<PAGE>
Filed pursuant to Rule 424b(5)
Registration No. 333-75623
PROSPECTUS SUPPLEMENT
(To prospectus dated September 13, 1999)
$543,000,000 (Approximate)
GREEN TREE
Seller and Servicer
Certificates for Home Improvement Loans
Series 1999-E
----------------
The certificates will consist of nine classes, but we are offering only the
classes listed below now:
<TABLE>
<CAPTION>
Approximate Pass-Through Underwriting Proceeds to
Class Principal Amount Rate Price to Public Discount Company
- ----- ---------------- ------------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
A-1..................... $216,000,000 6.32% 100% 0.2% 99.8%
A-2..................... $ 42,000,000 6.91% 99.984375% 0.25% 99.734375%
A-3..................... $124,000,000 7.18% 99.984375% 0.3% 99.684375%
A-4..................... $ 84,500,000 7.64% 99.984375% 0.35% 99.634375%
M-1..................... $ 48,000,000 8.13%(1) 100% 0.625% 99.375%
M-2..................... $ 28,500,000 9.45%(1) 99.984375% 0.65% 99.334375%
------------ --------------- ---------- ---------------
Total................... $543,000,000 $542,956,406.26 $1,690,000 $541,266,406.26
============ =============== ========== ===============
</TABLE>
(1) Or the weighted average rate of the loans in the pool, if less.
The approximate principal amount of each class listed above may vary plus or
minus 5%. Any increase or decrease will be allocated proportionately among all
classes. The price to public will be the percentage total in the table above
plus any accrued interest beginning on September 15, 1999. The proceeds to
company are before deducting expenses, which we estimate to be $425,000.
Consider carefully the risk factors beginning on page S-11 in this prospectus
supplement.
----------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The Attorney General of the state of New York has not passed on or endorsed
the merits of this offering. Any representation to the contrary is unlawful.
These certificates will be delivered on or about September 15, 1999.
The underwriters named below will offer these securities to the public at the
offering price listed on this cover page and they will receive the discount
listed above. See "Underwriting" on page S-64 in this prospectus supplement and
on page 70 in the prospectus.
----------------
Lehman Brothers
Chase Securities Inc.
First Union Capital Markets
Merrill Lynch & Co.
The date of this prospectus supplement is September 13, 1999.
<PAGE>
TABLE OF CONTENTS
Prospectus Supplement
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary of the Terms of the Certificates................................. S-4
Risk Factors............................................................. S-11
Structure of the Transaction............................................. S-14
Use of Proceeds.......................................................... S-15
The Loans................................................................ S-15
Yield and Prepayment Considerations...................................... S-22
Green Tree Financial Corporation......................................... S-30
Description of the Certificates.......................................... S-31
Description of the Class B-2 Limited Guaranty............................ S-58
Federal Income Tax Consequences.......................................... S-59
ERISA Considerations..................................................... S-59
Underwriting............................................................. S-64
Legal Matters............................................................ S-65
Prospectus
Important Notice about Information Presented in this Prospectus and the
Accompanying Prospectus Supplement...................................... 2
The Trust................................................................ 3
Use of Proceeds.......................................................... 7
Green Tree Financial Corporation......................................... 8
Yield Considerations..................................................... 11
Maturity and Prepayment Considerations................................... 11
Description of the Certificates.......................................... 12
Description of FHA Insurance............................................. 26
Legal Aspects of the Loans; Repurchase Obligations....................... 28
ERISA Considerations..................................................... 41
Federal Income Tax Consequences.......................................... 44
Legal Investment Considerations.......................................... 68
Ratings.................................................................. 69
Underwriting............................................................. 70
Legal Matters............................................................ 71
Experts.................................................................. 71
Glossary................................................................. 72
</TABLE>
You should rely only on the information contained in this prospectus. We
and the underwriters have not authorized any other person to provide you with
different information. If anyone provides you with different or inconsistent
information, you should not rely on it. We and the underwriters are not making
an offer to sell these securities in any jurisdiction where the offer or sale
is not permitted.
S-2
<PAGE>
This document consists of a prospectus supplement and a prospectus. The
prospectus provides general information about Green Tree Financial Corporation,
about our home improvement lending business, and about any series of
certificates for home improvement loans that we may wish to sell. This
prospectus supplement contains more detailed information about the specific
terms of this series of certificates. If the description of the terms of your
certificate varies between this prospectus supplement and the prospectus, you
should rely on the information in this prospectus supplement.
If you have received a copy of this prospectus supplement and prospectus in
an electronic format, and if the legal prospectus delivery period has not
expired, you may obtain a paper copy of this prospectus supplement and
prospectus from us or an underwriter by asking for it.
S-3
<PAGE>
SUMMARY OF THE TERMS OF THE CERTIFICATES
This summary highlights selected information regarding the certificates, and
does not contain all of the information that you need to consider in making
your investment decision. To understand all of the terms of the certificates,
read this entire prospectus supplement and the accompanying prospectus. In
particular, we will refer throughout this summary to sections of this
prospectus supplement or the prospectus, or both, which will contain more
complete descriptions of the matters summarized. All these references will be
to sections of this prospectus supplement only unless we note otherwise.
The nine classes of certificates for Home Improvement Loans, Series 1999-E
listed on the table below will represent interests in a trust. The trust will
own a pool of home improvement loans. We are not offering those classes listed
in italics now. We or one of our affiliates initially will retain these classes
of certificates, but may sell any or all of these certificates at a later date.
<TABLE>
<CAPTION>
Pass-Through Approximate S&P Fitch
Class Rate Principal Amount Rating Rating
- ----- ------------ ---------------- ------ ------
<S> <C> <C> <C> <C>
A-1................................. 6.32% $216,000,000 AAA AAA
A-2................................. 6.91% $ 42,000,000 AAA AAA
A-3................................. 7.18% $124,000,000 AAA AAA
A-4................................. 7.64% $ 84,500,000 AAA AAA
M-1................................. 8.13%(1) $ 48,000,000 AA AA
M-2................................. 9.45%(1) $ 28,500,000 A A
B-1................................. 10.34%(1) $ 18,000,000 BBB BBB
B-2................................. 11.01%(1) $ 39,000,000 BBB- BBB+
C .................................. (2)
</TABLE>
- --------
(1) Or the weighted average rate of the loans in the pool, if less.
(2) The Class C certificates are not entitled to any distributions of interest.
We will not issue or sell the certificates unless S&P and Fitch assign to
each class at least the rating listed above.
The rating on each class of certificates by S&P addresses the likelihood of
timely receipt of interest and ultimate receipt of principal. The rating on
each class of certificates by Fitch addresses the likelihood of the receipt by
certificateholders of all distributions to which such certificateholders are
entitled. A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating agency.
The ratings of the Class B-2 certificates are based in part on an assessment
of our ability to make payments under the Class B-2 limited guaranty. Any
reduction in the rating of our debt securities may result in a similar
reduction in the ratings of the Class B-2 certificates.
S-4
<PAGE>
Seller and Servicer......... Green Tree Financial Corporation, 1100 Landmark
Towers, 345 St. Peter Street, St. Paul, Minnesota
55102, telephone: (651) 293-3400.
Trustee..................... U.S. Bank Trust National Association, St. Paul,
Minnesota.
Payment Date................ The fifteenth day of each month, or if that day
is not a business day, the following business
day. The first payment date will be October 15,
1999.
Record Date................. The business day just before the payment date.
Distributions on the
Certificates................ Distributions on the certificates on any payment
date will be made primarily from amounts
collected during the prior calendar month on the
home improvement loans. On each payment date
distributions of principal and interest on the
certificates will be made in the following order
of priority:
- Class A interest;
- Class M-1 interest;
- Class M-2 interest;
- Class B-1 interest;
- Class A principal;
- Class M-1 principal;
- Class M-2 principal;
- Class B-1 principal;
- Class B-2 interest; and
- Class B-2 principal.
This prospectus supplement summarizes in the next
three pages the amounts of interest and principal
to be paid on each payment date. In each case,
the payments will be made only to the extent the
amount available is sufficient, after making
payments with a higher priority. See "Description
of the Certificates--Payments on Loans."
S-5
<PAGE>
A. Interest on the Class A,
Class M-1, Class M-2 and
Class B-1 Certificates... Interest will be payable
- first to each class of Class A certificates
concurrently, then
- to the Class M-1 certificates, then
- to the Class M-2 certificates, and then
- to the Class B-1 certificates.
See "Description of the Certificates--
Distributions on Certificates" and "--Losses on
Liquidated Loans."
B. Principal on the Class
A, Class M-1, Class M-2
and Class B-1
Certificates ............ The trustee will then apply the remaining amount
available to pay principal on the Class A, Class
M-1, Class M-2 and Class B-1 certificates in the
amounts and order of priority described below.
The trustee will distribute a predetermined
senior class percentage of scheduled and
unscheduled principal payments and other
recoveries on the home improvement loans for that
payment date. These distributions will be made:
- first, to the Class A-1 certificates until
retired, then
- to the Class A-2 certificates until retired,
then
- to the Class A-3 certificates until retired,
then
- to the Class A-4 certificates until retired,
then
- to the Class M-1 certificates until retired,
and then
- to the Class M-2 certificates until retired.
The trustee will pay principal on the Class B-1
certificates from available funds in an amount
equal to a percentage of the loan payments and
recoveries on the home improvement loans for that
payment date. Prior to the payment date in
October 2002, the percentage will be zero, unless
the Class A and Class M certificates have been
retired. After that date, assuming delinquencies,
defaults and losses on the home improvement loans
remain below specific thresholds
S-6
<PAGE>
and that the ratio of the aggregate outstanding
principal balance of the Class B certificates to
the total outstanding principal balance of the
pool has become at least 19.0%, the percentage
will generally equal 100% minus the senior
percentage. See "Description of the
Certificates--Distributions on Certificates."
C. Class B-2 Interest....... The trustee will then apply the remaining amount
available to pay interest on the Class B-2
certificates.
D. Class B-2 Principal...... The trustee will then apply the remaining amount
available to pay principal due on the Class B-2
certificates. Class B-2 certificates will not be
paid principal before the Class B-1 principal
balance has been reduced to zero and other tests
are satisfied. Principal will be distributed
generally according to a formula amount dictated
by the principal balance of the home improvement
loans.
E. Class B-2 Limited
Guaranty.................
We will guarantee payment of interest and
principal on the Class B-2 certificates. See
"Description of the Class B-2 Limited Guaranty."
Home Improvement Loans......
The pool will consist of fixed-rate home
improvement loans. This prospectus supplement
provides information about 49.8% of all the home
improvement loans that will be included in the
trust. We will transfer additional loans to the
trust on the closing date, and will transfer the
remaining loans to the trust within 90 days after
the closing date.
With respect to the loans as of the cut-off date:
. all are secured by a lien on the related
real property;
. the related properties are located in 48
states and the District of Columbia;
. there are 15,904 loans;
. the loan rates range from 6.00% to 20.99%,
with a weighted average of 12.54%;
. the weighted average term to scheduled
maturity, as of their dates of origination,
was 220 months,
S-7
<PAGE>
. the weighted average term to scheduled
maturity, as of the cut-off date, was 218
months;
. the loans provide for level monthly
payments for the duration of the loan; and
. the latest scheduled maturity date was in
July, 2029.
See "The Loans," which includes the permissible
characteristics of the other loans that we will
transfer to the trust on the closing date or
later.
Pre-Funding Account.........
If the aggregate principal balance of the loans
transferred by us to the trust on the closing
date is less than the aggregate original
principal balance of the certificates, that
difference will be deposited by the trustee in a
pre-funding account, and those funds will be used
to purchase loans from time to time until
December 10, 1999. If those funds are not
completely used by December 10, 1999, any
remaining funds will be distributed as principal
on the Class A-1 certificates on the December
1999 payment date.
Capitalized Interest On the closing date, we will establish a
Account.................. capitalized interest account to cover interest
payments on the certificates on the payment dates
in October, November and December 1999 in the
event interest payments on the loans are
insufficient. To establish the account, we will
deposit an amount that is approved by the rating
agencies. If we do not collect enough on the
loans to make a full interest distribution on the
certificates on the payment dates in October,
November and December 1999, the trustee will
withdraw the amount of the shortfall from the
capitalized interest account and deposit it in
the certificate account. The trustee will release
any funds remaining in the capitalized interest
account after the distribution to
certificateholders in December 1999 to one of our
subsidiaries.
Advances....................
The servicer will make advances each month of any
scheduled payments on the loans that were due but
not received during the prior due period, but it
will be entitled to reimbursement for any
advance. See
S-8
<PAGE>
"Description of the Certificates--Advances" in
this prospectus supplement and in the prospectus.
Repurchase or Substitution
Obligations.................
We will make representations and warranties about
the loans when we transfer them to the trust. If
a representation or warranty is breached in a way
that materially and adversely affects the
interests of the certificateholders, then we
must, within 90 days, either (1) cure the breach
or (2) repurchase the defective loans. During the
first two years after the closing date, we may
substitute other loans instead of repurchasing
defective loans. See "Description of the
Certificates--Conveyance of Loans" in this
prospectus supplement and in the prospectus.
Repurchase Option........... After the scheduled principal balance of the
loans is less than 10% of the aggregate principal
balance of the certificates on the closing date,
we, in our capacity as servicer, will have the
option to purchase all of the outstanding loans.
See "Description of the Certificates--Repurchase
Option" in this prospectus supplement and in the
prospectus.
Tax Status.................. In the opinion of our counsel, for federal income
tax purposes a segregated portion of the trust
will be treated as a REMIC. The Class A, Class M,
and Class B certificates will constitute regular
interests in the REMIC and generally will be
treated as debt instruments of the trust for
federal income tax purposes. A holder of a
certificate will be required to include as income
all interest paid on the certificates under the
accrual method of accounting, even if the holder
usually uses the cash method of accounting. See
"Federal Income Tax Consequences" in this
prospectus supplement and in the prospectus.
ERISA Considerations........
Subject to the conditions described under "ERISA
Considerations," employee benefit plans that are
subject to ERISA may purchase Class A
certificates. An employee benefit plan may not
purchase any other class of certificates, unless
it satisfies the conditions described under
"ERISA Considerations" in this prospectus
supplement and in the prospectus.
S-9
<PAGE>
Legal Investment
Considerations..............
The certificates will not constitute mortgage
related securities for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 because a
number of the loans are not secured by first
liens on the related real estate. This means that
many institutions that have the legal authority
to invest in mortgage related securities may not
be legally authorized to invest in the
certificates. You should consult with your own
legal advisor to decide whether and how much you
may legally invest in the certificates.
Reports to Holders of
Certificates................
The trustee will provide to the holder of the
certificates monthly and annual reports about the
certificates and the trusts. See "Description of
the Certificates--Reports to Certificateholders"
in the prospectus.
S-10
<PAGE>
RISK FACTORS
You should consider the following risk factors in deciding whether to
purchase certificates.
FHA insurance may not always cover defaults on the FHA-insured loans.
The availability of FHA insurance following a default on an FHA-insured home
improvement loan is subject to a number of conditions, including strict
compliance by us with FHA regulations in originating and servicing the loan.
Although we are an FHA-approved lender and we believe that we have complied
with FHA regulations, these regulations are susceptible to substantial
interpretation. The law does not require us to obtain approval from FHA of our
origination and servicing practices. If we fail to comply with FHA regulations,
FHA may deny some insurance claims and FHA's enforcement of its regulations may
also become stricter in the future. We sometime engage in disputes with FHA
over the validity of claims submitted and our compliance with FHA regulations
in servicing loans insured by FHA. In addition, FHA will only cover 90% of the
sum of the unpaid principal on a home improvement loan, up to nine months
unpaid interest and certain liquidation costs.
The amount of FHA insurance is limited to the balance of a reserve amount and
severe losses could reduce our FHA insurance reserves.
The FHA reserve amount, as of December 31, 1998, was approximately
$85,874,000, but will be reduced by the amount of all FHA insurance claims paid
and will be increased by an amount equal to 10% of the unpaid principal balance
of FHA Title I loans subsequently originated and reported for insurance by us.
Severe losses on our FHA-insured manufactured housing loans or on other FHA-
insured home improvement loans originated by us could reduce or eliminate our
FHA insurance reserves. If this happened, FHA insurance would not be available
to cover losses on the FHA-insured home improvement loans included in the
trust. If we were terminated as servicer due to bankruptcy or otherwise, it is
anticipated that a proportionate amount of our FHA insurance reserves would be
transferred to the reserve account of the trustee or the successor servicer,
but we can not assure you of the amount, if any, that would be transferred. For
a more complete description of the limits on the availability of FHA insurance,
see "Description of FHA Insurance" in the prospectus.
A substantial number of the liens on improved real estate securing the loans
will be junior to other liens on that real estate, which increases the risk of
loss upon default.
Because the liens are junior, the rights of the trust to cause the property
securing the loan to be sold upon default of the mortgagor or trustor are
subordinate to those of the senior mortgagee or beneficiary. This extinguishes
the junior mortgagee's or junior beneficiary's lien unless the servicer on
behalf of the trust asserts its subordinate interest in the property in
foreclosure litigation and, possibly, satisfies the defaulted senior loan or
loans. Approximately 97% by principal balance of the initial loans are secured
by subordinate liens on the applicable real estate. As a result, the real
estate securing these loans is not likely to
S-11
<PAGE>
provide adequate security if it becomes necessary to foreclose upon and sell
the collateral. For a more complete description of the risks associated with
junior mortgage liens, see "Legal Aspects of the Loans; Repurchase Obligations"
in the prospectus.
Some of the home improvement loans have high loan-to-value ratios, which may
result in more loan defaults and higher losses following a default.
We expect a substantial portion of the loans included in the loan pool to
have loan-to-value ratios of 90% or more, based on the total of the outstanding
principal balances of all senior mortgages or deeds of trust securing the loan,
on the one hand, and the value of the home, on the other. For a more complete
description, see "Green Tree Financial Corporation--Loan Origination." An
overall decline in the residential real estate market, the general condition of
a property securing a loan or other factors could adversely affect the value of
the property securing a loan. As a result, the remaining balance of that loan,
together with that of any senior liens on the related property, could equal or
exceed the value of the property.
A secondary market for the certificates may not develop, which means you may
have trouble selling them when you want to.
We cannot assure to you that a secondary market will develop for the
certificates of any series, or, if a secondary market does develop, that it
will provide the holders of any of the certificates with liquidity of
investment. We also cannot assure to you that if a secondary market does
develop, that it will continue to exist for the term of any series of
certificates.
The assignment to the trust will not be recorded, which in some states could
make our security interest ineffective; this could negatively affect the
trust's ability to pay on the certificates.
We will not record the assignment to the trustee of the mortgage or deed of
trust securing any loan, because of the expense and administrative
inconvenience involved. In some states, in the absence of a recordation, the
assignment to the related trustee of the mortgage or deed of trust securing a
loan may not be effective against our creditors or purchasers from us or a
trustee in bankruptcy for us. This could leave the trust unable to foreclose on
the real estate following a loan default, which could result in increased
losses on the loans. These losses could result in delays or reductions in
payments on your certificates.
Bankruptcy proceedings could delay distributions on the certificates.
We intend that each transfer of loans to the related trust will constitute a
sale, rather than a pledge of the loans to secure indebtedness. However, if we
were to become a debtor under the federal bankruptcy code, it is possible that
our creditor or trustee in bankruptcy may argue that the sale of the loans by
us was a pledge of the loans rather than a sale. This claim, if presented to or
accepted by a court, could result in a delay in or reduction of distributions
to the holders of the certificates.
S-12
<PAGE>
The historical delinquency experience with home improvement loans may not be an
accurate prediction of the performance of the loans in the pool.
We began purchasing and servicing FHA-insured home improvement loans in April
1989, and conventional home improvement loans in September 1992, and therefore
have limited historical experience with respect to the performance, including
the rate of prepayments, of home improvement loans. Accordingly, our
delinquency experience and loan loss and liquidation experience set forth under
"The Loans" may not be indicative of the performance of the loans in the pool.
Some loans in the trust will be subject to the Home Ownership and Equity
Protection Act of 1994 which, if not complied with, can affect enforceability
of a loan.
The Protection Act adds certain additional provisions to Regulation Z, the
implementing regulation of the Federal Truth-in-Lending Act. These provisions
impose additional disclosure and other requirements on creditors with respect
to non-purchase money mortgage loans with high interest rates or up-front fees
and charges. A violation of the Protection Act can affect the enforceability of
the related loan, and it subjects any assignee of the loan, such as the trust,
to all the claims and defenses that the consumer could assert against the
creditor, including the right to rescind the loan. If you purchase a
certificate, the return on your investment will depend largely on the
performance of the loans constituting the trust. If we are found to have
violated provisions of the Protection Act with respect to any loan that is
subject to the Protection Act, the trust may be unable to collect on that loan.
We would, however, be obligated to repurchase that loan, because of the breach
of our representation and warranty.
This prospectus supplement describes only a portion of the loans, and
additional loans added to the trust on and after closing could have different
characteristics.
The additional loans and the subsequent loans that we deliver on and after
the closing date will have characteristics that differ somewhat from the
initial loans described in this prospectus supplement. However, each of the
additional loans and subsequent loans must satisfy the eligibility criteria
described under "Description of the Certificates--Conveyance of Loans" and "--
Conveyance of Subsequent Loans and Pre-Funding Account." We will file current
reports on Form 8-K following the purchase of additional loans by the trust and
following the termination of the funding period. The 8-K filings will include
the same type of information regarding the additional loans and the subsequent
loans that is included in this prospectus supplement with respect to the
initial loans.
Other rating agencies could provide unsolicited ratings on the certificates
that could be lower than the requested ratings.
Although we have not requested a rating of the certificates from any rating
agencies other than S&P and Fitch, other rating agencies may rate the
certificates. These ratings could be higher or lower than the ratings S&P and
Fitch initially give to the certificates. There is a risk that a lower rating
of your certificate from another rating agency could reduce the market value or
liquidity of your certificate.
S-13
<PAGE>
STRUCTURE OF THE TRANSACTION
On or about the closing date, September 15, 1999, we will establish the trust
under a pooling and servicing agreement to be dated as of September 1, 1999,
between us, as seller and servicer, and the trustee.
The Class A-1, Class A-2, Class A-3, Class A-4, Class M-1, Class M-2, Class
B-1 and Class B-2 certificates will be issued by the trust, which will consist
primarily of home improvement loans, including all rights to receive payments
due on the loans after the Cut-off Date, all rights under FHA insurance with
respect to the FHA-insured loans, liens on the related real estate, amounts
held for the trust in the certificate account, and our Class B-2 limited
guaranty for the benefit of the Class B-2 certificates. The Cut-off Date for
the initial and additional loans is July 31, 1999. The Cut-off Date for any
subsequent loan delivered to the trust after the closing date will be the last
day of the month in which we transfer that loan to the trust. The trust will
also issue several other classes of more subordinated certificates, which are
not being offered here.
Payments and recoveries in respect of principal and interest on the loans
will be paid into a certificate account maintained at an eligible institution,
initially U.S. Bank Trust National Association, St. Paul, Minnesota, in the
name of the trust, no later than one business day after receipt. Payments
deposited in the certificate account and constituting the Amount Available will
be applied on the fifteenth day of the next month, or, if that day is not a
business day, the next succeeding business day, to make the distributions to
the certificateholders as of the immediately preceding record date, to pay
certain monthly fees to the servicer as compensation for its servicing of the
loans and to pay a guarantee fee to us for providing the Class B-2 limited
guaranty.
The servicer will be obligated to advance any scheduled payments on the loans
that were due but not received during the Due Period. The Due Period for the
payment date in October 1999 is the period from August 1 through September 30,
1999. The Due Period for each other payment date is the period from and
including the first day of the second month preceding the payment date, to and
including the last day of the month immediately preceding the payment date. The
servicer will be entitled to reimbursement of an advance from funds available
in the certificate account. The servicer will not be required to make any
advance to the extent that it does not expect to recoup the advance from
subsequent funds available in the certificate account. If the servicer fails to
make any advance required under the pooling and servicing agreement, the
trustee is obligated, subject to certain conditions, to make the advance.
Following the transfer of the loans from us to the trust, our obligations are
limited to:
(1)our obligation as servicer to service the loans,
(2) certain representations and warranties in the pooling and servicing
agreement as described under "Description of the Certificates--
Conveyance of Loans,"
(3)certain indemnities, and
S-14
<PAGE>
(4)the Class B-2 limited guaranty.
We are obligated under the pooling and servicing agreement to repurchase any
loan that is materially and adversely affected by a breach of a representation
and warranty made in the pooling and servicing agreement with respect to the
loan, if such breach has not been cured within 90 days of the day it was or
should have been discovered by the servicer or the trustee. We may, at our
option, substitute another loan for any loan that we are required to
repurchase. We also have certain obligations to repurchase loans and to
indemnify the trustee and certificateholders with respect to other matters.
USE OF PROCEEDS
We will use the net proceeds received from the sale of the certificates for
working capital and general corporate purposes, including building a portfolio
of home improvement loans, providing warehouse financing for the purchase of
loans and other costs of maintaining these loans until they are pooled and sold
to other investors.
THE LOANS
This prospectus supplement contains information regarding the initial loans,
which will represent approximately 49.8% of all of the loans, and which consist
of closed-end, fixed-rate home improvement loans originated through August
1999. The information for each loan is as of the Cut-off Date for the loan. The
initial loans have an aggregate principal balance of approximately
$298,642,838.05 as of the Cut-off Date. The trust may purchase additional loans
on the closing date and may purchase subsequent loans through December 10,
1999. See "Description of the Certificates--Conveyance of Subsequent Loans and
Pre-Funding Account" below.
Each loan is a home improvement loan originated by a home improvement
contractor approved by us, or a home improvement promissory note originated by
us directly. Each loan finances improvements to a one- to four-family
residential property, an owner-occupied condominium or town house or a
manufactured home which either qualifies as real estate under state law or is
located in a park approved by us. Each loan is secured by a lien on the related
real estate.
We will make certain representations and warranties in the pooling and
servicing agreement, including that:
(1)each loan is fully amortizing with a fixed contractual rate of interest
and provides for level monthly payments over the term of the loan,
computed on the simple interest method,
(2)each loan has its last scheduled payment due no later than July 2029,
(3)each FHA-insured loan was originated in accordance with applicable FHA
regulations and is insured, without set-off, surcharge or defense, by
FHA insurance, and
(4) each loan is secured by a lien, which is typically a subordinate lien
on the related real estate. The loans were originated or acquired by
us in the ordinary course of our business.
S-15
<PAGE>
A detailed listing of the loans is appended to the pooling and servicing
agreement. See "Description of the Certificates" in this prospectus supplement
and in the prospectus. Approximately 1.05% of the loans, by principal balance
as of the Cut-off Date, are insured by FHA as described in "Description of FHA
Insurance" in the prospectus. Each of the loans has a loan rate of at least
6.00% per annum and not more than 20.99% and the weighted average of the loan
rates of the loans as of the Cut-off Date is 12.54%. As of the Cut-off Date,
the loans had remaining maturities of at least eight months but not more than
360 months and original maturities of at least 13 months but not more than 360
months. The loans had a weighted average term to scheduled maturity, as of
origination, of 220 months, and a weighted average term to scheduled maturity,
as of the Cut-off Date, of 218 months. The average principal balance per loan
as of the Cut-off Date was $18,777.84 and the principal balances on the loans
as of the Cut-off Date ranged from $1,060.87 to $192,499.62. The loans arise
from loans relating to real property located in 48 states and the District of
Columbia. By principal balance as of the Cut-off Date, approximately 17.36% of
the loans financed improvements to real estate located in California, 9.41% in
New York, 7.09% in New Jersey, 6.46% in Pennsylvania and 5.23% in Michigan. No
other state represented 5% or more of the Cut-off Date pool principal balance.
Substantially none of the loans provide for recourse to the originating
contractor in the event of a default by the obligor.
S-16
<PAGE>
The tables below describe additional characteristics of the loans as of the
Cut-off Date.
Geographical Distribution of Improved Real Estate
<TABLE>
<CAPTION>
% of
% of Loan Pool by
Loan Pool by Aggregate Principal Outstanding
Number of Number of Balance Principal
Loans as of Loans as Outstanding as of Balance as of
Cut-off Date of Cut-off Date Cut-off Date Cut-off Date
------------ --------------- ------------------- -------------
<S> <C> <C> <C> <C>
Alabama................. 221 1.39% $ 4,461,607.56 1.49%
Arizona................. 592 3.72 12,445,859.70 4.17
Arkansas................ 414 2.60 5,078,566.73 1.70
California.............. 1,882 11.83 51,846,843.44 17.36
Colorado................ 421 2.65 5,573,754.37 1.87
Connecticut............. 431 2.71 7,649,594.15 2.56
Delaware................ 68 .43 1,239,933.78 .42
District of Columbia.... 19 .12 177,808.37 .06
Florida................. 586 3.68 11,669,763.32 3.91
Georgia................. 270 1.70 4,456,388.19 1.49
Idaho................... 23 .14 294,927.85 .10
Illinois................ 835 5.25 13,472,336.11 4.51
Indiana................. 357 2.24 4,775,969.15 1.60
Iowa.................... 80 .50 1,341,251.27 .45
Kansas.................. 125 .79 1,813,275.45 .61
Kentucky................ 82 .52 1,261,032.97 .42
Louisiana............... 112 .70 1,924,034.98 .64
Maine................... 128 .80 2,289,192.47 .77
Maryland................ 244 1.53 4,306,767.71 1.44
Massachusetts........... 269 1.69 5,158,279.19 1.73
Michigan................ 1,030 6.48 15,612,336.29 5.23
Minnesota............... 179 1.13 3,605,009.91 1.21
Mississippi............. 70 .44 1,415,513.04 .47
Missouri................ 564 3.55 7,381,018.79 2.47
Montana................. 19 .12 424,706.31 .14
Nebraska................ 52 .33 555,912.02 .19
Nevada.................. 258 1.62 6,504,615.46 2.18
New Hampshire........... 65 .41 1,209,109.69 .40
New Jersey.............. 1,042 6.55 21,184,758.88 7.09
New Mexico.............. 133 .84 2,080,901.05 .70
New York................ 1,282 8.06 28,094,726.19 9.41
North Carolina.......... 188 1.18 2,996,640.97 1.00
North Dakota............ 21 .13 411,831.44 .14
Ohio.................... 653 4.11 8,555,471.72 2.86
Oklahoma................ 161 1.01 2,406,394.17 .81
Oregon.................. 104 .65 1,675,890.58 .56
Pennsylvania............ 1,032 6.49 19,293,342.11 6.46
Rhode Island............ 73 .46 1,348,627.38 .45
South Carolina.......... 126 .79 1,956,746.43 .66
South Dakota............ 23 .14 577,146.16 .19
Tennessee............... 125 .79 2,046,541.48 .69
Texas................... 411 2.58 8,803,948.45 2.95
Utah.................... 74 .47 1,261,686.60 .42
Vermont................. 15 .09 239,742.66 .08
Virginia................ 478 3.01 8,114,450.30 2.72
Washington.............. 294 1.85 5,478,679.48 1.83
West Virginia........... 83 .52 1,124,586.66 .38
Wisconsin............... 139 .87 2,162,907.47 .72
Wyoming................. 51 .32 882,409.60 .30
------ ------ --------------- ------
Total............... 15,904 100.00% $298,642,838.05 100.00%
====== ====== =============== ======
</TABLE>
S-17
<PAGE>
Years of Origination of Loans
<TABLE>
<CAPTION>
% of
Number of Loan Pool By
Loans Aggregate Principal Outstanding Principal
as of Cut- Balance Outstanding Balance as of
Year of Origination off Date as of Cut-off Date Cut-off Date
- ------------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
1989...................... 1 $ 10,991.59 *%
1990...................... 5 18,725.75 .01
1997...................... 8 214,391.55 .07
1998...................... 1,923 31,710,454.80 10.62
1999...................... 13,967 266,688,274.36 89.30
------ --------------- ------
Total................. 15,904 $298,642,838.05 100.00%
====== =============== ======
</TABLE>
- --------
* Indicates an amount greater than zero but less than .005% of the aggregate
principal balance of the initial loans as of the Cut-off Date.
Distribution of Original Loan Amounts
<TABLE>
<CAPTION>
% of
Number of Loan Pool by
Loans Aggregate Principal Outstanding Principal
Original Loan as of Cut- Balance Outstanding Balance as of
Amount (in Dollars) off Date as of Cut-off Date Cut-off Date
- ------------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
Less than $ 10,000....... 3,906 $ 25,714,269.49 8.61%
Between$ 10,000--
$ 19,999.99............. 6,036 86,887,999.61 29.09
Between$ 20,000--
$ 29,999.99............. 3,401 81,594,989.80 27.32
Between$ 30,000--
$ 39,999.99............. 1,437 48,889,115.56 16.37
Between$ 40,000--
$ 49,999.99............. 750 32,449,080.07 10.87
Between$ 50,000--
$ 59,999.99............. 268 13,991,493.48 4.69
Between$ 60,000--
$ 69,999.99............. 42 2,682,062.29 .90
Between$ 70,000--
$ 79,999.99............. 24 1,788,095.56 .60
Between$ 80,000--
$ 89,999.99............. 15 1,264,182.85 .42
Between$ 90,000--
$ 99,999.99............. 4 373,434.63 .13
Between$100,000--
$109,999.99............. 5 526,249.89 .18
Between$110,000--
$119,999.99............. 1 115,117.68 .04
Between$120,000--
$129,999.99............. 2 248,123.19 .08
Between$130,000--
$139,999.99............. 2 273,014.94 .09
Between$140,000--
$149,999.99............. 2 296,669.78 .10
Between$150,000--
$159,999.99............. 3 457,593.75 .15
Between$160,000--
$169,999.99............. 0 .00 .00
Between$170,000--
$179,999.99............. 3 525,640.62 .18
Between$180,000--
$189,999.99............. 1 182,752.92 .06
Over $190,000........ 2 382,951.94 .13
------ --------------- ------
Total................ 15,904 $298,642,838.05 100.00%
====== =============== ======
</TABLE>
S-18
<PAGE>
Loan Rates
<TABLE>
<CAPTION>
% of
Number of Loan Pool by
Loans Aggregate Principal Outstanding Principal
Range of as of Cut- Balance Outstanding Balance as of
Loan Rates off Date as of Cut-off Date Cut-off Date
---------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
From 5.00001%--
6.00000%................ 1 $ 9,416.67 *%
From 6.00001%--
7.00000%................ 0 .00 .00
From 7.00001%--
8.00000%................ 17 486,982.32 .16
From 8.00001%--
9.00000%................ 337 9,840,217.87 3.29
From 9.00001%--
10.00000%................ 1,535 33,783,047.02 11.31
From 10.00001%--
11.00000%................ 2,179 47,712,684.30 15.98
From 11.00001%--
12.00000%................ 2,438 46,870,701.57 15.69
From 12.00001%--
13.00000%................ 2,320 40,755,758.16 13.65
From 13.00001%--
14.00000%................ 3,175 50,793,378.36 17.01
From 14.00001%--
15.00000%................ 2,530 38,492,545.12 12.89
From 15.00001%--
16.00000%................ 830 17,792,495.82 5.96
From 16.00001%--
17.00000%................ 416 9,362,185.58 3.13
Over 17.00000%............ 126 2,743,425.26 .92
------ --------------- ------
Total................. 15,904 $298,642,838.05 100.00%
====== =============== ======
</TABLE>
- --------
* Indicates an amount greater than zero but less than .005% of the aggregate
principal balance of the initial loans as of the Cut-off Date.
