal the
amount, if any, by which the then outstanding Stated Balance of the
Certificates of the related Classes of such Series (before taking into account
the amount of interest accrued on any Class of Compound Interest Certificates
of such Series to be added to the Stated Balance thereof on such Remittance
Date) exceeds the Asset Value, as defined in the related Prospectus
Supplement, of the Contracts in
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the Contract Pool underlying such Series as of the end of the applicable Due
Period specified in the related Prospectus Supplement. For purposes of
determining the Certificate Remittance Amount with respect to a Remittance
Date, the Asset Value of the Contracts will be reduced to take into account
the interest evidenced by such Classes of Certificates in the principal
distributions on or with respect to such Contracts received by the Trustee
during the preceding Due Period.
Unless otherwise specified in the Prospectus Supplement relating to a Series
of Certificates, one or more Classes of which have been assigned a Stated
Balance, Excess Cash Flow represents the excess of (i) the interest evidenced
by such Classes of Certificates in the distributions received on the Contracts
underlying such Series in the Due Period preceding a Remittance Date for such
Series (and, in the case of the first Due Period, the amount deposited in the
Certificate Account on the closing date for the sale of such Certificates),
together with income from the reinvestment thereof, (ii) the sum of all
interest accrued, whether or not then payable, on the Certificates of such
Classes since the preceding Remittance Date (or since the date specified in
the related Prospectus Supplement in the case of the first Remittance Date),
the Certificate Remittance Amount for the then current Remittance Date and, if
applicable, any payments made on any Certificates of such Class pursuant to
any special distributions in reduction of Stated Balance during such Due
Period.
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 Remittance Date on
account of principal and interest, stated separately, and a statement setting
forth certain information with respect to the Contracts.
If there are not sufficient funds in the Certificate Account to make the
full distribution to Certificateholders described above on any Remittance
Date, the Servicer will distribute the funds available for distribution to the
Certificateholders of each Class in accordance with the respective interests
therein, except that Subordinated Certificateholders, if any, will not,
subject to the limitations described in the related Prospectus Supplement,
receive any distributions until Senior Certificateholders receive the Senior
Distribution Amount plus the Outstanding Senior Shortfall. The difference
between the amount which the Certificateholders would have received if there
had been sufficient eligible funds in the Certificate Account and the amount
actually distributed, plus interest at the Remittance Rates of the respective
Contracts to which such shortfall is attributable, will be added to the amount
which the Certificateholders are entitled to receive on the next Remittance
Date.
Special Distributions. To the extent specified in the Prospectus Supplement
relating to a Series of Certificates, one or more Classes of which have been
assigned a Stated Balance and having less frequent than monthly Remittance
Dates, such Classes may receive Special Distributions in reduction of Stated
Balance ("Special Distributions") in any month, other than a month in which a
Remittance Date occurs, if, as a result of principal prepayments on the
Contracts in the related Contract Pool or low reinvestment yields, the Trustee
determines, based on assumptions specified in the related Agreement, that the
amount of cash anticipated to be on deposit in the Certificate Account on the
next Remittance Date for such Series and available to be distributed to the
Holders of the Certificates of such Classes may be less than the sum of (i)
the interest scheduled to be distributed to holders of the Certificates of
such Classes and (ii) the amount to be distributed in reduction of Stated
Balance of such Certificates on such Remittance Date. Any such Special
Distributions will be made in the same priority and manner as distributions in
reduction of Stated Balance would be made on the next Remittance Date.
Subordinated Certificates. The rights of a Class of Certificateholders of a
Series to receive any or a specified portion of distributions of principal or
interest or both with respect to the Contracts, to the extent specified in the
related Agreement and described in the related Prospectus Supplement, may be
subordinated to such rights of other Certificateholders. The Prospectus
Supplement with respect to a Series of Certificates having a Class of
Subordinated Certificates will set forth, among other things, the extent to
which such Class is subordinated (which may include a formula for determining
the subordinated amount or for determining the allocation of the Amount
Available 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
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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.
ADVANCES
To the extent provided in the related Prospectus Supplement, the Servicer is
obligated to make periodic Advances of cash from its own funds or, if so
specified in the related Prospectus Supplement, from excess funds in the
Certificate Account not then required to be distributed to Certificateholders,
for distribution to the Certificateholders in an amount equal to the
difference between the amount due to them and the amount in the Certificate
Account, eligible for distribution to them pursuant to the Agreement, but only
to the extent such difference is due to delinquent payments of principal and
interest for the preceding Due Period and only to the extent the Servicer
determines such advances are recoverable from future payments and collections
on the delinquent Contracts. The Servicer's obligation to make Advances, if
any, may, as specified in the related Prospectus Supplement, be limited in
amount. If so specified in the related Prospectus Supplement, the Servicer
will not be obligated to make Advances until all or a specified portion of the
Reserve Fund, if any, is depleted. Advances are intended to maintain a regular
flow of scheduled interest and principal payments to the Senior
Certificateholders, not to guarantee or insure against losses. Accordingly,
any funds so advanced are recoverable by the Servicer out of amounts received
on particular Contracts which represent late recoveries of principal or
interest respecting which any such Advance was made.
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,
on January 15, 1998 (all days are assumed to be business days):
<TABLE>
<S> <C> <C>
January 15...................................... (1) Cut-off Date.
January 15-February 14.......................... (2) Due Period. Servicer
receives scheduled payments
on the Contracts and any
Principal Prepayments made
by Obligors and applicable
interest thereon.
February 27..................................... (3) Record Date.
February 25..................................... (4) Determination Date.
Distribution amount
determined.
March 1......................................... (5) Remittance 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 March 1 will be made to Certificateholders of record at
the close of business on the Business Day immediately preceding the
related Remittance Date.
(4) On February 25 (the third Business Day prior to the Remittance Date), the
Servicer will determine the amounts of principal and interest which will
be passed through on March 1. In addition, the Servicer may advance funds
to cover any delinquencies, in which event the distribution to
Certificateholders on March 1
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will include the full amounts of principal and interest due during the
related Due Period. 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 March 1, the amounts determined on February 25 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
Manufactured Home 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). (Article
X).
The Agreement also requires the Servicer, in connection with its duties as
servicer of the Contracts, to defend and indemnify the Trust Fund, the Trustee
and the Certificateholders (which indemnification will survive any removal of
the Servicer as servicer of the Contracts) against any and all costs,
expenses, losses, damages, claims and liabilities, including reasonable fees
and expenses of counsel and expenses of litigation, in respect of any action
taken by the Servicer with respect to any Contract while it was the Servicer.
(Section 10.04.)
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 manufactured housing
contracts of the same type as the Contracts in those jurisdictions where the
related Manufactured Homes 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, repossession.
The Servicer will make reasonable efforts to collect all payments called for
under the Contracts and, consistent with the Agreement and any FHA insurance
and VA guaranty, will follow such collection procedures as it follows with
respect to mortgage loans or contracts serviced by it that are comparable to
the Contracts.
Hazard Insurance. Except as otherwise specified in the related Prospectus
Supplement, the terms of the Agreement will require the Servicer to cause to
be maintained with respect to each Contract one or more Hazard Insurance
Policies which provide, at a minimum, the same coverage as a standard form
fire and extended coverage insurance policy that is customary for manufactured
housing, issued by a company authorized to issue such policies in the state in
which the Manufactured Home is located, and in an amount which is not less
than the maximum insurable value of such Manufactured Home or the principal
balance due from the Obligor on the related Contract, whichever is less;
provided, however, that the amount of coverage provided by each Hazard
Insurance Policy shall be sufficient to avoid the application of any co-
insurance clause contained therein. Each Hazard Insurance Policy caused to be
maintained by the Servicer shall contain a standard loss payee clause in favor
of the Servicer and its successors and assigns. If any Obligor is in default
in the payment of premiums on its Hazard Insurance Policy or Policies, the
Servicer shall pay such premiums out of its own funds, and may add separately
such premium to the Obligor's obligation as provided by the Contract, but may
not add such premium to the remaining principal balance of the Contract.
The Servicer may maintain, in lieu of causing individual Hazard Insurance
Policies to be maintained with respect to each Manufactured Home, and shall
maintain, to the extent that the related Contract does not require the Obligor
to maintain a Hazard Insurance Policy with respect to the related Manufactured
Home, one or more blanket insurance policies covering losses on the Obligor's
interest in the Contracts resulting from the absence
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<PAGE>
or insufficiency of individual Hazard Insurance Policies. Any such blanket
policy shall be substantially in the form and in the amount carried by the
Servicer as of the date of this Agreement. The Servicer shall pay the premium
for such policy on the basis described therein and shall pay any deductible
amount with respect to claims under such policy relating to the Contracts. If
the insurer thereunder shall cease to be acceptable to the Servicer, the
Servicer shall exercise its best reasonable efforts to obtain from another
insurer a replacement policy comparable to such policy.
If the Servicer shall have repossessed a Manufactured Home on behalf of the
Trustee, the Servicer shall either (i) maintain at its expense hazard
insurance with respect to such Manufactured Home, or (ii) indemnify the
Trustee against any damage to such Manufactured Home prior to resale or other
disposition.
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 Remittance 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 firm of independent public accountants which is a member
of the American Institute of Certified Public Accountants stating that such
firm has examined certain documents, records and managements' assertions
relating to loans serviced by the Servicer and stating that, on the basis of
such procedures, such servicing has been conducted in compliance with the
minimum servicing standards identified in the Mortgage Bankers Association of
America's Uniform Single Attestation Program for Mortgage Bankers, or any
successor program, except for any significant exceptions or errors in records
that, in the opinion of such firm, generally accepted attestation standards
require it to report. (Article VI.)
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 pursuant to an Event of Termination
as discussed below. Any person with which the Servicer is merged or
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the Servicer is a party, or any person succeeding to
the business of the Servicer, will be the successor to the Servicer under the
Agreement so long as such successor services at least $100 million of
manufactured housing contracts. (Section 12.01.)
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will also provide that neither the Servicer, nor any director,
officer, employee or agent of the Servicer, will be under any liability to the
Trust Fund or the Certificateholders for any action taken or for restraining
from the taking of any action in good faith pursuant to the Agreement, or for
errors in judgment; provided, however, that neither the Servicer nor any such
person will be protected against any liability which would otherwise be
imposed by reason of the failure to perform its obligations in strict
compliance with the standards of care set forth in the Agreement. The Servicer
may, in its discretion, undertake any such action which it may deem necessary
or desirable with respect to the Agreement and the rights and duties of the
parties thereto and the interests of the Certificateholders thereunder. In
such event, the legal expenses and costs of such action and any liability
resulting therefrom will be expenses, costs and liabilities of the Trust Fund
and the Servicer will be entitled to be reimbursed therefor out of the
Certificate Account.
The Servicer shall keep in force throughout the term of this Agreement (i)
policy or policies of insurance covering errors and omissions for failure to
maintain insurance as required by this 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
manufactured housing contracts having an aggregate principal amount of $100
million or more and which are generally regarded as servicers acceptable to
institutional investors.
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The Servicer, to the extent practicable, shall cause the Obligors to pay all
taxes and similar governmental charges when and as due. To the extent that
nonpayment of any taxes or charges would result in the creation of a lien upon
any Manufactured Home having a priority equal or senior to the lien of the
related Contract, the Servicer shall advance any such delinquent tax or
charge.
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 Remittance Date) equal to 1/12th of the
product of 0.50% and the Pool Scheduled Principal Balance for the immediately
preceding Remittance 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 Remittance Date.
The Monthly Servicing Fee provides compensation for customary manufactured
housing contract third-party servicing activities to be performed by the
Servicer for the Trust Fund and for additional administrative services
performed 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 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, without limitation, payment of fees and expenses
of accountants, payments of all fees and expenses incurred in connection with
the enforcement of Contracts (except Liquidation Expenses) and payment of
expenses incurred in connection with distributions and reports to
Certificateholders. The Servicer will be reimbursed out of the Liquidation
Proceeds of a Liquidated Contract for all ordinary and necessary Liquidation
Expenses incurred by it in realization upon the related Manufactured Home.
(Section 5.08.)
As part of its Servicing Fees the Servicer will also be entitled to retain,
as compensation for the additional services provided in connection therewith,
any fees for late payments made by Obligors, extension fees paid by Obligors
for the extension of scheduled payments and assumption fees for permitted
assumptions of Contracts by purchasers of the related Manufactured Homes.
(Section 1.02.)
Events of Termination. Except as otherwise specified in the related
Prospectus Supplement, Events of Termination under each Agreement will include
(i) any failure by the Servicer to distribute to the Certificateholders any
required payment which continues unremedied for 5 days (or such other period
specified in the related Prospectus Supplement) after the giving of written
notice; (ii) any failure by the Servicer duly to observe or perform in any
material respect any other of its covenants or agreements in the Agreement
that materially and adversely affects the interests of Certificateholders,
which, in either case, continues unremedied for 30 days after the giving of
written notice of such failure of breach; (iii) any assignment or delegation
by the Servicer of its duties or rights under the Agreement, except as
specifically permitted under the Agreement, or any attempt to make such an
assignment or delegation; (iv) certain events of insolvency, readjustment of
debt, marshalling of assets and liabilities or similar proceedings regarding
the Servicer; and (v) the Servicer is no longer an Eligible Servicer (as
defined in the applicable Agreement). Notice as used herein shall mean notice
to the Servicer by the Trustee or the Company, or to the Company, the
Servicer, if any, and the Trustee by the Holders of Certificates representing
interests aggregating not less than 25% of the Trust Fund.
Rights Upon Event of Termination. Except as otherwise specified in the
related Prospectus Supplement, so long as an Event of Termination remains
unremedied, the Trustee may, and at the written direction of the
Certificateholders of a Series evidencing interests aggregating 25% or more of
the related Trust Fund, shall, terminate all of the rights and obligations of
the Servicer under the related Agreement and in and to the Contracts, and the
proceeds thereof, whereupon (subject to applicable law regarding the Trustee's
ability to make advances) the Trustee or a successor Servicer under the
Agreement will succeed to all the responsibilities, duties and liabilities of
the Servicer under the Agreement and will be entitled to similar compensation
arrangements; provided, however, that neither the Trustee nor any successor
Servicer will assume any obligation of the
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<PAGE>
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. Notwithstanding such
termination, the Servicer shall be entitled to payment of certain amounts
payable to it prior to such termination, for services rendered prior to such
termination. No such termination will affect in any manner the Company's
obligation to repurchase certain Contracts for breaches of representations or
warranties under the Agreement. In the event that the Trustee would be
obligated to succeed the Servicer but is unwilling or unable so to act, it may
appoint, or petition to a court of competent jurisdiction for the appointment
of a Servicer. Pending such appointment, the Trustee is obligated to act in
such capacity. The Trustee and such successor may agree upon the servicing
compensation to be paid, which in no event may be greater than the
compensation to the Servicer under the Agreement.