Remaining Months to Maturity
<TABLE>
<CAPTION>
% of
Number of Loan Pool by
Months Remaining to Loans Aggregate Principal Outstanding Principal
Scheduled Maturity as of Cut- Balance Outstanding Balance as of
As of Cut-off Date off Date as of Cut-off Date Cut-off Date
------------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
Less than 31.............. 81 $ 309,920.10 .10%
31-60..................... 1,171 8,282,640.13 2.77
61-90..................... 719 6,057,753.11 2.03
91-120.................... 3,746 47,375,930.47 15.86
121-150................... 168 2,348,694.43 .79
151-180................... 3,739 69,933,239.15 23.42
181-210................... 310 4,920,163.44 1.65
211-240................... 1,927 43,254,081.41 14.48
241-270................... 8 174,623.64 .06
271-300................... 4,033 115,751,690.65 38.76
301-330................... 0 .00 .00
331-360................... 2 234,101.52 .08
------ --------------- ------
Total................. 15,904 $298,642,838.05 100.00%
====== =============== ======
</TABLE>
S-19
<PAGE>
Lien Position of Loans
<TABLE>
<CAPTION>
% of % of
Number of Loan Pool by Loan Pool by
Loans Number of Aggregate Principal Outstanding Principal
as of Cut- Loans as of Balance Outstanding Balance as of
Lien Position off Date Cut-off Date as of Cut-off Date Cut-off Date
- ------------- ---------- ------------ ------------------- ---------------------
<S> <C> <C> <C> <C>
First........ 700 4.40% $ 8,918,022.16 2.99%
Second....... 12,370 77.78 233,692,911.58 78.25
Third........ 2,824 17.76 55,825,622.63 18.69
Fourth....... 10 .06 206,281.68 .07
------ ------ --------------- ------
Total.... 15,904 100.00% $298,642,838.05 100.00%
====== ====== =============== ======
</TABLE>
Delinquency, Loan Default and Loss Information
The following tables show the delinquency experience for the periods
indicated of the portfolios of conventional and FHA-insured secured home
improvement loans serviced by us, other than loans already in repossession. The
number of loans in the table excludes defaulted loans that have not yet been
liquidated. We consider a loan to be delinquent if any payment of $25 or more
is past-due by 30 days or more. The table does not include as delinquent the
home improvement loans of obligors that have entered bankruptcy, so long as
those obligors are current under their bankruptcy payment plan.
Delinquency Experience--Conventional Loans
<TABLE>
<CAPTION>
At
June 30, At December 31,
-------- ----------------------
1999 1998 1997 1996
-------- ------ ------ ------
<S> <C> <C> <C> <C>
Number of Loans Outstanding................. 107,281 98,888 85,958 74,021
Number of Loans Delinquent
30-59 Days................................ 1,426 1,493 946 656
60-89 Days................................ 499 411 258 241
90 Days or More........................... 773 622 338 279
------- ------ ------ ------
Total Loans Delinquent...................... 2,698 2,526 1,542 1,176
Delinquencies as a Percent of Loans
Outstanding................................ 2.51% 2.55% 1.79% 1.59%
</TABLE>
Delinquency Experience--FHA-Insured Loans
<TABLE>
<CAPTION>
At
June 30, At December 31,
-------- -----------------------------------------------
1999 1998 1997 1996 1995 1994
-------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Number of Loans
Outstanding............ 23,740 19,447 17,539 22,001 25,925 26,885
Number of Loans
Delinquent
30-59 Days............ 727 613 439 459 462 237
60-89 Days............ 301 152 95 123 121 95
90 Days or More....... 449 71 141 198 183 146
------ ------ ------ ------ ------ ------
Total Loans Delinquent.. 1,477 836 675 780 766 478
Delinquencies as a
Percent of Loans
Outstanding............ 6.22% 4.30% 3.85% 3.55% 2.95% 1.78%
</TABLE>
The following tables show the loan loss and repossession experience for the
periods indicated of the portfolios of conventional and FHA-insured secured
home improvement
S-20
<PAGE>
loans serviced by us, other than loans already in repossession. The principal
balance for the loans is calculated for the end of the indicated period and
includes defaulted loans not yet liquidated. We consider a loan to be in
default when we have commenced foreclosure or enforcement proceedings or the
loan is 180 days delinquent. Net losses do not include any estimated losses for
defaulted loans not yet liquidated and are calculated as a percentage of the
principal amount of loans being serviced for the end of the indicated period.
Loan Default and Loss Experience--Conventional Loans
(Dollars in thousands)
<TABLE>
<CAPTION>
At June
30, At December 31,
---------- ------------------------------------------------------
1999 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Principal Balance of
Loans Serviced......... $2,054,658 $1,816,425 $1,435,535 $1,147,111 $824,419 $418,055
Loan Defaults .93% 1.47% 1.60% 1.25% .53% .12%
Net Losses:
Dollars............... $ 14,883 $ 23,082 $ 16,034 $ 11,072 $ 3,424 $ 285
Percentage............ .72% 1.27% 1.12% .97% .42% .07%
</TABLE>
Loan Default and Loss Experience--FHA-Insured Loans
(Dollars in thousands)
<TABLE>
<CAPTION>
At June
30, At December 31,
-------- ------------------------------------------------
1999 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Principal Balance of
Loans Serviced......... $205,649 $159,626 $128,657 $161,438 $191,364 $199,286
Loan Defaults........... 8.74% 4.01% 3.17% 2.90% 1.81% 1.88%
Net Losses:
Dollars............... $ 6,516 $782 $ 500 $ 574 $ 291 $ 623
Percentage............ 3.17% .49% .39% .36% .15% .31%
</TABLE>
Our management is not aware of any trends or anomalies which have adversely
affected the delinquency, loan default and loss experience of our portfolio of
home improvement loans.
The data presented in the tables above are for illustrative purposes only and
there is no assurance that the delinquency, loan default and loss experience of
the loans will be similar to that described above. Because we began originating
and purchasing FHA-insured home improvement loans in April 1989, and secured
conventional home improvement loans in September 1992, it is likely that our
portfolio is not yet sufficiently seasoned to show the delinquencies and losses
that would be experienced if such data were collected over a longer period of
time. The delinquency, loan default and loss experience of home improvement
loans may be adversely affected by a downturn in regional or local economic
conditions. Regional and local economic conditions are often volatile, and no
predictions can be made regarding future economic conditions in any particular
area.
S-21
<PAGE>
YIELD AND PREPAYMENT CONSIDERATIONS
The yield on any certificate will depend on the price paid by the
certificateholder and will be sensitive to the amount and timing of principal
payments and liquidation losses on the loans. The loans generally may be
prepaid in full or in part at any time.
Higher than expected principal prepayments will increase the yield on
certificates purchased at a price less than the undivided ownership interest in
the aggregate principal balance of the loans represented by those certificates
and will decrease the yield on certificates purchased at a price greater than
the undivided ownership interest in the aggregate principal balance of the
loans represented by those certificates. We have no significant experience
relating to the rate of principal prepayments on home improvement loans.
Because the loans have scheduled due dates throughout the calendar month, and
because all principal prepayments are passed through to certificateholders on
the payment date following the Due Period in which such principal prepayment
occurred, prepayments on the loans would affect the amount of funds available
to make distributions on the certificates on any payment date only if a
substantial portion of the loans prepaid prior to their respective due dates in
a particular month, while very few loans prepaid after their due dates in that
month. In addition, liquidations of defaulted loans or the servicer's exercise
of its option to repurchase the entire remaining pool of loans will affect the
timing of principal distributions on the certificates. We have the option of
substituting new loans for those loans in the loan pool which are prepaid in
full prior to December 1, 1999. See "Description of the Certificates--
Conveyance of Loans." There is no assurance that we will exercise our option to
substitute loans, or that loans meeting the eligibility criteria will be
available. To the extent any loan substitutions are made, the impact on the
loan pool and the certificates of what would otherwise have been principal
prepayments will be averted.
The Class A-1 certificates will be prepaid in part on the first payment date
after the funding period to the extent of any pre-funded amount that remains in
the pre-funding account on such payment date after the purchase by the trust of
the subsequent loans. We believe that the principal amount of subsequent loans
to be purchased by the trust will require the application of substantially all
of the pre-funded amount. It is unlikely, however, that the aggregate principal
amount of subsequent loans purchased by the trust will be identical to the pre-
funded amount. Consequently, it is likely that the Class A-1 certificateholders
will receive some prepayment of principal.
Prepayments on mortgage loans and other consumer installment obligations are
commonly measured relative to a prepayment standard or model. Our prepayment
model assumes that the outstanding principal balance of a pool of loans prepays
each month at a specified constant annual rate. The certificates were priced
assuming that the pool of loans will prepay at 100% of our prepayment
assumption. There can be no assurance that the loans will prepay at such rate,
and it is unlikely that prepayments or liquidations of the loans will occur at
any constant rate.
The amount of interest to which the certificateholders of any class are
entitled on any payment date will be the product of the related pass-through
rate and the principal balance of
S-22
<PAGE>
such class immediately following the preceding payment date, based on a 360-day
year consisting of 12 months of 30 days each. Certificateholders will receive
payments in respect of principal on each payment date to the extent that funds
available in the certificate account are sufficient, in the priority described
under "Description of the Certificates--Distributions on the Certificates." As
required by state laws, interest paid by obligors on the loans is computed
according to the simple interest method. Principal and interest payable on the
certificates will be computed according to the actuarial method.
The final scheduled payment date on the loan with the latest maturity is in
July 2029.
The expected final maturity of each class of certificates, based on the
assumptions that there are no defaults, prepayments or delinquencies with
respect to payments due under the loans and that the repurchase option has not
been exercised, are as follows:
<TABLE>
<CAPTION>
Class Expected Final Maturity
----- -----------------------
<S> <C>
A-1.................................................. August 2008
A-2.................................................. July 2010
A-3.................................................. June 2015
A-4.................................................. February 2020
M-1.................................................. March 2023
M-2.................................................. October 2024
B-1.................................................. March 2015
B-2.................................................. January 2030
</TABLE>
Weighted Average Life of the Certificates
The following information is given solely to illustrate the effect of
prepayments of the loans on the weighted average life of each class of
certificates under the stated assumptions and is not a prediction of the
prepayment rate that might actually be experienced by the loans.
Weighted average life refers to the average amount of time from the date of
issuance of a security until each dollar of principal of the security is repaid
to the investor. The weighted average life of the certificates will be
influenced by the rate at which principal on the loans is paid. Principal
payments on loans may be in the form of scheduled amortization or prepayments.
For this purpose, the term prepayment includes repayments and liquidations due
to default or other dispositions of the loans.
The rate of principal payments on pools of home improvement loans is
influenced by a variety of economic, geographic, social and other factors,
including the level of interest rates and the rate at which homeowners sell
their homes or default on their loans. Other factors affecting prepayment of
loans include
. changes in obligors' housing needs,
. job transfers,
. unemployment, and
. obligors' net equity in their homes.
S-23
<PAGE>
In the case of home improvement loans secured by real estate, in general, if
prevailing interest rates fall significantly below the interest rates on these
loans, the loans are likely to be subject to higher prepayment rates than if
prevailing interest rates remained at or above the rates borne by such loans.
Conversely, if prevailing interest rates rise above the interest rates on such
home improvement loans, the rate of prepayment would be expected to decrease.
The percentages and weighted average lives in the following tables were
determined assuming that:
(1) scheduled interest and principal payments on the loans are received in
a timely manner and prepayments are made at the indicated percentages
of the prepayment assumption;
(2) the servicer exercises its option to repurchase the loans, as
described under "Description of the Certificates--Repurchase Option;"
(3) the aggregate principal balance of the initial loans as of the Cut-off
Date is $298,642,838.05 and these loans have the characteristics
described under "The Loans;"
(4) the initial loans will, as of the Cut-off Date, be grouped into 18
pools having the characteristics described below in the Assumed
Initial Loan Characteristics table and the additional and subsequent
loans will, as of the Cut-off Date, be grouped into 18 pools having
the characteristics described below in the Assumed Additional and
Subsequent Loan Characteristics table;
(5) each class of certificates has an original principal balance and pass-
through rate as shown on the cover page of this prospectus supplement;
(6) the additional and subsequent loans will have their first scheduled
payment date in October 1999;
(7) no interest shortfalls will arise in connection with prepayments in
full of the loans;
(8) no delinquencies or losses are experienced on the loans;
(9) distributions are made on the certificates on the 15th day of each
month, commencing in October 1999; and
(10) the certificates are issued on September 15, 1999.
No representation is made that the loans will not experience delinquencies or
losses.
S-24
<PAGE>
Assumed Initial Loan Characteristics
<TABLE>
<CAPTION>
Weighted Weighted
Weighted Average Average
Cut-off Date Average Remaining Term Original Term
Pool Principal Loan to Maturity to Maturity
Pool Balance Rate (months) (months)
- ---- -------------- -------- -------------- -------------
<S> <C> <C> <C> <C>
1.......................... $54,711,985.00 12.710% 103 106
2.......................... 63,327,560.77 12.586 175 179
3.......................... 4,535,477.07 14.392 188 192
4.......................... 37,185,467.11 12.413 236 240
5.......................... 103,304,103.38 12.327 297 300
6.......................... 7,075,014.06 12.794 108 108
7.......................... 8,283,666.85 12.671 179 179
8.......................... 241,960.40 14.559 191 191
9.......................... 4,015,093.53 12.356 240 240
10......................... 12,814,326.43 12.510 300 300
11......................... 188,957.52 12.994 90 96
12......................... 527,377.32 14.363 160 168
13......................... 255,257.62 13.478 200 203
14......................... 2,087,240.87 13.421 221 224
15......................... 41,986.00 9.750 300 300
16......................... 14,549.00 12.538 77 77
17......................... 26,486.00 14.241 180 180
18......................... 6,329.12 14.990 240 240
</TABLE>
Assumed Additional and Subsequent Loan Characteristics
<TABLE>
<CAPTION>
Weighted Weighted
Weighted Average Average
Cut-off Date Average Remaining Term Original Term
Pool Principal Loan to Maturity to Maturity
Pool Balance Rate (months) (months)
- ---- -------------- -------- -------------- -------------
<S> <C> <C> <C> <C>
1.......................... $45,271,116.01 12.710% 106 106
2.......................... 52,400,024.43 12.586 179 179
3.......................... 3,752,854.31 14.392 192 192
4.......................... 30,768,900.01 12.413 240 240
5.......................... 85,478,383.74 12.327 300 300
6.......................... 5,854,179.52 12.794 108 108
7.......................... 6,854,272.29 12.671 179 179
8.......................... 200,208.74 14.559 191 191
9.......................... 3,322,265.95 12.356 240 240
10......................... 10,603,140.40 12.510 300 300
11......................... 3,412,310.13 12.994 96 96
12......................... 9,523,701.25 14.363 168 168
13......................... 4,609,597.76 13.478 203 203
14......................... 37,692,668.46 13.421 224 224
15......................... 758,208.79 9.750 300 300
16......................... 262,734.71 12.538 77 77
17......................... 478,300.34 14.241 180 180
18......................... 114,295.11 14.990 240 240
</TABLE>
S-25
<PAGE>
The prepayment assumption used for the loans represents an assumed rate of
prepayment each month relative to the then outstanding principal balance of a
pool of home improvement loans for the life of such home improvement loans. The
100% prepayment assumption assumes a constant prepayment of 12% per annum of
the then outstanding principal balance of such loans in the first month of the
life of such loans and an additional 0.91% (precisely, 10/11%) per year in each
month thereafter until the twelfth month. Beginning in the twelfth month and in
each month thereafter during the life of such loans, the 100% prepayment
assumption assumes a constant prepayment rate of 22% per annum each month.
It is not likely that the loans will prepay at any constant percentage of the
prepayment assumption or that all of the loans will prepay at the same rate.
You are urged to make your investment decisions on a basis that includes your
own determination of anticipated prepayment rates under a variety of the
assumptions discussed.
Based on these assumptions, the following tables indicate the projected
weighted average lives of each class of certificates, and set forth the
percentages of the original principal balance of each class that would be
outstanding after each of the dates shown, at the indicated percentages of the
prepayment assumption.
The weighted average life of a class of certificates is determined by: (a)
multiplying the amount of cash distributions in reduction of the principal
balance of such certificate by the number of years from the date of issuance of
such certificate to the stated payment date, (b) adding the results, and (c)
dividing the sum by the initial principal balance of such certificate.
Percentage of the Original Principal Balance of the Class A-1
Certificates at the Respective Percentages of the
Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Date 75% 100% 125% 150% 175% 200%
- ---- --- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage........................... 100% 100% 100% 100% 100% 100%
September 15, 2000........................... 57 44 32 20 8 0
September 15, 2001........................... 13 0 0 0 0 0
September 15, 2002........................... 0 0 0 0 0 0
Weighted Average Life (years)................ 1.2 1.0 0.8 0.7 0.6 0.5
</TABLE>
S-26
<PAGE>
Percentage of the Original Principal Balance of the Class A-2 Certificates at
the Respective Percentages of the Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Date 75% 100% 125% 150% 175% 200%
- ---- --- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage........................... 100% 100% 100% 100% 100% 100%
September 15, 2000........................... 100 100 100 100 100 77
September 15, 2001........................... 100 52 0 0 0 0
September 15, 2002........................... 0 0 0 0 0 0
Weighted Average Life (years)................ 2.6 2.1 1.7 1.4 1.2 1.1
</TABLE>
Percentage of the Original Principal Balance of the Class A-3 Certificates at
the Respective Percentages of the Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Date 75% 100% 125% 150% 175% 200%
- ---- --- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage........................... 100% 100% 100% 100% 100% 100%
September 15, 2000........................... 100 100 100 100 100 100
September 15, 2001........................... 100 100 82 49 17 0
September 15, 2002........................... 92 46 5 0 0 0
September 15, 2003........................... 44 2 0 0 0 0
September 15, 2004........................... 9 0 0 0 0 0
September 15, 2005........................... 0 0 0 0 0 0
Weighted Average Life (years)................ 4.0 3.1 2.4 2.0 1.8 1.5
</TABLE>
Percentage of the Original Principal Balance of the Class A-4 Certificates at
the Respective Percentages of the Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Date 75% 100% 125% 150% 175% 200%
- ---- --- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage........................... 100% 100% 100% 100% 100% 100%
September 15, 2000........................... 100 100 100 100 100 100
September 15, 2001........................... 100 100 100 100 100 83
September 15, 2002........................... 100 100 100 55 11 0
September 15, 2003........................... 100 100 47 4 0 0
September 15, 2004........................... 100 53 5 0 0 0
September 15, 2005........................... 70 16 0 0 0 0
September 15, 2006........................... 35 0 0 0 0 0
September 15, 2007........................... 6 0 0 0 0 0
September 15, 2008........................... 0 0 0 0 0 0
Weighted Average Life (years)................ 6.7 5.2 4.0 3.2 2.7 2.3
</TABLE>
S-27
<PAGE>
Percentage of the Original Principal Balance of the Class M-1
Certificates at the Respective Percentages of the
Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Date 75% 100% 125% 150% 175% 200%
- ---- --- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage........................... 100% 100% 100% 100% 100% 100%
September 15, 2000........................... 100 100 100 100 100 100
September 15, 2001........................... 100 100 100 100 100 100
September 15, 2002........................... 100 100 100 100 100 52
September 15, 2003........................... 100 100 100 100 46 0
September 15, 2004........................... 100 100 100 47 0 0
September 15, 2005........................... 100 100 56 0 0 0
September 15, 2006........................... 100 77 0 0 0 0
September 15, 2007........................... 100 0 0 0 0 0
September 15, 2008........................... 71 0 0 0 0 0
September 15, 2009........................... 44 0 0 0 0 0
September 15, 2010........................... 0 0 0 0 0 0
Weighted Average Life (years)................ 9.6 7.5 6.1 4.9 4.0 3.2
</TABLE>
Percentage of the Original Principal Balance of the Class M-2 Certificates at
the Respective Percentages of the Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Date 75% 100% 125% 150% 175% 200%
- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage.......................... 100% 100% 100% 100% 100% 100%
September 15, 2000.......................... 100 100 100 100 100 100
September 15, 2001.......................... 100 100 100 100 100 100
September 15, 2002.......................... 100 100 100 100 100 100
September 15, 2003.......................... 100 100 100 100 100 0
September 15, 2004.......................... 100 100 100 100 0 0
September 15, 2005.......................... 100 100 100 0 0 0
September 15, 2006.......................... 100 100 0 0 0 0
September 15, 2007.......................... 100 0 0 0 0 0
September 15, 2008.......................... 100 0 0 0 0 0
September 15, 2009.......................... 100 0 0 0 0 0
September 15, 2010.......................... 0 0 0 0 0 0
Weighted Average Life (years)............... 10.2 8.0 6.6 5.5 4.7 4.0
</TABLE>
S-28
<PAGE>
Percentage of the Original Principal Balance of the Class B-1
Certificates at the Respective Percentages of the
Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Date 75% 100% 125% 150% 175% 200%
- ---- --- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage........................... 100% 100% 100% 100% 100% 100%
September 15, 2000........................... 100 100 100 100 100 100
September 15, 2001........................... 100 100 100 100 100 100
September 15, 2002........................... 100 100 100 100 100 100
September 15, 2003........................... 67 21 4 0 0 0
September 15, 2004........................... 9 0 0 0 0 0
September 15, 2005........................... 0 0 0 0 0 0
Weighted Average Life (years)................ 4.3 3.7 3.5 3.4 3.4 3.3
</TABLE>
Percentage of the Original Principal Balance of the Class B-2
Certificates at the Respective Percentages of the
Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Date 75% 100% 125% 150% 175% 200%
- ---- --- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage........................... 100% 100% 100% 100% 100% 100%
September 15, 2000........................... 100 100 100 100 100 100
September 15, 2001........................... 100 100 100 100 100 100
September 15, 2002........................... 100 100 100 100 100 100
September 15, 2003........................... 100 100 100 94 86 0
September 15, 2004........................... 100 82 71 60 0 0
September 15, 2005........................... 82 60 48 0 0 0
September 15, 2006........................... 64 44 0 0 0 0
September 15, 2007........................... 50 0 0 0 0 0
September 15, 2008........................... 38 0 0 0 0 0
September 15, 2009........................... 30 0 0 0 0 0
September 15, 2010........................... 0 0 0 0 0 0
Weighted Average Life (years)................ 8.1 6.6 5.7 5.0 4.5 4.0
</TABLE>
S-29
<PAGE>
GREEN TREE FINANCIAL CORPORATION
General
The following information supplements, and if inconsistent supersedes, the
information in the prospectus under the heading "Green Tree Financial
Corporation."
Ratio of Earnings to Fixed Charges for Green Tree
The table below shows Green Tree's ratios of earnings to fixed charges for
the past five years and the six months ended June 30, 1999. For the purposes of
compiling these ratios, earnings consist of earnings before income taxes plus
fixed charges. Fixed charges consist of interest expense and the interest
portion of rent expense.
<TABLE>
<CAPTION>
Six Months
Ended
Year Ended December 31, June 30,
------------------------ ----------
1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings (Losses) to Fixed
Charges.................................. 7.98 7.90 5.44 3.94 .62* 4.32
</TABLE>
- --------
* For 1998, adjusted earnings were $83.4 million less than fixed charges.
Adjusted earnings for 1998 included an impairment charge of $549.4 million
and nonrecurring charges of $108.0 million related to the merger of Green
Tree with Conseco, Inc.
Recent Developments
We have been served with various lawsuits in the United States District Court
for the District of Minnesota. These lawsuits were filed by a few of our
stockholders as purported class actions on behalf of persons or entities who
purchased common stock or traded in options of Green Tree during the alleged
class periods. These alleged class periods run from February 1995 to January
1998. One of these lawsuits did not include class action claims. In addition to
Green Tree, some of our current and former officers and directors are named as
defendants in one or more of the lawsuits. The lawsuits have been consolidated
into two complaints, one relating to an alleged class of purchasers of our
common stock and the other relating to an alleged class of traders in options
for our common stock. In addition to these two complaints, a separate non-class
action lawsuit containing similar allegations was also filed. Plaintiffs in the
lawsuits assert claims under Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934. In each case, plaintiffs allege that we and the other
defendants violated federal securities laws by, among other things, making
false and misleading statements about our current state and our future
prospects, particularly about prepayment assumptions and performance of some of
our loan portfolios, which allegedly rendered our financial statements false
and misleading. We believe that the lawsuits are without merit and intend to
defend the lawsuits vigorously. However, the ultimate outcome of these lawsuits
cannot be predicted with certainty. We filed motions to dismiss these lawsuits.
On August 24, 1999 our motions to dismiss were granted with prejudice. However,
the plaintiffs have the right to appeal these dismissals.
S-30
<PAGE>
DESCRIPTION OF THE CERTIFICATES
The following information supplements, and if inconsistent, supersedes the
information in the prospectus under "Description of the Certificates."
The certificates will be issued under the pooling and servicing agreement
between us, as seller and servicer, and the trustee. A copy of the execution
form of the pooling and servicing agreement will be filed in a current report
on Form 8-K with the SEC after the initial issuance of the certificates. The
following summary describes the material provisions of the pooling and
servicing agreement, reference to which is made for a complete recital of its
terms.
General
The certificates will be issued in fully registered, certificated form only
in denominations of $1,000 or any integral multiple of $1,000. The certificates
initially will be represented by certificates registered in the name of Cede &
Co. as the nominee of DTC, and will only be available in the form of book-
entries on the records of DTC and participating members. See "--Registration of
the Certificates" below. The trust consists primarily of the loans and the
rights, benefits, obligations and proceeds, including liens on the related real
estate, rights under applicable FHA insurance for FHA-insured home improvement
loans, amounts held in the certificate account and the Class B-2 limited
guaranty for the benefit of the Class B-2 certificateholders.
Distributions on the certificates will be made by the paying agent on each
payment date to persons in whose names the certificates are registered as of
the business day immediately preceding such payment date. See "--Registration
of the Certificates" below. The first payment date for the certificates will be
in October 1999. Payments will be made by check mailed to the certificateholder
at the address appearing on the certificate register, except that a
certificateholder who holds an aggregate percentage interest of at least 5% of
a class of certificates may request payment by wire transfer. Final payments
will be made only upon tender of the certificates to the trustee for
cancellation.
Conveyance of Loans
On the closing date, we will establish the trust and transfer, assign, set
over and otherwise convey to the trust all our right, title and interest in the
loans, including all principal and interest received on or with respect to the
loans after the Cut-off Date. The pooling and servicing agreement permits the
trust to purchase subsequent loans through December 10, 1999. See "Conveyance
of Subsequent Loans and Pre-Funding Account." On behalf of the trust, as the
issuer of the certificates, the trustee, concurrently with such conveyance,
will execute and deliver the certificates to or upon our order. The loans are
described on a list delivered to the trustee and certified by a duly authorized
officer of the company. The list includes the amount of monthly payments due on
each loan as of the date of issuance of the certificates, the loan rate on each
loan and the maturity date of each loan. The list will be attached as an
exhibit to the pooling and servicing agreement and will be
S-31
<PAGE>
available for inspection by any certificateholder at our principal office.
Before the conveyance of the loans to the trust, our internal audit department
will have completed a review of all the loan files, confirming the accuracy of
each item on the list of loans delivered to the trustee. Any loan discovered
not to agree with such list in a manner that is materially adverse to the
interests of the certificateholders will be repurchased by us, or, if the
discrepancy relates to the unpaid principal balance of a loan, we may deposit
cash in the certificate account in an amount sufficient to offset the
discrepancy.
The trustee will maintain possession of the loans and any other documents
contained in the loan files. Uniform Commercial Code financing statements will
be filed in Minnesota, reflecting the conveyance and assignment of the loans to
the trustee, and our accounting records and computer systems will also reflect
the conveyance and assignment.
Our counsel, Briggs and Morgan, Professional Association, will render an
opinion to the trustee that the transfer of the loans from us to the trust
would, in the event we became a debtor under the United States Bankruptcy Code,
be treated as a true sale and not as a pledge to secure borrowings. If,
however, the transfer of the loans from us to the trust were treated as a
pledge to secure borrowings by us, the distribution of proceeds of the loans to
the trust might be subject to the automatic stay provisions of the United
States Bankruptcy Code, which would delay the distribution of such proceeds for
an uncertain period of time. In addition, a bankruptcy trustee would have the
power to sell the loans if the proceeds of such sale could satisfy the amount
of the debt deemed owed by us, or the bankruptcy trustee could substitute other
collateral in lieu of the loans to secure such debt, or such debt could be
subject to adjustment by the bankruptcy trustee if we were to file for
reorganization under Chapter 11 of the United States Bankruptcy Code.
We will make certain representations and warranties in the pooling and
servicing agreement with respect to each loan, including that:
(1) no provision of a loan has been waived, altered or modified in any
respect, except by instruments or documents included in the loan file
and reflected on the list of loans delivered to the trustee;
(2) each loan is a legal, valid and binding obligation of the obligor and
is enforceable in accordance with its terms, except as may be limited
by laws affecting creditors' rights generally;
(3) no loan is subject to any right of rescission, set-off, counterclaim
or defense;
(4) each loan if an FHA-insured loan was originated in accordance with
applicable FHA regulations and is insured, without set-off, surcharge
or defense, by FHA insurance;
(5) each loan was originated by a home improvement lender in the ordinary
course of such lender's business or was originated by us directly;
(6) no loan was originated in or is subject to the laws of any
jurisdiction whose laws would make the transfer of the loan or an
interest therein unlawful;
S-32
<PAGE>
(7) each loan complies with all requirements of law;
(8) no loan has been satisfied, subordinated to a lower lien ranking than
its original position or rescinded;
(9) each loan creates a valid and perfected lien on the related improved
real estate;
(10) all parties to each loan had full legal capacity to execute such
loan;
(11) no loan has been sold, conveyed and assigned or pledged to any other
person and we have good and marketable title to each loan free and
clear of any encumbrance, equity, loan, pledge, charge, claim or
security interest, and we are the sole owner and have full right to
transfer such loan to the trustee;
(12) as of the Cut-off Date there was no default, breach, violation or
event permitting acceleration under any loan, except for payment
delinquencies permitted by clause (1) above, no event that with
notice and the expiration of any grace or cure period would
constitute a default, breach, violation or event permitting
acceleration under such loan, and we have not waived any of the
foregoing;
(13) each loan is a fully-amortizing loan with a fixed rate of interest
and provides for level Monthly Payments over the term of such loan;
(14) each loan contains customary and enforceable provisions such as to
render the rights and remedies of the holder thereof adequate for
realization against the collateral;
(15) the description of each loan set forth in the list delivered to the
trustee is true and correct;
(16) there is only one original of each loan;
(17) each loan was originated or purchased in accordance with our then-
current underwriting guidelines;
(18) each loan is a qualified mortgage under Section 860G(a)(3) of the
Internal Revenue Code;
(19) no loan had an original term to maturity at origination of more than
360 months; and
(20) no loan had a combined loan-to-value ratio in excess of 100%.
We will also make certain representations and warranties with respect to the
loans in the aggregate, including that:
(1) each loan has a contractual rate of interest of at least 6.00%;
(2) no more than 1% of the loans, by principal balance as of the Cut-off
Date, were secured by properties located in an area with the same zip
code;
(3) no more than 5% of the loans, by principal balance as of the Cut-off
Date, were originated by any one contractor; and
S-33
<PAGE>
(4) no adverse selection procedures were employed in selecting the loans
from our portfolio.
We will make certain additional representations and warranties with respect to
the subsequent loans. See "--Conveyance of Subsequent Loans and Pre-Funding
Account" below.
Under the terms of the pooling and servicing agreement, and subject to our
option to effect a substitution as described in the next paragraph, we have
agreed to repurchase, at the Repurchase Price, any loan that is materially and
adversely affected by a breach of a representation and warranty with respect to
the loan made in the pooling and servicing agreement if such breach has not
been cured within 90 days of the day it was or should have been discovered by
the servicer or the trustee. The Repurchase Price, with respect to any loan to
be so repurchased or with respect to a liquidated loan, means the outstanding
principal balance of such loan, without giving effect to any advances made by
the servicer or the trustee, plus interest on such loan at the pass-through
rate from the end of the Due Period with respect to which the obligor last made
a scheduled payment through the date of such repurchase or liquidation.
Instead of repurchasing a loan as specified in the preceding paragraph,
during the two-year period following the closing date, we may, at our option,
substitute an eligible substitute loan for the loan that we are otherwise
obligated to repurchase. An eligible substitute loan is a loan that satisfies,
as of the date of its substitution, the representations and warranties
specified in article III of the pooling and servicing agreement, has a
Scheduled Principal Balance that is not greater than the Scheduled Principal
Balance of the replaced loan, has a loan rate that is at least equal to the
loan rate of the replaced loan and has a remaining term to scheduled maturity
that is not greater than the remaining term to scheduled maturity of the
replaced loan. We will be required to deposit in the certificate account cash
in the amount, if any, by which the Scheduled Principal Balance of the replaced
loan exceeds the Scheduled Principal Balance of the loan being substituted. The
deposit will be deemed to be a partial principal prepayment.
The repurchase or subsitution of loans constitute the sole remedies available
to the trust and the certificateholders for a breach of a representation or
warranty, but not with respect to any other breach by us of our obligations.