No Certificateholder will have any right under an Agreement to institute any
proceeding with respect to such Agreement unless such Holder previously has
given to the Trustee written notice of default and unless the Holders of
Certificates evidencing interests aggregating not less than 25% of the related
Trust Fund requested the Trustee in writing to institute such proceeding in
its own name as Trustee and have offered to the Trustee reasonable indemnity
and the Trustee for 60 days has neglected or refused to institute any such
proceeding. The Trustee will be under no obligation to take any action or
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 Remittance Date,
or as soon thereafter as is practicable, as specified in the related
Prospectus Supplement, a statement setting forth, among other things:
(i) the amount of such distribution allocable to principal on the
Contracts;
(ii) the amount of such distribution allocable to interest on the
Contracts;
(iii) if the distribution to the Certificateholders is less than the full
amount that would be distributable to such Certificateholders if there were
sufficient eligible funds in the Certificate Account, the difference
between the aggregate amounts of principal and interest which
Certificateholders would have received if there were sufficient eligible
funds in the Certificate Account and the amounts actually distributed;
(iv) the aggregate amount of Advances, if any, by the Servicer included
in the amounts actually distributed to the Certificateholders;
(v) the outstanding principal balance of the Contracts; and
(vi) the approximate weighted average Remittance Rate of the Contracts
during the Due Period immediately preceding such Remittance Date.
In addition, not more than 90 days after the end of each calendar year, the
Servicer will furnish a report to each Certificateholder of record at any time
during such calendar year (a) as to the aggregate of amounts reported pursuant
to (i) through (v) above for such calendar year or, in the event such person
was a Certificateholder of record during a portion of such calendar year, for
the applicable portion of such year, (b) such information as the Servicer
deems necessary or desirable for Certificateholders to prepare their tax
returns and (c) if so specified in the related Prospectus Supplement, a
listing of the principal balances of the Contracts outstanding at the end of
such calendar year. Information in the monthly and annual reports provided to
the Certificateholders will not have been examined and reported upon by an
independent public accountant. However, the Servicer will provide to the
Trustee annually a report by independent public accountants with respect to
the servicing of the Contracts as described under "Evidence as to Compliance"
above.
In addition, to the extent applicable, such report shall include:
(i) in the case of Certificates which are assigned a Stated Balance, the
amount of the distribution being made in reduction of Stated Balance
specified in the related Prospectus Supplement, and the Stated Balance
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<PAGE>
of each such Class of Certificates and a Single Certificate of the Holder's
Class after giving effect to the distribution in reduction of Stated
Balance made on such Remittance Date and after giving effect to all Special
Distributions since the preceding Remittance Date or since the Closing Date
in the case of the first Remittance Date; and
(ii) with respect to Compound Interest Certificates (but only if the
Holders thereof shall not have received on such Remittance Date a
distribution of interest equal to the entire amount of interest accrued on
such Certificate during the related Due Period with respect to such
Remittance Date):
(a) the interest accrued on such Class of Compound Interest
Certificates and on a Single Certificate of such Class during the Due
Period (or specified interest accrual period) with respect to such
Remittance Date and added to the principal of such Compound Interest
Certificates; and
(b) the Stated Balance of such Class of Compound Interest
Certificates and of a Single Certificate of such Class after giving
effect to the addition thereto of all interest accrued thereon during
the Due Period (or specified interest accrual period) with respect to
such Remittance Date.
AMENDMENT
Unless otherwise specified in the related Prospectus Supplement, the
Agreement may be amended by the Company, the Servicer and the Trustee without
the consent of the Certificateholders, (i) to cure any ambiguity, (ii) to
correct or supplement any provision therein that may be inconsistent with any
other provision therein, (iii) if an election has been made with respect to a
particular Series of Certificates to treat the Trust Fund as a real estate
mortgage investment conduit ("REMIC") within the meaning of Section 860D(a) of
the Internal Revenue Code of 1986, as amended, to maintain the REMIC status of
the Trust Fund and to avoid the imposition of certain taxes on the REMIC or
(iv) to make any other provisions with respect to matters or questions arising
under such Agreement that are not inconsistent with the provisions thereof,
provided that such action will not adversely affect in any material respect
the interests of the Certificateholders of the related Series. Unless
otherwise specified in the related Prospectus Supplement, the Agreement may
also be amended by the Company, the Servicer and the Trustee with the consent
of the Certificateholders (other than holders of Residual Certificates)
evidencing interests aggregating not less than 51% of the Trust Fund for the
purpose of adding any provisions to or changing in any manner or eliminating
any of the provisions of such Agreement or of modifying in any manner the
rights of the Certificateholders; provided, however, that no such amendment
that reduces in any manner the amount of, or delay 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 upon the date
calculated as specified in the Agreement, generally upon (i) the later of the
final payment or other liquidation of the last Contracts subject thereto and
the disposition of all property acquired upon foreclosure of any Land-and-Home
Contract or repossession of any Manufactured Home and (ii) the payment to the
Certificateholders of all amounts held by the Servicer or the Trustee and
required to be paid to it pursuant to the Agreement. In addition, unless
otherwise specified in the related Prospectus Supplement, the Company or the
Servicer may at its option with respect to any Series of Certificates,
repurchase all Certificates or Contracts remaining outstanding at such time as
the aggregate unpaid principal balance of such Contracts is less than the
percentage of the aggregate unpaid principal balance of the Contracts on the
Cut-off Date specified with respect to such Series in the related Prospectus
Supplement. Unless otherwise provided in the related Prospectus Supplement,
the repurchase price will equal the principal amount of such Contracts plus
accrued interest from the first day of the month of repurchase to the first
day of the next succeeding month at the Contract Rates borne by such
Contracts.
THE TRUSTEE
The Prospectus Supplement for a Series of Certificates will specify the
Trustee under the related Agreement. The Trustee may have normal banking
relationships with the Company or its affiliates and the Servicer or its
affiliates.
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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. Unless otherwise specified in
the related Prospectus Supplement, the Trustee may also be removed at any time
by the Holders of Certificates evidencing interests aggregating over 50% of
the related Trust Fund as specified in the Agreement. Any resignation or
removal of the Trustee and appointment of a successor Trustee will not become
effective until acceptance of the appointment by the successor Trustee.
The Trustee will make no representation as to the validity or sufficiency of
the Agreement, the Certificates, 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. (Section 11.03.) 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. (Section
11.01.) 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.
(Section 11.01.)
Under the Agreement, the Servicer agrees to pay to the Trustee on each
Remittance Date (a) reasonable compensation for all services rendered by it
hereunder (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 the 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. (Section 11.05.)
DESCRIPTION OF FHA INSURANCE AND VA GUARANTEES
Certain of the Contracts may be FHA-insured or VA-guaranteed, the payments
upon which, subject to the following discussion, are insured by the FHA under
Title I of the National Housing Act or partially guaranteed by the VA.
The regulations governing FHA manufactured home insurance provide that
insurance benefits are payable upon the repossession and resale of the
collateral and assignment of the contract to HUD. With respect to a defaulted
FHA contract, the servicer must follow applicable regulations before
initiating repossession procedures. These regulations include requirements
that the lender arrange a face-to-face meeting with the borrower, initiate a
modification or repayment plan, if feasible, and give the borrower 30 days'
notice of default prior to any repossession. The insurance claim is paid in
cash by HUD. For manufactured housing contracts, the amount of insurance
benefits generally paid by FHA is equal to 90% of the sum of (i) the unpaid
principal amount of the Contract at the date of default and uncollected
interest earned to the date of default computed at the Contract rate, after
deducting the best price obtainable for the collateral (based in part on a
HUD-approved appraisal) and all amounts retained or collected by the lender
from other sources with respect to the Contract, (ii) accrued and unpaid
interest on the unpaid amount of the Contract from the date of default to the
date of submission of the claim plus 15 calendar days (but in no event more
than nine months) computed at a rate of 7% per annum, (iii) costs paid to a
dealer or other third party to repossess and preserve the Manufactured Home,
(iv) the amount of any sales commission paid to a dealer or other third party
for the resale of the property, (v) with respect to a
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Land-and-Home Contract, property taxes, special assessments and other similar
charges and hazard insurance premiums, prorated to the date of disposition of
the property, (vi) uncollected court costs, (vii) legal fees, not to exceed
$500, and (viii) expenses for recording the assignment of the lien on the
collateral to the United States.
The insurance available to a lender under FHA Title I insurance is subject
to the limit of a reserve amount equal to ten percent of the original
principal balance of all Title I insured loans originated by the lender, which
amount is reduced by all claims paid to the lender and which is increased by
an amount equal to ten percent of the original principal balance of insured
loans subsequently originated by the lender. As of June 30, 1998, the
Company's Title I reserve amount was approximately $82,870,000, which amount
was available to pay claims in respect of approximately $895,090,000 of FHA-
insured home improvement loans and manufactured housing contracts serviced by
the Company. If the Company were replaced as Servicer of the Contracts under
the Agreement, it is not clear from the FHA regulations what portion of this
reserve amount would be available for claims in respect of the FHA-insured
Contracts. The obligation to pay insurance premiums to FHA is the obligation
of the Company, as Servicer of the FHA-insured Contracts.
The maximum guarantee that may be issued by the VA for a VA-guaranteed
contract is the lesser of (a) the lesser of $20,000 and 40% of the principal
amount of the contract and (b) the maximum amount of guaranty entitlement
available to the obligor veteran (which may range from $20,000 to zero). The
amount payable under the guarantee will be the percentage of the VA contract
originally guaranteed applied to indebtedness outstanding as of the applicable
date of computation specified in the VA regulations, interest accrued on the
unpaid balance of the loan to the appropriate date of computation and limited
expenses of the contract holder, but in each case only to the extent that such
amounts have not been recovered through resale of the manufactured home. The
amount payable under the guarantee may in no event exceed the amount of the
original guarantee.
CERTAIN LEGAL ASPECTS OF THE CONTRACTS
The following discussion contains summaries of certain legal aspects of
manufactured housing contracts, including Land-and-Home Contracts, which are
general in nature. 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 security for the Contracts or Land-and-Home
Contracts is situated. The summaries are qualified in their entirety by
reference to the applicable federal and state laws governing the Contracts or
Land-and-Home Contracts.
THE CONTRACTS (OTHER THAN LAND-AND-HOME CONTRACTS)
General. As a result of the assignment of the Contracts to the Trustee, the
Trust Fund will succeed collectively to all of the rights (including the right
to receive payment on the Contracts) and will assume the obligations of the
obligee under the Contracts. Each Contract evidences both (a) the obligation
of the Obligor to repay the loan evidenced thereby, and (b) the grant of a
security interest in the Manufactured Home to secure repayment of such loan.
Certain aspects of both features of the Contracts are described more fully
below.
The Contracts generally are "chattel paper" as defined in the Uniform
Commercial Code (the "UCC") in effect in the states in which the Manufactured
Homes initially were registered. Pursuant to the UCC, the sale of chattel
paper is treated in a manner similar to perfection of a security interest in
chattel paper. Under the Agreement, the Company will retain possession of the
Contracts as custodian for the Trustee, and will make an appropriate filing of
a UCC-1 financing statement in Minnesota to give notice of the Trustee's
ownership of the Contracts. The Contracts will be stamped to reflect their
assignment from the Company to the Trustee. However, if through negligence,
fraud or otherwise, a subsequent purchaser were able to take physical
possession of the Contracts without notice of such assignment, the Trustee's
interest in the Contracts could be defeated.
Security Interests in the Manufactured Homes. The Manufactured Homes
securing the Contracts may be located in all 50 states and the District of
Columbia. Security interests in manufactured homes may be perfected
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either by notation of the secured party's lien on the certificate of title or
by delivery of the required documents and payment of a fee to the state motor
vehicle authority, depending on state law. In some nontitle states, perfection
pursuant to the provisions of the UCC is required. The Company effects such
notation or delivery of the required documents and fees, and obtains
possession of the certificate of title, as appropriate, under the laws of the
state in which a Manufactured Home is registered. In the event the Company
fails, due to clerical errors, to effect such notation or delivery, or files
the security interest under the wrong law (for example, under a motor vehicle
title statute rather than under the UCC, in a few states), the
Certificateholders may not have a first priority security interest in the
Manufactured Home securing a Contract. As manufactured homes have become
larger and often have been attached to their sites without any apparent
intention to move them, courts in many states have held that manufactured
homes, under certain circumstances, may become subject to real estate title
and recording laws. As a result, a security interest in a manufactured home
could be rendered subordinate to the interests of other parties claiming an
interest in the home under applicable state real estate law. In order to
perfect a security interest in a manufactured home under real estate laws, the
holder of the security interest must file either a "fixture filing" under the
provisions of the UCC or a real estate mortgage under the real estate laws of
the state where the home is located. See "Land-and-Home Contracts" below.
These filings must be made in the real estate records office of the county
where the home is located. Substantially all of the Contracts contain
provisions prohibiting the borrower from permanently attaching the
Manufactured Home to its site. So long as the borrower does not violate this
agreement, a security interest in the Manufactured Home will be governed by
the certificate of title laws or the UCC, and the notation of the security
interest on the certificate of title or the filing of a UCC financing
statement will be effective to maintain the priority of the security interest
in the Manufactured Home. If, however, a Manufactured Home becomes permanently
attached to its site, other parties could obtain an interest in the
Manufactured Home which is prior to the security interest originally retained
by the seller and transferred to the Company. The Company will represent that
at the date of the initial issuance of the related Certificates it has
obtained a perfected first priority security interest by proper notation or
delivery of the required documents and fees with respect to substantially all
of the Manufactured Homes securing the Contracts.
The Company will assign the security interest in the Manufactured Homes to
the Trustee on behalf of the Certificateholders. Unless otherwise specified in
the related Prospectus Supplement, neither the Company nor the Trustee will
amend the certificates of title to identify the Trustee as the new secured
party, and neither the Company nor the Servicer will deliver the certificates
of title to the Trustee or note thereon the interest of the Trustee.
Accordingly, the Company will continue to be named as the secured party on the
certificates of title relating to the Manufactured Homes. In some states, such
assignment is an effective conveyance of such security interest without
amendment of any lien noted on the related certificate of title and the new
secured party succeeds to the Servicer's rights as the secured party. However,
in some states in the absence of an amendment to the certificate of title,
such assignment of the security interest in the Manufactured Home may not be
held effective or such security interests may not be perfected and in the
absence of such notation or delivery to the Trustee, the assignment of the
security interest in the Manufactured Home may not be effective against
creditors of the Company or a trustee in bankruptcy of the Company.
In the absence of fraud, forgery or permanent affixation of the Manufactured
Home to its site by the Manufactured Home owner, or administrative error by
state recording officials, the notation of the lien of the Company on the
certificate of title or delivery of the required documents and fees will be
sufficient to protect the Certificateholders against the rights of subsequent
purchasers of a Manufactured Home or subsequent lenders who take a security
interest in the Manufactured Home. If there are any Manufactured Homes as to
which the Company's security interest is not perfected, such security interest
would be subordinate to, among others, subsequent purchasers for value of the
Manufactured Homes and holders of perfected security interests. There also
exists a risk in not identifying the Trustee as the new secured party on the
certificate of title that, through fraud or negligence, the security interest
of the Trustee could be released.