We may, at our option, substitute new loans for loans which are prepaid in
full prior to December 1, 1999. Any such substitute loans shall constitute
eligible substitute loans and must be substituted prior to the Determination
Date immediately following the calendar month in which the prepayment was
received by the servicer. In the event the aggregate amount of principal
received in respect of loans prepaid in full in a given calendar month exceeds
the aggregate of the scheduled principal balances of eligible substitute loans
substituted therefor, the excess will be distributed to certificateholders on
the related payment date as a prepayment of principal. Notwithstanding the
foregoing, there is no assurance that we will opt to make any substitutions or
that eligible substitute loans will be available for substitution.
S-34
<PAGE>
Conveyance of Subsequent Loans and Pre-Funding Account
If the aggregate principal balance of the loans transferred to the trust on
the closing date is less than the aggregate original principal balance of the
certificates, a pre-funding account will be established by the trustee and
funded by us on the closing date to provide the trust with sufficient funds to
purchase subsequent loans. The amount deposited in the pre-funding account will
initially equal the difference between $600,000,000 and the aggregate principal
balance as of the Cut-off Date of the initial loans and additional loans. In no
event will the pre-funded amount, less the aggregate principal balance of
subsequent loans specifically identified for purchase by the trust as of the
closing date, represent more than 25% of the original certificate principal
balance. The pre-funding account will be used to purchase subsequent loans
during the period from the closing date until the earliest of:
(1) the date on which the amount on deposit in the pre-funding account is
less than $10,000;
(2) December 10, 1999; or
(3) the date on which an event of termination occurs under the pooling and
servicing agreement.
The pre-funded amount will be reduced during the funding period by the amount
used to purchase subsequent loans in accordance with the pooling and servicing
agreement.
Under the pooling and servicing agreement, the trust will be obligated to
purchase subsequent loans from us during the funding period, subject to their
availability. In connection with the purchase of subsequent loans on such dates
of transfer, the trust will be required to pay us from amounts on deposit in
the pre-funding account a cash purchase price of 100% of the principal balance.
The amount paid from the pre-funding account on each subsequent transfer date
will not include accrued interest on the related subsequent loans. Following
each subsequent transfer date, the aggregate principal balance of the
subsequent loans will increase by an amount equal to the aggregate principal
balance of the loans so purchased and the amount in the pre-funding account
will decrease accordingly.
Any pre-funded amount remaining after the end of the funding period will be
applied on the next payment date to prepay principal on the Class A-1
certificates. Although no assurance can be given, we anticipate that the
principal amount of the related subsequent loans purchased by the trust will
require the application of substantially all of the related pre-funded amount
and that there should be no material amount of principal prepaid to the Class
A-1 certificateholders from the pre-funding account. However, it is unlikely
that we will be able to deliver subsequent loans with an aggregate principal
balance identical to the remaining pre-funded amount.
Any conveyance of subsequent loans on a subsequent transfer date is subject
to certain conditions including:
(1) each subsequent loan must satisfy the representations and warranties
specified in the related subsequent transfer instrument and the
pooling and servicing agreement;
S-35
<PAGE>
(2) we may not select subsequent loans in a manner that we believe is
adverse to the interests of the certificateholders;
(3) as of the respective subsequent Cut-off Date the subsequent loans must
satisfy the following criteria:
(a) no subsequent loan may be more than 31 days contractually
delinquent as of the related subsequent Cut-off Date;
(b) the original stated term to maturity of each subsequent loan may
not exceed 360 months;
(c) no subsequent loan may have an interest rate less than 6.00%;
(d) each subsequent loan must have been underwritten in accordance
with our standard underwriting criteria;
(e) as a result of the purchase of the subsequent loans, the Class A
certificates will not receive from S&P or Fitch a lower credit
rating than the rating assigned at the initial issuance of such
certificates; and
(f) an independent accountant will provide a letter stating whether or
not the characteristics of the subsequent loans conform to the
characteristics described in this prospectus supplement.
Payments on Loans
The servicer, on behalf of the trust, will establish and maintain a
certificate account in an eligible account at a depository institution with
trust powers organized under the laws of the United States or any state, the
deposits of which are insured to the full extent permitted by law by the FDIC,
whose short-term deposits have been rated A-1+ by S&P and F1+ by Fitch if the
deposits are to be held in the certificate account for less than 30 days or
whose unsecured long-term debt has been rated in one of the two highest rating
categories by S&P
and Fitch if the deposits are to be held in the certificate account for 30 days
or more, and which is subject to supervision and examination by federal or
state authorities. Eligible account means any account which is:
(1) an account maintained with an eligible institution;
(2) an account or accounts the deposits in which are fully insured by
either the Bank Insurance Fund or the Savings Association Insurance
Fund of the FDIC;
(3) a segregated trust account maintained with the corporate trust
department of a federal or state chartered depository institution
subject to regulations regarding fiduciary funds on deposit similar to
federal regulations or trust company with trust powers and acting in
its fiduciary capacity for the benefit of the trustee, which
depository institution or trust company has capital and surplus of not
less than $50,000,000; or
(4) an account that will not cause S&P or Fitch to downgrade or withdraw
its then-current rating assigned to the certificates, as evidenced in
writing by S&P and Fitch.
S-36
<PAGE>
The servicer may authorize the trustee to invest the funds in the certificate
account in Eligible Investments that will mature not later than the business
day preceding the applicable Monthly Payment date. Eligible Investments
include:
. obligations of the United States backed by the full faith and
credit of the United States, federal funds, certificates of
deposit, time deposits and bankers acceptances sold by eligible
commercial banks;
. any other demand or time deposit or certificate of deposit fully
insured by the FDIC;
. investments in certain money-market funds;
. certain repurchase agreements of United States government
securities with eligible commercial banks;
. securities bearing interest or sold at a discount issued by a
corporation which has a credit rating of at least "AA" from S&P
and Fitch not in excess of 10% of amounts in the certificate
account at the time of such investment; and
. commercial paper assigned a rating of at least A-1+ by S&P and at
least F1+ by Fitch. Any losses on such investments will be
deducted from other investment earnings or from other funds in the
certificate account.
All payments from obligors on the loans, including principal prepayments and
advance payments from obligors not constituting principal prepayments, will be
paid into the certificate account no later than one business day following
receipt thereof, except amounts received as extension fees or assumption fees
not allocated to regular installments due on loans, which are retained by the
servicer as part of its servicing fees and are not paid into the certificate
account and except for certain proceeds from liquidated loans which are used to
reimburse the servicer for customary out-of-pocket liquidation expenses. See
"Description of the Certificates--Servicing Compensation and Payment of
Expenses." In addition, any advances by the servicer or the trustee as
described under "Description of the Certificates--
Advances," and amounts paid by us for loans repurchased, or upon substitution
for a loan otherwise required to be repurchased, as a result of a breach of
representations or warranties, as described under "Description of the
Certificates--Conveyance of Loans," will be paid into the certificate account.
On the third business day preceding each payment date, the servicer will
determine the Amount Available and the amount of funds necessary to make all
payments to be made on the next payment date from the certificate account. Not
later than one business day after this Determination Date, we will deposit in
the certificate account the Repurchase Price of any loans required to be
repurchased on such payment date, or any amounts required to be deposited upon
substitution for any loan otherwise required to be repurchased on that payment
date, as a result of a breach of representations and warranties.
Distribution of Amount Available
On each payment date the trustee will withdraw the Amount Available from the
certificate account and make the following payments, in the following order of
priority:
S-37
<PAGE>
(1) if neither we nor any of our wholly owned subsidiaries is the
servicer, to pay the monthly servicing fee to the servicer;
(2) to pay interest and principal on the certificates, in the manner and
the order of priority described below;
(3) if we or any of our wholly owned subsidiaries is the servicer, to pay
the monthly servicing fee to the servicer;
(4) to reimburse the servicer or the trustee, as applicable, for any
unreimbursed advances with respect to the loans made in respect of
current or prior payment dates;
(5) to reimburse the holder of the Class C certificate for expenses
incurred by and reimbursable to it with respect to taxes or charges
imposed upon the trust as a REMIC or otherwise;
(6) to reimburse us for any prior unreimbursed Class B-2 guaranty
payments;
(7) to pay any remaining amounts to the holder of the Class C certificate.
The scheduled principal balance of a loan with respect to any payment date is
its principal balance as of the scheduled payment date in the calendar month
preceding that payment date as specified in its amortization schedule, after
giving effect to any previous partial principal prepayments and to the
scheduled payment due on such due date, but
without giving effect to any delinquency in payment or adjustments due to
bankruptcy or similar proceedings. The Pool Scheduled Principal Balance as of
any payment date is the aggregate of the scheduled principal balances of loans
comprising the loan pool that were outstanding during the preceding Due Period.
A liquidated loan is a defaulted loan as to which all amounts that the servicer
expects to recover on account of such loan have been received.
Distributions on Certificates
On each payment date, distributions on the certificates in respect of the
Amount Available will be made to the holders of:
. the Class A certificates,
. the Class M certificates and
. the Class B certificates, in the manner described below.
Distributions of interest and principal on the certificates will be made
primarily from amounts available in respect of the loans.
Interest on the Class A, Class M-1, Class M-2 and Class B-1 Certificates.
Interest will be distributable:
. first to each class of Class A certificates concurrently,
. then to the Class M-1 certificates,
. then to the Class M-2 certificates, and
. then to the Class B-1 certificates.
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Interest will accrue on the outstanding Class A principal balance, Class M-1
adjusted principal balance, Class M-2 adjusted principal balance and Class B-1
adjusted principal balance, at the related pass-through rate from September 15,
1999, or from the most recent payment date on which interest has been paid, to
but excluding the following payment date. Interest on each class of
certificates will be computed on the basis of a 360-day year of twelve 30-day
months. The principal balance of a class of certificates as of any payment date
is the original principal balance of that class less all principal amounts
previously distributed to the class. The Class M-1 adjusted principal balance
as of any payment date is the Class M-1 principal balance less any Class M-1
liquidation loss principal amounts allocated to that class, described below
under "Losses on Liquidated Loans." The Class M-2 adjusted principal balance as
of any payment date is the Class M-2 principal balance less any Class M-2
liquidation loss principal amounts allocated to that class, described below
under "Losses on Liquidated Loans." The Class B-1 adjusted principal balance as
of any payment date is the Class B-1 principal balance less any Class B-1
liquidation loss principal amounts allocated to that class, described below
under "Losses on Liquidated Loans".
The pass-through rates for the Class A, Class M and Class B certificates are
shown on the table on page S-4 of this prospectus supplement. The pass-through
rate for the Class M and Class B certificates will be the lesser of the rate
shown or the weighted average rate of the loans in the pool.
In the event that, on a particular payment date, the Amount Available is not
sufficient to make a full distribution of interest to the holders of a class of
Class A certificates, Class M-1 certificates, Class M-2 certificates or Class
B-1 certificates, after payment of interest on each class of certificates that
is senior to that class of certificates, the Class A certificates being treated
as a single class for this purpose, the amount of interest to be distributed in
respect of that class will be allocated among the outstanding certificates of
that class pro rata in accordance with their respective entitlements to
interest, and the amount of the shortfall will be carried forward and added to
the amount holders of that class will be entitled to receive on the next
payment date. Any such amount so carried forward will bear interest at the
applicable pass-through rate, to the extent legally permissible.
Principal on the Class A, Class M-1, Class M-2 and Class B-1 Certificates.
The Class A, Class M-1, Class M-2 and Class B-1 certificates will receive
distributions of principal in the order of priority described below, after
payment of all interest then accrued on the Class A principal balance, Class M-
1 adjusted principal balance, Class M-2 adjusted principal balance and Class B-
1 adjusted principal balance.
Holders of the Class A-1, Class A-2, Class A-3, Class A-4, Class M-1, Class
M-2 and Class B-1 certificates will be entitled to receive, as payments of
principal, an amount equal to the Senior Percentage or the Class B percentage,
as applicable, of a formula principal distribution amount.
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<PAGE>
Formula Principal Distribution Amount. The formula principal distribution
amount is generally equal to the sum of:
(1) all scheduled payments of principal due on each outstanding loan
during the related Due Period,
(2) the Scheduled Principal Balance of each loan which, during the related
Due Period, was purchased by us pursuant to the pooling and servicing
agreement on account of certain breaches of our representations and
warranties,
(3) all partial principal prepayments applied and all principal
prepayments in full received during the related Due Period in respect
of loans,
(4) the Scheduled Principal Balance of each loan that became a liquidated
loan during the related Due Period, and
(5) any amount described in clauses (1) through (4) above that was not
previously distributed because of an insufficient amount of funds
available in the certificate account if the payment date occurs on or
after the payment date on which the Class B-2 principal balance has
been reduced to zero, or such amount was not covered by a Class B-2
guaranty payment and corresponding reduction in the Class B-2
principal balance.
When the principal balance of a class of certificates is reduced to zero, no
further distributions of principal will be made to the holders of that class.
Senior Percentage. The Senior Percentage for any payment date prior to the
Class B cross-over date (as described below), and for any payment date on or
after the Class B cross-over date on which any Class B principal distribution
test (as described below) has not been satisfied, will equal 100%. On each
payment date on or after the Class B cross-over date, if each Class B principal
distribution test has been satisfied on such payment date, the Senior
Percentage will equal a fraction, expressed as a percentage, the numerator of
which is the sum of the Class A principal balance and the Class M principal
balance for that payment date and the denominator of which is the Pool
Scheduled Principal Balance of the loans for the immediately preceding payment
date.
The Senior Percentage of the formula principal distribution amount will be
distributed, to the extent of the Amount Available, after payment of all
interest then accrued on the Class A principal balance, Class M-1 adjusted
principal balance, Class M-2 adjusted principal balance and Class B-1 adjusted
principal balance, as follows:
. first, to the Class A-1 certificateholders until the Class A-1
principal balance has been reduced to zero, then
. to the Class A-2 certificateholders until the Class A-2 principal
balance has been reduced to zero, then
. to the Class A-3 certificateholders until the Class A-3 principal
balance has been reduced to zero, then
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<PAGE>
. to the Class A-4 certificateholders until the Class A-4 principal
balance has been reduced to zero, then
. to the Class M-1 certificateholders until the Class M-1 principal
balance has been reduced to zero and then
. to the Class M-2 certificateholders until the Class M-2 principal
balance has been reduced to zero.
Payments of principal on the Class B-l certificates will not commence until
the Class B cross-over date, and will be made on that payment date and each
subsequent payment date only if each Class B principal distribution test is
satisfied on such payment date (unless the Class A principal balance and the
Class M principal balance have been reduced to zero).
Class B Cross-over Date. The Class B cross-over date will be the earlier of:
(1) the payment date on which the Class M-2 principal balance is reduced
to zero and
(2) the payment date in October 2002.
Class B Principal Distribution Tests. On each payment date on or after the
Class B cross-over date and on which the Class M-2 principal balance has not
been reduced to zero, holders of Class B certificates will be entitled to
distributions of principal only if each of the following tests is satisfied on
such payment date:
(1) the average of the sixty-day delinquency ratio (as defined in the
pooling and servicing agreement) as of such payment date and the prior
two payment dates must not exceed 2.5%;
(2) the average of the thirty-day delinquency ratio (as defined in the
pooling and servicing agreement) as of such payment date and the prior
two payment dates must not exceed 5.0%;
(3) the cumulative realized loss ratio (as defined in the pooling and
servicing agreement) as of such payment date must not exceed 10.0%;
(4) the current realized loss ratio (as defined in the pooling and
servicing agreement) as of such payment date must not exceed 2.5%; and
(5) the Class B principal balance divided by the Pool Scheduled Principal
Balance as of the immediately preceding payment date must be equal to
or greater than 19.0%.
On each payment date on which the Class B certificates are eligible to
receive distributions of principal, the Class B percentage of the formula
principal distribution
amount will be paid to the Class B-1 certificateholders to the extent of the
Amount Available, after payment of all interest then accrued on the Class A,
Class M and Class B-1 certificates and all principal then due on the Class A
certificates and Class M certificates, until the Class B-l principal balance
has been reduced to zero.
S-41
<PAGE>
The Class B percentage for any payment date will be equal to 100% minus the
Senior Percentage. The Class B percentage for each payment date after the Class
A principal balance and the Class M principal balance have been reduced to zero
will be equal to 100%.
Notwithstanding the foregoing, on any payment date as to which there is a
Class A liquidation loss principal amount, the remaining Amount Available,
after payment of all interest then accrued on the Class A principal balance,
Class M-1 adjusted principal balance, Class M-2 adjusted principal balance and
Class B-1 adjusted principal balance, will be distributed pro rata to each
class of Class A certificates based on the principal balance of each class. In
no event will such amount exceed the principal balance of any such class. The
Class A liquidation loss principal amount is the amount, if any, by which the
Pool Scheduled Principal Balance plus the pre-funded amount is less than the
Class A principal balance.
Liquidation Loss Interest
Interest on liquidation loss principal amounts will be distributable first to
the Class M-1 certificates, then to the Class M-2 certificates and then to the
Class B-1 certificates. Interest on the outstanding Class M-1 liquidation loss
principal amount, Class M-2 liquidation loss principal amount and Class B-1
liquidation loss principal amount, as applicable, will accrue from the
settlement date, or from the most recent payment date on which interest has
been paid, to but excluding the following payment date.
Class B-2 Interest.
Interest will accrue on the outstanding Class B-2 principal balance from
September 15, 1999, or from the most recent payment date on which interest has
been paid, to but excluding the following payment date, and will be computed on
the basis of a 360-day year of twelve 30-day months.
If there is any remaining Amount Available on a payment date after payment of
all interest and principal then payable on the Class A, Class M-1, Class M-2
and Class B-1 certificates, interest will be paid to the Class B-2
certificateholders on that payment date at the Class B-2 pass-through rate on
the then outstanding Class B-2 principal balance. The Class B-2 principal
balance is the original Class B-2 principal balance less all amounts previously
distributed to the Class B-2 certificateholders in respect of principal,
including any Class B-2 guaranty payments.
In the event that, on a particular payment date, the remaining Amount
Available plus any amounts actually paid under the Class B-2 limited guaranty
are not sufficient to make a full distribution of interest to the Class B-2
certificateholders, the amount of the deficiency will be carried forward as an
amount that the Class B-2 certificateholders are entitled to receive on the
next payment date. Any amount so carried forward will, to the extent legally
permissible, bear interest at the Class B-2 pass-through rate.
Class B-2 Principal.
Except for payments of the Class B-2 liquidation loss principal amount,
payments of principal on the Class B-2 certificates will not commence until the
Class B-1 principal
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<PAGE>
balance has been reduced to zero, and will be made on that payment date and
each payment date after that only if each Class B principal distribution test
is satisfied on that payment date, unless the Class A principal balance and the
Class M principal balance have been reduced to zero. On any such payment date,
the Class B percentage of the formula principal distribution amount will be
distributed, from any remaining Amount Available, after payment of all interest
and principal then due on the Class A, Class M and Class B-1 (if any)
certificates, and any amounts actually paid under the Class B-2 limited
guaranty, in each case after payment of interest on the Class B-2 certificates,
to the Class B-2 certificateholders until the Class B-2 principal balance has
been reduced to zero.
On each payment date, the Class B-2 certificateholders will be entitled to
receive, pursuant to the Class B-2 limited guaranty, the Class B-2 liquidation
loss principal amount until the Class B-2 principal balance has been reduced to
zero.
Subordination of Class M Certificates and Class B Certificates
The rights of the holders of the Class M certificates and Class B
certificates to receive distributions with respect to the loans, as well as any
other amounts constituting the Amount Available, will be subordinated to the
rights of the holders of the Class A certificates. This subordination is
intended to enhance the likelihood of regular receipt by the holders of the
Class A certificates of the full amount of their scheduled monthly payments of
interest and principal and to afford those holders protection against losses on
liquidated loans.
A portion of the protection afforded to the holders of the Class A
certificates by means of the subordination of the Class M and Class B
certificates will be accomplished by the preferential right of the Class A
certificateholders to receive on any payment date the amount of interest due on
the Class A certificates, including any interest due on a prior payment date
but not received, prior to any distribution being made on a payment date in
respect of interest on the Class M and Class B certificates. After that, any
remaining Amount Available will be applied to the payment of interest accrued
on the Class M-1 adjusted principal balance, then interest due on the Class M-2
adjusted principal balance and then interest due on the Class B-1 adjusted
principal balance.
After payment of all interest accrued on the Class A principal balance, Class
M-1 adjusted principal balance, Class M-2 adjusted principal balance and Class
B-1 adjusted principal balance, any remaining Amount Available will be
distributed in the following order of priority:
. first, the Senior Percentage or the Class B percentage, as applicable,
of the formula principal distribution amount will be distributed to the
Class A, Class M and Class B-1 certificateholders in the order of
priority described under "Principal on the Class A, Class M-1, Class M-
2 and Class B-1 Certificates;"
. second, any unpaid Class M-1 liquidation loss interest amount, as
described below under "Losses on Liquidated Loans," will be distributed
to the Class M-1 certificateholders;
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<PAGE>
. third, any unpaid Class M-2 liquidation loss interest amount, as
described below under "Losses on Liquidated Loans," will be distributed
to the Class M-2 certificateholders; and
. fourth, any unpaid Class B-1 liquidation loss interest amount, as
described below under "Losses on Liquidated Loans," will be distributed
to the Class B-1 certificateholders.
The rights of the holders of the Class B-2 certificates to receive
distributions with respect to the loans and other amounts in the certificate
account will be subordinated to such rights of the holders of the Class A
certificates, Class M certificates and Class B-1 certificates. Thus, the Class
B-2 certificateholders will be entitled to distributions of interest and
principal on the Class B-2 certificates only after distributions of all
interest and principal then payable on the Class A, Class M and Class B-1
certificates.
If a Class B-2 liquidation loss amount is realized for any payment date and
we fail to pay that amount pursuant to our Class B-2 limited guaranty, the
Class B-2 certificateholders may incur losses on their investment in the Class
B-2 certificates to the extent such losses are not made up from future payments
on the loans or the Class B-2 limited guaranty.
Losses on Liquidated Loans
The formula principal distribution amount includes the scheduled principal
balance of each loan that became a liquidated loan during the preceding Due
Period. If the net Liquidation Proceeds from a liquidated loan are less than
the Scheduled Principal Balance of that liquidated loan plus accrued and unpaid
interest thereon, the deficiency will, because of the priorities of payment
described above, be absorbed on the following payment date
. first, by the Class C certificateholder,
. then the Class B-2 guaranty fee otherwise payable to us,
. then the monthly servicing fee otherwise payable to the servicer (so
long as we or any of our wholly owned subsidiaries is the servicer),
. then the Class B-2 certificateholders,
. then the Class B-1 certificateholders,
. then the Class M-2 certificateholders, and
. then the Class M-1 certificateholders, since a portion of the Amount
Available equal to such deficiency and otherwise distributable to them
will be paid to the Class A certificateholders.
Severe losses and delinquencies on the loan pool could cause the Amount
Available for a payment date to be insufficient to distribute the full formula
principal distribution amount for that payment date to the certificateholders,
and, as a result, the aggregate outstanding principal balance of the
certificates will decline on that payment date by an amount less than the
decline in the pool scheduled principal balance for that payment date. In this
event, the amount of the deficiency (the liquidation loss principal amount)
would be allocated first to
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<PAGE>
the Class B-2 certificates, and we would be obligated to pay the amount of the
Class B-2 liquidation loss principal amount to the Class B-2 certificateholders
pursuant to the Class B-2 limited guaranty. If on any payment date the sum of
the Class A principal balance, the Class M-1 adjusted principal balance, the
Class M-2 adjusted principal balance and the Class B-1 adjusted principal
balance were equal to the pool scheduled principal balance and no further
liquidation loss principal amounts could be allocated to the Class B-2
certificates, any further liquidation loss principal amounts would be allocated
to reduce the Class B-1 adjusted principal balance. If the Class B-1 adjusted
principal balance were reduced to zero, any further liquidation loss principal
amounts realized would be allocated to reduce the Class M-2 adjusted principal
balance. If the Class M-2 adjusted principal balance were reduced to zero, any
further liquidation loss principal amounts realized would be allocated to
reduce the Class M-1 adjusted principal balance. Any such liquidation loss
principal amounts would be reduced on subsequent payment dates to the extent
that the Amount Available on such payment dates is sufficient to permit the
distribution of principal due, but not paid, on the certificates on prior
payment dates. In the event the adjusted principal balance of the Class M-1,
Class M-2 or Class B-2 certificates were reduced by a liquidation loss
principal amount, interest accruing on that class would be calculated on the
reduced adjusted principal balance of that class. The interest accruing on that
class's liquidation loss principal amount each month, plus interest at the
applicable pass-through rate on any liquidation loss interest amount due on a
prior payment date but not paid, would be paid to the certificateholders of
that class from the Amount Available, after distributions of principal on all
Class A, Class M and Class B-1 certificates, in the order of priority described
above under "Subordination of Class M and Class B Certificates."
If the Amount Available is not sufficient to cover the entire amount
distributable to the Class A certificateholders, the Class M-1
certificateholders or the Class M-2 certificateholders on a particular payment
date, then the Senior Percentage on future payment dates may be increased and
the Class B percentage on future payment dates may be reduced as a result of
such deficiency.
But for the effect of the subordination of the Class M-2, Class B and Class C
certificates, the related monthly servicing fee otherwise payable to the
servicer with respect to the loans and the guaranty fee payable to us, the
Class M-1 certificateholders will absorb all losses on each liquidated loan.
But for the effect of the subordination of the Class B and Class C
certificates, the related monthly servicing fee otherwise payable to the
servicer with respect to the loans and the guaranty fee payable to us, the
Class M-2 certificateholders will absorb all losses on each liquidated loan.
But for the effect of the subordination of the Class B-2 and Class C
certificates, the related monthly servicing fee otherwise payable to the
servicer with respect to the loans and the guaranty fee payable to us, the
Class B-1 certificateholders will absorb all losses on each liquidated loan.
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<PAGE>
But for the payments under the Class B-2 limited guaranty described below and
the subordination of the Class C certificates, the related monthly servicing
fee otherwise payable to the servicer with respect to the loans and the
guaranty fee payable to us, the Class B-2 certificateholders will absorb all
losses on each liquidated loan.
Capitalized Interest Account
Because payments received with respect to interest on the loans may be
insufficient to cover payments of interest on the certificates on the payment
dates in October, November and December 1999, a capitalized interest account
will be established on the closing date with a deposit of an amount approved by
the rating agencies. Funds on deposit in the capitalized interest account will
be invested in eligible investments (as described under "--Payments on Loans").
If the Amount Available is insufficient to make a full distribution of interest
on the certificates (other than the Class B-2 Certificates) on the payment
dates in October, November and December 1999, the trustee will withdraw the
amount of any such shortfall from the capitalized interest account and deposit
such amount in the certificate account. The capitalized interest account will
be part of the trust but not part of the REMIC. Any funds remaining on deposit
in the capitalized interest account after the distribution to
certificateholders in December 1999 will be released to one of our
subsidiaries.
Advances
To the extent that collections on a loan in any Due Period are less than the
scheduled payment due, the servicer will be obligated to make an advance of the
uncollected portion of such scheduled payment. The servicer will be obligated
to advance a delinquent payment on a loan only to the extent that the servicer,
in its sole discretion, expects to recoup the advance from subsequent funds
available in the certificate account.
If the servicer fails to make an advance required under the pooling and
servicing agreement, the trustee will be obligated to deposit the amount of
that advance in the certificate account on the payment date. The trustee will
not, however, be obligated to deposit any of this amount if:
(1) the trustee does not expect to recoup the advance from subsequent
funds available in the certificate account, or
(2) the trustee determines that it is not legally able to make the
advance.
Reports to Certificateholders
The servicer will furnish to the trustee, and the trustee will include with
each distribution to a Class A certificateholder, a statement on the related
payment date that shows:
(1) the amount of the distribution to holders of each class of Class A
certificates allocable to interest, separately identifying any unpaid
interest shortfall included;
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<PAGE>
(2) the amount of the distribution to holders of each class of Class A
certificates allocable to principal, separately identifying the
aggregate amount of any principal prepayments included;
(3) the amount, if any, by which the Class A formula distribution amount
exceeds the Class A distribution amount for that payment date;
(4) the principal balance of each class of Class A certificates after
giving effect to the distribution of principal on that payment date;
(5) the Senior Percentage for that payment date;
(6) the Pool Scheduled Principal Balance of the loans for that payment
date;
(7) the pool factor, a percentage derived from a fraction the numerator
of which is the sum of the Class A principal balance, the Class M
principal balance and the Class B principal balance and the
denominator of which is the Cut-off Date pool principal balance; and
(8) the number and aggregate principal balance of loans delinquent (a)
30-59 days and (b) 60 or more days.
Information furnished under clauses (1) through (4) will be expressed as dollar
amounts for a Class A certificate with a 1% percentage interest or per $1,000
denomination of Class A certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the servicer will furnish a report to each Class A
certificateholder of record at any time during that calendar year as to the
aggregate of amounts reported pursuant to (1) and (2) above for that calendar
year.
The servicer will furnish to the trustee, and the trustee will include with
each distribution to a Class M-1 certificateholder, a statement on the related
payment date that shows:
(1) the amount of the distribution to holders of the Class M-1
certificates allocable to interest, separately identifying any unpaid
interest shortfall included;
(2) the amount of the distribution to holders of the Class M-1
certificates allocable to principal, separately identifying the
aggregate amount of any principal prepayments included;
(3) the amount, if any, by which the Class M-1 formula distribution
amount exceeds the Class M-1 distribution amount for that payment
date;
(4) the principal balance of the Class M-1 certificates after giving
effect to the distribution of principal on that payment date;
(5) the Class M-1 unpaid interest shortfall, after giving effect to
payments on that payment date;
(6) the Senior Percentage for that payment date;
(7) the Pool Scheduled Principal Balance of the loans for that payment
date;
(8) the pool factor; and
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<PAGE>
(9) the number and aggregate principal balance of loans delinquent (a)
30-59 days and (b) 60 or more days.
Information furnished under clauses (1) through (5) will be expressed as dollar
amounts for a Class M-1 certificate with a 1% percentage interest or per $1,000
denomination of Class M-1 certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the servicer will furnish a report to each Class M-1
certificateholder of record at any time during that calendar year as to the
aggregate of amounts reported pursuant to (1) and (2) above for that calendar
year.
The servicer will furnish to the trustee, and the trustee will include with
each distribution to a Class M-2 certificateholder, a statement on the related
payment date that shows:
(1) the amount of the distribution to holders of the Class M-2
certificates allocable to interest, separately identifying any unpaid
interest shortfall included;
(2) the amount of the distribution to holders of the Class M-2
certificates allocable to principal, separately identifying the
aggregate amount of any principal prepayments included;
(3) the amount, if any, by which the Class M-2 formula distribution
amount exceeds the Class M-2 distribution amount for that payment
date;
(4) the principal balance of the Class M-2 certificates after giving
effect to the distribution of principal on that payment date;
(5) the Class M-2 unpaid interest shortfall, after giving effect to
payments on that payment date;
(6) the Senior Percentage for that payment date;
(7) the Pool Scheduled Principal Balance of the loans for that payment
date;
(8) the pool factor; and
(9) the number and aggregate principal balance of loans delinquent (a)
30-59 days and (b) 60 or more days.
Information furnished under clauses (1) through (5) will be expressed as dollar
amounts for a Class M-2 certificate with a 1% percentage interest or per $1,000
denomination of Class M-2 certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the servicer will furnish a report to each Class M-2
certificateholder of record at any time during that calendar year as to the
aggregate of amounts reported pursuant to (1) and (2) above for that calendar
year.
The servicer will furnish to the trustee, and the trustee will include with
each distribution to a Class B-1 certificateholder, a statement on the related
payment date that shows:
(1) the amount of the distribution to holders of the Class B-1
certificates allocable to interest, separately identifying any unpaid
interest shortfall included;
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(2) the amount of the distribution to holders of the Class B-1
certificates allocable to principal, separately identifying the
aggregate amount of any principal prepayments included;
(3) the amount, if any, by which the Class B-1 formula distribution
amount exceeds the Class B-1 distribution amount for that payment
date;
(4) the principal balance of the Class B-1 certificates after giving
effect to the distribution of principal on that payment date;
(5) the Class B-1 unpaid interest shortfall, after giving effect to
payments on that payment date;
(6) the Class B percentage for that payment date;
(7) the Pool Scheduled Principal Balance of the loans for that payment
date;
(8) the pool factor; and
(9) the number and aggregate principal balance of loans delinquent (a)
30-59 days and (b) 60 or more days.
Information furnished under clauses (1) through (5) will be expressed as dollar
amounts for a Class B-1 certificate with a 1% percentage interest or per $1,000
denomination of Class B-1 certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the servicer will furnish a report to each Class B-1
certificateholder of record at any time during that calendar year as to the
aggregate of amounts reported pursuant to (1) and (2) above for that calendar
year.
The servicer will furnish to the trustee, and the trustee will include with
each distribution to a Class B-2 certificateholder, a statement on the related
payment date that shows:
(1) the amount of the distribution to holders of Class B-2 certificates
allocable to interest;
(2) the amount of the distribution to holders of Class B-2 certificates
allocable to principal, separately identifying the aggregate amount
of any principal prepayments included;
(3) the amount, if any, by which the sum of the Class B-2 formula
distribution amount and the Class B-2 liquidation loss principal
amount, if any, exceeds the Class B-2 distribution amount for that
payment date;
(4) the Class B-2 liquidation loss principal amount, if any, for that
payment date;
(5) the Class B-2 unpaid interest shortfall, after giving effect to
payments on that payment date;
(6) the Class B-2 guaranty payment, if any, for that payment date;
(7) the Class B-2 principal balance after giving effect to the
distribution of principal on that payment date;
(8) the Class B percentage for that payment date;
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<PAGE>
(9) the Pool Scheduled Principal Balance of the loans for that payment
date;
(10) the pool factor; and
(11) the number and aggregate principal balance of loans delinquent (a)
30-59 days and (b) 60 or more days.
Information furnished under clauses (1) through (7) will be expressed as dollar
amounts for a Class B-2 certificate with a 1% percentage interest or per $1,000
denomination of Class B-2 certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the servicer will furnish a report to each Class B-2
certificateholder of record at any time during that calendar year as to the
aggregate amounts reported pursuant to (1) and (2) above for that calendar
year.
Repurchase Option
The pooling and servicing agreement provides that at any time that the Pool
Scheduled Principal Balance is less than 10% of the aggregate principal balance
of the certificates on the closing date, the servicer will have the option to
repurchase, on 30 days' prior written notice to the trustee, all outstanding
loans (other than any loan as to which title to the underlying property has
been assigned) at a price sufficient to pay
(1) the aggregate certificate principal balance, and
(2) the monthly interest due on all certificates on the payment date
occurring in the month following the date of repurchase.
This amount will be distributed on the payment date.
Collection and Other Servicing Procedures
The servicer will manage, administer, service and make collections on the
loans, exercising the degree of skill and care required by FHA and otherwise
consistent with the highest degree of skill and care that the servicer
exercises with respect to similar loans serviced by the servicer. The servicer
will not be required to cause to be maintained, or otherwise monitor the
maintenance of, hazard insurance on the improved properties, but is required
under FHA regulations to monitor and ensure the maintenance of flood insurance
on properties securing FHA-insured loans located in federally designated
special flood hazard areas. We do, however, as a matter of our own policy,
monitor proof of hazard insurance coverage and require that we be named as an
additional loss payee on all first lien secured loans and generally on junior
lien secured loans with amounts financed of over $20,000.
Servicing Compensation and Payment of Expenses
The servicer will receive a monthly servicing fee for each Due Period equal
to one-twelfth of the product of 0.50% and the remaining Pool Scheduled
Principal Balance of the loans.
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The monthly servicing fee provides compensation for customary third-party
servicing activities to be performed by the servicer for the trust, for
additional administrative services performed by the servicer on behalf of the
trust and for expenses paid by the servicer on behalf of the trust. The
servicer is also entitled to reimbursement out of the Liquidation Proceeds of a
liquidated loan for customary out-of-pocket liquidation expenses incurred by
it.
Customary servicing activities include collecting and recording payments,
communicating with obligors, investigating payment delinquencies, providing
billing and tax records to obligors and maintaining internal records with
respect to each loan. Administrative services performed by the servicer on
behalf of the trust include selecting and packaging the loans, calculating
distributions to certificateholders and providing related data processing and
reporting services for certificateholders and on behalf of the trustee.
Expenses incurred in connection with the servicing of the loans and paid by us
from our servicing fees include payment of FHA insurance premiums, payment of
fees and expenses of accountants, payments of all fees and expenses incurred in
connection with the enforcement of loans or foreclosure on collateral relating,
including submission of FHA insurance claims, if applicable, payment of
trustee's fees, and payment of expenses incurred in connection with
distributions and reports to certificateholders.
Evidence as to Compliance
The pooling and servicing agreement provides for delivery to the trustee of a
monthly report by the servicer no later than one business day following the
Determination Date, setting forth the information described under "Reports to
Certificateholders" above. Each report to the trustee will be accompanied by a
statement from an appropriate officer of the servicer certifying the accuracy
of such report and stating that the servicer has not defaulted in the
performance of its obligations under the pooling and servicing agreement. On or
before May 1 of each year, beginning in 2000, the servicer will deliver to the
trustee a report of PricewaterhouseCoopers LLP, or another nationally
recognized accounting firm, stating that such firm has examined certain
documents and records relating to the servicing of home improvement loans
serviced by the servicer and stating that, on the basis of such examination,
such servicing has been conducted in compliance with the pooling and servicing
agreement, except for any exceptions listed in that report.
The pooling and servicing agreement provides that the servicer will furnish
to the trustee such reasonably pertinent underlying data as can be generated by
the servicer's existing data processing system without undue modification or
expense.
The pooling and servicing agreement provides that a certificateholder holding
certificates representing at least 5% of the aggregate certificate principal
balance will have the same rights of inspection as the trustee and may upon
written request to the servicer receive copies of all reports provided to the
trustee.
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Transferability
The certificates are subject to certain restrictions on transfer to or for
the benefit of employee benefit plans, trusts or accounts subject to ERISA and
described in Section 4975 of the Internal Revenue Code. See "ERISA
Considerations" in this prospectus supplement and in the prospectus.
Certain Matters Relating to Green Tree
The pooling and servicing agreement provides that we may not resign from our
obligations and duties as servicer, except upon a determination that our
performance of such duties is no longer permissible under the pooling and
servicing agreement or applicable law, and prohibits us from extending credit
to any certificateholder for the purchase of a certificate, purchasing
certificates in any agency or trustee capacity or lending money to the trust.
We can be removed as servicer only pursuant to an event of termination as
discussed below.
Events of Termination
An event of termination under the pooling and servicing agreement will occur
if:
(1) the servicer fails to make any payment or deposit required under the
pooling and servicing agreement, including an advance, and such
failure continues for four business days;
(2) the servicer fails to observe or perform in any material respect any
other covenant or agreement in the pooling and servicing agreement
which continues unremedied for 30 days;
(3) the servicer conveys, assigns or delegates its duties or rights under
the pooling and servicing agreement, except as specifically permitted
under the pooling and servicing agreement, or attempts to make such a
conveyance, assignment or delegation;
(4) a court having jurisdiction in the premises enters a decree or order
for relief in respect of the servicer in an involuntary case under
any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, or appoints a receiver, liquidator, assignee,
custodian, trustee, or sequestrator, or similar official of the
servicer, as the case may be, or enters a decree or order for any
substantial liquidation of its affairs;
(5) the servicer commences a voluntary case under any applicable
bankruptcy, insolvency or similar law, or consents to the entry of an
order for relief in an involuntary case under any such law, or
consents to the appointment of or taking possession by a receiver,
liquidator, assignee, trustee, custodian or its creditors, or fails
to, or admits in writing its inability to, pay its debts as they
become due, or takes any corporate action in furtherance of the
foregoing;
(6) the servicer fails to be an eligible servicer; or
(7) the servicer's seller-servicer contract with GNMA is terminated.
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The servicer will be required under the pooling and servicing agreement to
give the trustee and the certificateholders notice of an event of termination
promptly upon the occurrence of such event.
Rights Upon an Event of Termination
If an event of termination has occurred and is continuing, either the trustee
or holders of certificates representing 25% or more of the aggregate
certificate principal balance may terminate all of the servicer's management,
administrative, servicing and collection functions under the pooling and
servicing agreement. Upon such termination, the trustee or its designee will
succeed to all of our responsibilities, duties and liabilities as servicer
under the pooling and servicing agreement and will be entitled to similar
compensation arrangements; provided, however, that neither the trustee nor any
successor servicer will assume any accrued obligation of the prior servicer or
our obligation to repurchase loans for breaches of representations and
warranties, and the trustee will not be liable for any acts or omissions of the
servicer occurring prior to a transfer of the servicer's servicing and related
functions or for any breach by the servicer of any of its representations and
warranties contained in the pooling and servicing agreement or any related
document or agreement. In addition, the trustee will notify FHA of the
servicer's termination as servicer of the FHA-insured loans and will request
that the portion of the servicer's FHA insurance reserves allocable to the FHA-
insured loans be transferred to the trustee or a successor servicer. See
"Description of FHA Insurance" in the prospectus. Notwithstanding such
termination, the servicer shall be entitled to payment of certain amounts
payable to it prior to such termination, for services rendered prior to such
termination. No such termination will affect in any manner our obligation to
repurchase certain loans for breaches of representations or warranties under
the pooling and servicing agreement. In the event that the trustee is unwilling
or unable so to act, it may appoint, or petition a court of competent
jurisdiction for the appointment of, an eligible servicer so to act as
successor to the servicer under the pooling and servicing agreement. The
trustee and the successor may agree upon the servicing compensation to be paid,
after receiving comparable bids from other eligible servicers, which may not be
greater than the monthly servicing fee payable to us as servicer under the
pooling and servicing agreement without the consent of all of the
certificateholders.
Termination of the Agreement
The pooling and servicing agreement will terminate on the earlier of (a) the
payment date on which the Pool Scheduled Principal Balance is reduced to zero;
or (b) the payment date occurring in the month following the servicer's
repurchase of the loans as described under "Description of the Certificates--
Repurchase Option." However, our representations, warranties and indemnities
will survive any termination of the pooling and servicing agreement.
Amendment; Waiver
The pooling and servicing agreement may be amended by agreement of the
trustee, the servicer and us at any time without the consent of the
certificateholders to cure any
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ambiguity, to correct or supplement any provision which may be inconsistent
with any other provision or to add other provisions not inconsistent with the
pooling and servicing agreement, upon receipt of an opinion of counsel to the
servicer that such amendment will not adversely affect in any material way the
interests of any certificateholder.
The pooling and servicing agreement may also be amended by agreement of the
trustee, the servicer and us at any time without the consent of the
certificateholders to effect the transfer of FHA insurance reserves to another
entity in compliance with revisions to FHA regulations, provided that prior to
any such amendment S&P and Fitch shall have confirmed that the ratings of the
certificates will not be lowered or withdrawn following such amendment.
The pooling and servicing agreement may also be amended from time to time by
the trustee, the servicer and us with the consent of holders of certificates
representing 66 2/3% or more of the aggregate certificate principal balance,
and holders of certificates representing 51% or more of the aggregate
certificate principal balance may vote to waive any event of termination,
provided that no such amendment or waiver shall:
(1) reduce in any manner the amount of, or delay the timing of,
collections of payments on loans or distributions which are required
to be made on any certificate; or
(2) reduce the aggregate amount of certificates required for any
amendment of the pooling and servicing agreement, without unanimous
consent of the certificateholders.
The trustee is required under the pooling and servicing agreement to furnish
certificateholders with notice promptly upon execution of any amendment to the
pooling and servicing agreement.
Indemnification
The pooling and servicing agreement provides that we will defend and
indemnify the trust, the trustee and the certificateholders against any and all
costs, expenses, losses, damages, claims and liabilities, including reasonable
fees and expenses of counsel and expenses of litigation:
(1) arising out of or resulting from the use or ownership by us or any
affiliate of any real estate securing a loan,
(2) for any taxes which may at any time be asserted with respect to, and
as of the date of, the conveyance of the loans to the trust, but not
including any federal, state or other tax arising out of the creation
of the trust and the issuance of the certificates, and
(3) relating to various other tax matters.
The pooling and servicing agreement also provides that the servicer will
defend and indemnify the trust, the trustee and the certificateholders, which
indemnification will survive
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any removal of the servicer, against any and all costs, expenses, losses,
damages, claims and liabilities, including reasonable fees and expenses of
counsel and expenses of litigation, in respect of any action taken by us as
servicer for any loan.
Duties and Immunities of the Trustee
The trustee will make no representations as to the validity or sufficiency of
the pooling and servicing agreement, the certificates or any loan, loan file or
related documents, and will not be accountable for the use or application by us
of any funds paid to us in consideration of the conveyance of the loans, or
deposited into the certificate account by the servicer. If no event of
termination has occurred, the trustee will be required to perform only those
duties specifically required of it under the pooling and servicing agreement.
However, upon receipt of the various certificates, reports or other instruments
required to be furnished to it, the trustee will be required to examine them to
determine whether they conform to the requirements of the pooling and servicing
agreement.
Under the pooling and servicing agreement the servicer will agree:
(1) to pay to the trustee from time to time reasonable compensation for
all services rendered by it;
(2) to reimburse the trustee upon its request for all reasonable expenses,
disbursements and advances incurred by the trustee in accordance with
any provision of the pooling and servicing agreement, including FHA
insurance premiums not paid by the servicer and reasonable
compensation and the expenses and disbursements of its agents and
counsel, except any such expense, disbursement or advance as may be
attributable to its negligence or bad faith; and
(3) 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, including the costs and expenses of
defending itself against any claim or liability in connection with
the exercise or performance of any of its powers or duties.
The trustee is not obligated to expend or risk its own funds or otherwise
incur financial liability in the performance of its duties under the pooling
and servicing agreement if there is a reasonable ground for believing that the
repayment of such funds or adequate indemnity against such risk or liability is
not reasonably assured.
The pooling and servicing agreement also provides that the trustee will
maintain at its expense in Minneapolis or St. Paul, Minnesota, an office or
agency where certificates may be surrendered for registration of transfer or
exchange and where notices and demands to or upon the trustee and the
certificate registrar and transfer agent in respect of the certificates may be
served. On the date of this prospectus supplement the trustee's office for
these purposes is located at 180 East Fifth Street, St. Paul, Minnesota 55101.
The trustee will promptly give written notice to us, the servicer and the
certificateholders of any change of address.
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The Trustee
U.S. Bank Trust National Association has its corporate trust offices at 180
East Fifth Street, St. Paul, Minnesota 55101.
The trustee may resign from its duties under the pooling and servicing
agreement at any time, in which event the servicer will be obligated to appoint
a successor trustee. The servicer may also remove the trustee if the trustee
ceases to be eligible to continue as such under the pooling and servicing
agreement or if the trustee becomes insolvent. In such circumstances, the
servicer will also be obligated to appoint a successor trustee. Any resignation
or removal of the trustee and appointment of a successor trustee will not
become effective until acceptance of the appointment by the successor trustee.
Any successor trustee must be an FHA Title I approved lender.
Registration of the Certificates
The certificates initially will be registered in the name of Cede & Co., the
nominee of DTC. The certificates may be held by investors only through the
book-entry facilities of DTC. DTC is a limited-purpose trust company organized
under the laws of the State of New York, a member of the Federal Reserve
System, a clearing corporation within the meaning of the New York Uniform
Commercial Code, and a clearing agency registered pursuant to the provisions of
Section 17A of the Exchange Act. DTC accepts securities for deposit from its
participating organizations and facilitates the clearance and settlement of
securities transactions between Participants in such securities through
electronic book-entry changes in accounts of Participants, thereby eliminating
the need for physical movement of certificates. Participants include securities
brokers and dealers, banks and trust companies and clearing corporations and
may include certain other organizations. Indirect access to the DTC system is
also available to others such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Participant,
either directly or indirectly.
The beneficial owners of certificates who are not Participants but desire to
purchase, sell or otherwise transfer ownership of the certificates may do so
only through Participants, unless and until definitive certificates are issued.
In addition, certificate owners will receive all distributions of principal of,
and interest on, the certificates from the trustee through DTC and
Participants. Certificate owners will not receive or be entitled to receive
certificates representing their respective interests in the certificates,
except under the limited circumstances described below.
Unless and until definitive certificates are issued, it is anticipated that
the only certificateholder of the certificates will be Cede & Co., as nominee
of DTC. Certificate owners will not be recognized by the trustee as
certificateholders as that term is used in the pooling and servicing agreement.
Certificate owners are only permitted to exercise the rights of
certificateholders indirectly through Participants and DTC.
While certificates are outstanding, except under the circumstances described
below, under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts
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with respect to the certificates and is required to receive and transmit
distributions of principal of, and interest on, the certificates. Participants
with whom certificate owners have accounts with respect to certificates are
similarly required to make book-entry transfers and receive and transmit such
distributions on behalf of their respective certificate owners. Accordingly,
although certificate owners will not possess certificates, the rules provide a
mechanism by which certificate owners will receive distributions and will be
able to transfer their interests.
Definitive certificates will be issued in registered form to certificate
owners, or their nominees, rather than to DTC, only if:
(1) DTC or we advise the trustee in writing that DTC is no longer willing
or able to discharge properly its responsibilities as nominee and
depository with respect to the certificates, and we or the trustee
are unable to locate a qualified successor or
(2) we, at our sole option, advise the trustee in writing that we elect
to terminate the book-entry system through DTC.
Upon issuance of definitive certificates to certificate owners, such
certificates will be transferable directly, and not exclusively on a book-entry
basis, and registered holders will deal directly with the trustee with respect
to transfers, notices and distributions.
DTC has advised us that, unless and until definitive certificates are issued,
DTC will take any action permitted to be taken by a certificateholder under the
pooling and servicing agreement only at the direction of one or more
Participants to whose DTC accounts the certificates are credited. DTC has
advised us that DTC will take this action with respect to any fractional
interest of the certificates only at the direction of and on behalf of the
Participants beneficially owning a corresponding fractional interest of the
certificates. DTC may take actions, at the direction of the Participants, with
respect to some certificates which conflict with actions taken for other
certificates.
Issuance of certificates in book-entry form rather than as physical
certificates may adversely affect the liquidity of the certificates in the
secondary market and the ability of certificate owners to pledge them. In
addition, since distributions on the certificates will be made by the trustee
to DTC and DTC will credit such distributions to the accounts of its
Participants, with the Participants further crediting such distributions to the
accounts of indirect Participants or certificate owners, certificate owners may
experience delays in the receipt of such distributions.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of certificates among Participants of DTC, it is under no obligation
to perform or continue to perform such procedures and such procedures may be
discontinued at any time.
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DESCRIPTION OF THE CLASS B-2 LIMITED GUARANTY
In order to mitigate the effect of the subordination of the Class B-2
certificates and liquidation losses and delinquencies on the loans, we will
provide a guaranty against losses that would otherwise be borne by the Class B-
2 certificates. Each payment required to be made under the Class B-2 limited
guaranty is referred to as a Class B-2 guaranty payment. Before the Class B
Cross-over Date, and on any payment date on or after the Class B Cross-over
Date on which a Class B principal distribution test is not satisfied, the Class
B-2 guaranty payment will equal the amount, if any, by which:
(1) the sum of (a) the Class B-2 formula distribution amount for such
payment date, which will be equal to accrued and unpaid interest on
the Class B-2 certificates, and (b) the Class B-2 liquidation loss
principal amount, if any, for such payment date, exceeds
(2) the Class B-2 distribution amount for such payment date.
The Class B-2 liquidation loss principal amount for any payment date equals the
amount, if any, by which the sum of the Class A principal balance, the Class M
principal balance and the Class B principal balance for such payment date
exceeds the Pool Scheduled Principal Balance for such payment date, but in no
event greater than the Class B-2 principal balance.
The Class B-2 liquidation loss principal amount is, in substance, the amount
of delinquencies and losses experienced on the loans during the related Due
Period that was not absorbed by eliminating a payment to the Class C
certificate, deferring the related monthly servicing fee otherwise payable to
us, so long as we or our wholly owned subsidiary are the servicer and deferring
the guaranty fee otherwise payable to us. On each payment date on or after the
payment date on which the Class B-1 certificates have been retired, if each
Class B principal distribution test is satisfied on such payment date, or the
Class A principal balance and the Class M principal balance have been reduced
to zero, the Class B-2 guaranty payment will equal the amount, if any, by
which:
(1) the sum of (a) the Class B-2 formula distribution amount for such
payment date, which will include both interest and principal, and (b)
the Class B-2 liquidation loss principal amount, if any, for such
payment date exceeds
(2) the Class B-2 distribution amount for such payment date.
The Class B-2 limited guaranty will be our unsecured general obligation and
will not be supported by any letter of credit or other credit enhancement
arrangement. The Class B-2 limited guaranty will not benefit in any way, or
result in any payment to, the Class A-1, Class A-2, Class A-3, Class A-4, Class
M-1, Class M-2 or Class B-1 certificateholders.
As compensation for providing the limited guaranty, we will be entitled to
receive a guaranty fee on each distribution date, which generally will be equal
to the lesser of (A) one-twelfth of the product of 3.00% and the sum of the
pool scheduled principal balance and the pre-funded amount for the immediately
preceding payment date or (B) the amount available for payment after all
distributions with a higher payment priority are made.
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FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the certificates, Briggs and Morgan, Professional
Association, our counsel, will deliver its opinion that, assuming that an
election is made to treat segregated portions of the assets of the trust as a
REMIC, and further assuming ongoing compliance with the terms of the pooling
and servicing agreement, the trust, other than the pre-funding account and the
capitalized interest account, will qualify as a REMIC for federal income tax
purposes. The Class A, Class M and Class B certificates will be treated as
regular interests in the REMIC. The Class C certificate, which is not being
offered here, will constitute the sole class of residual interests in the
REMIC.
It is not anticipated that any of the certificates offered here will be
issued with original issue discount for federal income tax purposes. The
prepayment assumption that will be used to determine the rate of accrual of
original issue discount, market discount and premium, if any, will be based on
the assumption that the loans will prepay at a rate equal to 100% of the
applicable prepayment assumption.
Certificates held by financial institutions, thrift institutions taxed as
domestic building and loan associations and real estate investment trusts will
represent interests in loans secured by an interest in real property and real
estate assets for purposes of Sections 7701(a)(19)(C) and 856(c)(4)(A) of the
Internal Revenue Code, respectively, in the same proportion that the assets in
the REMIC consist of qualifying assets under these sections. Interest paid with
respect to certificates held by a real estate investment trust will be
considered to be interest on obligations secured by mortgages on real property
or on interests in real property for purposes of Section 856(c)(3) of the
Internal Revenue Code to the extent that such certificates are treated as real
estate assets under Section 856(c)(4)(A) of the Internal Revenue Code.
For further information regarding federal income tax consequences of
investing in the certificates, see "Federal Income Tax Consequences--REMIC
Series" in the prospectus.
ERISA CONSIDERATIONS
The following information supplements and, if inconsistent, supersedes the
information in the prospectus under "ERISA Considerations."
The Employee Retirement Income Security Act of 1974, as amended, imposes
certain restrictions on employee benefit plans that are subject to ERISA and on
persons who are fiduciaries with respect to these plans. Employee benefit plans
that are governmental plans, as defined in section 3(32) of ERISA, and some
church plans, as defined in Section 3(33) of ERISA, are not subject to ERISA
requirements. Accordingly, assets of those plans may be invested in the Class
A-1, Class A-2, Class A-3 and Class A-4 certificates without regard to the
ERISA restrictions described in this section, subject to applicable provisions
of other federal and state laws. However, any governmental or church plan which
is qualified under section 401(a) of the Internal Revenue Code and exempt from
taxation under section 501(a) of the Internal Revenue Code is subject to the
prohibited transaction rules set forth in section 503 of the Internal Revenue
Code.
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The U.S. Department of Labor has granted an administrative exemption to
Lehman Brothers Inc. (Prohibited Transaction Exemption No. 91-14, 56 Fed Reg.
7413 (1991)), from certain of the prohibited transaction rules of ERISA and the
Internal Revenue Code.
They provide an exemption from certain of the prohibited transaction rules of
ERISA and the Internal Revenue Code with respect to the initial purchase, the
holding and the subsequent resale by plans of certificates representing
interests in asset-backed pass-through trusts that consist of certain
receivables, loans and other obligations that meet the conditions and
requirements of the exemption. The receivables covered by the exemption include
home improvement loans such as the loans in the loan pool. The exemption will
apply to the acquisition, holding, and resale of the Class A certificates by a
plan, provided that specified conditions are met, including those described in
the paragraph below.
Among the conditions which must be satisfied for the exemption to apply to
the Class A-1, Class A-2, Class A-3 and Class A-4 certificates are the
following:
(1) the acquisition of the Class A-1, Class A-2, Class A-3 or Class A-4
certificates by a plan is on terms, including the price for the Class
A-1, Class A-2, Class A-3 or Class A-4 certificates, that are at
least as favorable to the plan as they would be in an arm's-length
transaction with an unrelated party;
(2) the rights and interests evidenced by the Class A-1, Class A-2, Class
A-3 or Class A-4 certificates acquired by the plan are not
subordinated to the rights and interests evidenced by other
certificates of the trust;
(3) the Class A-1, Class A-2, Class A-3 or Class A-4 certificates
acquired by the plan have received a rating at the time of such
acquisition that is in one of the three highest generic rating
categories from either S&P, Moody's, Duff & Phelps or Fitch;
(4) the trustee is not an affiliate of any member of the restricted
group, as defined below;
(5) the sum of all payments made to the underwriters in connection with
the distribution of the Class A-1, Class A-2, Class A-3 or Class A-4
certificates represents not more than reasonable compensation for
underwriting the Class A-1, Class A-2, Class A-3 or Class A-4
certificates, as applicable. The sum of all payments made to and
retained by us under the sale of the loans to the trust represents
not more than the fair market value of such loans. The sum of all
payments made to and retained by the servicer represents not more
than reasonable compensation for the servicer's services under the
pooling and servicing agreement and reimbursement of the servicer's
reasonable expenses in connection therewith; and
(6) the plan investing in the Class A-1, Class A-2, Class A-3 or Class A-
4 certificates is an accredited investor as defined in Rule 501(a)(1)
of Regulation D under the Securities Act of 1933.
On July 21, 1997, the DOL published in the Federal Register an amendment to
the exemption, which extends exemptive relief to mortgage-backed and asset-
backed securities
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transactions using pre-funding accounts for trusts issuing pass-through
certificates. The amendment generally allows mortgage loans or other secured
receivables, the obligations supporting payments to certificateholders, and
having a value equal to no more than 25% of the total principal amount of the
certificates being offered by the trust, to be transferred to the trust within
a 90-day or three-month pre-funding period following the closing date, instead
of requiring that all such obligations be either identified or transferred on
or before the closing date. The relief is available when the following
conditions are met:
(1) The ratio of the amount allocated to the pre-funding account to the
total principal amount of the certificates being offered must not
exceed 25%.
(2) All additional obligations transferred after the closing date must
meet the same terms and conditions for eligibility as the original
obligations used to create the trust, which terms and conditions have
been approved by a rating agency.
(3) The transfer of the additional obligations to the trust during the
pre-funding period must not result in the certificates to be covered
by the exemption receiving a lower credit rating from an exemption
rating agency upon termination of the pre-funding period than the
rating that was obtained at the time of the initial issuance of the
certificates by the trust.
(4) Solely as a result of the use of pre-funding period, the weighted
average annual percentage interest rate for all of the obligations in
the trust at the end of the pre-funding period must not be more than
100 basis points lower than the average interest rate for the
obligations transferred to the trust on the closing date.
(5) In order to insure that the characteristics of the additional
obligations are substantially similar to the original obligations
which were transferred to the trust fund:
. the characteristics of the additional obligations must be
monitored by an insurer or other credit support provider that is
independent of the depositor; or
. an independent accountant retained by the depositor must provide
the depositor with a letter, with copies provided to each rating
agency rating the certificates, the related underwriter and the
related trustee, stating whether or not the characteristics of the
additional obligations conform to the characteristics described in
the related prospectus, prospectus supplement and pooling and
servicing agreement. In preparing this letter, the independent
accountant must use the same type of procedures as were applicable
to the obligations transferred to the trust as of the closing
date.
(6) The period of pre-funding must end no later than three months or 90
days after the closing date or earlier in certain circumstances if the
pre-funding account falls below the minimum level specified in the
pooling and servicing agreement or an event of default occurs.
(7) Amounts transferred to any pre-funding account or capitalized interest
account used in connection with the pre-funding may be invested only
in certain permitted investments.
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(8) The related prospectus or prospectus supplement must describe:
. any pre-funding account or capitalized interest account used in
connection with a pre-funding account;
. the duration of the period of pre-funding;
. the percentage or dollar amount of the pre-funding limit for the
trust; and
. that the amounts remaining in the pre-funding account at the end
of the pre-funding period will be remitted to certificateholders
as repayments of principal.
(9) The related pooling and servicing agreement must describe these
permitted investments for the pre-funding account or capitalized
interest account and, if not disclosed in the related prospectus or
prospectus supplement, the terms and conditions for eligibility of
additional obligations.
Moreover, the exemption would provide relief from certain self-
dealing/conflict of interest prohibited transactions only if, among other
requirements:
(1) in the case of the acquisition of Class A-1, Class A-2, Class A-3 or
Class A-4 certificates in connection with the initial issuance, at
least 50% of the Class A-1, Class A-2, Class A-3 or Class A-4
certificates, as applicable, are acquired by persons independent of
the restricted group,
(2) the plan's investment in Class A-1, Class A-2, Class A-3 or Class A-4
certificates does not exceed 25% of all of the Class A-1, Class A-2,
Class A-3 or Class A-4 certificates, as applicable, outstanding at the
time of the acquisition, and
(3) immediately after the acquisition, no more than 25% of the assets of
the plan are invested in certificates representing an interest in one
or more trusts containing assets sold or serviced by the same entity.
The exemption does not apply to plans sponsored by us, the
underwriters, the trustee, the servicer, any obligor with respect to
loans included in the trust constituting more than 5% of the aggregate
unamortized principal balance of the assets in the trust or any
affiliate of such parties.
The Company believes that the exemption will apply to the acquisition and
holding of Class A-1, Class A-2, Class A-3 or Class A-4 certificates sold by
the underwriters and by plans and that all conditions of the exemption other
than those within the control of the investors have been met. In addition, as
of the date hereof, no obligor with respect to loans included in the trust
constitutes more than 5% of the aggregate unamortized principal balance of the
assets of the trust. Any plan fiduciary who proposes to cause a plan to
purchase Class A-1, Class A-2, Class A-3 or Class A-4 certificates should
consult with its own counsel with respect to the potential consequences under
ERISA and the Internal Revenue Code of the plan's acquisition and ownership of
the Class A-1, Class A-2, Class A-3 or Class A-4 certificates. Assets of a plan
or individual retirement account should not be invested in the Class A-1, Class
A-2, Class A-3 or Class A-4 certificates unless it is clear that the assets of
the trust will not be plan assets or unless it is clear that the exemption or a
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prohibited transaction class exemption will apply and exempt all potential
prohibited transactions. See "ERISA Considerations" in the prospectus.
No transfer of any class of certificates other than the Class A-1, Class A-2,
Class A-3 or Class A-4 certificates will be permitted to be made to a plan
unless such plan, at its expense, delivers to the trustee and us an opinion of
counsel, in form satisfactory to the trustee and us, to the effect that the
purchase or holding of any other class of certificates by such plan will not
result in the assets of the trust being deemed to be plan assets and subject to
the prohibited transaction provisions of ERISA and the Internal Revenue Code
and will not subject the trustee, us or the servicer to any obligation or
liability in addition to those undertaken in the pooling and servicing
agreement. Unless that opinion is delivered, each person acquiring such a
certificate will be deemed to represent to the trustee, us and the servicer
that such person is neither a plan, nor acting on behalf of a plan, subject to
ERISA or to Section 4975 of the Internal Revenue Code.
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<PAGE>
UNDERWRITING
The underwriters have agreed, subject to the terms and conditions of the
underwriting agreement, to purchase from us the respective principal amounts of
the certificates set forth opposite their names below.
<TABLE>
<CAPTION>
Principal Principal Principal Principal
Amount of Amount of Amount of Amount of
Class A-1 Class A-2 Class A-3 Class A-4
Underwriter Certificates Certificates Certificates Certificates
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Lehman Brothers Inc. ...... $ 54,000,000 $10,500,000 $ 31,000,000 $21,126,000
Chase Securities Inc. ..... 54,000,000 10,500,000 31,000,000 21,124,667
First Union Capital
Markets............. 54,000,000 10,500,000 31,000,000 21,124,667
Merrill Lynch, Pierce,
Fenner & Smith
Incorporated........ 54,000,000 10,500,000 31,000,000 21,124,667
------------ ----------- ------------ -----------
Totals................... $216,000,000 $42,000,000 $124,000,000 $84,500,000
============ =========== ============ ===========
</TABLE>
<TABLE>
<CAPTION>
Principal Principal
Amount of Amount of
Class M-1 Class M-2
Underwriter Certificates Certificates
----------- ------------ ------------
<S> <C> <C>
Lehman Brothers Inc. ................................. $12,000,000 $ 7,126,000
Chase Securities Inc. ................................ 12,000,000 7,124,667
First Union Capital Markets........................... 12,000,000 7,124,667
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................... 12,000,000 7,124,667
----------- -----------
Totals.............................................. $48,000,000 $28,500,000
=========== ===========
</TABLE>
In the underwriting agreement, the underwriters have agreed, subject to the
terms and conditions in the agreement, to purchase all of the certificates if
any certificates are purchased. If an underwriter defaults, the underwriting
agreement provides that, in some circumstances, the underwriting agreement may
be terminated.
We have been advised by the underwriters that they propose initially to offer
the certificates to the public at the offering prices set forth on the cover
page of this prospectus supplement and to dealers at these prices less a
concession not in excess of the amounts shown in the table below, expressed as
a percentage of the relative certificate principal balance. The underwriters
may allow and dealers may reallow a discount not more than the amounts listed
in the table below to other dealers.
<TABLE>
<CAPTION>
Selling Reallowance
Class Concession Discount
----- ---------- -----------
<S> <C> <C>
A-1.............................................. 0.120% 0.060%
A-2.............................................. 0.150% 0.075%
A-3.............................................. 0.180% 0.090%
A-4.............................................. 0.210% 0.105%
M-1.............................................. 0.375% 0.1875%
M-2.............................................. 0.390% 0.195%
</TABLE>
Until the distribution of the certificates is completed, rules of the SEC may
limit the ability of the underwriters and selling group members to bid for and
purchase the certificates. As an exception to these rules, the underwriters are
permitted to engage in
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<PAGE>
transactions that stabilize the price of the certificates. These transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the certificates.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be without these purchases.
Neither we nor any of the underwriters makes any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the prices of the certificates. In addition, neither we nor
any of the underwriters makes any representation that the underwriters will
engage in these transactions or that these transactions, once commenced, will
not be discontinued without notice.
The underwriting agreement provides that we will indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act of
1933, or contribute to payments the underwriters may be required to make in
respect thereof.
Upon receipt of a request by an investor who has received an electronic
prospectus supplement and prospectus from an underwriter or a request by the
investor's representative within the period during which there is an obligation
to deliver a prospectus supplement and prospectus, we or the underwriters will
promptly deliver, or cause to be delivered, without charge, a paper copy of the
prospectus supplement and prospectus.
Immediately prior to their sale to the trust, the loans were subject to
financing provided by affiliates of some of the underwriters. We will apply a
portion of the proceeds we receive from the sale of the loans to the trust to
repay that financing.
We have agreed that for a period of 30 days from the date of this prospectus
supplement we will not offer or sell publicly any other home improvement loan
pass-through certificates without the consent of the underwriters.
Each underwriter or one of its affiliates has from time to time provided
warehouse and other financing to us or our affiliates.
LEGAL MATTERS
The validity of the certificates will be passed upon for us and the trust by
Briggs and Morgan, Professional Association, St. Paul and Minneapolis,
Minnesota, and for the underwriters by Thacher Proffitt & Wood, New York, New
York. The material federal income tax consequences of the certificates will be
passed upon for us by Briggs and Morgan, Professional Association.
S-65
<PAGE>
PROSPECTUS
Green Tree Financial Corporation, Seller and Servicer
Certificates for Home Improvement Loans
We are offering certificates for home improvement loans under this prospectus
and a prospectus supplement. The prospectus supplement will be prepared
separately for each series of certificates offered. Green Tree Financial
Corporation will form a trust for each series, and the trust will issue the
certificates of that series. The certificates of any series may comprise
several different classes. A trust may also issue one or more other interests
in the trust that will not be offered under this prospectus.