In the event that the owner of a Manufactured Home moves it to a state other
than the state in which such Manufactured Home initially is registered, under
the laws of most states the perfected security interest in the
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Manufactured Home would continue for four months after such relocation and
thereafter only if and after the owner re-registers the Manufactured Home in
such state. If the owner were to relocate a Manufactured Home to another state
and not re-register the Manufactured Home in such state, and if steps were not
taken to re-perfect the Trustee's security interest in such state, the
security interest in the Manufactured Home would cease to be perfected. A
majority of states generally require surrender of a certificate of title to
re-register a Manufactured Home; accordingly, the Company must surrender
possession if it holds the certificate of title to such Manufactured Home or,
in the case of Manufactured Homes registered in states which provide for
notation of lien, the Company would receive notice of surrender if the
security interest in the Manufactured Home is noted on the certificate of
title. Accordingly, the Company would have the opportunity to re-perfect its
security interest in the Manufactured Home in the state of relocation. In
states which do not require a certificate of title for registration of a
manufactured home, re-registration could defeat perfection. In the ordinary
course of servicing the manufactured housing conditional sales contracts, the
Company takes steps to effect such re-perfection upon receipt of notice of re-
registration or information from the obligor as to relocation. Similarly, when
an obligor under a Contract sells a Manufactured Home, the Company must
surrender possession of the certificate of title or will receive notice as a
result of its lien noted thereon and accordingly will have an opportunity to
require satisfaction of the related manufactured housing conditional sales
contract before release of the lien. Under the Agreement, the Servicer is
obligated to take such steps, at the Servicer's expense, as are necessary to
maintain perfection of security interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a Manufactured
Home and liens for personal property taxes take priority over a perfected
security interest. The Company will represent in the Agreement that it has no
knowledge of any such liens with respect to any Manufactured Home securing
payment on any Contract. However, such liens could arise at any time during
the term of a Contract. No notice will be given to the Trustee or
Certificateholders in the event such a lien arises.
Enforcement of Security Interests in Manufactured Homes. The Servicer on
behalf of the Trustee, to the extent required by the related Agreement, may
take action to enforce the Trustee's security interest with respect to
Contracts in default by repossession and resale of the Manufactured Homes
securing such Defaulted Contracts. So long as the Manufactured Home has not
become subject to real estate laws, a creditor can repossess a Manufactured
Home securing a Contract by voluntary surrender, by "self-help" repossession
that is "peaceful" (i.e., without breach of the peace) or, in the absence of
voluntary surrender and the ability to repossess without breach of the peace,
by judicial process. The holder of a Contract must give the debtor a number of
days' notice, which varies from 10 to 30 days depending on the state, prior to
commencement of any repossession. The UCC and consumer protection laws in most
states place restrictions on repossession sales, including requiring prior
notice to the debtor and commercial reasonableness in effecting such a sale.
The law in most states also requires that the debtor be given notice of any
sale prior to resale of the unit so that the debtor may redeem at or before
such resale. In the event of such repossession and resale of a Manufactured
Home, the Trustee would be entitled to be paid out of the sale proceeds before
such proceeds could be applied to the payment of the claims of unsecured
creditors or the holders of subsequently perfected security interests or,
thereafter, to the debtor.
Under the laws applicable in most states, a creditor is entitled to obtain a
deficiency judgment from a debtor for any deficiency on repossession and
resale of the manufactured home securing such a debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments, and in many
cases the defaulting borrower would have no assets with which to pay a
judgment.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
Under the terms of the federal Soldiers' and Sailors' Civil Relief Act of
1940, as amended (the "Relief Act"), an Obligor who enters military service
after the origination of such Obligor's Contract (including an Obligor who is
a member of the National Guard or is in reserve status at the time of the
origination of the Contract and is later called to active duty) may not be
charged interest above an annual rate of 6% during the
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period of such Obligor's active duty status, unless a court orders otherwise
upon application of the lender. It is possible that such action could have an
effect, for an indeterminate period of time, on 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, to the
extent not covered by the subordination of a Class of Subordinated
Certificates, could result in losses to the holders of a Series of
Certificates. In addition, the Relief Act imposes limitations which would
impair the ability of the Servicer to foreclose on an affected Contract during
the Obligor's period of active duty status. Thus, in the event that such a
Contract goes into default, there may be delays and losses occasioned by the
inability to realize upon the Manufactured Home in a timely fashion.
LAND-AND-HOME CONTRACTS
General. The Land-and-Home Contracts will be secured by either first
mortgages or deeds of trust, depending upon the prevailing practice in the
state in which the underlying property is located. A mortgage creates a lien
upon the real property described in the mortgage. 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
bond 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, a 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 payment of
the loan. The trustee's authority under a deed of trust and the mortgagee's
authority under a mortgage are governed by the express provisions of the deed
of trust or mortgage, applicable law, and, in some cases, with respect to the
deed of trust, the directions of the beneficiary.
Foreclosure. Foreclosure of a mortgage is generally accomplished by judicial
action. Generally, the action is initiated by the service of legal pleadings
upon all parties having an interest of record in the real property. Delays in
completion of the foreclosure occasionally may result from difficulties in
locating necessary parties defendant. When the mortgagee's right to
foreclosure is contested, the legal proceedings necessary to resolve the issue
can be time-consuming and expensive. After the completion of a judicial
foreclosure proceeding, the court may issue a judgment of foreclosure and
appoint a receiver or other officer to conduct the sale of the property. In
some states, mortgages may also be foreclosed by advertisement, pursuant to a
power of sale provided in the mortgage. Foreclosure of a mortgage by
advertisement is essentially similar to foreclosure of a deed of trust by non-
judicial power of sale.
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust that authorizes
the trustee to sell the property to a third party upon any default by the
borrower under the terms of the note or deed of trust. In certain states, such
foreclosure also may be accomplished by judicial action in the manner provided
for foreclosure of mortgages. In some states the trustee must record a notice
of default and send a copy to the borrower-trustor and to any person who has
recorded a request for a copy of a notice of default and the notice of sale.
In addition, the trustee must provide notice in some states to any other
individual having an interest of record in the real property, including any
junior lienholders. If the deed of trust is not reinstated within any
applicable cure period, a notice of sale must be posted in a public place and,
in most states, published for a specified period of time in one or more
newspapers. In addition, some state laws require that a copy of the notice of
sale be posted on the property and sent to all parties having an interest of
record in the property.
In some states, the borrower-trustor has the right to reinstate the loan at
any time following default until shortly before the 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 attorneys' fees, that may be recovered by a lender.
In the case of foreclosure under either a mortgage or a deed of trust, the
sale by the receiver or other designated officer, or by the trustee, is a
public sale. However, because of the difficulty a potential buyer at the
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sale would 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. Rather, the lender generally purchases the
property from the trustee or receiver for an amount equal to the unpaid
principal amount of the note, accrued and unpaid interest and the expenses of
foreclosure. Thereafter, subject to the right of the borrower in some states
to remain in possession during the redemption period, the lender will assume
the burdens of ownership, including obtaining hazard insurance and making such
repairs at its own expense as are necessary to render the property suitable
for sale. The lender commonly will obtain the services of a real estate broker
and pay the broker a commission in connection with the sale of the property.
Depending upon market conditions, the ultimate proceeds of the sale of the
property may not equal the lender's investment in the property.
Rights of Redemption. In some states, after sale pursuant to a deed of trust
or foreclosure of a mortgage, the borrower and certain foreclosed junior
lienors are given a statutory period in which to redeem the property from the
foreclosure sale. In certain other states, this right of redemption applies
only to sale following judicial foreclosure, and not sale pursuant to a non-
judicial power of sale. In most states where the right of redemption is
available, statutory redemption may occur upon payment of the foreclosure
purchase price, accrued interest and taxes. In some states the right to redeem
is an equitable right. The effect of a right of redemption is to diminish the
ability of the lender to sell the foreclosed property. The exercise of a right
of redemption would defeat the title of any purchaser at a foreclosure sale,
or of any purchaser from the lender subsequent to judicial foreclosure or sale
under a deed of trust. Consequently, the practical effect of the redemption
right is to force the lender to maintain the property and pay the expenses of
ownership until the redemption period has run.
Anti-Deficiency Legislation and Other Limitations on Lenders. Certain states
have imposed statutory restrictions that limit the remedies of a beneficiary
under a deed of trust or a mortgagee under a mortgage relating to a single
family residence. In some states, statutes limit the right of the beneficiary
or mortgagee to obtain a deficiency judgment against the borrower following
foreclosure or sale under a deed of trust. A deficiency judgment is a personal
judgment against the borrower equal in most cases to the difference between
the amount due to the lender and the net amount realized upon the foreclosure
sale.
Some state statutes may require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an
attempt to satisfy the full debt before bringing a personal action against the
borrower. In certain other states, the lender has the option of bringing a
personal action against the borrower on the debt without first exhausting such
security; however, in some of these states, the lender, following judgment on
such personal action, may be deemed to have elected a remedy and may be
precluded from exercising remedies with respect to the security. Consequently,
the practical effect of the election requirement, when applicable, is that
lenders will usually proceed first against the security rather than bringing a
personal action against the borrower.
Other statutory provisions may limit any deficiency judgment against the
former borrower following a foreclosure sale to the excess of the outstanding
debt over the fair market value of the property at the time of such sale. The
purpose of these statutes is to prevent a beneficiary or a mortgagee from
obtaining a large deficiency judgment against the former borrower as a result
of low or no bids at the foreclosure sale.
In some states, exceptions to the anti-deficiency statutes are provided for
in certain instances where the value of the lender's security has been
impaired by acts or omissions of the borrower, for example, in the event of
waste of the property.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws
affording relief to debtors, may interfere with or affect the ability of a
secured mortgage lender to realize upon its security. For example, with
respect to a Land-and-Home Contract, in a Chapter 13 proceeding under the
federal Bankruptcy Code, when a court determines that the value of a home is
less than the principal balance of the loan, the court may prevent a lender
from foreclosing on the home, and, as part of the rehabilitation plan,
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reduce the amount of the secured indebtedness to the value of the home as it
exists at the time of the proceeding, leaving the lender as a general
unsecured creditor for the difference between that value and the amount of
outstanding indebtedness. A bankruptcy court may grant the debtor a reasonable
time to cure a payment default, and in the case of a mortgage loan not secured
by the debtor's principal residence, also may reduce the monthly payments due
under such mortgage loan, change the rate of interest and alter the mortgage
loan repayment schedule. Certain court decisions have applied such relief to
claims secured by the debtor's principal residence.
The Code 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
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, 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 Contracts.
CERTAIN MATTERS RELATING TO INSOLVENCY
The Company intends that each transfer of the Contracts to a Trust Fund will
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, receiver, conservator
or trustee in bankruptcy of the Company or the Company as a 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 argued or
accepted by a court, could result in a delay in or reduction of distributions
to the related Certificateholders.
CONSUMER PROTECTION LAWS
The so-called "Holder-in-Due-Course" rule of the Federal Trade Commission is
intended to defeat the ability of the transferor of a consumer credit contract
which is the seller of goods which gave rise to the transaction (and certain
related lenders and assignees) to transfer such contract free of notice of
claims by the debtor thereunder. The effect of this rule is to subject the
assignee of such a Contract (such as the Trust Fund) to all claims and
defenses which the Obligor could assert against the seller of the Manufactured
Home. 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. Numerous other federal and state consumer protection laws impose
requirements applicable to the origination and lending pursuant to the
Contracts, including the Truth in Lending Act, the Federal Trade Commission
Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the Equal
Credit Opportunity Act, the Fair Debt Collection Practices Act and the Uniform
Consumer Credit Code. In the case of some of these laws, the failure to comply
with their provisions may affect the enforceability of the related Contract.
TRANSFERS OF MANUFACTURED HOMES; ENFORCEABILITY OF "DUE-ON-SALE" CLAUSES
The Contracts, in general, prohibit the sale or transfer of the related
Manufactured Homes without the consent of the Servicer and permit the
acceleration of the maturity of the Contracts by the Servicer upon any such
sale or transfer that is not consented to. The Company expects that it will
permit most transfers of Manufactured Homes and not accelerate the maturity of
the related Contracts. In certain cases, the transfer may be made by a
delinquent Obligor in order to avoid a repossession proceeding with respect to
a Manufactured Home.
In the case of a transfer of a Manufactured Home after which the Servicer
desires to accelerate the maturity of the related Contract, the Servicer's
ability to do so will depend on the enforceability under state law of the
"due-on-sale" clause. The Garn-St. Germain Depositary Institutions Act of 1982
preempts, subject to certain exceptions and conditions, state laws prohibiting
enforcement of "due-on-sale" clauses applicable to the Manufactured Homes.
Consequently, in some states the Servicer may be prohibited from enforcing a
"due-on-sale" clause in respect of certain Manufactured Homes.
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APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control Act
of 1980, as amended ("Title V"), provides that, subject to the following
conditions, state usury limitations shall not apply to any loan which is
secured by a first lien on certain kinds of manufactured housing. The
Contracts would be covered if they satisfy certain conditions, among other
things, governing the terms of any prepayments, late charges and deferral fees
and requiring a 30-day notice period prior to instituting any action leading
to repossession of or foreclosure with respect to the related unit.
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen
states adopted such a law prior to the April 1, 1983 deadline. In addition,
even where Title V was not so rejected, any state is authorized by the law to
adopt a provision limiting discount points or other charges on loans covered
by Title V. The Company will represent in the applicable Agreement that all of
the Contracts comply with applicable usury law.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA")
imposes certain requirements on employee benefit plans subject to ERISA
("Plans") and on persons who are fiduciaries with respect to such Plans.
Generally, ERISA applies to investments made by such Plans. Among other
requirements, ERISA mandates that the assets of Plans be held in trust and
that the trustee, or other duly authorized fiduciary, have exclusive authority
and discretion to manage and control the assets of such Plans. ERISA also
imposes certain duties on persons who are fiduciaries of such Plans. Under
ERISA, any person who exercises any authority or control with respect to the
management or disposition of the assets of a Plan is considered to be a
fiduciary of such Plan, subject to the standards of fiduciary conduct under
ERISA. These standards include the requirements that the assets of Plans be
invested and managed for the exclusive benefit of Plan participants and
beneficiaries, a determination by the Plan fiduciary that any such investment
is permitted under the governing Plan instruments and is prudent and
appropriate for the Plan in view of its overall investment policy and the
composition and diversification of its portfolio. Certain employee benefit
plans, such as governmental plans (as defined in ERISA Section 3(32)) and
certain church plans (as defined in ERISA Section 3(33)), are not subject to
ERISA. Accordingly, assets of such plans may be invested in Certificates
without regard to the ERISA considerations described above and below, subject
to the provisions of applicable state law. Any such plan which is qualified
and exempt from taxation under Sections 401(a) and 501(a) of the Internal
Revenue Code of 1986, as amended (the "Code"), however, is subject to the
prohibited transaction rules set forth in Section 503 of the Code.
In addition to the imposition of general fiduciary standards of investment
prudence and diversification, ERISA, and the corresponding provisions of the
Code, prohibit a broad range of transactions involving Plan assets and persons
having certain specified relationships to a Plan ("parties in interest" and
"disqualified persons"). Such transactions are treated as "prohibited
transactions" under Sections 406 and 407 of ERISA and excise taxes are imposed
upon such persons by Section 4975 of the Code. An investment in the
Certificates by a Plan might constitute prohibited transactions under the
foregoing provisions unless an administrative exemption applies. In addition,
if an investing Plan's assets were deemed to include an interest in the assets
of the Contract Pool and not merely an interest in the Certificates,
transactions occurring in the operation of the Contract Pool might constitute
prohibited transactions unless an administrative exemption applies. Certain
such exemptions which may be applicable to the acquisition and holding of the
Certificates or to the servicing and operation of the Contract Pool are noted
below.
The Department of Labor ("DOL") has issued a regulation (29 C.F.R. Section
2510.3-101) (the "Regulation") concerning the definition of what constitutes
the assets of a Plan. This regulation provides that, as a general rule, the
underlying assets and properties of corporations, partnerships, trusts and
certain other
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entities in which a Plan makes an "equity" investment will be deemed for
purposes of ERISA to be assets of the investing plan unless certain exceptions
apply. However, the Regulation provides that, generally, the assets of a
corporation or partnership in which a Plan invests will not be deemed for
purposes of ERISA to be assets of such Plan if the equity interest acquired by
the investing Plan is a publicly-offered security. A publicly-offered
security, as defined under the Regulation, is a security that is widely held,
freely transferable, and registered under the Securities Exchange Act of 1934,
as amended. The Certificates are not expected to be publicly-offered
securities under the terms of the Regulation.
Relief from the prohibited transaction rules of Section 406 and 407 of ERISA
(and from the prohibited transaction excise tax provisions of Section 4975 of
the Code) may be found under the provisions of specific statutory or
administrative exemptive relief authorized under Section 408 of ERISA. In
Prohibited Transaction Exemption 83-1 ("PTE 83-1"), which amended Prohibited
Transaction Exemption 81-7, the DOL exempted from ERISA's prohibited
transaction rules certain transactions relating to the operation of
residential mortgage pool investment trusts and the purchase, sale and holding
of "mortgage pool pass-through certificates" in the initial issuance of such
certificates. PTE 83-1 permits, subject to certain conditions, transactions
which might otherwise be prohibited between Plans and parties in interest with
respect to those Plans related to the origination, maintenance and termination
of mortgage pools consisting of mortgage loans secured by first or second
mortgages or deeds of trust on single-family residential property, and the
acquisition and holding of certain mortgage pool pass-through certificates
representing an interest in such mortgage pools by Plans. If the general
conditions of PTE 83-1 are satisfied, investments by a Plan in certificates
that represent interests in a mortgage pool consisting of single family loans
will be exempt from the prohibitions of Sections 406(a) and 407 of ERISA
(relating generally to transactions with parties in interest who are not
fiduciaries) if the Plan purchases such certificates at no more than fair
market value, and will be exempt from the prohibitions of Section 406(b)(1)
and (2) of ERISA (relating generally to transactions with fiduciaries) if, in
addition, the purchase is approved by an independent fiduciary, no sales
commission is paid to the pool sponsor, the Plan does not purchase more than
25 percent of such certificates, and at least 50 percent of all such
certificates are purchased by persons independent of the pool sponsor or pool
trustee. However, PTE 83-1 does not provide an exemption for transactions
involving subordinate certificates or for certificates representing an
interest in conditional sales contracts and installment sales or loan
agreements secured by manufactured housing like the Contracts.
There can be no assurance that any of the exceptions set forth in the
Regulation, PTE 83-1 or any other administrative exemption under ERISA, will
apply to the purchase of Certificates offered hereby, and, as a result, an
investing Plan's assets could be considered to include an undivided interest
in the Contracts and any other assets held in the Contract Pool. In the event
that assets of a Contract Pool are considered assets of an investing Plan, the
Company, the Servicer, the Trustee and other persons, in providing services
with respect to the Contracts, may be considered fiduciaries to such Plan and
subject to the fiduciary responsibility provisions of Title I of ERISA and the
prohibited transaction provisions of Section 4975 of the Code with respect to
transactions involving such assets unless a statutory or administrative
exemption applies.
Any Plan fiduciary considering the purchase of a Certificate should consult
with its counsel with respect to the potential applicability of ERISA and the
Code to such investment. Moreover, each Plan fiduciary should determine
whether, under the general fiduciary standards of investment prudence and
diversification, an investment in the Certificates is appropriate for the
Plan, taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
Purchasers that are insurance companies should consult with their counsel
with respect to the recent United States Supreme Court case, John Hancock
Mutual Life Insurance Co. v. Harris Trust and Savings Bank (decided December
13, 1993). In John Hancock, the Supreme Court ruled that assets held in an
insurance company's general account may be deemed to be "plan assets" under
certain circumstances. Purchasers should analyze whether the decision may have
an impact with respect to purchases of the Certificates. In particular, such
an insurance company should consider the specific retroactive and prospective
exemptive relief provided in Prohibited Transaction Exemption 95-60 ("PTE 95-
60") for transactions involving insurance company general accounts in which an
employee benefit plan has an interest.
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PTE 95-60 exempts from ERISA's prohibited transaction rules certain
transactions engaged in by insurance company general accounts in which an
employee benefit plan has an interest if certain specified conditions are met.
Additional exemptive relief is provided for plans to engage in transactions
with persons who provide services to insurance company general accounts. PTE
95-60 also permits transactions relating to the origination and operation of
certain asset pool investment trusts in which an insurance company general
account has an interest as the result of the acquisition of certificates
issued by the trust.
PTE 95-60 will provide an exemption for transactions involving 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 PTE 95-60. The receivables covered by PTE 95-60 include
manufactured housing installment sale contracts and installment loan
agreements such as the Contracts. The exemption offered by PTE 95-60 is
conditioned upon compliance with the requirements of one of several
"underwriter exemptions," other than compliance with the requirements that the
certificates acquired by the general account not be subordinated and receive a
rating that is in one of the three highest generic rating categories from
either S&P, Moody's, Duff & Phelps Credit Rating Co. or Fitch. The Prospectus
Supplement will indicate whether PTE 95-60 will apply to the acquisition,
holding and resale of the Certificates by an insurance company general
account.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of certain federal income tax
consequences relating to the purchase, ownership, and disposition of the
Certificates. The discussion is based upon laws, regulations, rulings, and
decisions now in effect, including Treasury Regulations issued on December 23,
1992, and generally effective for REMICs with startup days on or after
November 12, 1991 (the "REMIC Regulations"), all of which are subject to
change or possibly differing interpretations. The discussion does not purport
to deal with federal income tax consequences applicable to all categories of
investors, some of which may be subject to special rules. Investors should
consult their own tax advisors to determine the federal, state, local, and any
other tax consequences of the purchase, ownership, and disposition of the
Certificates.
Many aspects of the federal tax treatment of the purchase, ownership, and
disposition of the Certificates will depend upon whether an election is made
to treat the Trust Fund or a segregated portion thereof evidenced by a
particular series or sub-series of Certificates as a REMIC within the meaning
of Section 860D(a) of the Code. The Prospectus Supplement for each series will
indicate whether or not an election to be treated as a REMIC has been or will
be made with respect thereto. The following discussion deals first with Series
with respect to which a REMIC Election is made and then with Series with
respect to which a REMIC Election is not made.
REMIC SERIES
With respect to each Series of Certificates for which a REMIC Election is
made, the counsel to the Company identified in the applicable Prospectus
Supplement will have advised the Company that in its opinion, assuming (i) the
making of that election in accordance with the requirements of the Code and
(ii) ongoing compliance with the applicable Agreement, at the initial issuance
of the Certificates in such series the Trust Fund will qualify as a REMIC and
the Certificates in such a Series ("REMIC Certificates") will be treated
either as regular interests in the REMIC within the meaning of Section
860G(a)(1) of the Code ("Regular Certificates") or as residual interests in
the REMIC within the meaning of Section 860G(a)(2) of the Code ("Residual
Certificates").
Qualification as a REMIC. Qualification as a REMIC involves ongoing
compliance with certain requirements and the following discussion assumes that
such requirements will be satisfied by the Trust Fund so long as there are any
REMIC Certificates outstanding. Substantially all of the assets of the REMIC
must consist of "qualified mortgages" and "permitted investments" as of the
close of the third month beginning after the day on which the REMIC issues all
of its regular and residual interests (the "Startup Day") and at all times
thereafter. The term "qualified mortgage" means any obligation (including a
participation or certificate of
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beneficial ownership in such obligation) which is principally secured by an
interest in real property that is transferred to the REMIC on the Startup Day
in exchange for regular or residual interests in the REMIC or is purchased by
the REMIC within the three-month period beginning on the Startup Day if such
purchase is pursuant to a fixed price contract in effect on the Startup Day.
The REMIC Regulations provide that a Contract is principally secured by an
interest in real property if the fair market value of the real property
securing the Contract is at least equal to either (i) 80% of the issue price
(generally, the principal balance) of the Contract at the time it was
originated or (ii) 80% of the adjusted issue price (the then-outstanding
principal balance, with certain adjustments) of the Contract at the time it is
contributed to a REMIC. The fair market value of the underlying real property
is to be determined after taking into account other liens encumbering that
real property. Alternatively, a Contract is principally secured by an interest
in real property if substantially all of the proceeds of the Contract were
used to acquire or to improve or protect an interest in real property that, at
the origination date, is the only security for the Contract (other than the
personal liability of the obligor). The REMIC Regulations provide that
obligations secured by manufactured housing or mobile homes (not including
recreational vehicles, campers or similar vehicles) which are "single family
residences" under Section 25(e)(10) of the Code will qualify as obligations
secured by real property without regard to state law classifications. See the
discussion below under "REMIC Series--Status of Manufactured Housing
Contracts." A qualified mortgage also includes a qualified replacement
mortgage that is used to replace any qualified mortgage within three months of
the Startup Day or to replace a defective mortgage within two years of the
Startup Day.
"Permitted investments" consist of (a) temporary investments of cash
received under qualified mortgages before distribution to holders of interests
in the REMIC ("cash-flow investments"), (b) amounts, such as a Reserve Fund,
if any, reasonably required to provide for full payment of expenses of the
REMIC, the principal and interest due on regular or residual interests in the
event of defaults on qualified mortgages, lower than expected returns on cash-
flow investments, prepayment interest shortfalls or certain other
contingencies ("qualified reserve assets"), and (c) certain property acquired
as a result of foreclosure of defaulted qualified mortgages ("foreclosure
property"). A reserve fund will not be qualified if more than 30% of the gross
income from the assets in the reserve fund is derived from the sale or other
disposition of property held for three months or less, unless such sale is
necessary to prevent a default in payment of principal or interest on Regular
Certificates. In accordance with Section 860G(a)(7) of the Code, a reserve
fund must be "promptly and appropriately" reduced as payments on contracts are
received. Foreclosure property will be a permitted investment only to the
extent that such property is not held for more than two years.
The Code requires that in order to qualify as a REMIC an entity must make
reasonable arrangements designed to ensure that certain specified entities,
generally including governmental entities or other entities that are exempt
from United States tax, including the tax on unrelated business income
("Disqualified Organizations"), not hold residual interests in the REMIC.
Consequently, it is expected that in the case of any Trust Fund for which a
REMIC Election is made the transfer, sale, or other disposition of a Residual
Certificate to a Disqualified Organization will be prohibited and the ability
of a Residual Certificate to be transferred will be conditioned on the
Trustee's receipt of a certificate or other document representing that the
proposed transferee is not a Disqualified Organization. The transferor of a
Residual Certificate must not, as of the time of the transfer, have actual
knowledge that such representation is false. The Code further requires that
reasonable arrangements must be made to enable a REMIC to provide the Internal
Revenue Service (the "Service") and certain other parties, including
transferors of residual interests in a REMIC, with the information needed to
compute the tax imposed by Section 860E(e)(1) of the Code if, in spite of the
steps taken to prevent Disqualified Organizations from holding residual
interests, such an organization does, in fact, acquire a residual interest.
See "REMIC Series--Restrictions on Transfer of Residual Certificates" below.
If the Trust Fund fails to comply with one or more of the ongoing
requirements for qualification as a REMIC, the Trust Fund will not be treated
as a REMIC for the year during which such failure occurs and thereafter unless
the Service determines, in its discretion, that such failure was inadvertent
(in which case, the Service may require any adjustments which it deems
appropriate). If the ownership interests in the assets of the Trust Fund
consist of multiple classes, failure to treat the Trust Fund as a REMIC may
cause the Trust Fund to be treated as an association taxable as a corporation.
Such treatment could result in income of the Trust Fund
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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.
Status of Manufactured Housing Contracts. The REMIC Regulations as well as a
Notice issued by the Service provide that obligations secured by interests in
manufactured housing, which qualify as "single family residences" within the
meaning of Section 25(e)(10) of the Code, are to be treated as "qualified
mortgages" for a REMIC. Under Section 25(e)(10) of the Code, the term "single
family residence" includes any manufactured home which has a minimum of 400
square feet of living space and a minimum width in excess of 102 inches and
which is of a kind customarily used at a fixed location. The Company will
represent and warrant that each of the manufactured homes securing the
Contracts which are a part of a Trust Fund meets this definition of a "single
family residence." See the discussion above under "REMIC Series--Qualification
as a REMIC."
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 to those Regular
Certificateholders that are "pass-through interest holders." Generally, a
single-class REMIC is defined as a REMIC that would be treated as a fixed
investment trust under applicable law but for its qualification as a REMIC, or
a REMIC that is substantially similar to an investment trust but is structured
with the principal purpose of avoiding this allocation requirement imposed by
the Temporary Treasury Regulations. Generally, a pass-through interest holder
refers to individuals, entities taxed as individuals, such as certain trusts
and estates, and regulated investment companies. An individual, an estate, or
a trust that holds a Regular Certificate in such a REMIC will be allowed to
deduct the foregoing 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 in 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. As a
result of the foregoing limitations, certain holders of Regular Certificates
in "single-class REMICs" may not be entitled to deduct all or any part of the
foregoing expenses.
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
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"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. Section 7701(a)(19)(C)(v) of the
Code provides that "loans secured by an interest in real property" includes
loans secured by mobile homes not used on a transient basis. Treasury
Regulations promulgated pursuant to Section 856 of the Code state that local
law definitions are not controlling in determining the meaning of the term
"real property" for purposes of that section, and the Service has ruled that
obligations secured by permanently installed mobile home units qualify as
"real estate assets" under this provision. Furthermore, interest paid with
respect to Certificates held by a real estate investment trust will be
considered "interest on obligations secured by mortgages on real property or
on interests in real property" within the meaning of Section 856(c)(3)(B) of
the Code to the same extent that the Certificates themselves are treated as
real estate assets. Regular Certificates held by a regulated investment
company or a real estate investment trust will not constitute "Government
securities" within the meaning of Sections 851(b)(4)(A)(i) and 856(c)(5)(A) of
the Code, respectively. In addition, the REMIC Regulations provide that
payments on Contracts held and reinvested pending distribution to
Certificateholders will be considered to be "real estate assets" within the
meaning of Section 856(c)(4)(A) of the Code. The Small Business Job Protection
Act of 1996 repealed the application of Section 593(d) of the Code to any
taxable year beginning after December 31, 1995. 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, as amended in June 1996 (the "OID Regulations").
The discussion herein is based in part on the OID Regulations, which generally
apply to debt instruments issued on or after April 4, 1994, but which
generally may be relied upon for debt instruments issued after December 21,
1992. Moreover, although the rules relating to original issue discount
contained in the Code were modified by the Tax Reform Act of 1986 specifically
to address the tax treatment of securities, such as the Regular Certificates,
on which principal is required to be prepaid based on prepayments of the
underlying assets, regulations under that legislation have not yet been
finalized. Certificateholders also should be aware that the OID Regulations do
not address certain issues relevant 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. It is possible that the
anticipated rate of prepayments assumed in pricing the debt instrument (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. The
OID Regulations provide a further special de minimis rule applicable to any
Regular Certificates that are "self-amortizing installment obligations," i.e.,
Regular Certificates that provide for equal payments composed of principal and
qualified stated interest payable unconditionally at least annually during its
entire term, with no significant additional payment
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required at maturity. Under this special rule, original issue discount on a
self-amortizing installment obligation is generally considered to be zero if
it is less than .167% of the principal amount of the obligation multiplied by
the number of complete years from the date of issue of such a Regular
Certificate to its maturity date.