The right of each class of certificates within a series to receive payments
may be senior or subordinate to the rights of one or more of the other classes
of certificates. In addition, a series of certificates may include one or more
classes which on the one hand are subordinated to one or more classes of
certificates, while on the other hand are senior to one or more classes of
certificates. The rate of principal and interest payment on the certificates of
any class will depend on the priority of payment of that class and the rate and
timing of payments of the related home improvement loans.
----------------
The certificates will represent obligations of the related trust and will not
represent any interest in or obligation of Green Tree Financial Corporation or
any of its affiliates.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
----------------
This prospectus may not be used to consummate sales of any certificates
unless accompanied by the prospectus supplement relating to that series.
Prospectus dated September 13, 1999
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS AND THE
ACCOMPANYING PROSPECTUS SUPPLEMENT
We tell you about the certificates in two separate documents that
progressively provide more detail: (1) this prospectus, which provides general
information, some of which may not apply to a particular series of
certificates, including your series; and (2) the prospectus supplement for the
particular terms of your series of certificates.
You should rely only on the information contained in this document or
information to which we have referred you. We have not authorized anyone to
provide you with information that is different. This document may only be used
where it is legal to sell these securities.
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<PAGE>
THE TRUST
General
Certificates evidencing interests in pools of home improvement loans may be
issued from time to time in series under a separate pooling and servicing
agreement between us, as seller and servicer, and the trustee.
The certificates of each series may be issued in one or more classes or
subclasses as and on the terms specified in the related prospectus supplement,
each of which will evidence the interest specified in the related prospectus in
the loan pool and other property held in a trust fund for the benefit of
certificateholders. Each trust will include:
. a loan pool;
. the amounts held from time to time in a trust certificate account
maintained by the trustee pursuant to separate pooling and servicing
agreements;
. proceeds from FHA insurance, with respect to any FHA-insured home
improvement loan included in the loan pool;
. 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
. other property as may be specified in the related prospectus
supplement.
Each certificate will evidence the interest specified in the prospectus
supplement in one trust, containing one loan pool comprised of loans having the
aggregate principal balance as of the specified day of the month of the
creation of the pool specified in the prospectus supplement. Holders of
certificates of a series will have interests only in such loan pool and will
have no interest in the loan pool created for any other series of certificates,
except for FHA insurance reserves. If specified in the related prospectus
supplement, the loan pool may be divided into two or more sub-pools, in which
event the certificates of certain specified classes may be payable primarily
from, and in respect of, the loans comprising a given sub-pool. If specified in
the related prospectus supplement, the trust may include a pre-funding account
which would be used to purchase subsequent loans during the pre-funding period
specified in the related prospectus supplement. The related prospectus
supplement will specify the conditions that must be satisfied before any
transfer of subsequent loans, including the requisite characteristics of the
subsequent loans.
Except as otherwise specified in the related prospectus supplement, all of
the loans will have been originated by us in the ordinary course of our
business. Specific information regarding the loans included in each trust will
be provided in the related prospectus supplement and, if not contained in the
related prospectus supplement, in a report on Form 8-K to be filed with the SEC
within 15 days after the initial issuance of the certificates. A copy of the
pooling and servicing agreement for 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 prospectus supplement. A schedule
of the loans relating to that series will be attached to the pooling and
servicing agreement delivered to the trustee upon delivery of the certificates.
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<PAGE>
The Loan Pools
Except as otherwise specified in the related prospectus supplement, the loan
pool will consist of:
. home improvement loans and promissory notes; and
. closed-end home equity loans originated by us on an individual basis
in the ordinary course of business.
The home improvement loans may be conventional home improvement loans or loans
insured by FHA. All loans will be secured by the related real estate. Except as
we specify otherwise in the applicable prospectus supplement, the loans will be
fully amortizing and will bear interest at a fixed or variable annual
percentage rate, which we refer to as the loan rate.
For each series of certificates, we will assign the loans constituting the
loan pool to the trustee named in the prospectus supplement. We, as servicer,
will service the loans under the pooling and servicing agreement. See
"Description of the Certificates--Servicing." Unless we specify otherwise in
the prospectus supplement, the loan documents will be held by the trustee or a
custodian on its behalf.
Each loan pool will be composed of loans bearing interest at the loan rates
specified in the prospectus supplement. Unless we specify otherwise in the
prospectus supplement, each registered holder of a certificate will be entitled
to receive periodic distributions, which will be monthly unless we specify
otherwise in the related prospectus supplement, of all or a portion of
principal on the underlying loans or interest on the principal balance of the
certificate, or on some other principal balance unrelated to that of the
certificate, at the pass-through rate, or both.
The prospectus supplement will specify for the loans contained in the loan
pool:
. the range of the dates of origination of the loans;
. the range of the loan rates and the weighted average loan rate;
. the minimum and maximum outstanding principal balances and the average
outstanding principal balance as of the Cut-off Date;
. the aggregate principal balance of the loans included in the loan pool
as of the Cut-off Date;
. the weighted average and range of scheduled terms to maturity as of
origination and as of the Cut-off Date;
. the range of original maturities of the loans and the last maturity
date of any loan; and
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<PAGE>
. the geographic location of improved real estate securing the loans.
If the trust includes a pre-funding account, the prospectus supplement will
specify the conditions that must be satisfied before any transfer of subsequent
loans, including the requisite characteristics of the subsequent loans.
We will make representations and warranties as to the types and geographical
distribution of the loans included in a loan pool and as to the accuracy in all
material respects of information furnished to the trustee for each such loan.
Upon a breach of any representation or warranty that materially and adversely
affects the interests of the certificateholders in a loan, we will be obligated
to cure the breach in all material respects, or to repurchase or substitute for
the loan as described below under "Descriptions of the Certificates--Repurchase
Option." This repurchase obligation constitutes the sole remedy available to
the certificateholders or the trustee for a breach of representation or
warranty by us. See "Description of the Certificates--Conveyance of Loans."
Conveyance of Loans
We will transfer to the trustee all our right, title and interest in the
loans, including all principal and interest received on or for the loans, other
than receipts of principal and interest due on the loans before the Cut-off
Date. On behalf of the trust, as the issuer of the related series of
certificates, the trustee, together with the conveyance, will execute and
deliver the certificates upon our order. The loans will be as described on a
list attached to the pooling and servicing agreement. This list will include
the amount of Monthly Payments due on each loan as of the date of issuance of
the certificates, the loan rate on each loan and the maturity date of each
loan. This list will be available for inspection by any certificateholder at
the principal executive office of the servicer. Before the conveyance of the
loans to the trust, our internal audit department will complete a review of all
of the loan files confirming the accuracy of the list of loans delivered to the
trustee. Any loan discovered not to agree with that list in a manner that is
materially adverse to the interests of the certificateholders will be
repurchased or substituted by us, or, if the discrepancy relates to the unpaid
principal balance of a loan, we may deposit cash in the separate certificate
account maintained at an eligible institution in the name of the trustee in an
amount sufficient to offset the discrepancy. If the trust includes a pre-
funding account, the related prospectus supplement will specify the conditions
that must be satisfied before any transfer of subsequent loans, including the
requisite characteristics of the subsequent loans.
Unless otherwise specified in the related prospectus supplement, the trustee
or its custodian will maintain possession of the loans and any other documents
contained in the loan files. Uniform Commercial Code financing statements will
be filed in Minnesota reflecting the sale and assignment of the loans to the
trustee, and our accounting records and computer systems will also reflect this
sale and assignment.
Our counsel identified in the applicable prospectus supplement will render an
opinion to the trustee that the transfer of the loans from us to the related
trust would, if we became a debtor under the United States Bankruptcy Code, be
treated as a true sale and not as a
5
<PAGE>
pledge to secure borrowings. If, however, the transfer of the loans from us to
the trust were treated as a pledge to secure borrowings by us, the distribution
of proceeds of the loans to the trust might be subject to the automatic stay
provisions of the United States Bankruptcy Code, which would delay the
distribution of the proceeds for an uncertain period of time. In addition, a
bankruptcy trustee would have the power to sell the loans if the proceeds of
the sale could satisfy the amount of the debt deemed owed by us, or the
bankruptcy trustee could substitute other collateral in lieu of the loans to
secure the debt, or the debt could be subject to adjustment by the bankruptcy
trustee if we were to file for reorganization under Chapter 11 of the United
States Bankruptcy Code.
Except as we specify otherwise in the related prospectus supplement, we will
make representations and warranties in the pooling and servicing agreement for
each loan as of the related closing date, including that:
. as of the Cut-off Date the most recent scheduled payment was made or
was not delinquent more than 59 days;
. no provision of a loan has been waived, altered or modified in any
respect, except by instruments or documents included in the loan file
and reflected on the list of loans delivered to the trustee;
. each loan is a legal, valid and binding obligation of the obligor and
is enforceable in accordance with its terms, except as may be limited
by laws affecting creditors rights generally;
. no loan is subject to any right of rescission, set-off, counterclaim
or defense;
. each FHA-insured home improvement loan was originated in accordance
with applicable FHA regulations and is insured, without set-off,
surcharge or defense, by FHA Insurance;
. each loan was either (a) entered into by a home improvement contractor
in the ordinary course of such contractor's business and, immediately
upon funding, assigned to us, (b) was originated by a home equity
lender in the ordinary course of such lender's business and assigned
to us, or (c) was originated by us directly;
. no loan was originated in or is subject to the laws of any
jurisdiction whose laws would make the transfer of the loan or an
interest under the pooling and servicing agreement or the certificates
unlawful;
. each loan complies with all requirements of law;
. no loan has been satisfied, subordinated to a lower lien ranking than
its original position or rescinded;
. each loan creates a valid and perfected lien on the related improved
real estate;
. all parties to each loan had full legal capacity to execute the loan;
. no loan has been sold, conveyed and assigned or pledged to any other
person and we have good and marketable title to each loan free and
clear of any encumbrance,
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<PAGE>
equity, loan, pledge, charge, claim or security interest, and is the
sole owner and has full right to transfer the loan to the trustee;
. as of the Cut-off Date there was no default, breach, violation or
event permitting acceleration under any loan, except for payment
delinquencies permitted by the first clause above, no event that with
notice and the expiration of any grace or cure period would constitute
a default, breach, violation or event permitting acceleration under
the loan, and we have not waived any of the foregoing;
. each loan is a fully-amortizing loan with a fixed rate of interest and
provides for level payments over the term of the loan;
. each loan contains customary and enforceable provisions to render the
rights and remedies of the holder adequate for realization against the
collateral;
. the description of each loan appearing in the list delivered to the
trustee is true and correct;
. there is only one original of each loan; and
. each loan was originated or purchased in accordance with our then-
current underwriting guidelines.
Under the terms of the pooling and servicing agreement, if we become aware
of a breach of any representation or warranty that materially adversely
affects the trust's interest in any loan or receives written notice of a
breach from the trustee or the servicer, then we will be obligated either to
cure the breach or to repurchase or, if so provided in the prospectus
supplement, substitute for the affected loan, in each case under the
conditions further described in this prospectus and in the prospectus
supplement. This repurchase obligation will constitute the sole remedy
available to the trust and the certificateholders for a breach of a
representation or warranty under the pooling and servicing agreement for the
loans, but not for any other breach by us of our obligations under the pooling
and servicing agreement. If a prohibited transaction tax under the REMIC
provisions of the Internal Revenue Code is incurred in connection with the
repurchase, distributions otherwise payable to residual certificateholders
will be applied to pay the tax. We will be required to pay the amount of the
tax that is not funded out of the distributions.
The Repurchase Price of a loan at any time means the outstanding principal
amount of the loan, without giving effect to any advances made by the servicer
or the trustee, plus interest at the applicable pass-through rate on the loan
from the end of the Due Period for which the obligor last made a payment,
without giving effect to any advances made by the servicer or the trustee
through the end of the immediately preceding Due Period.
USE OF PROCEEDS
Unless we specify otherwise in the related prospectus supplement,
substantially all of the net proceeds to be received from the sale of each
series of certificates will be used by us for general corporate purposes,
including the origination or acquisition of additional home
7
<PAGE>
improvement loans and home equity loans, costs of carrying the loans and loans
until sale of the related certificates and to pay other expenses connected with
pooling the loans and issuing the certificates.
GREEN TREE FINANCIAL CORPORATION
General
Green Tree is a Delaware corporation which, as of December 31, 1998, had
stockholders' equity of approximately $2.2 billion. We purchase, pool, sell and
service conditional sales loans for manufactured homes and other consumer
installment sales loans, as well as home equity loans. We are the largest
servicer of government-insured manufactured housing loans and conventional
manufactured housing loans in the United States. Servicing functions are
performed through Green Tree Financial Servicing Corporation, our wholly owned
subsidiary. Through our principal office in St. Paul, Minnesota, and service
centers throughout the United States, we serve all 50 states. We began
financing FHA-insured home improvement loans in April 1989, conventional home
improvement loans in September 1992 and home equity loans in January 1996. We
also purchase, pool and service installment sales loans for various consumer
products. Our principal executive offices are located at 1100 Landmark Towers,
345 St. Peter Street, St. Paul, Minnesota 55102-1639 (telephone (651) 293-
3400). Our quarterly and annual reports are available upon written request.
The SEC allows us to incorporate by reference some of the information we file
with it, which means that we can disclose important information to you by
referring you to those documents. The information that we incorporate by
reference is considered to be part of this prospectus, and later information
that we file with the SEC will automatically update and supersede this
information. We are incorporating by reference the following documents into
this prospectus and the prospectus supplement:
. Green Tree Financial Corporation's annual report on Form 10-K for the
year ended December 31, 1998.
. Green Tree Financial Corporation's quarterly reports on Form 10-Q for
the quarters ended March 31, 1999 and June 30, 1999.
All documents filed by the servicer, on behalf of any trust, pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, after
the date of this prospectus and prior to the termination of the offering of the
certificates issued by that trust, will be incorporated by reference into this
prospectus.
We will provide you, upon your written or oral request, a copy of any or all
of the documents incorporated by reference in this prospectus. Please direct
your requests for copies to John Dolphin, Director of Investor Relations, 11825
Pennsylvania Street, Carmel, Indiana 46032, telephone number (317) 817-6100.
8
<PAGE>
Federal securities law requires the filing of information with the SEC,
including annual, quarterly and special reports (including those referred to
above as being incorporated by reference), proxy statements and other
information. You can read and copy these documents at the public reference
facility maintained by the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549. You can also read and copy these reports and
other information at the following regional offices of the SEC:
New York Regional Chicago Regional Office
Office Citicorp Center
Seven World Trade 500 West Madison Street, Suite
Center 1400
Suite 1300 Chicago, IL 60661
New York, NY 10048
Please call the SEC at 1-800-SEC-0330 for more information about the public
reference rooms or visit the SEC's web site at http://www.sec.gov to access
available filings.
Loan Origination
We arrange to purchase certain loans from home improvement contractors
located throughout the United States. Through our centralized loan processing
operations in St. Paul, Minnesota, our regional sales managers contact home
improvement contractors and explain our available financing plans, terms,
prevailing rates and credit and financing policies. If the contractor wishes to
utilize our available customer financing, the contractor must make an
application for contractor approval. We have a contractor approval process
under which the financial condition, business experience and qualifications of
the contractor are reviewed before their approval to sell loans to us. In
addition, we have a centralized compliance group which reviews and updates
contractor financial condition and reviews contractors on an annual basis to
determine whether such contractor's approval will be continued. We also review
monthly contractor trend reports which show the default and delinquency trends
of the particular contractor with respect to loans sold to us. We occasionally
will originate directly a home improvement promissory note involving a home
improvement transaction.
All loans that we originate are written on forms provided or approved by us
and are purchased on an individually approved basis in accordance with our
guidelines. The contractor submits the customer's credit application and
construction loan to our office where an analysis of the creditworthiness of
the customer is made using a proprietary credit scoring system that was
implemented by us in June 1993. If we determine that the application meets our
underwriting guidelines and applicable FHA regulations (for FHA-insured loans)
and the credit is approved, we purchase the loan from the contractor when the
customer verifies satisfactory completion of the work, or, in the case of
staged funding, we follow up with the customer for the completion certificate
90 days after funding.
The types of home improvements financed by us include:
. exterior renovations, including windows, siding and roofing,
. pools and spas,
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<PAGE>
. kitchen and bath remodeling, and
. room additions and garages.
We may also, under certain limited conditions, extend additional credit beyond
the purchase price of the home improvement for the purpose of debt
consolidation.
The original principal amount of an FHA-insured home improvement loan with
respect to a single family property currently may not exceed $25,000 without
specific FHA approval, with a maximum term of 20 years. FHA will insure loans
of up to $17,500 for manufactured homes which qualify as real estate under
applicable state law and loans of up to $12,000 per unit or a $48,000 limit for
four units of owner-occupied multiple-family homes. Certain other criteria for
home improvement loans eligible for FHA Insurance are described under the
caption "Description of FHA Insurance."
We began financing conventional home improvement loans in September 1992.
Conventional home improvement loans are not insured by FHA. The original
principal amount of a conventional secured home improvement loan may not exceed
$40,000 for our secured no equity lien program, and $100,000 for our secured
equity lien program, unless a higher amount financed is approved by senior
management. The original principal amount of a conventional home improvement
loan may not exceed $100,000 for our secured lien program, unless a higher
amount financed is approved by senior management. We require that any secured
home improvement loan be secured by a recorded lien, which may be a first,
second or (with respect to FHA-insured loans and some conventional loans of
$30,000 or less) third lien, on the improved real estate.
Our underwriting guidelines and credit scoring process weight significantly
the applicant's creditworthiness and place less weight on the available equity
in the related real estate being improved. While it is our policy not to exceed
100% in loan-to-value ratio on any loan, a substantial portion of the home
improvement loans are expected to have loan-to-value ratios of 90% or more when
considering the estimated value of the real estate, other liens senior to that
of the home improvement loan, and the improvements being financed. Because we
do not require appraisals on most home improvement loans with loan amounts of
less than $30,000, which home improvement loans are expected to comprise a
substantial portion of any loan pool, and given the many other factors that can
affect the value of property securing a conventional home improvement loan, the
related prospectus supplement will not provide detailed disclosure of loan-to-
value ratios on the home improvement loans.
We have originated closed-end home equity loans since January 1996. As of
December 31, 1998, we had approximately $7,302,696,406 aggregate principal
amount of outstanding closed-end home equity loans.
Through a system of regional offices, we market our home equity lending
directly to consumers using a variety of marketing techniques. We also review
and re-underwrite loan applications forwarded by correspondent lenders.
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Our credit approval process analyzes both the equity position of the
requested loan, including both the priority of the lien and the combined loan-
to-value ratio, and the applicant's creditworthiness; to the extent the
requested loan would have a less or more favorable equity position, the
creditworthiness of the borrower must be stronger or may be weaker. The loan-
to-value ratio of the requested loan, combined with any existing loans with a
senior lien position, may not exceed 95% without senior management approval. In
most circumstances, an appraisal of the property is required. Currently, loans
secured by a first mortgage with an obligor having a superior credit rating may
not exceed $300,000 without senior management approval, and loans secured by a
second mortgage with an obligor having a superior credit rating may not exceed
$250,000 without senior management approval.
YIELD CONSIDERATIONS
The pass-through rates and the weighted average loan rate of the loans, as of
the related Cut-off Date, relating to each series of certificates are listed in
the prospectus supplement.
The prospectus supplement for each series will indicate that a lower rate of
principal prepayments than anticipated would negatively affect the total return
to investors of any class of certificates that is offered at a discount to its
principal amount, and a higher rate of principal prepayments than anticipated
would negatively affect the total return to investors of any 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 we may offer, such as interest
only certificates, principal only certificates, and fast pay/slow pay
certificates, may be particularly sensitive to prepayment rates, and to changes
in prepayment rates, on the underlying loans. If stated in the related
prospectus supplement, the yield on some types of certificates which we may
offer could change and may be negative under some prepayment rate scenarios.
Accordingly, some types of certificates may not be legal or appropriate
investments for financial institutions, pension funds or others. See "ERISA
Considerations" and "Legal Investment Considerations" in this prospectus and in
the prospectus supplement. In addition, the timing of changes in the rate of
prepayment on the loans included in a loan 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 loans occur, the greater the effect on the investor's yield
to maturity.
MATURITY AND PREPAYMENT CONSIDERATIONS
Maturity
Unless we describe otherwise in an applicable prospectus supplement, all of
the loans will have maturities at origination of not more than 25 years.
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Prepayment Considerations
Loans generally may be prepaid in full or in part without penalty. FHA-
insured home improvement loans may be prepaid at any time without penalty. We
have no significant experience with the rate of principal prepayments on home
improvement loans or home equity loans. Because the loans have scheduled due
dates throughout the calendar month, and because, unless otherwise specified in
the related prospectus supplement, all principal prepayments will be passed
through to certificateholders of the related series on the payment date
following the Due Period in which the principal prepayment occurred,
prepayments on the loans would affect the amount of funds available to make
distributions on the certificates on any payment date only if a substantial
portion of the loans prepaid before their respective due dates in a particular
month, thus paying less than 30 days' interest for that Due Period, while very
few loans prepaid after their respective due dates in that month. In addition,
liquidations of defaulted loans or the servicer's or our exercise of the option
to repurchase the entire remaining pool of loans will affect the timing of
principal distributions on the certificates of a series. See "Description of
the Certificates--Repurchase Option."
Information regarding the prepayment standard or model or any other rate of
assumed prepayment, as applicable, will be set forth in the prospectus
supplement for a series of certificates. Although the related prospectus
supplement will specify the prepayment assumptions used to price any series of
certificates, we cannot assure you that the loans will prepay at that rate, and
it is unlikely that prepayments or liquidations of the loans will occur at any
constant rate.
See "Description of the Certificates--Repurchase Option" for a description of
our or the servicer's option to repurchase the loans comprising part of a trust
when the aggregate outstanding principal balance of the loans is less than a
specified percentage of the initial aggregate outstanding principal balance of
the loans as of the related Cut-off Date. See also "The Trust--The Loan Pools"
for a description of our obligation to repurchase a loan in case of a breach of
a representation or warranty relative to that loan.
DESCRIPTION OF THE CERTIFICATES
Each series of certificates will be under a separate pooling and servicing
agreement to be entered into among us, as seller and servicer, and the trustee
named in the applicable prospectus supplement, and other parties as are
described in the applicable prospectus supplement. The following summaries
describe provisions expected to be common to each pooling and servicing
agreement and the related certificates, but do not claim to be complete and are
subject to, and are qualified in their entirety by reference to, the provisions
of the related pooling and servicing agreement and its description set forth in
the related prospectus supplement. The provisions of the form of pooling and
servicing agreement filed as an exhibit to the registration statement of which
this prospectus is a part that are not described herein may differ from the
provisions of any actual pooling and servicing agreement. The material
differences will be described in the related prospectus supplement. Capitalized
terms
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used in this prospectus shall have the meanings given to them in the form of
pooling and servicing 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 under this prospectus, and there may be
separate prospectus supplements relating to one or more of the classes sold.
When we refer to the prospectus supplement relating to a series comprised of
more than one class it should be understood to refer to each of the prospectus
supplements relating to the classes sold under this prospectus. When we refer
to the certificates of a class it 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.
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 created pursuant to the related pooling and servicing
agreement. The trust will be held by the trustee for the benefit of the
certificateholders. 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 listed 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 loan pool may be evidenced by one or more classes of
certificates, each representing the interest in the loan pool specified in the
related prospectus supplement. Each series of certificates may include one or
more classes of subordinated certificates which are subordinated in right of
distribution to one or more other classes of senior certificates as provided in
the related prospectus supplement. A series that is both senior and subordinate
are 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 for a series of mezzanine certificates will describe the
extent to which they are 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 amount, and any
distributions or payments which will not be affected by any subordination. The
protection afforded to the senior certificateholders from the subordination
feature described above will be effected by the preferential right of the
certificateholders to receive current distributions from the loan pool. If a
series of certificates contains more than one class of subordinated
certificates, losses will be allocated among the classes in the manner
described in the prospectus supplement. If 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
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and may, if rated in one of the four highest rating categories by a nationally
recognized statistical rating organization, be offered under this prospectus
and the prospectus supplement.
If specified in a prospectus supplement, a series of certificates may include
one or more classes which:
(1) are entitled to receive distributions only in respect of principal,
interest, or any combination of the two, or in specified proportions
of the payments;
(2) are entitled to receive distributions of principal before or after
specified principal distributions have been made on one or more other
classes within a series, or on a planned amortization schedule, or
targeted amortization schedule, or upon the occurrence of other
specified events.
The prospectus supplement will list the pass-through rate at which interest
will be paid to certificateholders of each class of a given series. The 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 loans evidenced by a single certificate of each
class of certificates of a series.
Distributions of principal and interest on the certificates will be made on
the payment dates listed in the related prospectus supplement 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.
Distributions will be made by check mailed to the address of the person
entitled to the distribution as it appears on the certificate register, or, as
described in the related prospectus supplement, by wire transfer, except that
the final distribution in retirement of certificates will be made only upon
presentation and surrender of the certificates at the office or agency of the
trustee specified in the final distribution notice to certificateholders.
Global Certificates
The certificates of a class may be issued in whole or in part in the form of
one or more global certificates that will be deposited with, or on behalf of,
and registered in the name of a nominee for, a 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.
Global certificates will be issued in registered form. Unless and until it is
exchanged in whole or in part for a certificate in definitive form, a global
certificate may not be transferred except as a whole by the depositary for the
global certificate to a nominee of the depositary or by a nominee of the
depositary to the depositary or another nominee of the depositary.
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The specific terms of the depositary arrangement for any certificates of a
class will be described in the related prospectus supplement. It is anticipated
that the following provisions described in this subsection will apply to all
depositary arrangements:
Upon the issuance of a global certificate, the depositary for the global
certificate will credit, on its book-entry registration and transfer system,
the respective denominations of the certificates represented by the global
certificate to the accounts of institutions that have accounts with the
depositary. 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 the global certificate will
be shown on, and the transfer of that ownership will be effected only through,
records maintained by the depositary for the global certificate or by
Participants or persons that hold through Participants. The laws of some states
require that purchasers of securities take physical delivery of the securities
in definitive form. These limits and 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 the global certificate, the depositary or the nominee, as the case may
be, will be considered the sole owner or holder of the certificates represented
by the global certificate for all purposes under the pooling and servicing
agreement relating to those certificates. Except as described in the paragraph
below, owners of beneficial interests in a global certificate will not be
entitled to have certificates of the series represented by a global certificate
registered in their names, will not receive or be entitled to receive physical
delivery of certificates of that series in definitive form and will not be
considered the owners or holders under the pooling and servicing agreement
governing those 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 the certificates. In addition, all reports required
under the applicable pooling and servicing 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. We, the
servicer, the trustee, or any agent, including any applicable certificate
registrar or paying agent, will not 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 the beneficial ownership interests or for
providing reports to the related beneficial owners.
We expect 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 the global certificate as shown on the
records of the depositary. We also expect that payments by Participants to
owners of beneficial interests in the global certificate held through
Participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers
registered in street name, and will be the responsibility of the Participants.
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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 us within the time period specified in the pooling and
servicing agreement, we will cause to be issued certificates of that class in
definitive form in exchange for the related global certificate or certificates.
In addition, we may at any time and in our sole discretion determine not to
have any certificates of a class represented by one or more global certificates
and, if this occurs, will cause to be issued certificates of that class in
definitive form in exchange for the related global certificate or certificates.
Further, if we specify that the certificates of a class, an owner of a
beneficial interest in a global certificate representing certificates of that
class may, on terms acceptable to us and the depositary for the global
certificate, receive certificates of that class in definitive form. If this
occurs, 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 the global certificate equal in denominations to the beneficial
interest and to have the certificates registered in its name.
Payments on Loans
Each certificate account will be a trust account established by the servicer
as to each series of certificates in the name of the trustee:
(1) with a depository institution, the long-term unsecured debt
obligations of which at the time of any deposit are rated within the
two highest rating categories, or other rating category as will not
adversely affect the ratings assigned to the certificates, by each
rating agency rating the certificates of that series; or
(2) with the trust department of a national bank; or
(3) in an account or accounts the deposits in which are fully insured by
the FDIC; or
(4) 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 so 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 the 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
(5) 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 other high-quality investments
specified in the applicable pooling and servicing agreement. A certificate
account may be maintained as an interest-bearing account, or the funds held in
the account may be invested pending each succeeding payment date in Eligible
Investments.
Unless we specify otherwise in the prospectus supplement, the servicer will
deposit in the certificate account on a daily basis all proceeds and
collections received or made by it
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subsequent to the Cut-off Date, including scheduled payments of principal and
interest due after the Cut-off Date but received by the servicer on or before
the Cut-off Date, including:
(1) all obligor payments on account of principal, including principal
prepayments, on the loans;
(2) all obligor payments on account of interest on the loans;
(3) all FHA insurance payments received by the servicer;
(4) all amounts received and retained for the liquidation of defaulted
loans, net of liquidation expenses;
(5) any advances made as described under "Advances" below and other
amounts required under the pooling and servicing agreement to be
deposited in the certificate account;
(6) all amounts received from any credit enhancement provided on a series
of certificates; and
(7) all proceeds of any loan or property acquired or repurchased by the
servicer or us, as described under "Conveyance of Loans" above or
under "Repurchase Option" below.
Distributions on Certificates
Except as we provide otherwise in the prospectus supplement, on each payment
date for a series of certificates, the trustee will withdraw from the
applicable certificate account and distribute to the certificateholders of that
series of record on the preceding record date an amount equal to, in the
aggregate, the Amount Available for that payment date. Unless we specify
otherwise in the applicable prospectus supplement, the Amount Available for a
payment date is an amount equal to the sum of all amounts on deposit in the
certificate account as of the seventh business day following the end of the
related Due Period, or another date as may be specified in the related
prospectus supplement, except:
(1) all payments on the loans that were due on or before the Cut-off
Date;
(2) all payments or collections received after the Due Period preceding
the month in which the payment date occurs;
(3) all scheduled payments of principal and interest due on a date or
dates subsequent to the Due Period preceding the Determination Date;
(4) amounts representing reimbursement for advances, such reimbursement
being limited, if so specified in the related prospectus supplement,
to amounts received on particular loans as late collections of
principal or interest as to which the servicer has made an
unreimbursed advance; and
(5) amounts representing reimbursement for any unpaid servicing fee.
In the case of a series of certificates which includes only one class, the
Amount Available for each distribution or payment date will be distributed pro
rata to the holders of the
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certificates. In the case of any other series of certificates, the Amount
Available for each payment date will be allocated and distributed to holders of
the certificates of the series according to the method and in the order of
priority specified in the applicable prospectus supplement. We refer to the
amount of principal and interest specified in the related prospectus supplement
to be distributed to certificateholders as the Certificate Distribution Amount.
Within the time specified in the pooling and servicing agreement and
described in the related prospectus supplement, the servicer will furnish a
statement to the trustee listing the amount to be distributed on the related
payment date on account of principal and interest, stated separately, and a
statement listing information about the loans.
Example of Distributions
The following is an example of the flow of funds as it would relate to a
hypothetical series of certificates issued, and with a Cut-off Date occurring,
in March 1999. All weekdays are assumed to be business days. The initial
principal balance of the loan pool will be the aggregate principal balance of
the loans 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 loan pool and will not be
passed through to certificateholders. 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 loan is prepaid in full, interest on the amount
prepaid is collected from the obligor only to the date of payment.
Distributions on April 15 will be made to certificateholders of record at the
close of business on the last business day of March, being the month
immediately preceding the month of distribution. On April 9, the seventh
business day following the end of the prior Due Period, the servicer will
determine the amounts of principal and interest which will be passed through on
April 15. In addition, the servicer may advance funds to cover any
delinquencies, in which event the distribution to certificateholders on April
15 will include the full amounts of principal and interest due during March.
The servicer will also calculate any changes in the relative interests
evidenced by the senior certificates and the subordinated certificates in the
trust. On April 15, the amounts determined on April 9 will be distributed to
certificateholders.
<TABLE>
<S> <C>
March 1............................................. Cut-off Date.
March 1-31.......................................... Due Period. Servicer
receives scheduled payments
on the loans and any
principal prepayments made
by obligors and applicable
interest thereon.
March 31............................................ Record date.
April 9............................................. Determination Date.
Distribution amount
determined.
April 15............................................ Payment date.
</TABLE>
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Succeeding months follow the pattern of the Due Period through the payment
date. The flow of funds with respect to any series of certificates may differ
from the above example, as specified in the related prospectus supplement.
Reports to Certificateholders
The trustee will forward to each certificateholder on each payment date, or
as soon thereafter as is practicable, as specified in the related prospectus
supplement, a statement listing the following information:
(1) the amount of distribution which constitutes monthly principal,
specifying the amounts constituting scheduled payments by obligors,
principal prepayments on the loans, and other payments on the loans;
(2) the amount of such distribution which constitutes monthly interest;
(3) the remaining principal balance represented by the certificateholder's
interest;
(4) our FHA insurance reserve amount;
(5) the amount of fees payable out of the trust;
(6) the pool factor, a percentage derived from a fraction the numerator of
which is the remaining principal balance of the certificates and the
denominator of which is the initial principal amount of the
certificates, immediately before and immediately after the payment
date;
(7) the number and aggregate principal balance of loans delinquent (a) 31-
59 days, (b) 60-89 and (c) 90 or more days;
(8) the number of loans liquidated during the Due Period ending
immediately before the payment date;
(9) other customary factual information as is necessary to enable
certificateholders to prepare their tax returns; and
(10) such other customary factual information available to the servicer
without unreasonable expense as is necessary to enable
certificateholders to comply with regulatory requirements.
Advances
Unless we specify otherwise in the prospectus supplement, to the extent that
collections on a loan in any Due Period are less than the scheduled payment
due, the servicer will be obligated to make an advance of the uncollected
portion of the scheduled payment. The servicer will be obligated to advance a
delinquent payment on a loan only to the extent that the servicer, in its sole
discretion, expects to recoup such advance from subsequent collections on the
loan or from Liquidation Proceeds of the loans. The servicer will deposit any
advances in the certificate account no later than one business day before the
following payment date. The servicer will be entitled to recoup its advances on
a loan from subsequent payments by or on behalf of the obligor and from
Liquidation Proceeds, including FHA
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insurance payments or foreclosure resale proceeds, if any, of the loan, and
will release its right to reimbursements in conjunction with the purchase of
the loan by us for breach of representations and warranties. If the servicer
determines in good faith that an amount previously advanced will not ultimately
be recoverable from payments by or on behalf of the obligor or from Liquidation
Proceeds, including FHA insurance payments or foreclosure resale proceeds of
the loan, the servicer will be entitled to reimbursement from payments on other
loans or from other funds available.