Generally, the original holder of a Regular Certificate that includes a de
minimis amount of original issue discount 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 reasonable legal remedies exist to compel
timely payment or the debt instrument otherwise provides terms and conditions
that make the likelihood of late payment or nonpayment a remote contingency.
It is possible that interest payable on Regular Certificates may be considered
not to be unconditionally payable under the OID Regulations. Until further
guidance is issued, however, the REMIC will treat the interest on Regular
Certificates as unconditionally payable under the OID Regulations. In
addition, under the OID Regulations, certain variable interest rates payable
on Regular Certificates, including rates based upon the weighted average
interest rate of a Pool of Contracts, might 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 Remittance Rate for a Certificate will not
change. Accordingly, interest at the initial Remittance Rate will constitute
qualified stated interest payments for purposes of applying the original issue
discount provisions of the Code. In general, the issue price of a Regular
Certificate is the first price at which a substantial amount of the Regular
Certificates of such class are sold for money to the public (excluding bond
houses, brokers or similar persons or organizations acting in the capacity of
underwriters, placement agents or wholesalers). If a portion of the initial
offering price of a Regular Certificate is allocable to interest that has
accrued prior to its date of issue, the issue price of such a Regular
Certificate includes that pre-issuance accrued interest.
If the Regular Certificates are determined to be issued with original issue
discount, a holder of a Regular Certificate must generally include the
original issue discount in ordinary gross income for federal income tax
purposes as it accrues in advance of the receipt of any cash attributable to
such income. The amount of original issue discount, if any, required to be
included in a Regular Certificateholder's ordinary gross income for federal
income tax purposes in any taxable year will be computed in accordance with
Section 1272(a) of 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.
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The amount of original issue discount includable in income by a holder of a
Regular Certificate is the sum of the "daily portions" of the original issue
discount for each day during the taxable year on which the holder held the
Regular Certificate. The daily portions of original issue discount are
determined by allocating to each day in any "accrual period" a pro rata
portion of the excess, if any, of the sum of (i) the present value of all
remaining payments to be made on the Regular Certificate as of the close of
the "accrual period" and (ii) the payments during the "accrual period" of
amounts included in the stated redemption price of the Regular Certificate
over the "adjusted issue price" of the Regular Certificate at the beginning of
the "accrual period." Generally, the "accrual period" for the Regular
Certificates corresponds to the intervals at which amounts are paid or
compounded with respect to such Regular Certificate, beginning with their date
of issuance and ending with the maturity date. The "adjusted issue price" of a
Regular Certificate at the beginning of any accrual period is the sum of the
issue price and accrued original issue discount for each prior accrual period
reduced by the amount of payments other than payments of qualified stated
interest made during each prior accrual period. The Code requires the present
value of the remaining payments to be determined on the bases of (a) the
original yield to maturity (determined on the basis of compounding at the
close of each accrual period and properly adjusted for the length of the
accrual period), (b) events, including actual prepayments, which have occurred
before the close of the accrual period, and (c) the assumption that the
remaining payments will be made in accordance with the original Prepayment
Assumption. The effect of this method is to increase the portions of original
issue discount that a Regular Certificateholder must include in income to take
into account prepayments with respect to the Contracts held by the Trust Fund
that occur at a rate that exceeds the Prepayment Assumption and to decrease
(but not below zero for any period) the portions of original issue discount
that a Regular Certificateholder must include in income to take into account
prepayments with respect to the Contracts that occur at a rate that is slower
than the Prepayment Assumption. Although original issue discount will be
reported to Regular Certificateholders based on the Prepayment Assumption, no
representation is made to Regular Certificateholders that the Contracts will
be prepaid at that rate or at any other rate.
A subsequent purchaser of a Regular Certificate will also be required to
include in such purchaser's ordinary gross income for federal income tax
purposes the original issue discount, if any, accruing with respect to such
Regular Certificate, unless the price paid equals or exceeds the Regular
Certificate's outstanding principal amount. If the price paid exceeds the sum
of the Regular Certificate's issue price plus the aggregate amount of original
issue discount accrued with respect to the Regular Certificate, but does not
equal or exceed the outstanding principal amount 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.
The Company believes that the holder of a Regular Certificate determined to
be issued with non-de minimis original issue discount will be required to
include the original issue discount in ordinary gross income for federal
income tax purposes computed in the manner described above. However, the OID
Regulations either do not address or are subject to varying interpretations
with respect to several issues concerning the computation of original issue
discount for obligations such as the Regular Certificates.
Variable Rate Regular Certificates. Regular Certificates may bear interest
at a variable rate. Under the OID Regulations, if a variable 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 is 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." Accordingly, if the issue price of
such a Regular Certificate is equal to its stated redemption price at
maturity, the Regular Certificate will not have any original issue discount.
For purposes of applying the original issue discount provisions of the Code,
all or a portion of the interest payable with respect to a variable rate
Regular Certificate may not be treated as qualified stated interest in certain
circumstances, including the following: (i) if the variable 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 variable rate during
the first half of the term of the
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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 either as part of a Regular
Certificate's stated redemption price at maturity resulting in original issue
discount, or represent contingent payments which are recognized as ordinary
gross income for federal income tax purposes only as the interest payments
become fixed in each accrual period.
If a variable rate Regular Certificate is deemed to have been issued with
original issue discount, as described above, the amount of original issue
discount accrues on a daily basis under a constant yield method that takes
into account the compounding of interest; provided, however, that the interest
associated with such a Regular Certificate generally is assumed to remain
constant throughout the term of the Regular Certificate at a rate that, in the
case of a qualified floating rate, equals the value of such qualified floating
rate as of the issue date of the Regular Certificate, or, in the case of an
objective rate, at a fixed rate that reflects the yield that is reasonably
expected for the Regular Certificate. A holder of such a Regular Certificate
would then recognize original issue discount during each accrual period which
is calculated based upon such Regular Certificate's assumed yield to maturity,
adjusted to reflect the difference between the assumed and actual interest
rate.
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 with respect to the Regular Certificates, including
variable rate Regular Certificates. Additional information regarding the
manner of reporting original issue discount to the Service and to holders of
variable rate Regular Certificates will be set forth in the Prospectus
Supplement relating to the issuance of such Regular Certificates.
Market Discount. Regular Certificates, whether or not issued with original
issue discount, will be subject to the market discount rules of the Code. A
purchaser of a Regular Certificate who purchases the Regular Certificate at a
market discount (i.e., a discount from its original issue price plus any
accrued original issue discount, if any, as described above) will be required
to recognize accrued market discount as ordinary income as payments of
principal are received on such Regular Certificate or upon the sale or
exchange of the Regular Certificate. In general, the holder of a Regular
Certificate may elect to treat market discount as accruing either (i) under a
constant yield method that is similar to the method for the accrual of
original issue discount or (ii) in proportion to accruals of original issue
discount (or, if there is no original issue discount, in proportion to
accruals of stated interest), in each case computed taking into account the
Prepayment Assumption.
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.
The Code grants authority to the Treasury Department to issue regulations
providing for the computation of accrued market discount on debt instruments
such as the Regular Certificates. Until such time as regulations are issued,
rules described in the legislative history for these provisions of the Code
will apply. Under those rules, as described above, the holder of a Regular
Certificate with market discount may elect to accrue market discount
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either on the basis of a constant interest rate or according to certain other
methods. Certificateholders who acquire a Regular Certificate at a market
discount should consult their tax advisors concerning various methods which
are available for accruing that market discount.
In general, limitations imposed by the Code that are intended to match
deductions with the taxation of income may require a holder of a Regular
Certificate having market discount to defer a portion of the interest
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 or she makes such an election, is exempt from this rule. Any such
election made with respect to a Regular Certificate issued with market
discount will apply to all Regular Certificates acquired by the holder on or
after the first day of the first taxable year to which such election applies
and may be revoked only with the consent of the Service. 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 outstanding principal amount will be considered to have
purchased the Regular Certificate at a premium. In general, the Regular
Certificateholder may elect to deduct the amortizable bond premium as it
accrues under a constant yield method. A Regular Certificateholder's tax basis
in the Regular Certificate will be reduced by the amount of the amortizable
bond premium deducted. In addition, it appears that the same methods which
apply to the accrual of market discount on installment obligations are
intended to apply in computing the amortizable bond premium deduction with
respect to a Regular Certificate. It is not clear, however, (i) whether the
alternatives to the constant-yield method which may be available for the
accrual of market discount are available for amortizing premium on Regular
Certificates and (ii) whether the Prepayment Assumption should be taken into
account in determining the term of a Regular Certificate for this purpose.
Certificateholders who pay a premium for a Regular Certificate should consult
their tax advisors concerning such an election and rules for determining the
method for amortizing bond premium.
Gain or Loss on Disposition. If a Regular Certificate is sold, the seller
will recognize gain or loss equal to the difference between the amount
realized from the sale and the seller's adjusted basis in such Regular
Certificate. The adjusted basis generally will equal the cost of such Regular
Certificate to the seller, increased by any original issue discount included
in the seller's ordinary gross income with respect to such Regular Certificate
and reduced (but not below zero) by any payments on the Regular Certificate
previously received or accrued by the seller (other than qualified stated
interest payments) and any amortizable premium. Similarly, a Regular
Certificateholder who receives a principal payment with respect to a Regular
Certificate will recognize gain or loss equal to the difference between the
amount of the payment and the holder's allocable portion of his or her
adjusted basis in the Regular Certificate. Except as discussed below or with
respect to market discount, any gain or loss recognized upon a sale, exchange,
retirement, or other disposition of a Regular Certificate will be capital gain
if the Regular Certificate is held as a capital asset.
Any capital gain recognized upon a sale, exchange or other disposition of a
Regular Certificate will be long-term capital gain if the seller's holding
period is more than one year and will be short-term capital gain if the
seller's holding period is one year or less. The deductibility of capital
losses is subject to certain limitations.
Gain from the disposition of a Regular Certificate that might otherwise be
capital gain, including any gain attributable to de minimis original issue
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.
If the Company is determined to have intended on the date of issue of the
Regular Certificates to call all or any portion of the Regular Certificates
prior to their stated maturity within the meaning of Section 1271(a)(2)(A)
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of the Code, any gain realized upon a sale, exchange, retirement, or other
disposition of a Regular Certificate would be considered ordinary income to
the extent it does not exceed the unrecognized portion of the original issue
discount, if any, with respect to the Regular Certificate. The OID Regulations
provide that the intention to call rule will not be applied to mortgage-backed
securities such as the Regular Certificates. In addition, under the OID
Regulations, a mandatory sinking fund or call option is not evidence of an
intention to call.
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 income on reinvestment of cash flows and reserve
assets, minus deductions, including interest and original issue discount
expense on the Regular Certificates, servicing fees on the Contracts, other
administrative expenses of a REMIC, and amortization of premium, if any, with
respect to the Contracts.
The taxable income recognized by a Residual Holder in any taxable year will
be affected by, among other factors, the relationship between the timing of
interest, original issue discount or market discount income, or amortization
of premium with respect to the Contracts, on the one hand, and the timing of
deductions for interest (including original issue discount) on the Regular
Certificates, on the other hand. In the event that an interest in the
Contracts is acquired by a REMIC at a discount, and one or more of such
Contracts is prepaid, the Residual Holder may recognize taxable income without
being entitled to receive a corresponding cash distribution because (i) the
prepayment may be used in whole or in part to make distributions on Regular
Certificates, and (ii) the discount on the Contracts which is includable in a
REMIC's income may exceed its deduction with respect to the distributions on
those Regular Certificates. When there is more than one class of Regular
Certificates that receive payments sequentially (i.e., a fast-pay, slow-pay
structure), this mismatching of income and deductions is particularly likely
to occur in the early years following issuance of the Regular Certificates,
when distributions are being made in respect of earlier classes of Regular
Certificates to the extent that such classes are not issued with substantial
discount. If taxable income attributable to such a mismatching is realized, in
general, losses would be allowed in later years as distributions on the later
classes of Regular Certificates are made. Taxable income may also be greater
in earlier years than in later years as a result of the fact that interest
expense deductions, expressed as a percentage of the outstanding principal
amount of Regular Certificates, may increase over time as distributions are
made on the lower yielding classes of Regular Certificates, whereas interest
income with respect to any given Contract will remain constant over time as a
percentage of the outstanding principal amount of that loan (assuming it bears
interest at a fixed rate). Consequently, Residual Holders must have sufficient
other sources of cash to pay any federal, state, or local income taxes due as
a result of such mismatching, or such holders must have unrelated deductions
against which to offset such income, subject to the discussion of "excess
inclusions" below under "REMIC Series--Limitations on Offset or Exemption of
REMIC Income." The mismatching of income and deductions described in this
paragraph, if present with respect to a series of Certificates, may have a
significant adverse effect upon the Residual Holder's after-tax rate of
return.
The amount of any net loss of a REMIC that may be taken into account by the
Residual Holder is limited to the adjusted basis of the Residual Certificate
as of the close of the quarter (or time of disposition of the Residual
Certificate if earlier), determined without taking into account the net loss
for the quarter. The initial adjusted basis of a purchaser of a Residual
Certificate is the amount paid for such Residual Certificate. Such adjusted
basis will be increased by the amount of taxable income of the REMIC
reportable by the Residual
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Holder and decreased 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 greater than
the corresponding portion of the REMIC's basis in the Contracts, the Residual
Holder will not recover a portion of such 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
as original issue discount income on Regular Certificates as described above
under "REMIC Series--Original Issue Discount" and "--Variable 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 may equal a proportionate part of the aggregate fair
market value of the REMIC Certificates). 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 person that
holds a Contract as a capital asset may 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. If the aggregate value
of the Residual Certificates relative to the aggregate value of the Regular
Certificates and Residual Certificates is considered to be "significant," as
described below, then a portion (but not 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 value of the
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Residual Certificates would be considered significant in cases where the
aggregate issue price of the Residual Certificates is at least 2% of the
aggregate issue price of the Regular Certificates and Residual Certificates,
and the anticipated weighted average life of the Residual Certificates is at
least 20% of the anticipated weighted average life of the REMIC.
The portion of a Residual Holder's REMIC taxable income consisting of the
excess inclusions generally may not be offset by other deductions on such
Residual Holder's tax return, including net operating loss carry forwards.
Further, if the Residual Holder is an organization subject to the tax on
unrelated business income imposed by Section 511 of the Code, the Residual
Holder's excess inclusions will be treated as unrelated business taxable
income of such Residual Holder for purposes of Section 511. 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, would
constitute unrelated business taxable income for tax-exempt shareholders, and
would be ineligible for reduction of withholding to certain persons who are
not U.S. persons.
The Small Business Job Protection Act of 1996 has eliminated the special
rule permitting Section 593 institutions ("thrift institutions") to use net
operating losses and other allowable deductions to offset their excess
inclusion income from REMIC residual certificates that have "significant
value" within the meaning of the REMIC Regulations, effective for taxable
years beginning after December 31, 1995, except with respect to residual
certificates continuously held by a thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides three
rules for determining the effect of excess inclusions on the alternative
minimum taxable income of a residual holder. First, alternative minimum
taxable income for such residual holder is determined without regard to the
special rule that taxable income cannot be less than excess inclusions.
Second, a residual holder's alternative minimum taxable income for a tax year
cannot be less than the excess inclusions for the year. Third, the amount of
any alternative minimum tax net operating loss deductions must be computed
without regard to any excess inclusions. These rules are effective for tax
years beginning after December 31, 1986, unless a residual holder elects to
have such rules apply only to tax years beginning after August 20, 1996.
Restrictions on Transfer of Residual Certificates. As described above under
"REMIC Series--Qualification as a REMIC," an interest in a Residual
Certificate may not be transferred to a Disqualified Organization. If any
legal or beneficial interest in a Residual Certificate is, nonetheless,
transferred to a Disqualified Organization, a tax would be imposed in an
amount equal to the product of (i) the present value of the total anticipated
excess inclusions with respect to such Residual Certificate for periods after
the transfer, and (ii) the highest marginal federal income tax rate applicable
to corporations. The anticipated excess inclusions are based on actual
prepayment experience to the date of the transfer and projected payments based
on the Prepayment Assumption. The present value rate equals the applicable
federal rate under Section 1274(d) of the Code as of the date of the transfer
for a term ending on the close of the last quarter in which excess inclusions
are expected to accrue. Such rate is applied to the anticipated excess
inclusions from the end of the remaining calendar quarters in which they arise
to the date of the transfer. Such a tax generally would be imposed on the
transferor of the Residual Certificate, except that where such transfer is
through an agent (including a broker, nominee, or other middleman) for a
Disqualified Organization, the tax would instead be imposed on such agent.
However, a transferor of a Residual Certificate would in no event be liable
for such tax with respect to a transfer if the transferee furnishes to the
transferor an affidavit, under penalties of perjury, that the transferee is
not a Disqualified Organization and, as of the time of the transfer, the
transferor does not have actual knowledge that such affidavit is false. The
tax also may be waived by the Treasury Department if the Disqualified
Organization promptly disposes of the residual interest and the transferor
pays such amount of tax as the Treasury Department may require (presumably, a
corporate tax on the excess inclusion for the period the residual interest is
actually held by the Disqualified Organization).
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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 is
excluded from the gross income of the partnership allocated to the partners
(in lieu of allocating to the partners a deduction for such tax paid by the
partnership).
For these purposes, a "Pass-Through Entity" means any regulated investment
company, real estate investment trust, common trust fund, partnership, trust
or estate and certain corporations operating on a cooperative basis. Except as
may be provided in Treasury Regulations, any person holding an interest in a
Pass-Through Entity as a nominee for another will, with respect to such
interest, be treated as a Pass-Through Entity.
Noneconomic Residual Interests. The REMIC Regulations would disregard
certain transfers of Residual Certificates, in which case the transferor would
continue to be treated as the owner of the Residual Certificates and thus
would continue to be subject to tax on its allocable portion of the net income
of the REMIC. Under the REMIC Regulations, a transfer of a "noneconomic
residual interest" (as defined below) to a Residual Holder is disregarded for
all federal income tax purposes if a significant purpose of the transfer is to
enable the transferor to impede the assessment or collection of tax. A
residual interest in a REMIC (including a residual interest with a positive
value at issuance) is a "noneconomic residual interest" unless, at the time of
transfer, (i) the present value of the expected future distributions on the
residual interest at least equals the product of the present value of the
anticipated excess inclusions and the highest corporate income tax rate in
effect for the year in which the transfer occurs, and (ii) the transferor
reasonably expects that the transferee will receive distributions from the
REMIC at or after the time at which taxes accrue on the anticipated excess
inclusions in an amount sufficient to satisfy the accrued taxes. The
anticipated excess inclusions and the present value rate are determined in the
same manner as set forth above. The REMIC Regulations explain that a
significant purpose to impede the assessment or collection of tax exists if
the transferor, at the time of the transfer, either knew or should have known
that the transferee would be unwilling or unable to pay taxes due on its share
of the taxable income of the REMIC. A safe harbor is provided if (i) the
transferor conducted, at the time of the transfer, a reasonable investigation
of the financial condition of the transferee and found that the transferee
historically had paid its debts as they came due and found no significant
evidence to indicate that the transferee would not continue to pay its debts
as they came due in the future, and (ii) the transferee represents to the
transferor that it understands that, as the holder of a non-economic residual
interest, the transferee may incur tax liabilities in excess of any cash flows
generated by the interest and that the transferee intends to pay taxes
associated with holding the residual interest as they become due. The Pooling
and Servicing 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."
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
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which case, if the Residual Holder has an adjusted basis in his Residual
Certificate remaining when his interest in the REMIC terminates, and if he
holds such Residual Certificate as a capital asset, then he will recognize a
capital loss at that time in the amount of such remaining adjusted basis.
The Conference Committee Report to the Tax Reform Act of 1986 provides that,
except as provided in Treasury Regulations, the wash sale rules of Code
Section 1091 will apply to dispositions of Residual Certificates where the
seller of the Residual Certificate, during the period beginning six months
before the sale or disposition of the Residual Certificate and ending six
months after such sale or disposition, acquires (or enters into any other
transaction that results in the application of Code Section 1091) any residual
interest in any REMIC or any interest in a "taxable mortgage pool" (such as a
non-REMIC owner trust) that is economically comparable to a Residual
Certificate.
Mark-to-Market of Residual Certificates. Prospective purchasers of a
Residual Certificate should be aware that the Service recently released final
regulations (the "Mark-to-Market Regulations") which provide that a Residual
Certificate acquired after January 3, 1995 cannot be marked-to-market. The
Mark-to-Market Regulations changed the temporary regulations which allowed a
Residual Certificate to be marked-to-market provided that it was not a
"negative value" residual interest and did not have the same economic effect
as a "negative value" residual interest.
Certain Other Taxes on the REMIC. The REMIC provisions of the Code impose a
100% tax on any net income derived by a REMIC from certain prohibited
transactions. Such transactions are: (i) any disposition of a qualified
mortgage, other than pursuant to the substitution of a qualified replacement
mortgage for a qualified mortgage (or the repurchase in lieu of substitution
of a defective obligation), a disposition incident to the foreclosure,
default, or imminent default of a mortgage, the bankruptcy or insolvency of
the REMIC, or a qualified liquidation of the REMIC; (ii) the receipt of income
from assets other than qualified mortgages and permitted investments; (iii)
the receipt of compensation for services; and (iv) the receipt of gain from
the dispositions of cash flow investments. The REMIC Regulations provide that
the modification of the terms of a Contract occasioned by default or a
reasonably foreseeable default of the Contract, the assumption of the
Contract, the waiver of a due-on-sale clause or the conversion of an interest
rate by an Obligor pursuant to the terms of a convertible adjustable-rate
Contract will not be treated as a disposition of the Contract. In the event
that a REMIC holds Convertible ARM Loans which are convertible at the option
of the Obligor into fixed-rate, fully amortizing, level payment Contracts, a
sale of such Contracts by the REMIC pursuant to a purchase agreement or other
contract with the Company or other party, if and when the Obligor elects to so
convert the terms of the Contract, is not expected to 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 generate
a significant amount of such income.
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)
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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 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), provided the Foreign Holder is not a controlled foreign
corporation related to the Company and does not own actually or constructively
10% or more of the voting stock of the Company. 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. Foreign Holders should consult
their own tax advisors regarding the specific tax consequences of their owning
a Regular Certificate.
Any gain recognized by a Foreign Holder upon a sale, retirement or other
taxable disposition of a Regular Certificate generally will not be subject to
United States federal income tax unless either (i) the Foreign Holder is a
nonresident alien individual who holds the Regular Certificate as a capital
asset and who is present in the United States for 183 days or more in the
taxable year of the disposition and either the gain is attributable to an
office or other fixed place of business maintained in the U.S. by the
individual or the individual has a "tax home" in the United States, or (ii)
the gain is effectively connected with the conduct by the Foreign Holder of a
trade or business within the United States.
A Regular Certificate will not be includible in the estate of a Foreign
Holder who does not own actually or constructively 10% or more of the voting
stock of the Company.
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.
On October 6, 1997, the Treasury Department issued new regulations which
make certain modifications to the withholding, backup withholding and
information reporting rules described above. The new regulations attempt to
unify certification requirements and modify reliance standards, and will
generally be effective for
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payments made after December 31, 1999, subject to certain transition rules.
Prospective investors are urged to consult their own tax advisors regarding
the new regulations.
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 final regulations concerning certain
aspects of REMIC tax administration. Under those regulations, a Residual
Certificateholder must be designated as the REMICs "tax matters person." The
tax matters person, generally, has responsibility for overseeing and providing
notice to the other Residual Certificateholders of certain administrative and
judicial proceedings regarding the REMIC's tax affairs. Unless otherwise
indicated in the related Prospectus Supplement, the Company will be designated
as tax matters person for each REMIC, and in conjunction with the Trustee will
act as the agent of the Residual Certificateholders in the preparation and
filing of the REMIC's federal and state income tax and other information
returns.
NON-REMIC SERIES
Tax Status of the Trust Fund. In the case of a Trust Fund evidenced by a
series or sub-series of Certificates, or a segregated portion thereof, with
respect to which a REMIC Election is not made ("Non-REMIC Certificates"),
Counsel will have advised the Company that, in their opinion, each Contract
Pool and the arrangement to be administered by the Company under which the
Trustee will hold and the Company will be obligated to service the Contracts
and pursuant to which Non-REMIC Certificates will be issued to Non-REMIC
Certificateholders will not be classified as an association taxable as a
corporation or a "taxable mortgage pool, within the meaning of Code Section
7701(i), but rather will be classified as a grantor trust under Subpart E,
Part I of Subchapter J of Chapter 1 of the Code. 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.
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 "qualifying real
property loans" 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. 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, original issue discount, if any, prepayment fees,
assumption fees, and late payment charges received by the Company, and any
gain upon disposition of such Contracts. (For purposes of this discussion, the
term "disposition," when used with respect to the Contracts, includes
scheduled or prepaid collections with respect to the Contracts, as well as the
sale or exchange of a Non-REMIC Certificate.) Non-REMIC Certificateholders
will be entitled under Section 162 or 212 of the Code to deduct their pro rata
share of 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
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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 in
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. 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.
Under current Service interpretations of applicable Treasury Regulations the
Company would be able to sell or otherwise dispose of any subordinated Non-
REMIC Certificates. Accordingly, the Company expects to offer subordinated
Non-REMIC Certificates for sale to investors. In general, such subordination
should not affect the federal income tax treatment of either the subordinated
or senior Certificates. Holders of subordinated classes of Certificates should
be able to recognize any losses allocated to such class when and if losses are
realized.
To the extent that any of the Contracts comprising a Contract Pool were
originated on or after March 2, 1984 and under circumstances giving rise to
original issue discount, Certificateholders will be required to report
annually an amount of additional interest income attributable to such discount
in such Contracts prior to receipt of cash related to such discount. To the
extent that the Non-REMIC Certificates represent an interest in any pool of
debt instruments the yield on which may be affected by reason of prepayments,
for taxable years beginning after August 5, 1997, a prepayment assumption must
be used with respect to the Contracts comprising the Contract Pool in
computing the accrual of any original issue discount, market discount or
amortizable premiums. See the discussion above under "REMIC Series--Original
Issue Discount." Similarly, Code provisions concerning market discount and
amortizable premium will apply to the Contracts comprising a Contract Pool to
the extent that the loans were originated after July 18, 1984 and September
27, 1985, respectively. See the discussions above under "REMIC Series--Market
Discount" and "REMIC Series--Amortizable Premium." It is unclear whether a
prepayment assumption would be applicable in accruing or amortizing any such
original issue or market discount or premium with respect to Non-REMIC
Certificates that do not represent an interest in any pool of debt instruments
the yield on which may be affected by reason of prepayments, or for taxable
years beginning prior to August 5, 1997.
Stripped Non-REMIC Certificates. Certain classes of Non-REMIC Certificates
may be subject to the stripped bond rules of Section 1286 of the Code and for
purposes of this discussion will be referred to as "Stripped Certificates." In
general, a Stripped Certificate will be subject to the stripped bond rules
where there has been a separation of ownership of the right to receive some or
all of the principal payments on a Contract from ownership of the right to
receive some or all of the related interest payments. Non-REMIC Certificates
will constitute Stripped Certificates and will be subject to these rules under
various circumstances, including the following: (i) if any servicing
compensation is deemed to exceed a reasonable amount; (ii) if the Company or
any other party retains a Retained Yield with respect to the Contracts
comprising a Contract Pool; (iii) if two or more classes of Non-REMIC
Certificates are issued representing the right to non-pro rata percentages of
the interest or principal payments on the Contracts; or (iv) if Non-REMIC
Certificates are issued which represent the right to interest only payments or
principal only payments.
Although not entirely clear, each Stripped Certificate should be considered
to be a single debt instrument issued on the day it is purchased for purposes
of calculating any original issue discount. Original issue discount with
respect to a Stripped Certificate, if any, must be included in ordinary gross
income for federal income tax purposes as it accrues in accordance with the
constant-yield method that takes into account the compounding of interest and
such accrual of income may be in advance of the receipt of any cash
attributable to such income. See "REMIC Series--Original Issue Discount"
above. For purposes of applying the original issue discount provisions of the
Code, the issue price of a Stripped Certificate will be the purchase price
paid by each holder
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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.
When an investor purchases more than one class of Stripped Certificates it
is currently unclear whether for federal income tax purposes such classes of
Stripped Certificates should be treated separately or aggregated for purposes
of applying the original issue discount rules described above.
It is possible that the Service may take a contrary position with respect to
some or all of the foregoing tax consequences. For example, a holder of a
Stripped Certificate may be treated as the owner of (i) as many stripped bonds
or stripped coupons as there are scheduled payments of principal and/or
interest on each Contract or (ii) a separate installment obligation for each
Contract representing the Stripped Certificate's pro rata share of principal
and/or interest payments to be made with respect thereto. As a result of these
possible alternative characterizations, investors should consult their own tax
advisors regarding the proper treatment of Stripped Certificates for federal
income tax purposes.
Gain or Loss on Disposition. Upon sale or exchange of a Non-REMIC
Certificate, a Non-REMIC Certificateholder will recognize gain or loss equal
to the difference between the amount realized in the sale and its aggregate
adjusted basis in the Contracts represented by the Non-REMIC Certificate.
Generally, the aggregate adjusted basis will equal the Non-REMIC
Certificateholder's cost for the Non-REMIC Certificate increased by the amount
of any previously reported gain with respect to the Non-REMIC Certificate and
decreased by the amount of any losses previously reported with respect to the
Non-REMIC Certificate and the amount of any distributions received thereon.
Except as provided above with respect to the original issue discount and
market discount rules, any such gain or loss would be capital gain or loss if
the Non-REMIC Certificate was held as a capital asset.
Recharacterization of Servicing Fees. The servicing compensation to be
received by the Company may be questioned by the Service with respect to
certain Certificates or Contracts as exceeding a reasonable fee for the
services being performed in exchange therefor, and a portion of such servicing
compensation could be recharacterized as an ownership interest retained by the
Company or other party in a portion of the interest payments to be made
pursuant to the Contracts. In this event, a Certificate might be treated as a
Stripped Certificate subject to the stripped bond rules of Section 1286 of the
Code and the original issue discount provisions rather than to the market
discount and premium rules. See the discussion above under "Non-REMIC Series--
Stripped Non-REMIC Certificates."