Unless we specify otherwise in the prospectus supplement, if the servicer
fails to make an advance required under the pooling and servicing agreement,
the trustee will be obligated to deposit the amount of the advance in the
certificate account on the payment date. The trustee will not be obligated to
deposit any amount if:
(1) the trustee does not expect to recoup the advance from subsequent
collections on the loan or from Liquidation Proceeds or
(2) the trustee determines that it is not legally able to make the
advance.
Indemnification
The pooling and servicing agreement requires us to defend and indemnify the
trust, the trustee, including any agent of the trustee and the
certificateholders against any and all costs, expenses, losses, damages, claims
and liabilities, including reasonable fees and expenses of counsel and expenses
of litigation:
(1) arising out of or resulting from the use or ownership by us or the
servicer or any affiliate of any real estate related to a loan and
(2) for any taxes which may at any time be asserted for, and as of the
date of, the transfer of the loans to the trust, but not including any
federal, state or other tax arising out of the creation of the trust
and the issuance of the certificates.
The pooling and servicing agreement also requires the servicer, in its duties
as servicer of the loans, to defend and indemnify the trust, the trustee and
the certificateholders, which indemnification will survive any removal of the
servicer as servicer of the loans, against any and all costs, expenses, losses,
damages, claims and liabilities, including reasonable fees and expenses of
counsel and expenses of litigation, for any action taken by the servicer on any
loan while it was the servicer.
Servicing
Under to the pooling and servicing agreement, the servicer will service and
administer the loans assigned to the trustee as more fully described below in
this section. The servicer will perform diligently all services and duties
specified in each pooling and servicing agreement, in the same manner as
prudent lending institutions of home improvement loans and home equity loans of
the same type as the loans in those jurisdictions where the related real
properties are located or as otherwise specified in the pooling and servicing
agreement.
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The duties to be performed by the servicer will include collection and
remittance of principal and interest payments, collection of insurance claims
and, if necessary, foreclosure of loans.
The servicer will make reasonable efforts to collect all payments called for
under the loans and, consistent with the pooling and servicing agreement and
any FHA insurance, will follow the collection procedures as it follows for
mortgage loans or loans serviced by it that are comparable to the loans.
Evidence as to Compliance. Unless we specify otherwise in the prospectus
supplement, each pooling and servicing agreement will require the servicer to
deliver to the trustee a monthly report before each payment date, describing
information about the loan pool and the certificates of the series as is
specified in the related prospectus supplement. Each report to the trustee will
be accompanied by a statement from an appropriate officer of the servicer
certifying the accuracy of the report and stating that the servicer has not
defaulted in the performance of its obligations under the pooling and servicing
agreement. On or before May 1 of each year, the servicer will deliver to the
trustee a report of a nationally recognized accounting firm stating that the
firm has examined documents and records relating to the servicing of home
improvement loans and home equity loans serviced by the servicer under pooling
and servicing agreements similar to the pooling and servicing agreement and
stating that, on the basis of those procedures, the servicing has been
conducted in compliance with the pooling and servicing agreement, except for
any exceptions described in the report.
Certain Matters Regarding the Servicer. The servicer may not resign from its
obligations and duties under the pooling and servicing agreement except upon a
determination that its duties under the agreement are no longer permissible
under applicable law. No resignation will become effective until the trustee or
a successor servicer has assumed the servicer's obligations and duties under
the pooling and servicing agreement. The servicer can only be removed as
servicer upon the occurrence of an event of termination as discussed below
under "--Events of Termination."
The servicer shall keep in force throughout the term of the pooling and
servicing agreement:
(1) a policy or policies of insurance covering errors and omissions for
failure to maintain insurance as required by the pooling and servicing
agreement, and
(2) a fidelity bond.
The policy or policies and the fidelity bond shall be in the form and amount as
is generally customary among persons which service a portfolio of home
improvement loans and home equity loans having an aggregate principal amount of
$10 million or more and which are generally regarded as servicers acceptable to
institutional investors.
Servicing Compensation and Payment of Expenses. For servicing the loans, we
will receive servicing fees which include a monthly servicing fee, which we may
assign, for each Due Period, paid on the next succeeding payment date, equal to
1/12th of
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the product of the annual servicing fee rate described in the prospectus
supplement and the Pool Scheduled Principal Balance for the payment date. As
long as we are the servicer, the trustee will pay us its monthly servicing fee
from any monies remaining after the certificateholders have received all
payments of principal and interest for the payment date.
The monthly servicing fee provides compensation for customary third-party
servicing activities to be performed by the servicer for the trust, for
additional administrative services performed by the servicer on behalf of the
trust and for expenses paid by the servicer on behalf of the trust.
Customary servicing activities include collecting and recording payments,
communicating with obligors, investigating payment delinquencies, providing
billing and tax records to obligors and maintaining internal records with
respect to each loan. Administrative services performed by the servicer on
behalf of the trust include selecting and packaging the loans, calculating
distributions to certificateholders and providing related data processing and
reporting services for certificateholders and on behalf of the trustee.
Expenses incurred in connection with servicing of the loans and paid by us from
our monthly servicing fees include payment of FHA insurance premiums, payment
of fees and expenses of accountants, payments of all fees and expenses incurred
in the enforcement of loans or foreclosure on collateral relating thereto,
including submission of FHA insurance claims, payment of trustee's fees, and
payment of expenses incurred in distributions and reports to
certificateholders, except that the servicer shall be reimbursed out of the
Liquidation Proceeds of a liquidated loan, including FHA insurance proceeds,
for customary out-of-pocket liquidation expenses incurred by it.
Events of Termination. Except as we specify otherwise in the prospectus
supplement, events of termination under each pooling and servicing agreement
will occur if:
(1) the servicer fails to make any payment or deposit required under the
pooling and servicing agreement, including an advance, and such
failure continues for four business days;
(2) the servicer fails to observe or perform in any material respect any
other covenant or agreement in the pooling and servicing agreement
which continues unremedied for 30 days;
(3) the servicer conveys, assigns or delegates its duties or rights under
the pooling and servicing agreement, except as specifically permitted
under the pooling and servicing agreement, or attempts to make such a
conveyance, assignment or delegation;
(4) a court having jurisdiction in the premises enters a decree or order
for relief in respect of the servicer in an involuntary case under any
applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, or appoints a receiver, liquidator, assignee,
custodian, trustee, or sequestrator, or similar official, of the
servicer or enters a decree or order for any substantial liquidation
of its affairs;
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(5) the servicer begins a voluntary case under any applicable bankruptcy,
insolvency or similar law, or consents to the entry of an order for
relief in an involuntary case under any law, or consents to the
appointment of or taking possession by a receiver, liquidator,
assignee, trustee, custodian or its creditors, or fails to, or admits
in writing its inability to, pay its debts as they become due, or
takes any corporate action in furtherance of the foregoing;
(6) the servicer fails to be an eligible servicer; or
(7) if we are the servicer, our servicing rights under its master seller-
servicer loan with GNMA are terminated.
The servicer will be required under the pooling and servicing agreement to give
the trustee and the certificateholders notice of an event of termination
promptly upon the occurrence of the event.
Rights Upon Event of Termination. Except as we specify otherwise in the
prospectus supplement, so long as an event of termination remains unremedied,
the trustee may, and at the written direction of certificateholders
representing 25% or more of the aggregate certificate principal balance of a
series shall, terminate all of the rights and obligations of the servicer under
the related pooling and servicing agreement and in and to the loans, and the
proceeds of the loans, at which time, subject to applicable law regarding the
trustee's ability to make advances, the trustee or a successor servicer under
the pooling and servicing agreement will succeed to all the responsibilities,
duties and liabilities of the servicer under the pooling and servicing
agreement and will be entitled to similar compensation arrangements; provided,
however, that neither the trustee nor any successor servicer will assume our
obligation to repurchase loans 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 before a transfer of the servicer's
servicing and related functions or for any breach by the servicer of any of its
obligations contained in the pooling and servicing agreement. In addition, the
trustee will notify FHA of our termination as servicer of the loans and will
request that our portion FHA insurance reserves allocable to the FHA-insured
home improvement loans be transferred to the trustee or a successor servicer.
See "Description of FHA Insurance." Notwithstanding the termination, the
servicer shall be entitled to payment of certain amounts payable to it before
the termination, for services rendered before the termination. No termination
will affect in any manner our obligation to repurchase certain loans for
breaches of representations or warranties under the pooling and servicing
agreement. If 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 appointment,
the trustee is obligated to act in this capacity. The trustee and the 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 pooling and servicing
agreement.
The trustee will be under no obligation to take any action or to institute,
conduct or defend any litigation under the pooling and servicing agreement at
the request, order or
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direction of any of the holders of certificates, unless the certificateholders
have offered to the trustee reasonable security or indemnity against the costs,
expenses and liabilities which the trustee may incur.
Repurchase Option
Unless we specify otherwise in the prospectus supplement, each pooling and
servicing agreement will provide that on any payment date on which the Pool
Scheduled Principal Balance is less than 10% of the Cut-off Date pool principal
balance, we or the servicer will have the option to repurchase, on 30 days'
prior written notice to the trustee, all outstanding loans in the related loan
pool at a price equal to the greatest of:
(1) the principal balance of the loans on the prior payment date plus 30
days' accrued interest thereon at the applicable pass-through rate
and any delinquent payments of interest, plus the fair market value,
as determined by the servicer, of any acquired properties,
(2) the fair market value of all of the assets of the trust, and
(3) an amount equal to the aggregate certificate principal balance of the
related certificates plus interest on the certificates payable on and
prior to the payment date occurring in the month after the
repurchase, less amounts on deposit in the certificate account and
available to pay the principal and interest.
Such price will be paid on the payment date on which the purchase occurs to the
certificateholders of record on the last business day of the immediately
preceding Due Period in immediately available funds against the trustee's
delivery of the loans and any acquired properties to the servicer. The
distribution of the purchase price to certificateholders will be in lieu of any
other distribution to be made on the payment date on the related loans.
Amendment
Unless we specify otherwise in the prospectus supplement, the pooling and
servicing agreement may be amended by us, the servicer and the trustee without
the consent of the certificateholders:
(1) to cure any ambiguity; or
(2) to correct or supplement any provision in the agreement that may be
inconsistent with another provision; or
(3) if an election has been made for a particular series of certificates
to treat the trust as a REMIC within the meaning of Section 860D(a) of
the Internal Revenue Code, to maintain the REMIC status of the trust
and to avoid the imposition of certain taxes on the REMIC; or
(4) to make any other provisions for matters or questions arising under
such pooling and servicing agreement that are not inconsistent with
its provisions, provided that the action will not adversely affect in
any material respect the interests of the certificateholders of the
related series.
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Unless we specify otherwise in the prospectus supplement, the pooling and
servicing agreement may also be amended by us, the servicer and the trustee
with the consent of the certificateholders, other than holders of residual
certificates, representing 66 2/3% or more of the aggregate certificate
principal balance of a series for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of the pooling and
servicing agreement or of modifying in any manner the rights of the
certificateholders; provided, however, that no amendment that reduces in any
manner the amount of, or delays the timing of, any payment received on loans
which are required to be distributed on any certificate may be effective
without the consent of the holders of each certificate.
Termination of the Agreement
The obligations created by each pooling and servicing agreement will
terminate, after distribution of all monthly principal and monthly interest
then due to certificateholders, on the earlier of:
(1) the payment date after the later of the final payment or other
liquidation of the last loan or the disposition of all property
acquired upon foreclosure of any loan; or
(2) the payment date on which we or the servicer repurchase the loans as
described under "Description of the Certificates--Repurchase Option."
However, our representations, warranties and indemnities will survive
any termination of the pooling and servicing agreement.
The Trustee
The prospectus supplement for a series of certificates will specify the
trustee under the related pooling and servicing agreement. The trustee may have
customary commercial banking relationships with us or our affiliates and the
servicer or its affiliates.
The trustee may resign at any time, in which event we will be obligated to
appoint a successor trustee. We may also remove the trustee if the trustee
ceases to be eligible to continue as trustee under the pooling and servicing
agreement or if the trustee becomes insolvent. Any resignation or removal of
the trustee and appointment of a successor trustee will not become effective
until acceptance of the appointment by the successor trustee.
The trustee will make no representation as to the validity or sufficiency of
the pooling and servicing agreement, the certificates or any loan, loan file or
related documents, and will not be accountable for the use or application by us
of any funds paid to us, as seller, in consideration of the conveyance of the
loans, or deposited into or withdrawn from the certificate account by the
servicer. If no event of termination has occurred, the trustee will be required
to perform only those duties specifically required of it under the pooling and
servicing 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 pooling and servicing agreement. Whether or not an event of
termination has occurred, the trustee is not required to expend or risk its own
funds or otherwise incur any financial liability in the performance
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of its duties or the exercise of its powers if it has reasonable grounds to
believe that repayment of the funds or adequate indemnity against the risk or
liability is not reasonably assured to it.
Under the pooling and servicing agreement, the servicer agrees to pay to the
trustee on each payment date:
. reasonable compensation for all services rendered by it under the
agreement, which compensation shall not be limited by any provision of
law in regard to the compensation of a trustee of an express trust;
and
. reimbursement for all reasonable expenses, disbursements and Advances
incurred or made by the trustee in accordance with any provision of
the pooling and servicing agreement, including FHA insurance premiums
not paid by the servicer and reasonable compensation and the expenses
and disbursements of its agents and counsel, except any such expense,
disbursement or advance as may be attributable to the trustee's
negligence or bad faith.
We have 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 and the trustee's duties, 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.
DESCRIPTION OF FHA INSURANCE
Some of the home improvement loans may be FHA-insured, the payments upon
which are insured by the FHA under Title I of the National Housing Act and are
subject to the following discussion.
The insurance available to any trust will be subject to the limit of a
reserve amount equal to 10% of the principal balance of all Title I insured
loans originated or purchased and reported for FHA insurance by us, which
amount will be increased by an amount equal to 10% of the lesser of the
principal balance or the purchase price of insured loans subsequently
originated or purchased of record by us. Our reserve amount may be reduced by
10% of the principal balance of any loans reported to FHA as sold without
recourse by us. In the pooling and servicing agreement, we will agree to pay
all FHA insurance premiums required by FHA regulations. If we fail to pay any
premium, the trustee or the successor servicer for each series is obligated to
pay the premium and is entitled to be reimbursed by us and from collections on
the related home improvement loans.
As of December 31, 1998, our FHA insurance reserve amount was equal to
approximately $85,874,000. These insurance reserves were available to cover
losses on approximately $688,627,000 of FHA-insured manufactured housing loans
and approximately $158,943,000 of FHA-insured home improvement loans, including
the FHA-insured home improvement loans that may be owned by a trust. If an
event of termination, as defined
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under "Description of the Certificates--Events of Termination" occurs, each
trustee will notify FHA of Green Tree's termination as servicer of the related
FHA-insured home improvement loans and will request that the portion of our FHA
insurance reserves allocable to the FHA-insured home improvement loans be
transferred to the trustee or a successor servicer. Although each trustee will
request a transfer of reserves, FHA is not obligated to comply with such a
request, and may determine that it is not in FHA's interest to permit the
transfer of reserves. In addition, FHA has not specified how insurance reserves
might be allocated in such event, and there can be no assurance that any
reserve amount, if transferred to the trustee or a successor servicer, would
not be substantially less than 10% of the outstanding principal amount of the
FHA-insured home improvement loans. It is likely that the trustee or any
successor servicer would be the lender of record on other FHA Title I loans, so
that any reserves that are so permitted to be transferred would become
commingled with reserves available for other FHA Title I loans. FHA also
reserves the right to transfer reserves with "earmarking," segregating reserves
so that they will not be commingled with the reserves of the transferee, if it
is in FHA's interest to do so.
In general, FHA will insure property improvement loans up to $25,000 for a
single-family property, with a maximum term of 20 years. FHA will insure loans
of up to $17,500 for manufactured homes which qualify as real estate under
applicable state law and loans of up to $12,000 per unit for a $48,000 limit
for four units for owner-occupied multiple-family homes. If the loan amount is
$15,000 or more, FHA requires a drive-by appraisal, the current tax assessment
value, or a full uniform residential appraisal report dated within 12 months of
the closing to verify the property's value. The maximum loan amount on
transactions requiring an appraisal is the amount of equity in the property
shown by the market value determination of the property. The loan proceeds must
be used for the purposes described in the loan application, and those
improvements must substantially protect or improve the basic livability or
utility of the property. The secretary of HUD from time to time publishes a
list of ineligible items and activities which may not be financed with the
proceeds of an FHA-insured home improvement loan.
Following a default on an FHA-insured home improvement loan the servicer may,
subject to certain conditions, either commence foreclosure proceedings against
the improved property securing the loan, or submit a claim to FHA, but may
submit a claim to FHA after proceeding against the improved property only with
the prior approval of the secretary of HUD. The availability of FHA insurance
following a default on an FHA-insured home improvement loan is subject to a
number of conditions, including strict compliance by us with FHA regulations in
originating and servicing the home improvement loan. Failure to comply with FHA
regulations may result in a denial of or surcharge on the FHA Insurance claim.
Prior to declaring an FHA-insured home improvement loan in default and
submitting a claim to FHA, the servicer must take certain steps to attempt to
cure the default, including personal contact with the borrower either by
telephone or in a meeting and providing the borrower with 30 days' written
notice before declaration of default. FHA may deny insurance coverage if the
borrower's nonpayment is related to a valid objection to faulty contractor
performance. In that event, we will seek to obtain payment by or a judgment
against the borrower, and may resubmit the claim to FHA following such a
judgment. As
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described under "Green Tree Financial Corporation--Loan Origination," We do not
purchase a home improvement loan until the customer verifies satisfactory
completion of the work.
Upon submission of a claim to FHA, the related trust must assign its entire
interest in the home improvement loan to the United States. In general, the
claim payment will equal 90% of the sum of:
(1) the unpaid principal amount of the home improvement loan at the date
of default and uncollected interest computed at the loan rate earned
to the date of default;
(2) accrued and unpaid interest on the unpaid amount of the home
improvement loan 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;
(3) uncollected court costs;
(4) legal fees, not to exceed $500; and
(5) expenses for recording the assignment of the lien to the United
States, if applicable.
LEGAL ASPECTS OF THE LOANS; REPURCHASE OBLIGATIONS
As a result of our conveyance and assignment of a pool of loans to a trust,
the certificateholders of such series, as the beneficial owners of the trust,
will succeed collectively to all of the rights thereunder, including the right
to receive payment on the loans. The following discussion contains summaries of
certain legal aspects of home improvement loans and home equity loans secured
by residential properties which are general in nature. These legal aspects are
in addition to the requirements of FHA regulations described in "Description of
FHA Insurance" with respect to the FHA-insured home improvement loans. Because
these legal aspects are governed by applicable state law, which laws may differ
substantially, the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the real estate securing the loans may be situated or which may govern any
loan. The summaries are qualified in their entirety by reference to the
applicable federal and state laws governing the loans.
Mortgages and Deeds of Trust
The loans will be secured by either mortgages, deeds of trust, security deeds
or deeds to secure debt depending upon the prevailing practice in the state in
which the underlying property is located, and may have first, second or third
priority. In some states, a mortgage creates a lien upon the real property
encumbered by the mortgage or deed of trust. In other states, the mortgage
conveys legal title to the property to the mortgagee subject to a condition
subsequent, such as, the payment of the indebtedness secured. There are two
parties to a mortgage: the mortgagor, who is the borrower, and the mortgagee,
who is the
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lender. In a mortgage state, the mortgagor delivers to the mortgagee a note or
retail installment loan evidencing the loan and the mortgage. Although a deed
of trust is similar to a mortgage, a deed of trust has three parties: the
borrower, or trustor, the lender as beneficiary, and a third-party grantee
called the trustee. Under a deed of trust, the borrower grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale,
to the trustee to secure repayment of the loan. The trustee's authority under a
deed of trust and the mortgagee's authority under a mortgage are governed by
applicable state law, the express provisions of the deed of trust or mortgage,
and, in some cases for deeds of trust, the directions of the beneficiary. Some
states use a security deed or deed to secure debt which is similar to a deed of
trust except that it has only two parties: a grantor, similar to a mortgagor,
and a grantee, similar to a mortgagee. Mortgages, deeds of trust and deeds to
secure debt are not prior to liens for real estate taxes and assessments and
other charges imposed under governmental police powers. Priority between
mortgages, deeds of trust and deeds to secure debt and other encumbrances
depends on their terms, the knowledge of the parties to the instrument in some
cases and generally on the order of recordation of the mortgage, deed of trust
or the deed to secure debt in the appropriate recording office.
Subordinate Mortgages; Rights of Senior Mortgagees or Beneficiaries
A substantial number of the mortgages, security deeds, deeds to secure debt
and deeds of trust securing the loans in any loan pool are expected to be
second or third mortgages or deeds of trust which are junior to mortgages or
deeds of trust held by other lenders or institutional investors. The rights of
the related trust, and therefore the certificateholders, as beneficiary under a
junior deed of trust or as mortgagee under a junior mortgage, are subordinate
to those of the mortgagee or beneficiary under the senior mortgage or deed of
trust, including the prior rights of the senior mortgagee or beneficiary to
receive hazard insurance and condemnation proceeds and to cause the property
securing the loan to be sold upon default of the mortgagor or trustor under the
senior mortgage or deed of trust, thereby extinguishing the junior mortgagee's
or junior beneficiary's lien unless the servicer on behalf of the trust asserts
its subordinate interest in the property in foreclosure litigation and,
possibly, satisfies the defaulted senior loan or loans. As discussed more fully
below, a junior mortgagee or beneficiary may satisfy a defaulted senior loan in
full, or in some states may cure the default and bring the senior loan current,
in either event usually adding the amounts expended to the balance due on the
junior loan. Although we generally do not cure defaults under a senior mortgage
or deed of trust, it is our standard practice to protect our interest by
attending any foreclosure sale and bidding for property only if it is in our
best interests to do so.
The standard form of the mortgage or deed of trust used by most institutional
lenders, like ours, confers on the mortgagee or beneficiary the right both to
receive all proceeds collected under any hazard insurance policy and all awards
made in connection with any condemnation proceedings, and to apply such
proceeds and awards to any indebtedness secured by the mortgage or deed of
trust, in such order as the mortgagee or beneficiary may determine. Thus, in
the event improvements on the property are damaged or destroyed by fire or
other casualty, or in the event the property is taken by condemnation, the
mortgagee
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or beneficiary under the underlying first mortgage or deed of trust will have
the prior right to collect any insurance proceeds payable under a hazard
insurance policy and any award of damages in connection with the condemnation
and to apply the same to the indebtedness secured by the first mortgage or deed
of trust. Proceeds in excess of the amount of first mortgage indebtedness, in
most cases, may be applied to the indebtedness of a junior mortgage or deed of
trust.
The form of mortgage or deed of trust used by institutional lenders may
contain a future advance clause, which provides, in essence, that additional
amounts advanced to or on behalf of the mortgagor or trustor by the mortgagee
or beneficiary are to be secured by the mortgage or deed of trust. The priority
of any advance made under the clause depends, in some states, on whether the
advance was an obligatory or optional advance. If the mortgagee or beneficiary
is obligated to advance the additional amounts, the advance is entitled to
receive the same priority as amounts initially advanced under the mortgage or
deed of trust, notwithstanding the fact that there may be junior mortgages or
deeds of trust and other liens which intervene between the date of recording of
the mortgage or deed of trust and the date of the future advance, and, in some
states, notwithstanding that the senior mortgagee or beneficiary had actual
knowledge of such intervening junior mortgages or deeds of trust and other
liens at the time of the advance. Where the mortgagee or beneficiary is not
obligated to advance additional amounts or, in some states, has actual
knowledge of the intervening junior mortgages or deeds of trust and other
liens, the advance will be subordinate to such intervening junior mortgages or
deeds of trust and other liens. Priority of Advances under the clause rests, in
some states, on state statutes giving priority to all Advances made under the
loan agreement to a credit limit amount stated in the recorded mortgage.
Another provision typically found in the form of the mortgage or deed of
trust used by most institutional lenders obligates the mortgagor or trustor to
pay before delinquency all taxes and assessments on the property and, when due,
all encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste, and to appear in and defend any action or proceeding purporting to
affect the property or the rights of the mortgagee or beneficiary under the
mortgage or deed of trust. If the mortgagor or trustor fails to perform any of
these obligations, the mortgagee or beneficiary is given the right under the
mortgage or deed of trust to perform the obligation itself, at its election,
with the mortgagor or trustor agreeing to reimburse the mortgagee or
beneficiary for any sums expended by the mortgagee or beneficiary on behalf of
the mortgagor or trustor. All sums so expended by a senior mortgagee or
beneficiary generally become part of the indebtedness secured by the senior
mortgage or deed of trust.
Subordinate Financing
Where the borrower encumbers the mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk.
. First, the borrower may have difficulty servicing and repaying multiple
loans.
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. Second, acts of the senior lender which prejudice the junior lender or
impair the junior lender's security may create a superior equity in
favor of the junior lender. For example, if the borrower and the senior
lender agree to an increase in the principal amount of or the interest
rate payable on the senior loan, the senior lender may lose its
priority to the extent any existing junior lender is harmed or the
borrower is additionally burdened.
. Third, if the borrower defaults on the senior loan or any junior loan,
the existence of junior loans and actions taken by junior lenders can
impair the security available to the senior lender and can interfere
with or delay the taking of action by the senior lender.
The bankruptcy of a junior lender may operate to stay foreclosure or similar
proceedings by the senior lender.
Foreclosure
Foreclosure is a legal procedure that allows the mortgagor to recover its
mortgage debt by enforcing its rights and available remedies under the
mortgage, deed of trust, deed to secure debt or security deed. Foreclosure of a
mortgage is generally accomplished by judicial action. A foreclosure action is
regulated by statutes and rules and subject throughout to the court's equitable
powers. Generally, a mortgagor is bound by the terms of the mortgage note and
the mortgage as made and cannot be relieved from its own default. However,
since a foreclosure action is equitable in nature and is addressed to a court
of equity, the court may relieve a mortgagor of a default and deny the
mortgagee foreclosure on proof that the mortgagor's default was neither willful
nor in bad faith and that the mortgagee's action establishes a waiver, or
fraud, bad faith, oppressive or unconscionable conduct and warrants a court of
equity to refuse affirmative relief to the mortgagee. In some circumstances a
court of equity may relieve the mortgagor from an entirely technical default
where the default was not willful. Generally, the action is initiated by the
service of legal pleadings upon all parties having an interest of record in the
real property. Delays in completion of the foreclosure occasionally may result
from difficulties in locating necessary parties defendant. When the mortgagee's
right to foreclosure is contested, the legal proceedings necessary to resolve
the issue can be time-consuming. After the completion of a judicial foreclosure
proceeding, the court may issue a judgment of foreclosure and appoint a referee
or other officer to conduct the sale of the property. In some states, mortgages
may also be foreclosed by advertisement, under a power of sale provided in the
mortgage. Foreclosure of a mortgage by advertisement is essentially similar to
foreclosure of a deed of trust by non-judicial power of sale.
Foreclosure of a deed of trust or a deed to secure debt is generally
accomplished by a non-judicial trustee's sale under a specific provision in the
deed of trust, security deed or deed to secure debt that authorizes the trustee
to sell the property upon any default by the borrower under the terms of the
note, deed of trust, security deed or deed to secure debt. In some states,
foreclosure also may be accomplished by judicial action in the manner provided
for foreclosure of mortgages. In some states, before a sale, the trustee must
record a notice of default and send a copy to the borrower trustor and to any
person who has recorded a
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request for a copy of a notice of default and notice of sale. In addition,
before the sale, the trustee must provide notice in some states to any other
individual having an interest of record in the real property, including any
junior lienholders. Some states require that a notice of sale be posted in a
public place and, in most states, published for a specified period of time in
one or more newspapers in a specified manner before the date of trustee's sale.
In addition, some state laws require that a copy of the notice of sale be
posted on the property and sent to all parties having an interest of record in
the property.
In some states, the borrower trustor has the right to reinstate the loan at
any time following default until shortly before the trustee's sale. In general,
the borrower, or any other person having a junior encumbrance on the real
estate, may, during a reinstatement period, cure the default by paying the
entire amount in arrears plus the costs and expenses incurred in enforcing the
obligation. Individual state laws control the amount of foreclosure expenses
and costs, including attorney's fees, which may be recovered by a lender.
In the case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer, or by the trustee, is
generally a public sale. However, because of the difficulty a potential third
party buyer at the sale might have in determining the exact status of title and
because the physical condition of the property may have deteriorated during the
foreclosure proceedings, it is not common for a third party to purchase the
property at the foreclosure sale. In some states, there is a statutory minimum
purchase price which the lender may offer for the property. Subject to the
right of the borrower in some states to remain in possession during the
redemption period, the lender will assume the burdens of ownership, including
obtaining hazard insurance, paying taxes and making such repairs at its own
expense as are necessary to render the property suitable for sale. The lender
commonly will obtain the services of a real estate broker and pay the broker a
commission in connection with the sale of the property. Depending upon market
conditions, the ultimate proceeds of the sale of the property may not equal the
lender's investment in the property. Any loss resulting from the sale may be
reduced by the receipt of any mortgage insurance proceeds.
A second or third mortgagee may not foreclose on the property securing a
second or first mortgage unless it forecloses subject to the senior mortgages,
in which case it must either pay the entire amount due on the senior mortgages
before or at the time of the foreclosure sale or make payments on the senior
mortgages in the event the mortgagor is in default thereunder, in either event
adding the amounts expended to the balance due on the junior loan, and may be
subrogated to the rights of the senior mortgagees. In addition, in the event
that the foreclosure by a junior mortgagee triggers the enforcement of a due-
on-sale clause in a senior mortgage, the junior mortgagee may be required to
pay the full amount of the senior mortgages to the senior mortgagees.
Accordingly, for those loans which are second or third mortgage loans, if the
lender purchases the property, the lender's title will be subject to all senior
liens and claims and certain governmental liens.
The proceeds received by the referee or trustee from the sale are applied
first to the costs, fees, and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage or deed of trust under which the sale was
conducted. Any remaining proceeds are
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generally payable to the holders of junior mortgages or deeds of trust and
other liens and claims in order of their priority, whether or not the borrower
is in default. Any additional proceeds are generally payable to the mortgagor
or trustor. The payment of the proceeds to the holders of junior mortgages may
occur in the foreclosure action of the senior mortgagee or may require the
institution of separate legal proceeding.
Some states impose prohibitions or limitations on remedies available to the
mortgagee, including the right to recover the debt from the mortgagor. See "--
Anti-Deficiency Legislation and Other Limitations on Lenders" herein.
In certain jurisdictions, real property transfer or recording taxes or fees
may be imposed on the related trust with respect to its acquisition, by
foreclosure or otherwise, and disposition of real property securing a loan, and
any taxes or fees imposed may reduce Liquidation Proceeds with respect to the
property, as well as distributions payable to the certificateholders.
Second or Third Mortgages
The loans may be secured by second or third mortgages or deeds of trust,
which are junior to first or second mortgages or deeds of trust held by other
lenders. The rights of the certificateholders as the holders of a junior deed
of trust, junior mortgage, or junior security deed are subordinate in lien and
in payment to those of the holder of the senior mortgage, deed of trust, or
security deed including the prior rights of the senior mortgagee or beneficiary
to receive and apply hazard insurance and condemnation proceeds and, upon
default of the mortgagor under the senior mortgage or deed of trust, to cause a
foreclosure on the property. Upon completion of the foreclosure proceedings by
the holder of the senior mortgage or the sale pursuant to the senior deed of
trust, the junior mortgagee's or junior beneficiary's lien will be extinguished
unless the junior lienholder satisfies the defaulted senior loan or asserts its
subordinate interest in a property in foreclosure proceedings. Such
extinguishment will eliminate access to the collateral for the loan. See "--
Foreclosure" herein.
Furthermore, the terms of the junior mortgage, deed of trust, deed to secure
debt or security deed are subordinate to the terms of the senior mortgage, deed
of trust, deed to secure debt or security deed. In the event of a conflict
between the terms of the senior mortgage, deed of trust, deed to secure debt or
security deed and the junior mortgage, deed of trust, deed to secure debt or
security deed, the terms of the senior mortgage, deed of trust, deed to secure
debt or security deed will govern generally. Upon a failure of the mortgagor or
trustor to perform any of its obligations, the senior mortgagee or beneficiary,
subject to the terms of the senior mortgage, deed of trust, deed to secure debt
or security deed may have the right to perform the obligation itself.
Generally, all sums so expended by the mortgagee or beneficiary become part of
the indebtedness secured by the mortgage, deed of trust, deed to secure debt or
security deed. To the extent a first mortgagee expends such sums, such sums
will generally have priority over all sums due under a junior mortgage, deed of
trust, deed to secure debt or security deed.
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Rights of Redemption
The purposes of a foreclosure action are to enable the mortgagee to realize
upon its security and to bar the mortgagor, and all persons who have an
interest in the property which is subordinate to the foreclosing mortgagee,
from their equity of redemption. The doctrine of equity of redemption provides
that, until the property covered by a mortgage has been sold in accordance with
a properly conducted foreclosure and foreclosure sale, those having an interest
which is subordinate to that of the foreclosing mortgagee have an equity of
redemption and may redeem the property by paying the entire debt with interest.
In addition, in some states, when a foreclosure action has been commenced, the
redeeming party must pay the costs of the action. Those having an equity of
redemption must generally be made parties and duly summoned to the foreclosure
action in order for their equity of redemption to be barred.
In some states, after sale under a deed of trust or foreclosure of a
mortgage, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property from the foreclosure sale. In other
states, this right of redemption applies only to sale following judicial
foreclosure, and not to sale under a non-judicial power of sale. In most states
where the right of redemption is available, statutory redemption may occur upon
payment of the foreclosure purchase price, accrued interest and expenses of
foreclosure. In other states, redemption may be authorized if the former
borrower pays only a portion of the sums due. In some states, the right to
redeem is an equitable right. The equity of redemption, which is a non-
statutory right that must be exercised before foreclosure sale, should be
distinguished from statutory rights of redemption. The effect of a right of
redemption is to diminish the ability of the lender to sell the foreclosed
property. The exercise of a right of redemption would defeat the title of any
purchaser at a foreclosure sale, or of any purchaser from the lender subsequent
to judicial foreclosure or sale under a deed of trust. Consequently, the
practical effect of the redemption right is to force the lender to maintain the
property and pay the expenses of ownership until the redemption period has run.
In some states, there is no right to redeem property after a trustee's sale
under a deed of trust.
Anti-Deficiency Legislation and Other Limitations on Lenders
Individual states have imposed statutory restrictions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the
borrower equal in most cases to the difference between the amount due to the
lender and the net amount realized upon the public sale.
Some state statutes may require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an
attempt to satisfy the full debt before bringing a personal action against the
borrower. In other states, the lender has the option of bringing a personal
action against the borrower on the debt without first exhausting the security;
however, in some of these states, the lender, following judgment on the
personal action, may be deemed to have elected a remedy and may be precluded
from
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exercising remedies on the security. Consequently, the practical effect of the
election requirement, when applicable, is that lenders will usually proceed
first against the security rather than bringing a personal action against the
borrower.
Other statutory provisions may limit any deficiency judgment against the
borrower following a foreclosure sale to the excess of the outstanding debt
over the fair market value of the property at the time of the 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 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 or enforce a deficiency
judgment. For example, in a Chapter 13 proceeding, the holder may not be able
to obtain a lift of the automatic stay to foreclose if the borrower has equity
and the home is necessary to the bankruptcy reorganization. Generally, under
the federal bankruptcy law, the filing of a petition acts as a stay against
virtually all actions against the debtor, including the enforcement of remedies
of collection of a debt and, often, no interest or principal payments are made
during bankruptcy proceedings. A bankruptcy court may also grant the debtor a
reasonable time to cure a payment default of a mortgage loan on a debtor's
residence by paying arrearages and reinstate the original mortgage loan payment
schedule even though the lender accelerated the mortgage loan and final
judgment of foreclosure had been entered in state court, provided no sale of
the property had yet occurred, before the filing of the debtor's Chapter 13
petition. Some courts with federal bankruptcy jurisdiction have approved plans,
based on the particular facts of the reorganization case, that effected the
curing of a mortgage loan default by paying arrearages over a number of years.
In the case of a mortgage loan not secured by the debtor's principal residence,
courts with federal bankruptcy jurisdiction may also reduce the Monthly
Payments due under the mortgage loan, change the rate of interest and alter the
mortgage loan repayment schedule.
The Internal Revenue Code provides priority to certain federal tax liens over
the lien of the mortgage or deed of trust. The bankruptcy code also provides
priority to certain tax liens over the lien of the mortgage or deed of trust.
The laws of some states provide priority to state tax liens over the lien of
the mortgage or deed of trust. Numerous federal and some state consumer
protection laws impose substantive requirements upon mortgage lenders in
connection with the origination, servicing and the enforcement of mortgage
loans. These laws include the federal Truth in Lending Act, Real Estate
Settlement Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing
Act, Fair Credit Reporting Act, state licensing requirements, and related
statutes and regulations. These federal laws and state laws impose specific
statutory liabilities upon lenders who originate or service mortgage loans and
who
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fail to comply with the provisions of the law. In some cases, this liability
may affect assignees of the mortgage loans.
Consumer Protection Laws with respect to Loans
Numerous federal and state consumer protection laws impose substantial
requirements upon creditors involved in consumer finance. These laws include
the Federal Truth-in-Lending Act, Regulation Z, the Equal Credit Opportunity
Act, Regulation B, the Fair Credit Reporting Act, and related statutes. The
Home Ownership and Equity Protection Act of 1994, which became effective on
October 1, 1995, adds provisions to Regulation Z which impose additional
disclosure and other requirements on creditors involved in non-purchase money
mortgage loans with high interest rates or high up-front fees and charges. It
is possible that some loans included in a loan pool may be subject to these
provisions. The Home Protection Act applies to mortgage loans originated on or
after the effective date of these regulations. These laws can impose specific
statutory liabilities upon creditors who fail to comply with their provisions
and may affect the enforceability of the loan.
Courts have imposed general equitable principles upon repossession and
litigation involving deficiency balances. These equitable principles are
generally designed to relieve a consumer from the legal consequences of a
default.
In several cases, consumers have asserted that the remedies provided secured
parties under the UCC and related laws violate the due process protections
provided under the 14th Amendment to the Constitution of the United States. For
the most part, courts have upheld the notice provisions of the UCC and related
laws as reasonable or have found that the repossession and resale by the
creditor does not involve sufficient state action to afford constitutional
protection to consumers.
The holder-in-due-course rule of the Federal Trade Commission is intended to
defeat the ability of the transferor of a consumer credit loan which is the
seller of goods which gave rise to the transaction, and lenders and assignees,
to transfer the loan free of notice of claims by the debtor. The effect of this
rule is to subject the assignee of the loan to all claims and defenses which
the debtor could assert against the seller of goods, such as a home improvement
contractor. Liability under this rule is limited to amounts paid under a loan;
however, the obligor also may be able to assert the rule to set off remaining
amounts due as a defense against a claim brought by the trust against obligor.
The home protection act provides that assignees of high-interest, non-purchase
money mortgage loans, which may include some home improvement loans are subject
to all claims and defenses that the debtor could assert against the original
creditor, unless the assignee demonstrates that a reasonable person in the
exercise of ordinary due diligence could not have determined that the mortgage
loan was subject to the provisions of the home protection act.
Enforceability of Certain Provisions
The standard forms of note, mortgage and deed of trust generally contain
provisions obligating the borrower to pay a late charge if payments are not
timely made. In addition to
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limitations imposed by FHA regulations with respect to FHA-insured home
improvement loans, in some states there are or may be specific limitations upon
late charges which a lender may collect from a borrower for delinquent
payments. Under the pooling and servicing agreement, late charges, to the
extent permitted by law and not waived by us will be retained by us as
additional servicing compensation.
The standard forms of note, mortgage and deed of trust also include a debt-
acceleration clause, which permits the lender to accelerate the debt upon a
monetary default of the borrower, after the applicable cure period. Courts will
generally enforce clauses providing for acceleration in the event of a material
payment default. However, courts, exercising equity jurisdiction, may refuse to
allow a lender to foreclose a mortgage or deed of trust when an acceleration of
the indebtedness would be inequitable or unjust and the circumstances would
render the acceleration unconscionable.
Courts have imposed general equitable principles upon foreclosure. These
equitable principles are generally designed to relieve the borrower from the
legal effect of defaults under the loan documents. Examples of judicial
remedies that may be fashioned include judicial requirements that the lender
undertake affirmative actions to determine the causes for the borrower's
default and the likelihood that the borrower will be able to reinstate the
loan. In some cases, courts have required lenders to reinstate loans or recast
payment schedules to accommodate borrowers who are suffering from temporary
financial disability. In some cases, courts have limited the right of lenders
to foreclose if the default under the mortgage instrument is not monetary, such
as the borrower failing to adequately maintain the property or the borrower
executing a junior mortgage or deed of trust affecting the property. In other
cases, some courts have been faced with the issue whether federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that borrowers under mortgages or the deeds of trust receive notices in
addition to statutorily-prescribed minimum requirements. For the most part,
these cases have upheld the notice provisions as being reasonable or have found
that the sale by a trustee under a deed of trust or under a mortgage having a
power of sale does not involve sufficient state action to afford constitutional
protection to the borrower.
It is our practice with some of the home improvement loans to defer the first
payment for up to 90 days, and to charge the home improvement contractor points
to cover the lost interest due to collecting only 30 days' interest on the
first payment on these deferred payment loans.
Due-on-Sale Clauses
All of the loan documents will contain due-on-sale clauses unless the
prospectus supplement indicates otherwise. These clauses permit the servicer to
accelerate the maturity of the loan on notice, which is usually 30 days, if the
borrower sells, transfers or conveys the property without the prior consent of
the mortgagee. In recent years, court decisions and legislative actions placed
substantial restrictions on the right of lenders to enforce such clauses in
many states. However, effective October 15, 1982, Congress enacted the Garn-St.
Germain Depository Institutions Act of 1982, which, after a three-year grace
period,
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preempts state laws which prohibit the enforcement of due-on-sale clauses by
providing, among other matters, that due-on-sale clauses in some loans,
including the home improvement loans, made after the effective date of the
Garn-St. Germain Act are enforceable within some limitations as described in
the Garn-St. Germain Act and its regulations.
By virtue of the Garn-St. Germain Act, the servicer generally may be
permitted to accelerate any home improvement loan which contains a due-on-sale
clause upon transfer of an interest in the mortgaged property. This ability to
accelerate will not apply to certain types of transfers, including:
. the granting of a leasehold interest which has a term of three years
or less and which does not contain an option to purchase;
. a transfer to a relative resulting from the death of a mortgagor or
trustor, or a transfer where the spouse or child(ren) becomes an owner
of the mortgaged property in each case where the transferee(s) will
occupy the mortgaged property;
. a transfer resulting from a decree of dissolution of marriage, legal
separation agreement or from an incidental property settlement
agreement by which the spouse becomes an owner of the mortgaged
property;
. the creation of a lien or other encumbrance subordinate to the
lender's security instrument which does not relate to a transfer of
rights of occupancy in the mortgaged property, provided that such lien
or encumbrance is not created under a loan for deed;
. a transfer by devise, descent or operation of law on the death of a
joint tenant or tenant by the entirety; and
. other transfers as set forth in the Garn-St. Germain Act and the
regulations thereunder.
As a result, a lesser number of loans which contain due-on-sale clauses may
extend to full maturity than earlier experience would indicate for single-
family mortgage loans. However, we cannot predict the extent of the effect of
the Garn-St. Germain Act on the average lives and delinquency rates of the
loans.
The inability to enforce a due-on-sale clause may result in home improvement
loans bearing an interest rate below the current market rate being assumed by a
new home buyer rather than being paid off, which may have an impact upon the
average life of the loans and the number of loans which may be outstanding
until maturity.
Although Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, as amended, provides that, subject to specific conditions,
state usury limitations shall not apply to FHA-insured loans and to first
mortgage secured conventional loans if the loan is defined as a federally
related mortgage loan, a number of states have adopted legislation overriding
Title V's exemptions, as permitted by Title V. We will represent and
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warrant in each pooling and servicing agreement that all loans comply with any
applicable usury limitations.
Environmental Legislation
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act, and under some states' laws, a secured party which takes a deed-
in-lieu of foreclosure, purchases a mortgaged property at a foreclosure sale,
or operates a mortgaged property may become liable in certain circumstances for
the costs of cleaning up hazardous substances regardless of whether they have
contaminated the property. CERCLA imposes strict, as well as joint and several,
liability on several classes of potentially responsible parties, including
current owners and operators of the property who did not cause or contribute to
the contamination. Additionally, liability under CERCLA is not limited to the
original or unamortized principal balance of a loan or to the value of the
property securing a loan. Lenders may be held liable under CERCLA as owners or
operators unless they qualify for the secured creditor exemption to CERCLA.
This exemption exempts from the definition of owners and operators those who,
without participating in the management of a facility, hold indicia of
ownership primarily to protect a security interest in the facility. What
constitutes sufficient participation in the management of a property securing a
loan or the business of a borrower to render the exemption unavailable to a
lender has been a matter of interpretation by the courts. CERCLA has been
interpreted to impose liability on a secured party, even absent foreclosure,
where the party participated in the financial management of the borrower's
business to a degree indicating a capacity to influence waste disposal
decisions. However, court interpretations of the secured creditor exemption
have been inconsistent. In addition, when lenders foreclose and then become
owners of collateral property, courts are inconsistent as to whether ownership
renders the secured creditor exemption unavailable. Other federal and state
laws in some circumstances may impose liability on a secured party which takes
a deed-in-lieu of foreclosure, purchases a mortgaged property at a foreclosure
sale, or operates a mortgaged property on which contaminants other than CERCLA
hazardous substances are present, including petroleum, agricultural chemicals,
hazardous wastes, asbestos, radon, and lead-based paint. Such cleanup costs may
be substantial. It is possible that such cleanup costs could become a liability
of a trust and reduce the amounts otherwise distributable to the holders of the
related series of certificates in some circumstances if such cleanup costs were
incurred. Moreover, some states by statute impose a lien for any cleanup costs
incurred by the state on the property that is the subject of the cleanup costs,
an "environmental lien." All subsequent liens on the property generally are
subordinated to such an environmental lien and, in some states, even prior
recorded liens are subordinated to environmental liens. In the latter states,
the security interest of the trustee in a related parcel of real property that
is subject to an environmental lien could be adversely affected.
Traditionally, many residential mortgage lenders have not taken steps to
evaluate whether contaminants are present on any mortgaged property before the
origination of the mortgage loan or before foreclosure or accepting a deed-in-
lieu of foreclosure. Accordingly, we have has not made and will not make these
evaluations before the origination of the
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loans. Neither we nor any replacement servicer will be required by any pooling
and servicing agreement to undertake any such evaluations before foreclosure or
accepting a deed-in-lieu of foreclosure. We do not make any representations or
warranties or assume any liability for the absence or effect of contaminants on
any related real property or any casualty resulting from the presence or effect
of contaminants. However, we will not foreclose on related real property or
accept a deed-in-lieu of foreclosure if we know or reasonably believe that
there are material contaminated conditions on the property. A failure so to
foreclose may reduce the amounts otherwise available to certificateholders of
the related series.
Soldiers' and Sailors' Civil Relief Act
Application of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended, would adversely affect, for an indeterminate period of time, the
ability of the Servicer to collect full amounts of interest on certain of the
loans. Any shortfall in interest collections resulting from the application of
the Relief Act or similar legislation, which would not be recoverable from the
related loans, would result in a reduction of the amounts distributable to the
certificateholders. In addition, the Relief Act imposes limitations that would
impair the ability of the servicer to foreclose on an affected mortgage, deed
of trust, deed to secured debt or security deed during the mortgagor's period
of active duty status, and, under certain circumstances, during an additional
three month period. In the event that the Relief Act or similar legislation
applies to any loan which goes into default, there may be delays in payment on
the certificates. Any other interest shortfalls, deferrals or forgiveness of
payments on the loans resulting from similar legislation or regulations may
result in delays in payments or losses to certificateholders.
Repurchase Obligations
We will represent and warrant that each FHA-insured home improvement loan was
originated in compliance with FHA regulations and is covered by FHA insurance.
In the event FHA were to deny insurance coverage on an FHA-insured home
improvement loan due to a violation of FHA regulations in originating or
servicing such home improvement loans, such violation would constitute a breach
of a representation and warranty under the pooling and servicing agreement and
would create an obligation of us to repurchase such home improvement loan
unless the breach is cured. See "Description of the Certificates--Conveyance of
Loans."
In addition, we will also represent and warrant under each pooling and
servicing agreement that each loan complies with all requirements of law. If
any obligor has a claim against the related trust for violation of any law and
the claim materially adversely affects the trust's interest in a loan, such
violation would constitute a breach of a representation and warranty under the
pooling and servicing agreement and would create an obligation to repurchase
the loan unless the breach is cured. See "Description of the Certificates--
Conveyance of Loans."
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ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974 imposes requirements on
employee benefit plans subject to ERISA 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 those
plans. ERISA also imposes duties on persons who are fiduciaries of the plans.
Under ERISA, and subject to exemptions not relevant to this offering, any
person who exercises any authority or control over the management or
disposition of the assets of a Plan is considered to be a fiduciary of the
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. Some 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 these plans may
be invested in certificates without regard to the ERISA considerations
described above and in the paragraphs below, subject to the provisions of
applicable state law. Any plan which is qualified and exempt from taxation
under Sections 401(a) and 501(a) of the Internal Revenue Code, however, is
subject to the prohibited transaction rules provided in Section 503 of the
Internal Revenue Code.
In addition to the imposition of general fiduciary standards of investment
prudence and diversification, ERISA, and the corresponding provisions of the
Internal Revenue Code, prohibit a broad range of transactions involving plan
assets and persons having specified relationships to a plan. These 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 Internal
Revenue 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 loan pool and not merely an interest
in the certificates, transactions occurring in the operation of the loan pool
might constitute prohibited transactions unless an administrative exemption
applies. Selected exemptions which may be applicable to the acquisition and
holding of the certificates or to the servicing and operation of the loan pool
are noted in the paragraphs below.
The Department of Labor has issued a regulation (29 C.F.R. Section 2510.3-
101) 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 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
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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. The certificates are not expected to be
publicly offered securities under the terms of this 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 Internal Revenue 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, which amended Prohibited
Transaction Exemption 81-7, the DOL exempted from ERISA's prohibited
transaction rules 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 the 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 housing like the loans.
We cannot assure you that any of the exceptions provided in the regulation
described in the paragraph above, PTE 83-1 or any other administrative
exemption under ERISA, will apply to the purchase of certificates offered under
this prospectus, and, as a result, an investing plan's assets could be
considered to include an undivided interest in the home equity loans and any
other assets held in the loan pool. If the assets of a contract pool are
considered assets of an investing plan, we, the servicer, the trustee and other
persons, in providing services on the contracts, may be considered fiduciaries
to the plan and subject to the fiduciary responsibility provisions of Title I
of ERISA and the prohibited transaction provisions of Section 4975 of the
Internal Revenue Code for transactions involving those assets unless a
statutory or administrative exemption applies.
Any plan fiduciary considering the purchase of a certificate should consult
with its counsel about the potential applicability of ERISA and the Internal
Revenue Code to the investment. Moreover, each plan fiduciary should determine
whether, under the general
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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.
PTE 95-60 exempts from ERISA's prohibited transaction rules transactions
engaged in by insurance company general accounts in which an employee benefit
plan has an interest if 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 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 home
equity loans secured by either first or second mortgages in single-family,
residential property. 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 or Fitch.
In addition to any exemption that may be available under PTCE 95-60 for the
purchase and holding of the certificates by an insurance company general
account, the Small Business Job Protection Act of 1996 added a new Section
401(c) to ERISA, which provides exemptive relief from the provisions of Part 4
of Title I of ERISA and Section 4975 of the Internal Revenue Code, including
the prohibited transaction restrictions imposed by ERISA and the related excise
taxes imposed by the Internal Revenue Code, for transactions involving an
insurance company general account. Under Section 401(c) of ERISA, the DOL
published proposed regulations on December 22, 1997 to provide guidance for the
purpose of determining, in cases where insurance policies supported by an
insurer's general account are issued to or for the benefit of a plan on or
before December 31, 1998, which general account assets constitute plan assets.
Section 401(c) of ERISA generally provides that, until the date which is 18
months after the Proposed 401(c) Regulations become final, no person will be
subject to liability under Part 4 of Title I of ERISA and Section 4975 of the
Internal Revenue Code on the basis of a claim that the assets of an insurance
company general account constitute plan assets, unless
(1)as otherwise provided by the Secretary of Labor in the Proposed 401(c)
Regulations to prevent avoidance of the regulations; or
(2)an action is brought by the Secretary of Labor for breaches of
fiduciary duty which would also constitute a violation of federal or
state criminal law.
Any assets of an insurance company general account which support insurance
policies issued to a plan after December 31, 1998 or issued to plans on or
before December 31, 1998 for which the insurance company does not comply with
the Proposed 401(c) Regulations may be
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treated as Plan assets. In addition, because Section 401(c) does not relate to
insurance company separate accounts, separate account assets are still treated
as plan assets of any Plan invested in the separate account. Insurance
companies contemplating the investment of general account assets in the
certificates should consult with their legal counsel about the applicability of
PTCE 95-60 and Section 401(c) of ERISA, including the general account's ability
to continue to hold the securities after the date which is 18 months after the
date the Proposed 401(c) Regulations become final.
FEDERAL INCOME TAX CONSEQUENCES
General
The following is a general discussion of the 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,
all of which are subject to change, including retroactive changes, 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 or a segregated portion thereof evidenced by a particular
series or sub-series of certificates as a REMIC within the meaning of Section
860D(a) of the Internal Revenue Code. 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. The following discussion deals first with series for which a
REMIC election is made and then with series for which a REMIC election is not
made.
REMIC Series
For each series of certificates for which a REMIC election is made, at the
initial issuance of the certificates in that series our counsel identified in
the applicable prospectus supplement will have advised us that in its opinion,
assuming ongoing compliance with the applicable pooling and servicing
agreement, the trust will qualify as a REMIC and the certificates in that
series, REMIC certificates, will be treated either as regular interests in the
REMIC within the meaning of Section 860G(a)(1) of the Internal Revenue Code,
regular certificates, or as residual interests in the REMIC within the meaning
of Section 860G(a)(2) of the Internal Revenue Code, residual certificates.
Qualification as a REMIC. Qualification as a REMIC involves ongoing
compliance with requirements and the following discussion assumes that these
requirements will be satisfied by the trust so long as there are any REMIC
certificates outstanding. Substantially
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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 startup
day and at all times after that. The term qualified mortgage means any
obligation, including a participation or certificate of beneficial ownership in
such obligation, which is principally secured by an interest in real property
that is transferred to the REMIC on the startup day in exchange for regular or
residual interests in the REMIC or is purchased by the REMIC within the three-
month period beginning on the startup day pursuant to a fixed price loan in
effect on the startup day. The REMIC regulations provide that a home
improvement loan is principally secured by an interest in real property if the
fair market value of the real property securing the loan is at least equal to
either: (1) 80% of the issue price, generally, the principal balance, of the
loan at the time it was originated or (2) 80% of the adjusted issue price, the
then-outstanding principal balance, with adjustments, of the loan 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 home improvement loan is principally
secured by an interest in real property if substantially all of the proceeds of
the loan 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 loan,
other than the personal liability of the obligor. A qualified mortgage also
includes a qualified replacement mortgage that is used to replace any qualified
mortgage within three months of the startup day or to replace a defective
mortgage within two years of the startup day.
Permitted investments consist of:
. temporary investments of cash received under qualified mortgages
before distribution to holders of interests in the REMIC, cash-flow
investments,
. 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 contingencies,
qualified reserve assets, and
. 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 the 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 Internal Revenue Code, a reserve fund
must be promptly and appropriately reduced as payments on loans are received.
Foreclosure property will be a permitted investment only to the extent that the
property is not held for more than two years.
The Internal Revenue 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,
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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 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 the representation is false. The Internal
Revenue Code further requires that reasonable arrangements must be made to
enable a REMIC to provide the IRS and 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 Internal Revenue 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 fails to comply with one or more of the ongoing requirements for
qualification as a REMIC, the trust will not be treated as a REMIC for the year
during which the failure occurs and thereafter unless the IRS determines, in
its discretion, that the failure was inadvertent, in which case, the IRS may
require any adjustments which it deems appropriate. If the ownership interests
in the assets of the trust consist of multiple classes, failure to treat the
trust as a REMIC may cause the trust to be treated as an association taxable as
a corporation. Such treatment could result in income of the trust being subject
to corporate tax in the hands of the trust and in a reduced amount being
available for distribution to certificateholders as a result of the payment of
the taxes.
Two-Tier REMIC Structures. For certain series of certificates, two separate
elections may be made to treat segregated portions of the assets of a single
trust as a subsidiary REMIC and a master REMIC for federal income tax purposes.
Upon the issuance of any such series of certificates, counsel will have advised
Green Tree, 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 the 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 under this prospectus. Solely for the purpose of determining whether
the 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 for 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.
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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 on such regular certificates
under the accrual method. Under temporary treasury regulations, if a trust,
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 Green Tree, will be allocated as a separate item of gross income
and as a separate item of expense to those regular certificateholders that are
pass-through interest holders. Generally, a single-class REMIC is defined as a
REMIC that would be treated as a fixed investment trust under applicable law
but for its qualification as a REMIC, or a REMIC that is substantially similar
to an investment trust but is structured with the principal purpose of avoiding
this allocation requirement imposed by the temporary treasury regulations.
Generally, a pass-through interest holder refers to individuals, trusts and
estates, certain other pass-through entities beneficially owned by one or more
individuals, trusts or estates, and regulated investment companies. Such an
individual, estate, trust or pass-through entity that holds a regular
certificate in such a REMIC will be allowed to deduct the foregoing separate
item of expense under Section 212 of the Internal Revenue Code only to the
extent that, in the aggregate and combined with other itemized deductions, it
exceeds 2% of the adjusted gross income of the holder. In addition, Section 68
of the Internal Revenue Code provides that the amount of itemized deductions,
including those provided for in Section 212 of the Internal Revenue Code,
otherwise allowable for the taxable year for an individual whose adjusted gross
income exceeds a threshold amount specified in the Internal Revenue Code,
$126,600 for 1999, in the case of a joint return, will be reduced by the lesser
of (1) 3% of the excess of adjusted gross income over the specified threshold
amount or (2) 80% of the amount of itemized deductions otherwise allowable for
that taxable year. In determining the alternative minimum taxable income of
such an individual, trust, estate or pass-through entity that is a holder of a
regular certificate in such a REMIC, no deduction will be allowed for the
holder's allocable portion of the foregoing expenses, even though an amount
equal to the total of the expenses will be included in the holder's gross
income for alternative minimum tax purposes. Unless otherwise stated in the
related prospectus supplement, the foregoing expenses will not be allocated to
holders of a regular certificate in a REMIC. If the foregoing limitations
apply, some holders of regular certificates in single-class REMICs may not be
entitled to deduct all or any part of the foregoing expenses. Accordingly,
regular certificates in such a single class-REMIC may not be appropriate
investments for individuals, trusts, estates or pass-through entities
beneficially owned by one or more individuals, trusts or estates. Prospective
investors should carefully consult with their own tax advisors prior to making
an investment in any regular certificates.
Tax Status of REMIC Certificates. In general:
(1) 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 Internal Revenue Code will constitute "a regular
... interest in a REMIC" within the meaning of Section
7701(a)(19)(C)(xi) of the Internal Revenue Code; and
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(2) regular certificates held by a real estate investment trust will
constitute real estate assets within the meaning of Section
856(c)(5)(A) of the Internal Revenue 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 Internal
Revenue 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 Internal
Revenue Code, including assets described in Section 7701(a)(19)(C) of the
Internal Revenue Code, then the regular certificates will be qualifying assets
only to the extent that the assets comprising the REMIC are qualifying assets.
Furthermore, interest paid with respect to certificates held by a real estate
investment trust will be considered "interest on obligations secured by
mortgages on real property or on interests in real property" within the meaning
of Section 856(c)(3)(B) of the Internal Revenue 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 Internal Revenue Code, respectively. In
addition, the REMIC regulations provide that payments on loans held and
reinvested pending distribution to certificateholders will be considered to be
"real estate assets" within the meaning of Section 856(c)(5)(A) of the Internal
Revenue Code. Entities affected by the foregoing provisions of the Internal
Revenue 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 Internal Revenue Code and the treasury
regulations issued under it in January 1994. The discussion here 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. Although the rules relating to
original issue discount contained in the Internal Revenue Code were modified by
the Tax Reform Act of 1986 specifically to address the tax treatment of
securities, such as the regular certificates, on which principal is required to
be prepaid based on prepayments of the underlying assets, regulations under
that legislation have not yet been issued. Nonetheless, the Internal Revenue
Code requires that a prepayment assumption be used with respect to the
underlying assets of a REMIC in computing the accrual of original issue
discount on regular certificates, and that regular adjustments be made in the
amount and the rate of accrual to reflect differences between the actual
prepayment rate and the prepayment assumption. Although regulations have not
been issued concerning the use of a prepayment assumption, the legislative
history associated with the Tax Reform Act of 1986 indicates that such
regulations are to provide that the prepayment assumption used with respect to
a regular certificate must be the same as that used in pricing the initial
offering of the regular certificate. The prepayment assumption used in
reporting original issue discount for each series of regular certificates will
be consistent with this standard and will be disclosed in the related
prospectus supplement. However, no representation is made hereby nor can there
be any assurance that the underlying assets of a REMIC will in fact prepay at a
rate conforming to the prepayment
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assumption or at any other rate. Certificateholders also should be aware that
the OID Regulations do not address certain issues relevant to, or are not
applicable to, prepayable securities such as the regular certificates.
In general, in the hands of the original holder of a regular certificate,
original issue discount, if any, is the difference between the stated
redemption price at maturity of the regular certificate and its issue price.
The original issue discount with respect to a regular certificate will be
considered to be zero if it is less than .25% of the regular certificate's
stated redemption price at maturity multiplied by the number of complete years
from the date of issue of such regular certificate to its maturity date. The
OID Regulations, however, provide a special de minimis rule to apply to
obligations such as the regular certificates that have more than one principal
payment or that have interest payments that are not qualified stated interest
as defined in the OID Regulations, payable before maturity. Under the special
rule, original issue discount on an installment obligation is generally
considered to be zero if it is less than .25% of the principal amount of the
obligation multiplied by the weighted average maturity of the obligation as
defined in the OID Regulations. Because of the possibility of prepayments, it
is not clear whether or how the de minimis rules will apply to the regular
certificates. As described above, it appears that the prepayment assumption
will be required to be used in determining the weighted average maturity of the
regular certificates. In the absence of authority to the contrary, Green Tree
expects to apply the de minimis rule applicable to installment obligations by
using the prepayment assumption.
Generally, the original holder of a regular certificate that includes a de
minimis amount of original issue discount other than de minimis original issue
discount attributable to a so-called teaser interest rate or initial interest
rate holiday, includes that original issue discount in income as principal
payments are made. The amount includable in income with respect to each
principal payment equals a pro rata portion of the entire amount of de minimis
original issue discount with respect to that regular certificate. Any de
minimis amount of original issue discount includable in income by a holder of a
regular certificate is generally treated as a capital gain if the regular
certificate is a capital asset in the hands of the holder thereof. Pursuant to
the OID Regulations, a holder of a regular certificate that uses the accrual
method of tax accounting or that acquired such regular certificate on or after
April 4, 1994, may, however, elect to include in gross income all interest that
accrues on a regular certificate, including any de minimis original issue
discount and market discount, by using the constant yield method described
below with respect to original issue discount.
The stated redemption price at maturity of a regular certificate generally
will be equal to the sum of all payments, whether denominated as principal or
interest, to be made with respect thereto other than qualified stated interest.
Under the OID Regulations, qualified stated interest is stated interest that is
unconditionally payable at least annually at a single fixed rate of interest,
or, under certain circumstances, a variable rate tied to an objective index,
during the entire term of the regular certificate, including short periods.
Under the OID Regulations, interest is considered unconditionally payable only
if late payment or nonpayment is expected to be penalized or reasonable
remedies exist to compel payment. It is possible that interest payable on
regular certificates may not be considered to be
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unconditionally payable under the OID Regulations because regular
certificateholders may not have default remedies ordinarily available to
holders of debt instruments or because no penalties are imposed as a result of
any failure to make interest payments on the regular certificates. Until
further guidance is issued, however, the REMIC will treat the interest on
regular certificates as unconditionally payable under the OID Regulations. In
addition, under the OID Regulations, certain variable interest rates payable on
regular certificates, including rates based upon the weighted average interest
rate of a loan pool, may not be treated as qualified stated interest. In this
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, Green Tree expects to
determine the stated redemption price at maturity of a regular certificate by
assuming that the anticipated rate of prepayment for all loans will occur in
such a manner that the initial pass-through rate for a certificate will not
change. Accordingly, interest at the initial pass-through rate will constitute
qualified stated interest payments for purposes of applying the original issue
discount provisions of the Internal Revenue Code. In general, the issue price
of a regular certificate is the first price at which a substantial amount of
the regular certificates of that class are sold for money to the public,
excluding bond houses, brokers or similar persons or organizations acting in
the capacity of underwriters, placement agents or wholesalers. If a portion of
the initial offering price of a regular certificate is allocable to interest
that has accrued prior to its date of issue, the issue price of such a regular
certificate generally includes that pre-issuance accrued interest.
If the regular certificates are determined to be issued with original issue
discount, a holder of a regular certificate must generally include the original
issue discount in ordinary gross income for federal income tax purposes as it
accrues in advance of the receipt of any cash attributable to such income. The
amount of original issue discount, if any, required to be included in a regular
certificateholder's ordinary gross income for federal income tax purposes in
any taxable year will be computed in accordance with Section 1272(a) of the
Internal Revenue Code and the OID Regulations. Under this section and the OID
Regulations, original issue discount accrues on a daily basis under a constant
yield method that takes into account the compounding of interest. The amount of
original issue discount to be included in income by a holder of a debt
instrument, such as a regular certificate, under which principal payments may
be subject to acceleration because of prepayments of other debt obligations
securing such instruments, is computed by taking into account the prepayment
assumption.
The amount of original issue discount includable in income by a holder of a
regular certificate is the sum of the daily portions of the original issue
discount for each day during the taxable year on which the holder held the
regular certificate. The daily portions of
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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
(1) the present value of all remaining payments to be made on the regular
certificate as of the close of the accrual period and
(2) 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 on 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
Internal Revenue Code requires the present value of the remaining payments to
be determined on the bases of
. 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,
. events, including actual prepayments, which have occurred before the
close of the accrual period and
. 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 loans held by the trust 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 loans 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 loans will be prepaid at that rate
or at any other rate.
A subsequent purchaser of a regular certificate will also be required to
include in such purchaser's ordinary gross income for federal income tax
purposes the original issue discount, if any, accruing with respect to such
regular certificate, unless the price paid equals or exceeds the regular
certificate's remaining stated redemption price. If the price paid exceeds the
regular certificate's adjusted issue price, but does not equal or exceed the
remaining stated redemption price of the regular certificate, the amount of
original issue discount to be accrued will be reduced in accordance with a
formula set forth in Section 1272(a)(7)(B) of the Internal Revenue Code. Under
this provision, the daily portions of original issue discount which must be
included in gross income will be reduced by an amount equal to this daily
portion multiplied by the fraction obtained by dividing (1) the
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excess of the purchase price over the regular certificate's adjusted issue
price by (2) the aggregate original issue discount remaining to be accrued with
respect to such regular certificate.
We believe that the holder of a regular certificate determined to be issued
with more than de minimis original issue discount will be required to include
the original issue discount in ordinary gross income for federal income tax
purposes computed in the manner described above. However, the OID Regulations
either do not address or are subject to varying interpretations with respect to
several issues concerning the computation of original issue discount for
obligations such as the regular certificates.
Adjustable Rate Regular Certificates. Regular certificates may bear interest
at an adjustable rate. Under the OID Regulations, if an adjustable rate regular
certificate provides for qualified stated interest payments computed on the
basis of certain qualified floating rates or objective rates, then any original
issue discount on a regular certificate may be computed and accrued under the
same methodology that applies to regular certificates paying qualified stated
interest at a fixed rate. See the discussion above under "REMIC Series--
Original Issue Discount." If adjustable rate regular certificates are issued,
the related prospectus supplement will describe the manner in which the
original issue discount rules may be applied and the method to be used in
preparing information returns to the holders of such adjustable rate regular
certificates and to the IRS.