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Tax Treatment of Certain Foreign Investors. Generally, interest or original
issue discount paid to or accruing for the benefit of a Non-REMIC
Certificateholder who is a Foreign Holder (as defined in "REMIC Series--
Taxation of Certain Foreign Investors") will be treated as "portfolio
interest" and therefore will be exempt from the 30% withholding tax. Such Non-
REMIC Certificateholder will be entitled to receive interest payments and
original issue discount on the Non-REMIC Certificates free of United States
federal income tax, but only to the extent the Contracts were originated after
July 18, 1984 and provided that such Non-REMIC Certificateholder periodically
provides the Trustee (or other person who would otherwise be required to
withhold tax) with a statement certifying under penalty of perjury that such
Non-REMIC Certificateholder is not a United States person and providing the
name and address of such Non-REMIC Certificateholder. For additional
information concerning interest or original issue discount paid by the Company
to a Foreign Holder and the treatment of a sale or exchange of a Non-REMIC
Certificate by a Foreign Holder, which will generally have the same tax
consequences as the sale of a Regular Certificate, see the discussion above
under "REMIC Series--Taxation of Certain Foreign Investors".
Tax Administration and Reporting. The Company will furnish to each Non-REMIC
Certificateholder with each distribution a statement setting forth the amount
of such distribution allocable to principal and to interest. In addition, the
Company will furnish, within a reasonable time after the end of each calendar
year, to each Non-REMIC Certificateholder who was a Certificateholder at any
time during such year, information regarding the amount of servicing
compensation received by the Company and any sub-servicer and such other
customary factual information as the Company deems necessary or desirable to
enable Certificateholders to prepare their tax returns. Reports will be made
annually to the Service and to holders of record that are not excepted from
the reporting requirements regarding information as may be required with
respect to interest and original issue discount, if any, with respect to the
Non-REMIC Certificates.
OTHER TAX CONSEQUENCES
No advice has been received as to local income, franchise, personal
property, or other taxation in any state or locality, or as to the tax effect
of ownership of Certificates in any state or locality. Certificateholders are
advised to consult their own tax advisors with respect to any state or local
income, franchise, personal property, or other tax consequences arising out of
their ownership of Certificates.
LEGAL INVESTMENT CONSIDERATIONS
Unless otherwise indicated in the applicable Prospectus Supplement, any
Certificates offered hereby that are rated in one of the two highest rating
categories by at least one nationally recognized statistical rating
organization will constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") and, as such, will
be legal investments for persons, trusts, corporations, partnerships,
associations, business trusts and business entities (including depository
institutions, life insurance companies and pension funds) created pursuant to
or existing under the laws of the United States or of any state whose
authorized investments are subject to state regulation to the same extent as,
under applicable law, obligations issued by or guaranteed as to principal and
interest by the United States or any such entities. Under SMMEA, certain
states have created legislation specifically limiting the legal investment
authority of any such entities with respect to "mortgage related securities,"
in which case the Certificates will constitute legal investments for entities
subject to such legislation only to the extent provided therein. SMMEA
provides, however, that in no event will the enactment of any such legislation
affect the validity of any contractual commitment to purchase, hold or invest
in Certificates, or require the sale or other disposition of Certificates, so
long as such contractual commitment was made or such Certificates were
acquired prior to the enactment of such legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in Certificates
without limitation as to the percentage of their assets represented thereby;
federal credit unions may
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invest in Certificates; and national banks may purchase Certificates for their
own account without regard to the limitations generally applicable to
investment securities set forth in 12 U.S.C. (S)24 (Seventh), subject in each
case to such regulations as the applicable federal regulatory authority may
prescribe.
Some Classes of Certificates offered hereby may not be rated in one of the
two highest rating categories and thus would not constitute "mortgage related
securities" for purposes of SMMEA.
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.
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
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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 Act. Any such Underwriters or agents will be
identified, and any such compensation received from the Company will be
described, in the Prospectus Supplement.
Under agreements which may be entered into by the Company, Underwriters and
agents who participate in the distribution of the Certificates may be entitled
to indemnification by the Company against certain liabilities, including
liabilities under the Act.
If so indicated in the Prospectus Supplement, the Company will authorize
Underwriters or other persons acting as the Company's agents to solicit offers
by certain institutions to purchase the Certificates from the Company pursuant
to contracts providing for payment and delivery on a future date. Institutions
with which such contracts may be made include commercial and savings banks,
insurance companies, pension funds, investment companies, educational
charitable institutions and others, but in all cases such institutions must be
approved by the Company. The obligation of any purchaser under any such
contract will be subject to the condition that the purchaser of the offered
Certificates shall not at the time of delivery be prohibited under the laws of
the jurisdiction to which such purchaser is subject from purchasing such
Certificates. The Underwriters and such other agents will not have
responsibility in respect of the validity or performance of such contracts.
The Underwriters may, from time to time, buy and sell Certificates, but
there can be no assurance that an active secondary market will develop and
there is no assurance that any such market, if established, will continue.
Certain of the Underwriters and their associates may engage in transactions
with and perform services for the Company in the ordinary course of business.
LEGAL MATTERS
The legality and material federal income tax consequences of the
Certificates will be passed upon for the Company by the counsel to the Company
identified in the applicable Prospectus Supplement.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1997
and 1996 and for each of the years in the three-year period ended December 31,
1997 incorporated by reference herein have been audited by KPMG Peat Marwick
LLP, independent accountants, as stated in their report given upon their
authority as experts in accounting and auditing.
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GLOSSARY
There follows abbreviated definitions of certain capitalized terms used in
this Prospectus and the Prospectus Supplement. The Agreement may contain a
more complete definition of certain of the terms defined herein and reference
should be made to the Agreement for a more complete definition of all such
terms.
"Accrual Remittance Amount" means, with respect to the Compound Interest
Certificates of a Series of Certificates providing for sequential
distributions in reduction of the Stated Balance of the Classes of such
Series, as of any Remittance Date, the amount of interest, calculated at the
Interest Rate, which has accrued on such Compound Interest Certificates from
the prior Remittance Date.
"Adjustable Rate Certificates" means Certificates which evidence the right
to receive distributions of income at a variable Remittance Rate.
"Advances" means the advances made by a Servicer (including from advances
made by a Sub-servicer) on any Remittance Date pursuant to an Agreement.
"Agreement" means each Pooling and Servicing Agreement by and among the
Company, the Trustee and any other party specified in the related Prospectus
Supplement.
"Asset Value" means the Asset Value of the Contracts included in a Trust
Fund, determined in the manner set forth in the related Agreement.
"Amount Available" means, with respect to each Series of Certificates,
certain amounts on deposit in the Certificate Account on a Determination Date.
"Available Subordination Amount" means, with respect to a Series of
Certificates having a Class of Subordinated Certificates, unless otherwise
provided in the related Prospectus Supplement, as of any Remittance Date, the
excess, if any, of the then applicable Maximum Subordination Amount over the
Cumulative Subordination Payments as of the preceding Remittance Date.
"Certificate Account" means the account maintained by the Servicer or the
Trustee, as specified in the related Prospectus Supplement.
"Certificate Distribution Amount" means, unless otherwise specified in the
related Prospectus Supplement, with respect to a Series of Certificates
evidencing an interest in a Contract Pool, the amount of interest (calculated
as specified in such Prospectus Supplement) and the amount of Principal
(calculated as specified in such Prospectus Supplement) to be distributed to
Certificateholders on each Remittance Date.
"Certificate Remittance Amount" means, unless otherwise specified in the
related Prospectus Supplement, with respect to a Series of Certificates
providing for sequential distributions in reduction of the Stated Balance of
the Classes of such Series, as of any Remittance Date, the amount, if any, by
which the then outstanding Stated Balance of the Classes of Certificates of
such Series (before taking into account the amount of interest accrued on any
Class of Compound Interest Certificates to be added to the Stated Balance
thereof on such Remittance Date) exceeds the Asset Value (as defined in the
related Prospectus Supplement) of the Contracts included in the Trust Fund for
such Series as of the end of the related Due Period.
"Certificates" means the Manufactured Housing Contract Pass-Through
Certificates issued pursuant to an Agreement.
"Code" means the Internal Revenue Code of 1986, as amended, and any
regulations promulgated thereunder.
"Company" means Green Tree Financial Corporation.
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"Compound Interest Certificates" means Certificates on which interest may
accrue but not be paid for the period described in the related Prospectus
Supplement.
"Contract Pool" means, with respect to each Series of Certificates, the pool
of manufactured housing conditional sales contracts and installment loan
agreements transferred by the Company to the Trustee.
"Contract Rate" means, with respect to each Contract, the interest rate
specified in the Contract.
"Contracts" means manufactured housing installment sales contracts and
installment loan agreements, including any and all rights to receive payments
due thereunder on and after the Cut-off Date and security interests in
Manufactured Homes purchased with the proceeds of such contracts.
"Cumulative Subordination Payments" means, with respect to a Series of
Certificates having a class of Subordinated Certificates, unless otherwise
provided in the related Prospectus Supplement as of any Remittance Date, the
cumulative amount equal to (i) the total of all amounts distributed to the
Senior Certificateholders, exclusive of Advances made by the Servicer and the
Initial Deposit to the Reserve Fund, up to and including such Remittance Date
minus (ii) the Senior Percentage times the Available Distribution Amount for
all Remittance Dates up to and including such Remittance Date.
"Cut-off Date" means the date specified in the related Prospectus Supplement
as the date from which principal and interest payments on the Contracts are
included in the Trust Fund.
"Determination Date" means, unless otherwise specified in the related
Prospectus Supplement, the third Business Day immediately preceding the
related Remittance Date.
"Due Period" means, unless otherwise provided in a related Prospectus
Supplement, with respect to any Remittance Date, the period from and including
the 15th day of the second month preceding the Remittance Date, to and
including the 14th day of the month immediately preceding the Remittance Date.
"Eligible Investments" means one or more of the investments specified in the
Agreement in which moneys in the Certificate Account and certain other
accounts are permitted to be invested.
"Excess Interest or Excess Interest Rate" means, with respect to any
Contract, the per annum percentage of the principal balance from time to time
outstanding, which may be retained by a seller, the Company or the Servicer or
allocated to a designated Class of Certificates, as specified in the related
Prospectus Supplement.
"FDIC" means the Federal Deposit Insurance Corporation.
"FHA" means the Federal Housing Administration.
"Final Scheduled Remittance Date" means, with respect to a Series of
Certificates providing for sequential distributions in reduction of the Stated
Balance of the Classes of each Series, the date, based on the assumptions set
forth in the related Prospectus Supplement, on which the Stated Balance of all
Certificates of each Class shall have been reduced to zero.
"FNMA" means the Federal National Mortgage Association.
"GNMA" means the Government National Mortgage Association.
"GNMA Certificates" means individual mortgage pass-through securities issued
or guaranteed by GNMA.
"HUD" means the United States Department of Housing and Urban Development.
"Initial Deposit" means, with respect to a Series of Certificates, the
amount, if any, deposited into the Reserve Fund on the date of the initial
issuance of the Certificates.
"Interest Rate" means, with respect to a Series of Certificates providing
for sequential distributions in reduction of the Stated Balance of the Classes
of such Series, the interest payable on the Principal Balance outstanding of
each such Class.
61
<PAGE>
"Late Collections" means, with respect to any Contract, amounts received
during any Due Period, whether as late payments of Monthly Payments, or as
Liquidation Proceeds, condemnation awards, proceeds of insurance policies or
otherwise, which represent late payments or collections of Monthly Payments
due but delinquent for a previous Due Period and not previously recovered.
"Liquidation Proceeds" means cash (including insurance proceeds) received in
connection with the repossession of a Manufactured Home.
"Loan-to-Value Ratio" means the loan-to-value ratio at the time of
origination of the Contract.
"Manufactured Home" means a unit of manufactured housing, including all
accessions thereto, securing the indebtedness of the Obligor under the related
Contract.
"Maximum Subordination Amount" means, with respect to a Series of
Certificates having a Class of Subordinated Certificates, the amount specified
in the related Prospectus Supplement, representing the maximum amount of
Cumulative Subordination Payments which may be required to be made over the
term of the related Agreement.
"Monthly Payment" means the scheduled monthly payment of principal and
interest on a Contract.
"Obligor" means each person who is indebted under a Contract or who has
acquired a Manufactured Home subject to a Contract.
"Record Date" means the date specified in the related Prospectus Supplement
for the list of Certificateholders entitled to distributions on the
Certificates.
"REMIC" means a "real estate mortgage investment conduit" as defined in the
Code.
"Remittance Date" means the date specified in the related Prospectus
Supplement for payments on the Certificates.
"Remittance Rate" means, as to a Certificate, the rate or rates of interest
thereon specified in the related Prospectus Supplement.
"Senior Certificates" means, with respect to each Series of Certificates,
the Class or Classes which have rights senior to another Class or Classes in
such Series.
"Senior Distribution Amount" means, with respect to a Series of Certificates
having Subordinated Certificates, as of each Remittance Date and for each
Class of Senior Certificates, the amount due the holders of such Class of
Senior Certificates.
"Senior Percentage" means, with respect to a Series of Certificates having
Subordinated Certificates, the percentage specified in the related Prospectus
Supplement.
"Senior Shortfall" means, with respect to a Series of Certificates having
Subordinated Certificates, as of any date, to the extent not previously paid,
the aggregate of the amounts by which the Senior Distribution Amount for any
Remittance Date exceeds the amount actually paid on such date.
"Servicer" means, with respect to each Series of Certificates evidencing
interests in Contracts, the Servicer specified in the related Prospectus
Supplement.
"Servicing Fee" means the amount of the annual fee paid to the Servicer or
the Trustee as specified in this Prospectus.
62
<PAGE>
"Single Certificate" means, unless otherwise specified in the related
Prospectus Supplement, for each Class of Certificates of any Series, the
initial principal amount of Contracts evidenced by a single Certificate of
such Class.
"Stated Balance" means, with respect to a Series of Certificates providing
for sequential distributions in reduction of Stated Balance of the Classes of
such Series, the maximum specified dollar amount (exclusive of interest at the
related Interest Rate) to which the Holder thereof is entitled from the cash
flow of the Trust Fund.
"Subordinated Certificates" means, with respect to each Series of
Certificates, the Class or Classes with rights subordinate to another Class or
Classes of such Series.
"Subordinated Percentage" means, with respect to a Series of Certificates
having Subordinated Certificates, the percentage specified in the related
Prospectus Supplement.
"Trust Fund" means, with respect to each Series of Certificates, the corpus
of the trust created by the related Agreement, to the extent described in such
Agreement, consisting of, among other things, Contracts, such assets as shall
from time to time be identified as deposited in the Certificate Account, the
Manufactured Home which secured a Contract, insurance, a reserve fund and
other forms of credit enhancement, if any.
"Trustee" means the Trustee for a Series of Certificates specified in the
related Prospectus Supplement.
"VA" means the Veterans' Administration.
"Variable Rate Certificates" means Certificates which evidence the right to
receive distributions of income at a variable Remittance Rate.
63
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
SEC registration fee........................................ $ 885,000.00
Blue Sky fees and expenses.................................. 5,000.00
Accountant's fee and expenses............................... 20,000.00
Attorney's fees and expenses................................ 168,000.00
Trustee's fees and expenses................................. 22,000.00
Printing and engraving expenses............................. 100,000.00
Rating Agency fee........................................... 180,000.00
Miscellaneous............................................... 22,500.00
-------------
Total................................................... $1,402,500.00
=============
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Green Tree Financial Corporation is incorporated under the laws of Delaware.