For purposes of applying the original issue discount provisions of the
Internal Revenue Code, all or a portion of the interest payable with respect to
adjustable rate regular certificate may not be treated as qualified stated
interest in certain circumstances, including the following:
(1) if the adjustable rate of interest is subject to one or more minimum
or maximum rate floors or ceilings which are not fixed throughout the
term of the regular certificate and which are reasonably expected as
of the issue date to cause the rate in certain accrual periods to be
significantly higher or lower than the overall expected return on the
regular certificate determined without such floor or ceiling;
(2) if it is reasonably expected that the average value of the adjustable
rate during the first half of the term of the regular certificate
will be either significantly less than or significantly greater than
the average value of the rate during the final half of the term of
the regular certificate; or
(3) if interest is not payable in all circumstances.
In these situations, as well as others, it is unclear under the OID Regulations
whether such interest payments constitute qualified stated interest payments,
or must be treated as part of a regular certificate's stated redemption price
at maturity resulting in original issue discount.
Market Discount. Regular certificates, whether or not issued with original
issue discount, will be subject to the market discount rules of the Internal
Revenue Code. A purchaser of a regular certificate who purchases the regular
certificate at a market discount, such as a discount from its adjusted issue
price as described above, will be required to
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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:
(1) under a constant yield method that is similar to the method for the
accrual of original issue discount or
(2) under a ratable accrual method under which the market discount is
treated as accruing in equal daily installments during the period the
regular certificate is held by the purchaser, in each case computed
taking into account the prepayment assumption.
Because the regulations referred to above have not been issued, it is not
possible to predict what effect, if any, the regulations, when issued, might
have on the tax treatment of a regular certificate purchased at a discount in
the secondary market.
The Internal Revenue 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 Internal Revenue 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 will be treated as ordinary income to
the extent it does not exceed the accrued market discount at the time of such
payment. The amount of accrued market discount for purposes of determining the
amount of ordinary income to be recognized with respect to subsequent payments
on such a regular certificate is to be reduced by the amount previously treated
as ordinary income.
In general, limitations imposed by the Internal Revenue Code that are
intended to match deductions with the taxation of income will require a holder
of a regular certificate having market discount to defer a portion of the
interest deductions attributable to any indebtedness incurred or continued to
purchase or carry such regular certificate. Alternatively, a holder of a
regular certificate may elect to include market discount in gross income as it
accrues and, if he makes such an election, is exempt from this rule. The
adjusted basis of a regular certificate subject to such election will be
increased to reflect market discount included in gross income, reducing any
gain or increasing any loss on a sale or taxable disposition.
Amortizable Premium. A holder of a regular certificate who holds the regular
certificate as a capital asset and who purchased the Regular certificate at a
cost greater than its stated redemption price at maturity will be considered to
have purchased the regular certificate at a premium. In general, the regular
certificateholder may elect to deduct the amortizable bond premium as it
accrues under a constant yield method. A regular
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certificateholder's tax basis in the regular certificate will be reduced by the
amount of the amortizable bond premium deducted. It appears that the prepayment
assumption should be taken into account in determining the term of a regular
certificate for this purpose. Amortizable bond premium with respect to a
regular certificate will be treated as an offset to interest income on such
regular certificate, and a certificateholder's deduction for amortizable bond
premium will be limited in each year to the amount of interest income derived
with respect to such regular certificate for such year. Any election to deduct
amortizable bond premium will apply to all debt instruments, other than
instruments the interest on which is excludable from gross income, held by the
certificateholder at the beginning of the first taxable year to which the
election applies or later acquired, and may be revoked only with the consent of
the IRS. Bond premium on a regular certificate held by a certificateholder who
does not elect to deduct the premium will decrease the gain or increase the
loss otherwise recognized on the disposition of the regular certificate.
Certificateholders who pay a premium for a regular certificate should consult
their tax advisors concerning such an election and rules for determining the
method for amortizing bond premium.
Realized Losses. Holders of a regular certificate acquired in connection with
a trade or business should be allowed to deduct as ordinary losses any losses
sustained during a taxable year in which the regular certificates become wholly
or partially worthless as a result of one or more realized losses on the
underlying assets of the REMIC. However, it appears that a noncorporate holder
of a regular certificate that does not acquire such certificate in connection
with a trade or business may not be entitled to deduct such a loss until such
holder's certificate becomes wholly worthless, which may not occur until its
outstanding principal balance has been reduced to zero. Any such loss may be
characterized as a short-term capital loss.
At present, the law is unclear with respect to the timing and character of
any loss which may be realized by a holder of a regular certificate. Such a
holder may be required to accrue interest and original issue discount with
respect to such regular certificate without giving effect to any defaults or
deficiencies on the underlying assets of the REMIC until such holder can
establish that such losses will not be recoverable under any circumstances. As
a result, the holder of a regular certificate may be required to report taxable
income in excess of the amount of economic income actually accruing to the
benefit of such holder in a particular period. It is expected, however, that
the holder of such a regular certificate would eventually recognize a loss or
reduction in income attributable to such income when such loss is, in fact,
realized for federal income tax purposes.
Gain or Loss on Disposition. If a regular certificate is sold, the seller
will recognize gain or loss equal to the difference between the amount realized
from the sale and the seller's adjusted basis in that regular certificate. The
adjusted basis generally will equal the cost of such regular certificate to the
seller, increased by any original issue discount included in the seller's
ordinary gross income with respect to such regular certificate and reduced, but
not below zero, by any payments on the regular certificate previously received
or accrued by the seller, other than qualified stated interest payments, and
any amortizable premium. Except as discussed below or with respect to market
discount, any gain or loss recognized
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upon a sale, exchange, retirement, or other taxable disposition of a regular
certificate will be capital gain if the regular certificate is held as a
capital asset.
Gain from the disposition of a regular certificate that might otherwise be
capital gain, including any gain attributable to de minimis original issue
discount or market discount, will be treated as ordinary income to the extent
of the excess, if any, of (1) 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 (2) the amount of ordinary income actually recognized by
the holder with respect to such regular certificate.
Taxation of Residual Interests. Generally, the daily portions of the taxable
income or net loss of a REMIC will be includable as ordinary income or loss in
determining the taxable income of holders of residual certificates, 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 that 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:
(1) the limitation on deductibility of investment interest expense and
expenses for the production of income do not apply,
(2) all bad loans will be deductible as business bad debts, and
(3) 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 loans, plus any cancellation of indebtedness income due to realized
losses with respect to regular certificates and income on reinvestment of cash
flows and reserve assets, minus deductions, including interest and original
issue discount expense on the regular certificates, bad debt losses with
respect to the underlying assets of a REMIC, servicing fees on the loans, other
administrative expenses of a REMIC, and amortization of premium, if any, with
respect to the loans.
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 loans, 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 loans is
acquired by a REMIC at a discount, and one or more of such loans is prepaid,
the residual holder may recognize taxable income without being entitled to
receive a corresponding cash distribution because:
(1) the prepayment may be used in whole or in part to make distributions
on regular certificates, and
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(2) the discount on the loans 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, 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 loan will remain constant over time as a percentage of the
outstanding principal amount of that loan, assuming it bears interest at a
fixed rate. Consequently, residual holders must have sufficient other sources
of cash to pay any federal, state, or local income taxes due as a result of
such mismatching, or such holders must have unrelated deductions against which
to offset such income, subject to the discussion of excess inclusions below
under "REMIC Series--Limitations on Offset or Exemption of REMIC Income." The
mismatching of income and deductions described in this paragraph, if present
with respect to a series of certificates, may have a significant adverse effect
upon the residual holder's after-tax rate of return.
The amount of any net loss of a REMIC that may be taken into account by the
residual holder is limited to the adjusted basis of the residual certificate as
of the close of the quarter, or time of disposition of the residual certificate
if earlier, determined without taking into account the net loss for the
quarter. The initial adjusted basis of a purchaser of a residual certificate is
the amount paid for such residual certificate. Such adjusted basis will be
increased by the amount of taxable income of the REMIC reportable by the
residual holder and decreased, but not below zero, by the amount of loss of the
REMIC reportable by the residual holder. A cash distribution from the REMIC
also will reduce such adjusted basis, but not below zero. Any loss that is
disallowed on account of this limitation may be carried over indefinitely by
the residual holder for whom such loss was disallowed and may be used by such
residual holder only to offset any income generated by the same REMIC.
If a residual certificate has a negative value, it is not clear whether its
issue price would be considered to be zero or such negative amount for purposes
of determining the REMIC's basis in its assets. The REMIC regulations imply
that residual interests cannot have a negative basis or a negative issue price.
However, the preamble to the REMIC regulations indicates that, while existing
tax rules do not accommodate such concepts, the IRS 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, we do 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.
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Further, to the extent that the initial adjusted basis of a residual holder,
other than an original holder, in the residual certificate is in excess of the
corresponding portion of the REMIC's basis in the loans, the residual holder
will not recover such excess basis until termination of the REMIC unless
Treasury Regulations yet to be issued provide for periodic adjustments to the
REMIC income otherwise reportable by that holder.
Treatment of Certain Items of REMIC Income and Expense. Generally, a REMIC's
deductions for original issue discount will be determined in the same manner,
and subject to the same uncertainties, as original issue discount income on
regular certificates as described above under "REMIC Series--Original Issue
Discount" and "--Adjustable Rate Regular Certificates," without regard to the
de minimis rule.
The REMIC will have market discount income in respect of the loans if, in
general, the basis of the REMIC in such loans is exceeded by their unpaid
principal balances. The REMIC's basis in the loans is generally the fair market
value of the loans immediately after the transfer to the REMIC, which will
equal the aggregate issue prices of the REMIC certificates which are sold to
investors and the estimated fair market value of any classes of certificates
which are retained. In respect of the loans that have market discount to which
Internal Revenue Code Section 1276 applies, the accrued portion of this 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 loans exceeds the unpaid principal
balances, the REMIC will be considered to have acquired such loans at a premium
equal to the amount of such excess. As stated above, the REMIC's basis in the
loans is the fair market value of the loans immediately after the transfer to
the REMIC. Generally, a REMIC that holds a loan as a capital asset will elect
to amortize premium on the loans under a constant interest method. See the
discussion under "REMIC Series--Amortizable Premium."
Limitations on Offset or Exemption of REMIC Income. All or a portion 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:
(1) 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 Internal Revenue Code,
multiplied by
(2) the adjusted issue price of the 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.
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The portion of a residual holder's REMIC taxable income consisting of the
excess inclusions will be subject to federal income tax in all events and may
not be offset by other deductions on such residual holder's tax return,
including net operating loss carry forwards. Further, if the residual holder is
an organization subject to the tax on unrelated business income imposed by
Section 511 of the Internal Revenue Code, the residual holder's excess
inclusions will be treated as unrelated business taxable income of such
residual holder for purposes of Section 511. In addition, if the residual
holder is not a U.S. person, the residual holder's excess inclusions generally
would be ineligible for exemption from or reduction in the rate of United
States withholding tax. Finally, if a real estate investment trust or regulated
investment company owns a residual certificate, a portion, allocated under
Treasury Regulations yet to be issued, of dividends paid by such real estate
investment trust or regulated investment company could not be offset by net
operating losses of its shareholders and would constitute unrelated business
taxable income for tax-exempt shareholders.
Additionally, for purposes of the alternative minimum tax, (1) excess
inclusions will not be permitted to be offset by the alternative tax net
operating loss deduction and (2) alternative minimum taxable income may not be
less than the taxpayer's excess inclusions. The latter rule has the effect of
preventing nonrefundable tax credits from reducing the taxpayer's income tax to
an amount lower than the tentative minimum tax on excess inclusions.
Restrictions on Transfer of Residual Certificates. As described above under
"REMIC Series--Qualification as a REMIC," an interest in a residual certificate
may not be transferred to a disqualified organization. If any legal or
beneficial interest in a residual certificate is, nonetheless, transferred to a
disqualified organization, a tax would be imposed in an amount equal to the
product of:
(1) the present value of the total anticipated excess inclusions with
respect to such residual certificate for periods after the transfer,
and
(2) 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 Internal Revenue 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
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also may be waived by the Treasury Department if the disqualified organization
promptly disposes of the residual interest and the transferor pays such amount
of tax as the Treasury Department may require, presumably, a corporate tax on
the excess inclusion for the period the residual interest is actually held by
the disqualified organization.
In addition, if a pass-through entity 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:
(1) 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
(2) the highest marginal federal income tax rate imposed on corporations.
This 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.
A pass-through entity means any regulated investment company, real estate
investment trust, common trust, 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 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:
(1) 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
(2) 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
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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:
(1) 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
(2) 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 (2) of the preceding sentence as part of the
affidavit described above under "Restrictions on Transfer of Residual
Certificates."
Mark-to-Market Rules. On December 24, 1996, the IRS released final
regulations, the mark-to-market regulations, relating to the requirement that a
securities dealer mark to market securities held for sale to customers. This
mark-to-market requirement applies to all securities owned by a dealer, except
to the extent that the dealer has specifically identified a security as held
for investment. The mark-to-market regulations provide that for purposes of
this mark-to-market requirement, a residual certificate acquired on or after
January 4, 1995 is not treated as a security and thus may not be marked to
market. Prospective purchasers of a residual certificate should consult their
tax advisors regarding the possible application of the mark-to-market
requirement to residual certificates.
Sale or Exchange of a Residual Certificate. Upon the sale or exchange of a
residual certificate, the residual holder will recognize gain or loss equal to
the excess, if any, of the amount realized over the adjusted basis as described
above of such residual holder in such residual certificate at the time of the
sale or exchange. In addition to reporting the taxable income of the REMIC, a
residual holder will have taxable income to the extent that any cash
distribution to him from the REMIC exceeds such adjusted basis on that
distribution date. Such income will be treated as gain from the sale or
exchange of the residual certificate. It is possible that the termination of
the REMIC may be treated as a sale or exchange of a residual holder's residual
certificate, in which case, if the residual holder has an adjusted basis in his
residual certificate remaining when his interest in the REMIC terminates, and
if he holds such Residual certificate as a capital asset, then he will
recognize a capital loss at that time in the amount of such remaining adjusted
basis.
Except as provided in Treasury Regulations, the wash sale rules of Internal
Revenue 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
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enters into any other transaction that results in the application of Internal
Revenue Code Section 1091, any residual interest in any REMIC or any interest
in a taxable mortgage pool that is economically comparable to a residual
certificate.
Certain Other Taxes on the REMIC. The REMIC provisions of the Internal
Revenue Code impose a 100% tax on any net income derived by a REMIC from
certain prohibited transactions. Such transactions are:
(1) 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;
(2) the receipt of income from assets other than qualified mortgages and
permitted investments;
(3) the receipt of compensation for services; and
(4) the receipt of gain from the dispositions of cash flow investments.
The REMIC regulations provide that the modification of the terms of a loan
occasioned by default or a reasonably foreseeable default of the loan, the
assumption of the loan, 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 loan will not be treated as a disposition of the loan. If a
REMIC holds convertible ARM loans which are convertible at the option of the
obligor into fixed-rate, fully amortizing, level payment loans, a sale of such
loans by the REMIC under a purchase agreement or other loan with us or other
party, if and when the obligor elects to so convert the terms of the loan, will
not result in a prohibited transaction for the REMIC. The Internal Revenue 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 Internal Revenue Code also imposes a tax on
a REMIC at the highest corporate rate on certain net income from foreclosure
property that the REMIC derives from the management, sale, or disposition of
any real property, or any personal property incident thereto, acquired by the
REMIC in connection with the default or imminent default of a loan. Generally,
it is not anticipated that a REMIC will incur a significant amount of such
taxes or any material amount of state or local income or franchise taxes.
However, if any such taxes are imposed on a REMIC they will be paid by us or
the trustee, if due to our breach or the trustee's obligations, as the case may
be, under the related pooling and servicing agreement or in other cases, such
taxes shall be borne by the related trust resulting in a reduction in amounts
otherwise payable to holders of the related regular or residual certificates.
Liquidation of the REMIC. A REMIC may liquidate without the imposition of
entity-level tax only in a qualified liquidation. A liquidation is considered
qualified if a REMIC adopts a plan of complete liquidation, which may be
accomplished by designating in the
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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
(1) a citizen or resident of the United States;
(2) a corporation, partnership, or other entity organized in or under the
laws of the United States;
(3) an estate the income of which is includible in gross income for
United States tax purposes regardless of its source; or
(4) a trust if;
(a) a court within the United States is able to exercise primary
supervision over the administration of the trust and
(b) one or more United States trustees have authority to control all
substantial decisions of the trust.
Unless the interest on a regular certificate is effectively connected with the
conduct by the foreign holder of a trade or business within the United States,
the foreign holder is not subject to federal income or withholding tax on
interest, or original issue discount, if any, on a regular certificate, subject
to possible backup withholding of tax, discussed below. To qualify for this tax
exemption, the foreign holder will be required to provide periodically a
statement signed under penalties of perjury certifying that the foreign holder
meets the requirements for treatment as a foreign holder and providing the
foreign holder's name and address. The statement, which may be made on a Form
W-8 or substantially similar substitute form, generally must be provided in the
year a payment occurs or in either of the two preceding years. The statement
must be provided, either directly or through clearing organization or financial
institution intermediaries, to the person that otherwise would withhold tax.
This exemption may not apply to a foreign holder that owns both regular
certificates and residual certificates. If the interest on a regular
certificate is effectively connected with the conduct by a foreign holder of a
trade or business within the United States, then the foreign holder will be
subject to tax at regular graduated rates. In addition, the foregoing rules
will not apply to exempt a U.S. shareholder of a controlled foreign corporation
from taxation on such U.S. shareholder's allocable portion of the interest
income received by such controlled foreign corporation. Foreign holders should
consult their own tax advisors regarding the specific tax consequences of their
owning a regular certificate.
Any gain recognized by a foreign holder upon a sale, retirement or other
taxable disposition of a regular certificate generally will not be subject to
United States federal income tax unless either:
(1) 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
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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
(2) the gain is effectively connected with the conduct by the foreign
holder of a trade or business within the United States.
It appears that a regular certificate will not be included in the estate of
a foreign holder and will not be subject to United States estate taxes.
However, foreign holders should consult their own tax advisors regarding
estate tax consequences.
Unless otherwise stated in the related prospectus supplement, transfers of
residual certificates to foreign holders will be prohibited by the related
pooling and servicing agreement.
Backup Withholding. Under certain circumstances, a REMIC certificateholder
may be subject to backup withholding at a 31% rate. Backup withholding may
apply to a REMIC certificateholder who is a United States person if the
holder, among other circumstances, fails to furnish his social security number
or other taxpayer identification number to the trustee. Backup withholding may
apply, under certain circumstances, to a REMIC certificateholder who is a
foreign person if the REMIC certificateholder fails to provide the trustee or
the REMIC certificateholder's securities broker with the statement necessary
to establish the exemption from federal income and withholding tax on interest
on the REMIC certificate. Backup withholding, however, does not apply to
payments on a certificate made to certain exempt recipients, such as
corporations and tax-exempt organizations, and to certain foreign persons.
REMIC certificateholders should consult their tax advisors for additional
information concerning the potential application of backup withholding to
payments received by them with respect to a certificate.
Reporting Requirements and Tax Administration. We will report annually to
the IRS, holders of record of the regular certificates that are not excepted
from the reporting requirements and, to the extent required by the Internal
Revenue Code, other interested parties, information with respect to the
interest paid or accrued on the regular certificates, original issue discount,
if any, accruing on the regular certificates and information necessary to
compute the accrual of any market discount or the amortization of any premium
on the regular certificates.
The Treasury Department has issued temporary regulations concerning certain
aspects of REMIC tax administration. Under those regulations, a residual
certificateholder must be designated as the REMIC's tax matters person. The
tax matters person, generally, has responsibility for overseeing and providing
notice to the other residual certificateholders of certain administrative and
judicial proceedings regarding the REMIC's tax affairs. Unless otherwise
indicated in the related prospectus supplement, Green Tree 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.
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Non-REMIC Series
Tax Status of the Trust. In the case of a trust evidenced by a series of
certificates, or a segregated portion of them, for which a REMIC election is
not made counsel will, unless otherwise specified in the related prospectus
supplement, have advised us that, in their opinion, each loan pool and the
arrangement to be administered by us under which the trustee will hold and we
will be obligated to service the loans and pursuant to these 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 Internal Revenue Code Section 7701(i), but rather
will be classified as a grantor trust under Subpart E, Part I of Subchapter J
of the Internal Revenue Code. In that event, each Non-REMIC certificateholder
will be treated as the owner of a pro rata undivided interest in the ordinary
income and corpus portions of the trust attributable to the loan 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 loans included.
The following discussion assumes the trust will be so classified as a grantor
trust.
Tax Status of Non-REMIC Certificates. In general,
(1) certificates held by a domestic building and loan association within
the meaning of Section 7701(a)(19) of the Internal Revenue Code may
be considered to represent loans secured by an interest in real
property within the meaning of Section 7701(a)(19)(C)(v) of the
Internal Revenue Code; and
(2) certificates held by a real estate investment trust may constitute
"real estate assets" within the meaning of Section 856(c)(5)(A) of
the Internal Revenue Code and interest may be considered interest on
obligations secured by mortgages on real property within the meaning
of Section 856(c)(3)(B) of the Internal Revenue Code.
See the discussions of such Internal Revenue Code provisions above under "REMIC
Series Tax Status of REMIC Certificates." Investors should review the
prospectus supplement for a discussion of the treatment of non-REMIC
certificates and loans under these Internal Revenue Code sections and should,
in addition, consult with their own tax advisors with respect to these matters.
Tax Treatment of Non-REMIC Certificates. Subject to the discussion below of
the stripped bond rules of the Internal Revenue Code, non-REMIC
certificateholders will be required to report on their federal income tax
returns, and in a manner consistent with their respective methods of
accounting, their pro rata share of the entire income arising from the loans
comprising such loan pool, including interest, market or original issue
discount, if any, prepayment fees, assumption fees, and late payment charges
received by us, and any gain upon disposition of such loans. A disposition
includes scheduled or prepaid collections with respect to the loans, as well as
the sale or exchange of a non-REMIC certificate. Subject to the discussion
below of certain limitations on itemized deductions, non-REMIC
certificateholders will be entitled under Section 162 or 212 of the Internal
Revenue Code to deduct their pro rata share of related servicing fees,
administrative and other non-interest
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expenses, including assumption fees and late payment charges retained by us. An
individual, an estate, or a trust that holds a non-REMIC certificate either
directly or through a pass-through entity will be allowed to deduct such
expenses under Section 212 of the Internal Revenue 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 Internal Revenue Code provides that the amount of itemized
deductions, including those provided for in Section 212 of the Internal Revenue
Code otherwise allowable for the taxable year for an individual whose adjusted
gross income exceeds a threshold amount specified in the Internal Revenue Code,
$126,600 for 1999, in the case of a joint return, will be reduced by the lesser
of:
(1) 3% of the excess of adjusted gross income over the specified threshold
amount or
(2) 80% of the amount of itemized deductions otherwise allowable for such
taxable year.
Furthermore, in determining the alternative minimum taxable income of an
individual, trust, estate or pass-through entity that is a holder of a non-
REMIC certificate, no deduction will be allowed for such holder's allocable
portion of the foregoing expenses, even though an amount equal to the total of
such expenses will be included in such holder's gross income for alternative
minimum tax purposes. To the extent that a non-REMIC certificateholder is not
permitted to deduct servicing fees allocable to a non-REMIC certificate, the
taxable income of the non-REMIC certificateholder attributable to that non-
REMIC certificate will exceed the net cash distributions related to such
income. Non-REMIC certificateholders may deduct any loss on disposition of the
loans to the extent permitted under the Internal Revenue Code.
To the extent that any of the loans comprising a loan 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 the discount in the loans prior to
receipt of cash related to the discount. See the discussion above under "REMIC
Series--Original Issue Discount." Similarly, Internal Revenue Code provisions
concerning market discount and amortizable premium will apply to the loans
comprising a loan pool to the extent that the loans were originated after July
18, 1984 and September 27, 1985, respectively. See the discussions above under
"REMIC Series--Market Discount" and "REMIC Series--Amortizable Premium."
However, it is unclear whether a prepayment assumption should be used in
accruing or amortizing any such discount or premium.
Stripped Non-REMIC Certificates. Certain classes of non-REMIC certificates
may be subject to the stripped bond rules of Section 1286 of the Internal
Revenue 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 loan from ownership
of the right to receive some or all of the related interest payments. Non-REMIC
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certificates will constitute stripped certificates and will be subject to these
rules under various circumstances, including the following:
(1) if any servicing compensation is deemed to exceed a reasonable
amount;
(2) if Green Tree or any other party retains a retained yield with
respect to the loans comprising a loan pool;
(3) 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 loans; or
(4) if non-REMIC certificates are issued which represent the right to
interest only payments or principal only payments.
Although unclear, 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 Internal Revenue Code,
the issue price of a stripped certificate will be the purchase price paid by
each holder 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:
(1) 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
(2) no more than 100 basis points, including any amount of servicing in
excess of reasonable servicing, is stripped off of the loans. See
"REMIC Series--Market Discount" above.
Although the OID Regulations suggest that a prepayment assumption is not to
be used in computing the yield on the underlying assets of a trust with respect
to which a REMIC election is not made, the Internal Revenue Code appears to
require that such a prepayment assumption be used in computing yield with
respect to stripped certificates. In the absence of authority to the contrary,
we intend to base information reports and returns to the IRS 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
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be treated separately or aggregated for purposes of applying the original issue
discount rules described above.
It is possible that the IRS 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:
(1) as many stripped bonds or stripped coupons as there are scheduled
payments of principal and/or interest on each loan; or
(2) a separate installment obligation for each loan representing the
stripped certificate's pro rata share of principal and/or interest
payments to be made.
As a result of these possible alternative characterizations, investors should
consult their own tax advisors regarding the proper treatment of stripped
certificates for federal income tax purposes.
The servicing compensation to be received by us and the fee for credit
enhancement, if any, may be questioned by the IRS with respect to certain
certificates or loans as exceeding a reasonable fee for the services being
performed, and a portion of the servicing compensation could be recharacterized
as an ownership interest retained by us or other party in a portion of the
interest payments to be made pursuant to the loans. In this event, a
certificate might be treated as a stripped certificate subject to the stripped
bond rules of Section 1286 of the Internal Revenue Code and the original issue
discount provisions rather than to the market discount and premium rules.
Gain or Loss on Disposition. Upon sale or exchange of a non-REMIC
certificate, a non-REMIC certificateholder will recognize gain or loss equal to
the difference between the amount realized in the sale and its aggregate
adjusted basis in the loans represented by the non-REMIC certificate.
Generally, the aggregate adjusted basis will equal the non-REMIC
certificateholder's cost for the non-REMIC certificate increased by the amount
of any previously reported income or gain with respect to the non-REMIC
certificate and decreased by the amount of any losses previously reported with
respect to the non-REMIC certificate and the amount of any distributions
received. Except as provided above with respect to the original issue discount
and market discount rules, any such gain or loss would be capital gain or loss
if the non-REMIC certificate was held as a capital asset.
Tax Treatment of Certain Foreign Investors. Generally, interest or original
issue discount paid to or accruing for the benefit of a non-REMIC
certificateholder who is a foreign holder will be treated as portfolio interest
and will be exempt from the 30% withholding tax. The 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 loans 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
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information concerning interest or original issue discount paid by us 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. We will furnish to each non-REMIC
certificateholder with each distribution a statement showing the amount of the
distribution allocable to principal and to interest. In addition, Green Tree
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 Green Tree and any sub-servicer and such other customary factual information
as Green Tree deems necessary to enable certificateholders to prepare their tax
returns. Reports will be made annually to the IRS 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 here are not expected to constitute mortgage related
securities for purposes of the Secondary Mortgage Market Enhancement Act of
1984 because there will be a substantial number of loans that are secured by
liens on real estate that are not first liens, as required by SMMEA.
Accordingly, many institutions with legal authority to invest in mortgage
related securities may not be legally authorized to invest in the certificates.
The Federal Financial Institutions Examination Council, The Federal Deposit
Insurance Corporation, the Office of Thrift Supervision, the Office of the
Comptroller of the Currency and the National Credit Union Administration have
proposed or adopted guidelines regarding investment in various types of
mortgage-backed securities. In addition, certain state regulators have taken
positions that may prohibit regulated institutions subject to their
jurisdiction from holding securities representing residual interests, including
securities previously purchased. There may be other restrictions on the ability
of certain investors, including depository institutions, either to purchase
certificates or to purchase certificates representing more than a specified
percentage of the investor's assets. Investors should consult their own legal
advisors in determining whether and to what extent the certificates constitute
legal investments for such investors.
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RATINGS
Prior to the issuance of any class of certificates sold under this
prospectus, they must be rated by at least one nationally recognized
statistical rating organization in one of its four highest rating categories. A
security rating is not a recommendation to buy, sell or hold securities and may
be subject to revision or withdrawal at any time by the assigning rating
agency. The security rating of any series of certificates should be evaluated
independently of similar security ratings assigned to other kinds of
securities.
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UNDERWRITING
We may sell certificates of each series to or through 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. We intend 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, we or any of our affiliate 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 the prospectus supplement. The purchaser
may then from time to time offer and sell some or all of the certificates so
purchased directly, through one or more underwriters to be designated at the
time of the offering of the certificates or through broker-dealers acting as
agent or principal. This kind of offering may be restricted in the manner
specified in the 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 us 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 or commissions from the purchasers for whom they may act
as agents. Underwriters, dealers and agents that participate in the
distribution of the certificates of a series may be deemed to be underwriters,
and any discounts or commissions received by them from us and any profit on the
resale of the certificates by them may be deemed to be underwriting discounts
and commissions, under the Securities Act of 1933. Any such underwriters or
agents will be identified, and any such compensation received from us will be
described in the prospectus supplement.
We may agree to indemnify the underwriters and agents who participate in the
distribution of the certificates against certain liabilities, including
liabilities under the Securities Act.
If so indicated in the prospectus supplement, we will authorize underwriters
or other persons acting as our agents to solicit offers by certain institutions
to purchase the certificates from us pursuant to loans providing for payment
and delivery on a future date. Institutions with which these loans 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 us. The obligation of any
purchaser under any such loan will be subject to the condition that the
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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 loans.
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.
Some persons participating in this offering may engage in transactions that
stabilize, maintain or in some way affect the price of the certificates. These
types of transactions may include stabilizing, the purchase of certificates to
cover syndicate short positions and the imposition of penalty bids. For a
more complete description of these activities, please read the section entitled
"Underwriting" in the prospectus supplement.
Certain of the underwriters and their associates may engage in transactions
with and perform services for us in the ordinary course of business.
LEGAL MATTERS
The legality and material federal income tax consequences of the certificates
will be passed upon for us by our counsel as identified in the applicable
prospectus supplement.
EXPERTS
The consolidated financial statements of Green Tree as of December 31, 1998
and for the year ended December 31, 1998 are incorporated by reference in this
prospectus in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given upon their authority as experts in accounting and auditing.
The consolidated financial statements of Green Tree as of December 31, 1997
and for each of the years in the two-year period ended December 31, 1997 are
incorporated by reference in this prospectus and in the registration statement
in reliance upon the report of KPMG LLP, independent certified public
accountants, incorporated by reference in this prospectus, and upon the
authority of KPMG LLP as experts in accounting and auditing.
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GLOSSARY
Below are abbreviated definitions of capitalized terms used in this prospectus
and the prospectus supplement. The pooling and servicing agreement may contain
a more complete definition of some of the terms defined here and reference
should be made to the pooling and servicing agreement for a more complete
definition of all such terms.
"Amount Available" means, for each series of certificates, amounts on deposit
in the certificate account on a Determination Date.
"Certificate Distribution Amount" means the amount of principal and interest
specified in the related prospectus supplement to be distributed to
certificateholders.
"Compound Interest Certificates" means certificates on which interest may
accrue but not be paid for the period described in the related prospectus
supplement.
"Cut-off Date" means the date specified in the related prospectus supplement as
the date after which principal and interest payments on the loans are included
in the trust.
"Determination Date" means, unless otherwise specified in the related
prospectus supplement, the third business day immediately preceding the related
payment date.
"Due Period" means, unless otherwise provided in a related prospectus
supplement, with respect to any payment date, the period from and including the
first day of the second month preceding the payment date, to and including the
last day of the month immediately preceding the payment date.
"Eligible Investments" means one or more of the investments specified in the
pooling and servicing agreement in which moneys in the certificate account and
certain other accounts are permitted to be invested.
"Formula Principal Distribution Amount" means the scheduled amounts of
principal due and prepayments and other amounts received for principal on the
loans, as described in the related prospectus supplement.
"Liquidation Proceeds" means cash including insurance proceeds received in
connection with the liquidation of defaulted loans, whether through
repossession, foreclosure, sale or otherwise.
"Monthly Payment" means the scheduled Monthly Payment of principal and interest
on a loan.
"Net Liquidated Proceeds" means all amounts received and retained for the
liquidation of defaulted loans, net of liquidation expenses.
"Participants" means institutions that have accounts with the depositary.
"Pool Scheduled Principal Balance" means, as of any payment date, the aggregate
of the Scheduled Principal Balances of loans outstanding at the end of the
related Due Period.
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"Repurchase Price" means the remaining principal amount outstanding on a home
improvement loan on the date of repurchase plus accrued and unpaid interest at
its loan rate to the date of the repurchase.
"Scheduled Principal Balance" means, as of any payment date, the unpaid
principal balance of the loan as specified in the amortization schedule at the
time relating to the loan as of the due date in the related Due Period, after
giving effect to any previous partial prepayments and to the payment of
principal due on the due date and irrespective of any delinquency in payment on
the loan.
"Senior Distribution Amount" means, for a series of certificates having
Subordinated Certificates, as of each payment date and for each class of Senior
Certificates, the amount due the holders of that class of Senior Certificates.
"Senior Percentage" means, for a series of certificates having Subordinated
Certificates, the percentage specified in the related prospectus supplement.
"Subordinated Percentage" means, for a series of certificates having
Subordinated Certificates, the percentage specified in the related prospectus
supplement.
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For 90 days after the date of this prospectus supplement, all dealers that
effect transactions in these securities, whether or not participating in this
offering, may be required to deliver a prospectus. This is in addition to the
dealers' obligation to deliver a copy of this prospectus supplement and the
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
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