Section 145 of the Delaware General Corporation Law provides that a Delaware
corporation may indemnify any persons, including officers and directors, who
are, or are threatened to be made, parties to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of such corporation,
by reason of the fact that such person was an officer, director, employee or
agent of such corporation, or is or was serving at the request of such
corporation as a director, employee or agent of such corporation, or is or was
serving at the request of such corporation as a director, officer, employee or
agent of another corporation or enterprise). The indemnity may include
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding, provided such person acted in good faith and
in a manner he reasonably believed to be in or not opposed to the
corporation's best interests and, for criminal proceedings, had no reasonable
cause to believe that his conduct was illegal. A Delaware corporation may
indemnify officers and directors in an action by or in the right of the
corporation under the same conditions, except that no indemnification is
permitted without judicial approval if the officer or director is adjudged to
be liable to the corporation. Where and officer or director is successful on
the merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which such officer or
director actually and reasonably incurred.
The Certificate of Incorporation and Bylaws of Green Tree Financial
Corporation provide, in effect, that, subject to certain limited exceptions,
such corporation will indemnify its officers and directors to the extent
permitted by the Delaware General Corporation Law.
The Company maintains a directors' and officers' insurance policy.
Pursuant to the form of Underwriting Agreement, the Underwriters will agree,
subject to certain conditions, to indemnify the Company, its directors,
certain of their officers and any persons who control the Company, within the
meaning of the Securities Act of 1933, as amended (the "Securities Act"),
against certain liabilities.
II-1
<PAGE>
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
<C> <S> <C>
1.1 Proposed form of Underwriting Agreement (incorporated by
reference to similarly numbered exhibit on Registrant's
Registration Statement No. 333-36969)
1.2 Proposed form of alternate Underwriting Agreement (incor-
porated by reference to similarly numbered exhibit on Reg-
istrant's Registration Statement No. 333-36969)
3.1 Certificate of Incorporation of Green Tree (incorporated
by reference to Exhibit 1.2 to the Registrant's Registra-
tion Statement No. 33-60869)
3.2 Restated By-Laws of Green Tree (incorporated by reference
to Exhibit 3.2 to Registrant's Registration Statement No.
333-52233)
4.1 Form of Pooling and Servicing Agreement (incorporated by
reference to Exhibit 4.1 to the Registrant's Current Re-
port on Form 8-K dated August 13, 1998)
*5.1 Opinion and consent of Dorsey & Whitney LLP as to legality
*8.1 Opinion of Dorsey & Whitney LLP as to tax matters
12.1 Computation of Ratio of Earnings to Fixed Charges (incor-
porated by reference to Exhibit 12.1 to the Registrant's
Quarterly Report on Form 10-Q for the period ended June
30, 1998)
**23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Dorsey & Whitney LLP (included as part of Ex-
hibit 5.1)
24.1 Power of attorney from officers and directors of the Reg-
istrants signed by an attorney-in-fact (included on page
II-4)
</TABLE>
- --------
*Filed herewith.
**To be filed by amendment.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that, in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as a part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating
II-2
<PAGE>
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change to the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) under the Securities Act of
1933 if, in the aggregate, the changes in volume and price represent no
more than a 20% change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the effective
registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
Provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if
the registration statement is on Form S-3 or Form S-8, and the
information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by the
registrant pursuant to section 13 or section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remains unsold at the
termination of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent
or given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X are not set forth in the prospectus, to deliver,
or cause to be delivered to each person to whom the prospectus is sent or
given, the latest quarterly report that is specifically incorporated by
reference in the prospectus to provide such interim financial information.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF SAINT PAUL, STATE OF MINNESOTA, ON THE 9TH DAY OF
SEPTEMBER, 1998.
Green Tree Financial Corporation
/s/ Joel H. Gottesman
By __________________________________
JOEL H. GOTTESMAN
Senior Vice President, General
Counsel and Secretary
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON
THE DATE INDICATED. EACH PERSON WHOSE SIGNATURE TO THIS REGISTRATION STATEMENT
APPEARS BELOW HEREBY CONSTITUTES AND APPOINTS JOEL H. GOTTESMANN AND JAMES S.
ADAMS AS HIS/HER TRUE AND LAWFUL ATTORNEY-IN-FACT AND AGENT, WITH FULL POWER
OF SUBSTITUTION, TO SIGN ON THEIR BEHALF INDIVIDUALLY AND IN THE CAPACITY
STATED BELOW AND TO PERFORM ANY ACTS NECESSARY TO BE DONE IN ORDER TO FILE ALL
AMENDMENTS AND POST-EFFECTIVE AMENDMENTS TO THIS REGISTRATION STATEMENT, AND
ANY AND ALL INSTRUMENTS OR DOCUMENTS FILED AS PART OF OR IN CONNECTION WITH
THIS REGISTRATION STATEMENT OR THE AMENDMENTS THERETO AND EACH OF THE
UNDERSIGNED DOES HEREBY RATIFY AND CONFORM ALL THAT SAID ATTORNEY-IN-FACT AND
AGENT, OR HIS SUBSTITUTES, SHALL DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
SIGNATURE TITLE DATE
/s/ Lawrence M. Coss Chairman of the September 9,
- ------------------------------------- Board and Chief 1998
LAWRENCE M. COSS Executive Officer
(Principal
Executive Officer
and Director)
/s/ Rollin M. Dick Executive Vice September 9,
- ------------------------------------- President and Chief 1998
ROLLIN M. DICK Financial Officer
(Principal
Financial Officer)
/s/ James S. Adams Senior Vice September 9,
- ------------------------------------- President and Chief 1998
JAMES S. ADAMS Accounting Officer
(Principal
Accounting Officer)
/s/ Stephen C. Hilbert Director September 9,
- ------------------------------------- 1998
STEPHEN C. HILBERT
/s/ Thomas J. Kilian Director September 9,
- ------------------------------------- 1998
THOMAS J. KILIAN
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
1.1 Proposed form of Underwriting Agreement (incorporated by ref-
erence to similarly numbered exhibit on Registrant's Regis-
tration Statement No. 333-36969)
1.2 Proposed form of alternate Underwriting Agreement (incorpo-
rated by reference to similarly numbered exhibit on Regis-
trant's Registration Statement No. 333-36969)
3.1 Certificate of Incorporation of Green Tree (incorporated by
reference to Exhibit 1.2 to the Registrant's Registration
Statement No. 33-60869)
3.2 Restated By-Laws of Green Tree (incorporated by reference to
Exhibit 3.2 to Registrant's Registration Statement No. 333-
52233)
4.1 Form of Pooling and Servicing Agreement (incorporated by ref-
erence to Exhibit 4.1 to the Registrant's Current Report on
Form 8-K dated August 13, 1998)
*5.1 Opinion and consent of Dorsey & Whitney LLP as to legality
*8.1 Opinion of Dorsey & Whitney LLP as to tax matters
12.1 Computation of Ratio of Earnings to Fixed Charges (incorpo-
rated by reference to Exhibit 12.1 to the Registrant's Quar-
terly Report on Form 10-Q for the period ended June 30, 1998)
**23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Dorsey & Whitney LLP (included as part of Exhibit
5.1)
24.1 Power of attorney from officers and directors of the Regis-
trants signed by an attorney-in-fact (included on page II-4)
</TABLE>
- --------
*Filed herewith.
**To be filed by Amendment.
<PAGE>
[Letterhead of Dorsey & Whitney LLP]
EXHIBIT 5.1
Green Tree Financial Corporation
1100 Landmark Towers
345 St. Peter Street
St. Paul, Minnesota 55102-1639
Re: Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted as counsel to Green Tree Financial Corporation, a
Delaware corporation (the "Company"), in connection with the preparation of a
Registration Statement on Form S-3 filed by the Company with the Securities and
Exchange Commission (the "Commission") on September 11, 1998 (the "Registration
Statement"), relating to the registration by the Company of $3,000,000,000 of
Manufactured Housing Contract Pass-Through Certificates (the "Certificates").
The Certificates will be issued from time to time in series under separate
Pooling and Servicing Agreements, each in substantially the form incorporated as
an exhibit to the Registration Statement (each such agreement, a "Pooling and
Servicing Agreement"), between the Company, as seller and servicer, and a bank
or trust company, as trustee (the "Trustee"). The Company may provide a Limited
Guarantee (the "Limited Guarantee") with respect to one or more classes of any
series of Certificates.
We have examined the Registration Statement and such other documents,
and have reviewed such questions of law, as we have considered necessary and
appropriate for the purposes of this opinion. Based on the foregoing, we are of
the opinion that:
1. Each Pooling and Servicing Agreement, when it has been duly
authorized by the Board of Directors of the Company and duly executed and
delivered by the Company and the Trustee, will constitute the valid and binding
obligation of the Company, and the Limited Guarantee of the Company, if any,
provided for therein will constitute the valid and binding obligation of the
Company.
2. Each series of Certificates, when duly executed and delivered in
accordance with the terms of the Pooling and Servicing Agreement relating to
that series, will be legally and validly issued, and the holders of such
Certificates will be entitled to the benefits of that Pooling and Servicing
Agreement.
The opinions set forth above are subject to the following
qualifications and exceptions:
<PAGE>
Green Tree Financial Corporation
September 11, 1998
Page 2
(a) In rendering the opinions set forth above, we have assumed that,
at the time of the execution of the applicable Pooling and Servicing
Agreement and the execution and delivery of the related series of
Certificates, there will not have occurred any change in the law affecting
the authorization, execution, delivery, validity or enforceability of the
Certificates or any Limited Guarantee, the Registration Statement will have
been declared effective by the Commission and will continue to be
effective, the Certificates and the Limited Guarantee will be issued and
sold as described in the Registration Statement, none of the particular
terms of a series of Certificates will violate any applicable law and
neither the issuance and sale thereof nor the compliance by the Company
with the terms thereof will result in a violation of any agreement or
instrument then binding upon the Company or any order of any court or
governmental body having jurisdiction over the Company.
(b) Our opinion in paragraph 1 above is subject to the effect of any
applicable bankruptcy, insolvency, reorganization, moratorium or other
similar law of general application affecting creditors' rights.
(c) Our opinion in paragraph 1 above is subject to the effect of
general principles of equity, including (without limitation) concepts of
materiality, reasonableness, good faith and fair dealing, and other similar
doctrines affecting the enforceability of agreements generally (regardless
of whether considered in a proceeding in equity or at law).
(d) Minnesota Statutes (S) 290.371, Subd. 4, provides that any
corporation required to file a Notice of Business Activities Report does
not have a cause of action upon which it may bring suit under Minnesota law
unless the corporation has filed a Notice of Business Activities Report and
provides that the use of the courts of the State of Minnesota for all
contracts executed and all causes of action that arose before the end of
any period for which a corporation failed to file a required report is
precluded. Insofar as our opinion may relate to the valid, binding and
enforceable character of any agreement under Minnesota law or in a
Minnesota court, we have assumed that any party seeking to enforce such
agreement has at all times been, and will continue at all times to be,
exempt from the requirement of filing a Notice of Business Activities
Report or, if not exempt, has duly filed, and will continue to duly file,
all Notice of Business Activities Reports.
Our opinions expressed above are limited to the laws of the State of
Minnesota.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, and to the reference to our firm under the heading
"Legal Matters" in the Prospectus comprising part of the Registration Statement.
Dated: September 11, 1998
Very truly yours,
/s/ Dorsey & Whitney LLP
CFS
<PAGE>
[Letterhead of Dorsey & Whitney LLP]
EXHIBIT 8.1
Green Tree Financial Corporation
1100 Landmark Towers
345 St. Peter Street
St. Paul, MN 55102-1639
Re: Federal Income Tax Consequences of Manufactured
Housing Contract Pass-Through Certificates
Ladies and Gentlemen:
We have acted as counsel to Green Tree Financial Corporation (the
"Company") in connection with the proposed registration under the Securities Act
of 1933, as amended, by the Company of $3,000,000,000 of Manufactured Housing
Contract Pass-Through Certificates (the "Certificates"), and the related
preparation and filing of a registration statement on Form S-3, filed by the
Company with the Securities and Exchange Commission on September 11, 1998 (the
"Registration Statement"). The Certificates will be issued in series under
separate Pooling and Servicing Agreements (each, an "Agreement") between the
Company, as seller and servicer, and a bank or trust company, as trustee (the
"Trustee"). The Certificates are described in the prospectus constituting Part
I of the Registration Statement (the "Prospectus"). Each series of Certificates
will be more particularly described in a supplement to the Prospectus (each, a
"Supplement").
You have requested our opinion with respect to certain federal income
tax consequences of the purchase, ownership and disposition of the Certificates.
For purposes of rendering our opinion we have examined the Registration
Statement. Each Supplement and Agreement pertaining to a specific series is to
be completed subsequent to the date of this opinion. Accordingly, we have not
examined any Supplement or Agreement relating to any specific series to be
issued, and our opinion does not address the contents of any such Supplement or
Agreement except as and to the extent that the provisions of same may be
described in the Prospectus. We understand that each Supplement will contain a
discussion of any material federal income tax consequences pertaining to the
series to be offered thereunder which are not addressed in the Prospectus.
As set forth in the Prospectus, for federal income tax purposes each
series of Certificates will be issued as either a grantor trust ("Grantor
Trust") or a real estate mortgage investment conduit ("REMIC") under the
Internal Revenue Code of 1986, as amended (the "Code"). Each series' status as
a Grantor Trust or a REMIC is to be set forth in the Supplement related thereto.
Our opinion is based upon existing law and currently applicable
Treasury Department regulations, current published administrative positions of
the Internal Revenue Service contained in revenue rulings and revenue
procedures, and judicial decisions, all of which are subject to change, either
<PAGE>
Green Tree Financial Corporation
September 11, 1998
Page 2
prospectively or retroactively, and to possibly differing interpretations. Our
opinion is also based on the representations and warranties set forth in the
applicable Agreement and the assumptions that the Company and the Trustee will
at all times comply with the requirements of the applicable Agreement,
including, without limitation, in the case of each REMIC series of Certificates,
the requirement that a proper election to be taxed as a REMIC is made in
accordance with the applicable Agreement and the Code and that the certificates
of such series will be issued as described in the related Supplement and any
other prospectus relating to other classes of certificates of such series.
Based upon the foregoing, as of the date hereof it is our opinion that:
(1) With respect to each Grantor Trust series of Certificates, each
pool of manufactured housing contracts and the arrangement to be
administered by the Company under which the Trustee will hold and the
Company will be obligated to service the manufactured housing contracts and
pursuant to which Certificates will be issued to certificateholders, all as
described in the Prospectus, will not be classified as an association
taxable as a corporation or as a "taxable mortgage pool," within the
meaning of Section 7701(i) of the Code, but rather will be classified as a
grantor trust under Subpart E, Part I of Subchapter J of the Code.
(2) With respect to each Grantor Trust series of Certificates, under
Section 671 of the Code, each holder of a Certificate 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 pool of manufactured
housing contracts in which such Certificate evidences an ownership interest
and will be considered the equitable owner of a pro rata undivided interest
in each of the manufactured housing contracts comprising that pool.
(3) With respect to each REMIC series of Certificates, those assets
constituting the trust fund created pursuant to the related Agreement and
designated as comprising the "real estate mortgage investment conduit"
thereunder will qualify as a REMIC under the Code.
We consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the heading "Certain
Federal Income Tax Consequences" in the Prospectus, and we hereby confirm that,
insofar as they constitute statements of law or legal conclusions as to the
likely outcome of material issues under the federal income tax laws, the
discussion under such heading accurately sets forth our advice.
Dated: September 11, 1998
Very truly yours,
/s/ Dorsey & Whitney LLP
CFS
